Miller Industries, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; fourth-quarter figures are also disclosed. The company manufactures towing and recovery equipment, selling primarily through independent distributors. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $615.1 | $601.1 | +2.3% |
| Gross profit / margin | $67.1 / 10.9% | $64.3 / 10.7% | Margin +0.2 percentage points |
| Operating income / margin | $31.5 / 5.1% | $32.0 / 5.3% | Operating income -1.3% |
| Net income | $23.0 | $19.9 | +15.5% |
| Diluted EPS | $2.02 | $1.75 | +15.4% |
| Cash from operating activities | $14.0 | $20.9 | Down $7.0 |
| Capital expenditures | $24.7 | $25.0 | Nearly unchanged |
| Cash and temporary investments | $21.9 | $31.1 | Down $9.2 |
- Revenue growth was driven mainly by foreign sales, up to $88.0 million from $63.8 million; North American sales declined to $527.1 million from $537.3 million.
- Costs of operations were 89.1% of sales versus 89.3% in 2016. SG&A rose to $35.6 million from $32.3 million, or 5.8% of sales versus 5.4%.
- Working capital was $125.7 million and total assets were $317.2 million. Current assets of $227.4 million compared with current liabilities of $101.7 million.
- Year-end obligations included $10.0 million outstanding on a $50 million revolving facility and $0.6 million on a French subsidiary loan. The facility matures May 31, 2019; $40 million was unused at year-end. The company reported compliance with its covenants.
- Operating cash flow less capital expenditures was approximately negative $10.7 million. Financing cash use was $2.4 million, including $8.2 million of dividends and $5.0 million of net facility borrowings.
- Quarterly sales rose from $148.9 million in Q1 to $159.7 million in Q4. Q4 net income was $9.3 million, or $0.81 diluted EPS, compared with $4.5 million and $0.38 diluted EPS in Q4 2016.
Material changes and unusual items
- Net income increased despite slightly lower pretax income ($30.3 million versus $31.1 million), principally reflecting a lower effective tax rate: 24.1% versus 35.8%.
- The 2017 tax provision reflected the Tax Cuts and Jobs Act, including deferred-tax remeasurement and a $1.1 million deemed-repatriation tax. Release of a $1.157 million previously unrecognized tax-benefit liability also reduced tax expense. The company elected to pay the deemed-repatriation tax over eight installments.
- Other income included a $0.601 million gain on the sale of a Pennsylvania facility. The Pennsylvania manufacturing consolidation and expansion was substantially completed; total project costs were approximately $24.7 million.
- Cash flow was affected by working-capital investment, including higher receivables and inventory and lower accounts payable. Capital spending supported Pennsylvania, Tennessee and French facilities.
- The quarterly dividend increased to $0.18 per share from $0.17 in 2016; full-year dividends were $0.72 per share. A $0.18 quarterly dividend was declared in March 2018.
Outlook, risks and contingencies
- Management expected cash from operations, cash on hand and available facility borrowings to be sufficient for cash needs during 2018 and the next several years. No specific revenue or earnings guidance was provided.
- Management cited favorable economic conditions and demand, while identifying cyclical end markets and customers’ access to credit as important demand drivers. Component and chassis supply delays were experienced in late 2017.
- Management warned that proposed U.S. tariffs on imported steel and aluminum could raise material costs substantially; the company uses significant quantities of imported materials and may not be able to pass increases through promptly or fully.
- Other significant risks include volatile input costs, competition, skilled-labor availability, foreign-exchange and Brexit uncertainty, cybersecurity and regulatory exposure, product warranty/liability claims, and disruption or loss of manufacturing facilities.
- Distributor financing arrangements could require product repurchases of up to $54.1 million if distributors default; no repurchases were required in 2017 or 2016. The company also reported $11.1 million of capital-project commitments and $33.5 million of purchase obligations.
- Routine litigation was disclosed; management believed liabilities beyond recorded accruals and insurance would not materially affect the company. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile operating cash flow: the audited cash flow statement reports $13.953 million for 2017, while the MD&A narrative states $13.975 million.
- Assess whether strong Q4 earnings and the lower 2017 tax rate are sustainable, separating recurring operating performance from tax-law effects and the facility-sale gain.
- Track steel, aluminum and component costs, the effects of any tariffs, and whether suppliers can meet chassis and parts requirements.
- Review cash conversion and working-capital trends alongside the ongoing capital program, debt maturity, credit-facility covenants and dividend capacity.
- Evaluate the potential exposure under distributor repurchase commitments and the company’s ability to manage international, currency and customer-credit risks.