THO

Business Context and Reporting Period

Company: Thor Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2009 (Nine months ended April 30, 2009)
Business Overview: Thor Industries is the largest manufacturer of Recreation Vehicles (RVs) and a major manufacturer of commercial buses in North America. The company operates three reportable segments: Towable Recreation Vehicles, Motorized Recreation Vehicles, and Buses.

Key Financial Metrics

All amounts in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Net sales for the nine months ended April 30, 2009, decreased 47.8% compared to the prior year. The Motorized segment saw the steepest decline at 69.8%, while the Towable segment decreased 52.5%. The Bus segment remained relatively stable with a 1.2% increase.
• Profitability Reversal: The company reported a net loss of $7.6 million for the nine-month period, a sharp contrast to the $87.7 million net income in the same period of 2008. Income before taxes turned from a $140 million profit to a $10.1 million loss.
• Impairment Charges: Significant non-cash charges impacted results, including a $9.7 million goodwill impairment and a $0.6 million trademark impairment, both related to the Motorized segment due to difficult market conditions.
• Margin Compression: Gross profit margins contracted across RV segments due to increased discounts, incentives, and lower absorption of fixed overhead costs resulting from reduced production volumes.
• Investment Volatility: The company recorded a net loss of $1.1 million related to auction rate securities (ARS), offset by a benefit from Put Rights associated with a settlement with UBS.

Outlook, Risks, and Management Commentary

• Market Outlook: Management anticipates weakness to continue for the remainder of 2009 due to tight credit markets, low consumer confidence, and high fuel prices. The Motorized segment is expected to be more severely impacted than the Towable segment.
• Cost Reductions: The company has scaled back activities and reduced its workforce. Further cost-cutting measures, including idling plants, may be necessary if market conditions persist.
• Liquidity and Investments: While the company maintains a strong cash position ($177.9 million) and no long-term debt, a significant portion of its investment portfolio ($119.9 million) is tied up in illiquid Auction Rate Securities (ARS). Management expects recovery of par value but notes liquidity may be restricted for up to 31 years.
• Dealer Financing: The company launched a new retail financing subsidiary, Thor CC, Inc., to fund loans for dealers, allocating approximately $10 million for this purpose.
• Legal and Contingencies:
  • SEC Investigation: The SEC is reviewing facts regarding the restatement of financial statements for 2005 and 2006. Potential penalties or relief cannot be predicted.
  • FEMA Litigation: Thor is named in approximately 38 complaints regarding formaldehyde in trailers supplied to FEMA for Hurricane Katrina/Rita relief. No specific damages have been alleged yet.
  • Repurchase Obligations: Losses from repurchasing units from dealers have increased due to the difficult market, with a $4.9 million loss recorded for the nine-month period.

Investor Verification Checklist

• ARS Liquidity: Verify the current status of the $119.9 million in Auction Rate Securities and the enforceability of the Put Rights with UBS.
• Goodwill Impairment: Assess the long-term viability of the Motorized segment given the $9.7 million goodwill write-off and continued sales declines.
• Dealer Solvency: Monitor the financial health of major dealers, specifically FreedomRoads (owner of Stephen Adams), to whom Thor lent $20 million in January 2009.
• Repurchase Reserves: Review the adequacy of reserves for dealer repurchase obligations as dealer defaults may increase in a weak economy.
• Legal Exposure: Track developments in the SEC investigation and the FEMA trailer litigation for potential material financial impact.