THOR Industries, Inc. — Fiscal 2011 First Quarter 10-Q
Reporting period: Three months ended October 31, 2010; comparisons are with the three months ended October 31, 2009 unless otherwise noted. Financial amounts below are in millions, converted from the filing’s thousands, except per-share data and units.
Business context and results
THOR manufactures towable and motorized recreation vehicles (RVs) and small- and mid-size buses. Its September 16, 2010 acquisition of Heartland is included in results from the acquisition date and materially affects comparability.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $606.7 | $502.6 | +20.7% |
| Gross profit / margin | $76.6 / 12.6% | $69.8 / 13.9% | Profit +9.8%; margin down 1.3 percentage points |
| Income before taxes | $33.8 | $37.3 | −9.3% |
| Net income | $23.7 | $23.4 | +1.1% |
| Diluted EPS | $0.44 | $0.42 | +$0.02 |
| Operating cash flow | $9.7 | $18.5 | −47.5% |
Net income included a $4.8 million gain related to insurance recoveries following the February 2010 bus-facility fire, a $2.0 million trademark impairment, and a favorable tax benefit of approximately $3.3 million from settlement of uncertain tax positions. The effective tax rate was 29.9%, versus 37.1%.
Segments and material changes
- Towable RVs: Sales rose 23.5% to $422.4 million; pretax income increased to $33.1 million from $31.5 million. Heartland contributed $50.1 million of sales and 1,789 of the segment’s 2,410 additional units. Segment gross margin declined to 13.7% from 15.4%, primarily due to discounting and incentives.
- Motorized RVs: Sales increased 76.0% to $84.1 million and pretax income was $1.0 million versus $0.1 million. Higher unit shipments and improved production efficiency helped; discounting and the $2.0 million trademark impairment were offsets.
- Buses: Sales fell 11.1% to $100.1 million and unit shipments declined 11.0%. Pretax income rose to $9.4 million from $8.4 million, including benefit from the fire-related gain.
- Consolidated SG&A increased 29.1% to $44.9 million. Corporate SG&A rose $6.5 million, including acquisition and ongoing SEC-review legal and professional fees.
- Order backlog at October 31, 2010 was $466.8 million, down 22.1% year over year: RV backlog declined 19.3% and bus backlog 25.1%.
Cash, liquidity and capital
- Cash and equivalents were $141.7 million at October 31, down from $247.8 million at July 31, 2010. Working capital was $264.8 million, versus $345.0 million.
- THOR reported no long-term debt. Current liabilities were $245.8 million; current assets were $510.7 million.
- Operating cash flow was $9.7 million. Investing cash use was $110.9 million, principally the $99.6 million cash consideration for Heartland and approximately $16.5 million in capital expenditures. Financing cash use was $4.8 million, primarily dividends.
- Heartland consideration also included 4.3 million THOR shares valued at $90.5 million. The acquisition was funded with cash on hand and shares; THOR assumed no Heartland debt other than existing capital leases.
- The regular quarterly dividend increased from $0.07 to $0.10 per share. The company anticipated a further $14.8 million of fiscal 2011 capital expenditures, to be funded by operations and/or cash on hand.
Outlook, risks and unusual items
Management said RV industry conditions had improved, but dealer restocking was largely complete and it expected industry wholesale shipments could be lower for several months. It expected continued sales improvement if consumer confidence and credit availability improved, interest rates stayed low and fuel prices remained stable. Poor employment and income growth and credit constraints could slow demand. Rising steel, aluminum and thermoplastic costs could pressure margins if price increases cannot be passed through.
Bus demand faced pressure from expired federal stimulus funding and constrained municipal budgets; THOR reported softer orders and staffing reductions at some locations. Management cited longer-term support from replacement demand, potential federal transit funding and new products. Chassis supply was adequate, but a significant deterioration in the auto industry could disrupt supply.
Key unusual and contingent matters include the Heartland integration and preliminary purchase-price allocation; approximately 800 FEMA-trailer formaldehyde complaints with damages not specified in the filing; and an ongoing SEC review concerning historical financial-statement restatements, with possible settlement discussions but no assurance of settlement. A dealer-financing exposure of $708.3 million under standby repurchase obligations was disclosed, against a $3.9 million reserve; management said expected losses would not significantly affect consolidated results or financial position. One dealer accounted for 17% of RV sales and 14% of total sales, as reported. Auction-rate securities had $3.7 million par value and limited near-term liquidity; THOR held $3.4 million at fair value and said it intended and was able to hold them. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Important facts for investors to verify
- How much of sales and earnings growth is attributable to Heartland, and whether the acquisition is becoming accretive as management expected.
- Whether discounting, incentives and input-cost inflation continue to weigh on RV margins; monitor backlog and dealer inventory after restocking.
- Whether operating cash generation improves following acquisition spending, capital investment and significant tax payments.
- Developments in the SEC matter, FEMA litigation and the adequacy of warranty, repurchase and other legal reserves.
- Heartland integration and final purchase accounting, including the value and impairment assumptions for goodwill and intangible assets.