THOR Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended October 31, 2022. Comparative period: three months ended October 31, 2021. Financial amounts below are rounded to millions of U.S. dollars unless stated otherwise.
Business context and financial performance
THOR manufactures recreational vehicles and related components, selling primarily through independent dealers. Its reportable segments are North American Towables, North American Motorized and European. The interim financial statements are unaudited.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $3,108.1 million | $3,958.2 million |
| Gross profit / gross margin | $486.5 million / 15.7% | $655.4 million / 16.6% |
| Income before taxes | $179.3 million | $312.8 million |
| Net income attributable to THOR | $136.2 million | $242.2 million |
| Diluted EPS | $2.53 | $4.34 |
| Operating cash flow | $94.0 million | $41.8 million |
| Capital expenditures | $55.9 million | $43.2 million |
Cash and cash equivalents were $291.7 million at October 31, 2022, down from $311.6 million at July 31, 2022. Net working capital was $1,371.8 million. Gross debt was $1,755.1 million, including $85.0 million drawn on the asset-based credit facility (ABL); approximately $890 million of ABL availability remained. Interest expense, net, was $22.8 million, compared with $20.7 million. The effective tax rate was 23.3%, versus 21.7%.
Material changes versus the prior-year quarter
- Sales declined 21.5%, primarily reflecting weaker demand compared with the prior-year record, when dealers were replenishing depleted inventories. The filing attributes $91.2 million of the sales decline to foreign exchange movements.
- North American Towables sales fell 41.2%; shipments dropped 52.8%, partly offset by an 11.6% increase in net price per unit. North American Motorized sales rose 21.5%, with shipments up 11.1%. European sales fell 20.3%, including a substantial currency impact and constrained motorized production.
- Gross margin fell to 15.7% from 16.6%; pretax income declined 42.7%. Management cited lower volume and weaker towables margins, partly offset by improved North American Motorized and European gross margins.
- North American backlog fell 69.9% to $4,432.1 million; European backlog declined 10.8% to $2,985.2 million. Total backlog was $7,417.3 million, down 59.0% year over year.
- Operating cash flow increased despite lower earnings, with working-capital changes using $119.6 million of cash in the quarter, principally due to higher chassis inventory. The prior-year quarter included $747.9 million of acquisition spending, primarily for Airxcel; there were no business acquisition outlays in this quarter.
Outlook, risks and unusual items
- Management expected the remaining quarters of fiscal 2023 to be negatively affected by inflation, rising interest rates, softer discretionary demand and dealers’ reassessment of inventory levels. It remained positive on longer-term RV demand. The filing does not provide company-specific full-year revenue or earnings guidance.
- Management reported that a North American chassis supplier issue could delay some production and sales from fiscal Q2 to a later quarter; it expected resolution within fiscal 2023. European chassis and other component shortages, along with skilled-labor constraints, were expected to continue limiting production.
- RVIA’s December 2022 forecast cited in the filing projected North American wholesale shipments of approximately 495,300 units for calendar 2022 and 391,400 for calendar 2023 in its most-likely scenarios. These are industry forecasts, not THOR guidance.
- Cash dividends declared increased to $0.45 per share from $0.43. THOR repurchased 338,733 shares for $25.4 million during the quarter; $507.8 million remained authorized for repurchases. A 1% federal excise tax on certain share repurchases was scheduled to apply to repurchases after December 31, 2022.
- Other expense, net, was $7.6 million, versus $7.2 million of other income in the prior-year quarter. Management attributed the change mainly to unfavorable fair-value movements in deferred compensation plan assets and certain equity investments, and reduced foreign-currency gains.
- Warranty liability was $325.7 million. Standby dealer-inventory repurchase commitments totaled $4,408.1 million; the recorded repurchase and guarantee reserve was $11.8 million. Management said expected losses under these arrangements were not expected to have a material effect, while noting the inherent uncertainty of litigation and claims.
- Prior-year SG&A included a $22.0 million net expense related to a product recall; current-quarter adjustments for the recall and a German vehicle-weight disclosure investigation were not material. Management stated it did not expect these matters to materially adversely affect future results or cash flows based on information then available.
- Interest-rate exposure remains relevant: a 1-percentage-point rate increase was estimated to reduce pretax earnings by approximately $11.1 million over a year. A 10% change in the euro/U.S. dollar exchange rate would change the euro-denominated debt balance by approximately $50.8 million.
Important facts for investors to verify
- Whether dealer inventory and retail demand stabilize, and whether backlog declines translate into further reductions in production and sales.
- Whether the North American supplier issue and continuing European chassis and component constraints resolve on management’s expected timetable.
- Whether pricing, discounts, input costs, warranty costs and production utilization support or pressure segment margins.
- Cash conversion and inventory levels, including the cash required to support chassis and other working capital.
- Debt costs and refinancing exposure, particularly the term-loan maturity in 2026 and the effect of floating interest rates.
- Dealer concentration: FreedomRoads accounted for 15% of quarterly sales and 16% of trade receivables at October 31, 2022; the filing says losing this dealer could materially affect the business.
- Potential claims under the $4.4 billion of standby repurchase commitments, warranty obligations, and the product-recall and German regulatory matters.