THOR INDUSTRIES INC - Quarter Report: 2005 January (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.

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Table of Contents

PART I - Financial Information

THOR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

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THOR INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 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 SIX MONTHS ENDED JANUARY 31, 2005 AND 2004

See notes to consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 30% 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. Senior corporate management interacts regularly with operating management to assure that corporate objectives are understood clearly and are monitored appropriately.

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

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 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.

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.

Quarter Ended January 31, 2005 vs.
     Quarter Ended January 31, 2004

Net sales for the second quarter of fiscal 2005 were up 25.9% to $537,041,204 compared to $426,479,447 for the second quarter of fiscal 2004. Income before income taxes in fiscal 2005 was $32,908,479 a 20% increase from $27,425,762 in fiscal 2004. Included in the second quarter of fiscal 2005 are sales of $14,435,024 and income before income taxes of $833,642 for CrossRoads RV acquired November 1, 2004. The increase in income before income taxes of $5,482,717 in the second quarter of fiscal 2005, compared to the same period of fiscal 2004, is the result of the following items. $833,642 income generated by CrossRoads RV, $7,869,219 income from increased recreation vehicle revenues, and reduced Corporate costs of $670,236 due primarily to favorable settlement of certain insurance claims accrued in prior periods. Offsetting these items was reduced income of $2,076,115 by our bus companies and $1,814,265 income from the sale of certain equity securities in fiscal 2004.

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

Recreation vehicle revenues increased in fiscal 2005 by 28% to $479,026,895 compared to $374,222,141 in fiscal 2004, and accounted for 89.2% of total company revenues compared to 87.7% in fiscal 2004. Recreation vehicle order backlogs of $313,565,000 at January 31, 2005, were down 22.6% compared to the same period last year. Bus revenues in fiscal 2005 increased by 11% to $58,014,309 compared to $52,257,306 in fiscal 2004 and accounted for 10.8% of the total company revenues compared to 12.3% in fiscal 2004. Bus vehicle order backlogs of $135,817,000 at January 31, 2005 were up 44.4% compared to the same period last year.

Gross profit as a percentage of sales in the second quarter of fiscal 2005 increased to 12.6% from 12.5% for the same period last year. The increase in gross profits for the second quarter of fiscal 2005 is due primarily to reduced warranty costs and increased recreation vehicle revenues. Our bus segment gross profits have been affected by continuing discounts offered to achieve bus contracts in a very competitive market place.

Selling, general and administrative expense and amortization of intangibles were $35,762,252 compared to $28,728,268 for the same period in fiscal 2004. As a percentage of sales, selling, general and administrative expense was 6.7% in fiscal 2005 and fiscal 2004. Amortization of intangibles was $269,679 in fiscal 2005 compared to $201,562 in fiscal 2004. The additional selling, general and administrative costs are due primarily to the increased costs associated with the 25.9% increase in revenue.

The overall effective tax rate was 37.3% for fiscal 2005 compared to 36.1% for fiscal 2004. The fiscal 2004 tax rate included an increased tax benefit for research and development credits.

The following table represents the results of our reporting segments for the quarter ended January 31, 2005 and 2004:

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

Six Months Ended January 31, 2005 vs.
     Six Months Ended January 31, 2004

Net sales for the six months of fiscal 2005 were up 27.6% to $1,169,767,296 compared to $916,906,559 for the six months of fiscal 2004. Income before income taxes in fiscal 2005 was $88,924,629 a 33.7% increase from $66,506,510 in fiscal 2004. Included in the six months of fiscal 2005 are sales of $14,435,024 and income before taxes of $833,642 for CrossRoads RV acquired November 1, 2004. The increase in income before income taxes of $22,418,119 in the six months of fiscal 2005, compared to the same period of fiscal 2004, is the result of the following items. $833,642 income generated by CrossRoads RV, $25,919,474 income from increased recreation vehicle revenues, and reduced Corporate costs of $1,162,410, due primarily to favorable settlement of certain insurance claims accrued in prior periods. Offsetting these items was reduced income of $3,683,143 by our bus companies and $1,814,265 income from the sale of certain equity securities in fiscal 2004.

Recreation vehicle revenues increased in fiscal 2005 by 31.5% to $1,061,323,085 compared to $807,193,484 in fiscal 2004, and accounted for 90.7% of total company revenues compared to 88.0% in fiscal 2004. Bus revenues in fiscal 2005 decreased by 1.2% to $108,444,211 compared to $109,713,075 in fiscal 2004 and accounted for 9.3% of the total company revenues compared to 12.0% in fiscal 2004.

Gross profit as a percentage of sales in the six months of fiscal 2005 increased to 13.6% from 13.0% for the same period last year. The increase in gross profits for the six months of fiscal 2005 is due primarily to reduced warranty costs and increased recreation vehicle revenues. Our bus segment gross profits have been affected by continuing discounts offered to achieve bus contracts in a very competitive market place.

Selling, general and administrative expense and amortization of intangibles were $72,042,755 compared to $56,936,979 for the same period in fiscal 2004. As a percentage of sales, selling, general and administrative expense was 6.2% in fiscal 2005 and fiscal 2004. Amortization of intangibles was $471,241 in fiscal 2005 compared to $395,504 in fiscal 2004. The additional selling, general and administrative costs are due primarily to the increased costs associated with the 27.6% increase in revenue.

The overall effective tax rate was 37.4% for fiscal 2005 compared to 38.0% for fiscal 2004.

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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 six months ended January 31, 2005 and 2004:

Financial Condition and Liquidity

As of January 31, 2005, we had $84,296,571 in cash, cash equivalents and short-term investments, compared to $199,166,146 on July 31, 2004. The decrease in cash equivalents is related to $31,000,000 in capital expenditures, the $28,000,000 acquisition of CrossRoads, and seasonal increases in inventory and receivables. 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”.

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 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”.

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

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

Working capital at January 31, 2005 was $250,904,011 compared to $256,198,030 on July 31, 2004. 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 30, 2005. There were no borrowings on this line of credit at January 31, 2005. 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 $31,121,000 for the six months ended January 31, 2005 were primarily for planned purchases of leased buildings of approximately $10,100,000 and planned capacity expansions of approximately $21,021,000 in our RV companies.

The Company anticipates additional capital expenditures in fiscal 2005 of approximately $19,444,000. These expenditures will be made primarily to expand our RV companies and for replacement of machinery and equipment to be used 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 Goodwill, Trademarks and Long-Lived Assets

We at least annually review the carrying value of its goodwill and trademarks with indefinite useful lives. Long-lived assets, identifiable intangibles that are amortized, goodwill and trademarks with indefinite useful lives are also reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable from undiscounted future cash flows. 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 and actuarial information. We maintain excess liability insurance aggregating $5,000,000 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.

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

Warranty

We provide 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. Controls and Procedures

As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedure, as required by Exchange Act Rule 13a-15. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures will prevent all error 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

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

can provide absolute assurance that all control issues and instances of fraud, if any, within the 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 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. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls over financial reporting subsequent to the date the Company carried out its evaluation.

PART II - Other Information

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

ITEM 6. Exhibits

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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.

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