Miller Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Miller Industries manufactures vehicle towing and recovery equipment. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First 9 months 2011 | First 9 months 2010 |
|---|---|---|---|---|
| Net sales | $96.8 | $73.7 | $303.3 | $227.2 |
| Costs of operations | $81.2 | $62.3 | $249.4 | $194.0 |
| Gross profit (sales less costs of operations) | $15.6 | $11.4 | $53.8 | $33.3 |
| Gross margin | 16.1% | 15.5% | 17.8% | 14.6% |
| Income before taxes | $8.0 | $4.8 | $30.0 | $13.2 |
| Net income | $4.9 | $2.9 | $18.1 | $8.1 |
| Diluted earnings per share | $0.41 | $0.24 | $1.49 | $0.67 |
Sales grew 31.4% in Q3 and 33.5% year to date. Management attributed the increase primarily to government-related orders, with additional contribution from stronger commercial demand. Costs of operations declined as a share of sales, mainly reflecting a lower proportion of lower-margin chassis sales. SG&A rose in dollars but fell as a percentage of sales to 7.7% in both periods, from 8.8% in Q3 2010 and 8.7% for the first nine months of 2010. Effective tax rates were 38.9% for Q3 and 39.7% year to date.
Cash flow, balance sheet, and capital allocation
- Operating cash flow: $3.9 million for the first nine months, down from $13.8 million. Higher receivables and inventory absorbed cash; the filing links their growth to increased demand and government-order production.
- Investing cash flow: $0.3 million used, versus $4.2 million used in the prior-year period. Capital expenditures were $1.4 million, partly offset by $1.0 million in asset-sale proceeds.
- Financing cash flow: $15.3 million used, mainly for $13.7 million of share repurchases and $4.2 million of dividends, partly offset by $2.1 million from stock-option exercises.
- Cash and temporary investments: $35.7 million at September 30, 2011, down from $46.3 million at year-end 2010. Accounts receivable were $72.5 million and inventories $55.1 million, compared with $60.1 million and $38.9 million, respectively, at year-end.
- Debt and liquidity: No borrowings under the $20 million unsecured revolving facility; $10,000 of equipment notes remained, all current. The facility expires March 31, 2013. Current liabilities were $56.1 million and shareholders’ equity was $155.7 million.
- Dividends and repurchases: The board shifted from an annual to a quarterly dividend policy in May 2011; the declared quarterly dividend was $0.12 per share. By September 30, the company had repurchased 796,500 shares for $13.7 million under a $20 million authorization, with $6.3 million remaining.
Outlook, risks, and contingencies
Management expected follow-on government-order deliveries to continue at roughly current levels through year-end, with production expected to be completed in Q4 2011. It did not expect additional follow-on government-related orders in the near term, while continuing to pursue domestic and foreign government business. Management said cash on hand, operating cash flow, and available credit were expected to meet cash needs during 2011 and for the next several years, subject to operating and economic conditions.
Key uncertainties include the slow economic recovery, the cyclical industry, customer access to credit and floor-plan financing, fuel and transportation costs, and the cost and availability of steel, aluminum, and other raw materials. Government orders are an important source of revenue: prime-contractor government-related orders accounted for 22.3% of Q3 sales. The largest customer represented 29.2% of nine-month sales and 30.1% of receivables at September 30. Foreign-exchange translation increased accumulated other comprehensive income by $1.9 million from year-end; transaction gains were not material. The company reported no material change in risk factors and said disclosure controls were effective.
Potential repurchase obligations tied to customer defaults had a maximum collateral repurchase amount of approximately $17.2 million; management said the value of the products and the liability at inception mitigated the exposure. The company also had $1.3 million of property and equipment commitments and approximately $1.1 million of non-cancelable operating lease obligations. Routine litigation is ongoing; management did not expect uninsured or unaccrued outcomes to materially affect financial position or results.
Most important facts for investors to verify
- Whether sales and earnings can be sustained after government-order production is expected to finish in Q4 2011, especially given management’s near-term order expectations.
- Whether the substantial increase in receivables and inventory converts into cash; operating cash flow was much lower despite higher earnings.
- The concentration and collectability risks from the largest customer, including its share of sales and receivables.
- Raw-material cost trends, commercial demand, and customer financing conditions, all identified as material business sensitivities.
- Future cash use for dividends and the remaining share-repurchase authorization, alongside liquidity and credit-facility covenant requirements.