THOR Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended January 31, 2012. Dollar amounts below are in millions unless otherwise noted. Thor manufactures towable and motorized recreation vehicles and small- and mid-size buses.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Prior-year quarter | Six months ended Jan. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $597.0 | $526.2 | $1,270.0 | $1,132.9 |
| Gross profit | $59.4 | $47.6 | $134.4 | $124.2 |
| Gross margin | 9.9% | 9.1% | 10.6% | 11.0% |
| Income before taxes | $21.5 | $7.4 | $56.1 | $41.2 |
| Net income | $13.7 | $5.7 | $36.0 | $29.4 |
| Diluted EPS | $0.25 | $0.10 | $0.66 | $0.54 |
- Quarterly sales rose 13.4% and net income rose about 141% year over year. Six-month sales rose 12.1% and net income rose about 23%.
- Quarterly gross margin improved 0.8 percentage points, reflecting better fixed-overhead absorption and lower warranty costs. Six-month gross margin fell 0.4 points, primarily due to heavier RV discounting and incentives earlier in the period and some higher material costs.
- Quarterly SG&A declined 11.0%; six-month SG&A declined 12.8%, in part because prior-year corporate costs included acquisition, SEC-review, legal and professional expenses.
- Six-month operating cash flow was $36.0 million, versus cash used of $21.2 million a year earlier. Investing used $2.1 million, while financing used $93.1 million, principally for $77.0 million of share repurchases and $16.5 million of dividends.
- Cash was $156.2 million at January 31, down from $215.4 million at July 31, 2011. Working capital was $298.5 million, compared with $345.2 million. The company reported no long-term debt.
Segments and material changes
- Towable RVs: Quarter sales increased 21.8% to $444.2 million; unit shipments rose 12.1%. Six-month sales increased 19.8% to $943.3 million, with Heartland contributing $56.3 million of the increase. Quarterly segment income before taxes was $21.2 million, versus $8.8 million.
- Motorized RVs: Quarter sales fell 21.5% to $56.8 million; unit shipments fell 19.2%. Six-month sales fell 23.7% to $119.3 million. Lower Class A and C volumes were partly offset by growth in Class B.
- Buses: Quarter sales rose 7.7% to $96.0 million; six-month sales rose 9.6% to $207.3 million. Six-month segment income before taxes declined to $7.9 million from $13.2 million, largely because the prior-year period included a $6.8 million insurance-related gain from a facility fire.
- Company-wide backlog at January 31 was $646.9 million, down 6.0% from $688.5 million a year earlier. RV backlog declined 11.6% to $412.8 million; bus backlog increased 5.8% to $234.1 million.
- The company repurchased 3.0 million shares during the six months for $77.0 million in private transactions and increased its quarterly dividend from $0.10 to $0.15 per share. Six-month dividends paid were $16.5 million.
Outlook, risks and contingencies
- Thor gave no specific company financial earnings or revenue guidance. RVIA forecast 2012 calendar-year wholesale shipments of 265,200 RVs, up 5.1% from 2011. Management described dealers as cautious and expects near-term discounting to continue; it viewed retail demand as key to industry improvement.
- Management cited consumer confidence, fuel prices, unemployment, credit availability, housing weakness, interest rates, discretionary spending, competition and raw-material costs as risks to RV demand and margins. Bus demand is exposed to government transit spending and travel activity; chassis supply disruptions could also affect production.
- FEMA trailer formaldehyde litigation involved approximately 500 cases against Thor. Thor subsidiaries reached agreements in principle to resolve the claims in February 2012; settlement terms were confidential. The company had accrued $5.0 million and said it believed the accrual was adequate.
- Standby dealer inventory repurchase obligations totaled $887.0 million, with a separate $0.9 million dealer-financing guarantee. The related repurchase and guarantee reserve was $3.6 million. Management said expected future losses would not have a significant overall financial effect; actual outcomes remain uncertain.
- FreedomRoads, Thor’s largest dealer, represented 11% of six-month RV sales and 14% of trade receivables. Thor also had $30 million in loans to owners of FreedomRoads, bearing 12% interest; management said its credit review found no impairment. The dealer relationship and concentration warrant attention.
- At January 31, auction-rate securities of $1.6 million remained illiquid after repeated failed auctions. The company believed government backing supported recovery of par value, but timing could extend to maturity.
- Goodwill totaled $245.2 million. No impairment-triggering event was identified during the six months; management noted that adverse RV volume or pricing could affect future impairment assessments. The company also cited estimates for warranty, insurance, tax and litigation reserves as areas of judgment.
- The effective tax rate increased to 36.4% for the quarter and 35.8% for six months, versus 22.9% and 28.6%, respectively, in the prior periods. Prior-year tax settlements and a research-credit benefit contributed to the comparison. Management anticipated a reduction of about $3.5 million in unrecognized tax benefits and $0.8 million in related interest and penalties within 12 months, subject to actual outcomes.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to previously disclosed risk factors.
Investor verification priorities
- Track RV retail demand, backlog conversion and discounting, particularly given the 11.6% year-over-year decline in RV backlog.
- Assess whether towable growth and margins can offset continued weakness in motorized RVs and pressure in bus margins.
- Review cash generation and liquidity after the $77.0 million buyback and higher dividend, alongside planned fiscal 2012 capital expenditures of approximately $13 million.
- Follow the final terms and recorded costs of the FEMA litigation settlements, and any changes to the $5.0 million accrual.
- Monitor dealer concentration, FreedomRoads loan repayment and the potential exposure under dealer repurchase commitments.
- Check future warranty claims, raw-material and chassis costs, tax audit developments, and goodwill impairment assumptions.