THOR Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended January 31, 2018; fiscal Q2. Comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. Interim results are unaudited. The RV business is seasonal, and Q2 is historically a lower-sales quarter.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $1,971.6 | $1,588.5 | $4,203.2 | $3,297.1 |
| Gross profit | $270.3 | $211.7 | $603.5 | $448.5 |
| Gross margin | 13.7% | 13.3% | 14.4% | 13.6% |
| Income before taxes | $141.1 | $98.4 | $328.2 | $214.2 |
| Net income | $79.8 | $64.8 | $208.2 | $143.5 |
| Diluted EPS | $1.51 | $1.23 | $3.94 | $2.72 |
- Q2 sales grew 24.1%; net income rose 23.1% and diluted EPS 22.8%. For the six months, sales rose 27.5%, net income 45.0%, and diluted EPS 44.9%.
- Six-month towable sales increased 30.5% and motorized sales 20.3%. Unit shipments rose 25.3% and 20.7%, respectively. Q2 segment sales increased 26.9% for towables and 17.9% for motorized RVs.
- Margin improvement reflected higher production volume and fixed-cost absorption, selective pricing and operating efficiencies. Management cited labor-market costs and higher warranty costs as offsets.
- Q2 effective tax rate was 43.5% versus 34.1%; six-month rate was 36.6% versus 33.0%. FY2018 results include an approximately $34 million non-cash, non-recurring deferred-tax revaluation charge related to the Tax Act, partly offset by tax benefits, including $12.5 million from applying the lower rate to Q1 results.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $56.8 million versus $52.8 million. Working-capital changes used $228.6 million, chiefly from higher receivables and inventories, seasonal shipment timing and tax payments.
- Capital expenditures were $63.0 million; operating cash flow less capital expenditures was approximately negative $6.2 million. Cash fell $113.5 million to $109.8 million from July 31, 2017, after $65.0 million of debt repayments, $39.0 million of dividends and capital spending.
- Working capital was $517.1 million, up from $399.1 million at July 31, 2017. Trade receivables were $598.9 million and inventory $590.4 million at January 31, 2018.
- Long-term debt was $80.0 million, down from $145.0 million; unused revolver availability was $417.7 million. The company reported compliance with its credit-facility covenant. Variable-rate debt exposes the company to interest-rate changes; management said a 0.25 percentage-point increase would not have materially affected the period’s results or cash flows.
- Regular dividends were $0.37 per share per quarter, increased from $0.33. The filing reports no preferred shares outstanding.
Outlook, commentary and notable items
- Management estimated an overall effective tax rate of 27%–29% for the remainder of FY2018, before discrete items, and 23%–25% for FY2019, before discrete items. It expected the lower federal rate to benefit future after-tax earnings, while FY2019 is also affected by repeal of the domestic production deduction and limits on executive-compensation deductions.
- Management planned approximately $110 million of capital expenditures for the remainder of FY2018, mainly for facility expansion and equipment. It expected to repay the remaining $80 million of debt by fiscal year-end, absent an alternative strategic use of facility funds. Priorities for available cash include growth, dividends and debt reduction; acquisitions, share repurchases and special dividends may also be considered.
- Backlog at January 31, 2018 was $2.80 billion, up 33.9% year over year. Thor product dealer inventory was approximately 155,650 units, up 25.5%; management considered inventory appropriate for seasonal demand. Industry wholesale shipments rose 17.2% in calendar 2017, while retail registrations rose 11.8%.
- After quarter-end, Thor formed TH2, a 50/50 joint venture with Tourism Holdings Limited. Thor contributed approximately $47 million cash in early March; the venture will develop and sell digital platforms for RV ownership and use. Future capital needs were not expected to be material to Thor.
- Key risks cited include consumer confidence and discretionary spending, interest rates and credit availability, commodity and labor costs, chassis or other supply constraints, warranty claims, competition, and dependence on dealers. FreedomRoads accounted for 22% of six-month sales and 20% of trade receivables at January 31, 2018. Dealer-inventory repurchase commitments totaled $3.08 billion; the recorded reserve was $8.6 million. Management said expected losses were not currently expected to be significant, but outcomes remain uncertain.
- Warranty liabilities were $243.3 million, up from $216.8 million at July 31, 2017. The company also cited ordinary-course litigation, including lemon-law, warranty and vehicle-accident claims; management did not expect current matters to materially affect overall financial condition, results or cash flows, while noting an adverse outcome could materially affect a period.
Important facts for investors to verify
- Whether backlog and dealer-inventory growth convert to retail demand without overproduction or increased dealer financing stress.
- Whether margin gains persist as labor, material, freight and warranty costs evolve, and whether warranty reserves prove adequate.
- Cash conversion and working-capital needs, including the planned capital program, TH2 investment and expected debt repayment.
- Final tax-accounting effects of the Tax Act and whether estimated FY2018 and FY2019 tax rates are realized.
- Exposure to FreedomRoads and the scale and potential loss severity of dealer repurchase commitments.