THOR Industries, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended October 31, 2018; comparative period ended October 31, 2017. Thor manufactures recreational vehicles, primarily in the U.S., and sells through independent dealers. Unless noted, amounts below are U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,756.0 million | $2,231.7 million | Down 21.3% |
| Gross profit / gross margin | $207.3 million / 11.8% | $333.2 million / 14.9% | Margin down 3.1 percentage points |
| Income before taxes | $31.5 million | $187.1 million | Down 83.2% |
| Net income | $14.0 million | $128.4 million | Down 89.1% |
| Diluted EPS | $0.26 | $2.43 | Down $2.17 |
| Operating cash flow | $(15.8) million | $13.4 million | Cash used this quarter |
| Capital expenditures | $34.5 million | $34.3 million | — |
- Revenue declined in both RV segments: towables sales fell 21.0% and motorized sales fell 23.9%. Unit shipments were down 25.8% and 36.2%, respectively; higher average selling prices from mix and pricing partly offset lower volumes.
- Gross margin pressure reflected higher product costs as a share of sales, including material, warranty and manufacturing overhead costs. Lower production also increased overhead per unit. Segment income before taxes declined to $74.6 million for towables and $21.7 million for motorized.
- Reported results included $57.1 million of acquisition-related costs, including a $42.6 million non-cash, non-deductible foreign-currency forward-contract loss. Excluding that loss alone, reported pre-tax income would have been higher, but the filing does not provide a fully adjusted earnings measure.
- The effective tax rate was 55.7%, versus 31.4% a year earlier, affected by the non-deductible currency loss and tax-law changes. Management estimated a 23%–25% FY2019 effective rate before discrete items.
Financial position and liquidity
- Cash was $224.9 million at October 31, down $50.3 million from July 31. Working capital was $525.2 million, including the $42.6 million forward-contract liability.
- Operating cash use of $15.8 million reflected $99.5 million of cash used by working-capital changes, including seasonal receivables and inventory growth, partly offset by $83.7 million of net income adjusted for non-cash items.
- No borrowings were outstanding under the existing revolving facility; $495.7 million was available and unused. The company reported compliance with its financial covenant. The filing does not show material funded debt outstanding under this facility.
- Current assets were $1,325.0 million and current liabilities $799.8 million. Product warranty liabilities were $271.7 million, up from $264.9 million at July 31.
Material changes, outlook and risks
- Thor agreed to acquire Erwin Hymer Group, Europe’s largest RV manufacturer by revenue. Consideration was approximately €1.7 billion in cash plus about 2.3 million Thor shares; Thor also expected to assume approximately €440 million of the target’s debt. Closing was anticipated near the end of calendar 2018, subject to customary conditions, including regulatory approvals.
- The company obtained financing commitments for a $750 million, five-year asset-based facility and a $2.3 billion, seven-year term loan, and planned to finance the acquisition primarily with debt. The transaction, integration, financing and euro-dollar exchange-rate exposure are significant execution risks.
- The acquisition-related forward contract covered €1.625 billion. Its $42.6 million fair-value liability depended partly on management’s probability-weighted estimate of transaction completion and timing; changes in assumptions or exchange rates could materially change its value.
- Thor dealer inventory was about 131,500 units, up 4.9% year over year; management said levels were approaching appropriate seasonal levels, though some locations remained elevated. Backlog fell 50.9% to $1.76 billion, which management attributed mainly to increased capacity and quicker delivery, as well as dealer inventory levels.
- RVIA forecast calendar-2018 shipments of 479,000 units, down 5.1% from 2017, and calendar-2019 shipments of 453,200, down 5.4% from expected 2018. Management expected dealer inventory to normalize during the second half of FY2019 and planned approximately $100 million of additional FY2019 capital expenditures.
- Key risks include discretionary consumer demand, interest rates and credit availability, input and labor costs, tariffs, warranty claims, production and supply constraints, and the loss or reduction of sales to key dealers. FreedomRoads accounted for 24% of sales and 24% of trade receivables at October 31. Dealer inventory repurchase commitments totaled $2.62 billion, although the recorded reserve was $7.2 million and management did not expect material losses under current conditions.
- The company adopted the new revenue-recognition standard on August 1, 2018. The adoption reduced opening retained earnings by $5.5 million net of tax; current-quarter sales were reduced by $0.7 million for estimated sales incentives. Prior-period figures were not restated.
Investor verification points
- Confirm whether the Erwin Hymer Group acquisition closed on the expected timetable and compare final financing, assumed debt and integration costs with the announced terms.
- Track RV retail demand, dealer inventory normalization, backlog conversion and Thor’s shipment volumes against the industry forecasts.
- Assess whether gross margins recover as volumes, input costs, incentives, warranty costs and factory utilization change.
- Review the forward contract’s final settlement and the acquisition’s effect on debt, liquidity and cash flow.
- Monitor FreedomRoads concentration, warranty reserves and exposure under dealer repurchase commitments.