THOR INDUSTRIES INC quarterly report, Q1 FY2012

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THOR Industries, Inc. — Q1 FY2012 Form 10-Q

Reporting period: Three months ended October 31, 2011; all dollar amounts are in thousands except per-share data. Thor manufactures towable and motorized recreation vehicles and buses. The interim statements are unaudited, and management cautions that RV seasonality means the quarter may not indicate full-year results.

Financial performance and liquidity

  • Revenue: $673.0 million, up 10.9% from $606.7 million. Heartland contributed $54.1 million of the increase; the comparison reflects three months of Heartland in the current quarter versus six weeks in the prior-year quarter.
  • Profit: Gross profit was $75.0 million, down 2.1%; net income was $22.4 million, down 5.6%. Basic and diluted EPS were $0.41 versus $0.44. Income before tax increased 2.6% to $34.6 million.
  • Margins: Gross margin fell to 11.1% from 12.6%; net margin was approximately 3.3% versus 3.9%. Increased discounting, dealer incentives, and certain material costs pressured gross margin.
  • Cash flow: Operating cash flow was $22.3 million, compared with $9.7 million. Investing used $2.0 million, mainly for capital expenditures; financing used $28.2 million, including $20.0 million for a share repurchase and $8.2 million of dividends. Cash declined $7.9 million to $207.5 million.
  • Liquidity and debt: Working capital was $343.1 million, versus $345.2 million at July 31, 2011. The company reported no long-term debt. Current assets were $611.7 million and current liabilities $268.6 million.
  • Capital returns: The quarterly dividend increased from $0.10 to $0.15 per share. Thor repurchased 1.0 million shares from the estate of co-founder Wade F. B. Thompson for $20 per share, using cash on hand.

Material changes and segment trends

  • Towable RVs: Sales rose 18.1% to $499.1 million, supported by Heartland, a 4.7% increase in units, and higher average selling prices. Segment pretax income declined 1.5% to $32.6 million; gross margin contracted to 12.0% from 13.7%, primarily due to discounting and incentives.
  • Motorized RVs: Sales fell 25.6% to $62.6 million as shipments declined 25.9%. Gross margin fell to 7.8% from 9.6%. Pretax income was $1.3 million, compared with $1.0 million; the prior-year comparison included a $2.0 million trademark impairment.
  • Buses: Sales increased 11.2% to $111.3 million as unit shipments rose 19.2%, but lower-priced product mix and discounting reduced gross margin to 9.1% from 10.6%. Pretax income fell to $5.3 million from $9.4 million; the prior-year quarter included a $4.8 million insurance-related gain following a 2010 facility fire.
  • Backlog: Total backlog increased 9.2% to $509.7 million. RV backlog rose 17.8% to $299.5 million, driven by towables; bus backlog decreased 1.1% to $210.2 million.
  • Other comparison factors: Corporate SG&A decreased $6.2 million, partly because the prior year included Heartland acquisition and SEC-related professional fees. The effective tax rate increased to 35.5% from 29.9%, principally because of favorable state tax settlements in the prior-year period.

Outlook, risks, and contingencies

  • Management described dealers’ inventory as appropriate but noted consumer uncertainty and cautious dealer ordering. Thor cited RV backlog growth and new-product interest, while warning that the September 2011 Open House may have accelerated sales from later periods; the effect was not determinable.
  • RVIA forecast 2011 industry wholesale shipments up 2.1% and 2012 shipments down 2.1%. These are industry forecasts, not company guidance. Management said near-term discounting could continue and identified consumer confidence, fuel prices, unemployment, credit availability, housing weakness, taxes, and discretionary spending as risks.
  • Bus demand is exposed to government spending and transit funding. Management cited reduced municipal budgets, expired stimulus funding, softer order input at some operations, and competitive discounting, while noting fleet replacement and new products as potential longer-term supports.
  • Raw-material cost increases could pressure margins if not offset by pricing; chassis supply interruptions could affect production and earnings. Management reported no unusual chassis cost increases to date.
  • Legal: Approximately 550 company cases remained among roughly 4,100 suits in the FEMA trailer formaldehyde litigation. Thor disputes the allegations and could not reasonably estimate potential loss beyond amounts accrued; it warned an unfavorable outcome could materially affect its financial statements. A separate motorhome case against Damon was dismissed on appeal, subject to possible further appeal.
  • Dealer and credit exposure: Standby repurchase obligations on dealer inventory financing totaled $775.6 million; the recorded repurchase and guarantee reserve was $3.5 million. Thor reported first-quarter repurchase losses of $173 thousand and said it did not expect these guarantees to have a significant financial effect. FreedomRoads accounted for 12% of consolidated RV sales and 10% of total sales. Thor also held notes receivable from FreedomRoads-related borrowers; management said they were not impaired and payments due had been made.
  • Thor anticipated approximately $12.4 million of FY2012 capital expenditures, funded from operations and/or cash. It anticipated a $3.5 million decrease in unrecognized tax benefits and an $0.8 million decrease in related interest and penalties within 12 months, subject to actual outcomes.
  • Goodwill totaled $245.2 million, largely in towables. Management reported no impairment-triggering event in the quarter, but noted that competitive pricing and RV volumes could affect future impairment assessments. Warranty liabilities were $66.3 million; actual claims may differ from estimates.

Key facts for investors to verify

  1. Whether RV backlog converts into shipments and sales without continued margin-eroding discounting or sales incentives.
  2. How much of revenue and backlog growth reflects Heartland acquisition timing versus underlying demand, especially as motorized RV sales declined.
  3. The future effect of pricing, product mix, material costs, and production levels on segment and consolidated margins.
  4. Potential exposure from FEMA litigation and dealer-financing repurchase commitments, including the adequacy of recorded reserves.
  5. FreedomRoads’ sales concentration and credit exposure, including the status and collectability of Thor’s related-party notes receivable.
  6. Whether cash generation can support planned capital expenditures, dividends, and other capital returns while preserving liquidity.