THOR INDUSTRIES INC - Quarter Report: 2005 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.

Yes þ  No o

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

Yes þ  No o

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

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Table of Contents

PART I — Financial Information

See notes to consolidated financial statements

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THOR INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2005 AND 2004

     See notes to consolidated financial statements

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THOR INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2005 AND 2004

See notes to consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has three reportable segments: Recreation Vehicles — Towable and Motorized, and Buses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company purchased and retired 323,200 shares of treasury stock in the first quarter of fiscal 2005 at an average cost of $26.27 per share. This retirement resulted in a reduction of $32,320 in common stock and $458,345 in additional paid-in-capital and $7,999,600 in retained earnings. In addition, the Company purchased 256,000 shares of Thor common stock in April 2005 at a cost of $7,031,014 to be held as Treasury shares. Of the 256,000 shares, 90,000 shares at a cost of $2,430,495 did not settle until May, and therefore, are recorded in accounts payable. The average cost per share was $27.46.

The Company classifies its debt and equity securities as trading or available-for-sale. Trading securities are bought and held principally for the purpose of selling them in the near term. All securities not classified as trading are classified as available-for-sale. During the second quarter of fiscal 2004, the Company decided to begin actively trading its equity securities
previously classified as available-for-sale securities.

Trading and available-for-sale investments are recorded at fair market value. Unrealized holding gains and losses on trading investments are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale investments are excluded from earnings and are reported as a separate component of accumulated other comprehensive income, net of income taxes until realized. Realized gains and losses from the sale of available-for-sale investments are determined on a specific-identification basis. Dividend and interest income are recognized when earned.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company also holds certain corporate investments that are classified as trading
investments and reported as Investments — short term.

On September 2, 2003, we 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 $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.

The following table summarizes the allocation of the fair values of the assets acquired and liabilities assumed at the date of acquisition:

The purchase price allocation includes $640,000 of non-compete agreements, which will be amortized over seven to ten years, $10,302,290 of goodwill and $3,600,000 for trademarks that are not subject to amortization. The Company has made an election under Section 338 of the Internal Revenue Code allowing it to deduct non-compete, goodwill and trademarks for tax purposes.

The primary reasons for the acquisition include Damon’s future earnings potential, its fit with our existing operations, its market share, and its cash flow. The results of operations for Damon are included in Thor’s operating results beginning September 3, 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On November 1, 2004, we completed our acquisition of the stock of DS Corp. dba CrossRoads RV, an Indiana corporation (“CrossRoads”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of October 28, 2004, by and among our company, Thor Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of our company (“Acquisition Subsidiary”), CrossRoads and the securityholders of CrossRoads. CrossRoads is engaged in the business of manufacturing towable recreation vehicles. Under the terms of the Merger Agreement, Acquisition Subsidiary merged with and into CrossRoads, and CrossRoads continued as the surviving corporation (the “Merger”). In addition, as part of the Merger, certain members of management of CrossRoads entered into non-competition agreements with our company.

The purchase price paid by us for the acquisition of the stock of CrossRoads was $28,021,951, which was payable in cash and was funded from our cash on hand.

The components of other intangible assets are as follows:

Non-compete agreements are amortized on a straight-line basis.

Estimated Amortization Expense:

The change in the carrying amount of goodwill and trademarks for the period ended April 30, 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of April 30, 2005, Goodwill and Trademarks by segments totaled as follows:

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.

In the second quarter of 2004, the Company declared a two-for-one common stock split that was distributed to shareholders of record as of January 5, 2004. All share and per share amounts have been retroactively adjusted for the effect of the common stock split.

Our principal commercial commitments at April 30, 2005 are summarized in the following chart:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company records repurchase and guarantee reserves based on prior experience and known current events. The combined repurchase and recourse reserve balances are approximately $1,204,000 and $546,000 as of April 30, 2005 and July 31, 2004, respectively.

$1,033,000 of the losses due to repurchase for the nine months ended April 30, 2005, was a repurchase from a single dealer. The sales value of units repurchased from that dealer was $5,463,000.

In December 2002, The Financial Accounting Standards Board “(FASB)” issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This Statement amends the disclosure requirements of Statement 123, “Accounting for Stock-Based Compensation,” to require disclosure in interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results.

As an alternative to accounting for stock-based compensation under APB No. 25, SFAS No. 123, establishes a fair-value method of accounting for employee stock options. The Company used the Black-Scholes option pricing model to estimate the grant date fair value of its option grants. The fair value is recognized over the option vesting period which is three years. Had compensation cost for these grants been determined in accordance with SFAS No. 123, the Company’s net income and earnings per common share would have been:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The assumptions used in determining the fair value of options granted during the nine months of fiscal 2005 are as follows:

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151 (“SFAS 151”), Inventory Costs, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS 151 will have a material impact on our financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values. This standard is effective for the Company August 1, 2005 and the Company may elect to use either the modified-prospective or modified-retrospective transition method. Under the modified prospective method, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the income statement. Under the modified retrospective approach, the previously reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS 123 amounts in the income statement. We are currently evaluating the impact of this standard and its transition alternatives, which may impact the Company’s results of operations in the first quarter of fiscal 2006 and thereafter.

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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 midsize buses in North America. Our position in the travel trailer and fifth wheel segment of the industry (towables), with the acquisition of CrossRoads RV, gives us an approximate 31% market share. In the motorized segment of the industry we have an approximate 11% market share. Our market share in small and mid-size buses is approximately 29%. 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 profitability in North America 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 entered 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 provide for rapid payback. We have invested significant capital to modernize our plant facilities and have expended approximately $54 million for that purpose in the past two fiscal 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, risk management, and internal audit functions. 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, operated by E-Trade, which provides retail credit to ultimate purchasers of any recreation vehicle purchased from a Thor dealer. This retail credit on recreation vehicles is not limited to Thor product only.

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

Trends and Business Outlook

The most important determinant of demand for Recreation Vehicles is demographics. The baby boomer population 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 48% by 2010, or five times as fast as the expected 9% growth in the total United States population. We believe a primary indicator of the strength of the recreation vehicle industry is retail RV sales, which we closely monitor to determine industry trends.

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.

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.

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

Economic or industry-wide factors affecting our recreation vehicle business include raw material costs of commodities used in the manufacture of our product. Material cost is the primary factor determining our cost of goods sold. During fiscal 2005, we increased product prices on our RV segments approximately 1.5% to offset increased raw material costs. Price increases for buses were less than 1% due to continued soft market conditions and competitive pressures. 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.

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

CONSOLIDATED

($ in 000)

Net sales and gross profit for the third quarter of fiscal 2005 were up 12.9% and 4.3% respectively compared to the third quarter of fiscal 2004. Income before income taxes for the third quarter of fiscal 2005 was down 3% compared to the third quarter of fiscal 2004. Selling, general and administrative expenses for the third quarter of fiscal 2005 increased 15.4% compared to the third quarter of fiscal 2004. The specifics on changes in net sales, gross profit, general and administrative expense and income before income taxes will be addressed in the segment reporting.

Corporate costs in selling, general and administrative were $3,345 for the third quarter of fiscal 2005 compared to $4,016 in fiscal 2004. This $671 reduction is primarily the result of lower legal costs and insurance claims in fiscal 2005 of approximately $1,440 offset by increased costs of Sarbanes-Oxley compliance of approximately $462.

Net sales and income before income taxes for the third quarter of fiscal 2005 included net sales and income before income taxes of $29,721 and $2,913 respectively, for CrossRoads RV acquired November 1, 2004. The overall effective tax rate for the third quarter of fiscal 2005 was 36.8% compared to 39.0% for fiscal 2004. The primary reason for the lower effective tax rate in the third quarter of 2005 is lower state tax rates and increased extra-territorial income tax exclusion on related foreign sales increases.

Segment Reporting

RECREATION VEHICLES

Analysis of Percentage Change in Net Sales Versus Prior Year

TOWABLE RECREATION VEHICLES

The increase in towables net sales resulted from a combination of an increase in both average price per unit and unit shipments and our acquisition of CrossRoads RV. The increase in units sold of approximately 12.1% would be a 5.2% increase excluding CrossRoads. The overall industry increase in towables on a comparable basis was 7.6%. Increases in the average price per unit resulted from the combination of price increases and product mix.

Towables gross profit percentage decreased to 14.6% of net sales for fiscal 2005 from 16.3% of net sales for fiscal 2004. The primary factors for the 1.7% reduced gross margin in 2005 were a $3.7 million decline in gross margin at our Thor California operation and a $1.4 million recall provision at our Keystone operation. Selling, general and administrative expenses increased to 5.8% of net sales for fiscal 2005 from 5.5% of net sales for fiscal 2004. The primary factor for the increase in fiscal 2005 as a percentage of sales were various sales promotion expenses due to competitive sales pressure.

Towables income before income taxes decreased to 8.9% of net sales for fiscal 2005 from 10.8% of net sales for fiscal 2004. The primary factors for this reduction were 1.7% reduction in gross margin as mentioned earlier and the increase in selling general and administrative expense as noted above.

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

MOTORIZED RECREATION VEHICLES

The decrease in motorized net sales resulted primarily from reduced unit sales. The decrease in units sold of approximately 17.5% is in line with the overall market decrease in motorhomes of 15.1%. Increases in the average price per unit resulted from the combination of price increases and product mix.

Motorized gross profit percentage decreased to 9.5% of net sales from 10.3% of net sales for fiscal 2004. The primary factor for the reduced gross margin in 2005 was lower unit sales.

Motorized income before income taxes decreased to 4.5% of net sales for fiscal 2005 from 6.0% of net sales for fiscal 2004. The reduction was due primarily to reduced unit sales.

BUSES

Analysis of Percentage Change in Net Sales Versus Prior Year

The increase in buses net sales resulted from a combination of an increase in both average price per unit and unit shipments. The unit sales increases are indicative of an expected replacement cycle on our buses the majority of which have a 5 year useful life. In addition, replacement of many older buses were delayed due to decline in the travel industry subsequent to the 9/11 terrorist attacks.

Buses gross profit percentage increased to 8.6% of net sales for fiscal 2005 from 8.0% of net sales for fiscal 2004 due to leveraging of fixed production costs due to a 27.9% volume increase and lower warranty costs.

Buses income before income taxes increased to 4.0% of net sales for fiscal 2005 from 2.7% for fiscal 2004. The primary reason for the increase is due to increased gross margins as explained above.

Nine Months Ended April 30, 2005 vs.

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