Summary of THOR INDUSTRIES INC

ITEM 7. 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 ("RVs") and a major manufacturer of commercial buses in North America. Our market share in the travel trailer and fifth wheel segment of the industry (towables) is approximately 31%. In the motorized segment of the industry we have a market share of approximately 18%. Our market share in small and mid-size buses is approximately 40%. We also manufacture and sell 40-foot buses at our facility in Southern California.
Our growth has been internal and by acquisition. Our strategy has been to increase our profitability in North America in the RV industry and in the bus business through product innovation, service to our customers, manufacturing quality products, improving our facilities and 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. Capital expenditures of approximately $5,135 in fiscal 2009 were made primarily to upgrade IT systems and replace machinery and equipment used in the ordinary course of business. Our business model includes decentralized operating units and we compensate operating management primarily with cash based upon profitability of the business unit which they manage. Our corporate staff provides financial management, 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 generally do not directly finance dealers but do provide repurchase agreements in order to facilitate the dealers obtaining floor plan financing.
Trends and Business Outlook
Industry conditions in the RV market have been adversely affected by low consumer confidence, tighter lending practices and the general economic downturn. As a result of these continuing concerns, market conditions continue to be soft and we anticipate this weakness may continue in fiscal 2010. The motorized market has been significantly impacted by current market conditions. The tightening of the retail credit markets, low consumer confidence and the volatility of fuel prices are continuing to place pressure on retail sales and our dealers continue to be cautious in the amount of inventory they are willing to carry. Based on the foregoing and with the assistance of an independent valuation firm, we recognized a non-cash goodwill impairment of $9,717 in the third quarter of fiscal 2009 for the goodwill associated with an operating subsidiary within our motorized segment. The Company also completed an impairment review in the second quarter which resulted in a non-cash trademark impairment charge of $564 for the trademark associated with an operating subsidiary in our motorized segment. The impairments result from the difficult market environment and outlook for the motorhome business. For fiscal 2009, net sales in our motorized segment decreased 65% compared to fiscal 2008. Our towables market has been significantly impacted as well, albeit less than our motorized market, as the price of a towable recreation vehicle is generally about one-fourth that of a motorhome and sales of more expensive recreation vehicles have suffered greater in the current economic downturn. Dealers continue to sell older model-year units before replacing them with new products. The decline in wholesale demand has directly impacted our gross margins as we have had to increase our discounts to meet competitive pricing.
The Company has reacted to the difficult business environment by scaling back its activities and reducing its workforce. If the current market environment persists, we may have to take additional cost-cutting measures including idling additional plants, if necessary.
When consumer confidence stabilizes and retail and wholesale credit availability improves, we expect to see a rebound in sales from dealers ordering units for stock and expect to benefit from our ability to ramp up production in an industry with fewer manufacturing facilities than before, due to competitor failures or plant consolidations. A short-term positive indicator for us is reflected in our order backlog, which has increased from $406,371 at July 31, 2008 to $587,859 at July 31, 2009, an increase of $181,488 or 45%. A longer-term positive outlook for the recreation vehicle industry is supported by favorable demographics as baby boomers reach the age brackets that historically have accounted for the bulk of retail RV sales, and an increase in interest has occurred in the RV lifestyle among both older and younger segments of the population than have traditionally participated.

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We believe an 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 retiree population in the United States is expected to grow five times as fast as 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. Recently, although the entire RV industry has been weak, the towable segment of the RV industry has been stronger than the motorized segment. For the towable segment, retail sales as reported by Statistical Surveys, Inc. were down approximately 31% for the seven months ended July 31, 2009 compared with the same period last year. The motorized segment was down approximately 42%. Tighter retail credit and lower consumer confidence appear to affect the motorized segment more severely.
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 products sold. Material costs have generally been flat in 2009. Future increases in raw material costs would impact our profit margins negatively if we were unable to raise prices for our products by corresponding amounts.
Government entities are the 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 travel is an important indicator for this market. The majority of our buses have a 5-year useful life and are being continuously replaced by operators. According to the Mid Size Bus Manufacturers Association, unit sales of small and mid-sized buses are down 12.1% for the six months ended June 30, 2009 compared with the same period last year. Bus sales may benefit from the U.S. government's emphasis on mass transportation in the American Reinvestment and Recovery Act stimulus package.
We do not expect the current condition of the U.S. auto industry, including the recent bankruptcy filings and reorganizations of General Motors and Chrysler, to have a significant impact on our supply of chassis. Supply of chassis is adequate for now and we believe that on-hand inventory would compensate for changes in supply schedules if they occur. To date, we have not noticed any unusual cost increases from our chassis suppliers. If the condition of the U.S. auto industry significantly worsens, this could result in supply interruptions and a decrease in our sales and earnings while we obtain replacement chassis from other sources.

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FISCAL 2009 VS. FISCAL 2008
                                                                    Change
                               Fiscal 2009      Fiscal 2008         Amount            %
   NET SALES
   Recreation Vehicles
   Towables                    $    953,279     $  1,763,099     $   (809,820)       (45.9)
   Motorized                        161,727          461,856         (300,129)       (65.0)

   Total Recreation Vehicles      1,115,006        2,224,955       (1,109,949)       (49.9)
   Buses                            406,890          415,725           (8,835)        (2.1)

   Total                       $  1,521,896     $  2,640,680     $ (1,118,784)       (42.4)

   # OF UNITS
   Recreation Vehicles
   Towables                          43,300           78,888          (35,588)       (45.1)
   Motorized                          2,165            5,863           (3,698)       (63.1)

   Total Recreation Vehicles         45,465           84,751          (39,286)       (46.4)
   Buses                              6,145            6,280             (135)        (2.1)

   Total                             51,610           91,031          (39,421)       (43.3)




                                                      % of                                    % of
                                                     Segment                                 Segment            Change
                               Fiscal 2009          Net Sales          Fiscal 2008          Net Sales           Amount               %
GROSS PROFIT
Recreation Vehicles

Towables                      $     111,475               11.7        $     246,505               14.0        $ (135,030)            (54.8)
Motorized                               272                0.2               35,928                7.8           (35,656)            (99.2)

Total Recreation
Vehicles                            111,747               10.0              282,433               12.7          (170,686)            (60.4)
Buses                                40,790               10.0               39,993                9.6                797               2.0

Total                         $     152,537               10.0        $     322,426               12.2        $ (169,889)            (52.7)

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Recreation Vehicles
Towables                      $      64,441                6.8        $     102,356                5.8        $  (37,915)            (37.0)
Motorized                            19,695               12.2               28,899                6.3            (9,204)            (31.8)

Total Recreation
Vehicles                             84,136                7.5              131,255                5.9           (47,119)            (35.9)
Buses                                22,782                5.6               18,088                4.4              4,694              26.0
Corporate                            17,660                  -               27,725                  -           (10,065)            (36.3)

Total                         $     124,578                8.2        $     177,068                6.7        $  (52,490)            (29.6)

INCOME (LOSS) BEFORE INCOME
TAXES
Recreation Vehicles
Towables                      $      47,347                5.0        $     146,306                8.3        $  (98,959)            (67.6)
Motorized                          (29,728)             (18.4)                (522)              (0.1)           (29,206)          (5595.0)

Total Recreation
Vehicles                             17,619                1.6              145,784                6.6          (128,165)            (87.9)
Buses                                17,422                4.3               21,132                5.1            (3,710)            (17.6)
Corporate                          (11,646)                  -             (14,509)                  -              2,863              19.7

Total                         $      23,395                1.5        $     152,407                5.8        $ (129,012)            (84.6)




                                   As of               As of           Change
  ORDER BACKLOG                July 31, 2009       July 31, 2008       Amount          %
  Recreation Vehicles
  Towables                    $       262,072     $       106,792     $ 155,280       145.4
  Motorized                            36,256              38,774       (2,518)       (6.5)

  Total Recreation Vehicles           298,328             145,566       152,762       104.9
  Buses                               289,531             260,805        28,726        11.0

  Total                       $       587,859     $       406,371     $ 181,488        44.7

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CONSOLIDATED
Net sales and gross profit for fiscal 2009 decreased 42.4% and 52.7% respectively, compared to fiscal 2008. Selling, general and administrative expenses for fiscal 2009 decreased 29.6% compared to fiscal 2008. Income before income taxes for fiscal 2009 decreased 84.6% compared to fiscal 2008. The specifics on changes in net sales, gross profit, selling, general and administrative expense and income before income taxes are addressed in the segment reporting below.
Corporate costs in selling, general and administrative were $17,660 for fiscal 2009 compared to $27,725 for fiscal 2008. This decrease of $10,065 is primarily due to a decrease of $3,142 in insurance related expense, $1,532 in audit and tax related fees, $1,414 in self-insured workers compensation costs, $1,569 in legal and professional fees, and $828 in incentive based compensation. These decreases resulted from the overall decline in our business and cost reduction efforts. In addition, the Company's expense for probable losses related to vehicle repurchase commitments decreased by $1,176 due to a decrease in actual and anticipated repurchase activity resulting from lower dealer inventory. Corporate interest and other income was $6,014 for fiscal 2009 compared to $13,333 for fiscal 2008. The decrease of $7,319 is attributed to a $5,792 decrease in interest income due to lower interest rates and the contractual terms of our auction rate securities which restrict the maximum yearly interest earned and a $1,519 decrease in income from TCC, our former joint venture, which dissolved in September 2008.
The overall annual effective tax rate for fiscal 2009 was 26.7% on $23,395 of income before income taxes, compared to 39.2% on $152,407 of income before income taxes for fiscal 2008. The primary reasons for this decrease in rate were
(1) the benefit derived from recording Qualified Alternative Fuel Motor Vehicle ("QAFMV") credits for fiscal years ended 2007 and 2008 in the current year provision and the current year 2009 QAFMV credits received (2) recording the benefit derived from amending the Company's federal and state income tax returns as a result of the Company's IRS examination (3) the benefit of changes in legislation relative to the Company's fiscal year 2008 research and development credit and (4) adjustments to the Company's income taxes payable as a result of entries to correct the Company's prior year deferred taxes and state tax expense. The income tax payable adjustments are for FASB Interpretation No. 48 ("FIN 48") deferred tax assets, accrued dealer incentives, and an adjustment for the difference between state income tax expense accrued vs. paid. The changes in costs and price within the Company's business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by changes caused by inflation.

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SEGMENT REPORTING
Towable Recreation Vehicles
Analysis of Change in Net Sales for Fiscal 2009 vs. Fiscal 2008

                                                     % of                                       % of

                                                   Segment                                    Segment             Change               %

                              Fiscal 2009         Net Sales            Fiscal 2008           Net Sales            Amount             Change

NET SALES:

Towables

Travel Trailers              $     489,637                51.3        $       864,796                49.0        $ (375,159)          (43.4)

Fifth Wheels                       425,826                44.7                839,168                47.6          (413,342)          (49.3)

Other                               37,816                 4.0                 59,135                 3.4           (21,319)          (36.1)


Total Towables               $     953,279               100.0        $     1,763,099               100.0        $ (809,820)          (45.9)




                                                   % of                                       % of

                                                 Segment                                    Segment             Change              %

                            Fiscal 2009         Shipments            Fiscal 2008           Shipments            Amount            Change

# OF UNITS:

Towables

Travel Trailers                   28,292                65.4                 48,855                61.9          (20,563)          (42.1)

Fifth Wheels                      13,823                31.9                 28,169                35.7          (14,346)          (50.9)

Other                              1,185                 2.7                  1,864                 2.4             (679)          (36.4)


Total Towables                    43,300               100.0                 78,888               100.0          (35,588)          (45.1)

IMPACT OF CHANGE IN PRICE ON NET SALES:
                            %

                   Increase /(Decrease)

Towables

Travel Trailer                 (1.3) %

Fifth Wheel                      1.6 %

Other                            0.3 %

Total Towables                 (0.8) %

The decrease in towable net sales of 45.9% resulted primarily from a 45.1% decrease in unit shipments and an 0.8% decrease in the impact of the change in the net price per unit. The overall industry decrease in wholesale unit shipments of towables for August 2008 through July 2009 was 51.2%, according to statistics published by the RVIA.
The impact of the change in net price per unit of towables was a decrease of 0.8%, which included decreases in travel trailers of 1.3% and increases in fifth wheels of 1.6%, in fiscal year 2009 as compared to fiscal year 2008. The primary reason for the decrease or nominal increase in the change in the net price per unit is due to heavier discounting and increased incentives in fiscal 2009 necessitated by prevailing depressed market conditions. This decrease created by discounting was offset, to varying degrees, by continued consumer demands for additional features or upgrades.
Cost of products sold decreased $674,790 to $841,804 or 88.3% of towable net sales for fiscal 2009 compared to $1,516,594 or 86.0% of towable net sales for fiscal 2008. The change in material, labor, freight-out and warranty comprised $626,299 of the $674,790 decrease in

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cost of products sold and was due to decreased sales volume. In addition, in fiscal 2008 cost of products sold included an impairment and other charges of $5,711, of which $5,411 related to the sale of our Thor California subsidiary and $300 related to the write-down of certain properties to fair value. Material, labor, freight-out and warranty as a percentage of net sales increased to 79.8% from 78.7% from fiscal 2008 to 2009. The 1.1% increase as a percentage of net sales is due primarily to the additional discounting in fiscal 2009. These costs in relation to gross sales remained consistent with fiscal 2008. Manufacturing overhead decreased $42,780 to $80,837 in fiscal 2009 compared to $123,617 in fiscal 2008. Variable costs in manufacturing overhead decreased $41,493 to $68,679 or 7.2% of towable net sales for fiscal 2009 compared to $110,172 or 6.2% of towable net sales for fiscal 2008 due to lower production. Fixed costs in manufacturing overhead, which consist primarily of facility costs and property taxes, decreased $1,287 to $12,158 in fiscal 2009 from $13,445 in fiscal 2008.
Towable gross profit decreased $135,030 to $111,475 or 11.7% of towable net sales for fiscal 2009 compared to $246,505 or 14.0% of towable net sales for fiscal 2008. The decrease in gross profit was due primarily to the 45.1% decrease in unit sales volume and the additional discounting during fiscal 2009. Selling, general and administrative expenses were $64,441 or 6.8% of towable net sales for fiscal 2009 compared to $102,356 or 5.8% of towable net sales for fiscal 2008. The primary reason for the $37,915 decrease in selling, general and administrative expenses was decreased net sales, which caused related commissions, bonuses and other compensation to decrease by $32,385. In addition, advertising and selling related costs decreased $2,708 due to decreased sales activity and legal and settlement costs decreased $1,604 due to the resolution of various legal and product disputes.
Towable income before income taxes decreased to 5.0% of towable net sales for fiscal 2009 from 8.3% of towable net sales for fiscal 2008. The primary factor for this decrease was the reduction in unit sales coupled with additional discounting.
Motorized Recreation Vehicles
Analysis of Change in Net Sales for Fiscal 2009 vs. Fiscal 2008

                                                     % of                                       % of

                                                   Segment                                    Segment             Change               %

                              Fiscal 2009         Net Sales            Fiscal 2008           Net Sales            Amount             Change

NET SALES:

Motorized

Class A                      $      89,477                55.3        $       306,577                66.4        $ (217,100)          (70.8)

Class C                             62,789                38.8                152,134                32.9           (89,345)          (58.7)

Other                                9,461                 5.9                  3,145                 0.7              6,316           200.8


Total Motorized              $     161,727               100.0        $       461,856               100.0        $ (300,129)          (65.0)




                                                   % of                                       % of

                                                 Segment                                    Segment            Change              %

                            Fiscal 2009         Shipments            Fiscal 2008           Shipments           Amount            Change

# OF UNITS:

Motorized

Class A                              913                42.2                  3,192                54.4          (2,279)          (71.4)

Class C                            1,131                52.2                  2,631                44.9          (1,500)          (57.0)

Other                                121                 5.6                     40                 0.7               81           202.5


Total Motorized                    2,165               100.0                  5,863               100.0          (3,698)          (63.1)

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IMPACT OF CHANGE IN PRICE ON NET SALES:

                            %
                   Increase/(Decrease)

Motorized

Class A                          0.6 %

Class C                        (1.7) %

Other                          (1.7) %

Total Motorized                (1.9) %

The decrease in motorized net sales of 65.0% resulted primarily from a 63.1% decrease in unit shipments and the impact of a 1.9% decrease in the impact of the change in net price per unit. The overall industry decrease in wholesale unit shipments of motorhomes for the period August 2008 through July 2009 was 70.2% according to statistics published by the RVIA.
The impact of the change in the net price per unit of motorized was a decrease of 1.9%, which included increases in Class A motorized units of 0.6%, and decreases in Class C motorized units of 1.7% in fiscal year 2009 as compared to fiscal year 2008. The nominal increase or decrease in the impact in net price per unit is attributable to much greater discounting and increased wholesale and retail incentives in fiscal 2009 in response to the significant contraction within the motorized market. The negative effects of the increase in discounting was offset in the Class A segment by the continued increase in the concentration of diesel units within the Class A line (30.9% in 2009 and 25.7% in 2008). Diesel units are generally larger and more expensive than gas units. Cost of products sold decreased $264,473 to $161,455 or 99.8% of motorized net sales for fiscal 2009 compared to $425,928 or 92.2% of motorized net sales for fiscal 2008. The change in material, labor, freight-out and warranty comprised $252,347 of the $264,473 decrease in cost of products sold and was due to decreased sales volume. In addition, in fiscal 2008 cost of products sold includes charges of $1,526 related to the write-down of certain properties to fair value. Material, labor, freight-out and warranty as a percentage of net sales increased to 87.4% from 85.2% from fiscal 2008 to 2009. This 2.2% increase as a percentage of net sales was primarily driven by the deep discounting done in fiscal 2009 to remain competitive in the difficult motorized market segment. Labor, freight-out and warranty costs in relation to gross sales remained consistent with fiscal 2008. Material costs in relation to gross sales decreased by 1.0% in fiscal 2009 primarily due to the favorable impact of the LIFO inventory liquidations of $4,430. Manufacturing overhead decreased $10,600 to $20,083 in fiscal 2009 compared to $30,683 in fiscal 2008. Variable costs in manufacturing overhead decreased $10,889 to $15,920 or 9.8% of motorized net sales for fiscal 2009 compared to $26,809 or 5.8% of motorized net sales for fiscal 2008 due to lower production. Fixed costs in manufacturing overhead, which consist primarily of facility costs and property taxes, increased $289 to $4,163 from $3,874 in fiscal 2008.
Motorized gross profit decreased $35,656 to $272 or 0.2% of motorized net sales for fiscal 2009 compared to $35,928 or 7.8% of motorized net sales for fiscal 2008. The decrease in gross profit was due primarily to the 63.1% decrease in unit sales volume and additional discounting.
Selling, general and administrative expenses were $19,695 or 12.2% of motorized net sales for fiscal 2009 compared to $28,899 or 6.3% of motorized net sales for fiscal 2008. The primary reason for the $9,204 decrease in selling, general and administrative expenses was decreased net sales which caused related commissions, bonuses and other compensation to decrease by $7,681. In addition, self-insurance costs decreased $2,650 due to the settlement in fiscal 2008 of a . . .