Thor Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended July 31, 2018. The filing also reports the fourth quarter ended July 31, 2018. Unless stated otherwise, dollar amounts below are in millions; figures are rounded from amounts reported in thousands.
Business context
Thor manufactures towable and motorized recreational vehicles, primarily in the United States, and sells mainly through independent dealers in the United States and Canada. It reported two main segments: towable RVs and motorized RVs. Thor described itself as North America’s largest RV manufacturer; its reported U.S. and Canadian market shares for the first half of calendar 2018 were approximately 49.6% for travel trailers and fifth wheels and 40.0% for motorhomes.
Financial and operating performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $8,328.9 | $7,247.0 | +14.9% |
| Gross profit | $1,164.7 | $1,043.6 | +11.6% |
| Gross margin | 14.0% | 14.4% | Down 0.4 percentage points |
| Income before tax | $633.0 | $556.4 | +13.8% |
| Net income | $430.2 | $374.3 | +14.9% |
| Diluted EPS | $8.14 | $7.09 | +14.8% |
| Operating cash flow | $466.5 | $419.3 | +11.3% |
- Towable sales rose 17.2% to $6,008.7 million; shipments increased 12.8% and average net price per unit increased 4.4%. Towable gross margin fell to 14.7% from 15.3%, with labor and warranty costs among the pressures cited.
- Motorized sales rose 8.9% to $2,146.3 million; shipments increased 5.1% and average net price per unit increased 3.8%. Motorized gross margin was 10.9%, unchanged from FY2017.
- Fiscal 2018’s effective tax rate was 32.0%, including approximately $34 million of noncash tax expense from remeasuring deferred tax assets under the Tax Act and a provisional $2 million fourth-quarter charge related to executive compensation deductibility.
- In the July quarter, sales were $1,874.1 million, gross profit $244.4 million, net income $88.2 million and diluted EPS $1.67. Compared with the July 2017 quarter, sales declined about 3.1%, gross profit 18.9%, net income 26.2% and diluted EPS from $2.26.
Cash, liquidity and capital allocation
- Cash and cash equivalents were $275.2 million at July 31, 2018, up from $223.3 million a year earlier. Working capital was $542.3 million, compared with $399.1 million.
- Operating cash flow of $466.5 million was partly offset by $138.2 million of capital spending, $50.4 million invested in the TH2 joint venture, $145.0 million of revolving-credit principal payments and $78.0 million of dividends.
- No revolving-credit borrowings were outstanding at year-end; available and unused revolver capacity was $495.7 million. The facility matures June 2021. The balance sheet reported no long-term debt at year-end; this is separate from lease and other liabilities.
- Capital expenditures were $138.2 million in FY2018. Management expected FY2019 capital expenditures of approximately $130 million, mainly for facility expansion and equipment.
- Quarterly dividends were $0.37 per share during FY2018, totaling $1.48 per share for the year. A share-repurchase authorization of up to $250 million was approved in June 2018, but the company reported no repurchases in the fourth quarter.
Material changes, outlook and risks
- Dealer inventory of Thor products increased 26.3% year over year to approximately 138,500 units at July 31, 2018. Total order backlog fell 39.9% to $1,401.1 million; management attributed the decline to expanded production capacity, higher dealer inventory in some locations and a more typical seasonal order pattern. The backlog was expected to be filled in FY2019.
- RVIA’s August 2018 forecast anticipated 2019 North American wholesale shipments of 497,100 units, down 1.7% from expected 2018 shipments. Thor’s outlook remained sensitive to consumer confidence, disposable income, interest rates and credit availability.
- Management estimated a FY2019 effective tax rate of 23%–25%, before discrete tax items. It expected the lower federal statutory rate to benefit future U.S. after-tax earnings, while noting the repeal of the domestic production deduction and limits on executive compensation deductions.
- On September 18, 2018, after fiscal year-end, Thor agreed to acquire Germany-based Erwin Hymer Group for approximately €1.7 billion in cash and 2.3 million Thor shares, and to assume approximately €300 million of its debt. Closing was expected near the end of calendar 2018, subject to customary conditions and regulatory approvals. Thor obtained financing commitments for a $750 million asset-based facility and a $2.3 billion term loan and planned to finance the acquisition primarily with debt.
- Thor and Tourism Holdings Limited each own 50% of TH2connect, an RV-industry digital-products venture. Thor contributed approximately $50.4 million during FY2018; its reported share of the venture’s losses was $1.9 million.
- Material risks include cyclicality and seasonality, dealer and consumer financing availability, commodity and labor costs, component supply, warranty and product-liability exposure, and dependence on major dealers. FreedomRoads accounted for 20% of annual sales and 26% of trade receivables at year-end. Standby repurchase obligations on dealer inventory financing totaled $2,748.5 million; this is a contingent commitment, not reported debt, and historical losses were not material.
- The filing states that the financial statements received an unqualified audit opinion and management assessed internal control over financial reporting as effective.
Key facts for investors to verify
- Whether the Erwin Hymer acquisition closed on the anticipated terms and timing, and the resulting debt, share issuance, integration costs and synergies.
- Whether dealer inventory normalizes and retail demand supports shipments, given the sharp backlog decline and the company’s exposure to FreedomRoads.
- Whether labor, warranty, commodity and tariff pressures continue to weigh on margins and cash generation.
- Final tax effects of the Tax Act and whether the provisional tax estimates or expected FY2019 tax rate change.
- Actual exposure and losses under dealer repurchase commitments, particularly if dealer credit conditions deteriorate.