Miller Industries Inc: Form 10-Q for the period ended Sep 30, 2024

RESULTS OF OPERATIONS

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 for the 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 the applicable period end (December 31st or September 30th) 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.

We develop and manufacture 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 and then 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. Furthermore, 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. We believe this 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 research and development 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. Our investments in strategic and planned projects have contributed to our increased production capacity and optimized our manufacturing processes, including investing in component re-design capabilities that allow for more flexibility in our manufacturing and sourcing. Our recent domestic plant expansion and modernization projects have installed sophisticated robotics systems and other advanced technologies to complement our talented workforce. The projects completed during the period from 2017 to 2021 were at a cost of over $82 million. As we continue to focus on modernization and operational excellence, we expect to continue to invest in robotics and automated material handling equipment across all our domestic manufacturing facilities.

We completed phase one of the implementation of an enterprise software solution during 2021, and we are continuing to implement additional functionality available in the solution. We expect this software to substantially improve our administrative efficiency and customer service levels throughout the company.

TRENDS AND OTHER FACTORS AFFECTING OUR BUSINESS

During the first three quarters of 2024, our strong backlog allowed revenues to increase as a result of the actions we took to diversify and increase the flexibility of our supply chain, as well as the increased availability of parts and components due to global supply chain improvements. Gross margin also slightly improved over the prior year’s average due to our pricing actions, productivity improvements, and the stabilizing of raw material costs. The combination of favorable macroeconomic trends and improved productivity resulted in increased net income for the period.

Based on our strong backlog, price increases, and productivity improvements we have implemented, lessening supply chain disruptions and easing inflationary pressures, our operating results improved throughout fiscal 2023 and through the nine months ended September 30, 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, supply chain constraints, inflationary pressures, 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 through the remainder of 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.

During the last week of the third quarter of 2024, the Company experienced delays in delivery of finished goods from its Tennessee facilities due to the effects of Hurricane Helene. While our facilities sustained no physical damage, we did experience a two-week disruption to production at our Greeneville, Tennessee location due to utility outages.

The impacts of the 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 statements 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 nine months ended September 30, 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 for the fiscal year ended December 31, 2023.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

(in thousands)

Net Sales

Net sales for the three months ended September 30, 2024 were $314.3 million compared to $274.6 million for the corresponding period in fiscal 2023, an increase of 14.5%. The increase in net sales was primarily driven by increases in original equipment manufacturer (“OEM”) chassis deliveries over the prior year period.

Net foreign sales for the three months ended September 30, 2024 were $27.7 million compared to $31.9 million for the corresponding period in fiscal 2023, a decrease of 13.0%.

Cost of Operations

Cost of operations includes the direct cost of manufacturing, including direct materials, labor and related factory overhead, physical inventory adjustments, as well as inbound and outbound freight. Cost of operations for the three months ended September 30, 2024 were $272.2 million compared to $231.7 million for the corresponding period in fiscal 2023, an increase of 17.5%. The increase in cost of operations was primarily attributed to increased OEM chassis deliveries during the quarter.

Gross Profit

Gross profit is equal to net sales less cost of operations. Gross profit for the three months ended September 30, 2024 was $42.0 million compared to $42.9 million for the corresponding period in fiscal 2023, a decrease of 2.0%. This decrease was primarily due to increased sales of chassis which put downward pressure on our overall margin.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended September 30, 2024 were $22.3 million compared to $19.3 million for the corresponding period in fiscal 2023, an increase of 15.6%. The increase in selling, general and administrative expenses was primarily due to additional executive compensation expense and incentives for all employees, including training and more competitive compensation to improve employee retention, and, to a lesser extent, due to increased investor relations activity during the quarter. As a percentage of net sales, selling, general and administrative expenses increased to 7.1% for the three months ended September 30, 2024, from 7.0% for the comparable period in fiscal 2023.

Interest Expense, Net

Interest expense, net for the three months ended September 30, 2024 was $0.3 million compared to $1.8 million for the corresponding period in fiscal 2023, a decrease of 86.2%. Interest expense was consistent with the comparable period in 2023, offset by increased interest income billed on open accounts receivable balances.

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 gain of $0.3 million and loss of $0.02 million for the three months ended September 30, 2024 and 2023, respectively. Other (income) expense for the three months ended September 30, 2024 was de minimus.

Provision for Income Taxes

The provision for income taxes for the three months ended September 30, 2024 and 2023 reflects a combined federal, state, and foreign tax rate of 22.0% and 20.8%, 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.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

(in thousands)

Net Sales

Net sales for the nine months ended September 30, 2024 were $1.04 billion compared to $857.1 million for the corresponding period in fiscal 2023, an increase of 20.8%. 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 nine months ended September 30, 2024 were $89.8 million compared to $83.9 million for the corresponding period in fiscal 2023, an increase of 7.0%.

Cost of Operations

Cost of operations includes the direct cost of manufacturing, including direct materials, labor and related factory overhead, physical inventory adjustments, as well as inbound and outbound freight. Cost of operations for the nine months ended September 30, 2024 were $898.2 million compared to $743.9 million for the corresponding period in fiscal 2023, an increase of 20.7%. 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 nine months ended September 30, 2024 was $137.3 million compared to $113.2 million for the corresponding period in fiscal 2023, an increase of 21.3%. Gross profit as a percentage of sales remained consistent at approximately 13.2% for the period ending September 30, 2024 and 2023.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2024 were $66.6 million compared to $56.7 million for the corresponding period in fiscal 2023, an increase of 17.5%. The increase in selling, general and administrative expenses was primarily due to additional executive compensation expense and incentives for all employees, including training and more competitive compensation to improve employee retention, and, to a lesser extent, due to increased investor relations activity. As a percentage of net sales, selling, general and administrative expenses decreased to 6.4% for the nine months ended September 30, 2024, from 6.6% for the comparable period in fiscal 2023.

Interest Expense, Net

Interest expense, net for the nine months ended September 30, 2024 was $3.5 million compared to $4.5 million for the corresponding period in fiscal 2023, a decrease of 21.7%. Interest expense was consistent with the comparable period in 2023, offset by increased interest income billed on open accounts receivable balances during the current year.

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 gain of $0.2 million and gain of $0.6 million for the nine months ended September 30, 2024 and 2023, respectively. Other (income) expense for the nine months ended September 30, 2024 includes $0.2 million of other income.

Provision for Income Taxes

The provision for income taxes for the nine months ended September 30, 2024 and 2023 reflects a combined federal, state, and foreign tax rate of 21.5% and 21.2%, 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 flows, 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 September 30, 2024, we had cash and temporary investments of $40.6 million, and $35.0 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 stock repurchase program, and principal and interest payments on indebtedness.

The cash and temporary investments balance as of September 30, 2024 included $17.8 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 flows, 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 nine months ended September 30, 2024, net cash provided by operating activities was $28.6 million compared to net cash provided by operating activities of $4.2 million in the comparable period in fiscal 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 due to increased net income that was offset primarily by increased accounts receivable as a result of the timing of OEM chassis deliveries, as well as other major components, creating an installation backlog throughout our distribution network and delays in completion of the retail product.

Cash Flows Provided by (Used in) Investing Activities

During the nine months ended September 30, 2024, cash used in investing activities was $14.0 million compared to cash used in investing activities of $27.5 million for the comparable period in fiscal 2023. The cash used in investing activities was primarily for purchases of property, plant and equipment as we continue to invest in manufacturing automation and ERP system enhancements. The prior year included $17.8 million for the acquisition by SHC which was adjusted down by $0.4 million as of June 30, 2024 as a result of the final valuation adjustment.

Cash Flows Provided by (Used in) Financing Activities

During the nine months ended September 30, 2024, cash used in financing activities was $4.4 million compared to cash provided by financing activities of $8.8 million for the comparable period in fiscal 2023. The cash used in financing activities was primarily due to cash payments for dividends and repurchase of common stock, offset by an advance on the credit facility.

Contractual Obligations

As of September 30, 2024 and December 31, 2023, we had commitments of approximately $15.4 million and $8.6 million, respectively, for the acquisition of property, plant and equipment and commitments of approximately $0.5 million in software license fees related to the implementation of our enterprise software solution. This increase in commitments for acquisition of property, plant and equipment was due to our continued investments in automation and the use of robotics in our production processes to streamline efficiency. There have been no other material changes to our contractual obligations from what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Credit Facility

The Company had outstanding borrowings of $65.0 million and $60.0 million under the credit facility as of September 30, 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 November 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 $0.6 million and $0.9 million in non-cancelable operating lease obligations as of September 30, 2024 and December 31, 2023, respectively. We had no non-cancelable finance lease obligations as of September 30, 2024 and December 31, 2023.

Capital Expenditures

Capital expenditures during the nine months ended September 30, 2024 and 2023 were $14.1 million and $9.7 million, respectively. We make ongoing capital investments in our property, plant and equipment to increase our production capacity and the efficiencies, as well as the sustainability and safety of our operations. This includes capital investments during the nine months ended September 30, 2024 in the use of robotics and automation in our production processes to streamline efficiency. 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.

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 September 30, 2024. Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of September 30, 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 Controls over Financial Reporting

There were no significant changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

There have been no material changes to the risk factors described in Part I., Item 1A. – “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.