Miller Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Miller Industries manufactures vehicle towing and recovery equipment and sells primarily through independent distributors.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $95.0 million | $108.9 million | Down 12.8% |
| Costs of operations | $84.1 million | $88.2 million | Down 4.7% |
| Gross profit and margin | $10.9 million; 11.5% | $20.7 million; 19.0% | Margin down 7.5 percentage points |
| SG&A | $7.0 million | $8.1 million | Down 14.1% |
| Income before taxes | $3.3 million | $12.4 million | Down 73.2% |
| Net income | $2.0 million | $7.4 million | Down 73.0% |
| Diluted EPS | $0.18 | $0.61 | Down $0.43 |
| Net profit margin | 2.1% | 6.8% | Down 4.7 percentage points |
The filing attributes lower sales mainly to the absence of government-related follow-on order revenue, partly offset by stronger commercial demand. Lower-margin sales of completed vehicles including purchased chassis raised costs of operations to 88.5% of sales from 81.0%. SG&A was 7.4% of sales versus 7.5%. Net interest expense was $0.2 million, up from $0.1 million; foreign-currency-related other expense was $0.3 million versus a negligible loss. The effective tax rate was 39.6%, compared with 40.2%.
Cash flow, liquidity, and capital
- Operating cash flow was negative $11.3 million, compared with negative $7.5 million a year earlier. The 2012 outflow reflected working-capital investment, including higher receivables, inventory, and prepaid expenses and lower accrued liabilities, partly offset by higher accounts payable.
- Investing cash flow was negative $0.7 million, primarily for capital expenditures; financing cash flow was negative $1.0 million, primarily for dividends.
- Cash and temporary investments were $37.6 million at March 31, down $12.6 million from year-end. Current assets were $172.9 million and current liabilities $61.4 million; the current ratio was approximately 2.8.
- No borrowings were outstanding under the $25 million unsecured revolving credit facility, which expires March 31, 2014. Long-term obligations were zero; the balance sheet showed only $2,000 of current equipment-note obligations.
- The company declared and paid a quarterly dividend of $0.13 per share, up from $0.12 in Q1 2011. It had approximately $0.9 million in property and equipment commitments and approximately $0.8 million in non-cancelable operating lease obligations.
Material changes, outlook, and risks
- Management reported strengthening commercial demand through Q1 2012, though it remained below pre-2008 levels. It did not expect additional government-related follow-on orders in the near term and could not predict the timing or success of efforts to win new government orders.
- Management expected cash on hand, operating cash flow, and available credit to meet cash needs during 2012 and for the next several years, while noting that this depends on operating performance and economic and other factors. No specific earnings or revenue guidance was provided.
- Key risks include cyclical demand and economic conditions, customers’ access to credit and floor-plan financing, fuel and transportation costs, raw-material prices and supply, and the timing and success of government and export orders.
- Customer concentration shifted materially: no customer represented 10% or more of Q1 2012 sales, whereas the largest customer represented 41.6% in Q1 2011. Foreign sales rose to $16.1 million from $12.6 million while North American sales fell to $78.8 million from $96.4 million.
- Potential customer-product repurchase obligations had a maximum exposure of approximately $21.6 million, up from $18.1 million at year-end; management said the products’ value mitigates the risk and the inception liability was not material. Normal-course litigation is possible, but management did not expect any excess liability to materially affect the company.
- Foreign-currency contracts had $6.3 million notional value maturing in Q4 2013, in addition to $0.6 million maturing in April 2012. The filing reported a $0.3 million Q1 currency loss. The company reported no material changes to its previously disclosed risk factors and no significant impact from newly adopted accounting standards.
Investor verification priorities
- Assess whether commercial demand can offset the loss of government-related orders and how the absence of near-term follow-on orders affects future sales.
- Track gross margin and product mix, especially the proportion of lower-margin chassis sales.
- Monitor receivables, inventory, and operating cash flow to determine whether working-capital outflows moderate as commercial activity increases.
- Verify liquidity, covenant compliance, and dividend capacity, including the potential effect of the $21.6 million maximum customer repurchase exposure.
- Review currency exposure and the impact of exchange-rate movements and contract maturities on earnings and cash flows.