Thor Industries, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended October 31, 2016; comparison is with the three months ended October 31, 2015. Thor manufactures towable and motorized recreational vehicles. Unless stated otherwise, dollar amounts below are in millions; the filing presents financial statement amounts in thousands. Jayco was acquired on June 30, 2016, so the prior-year quarter did not include Jayco.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change / context |
|---|---|---|---|
| Net sales | $1,708.5 | $1,030.4 | +65.8%; Jayco contributed $467.1, or 45.3% of the increase |
| Gross profit / margin | $236.8 / 13.9% | $152.2 / 14.8% | Profit +55.5%; margin down 0.9 percentage points |
| Income before taxes | $115.8 | $77.7 | +49.1%; 6.8% of sales versus 7.5% |
| Net income | $78.7 | $50.5 | Continuing operations were $78.7 versus $50.7; prior period included a $0.2 discontinued-operations loss |
| Diluted EPS | $1.49 | $0.96 | Continuing-operations diluted EPS was $1.49 versus $0.97 |
| Cash from operations | $1.3 | $18.9 | Working capital used $102.7, primarily from receivables and seasonal inventory; net income adjusted for non-cash items provided $104.0 |
| Capital expenditures | $26.2 | $15.9 | Primarily facility expansion and equipment |
Cash and cash equivalents were $161.7 at October 31, down $48.2 from July 31. Working capital was $404.9, compared with $365.2 at July 31. Current assets were $1,069.7 and current liabilities $664.8. Long-term debt was $340.0, down from $360.0 at July 31; the variable-rate revolving facility has a $500.0 commitment plus a conditional $100.0 expansion option. Unused availability was $157.8, and adjusted excess availability for covenant purposes was $289.4. Thor reported covenant compliance.
Gross margins declined in both RV segments: towables were 14.5% versus 14.9%, and motorized were 11.1% versus 14.1%. The consolidated effective tax rate fell to 32.0% from 34.7%. Thor declared a quarterly dividend of $0.33 per share, payable in Q2 FY2017, up from $0.30 per share in the year-ago quarter.
Material changes versus the prior period
- Towable sales rose 62.6% to $1,210.9; unit shipments increased 76.9%. The overall net price per unit fell 14.3%, mainly reflecting product mix, including more moderately priced travel trailers and Jayco’s contribution. Segment pretax income rose 49.0% to $94.2, while its margin fell to 7.8% from 8.5%.
- Motorized sales rose 83.8% to $461.5; unit shipments increased 76.6%, and overall net price per unit rose 7.2%. Segment pretax income increased 33.6% to $28.9, but its margin declined to 6.3% from 8.6%.
- Thor’s total RV shipments in the quarter increased 76.8% to 56,593 units. For the nine months ended September 30, company wholesale shipments rose 28.7%, versus industry shipments up 13.8%; company retail registrations rose 23.2%, versus industry retail registrations up 8.8%. Company comparisons include Jayco only after acquisition.
- Jayco contributed substantially to sales growth, but also increased amortization and affected mix and costs. Consolidated amortization expense rose to $18.2 from $6.0, primarily due to Jayco.
Outlook, commentary and risks
- Management said dealer inventory levels were appropriate for seasonal demand. Thor-product dealer inventory was approximately 99,100 units at October 31, up 49.7% year over year; Jayco accounted for 27,500 of the 32,900-unit increase. Backlog rose 100.5% to $2,106.8, with Jayco accounting for 54.9% of the increase.
- RVIA’s August 2016 industry forecast projected 2016 shipments of 353,100 towable and 52,200 motorized units, and 2017 shipments of 357,100 towable and 53,900 motorized units. These are industry forecasts, not Thor company guidance. Thor cautioned that the quarter’s results should not be annualized because of industry seasonality.
- Management expected approximately $75.0 of capital expenditures for the remainder of FY2017, mainly for facility expansion and replacement or upgrades of equipment. It said cash, operating cash generation and revolver availability should be sufficient for expected operating needs. The board intended to continue regular quarterly dividends, subject to credit-agreement conditions and future board decisions.
- Costs and margin pressures included higher warranty and freight percentages in towables, and higher material and warranty costs in motorized. Jayco’s results included $2.6 of one-time inventory purchase-accounting charges. The quarter also included a $2.2 gain on sale of property, plant and equipment.
- Warranty reserves were $209.0, versus $107.8 a year earlier; quarterly warranty provision was $51.9 versus $26.2. Management considered reserves adequate but noted actual claims may differ from estimates.
- Key risks include discretionary consumer demand, interest rates and credit availability, raw-material and chassis supply and costs, integration of acquisitions, dealer concentration, and legal or warranty claims. One dealer represented 17% of quarterly sales and 19% of trade receivables. Standby dealer-inventory repurchase commitments totaled $1,919.3; the recorded reserve was $5.8. Thor said expected future losses under these agreements would not materially affect its consolidated financial position, results or cash flows.
- The filing describes ordinary-course litigation and tax audits/disputes; management did not expect current legal matters to materially affect the company overall, while acknowledging an adverse outcome could affect a particular period. A 0.25-percentage-point interest-rate increase was not expected to materially affect quarterly results or cash flows. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- How much of subsequent sales and earnings growth is organic, versus the Jayco acquisition, and whether the large backlog converts to shipments without excessive dealer inventory.
- Whether segment and consolidated margins recover as acquisition-related mix, purchase accounting, warranty and material costs evolve.
- Whether working-capital demands ease and operating cash flow improves, given the quarter’s low cash generation despite higher net income.
- Progress in reducing revolver debt and maintaining availability and covenant headroom while funding capital spending, dividends and potential acquisitions.
- Developments in the concentrated dealer relationship, dealer financing repurchase exposure, warranty claims, and pending tax matters.