Thor Industries - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                               No þ

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

See notes to consolidated financial statements

See notes to consolidated financial statements

See notes to consolidated financial statements

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

Estimated Amortization Expense:

There was no change in the carrying amount of goodwill and trademarks for the three month period ended October 31, 2005.

As of October 31, 2005, Goodwill and Trademarks by segments totaled as follows:

Stock Options — The Company’s Board of Directors approved the 1999 Stock Option Plan. 2,000,000 shares were authorized under the Plan. Options expire 10 years from the date of grant and are vested evenly over 3 to 4 years from the date of grant.

A summary of option activity under the 1999 Stock Option Plan for the three months ended October 31, 2005 is as follows:

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience. The fair value of the stock options is based upon the market price of the underlying common stock as of the date of the grant, reduced by the present value of estimated future dividends, and risk-free interest rates. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatilities are based on the historical volatility of our stock. The expected term of the options represents the period of time that options are granted are outstanding and is estimated using historical exercise and termination behavior.

The amount expensed in the current period under SFAS No. 123R is consistent with prior proforma disclosures under SFAS 123.

For the three months ended October 31, 2005, the Company recorded expense of $198 for stock incentive awards. At October 31, 2005, there was $1,156 of total unrecognized compensation costs related to stock options that is expected to be recognized over a weighted average period of 1.5 years.

Cash received from stock option exercises for the three months ended October 31, 2005 was $43. The total intrinsic value of stock options exercised was $70.

Exercises of options are satisfied with the issuance of new shares from the authorized share pool.

Stock Awards — The Company has a stock award plan which allows for the granting of up to 600,000 shares of restricted stock to selected executives. Restrictions expire 50% after 5 years following the date of issue and the balance after six years.

A summary of stock award activity under this Plan for the three months ended October 31, 2005 is as follows:

For the three months ended October 31, 2005, the Company recorded expense of $62 for restricted stock awards. At October 31, 2005, there was $686 of total unrecognized compensation costs related to restricted stock awards that is expected to be recognized over a weighted average period of 3.1 years.

The total fair value of restricted shares vested during the period is $269.

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 13% market share. Our market share in small and mid-size buses is approximately 44%. 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 through product innovation, service to our customers, manufacturing quality products, improving our facilities and opportunistic acquisitions. 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 expended approximately $48,000 for that purpose in fiscal 2005.

Our business model includes decentralized operating units and we compensate operating management primarily with cash 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 GE Consumer Finance, 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 towable recreation vehicles, motorized recreation vehicles and buses.

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 five times as fast as the expected 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. Travel trailer sales were up substantially this quarter as a result of the hurricanes and sale of hurricane relief units being used as temporary emergency living quarters.

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 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.

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. Additional increases in raw material costs would impact our profit margins negatively if we were unable to raise prices for our products by corresponding amounts.

Three Months Ended October 31, 2005 vs.
     Three Months Ended October 31, 2004

Net sales and gross profit for the first quarter of fiscal 2006 were up 20.3% and 23.0% respectively compared to the first quarter of fiscal 2005. Income before income taxes for the first quarter of fiscal 2006 was up 24% compared to the first quarter of fiscal 2005. Selling, general and administrative expenses for the first quarter of fiscal 2006 increased 22.2% compared to the first quarter of fiscal 2005. The specifics on changes in net sales, gross profit, general and administrative expense and income before income taxes are addressed in the segment reporting below

Corporate costs in selling, general and administrative were $2,346 for the first quarter of fiscal 2006 compared to $704 in fiscal 2005. This increase of $1,642 is primarily the result of increased insurance costs, legal expenses and cost of compliance with Sarbanes-Oxley.

Net sales and income before income taxes for the first quarter of fiscal 2006 included net sales and income before income taxes of $37,636 and $3,990 respectively, for CrossRoads RV acquired November 1, 2004 and net sales and loss before income taxes of $10,674 and $294 respectively, for Goshen Coach acquired May 27, 2005. The overall effective tax rate for the first quarter of fiscal 2006 was 37.5% compared to 37.4% for fiscal 2005.

Analysis of Percentage Change in Net Sales Versus Prior Year

The increase in towables net sales resulted primarily from a combination of an increase in unit shipments and our acquisition of CrossRoads RV. The increase in units sold of approximately 22.1% would have been a 12.8% increase excluding CrossRoads. The overall industry increase in towables for August and September of 2005 was 30.1%. Decreases in the average price per unit resulted from product mix. We estimate that approximately $75,000 of net sales were related to Hurricane relief units which were basic temporary emergency living units sold through our dealer network. We have no industry statistics for the total Hurricane relief units sold.

Towables gross profit percentage increased to 17.0% of net sales for fiscal 2006 from 16.3% of net sales for fiscal 2005. The primary factor for the 26.8% increase in gross profit was the 21.1% increase in net sales. Selling, general and administrative expenses were 5.5% of net sales for fiscal 2006 and 5.4% of net sales for fiscal 2005.

Towables income before income taxes increased to 11.5% of net sales for fiscal 2006 from 10.8% of net sales for fiscal 2005. The primary factor for this increase was our 21.1% revenue increase.

The increase in motorized net sales resulted from a combination of an increase in both average price per unit and unit shipments. The increase in units sold of approximately 1.4% outperformed the overall market decrease in motorhomes of 15.0% for the two month period August and September of 2005. Increases in the average price per unit resulted from the combination of price increases and product mix.

Motorized gross profit percentage increased to 10.3% of net sales from 10.2% of net sales for fiscal 2005. The primary factor for the increased gross profit in 2006 was increased unit sales and mix of products. Selling, general and administrative expenses were 4.7% of net sales for fiscal 2006 and 4.6% to net sales for fiscal 2005.

Motorized income before income taxes was 5.6% of net sales for fiscal 2006 and 2005.

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 and our acquisition of Goshen Coach. The increase in units sold of approximately 62.9% would have been 22.0% excluding Goshen Coach. 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 decreased to 7.1% of net sales for fiscal 2006 from 9.5% of net sales for fiscal 2005 due to continuing discounts offered to achieve bus contracts in a very competitive market place. Selling, general and administrative expenses were 4.4% of net sales for fiscal 2006 and 7.4% for fiscal 2005. The reduction in selling, general and administrative expenses as a percentage of net sales is primarily due to a 56.6% increase in bus revenues.

Buses income before income taxes increased to 2.5% of net sales for fiscal 2006 from 2.2% for fiscal 2005. The primary reason for the increase is increased revenues of 56.6%.

ORDER BACKLOG
$(in 000’s)

As of October 31, 2005, we had $193,621 in cash, cash equivalents and short-term investments, compared to $208,815 on July 31, 2005. We classify our debt and equity securities as trading 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, auction rate securities and corporate bonds, are generally bought and held for sale in the near term. Securities are carried at fair market value. Realized and unrealized gains and losses on trading securities are included in earnings.

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

Working capital at October 31, 2005 was $314,170 compared to $275,228 on July 31, 2005. We have no long-term debt. We currently have a $30,000 revolving line of credit which bears interest at negotiated rates below prime and expires on November 30, 2005. We anticipate renewing the line of credit. There were no borrowings on this line of credit during the period ended October 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 $7,755 for the three months ended October 31, 2005 were primarily for planned expansions and improvements of $6,790 at our recreation vehicle facilities and $965 for our bus operations, primarily at our new Goshen Coach facility.

The Company anticipates additional capital expenditures in fiscal 2006 of approximately $30,000. These expenditures will be made primarily for planned capacity expansions and for replacement of machinery and equipment to be used in the ordinary course of business and expansions primarily in our recreation vehicle segment.

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:

We at least annually review the carrying value of 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 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.

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 $10,000,000 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.

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.

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.

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.

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 procedures, as required by Exchange Act Rule 13a-15(f). 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 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, controls 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 changes in the Company’s internal control over financial reporting during the quarter ended October 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.