THOR Industries, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended April 30, 2017. Financial amounts below are in millions of dollars, except per-share data. Thor manufactures towable and motorized recreational vehicles. Comparisons with 2016 are affected by Jayco, acquired June 30, 2016; the prior-year periods largely exclude Jayco.
Key financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $2,015.2 | $1,284.1 | $5,312.3 | $3,289.5 |
| Gross profit | $293.8 | $201.9 | $742.3 | $503.0 |
| Gross margin | 14.6% | 15.7% | 14.0% | 15.3% |
| Income before taxes | $166.2 | $116.3 | $380.4 | $259.9 |
| Net income | $111.3 | $78.6 | $254.8 | $173.7 |
| Diluted EPS | $2.11 | $1.49 | $4.83 | $3.31 |
Liquidity, cash flow and debt
- Cash was $189.4 at April 30, down from $209.9 at July 31, 2016. Working capital was $492.9, versus $365.2 at fiscal year-end.
- Nine-month operating cash flow was $182.8, compared with $144.9. Accounts receivable and inventory growth absorbed cash as sales, backlog and production increased.
- Capital expenditures were $79.5, versus $39.4 in the prior-year period. Operating cash flow less capital expenditures was approximately $103.4.
- Revolver debt was $295.0 at April 30, with $202.8 available and unused; Thor reported compliance with its financial covenant. The weighted-average borrowing rate was 2.25% for the nine months.
- Thor paid down a further $50.0 of debt in May, leaving $245.0 outstanding as of May 31. Nine-month dividends paid were $52.1; the quarterly dividend had increased to $0.33 per share from $0.30.
Material changes and operating performance
- Q3 sales rose 56.9% and nine-month sales rose 61.5%. Jayco accounted for $516.5 of the quarterly increase and $1,415.0 of the nine-month increase.
- RV unit shipments increased 63.7% in Q3 and 71.0% for nine months. Growth was present in both segments, with motorized sales rising faster than towables in the reported periods.
- Profit increased in dollars, but gross margin declined year over year. Management cited Jayco’s lower gross margins, a shift toward smaller and lower-priced products, and higher material, freight, labor and warranty costs. Nine-month pretax income rose 46.4%, below sales growth.
- Intangible amortization increased to $48.7 for nine months from $17.7, primarily due to Jayco. The prior-year nine-month period included a $9.1 goodwill impairment; no goodwill impairment was identified in the 2017 annual test.
- RV backlog at April 30 was $2,360.1, up 123.3% from a year earlier. Dealer inventory of Thor products rose 54.8% to approximately 127,100 units; management said inventory was appropriate for seasonal demand. Jayco contributed substantially to both increases.
Outlook, risks and contingencies
- No specific company revenue or earnings guidance is provided. Management expected continued industry growth if consumer confidence, credit availability and interest-rate conditions remained supportive, and noted favorable demographic trends. The filing cautions that RV demand depends on consumer spending, credit, interest rates and broader economic conditions.
- Thor expected approximately $50.0 of additional capital expenditures during the remainder of FY2017, primarily for facility expansion and equipment. Management said cash, operating cash flow and available credit should fund expected operational needs.
- Risks include commodity and labor costs, chassis or component supply constraints, warranty claims, consumer demand and financing conditions, acquisition integration, key dealer exposure, and variable-rate debt. A 0.25% interest-rate increase was not expected to have materially affected the nine-month results or cash flows.
- One dealer, FreedomRoads, represented 18% of nine-month sales and 23% of trade receivables at April 30. Standby dealer-inventory repurchase commitments totaled $2,443.5; the recorded repurchase and guarantee reserve was $7.2. Thor reported settled-period repurchase losses of $0.2 for the nine months and did not expect future losses to have a significant consolidated effect.
- Product warranty reserves were $214.9 at April 30, compared with $112.6 a year earlier. Management considered reserves adequate but noted actual claims may differ from estimates. Ordinary-course litigation includes warranty, “lemon law” and vehicle-accident matters; management did not expect current matters to materially affect the company overall, while acknowledging outcomes are uncertain.
- Thor stated disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter. The nine-month period is seasonal and should not be annualized as a full-year forecast.
Important facts for investors to verify
- How much of sales, backlog and shipment growth reflects sustainable organic demand versus Jayco’s inclusion and dealer inventory changes.
- Whether lower gross margins and higher material, freight, labor and warranty costs persist, and whether product mix or pricing can offset them.
- Dealer inventory, retail registrations and backlog conversion, including the concentration of sales and receivables with FreedomRoads.
- Warranty-reserve adequacy and potential exposure under the substantial dealer repurchase commitments.
- Debt reduction, planned capital spending, revolver availability and the conditions governing future dividends or share repurchases.