Business context and reporting period
Thor Industries, Inc. manufactures towable and motorized recreational vehicles, primarily in the United States. This unaudited Form 10-Q covers the three and six months ended January 31, 2017 (fiscal Q2 and first half). Unless otherwise noted, financial amounts below are in millions of dollars; comparisons are with the corresponding 2016 periods.
Results include Jayco, acquired June 30, 2016, while the comparable 2016 results generally exclude Jayco. Accordingly, acquisition effects account for a substantial portion of reported growth.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,588.5; up 62.9% | $3,297.1; up 64.4% |
| Gross profit / margin | $211.7 / 13.3%, versus $148.8 / 15.3% | $448.5 / 13.6%, versus $301.0 / 15.0% |
| Income from continuing operations | $64.8, versus $45.2 | $143.5, versus $96.0 |
| Diluted EPS | $1.23, versus $0.86 from continuing operations | $2.72, versus $1.83 from continuing operations |
| Operating cash flow | Not separately presented | $52.8, versus $51.9 |
For the three months, income before tax was $98.4 million and net income was $64.8 million; the prior-year period included a $0.6 million loss from discontinued operations. Six-month net income was $143.5 million, versus $95.2 million.
At January 31, cash was $134.7 million, down $75.2 million from July 31, 2016. Working capital was $434.9 million and current assets were $1,115.6 million against current liabilities of $680.7 million. Long-term debt was $325.0 million, down from $360.0 million. The $500 million asset-based revolver had $137.6 million of available and unused credit; adjusted excess availability for covenant purposes was $238.5 million. The company reported compliance with its applicable financial covenant.
Six-month capital expenditures were $50.9 million. Cash dividends paid were $34.7 million, or $0.66 per share for the first two fiscal quarters; the quarterly dividend was raised from $0.30 to $0.33 per share in October 2016.
Material changes versus the prior comparable period
- Jayco contributed $431.3 million of the $613.5 million quarterly sales increase and $898.4 million of the $1,291.6 million six-month increase. Total RV shipments rose 74.5% in the quarter and 75.7% year to date.
- Despite higher gross profit dollars, consolidated gross margin declined 2.0 percentage points in the quarter and 1.4 points year to date. Management attributed the decline principally to Jayco’s lower gross margin and changes in product mix, along with higher material, freight, warranty and labor costs. Segment pretax margins also fell: towables to 7.2% from 7.6% for the quarter, and motorized to 6.0% from 8.4%.
- Intangible amortization rose to $15.3 million for the quarter and $33.5 million for the six months, primarily reflecting Jayco-related intangibles. The prior-year periods included a $9.1 million goodwill impairment charge; no such charge was recorded in 2017.
- Operating cash flow was nearly flat year over year despite higher earnings, as working-capital changes used $141.2 million of cash, mainly from receivables and inventory growth. Capital expenditures were more than double the prior-year six-month amount.
- Dealer inventory of Thor products increased 59% year over year to approximately 124,000 units; Jayco accounted for 36,200 units of the increase. Backlog rose 89.1% to $2.09 billion, with Jayco representing about half of the increase.
Outlook, commentary and risks
Management said dealer inventory levels were appropriate for seasonal demand and expected on-hand cash, operating cash flows and revolver availability to support expected requirements. It anticipated approximately $80 million of capital expenditures during the remainder of fiscal 2017, primarily for facility expansion and equipment. Management also cited continued investment in the core business, potential strategic acquisitions, debt reduction and regular dividends as priorities; future dividends remain subject to Board approval and credit-facility conditions.
The filing cites an RVIA March 2017 forecast for 2017 calendar-year wholesale shipments of approximately 388,000 towable units and 57,700 motorized units, increases of 3.2% and 5.4%, respectively, from 2016. This is an industry forecast, not a specific company earnings or sales guidance range. Management noted that RV demand depends on consumer confidence, employment, disposable income, interest rates and credit availability. The business is also exposed to commodity costs, chassis or other supply constraints, competition, labor availability and acquisition integration risks. Management said current chassis supply was adequate and it had not recently experienced unusual chassis constraints or cost increases.
Significant exposures include dealer-financing repurchase commitments of $2.38 billion, generally for terms up to 18 months, against a recorded reserve of $7.1 million. Losses on settled repurchases were $0.2 million for the six months. FreedomRoads represented 18% of six-month sales and 21% of trade receivables at January 31. Product warranty reserves were $209.2 million, versus $106.3 million a year earlier; management considers reserves adequate, but actual claims may differ. The company also disclosed ordinary-course litigation, including warranty and vehicle-related claims, and ongoing federal and state tax examinations; management did not expect current legal matters to have a material overall effect, while noting litigation uncertainty.
Management identified additional risks including rising interest rates, lower discretionary spending, raw-material price changes, regulatory and tax developments, dealer losses, acquisition integration and a stronger U.S. dollar. The filing states there were no material changes to the risk factors in the prior Form 10-K. Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future sales and earnings growth reflects Jayco versus organic unit demand, pricing and product mix.
- Whether backlog converts to shipments and retail sales without excessive dealer inventory or discounting.
- Whether margins recover as Jayco integration proceeds and elevated material, freight, warranty and labor costs evolve.
- Whether working-capital investment and planned capital expenditures translate into sustained operating cash flow and manageable debt.
- The potential loss exposure under dealer repurchase commitments, warranty claims and customer concentration, particularly FreedomRoads.
- Whether industry shipment forecasts and consumer-demand assumptions remain valid as interest rates, credit availability and other economic conditions change.