THOR INDUSTRIES INC – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, all dollar amounts are presented in thousands except per share data.

  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 U.S. RV industry market share in the travel trailer and fifth wheel portion of the towable segment is approximately 39%. In the motorized segment of the RV industry we have a U.S. market share of approximately 21%. Our U.S. and Canada market share in small and mid-size buses is approximately 38%. We also manufacture and sell 40-foot buses at our facility in Southern California and manufacture and sell ambulances at our Goshen Coach facility in Elkhart, Indiana.  On September 16, 2010, we acquired 100% of Towable Holdings, Inc., parent company of Heartland Recreational Vehicles, LLC ("Heartland"), pursuant to a stock purchase agreement. Heartland is located in Elkhart, Indiana and is a major manufacturer of towable recreation vehicles. Under our ownership, Heartland continues as an independent operation, in the same manner as our existing RV and bus companies, and its operations are included in our Towables reportable segment.  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 acquisitions of $1,713 for the three months ended October 31, 2011 were made primarily for building improvements and to 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 the profitability of the business unit which they manage. Our corporate staff provides financial management, purchasing, insurance, legal, human resource, 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 finance dealers directly, but do provide repurchase agreements to the dealers' floor plan lenders.  

Trends and Business Outlook

  The Company monitors the industry conditions in the RV market through the use of monthly wholesale shipment data as reported by the Recreation Vehicle Industry Association ("RVIA") which is typically issued on a one month lag and represents the manufacturers' RV production and delivery to dealers. In addition, the Company also utilizes monthly retail sales trends as reported by Statistical Surveys, Inc. ("Stat Surveys"). Stat Surveys data is typically issued on a month and a half lag. The Company believes that monthly RV retail sales data is the most important as the consumers' purchases dictate future dealer orders and ultimately our production.  After declining wholesale shipments in calendar years 2008 and 2009, industry conditions in the RV market substantially improved in calendar year 2010, with RV wholesale shipments of travel trailers, fifth wheels and motorized RVs up 48.1% for the twelve months ended December 31, 2010, according to RVIA. This large increase in shipments in calendar year 2010 was attributable to a number of forces in the market including: RV dealers' restocking of depleted lot inventories, improved floor plan financing availability to RV dealers and improved retail sales to consumers. The slower growth rate in wholesale shipments in calendar year 2011 (4.3% for the nine months ended September 30, 2011) is attributable to lower consumer confidence and uncertain economic conditions.  We believe our dealer inventory is at appropriate levels for seasonal consumer demand, with dealers remaining cautious given current economic uncertainties. Thor's RV backlog as of October 31, 2011 was up 18% to approximately $300,000 from $254,000 as of October 31, 2010. The increase in the RV backlog is partially attributable to dealer enthusiasm for our new RV product lines and sales incentives offered in connection with the Thor Open House event held in Elkhart, Indiana in September 2011.  

Key wholesale statistics for the RV industry, as reported by RVIA (rounded to the nearest hundred) are as follows:

                                                  00000000000000       00000000000000       00000000000000       00000000000000                                                                   U.S. and Canada Wholesale Shipments                                                 Calendar Year to Date through                                                         September 30,                     Increase                %                                                   2011                 2010              (Decrease)             Change Towables Units (1)                                  167,700              160,200                7,500                 4.7% Motorized Units                                      20,000               19,700                  300                 1.5%  Total                                               187,700              179,900                7,800                 4.3%   

(1) Excluding Folding Camp Trailers and Truck Campers, which the Company does not manufacture.

                                           15  -------------------------------------------------------------------------------- According to the RVIA, all 2011 calendar year wholesale shipments are forecast to total 247,500 units, a 2.1% increase over 2010. RVIA has also forecast that all 2012 calendar year shipments will total 242,400 units, a 2.1% reduction from the expected 2011 wholesale shipments, with most of the 2012 weakness expected in folding camping trailers and truck campers, which the Company does not manufacture.  We believe that retail demand is the key to continued improvement in the RV industry. With appropriate levels of dealer inventory currently, we believe that RV industry wholesale shipments will generally be on a one-to-one replenishment ratio with retail sales going forward. We also believe that current levels of discounting will continue in the near term due to current economic conditions and competitive pressures.  Key retail statistics for the RV industry, as reported by Statistical Surveys, Inc., are as follows:                                                    0000000000000000       0000000000000000       0000000000000000       0000000000000000                                                                        U.S.

and Canada Retail Registrations

                                                    Calendar Year to Date through                                                             September 30,                                                                                                  Increase                  %                                                      2011                   2010                (Decrease)               Change  Towables Units (1)                                      168,959                160,118                  8,841                   5.5% Motorized Units                                          19,178                 19,538                  (360)                 (1.8%)  

(1) Excluding Camping Trailers, which the Company does not manufacture.

Note: Data reported by Statistical Surveys, Inc. based on official state records. This information is subject to adjustment and is continuously updated.

The Company's wholesale RV shipments, including Heartland since its acquisition in September 2010, were as follows:

                                                    0000000000000000       0000000000000000       0000000000000000       0000000000000000                                                                                 Wholesale Shipments                                                     Calendar Year to Date through                                                             September 30,                                                                                                  Increase                  %                                                      2011                   2010                (Decrease)               Change Towables Units                                           66,754                 58,254                  8,500                  14.6% Motorized Units                                           3,968                  3,708                    260                   7.0%   Retail shipments of the Company's RV products, including Heartland since its acquisition in September 2010, as reported by Statistical Surveys, Inc., were as follows:                                                    0000000000000000       0000000000000000       0000000000000000       0000000000000000                                                                        U.S.

and Canada Retail Registrations

                                                    Calendar Year to Date through                                                             September 30,                                                                                                  Increase                  %                                                      2011                   2010                (Decrease)               Change Towables Units                                           64,335                 53,192                 11,143                  20.9% Motorized Units                                           3,825                  3,484                    341                   9.8%   Our outlook for future retail sales is tempered by the continuing economic conditions faced by consumers, including current fuel prices, the continuing rate of unemployment, the current low level of consumer confidence, poor income growth of consumers, credit constraints, continued weakness in the housing market and the likelihood of rising taxes, all of which could slow the pace of RV sales. However, if consumer confidence improves, retail and wholesale credit remains available, interest rates remain low and economic uncertainties begin to dissipate, we would expect to see an improvement in RV sales and expect to benefit from our ability to increase production. In addition, a positive longer-term outlook for the RV segment 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 in the RV lifestyle among both older and younger segments of the population.  Economic or industry-wide factors affecting our RV business include raw material costs of commodities used in the manufacture of our products. Material cost is the primary factor determining our cost of products sold. Cost increases we witnessed earlier in the 2011 calendar year have started to abate for steel, aluminum and copper with thermoplastic prices holding steady at the higher cost levels. 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. Historically, we have been able to pass along those cost increases to consumers.                                           16 

-------------------------------------------------------------------------------- Government entities are the primary purchaser or end users of our buses. Demand in this segment is subject to fluctuations in government spending on transit. In addition, hotel, rental car and parking lot operators are also major users of our small and mid-sized 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 ("MSBMA"), unit sales of small and mid-sized buses decreased 5.3% for the six months ended June 30, 2011 compared with the same period in 2010. Federal stimulus funds helped the transit industry in the recent economic downturn, however, that funding has now expired. Municipal budgets have been reduced and transit agencies' operating costs have increased. As a result, we have experienced a softening of order input at some of our bus operations and an increase in discounting required to secure orders. As of October 31, 2011, our buses reportable segment backlog is down by approximately 1% to $210,000 as compared to $212,000 as of October 31, 2010. We have recently started to see public agencies and private operators begin to replace their fleets. Longer term, we expect positive trends in our bus segment, which we believe will be supported by increased federal funding for transit, the replacement cycle for buses among public and private bus customers, and the introduction of new bus products.  The supply of chassis, used in both motorized RV and bus production, is adequate for current production levels and we believe that available inventory would compensate for changes in supply schedules if they occur. To date, we have not experienced any unusual cost increases from our chassis suppliers. If the condition of the U.S. auto industry deteriorates, this could result in supply interruptions and a decrease in our sales and earnings while we obtain replacement chassis from other sources.                                           17

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Three Months Ended October 31, 2011 vs. Three Months Ended October 31, 2010

                                                   Three Months Ended                   Three Months Ended                        Change                  %                                                  October 31,  2011                    October 31,  2010                        Amount               Change  NET SALES: Recreation Vehicles Towables                                                 $   499,104                          $   422,449                        $     76,655          18.1 Motorized                                                     62,556                               84,114                            (21,558)        (25.6)  Total Recreation Vehicles                                    561,660                              506,563                              55,097          10.9 Buses                                                        111,340                              100,121                              11,219          11.2  Total                                                    $   673,000                          $   606,684                        $     66,316          10.9   # OF UNITS: Recreation Vehicles Towables                                                      19,060                               18,211                                 849           4.7 Motorized                                                        804                                1,085                               (281)        (25.9)  Total Recreation Vehicles                                     19,864                               19,296                                 568           2.9 Buses                                                          1,687                                1,415                                 272          19.2  Total                                                         21,551                               20,711                                 840           4.1                                                                                 % of                                         % of                                                                             Segment                                      Segment          Change            % GROSS PROFIT:                                                              Net Sales                                    Net Sales         Amount         Change Recreation Vehicles Towables                                             $       59,898              12.0              $       57,869            13.7       $    2,029           3.5 Motorized                                                     4,898               7.8                       8,075             9.6          (3,177)        (39.3)  Total Recreation Vehicles                                    64,796              11.5                      65,944            13.0          (1,148)         (1.7) Buses                                                        10,182               9.1                      10,634            10.6            (452)         (4.3)  Total                                                $       74,978              11.1              $       76,578            12.6       $  (1,600)         (2.1)   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Recreation Vehicles Towables                                             $       24,655               4.9              $       22,986             5.4       $    1,669           7.3 Motorized                                                     3,603               5.8                       5,032             6.0          (1,429)        (28.4)  Total Recreation Vehicles                                    28,258               5.0                      28,018             5.5              240           0.9 Buses                                                         4,701               4.2                       5,196             5.2            (495)         (9.5) Corporate                                                     5,501                 -                      11,677               -          (6,176)        (52.9)  Total                                                $       38,460               5.7              $       44,891             7.4       $  (6,431)        (14.3)   INCOME (LOSS) BEFORE INCOME TAXES: Recreation Vehicles Towables                                             $       32,591               6.5              $       33,100             7.8       $    (509)         (1.5) Motorized                                                     1,293               2.1                       1,004             1.2              289          28.8  Total Recreation Vehicles                                    33,884               6.0                      34,104             6.7            (220)         (0.6) Buses                                                         5,266               4.7                       9,419             9.4          (4,153)        (44.1) Corporate                                                   (4,502)                 -                     (9,737)               -            5,235          53.8  Total                                                $       34,648               5.1              $       33,786             5.6       $      862           2.6                                                      As of                  As of                                              October 31,            October 31,            Change             % ORDER BACKLOG:                                  2011                   2010                Amount          Change Recreation Vehicles Towables                                   $       256,889        $       181,423        $   75,466           41.6 Motorized                                           42,583                 72,775          (30,192)         (41.5)  Total Recreation Vehicles                          299,472                254,198            45,274           17.8 Buses                                              210,245                212,602           (2,357)          (1.1)  Total                                      $       509,717        $       466,800        $   42,917            9.2                                             18 

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CONSOLIDATED

  Consolidated net sales for the three months ended October 31, 2011 increased $66,316, or 10.9%, compared to the three months ended October 31, 2010, partially attributable to the success of the Thor Open House event held in Elkhart, Indiana in September 2011. Heartland accounted for $54,072 of the total $66,316 increase in net sales, as Heartland's results include three months in the current quarter as compared with the six weeks of operations in the prior year quarter from the date of acquisition. Consolidated gross profit decreased $1,600, or 2.1%, compared to the three months ended October 31, 2010. Consolidated gross profit was 11.1% of consolidated net sales for the three months ended October 31, 2011 compared to 12.6% of consolidated net sales for the three months ended October 31, 2010. This 1.5% decrease in gross profit percentage was driven primarily by increased discounting and dealer incentive programs within the RV segments in the current period, as dealer and competitor pressures have necessitated greater discounting and incentives to secure sales. Certain material costs have increased in the current period as well. Selling, general and administrative expenses for the three months ended October 31, 2011 decreased 14.3% compared to the three months ended October 31, 2010. Income before income taxes for the three months ended October 31, 2011 was $34,648 as compared to the three months ended October 31, 2010 of $33,786, an increase of 2.6%. The specifics on changes in net sales, gross profit, selling, general and administrative expenses and income before income taxes are addressed in the segment reporting below. While the Thor Open House may have had the effect of accelerating sales from future periods, the impact cannot be determined at this time and dealer inventories remain balanced.  Corporate costs included in selling, general and administrative expenses decreased $6,176 to $5,501 for the three months ended October 31, 2011 compared to $11,677 for the three months ended October 31, 2010. The decrease is primarily attributable to one-time legal and professional fees of $1,796 incurred in the prior year in connection with the Heartland acquisition and $1,448 in additional fees in the prior year related to the now completed SEC review. Ongoing legal and professional fees have also decreased $1,122. In addition, deferred compensation plan expense decreased $772 and stock option expense decreased $685.  Corporate interest income and other income and expense was $999 for the three months ended October 31, 2011 compared to $1,940 for the three months ended October 31, 2010. The decrease of $941 is primarily due to other expenses increasing in the current year due to the market value depreciation of $772 on the Company's deferred compensation plan assets as compared to the prior year.  The overall effective income tax rate for the three months ended October 31, 2011 was 35.5% compared with 29.9% for the three months ended October 31, 2010. The primary reason for the increase in the overall effective income tax rate was the favorable settlement of certain state uncertain tax benefits that occurred for the three months ended October 31, 2010 as compared to the three months ended October 31, 2011, partially offset by a reduction to the state blended tax rate for the three months ended October 31, 2011 as compared to the three months ended October 31, 2010.                                           19 

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Segment Reporting  TOWABLE RECREATION VEHICLES   

Analysis of change in net sales for the three months ended October 31, 2011 vs. the three months ended October 31, 2010:

                           Three Months             % of               Three Months               % of                           Ended               Segment                 Ended                 Segment           Change             %                     October 31, 2011         Net Sales          October 31, 2010           Net Sales          Amount          Change NET SALES: Towables  Travel Trailers            $ 222,748              44.6                   $ 196,349              46.5      $     26,399          13.4  Fifth Wheels                 271,550              54.4                     220,881              52.3            50,669          22.9  Other                          4,806               1.0                       5,219               1.2             (413)         (7.9)  Total Towables              $ 499,104             100.0                   $ 422,449             100.0      $     76,655          18.1                         Three Months             % of               Three Months               % of                           Ended               Segment                 Ended                 Segment           Change             %                     October 31, 2011         Shipments          October 31, 2010           Shipments          Amount          Change # OF UNITS: Towables  Travel Trailers               11,435              60.0                      11,106              61.0               329           3.0  Fifth Wheels                   7,481              39.2                       6,924              38.0               557           8.0  Other                            144               0.8                         181               1.0              (37)        (20.4)  Total Towables                 19,060             100.0                      18,211             100.0               849           4.7   

Impact Of Change In Price On Net Sales:

                                                   %                                         Increase /(Decrease)                      Towables                       Travel Trailers                  10.4%                       Fifth Wheels                     14.9%                       Other                            12.5%                      Total Towables                    13.4%   The increase in towables net sales of 18.1% compared to the prior year quarter resulted from a 4.7% increase in unit shipments and a 13.4% increase in the impact of the change in the net price per unit. Heartland accounted for $54,072 of the total $76,655 increase in towables net sales and for 1,695 of the 849 increase in total towable unit sales, as Heartland's results include three months in the current quarter as compared with the six weeks of operations in the prior year quarter from the date of acquisition.  The increase in the net price per unit within the travel trailer and fifth wheel product lines is due to current customer preference trending toward higher priced units with additional features and upgrades compared to a year ago, many of which were introduced at the Thor RV Open House in September 2011. Fifth wheel selling prices have also increased due to the introductions of both the Redwood luxury product line and certain upscale toy hauler lines since the first quarter of last year. In addition, selling price increases were implemented for many models within both the travel trailer and fifth wheel product lines in the spring of 2011. These increases were partially offset by increased discounting and dealer sales incentive programs, including interest reimbursement programs, which effectively reduces the net sales price per unit. The "other" category relates primarily to sales in the park model industry.  

The overall industry increase in travel trailer and fifth wheel wholesale unit shipments for the two month period of August and September 2011 was 1.3% compared to the same period last year according to statistics published by RVIA.

  Cost of products sold increased $74,626 to $439,206, or 88.0% of towables net sales, for the three months ended October 31, 2011 compared to $364,580, or 86.3% of towable net sales, for the three months ended October 31, 2010. The change in material, labor, freight-out and warranty comprised $71,039 of the $74,626 increase in cost of products sold due to increased sales volume. Material, labor, freight-out and warranty as a percentage of towable net sales was 82.4% for the three months ended October 31, 2011 and 80.5% for the three months ended October 31, 2010. This increase as a percentage of towable net sales is primarily due to an increase in discounting, which effectively decreases net sales per unit and therefore increases the material cost percentage to net sales. Certain increases in material costs have also contributed to this increase in the material cost percentage to sales, although these increases were partially offset by tariff refunds on certain raw material products. Total manufacturing overhead as a percentage of towable net sales decreased from 5.8% to 5.6% due to the increase in production resulting in increased absorption of fixed overhead costs.                                           20  -------------------------------------------------------------------------------- Towable gross profit increased $2,029 to $59,898, or 12.0% of towable net sales, for the three months ended October 31, 2011 compared to $57,869, or 13.7% of towable net sales, for the three months ended October 31, 2010. The increase was due to the combination of increased sales, partially offset by increased discounts from unit list prices and increased wholesale and retail incentives provided to customers, and changes in cost of products sold as discussed above.  Selling, general and administrative expenses were $24,655, or 4.9% of towable net sales, for the three months ended October 31, 2011 compared to $22,986, or 5.4% of towable net sales, for the three months ended October 31, 2010. The primary reason for the $1,669 increase was increased towable net sales, which caused commissions and other compensation to increase by $1,989. Sales related travel, advertising, and promotional costs also increased $532 in correlation with the increase in sales and settlement costs increased $338. These cost increases were partially offset by the effects of the decrease in income before income taxes and management changes within the towables segment, which caused related bonus expenses to decrease by $1,199.  Towable income before income taxes decreased to 6.5% of towable net sales for the three months ended October 31, 2011 from 7.8% of towable net sales for the three months ended October 31, 2010. The primary factor for this decrease in percentage was the increased discounting noted above.  

MOTORIZED RECREATION VEHICLES

Analysis of change in net sales for the three months ended October 31, 2011 vs. the three months ended October 31, 2010:

                                                           Three Months             % of              Three Months             % of                                                           Ended                Segment               Ended                Segment          Change            %                                                      October 31, 2011         Net Sales         October 31, 2010         Net Sales         Amount         Change NET SALES: Motorized Class A                                            $            43,295              69.2      $            58,152              69.1      $ (14,857)        (25.5) Class C                                                         12,402              19.8                   21,960              26.1         (9,558)        (43.5) Class B                                                          6,859              11.0                    4,002               4.8           2,857          71.4  Total Motorized                                    $            62,556             100.0      $            84,114             100.0      $ (21,558)        (25.6)                                                          Three Months             % of              Three Months             % of                                                           Ended                Segment               Ended                Segment          Change            %                                                      October 31, 2011         Shipments         October 31, 2010         Shipments         Amount         Change # OF UNITS: Motorized Class A                                                            509              63.3                      635              58.5           (126)        (19.8) Class C                                                            223              27.7                      405              37.3           (182)        (44.9) Class B                                                             72               9.0                       45               4.2              27          60.0  Total Motorized                                                    804             100.0                    1,085             100.0           (281)        (25.9)     

Impact of Change In Price On Net Sales:

                                                    %                                         Increase/(Decrease)                    Motorized                    Class A                            (5.7) %                    Class C                              1.4 %                    Class B                             11.4 %                    Total Motorized                      0.3 %   The decrease in motorized net sales of 25.6% compared to the prior year quarter resulted from a 25.9% decrease in unit shipments and a 0.3% overall increase in the impact of the change in the net price per unit resulting primarily from mix of product. The overall market decrease in unit shipments of motorhomes was 16.3% for the two month period of August and September 2011 compared to the same period last year according to statistics published by RVIA.                                           21  -------------------------------------------------------------------------------- The decrease in the net price per unit within the Class A product line is primarily due to increased demand for the more moderately priced gas units as compared to the generally larger and more expensive diesel units. In addition, due to current competitor and dealer pressures, discounting has increased, which also effectively lowers unit sales prices. The decrease due to these factors was partially offset by certain selling price increases implemented in the spring of 2011. The slight increase within the Class C product line is the net impact of selling price increases partially offset by increased discounting. Within the Class B product line, the increase in the net price per unit is due to a greater concentration of higher priced models in the current year.  Cost of products sold decreased $18,381 to $57,658, or 92.2% of motorized net sales, for the three months ended October 31, 2011 compared to $76,039, or 90.4% of motorized net sales, for the three months ended October 31, 2010. The change in material, labor, freight-out and warranty comprised $18,342 of the $18,381 decrease due to decreased sales volume. Material, labor, freight-out and warranty as a combined percentage of motorized net sales remained stable at 85.4% compared to 85.3% for the prior year period. Total manufacturing overhead decreased only $39, but total manufacturing overhead as a percentage of motorized net sales increased to 6.8% from 5.1% due to the decrease in unit production resulting in lower absorption of fixed overhead costs.  Motorized gross profit decreased $3,177 to $4,898, or 7.8% of motorized net sales, for the three months ended October 31, 2011 compared to $8,075, or 9.6% of motorized net sales, for the three months ended October 31, 2010. The decrease in gross profit was due primarily to the 25.9% decrease in unit sales volume and the increase in cost of products sold as a percentage of motorized sales noted above.  Selling, general and administrative expenses were $3,603, or 5.8% of motorized net sales, for the three months ended October 31, 2011 compared to $5,032, or 6.0% of motorized net sales, for the three months ended October 31, 2010. The primary reason for the $1,429 decrease was decreased motorized net sales and decreased income before income taxes subject to bonus, which caused related commissions, bonuses and other compensation to decrease by $1,290.  Motorized income before income taxes was 2.1% of motorized net sales for the three months ended October 31, 2011 and 1.2% of motorized net sales for the three months ended October 31, 2010. The primary reason for this increase in percentage was the impact of reduced gross profit on decreased motorized net sales in the current year being more than offset by the $2,036 trademark impairment charge included in the results for the three months ended October 31, 2010.  BUSES 

Analysis of change in net sales for the three months ended October 31, 2011 vs. the three months ended October 31, 2010:

                                                   Three Months             Three Months                                                    Ended                    Ended                Change             %                                               October 31, 2011         October 31, 2010          Amount          Change  Net Sales                                    $          111,340       $          100,121       $    11,219          11.2 # of Units                                                1,687                    1,415               272          19.2 Impact of Change in Price on Net Sales                                                                             (8.0)    

The increase in buses net sales of 11.2% compared to the prior year quarter resulted from a 19.2% increase in unit shipments and an 8.0% decrease in the impact of the change in the net price per unit.

The 8.0% decrease in the impact of the change in the net price per unit is primarily due to a greater concentration of smaller, more moderately priced units in the current year. In addition, the current competitive pricing environment in the bus industry has led to increased discounting, which effectively lowers unit sales prices.

  Cost of products sold increased $11,671 to $101,158, or 90.9% of buses net sales, for the three months ended October 31, 2011 compared to $89,487, or 89.4% of buses net sales, for the three months ended October 31, 2010. The increase in material, labor, freight-out and warranty represents $11,419 of the $11,671 increase in cost of products sold. Material, labor, freight-out and warranty as a percentage of buses net sales increased to 83.1% from 81.0% compared to the prior year period. This increase in percentage of cost of products sold was primarily due to the lower margin product mix as well as increased material costs in the current period as compared to the prior year period. Total manufacturing overhead increased just $252, which caused manufacturing overhead to decrease to 7.8% from 8.4% as a percentage of buses net sales as the increase in production resulted in higher absorption of fixed overhead costs.  Buses gross profit decreased $452 to $10,182, or 9.1% of buses net sales, for the three months ended October 31, 2011 compared to $10,634, or 10.6% of buses net sales, for the three months ended October 31, 2010. The decrease was mainly due to product mix and increased discounting as noted above.  Selling, general and administrative expenses were $4,701, or 4.2% of buses net sales, for the three months ended October 31, 2011 compared to $5,196, or 5.2% of buses net sales, for the three months ended October 31, 2010. The primary reason for the $495 decrease was the reduction in income before income taxes, which caused related bonuses to decrease by $406.                                           22  -------------------------------------------------------------------------------- Buses income before income taxes was 4.7% of buses net sales for the three months ended October 31, 2011 compared to 9.4% for the three months ended October 31, 2010. This decrease in percentage is primarily due to the favorable impact of the $4,802 gain on involuntary conversion relating to the fire at our Champion/General Coach America north bus production facility for the three months ended October 31, 2010.  

Financial Condition and Liquidity

As of October 31, 2011, we had $207,538 in cash and cash equivalents compared to $215,435 on July 31, 2011.

  Working capital at October 31, 2011 was $343,141 compared to $345,169 at July 31, 2011. We have no long-term debt. Capital acquisitions of $1,713 for the three months ended October 31, 2011 were made primarily for building improvements and to replace machinery and equipment used in the ordinary course of business.  The Company anticipates additional capital expenditures in fiscal 2012 of approximately $12,400. These expenditures will be made primarily for expanding our recreation vehicle facilities and replacing and upgrading machinery, equipment and other assets to be used in the ordinary course of business. Anticipated capital expenditures will be funded by operations and/or cash on hand.  Operating Activities  Net cash generated from operating activities for the three months ended October 31, 2011 was $22,341 as compared to $9,694 for the three months ended October 31, 2010. The combination of net income and non-cash items (primarily depreciation, amortization, trademark impairment, involuntary conversion of assets and deferred income taxes) provided $29,326 of operating cash compared to $32,395 in the prior year period. However, the amount of $29,326 provided in the three months ended October 31, 2011 was partially offset by a reduction in accrued liabilities, primarily due to tax payments exceeding income tax provisions during this period. The $32,395 provided in the prior year was partially offset by decreases in accounts payable and accrued liabilities due to reductions in backlog and production and tax payments significantly exceeding income tax provisions during the quarter.  

Investing Activities

  Net cash used in investing activities for the three months ended October 31, 2011 was $2,011, primarily for capital expenditures of $2,041. During the three months ended October 31, 2010, net cash used in investing activities of $110,910 was primarily due to the cash consideration paid of $99,562 for the acquisition of Heartland and its parent company on September 16, 2010 and capital expenditures of $16,642. The capital expenditures of $16,642 included approximately $4,300 for the construction of the Champion Bus plant, approximately $4,900 for the purchase of recreation vehicle plants that were previously leased and approximately $3,000 for plant expansions in our towables operations.  Financing Activities  Net cash used in financing activities of $28,227 for the three months ended October 31, 2011 was related to the repurchase of 1,000,000 shares of common stock of the Company for $20,000 and cash dividend payments of $8,227. See Note 7 to our condensed consolidated financial statements contained elsewhere in this report for a description of the share repurchase transaction. The Company increased its previous regular quarterly dividend of $0.10 per share to $0.15 per share in October 2011. During the three months ended October 31, 2010, net cash used in financing activities of $4,788 was primarily for cash dividend payments of $5,578. The Company increased its previous regular quarterly dividend of $0.07 per share to $0.10 per share in October 2010.  

Critical Accounting Principles

  Our consolidated financial statements 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 review our long-lived assets (individually or in a related group as appropriate) for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable from future cash flows attributable to the assets. Additionally, we review our goodwill for impairment annually as of April 30 of each year. Accordingly, we continually assess whether events or changes in circumstances represent a 'triggering' event that would require us to complete an impairment assessment. Factors that we consider in determining whether a triggering event has occurred include, among other things, whether there has been a significant adverse change in legal factors, business climate or competition related to the operation of the asset, whether there has been a significant decrease in actual or expected operating results related to the asset and whether there are current plans to sell or dispose of the asset. The determination of whether a triggering event has occurred is subject to significant management judgment, including at which point or fiscal quarter a triggering event has occurred when the relevant adverse factors persist over extended periods.                                           23  -------------------------------------------------------------------------------- Should a triggering event be deemed to occur, and for each of the annual impairment assessments, management is required to estimate the expected net cash flows to be realized over the life of the asset and/or the asset's fair value. Fair values are often determined by a discounted cash flow model, although we also use a market approach in determining fair values when appropriate. These estimates are also subject to significant management judgment including the determination of many factors such as sales growth rates, gross margin patterns, cost growth rates, terminal value assumptions, discount rates and comparable companies. Changes in these estimates can have a significant impact on the determination of cash flows and fair value and could potentially result in future material impairments. Management engages an independent valuation firm in many cases to assist in its impairment assessments.  The Company has five individual reporting units that carry goodwill. One reporting unit carries 49% of our consolidated goodwill of $245,209 and a second reporting unit carries another 38% of our consolidated goodwill. For these two reporting units, our estimate of their fair values exceeded their respective carrying values by 272% and 9.5%, respectively, as of our April 30, 2011 assessment. Our other reporting units' fair values exceeded their respective carrying values by 17%-67%.  In regards to our April 2011 assessment for the second reporting unit indicated above, we used both a discounted cash flows model and a market approach to determine an estimate of its fair value. We weighed the discounted cash flow model slightly more because we believe that the discounted cash flow model better reflects the specific operating and other conditions impacting this unit as compared to the more general applicability of comparable market transactions. Assumptions which more significantly impact the discounted cash flows used in estimating the fair value of this unit included forecasted annual sales increases over the next five years, margin percentages over those years, terminal sales growth and weighted average cost of capital. Each of these estimates is subject to significant management judgment; however, we believe each to be reasonable based on currently available information regarding this unit's current and expected operations. The more significant factors that might serve to cause future actual results to differ from these estimates include future RV industry volume and pricing pressure related to a highly competitive environment. Should such future actual results require us to reduce our expectations for this reporting unit, future impairment assessments may indicate that the related goodwill and/or other intangible assets may be impaired and such impairment could be material.  Our assessment of whether any triggering events occurred during the three months ended October 31, 2011 for which we should further analyze whether an impairment exists through that date did not result in the identification of such a triggering event.  
Insurance Reserves
  Generally, we are self-insured for workers' compensation, products liability and group medical insurance. Under these plans, liabilities are recognized for claims incurred, including those incurred but not reported. The liability for workers' compensation claims is determined by the Company with the assistance of a third party administrator and actuary using various state statutes and historical claims experience. Group medical reserves are estimated using historical claims experience. We have a self-insured retention ("SIR") for products liability and personal injury matters of $5,000 per occurrence. We have established a liability on our balance sheet for such occurrences based on historical data, known cases and actuarial information. Amounts above the SIR, up to a certain dollar amount, are covered by our excess insurance policy. Currently, we maintain excess liability insurance aggregating $50,000 with outside insurance carriers to minimize our risks related to catastrophic claims in excess of all our self-insured positions for product liability and personal injury matters. Any material change in the aforementioned factors could have an adverse impact on our operating results.  
Product Warranties
  We generally provide customers of our products with a one-year warranty covering defects in material or workmanship, 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 liability is adequate; however, actual claims incurred could differ from estimates, requiring adjustments to the reserves. Warranty liabilities are reviewed and adjusted as necessary on a quarterly basis.  
Income Taxes
  The Company accounts for income taxes under the provisions of ASC 740, "Income Taxes". The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company's financial position or its results of operations.                                           24  -------------------------------------------------------------------------------- We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.  Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and valuation allowances recorded against our deferred tax assets, if any. Valuation allowances must be considered due to the uncertainty of realizing deferred tax assets. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets on a tax jurisdictional basis based on the consideration of all available evidence, using a more likely than not standard. We have evaluated the sustainability of our deferred tax assets on our consolidated balance sheet which includes the assessment of the cumulative income over recent prior periods. As of October 31, 2011, based on ASC guidelines, we determined a valuation allowance was not required to be recorded against deferred income tax assets in any of the tax jurisdictions in which we currently operate.  Revenue Recognition 
Revenues from the sale of recreation vehicles and buses are recorded primarily when all of the following conditions have been met:
1)  An order for a product has been received from a dealer;
2)  Written or oral approval for payment has been received from the dealer's flooring institution;
3)  A common carrier signs the delivery ticket accepting responsibility for the product as agent for the dealer; and
4)  The product is removed from the Company's property for delivery to the dealer who placed the order.
  Certain shipments are sold to customers on credit or cash on delivery ("COD") terms. The Company recognizes revenue on credit sales upon shipment and COD sales upon payment and delivery. Most sales are made by dealers financing their purchases under flooring arrangements with banks or finance companies. Products are not sold on consignment, dealers do not have the right to return products, and dealers are typically responsible for interest costs to floorplan lenders. On average, the Company receives payments from floorplan lenders on products sold to dealers within 15 days of the invoice date.  
Repurchase Commitments
  We are contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for certain dealers of certain of our products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to dealers in the event of default by the dealer. The repurchase price is generally determined by the original sales price of the product and pre-defined curtailment arrangements and we typically resell the repurchased product at a discount from its repurchase price. We account for the guarantee under our repurchase agreements of our dealers' financing by estimating and deferring a portion of the related product sale that represents the estimated fair value of the guarantee. The estimated fair value takes into account our estimate of the loss we will incur upon resale of any repurchases. This estimate is based on recent historical experience supplemented by management's assessment of current economic and other conditions affecting our dealers. This deferred amount is included in the repurchase and guarantee reserve.  Our risk of loss under these repurchase agreements is reduced because (a) we sell our products to a large number of dealers under these arrangements, (b) the repurchase price we are obligated to pay declines over the period of the agreements (generally up to eighteen months) while the value of the related product may not decline ratably and (c) we have historically been able to readily resell any repurchased product. We believe that any future losses under these agreements will not have a significant effect on the Company's consolidated financial position or results of operations.  
Accounting Pronouncements
  In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which is intended to improve comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. This standard clarifies the application of existing fair value measurement requirements, including (1) the application of the highest and best use valuation premise, (2) the methodology to measure the fair value of an instrument classified in a reporting entity's shareholders' equity, (3) disclosure requirements for quantitative information on Level 3 fair value measurements and (4) guidance on measuring the fair value of financial instruments managed within a portfolio. In addition, the standard requires additional disclosures of the sensitivity of fair value to changes in unobservable inputs for Level 3 securities. This standard is effective for interim and annual reporting periods ending on or after December 15, 2011. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.                                           25  -------------------------------------------------------------------------------- In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income", which requires that comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard also requires entities to disclose on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net earnings. This standard no longer allows companies to present components of other comprehensive income only in the statement of equity. This standard is effective for interim and annual reporting periods ending on or after December 15, 2011. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements other than the prescribed change in presentation.  In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment", to simplify how entities test goodwill for impairment. This guidance permits an entity to assess qualitative factors to determine whether it is more likely than not (defined as more than fifty percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the current two-step goodwill impairment test. The two-step goodwill impairment test is only required if the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.  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 (the "Exchange Act"). These forward looking statements involve uncertainties and risks. There can be no assurance that actual results will not differ from our expectations. Factors which could cause materially different results include, among others, fuel prices, lower consumer confidence and the level of discretionary consumer spending, interest rate increases, restrictive lending practices, increased material and component costs, recent management changes, the success of new product introductions, the pace of acquisitions, cost structure improvements, competition and general economic conditions and the other risks and uncertainties discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended July 31, 2011. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward looking statements contained in this report or to reflect any change in our expectations after the date hereof or any change in events, conditions or circumstances on which any statement is based, except as required by law. 


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