THOR Industries, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Quarter ended April 30, 2014; year-to-date period is the nine months ended April 30, 2014. Unless noted, dollar amounts are in millions; the filing reports financial statements in thousands. Thor manufactures towable and motorized recreational vehicles, primarily in the United States.
Financial performance and liquidity
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales from continuing operations | $1,046.8 | $929.8 | $2,482.1 | $2,327.8 |
| Gross profit | $142.1 | $124.6 | $317.6 | $284.4 |
| Gross margin | 13.6% | 13.4% | 12.8% | 12.2% |
| Income before tax, continuing operations | $82.7 | $70.6 | $161.1 | $139.2 |
| Net income from continuing operations | $55.1 | $48.7 | $108.7 | $96.5 |
| Diluted EPS from continuing operations | $1.03 | $0.92 | $2.04 | $1.82 |
- Third-quarter sales rose 12.6%; continuing-operations diluted EPS rose 12.0%. Nine-month sales increased 6.6% and diluted EPS increased 12.1%.
- Quarterly towable sales increased 7.9% and motorized sales increased 31.4%. For the nine months, towable sales declined 0.4%, while motorized sales grew 38.4%.
- Motorized gross margin weakened to 11.5% from 12.6% in Q3, with labor, start-up, facility and weather costs cited. Towable margin improved to 14.2% from 13.6%.
- Operating cash flow was negative $33.6 for the nine months, versus positive $44.7 a year earlier. Management attributed the change chiefly to seasonal growth in receivables and inventory, including slower deliveries to dealers due to transportation-driver shortages and higher backlog.
- At April 30, cash and equivalents were $120.9, with a further $53.4 classified as restricted cash for the KZ acquisition. Working capital was $468.7; current assets were $848.3 and current liabilities $379.6. No borrowings are shown on the balance sheet; nine-month interest expense was $0.007.
- Cash declined $115.7 from July 31, 2013. Uses included dividends of $90.1, acquisitions of Livin’ Lite and Bison totaling $33.7, capital expenditures of $19.4 and operating cash use; proceeds included $105.0 from the bus-business sale.
Material changes and significant transactions
- Thor sold its bus business in October 2013 and received total consideration of $105.0, recording a pretax gain of $7.1. The bus operations are presented as discontinued operations. Q3 FY2014 discontinued-operations loss was negligible; nine-month income was $3.7, including the sale gain.
- Thor acquired Livin’ Lite in August 2013 for $16.8 net of acquired cash and Bison Coach in October 2013 for $16.9, expanding towable product offerings.
- On May 1, 2014, after quarter-end, Thor completed its acquisition of K.Z., Inc. for initial cash consideration of $53.4, subject to adjustment. At April 30, that amount was held in restricted cash. Purchase-price allocation remained preliminary.
- Regular quarterly dividends increased to $0.23 per share from $0.18; a $1.00-per-share special dividend was paid in November 2013. Total dividends paid in the nine-month period were $90.1.
- Inventory increased to $234.4 from $153.0 at July 31, and trade receivables increased to $359.6 from $230.9. Goodwill was $253.9; the annual goodwill review identified no impairment. A $0.7 noncash impairment charge was recorded on certain RV facilities in Q1.
Outlook, commentary and risks
- Thor said dealer inventories were appropriate for seasonal demand and dealers were optimistic about calendar 2014. Thor’s RV backlog rose 26.3% year over year to $820.2 at April 30; dealer inventory of Thor products increased 1.7% to 66,014 units.
- RVIA forecast 2014 industry wholesale shipments of 302,900 towable units and 46,500 motorized units, up 7.1% and 21.1%, respectively, from 2013. These are industry forecasts, not company-issued revenue or earnings guidance.
- Management said cash on hand and operating cash generation should fund expected operating needs. It anticipated approximately $15.0 of additional FY2014 capital expenditures, apart from the KZ acquisition. The Board intended to continue quarterly dividends, subject to future earnings, cash flows and other factors.
- Risks cited include discretionary consumer demand, credit availability and interest rates, material and chassis supply, competition, acquisition integration, production capacity and costs. Management said the recent motorized-chassis shortage had ended in Q1 calendar 2014 and supply was adequate for current production.
- One dealer, FreedomRoads, represented 16% of continuing sales for the nine months and 19% of trade receivables at April 30. Thor’s standby dealer-inventory repurchase commitment was $1,246.8, with a recorded reserve of $3.9; management did not expect future losses to materially affect consolidated results.
- Thor retains certain pre-sale bus product-liability and workers’ compensation obligations and has tax indemnification obligations related to the bus divestiture. The filing also describes ordinary-course litigation and uncertain tax positions; management considered reserves adequate and did not expect the noted matters to have a material overall effect, while acknowledging significant litigation could affect a particular period.
Investor verification points
- Check whether the higher backlog converts into shipments and cash, particularly given receivables, inventory growth and the delivery-driver constraint.
- Track motorized margins, labor and facility-expansion costs, and the effect of product mix and pricing in both RV segments.
- Review final KZ purchase accounting, integration progress and the cash impact of the acquisition and planned capital spending.
- Monitor FreedomRoads’ concentration, dealer repurchase exposure, warranty reserves, retained bus liabilities and the resolution of uncertain tax positions.
- Confirm ongoing cash generation and dividend capacity; the nine-month period used operating cash despite higher earnings.