Miller Industries Inc: Form 10-Q for the period ended Mar 31, 2024

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a summary from the perspective of management on our consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented.

The MD&A should be read in conjunction with our Annual Report on Form 10-K filed with the SEC for fiscal year ended December 31, 2023 and the unaudited condensed consolidated financial statements and the accompanying notes thereto included herein.

To facilitate timely reporting, the condensed consolidated financial statements include accounts of certain subsidiaries whose closing dates differ from March 31st by 31 days (or less).

References to “the Company” “we”, “us”, and “our” are intended to mean the business and operations of Miller Industries, Inc., and its consolidated subsidiaries unless the context requires otherwise.

ABOUT MILLER INDUSTRIES, INC.

Miller Industries, Inc. is The World’s Largest Manufacturer of Towing and Recovery Equipment®, with domestic manufacturing operations in Tennessee and Pennsylvania, and foreign manufacturing operations in France and the United Kingdom.

The Company develops innovative high-quality towing and recovery equipment worldwide. We design and manufacture bodies of car carriers and wreckers, which are installed on chassis manufactured by third parties, which are sold to our customers under our Century®, Vulcan®, Chevron™, Holmes®, Challenger®, Champion®, Jige™, Boniface™, Titan® and Eagle® brand names.

Our products are primarily marketed and sold through a network of distributors that serve all 50 states, Canada, Mexico and other foreign markets, and through prime contractors to governmental entities. Further, we have substantial distribution capabilities in Europe as a result of our ownership of Jige International S.A. and Boniface Engineering, Ltd. While most of our distributor agreements do not generally contain exclusivity provisions, management believes our independent distributors do not offer products of any other towing and recovery equipment manufacturer, which we believe is a testament of their loyalty to our brands.

In addition to selling our products, our independent distributors provide end-users with parts and service. We also utilize sales representatives to inform prospective end-users about our current product lines in an effort to drive sales to independent distributors. Management believes the strength of our distribution network and the breadth and quality of our product offerings are two key advantages over our competitors.

We focus on a variety of key indicators to monitor our overall operating and financial performance. These indicators include measurements of revenue, operating income, gross margin, net income, earnings per share, capital expenditures and cash flow.

Our history of innovation in the towing and recovery industry has been an important factor behind our growth over the last decade and we believe that our continued emphasis on research and development will be a key factor in our future growth. We opened a free-standing R&D facility in Chattanooga in 2019, where we pursue various innovations in our products and manufacturing processes, some of which are intended to enhance the safety of our employees and reduce our environmental impact. In addition, our recent domestic plant expansion and modernization projects have installed sophisticated robotics and implemented other advanced technologies to increase our production capacity and optimize our manufacturing processes, including investing in part re-design capabilities that allows for more flexibility in our manufacturing and sourcing. These projects were completed during the period from 2017 to 2021 at a cost of over $82.0 million. We completed phase one of the implementation of an enterprise software solution during 2021, and we continued to implement additional functionality available in the solution in 2022 and 2023. We expect this software to substantially improve our administrative efficiency and customer service levels. As we retain our focus toward modernization, we expect to continue to invest in robotics and automated material handling equipment across all of our domestic manufacturing facilities.

TRENDS AND OTHER FACTORS AFFECTING OUR BUSINESS

Continuing in 2024, our strong backlog allowed revenues to increase as parts became more available due to supply chain improvements and actions we took to diversify and increase the flexibility of our supply chain. Gross margin also steadily improved due to our pricing actions, productivity improvements and the stabilizing of raw material costs. In addition, with the acquisition of SHC, we were able to enhance the stability of our supply chain. The combination of favorable macroeconomic trends and improved productivity resulted in increased net income for the period.

Based on our strong backlog, the price increases and productivity improvements we have implemented, lessening supply chain disruptions and easing inflationary pressures, our operating results improved throughout fiscal 2023 and for the period ended March 31, 2024, and we believe we are well-positioned to continue enhancing our operating results. However, our performance will be heavily influenced by, among other things, whether supply chain constraints and inflationary pressures continue to lessen or worsen, the continuing impact of geopolitical factors, the threat of recession and general

economic factors. The impact of these factors remains largely out of our control, and we currently anticipate that these factors could have an adverse impact on our production capabilities, financial results and cash flows to continue throughout fiscal 2024.

In the second quarter of 2023, the Company acquired the assets and assumed certain liabilities of Southern Hydraulic Cylinder, Inc., which manufactures hydraulic cylinders and related components used in the production of our small carrier units. Management believes this acquisition will strengthen its efforts to enhance the stability of the Company’s supply chain.

The impacts of current global supply chain disruptions, inflationary environment, geopolitical tensions and other macroeconomic factors have led to foreign currency fluctuations. The impact of inflationary or deflationary pressures have caused and may continue to cause foreign currency translation gains or losses within our condensed consolidated statement of comprehensive income.

CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates. Certain accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimations and assumptions. The accounting policies deemed to be most critical to our financial position and results of operations are those related to accounts receivable, inventory, long-lived assets, warranty reserves, revenues, and income taxes. There have been no significant changes in our critical accounting policies during the three months ended March 31, 2024, from the information provided under the heading “Critical Accounting Policies and Sensitive Accounting Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC for fiscal year ended December 31, 2023.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

(in thousands)

Net Sales

Net sales for the three months ended March 31, 2024 were $349.9 million compared to $282.3 million for the comparable period in fiscal 2023, an increase of 23.9%. The increase in net sales was primarily driven by increases in production volume due to supply chain improvements and continued strong customer demand.

Net foreign sales for the three months ended March 31, 2024 were $31.3 million compared to $24.1 million for the comparable period in 2023, an increase of 30.0%.

Cost of Operations

Cost of operations for the three months ended March 31, 2024 were $305.6 million compared to $251.9 million for the comparable period in fiscal 2023, an increase of 21.3%. The increase in cost of operations was primarily attributed to increased deliveries resulting from continued stabilization in our supply chain.

Gross Profit

Gross profit is equal to net sales less cost of operations. Gross profit for the three months ended March 31, 2024 was $44.2 million compared to $30.4 million for the comparable period in fiscal 2023, an increase of 45.5%. Cost of operations includes the direct cost of manufacturing, including direct materials, labor and related overhead, physical inventory adjustments, as well as inbound and outbound freight.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended March 31, 2024 were $21.5 million compared to $17.9 million for the comparable period in fiscal 2023, an increase of 20.2%. The increase in selling, general and administrative expenses was primarily due to additional executive compensation expense and incentives for all employees, investor relations activity, increased expenses associated with increased sales volume and increased investment in our workforce, specifically for training and more competitive compensation to improve employee retention. As a percentage of net sales, selling, general and administrative expenses decreased to 6.2% for the three months ended March 31, 2024, from 6.3% for the comparable period in fiscal 2023.

Interest Expense, Net

Interest expense, net for the three months ended March 31, 2024 was $1.2 million compared to $1.0 million for the comparable period in fiscal 2023, an increase of 23.0%. Increases in interest expense, net were primarily due to increases in floor plan interest payments, increased borrowings, and increased interest rates, offset by interest income.

Other (Income) Expense

The Company is exposed to foreign currency transaction risk when the Company has transactions that are denominated in a currency other than its functional currency. When the related balance sheet items are remeasured in the functional currency of the Company, gains and losses are recorded through other (income) expense. Other (income) expense, net is composed primarily of these foreign currency exchange gains and losses. The Company experienced a net foreign currency exchange loss of $0.2 million and gain of $0.3 million for the three months ended March 31, 2024 and 2023, respectively. Other (income) expense for the three months ended March 31, 2024 includes $0.2 million of other income.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2024 and 2023 reflects a combined federal, state and foreign tax rate of 20.8% and 21.9%, respectively. The principal differences between the federal statutory tax rate and the effective tax rate consist primarily of state taxes, domestic tax credits, and tax differences on foreign earnings.

LIQUIDITY AND CAPITAL RESOURCES

We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund our operations and expected future cash needs over the next 12 months. However, our ability to satisfy our cash needs will substantially depend upon a number of factors, including our future operating performance, and the economic, regulatory and other factors discussed elsewhere in this Quarterly Report, many of which are beyond our control.

Cash and Temporary Investments

As of March 31, 2024, we had cash and temporary investments of $26.8 million, and $45.0 million in available borrowings under our credit facility. Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends, purchases pursuant to our recently announced share repurchase program, and principal and interest payments on indebtedness. At March 31, 2024, the Company had commitments of approximately $5.8 million for the acquisition of property, plant and equipment and commitments of approximately $1.4 million in software license fees related to the implementation of our enterprise software solution.

The cash and temporary investments balance at March 31, 2024 included $18.3 million of cash held by subsidiaries outside of the United States.

Cash Flows

The following table summarizes our cash flows for the period:

(in thousands)

Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases and payments to vendors and tax payments in the regular course of business.

Cash Flows Provided by (used in) Operating Activities

During the three months ended March 31, 2024, net cash provided by operating activities was $9.0 million compared to net cash used in operating activities of $6.8 million in the comparable period in 2023. Cash provided by operating activities is generally attributable to the receipt of payments from our customers as settlement of their contractual obligation once we have fulfilled all performance obligations related to our contracts with them. These cash receipts are netted with payments for purchases of inventory, payments for materials used in manufacturing and other payments that are necessary in the ordinary course of our operations, such as those for utilities and taxes. The change in operating activities is primarily due to increased net income and a stabilization of changes in operating assets and liabilities as a result of improved availability of purchased components.

Cash Flow Provided by (used in) Investing Activities

During the three months ended March 31, 2024, cash used in investing activities was $4.7 million compared to cash used in investing activities of $1.7 million for the comparable period in 2023. The increase in cash used in investing activities was primarily for purchases of property, plant and equipment. We also continued to invest in manufacturing automation and ERP system enhancements.

Cash Flows Provided by (used in) Financing Activities

During the three months ended March 31, 2024, cash used in financing activities was $7.2 million compared to cash used in financing activities of $2.1 million for the comparable period in 2023. The increase in cash used in financing activities was primarily due to payments of $5 million under the Company’s credit facility, as well as cash dividend payments of $2.2 million.

Contractual Obligations

There have been no material changes to our contractual obligations from what was previously disclosed in our Annual Report on Form 10-K filed with the SEC for fiscal year ended December 31, 2023.

Credit Facility

The Company had outstanding borrowings of $55.0 million and $60.0 million under the credit facility at March 31, 2024 and December 31, 2023, respectively. See the disclosure under the heading “Credit Facility” in Note 5 of the “Notes to Condensed Consolidated Financial Statements” in this Quarterly Report on Form 10-Q for additional information regarding the Company’s credit facility.

As of May 1, 2024, the outstanding balance on our credit facility was $65.0 million.

Other Long-Term Obligations

Prior to applying a discount rate to our lease liabilities, we had approximately $0.8 million and $0.9 million in non-cancelable operating lease obligations at March 31, 2024 and December 31, 2023, respectively. We had no non-cancelable finance lease obligations as of March 31, 2024 and December 31, 2023.

Capital Expenditures

Capital expenditures during the period ended March 31, 2024 and 2023 were $4.7 million and $1.7 million, respectively. We make ongoing capital investments in our property, plant and equipment, and continue to increase purchases of materials, components and chassis to ramp up production to meet demand, which has been at historic levels. We believe that in periods of normalized supply chain, our historical capital investments in our manufacturing facilities and other capital assets will increase the production capacity and efficiencies of our operations. See “Cash Flows” – “Cash Flows provided by (used in) Investing Activities” contained within this MD&A for additional discussion on capital expenditures.

There have been no material changes to our quantitative and qualitative disclosures about market risk from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.

Disclosure Controls and Procedures

We evaluated, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of March 31, 2024. Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal controls over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in Part I, "Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.