THOR INDUSTRIES INC quarterly report, Q2 FY2016

Business context and reporting period

Thor Industries, Inc. manufactures towable and motorized recreational vehicles (RVs), primarily in the United States. This unaudited Form 10-Q covers the three and six months ended January 31, 2016 (fiscal 2016 second quarter and first half). Dollar amounts below are in millions unless stated otherwise. RV results are seasonal; management cautions that first-half results should not be annualized.

Financial performance and liquidity

  • Second-quarter sales and earnings: Net sales were $975.1 million, up 14.4% year over year. Gross profit was $148.8 million, with gross margin of 15.3% versus 12.0%. Income from continuing operations before tax was $65.9 million versus $44.1 million; net income was $44.7 million versus $28.6 million. Diluted EPS was $0.85 versus $0.54.
  • First-half results: Net sales were $2,005.4 million, up 13.0%. Gross profit was $301.0 million and gross margin was 15.0%, versus $219.7 million and 12.4%. Pretax income was $143.6 million versus $100.8 million; net income was $95.2 million versus $67.6 million. Diluted EPS was $1.81 versus $1.26.
  • Segments, first half: Towable sales increased 5.0% to $1,443.0 million and pretax income rose 29.8% to $116.3 million. Motorized sales increased 23.6% to $494.0 million and pretax income rose 56.4% to $42.2 million. The filing attributes some growth to acquisitions, including CRV/DRV and Postle.
  • Cash flow: First-half operating cash flow was $51.9 million, compared with $53.2 million a year earlier. Working-capital changes used $78.4 million, principally from seasonal increases in receivables and inventory. Capital expenditures were $24.5 million; investing cash outflow was $16.1 million. Dividends paid were $31.5 million.
  • Liquidity and balance sheet: At January 31, cash was $185.4 million, working capital was $470.9 million, total assets were $1,586.4 million, current liabilities were $397.2 million, and stockholders’ equity was $1,131.4 million. Cash increased $1.9 million from July 31, 2015. The balance sheet does not show a separate conventional borrowing balance; lease and other obligations are included in reported liability categories.
  • Margins and costs: First-half SG&A rose 21.0% to $135.8 million, faster than sales, and was 6.8% of sales versus 6.3%. The effective tax rate was 33.1%, up from 31.1%, mainly because favorable uncertain-tax-position settlements benefited the prior-year period.

Material changes and unusual items

  • A $9.1 million noncash goodwill impairment charge was recorded in the second quarter, fully impairing goodwill for one reporting unit within towables. The valuation used discounted cash-flow estimates and significant Level 3 assumptions.
  • First-half RV backlog increased 17.3% to $1,105.2 million from $942.1 million. Dealer inventory of Thor products was approximately 78,000 units, up 2.0% year over year.
  • Motorized second-quarter shipments rose 38.2%; management said some rental-unit shipments normally made in the third quarter were accelerated into the second quarter. Towable shipments rose 7.1%, while towable net price per unit declined, reflecting product mix.
  • The first-half comparison includes Postle, acquired in May 2015, and a longer contribution from CRV/DRV, acquired in January 2015. Comparisons therefore are not wholly like-for-like.
  • Discontinued bus operations generated a first-half after-tax loss of $0.8 million, primarily from retained liabilities and related costs.

Outlook, risks and contingencies

  • Industry outlook: The filing cites the RVIA’s March 2016 forecast for calendar-year 2016 North American wholesale shipments of 332,800 towable units and 49,000 motorized units, increases of 1.8% and 3.6%, respectively. This is an industry forecast, not company revenue guidance.
  • Management plans: Thor expected approximately $25 million of additional capital expenditures in the remainder of fiscal 2016, mainly for production-facility expansion and equipment. Management said cash on hand and operating cash flows should fund expected operating needs; it also noted potential complementary acquisitions and continued quarterly dividends, subject to Board approval.
  • Concentration and commitments: FreedomRoads accounted for 21% of first-half continuing sales and 24% of trade receivables at January 31. Dealer inventory-financing repurchase commitments were $1,558.6 million, with a recorded reserve of $4.7 million. Management said future losses were not expected to materially affect consolidated results, but guarantees could expose Thor to losses if dealers default.
  • Other risks: Demand depends on consumer confidence, discretionary spending, credit availability, interest rates and retail trends. The filing also cites material-cost and chassis-supply risks, competition, acquisition integration, key-dealer exposure, currency effects, warranty claims and possible asset impairments. Normal-course litigation includes lemon-law, warranty and vehicle-accident claims; management did not expect current matters to materially affect the company overall, while noting an adverse outcome could affect a particular period.
  • Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed annual-report risk factors were reported.

Important facts for investors to verify

  • Whether backlog converts to retail demand and cash generation, particularly given seasonality and the second-quarter pull-forward of some rental shipments.
  • How much sales and earnings growth reflects organic demand versus acquisitions and changes in product mix.
  • The financial and valuation assumptions behind the goodwill impairment and the possibility of further impairment.
  • Exposure to FreedomRoads and the potential cash impact of dealer repurchase commitments relative to the reserve.
  • Whether receivables and inventory growth reverse into operating cash flow, and how planned capital spending affects liquidity.
  • Any developments in warranty, legal, tax or other retained liabilities, including the former bus operations.