Miller Industries, Inc. — Q2 2016 Form 10-Q
Business context and period. Miller Industries manufactures vehicle towing and recovery equipment, with operations in North America and Europe. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods. Financial statement amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $156.1 | $151.5 | $304.9 | $278.3 |
| Gross profit | $19.0 | $17.5 | $32.0 | $29.5 |
| Gross margin | 12.2% | 11.6% | 10.5% | 10.6% |
| Net income | $6.6 | $5.9 | $9.9 | $8.9 |
| Diluted EPS | $0.58 | $0.52 | $0.88 | $0.79 |
| Cash dividends per share declared | $0.17 | $0.16 | $0.34 | $0.32 |
- Q2 sales increased 3.0% and net income increased approximately 12%; first-half sales rose 9.6% and net income rose approximately 11%. Management attributed sales growth chiefly to stronger domestic demand, recovering economic conditions, improved consumer sentiment and higher production.
- North American sales rose to $139.7 million in Q2 from $130.6 million, while foreign sales fell to $16.4 million from $21.0 million. For the first half, North American sales increased to $273.3 million from $239.0 million, while foreign sales declined to $31.6 million from $39.3 million.
- Q2 costs of operations declined as a share of sales to 87.8% from 88.4%, improving gross margin. First-half costs of operations rose slightly as a share of sales to 89.5% from 89.4%, leaving gross margin marginally lower. SG&A increased in dollars; it was 5.3% of Q2 sales versus 5.0%, and 5.4% of first-half sales in both years, with staffing and personnel costs cited.
- Cash from operations was negative $11.9 million for the first half, versus positive $4.4 million in 2015, largely reflecting a $28.8 million increase in accounts receivable and a $2.8 million increase in inventory, partly offset by higher payables and accrued liabilities. Capital expenditures were $13.2 million, compared with $3.1 million a year earlier.
- Cash and temporary investments were $29.6 million at June 30, down from $38.4 million at year-end 2015. Current assets were $244.7 million and current liabilities $103.9 million. The company had $20.0 million drawn on its unsecured revolving facility, versus none at year-end; total facility capacity had been increased to $50.0 million. Borrowings bear interest at LIBOR plus 1.50% (1.97% at June 30). Shareholders’ equity was $180.9 million.
Changes, outlook and risks
- On June 22, 2016, the revolving credit facility was increased from $30 million to $50 million to provide flexibility for capital projects. The company said borrowings were primarily used to finance those projects.
- Capital investment includes a Pennsylvania manufacturing consolidation and expansion estimated at $23.7 million, of which $17.3 million had been incurred by June 30; the remainder was expected in the second half of 2016. Additional projects at Tennessee facilities were estimated at $15.2 million through year-end, with $2.5 million incurred. Timing and costs may change. Total property and equipment purchase and construction commitments were approximately $15.7 million at June 30.
- Management expected operating cash flow, cash on hand and available credit to be sufficient for cash needs during 2016 and the next several years, while noting dependence on future performance and factors outside its control. The filing provides no specific earnings or revenue guidance.
- Key risks include industry cyclicality and customer access to financing, raw-material and transportation cost changes, supplier dependence, foreign currency exposure and international market conditions. The company highlighted uncertainty following the UK’s June 23, 2016 Brexit referendum and related currency volatility.
- Potential customer-default repurchase obligations had a maximum collateral amount of $42.7 million; management said the product value mitigated exposure and the related liability was not material or probable. Ordinary-course litigation was disclosed; management did not expect any uninsured liability beyond accruals to materially affect financial position or results.
- The board declared a $0.17-per-share quarterly dividend on August 1, payable September 19, 2016. Dividend payments are subject to credit-facility covenants. Foreign-currency translation increased accumulated other comprehensive income by $0.9 million in the first half; transaction effects included a $0.2 million gain versus a $0.3 million loss in the 2015 first half.
Important facts for investors to verify
- Whether receivables convert to cash and operating cash flow recovers after the first-half working-capital outflow.
- Progress, remaining commitments, final costs and expected benefits of the Pennsylvania and Tennessee capital projects.
- Facility availability, covenant compliance, borrowing costs and the effect of variable rates as capital spending continues.
- Whether foreign-market demand, Brexit-related currency movements and other international risks affect sales, margins or cash flows.
- Developments in customer repurchase exposure, litigation and other contingencies, and the sustainability of dividends alongside investment needs.