THOR Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2018. Unless noted, dollar amounts below are in millions. THOR manufactures recreational vehicles, primarily in the United States, and sells through independent dealers. The filing is unaudited.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $2,251.6 | $2,015.2 | $6,454.8 | $5,312.3 |
| Gross profit | $316.7 | $293.8 | $920.3 | $742.3 |
| Gross margin | 14.1% | 14.6% | 14.3% | 14.0% |
| Income before taxes | $180.5 | $166.2 | $508.7 | $380.4 |
| Net income | $133.8 | $111.3 | $341.9 | $254.8 |
| Diluted EPS | $2.53 | $2.11 | $6.47 | $4.83 |
- Quarterly sales increased 11.7%; RV segment sales rose 11.7% in towables and 8.8% in motorized. Nine-month sales increased 21.5%, with towables up 23.7% and motorized up 16.1%.
- Quarterly gross margin fell 0.5 percentage points as product, labor, freight and warranty costs rose relative to sales. Nine-month gross margin improved 0.3 points. Higher unit volumes drove much of the profit growth.
- Operating cash flow was $197.2 for nine months, versus $182.8 a year earlier. Working-capital changes used $245.0 of cash, principally from receivables and inventory growth.
- Cash was $147.0 at April 30, down from $223.3 at July 31, 2017. Working capital was $571.8, compared with $399.1. Capital expenditures were $100.0; the company also invested $46.9 in a joint venture and paid $58.5 in dividends.
- Long-term debt was $80.0, down from $145.0; $415.8 remained available under the revolver, and the company reported compliance with its financial covenant. In May, it repaid a further $60.0, leaving $20.0 outstanding at May 31.
Changes, outlook and risks
- The Tax Act reduced the federal corporate rate to 21% beginning January 1, 2018. The company recorded an approximately $34.0 noncash tax charge for revaluing deferred tax assets. The nine-month effective tax rate was 32.8%; management estimated 27%–29% for Q4 FY2018 and 23%–25% for FY2019, before discrete items. Management expected lower rates to benefit future after-tax earnings and cash flow.
- Industry wholesale shipments rose 13.4% in the calendar quarter ended March 31, 2018, while industry retail registrations increased 7.9%. THOR’s dealer inventory rose 30.8% year over year to approximately 166,200 units; management considered levels generally appropriate but modestly elevated in some locations. Backlog declined 15.1% to $2,003.1, which management attributed mainly to expanded production capacity, quicker deliveries, and dealer inventory.
- RVIA’s March forecast projected 2018 calendar-year industry shipments of approximately 472,000 towable and 67,900 motorized units. This is an industry forecast, not company revenue guidance. Management linked continued industry growth to consumer confidence, employment, income, credit availability and interest rates.
- Warranty provision for nine months was $198.1, versus $146.5 a year earlier; the recorded warranty liability was $260.1. Management cited extended structural coverage, labor-market pressure and higher warranty costs as margin factors.
- THOR and Tourism Holdings Limited formed the 50/50 TH2 digital-RV joint venture; THOR contributed $46.9 and recorded a $0.4 share of losses to date. Management expected future capital needs not to be material.
- Key risks include discretionary consumer demand, interest rates and credit availability, commodity and labor costs, chassis or workforce constraints, warranty claims, dealer inventory and concentration, and competition. One dealer accounted for 20% of nine-month sales and 18% of trade receivables at April 30. Standby dealer-inventory repurchase commitments totaled $3,221.9; the recorded reserve was $8.9. The company said expected losses under these arrangements were not expected to have a significant effect. Routine litigation outcomes remain uncertain; management did not expect current matters to materially affect overall financial condition, results or cash flows.
Investor verification priorities
- Track whether elevated dealer inventory converts into retail sales and whether backlog declines further as capacity and delivery rates change.
- Verify the sustainability of margins, particularly warranty, labor and materials costs, and the growth in warranty provisions.
- Assess operating cash conversion and working-capital needs alongside planned remaining FY2018 capital expenditures of approximately $60 million.
- Confirm repayment of the remaining $20 million of debt and monitor revolver availability, covenant conditions and dividend capacity.
- Monitor final measurement of Tax Act impacts and realized effective tax rates against management’s estimates.
- Evaluate exposure to the major dealer and potential losses on the substantial repurchase commitments.