THOR Industries, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended January 31, 2020. Unaudited figures; dollar amounts below are in millions unless noted. Thor manufactures recreational vehicles and related products in North America and Europe. Results include Erwin Hymer Group (EHG), acquired February 1, 2019; the prior-year quarterly comparison does not include EHG.
Financial performance
| Metric | Three months ended Jan. 31 | Six months ended Jan. 31 |
|---|---|---|
| Net sales | $2,003.1; +55.2% year over year | $4,161.9; +36.6% |
| Gross profit / margin | $256.4 / 12.8%, versus $141.6 / 11.0% | $565.2 / 13.6%, versus $348.9 / 11.5% |
| Income before tax | $34.9, versus $1.9 | $103.5, versus $33.4 |
| Net income attributable to Thor | $28.7, versus a $5.4 loss; diluted EPS $0.52, versus ($0.10) | $79.7, versus $8.5; diluted EPS $1.44, versus $0.16 |
| Operating cash flow | $5.3 for the six-month period, versus $134.6 | |
| Capital expenditures | $52.9 for the six-month period; operating cash flow less capex was approximately negative $47.6 |
Quarterly sales growth primarily reflects $637.1 of EHG sales; North American sales rose 5.9%. North American towables sales rose 11.6% and segment pretax income rose to $53.4; motorized sales fell 7.5% and pretax income fell to $14.9. EHG generated quarterly sales of $637.1, gross margin of 12.5% and pretax income of $4.7. For the six months, EHG recorded a pretax loss of $18.3, including $53.5 of depreciation and amortization.
Financial position and liquidity
- Cash and cash equivalents were $242.1 at January 31, 2020, down from $425.6 at July 31, 2019. Net working capital was $572.6, versus $589.0.
- Total current assets were $2,067.5 and current liabilities $1,494.9 at January 31. Inventories were $926.9, up from $828.0 at fiscal year-end.
- Gross long-term debt was $1,812.4, down from $1,954.3 at July 31; this includes a $1,670.9 term loan and $27.6 outstanding on the asset-based credit facility (ABL). A further $667 million of ABL availability was reported at January 31.
- Six-month financing cash outflow was $173.3, including $210.1 of debt payments and $44.2 of dividends. After quarter-end, Thor paid down $32.0 of the U.S. term loan and repaid the ABL balance; March 6 balances were $963.0 and zero, respectively.
Material changes and unusual items
- Consolidated growth and comparisons are materially affected by EHG’s inclusion in the current period. Excluding Europe, North American sales declined 0.6% for the six months; North American unit shipments declined 3.9%.
- Gross margin improved, particularly in North American towables, where lower material and labor cost percentages, product mix and selective price increases contributed. North American motorized sales remained pressured, particularly Class A units.
- Quarter and six-month results include a $10.1 non-cash impairment charge for assets, including goodwill, associated with operations and facilities designated as held for sale. Thor expected the sales to be completed before July 31, 2020; estimated proceeds could differ from actual proceeds.
- Six-month operating cash flow was substantially lower year over year, principally because seasonal increases in receivables and inventory used $201.1 of working capital.
- Six-month interest expense was $55.3, versus $1.7 in the prior-year period, reflecting debt used to finance the EHG acquisition. Prior-year results included acquisition-related costs of $99.1, including foreign-currency forward-contract losses, which did not recur.
Outlook, risks and contingencies
- Management expected North American retail markets to be flat to modestly down in calendar 2020, absent a significant macroeconomic impact. RVIA forecast calendar-year 2020 North American wholesale shipments up 1.0% from 2019. European management described the long-term outlook as positive but conditional on consumer and economic conditions.
- North American dealer inventory of Thor products was down 16.5% year over year to approximately 115,200 units. North American backlog was $1,732.4, up 19.3%; European backlog was $1,142.0. Combined backlog was $2,874.4, up 98.0%, with the comparison affected by EHG’s acquisition.
- Management anticipated $75–$85 million of capital expenditures for the remainder of fiscal 2020 and stated that cash, operating cash generation and available ABL funds should meet foreseeable operating needs. The filing provides no specific earnings or revenue guidance.
- The filing identified coronavirus-related component supply disruption as a risk to production, costs, sales and earnings if prolonged. Other risks include consumer demand and credit conditions, commodity and labor costs, chassis or component shortages, tariffs, currency and interest-rate movements, European emissions standards and Brexit-related uncertainty.
- One dealer accounted for 13% of quarterly sales and 19% of trade receivables at January 31; Thor cautioned that loss of the dealer could materially affect its business. Dealer inventory financing repurchase commitments totaled $3,143.1; recorded reserves were $9.5. Management said expected losses were not material under current conditions.
- Management considered ordinary-course litigation not likely to have a material overall effect, while noting that an adverse outcome could materially affect a particular reporting period. Dividend payments remain subject to debt-facility conditions and Board approval.
Important facts for investors to verify
- How much of reported sales and backlog growth reflects EHG acquisition scope versus underlying organic demand, and how EHG’s profitability develops after its six-month pretax loss.
- Whether the seasonal working-capital outflow reverses and operating cash flow supports planned capital spending, debt reduction and dividends.
- Actual proceeds and final impairment impact from the held-for-sale asset disposals.
- Whether coronavirus-related supply risks, consumer demand, dealer inventory and the concentrated dealer exposure change materially.
- Debt repayment progress, interest-rate exposure and continued compliance with credit-facility conditions for dividends.