Miller Industries, Inc. (MLR) Q2 2012 Earnings Report, Transcript and Summary

Hello, this is the Chorus Call operator. Welcome to the Miller Industries Second Quarter 2012 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to Alexandra Tramont. Ms. Tramont?

Thank you, and good morning, everyone. I would like to welcome you to the Miller Industries conference call. We are here to discuss the company's 2012 second quarter results, which were released after the close of the market yesterday. With us from management today are Bill Miller, Chairman of the Board; Jeff Badgley, CEO; Vince Mish, CFO; Frank Madonia, General Counsel; Debbie Whitmire, Corporate Controller; and Allison Houghton, Director of Finance. Today's call will begin with formal remarks from management, followed by a question-and-answer period. Please note that in this morning's call, management may make forward-looking statements in accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risks related to these statements, which are more fully described in the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission. With these formalities out of the way, I would like to turn the call over to Jeff Badgley. Jeff, please go ahead.

Thank you, and good morning. Our second quarter results reflect continued execution in an environment that became increasingly challenging during the 2012 second quarter. Yesterday, we reported 2012 second quarter sales of $87.3 million compared to sales of $97.6 million in the prior year period. As we noted in the press release, this decrease reflected sales that were made to prime contractors for government-related orders in the year-ago period that did not repeat in the current quarter's results. Those sales represented approximately 22% of our total sales in the 2011 second quarter. Softer economic conditions developed during the quarter across many of our commercial markets both in the U.S. and abroad with a strong demand from commercial products that we saw on the first quarter moderating, particularly, in the latter part of the second quarter. Much of the softer market conditions across these markets was attributable to an overall decline in consumer confidence. Now I'll turn the call over to Vince, who will review the quarter's financial results. After that, I'll be back with some more comments, then we'll open the line for questions. Mr. Mish?

Thanks, Jeff, and good morning, everyone. As Jeff mentioned, net sales for the second quarter 2012 were $87.3 million versus $97.6 million in the 2011 second quarter. Sales were down approximately 11% year-over-year, reflecting the government-related work we filled a year ago, which did not repeat, offset by higher sales volumes in our commercial markets. Cost of operations decreased by about 4% to $76.8 million in the 2012 second quarter compared to $80.1 million last year driven by the lower volumes. Gross profit was $10.6 million or 12.1% of net sales in the second quarter of 2012, compared to $17.5 million or 17.9% of net sales in the second quarter of 2011. The decrease in gross margin percentage resulted from the change in sales mix, which, in 2012, consisted of more commercial sales with the related chassis component as Jeff highlighted. SG&A expense decreased 6.4% over the prior year to $7.2 million. As a percentage of sales, SG&A increased to 8.3% from 7.9% over the prior year period due to the fixed nature of certain of these expenses. Other income related to foreign currency transactions was a net gain of $1.0 million in the second quarter of 2012 compared to a net gain of $9,000 in the second quarter 2011. The shift in foreign currency effects were primarily a result of the dollar strengthening against the euro. Interest expense in the 2012 second quarter was $214,000, flat with the second quarter of 2011. Net income was $2.5 million or $0.23 per diluted share compared to $5.8 million or $0.47 per diluted share for the 2011 second quarter. Now let me briefly review our results for the 6 months ended June 30, 2012. Net sales for the first 6 months of 2012 were $182.3 million compared to $206.5 million in the prior year period. Results in the first 6 months of 2011 included the completion of a government-related order from a prime contractor during the first quarter of 2011, as well as additional government-related work in the 2011 second quarter that represented about 32.5% of our total sales for the first 6 months of 2011 and did not recur in the 2012 period. Gross profit was $21.4 million or 11.8% of sales compared to $38.2 million or 18.5% of sales for the 6 months of 2011. For the first 6 months of 2012, the company reported net income of $4.6 million or $0.40 per diluted share compared to net income for the first 6 months of 2011 of $13.2 million or $1.08 per diluted share. Turning now to our balance sheet. We continue to operate from a position of financial strength. We had cash and cash equivalents of $40.8 million as of June 30, 2012 compared to $37.6 million as of March 31, 2012 and $50.2 million at December 31, 2011. Accounts receivable at June 30, 2012 totaled $67.3 million compared to $74.3 million as of March 31, 2012 and $61.1 million at December 31, 2011. Inventories were $47.7 million at June 30, 2012 compared to $52.4 million at March 31, 2012 and $48.2 million at December 31, 2011. Accounts payable at June 30, 2012 were $36.4 million compared to $46.1 million at March 31, 2012, and $39.7 million at December 31, 2011. We continue to operate with no borrowings against our $25 million unsecured revolving credit facility. Now I'll turn the call back to Jeff for further remarks.

Thanks, Vince. Overall, our second quarter performance reflected the ongoing economic uncertainty. As you no doubt have read in recent weeks, the impact of the lingering, generally weak global economy is being felt by most manufacturing industries operating in the global marketplace. We continue to remain susceptible to macroeconomic factors such as consumer confidence, economic turmoil in Europe and credit availability, which in this environment can instill fear of purchasing or, to minimum, delay purchasing decisions on the part of our end users. As we move through the second quarter and to the last half of the year, we see the impact of all these factors in the form of volatility in the short-term demand for our products. I would expect this trend to continue in the coming months until confidence in the general economic direction is restored especially in the U.S. and Europe. While this presents short-term challenges, we continue to invest in initiatives to drive long-term growth and enhance our product line going forward. We're focusing our sales initiatives on targeting new customers and new markets and aggressively pursuing municipal and military tenders. Although conditions weakened in Europe, we continue to seek out new channels of distribution and believe this region provides good growth opportunities as economic conditions improve. We continue to target military tenders in relationships with prime contractors who are bidding the tenders. While success in the form of orders under these tenders is clearly a long-term initiative, we have enhanced our position with a number of large prime contractors around the world, which we feel will lead to opportunities in the future. Additionally, we continue to invest in the development of new products and capabilities to meet a variety of customer needs. These products have been on display at numerous trade shows in the U.S. and Europe. While you can never predict success in tender process, the combination of our industry-leading product offering and unmatched ability to deliver on order positions us well for success when opportunities arise. To recap, while our results were affected by near-term challenges, we have positioned the company since the last downturn to operate a cross cycle such as this from a position of financial strength. While we remain aggressive on the sales front, we will continue to protect margins by adjusting our cost base to conform with the current operating environment and seek out efficiencies throughout our business where possible. We remain committed to leveraging our strong financial position to further invest in our business and return value to our shareholders. Looking ahead to the second half of 2012, economic conditions remain challenging and visibility is limited across our markets. While we are cautious in our near-term outlook, we remain confident that our investment initiatives will create long-term growth for the company. In closing, I would like to thank our employees, our shareholders, suppliers and our customers for their ongoing support of Miller Industries. With that, we're ready to take your questions. Thank you.

[Operator Instructions] And the first question comes from Rick D'Auteuil from Columbia Management.

A couple of quarters, I think, actually in each of the last 2 quarters maybe, you have mentioned France as a identified potential government related opportunity. Can you give us an update on the status of that?

Sure. We're still in the testing stage. We have received a purchase order for a first tranche of that business, which will start production in probably midway through the first quarter of next year.

Okay. And that is just a fraction of the opportunity if that goes well?

Yes, sir. And obviously, given current economic conditions and budgetary restraints in Europe, you hope the purchase order remains in place. We think it will, but I would be remiss in not saying that the environment continues to change.

Okay. I mean, so how would you describe the pipeline of defense-related opportunities? Is it robust, average, weaker than average?

For us, we're working on a lot of tenders. But predominantly, in areas of the world where we never have those opportunities in the past. So in the U.S., I would say it's extremely weak. We feel that we have more opportunities today than we did in the past due to our efforts in developing relationships with prime contractors throughout the world.

Okay. And then just, again, you guys still have an excellent balance sheet, which we appreciate as holders. You've done things with the capital. You retained a dividend that's healthy. You bought back shares in the past. Any current thoughts on capital allocation? It doesn't look like you're going to need capital to expand anytime soon given the environment you talked about. So what are your thoughts on capital allocation from your excess cash?

Bill, you want to talk about that?

Sure. As we look at -- from a board perspective, we realized that when the business comes back, which we expect, and it's been a slow as you can tell, without the military business in it this year, we would still pick up, I'd say, probably 10% increase in our ordering from the domestic side, the commercial side and we're still way, I don't -- we were way below what our normalized sales and production levels would be. When they hit, assuming historically, they always do hit because we have some cyclical business, and it requires quite a bit of capital to gear up very quickly. And that's usually in the range, I'd say, of $20 million. Another portion of our capital, a portion is in Europe, which is there, which obviously, we're not going to bring it back and pay 30% taxes. And we might take a look at that if they have a tax holiday on bringing the money back. In addition, that money is pretty much needed for the French military order that Jeff spoke about, the gear that plays up. So we kind of feel like that capital, at least, at this time, is -- could be very useful and we could need it on a fairly short-term basis. Although, we continue to pay out our dividend, which is probably slightly more than our depreciation and it's certainly less than our cash flows, we would like to see what else happens in the world and see how the economy comes along. So I think at this point, the board is kind of very careful about what it does, which -- we don't consider it to be seriously excess capital. Maybe that's the best thing to say.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

This is Jeff. And I'd like to thank you all for joining our conference call and look forward to talking to you at our Q3 conference call. Thank you. Bye.

This concludes today's event. Thank you for attending today's presentation. You may now disconnect.