MILLER INDUSTRIES INC /TN/ (MLR)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

As used in this report, “Miller Industries”, the “Company”, “we”, “our”, “ours”, “us”, and similar pronouns refer to Miller Industries, Inc., and its consolidated subsidiaries, unless the context requires otherwise. Our fiscal year ends on December 31. References to fiscal 2024, 2023 and 2022, are to the fiscal years ended December 31, 2024, 2023, and 2022, respectively. Except as otherwise specified, information in this report is provided as of December 31, 2024. To facilitate timely reporting, the consolidated financial statements include accounts of certain subsidiaries whose fiscal closing dates differ from December 31st by 31 days (or less).

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our MD&A within this Form 10-K generally discusses fiscal 2024 and fiscal 2023 items and year-over-year comparisons between fiscal 2024 and fiscal 2023. Fiscal 2023 items and discussions of year-over-year comparisons between fiscal 2023 and fiscal 2022 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”).

Important Information Regarding Forward-Looking Statements

This report (including information incorporated by reference) includes forward-looking statements addressing expectations, prospects, estimates, and other matters that are dependent upon future events or developments. Many forward-looking statements appear in MD&A and Risk Factors, but there are others throughout this report, which may be identified by words such as “may”, “will”, “should”, “could”, “continue”, “future”, “potential”, “believe”, “project”, “plan”, “intend”, “seek”, “estimate”, “predict”, “expect”, “anticipate”, and variations of such words and similar expressions, and include statements reflecting future results or guidance, statements of outlook, and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. The most significant of these risks and uncertainties are described in “Risk Factors” in this report. Forward-looking statements in this report speak only as of the date of this report. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge on our website (www.millerind.com), under the “Investors — Filings — Annual Reports” caption, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website (www.sec.gov) where you can search for annual, quarterly, and current reports, proxy and information statements, and other information regarding us and other public companies.

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ABOUT MILLER INDUSTRIES

Miller Industries, headquartered in Ooltewah, Tennessee, was formed in 1990 and has become The World’s Largest Manufacturer of Towing and Recovery Equipment®, with domestic manufacturing operations in Tennessee and Pennsylvania, and foreign manufacturing operations in France and the United Kingdom.

The Company develops innovative high-quality towing and recovery equipment worldwide. We design and manufacture bodies of car carriers and wreckers, which are installed on chassis manufactured by third parties, and sold to our customers under our Century®, Vulcan®, Chevron™, Holmes®, Challenger®, Champion®, Jige™, Boniface™, Titan®, and Eagle® brand names.

Our management focuses on a variety of key indicators to monitor our overall operating and financial performance. These indicators include measurements of revenue, income from operations, gross margin, net income, earnings per share, capital expenditures, and cash flow.

Our history of innovation in the towing and recovery industry has been an important factor behind our growth over the last decade, and we believe that our continued emphasis on research and development will be a key factor in our future growth.

SIGNIFICANT TRENDS AND OUTLOOK

In 2024, we were presented with several ongoing challenges, such as timing of supply chain deliveries, freight challenges, continued inflationary pressures, and increased interest rates, all of which impacted our profitability and liquidity.

In 2025, the Company plans to launch multiple new products as part of its continued focus on innovation and product development.

Supply Chain

We continue to see significant pressure on global supply chains due to a confluence of events from the pandemic, geopolitical tensions, and economic uncertainty. Logistic disruptions and supplier shortages have caused delays in shipping and freight cost increases. Increases in freight costs and supplier constraints due to workforce disruptions and material shortages have affected our ability to receive essential materials and component parts on time. These supply chain issues have had a direct impact on our production capabilities. Also affecting supply chain are the ongoing conflicts in Ukraine and the Middle East. Given these challenges, we are maintaining focus on meeting the needs of our customers. Ongoing communication and prioritization continue with our suppliers in an effort to identify and mitigate such risks, and to proactively manage inventory levels of materials and component parts to align with anticipated demand for our products.

The global supply chain issues have also had a direct impact on our production capabilities including production delays and cost pressures. Production delays have affected product availability and delivery timelines, and increased logistics costs have led to higher operating cost which resulted in price adjustments for our products. In 2022, we implemented several price increases and surcharges and announced an eight-percent price increase effective in the first quarter of 2023. We have also developed alternatives to some of the components used in our production process that incorporate raw materials, and our suppliers have implemented these alternatives in the production of our component parts. In addition, beginning in the first quarter of fiscal 2022, we sought additional production capabilities through capital deployment, such as our acquisition from Southern Hydraulic Cylinder, Inc. in the second quarter of 2023, and our purchase of an additional small facility in Ooltewah, Tennessee to be used in the production of small carrier units.

In an effort to address ongoing supply chain challenges, on March 3, 2025, the Board of Directors authorized an €8 million expansion of the Company’s facilities in France.

Based on our strong backlog, the price increases and productivity improvements we have implemented, lessening supply chain disruptions and easing inflationary pressures, our operating results improved throughout fiscal 2024 and we believe we are well-positioned to continue enhancing our operating results. However, our performance will be heavily influenced by, among other things, whether supply chain constraints and inflationary pressures continue to lessen or worsen, ongoing changes in U.S. and foreign government trade policies, such as the imposition of new or additional tariffs, potential modifications to existing trade agreements and further restrictions on free trade, the continuing impact of the wars in Ukraine and Middle East or other geopolitical factors, and the threat of recession and general economic factors. The impact of these factors remains largely out of our control, and we currently anticipate that these factors will continue to have an adverse impact on our production capabilities, financial results, and cash flow to continue into fiscal 2025.

Inflation

Impacts of current global supply chain disruptions, inflationary environment, geopolitical tensions, and other macroeconomic factors can lead to foreign currency fluctuations. The impact of inflationary or deflationary pressures have caused and may continue to cause foreign currency translation gains or losses within our consolidated statement of comprehensive income/loss.

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California’s Air Resources Board

The information regarding the California Air Resources Board’s regulations is included under the heading “Government Regulations and Environmental Matters” in Part I, Item 1 – “Business” and in Part I, Item 1A – “Risk Factors” of this Annual Report.

Credit Facility

As of December 31, 2024, we had $65.0 million in borrowings outstanding under our credit facility. Since December 2024, we drew net advances of $5.0 million from our credit facility for a balance of $70.0 million as of February 28, 2025.

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RESULTS OF OPERATIONS

The following table sets forth the components of the consolidated statements of income for the years ended:

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Comparison of the Years Ended December 31, 2024 and 2023

Net Sales

Consolidated net sales in fiscal 2024 were $1.26 billion compared to $1.15 billion in fiscal 2023, an increase of 9.0%. The increase in net sales was primarily driven by higher production volume as a result of stabilization of the supply chain and continued strong customer demand, as well as an annual price increase of 3% implemented throughout the first half of the year.

Net foreign sales in fiscal 2024 were $125.7 million compared to $114.4 million in fiscal 2023, an increase of 9.9%.

Cost of Operations

Cost of operations includes the direct cost of manufacturing, including direct materials, labor and related overhead, physical inventory adjustments, as well as inbound and outbound freight. Costs of operations in fiscal 2024 were $1.09 billion compared to $1.00 billion in fiscal 2023, an increase of 8.5%. The increase in cost of operations was primarily attributed to increased deliveries resulting from increased stabilization in our supply chain.

Gross Profit

Gross profit is equal to net sales less cost of sales. Gross profit in fiscal 2024 was $170.8 million compared to $151.9 million in fiscal 2023, an increase of 12.5%. Gross profit as a percentage of sales increased to 13.6% for fiscal 2024 compared to 13.2% in fiscal 2023 as a result of our continuous investment in robotics and automation.

Selling, General and Administrative

Selling, general and administrative expenses in fiscal 2024 were $86.3 million compared to $73.1 million in fiscal 2023, an increase of 18.1%. The increase in selling, general and administrative expenses was primarily due to additional executive compensation expense,  and increased investment in our workforce, specifically for training and more competitive compensation to improve employee retention. As a percentage of net sales, selling, general and administrative expenses increased to 6.9% in 2024 from 6.3% in 2023.

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Interest Expense, Net

Interest expense, net in fiscal 2024 was $3.9 million compared to $6.0 million in fiscal 2023, a decrease of 34.2%. For fiscal 2024 interest expense totaled $9.8 million offset by interest income of $5.9 million. For fiscal 2023, interest expense totaled $8.4 million, offset by interest income of $2.4 million.

Other (Income) Expense

The Company is exposed to foreign currency transaction risk when the Company has transactions that are denominated in a currency other than its functional currency. When the related balance sheet items are remeasured in the functional currency of the Company, gains and losses are recorded through other (income) expense. Other (income) expense, net is composed primarily of these foreign currency exchange gains and losses. The Company experienced a net foreign currency exchange loss of $0.6 million for 2024 compared to a net exchange gain of $0.8 million for 2023. Other (income) expense for fiscal 2024 includes $0.1 million of other income.

Provision for Income Taxes

The provision for income taxes for the years ended December 31, 2024 and 2023 reflects a combined federal, state, and foreign tax rate of 20.8% and 21.0%, respectively, which corresponds to a tax provision of $16.6 million in 2024 compared to $15.5 million for 2023. For more information on the effective tax rate, see Note 8 – “Income Taxes” to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We expect our primary sources of cash to be from cash and temporary investments, cash flow from operations, and availability under our credit facility as of December 31, 2024. We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund our operations and expected future cash needs for the next twelve months. 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, regulatory, and other factors discussed elsewhere in this Annual Report, many of which are beyond our control.

Cash and Temporary Investments

As of December 31, 2024 and 2023, we had consolidated cash and temporary investments of $24.3 million and $29.9 million, respectively. Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends and principal, and interest payments on indebtedness.

Cash and temporary investments included $18.2 million held by foreign subsidiaries based in local currency for the years ended December 31, 2024 and 2023. We do not currently have plans to repatriate undistributed foreign earnings to the United States and have not determined any timeline or amount for any such future distributions.

Working Capital

Working capital as of December 31, 2024 and 2023 was $331.9 million and $275.8 million, respectively. Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, and payments to vendors. Management continually monitors working capital to ensure it remains at levels to support ongoing operations, meet obligations, and pursue growth opportunities. See “Cash Flows” – “Cash Flows Provided by (Used in) Operating Activities” contained within this MD&A for additional discussion on working capital.

Capital Expenditures

Capital expenditures during fiscal 2024 and 2023 were $15.4 million and $12.1 million, respectively. We make ongoing capital investments in our property, plant and equipment, and continue to increase purchases of materials, components, and chassis to ramp up production to meet demand, which has been at historic levels. We believe that in periods of normalized supply chain, our historical capital investments in our manufacturing facilities and other capital assets will increase the production capacity and efficiencies of our operations. See “Cash Flows” – “Cash Flows Provided by (Used in) Investing Activities” contained within this MD&A for additional discussion on capital expenditures.

Dividends

Our Board of Directors declared quarterly cash dividends of $0.19 per share in fiscal 2024. Future common stock cash dividends will depend on our financial condition, results of operations, capital requirements, and other factors deemed relevant by our Board of Directors. See Note 11 – “Shareholders’ Equity”, for additional discussion on dividends.

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Indebtedness

Credit Facility

On October 28, 2022, we entered into a first amendment to the loan agreement with First Horizon Bank (“First Horizon”) that provides an unsecured revolving credit facility with a maturity date of May 31, 2027, to increase the credit facility from $50.0 million to $100.0 million. We made certain technical and operational adjustments necessary to implement the one-month Term SOFR Rate (as defined in the loan agreement) as the primary interest rate index under the credit facility and added a new asset coverage financial covenant test. All other material terms and conditions of the credit facility remained unchanged.

The Company pays a quarterly, 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 under the credit facility. The credit facility contains customary representations and warranties, events of default, and financial, affirmative, and negative covenants for loan agreements of this kind.

Our ongoing operations have, to date, been funded by a combination of cash flow from operations and borrowings under our credit facility. As of December 31, 2024, the Company had $65.0 million in borrowings outstanding under the credit facility. Since December 2024, the Company drew net advances of $5.0 million from its credit facility for a balance of $70.0 million as of February 28, 2025.

Changes in interest rates affect the interest paid on indebtedness under our credit facility because the outstanding amounts of indebtedness under our current credit facility are subject to variable interest rates. Under our credit facility, the non-default rate of interest is equal to the one-month Term SOFR plus 1.00% or 1.25% per annum, depending on our leverage ratio, for a rate of interest of 5.45% as of December 31, 2024.

As of December 31, 2024, we were in compliance with all covenants under the credit facility.

Other Long-Term Obligations

Prior to applying a discount rate to our lease liabilities, we had approximately $0.6 million in non-cancellable operating lease obligations for the year ended December 31, 2024 and approximately $0.9 million for the year ended December 31, 2023. There were no non-cancellable finance lease obligations for either year. Leases with original contractual terms less than one year were excluded from non-cancellable lease obligations.

During fiscal 2021, we completed phase one of our enterprise software solution implementation. Through fiscal 2024, we have continued to implement additional functionality available in the enterprise software solution. We expect this software to substantially improve our administrative efficiency and customer service levels. We have $0.5 million in remaining contractual payments under our agreement with the software provider, which extends through 2025.

Cash Flows

Information about our cash flows, by category, is presented in our consolidated statement of cash flows and is summarized below:

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Cash Flows Provided by (Used in) Operating Activities

Cash provided by operating activities during 2024 was $16.9 million, compared to $11.0 million of cash provided by operating activities during 2023. Cash provided by operating activities is generally attributable to the receipt of payments from our customers as settlement of their contractual obligation once we have fulfilled all performance obligations related to our contracts with them. These cash receipts are netted with payments for purchases of inventory, payments for materials used in manufacturing, and other payments that are necessary in the ordinary course of our operations, such as those for utilities and taxes. During fiscal 2024, the change in operating activities was primarily due to increased net income and a further stabilization of changes in asset and liabilities as a result of the continued supply chain recovery. During fiscal 2023, the change in operating activities was primarily due to increased net income and a stabilization of changes in operating assets and liabilities as a result of improved availability of purchased components.

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Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, payments to vendors, and tax payments in the regular course of business.

Cash Flows Provided by (Used in) Investing Activities

Cash used in investing activities during 2024 was $15.3 million, compared to $29.1 million used in investing activities during 2023. The cash used in investing activities for 2024 was primarily for purchases of plant, property and equipment; cash used in 2023 was primarily for the purchase of the assets and assumption of certain liabilities of Southern Hydraulic Cylinder, Inc., (see Note 2) as well as purchases of property, plant and equipment.

Cash Flows Provided by (Used in) Financing Activities

Cash used in financing activities during 2024 was $6.6 million, compared to $6.8 million provided by financing activities during 2023. The cash used in financing activities in 2024 resulted from advances of $5.0 million under the Company’s primary credit facility, offset by the payment of cash dividends of $8.7 million and stock repurchase of $2.9 million. See Note 11 – “Shareholders’ Equity” for more information.

Cash provided by financing activities during fiscal 2023 included advances on the credit facility of $15.0 million, offset by dividend payments of $8.2 million and an immaterial amount of payments on finance lease obligations.

CRITICAL ACCOUNTING POLICIES AND SENSITIVE ACCOUNTING ESTIMATES

Critical accounting policies and estimates are those accounting policies that (i) can have a significant impact on our financial condition and results of operations and (ii) require the use of complex and subjective estimates based upon past experience and management’s judgment. Because estimates are inherently uncertain, actual results may differ. In this section, we describe the significant policies applied in preparing our consolidated financial statements that management believes are the most dependent on estimates and assumptions. See Note 1 of the consolidated financial statements for further discussion on significant accounting policies.

Allowance for Credit Losses

The allowance for credit losses includes general and specific reserves. We determine our allowance for credit losses by reviewing accounts receivable agings, historical write-off trends, payment history, pricing discrepancies, industry trends, customer financial strength, customer credit ratings or bankruptcies. We regularly evaluate how changes in economic conditions may affect credit risks.

A hypothetical 0.1 percent increase or decrease in the reserve as a percentage of trade receivables as of December 31, 2024, would result in an increase or decrease in bad debt expense of $0.3 million. We believe the reserve maintained and expenses recorded in fiscal 2024 are appropriate.

At this time, we are not aware of any analytical findings or customer issues that are likely to lead to a significant future increase in the allowance for credit losses as a percentage of revenue. The following table presents information regarding our allowance for credit losses over the past three fiscal years:

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Inventory

Inventories are valued at the lower of cost or net realizable value determined primarily on a moving average unit cost basis. As needed, we record an inventory valuation adjustment for excess, slow-moving, and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value. The inventory valuation adjustment to net realizable value establishes a new cost basis of the inventory that cannot be subsequently reversed.

In developing inventory valuation adjustments for excess, slow moving, and obsolete inventory, we are required to use judgment and make estimates of future sales demand and production requirements compared with current inventory levels.

Our estimate of forecasted sales demand and production requirements is primarily based on actual orders received, historical and projected sales trends, demand, product pricing, economic trends, and competitive factors. Forecasted sales demand and production requirements can also be affected by the significant redesign of our existing products. If actual conditions are less favorable than our assumptions, additional inventory reserves may be required.

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 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, 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 estimates, we believe that our long-lived assets are appropriately valued.

Business Combinations

When applicable, we account for the acquisition of a business in accordance with ASC 805, Business Combinations, whereby the fair value of total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired.

The allocation of purchase consideration requires management to make significant estimates and assumptions. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from such estimates. During the measurement period, which is no longer than one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recognized in operations.

While the ultimate responsibility for determining estimated fair values of the acquired net assets resides with management, for material acquisitions we may retain the services of certified valuation specialists to assist with assigning estimated fair values to certain acquired assets and assumed liabilities.

Goodwill

Goodwill is initially recognized as a result of the excess of purchase consideration transferred over the estimated fair value of the net assets acquired in a business combination. Goodwill is not amortized but is tested at least annually for impairment during the fourth quarter of our fiscal year unless events or changes in circumstances indicate that impairment may have occurred prior to our annual assessment.

We may elect to first perform a qualitative assessment to determine whether changes in events or circumstances since our most recent quantitative test for impairment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount. We have an unconditional option to bypass the qualitative assessment for a reporting unit and proceed directly to performing the quantitative analysis. If elected, in conducting the initial qualitative assessment, we analyze our most recent estimates of the fair value of a reporting unit by assessing actual and projected growth trends for operating results, as well as historical operating results versus planned performance. Additionally, a reporting unit is assessed for critical areas that may impact its operating performance, including macroeconomic conditions, industry and market considerations, cost factors such as products and component parts and labor, market-related exposures such as fluctuations in our company’s market capitalization and share price, and/or any other potential risks to operating performance, such as

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regulatory and environmental changes. If, after evaluating the weight of the changes in events and circumstances, both positive and negative, we conclude that an impairment of goodwill may exist, a quantitative test for impairment is performed.

If performed due to identified impairment indicators under the qualitative assessment or our election to bypass the qualitative assessment and move directly to the quantitative analysis, the quantitative impairment analysis for goodwill is conducted under the income approach. Under the income approach, we calculate the fair value of our reporting unit’s assets using the present value of future cash flows. Assumptions utilized in determining fair value under the income approach include forecasted operating results, terminal growth rates, and weighted-average cost of capital (“WACC”) or discount rates.

Estimating the fair value of a reporting unit requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. The use of estimates and assumptions could materially affect the determination of fair value for a reporting unit and potentially result in goodwill impairment. If a reporting unit fails to achieve expected earnings or operating cash flow, or otherwise fails to meet current financial plans, or if there were changes to any other key assumptions used in the tests, the reporting unit could incur a goodwill impairment in a future period.

Warranty Reserves

Our products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage on our products is generally provided for specified periods of time and generally covers parts, labor, and other expenses for non-maintenance repairs.

At the time of sale, we recognize expense and record a warranty accrual by product line for estimated costs in connection with forecasted future warranty claims. Our estimate of the cost of future warranty claims is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of warranty claims to sales, and the historical length of time between the sale and resulting warranty claim. If applicable, historical claims experience may be adjusted for known product design improvements.

We believe that our analysis of historical warranty claims trends and knowledge of potential manufacturing and/or product design improvements provide sufficient information to establish a reasonable estimate for the cost of future warranty claims at the time of sale and our warranty accruals as of the date of our consolidated balance sheets. However, due to the inherent uncertainty in the accrual estimation process, including forecasting future warranty claims and costs associated with servicing future warranty claims, our actual warranty costs incurred may differ from our warranty accrual estimate. An unexpected increase in warranty claims and/or in the costs associated with servicing those claims would result in an increase in our warranty accruals and a decrease in our net earnings.

Income Taxes

We estimate our deferred tax assets and liabilities, income taxes payable, provision for income taxes, and unrecognized tax benefit liabilities based upon various factors including, but not limited to, historical pretax operating income, future estimates of pretax operating income, differences between book and tax treatment of various items of income and expense, interpretation of tax laws, and tax planning strategies. We are subject to income taxes in the U.S. and foreign jurisdictions.

We recognize tax assets and liabilities in accordance with ASC 740, Income Taxes, for income tax accounting. Accordingly, we recognize a tax benefit from an uncertain tax position when it is more likely than not the position will be sustained upon examination based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. In addition, changes in existing tax laws or rates could significantly change our current estimate of our unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Changes in current estimates, if significant, could have a material adverse impact on our financial statements.

We recognize our deferred tax assets and liabilities based upon the expected future tax outcome of amounts recognized in our results of operations. If necessary, we recognize a valuation allowance on deferred tax assets when it is more likely than not they will not be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future expected taxable income, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. The realization of deferred tax assets is evaluated by jurisdiction and the realizability of these assets can vary based on the character of the tax attribute and the carryforward periods specific to each jurisdiction. We believe it is more likely than not the results of future operations will generate sufficient taxable income to realize our existing deferred tax assets, net of valuation allowances. Changes in the realizability of our deferred tax assets will be reflected in our effective tax rate in the period in which they are determined.

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Foreign Currency Translations

The functional currency of the Company’s foreign operations is generally the applicable local currency. The functional currency is translated into U.S. dollars using the respective current exchange rate in effect as of the balance sheet date for balance sheet accounts and the respective weighted-average exchange rate during the period for revenue and expense accounts. The resulting translation adjustments are deferred as a component of other comprehensive income within the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Shareholders’ Equity. Gains or losses resulting from transactions denominated in foreign currencies are included in other income, net in the Consolidated Statements of Income.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

As used in this report, "Miller Industries," the “Company,” "we," "our," “ours” "us," and similar pronouns refer to Miller Industries, Inc., and its consolidated subsidiaries, unless the context requires otherwise. Our fiscal year ends on December 31. References to fiscal 2023, 2022 and 2021, are to the fiscal years ended December 31, 2023, 2022, and 2021, respectively. Except as otherwise specified, information in this report is provided as of December 31, 2023. To facilitate timely reporting, the consolidated financial statements include accounts of certain subsidiaries whose fiscal closing dates differ from December 31st by 31 days (or less).

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our MD&A within this Form 10-K generally discusses fiscal 2023 and fiscal 2022 items and year-over-year comparisons between fiscal 2023 and fiscal 2022. Fiscal 2022 items and discussions of year-over-year comparisons between fiscal 2022 and fiscal 2021 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "Fiscal 2022 Form 10-K").

Important Information Regarding Forward-Looking Statements

This report (including information incorporated by reference) includes forward-looking statements addressing expectations, prospects, estimates and other matters that are dependent upon future events or developments. Many forward-looking statements appear in MD&A and Risk Factors, but there are others throughout this report, which may be identified by words such as “may,” “will,” “should,” “could,” “continue,” “future,” “potential,” “believe,” “project,” “plan,” “intend,” “seek,” “estimate,” “predict,” “expect,” “anticipate” and variations of such words and similar expressions, and include statements reflecting future results or guidance, statements of outlook and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these risks and uncertainties are described in “Risk Factors” in this report. Forward-looking statements in this report speak only as of the date of this report. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge on our website (www.millerind.com), under the “Investors — Filings — Annual Reports” caption, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.

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ABOUT MILLER INDUSTRIES

Miller Industries, headquartered in Ooltewah, Tennessee, was formed in 1990 and has become The World’s Largest Manufacturer of Towing and Recovery Equipment®, with domestic manufacturing operations in Tennessee and Pennsylvania, and foreign manufacturing operations in France and the United Kingdom.

The Company develops innovative high-quality towing and recovery equipment worldwide. We design and manufacture bodies of car carriers and wreckers, which are installed on chassis manufactured by third parties, and resale to our customers under our Century®, Vulcan®, Chevron™, Holmes®, Challenger®, Champion®, Jige™, Boniface™, Titan® and Eagle® brand names.

Our management focuses on a variety of key indicators to monitor our overall operating and financial performance. These indicators include measurements of revenue, income from operations, gross margin, net income, earnings per share, capital expenditures and cash flow.

Our history of innovation in the towing and recovery industry has been an important factor behind our growth over the last decade and we believe that our continued emphasis on research and development will be a key factor in our future growth.

SIGNIFICANT TRENDS AND OUTLOOK

In 2023, we were presented with several ongoing challenges, such as supply chain constraints, freight challenges, intense inflation, rapidly increasing interest rates and labor shortages, all of which impacted our profitability and liquidity.

Supply Chain

We continue to see significant pressure on global supply chains due to a confluence of events from the pandemic to geopolitical tensions, and economic uncertainty. Logistic disruptions and supplier shortages have caused delays in shipping and freight cost increases. Increases in freight costs and supplier constraints due to workforce disruptions and material shortages have affected our ability to receive essential materials and component parts on time. These supply chain issues have had a direct impact on our production capabilities. Also affecting supply chain is the ongoing conflict in Ukraine and more recently in the Middle East. Given these challenges, we are maintaining focus on meeting the needs of our customers. Ongoing communication and prioritization continues with our suppliers in an effort to identify and mitigate such risks and to proactively manage inventory levels of materials and component parts to align with anticipated demand for our products.

The global supply chain issues have also had a direct impact on our production capabilities including production delays and cost pressures. Production delays have affected product availability and delivery timelines and increased logistics costs have led to higher operating cost which resulted in price adjustments for our products. In 2022, we implemented several price increases and surcharges and announced an eight-percent price increase effective in the first quarter of 2023. We have also developed alternatives to some of the components used in our production process that incorporate raw materials, and our suppliers have implemented these alternatives in the production of our component parts. In addition, beginning in the first quarter of fiscal 2022, we sought additional production capabilities through capital deployment, such as our acquisition of SHC in the second quarter of 2023 and our purchase of an additional small facility in Ooltewah, TN to be used in the production of small carrier units.

Based on our strong backlog, the price increases and productivity improvements we have implemented, lessening supply chain disruptions and easing inflationary pressures, our operating results improved throughout fiscal 2023 and we believe we are well-positioned to continue enhancing our operating results. However, our performance will be heavily influenced by, among other things, whether supply chain constraints and inflationary pressures continue to lessen or worsen, the continuing impact of the wars in Ukraine and Middle East or other geopolitical factors, and the threat of recession and general economic factors. The impact of these factors remains largely out of our control, and we currently anticipate that these factors will continue to have an adverse impact on our production capabilities, financial results and cash flow to continue into fiscal 2024.

Inflation

Impacts of current global supply chain disruptions, inflationary environment, geopolitical tensions and other macroeconomic factors can lead to foreign currency fluctuations. The impact of inflationary or deflationary pressues have caused and may continue to cause foreign currency translation gains or losses within our consolidated statement of comprehensive income/loss.

California’s Air Resources Board

The information regarding the California Air Resources Board’s regulations is included under the heading “Government Regulations and Environmental Matters” in Part I, Item I and in Part I, Item 1A–“Risk Factors” of this Annual Report.

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RESULTS OF OPERATIONS

The following table sets forth the components of the consolidated statements of income expressed as a percentage of net sales for the years ended:

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Comparison of the Years Ended December 31, 2023 and 2022

Net Sales

Consolidated net sales in fiscal 2023 were $1,153.4 million compared to $848.5 million in fiscal 2022, an increase of 35.9%. The increase in net sales was primarily driven by increases in production volume due to supply chain improvements and continued strong customer demand, as well as pricing adjustments implemented in the first quarter.

Net foreign sales in fiscal 2023 were $114.4 million compared to $83.1 million in fiscal 2022, an increase of 38.0%.

Cost of Operations

Costs of operations in fiscal 2023 were $1,001.5 million compared to $766.0 million in fiscal 2022, an increase of 30.7%. The increase in cost of operations was primarily attributed to increased deliveries resulting from increased stabilization in supply chain.

Gross Profit

Gross profit is equal to net sales less cost of sales. Gross profit in fiscal 2023 was $151.9 million compared to $82.4 million in fiscal 2022, an increase of 84.2%. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, physical inventory adjustments, as well as inbound and outbound freight.

Selling, General and Administrative

Selling, general and administrative expenses in fiscal 2023 were $73.1 million compared to $52.8 million in fiscal 2022, an increase of 38.4%. The increase in selling, general and administrative expenses was primarily due to additional executive compensation expense, investor relations activity, increased expenses associated with increased sales volume and increased investment in our workforce, specifically for training and more competitive compensation to improve employee retention. As a percentage of net sales, selling, general and administrative expenses increased to 6.3% in 2023 from 6.2% in 2022.

Interest Expense, Net

Interest expense, net in fiscal 2023 was $6.0 million compared to $3.4 million in fiscal 2022, an increase of 76.8%. Increases in interest expense, net were primarily due to increased borrowings, increased interest rates and increases in floor plan interest payments, offset by interest income.

Other (Income) Expense

The Company is exposed to foreign currency transaction risk when the Company has transactions that are denominated in a currency other than its functional currency. When the related balance sheet items are remeasured in the functional currency of the Company, gains and losses are recorded through other (income) expense. Other (income) expense, net is composed primarily of these foreign currency exchange gains and losses. The Company experienced a net foreign currency exchange gain of $0.8 million for 2023 compared to a net exchange loss of $0.7 million for 2022. Other (income) expense for fiscal 2023 includes $0.2 million of other income.

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Provision for Income Taxes

The provision for income taxes for the years ended December 31, 2023 and 2022 reflects a combined federal, state and foreign tax rate of 21.0% and 21.0%, respectively, which corresponds to a tax provision of $15.5 million in 2023 compared to $5.4 million for 2022. For more information on the effective tax rate, see Note 8 to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We expect our primary sources of cash to be from cash and temporary investments, cash flow from operations and availability under our credit facility at December 31, 2023. We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund our operations and expected future cash needs as described below. 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, regulatory and other factors discussed elsewhere in this Annual Report, many of which are beyond our control.

Cash and Temporary Investments

At December 31, 2023 and 2022, we had consolidated cash and temporary investments of $29.9 million and $40.2 million, respectively. Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends and principal and interest payments on indebtedness.

At December 31, 2023 and 2022, cash and temporary investments included $18.2 million and $18.3 million held by foreign subsidiaries based in the local currency, respectively. We do not currently have plans to repatriate undistributed foreign earnings to the United States and have not determined any timeline or amount for any such future distributions.

Working Capital

Working capital at December 31, 2023 and 2022 was $275.8 million and $219.9 million, respectively. Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases and payments to vendors. Management continually monitors working capital to ensure it remains at levels to support ongoing operations, meet obligations and pursue growth opportunities. See “Cash Flows” – “Cash Flows provided by (used in) Operating Activities” contained within this MD&A for additional discussion on working capital.

Capital Expenditures

Capital expenditures during fiscal 2023 and 2022 were $12.1 million and $28.9 million, respectively. We make ongoing capital investments in our property, plant and equipment, and continue to increase purchases of materials, components and chassis to ramp up production to meet demand, which has been at historic levels. We believe that in periods of normalized supply chain, our historical capital investments in our manufacturing facilities and other capital assets will increase the production capacity and efficiencies of our operations. See “Cash Flows” – “Cash Flows provided by (used in) Investing Activities” contained within this MD&A for additional discussion on capital expenditures.

Dividends

Our Board of Directors declared quarterly cash dividends of $0.18 per share in fiscal 2023. Future common stock cash dividends will depend on our financial condition, results of operations, capital requirements and other factors deemed relevant by our Board of Directors. See Note 11, Shareholders’ Equity, for additional discussion on dividends.

Indebtedness

Credit Facility

On October 28, 2022, we entered into a first amendment to the loan agreement with First Horizon Bank (“First Horizon”) that provides an unsecured revolving credit facility with a maturity date of May 31, 2027, to increase the credit facility from $50.0 million to $100.0 million, made certain technical and operational adjustments necessary to implement the one month Term SOFR Rate (as defined in the loan agreement) as the primary interest rate index under the credit facility and added a new asset coverage financial covenant test. All other material terms and conditions of the credit facility remained unchanged.

The Company pays a quarterly, 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 under the credit facility. The credit facility contains customary representations and warranties, events of default and financial, affirmative and negative covenants for loan agreements of this kind.

Our ongoing operations have, to date, been funded by a combination of cash flow from operations and borrowings under our credit facility. As of December 31, 2023, the Company had $60.0 million in borrowings outstanding under the credit facility. In January 2024, the Company paid $5.0 million towards its credit facility and retains a balance of $55.0 million at February 29, 2024.

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Changes in interest rates affect the interest paid on indebtedness under our credit facility because the outstanding amounts of indebtedness under our current credit facility are subject to variable interest rates. Under our credit facility, the non-default rate of interest is equal to the one-month Term SOFR plus 1.00% or 1.25% per annum, depending on our leverage ratio, for a rate of interest of 6.47% at December 31, 2023.

As of December 31, 2023, we were in compliance with all covenants under the credit facility.

Other Long-Term Obligations

Prior to applying a discount rate to our lease liabilities, we had approximately $0.9 million in non-cancellable operating lease obligations and no non-cancellable finance lease obligations for both years ended December 31, 2023 and 2022. Leases with original contractual terms less than one year were excluded from non-cancellable lease obligations.

During fiscal 2021, we completed phase one of our enterprise software solution implementation. During fiscal 2022 and fiscal 2023, we continued to implement additional functionality available in the enterprise software solution. We expect this software to substantially improve our administrative efficiency and customer service levels. We have $1.4 million in remaining contractual payments under our agreement with the software provider, which extends through 2025.

Cash Flows

Information about our cash flows, by category, is presented in our consolidated statement of cash flows and is summarized below:

Cash Flows provided by (used in) Operating Activities

Cash provided by operating activities during 2023 was $11.0 million, compared to $19.2 million of cash used in operating activities during 2022. Cash provided by operating activities is generally attributable to the receipt of payments from our customers as settlement of their contractual obligation once we have fulfilled all performance obligations related to our contracts with them. These cash receipts are netted with payments for purchases of inventory, payments for materials used in manufacturing and other payments that are necessary in the ordinary course of our operations, such as those for utilities and taxes. The change in operating activities is primarily due to increased net income and a stabilization of changes in operating assets and liabilities as a result of improved availability of purchased components.

Cash used in operating activities during fiscal 2022, included purchases of materials, components and chassis to ramp up production to meet our historic demand levels and to mitigate various supply chain disruptions. These purchases coupled with the increased costs of inventory and labor caused cash provided by operating activities to be exceeded by cash used in operating activities.

Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, payments to vendors and tax payments in the regular course of business.

Cash Flows provided by (used in) Investing Activities

Cash used in investing activities during 2023 was $29.1 million, compared to $28.9 million used during 2022. The cash used in investing activities for 2023 was primarily for the purchase of SHC, Inc., (see Note 2) and purchases of property, plant and equipment.

Cash used in investing activities during fiscal 2022 was primarily for the purchase of property, plant and equipment, including an aircraft purchased which is used to enhance our marketing efforts, establish and maintain our relationships with key suppliers and visit our facilities that are not easily accessible via commercial air travel. We also continued to invest in manufacturing automation, ERP system enhancements and employee safety initiatives.

Cash Flows provided by (used in) Financing Activities

Cash provided by financing activities during 2023 was $6.8 million, compared to $36.8 million provided by 2022. The cash provided by financing activities in 2023 resulted from advances of $15.0 million under the Company’s primary credit facility, offset by the payment of cash dividends of $8.2 million.

Cash provided by financing activities during fiscal 2022 included advances on the credit facility of $45.0 million, offset by dividend payments of $8.2 million and an immaterial amount of payments on finance lease obligations.

CRITICAL ACCOUNTING POLICIES AND SENSITIVE ACCOUNTING ESTIMATES

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Critical accounting policies and estimates are those accounting policies that (i) can have a significant impact on our financial condition and results of operations and (ii) require the use of complex and subjective estimates based upon past experience and management’s judgment. Because estimates are inherently uncertain, actual results may differ. In this section, we describe the significant policies applied in preparing our consolidated financial statements that management believes are the most dependent on estimates and assumptions. See Note 1 of the consolidated financial statements for further discussion on significant accounting policies.

Allowance for Credit Losses

The allowance for credit losses includes general and specific reserves. We determine our allowance for credit losses by reviewing accounts receivable aging, historical write-off trends, payment history, pricing discrepancies, industry trends, customer financial strength, customer credit ratings or bankruptcies. We regularly evaluate how changes in economic conditions may affect credit risks.

A hypothetical 0.1 percent increase or decrease in the reserve as a percentage of trade receivables at December 31, 2023, would result in an increase or decrease in bad debt expense of $0.3 million. We believe the reserve maintained and expenses recorded in fiscal 2023 are appropriate.

At this time, we are not aware of any analytical findings or customer issues that are likely to lead to a significant future increase in the allowance for credit losses as a percentage of revenue. The following table presents information regarding our allowance for credit losses over the past three fiscal years:

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Inventory

Inventories are valued at the lower of cost or net realizable value determined primarily on a moving average unit cost basis. As needed, we record an inventory valuation adjustment for excess, slow moving and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value. The inventory valuation adjustment to net realizable value establishes a new cost basis of the inventory that cannot be subsequently reversed.

In developing inventory valuation adjustments for excess, slow moving, and obsolete inventory, we are required to use judgment and make estimates of future sales demand and production requirements compared with current inventory levels.

Our estimate of forecasted sales demand and production requirements is primarily based on actual orders received, historical and projected sales trends, demand, product pricing, and economic trends and competitive factors. Forecasted sales demand and production requirements can also be affected by the significant redesign of our existing products.  If actual conditions are less favorable than our assumptions, additional inventory reserves may be required.

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 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 estimates, we believe that our long-lived assets are appropriately valued.

Business Combinations

When applicable, we account for the acquisition of a business in accordance with ASC 805, Business Combinations, whereby the fair value of total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired.

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The allocation of purchase consideration requires management to make significant estimates and assumptions. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from such estimates. During the measurement period, which is no longer than one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed. Upon the conclusion of the measurement period, any subsequent adjustments are recognized in operations.

While the ultimate responsibility for determining estimated fair values of the acquired net assets resides with management, for material acquisitions we may retain the services of certified valuation specialists to assist with assigning estimated fair values to certain acquired assets and assumed liabilities.

Goodwill

Goodwill is initially recognized as a result of the excess of purchase consideration transferred over the estimated fair value of the net assets acquired in a business combination. Goodwill is not amortized, but is tested at least annually for impairment during the fourth quarter of our fiscal year unless events or changes in circumstances indicate that impairment may have occurred prior to our annual assessment.

We may elect to first perform a qualitative assessment to determine whether changes in events or circumstances since our most recent quantitative test for impairment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount. We have an unconditional option to bypass the qualitative assessment for a reporting unit and proceed directly to performing the quantitative analysis. If elected, in conducting the initial qualitative assessment, we analyze our most recent estimates of the fair value of a reporting unit by assessing actual and projected growth trends for operating results, as well as historical operating results versus planned performance. Additionally, a reporting unit is assessed for critical areas that may impact its operating performance, including macroeconomic conditions, industry and market considerations, cost factors such as products and component parts and labor, as well as market-related exposures such as fluctuations in our company's market capitalization and share price, and/or any other potential risks to operating performance, such as regulatory and environmental changes. If, after evaluating the weight of the changes in events and circumstances, both positive and negative, we conclude that an impairment of goodwill may exist, a quantitative test for impairment is performed.

If performed due to identified impairment indicators under the qualitative assessment or our election to bypass the qualitative assessment and move directly to the quantitative analysis, the quantitative impairment analysis for goodwill is conducted under the income approach. Under the income approach, we calculate the fair value of our reporting unit’s assets using the present value of future cash flows. Assumptions utilized in determining fair value under the income approach include forecasted operating results, terminal growth rates, and weighted-average cost of capital ("WACC") or discount rates.

Estimating the fair value of a reporting unit requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. The use of estimates and assumptions could materially affect the determination of fair value for a reporting unit and potentially result in goodwill impairment. If a reporting unit fails to achieve expected earnings or operating cash flow, or otherwise fails to meet current financial plans, or if there were changes to any other key assumptions used in the tests, the reporting unit could incur a goodwill impairment in a future period.

Warranty Reserves

Our products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage on our products is generally provided for specified periods of time and generally covers parts, labor, and other expenses for non-maintenance repairs.

At the time of sale, we recognize expense and record a warranty accrual by product line for estimated costs in connection with forecasted future warranty claims. Our estimate of the cost of future warranty claims is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of warranty claims to sales, and the historical length of time between the sale and resulting warranty claim. If applicable, historical claims experience may be adjusted for known product design improvements.

We believe that our analysis of historical warranty claim trends and knowledge of potential manufacturing and/or product design improvements provide sufficient information to establish a reasonable estimate for the cost of future warranty claims at the time of sale and our warranty accruals as of the date of our consolidated balance sheets. However, due to the inherent uncertainty in the accrual estimation process, including forecasting future warranty claims and costs associated with servicing future warranty claims, our actual warranty costs incurred may differ from our warranty accrual estimate. An unexpected increase in warranty claims and/or in the costs associated with servicing those claims would result in an increase in our warranty accruals and a decrease in our net earnings.

Income Taxes

We estimate our deferred tax assets and liabilities, income taxes payable, provision for income taxes, and unrecognized tax benefit liabilities based upon various factors including, but not limited to, historical pretax operating income, future estimates of pretax operating income, differences between book and tax treatment of various items of income and expense, interpretation of tax laws and tax planning strategies. We are subject to income taxes in the U.S. and foreign jurisdictions.

We recognize tax assets and liabilities in accordance with ASC 740, Income Taxes, for income tax accounting. Accordingly, we recognize a tax benefit from an uncertain tax position when it is more likely than not the position will be sustained upon examination based on the largest benefit that has a greater than

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50 percent likelihood of being realized upon ultimate settlement. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. In addition, changes in existing tax laws or rates could significantly change our current estimate of our unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Changes in current estimates, if significant, could have a material adverse impact on our financial statements.

We recognize our deferred tax assets and liabilities based upon the expected future tax outcome of amounts recognized in our results of operations. If necessary, we recognize a valuation allowance on deferred tax assets when it is more likely than not they will not be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future expected taxable income, historical and projected operating results and the availability of prudent and feasible tax planning strategies. The realization of deferred tax assets is evaluated by jurisdiction and the realizability of these assets can vary based on the character of the tax attribute and the carryforward periods specific to each jurisdiction. We believe it is more likely than not the results of future operations will generate sufficient taxable income to realize our existing deferred tax assets, net of valuation allowances. Changes in the realizability of our deferred tax assets will be reflected in our effective tax rate in the period in which they are determined.

Foreign Currency Translations

The functional currency of the Company's foreign operations is generally the applicable local currency. The functional currency is translated into U.S. dollars using the respective current exchange rate in effect as of the balance sheet date for balance sheet accounts and the respective weighted-average exchange rate during the period for revenue and expense accounts. The resulting translation adjustments are deferred as a component of other comprehensive income within the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Shareholders' Equity. Gains or losses resulting from transactions denominated in foreign currencies are included in other income, net in the Consolidated Statements of Income.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the consolidated financial statements for a discussion of recent accounting standards and pronouncements.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our results of operations and financial condition should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Unless the context indicates otherwise, all dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands.

As disclosed in Note 11, “Correction of Prior Period Errors” to our consolidated financial statements, the Company’s consolidated financial statements as of and for the fiscal year ended December 31, 2022, have been revised to give effect to the correction of certain accounting errors identified during the current fiscal year-end financial reporting process.

Company Background

Miller Industries, Inc. is The World’s Largest Manufacturer of 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, net income, earnings per share, capital expenditures and cash flow.

We derive revenues primarily from product sales made to 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 and availability of purchased component parts, truck chassis and raw materials (including aluminum, steel and petroleum-related products).

Our history of innovation in the towing and recovery industry has been an important factor behind our growth over the last decade and we believe that our continued emphasis on research and development will be a key factor in our future growth. We opened a free-standing R&D facility in Chattanooga in 2019, where we pursue various innovations in our products and manufacturing processes, some of which are intended to enhance the safety of our employees and reduce our environmental impact.  In addition, our recent domestic plant expansion and modernization projects have installed sophisticated robotics and implemented other advanced technologies to increase our production capacity and optimize our manufacturing processes.  These projects were completed during the period from 2017 to 2021 at a cost of over $82,000.  We completed phase one of the implementation of an enterprise software solution during 2021, and we continued to implement additional functionality available in the solution in 2022.  We expect this software to substantially improve our administrative efficiency and customer service levels. As we retain our focus toward modernization, we expect to continue to invest in robotics and automated material handling equipment across all of our domestic manufacturing facilities.

As of December 31, 2022 and 2021, the Company owed $45,000 and $0, respectively, under its primary credit facility.  During 2022, the Company drew $45,000 for working capital needs and retains a balance on its credit facility of $45,000 at February 28, 2023.

Factors That Affect Our Operating Results; Trends

Conditions Affecting Demand

Our industry is, and will continue to be, cyclical in nature, and the overall demand for our products and our resulting revenues are influenced by a variety of factors, including:

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We remain concerned about the continuing effects of these factors on the towing and recovery industry, and we continue to monitor our overall cost structure to see that it remains in line with business conditions.

Costs of Components and Raw Materials; Product Availability; Supply Chain Impacts

We have been and will continue to be affected by the availability of, and changes in the prices that we pay for component parts and raw materials, particularly aluminum, steel and petroleum-related products, which represent a substantial part of our total cost of operations.

Supply chain challenges such as shortages and delivery delays in component parts and raw materials were generally lessening as 2022 began but the impact of the war in Ukraine and general economic conditions caused these challenges to substantially increase over the first half of 2022. Supply chain disruptions and workforce retention challenges eased substantially during the second half of 2022, but these challenges continued to reduce our ability to complete finished goods without timing delays and to increase our costs of operations. In addition, general inflationary pressures coupled with rising interest rates have substantially increased in 2022, and the rapid strengthening of the US Dollar in comparison to certain other currencies has caused fluctuations within accumulated other comprehensive loss in our condensed consolidated balance sheet and the recognition of significant losses in our condensed consolidated statement of comprehensive income.

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We continue to monitor these pressures closely and, when possible, attempt to mitigate the risk associated with them.  Historically, we have implemented price increases on our products to offset price increases in the raw materials that we use, and developed new supplier relationships to provide alternative sources for materials and component parts.  We have 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.  In 2022, we implemented several price increases and surcharges and we announced an 8% price increase effective in the first quarter of 2023.  We have also sought additional production capabilities through capital deployment (such as our first quarter 2022 purchase of an additional small facility in Ooltewah, TN to be used in the production of small carrier units), by monitoring currency rates and purchasing currency denominations at advantageous times, and by relying more heavily on our in-house fabrication capabilities.

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Trends and Outlook

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Based on our strong backlog, the surcharge and price increases we have implemented and the current status of our process improvements, our operating results improved towards the end of 2022, and we believe we are well positioned to continue enhancing operating results.  However, our performance will be heavily influenced by, among other things, whether supply chain constraints and inflationary pressures worsen, the continuing impact of the war in Ukraine or other geopolitical factors, and the threat of recession and general economic factors.  The impact of these factors remains largely out of our control, and we currently anticipate that these factors will continue to have an adverse impact on our production capabilities, financial results and cash flow during 2023.

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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, estimations and assumptions. A discussion of critical accounting policies, the judgments and uncertainties affecting

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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 credit losses 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 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 asset 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 estimates, we believe that our long-lived assets are appropriately valued.

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. Goodwill is reviewed for impairment utilizing a qualitative assessment and, if necessary, a quantitative assessment. If we perform a qualitative analysis of goodwill and determine that fair value more likely than not exceeds the carrying value of the reporting unit, no further testing is needed. Alternatively, if we elect to utilize a quantitative assessment, an impairment loss would be recognized to the extent that the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying value of the goodwill. 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

Our income tax expense, deferred tax assets and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. When calculating a provision for income tax for each of the years presented in the consolidated statements of income and deferred tax assets and liabilities as of each date presented in the consolidated balance sheets, we make significant estimates related to tax depreciation and inventory capitalization that are subject to review and that may change significantly prior to filing our income tax return. As such, the estimates made to calculate current and deferred tax expense represent a critical accounting estimate which could materially change in future periods.

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Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in deductible or taxable amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying businesses.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. Accounting Standards Codification (“ASC”) 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation process, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes because of the evaluation of new information not previously available to us. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Revenues

Under our accounting policies, revenues are recognized when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs upon shipment, which is when control has transferred to independent distributors or other customers. From time to time, revenue is recognized under a bill and hold arrangement. Recognition of revenue on bill and hold arrangements occurs when control transfers to the customer. Our policy requires the reason for the bill and hold arrangement to be substantive, and the product to be separately identified as belonging to the customer, ready for physical transfer, and unavailable to be used or directed to another customer.

Revenue is measured as the amount of consideration expected to be received in exchange for the transfer of products. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Warranty related costs are recognized as an expense at the time products are sold. Depending on the terms of the arrangement, for certain contracts the Company may defer the recognition of a portion of the consideration received because a future obligation has not yet been satisfied, such as an extended service contract. An observable stand-alone selling price for separate performance obligations or a cost plus margin approach is utilized when one is not available.

While we manufacture only the bodies of wreckers and car carriers, which are installed on truck chassis manufactured by third parties, we frequently purchase truck chassis for resale to our customers. Sales of company-purchased truck chassis are included in net sales. Margin percentages are substantially lower on completed recovery vehicles containing company-purchased chassis.

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 transactions denominated in a currency other than the functional currency are remeasured into the functional currency. Gains and losses resulting from foreign currency transactions are included in other (income) expense, net in our consolidated statements of income.

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Results of Operations

The following table sets forth, for the years indicated, the components of the consolidated statements of income expressed as a percentage of net sales.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net sales were $848,456 for the year ended December 31, 2022, compared to $717,476 for the year ended December 31, 2021, an increase of 18.3%. The increase in our revenue stream was largely attributable to improvement in supply chain disruptions during the latter part of the year, which was in part due to onboarding of new suppliers as well as reengineering our products to overcome part scarcity. Net domestic sales increased from $627,573 for the year ended December 31, 2021 to $765,307 for the year ended December 31, 2022, and net foreign sales decreased from $89,903 to $83,149 during the same periods.

Costs of operations also increased 18.3% to $766,037 for the year ended December 31, 2022 from $647,624 for the year ended December 31, 2021. Overall, costs of operations as a percentage of net sales remained consistent at 90.3% for both the year ended December 31, 2022 and the year ended December 31, 2021. The sales price increases implemented in the second half of 2022 offset the dramatic rise of our component part costs during the first half of the year.

Selling, general and administrative expenses for the year ended December 31, 2022 increased to $52,827 from $46,233 for the year ended December 31, 2021, primarily due to increased employee compensation and continued inflationary pressures.  In addition, we experienced increases in travel related expenses as marketing activites resumed and we intensified efforts to expand our supply chain network during 2022. As a percentage of net sales, selling, general and administrative expenses decreased to 6.2% for 2022 from 6.4% for 2021.

Interest expense, net increased to $3,379 for the year ended December 31, 2022 from $1,355 for the year ended December 31, 2021. Increases in interest expense, net were primarily due to an increase in interest payments on distributor floor planning, as well interest payments on the credit facility.

When the Company has transactions that are denominated in a currency other than its functional currency, the Company is exposed to foreign currency transaction risk and must record gains and losses through other (income) expense when the related balance sheet items are remeasured in the functional currency of the Company. Other (income) expense, net is composed primarily of these foreign currency exchange gains and losses, with the remainder being composed of gains and losses on disposals of equipment. The Company experienced a net foreign currency exchange loss of $669 for 2022 compared to a net exchange loss of $536 for 2021.

The provision for income taxes for the years ended December 31, 2022 and 2021 reflects a combined federal, state and foreign tax rate of 21.0% and 25.3%, respectively, which corresponds to a tax provision of $5,386 for 2022 as compared to $5,511 for 2021. Our tax rate in 2022 compares favorably to 2021 primarily due to an increased percentage of income recognized in foreign jurisdictions with higher statutory rates during 2021, which also prohibited the Company from recognizing certain domestic deductions which reward higher levels of domestic earnings in comparison to earnings from foreign jurisdictions during 2021. For more information on the effective tax rate, see Note 6 to our Consolidated Financial Statements.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

For a comparison of the 2021 to 2020 reporting periods, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Results of Operations – Year Ended December 31, 2021 Compared to Year Ended December 31, 2020” of our Annual Report on Form 10-K filed on March 9, 2022 for the fiscal year ended December 31, 2021.

Liquidity and Capital Resources

Cash used in operating activities during 2022 was $19,155, compared to $15,268 cash provided by operating activities during 2021. Cash provided by operating activities is generally attributable to the receipt of payments from our customers as settlement of their contractual obligation once we have fulfilled all performance obligations related to our contracts with them. These cash receipts are netted with payments for purchases of inventory, payments for materials used in manufacturing, and other payments that are necessary in the ordinary course of our operations, such as those for utilities and taxes. During 2022, we continued to increase purchases of materials, components and chassis to ramp up production to meet our historic demand levels and to mitigate various supply chain disruptions. These factors coupled with the increased costs of inventory and labor caused cash provided by operating activities to be exceeded by cash used in operation activities in 2022.  During 2021, we used available cash flow from operations toward similar working capital needs, to pay for capital expenditures, and to pay dividends.

Cash used in investing activities during 2022 was $28,931, compared to $9,059 used during 2021. The cash used in investing activities for 2022 and 2021 was primarily for the purchase of property, plant and equipment, including an aircraft purchased in 2022 which is used to enhance our marketing efforts, establish and maintain our relationships with key suppliers and visit our facilities that are not easily accessible via commercial air travel.  We also continued to invest in manufacturing automation, ERP system enhancements and employee safety initiatives during 2022.

Cash provided by financing activities during 2022 was $36,765, compared to $8,238 used during 2021. The cash provided by financing activities in 2022 was attributable to advances on the credit facility of $45,000, offset by dividend payments of $8,220 and an immaterial amount of payments on finance lease obligations. The cash used in financing activities in 2021 was primarily attributable to dividend payments of $8,216 and an immaterial amount of payments on finance lease obligations.

As of December 31, 2022, we had cash and cash equivalents of $40,153. Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends and principal and interest payments on indebtedness. During 2022, supply chain bottlenecks required us to continue allocating cash to working capital at higher than our normal levels in order to allow inventory to be produced to completion as quickly as the supply chain allowed. Accounts payable balances and raw materials and work in process inventory balances at December 31, 2022 increased significantly when compared to the prior year balances. Such constraints also impacted our ability to reduce our backlog, which remain at historically high levels. These supply chain disruptions and bottlenecks improved substantially over the second half of 2022 but are continuing into 2023.  However, we are optimistic that our efforts to supplement our supplier network and reengineer our products will improve our ability to finalize deliveries on a timely basis throughout 2023, allowing cash to be allocated consistent with the Company’s past practices and the buildup in backlog to be reduced.

At December 31, 2022, we had commitments of approximately $6,351 for the acquisition of property and equipment. As of December 31, 2022, we also had commitments of $2,565 in software license fees, all of which is expected to be settled over the next three years. In addition, as of December 31, 2022 we had purchase obligations of $94,356 arising from open purchase orders, which increased from $90,494 at December 31, 2021 as a result of materials and component cost increases and ramp up of production to meet customer demand. We expect all such purchase order obligations will be settled during 2023.

We expect our primary sources of cash to be cash flow from operations and cash and temporary investments on hand at December 31, 2022, with borrowings under our credit facility being available as needed. We expect these sources to be sufficient to satisfy our cash needs during 2023 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, regulatory and other factors discussed above and elsewhere in this Annual Report, as well as financial, business and other factors, many of which are beyond our control.

At December 31, 2022 and 2021, $18,254 and $28,983, respectively, of the Company’s cash and temporary investments were held by foreign subsidiaries based in the local currency. We do not currently have plans to repatriate undistributed foreign earnings to the United States and have not determined any timeline or amount for any such future distributions.

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For a discussion of the 2021 reporting period, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Liquidity and Capital Resources” of our Annual Report on Form 10-K filed on March 9, 2022 for the fiscal year ended December 31, 2021.

Credit Facility and Other Obligations

Credit Facility

On December 21, 2020, we amended and restated our loan agreement with First Horizon Bank (successor in interest to First Tennessee Bank National Association) (“First Horizon”).  The loan agreement provided for a $50 million unsecured revolving credit facility with a maturity date of May 31, 2027.  Borrowings under the credit facility bore interest at the LIBOR Rate (as defined in the loan agreement) plus 1.00% or 1.25% per annum, and we are required to pay a quarterly non-usage fee at a rate per annum equal to between 0.15% and 0.35% of the unused amount of the credit facility.  The credit facility contains customary representations and warranties, events of default and financial, affirmative and negative covenants for loan agreements of this kind.

Amended and restated covenants under the credit facility restrict payment of cash dividends if we would be in violation of the minimum tangible net worth test or the leverage ratio test as a result of the dividend, among other restrictions.

On October 28, 2022, we entered into a first amendment to the loan agreement with First Horizon.  Among other things, the amendment increased availability under the credit facility to a maximum principal amount of $100,000, made certain technical and operational adjustments necessary to implement one month Term SOFR as the primary interest rate index under the facility and added a new asset coverage financial covenant test. All other material terms and conditions of the credit facility remained unchanged.

We were in compliance with all covenants under the credit facility as of December 31, 2022.

Outstanding Borrowings

As of December 31, 2022 and 2021, the Company had $45,000 and $0 borrowings outstanding under the credit facility, respectively, and retains a balance of $45,000 at February 28, 2023.

Changes in interest rates affect the interest paid on indebtedness under our credit facility because the outstanding amounts of indebtedness under our current credit facility are subject to variable interest rates. Under our credit facility, the non-default rate of interest is equal to the one month Term SOFR plus 1.00% or 1.25% per annum, depending on our leverage ratio, for a rate of interest of 5.47% at December 31, 2022. 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 year ended December 31, 2022.

Other Long-Term Obligations

Prior to applying a discount rate to our lease liabilities, we had approximately $926 in non-cancellable operating lease obligations and no non-cancellable finance lease obligations at December 31, 2022.  Leases with original contractual terms less than one year were excluded from non-cancellable lease obligations.

During 2021, we completed phase one of our enterprise software solution implementation and we continue to implement additional functionality available in the solution during 2022.  We expect this software to substantially improve our administrative efficiency and customer service levels.  We have $2,565 in remaining contractual payments under our agreement with the software provider, which extends through 2025.

Recent Accounting Pronouncements

Recently Issued Standards

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805).  The update provides guidance on how to measure and recognize contract assets and contract liabilities when purchased as part of a business combination.  According to the guidance, the acquirer must follow ASC Topic 606 in accounting for

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the contract asset or contract liability being purchased.  The amendments in the update will be effective for financial statements beginning after December 15, 2022, including interim periods within those fiscal years.  The Company will apply the amendments prospectively.  The adoption of this update will not have a material impact on the Company’s consolidated financial statements and related disclosures.

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit Losses (Topic 326). The update will require entities with financing receivables to disclose gross write-offs by year of origination of the receivable. The amendments in the update will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and will be applied prospectively. The adoption of this update will not have a material impact on the Company’s consolidated financial statements and related disclosures.Recently Adopted Standards.

During the first quarter of 2021, the Company adopted ASU 2019-12 Income Taxes (Topic 740), which among other things requires the Company to recognize franchise tax that is partially based on income as an income-based tax. The Company applied the amendments in the update on a modified retrospective basis, which did not have a material impact on the Company’s consolidated financial statements or related disclosures.

During the first quarter of 2022, the Company adopted ASU 2021-10, Government Assistance (Topic 832), which requires certain disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The amendments require disclosure of information about the nature of the transactions and the related accounting policy used to account for the transactions, information regarding the line items within the consolidated financial statements that are affected by the transactions, and significant terms and conditions of the transactions. The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our results of operations and financial condition should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Unless the context indicates otherwise, all dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands.

Executive Overview

Miller Industries, Inc. is The World’s Largest Manufacturer of 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®,

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Champion®, Chevron™, Eagle®, Titan®, Jige™ and Boniface™ brand names. In this Item 7 – “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, net income, 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 and availability of purchased component parts, truck chassis and raw materials (including aluminum, steel and petroleum-related products).

Our history of innovation in the towing and recovery industry has been an important factor behind our growth over the last decade and we believe that our continued emphasis on research and development will be a key factor in our future growth. Our domestic plant expansion and modernization projects have installed sophisticated robotics and implemented other advanced technologies to optimize our manufacturing processes.  We completed phase one of the implementation of an enterprise software solution during 2021, which we expect to substantially improve our administrative efficiency and customer service levels. As we retain our focus toward modernization, we continue to invest in robotics and automated material handling equipment across all of our domestic manufacturing facilities.

We opened our free-standing R&D facility in Chattanooga in 2019, where we pursue various innovations in our products and manufacturing processes, some of which are intended to enhance the safety of our employees and reduce our environmental impact.  Our latest new product, the M100, which we believe to be the world’s largest tow truck, was introduced in the fall of 2019.

All of our domestic facilities have undergone substantial expansion and modernization projects during the period 2017 to 2021, as we have invested over $82,000 on property, plant and equipment over this five-year period, including our most recent fabrication equipment upgrades at our Greeneville, Tennessee facilities.  These projects not only increased our production capacity, but also included installing sophisticated robotics and implementing other advanced technologies to optimize our manufacturing process.

Our industry is cyclical in nature. Until the onset of the COVID-19 pandemic, the overall demand for our products and resulting revenues in recent years have been positively affected by favorable economic conditions, such as lower fuel prices, and positive consumer sentiment in our industry. However, historically, the overall demand for our products and our resulting revenues have at times been negatively affected by:

We remain concerned about the continuing effects of these factors on the towing and recovery industry, and we continue to monitor our overall cost structure to see 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 cost of operations. Prices in raw materials can be affected by tariffs and quantitative restrictions, such as those that were imposed by the U.S. government in 2018. Historically, we have implemented price increases on our products to offset price increases in the raw materials that we use which will be fully-implemented over the course of 2022. 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.

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As of December 31, 2021 and 2020, the Company owed $0 under its primary credit facility.

The supply chain disruptions and workforce retention challenges we experienced during 2021 were due primarily to continued impacts from COVID-19. These factors along with our new software system implementation caused substantial downward pressures on our revenues, margins and earnings during 2021. The business process improvements critical to developing our new software system are now operational. However, supply chain constraints continue to significantly reduce our ability to complete finished goods without timing delays. Nevertheless, based on our strong backlog and the current status of our process improvements, and assuming a continued easing of supply chain constraints and workforce challenges during 2022, we believe we have the opportunity to substantially improve our operating results in 2022.

Impact of COVID-19 and Supply Chain Disruptions

The spread of the COVID-19 virus during 2020 caused an economic downturn on a global scale, as well as significant volatility in the financial markets. During the month of March 2020, we enacted limited shutdowns of all of our domestic facilities to make appropriate modifications to our operations because of COVID-19, which allowed us to continue to serve our customers, while taking precautions to provide a safe work environment for our employees and customers. Since that time and through the present, we have been rotating the majority of our workforce every four days, have designated periods of non-production time for sanitation efforts, have adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing, and have established and implemented work from home provisions where possible. These safety modifications continue to have an adverse impact on our plant productivity, although the impact has been less severe as we have become more accustomed to working under them. We are unable to predict when we may be able to safely relax these new operating measures that were adopted as a result of the COVID-19 pandemic.

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In March 2020, we drew $25,000 on our existing credit facility for working capital needs and as a precautionary measure to ensure future short-term cash flow requirements were met during the heightened uncertainty resulting from the COVID-19 pandemic, but repaid the balance in full later in 2020, as our cash position was stronger than anticipated. At December 31, 2021, we had cash and temporary investments of $54,332.

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During the second and third quarters of 2020 we experienced material curtailments of new chassis deliveries due to shutdowns and production slowdowns at our suppliers’ facilities. We also experienced reductions in orders for our products at the beginning of the pandemic. This depressed demand along with the decreases in deliveries of chassis caused us to temporarily shut our domestic plants in Pennsylvania and Greeneville, Tennessee for several weeks at the end of the second quarter of 2020 and for the first few weeks of the third quarter of 2020. Our international plants also were adversely impacted and experienced shutdowns during the second quarter of 2020. While all of our plants were open for all of 2021, the possibility of new shutdowns of one or more of our facilities due to the COVID-19 pandemic remains.

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As the economy improved over the course of 2021, significant supply chain challenges such as shortages and delivery delays in semiconductors and other component parts and price increases on many materials, including record high steel prices, impacted the operations of many companies on a global scale. We continued to experience these critical supply chain disruptions during the second half of 2021, which impacted our ability to obtain on a timely basis various raw materials and purchased component parts that are necessary to our production processes, including our ability to obtain chassis from third party suppliers, and also resulted in substantial price increases for many materials and component parts. We also continued to experience in the second half of 2021 increases in employee turnover rates and difficulties in hiring new workers for our skilled workforce, which has caused increased recruiting, training and retention costs. These supply chain and workforce headwinds generally worsened over the course of the second half of 2021, and are continuing into early 2022. We continue to monitor these disruptions and attempt to mitigate the risk associated with them, including by implementing several price increases and surcharges that will be fully-implemented over the course of 2022, and by relying more heavily on our in-house fabrication capabilities, which were significantly expanded in 2020. However, the impact of these disruptions remains largely out of our control and we currently anticipate that these factors will continue to have a material adverse impact on production at our facilities during the first half of 2022 and possibly beyond.

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We implemented several price increases and surcharges for our products during 2021 and have announced several more for the first half of 2022 in an effort to address the substantial price increases for materials and component parts used in our production process. However, our price increases require a long lead time to implement and will not be fully implemented until later in 2022, while the higher material costs for raw materials or purchased component parts that we use is felt much sooner, which factors had a substantial adverse impact on our net income during the second half of 2021.

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The impact of the COVID-19 pandemic and supply chain disruptions resulting from the economic recovery from the pandemic continue to unfold and their effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the ongoing pandemic, including as a result of the emergence of new strains of the virus and any future resurgences of COVID-19 or variant strains, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the success of vaccination programs, the development of treatments or other vaccines, the demand for new equipment from towing equipment operators and the resumption of widespread economic activity and the success and timing of the general economy and our suppliers in resolving supply chain disruptions. While we know that COVID-19 related changes to our operating processes and supply chain disruptions experienced as the economy recovers from the impact of the pandemic have and will continue to impact our production levels for so long as they are in place, due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the continuing COVID-19 pandemic and supply chain disruptions on our future operations. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression, or to continuing or worsening supply chain disruptions and workforce turnover, or to a general reduction in miles driven on roadways due to a decrease in travel. We also will be monitoring the potential impact of the Russia conflict with Ukraine on our fuel costs and supply chain for materials, parts and components, particularly with respect to steel and items with substantial steel content.

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, estimations 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 credit losses 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 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 asset 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 estimates, we believe that our long-lived assets are appropriately valued.

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. Goodwill is reviewed for impairment utilizing a qualitative assessment and, if necessary, a quantitative assessment. If we perform a qualitative analysis of goodwill and determine that fair value more likely than not exceeds the carrying value of the reporting unit, no further testing is needed. Alternatively, if we elect to utilize a quantitative assessment,

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an impairment loss would be recognized to the extent that the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying value of the goodwill. 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

Our income tax expense, deferred tax assets and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. When calculating a provision for income tax for each of the years presented in the consolidated statements of income and deferred tax assets and liabilities as of each date presented in the consolidated balance sheets, we make significant estimates related to tax depreciation and inventory capitalization that are subject to review and that may change significantly prior to filing our income tax return. As such, the estimates made to calculate current and deferred tax expense represent a critical accounting estimate which could materially change in future periods.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in deductible or taxable amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage the underlying businesses.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. Accounting Standards Codification (“ASC”) 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation process, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes because of the evaluation of new information not previously available to us. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Revenues

Under our accounting policies, revenues are recognized when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs upon shipment, which is when control has transferred to independent distributors or other customers. From time to time, revenue is recognized under a bill and hold arrangement. Recognition of revenue on bill and hold arrangements occurs when control transfers to the customer. Our policy requires the reason for the bill and hold arrangement to be substantive, and the product to be separately identified as belonging to the customer, ready for physical transfer, and unavailable to be used or directed to another customer.

Revenue is measured as the amount of consideration expected to be received in exchange for the transfer of products. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Warranty related costs are recognized as an expense at the time products are sold. Depending on the terms of the arrangement, for certain contracts the Company may defer the recognition of a portion of the consideration received because a future obligation has not yet been satisfied, such as an extended service contract. An observable stand-alone selling price for separate performance obligations or a cost plus margin approach is utilized when one is not available.

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While we manufacture only the bodies of wreckers and car carriers, which are installed on truck chassis manufactured by third parties, we frequently purchase truck chassis for resale to our customers. Sales of company-purchased truck chassis are included in net sales. Margin percentages are substantially lower on completed recovery vehicles containing company-purchased chassis.

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 transactions denominated in a currency other than the functional currency are remeasured into the functional currency. Gains and losses resulting from foreign currency transactions are included in other (income) expense, net in our consolidated statements of income.

Results of Operations

The following table sets forth, for the years indicated, the components of the consolidated statements of income expressed as a percentage of net sales.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net sales were $717,476 for the year ended December 31, 2021, compared to $651,286 for the year ended December 31, 2020, an increase of 10.2%. The increase in our revenue stream was largely attributable to not experiencing shutdown periods during 2021 that were necessary during 2020 due to the impact of the COVID-19 pandemic. Net domestic sales increased during the period from $556,540 to $627,573, and net foreign sales decreased from $94,746 to $89,903 during the same period.  Net sales during 2021 were adversely impacted by supply chain disruptions throughout the year, which increased work in process and inventories as deliveries of our products were delayed by delays in deliveries of certain critical final component parts from our suppliers, which in turn substantially increased our backlog of orders.

Costs of operations increased 13.0% to $647,624 for the year ended December 31, 2021 from $572,928 for the year ended December 31, 2020. Overall, costs of operations as a percentage of net sales increased from 88.0% for the year ended December 31, 2020 to 90.3% for the year ended December 31, 2021, primarily due to rising inflation, supply chain disruptions/constraints, and significant increases in labor costs. These factors were more pronounced during the third and fourth quarters of 2021, in comparison to the prior two quarters, which resulted in significantly increased costs, and contributed to a substantial decrease in net income during the second half of 2021.

Selling, general and administrative expenses for the year ended December 31, 2021 increased to $46,233 from $39,714 for the year ended December 31, 2020, primarily due to increases in travel related expenses and a resumption of activities that were suspended due to the onset of the COVID-19 pandemic during 2020. In addition, these costs were adversely impacted by increased salaries and inflationary pressures from the economic climate. As a percentage of net sales, selling, general and administrative expenses increased to 6.4% for 2021 from 6.1% for 2020, primarily due the factors indicated above. These factors were more pronounced during the third and fourth quarters of

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2021, in comparison to the prior two quarters, which resulted in significantly increased expenses, and contributed to a substantial decrease in net income during the second half of 2021.

Interest expense, net increased to $1,355 for the year ended December 31, 2021 from $1,215 for the year ended December 31, 2020. Increases in interest expense, net were primarily due to decreases in interest income from distributor receivables, partially offset by decreases in interest payments on distributor floor planning and interest payments on the credit facility.

When the Company has transactions that are denominated in a currency other than its functional currency, the Company is exposed to foreign currency transaction risk and must record gains and losses through other (income) expense when the related balance sheet items are remeasured in the functional currency of the Company. Other (income) expense, net is composed primarily of these foreign currency exchange gains and losses, with the remainder being composed of gains and losses on disposals of equipment. The Company experienced a net foreign currency exchange loss of $536 for 2021 compared to a net exchange gain of $685 for 2020.

The provision for income taxes for the years ended December 31, 2021 and 2020 reflects a combined federal, state and foreign tax rate of 25.3% and 21.7%, respectively, which corresponds to a tax provision of $5,511 for 2021 as compared to $8,267 for 2020. Our tax rate in 2021 compares unfavorably to 2020 primarily due to an increased percentage of income recognized in foreign jurisdictions with higher statutory rates, which also prohibited the company from recognizing certain domestic deductions which reward higher levels of domestic earnings in comparison to earnings from foreign jurisdictions. For more information on the effective tax rate, see Note 6 to our Consolidated Financial Statements.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

For a comparison of the 2020 to 2019 reporting periods, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Results of Operations - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019” of our Annual Report on Form 10-K filed on March 3, 2021 for the fiscal year ended December 31, 2020.

Liquidity and Capital Resources

Cash provided by operating activities during 2021 was $15,268, compared to $60,709 provided during 2020. Cash provided by operating activities is generally attributable to the receipt of payments from our customers as settlement of their contractual obligation once we have fulfilled all performance obligations related to our contracts with them. These cash receipts are netted with payments for purchases of inventory, payments for materials used in manufacturing, and other payments that are necessary in the ordinary course of our operations, such as those for utilities and taxes. During 2021, we increased purchases of materials, components and chassis to ramp up production to meet rising demand as the global economy began to recover from the pandemic and to mitigate certain supply chain disruptions, and we also increased headcount in response to labor shortages and workforce retention challenges in our markets. These factors coupled with the increased costs of inventory and labor caused cash provided by operating activities to decrease in 2021.  Additionally, during 2020, our decreased revenue stream caused less cash to be used for purposes of new production while receivables from higher sales levels of the prior year continued to flow in, resulting in substantially greater cash provided by operating activities during 2020.  During 2021, we have largely used available cash flow from operations toward working capital needs, to pay for capital expenditures, and to pay dividends.

Cash used in investing activities during 2021 was $9,059, compared to $17,224 used during 2020. The cash used in investing activities for 2021 and 2020 was primarily for the purchase of property, plant and equipment, including a significant equipment upgrade project at our Greeneville, Tennessee location.

Cash used in financing activities during 2021 was $8,238, compared to $13,631 used during 2020. The cash used in financing activities in 2021 was attributable to dividend payments of $8,216 and an immaterial amount of payments on finance lease obligations. The cash used in financing activities in 2020 was primarily attributable to dividend payments of $8,212, net payments on the credit facility of $4,998, net payments on our French subsidiary’s loan of $400, and an immaterial amount of payments on finance lease obligations.

As of December 31, 2021, we had cash and cash equivalents of $54,332. Our primary cash requirements include working capital, capital expenditures, the funding of any declared cash dividends and principal and interest payments on indebtedness. In the latter half of 2021, supply chain bottlenecks required us to allocate cash to working capital at higher than our normal levels in order to allow inventory to be produced to completion as quickly as the supply chain allowed. As a result, the accounts payable balance and raw materials and work in process inventory balances at December 31, 2021 increased significantly when compared to the prior year balances. Such constraints also

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impacted our ability to reduce our backlog, which has increased to historic highs. These supply chain disruptions and bottlenecks are continuing into 2022, but we are optimistic that they will ease in the second half of 2022, allowing cash to be allocated to future capital projects consistent with the Company’s past practices and the buildup in backlog to be reduced.

At December 31, 2021, we had commitments of approximately $5,052 for the acquisition of property and equipment. As of December 31, 2021, we also had commitments of $3,751 in software license fees, all of which is expected to be settled over the next four years. In addition, as of December 31, 2021 we had purchase obligations of $90,494 arising from open purchase orders, which increased from $34,316 at December 31, 2020 as a result of supply chain constraints and increased production during the second half of 2021. We expect all such purchase order obligations will be settled during 2022.

We expect our primary sources of cash to be cash flow from operations and cash and temporary investments on hand at December 31, 2021, with borrowings under our credit facility being available as needed. We expect these sources to be sufficient to satisfy our cash needs during 2022 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, regulatory and other factors discussed above and elsewhere in this Annual Report, as well as financial, business and other factors, many of which are beyond our control.

At December 31, 2021 and 2020, $28,983 and $22,787, respectively, of the Company’s cash and temporary investments were held by foreign subsidiaries based in the local currency. We do not currently have plans to repatriate undistributed foreign earnings to the United States and have not determined any timeline or amount for any such future distributions.

During 2019, in addition to investments in manufacturing equipment technology, the Company purchased a facility in Chattanooga to be used in research and development and various other activities. During 2020 and 2021, the Company took advantage of temporary shutdown periods and engaged in a project to significantly upgrade fabrication equipment at its Greeneville, Tennessee location.

For a discussion of the 2020 reporting period, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Liquidity and Capital Resources” of our Annual Report on Form 10-K filed on March 3, 2021 for the fiscal year ended December 31, 2020.

Credit Facility and Other Obligations

Credit Facility

On December 21, 2020, we amended and restated our loan agreement with First Horizon Bank (formerly known as First Tennessee Bank National Association), which governs our existing $50,000 unsecured revolving credit facility, to (i) renew and extend the maturity date from May 31, 2022 to May 31, 2027 and make certain other conforming changes, (ii) amend the tangible net worth covenant to increase the minimum required compliance level thereunder from $160,000 to $190,000 (the Company’s tangible net worth at December 31, 2021 was approximately $277,000), and (iii) allow for the sale and leaseback of certain equipment. The 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 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 dividend, among various restrictions. We have been in compliance with these covenants throughout 2019 and 2020. In the absence of a default, all borrowings under the credit facility bear interest at the LIBOR Rate plus 1.00% or 1.25% 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 credit facility, which fee is paid quarterly.

Outstanding Borrowings

As of December 31, 2021 and 2020, the Company had no borrowings outstanding under the credit facility. During 2020, the Company continued to collect on accounts receivable while less cash was used on working capital expenditures during the periods of lower demand resulting from the COVID-19 pandemic, thus increasing cash available for payments on the credit facility. While our cash position is still strong, demand has strengthened and our backlog has increased during 2021, which has prompted us to increase our inventory in efforts to mitigate risk from supply chain bottlenecks, which has decreased our cash position in 2021.

Our French subsidiary, Jige International S.A., had an agreement with Banque Européenne du Crédit Mutuel for an unsecured fixed rate loan which matured at September 30, 2020.

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Changes in interest rates affect the interest paid on indebtedness under our credit facility because the outstanding amounts of indebtedness under our current credit facility are subject to variable interest rates. Under our credit facility, the non-default rate of interest is equal to the LIBOR Market Index Rate plus 1.00% or 1.25% per annum, depending on our leverage ratio, for a rate of interest of 1.10% at December 31, 2021. 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 year ended December 31, 2021.

Other Long-Term Obligations

Prior to applying a discount rate to our lease liabilities, we had approximately $1,328 in non-cancellable operating lease obligations and $15 in non-cancellable finance lease obligations at December 31, 2021.  Leases with original contractual terms less than one year were excluded from non-cancellable lease obligations.

During 2021, we completed phase one of our enterprise software solution implementation which we expect to substantially improve our administrative efficiency and customer service levels.  We have $3,751 in remaining contractual payments under our agreement with the software provider, which extends through 2025.

Recent Accounting Pronouncements

Recently Issued Standards

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805).  The update provides guidance on how to measure and recognize contract assets and contract liabilities when purchased as part of a business combination.  According to the guidance, the acquirer must follow ASC Topic 606 in accounting for the contract asset or contract liability being purchased.  The amendments in the update will be effective for financial statements beginning after December 15, 2022, including interim periods within those fiscal years.  The Company will apply the amendments prospectively.  The adoption of this update will not have a material impact on the Company’s consolidated financial statements and related disclosures.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832). The amendments within the update require certain disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy.  The amendments will require disclosure of information about the nature of the transactions and the related accounting policy used to account for the transactions, information regarding the line items within the consolidated financial statements that are affected by the transactions, and significant terms and conditions of the transactions.  The amendments in the update will be effective for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted.  The Company will apply the amendments prospectively.  The adoption of this update will not have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Adopted Standards

During the first quarter of 2021, the Company adopted ASU 2019-12 Income Taxes (Topic 740), which among other things requires the Company to recognize franchise tax that is partially based on income as an income-based tax. The Company applied the amendments in the update on a modified retrospective basis, which did not have a material impact on the Company’s consolidated financial statements or related disclosures.

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