THOR Industries, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended January 31, 2015. Unless noted otherwise, dollar figures below are in millions; the filing reports financial statements in thousands. Thor manufactures towable and motorized recreational vehicles, primarily in the U.S. and Canada. Results are seasonal, so the six-month period should not be annualized mechanically.
Financial performance and liquidity
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $852.4 | $635.3 | $1,774.4 | $1,435.3 |
| Gross profit | $102.0 | $70.3 | $219.7 | $175.5 |
| Gross margin | 12.0% | 11.1% | 12.4% | 12.2% |
| Income from continuing operations before tax | $44.1 | $23.9 | $100.8 | $78.3 |
| Net income from continuing operations | $30.3 | $17.2 | $69.5 | $53.6 |
| Net income, including discontinued operations | $28.6 | $16.2 | $67.6 | $57.3 |
| Diluted EPS | $0.54 | $0.30 | $1.26 | $1.07 |
- Sales rose 34.2% in Q2 and 23.6% for the six months. Q2 towable sales increased 42.9%; motorized sales increased 8.9%. Higher shipment volumes drove growth, with acquisitions contributing to towables.
- Q2 gross margin improved to 12.0%, primarily reflecting towables growth and better fixed-overhead absorption. Six-month gross margin was 12.4%. Motorized gross margin declined to 11.9% for the six months from 12.4%, with higher costs associated with labor, warranty and facility expansion.
- Operating cash flow was $53.2 for the six months, compared with cash used of $17.8 in the prior-year period. Capital expenditures were $16.2; net cash used in investing was $64.0, including $46.4 paid for CRV/DRV. Dividends paid were $28.8.
- Cash was $248.3 at January 31, 2015, down from $289.3 at July 31, 2014. Working capital was $482.6, versus $473.3. Current assets were $860.5 and current liabilities $377.9. The balance sheet reports no borrowings; interest expense was immaterial.
- Product warranty liabilities were $102.0, up from $94.9 at July 31, 2014. Stockholders’ equity was $1,018.7.
Changes versus the prior comparable period
- Q2 pretax income from continuing operations increased 84.7%; for the six months it increased 28.7%. SG&A rose 24.1% in Q2 and 21.9% for the six months, slower than sales growth.
- Six-month net income was higher by $10.3, but included a $1.9 after-tax loss from discontinued bus operations, compared with $3.7 of discontinued-operations income in the prior-year period. The prior period included a $7.1 pretax gain on the bus business sale.
- On January 5, 2015, Thor acquired towable RV makers Cruiser RV and DRV, including certain operating real estate, for initial cash consideration of $47.4, subject to adjustment. The acquisition was funded from cash on hand; purchase accounting remained preliminary.
- Quarterly regular dividends increased to $0.27 per share from $0.23. No special dividend was paid in the current period; the prior-year six-month period included a $1.00-per-share special dividend.
Outlook, commentary and risks
- Thor provided no specific company earnings or revenue guidance. RVIA projected calendar-year 2015 industry wholesale shipments of 315,200 towable units and 46,200 motorized units, increases of 0.8% and 5.1%, respectively, from 2014.
- Management said dealer inventory levels were appropriate for seasonal demand and expected wholesale shipments generally to track retail sales at a one-to-one replenishment ratio. Thor backlog was $942.1 at January 31, up 11.5% year over year; dealer inventory of Thor products was up 27.1% to 76,441 units, partly reflecting acquisitions and prior-year weather disruption.
- Management expected approximately $25.0 of additional FY2015 capital expenditures, mainly for facility expansion and equipment. It said cash on hand and operating cash generation should fund expected operating needs and that the Board intended to continue quarterly dividends, subject to future conditions.
- Key risks include discretionary consumer demand, credit availability and interest rates, commodity costs, chassis supply, competition, regulatory and legal matters, and a strong U.S. dollar potentially reducing Canadian sales. Management also highlighted acquisition integration risks. One dealer accounted for 14% of six-month continuing sales and 17% of trade receivables at January 31.
- Standby dealer-inventory repurchase commitments totaled $1,496.0, primarily for terms up to 18 months; this is a contingent commitment, not recorded debt. The related reserve was $4.7. Six-month repurchase losses were $1.1, versus $0.1 a year earlier. Management said future losses were not expected to materially affect consolidated results, but actual losses may differ.
- 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 adverse outcomes could materially affect an individual reporting period. The filing also identifies uncertain tax positions and estimates possible settlements and payments within the next 12 months.
Most important facts for investors to verify
- How much of towable growth and backlog reflects acquired businesses versus organic demand, and whether dealer inventory converts into retail sales.
- Whether gross-margin improvement is sustainable, particularly given motorized cost pressure and the increased warranty reserve.
- CRV/DRV final purchase-price adjustments, integration progress, and the acquisitions’ contribution to earnings and cash flow.
- Exposure and potential losses under the $1.496 billion of dealer repurchase commitments, including the concentration in FreedomRoads.
- Canadian sales sensitivity to currency movements and the progress and potential cash impact of tax settlements.