t70555_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended      March 31, 2011                                                                                                                                                                                                           
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                                                                                       to                                                                                                                  
 
Commission file number      001-14124                                                                                                                                                                                                                               
 
MILLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Tennessee
 
62-1566286
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
8503 Hilltop Drive
Ooltewah, Tennessee
 
37363
(Address of principal executive offices)
 
(Zip Code)
 
(423) 238-4171
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x     Yes                                o     No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
o     Yes                                o     No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer     o                                               Accelerated filer     x
 
Non-accelerated filer     o                                                 Smaller reporting company     o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
o     Yes                                x     No
 
The number of shares outstanding of the registrant’s common stock, par value $.01 per share, as of April 29, 2011 was 11,828,050.
 
 
 

 

(MILLER LOGO)
 
Index
           
       
Page Number
PART I
FINANCIAL INFORMATION
     
           
 
Item 1.
Financial Statements
     
           
   
Condensed Consolidated Balance Sheets – March 31, 2011 and December 31, 2010
 
2
 
           
   
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010
 
3
 
           
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
 
4
 
           
   
Notes to Condensed Consolidated Financial Statements
 
5
 
           
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
9
 
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
13
 
           
 
Item 4.
Controls and Procedures
 
13
 
         
PART II
OTHER INFORMATION
     
           
 
Item 1.
Legal Proceedings
 
14
 
           
 
Item 1A.
Risk Factors
 
14
 
           
 
Item 6.
Exhibits
 
14
 
           
SIGNATURES
   
15
 
 
FORWARD-LOOKING STATEMENTS
 
Certain statements in this Form 10-Q, including but not limited to statements made in Part I, Item 2–“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may be deemed to be forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the use of words such as “may,” “will,” “should,” “could,” “continue,” “future,” “potential,” “believe,” “project,” “plan,” “intend,” “seek,” “estimate,” “predict,” “expect,” “anticipate” and similar expressions, or the negative of such words, or other comparable terminology.  Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.  Such forward-looking statements are made based on our management’s beliefs as well as assumptions made by, and information currently available to, our management.  These forward-looking statements are subject to a number of risks and uncertainties, including, economic and market conditions; the risks related to the general economic health of our customers; the success and timing of existing and additional export and governmental orders; our customers’ access to capital and credit to fund purchases, including the ability of our customers to secure floor plan financing; changes in fuel and other transportation costs; the cyclical nature of our industry; our dependence on outside suppliers of raw materials; changes in the cost of aluminum, steel and related raw materials; and those other risks referenced herein, including those risks referred to in Part II, Item 1A–”Risk Factors” and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for fiscal 2010, which discussion is incorporated herein by this reference.  Such factors are not exclusive.  We do not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, our company.
 
 
 

 

PART I.  FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share data)
 
   
March 31, 2011
(Unaudited)
   
December 31, 2010
 
ASSETS
           
CURRENT ASSETS:
           
Cash and temporary investments
  $ 39,073     $ 46,334  
Accounts receivable, net of allowance for doubtful accounts of $1,832 and $1,843 at March 31, 2011 and December 31, 2010, respectively
    84,389       60,110  
Inventories
    53,361       38,938  
Prepaid expenses
    2,758       3,556  
Current deferred income taxes
     4,799        5,218  
Total current assets
    184,380       154,156  
PROPERTY, PLANT, AND EQUIPMENT, net
    32,618       33,813  
GOODWILL
    11,619       11,619  
OTHER ASSETS
     281        288  
    $ 228,898     $ 199,876  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Current portion of long-term obligations
  $ 31     $ 44  
Accounts payable
    50,343       34,008  
Accrued liabilities
     18,246        13,273  
Total current liabilities
    68,620        47,325  
LONG-TERM OBLIGATIONS, less current portion
    2        5  
DEFERRED INCOME TAX LIABILITIES
    1,978        1,978  
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
               
SHAREHOLDERS’ EQUITY:
               
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued or outstanding
           
Common stock, $.01 par value; 100,000,000 shares authorized, 11,821,050 and 11,709,275 outstanding at March 31, 2011 and December 31, 2010, respectively
    118       117  
Additional paid-in capital
    163,257       162,447  
Accumulated deficit
    (6,033 )     (12,062 )
Accumulated other comprehensive income
     956        66  
Total shareholders’ equity
     158,298        150,568  
    $ 228,898     $ 199,876  
 
The accompanying notes are an integral part of these financial statements.
 
 
2

 

MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(In thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
NET SALES
  $ 108,925     $ 72,295  
COSTS AND EXPENSES:
               
Costs of operations
    88,192       62,467  
Selling, general and administrative expenses
    8,149       6,477  
Interest expense, net
    146       110  
Other expense (income)
     —        42  
Total costs and expenses
     96,487        69,096  
INCOME BEFORE INCOME TAXES
    12,438       3,199  
INCOME TAX PROVISION
     4,994        1,191  
NET INCOME
  $ 7,444     $ 2,008  
BASIC INCOME PER COMMON SHARE
  $ 0.63     $ 0.17  
DILUTED INCOME PER COMMON SHARE
  $ 0.61     $ 0.17  
CASH DIVIDENDS DECLARED PER SHARE
  $ 0.12     $ 0.10  
WEIGHTED AVERAGE SHARES OUTSTANDING:
               
Basic
     11,769        11,635  
Diluted
     12,260        12,092  
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
 
MILLER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income
  $ 7,444     $ 2,008  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    876       835  
Provision for doubtful accounts
    45       45  
Stock-based compensation
    100       100  
Issuance of non-employee director shares
    100       75  
Deferred income tax provision
    418       938  
Changes in operating assets and liabilities:
               
Accounts receivable
    (24,302 )     (8,111 )
Inventories
    (13,974 )     1,267  
Prepaid expenses
    810       14  
Accounts payable
    16,078       8,421  
Accrued liabilities
    4,870       (759 )
Net cash flows from operating activities
    (7,535 )     4,833  
INVESTING ACTIVITIES:
               
Purchases of property, plant, and equipment
    (608 )     (308 )
Proceeds from sale of property, plant and equipment
    989       22  
Payments received on notes receivable
    142       99  
Net cash flows from investing activities
    523       (187 )
FINANCING ACTIVITIES:
               
Payments on long-term obligations
    (19 )     (70 )
Payments of cash dividends
    (1,415 )     (1,163 )
Proceeds from stock option exercises
    611       14  
Net cash flows from financing activities
    (823 )     (1,219 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND TEMPORARY INVESTMENTS
    574       (1,110 )
NET CHANGE IN CASH AND TEMPORARY INVESTMENTS
    (7,261 )     2,317  
CASH AND TEMPORARY INVESTMENTS, beginning of period
    46,334       36,160  
CASH AND TEMPORARY INVESTMENTS, end of period
  $ 39,073     $ 38,477  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash payments for interest
  $ 239     $ 244  
Cash payments for income taxes, net of refunds
  $ 750     $ 899  
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 

MILLER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.           BASIS OF PRESENTATION
 
The condensed consolidated financial statements of Miller Industries, Inc. and subsidiaries (the “Company”) included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Nevertheless, the Company believes that the disclosures are adequate to make the financial information presented not misleading.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows at the dates and for the periods presented.  Cost of goods sold for interim periods for certain entities is determined based on estimated gross profit rates.  Interim results of operations are not necessarily indicative of results to be expected for the fiscal year.  These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  Certain prior year amounts have been reclassified to conform to current year presentation, with no impact on previously reported shareholders’ equity.  The Company evaluated subsequent events through the date the financial statements were issued.
 
2.           BASIC AND DILUTED INCOME PER SHARE
 
Basic income per share is computed by dividing income by the weighted average number of common shares outstanding.  Diluted income per share is calculated by dividing income by the weighted average number of common and potential dilutive common shares outstanding.  Diluted income per share takes into consideration the assumed exercise of outstanding stock options resulting in approximately 491,000 and 457,000 potential dilutive common shares for the three months ended March 31, 2011 and 2010, respectively.  For the three months ended March 31, 2011 and 2010, none of the outstanding stock options would have been anti-dilutive.
 
3.           INVENTORIES
 
Inventory costs include materials, labor and factory overhead.  Inventories are stated at the lower of cost or market (net realizable value), determined on a first-in, first-out basis.  Appropriate consideration is given to obsolescence, valuation and other factors in determining net realizable value.  Revisions of these estimates could result in the need for adjustments.  Inventories, net of reserves, at March 31, 2011 and December 31, 2010 consisted of the following (in thousands):
 
             
   
March 31, 2011
   
December 31, 2010
 
                 
  Chassis
  $ 16,068     $ 7,585  
                 
  Raw materials
    18,972       17,243  
                 
  Work in process
    8,338       7,181  
                 
  Finished goods
    9,983       6,929  
                 
    $ 53,361     $ 38,938  
                 
 
4.           LONG-LIVED ASSETS
 
The Company periodically reviews the carrying amount of its long-lived assets to determine if those assets may be recoverable based upon the future operating cash flows expected to be generated by those assets.  Management believes that its long-lived assets are appropriately valued.
 
 
5

 
 
5.           GOODWILL
 
Goodwill consists of the excess of cost of acquired entities over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed.  Goodwill is not amortized.  However, the Company evaluates the carrying value of goodwill for impairment at least annually or if an event or circumstance occurs that would indicate that the carrying amount had been impaired.  The carrying value of the entity is compared to the fair value.  If the fair value is less, a comparison of the carrying value of goodwill to the fair value of goodwill is performed to determine if a writedown is required.
 
6.           LONG-TERM OBLIGATIONS
 
Long-term obligations consisted of the following at March 31, 2011 and December 31, 2010 (in thousands):
 
             
   
March 31, 2011
   
December 31, 2010
 
  Equipment and other notes payable
    33       49  
                 
  Less current portion
    (31 )     (44 )
    $ 2     $ 5  
                 
 
Certain equipment is pledged as collateral under the Company’s equipment notes payable.
 
Future maturities of long-term obligations at March 31, 2011 are as follows (in thousands):
 
  2012
  $ 31  
         
  2013
    2  
    $ 33  
         
 
Credit Facility and Other Obligations
 
Current Credit Facility
 
On April 6, 2010, the Company entered into a Loan Agreement (as amended, the “Current Loan Agreement”) with First Tennessee Bank National Association for a $20.0 million unsecured revolving credit facility (the “Current Credit Facility”).  The Current Credit Facility contains customary representations and warranties, events of default, and financial, affirmative and negative covenants for loan agreements of this kind.  Covenants under the Current Credit Facility restrict the payment of cash dividends if the Company would be in violation of the minimum tangible net worth test or the leverage ratio test in the Current Loan Agreement as a result of the dividends, among various other restrictions.
 
In the absence of a default, all borrowings under the Current Credit Facility bear interest at the LIBOR Rate plus 1.75% per annum.  The Company will pay a non-usage fee under the Current Loan Agreement at a rate per annum equal to between 0.15% and 0.35% of the unused amount of the Current Credit Facility, which fee shall be paid quarterly.  The Current Credit Facility is scheduled to expire on March 31, 2013.
 
At March 31, 2011 and December 31, 2010, the Company had no outstanding borrowings under the Current Credit Facility.
 
Previous Credit Facility
 
On April 6, 2010, in connection with the consummation of the Current Credit Facility, the Company terminated its Credit Agreement with Wachovia Bank, National Association, which provided for a $27.0 million senior secured credit facility.
 
 
6

 
 
Interest Rate Risk
 
Changes in interest rates affect the interest paid on indebtedness under the Current Credit Facility because outstanding amounts of indebtedness under the Current Credit Facility are subject to variable interest rates.  Under the Current Credit Facility, the non-default rate of interest was equal to the LIBOR Market Index Rate plus 1.75% per annum (for a rate of interest of 1.99% at March 31, 2011).  Because there were no amounts outstanding under the Current Credit Facility, a one percent change in the interest rate on our variable-rate debt would not have a material impact on our financial position, results of operations or cash flows for the three-month period ended March 31, 2011.
 
7.           STOCK-BASED COMPENSATION
 
Stock compensation expense for each of the three months ended March 31, 2011 and 2010 was $100,000 and is included in selling, general and administrative expenses in the accompanying consolidated statements of income.  The Company did not issue any stock options during the three months ended March 31, 2011.  As of March 31, 2011, the Company had $632,000 of unrecognized compensation expense related to stock options with $299,000 to be expensed during the remainder of 2011 and $333,000 to be expensed in 2012.  For additional disclosures related to the Company’s stock-based compensation refer to Notes 2 and 5 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
During the three months ended March 31, 2011 and 2010, options were exercised for the purchase of 104,935 shares of common stock at a weighted-average exercise price of $5.82 and 2,625 shares of common stock at a weighted-average exercise price of $5.49, respectively.
 
8.           COMMITMENTS AND CONTINGENCIES
 
Commitments
 
The Company has entered into arrangements with third-party lenders where it has agreed, in the event of default by a customer, to repurchase from the third-party lender Company products repossessed from the customer.  These arrangements are typically subject to a maximum repurchase amount.  The maximum amount of collateral that the Company could be required to purchase was approximately $13.0 million at March 31, 2011, and $13.2 million at December 31, 2010.  However, the Company’s risk under these arrangements is mitigated by the value of the products that would be repurchased as part of the transaction.  The Company considered the fair value at inception of its liability under these arrangements and concluded that the liability associated with these potential repurchase obligations is not material.
 
At March 31, 2011, the Company had commitments of approximately $1.2 million for construction and acquisition of property, plant and equipment.
 
Contingencies
 
The Company is, from time to time, a party to litigation arising in the normal course of its business.  Litigation is subject to various inherent uncertainties, and it is possible that some of these matters could be resolved unfavorably to the Company, which could result in substantial damages against the Company.  The Company has established accruals for matters that are probable and reasonably estimable and maintains product liability and other insurance that management believes to be adequate.  Management believes that any liability that may ultimately result from the resolution of these matters in excess of available insurance coverage and accruals will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
 
9.           INCOME TAXES
 
At March 31, 2011 and December 31, 2010, the Company had no unrecognized income tax positions recorded.  The Company does not expect its unrecognized tax positions to change significantly in the next twelve months.  If unrecognized tax positions existed, the interest and penalties related to the unrecognized tax positions would be recorded as income tax expense in the consolidated statement of income.
 
 
7

 
 
The Company is subject to United States federal income taxes, as well as income taxes in various states and foreign jurisdictions.  The Company’s tax years 2007 through 2009 remain open to examination for U.S. federal income taxes.  With few exceptions, the Company is no longer subject to state or non-U.S. income tax examinations prior to 2007.
 
10.           SHAREHOLDERS EQUITY
 
Comprehensive Income
 
The Company had comprehensive income of $8.3 million and a comprehensive loss of $28,000 for the three months ended March 31, 2011 and 2010, respectively.  Components of the Company’s other comprehensive income consist primarily of foreign currency translation adjustments.
 
Dividends
 
On March 8, 2010, the Company’s board of directors adopted a dividend policy to consider and pay annual cash dividends subject to the Company’s ability to satisfy all applicable statutory requirements and the Company’s continued financial strength, and declared the first such annual cash dividend of $.10 per share of common stock.  The dividend of $1,163,000 was paid on March 25, 2010 to shareholders of record as of March 18, 2010.  On March 7, 2011, the Company’s board of directors declared an annual cash dividend of $0.12 per share.  The dividend of $1,415,000 was paid on March 24, 2011 to shareholders of record as of March 17, 2011.
 
11.           GEOGRAPHIC AND CUSTOMER INFORMATION
 
Net sales and long-lived assets (property, plant and equipment and goodwill and intangible assets) by region were as follows (revenue is attributed to regions based on the locations of customers) (in thousands):
 
       
   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
Net Sales:
           
North America
  $ 96,360     $ 59,994  
Foreign
    12,565       12,301  
    $ 108,925     $ 72,295  
                 
 
             
   
March 31, 2011
   
December 31, 2010
 
Long Lived Assets:
           
North America
  $ 41,583     $ 42,838  
Foreign
    2,654       2,594  
    $ 44,237     $ 45,432  
                 
 
The Company’s largest customer accounted for 41.6% and 17.9% of consolidated net sales for the three months ended March 31, 2011 and 2010, respectively.  The Company’s largest customer represented 43.8% and 22.0% of accounts receivable as of March 31, 2011 and December 31, 2010, respectively.
 
12.           RECENT ACCOUNTING PRONOUNCEMENTS
 
In January 2009, the SEC issued Final Rule No. 33-9002, Interactive Data to Improve Financial Reporting, which will require the Company to submit financial statements in XBRL (extensible business reporting language) format with its SEC filings beginning June 30, 2011.
 
 
8

 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Executive Overview
 
Miller Industries, Inc. is the world’s largest manufacturer of vehicle towing and recovery equipment, with domestic manufacturing subsidiaries in Tennessee and Pennsylvania, and foreign manufacturing subsidiaries in France and the United Kingdom.  We offer a broad range of equipment to meet our customers’ design, capacity and cost requirements under our Century®, Vulcan®, Challenger®, Holmes®, Champion®, Chevron™, Eagle®, Titan®, Jige™ and Boniface™ brand names.  In this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the words “Miller Industries,” “the Company,” “we,” “our,” “ours” and “us” refer to Miller Industries, Inc. and its subsidiaries or any of them.
 
Our management focuses on a variety of key indicators to monitor our overall operating and financial performance.  These indicators include measurements of revenue, operating income, gross margin, earnings per share, capital expenditures and cash flow.
 
We derive revenues primarily from product sales made through our network of domestic and foreign independent distributors.  Our revenues are sensitive to a variety of factors including general economic conditions as well as demand for, and price of, our products, our technological competitiveness, our reputation for providing quality products and reliable service, competition within our industry, and the cost of raw materials (including aluminum, steel and petroleum-related products).
 
Our industry is cyclical in nature and in recent years the overall demand for our products and our resulting revenues continued to be negatively affected by:
 
 
wavering levels of consumer confidence;
 
 
volatility and disruption in domestic and international capital and credit markets and the resulting decrease in the availability of financing, including floor plan financing, for our customers and towing operators;
 
 
significant periodic increases in fuel and insurance costs and their negative effect on the ability of our customers to purchase towing and related equipment;
 
 
the overall effects of the global economic downturn; and
 
 
currently, the slow economic recovery.
 
We remain concerned about the continuing effects of these factors on the towing and recovery industry and with the cooperation of our employees have continued certain steps implemented in 2009 to lower costs in response to these uncertainties.  These steps included headcount reductions for certain non-production personnel and reductions in certain administrative expenses.  Due to increased demand for our domestic products and higher production of follow-on government orders through prime contracts during 2010 and the first quarter of 2011, production hours at all facilities were restored and reduced work weeks and furloughs were eliminated.  We will continue to monitor our overall cost structure to ensure that it remains in line with business conditions.
 
In addition, we have been and will continue to be affected by changes in the prices that we pay for raw materials, particularly aluminum, steel, petroleum-related products and other raw materials, which represent a substantial part of our total costs of operations.  In the past, as we have determined necessary, we have implemented price increases to offset these higher costs.  We also developed alternatives to some of the components used in our production process that incorporate these raw materials, and our suppliers have implemented these alternatives in the production of our component parts.  We continue to monitor raw material prices and availability in order to more favorably position the Company in this dynamic market.
 
 
9

 
 
During the second half 2008, we began to secure follow-on governmental orders through prime contractors for which we now expect production to continue into the third quarter of 2011.  Through these follow-on orders, along with continued performance in the governmental and international marketplace, we were able to somewhat offset significantly lower demand from our commercial customers which began in the second half of 2008.  Although demand from our commercial customers has not recovered to pre-2008 levels, we have seen strengthening demand from these customers during 2010 and into 2011.  However, the increase in revenues in the first quarter of 2011 is primarily due to the completion during the quarter of the government-related order secured in November 2010 from a prime contractor.  For the three months ended March 31, 2011, 41.6% of our consolidated sales were made to prime contractors for government-related orders, as compared to 17.6% of our sales for such sales during the fourth quarter of 2010.  We continue to work to secure additional export and governmental orders, but we cannot predict the success or timing of any such orders.
 
There were no borrowings under the current credit facility at March 31, 2011.
 
Critical Accounting Policies
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates.  Certain accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions.  A discussion of critical accounting policies, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions follows:
 
Accounts receivable
 
We extend credit to customers in the normal course of business.  Collections from customers are continuously monitored and an allowance for doubtful accounts is maintained based on historical experience and any specific customer collection issues.  While such bad debt expenses have historically been within expectations and the allowance established, there can be no assurance that we will continue to experience the same credit loss rates as in the past.
 
Inventory
 
Inventory costs include materials, labor and factory overhead.  Inventories are stated at the lower of cost or market (net realizable value), determined on a first-in, first-out basis.  Appropriate consideration is given to obsolescence, valuation and other factors in determining net realizable value.  Revisions of these estimates could result in the need for adjustments.
 
Long-lived assets
 
Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be fully recoverable.  When a determination has been made that the carrying amount of long-lived assets and goodwill may not be fully recovered, the amount of impairment is measured by comparing an asset’s estimated fair value to its carrying value.  The determination of fair value is based on projected future cash flows discounted at a rate determined by management or, if available, independent appraisals or sales price negotiations.  The estimation of fair value includes significant judgment regarding assumptions of revenue, operating costs, interest rates, property and equipment additions, and industry competition and general economic and business conditions among other factors.  We believe that these estimates are reasonable, however, changes in any of these factors could affect these evaluations.  Based on these estimations, we believe that our long-lived assets are appropriately valued.
 
 
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Goodwill
 
Goodwill is tested for impairment annually or if an event or circumstance occurs that would more likely than not reduce the fair value of the reporting unit below the carrying amount.  We assess the fair value of goodwill using impairment testing generally based on two-step test.  The first step identifies potential impairment by comparing the fair value of the reporting unit with its carrying value.  If the fair value exceeds the carrying value the second step is not necessary.  If the carrying value is more than the fair value, the second step of testing is performed to compare the fair value of the goodwill with its carrying value.  An impairment loss would be recognized to the extent that the carrying value of the goodwill exceeds it fair value.  We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill.  Such events might include, but are not limited to, the impact of the economic environment or a material change in a relationship with significant customers.
 
Warranty reserves
 
We estimate expense for product warranty claims at the time products are sold.  These estimates are established using historical information about the nature, frequency, and average cost of warranty claims.  We review trends of warranty claims and take actions to improve product quality and minimize warranty claims.  We believe the warranty reserve is adequate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual.
 
Income taxes
 
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities.  Differences between the effective tax rate and the expected tax rate are due to changes in deferred tax assets.  If unrecognized tax positions exist, we record interest and penalties related to the unrecognized tax positions as income tax expense in our consolidated statement of income.
 
Revenues
 
Under our accounting policies, revenues are recorded when the risk of ownership for products has transferred to independent distributors or other customers, which generally occurs on shipment.  From time to time, revenue is recognized under a bill and hold arrangement.  Recognition of revenue on bill and hold arrangements occurs when risk of ownership has passed to the customer, a fixed  written commitment has been provided by the customer, the goods are complete and ready for shipment, the goods are segregated from inventory, no performance obligation remains, and a schedule for delivery has been established.  While we manufacture only the bodies of wreckers, which are installed on truck chassis manufactured by third parties, we frequently purchase the truck chassis for resale to our customers.  Sales of company-purchased truck chassis are included in net sales.  Margins are substantially lower on completed recovery vehicles containing company-purchased chassis because the markup over the cost of the chassis is nominal.
 
Foreign Currency Translation
 
The functional currency for our foreign operations is the applicable local currency.  The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date, historical rates for equity and the weighted average exchange rate during the period for revenue and expense accounts.  Foreign currency translation adjustments are included in shareholders’ equity.  Intercompany debt denominated in a currency other than the functional currency, is remeasured into the functional currency.  Gains and losses resulting from foreign currency transactions are included in other income and expense in our consolidated statement of income.
 
Results of Operations–Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 
Net sales for the three months ended March 31, 2011 increased 50.7% to $108.9 million from $72.3 million for the comparable period in 2010.  This increase was primarily attributable to increased revenues from a prime contractor for a government-related order discussed above, which order was completed during the quarter.
 
Costs of operations for the three months ended March 31, 2011 increased 41.1% to $88.2 million from $62.5million for the comparable period in 2010, which was attributable to the increase in domestic and governmental sales described above. Overall, costs of operations decreased as a percentage of sales from 86.4% to 81.0%, primarily due to product mix during the quarter consisting of a lower percentage of lower margin chassis sales.
 
 
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Selling, general, and administrative expenses for the three months ended March 31, 2011 increased to $8.1 million from $6.5 million for the three months ended March 31, 2010.  This increase was attributable to higher sales levels during the period, as well as increased sales commissions and incentives and medical costs.  As a percentage of sales, selling, general, and administrative expenses decreased to 7.5% for the three months ended March 31, 2011 from 9.0% for the three months ended March 31, 2010 due to the fixed nature of certain of these expenses.
 
Total interest expense remained constant at $0.1 million for the three months ended March 31, 2011 and 2010.
 
Other income and expense relate to foreign currency transaction gains and losses.  During the three months ended March 31, 2011, there was a negligible loss compared to a loss of $42,000 for the prior year period.
 
The provision for income taxes for the three months ended March 31, 2011 and 2010 reflects a combined effective U.S. federal, state and foreign tax rate of 40.2% and 37.2%, respectively.
 
Liquidity and Capital Resources
 
Cash used in operating activities was $7.5 million for the three months ended March 31, 2011, compared to cash provided by operating activities of $4.8 million for the comparable period in 2010.  The cash used in operating activities is attributable to increases in accounts receivable and inventory partially offset by increases in accounts payable and accrued liabilities.  Each of these increases is attributable to the increased demand for our products as well as higher levels of production of follow-on governmental orders through prime contractors discussed above.
 
Cash provided by investing activities was $0.5 million for the three months ended March 31, 2011 compared to cash used in investing activities of $0.2 million for the comparable period in 2010.  The cash provided by investing activities resulted from proceeds on the sale of certain fixed assets offset by fixed asset purchases during the quarter.
 
Cash used in financing activities was $0.8 million for the three months ended March 31, 2011, compared to $1.2 million for the comparable period in 2010.  The cash used in financing activities was used to primarily pay cash dividends partially offset by proceeds from the exercise of stock options.
 
As of March 31, 2011, we had cash and cash equivalents of $39.1 million, exclusive of unused availability under our current credit facility.  Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends and interest and principal payments on indebtedness, if any, under our current credit facility.  At March 31, 2011, the Company had commitments of approximately $1.2 million for construction and acquisition of property and equipment.  We expect our primary sources of cash to be cash flow from operations and cash and cash equivalents on hand at March 31, 2011, with borrowings under our current credit facility being available if needed.  We expect these sources to be sufficient to satisfy our cash needs during 2011 and for the next several years.  However, our ability to satisfy our cash needs will substantially depend upon a number of factors including our future operating performance, taking into account the economic and other factors discussed above and elsewhere in this Quarterly Report, as well as financial, business and other factors, many of which are beyond our control.
 
Credit Facilities and Other Obligations
 
Current Credit Facility
 
On April 6, 2010, the Company entered into a Loan Agreement with First Tennessee Bank National Association for a $20.0 million unsecured revolving credit facility.  The current credit facility contains customary representations and warranties, events of default, and financial, affirmative and negative covenants for loan agreements of this kind.  Covenants under the current credit facility restrict the payment of cash dividends if the Company would be in violation of the minimum tangible net worth test or the leverage ratio test in the current loan agreement as a result of the dividends, among various other restrictions.
 
 
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In the absence of a default, all borrowings under the current credit facility bear interest at the LIBOR Rate plus 1.75% per annum.  The Company will pay a non-usage fee under the current loan agreement at a rate per annum equal to between 0.15% and 0.35% of the unused amount of the current credit facility, which fee shall be paid quarterly.  The current credit facility is scheduled to expire on March 31, 2013.
 
At March 31, 2011 and December 31, 2010, the Company had no outstanding borrowings under the current credit facility.
 
Previous Credit Facility
 
On April 6, 2010, in connection with the consummation of the current credit facility, the Company terminated its Credit Agreement with Wachovia Bank, National Association, which provided for a $27.0 million senior secured credit facility.
 
Other Long-Term Obligations
 
At March 31, 2011 we had approximately $33,000 of equipment notes payable and other long-term obligations.  We also had approximately $1.2 million in non-cancelable operating lease obligations.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
In the normal course of our business, we are exposed to market risk from changes in interest rates and foreign currency exchange rates that could impact our results of operations and financial position.
 
Interest Rate Risk
 
Changes in interest rates affect the interest paid on indebtedness under our current credit facility because the outstanding amounts of indebtedness under our current credit facility are subject to variable interest rates.  Under our current credit facility, the non-default rate of interest was equal to the LIBOR Market Index Rate plus 1.75% per annum (for a rate of interest of 1.99% at March 31, 2011).  Because there were no amounts outstanding under the current credit facility, a one percent change in the interest rate on our variable-rate debt would not have materially impacted our financial position, results of operations or cash flows for the quarter ended March 31, 2011.
 
Foreign Currency Exchange Rate Risk
 
We are subject to risk arising from changes in foreign currency exchange rates related to our international operations in Europe.  We manage our exposure to our foreign currency exchange rate risk through our regular operating and financing activities, and not through the use of any financial or derivative instruments, forward contracts or hedging activities.  Because we report in U.S. dollars on a consolidated basis, foreign currency exchange fluctuations could have a translation impact on our financial position.  At March 31, 2011, we recognized a $0.9 million increase in our foreign currency translation adjustment account compared with December 31, 2010 because of weakening of the U.S. dollar against certain foreign currencies.  During the three months ended March 31, 2011 and 2010, the impact of foreign currency exchange rate changes on our results of operations and cash flows was a negligible loss and a loss of $42,000, respectively.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Within 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a14(c) under the Securities Exchange Act of 1934.  Based upon this evaluation, our CEO and CFO have concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
 
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There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
 
PART II.  OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
We are, from time to time, a party to litigation arising in the normal course of our business.  Litigation is subject to various inherent uncertainties, and it is possible that some of these matters could be resolved unfavorably to us, which could result in substantial damages against us.  We have established accruals for matters that are probable and reasonably estimable and maintain product liability and other insurance that management believes to be adequate.  Management believes that any liability that may ultimately result from the resolution of these matters in excess of available insurance coverage and accruals will not have a material adverse effect on our consolidated financial position or results of operations.
 
ITEM 1A.
RISK FACTORS
 
There have been no material changes to the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
 
ITEM 6.
EXHIBITS
 
31.1
Certification Pursuant to Rules 13a-14(a)/15d-14(a) by Chief Executive Officer*
31.2
Certification Pursuant to Rules 13a-14(a)/15d-14(a) by Chief Financial Officer*
32.1
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Executive Officer*
32.2
Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of United States Code by Chief Financial Officer*
 

*      Filed herewith
 
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Miller Industries, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
    MILLER INDUSTRIES, INC.  
         
 
  By:
    /s/ J. Vincent Mish
 
 
   
    J. Vincent Mish
 
 
   
    Executive Vice President and Chief Financial Officer
 
 
Date:  May 4, 2011
 
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