THOR Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended January 31, 2019. Amounts below are in U.S. dollars; financial figures are shown in millions unless otherwise stated. Thor manufactures recreational vehicles, primarily in the United States, and reports towable and motorized RV segments.
Financial performance
| Metric | Three months ended Jan. 31, 2019 | Prior-year quarter | Six months ended Jan. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $1,290.6 | $1,971.6 | $3,046.6 | $4,203.2 |
| Gross profit | $141.6 | $270.3 | $348.9 | $603.5 |
| Gross margin | 11.0% | 13.7% | 11.5% | 14.4% |
| Income before taxes | $1.9 | $141.1 | $33.4 | $328.2 |
| Net income (loss) | $(5.4) | $79.8 | $8.5 | $208.2 |
| Diluted EPS | $(0.10) | $1.51 | $0.16 | $3.94 |
| Cash provided by operations | Not stated by quarter | $134.6 | $56.8 |
- Sales fell 34.5% in the quarter and 27.5% for the six-month period. RV shipments declined 40.6% and 33.1%, respectively; higher average net prices from product mix and pricing partly offset lower volumes.
- Quarterly towable and motorized sales declined 35.8% and 33.7%. For the six months, segment sales declined 27.8% and 28.7%, respectively.
- Gross margin pressure reflected lower production and sales volumes, higher per-unit manufacturing overhead, and increased material, discount/incentive and warranty costs. Management also cited tariffs and commodity and labor costs as potential margin pressures.
- Acquisition-related costs were $42.1 million for the quarter and $99.1 million for the six months. They included noncash foreign-currency forward-contract losses of $31.2 million and $73.7 million, respectively, plus other transaction costs.
- The effective tax rate was 389.1% for the quarter and 74.4% for the six months, largely because the forward-contract loss was not deductible for federal tax purposes. Excluding its tax effect, management said the rates would have been approximately 24% and 25%, respectively.
Cash, liquidity and debt
- At January 31, cash and cash equivalents were $305.8 million, versus $275.2 million at July 31, 2018. Working capital was $497.5 million, down from $542.3 million; the $73.7 million forward-contract liability contributed to the decrease.
- Six-month operating cash flow was $134.6 million; capital expenditures were $54.8 million, and dividends paid were $41.2 million. Cash from operations benefited from a $142.5 million reduction in receivables and a $73.7 million noncash forward-contract loss adjustment.
- There was no borrowing under the then-existing revolving facility at January 31; unused availability was $406.3 million. That facility was terminated and replaced at the February 1 acquisition closing.
- After the EHG acquisition, Thor reported approximately $2.2 billion of combined indebtedness. Financing included a seven-year $2.1 billion term loan and a five-year $750 million asset-based credit facility (ABL); borrowings at closing included approximately $1.386 billion in U.S. dollar term debt, $704 million in euro term debt and $100 million under the ABL. The facilities are secured by substantially all company assets, and most of the debt has floating rates.
- Thor said cash, operating cash generation and ABL availability should fund foreseeable operating needs. It anticipated approximately $60 million of additional fiscal 2019 capital expenditures, excluding EHG, and made a $20 million ABL payment in February 2019.
Material developments, outlook and risks
- Erwin Hymer Group (EHG): The acquisition closed February 1, 2019, after the reporting-period end. Thor paid approximately €1.5 billion in cash, issued 2,256,492 shares and assumed approximately €315 million of EHG and affiliate debt. EHG’s North American operations were excluded in a closing amendment. Purchase-price allocation was not complete when the filing was prepared.
- Thor entered the deal-contingent euro forward contract to reduce exchange-rate exposure. The contract liability was settled at closing; its mark-to-market losses materially reduced reported earnings. The new facilities carry scheduled term-loan amortization and covenants; the ABL fixed-charge coverage test applies when availability falls below a specified threshold.
- Dealer inventory of Thor RVs was approximately 137,900 units at January 31, down 11.4% year over year; management said levels were approaching appropriate seasonal levels. Backlog fell 48.1% to $1.452 billion, which Thor attributed partly to lower dealer inventory and expanded capacity enabling faster production and delivery.
- RVIA forecast 2019 calendar-year industry wholesale shipments of 460,100 units, down 4.9% from 2018. Management expected dealer inventory to normalize in the second half of fiscal 2019 and expressed a positive long-term industry outlook conditional on stable consumer confidence and credit availability, low interest rates and no adverse economic factors.
- Risks include consumer demand and financing conditions, interest rates, tariffs and input costs, production and chassis supply, warranty costs, acquisition integration and compliance costs, and the increased debt burden. One dealer represented 22% of sales in each six-month comparison period and 28% of trade receivables at January 31, 2019.
- Standby repurchase commitments for dealer inventory financing totaled $2.588 billion. The recorded reserve was $7.1 million; management did not expect future losses under these agreements to have a material effect under current market conditions. The filing also describes ordinary-course litigation and states that outcomes are uncertain.
- Revenue recognition standard adoption reduced retained earnings by $5.5 million at August 1, 2018 and changed the timing of estimated sales incentives; prior-year comparisons were not restated. The filing says the change does not alter total revenue recognized.
Important facts for investors to verify
- Post-acquisition debt outstanding, interest expense, covenant headroom and any impact of floating rates on cash flow and dividend capacity.
- EHG’s purchase-price allocation, acquired liabilities, integration costs, operating contribution and realization of anticipated benefits.
- Whether RV demand, dealer inventory and backlog stabilize as management expected, and whether Thor’s shipment declines track or exceed industry trends.
- Whether gross margins recover as production volumes change and material, warranty, freight and discount costs evolve.
- The concentration and credit condition of the major dealer, and any changes in dealer repurchase exposure or warranty claims.
- The final tax and accounting effects of the acquisition and foreign-currency exposures; the filing’s purchase accounting was preliminary.