Thor Industries (NYSE:THO) closed its acquisition of European recreational vehicle manufacturer Erwin Hymer Group (EHG) on the first day of its fiscal third quarter. Consequently, Thor shareholders were able to see an entire quarter of combined results when the RV maker reported Q3 earnings on Monday before the markets opened. The company has added a "European RV" reporting segment to accompany its North American towable and motorized RV divisions. Note that in the discussion that follows, all comparative numbers refer to the prior-year quarter.
Thor Industries: The raw numbers
|Metric||Q3 2019||Q3 2018||Growth (YOY)|
|Revenue||$2.51 billion||$2.25 billion||11.6%|
|Net income||$32.7 million||$133.8 million||(75.6%)|
|Diluted earnings per share||$0.59||$2.53||(76.7)|
What happened this quarter?
- The acquisition of EHG contributed $767.5 million to Thor Industries' $2.51 billion top line, helping the company set a record for third-quarter sales.
- North American towable segment sales dropped 23% to $1.24 billion, and North American motorized segment sales also decreased by 23%, to $459.2 million. While independent dealers continue to rationalize the inventory on their lots to adjust to lower retail demand, Thor indicated on Monday that it foresees a resumption of growth in North America in 2020.
- Total North American backlog between the towable and motorized segments decreased by 30% to $1.4 billion, following a similar year-over-year comparative decline in the second quarter. I discussed my belief in March that Thor's North American backlog had neared an equilibrium point at roughly $1.45 billion; management stated in Monday's press release that the current backlog is returning to "more normalized levels." For a few quarters then, $1.4 billion may remain a sweet spot for unfilled orders. Adding in a $687.4 million European backlog from the EHG transaction, Thor's total order book now stands at roughly $2.1 billion.
- Thor continues to adjust its production schedules to match its manufacturing output to dealer order flow and ultimately, current retail RV appetite. The company has reduced unit production rates at a number of its North American plants have, and moved others to four-day workweeks, with the option of given them an extended holiday shutdown during the fiscal fourth quarter (i.e., around the Fourth of July).
- Net income and earnings per share were impacted by a purchase accounting method adjustment to EHG's inventory cost of $61.4 million, as well as $13.4 million in transaction closing expenses. In addition, Thor incurred ongoing incremental costs related to EHG of $12.8 million in amortization expense and $35.4 million in interest expense. In total, EHG-related acquisition and incremental expenses affected comparable net income by $123 million.
- Thor announced that it's already paid down $255 million of the $2.4 billion in debt undertaken to finance the EHG purchase, including the entire balance on its $100 million asset-based lending facility, and $155 million in term loans.
What management had to say
Within the earnings press release, Thor CEO Bob Martin touched on both the EHG deal (which made it the world's largest RV manufacturer) and the still-difficult but improving conditions in North America:
EHG made a significant contribution to our top-line results for the quarter, and as we move through some of the transitional costs, we look forward to EHG's meaningful contribution to our bottom line as well. This transformational acquisition is a critical first step in our long-term strategic plan to expand outside of the North American market. Beyond the acquisition, we have seen improvements in the operating results of our North American segments, reflecting a more stable environment as we finish the fiscal year
As mentioned above, Thor's management believes that North American demand should revive in the 2020 fiscal year. In Europe, dealer inventory levels are elevated in spots, but on the whole, they appear suited for seasonal consumer demand, and, as Martin noted, dealer inventory is "progressing toward more normalized levels."
The company didn't release any goals on acquisition synergies, but management did state an intention to dive in and begin realizing the full value of EHG to bolster cash flow and improve the organization's overall return on investment for shareholders. Shareholders seemed pleased with Thor's European foray: The stock price rose 4.4% in Monday trading following the earnings release.