Thor Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended January 31, 2011. Amounts below are in millions of dollars, except per-share data, percentages, and units. The interim statements are unaudited.
Business context
Thor manufactures towable and motorized recreation vehicles and small- and mid-size buses. The September 2010 acquisition of Heartland expanded the towable RV segment; Heartland’s results are included from September 16, 2010. Thor reported three segments: towable RVs, motorized RVs, and buses.
Key financial metrics
| Metric | Three months ended Jan. 31, 2011 | Six months ended Jan. 31, 2011 |
|---|---|---|
| Net sales | $526.2; up 22.4% year over year | $1,132.9; up 21.5% |
| Gross profit / margin | $47.6 / 9.1%, versus $50.0 / 11.6% | $124.2 / 11.0%, versus $119.8 / 12.8% |
| Income before taxes | $7.4, versus $19.3 | $41.2, versus $56.5 |
| Net income | $5.7, versus $11.9 | $29.4, versus $35.4 |
| Diluted EPS | $0.10, versus $0.22 | $0.54, versus $0.65 |
For the six months, net sales rose 21.5%, but income before taxes fell 27.1% and net income fell 16.9%. Heartland contributed $134.0 million of the six-month sales increase and $83.9 million of the quarterly increase. The filing’s unaudited pro forma six-month results, as if Heartland had been acquired at the start of the comparable periods, show 2011 sales of $1,194.8 million and net income of $32.5 million, versus $1,079.8 million and $37.1 million in 2010.
Cash flow and liquidity: Six-month operating cash flow was negative $21.2 million, compared with negative $19.6 million. Investing cash flow was negative $119.7 million, principally reflecting $99.6 million cash paid for Heartland and $25.9 million of capital expenditures. Financing cash flow was negative $10.2 million, primarily dividends. Cash fell to $96.6 million from $247.8 million at July 31, 2010; working capital was $263.8 million, down from $345.0 million. Thor reported no long-term debt. It paid $0.20 per share in regular dividends for the six months; the prior-year period also included a $0.50 special dividend.
Other balance-sheet items: Total assets were $1,127.1 million and stockholders’ equity was $768.8 million at January 31, 2011. Goodwill was $245.8 million, increased mainly by Heartland. Product warranty liabilities were $61.6 million, versus $51.5 million at July 31, 2010.
Material changes versus prior period
- Quarterly RV sales increased, while bus sales declined 5.4%; six-month bus sales declined 8.5%. Six-month RV sales rose 30.0%.
- Despite higher sales, consolidated gross margin contracted, chiefly because of RV discounting, higher raw-material costs, and bus product mix. Quarterly gross profit decreased 4.7%.
- Quarterly SG&A rose 31.1% to $40.7 million; six-month SG&A rose 30.0% to $85.6 million. The company cited acquisition-related and SEC-review costs, compensation, insurance, and higher sales-related expenses.
- The six-month effective tax rate was 28.6%, versus 37.4%, reflecting settlements of uncertain tax positions and the reinstated federal research and development credit. Thor recorded a $3.9 million net tax benefit from the settlement of certain tax positions.
- Heartland consideration comprised $99.6 million cash and 4.3 million Thor shares valued at $90.5 million. Thor recorded $1.8 million of transaction costs; Heartland reported $134.0 million sales and a $1.2 million pretax loss for its included period.
Outlook, risks, and unusual items
- Management said RV industry conditions improved and expected spring selling activity to increase, with shorter dealer lead times, price increases to offset input costs, and potential procurement savings from Heartland. It provided no quantified earnings or revenue guidance and cautioned that results are seasonal.
- RV backlog was $467.1 million, up 4.0% year over year; bus backlog was $221.4 million, down 15.6%. Total backlog was $688.5 million, down 3.2%.
- Management identified fuel prices, weak employment and income growth, consumer confidence, tight credit, interest rates, competition, and material-cost increases as potential headwinds. It noted approximately $0.9 million of additional labor costs in January from Indiana unemployment tax changes and said price increases had begun in most product segments.
- Thor had $782.8 million of dealer-financing repurchase commitments, generally extending up to 18 months, with a recorded reserve of $3.9 million. Management said expected future losses would not significantly affect consolidated results, but outcomes depend on dealer defaults and resale values.
- The company disclosed an ongoing SEC review related to prior-period restatements and said it was discussing a possible settlement, with no assurance of agreement. It also faced approximately 800 FEMA-trailer formaldehyde complaints; claimed damages were not specified. Thor disputed the allegations and intended to defend itself.
- A 2010 bus-facility fire generated a $6.8 million gain on involuntary conversion in the six-month period, including insurance recoveries. The replacement facility was operational by September 2010; management said the remaining potential gain could not yet be estimated accurately.
- Thor held auction-rate securities with a $3.25 million par value and $2.98 million carrying value. Failed auctions may limit near-term liquidity; management said recovery at par could take until maturity, potentially up to 26 years.
- Thor recorded a $2.0 million trademark impairment after reorganizing its motorized RV operations. Management also cited warranty-estimate uncertainty and the risk of further goodwill or intangible-asset impairment.
Important facts for investors to verify
- Whether RV pricing and gross margins recover as management anticipates, and whether Heartland delivers expected earnings and integration benefits.
- Cash conversion and working-capital needs, particularly seasonal inventory growth, planned capital expenditures, and the reduced cash balance after the acquisition.
- Bus demand and backlog trends following reduced stimulus funding, and the effect of lower-priced product mix on margins.
- Potential outcomes and financial exposure from the SEC matter, FEMA-trailer litigation, and dealer repurchase guarantees.
- Liquidity and valuation assumptions for auction-rate securities, plus the adequacy of warranty, tax, and other reserves.