THOR INDUSTRIES INC - Quarter Report: 2004 April (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

THOR INDUSTRIES, INC.

Registrant’s telephone number, including area code: (937) 596-6849

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

PART I — Financial Information
ITEM 1. Financial Statements

THOR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

THOR INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2004 AND 2003

See notes to consolidated financial statements

THOR INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2004 AND 2003

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Four Winds. The bus segment consists of the following operating companies that have been aggregated: Champion Bus, ElDorado California and ElDorado Kansas. Previously, the Company was organized into two reportable segments, total recreation vehicles and buses. Previous segment information has been restated to conform to the current reportable segment presentation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We were founded in 1980 and have grown to be the largest manufacturer of Recreation Vehicles (“RV’s”) and small and mid-size buses in North America. Our position in the towables segment of the industry gives us an approximate 30.2% market share and in the motorized segment of the industry an approximate 10.2% market share. Our market share in small and mid-size buses is approximately 35%. We have recently entered the 40-foot bus market with a new facility in Southern California designed for that product as well as our existing 30 foot and 35 foot buses.

Our growth has been internal and by acquisition. Our strategy has been to increase our market share in North America and our profitability in the recreation vehicle industry and in the bus business by improving our facilities, product innovation, opportunistic acquisitions and manufacturing quality products. We have not purchased unrelated businesses and have no plans to do so in the future.

We rely on internally generated cash flows from operations to finance our growth although we may borrow to make an acquisition if we believe the incremental cash flows will assure rapid payback. We have invested significant capital to modernize our plant facilities and have expended approximately $50 million for that purpose in the past two years.

Our business model includes decentralized operating units and we compensate operating management based upon profitability of the unit which they manage. Our corporate staff provides financial management, centralized purchasing services, insurance, legal and human resources. Senior corporate management interacts regularly with operating management to assure that corporate objectives are understood clearly and are monitored appropriately.

Our RV products are sold to dealers who, in turn, retail those products. Our buses are sold through dealers to municipalities and private purchasers such as rental car companies and hotels. We do not directly finance dealers but do provide repurchase agreements in order to facilitate the dealers obtaining floor plan financing. We have a joint venture, Thor Credit, which provides retail credit to ultimate purchasers for recreation vehicles.

For management and reporting purposes we segment our business into Recreation Vehicles – Towables and Motorized – and Buses.

Trends and Business Outlook

We believe the primary indicator of the strength of the recreation vehicle industry is retail sales, which we closely monitor to determine industry trends. Among the important determinants of demand for RV’s are demographics. The baby boomer population (age 55-65) is now reaching retirement age and retirees are a large market for our products. The baby boomer population in the United States is expected to grow by 48% between today and 2010, or five times the expected 9% growth in the total United States population. In addition, in the post-September 11, 2001 environment, a recreation vehicle vacation has become an attractive leisure activity compared to an overseas vacation, which involves the hassle of airline travel and the terrorism concerns.

Government entities are primary users of our buses. Demand in this segment is subject to fluctuations in government spending on transit. In addition, hotel and rental car companies are also major users of our small and mid-size buses and therefore airline travel is an important indicator for this market. The majority of our buses have a 5-year useful life, so that many of the buses we sold in 1999 and 2000 will need to be replaced.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Fuel price fluctuations have not historically influenced our sales materially and we do not anticipate that modest increases in interest rates will have a significant negative effect on such sales. Retail sales in the recreation vehicle industry have been strong due to low inflation, favorable interest rates, population trends and concerns about the safety of international travel. All segments of our recreation vehicle business experienced record sales due to exceptional industry strength. To satisfy that demand, we hired 660 employees since January 2004, increasing our employee total by more than 10%.

Economic or industry-wide factors affecting our recreation vehicle business include raw material costs of commodities used in the manufacture of our product. Materials cost is the primary factor determining our cost of goods sold. In March 2004, we increased product prices on our RV’s segment by approximately 3% to offset increases in raw materials. Additional increases in raw material costs would impact our profit margins if we were unable to raise prices for our products by corresponding amounts without negatively affecting sales.

Quarter Ended April 30, 2004 vs.
     Quarter Ended April 30, 2003

Net sales for the third quarter of fiscal 2004 were $645,690,437 compared to $412,749,534 for the third quarter of fiscal 2003. Income before income taxes in fiscal 2004 was $53,744,819, a 61.3% increase from $33,311,783 in fiscal 2003. Included in the third quarter of fiscal 2004 are sales of $67,621,736 and income before income taxes of $4,579,774 for Damon Corporation acquired on September 2, 2003. The increase in income before income taxes of $20,433,036 in the third quarter of fiscal 2004 is the result of the following items: $4,579,774 of income generated by Damon Corporation and $18,580,373 of income from increased recreation vehicle revenues. Offsetting these increases were reduced income of $1,125,093 by our bus companies, a $12,816 loss from the sale and reclassification of certain equity securities previously held as investments available-for-sale, and increased corporate costs of $1,589,202 primarily due to funding of insurance reserves and legal and professional fees incurred in defense of claims. Thor California, which incurred losses in the first two quarters of 2004, was profitable in the third quarter of 2004.

Other income increased by $190,725 due primarily to increased profits of Thor Credit Corporation, our joint venture retail finance company for recreation vehicles.

Recreation vehicle revenues increased in fiscal 2004 by 65.4% to $594,156,952 compared to $359,180,794 in fiscal 2003, and accounted for 92% of total company revenues compared to 87% in fiscal 2003. Recreation vehicle backlogs of $478,952,000 (includes $34,570,000 for Damon Corporation) at April 30, 2004, were up 177.3% compared to the same period last year. Excluding Damon Corporation, recreation vehicle backlogs were $ 444,382,000 at April 30, 2004, up 157.3% compared to the same period last year. Bus revenues in fiscal 2004 decreased by 3.8% to $51,533,485 compared to $53,568,740 in fiscal 2003 and accounted for 8% of the total company revenues compared to 13% in fiscal 2003. Bus vehicle order backlog of $121,038,000 at April 30, 2004 was up 24.3% compared to the same period last year.

Gross profit as a percentage of sales in the third quarter of fiscal 2004 increased to 14.0% from 13.8% for the same period last year. The increase in gross profits for the third quarter of fiscal 2004 is due primarily to overall price increases of approximately 3% and cost reductions in manufacturing overhead and warranty costs. We continue to incur material cost increases in commodities, which as mentioned earlier have resulted in price increases in our products. We continue to review these cost increases and take necessary action to preserve our gross margins both in the form of price increases and reducing costs. Our bus segment gross profits have been affected by discounts offered to achieve bus contracts in a very competitive market place.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Selling, general and administrative expense and amortization of intangibles were $37,410,857 compared to $24,556,771 for the same period in fiscal 2003. As a percentage of sales, selling, general and administrative expense was 5.8% in fiscal 2004 compared to 5.9% in fiscal 2003. Amortization of intangibles was $201,000 in fiscal 2004 compared to $180,000 in fiscal 2003. This increase is due to certain non-compete expenses associated with the Damon Corporation acquisition. The additional selling, general and administrative costs are due primarily to the increased costs associated with the 56.4% increase in revenue.

The overall effective tax rate was 39.0% for fiscal 2004 compared to 39.5% for fiscal 2003.

The following table represents the results of our reporting segments for the quarter ended April 30, 2004 and 2003:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Nine Months Ended April 30, 2004 vs.
     Nine Months Ended April 30, 2003

Net sales for the nine months of fiscal 2004 were $1,562,596,996 compared to $1,148,909,412 for the same period last year. Income before income taxes in fiscal 2004 was $120,251,329, a 31.4% increase from $91,506,187 in fiscal 2003. Included in fiscal 2004 are sales of $157,366,626 and income before taxes of $8,979,793 for Damon Corporation acquired on September 2, 2003. The increase in income before income taxes of $28,745,142 for the nine months of fiscal 2004 is the result of the following items. $8,979,793 of income generated by Damon Corporation, $19,650,432 of income from increased recreation vehicle revenues, $1,801,449 of income from the gain on the sale and reclassification of certain equity securities previously held as investment available-for-sale, and no impairment losses versus a $1,580,334 loss last year. Offsetting these increases in income before income taxes was reduced income of $912,853 generated by our bus companies, and increased corporate costs of $2,354,013 primarily due to funding insurance reserves and legal and professional fees incurred in defense of claims.

Other income increased by $801,389 due primarily to a one time gain on a sale of excess land at our ElDorado Kansas facility for approximately $222,000 and increased profits of Thor Credit, our joint venture retail finance company for recreation vehicles.

Recreation vehicle revenues increased in the nine months of fiscal 2004 by 41.9% to $1,401,350,436 compared to $987,327,907 in fiscal 2003 and accounted for 90% of total company revenues compared to 85.9% in fiscal 2003. Bus revenues in fiscal 2004 decreased by .2% to $161,246,560 compared to $161,581,505 in fiscal 2003 and accounted for 10.3% of the total company revenues compared to 14.1% in fiscal 2003.

Gross profit as a percentage of sales for the nine months of fiscal 2004 decreased to 13.4% from 14.0% for the same period last year. This reduction in gross margin in 2004 is the result of a competitive pressure in the recreation vehicle market in the first two quarters of 2004, losses at our Thor California operation, and cost increases in aluminum, copper, lumber, plywood and steel. Price increases during our third quarter of 2004 on recreation vehicles have improved our margins as noted in the discussion of the quarter ended April 30, 2004 versus April 30, 2003.

Selling, general, and administrative expenses and amortization of intangibles were $94,347,836 compared to $69,991,832 for the same period in fiscal 2003. As a percentage of sales, selling, general and administrative expense was 6.0% in fiscal 2004 compared to 6.1% in fiscal 2003. Amortization of intangibles increased in fiscal 2004 to $597,066 compared to $536,000 in fiscal 2003. This increase is due to certain non-compete expenses associated with the Damon Corporation acquisition. The additional selling, general and administrative costs are due primarily to the increased costs associated with the 36.0% increase in revenue.

The overall effective tax rate was 38.5% for the nine months of fiscal 2004 compared to 38.4% for fiscal 2003.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table represents the results of our reporting segments for the nine months ended April 30, 2004 and 2003:

Financial Condition and Liquidity

As of April 30, 2004, we had $109,489,860 in cash, cash equivalents and short-term investments, compared to $172,233,135 on July 31, 2003. We classify our debt and equity securities as trading or available-for-sale securities. The former are carried on our consolidated balance sheets as “Cash and cash equivalents” or “Investments – short term”. The latter are carried on our consolidated balance sheet as “Investments – investments available-for-sale”.

On September 2, 2003, Thor acquired 100% of the common stock of Damon Corporation (“Damon”). Damon is engaged in the business of manufacturing Class A motorhomes and park models. The cash price of the acquisition was approximately $29,618,354, which was paid from internal funds. Immediately after the closing, the Company paid off a $12,972,498 bank debt assumed in connection with the acquisition.

Trading securities, principally investment grade securities composed of asset-based notes, mortgage-backed notes and corporate bonds, are generally bought and held for sale in the near term. All other securities are classified as available-for-sale. In each case, securities are carried at fair market value. Unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses on investments classified as available-for-sale, net of related tax effect, are not included in earnings, but appear as a component of “Accumulated other comprehensive income (loss)” on our consolidated balance sheets until the gain or loss is realized upon the disposition of the investment or if a decline in the fair market value is determined to be other than temporary.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Due to the relative short-term maturity (average 3 months) of our trading securities, we do not believe that a change in the fair market value of these securities will have a significant impact on our financial position or results of future operations.

Working capital at April 30, 2004 was $228,155,791 compared to $190,689,508 on July 31, 2003. We have no long-term debt. We currently have a $30,000,000 revolving line of credit which bears interest at negotiated rates below prime and expires on November 27, 2004. There were no borrowings on this line of credit at April 30, 2004. The loan agreement executed in connection with the line of credit contains certain covenants, including restrictions on additional indebtedness, and requires us to maintain certain financial ratios. We believe that internally generated funds and the line of credit will be sufficient to meet our current needs and any additional capital requirements. Capital expenditures of approximately $19,455,603 for the nine months ended April 30, 2004 were primarily for planned expansions at our Keystone, Dutchmen, Four Winds, and ElDorado National California companies.

The Company anticipates additional capital expenditures in fiscal 2004 of approximately $6,511,000. The major components of these capital expenditures include $3,715,000 at our Keystone facilities, $557,000 at our Four Winds facilities, and approximately $415,000 of capital expenditures at our recently purchased Damon manufacturing operation. The balance of capital expenditures will be for purchasing or replacement of machinery and equipment in the ordinary course of business.

Critical Accounting Principles

The consolidated financial statements of Thor are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We believe that of our accounting policies, the following may involve a higher degree of judgments, estimates, and complexity:

Impairment of Long-Lived Assets

Thor at least annually reviews the carrying value of its long-lived assets held and used and assets to be disposed of, including goodwill and other intangible assets, or when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair values are reasonable; however, changes in estimates of such cash flows and fair values could affect the evaluations.

Insurance Reserves

Generally, we are self-insured for workers’ compensation and group medical insurance. Under these plans, liabilities are recognized for claims incurred, including those incurred but not reported, and changes in the reserves. At the time a workers’ compensation claim is filed, a liability is estimated to settle the claim. The liability for workers’ compensation claims is determined by a third party administrator using various state statutes and reserve requirements. Group medical reserves are funded through a Trust and are estimated using historical claims’ experience. We have a self-insured retention for products liability and personal injury matters of $5,000,000 per occurrence. We have established a reserve on our balance sheet for such occurrences based on historical data. We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims in excess of all our self-insured positions. Any material change in the aforementioned factors could have an adverse impact on our operating results.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Warranty

Thor provides customers of our products with a warranty covering defects in material or workmanship for periods generally ranging from one to two years, with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors we use in estimating the warranty liability include a history of units sold, existing dealer inventory, average cost incurred and a profile of the distribution of warranty expenditures over the warranty period. A significant increase in dealer shop rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize. Management believes that the warranty reserve is adequate; however, actual claims incurred could differ from estimates, requiring adjustments to the reserves. Warranty reserves are reviewed and adjusted as necessary on a quarterly basis.

Forward Looking Statements

This report includes certain statements that are “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company’s expectations. Factors which could cause materially different results include, among others, fuel availability, interest rate increases, increased material costs, the success of new product introductions, the pace of acquisitions and cost structure improvements, competition and general economic conditions. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any change in expectation of the Company after the date hereof or any change in events, conditions or circumstances on which any statement is based except as required by law.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in foreign currency related to its operations in Canada. However, because of the size of Canadian operations, a hypothetical 10% change in the Canadian dollar as compared to the U.S. dollar would not have a significant impact on the Company’s financial position or results of operations. The Company is also exposed to market risks related to interest rates because of its investments in corporate debt securities. A hypothetical 10% change in interest rates would not have a significant impact on the Company’s financial position or results of operations.

ITEM 4. Disclosure Controls and Internal Controls

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) (“Disclosure Controls’) are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our internal control over financial reporting (“Internal Controls”) is a process designed by, or under the supervision of, our President and Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal Controls also include policies and procedures that:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Limitations on the Effectiveness of Controls

Our management, including our President and Chief Executive Officer and our Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

Notwithstanding the foregoing limitations, we believe that our Disclosure Controls and Internal Controls provide reasonable assurances that the objectives of our control system are met.

Quarterly Evaluation of the Company’s Disclosure Controls

As of April 30, 2004, the last day of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our Disclosure Controls. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded, subject to the limitations noted above, that the design and operation of our Disclosure Controls were effective to ensure that material information related to our company which is required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There has been no change in the Company’s internal control over financial reporting during the last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — Other Information

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.