Miller Industries, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The company manufactures towing and recovery equipment and sells primarily through independent distributors. This unaudited quarterly report covers the three and nine months ended September 30, 2019; financial amounts below are in USD millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $195.5 | $195.7 | $615.0 | $531.7 |
| Gross profit | $21.7 | $21.5 | $69.6 | $61.2 |
| Gross margin | 11.1% | 11.0% | 11.3% | 11.5% |
| Income before taxes | $10.6 | $11.4 | $35.6 | $31.2 |
| Net income | $8.1 | $8.7 | $27.4 | $22.9 |
| Diluted EPS | $0.71 | $0.76 | $2.41 | $2.01 |
- Q3 net sales were nearly flat year over year; nine-month sales rose 15.7%. North American sales increased to $174.7 million for Q3 and $530.3 million year to date, while foreign sales declined to $20.8 million and $84.7 million, respectively.
- Q3 net income declined about 6.9%; nine-month net income increased about 19.5%. Q3 operating expenses included higher SG&A, which rose to $10.5 million from $9.5 million. Nine-month SG&A increased to $31.6 million, but declined as a share of sales to 5.1% from 5.4%.
- Costs of operations were 88.9% of Q3 sales versus 89.0% a year earlier. For the first nine months, the ratio rose to 88.7% from 88.5%, mainly reflecting material cost increases. The effective tax rate was 24.1% in Q3 and 22.9% year to date, versus 26.6% year to date in 2018.
- Operating cash flow was $28.0 million for the first nine months, compared with $15.4 million. Capital spending was $15.4 million; cash used in financing was $11.4 million, including $6.2 million of dividends and $5.0 million of net revolver repayments. Cash increased $0.4 million to $27.5 million.
- At September 30, cash was $27.5 million, current assets $296.1 million, and current liabilities $140.4 million; working capital was $155.7 million and the current ratio approximately 2.1. Total assets were $401.1 million and shareholders’ equity $247.8 million.
- Revolver borrowings were $10.0 million, down from $15.0 million at December 31, 2018; the facility provides up to $50 million and matures May 31, 2022. The French subsidiary had $0.46 million of loan borrowings. The company reported compliance with credit covenants.
Material changes, outlook, and risks
- Management attributed nine-month growth to strong domestic demand and capacity added through prior capital projects. Domestic sales gains were partly offset by lower foreign sales, reflecting the timing and mix of military and other international customer deliveries.
- Chassis supply delays affected deliveries during Q3; management said these delays were not expected to affect Q4. Management cited raw-material cost increases, including effects of steel and aluminum tariffs, and continuing uncertainty around Brexit. It also remained focused on replacing military projects scheduled to be completed during 2019.
- No numerical earnings or revenue guidance was provided. Management expected available cash, operating cash flows, and potential revolver borrowings to meet cash needs through the remainder of 2019 and the next several years, subject to operating and economic conditions.
- Capital expenditure commitments were approximately $3.9 million. The planned three-year ERP migration carries $8.9 million of software license commitments payable through 2025.
- Potential distributor floor-plan repurchases reached a maximum exposure of approximately $73.8 million, up from $49.7 million at year-end as distributors increased use of financing. Management said the risk is mitigated by the value of the repossessed products and the related liability was not considered probable or material.
- Other risks include cyclical demand, customer access to credit, supplier availability and input prices, foreign exchange, and ordinary-course litigation. Management considered litigation accruals and insurance adequate and did not expect excess liabilities to materially affect results. The filing reported no material change to previously disclosed risk factors.
- Foreign-exchange transaction losses were $0.2 million in Q3 and $0.6 million year to date; the nine-month 2018 period had a $0.3 million gain. Foreign currency translation reduced other comprehensive income by $1.2 million year to date.
- The company adopted lease accounting guidance in 2019, recognizing operating lease right-of-use assets and liabilities. A quarterly dividend of $0.18 per share was declared on November 4, payable December 16, 2019.
Important facts for investors to verify
- Whether domestic demand and production capacity can sustain growth as military and foreign deliveries fluctuate.
- Whether chassis supply constraints, material costs, and tariff effects change production, margins, or delivery timing.
- Progress and spending against the ERP project, software commitments, and capital expenditure plans.
- Revolver utilization, covenant headroom, and liquidity relative to the distributor repurchase exposure.
- Foreign-exchange effects and the timing of international and military customer orders.