THOR Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2017; comparisons are with the quarter ended October 31, 2016 unless noted. Financial statement amounts below are in millions of dollars unless otherwise stated. Thor manufactures recreational vehicles, primarily in the United States, and sells through independent dealers.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $2,231.7 | $1,708.5 | +30.6% |
| Gross profit | $333.2 | $236.8 | +40.7% |
| Gross margin | 14.9% | 13.9% | +1.0 percentage point |
| Income before taxes | $187.1 | $115.8 | +61.6% |
| Net income | $128.4 | $78.7 | +63.1% |
| Diluted earnings per share | $2.43 | $1.49 | +$0.94 |
| Operating cash flow | $13.4 | $1.3 | +$12.2 |
Quarterly sales growth reflected higher shipments: total RV units rose 28.9%. Towable sales increased 33.7%, and motorized sales increased 22.8%. Towables’ gross margin improved to 15.9% from 14.5%; motorized gross margin was 11.3% versus 11.1%. The effective tax rate was 31.4%, compared with 32.0%. Regular dividends declared were $0.37 per share, up from $0.33.
Cash, liquidity and debt
- Cash and cash equivalents were $151.5 million at October 31, down from $223.3 million at July 31, 2017. Working capital increased to $440.2 million from $399.1 million.
- Operating cash flow was modest relative to net income, as working capital used $135.6 million, principally from seasonal and sales-related increases in receivables and inventory.
- Capital expenditures were $34.3 million; net cash used in investing was $30.1 million. Financing used $55.1 million, mainly for $55.0 million of revolving-credit principal payments.
- Long-term debt was $90.0 million, down from $145.0 million at July 31. The revolver had $407.7 million available and unused; the company reported compliance with its financial covenant. The weighted-average borrowing rate was 2.57%.
- Management said cash, operating cash generation and available credit should fund expected requirements for the foreseeable future.
Material changes and operating trends
- Consolidated backlog reached $3.579 billion, up 69.9% from October 31, 2016. Dealer inventory of Thor products rose 26.5% year over year to approximately 125,400 units; management considered inventory appropriate to slightly low for seasonal demand.
- Segment income before taxes rose to $158.9 million for towables from $94.2 million, and to $37.6 million for motorized from $28.9 million.
- Towables benefited from shipment growth, favorable mix and selective pricing, operating efficiencies, and lower warranty-cost percentage. Motorized shipment growth was partly offset by a 3.5% decline in average net price, mainly due to a greater mix of lower-priced Class C units.
- Corporate SG&A increased $7.1 million, including higher compensation and stock-based compensation. Segment SG&A also included increased estimated costs for an industry-wide recall of certain vendor-supplied components and product-liability settlements; the filing does not quantify the total recall exposure.
Outlook, risks and contingencies
- Thor provided no specific company revenue or earnings guidance. It cited the RVIA’s August 2017 industry forecast of 479,700 North American wholesale shipments for calendar 2017 and 491,200 for 2018; these are industry forecasts, not company guidance.
- Management expected approximately $150 million of capital expenditures for the remainder of fiscal 2018, primarily for facility expansion and equipment. After an additional $10 million debt payment in November, it expected to repay the remaining $80 million of debt by fiscal year-end, absent a strategic use of those funds.
- Management identified consumer confidence and spending, interest rates and credit availability, commodity and labor costs, chassis supply, production staffing, warranty claims, competition, acquisitions, and dealer demand as risks. The business is seasonal, and interim results should not be annualized as a full-year indicator.
- FreedomRoads accounted for 23% of quarterly sales and 25% of trade receivables at October 31; management warned that losing the dealer could significantly affect the business.
- Dealer inventory repurchase commitments totaled $2.408 billion, with a related reserve of $6.7 million. Management said expected future losses were not expected to materially affect consolidated results, but the commitments expose the company to potential losses if dealers default and inventory must be repurchased.
- Warranty liabilities were $232.0 million, compared with $209.0 million a year earlier. Management considers reserves adequate, but actual claims may differ from estimates. Routine litigation, including warranty, “lemon law” and vehicle-accident matters, was not expected by management to materially affect the company overall; an adverse outcome could affect an individual reporting period.
- Variable-rate debt creates interest-rate exposure; management said a 0.25% rate increase would not have materially affected the reported quarter’s results or cash flows.
Key facts for investors to verify
- Whether strong backlog converts to shipments and retail demand without excessive dealer inventory accumulation.
- Whether operating cash generation improves as seasonal receivables and inventory unwind.
- Progress on the stated fiscal 2018 capital-spending plan and debt repayment target.
- Developments in the vendor-component recall, related product-liability matters, and warranty reserve adequacy.
- FreedomRoads’ continuing importance and the company’s exposure under dealer inventory repurchase commitments.
- Whether cost inflation, labor availability, interest rates, and retail credit conditions affect margins and consumer demand.