Miller Industries, Inc. (MLR) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Miller Industries Third Quarter 2012 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Steinberg, please go ahead.

Thank you, and good morning, everyone. I would like to welcome you to the Miller Industries conference call. We're here to discuss the company's 2012 third 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 conference call, management may make forward-looking statements in accordance with the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. I would 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'd like to turn the call over to Jeff Badgley. Jeff, please go ahead.

Thank you, and good morning. Our third quarter results reflect sound execution against the soft economic environment and challenging comparables from the year-ago period. Yesterday, we reported 2012 third quarter sales of $78 million compared to sales of $96.8 million in the prior-year period. The decrease in sales was primarily a result of government-related orders to prime contractors 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 third quarter. While the year-over-year comparisons are challenging. As a result, they also masked what has been steady demand from our U.S. commercial customers. Overall, economic conditions remained weak due to deteriorating customer sentiment, affecting our sales growth initiatives in the quarter. Lower government spending and softer conditions in Europe also hindered our performance. However, we maintained good domestic order flow, which were similar to trends exhibited in the 2012 second quarter. Additionally, we contained cost and enhanced efficiencies in our business to sustain acceptable margin levels in this challenging environment. Reflecting our continued commitment to return value to shareholders, we announced yesterday our quarterly cash dividend of $0.13 per share payable in December. 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 comments and then we'll go to Q&A. Vince?

Thanks, Jeff, and good morning, everyone. As Jeff mentioned, net sales for the third quarter 2012 were $78 million versus $96.8 million in the 2011 third quarter. Sales were down approximately 19.4% year-over-year, reflecting the government-related work we filled a year ago, which did not repeat, partially offset by higher sales volumes in our U.S. commercial markets. Cost of operations decreased by about 15% to $68.7 million in the 2012 third quarter, compared to $81.2 million last year driven by the lower volumes. Gross profit was $9.2 million or 11.8% of net sales in the third quarter of 2012, compared to $15.6 million or 16.1% of net sales in the third quarter of 2011. The decrease in gross margin percentage resulted from the lower sales volumes, as well as from the change in sales mix, particularly the increase in commercial sales with its related chassis component, as a percentage of our overall mix, as Jeff highlighted. SG&A expense decreased 10.6% over the prior year to $6.7 million compared to $7.5 million in the third quarter of 2011. As a percentage of sales, SG&A increased to 8.6% from 7.7% 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 $97,000 in the third quarter 2012 compared to a net gain of $9,000 in the third quarter of 2011. Interest expense in the 2012 third quarter was $192,000, compared to $174,000 in the third quarter of 2011. Income taxes in the third quarter include income tax benefits of approximately $1.4 million. The benefits resulted primarily from federal domestic production activity deductions, as well as from federal research and development and other tax credits recognized from the period. Net income in the 2012 third quarter was $2.9 million, including the income tax benefit mentioned earlier, or $0.26 per diluted share compared to $4.9 million or $0.41 per diluted share for the 2011 third quarter. Now let me briefly review our results for the 9 months ended September 30, 2012. Net sales for the first 9 months of 2012 were $260.3 million compared to $303.3 million in the prior-year period. Results in the first 9 months of 2011 included government-related work for a prime contractor that represented about 29.2% of our total sales and did not occur in the 2012 period. Gross profit was $30.7 million or 11.8% of sales compared to $53.8 million or 17.7% of sales for the first 9 months of 2011. Income taxes for the first 9 months of 2012 included the benefits of $1.4 million I noted earlier in the discussion of our 2012 third quarter results. For the first 9 months of 2012, the company reported net income of $7.4 million, including income tax benefit, or $0.66 per diluted share compared to net income for the first 9 months of 2011 of $18.1 million or $1.49 per diluted share. Turning now to our balance sheet. We continued to operate from a position of financial strength. We had cash and cash equivalents of $43.5 million, as of September 30, 2012, compared to $40.8 million as of June 30, 2012, and $50.2 million at December 31, 2011. Accounts receivable at September 30, 2012, totaled $63 million compared to $67.3 million as of June 30, 2012, and $61.1 million at December 31, 2011. Inventories were $45.2 million at September 30, 2012, compared to $47.7 million at June 30, 2012, and $48.2 million at December 31, 2011. Accounts payable at September 30, 2012, were $31.5 million compared to $36.4 million at June 30, 2012, and $39.7 million at December 31, 2011. We continue to operate with no borrowings under our $25 million unsecured revolving credit facility. As Jeff mentioned, we are pleased to announce that our Board of Directors declared a quarterly cash dividend of $0.13 per share payable December 17, 2012, to shareholders of record at the close of business on December 10, 2012. Now I'll turn the call back to Jeff for further remarks.

Thanks, Vince. While broad-based economic weakness continued to affect our markets in the quarter, we were able to execute on many of our strategic goals and position the business for a strong long-term growth as our markets improve. We addressed many of our challenges head-on by rightsizing the business to operate more efficiently and generate stronger profits than in previous down cycles. Meanwhile, we also invested in innovations across our product line to meet new and changing customer demands. We believe these actions position us to take a better advantage of the upturns when demand improves. We also executed on our geographic expansion initiatives by presenting our innovative new products at numerous trade shows globally, targeting new customers and new markets and aggressively pursuing municipal and military tenders. The combination of our industry-leading product offering and unmatched ability to deliver on orders positions us well for success as opportunities arise. Commercial demand in the U.S. remains volatile on a short-term basis. While we have seen modest demand improvement over recent months, we remain impacted by macroeconomic factors such as customer sentiment and the price of fuel. As long as uncertainties remain in the overall direction of the economy, we expect to continue to see volatile swings in short-term demand for our products. Although conditions remain soft in Europe, we continue to seek out new channels for distribution. Despite the troubles facing many of our European markets, we believe this region provides good growth opportunities as economic conditions improve. Let me also provide you with an update to our order from our prime contractor from the French military. While testing continues through the end of the year, we've been pleased with the performance of our equipment to date. Present expectations are for deliveries to begin around midyear of 2013. Looking ahead to the fourth quarter and beyond, our visibility remains limited as we continue to face challenges from weaker customer sentiment and general economic softness across our markets. We remain focused on areas we can control to position our company for growth such as operational execution, product development and geographic expansion. While we believe we have situated ourselves well for the eventual recovery in our markets and are encouraged by the recent order rates in the U.S., we remain cautious regarding our outlook and are committed to continuing our successful management through the current economic environment. 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] Our first question comes from Rob Schwartz of Cooper Creek Partners.

Just so I can understand my model for going forward, what was the EPS number net of the tax benefit?

Well, without getting into non-GAAP stuff, I mean it was $1.4 million or slightly less than $1.4 million. So with our shares, that's $0.13 -- $0.12, $0.13 a share you would take out of there for that.

Right. So okay, I came -- I did $2.4 million minus the $1.4 million tax benefit is $1 million divided by your shares, I got $0.09. But somewhere between $0.09 and $0.14 is...

Well, we -- the diluted income per common share is $0.26, but the tax benefit, just doing the math, is about $0.13, so it's about $0.13.

About $0.13. Okay. And as we look forward into next quarter, do you expect trends to improve from here or to decelerate from here?

I think they're fairly stable.

Stable?

Yes.

So core [ph] from operations, we should expect, I guess, low to mid-teens EPS numbers with low single-digit-ish top line growth?

Well, I'm not doing your model. I would kind of look at what our order entry rate is. And I would say our order entry rate is relatively the same as our second quarter order entry rate. So I would see revenues to be fairly similar.

Okay. Similar in dollars. Because I guess revenues were up about 50% in Q1 on the commercial side only, taking out the military? And then 16% in Q2 and then this quarter they were up 4%. So it's -- but you think this is the right run rate? So going forward, we can use this sales number basically?

Yes, I would say short-term we're within that range in terms of revenue. Obviously, we get some peaks and valleys based on income and chassis order run rates. But from our standpoint looking at order entry rate improvement, we're probably going to be in that range for the fourth quarter.

Okay. And given this lower run rate of the company near term, have you made the necessary cuts -- cost cuts to run for the next, I don't know, 6 to 18 months? Are you going to keep the business -- the infrastructure in place waiting for that uptick over time?

Well, as you noticed from third -- from second to third quarter levels, SG&A reduced about $0.5 million, I believe. We certainly need as a management team continuously to rightsize our company based on economic conditions. So I guess what I would say is, if need be, we will take more in SG&A cuts. We are hoping as a management team that is not necessary because we're at the point now where we don't want to cut into the strength of the organization. If factors deteriorate, we'll make some changes.

Okay. And then just analyzing that relative to the free cash flow and the dividend, free cash flow has been negative year-to-date, and you've stated you have a goal, you want to invest for future growth. Is maintaining the dividend at this level a priority for you guys right now?

Yes, it is.

And let me say, the free cash flow, the number you're talking about, I mean we looked at some things and some of that is just paying payables a little earlier to get additional discounts. We saw that as a good use of our cash as well and that's kind of a one-time thing.

Okay. But, if need be, in the interim, you'd use the cash from the balance sheet to keep the dividend at this level until the earnings start to accelerate again?

I think one of our priorities is to maintain dividend levels where they are currently. And I think -- I can't speak for the total board, but we certainly hope to be dividend payers in the future, yes.

Yes, dividend payers in the future and at this level? Dividend payers at this level?

Correct. That would be our goal. Bill, are you on the phone?

Yes. That is definitely one of the objectives. Jeff, you were speaking and it was fine. And Jeff and I are 2 of the board members, but all of our discussions when we started the dividend was to create a long-term dividend trend for the company for our shareholders of return -- to improve and return more to the shareholders. So we anticipate -- we don't see any change in that.

Okay. And then last question. Sorry for monopolizing a lot of the time. Last year and the year before, you guys are pretty aggressive buyers of your stock. The stock now is 15%, 20% below those levels. How do you feel about a share repurchase authorization here?

We did not discuss that at the last board meeting. And I think what our goal is, is to look at it on a quarterly basis with the board. And if the board believes that's the appropriate use of our cash, then we would certainly consider it.

[Operator Instructions] I'm showing no further questions. So I'd like to turn the call back over to management for any closing remarks they may have.

I'd like to thank you for joining our conference call on third quarter results, and we look forward to discussing our fourth quarter and year-end results with you in the near future. Thank you.

Thank you for your time, sir. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect and have a wonderful day.