Thor Industries, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended July 31, 2016. Unless noted, amounts are in millions of dollars; the filing presents financial statements in thousands. Thor manufactures towable and motorized recreational vehicles, primarily for U.S. and Canadian markets.
Business context and results
Thor acquired Jayco on June 30, 2016 for initial cash consideration of $576.1 million, subject to adjustment. The acquisition was funded with cash and $360 million drawn on a new revolving credit facility. FY2016 results include only one month of Jayco operations.
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $4,582.1 | $4,006.8 | +14.4% |
| Gross profit | $726.3 | $557.5 | +30.3% |
| Gross margin | 15.9% | 13.9% | +2.0 percentage points |
| Income from continuing operations before taxes | $383.3 | $292.9 | +30.9% |
| Net income from continuing operations | $258.0 | $202.0 | +27.7% |
| Net income | $256.5 | $199.4 | +28.6% |
| Diluted EPS from continuing operations | $4.91 | $3.79 | +29.6% |
| Operating cash flow | $341.2 | $247.9 | +$93.3 |
Towable RV sales rose 7.8% to $3,338.7 million; shipments increased 11.5%, while lower average price/mix partly offset volume. Motorized RV sales rose 25.7% to $1,094.3 million, with shipments up 27.2%. Segment gross margins improved to 16.4% for towables from 14.3%, and to 13.2% for motorized from 12.8%. Reported FY2016 included a $9.1 million non-cash goodwill impairment in the towable segment.
FY2016 fourth-quarter sales were $1,292.6 million versus $1,058.2 million a year earlier; net income was $82.8 million versus $69.0 million, and diluted EPS was $1.57 versus $1.31.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $209.9 million at year-end, up from $183.5 million. Working capital was $365.2 million, compared with $397.5 million.
- Long-term debt was $360 million under a five-year, $500 million asset-based revolver maturing June 30, 2021, with a conditional $100 million expansion option. Thor reported approximately $114 million of borrowing availability beyond outstanding borrowings and $276 million of adjusted excess availability for covenant purposes; it was in compliance with its financial covenant.
- Net cash used in investing activities was $601.5 million, mainly the $557.7 million Jayco acquisition payment and $52.0 million of capital expenditures. Financing activities provided $286.7 million, principally from revolver borrowings. Dividends paid totaled $63.0 million, or $1.20 per share.
- Management expected FY2017 capital expenditures of approximately $95 million, primarily for facility expansion and equipment. The Board intended to continue regular quarterly dividends, subject to credit-agreement conditions and Board approval.
Changes, outlook and risks
- Consolidated backlog increased 108.5% to $1,196.8 million at July 31, 2016. Management attributed 60.3% of the dollar increase to Jayco; the company expected the backlog to be filled in FY2017. Backlog is seasonal and can fluctuate.
- Thor cited dealer inventory as generally appropriate for seasonal demand. RVIA’s August 2016 forecast projected calendar-year 2016 North American shipments of 405,300 units, up from 2015, and modest further growth in 2017. These are industry forecasts, not company guidance.
- Management identified consumer confidence, discretionary spending, interest rates and credit availability, dealer stocking, fuel prices, commodity costs, chassis and component supply, and the U.S. dollar’s strength against the Canadian dollar as factors that could affect demand, costs and results.
- FreedomRoads, the largest dealer, accounted for 20% of FY2016 continuing sales and 18% of year-end trade receivables. Two major floor-plan lenders held approximately 76% of dealers’ floored dollars, creating dealer-financing concentration risk.
- Standby repurchase commitments for dealer inventory financing totaled $1,898.3 million; the recorded repurchase and guarantee reserve was $6.1 million. These commitments are contingent, not reported funded debt. Repurchase losses were $0.8 million in FY2016.
- Other key risks include seasonality and industry cyclicality, acquisition integration, product liability and warranty claims, dependence on certain suppliers, and competition. Management said pending ordinary-course litigation was not expected to materially affect financial condition, results or cash flows, while noting outcomes are inherently uncertain.
Unusual items and reporting matters
Thor reported a $1.5 million after-tax loss from discontinued bus operations in FY2016, largely reflecting retained liabilities and expenses after the bus business sale. The FY2016 Jayco purchase-price allocation was preliminary, and a final purchase-price adjustment was expected in FY2017. Management and the auditor excluded Jayco from the FY2016 internal-control assessment; Jayco represented approximately 34% of consolidated assets and 2% of consolidated sales. Deloitte issued unqualified opinions on the financial statements and on internal control over financial reporting for the operations included in its assessment.
Most important facts for investors to verify
- Jayco’s full-year contribution, final purchase accounting and integration performance after its one-month inclusion in FY2016.
- Whether backlog converts to shipments and sales as expected, and whether dealer inventories and retail demand remain balanced.
- Debt repayment capacity, revolver availability, covenant headroom and the terms governing dividends and other cash uses.
- Exposure to FreedomRoads and floor-plan lenders, including changes in receivables, dealer credit quality and repurchase losses.
- Warranty and product-liability reserve adequacy, and the assumptions underlying the $9.1 million goodwill impairment and remaining goodwill valuations.