THOR INDUSTRIES INC quarterly report, Q3 FY2019

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Thor Industries, Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended April 30, 2019. Dollar amounts below are in millions unless otherwise noted. Thor manufactures recreational vehicles in North America and Europe; results include Erwin Hymer Group (EHG) from its February 1, 2019 acquisition date, so reported comparisons are not like-for-like.

Financial performance and liquidity

  • Quarterly revenue: $2,506.6, up 11.3% year over year. EHG contributed $767.5; North American sales declined 23.1% to $1,696.5.
  • Quarterly earnings: Gross profit was $292.4, down 7.7%; gross margin was 11.7% versus 14.1%. Net income attributable to Thor was $32.7 versus $133.8, and diluted EPS was $0.59 versus $2.53.
  • Nine-month results: Revenue was $5,553.1, down 14.0%; gross profit was $641.3, down 30.3%, with margin of 11.5% versus 14.3%. Net income attributable to Thor was $41.2 versus $341.9; diluted EPS was $0.77 versus $6.47.
  • Cash flow: Nine-month operating cash flow was $175.8 versus $197.2. Investing used $1,817.1, principally for the $1,658.6 EHG acquisition and $83.7 of capital expenditures. Financing provided $1,855.5, mainly from acquisition-related borrowings.
  • Balance sheet and liquidity: April 30 cash and cash equivalents were $461.1, plus $25.8 restricted cash; working capital was $822.0. Net long-term debt, including current maturities, was $2,211.9; the balance sheet also reported $32.0 of short-term financial obligations. ABL availability was $618.3.
  • Other measures: Product-warranty liabilities were $299.1. Regular dividends declared and paid were $0.39 per share for the quarter and $1.17 for the nine months.

Material changes and acquisition effects

  • EHG was acquired for approximately €1.53 billion in cash (about $1.76 billion at closing exchange rates) and 2.26 million Thor shares valued at $144.2. The acquisition expanded Thor into Europe and added the European reporting segment.
  • EHG contributed $767.5 of sales and a $30.9 pretax loss during the period included in Thor’s results. Its gross profit and pretax loss included a $61.4 inventory fair-value step-up charge, as well as acquired-intangible amortization.
  • North American sales and shipments contracted sharply. For the quarter, North American towables sales fell 23.1% and motorized sales fell 23.3%; lower volumes also weakened segment margins.
  • Year-to-date acquisition-related costs were $112.5, including a $70.8 loss on a deal-contingent foreign-currency forward contract. Interest expense rose materially following the acquisition financing.
  • At April 30, gross debt was $2,265.3 before $53.3 of unamortized issuance costs. Subsequent to quarter-end, Thor made additional principal payments; by June 10, the U.S. term loan balance was $1,232.0 and the ABL balance was zero.

Outlook, risks, and unusual items

  • Management expected North American dealer inventory rationalization to continue through the remainder of fiscal 2019, with a resumption of market growth in 2020. Thor’s North American backlog was $1,409.7, down 29.6% year over year; European backlog was $687.4.
  • RVIA forecast 2019 calendar-year North American industry shipments of 416,300 units, down 13.9% from 2018. This is an industry forecast, not Thor-specific guidance. Thor expected approximately $45 million of capital expenditures for the remainder of fiscal 2019.
  • Management estimated a 21%–23% effective tax rate for the rest of fiscal 2019, before discrete or unusual items. The nine-month rate was 46.6%, influenced in part by the non-deductible forward-contract loss and EHG-related effects.
  • Risks include weaker consumer demand and dealer orders, commodity and labor costs, tariffs, interest and currency movements, chassis availability, acquisition integration and potential undisclosed EHG liabilities, and European emissions requirements. Euro 6d standards may affect chassis supply or buying patterns from 2020–2021; Brexit adds uncertainty.
  • One dealer represented 16% of quarterly consolidated sales and 15% of trade receivables at April 30. Standby repurchase commitments on dealer inventory financing totaled $3,337.5; these are contingent commitments, not reported debt. Thor reported normal-course litigation and said it did not expect current matters to materially affect overall financial condition, while noting adverse outcomes could affect a period.
  • Former EHG North American subsidiary guarantees had an accrued balance of about $10.3 at April 30. The maximum dealer-financing guarantee obligation was about $17.0; the lease guarantee accrual was about $3.6.

Important facts for investors to verify

  • How much of revenue, earnings, and balance-sheet growth reflects EHG, and how EHG’s operating performance develops after the inventory step-up and acquisition costs.
  • Whether North American retail demand, dealer inventory, backlog, shipment volumes, and margins stabilize as management expects.
  • Debt reduction, interest costs, covenant headroom, and cash available after the reported post-quarter payments.
  • Potential losses under dealer repurchase commitments and remaining EHG guarantees, along with warranty costs and the concentration of sales and receivables in a single dealer.
  • Progress in integrating EHG and its controls: Thor was still evaluating and integrating EHG’s internal controls and excluded the acquired business from the stated assessment.