Miller Industries(MLR) - 2019 Q4 - Annual Report

PART I Business Miller Industries is the world's largest manufacturer of towing and recovery equipment, globally distributing diverse products under ten brand names - Miller Industries is The World's Largest Manufacturer of Towing and Recovery Equipment, with domestic manufacturing operations in Tennessee and Pennsylvania, and foreign operations in France and the United Kingdom[11] - The company manufactures a broad range of towing and recovery equipment, including wreckers, car carriers, and vehicle transport trailers, which are installed on third-party truck chassis[13] - Products are sold through independent distributors across 50 states, Canada, Mexico, Europe, the Pacific Rim, the Middle East, South America, and Africa, and directly to governmental entities through prime contractors[14] - The company markets its products under ten brand names, including Century, Vulcan, Challenger, Holmes, Champion, Chevron™, Eagle, Titan, Jige™, and Boniface™[20][21][22] - Miller Industries has a long history of innovation, including the rapid reverse winch, tow sling, hydraulic lifting mechanism, and the underlift with parallel linkage and L-arms. A new R&D facility opened in Chattanooga in 2019, leading to the introduction of the M100, believed to be the world's largest tow truck[24][114] - From 2015 to 2019, the company invested over $92 million in property, plant, and equipment for domestic facility expansion and modernization, including sophisticated robotics, to increase production capacity, enhance safety, and reduce environmental impact[25][115] - As of December 31, 2019, the company employed approximately 1,310 people and emphasizes workforce engagement, productivity, and safety through training programs like Welding School and Miller University[38][39] - The company holds utility and design patents for its products and registered trademarks for its brand names, which are associated with high quality and value[40][41] - Operations are subject to federal, state, and local environmental, health, safety, privacy, data protection, and anti-corruption laws and regulations, with management believing the company is in substantial compliance[42][43][44][45][47] Risk Factors The company faces various material risks, including industry cyclicality, economic downturns, supply chain dependencies, and international operational challenges - The business is subject to the cyclical nature of the industry and general economic conditions, with adverse changes potentially leading to a downturn[59] - Dependence on outside suppliers for raw materials (aluminum, steel, petroleum-related products) and component parts exposes the company to price changes, tariffs, and supply delays, with the COVID-19 outbreak posing an additional risk[60][62][63][64] - Customer demand is affected by the availability of capital and access to credit for distributors and towing operators, with volatility in credit markets potentially impacting sales[65] - Increased sales volumes have caused operational challenges, including supply chain constraints and production capacity limitations, which could lead to delays, increased costs, and loss of business opportunities[66] - International operations are subject to political, economic, and regulatory uncertainties, including Brexit's impact on European conditions and foreign currency fluctuations (British pound sterling and euro)[67][68] - Sales to governmental entities through prime contractors carry special risks, such as susceptibility to changes in government spending, fixed-price contract cost overruns, intense competition, and strict technical requirements[70][71] - The highly competitive industry focuses on product quality, innovation, reputation, technology, customer service, availability, and price. Competitors may have greater financial resources and offer more attractive financing[36][37][76] - Future success depends on developing or acquiring proprietary products and technology, while assertions against the company relating to intellectual property rights could lead to substantial litigation costs or operational disruptions[77][78] - Disruptions or breaches in IT system security or violations of data protection laws (e.g., GDPR, CCPA) could adversely impact business operations, reputation, and lead to significant costs, liabilities, or fines[80][81][82][83] - The company's credit facility contains covenants that restrict its ability to operate and pay dividends, and failure to comply could lead to acceleration of debt. Obligations to repurchase products from third-party lenders in case of distributor default could also impact future revenues and financial condition[93][94][95] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[96] Properties Miller Industries operates four manufacturing facilities in the US and three internationally, including a new R&D facility in Chattanooga - The company operates four manufacturing facilities in the United States: Ooltewah (Chattanooga), Tennessee (343,000 sq ft for light and heavy-duty wreckers); Hermitage, Pennsylvania (279,000 sq ft for car carriers); and two in Greeneville, Tennessee (aggregate 210,000 sq ft for car carriers, heavy-duty wreckers, and trailers)[97] - A free-standing R&D facility (34,000 sq ft) was opened in Chattanooga in 2019[97] - International facilities include two manufacturing and one storage facility in Lorraine, France (aggregate 205,000 sq ft), and manufacturing operations in Norfolk, England (48,000 sq ft)[99] - All domestic facilities underwent substantial expansion and modernization projects from 2015 to 2019[98] Legal Proceedings The company is involved in routine litigation, maintaining accruals and insurance, and expects no material adverse financial impact - The company is a party to litigation arising in the normal course of business[100] - Accruals are established for probable and reasonably estimable matters, and product liability and other insurance are maintained[100] - Management believes that any liability exceeding insurance coverage and accruals will not materially adversely affect consolidated financial position or results of operations[100] Mine Safety Disclosures This item is not applicable to Miller Industries, Inc - Not applicable[101] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Miller Industries' common stock trades on the NYSE under 'MLR', with quarterly cash dividends paid since May 2011 - Miller Industries' common stock is traded on the New York Stock Exchange under the symbol 'MLR'[103] - As of February 28, 2020, there were approximately 435 registered holders of common stock[103] - The Company has paid consecutive quarterly cash dividends since May 2011. Future dividend payments are at the discretion of the board of directors and subject to financial conditions and credit facility covenants[104][95] - No unregistered securities were sold during the year ended December 31, 2019[105] Cumulative Shareholder Return (December 31, 2014 - December 31, 2019) | Index | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Miller Industries, Inc. | 100 | 105 | 127 | 124 | 130 | 179 | | NYSE Composite Index | 100 | 94 | 102 | 118 | 105 | 128 | | S&P Construction Machinery & Heavy Trucks Index | 100 | 74 | 105 | 151 | 131 | 148 | Selected Financial Data This section provides a five-year summary of selected consolidated financial data, including statements of income and balance sheet data Selected Statements of Income Data (2015-2019, in thousands except per share data) | Statements of Income Data: | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------- | :----- | :----- | :----- | :----- | :----- | | Net Sales | $818,166 | $711,706 | $615,101 | $601,119 | $540,966 | | Costs of operations | 721,678 | 628,370 | 548,000 | 536,840 | 483,353 | | Gross Profit | 96,488 | 83,336 | 67,101 | 64,279 | 57,613 | | Selling, general and administrative expenses | 43,394 | 39,542 | 35,561 | 32,318 | 31,491 | | Interest expense, net | 2,378 | 1,878 | 1,588 | 1,161 | 919 | | Other (income) expense, net | 331 | 253 | (387) | (277) | 340 | | Income before income taxes | 50,385 | 41,663 | 30,339 | 31,077 | 24,863 | | Income tax provision | 11,274 | 7,917 | 7,323 | 11,155 | 8,887 | | Net income | $39,111 | $33,746 | $23,016 | $19,922 | $15,976 | | Basic income per common share | $3.43 | $2.96 | $2.02 | $1.76 | $1.41 | | Diluted income per common share | $3.43 | $2.96 | $2.02 | $1.75 | $1.41 | | Weighted average shares outstanding (Basic) | 11,400 | 11,388 | 11,368 | 11,346 | 11,324 | | Weighted average shares outstanding (Diluted) | 11,400 | 11,393 | 11,385 | 11,374 | 11,360 | Selected Balance Sheet Data (2015-2019, in thousands) | Balance Sheet Data: | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------ | :----- | :----- | :----- | :----- | :----- | | Working capital | $163,170 | $149,830 | $125,734 | $119,797 | $121,046 | | Total assets | 391,967 | 368,184 | 317,238 | 297,438 | 268,356 | | Long-term obligations | 7,061 | 15,838 | 10,606 | 5,000 | — | | Common shareholders' equity | 257,927 | 227,563 | 203,100 | 184,602 | 173,862 | Other Data (2015-2019) | Other Data: | 2019 | 2018 | 2017 | 2016 | 2015 | | :---------- | :----- | :----- | :----- | :----- | :----- | | Cash dividend per common share | $0.72 | $0.72 | $0.72 | $0.68 | $0.64 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Miller Industries' financial performance, liquidity, and capital resources, discussing key drivers, risks, and accounting policies Executive Overview Miller Industries, the world's largest towing equipment manufacturer, drives growth through innovation and R&D, while managing cyclical industry risks and raw material costs - Miller Industries is The World's Largest Manufacturer of Towing and Recovery Equipment, with a broad range of products sold under ten brand names[112] - Revenues are primarily from product sales through domestic and foreign independent distributors, influenced by economic conditions, product demand, technological competitiveness, reputation, competition, and raw material costs[113] - The company's growth is supported by a history of innovation, continued R&D emphasis (including a new R&D facility opened in 2019), and the introduction of new products like the M100 tow truck[114] - Over $92 million was invested in property, plant, and equipment from 2015-2019 for domestic facility expansion and modernization, increasing production capacity and optimizing manufacturing processes with advanced technologies[115] - The industry is cyclical, with recent positive demand influenced by favorable economic conditions. Concerns include wavering consumer confidence, capital/credit market volatility, increased fuel/insurance costs, and global economic/health conditions (e.g., COVID-19)[116][119] - Raw material price changes (aluminum, steel, petroleum-related products) significantly affect costs. Tariffs in 2018 led to price increases, which the company offset through product price adjustments and component alternatives[118] Outstanding Borrowings under Primary Credit Facility (in thousands) | As of December 31, | 2019 | 2018 | | :----------------- | :----- | :----- | | Owed under primary credit facility | $4,998 | $15,000 | Critical Accounting Policies The company's critical accounting policies involve significant judgments for accounts receivable, inventory, asset impairment, warranty reserves, income taxes, and revenue recognition - Accounts Receivable: An allowance for doubtful accounts is maintained based on historical experience and specific customer issues, with continuous monitoring of collections[122][230] - Inventory: Stated at the lower of cost or net realizable value (FIFO basis), with consideration for obsolescence and valuation[123][231] - Long-Lived Assets: Reviewed for impairment when circumstances indicate carrying amounts may not be recoverable, with impairment measured by comparing fair value (based on discounted future cash flows) to carrying value[124][237] - Goodwill: Tested for impairment annually or when circumstances indicate impairment, using qualitative or quantitative assessments[125][126][238] - Warranty Reserves: Estimated at the time of sale using historical data on claim nature, frequency, and cost. Trends are reviewed to minimize claims[127][246] - Income Taxes: Expense, deferred tax assets/liabilities, and unrecognized tax benefits reflect management's assessment of current and future taxes, involving significant judgment in applying complex tax laws[128][129][130][131][240][241][242] - Revenues: Recognized when performance obligations are satisfied, generally upon shipment (transfer of control). Bill-and-hold arrangements require substantive reasons and product identification. Sales of company-purchased truck chassis are included in net sales but have substantially lower margin percentages[132][133][134][249][250] - Foreign Currency Translation: Functional currency for foreign operations is local currency. Translation adjustments are included in shareholders' equity, while gains/losses from foreign currency transactions are in other (income) expense, net[135][253] Results of Operations In 2019, net sales increased by 15.0% to $818,166 thousand, driven by domestic demand, while the effective tax rate rose to 22.4% Consolidated Statements of Income as Percentage of Net Sales | | 2019 | 2018 | 2017 | | :-------------------------------- | :----- | :----- | :----- | | Net Sales | 100.0 % | 100.0 % | 100.0 % | | Costs of operations | 88.2 % | 88.3 % | 89.1 % | | Gross Profit | 11.8 % | 11.7 % | 10.9 % | | Selling, general and administrative | 5.3 % | 5.6 % | 5.8 % | | Interest expense, net | 0.3 % | 0.3 % | 0.3 % | | Other (income) expense, net | — % | (0.1)% | (0.1)% | | Total expenses, net | 5.6 % | 5.8 % | 6.0 % | | Income before income taxes | 6.2 % | 5.9 % | 4.9 % | Net Sales Comparison (2019 vs. 2018, in thousands) | Metric | 2019 | 2018 | Change (%) | | :---------------- | :------- | :------- | :--------- | | Total Net Sales | $818,166 | $711,706 | 15.0% | | Net Domestic Sales | $697,002 | $574,806 | 21.3% | | Net Foreign Sales | $121,164 | $136,900 | -11.5% | - Costs of operations increased by 14.8% to $721,678 thousand in 2019 (from $628,370 thousand in 2018) due to increased production, but decreased as a percentage of net sales from 88.3% to 88.2% due to product mix and efficiency efforts[139] - Selling, general and administrative expenses increased to $43,394 thousand in 2019 (from $39,542 thousand in 2018) due to marketing, software, salary, and professional fees, but decreased as a percentage of net sales from 5.6% to 5.3% due to efficiencies[140] - Interest expense, net, increased to $2,378 thousand in 2019 (from $1,878 thousand in 2018) primarily due to higher interest on distributor floor planning, chassis suppliers, and increased credit facility borrowings[141] - Other (income) expense, net, included a net foreign currency exchange loss of $274 thousand in 2019, compared to a loss of $97 thousand in 2018[142] Income Tax Provision and Effective Tax Rate | Metric | 2019 | 2018 | | :-------------------- | :------- | :------- | | Income tax provision | $11,274 | $7,917 | | Combined tax rate | 22.4% | 19.0% | | Reason for change | Unfavorable adjustment to deemed repatriation tax liability in 2018 no longer applies. | Favorable adjustment to deemed repatriation tax liability. | Liquidity and Capital Resources Operating cash flow increased to $35,132 thousand in 2019, funding capital expenditures, dividends, and debt repayment, with $26,072 thousand cash on hand Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Operating Activities | $35,132 | $21,897 | | Investing Activities | $(17,063) | $(13,201) | | Financing Activities | $(18,597) | $(2,965) | - Cash from operations in 2019 was favorably impacted by revenue growth from increased production capacities and favorable changes in inventory levels[145] - Cash used in financing activities in 2019 was primarily due to net payments on the credit facility ($10,002 thousand) and dividend payments ($8,208 thousand)[147] - As of December 31, 2019, cash and cash equivalents totaled $26,072 thousand. Primary cash requirements include working capital, capital expenditures, dividends, and debt payments[148] - The company had commitments of approximately $3,583 thousand for property and equipment and $8,430 thousand for software license fees as of December 31, 2019[148] - Foreign subsidiaries held $18,103 thousand in cash as of December 31, 2019, with no current plans to repatriate undistributed foreign earnings[149] - Total capital expenditures for an administrative building and R&D facility in Chattanooga during 2018 and 2019 were approximately $4,219 thousand[150] Contractual Obligations As of December 31, 2019, total contractual obligations were $70,560 thousand, with $58,668 thousand due within one year, including potential repurchase commitments Contractual Obligations as of December 31, 2019 (in thousands) | Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :------------------------ | :------ | :--------------- | :-------- | :-------- | :---------------- | | Operating and Finance Lease Obligations | $1,868 | $404 | $687 | $487 | $290 | | Purchase Obligations | 51,313 | 51,313 | — | — | — | | Revolving Credit Facility | 4,998 | — | 4,998 | — | — | | Other Long-term Obligations | 368 | 368 | — | — | — | | Software License Fees | 8,430 | 3,000 | 2,172 | 2,172 | 1,086 | | Capital Projects | 3,583 | 3,583 | — | — | — | | Total | $70,560 | $58,668 | $7,857 | $2,659 | $1,376 | - The company has potential contingent obligations of $73,958 thousand under repurchase commitments with third-party lenders in the event of independent distributor customer default, but no repurchases were required in 2019 or 2018[153][269] Credit Facility and Other Obligations The $50,000 thousand unsecured revolving credit facility was amended in 2018, with $4,998 thousand outstanding at year-end 2019, and the company remained compliant with covenants - The $50,000 thousand unsecured revolving credit facility was amended in December 2018, extending maturity to May 31, 2022, reducing interest rates, and increasing the minimum tangible net worth covenant to $160,000 thousand (actual $246,000 thousand at December 31, 2019)[154][257] - The company was in compliance with all credit facility covenants throughout 2018 and 2019[154][257] Outstanding Borrowings under Credit Facility (in thousands) | As of December 31, | 2019 | 2018 | | :----------------- | :----- | :----- | | Credit facility | $4,998 | $15,000 | | French subsidiary loan | $368 | $760 | - The French subsidiary's unsecured fixed-rate loan (0.3% per annum) matures September 30, 2020, with $368 thousand outstanding at December 31, 2019[156][260] - A one percent change in the interest rate on variable-rate debt would not have materially impacted financial position, results of operations, or cash flows for 2019[157][261] - Other long-term obligations include approximately $1,807 thousand in non-cancellable operating lease obligations and $61 thousand in non-cancellable finance lease obligations at December 31, 2019[158] - The company has $8,430 thousand in remaining contractual payments for an enterprise software solution, extending through 2025[159] Recent Accounting Pronouncements The company adopted ASU 2016-02 (Leases) in Q1 2019, recognizing right-of-use assets and lease liabilities, with no material impact expected from other new standards - Recently Issued Standards: ASU 2019-12 (Income Taxes) and ASU 2018-15 (Intangibles – Goodwill and Other – Internal-Use Software) are effective after December 15, 2020, and December 15, 2019, respectively. The company plans to adopt them on a modified retrospective or prospective basis, with no material impact expected[160][161][254][255] - Recently Adopted Standards: ASU 2016-02 (Leases) was adopted in Q1 2019 using a modified retrospective approach. This required recognizing right-of-use assets and lease liabilities for leases with terms over twelve months on the balance sheet[162][256] Cumulative Effect Adjustment for ASU 2016-02 Adoption (January 1, 2019, in thousands) | | Balance at Dec 31, 2018 | Cumulative Effect Adjustment | Balance at Jan 1, 2019 | | :-------------------------------- | :---------------------- | :--------------------------- | :--------------------- | | Right-of-use assets - operating leases | $— | $2,268 | $2,268 | | Current portion of operating lease obligation | — | 1,358 | 1,358 | | Noncurrent portion of operating lease obligation | — | 905 | 905 | | Deferred income tax liabilities | 1,700 | 1 | 1,701 | | Accumulated surplus | 81,354 | 4 | 81,358 | Quantitative and Qualitative Disclosures About Market Risk Miller Industries is exposed to interest rate and foreign currency risks, with a strengthening U.S. dollar decreasing foreign currency translation adjustments in 2019 - The company is exposed to market risk from changes in interest rates and foreign currency exchange rates[163] - Interest Rate Risk: Variable interest rates on the credit facility (LIBOR Market Index Rate plus 1.00% or 1.25%) expose the company to interest rate changes. A one percent change in the interest rate would not have materially impacted 2019 financial position, results of operations, or cash flows[164] - Foreign Currency Risk: Arises from international operations in Europe. Managed through operating and financing activities, and sometimes forward foreign currency exchange contracts[165] Impact of Foreign Currency Exchange Rate Changes (in thousands) | Year Ended December 31, | Net Foreign Currency Exchange Loss | | :---------------------- | :------------------------------- | | 2019 | $274 | | 2018 | $97 | | 2017 | $221 | - Foreign currency translation adjustment decreased by $693 thousand in 2019 due to the strengthening U.S. dollar against certain foreign currencies, primarily the euro[166][167] Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data, which are included in Part IV, Item 15 of this report - The financial statements and supplementary data are included in Part IV, Item 15 of this Report[168] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure were reported[169] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Disclosure Controls and Procedures: Management concluded that disclosure controls and procedures were effective as of December 31, 2019[171] - Changes in Internal Control over Financial Reporting: No significant changes occurred during the most recent fiscal quarter that materially affected internal control over financial reporting[172] - Management's Report on Internal Control over Financial Reporting: Management assessed and concluded that the company maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO framework[172][174] - Report of Independent Registered Public Accounting Firm: Elliott Davis, LLC issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[177][178] Other Information The company reported no other information required to be disclosed - No other information was reported[185] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information relating to directors, executive officers, corporate governance, and Section 16(a) compliance is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement[187] Executive Compensation Executive compensation details are incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting - Information relating to executive compensation, compensation committee report, and director/executive officer compensation is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement[188] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2020 Annual Meeting proxy statement - Information relating to security ownership of beneficial owners and management, and equity compensation plans, is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement[189][190] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Annual Meeting proxy statement - Information relating to certain relationships and related transactions, and director independence, is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement[191] Principal Accounting Fees and Services Details on principal accounting fees and services, including the pre-approval policy, are incorporated by reference from the 2020 proxy statement - Information relating to principal accounting fees and services, and pre-approval policy for audit/non-audit services, is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement[192] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and various exhibits filed as part of the 10-K report, including auditor's report and consolidated financials - The report includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[195][206] - Financial Statement Schedule II – Valuation and Qualifying Accounts is filed as part of the report[196][206] - Various exhibits are filed, including the company's charter, bylaws, noncompetition agreements, indemnification agreements, equity incentive plans, loan agreements, subsidiaries list, consent of auditor, power of attorney, and certifications[197][198][199][203] Form 10-K Summary The company does not provide a separate Form 10-K summary - No Form 10-K Summary is provided[201] INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Elliott Davis, LLC issued unqualified opinions on Miller Industries' consolidated financial statements and internal control over financial reporting - Elliott Davis, LLC issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019, 2018, and 2017, stating they present fairly the financial position and results of operations in conformity with GAAP[207] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019, based on the COSO framework[208] - Elliott Davis, LLC has served as the company's auditor since 2003[211] Consolidated Balance Sheets December 31, 2019 and 2018 The consolidated balance sheets show Miller Industries' financial position, with changes in cash, receivables, inventories, and a reduction in long-term obligations Consolidated Balance Sheets (in thousands) | ASSETS | 2019 | 2018 | | :------------------------------------------------------------------------------------------------ | :----- | :----- | | Cash and temporary investments | $26,072 | $27,037 | | Accounts receivable, net | 168,619 | 149,142 | | Inventories, net | 87,965 | 93,767 | | Prepaid expenses | 4,796 | 3,272 | | Total current assets | 287,452 | 273,218 | | Property, plant and equipment, net | 90,735 | 82,850 | | Right-of-use assets - operating leases | 1,640 | — | | Goodwill | 11,619 | 11,619 | | Other assets | 521 | 497 | | TOTAL ASSETS | $391,967 | $368,184 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $95,750 | $98,220 | | Accrued liabilities | 27,813 | 24,863 | | Current portion of operating lease obligation | 330 | — | | Current portion of finance lease obligation | 21 | 20 | | Long-term obligations due within one year | 368 | 285 | | Total current liabilities | 124,282 | 123,388 | | Long-term obligations | 4,998 | 15,475 | | Noncurrent portion of operating lease obligation | 1,307 | — | | Noncurrent portion of finance lease obligation | 37 | 58 | | Deferred income tax liabilities | 3,416 | 1,700 | | Total liabilities | 134,040 | 140,621 | | Common stock | 114 | 114 | | Additional paid-in capital | 151,055 | 150,905 | | Accumulated surplus | 112,261 | 81,354 | | Accumulated other comprehensive loss | (5,503) | (4,810) | | Total shareholders' equity | 257,927 | 227,563 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $391,967 | $368,184 | Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017 Net sales and net income consistently increased from 2017 to 2019, with stable cash dividends declared per common share Consolidated Statements of Income (in thousands, except per share data) | | 2019 | 2018 | 2017 | | :------------------------------------ | :------- | :------- | :------- | | NET SALES | $818,166 | $711,706 | $615,101 | | COSTS OF OPERATIONS | 721,678 | 628,370 | 548,000 | | GROSS PROFIT | 96,488 | 83,336 | 67,101 | | Selling, general and administrative expenses | 43,394 | 39,542 | 35,561 | | Interest expense, net | 2,378 | 1,878 | 1,588 | | Other (income) expense, net | 331 | 253 | (387) | | Total expense, net | 46,103 | 41,673 | 36,762 | | INCOME BEFORE INCOME TAXES | 50,385 | 41,663 | 30,339 | | INCOME TAX PROVISION | 11,274 | 7,917 | 7,323 | | NET INCOME | $39,111 | $33,746 | $23,016 | | BASIC INCOME PER COMMON SHARE | $3.43 | $2.96 | $2.02 | | DILUTED INCOME PER COMMON SHARE | $3.43 | $2.96 | $2.02 | | CASH DIVIDENDS DECLARED PER COMMON SHARE | $0.72 | $0.72 | $0.72 | | WEIGHTED AVERAGE SHARES OUTSTANDING (Basic) | 11,400 | 11,388 | 11,368 | | WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) | 11,400 | 11,393 | 11,385 | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 AND 2017 Net income consistently increased, while foreign currency translation adjustments resulted in losses in 2018 and 2019, impacting total comprehensive income Consolidated Statements of Comprehensive Income (in thousands) | | 2019 | 2018 | 2017 | | :-------------------------------- | :------- | :------- | :------- | | NET INCOME | $39,111 | $33,746 | $23,016 | | OTHER COMPREHENSIVE INCOME: | | | | | Foreign currency translation adjustment | (693) | (965) | 3,374 | | Total other comprehensive income | (693) | (965) | 3,374 | | COMPREHENSIVE INCOME | $38,418 | $32,781 | $26,390 | Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2019, 2018 AND 2017 Total shareholders' equity consistently increased, driven by net income, with adjustments for dividends and foreign currency translation Consolidated Statements of Shareholders' Equity (in thousands, except share data) | | Common Stock | Additional Paid-In Capital | Accumulated Surplus | Accumulated Other Comprehensive Income (Loss) | Total | | :------------------------------------------ | :----------- | :------------------------- | :------------------ | :-------------------------------------------- | :------ | | BALANCE, December 31, 2016 | $113 | $150,404 | $40,752 | $(6,667) | $184,602 | | Net income (2017) | — | — | 23,016 | — | 23,016 | | Foreign currency translation adjustments (2017) | — | — | — | 3,374 | 3,374 | | Issuance of common stock to non-employee directors (2017) | — | 150 | — | — | 150 | | Exercise of stock options (2017) | 1 | 145 | — | — | 146 | | Dividends paid (2017) | — | — | (8,188) | — | (8,188) | | BALANCE, December 31, 2017 | 114 | 150,699 | 55,580 | (3,293) | 203,100 | | Cumulative effect adjustment for adoption of ASU 2014-09 | — | — | (324) | — | (324) | | BALANCE, January 1, 2018 | 114 | 150,699 | 55,256 | (3,293) | 202,776 | | Prior period accounting reclassification | — | — | 552 | (552) | - | | Net income (2018) | — | — | 33,746 | — | 33,746 | | Foreign currency translation adjustments (2018) | — | — | — | (965) | (965) | | Issuance of common stock to non-employee directors (2018) | — | 150 | — | — | 150 | | Exercise of stock options (2018) | — | 56 | — | — | 56 | | Dividends paid (2018) | — | — | (8,200) | — | (8,200) | | BALANCE, December 31, 2018 | 114 | 150,905 | 81,354 | (4,810) | 227,563 | | Cumulative effect adjustment for adoption of ASU 2016-02 | — | — | 4 | — | 4 | | BALANCE, January 1, 2019 | 114 | 150,905 | 81,358 | (4,810) | 227,567 | | Net income (2019) | - | - | 39,111 | - | 39,111 | | Foreign currency translation adjustments (2019) | - | - | - | (693) | (693) | | Issuance of common stock to non-employee directors (2019) | - | 150 | - | - | 150 | | Dividends paid (2019) | - | - | (8,208) | - | (8,208) | | BALANCE, December 31, 2019 | $114 | $151,055 | $112,261 | $(5,503) | $257,927 | Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 AND 2017 Cash from operating activities increased significantly in 2019, while investing activities consistently used cash for property, plant, and equipment Consolidated Statements of Cash Flows (in thousands) | | 2019 | 2018 | 2017 | | :------------------------------------------ | :------- | :------- | :------- | | OPERATING ACTIVITIES: | | | | | Net income | $39,111 | $33,746 | $23,016 | | Depreciation and amortization | 9,127 | 7,745 | 6,147 | | Changes in operating assets and liabilities (net) | (13,115) | (20,012) | (15,209) | | Net cash flows from operating activities | 35,132 | 21,897 | 13,953 | | INVESTING ACTIVITIES: | | | | | Purchases of property, plant and equipment | (17,391) | (13,342) | (24,693) | | Proceeds from sale of property, plant and equipment | 328 | 141 | 1,303 | | Net cash flows from investing activities | (17,063) | (13,201) | (23,390) | | FINANCING ACTIVITIES: | | | | | Net proceeds (payments) under credit facility | (10,002) | 5,000 | 5,000 | | Payments of cash dividends | (8,208) | (8,200) | (8,188) | | Net proceeds (payments) on other long-term obligations | (367) | 56 | 146 | | Finance lease obligation payments | (20) | — | — | | Proceeds from exercise of stock options | — | 179 | 606 | | Net cash flows from financing activities | (18,597) | (2,965) | (2,436) | | EFFECT OF EXCHANGE RATE CHANGES ON CASH AND TEMPORARY INVESTMENTS | (437) | (589) | 2,653 | | NET CHANGE IN CASH AND TEMPORARY INVESTMENTS | (965) | 5,142 | (9,220) | | CASH AND TEMPORARY INVESTMENTS, beginning of period | 27,037 | 21,895 | 31,115 | | CASH AND TEMPORARY INVESTMENTS, end of period | $26,072 | $27,037 | $21,895 | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | Cash payments for interest | $3,249 | $2,437 | $1,877 | | Cash payments for income taxes, net of refunds | $10,067 | $7,457 | $11,605 | Notes to Consolidated Financial Statements These notes provide detailed information supporting the consolidated financial statements, covering accounting policies, obligations, and recent pronouncements 1. Organization and Nature of Operations Miller Industries, Inc. is the world's largest manufacturer of towing and recovery equipment, serving global independent distributors and end-users - Miller Industries, Inc. is The World's Largest Manufacturer of Towing and Recovery Equipment[227] - Principal markets are approximately 80 independent distributors and users of towing and recovery equipment primarily in North America and globally[227] - Products are marketed under brand names including Century, Challenger, Holmes, Champion, Eagle, Titan, Jige, Boniface, Vulcan, and Chevron[227] 2. Summary of Significant Accounting Policies This section details the company's significant accounting policies, including estimates for receivables, inventory, assets, taxes, and revenue recognition, and the adoption of ASU 2016-02 - Financial statements are prepared using U.S. GAAP, requiring management estimates and assumptions[228] - Consolidated financial statements include Miller Industries, Inc. and its subsidiaries, with intercompany transactions eliminated[229] - Cash and temporary investments include cash and cash equivalents with original maturities of three months or less[229] - Accounts receivable are stated at estimated collectible amounts, with an allowance for doubtful accounts based on historical experience and specific customer issues[230] Inventories, net (in thousands) | | December 31, 2019 | December 31, 2018 | | :-------------- | :---------------- | :---------------- | | Chassis | $6,561 | $8,921 | | Raw materials | 39,444 | 40,021 | | Work in process | 16,520 | 14,995 | | Finished goods | 25,440 | 29,830 | | Total | $87,965 | $93,767 | - Property, plant and equipment are recorded at cost, depreciated using the straight-line method over estimated useful lives (20-30 years for buildings, 5-10 years for machinery/equipment/software)[233] Property, Plant and Equipment, net (in thousands) | | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Land and improvements | $13,953 | $11,807 | | Buildings and improvements | 73,121 | 68,717 | | Machinery and equipment | 50,235 | 43,961 | | Furniture and fixtures | 9,172 | 7,786 | | Software costs | 6,033 | 5,695 | | Less accumulated depreciation | (61,779) | (55,116) | | Total, net | $90,735 | $82,850 | - Depreciation and amortization expense was $9,127 thousand in 2019, $7,745 thousand in 2018, and $6,147 thousand in 2017[234] - Goodwill is tested for impairment annually or when circumstances indicate impairment, using qualitative or quantitative assessments[238] Accrued Liabilities (in thousands) | | 2019 | 2018 | | :------------------------------------ | :------- | :------- | | Accrued wages, commissions, bonuses and benefits | $12,382 | $9,152 | | Accrued products warranty | 3,859 | 3,752 | | Accrued taxes | 2,079 | 1,039 | | Other | 9,493 | 10,920 | | Total | $27,813 | $24,863 | - Stock compensation expense was $150 thousand for 2019, 2018, and 2017. No options were granted in these years, and no shares were issued from stock option exercises in 2019[243][244][245] Product Warranty Liability Summary (in thousands) | | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Accrual at beginning of the year | $3,752 | $3,147 | | Provision | 2,483 | 3,793 | | Settlement and Other | (2,376) | (3,188) | | Accrual at end of year | $3,859 | $3,752 | - Revenue is recognized when performance obligations are satisfied, generally upon shipment. Sales of company-purchased truck chassis are included in net sales but have lower margin percentages[249][250][134] - Research and development costs were $3,702 thousand in 2019, $3,127 thousand in 2018, and $1,943 thousand in 2017, expensed as incurred[252] - ASU 2016-02 (Leases) was adopted in Q1 2019, requiring recognition of right-of-use assets and lease liabilities for leases over 12 months. A cumulative-effect adjustment was made to retained earnings[256] 3. Long-Term Obligations The $50,000 thousand unsecured revolving credit facility was amended in 2018, with $4,998 thousand outstanding at year-end 2019, and the company remained compliant with covenants - The $50,000 thousand unsecured revolving credit facility was amended in December 2018, extending maturity to May 31, 2022, reducing interest rates, and increasing the minimum tangible net worth covenant to $160,000 thousand[257] - The company was in compliance with credit facility covenants throughout 2018 and 2019[257] Outstanding Borrowings (in thousands) | | December 31, 2019 | December 31, 2018 | | :-------------------------- | :---------------- | :---------------- | | Credit facility | $4,998 | $15,000 | | French subsidiary loan | $368 | $760 | - Interest expense on the credit facility was $684 thousand in 2019, $512 thousand in 2018, and $492 thousand in 2017[258] - A one percent change in the interest rate on variable-rate debt would not have materially impacted financial position, results of operations, or cash flows for 2019[261] 4. Stock-Based Compensation Plans The 2016 Stock Incentive Plan authorized 800,000 shares for awards, with $150 thousand in stock compensation expense annually from 2017-2019 - The 2016 Stock Incentive Plan authorizes 800,000 shares of common stock for awards[262] - Stock compensation expense was $150 thousand for 2019, 2018, and 2017[243] - No options were granted during 2019, 2018, or 2017[244][263] - No shares were issued from the exercise of stock options during 2019. In 2018, 10,250 shares were issued, and in 2017, 26,500 shares were issued[245][263] 5. Commitments and Contingencies The company leases equipment and facilities, recognizing right-of-use assets and lease obligations, and has potential repurchase commitments of $73,958 thousand - The company leases equipment and facilities under long-term non-cancellable operating and finance lease agreements, expiring through 2026[264] - Right-of-use assets and lease obligations are recognized on the balance sheet, with lease costs expensed over the lease term[265] Lease Cost and Other Information (2019, in thousands) | Lease Cost | 2019 | | :-------------------------- | :----- | | Finance lease cost | $23 | | Total operating lease cost | 585 | | Short-term lease cost | 1,231 | | Total lease cost | $1,839 | | Cash paid for operating leases | $582 | | Cash paid for finance leases | $20 | | Right-of-use assets obtained (new operating leases) | $265 | - The weighted average remaining lease term for operating leases was 5.6 years and for finance leases was 2.7 years at December 31, 2019[268] - The company has contingent obligations to repurchase products from third-party lenders in case of distributor default, with a maximum repurchase amount of approximately $73,958 thousand at December 31, 2019[269] - No repurchases of products were required during 2019 or 2018[269] - The company is involved in litigation, for which accruals and insurance are maintained, with management believing no material adverse effect will result beyond current coverage[270] 6. Income Taxes The TCJA of 2017 impacted tax calculations, with the effective tax rate increasing to 22.4% in 2019 due to a prior year adjustment - The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a territorial tax system, reduced the corporate tax rate to 21%, and included provisions like GILTI and FDII, impacting the company's tax calculations[271][273] Income Before Income Taxes by Component (in thousands) | | 2019 | 2018 | 2017 | | :------------ | :------- | :------- | :------- | | United States | $41,220 | $34,220 | $22,695 | | Foreign | 9,165 | 7,443 | 7,644 | | Total | $50,385 | $41,663 | $30,339 | Provision for Income Taxes (in thousands) | | 2019 | 2018 | 2017 | | :---------- | :------- | :------- | :------- | | Current | $9,558 | $7,342 | $8,191 | | Deferred | 1,716 | 575 | (868) | | Total | $11,274 | $7,917 | $7,323 | Effective Tax Rate Reconciliation | | 2019 | 2018 | 2017 | | :------------------------------------------ | :----- | :----- | :----- | | Federal statutory tax rate | 21.0 % | 21.0 % | 35.0 % | | State taxes, net of federal tax benefit | 0.1 % | (0.8)% | 1.0 % | | Excess of (decreases in) foreign tax over US tax on foreign income | 2.5 % | 2.9 % | 2.9 % | | Remeasurement of deferred taxes under TCJA | — % | — % | (8)% | | Deemed repatriation tax | — % | (1.1)% | 3.6 % | | Domestic tax deductions and credits | (0.4)% | (0.4)% | (3.1)% | | Foreign Derived Intangible Income deduction | (1.1)% | (1.3)% | — % | | Release of unrecognized tax benefit | — % | — % | (6)% | | Other | 0.3 % | (1.3)% | (1.8)% | | Effective tax rate | 22.4 % | 19.0 % | 24.1 % | Deferred Income Tax Assets and Liabilities (in thousands) | | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Total deferred tax assets | $2,513 | $2,987 | | Total deferred tax liabilities | 5,929 | 4,687 | | Net deferred tax (liability) | $(3,416) | $(1,700) | - The company has no federal net operating loss carryforwards as of December 31, 2019[277] - Unrecognized tax benefits were $0 at December 31, 2019 and 2018, following a release of $1,157 thousand liability in 2017 due to new information[279] 7. Shareholders Equity The company is authorized to issue 100,000,000 common shares and 5,000,000 preferred shares, consistently paying $0.72 annual cash dividends per share - Common Stock: Authorized to issue up to 100,000,000 shares with a par value of one cent per share[281] - Preferred Stock: Authorized to issue up to 5,000,000 shares of undesignated preferred stock, with no shares issued or outstanding[282] Cash Dividends Declared Per Common Share | Year | Dividend (per share) | Amount (in thousands) | | :--- | :------------------- | :-------------------- | | 2019 | $0.72 | $8,208 | | 2018 | $0.72 | $8,200 | | 2017 | $0.72 | $8,188 | - Accumulated Other Comprehensive Loss: A net foreign currency gain of $552 thousand related to discontinued operations was reclassified from accumulated other comprehensive loss to accumulated surplus in 2018[285] 8. Employee Benefit Plans Miller Industries maintains a contributory 401(k) plan, matching 50% of the first 5% of contributions, with company contributions of $1,030 thousand in 2019 - The company maintains a contributory 401(k) retirement plan for full-time employees with at least 90 days of service[286] - The company matches 50% of the first 5% of participant contributions, with matching contributions vesting over five years[287] Company Contributions to 401(k) Plan (in thousands) | Year | Contribution | | :--- | :----------- | | 2019 | $1,030 | | 2018 | $917 | | 2017 | $833 | 9. Revenue and Long-Lived Assets Substantially all revenue is from towing equipment sales, with North America accounting for the majority of net sales and long-lived assets - Substantially all revenue is generated from sales of towing equipment; disaggregation by product line is not useful[288] Net Sales and Long-Lived Assets by Region (in thousands) | Region | 2019 Net Sales | 2019 Long-Lived Assets | 2018 Net Sales | 2018 Long-Lived Assets | 2017 Net Sales | 2017 Long-Lived Assets | | :----------- | :------------- | :--------------------- | :------------- | :--------------------- | :------------- | :--------------------- | | North America | $697,002 | $97,650 | $574,806 | $90,036 | $527,134 | $85,707 | | Foreign | 121,164 | 6,344 | 136,900 | 4,433 | 87,967 | 3,540 | | Total | $818,166 | $103,994 | $711,706 | $94,469 | $615,101 | $89,247 | - Contract liabilities were $324 thousand at December 31, 2019, and $331 thousand at December 31, 2018, primarily related to future performance obligations. No contract assets were held[289] 10. Customer Information No single customer accounted for 10% or more of consolidated net sales for 2017, 2018, and 2019 - No single customer accounted for 10% or more of consolidated net sales for 2019, 2018, and 2017[290] 11. Quarterly Financial Information (Unaudited) Unaudited quarterly financial data for 2019 and 2018 show generally upward trends in net sales and net income, with consistent quarterly dividends Unaudited Quarterly Financial Information (2019, in thousands except per share data) | 2019 | Net Sales | Operating Income | Net Income | Basic Income Per Share | Diluted Income Per Share | Cash Dividends Declared Per Share | | :------------- | :-------- | :--------------- | :--------- | :--------------------- | :----------------------- | :-------------------------------- | | First Quarter | $197,213 | $12,382 | $8,660 | $0.76 | $0.76 | $0.18 | | Second Quarter | 222,346 | 14,245 | 10,683 | 0.94 | 0.94 | 0.18 | | Third Quarter | 195,467 | 11,293 | 8,076 | 0.71 | 0.71 | 0.18 | | Fourth Quarter | 203,140 | 15,174 | 11,692 | 1.03 | 1.03 | 0.18 | Unaudited Quarterly Financial Information (2018, in thousands except per share data) | 2018 | Net Sales | Operating Income | Net Income | Basic Income Per Share | Diluted Income Per Share | Cash Dividends Declared Per Share | | :------------- | :-------- | :--------------- | :--------- | :--------------------- | :----------------------- | :-------------------------------- | | First Quarter | $159,160 | $8,838 | $6,670 | $0.59 | $0.59 | $0.18 | | Second Quarter | 176,888 | 11,601 | 7,600 | 0.67 | 0.67 | 0.18 | | Third Quarter | 195,690 | 12,026 | 8,677 | 0.76 | 0.76 | 0.18 | | Fourth Quarter | 179,968 | 11,329 | 10,799 | 0.95 | 0.95 | 0.18 | 12. Subsequent Events On March 2, 2020, the board declared a quarterly cash dividend of $0.18 per share, payable March 23, 2020 - On March 2, 2020, the board of directors declared a quarterly cash dividend of $0.18 per share, payable March 23, 2020, to shareholders of record as of March 16, 2020[292] Schedule II –Valuation and Qualifying Accounts Schedule II summarizes changes in the allowance for doubtful accounts from 2017 to 2019, showing relatively stable balances with minor adjustments Allowance for Doubtful Accounts (in thousands) | Year Ended December 31, | Balance at Beginning of Period | Charged to Expense | Accounts Written Off | Balance at End of Period | | :------------------------ | :----------------------------- | :----------------- | :------------------- | :----------------------- | | 2017 | $1,004 | 86 | (52) | $1,038 | | 2018 | $1,038 | 214 | (140) | $1,112 | | 2019 | $1,112 | 15 | (21) | $1,106 |