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Saturday, October 29, 2005

Miller Industries (MLR)

Year ending: Dec 31, 2004
11.2 million shares at March 9, 2005
incorporated: Tennessee
offices located: Ooltewah, Tennessee (outside Chattanooga)
Was on the NYSE.

World's largest manufacturer of vehicle towing and recovery equipment (which is installed on 3rd party truck chasis). Disposed of all towing services business around 1997. Sold via 120 independent distributors for US, Canada, and Mex. and 50 distributors covering other countries. Jige subsidiary in France. Beniface subsidiary in UK. 65% of distributors sell MLLS on an exclusive basis. MLLS has some independent commission-based sales reps covering specific territories. They have demo units available.

No single distributor accounted for more than 5% of sales.

Wreckers: from conventional tow trucks to large recovery vehicles with 70-ton lifting. Various special features available ("Express" automatic wheellift allows operators to get a vehicle without leaving the truck cab.

Car Carriers: flat bed trucks.

Multi-Vehicle Transport Trailers: those open air trailers with upper and lower decks. 6-7 cars (can get up to 8 with speical cab rack).

Century: top of the line. started in 1974. 8-70 ton.
Vulcan: light and heavy duty wreckers, sold via distributors
Challenger: 8-70 ton wreckers, car carriers. started in 1975.
Holmes: mid-priced wreckers 8-16 ton. car carriers. started in 1916. well recognized brand.
Champion: started in 1991. Low priced car carriers. Expanded in 1993 to include cheap tow trucks.
Chevron: car carriers, light duty wreckers. Operated autonomously with its own distribution network in the salvage industry.
Eagle: light duty wreckers, acquired, "Eagle Claw" express hook-up system, patented in 1984. Designed for the repo market. Upgraded and expanded after acquisition.
Jige: light and heavy wreckers and car carriers for Europe.
Boniface: heavy duty wreckers in Europe. Long underlift technology for European tour buses.

Four major innovations in the industry (associated with Holmes and Century).
  1. Rapid reverse winch
  2. Tow sling
  3. Hydraulic lifting mechanism
  4. Underlift with parallel linkage and L-arms
Much of the patent IP has expired and the rest will expire within the next few years. They've successfully defended their IP in the past.

Six manufacturing plants in US, France, and UK.
Oolteway, Tenn (242K sq ft)
Hermitage, PA (95K sq ft)
Mercer, PA (110K sq ft)
Greeneville, TN (112K sq ft)
Lorraine region of France (180K sq ft)
Norfolk, England (30K sq ft)

They purchase components such as hydraulic cylinders, winches, valves, pumps. Either MLLS installs it on the truck chassis, or it's shipped and installed on-site. MLLS only applies primer coat so the buyer can paint is as desired. Painting before delivery is done by outside paint shops.

No supply issues.

In 2002, the board decided to sell the distribution group. Only one remained (in BC Canada) at year end 2004. It will be sold quickly. Accounted as a discontinued business.

Barriers to entry into the business are actually low (which is bad). Technologicial capabilities are becoming more important (which is good).

840 employees. No unions (except for the usual nasty governmental stuff in Europe).

30,000 towing operators
80,000 service station, repair shop, salvage operators.

MLLS is the official recovery vehicle for: Daytona, Talledega, Atlanta, and Darlington NASCAR. Grand Prix Miami, Suzuka in Japan, Rolex Daytona 24 Hour Race, Molson Indy, Brickyard, and the Indianapolis 500 (and others).

Virtually all products are based on orders, not for general inventory.

Expiring IP (I expect profits to drop by some unknown amount, depends on their current margins and whether they're gouging for profits today).

Large debt, credit facility expired in July 2005, but they entered into another one with Wachovia: $20 million revolver at LIBOR+(1.75 to 2.5), plus a term loan of $7 million at same rate. Revolver expires June 08, term loan expires June 2010. Junior term loan by William G. Miller (owns 20% of the business) of $5.7 million, matures Sept 2008, rate of 9%.

Retaining some liabilities in tow services businesses sold off.

Officers and Board:
William G. Miller, 58, Chairman since 1994 and co-CEO since 2003 and from 1994 to present (as co-CEO with two others including Badgley), owns 20%, (Team Sports Entertainment CEO only during 2002). Was also head of Miller Group in early 1990s.

Jeffrey Badgley, 52, President and co-CEO since 2003, president since 1996, director since 1996. Various titles. President of Miller Industries Towing Equipment since 1996. VP of sales and marketing for Challenger Wrecker Corp from 1982 until joining Miller Industries Towing Equip Inc.

Frank Madonia, 56, Exec VP, general counsel since 1998. Was also general counsel at Miller Industry Towing Equip Inc. Was general counsel at Flow Measurement from 1987 to 1994. Before 1987, he was in various legal and mgmt positions for US Steel, Neptune International, Wheelabrator-Frye, and Signal Companies (Note: Miller was also at those same companies).

J. Vincent Mish, 54, Exec VP, CFO since 1999 and 94-96, president of Financial Services Group. Also a VP of Miller Industries and Miller Industries Towing Equip. Also at Flow Measurement. Worked at Touche Ross & Co for 10 years, CFO of DNE Corp 1982 to 1987. Member of AICPA.

Ownership from proxy statement:
William G. Miller: 17.9%
Ashford Capital Mgmt: 12.7%
Various interlinked investment firms: 7.9%

Miller: $180K no options or bonuses, total options=0 (wow!)
Badgley: $276K plus 100K options, total options=155K
Madonia: $196K plus 30K options, total options=70K
Mish: $176K plus 30K options, total options=54K

No significant legal proceedings.

De-listed from NYSE due to a lack of sufficient equity and low market cap. Company restructured, converted debt into equity with shareholder approval, disposed of towing services. December 2004, NYSE moved MLLS into a company in good standing. Need 12 months of good standing to return to NYSE.

Revenues have been fairly steady around $200 million. Was $192 million in 2003 and $236 million in 2004. The increase was due to increased demand due to market conditions.
Operating margins excluding SG&A are low at around 13%.
Net margins are 3.2%. Earned 64 cents from continuing operations in 2004, 22 cents in 2003, 34 cents in 2002. In 2004 the tax rate was only 9.3%.

This is already not a particularly strong business. If Korea or China jump into this business, it's all over for MLLS.

Auditor is Joseph Decosimo and Co in Chattanooga. Audit opinion contains a qualification that they changed their accounting for intangibles in 2002 (was that the discontinuation of goodwill amortization? If so, that's a strange qualification to add)

Balance sheet current ratio is close to 2, but it's still fairly weak. Current assets are mostly AR which incrased in 2004. So did inventories. PP&E is fairly small.

Cash flow from operations is terrible due to AR and inventory increase.

I'm scaling back on detail now because this is looking fairly bad, but mostly because of the reason listed at the bottom of the post. But let's see what Q2 looks like.

Q2 results

Holy cow, AR climbed by 31% from year end 2004! Inventories went up a bit, too. However, AP went up 29%. So I'm expecting significantly higher revenues.
Yes, revenues went up 56%! Net margins are up to 5.5%. They earned 46 cents diluted in Q2 vs 19 cents prior year.

Increase in sales was due to general market conditions and to delivery to the Australian military and production of mobile communications trailers for DataPath. Also helped by price increases in 2004 (good sign of pricing power).

Results were better during Q1 (revenues up 60%).

Cash flow from ops still stinks as they seem to be selling stuff for IOUs.

Ok, so do we value this business at $19 assuming the last 6 months is the reality of the future? What about Korean and Chinese entry into the market? Will that happen?

The stock price right now is around $18 so this was a waste of time. I had looked into it trying to figure out why it looked like two different companies. It was two different companies. MLLS is Miller Industries the Florida real estate business selling for around 12 cents. MLR is Miller Industries the Tennessee tow truck maker which is earning around 64 cents a share in the first half of 2005. Unfortunately, this isn't some deep discount business.

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