Thor Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended April 30, 2011. Unaudited figures are in thousands of dollars, except per-share data and units. Thor manufactures towable and motorized recreational vehicles and small- and mid-size buses.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $852,059 | $680,192 | $1,984,970 | $1,612,769 |
| Gross profit | $108,484 | $92,499 | $232,705 | $212,266 |
| Gross margin | 12.7% | 13.6% | 11.7% | 13.2% |
| Income before taxes | $57,318 | $52,205 | $98,485 | $108,711 |
| Net income | $40,008 | $34,111 | $69,384 | $69,464 |
| Diluted EPS | $0.72 | $0.66 | $1.26 | $1.30 |
- Third-quarter sales rose 25.3%; Heartland contributed $126,727 of the $171,867 increase. Nine-month sales rose 23.1%, with Heartland contributing $260,758 of the increase.
- Recreation vehicle sales strengthened: third-quarter towable revenue increased 33.5% and motorized revenue 29.6%. Bus revenue declined 9.7%. For the nine months, towable and motorized sales rose 29.4% and 41.5%, respectively, while bus sales fell 9.0%.
- Margins weakened despite higher sales. Management cited heavier RV discounting, rising material costs, and a shift toward lower-priced buses. Nine-month pretax income declined 9.4%; lower taxes helped keep net income approximately flat. The nine-month effective tax rate was 29.6%, versus 36.1%.
- Operating cash flow was negative $49,787 for the nine months, versus negative $1,186 in the prior-year period, primarily reflecting increases in receivables and inventory and tax payments. Investing cash outflow was $123,536, including Heartland acquisition cash consideration of $99,562 and capital expenditures of $28,825. Financing cash outflow was $15,181, mainly dividends.
- Cash and equivalents were $59,247 at April 30, 2011, versus $247,751 at July 31, 2010; working capital was $305,117, versus $345,006. Thor reported no long-term debt. A further approximately $8,000 of fiscal-2011 capital expenditures was anticipated.
- Regular quarterly dividends increased from $0.07 to $0.10 per share beginning in October 2010. Nine-month dividends paid totaled $16,744; the prior-year period included a $0.50-per-share special dividend.
Material changes, outlook, and risks
- Thor acquired Heartland on September 16, 2010 for $99,562 in cash and 4.3 million shares valued at $90,531. Heartland contributed $260,758 in sales and $6,226 in pretax income from acquisition through April 30; results included acquisition-related inventory step-up and backlog amortization costs. Acquisition integration and execution remain risks.
- RV backlog declined 5% year over year to approximately $427 million; bus backlog fell 6% to approximately $206 million. Management said dealer inventories appeared balanced and expected future RV shipments to track retail demand, rather than dealer restocking.
- Management saw potential for continued RV improvement if consumer confidence and retail financing hold up and interest rates remain low. It cautioned that fuel prices, weak employment and income growth, credit constraints, and higher input costs could weigh on demand and margins. Price increases, procurement, and lean manufacturing were cited as responses to cost inflation.
- Bus demand faced pressure from reduced municipal budgets and the expiration of federal stimulus funding; Thor reported softer orders and staffing reductions at certain locations. Chassis supply was described as adequate, but a deterioration in the auto industry could disrupt supply.
- Third-quarter results included a $1,430 noncash bus trademark impairment. Nine-month results also included a $2,036 motorized trademark impairment and an $8,651 gain on involuntary conversion, principally associated with insurance recoveries following the 2010 bus-facility fire.
- The SEC settlement received final court approval on May 23, 2011, after quarter-end. Thor agreed to a $1 million civil penalty and an independent consultant’s review of specified internal controls and record-keeping practices. The penalty had been funded in restricted cash at April 30 and was released to the SEC after approval; the consultant’s report was expected by September 7, 2011.
- Approximately 745 Thor-related claims remained in the FEMA formaldehyde multidistrict litigation, which involved more than 5,000 total suits. Thor disputed the allegations and said it would defend them. The filing states ultimate disposition of litigation is not expected to materially adversely affect its financial position, results, or liquidity, but outcomes remain uncertain.
- Dealer financing arrangements included standby repurchase obligations of $838,988, generally extending up to 18 months; the recorded reserve was $4,138. FreedomRoads, Thor’s largest dealer, represented 12% of consolidated sales for the nine months, and the filing warns its loss could significantly affect the business. Thor also held $3,250 par value of auction-rate securities, with $2,982 carrying value; failed auctions may limit near-term liquidity, potentially until maturity.
Investor facts to verify
- Whether RV demand, pricing, and gross margins can withstand discounting and continued material-cost inflation.
- Heartland’s post-acquisition profitability, integration progress, and contribution relative to acquisition-related amortization and costs.
- Cash conversion, working-capital needs, and the effect of planned capital spending on liquidity.
- Developments in the SEC consultant review and any resulting control remediation costs or findings.
- Exposure to FEMA litigation, dealer repurchase commitments, and concentration in FreedomRoads.