THOR INDUSTRIES INC quarterly report, Q1 FY2020

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Business context and reporting period

Thor Industries, Inc. (THO) filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended October 31, 2019. Thor manufactures recreational vehicles (RVs) in North America and Europe and sells primarily through independent dealers. The results include Erwin Hymer Group (EHG), acquired February 1, 2019; therefore, the year-over-year comparison includes a new European segment but no comparable European revenue in the prior-year quarter.

Financial results and liquidity

Unless otherwise stated, amounts below are in U.S. dollars.

  • Revenue: $2.159 billion, up 22.9% from $1.756 billion. EHG contributed $493.0 million; North American RV revenue declined 5.5% to $1.617 billion.
  • Profit and margins: Gross profit was $308.8 million, up 49.0%; gross margin improved to 14.3% from 11.8%. Income before tax rose to $68.6 million from $31.5 million. Net income attributable to Thor was $51.1 million, or $0.92 diluted EPS, versus $14.0 million, or $0.26 per diluted share.
  • Cash flow: Operating cash flow was negative $52.0 million, compared with negative $15.8 million. Seasonal working-capital needs used $164.7 million, primarily from increases in receivables and inventory and a reduction in accrued liabilities. Investing cash outflow was $13.8 million; capital expenditures were $31.2 million. Financing cash outflow was $114.8 million, mainly reflecting debt repayments.
  • Liquidity: Cash and cash equivalents were $231.8 million at October 31, down from $425.6 million at July 31; restricted cash was an additional $38.7 million. Working capital was $554.1 million. Thor reported approximately $668 million of unused ABL availability.
  • Debt: Gross long-term debt was $1.848 billion, compared with $1.954 billion at July 31. The company made additional payments after quarter-end: $13.5 million on the U.S. term loan and €18 million on the ABL. Interest expense increased to $28.0 million from $0.9 million, principally due to acquisition-related financing.
  • Other metrics: The quarterly dividend increased to $0.40 per share from $0.39. Total backlog was $3.029 billion, including $1.292 billion in Europe; North American backlog was $1.737 billion.

Material changes versus the prior comparable period

  • Reported revenue growth chiefly reflects EHG’s inclusion. Excluding its $493.0 million of sales, North American RV and other sales together declined $90.2 million, or 5.1%.
  • North American gross margin improved to 14.2% from 11.6%, led by towables, where gross margin rose to 15.3% from 12.0%. Management attributed the improvement primarily to product mix, selective pricing, stable material costs, and lower warranty costs.
  • EHG generated $493.0 million of revenue and $64.6 million of gross profit, but reported a $23.0 million pretax loss, including $27.5 million of depreciation and amortization.
  • SG&A rose 83.5% to $188.5 million, with $73.8 million of the increase attributable to EHG. Intangible amortization also rose, primarily due to EHG.
  • The prior-year quarter included $57.1 million of acquisition-related costs, including a $42.6 million foreign-currency forward-contract loss. This unusual prior-year expense and its nondeductibility contributed to the lower current-period effective tax rate: 24.5%, versus 55.7%.

Outlook, risks and unusual items

  • Management expected North American dealer inventory rationalization to continue through the remainder of calendar 2019 and forecast a flat to modest decline in North American markets in calendar 2020, barring a significant macroeconomic impact. Thor’s North American dealer inventory was down 22.8% year over year to approximately 101,500 units.
  • Industry wholesale shipments in the U.S. and Canada fell 18.2% in the first nine months of 2019; retail registrations fell 7.9%. Thor’s North American backlog declined 1.2% year over year. In Europe, reported industry registrations increased, but European RV operations are seasonal and EHG dealer inventory was elevated in some locations.
  • Management anticipated $100 million to $115 million of capital expenditures for the remainder of fiscal 2020. It stated that cash, operating cash generation, and available credit were expected to fund foreseeable operating needs.
  • Key risks include consumer confidence and discretionary spending, interest rates and credit availability, tariffs and material or labor costs, warranty claims, chassis and other supply constraints, dealer concentration, foreign exchange, and EHG integration and potential unknown liabilities. New European emissions standards could affect chassis availability and purchasing patterns.
  • One dealer, FreedomRoads, represented 15% of quarterly sales and 17% of trade receivables at quarter-end; the filing says its loss could materially affect the business. Standby dealer-inventory repurchase commitments totaled $2.848 billion, although the recorded reserve was $8.9 million and settled-period losses were not material.
  • Interest-rate swaps hedged $798.2 million of debt. Management estimated that a one-percentage-point rate increase would reduce pretax earnings by approximately $7.1 million over a year. A hypothetical 10% change in the euro-dollar rate would change euro-denominated debt by approximately $84.0 million.
  • The company adopted lease accounting guidance on August 1, 2019, recognizing approximately $33 million of operating lease right-of-use assets and obligations; adoption did not materially affect reported income. Management reported effective disclosure controls and no material change in internal control during the quarter.

Important facts for investors to verify

  1. How much of subsequent revenue and earnings growth is attributable to EHG versus underlying North American performance, and whether EHG can improve profitability after acquisition-related depreciation and amortization.
  2. Whether North American dealer inventory, shipments, retail demand, and backlog stabilize or weaken further, particularly given the disclosed market and calendar 2020 outlook.
  3. Whether seasonal working-capital outflows reverse and operating cash flow supports planned capital spending, dividends, and continued debt reduction.
  4. Debt repayment progress, interest costs, covenant and dividend conditions, and the company’s remaining exposure to variable rates and foreign exchange.
  5. Whether dealer concentration, repurchase commitments, warranty costs, legal matters, and EHG integration or valuation adjustments create material losses or cash requirements.