Q3 2023 Miller Industries Inc Earnings Call
Participants
Deborah L. Whitmire; Executive VP, CFO & Treasurer; Miller Industries, Inc.
William G. Miller; President, CEO & Director; Miller Industries, Inc.
Michael Shlisky; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Michael Gaudreau
Presentation
Operator
Good day, ladies and gentlemen, and welcome to the Miller Industries Third Quarter 2023 Results Conference Call. Please note, this event is being recorded.
It is now time. I would like to turn the call over to Mike Gaudreau at FTI Consulting. Please go ahead, sir.
Michael Gaudreau
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 2023 third quarter results, which were released after close of the market. With us from the management team today are Bill Miller, Chairman of the Board; Will Miller, President and CEO; Debbie Whitmire, Executive Vice President and CFO; and Frank Madonia, Executive Vice President, Secretary and General Counsel. Today's call will begin with formal remarks from management, followed by a question-and-answer session.
Please note in this morning's conference call, management may make forward-looking statements in accordance with the safe harbor provisions 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.
At this time, I'd like to turn the call over to Will. Please go ahead, Will.
William G. Miller
Thank you, and good morning, everyone. It is a great feeling to report yet another strong quarter, proving once again that our strategic actions are yielding positive results. And stepping into this role, a great focus of mine has been on innovation and modernization. .
In 2019, we built a freestanding research and development facility to accelerate product development, increase research and integration of automation and robotics, reduce our environmental impact, and improve safety within our operating footprint. Unfortunately, given the macroeconomic environment over the last 2 to 3 years, we have really -- we have not really had an opportunity to see these investments bear fruit in our results until this year.
We believe that the strong performance we've reported thus far this year is attributed to our team's execution on the strategic initiatives we put in place, investments we have made over the last decade, both in improving our facilities, increasing capacity and attracting and retaining the best talent in the industry. Those investments in our production capabilities and our strategy to accumulate inventory to service our elevated backlog are paying off this year.
In the third quarter of 2023, we generated revenues of $274.6 million, an increase of 33.6% year-over-year, mainly due to execution on our healthy backlog in the form of improved deliveries of finished goods to our customers.
Gross profit for the third quarter was $42.9 million, an increase of 84.9% compared to the prior year quarter, while our gross margin of 15.6% improved 430 basis points year-over-year and 220 basis points sequentially.
The year-over-year increase is largely due to the impact of those productivity enhancements I mentioned earlier, a favorable product mix and the stabilization of raw material costs compared to the prior year.
In addition, we also wanted to provide an update on our recent acquisition of Southern Hydraulic Cylinder or SHC, which we announced in May of this year. We're very pleased with the way SHC is performing as part of our portfolio. As we've said previously, we knew the company extremely well prior to our acquisition, and it is clear that this familiarity is paying dividends as it relates to integration.
The SHC team has been in seamlessly and the acquisition has helped shore up our supply chain tremendously, particularly because cylinders are some of the products that historically have longer lead times. SHC is meeting if not exceeding all of our expectations in year 1 and delivering a return on investment ahead of our calculations.
During the early days of my tenure, we focused on organic investments in our business, and this transaction demonstrates that we are willing to make smart acquisitions if they are accretive and they're complementary to our overall strategy.
Despite all the positives, we are not completely out of the woods on supply chain difficulties. Some chassis suppliers have had disruptions in production, and it is difficult to determine when that dynamics will improve. That said, the overall supply chain is in much better health than it was a year ago, and our results so far this year have demonstrated that we can continue to perform at a high level despite facing some macro challenges. Additionally, I would like to note that we have not experienced any disruptions from any of the large OEM strikes thus far.
Demand for our products remains high across all of our end markets. Backlog remains healthy and no longer at record levels due to our improved -- improvement in deliveries. After all of our execution this year and strong year-over-year sales growth in the first 9 months, backlog is still substantially higher than prepandemic levels. Because of the immense customer demand, our strategy now remains the same as it has been throughout the year, investing in our inventory and in our business to improve lead times and ship finished goods to our customers as quickly as possible.
We are extremely focused on managing our inventory levels and expect inventories to grow at a slower rate than they have in the prior year. However, with the demand we are seeing, we continue to believe it is the best use of our cash at the moment.
Lastly, before I hand the call over to Debbie, I want to quickly touch on our international and military business, which makes up approximately 10% of our sales. As in our domestic business, demand remains strong. We are starting to see more activity in the military space, and we are encouraged by the performance of this aspect of our business as well.
Now I'll turn the call over to Debbie, who will review the third quarter financial results in more detail. Following her remarks, I'll provide some closing comments and an update on our outlook. Debbie?
Deborah L. Whitmire
Thanks, Will, and good morning, everyone. Net sales for the third quarter of 2023 were $274.6 million versus $205.6 million for the third quarter of 2022, a 33.6% year-over-year increase, driven largely by improved delivery of finished product and supply chain disruptions continued to recover. Cost of operations increased 27% to $231.7 million for the third quarter of 2023 compared to $182.4 million for the third quarter of 2022. The increase in our cost of operations is due largely to an increase in deliveries to meet demand. Cost of operations as a percentage of net sales decreased approximately 430 basis points from the prior year period to 84.9%.
Gross profit was $42.9 million or 15.6% of net sales for the third quarter of 2023 compared to $23.2 million or 11.3% of net sales for the prior year period. The year-over-year improvement was driven largely by our productivity initiatives that Will mentioned earlier, favorable product mix and a reduction in raw material costs compared to the prior year period.
While we always remind you that our gross margins are subject to some quarter-to-quarter fluctuation based on product mix, we are extremely encouraged by our productivity initiatives have begun to yield much improved results compared to the prior year.
SG&A expenses were $19.3 million in the third quarter of 2023 compared to $14.7 million in the third quarter of 2022. As a percentage of net sales, SG&A was 7%, 10 basis points lower than the prior year period. The increase in SG&A expense was largely due to increased bonus accruals as a result of higher adjusted pretax income as set forth by our new executive compensation plan, which we adopted to more closely align management and shareholder interest as well as more investments in training and retraining our extremely specialized workforce.
We have also increased our bonus accruals for our employees as they are easily replaceable under the backbone of everything we are able to achieve here at Miller Industries. Investing in our team is one of the most important aspects of our long-term success. Moving forward, we would expect quarterly SG&A expenses to remain at approximately these levels.
Interest expense for the third quarter 2023 was $1.8 million, up from $1 million for the third quarter 2022 driven largely by an increase in our debt levels, along with an increase related to customer floor plan financing costs, which is a function of higher revenues.
Other income for the third quarter was $294,000 compared to an expense of $666,000 for the third quarter of 2022 attributable to foreign currency exchange rate shifts.
Our effective tax rate for the quarter was 20.8%, slightly lower than year-over-year sequentially, primarily due to tax credits and favorable adjustments related to our prior year provision.
Net income for the third quarter was -- third quarter 2023 was $17.5 million or $1.52 per diluted share compared to net income of $5.2 million or $0.46 per diluted share in the third quarter of 2022, a direct result of all the factors I discussed above that impacted our revenues and profit margins.
Turning to the balance sheet. Cash and cash equivalents as of September 30, 2023, was $26.8 million compared to $30.5 million as of June 30, 2023, and $40.2 million as of December 31, 2022.
Accounts receivable as of September 30, 2023, was $240.6 million compared to $264.5 million as of June 30, 2023, and $177.7 million as of December 31, 2022.
Inventories were $176.3 million as of September 30, 2023, compared to $167.5 million as of June 30, 2023, and $153.7 million as of December 31, 2022.
While we are continuing to accumulate inventory to meet the immense -- and Will refer to earlier, we are making significant progress in turning our inventory into finished goods. This strategy has been a significant piece of improved year-over-year results. And while it's impossible to determine when this dynamic will shift, we monitor our planning requirements constantly and are hopeful that we will reach a peak in our inventory levels in the near term. For now, this is one of the best investments we can make with our working capital.
Accounts payable as of September 30, 2023, was $146.8 million compared to $189.8 million as of June 30, 2023, and $125.5 million as of December 31, 2022.
Our outstanding balance of $60 million on our $100 million revolving credit facility remained unchanged this quarter, which includes our acquisition of SHC in May of 2023.
In terms of our broader capital allocation strategy, our recent focus has been centered around returning capital to shareholders through an industry-leading dividend, which we have paid for 52 straight quarters, something we are incredibly proud of. While we will continue to look for areas to invest in our business, as we always have, we are prioritizing returning capital to shareholders through this dividend and reducing our debt balance. We are and have always been a debt diverse company, and we believe reducing our debt balance will be in the best interest of both Miller Industries and our shareholders. That said, we feel extremely comfortable with our liquidity position. And though we do not expect anything in the short term, we have demonstrated that if the right acquisition opportunity materializes, such as SHC, we have the flexibility to pursue it.
Lastly, the Board of Directors approved our quarterly cash dividend of $0.18 per share payable December 11, 2023, to shareholders of record at the close of business on December 4, 2023.
Now I'll turn the call back over to Will for some closing remarks.
William G. Miller
Thank you, Debbie. Stepping back a bit, I'm incredibly proud of what we've achieved as a company in the first 9 months of 2023. The investments we made in our business and the strategy we undertook while navigating the pandemic and global supply chain crisis has paid off in spades. Just for some perspective, in the first 9 months of 2023, we have already surpassed previous records for full year revenues and earnings per share. This, to us, is validation of our quest for operational excellence, while embracing innovation and managing the business for the long term, not quarter-to-quarter fluctuations. While we never know what the next hurdle to clear will be, I am confident that we have the right strategy and the right team in place to execute on that strategy and overcome any challenges we might face. As a result, it should come as no surprise that we are still extremely confident in meeting our expectations for over $1 billion in annual revenue and significant year-over-year improvements of profitability for the full year of 2023.
As I mentioned in my opening remarks, I believe we have the most talented leadership team and workforce in the industry, which has allowed us to execute on our strategic initiatives and delivered record results for the first 9 months of this year. As always, the entire management team, and I would like to thank all of our employees, suppliers, customers and shareholders for their continued support of Miller Industries.
At this time, we'd like to open the line for any questions.
Question and Answer Session
Operator
(Operator Instructions) First question comes from Mike Shlisky with D.A. Davidson .
Michael Shlisky
I want to maybe ask first with a quick balance sheet question and capital allocation question. If I map out the inventory increase and just the inventories in general and look at your debt that you've got outstanding, it doesn't sound like that much of a stretch that at the appropriate time, you'll have the ability to reduce the inventory and then take that cash and pay down most of your debt. It seems like you have enough room, Am I on the right track? And then maybe beyond that, do you have the ability to, at some point, raise the dividend over time once you've reduced the debt to essentially 0?
Deborah L. Whitmire
Mike, yes, you are on the right track. We do feel like we are reaching that peak of the inventory levels required based on product mix and the different initiatives that we have going at the moment. So yes, once we get to that peak, the intention would be to pay down the debt. That is certainly a priority for us. As far as the dividend goes, that's a Board decision. It is analyzed quarterly by the Board and the decision is made. So that would be a decision they would make at that time.
Michael Shlisky
Okay. Perfect. And then speaking of inventories, I also wanted to ask about your sales growth in the quarter and the productivity. Will, you had mentioned improvements in productivity, but I wanted to see if you had better chassis supply in the quarter, did just having that additional chassis help you at all for getting more out the door? And just remind us also, do you -- in most cases, you own the chassis at some point? Or are you simply upfitting just it's a non-pass-through it, it's a bailment pool .
William G. Miller
Yes. With regards to chassis, we do, we do purchase and resell the chassis. So we do own the chassis. It is not part of a pool. With regards to chassis and being able to meet customer demands and deliveries. Although the chassis OEMs did struggle quite a bit in Q3 with deliveries, they are working diligently to resolve their issues and expect better deliveries in Q4 going into Q1 of next year and into Q2 from the discussions we've had with them. We believe we have enough chassis on the ground to both at our facilities and at our distribution network to continue production levels that we've seen so far this year.
Michael Shlisky
Okay. I was going to ask about that distribution inventory. So I appreciate you answering that. Maybe I'll just add one more question then on a different topic and that is on the SG&A run rate going forward. What you had mentioned a bit about investing in innovation, R&D, et cetera but then Debbie, you also mentioned somewhat consistent going forward on the SG&A side. I guess, do you sense any changes in the mix of SG&A? Will you -- even though you'll be consistent on an overall company-wide basis, do you intend to increase any of your selling or R&D expenses over time? And then perhaps how we dusted elsewhere?
Deborah L. Whitmire
No. I think we have a pretty good run rate at the moment for everything that we see on the horizon at this point. So I believe it is pretty consistent with what we should see going forward.
Operator
There are no further questions at this time. I would like to turn the floor over to William for closing comments.
William G. Miller
Thank you. I'd like to thank you all again for joining us on the call today and we look forward to speaking with you on the fourth quarter conference call. If you would like information on how to participate and ask questions on the call, please visit our Investor Relations website, miller.com/investors, or e-mail investors.relations@millerind.com. Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
