Good day, ladies and gentlemen, and welcome to the Miller Industries Third Quarter 2022 Results Conference Call. Please note, this event is being recorded. Now at this time, I'd like to turn the call over to your host, Mike Gaudreau at FTI Consulting. Please go ahead, sir.
Thank you, and good morning, everyone. I'd like to welcome you to the Miller Industries Conference call. We are here to discuss the company's 2022 third quarter results, which were released after the close of the market yesterday. With us from the management team today are Bill Miller, Chairman of the Board, Debbie Whitmire, Executive Vice President and CFO, Frank Madonia, Executive Vice President, Secretary, and General Counsel, Vin Tiano, Chief Revenue Officer, and Jamison Linden, Chief Manufacturing Officer. Today's call will begin with formal remarks from management, followed by a question-and-answer session. Please note on this afternoon's conference call, management may make forward-looking statements in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
I'd like to call your attention to the risks related to these statements, which are more fully described in the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission. At this time, I'd like to turn the call over to Debbie. Please go ahead, Debbie.
Thank you, and good morning, everyone. Will is traveling today, so I'll be providing today's update. We were pleased by our third quarter results, both the continued strong demand in our end markets and the sequential revenue growth. Sales in the quarter increased 24.8% to $205.6 million compared to the third quarter last year. Gross profit for the third quarter was $23.2 million, an increase of 30% compared to the prior year quarter, resulting in a gross margin of 11.3%. We are encouraged by the profitability improvement as we benefited from our pricing initiatives. Our results also reflect strategic actions taken since the last downturn to build information systems with our business partners, giving us more visibility into sales trends and helping us adjust production to the proper levels for our products.
However, we continue to experience significant supply chain challenges. We still had difficulty sourcing certain parts that are critical to the completion of finished goods, though slightly fewer than we had in prior quarters. Despite these continued challenges, we have taken steps to strengthen our supply chain in recent quarters that we anticipate will yield positive results going forward. Our backlog remains strong, and despite the macroeconomic environment, we have had an insignificant number of cancellations to date, which gives us confidence in the resiliency of our business and our end markets. Moving on to our international business, demand remains strong for our products despite the ongoing conflict in Ukraine.
While we are experiencing some impacts of increased raw material and component pricing, higher freight and energy costs, and unfavorable exchange rates, net of all the impacts, our international operations have performed steadily to meet customer demand in spite of headwinds. Now, I'd like to turn to the review of the third quarter financial results in more detail. Net sales for the third quarter 2022 were $205.6 million versus $164.7 million for the third quarter of 2021, a 24.8% year-over-year increase, driven largely by the continued strong demand for our products, our pricing actions, and an ability to ship more finished goods.
Cost of operations increased 24.2% to $182.4 million for the third quarter 2022, compared to $146.9 million for the third quarter 2021. Cost of operations as a percentage of net sales decreased approximately 45 basis points from the prior year period to 88.7%. Gross profit was $23.2 million, or 11.3% of net sales for the third quarter 2022, compared to $17.8 million, or 10.8% of net sales for the prior year period. The year-over-year increase in gross margin was driven largely by a more favorable product mix. SG&A expenses were $14.7 million in the third quarter 2022, compared to $12 million in the third quarter 2021.
However, as a percentage of sales, SG&A decreased approximately 14 basis points to 7.1% from 7.3% in the prior year period. The dollar increase was due to one-time expenses to support our strategic initiatives, as well as increases in employee wages and benefit costs, including training and development. Net interest expense for the third quarter 2022 was $1 million, up from $286,000 for the third quarter 2021, primarily related to increases in distributor floor plan financing costs, which flex up and down with revenue, as well as the increase in our outstanding debt and rising interest rates.
Other expense for the third quarter 2022 was $666,000 compared to $206,000 for the third quarter 2021, attributed largely to currency exchange rate fluctuations and the relative strength of the US dollar. Net income for the third quarter 2022 was $5.2 million, or $0.46 per diluted share, compared to net income of $3.8 million, or $0.34 per diluted share in the third quarter of 2021, increases of 36% and 35.3% respectively. Before moving to the balance sheet, I'd like to quickly recap our results for the first nine months of the year.
Net sales for the first nine months of 2022 were $622.6 million compared to $515.8 million in the prior year period, an increase of 20.7%. Gross profit for the nine months ended September 30, 2022 was $56.9 million or 9.1% of sales compared to $54.3 million or 10.5% of sales compared to the same period last year. Net income for the first nine months of 2022 was $11.1 million or $0.97 per share compared to net income for the first nine months of 2021 of $13.5 million or $1.19 per share, representing decreases of 18.4% and 18.5% respectively.
Turning to the balance sheet, cash and cash equivalents as of September 30, 2022 was $33.2 million compared to $31.1 million as of June 30, 2022, and $50.4 million as of September 30, 2021. Accounts receivable as of September 30, 2022 was $167.9 million compared to $191.2 million as of June 30, 2022, and $131.1 million as of September 30, 2021. Inventories were $144.4 million as of September 30, 2022 compared to $141.2 million as of June 30, 2022, and $108.8 million as of September 30, 2021.
Accounts payable as of September 30, 2022 was $107.5 million compared to $137.7 million as of June 30, 2022, and $87.8 million as of September 30, 2021. We are hopeful that we have hit the peak of our working capital requirements as inventory increased only moderately compared to the prior quarter. Traditionally, we are a debt-averse company. However, we feel that increasing our debt to fund our working capital needs is in the best interest of our customers and our shareholders, given our significant backlog. We will continue to invest in our working capital as necessary to have the critical parts available for us to turn inventory into finished goods and get product into the customers' hands as quickly as possible.
Lastly, the board of directors approved our quarterly cash dividend of $0.18 per share, payable December twelfth, 2022 to shareholders of record at the close of business on December fifth, 2022, marking the 48th consecutive quarter that the company has paid a dividend. Finally, some closing remarks. The third quarter was extremely encouraging as we saw sequential revenue growth, saw the effects of our pricing actions flow through our results, and began to experience success of our actions to alleviate some supply chain constraints. As I mentioned earlier, getting product to the customers is our top priority, and we are working closely with all of our customers, distributors, and partners to ensure that we further strengthen these relationships. While there are still many issues related to part sourcing, rising interest rates, conflict in Europe, and foreign exchange headwinds, we remain encouraged by the strength of our business. In closing, we'd like to thank all of our stakeholders for their continued support of Miller Industries. At this time, we'll open the line for any questions.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Arnie Ursaner with Ursaner Family Office. Please proceed with your question.
Hi, good morning. Can you hear me okay?
Yeah. Good morning, Arnie.
Great. Thanks for taking my questions. I have a few really quick, simple ones to knock out of the way. Is there any margin difference between your domestic and international business?
Typically, that margin is very similar. Obviously the strength of the US dollar right now is definitely challenging. With the increased pricing in the European operations due to energy costs and those things, it is fluctuating some, but typically it is very similar.
Perfect. Thank you. A simple question on backlog. Shrinking or expanding?
Remaining steady.
Okay.
Order entry is slightly outpacing our shipments. That's mainly because of the supply chain constraints. It kind of ebbs and flows right now. You know, as we start to see pockets of improvement in certain areas, we're able to deliver, but I would say it is remaining steady.
Perfect. In Q2, you mentioned volume was down, but pricing had made up the difference. In Q3, you had indicated that it would be impacted by when component parts were arriving. Can you give us a little more thorough update on things like hydraulics, winches, valves, cylinders, items that you had highlighted earlier? You've mentioned you're looking for additional suppliers. Give us an update on the process of getting additional suppliers and how perhaps you look at current time. Thanks.
Hi, Arnie. This is Jamison Linden. How are you doing today?
I'm great, thanks.
Wonderful. Just quick update. We have seen some pockets of improvement within the supply chain, mostly related to the metals market and castings. We still are seeing significant delays in hydraulic cylinders, valves, and winches. We have made some inroads with new product being designed by engineering and bringing on a few suppliers. We are hopeful that in the upcoming months and quarters, we'll see some improvements. Right now it is still very challenging, but we have made some improvements.
You have products sitting, if you will, on your dock that can't get out because they're missing certain parts. What do you tell the customer? What's the timing on when these would be likely to ship? Are there certain products literally holding up shipments going out?
That is correct. We have component parts that are shortages that delay us from delivering to our product. We give them the best answer that we can, depending on the components. It's a different answer depending on the component.
Got it. My next question relates to pricing of your product and orders that you're taking in. You had a 5% price increase in June. You had a 3%-11% surcharge in April. You indicated in your filing that you intend to have an 8% price increase effective Q1 2023. I have a couple of questions related to pricing. If I place an order today, and your costs are going up quite dramatically now, why would that price increase be deferred till Q1 2023? I guess my question as a shareholder is why aren't you trying to be a little more immediate getting price recovery on orders you're taking in?
Orders that we're taking in today, the price increase in January is dependent on delivery date. We can take an order today, and if that unit is delivered by the end of the year, it would not be subject to the 2023 price increase. If it is delivered after January of 2023, it would be subject to that price increase. It's not dependent on order intake date, it's dependent on delivery date.
Which goes to the key point I was trying to make. Your margin recovery, if you are getting price recognition for your increased costs on deliveries, then your margins should be improving as we go into next year. Is that a fair statement?
That is the intent, yes. Obviously, with all of the macroeconomic conditions, it is volatile for sure, but that is the intent.
Okay. I just wanna be clear in my mind, your price increases are not replacing the surcharge. Is that correct?
Surcharge is rolled in plus an increase.
Okay, thank you. I guess my last question is one of those really simple one. The trends you saw in Q3, are they continuing in October?
As far as relief from some of the pockets of the supply chain issues?
Deliveries and manufacturing. No additional glitches have come up. Again, you showed some nice improvement in Q3, relative to last year when you had major challenges. I'm assuming the current trends are continuing.
It is an ever-changing scenario. As Jamison mentioned, there are pockets of relief, but it seems that as you get one pocket of relief, another challenge presents itself. Yes, we are seeing some positive trends, but there are also some headwinds that we're facing. They seem to be balancing each other out at this point, but it is very challenging still, as Jamison said.
Okay. I know you don't provide guidance, but I'm gonna try to ask questions at least directionally, 'cause investors like myself are thinking about 2023 at this point. You've obviously put in massive price increases during the course of 2022, many of which will continue or even go further in 2023. If I assume Q4 revenues are lower than Q3 for seasonal and other reasons, and build in something in the mid to high teens, almost entirely based on price for next year. If I assume your gross margin returns another 50 or 60, 80 basis points to what has been your historic going back to 2016. If you can control your operating expenses to in the mid-fives, which again, you should be getting leverage. You spent $82 million on an expansion and other factors that are productivity enhancing.
Full tax rate, that would lead me to an earnings model somewhere between $4-$5. What about my thinking about next year, are you uncomfortable with?
Well, there, as you clearly said, there are a lot of assumptions in there, and, you know.
A lot of uncertainties.
Correct.
Well, I'm giving you any volume improvement. I'm not giving you the benefit of getting the parts that have held back your productivity. I think my assumptions are, and if anything, I think they're reasonable with maybe one exception, the SG&A, which I'm assuming you can get some leverage on.
That is, you know, we're doing all the things that we can to make the business profitable and get back to the margins that we have seen in the past. There are many uncertainties facing us and, you know, if you are trying to model, certainly taking all of those challenges into consideration is front of our mind. We are taking steps to move in that direction. As you said, we don't give guidance, but, you know, based on the initiatives that we have via pricing, via automation, we are certainly moving, and moving in that direction, and that is our goal.
As I said, it's not whether you do it in 2023, but maybe in the 2023, 2024 timetable. I'm not trying to pin you down.
Mm-hmm.
I am trying to figure out, you know, the earnings power of Miller in a more normal environment. My last comment, and I don't expect you to necessarily speak to this, one thing that is in control is executive compensation. You put out a comment where your compensation committee on October second raised a few salaries, base salaries. William Miller II got a 16% increase. Debbie Whitmire, you got an 18% increase. Your CIO and Chief Manufacturing Officer got 28% pay increases. At least I noticed this, and I would hope your compensation committee is aware that I'd rather see much more performance-based compensation, which you have in place, excellent RSU program, than base salary increases of the magnitude that you put in. That's all I have for today. Thank you.
Are there any other questions?
There are no other questions. We've reached the end of the question and answer session. I'd now like to turn the call back over to Debbie Whitmire for closing comments.
I'd like to thank everyone again for joining the call today, and we look forward to speaking with you on our fourth quarter and year-end conference call. Thank you.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.