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.