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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INFORMATION SPECIFIED IN FORM 10-Q
(see note below)
(Mark one)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 333-43335
AIRXCEL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1071795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3050 North Saint Francis, Wichita, Kansas 67219
(Address of principal executive offices)
(Zip Code)
(316) 832-3400
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [XX] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
1,000 shares of Common Stock as of June 30, 2004
Note: This information is provided solely to comply with the obligation
contained in the indenture agreement governing the Company's Senior Subordinated
Notes.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 2,571 33
Accounts receivable, net of allowances for doubtful accounts
of $525 and $550, in 2004 and 2003, respectively 18,501 13,472
Inventories 22,240 19,811
Deferred income taxes 2,387 2,533
Other current assets 639 409
------------- -------------
Total current assets 46,338 36,258
------------- -------------
Deferred income taxes 2,087 2,233
Property, plant and equipment, net 15,150 15,906
Loan financing costs, net 1,347 1,583
Other identifiable intangible assets, net 1,552 1,645
Goodwill and other indefinite lived intangible assets 15,873 15,873
Notes receivable from Holdings 3,447 3,447
------------- -------------
Total assets $ 85,794 $ 76,945
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 70 $ 64
Cash overdraft 3,352 --
Accounts payable 12,079 7,021
Warranty reserve 2,593 2,186
Accrued interest 1,240 1,243
Accrued payroll 2,754 2,620
Income tax payable 1,751 631
Accrued expenses and other current liabilities 2,689 2,386
------------- -------------
Total current liabilities 26,528 16,151
------------- -------------
Pension liability 2,289 2,394
Long-term debt, net of current portion 90,143 94,884
Commitments and contingencies
Stockholder's equity (deficiency):
Common stock 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (59,073) (62,391)
Accumulated other comprehensive loss (1,416) (1,416)
------------- -------------
Total stockholder's equity (deficiency) (33,166) (36,484)
------------- -------------
Total liabilities and stockholder's equity (deficiency) $ 85,794 $ 76,945
============= =============
See accompanying notes.
2
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 50,045 $ 40,486 $ 93,952 $ 79,907
Cost of sales 40,269 32,952 75,077 64,467
--------- --------- --------- ---------
Gross profit 9,776 7,534 18,875 15,440
Selling, general and administrative expense 4,130 3,727 8,391 7,842
--------- --------- --------- ---------
Income from operations 5,646 3,807 10,484 7,598
Interest expense, net 2,635 2,705 5,266 5,433
Other (income) expense, net 88 (1) 114 10
--------- --------- --------- ---------
Income before income tax expense 2,923 1,103 5,104 2,155
Income tax expense 948 430 1,786 838
--------- --------- --------- ---------
Net income $ 1,975 $ 673 $ 3,318 $ 1,317
========= ========= ========= =========
See accompanying notes.
3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
June 30, 2004 June 30, 2003
------------- -------------
Cash flows from operating activities:
Net income $ 3,318 $ 1,317
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,517 1,524
Amortization of financing costs 236 228
Deferred income taxes 291 838
Provision for bad debt 129 79
(Gain) loss on sale of property, plant and equipment 64 2
Changes in operating assets and liabilities:
Accounts receivable (5,158) (3,465)
Inventories (2,429) 1,250
Other assets (230) (305)
Accounts payable 5,058 (1,316)
Accrued expenses and other liabilities 1,857 (872)
------------- -------------
Net cash provided by (used in) operating activities 4,653 (720)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 1 33
Capital expenditures (686) (363)
Purchase of notes receivable from Holdings -- (3,447)
Other (46) --
------------- -------------
Net cash used in investing activities (731) (3,777)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 80,301 76,741
Principal payments on long-term debt (85,037) (75,363)
Cash overdraft 3,352 3,154
Financing costs incurred -- (92)
Dividend to parent -- (5)
------------- -------------
Net cash provided by (used in) financing activities (1,384) 4,435
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,538 (62)
Cash and cash equivalents, beginning of period 33 179
------------- -------------
Cash and cash equivalents, end of period $ 2,571 $ 117
============= =============
See accompanying notes.
4
AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(in thousands)
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying interim consolidated financial statements have not been
audited but reflect normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the Company's financial
position and results of operations and cash flows for the interim periods
presented in accordance with accounting principles generally accepted in the
United States for interim financial information and Article 10 of Regulation
S-X. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. These interim
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes therein for the fiscal year ended December
31, 2003 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 26, 2004. The results of operations for any interim
period are not necessarily indicative of results for the full year or for any
quarter.
2. ORGANIZATION AND BUSINESS:
Airxcel, Inc. (the "Company" is a wholly-owned subsidiary of Airxcel
Holdings Corporation (Holdings); formerly known as RV Holdings Corporation. The
Company is a diversified designer, manufacturer and marketer of air
conditioners, furnaces, water heaters, cooking appliances and low-voltage
refrigeration compressors for the recreation vehicle industry, and wall mount
air conditioners, environmental control units and heat pumps for the heating,
ventilating and air conditioning industry in the United States, Canada and
certain international markets. The recreation vehicle industry is supplied by
its RV Products Division and Suburban Manufacturing Company while the heating,
ventilating and air conditioning industry is supplied by the Marvair division,
formerly Crispaire division. Due to the similarities of the economic
characteristics, production processes, customers, distribution methods and
regulatory environment of the Company's products, the Company is managed,
operated and reported as one segment.
A significant part of the Company's operations are directly dependent upon
the conditions in the highly cyclical RV industry, highly competitive
telecommunications industry and the commercial and public construction industry.
Companies within these industries, including the Company's largest customers,
are subject to volatility in operating results due to external factors such as
economic, demographic and political changes. These factors include seasonal
factors, fuel availability and fuel prices, overall consumer confidence and
general economic conditions, the level of discretionary consumer spending,
government regulation, interest rates and unemployment.
5
3. INVENTORIES:
Inventories consist of the following:
June 30, 2004 December 31, 2003
------------- -----------------
Raw materials $ 10,874 $ 8,744
Work-in-process 2,499 2,013
Finished goods 8,867 9,054
------------- -------------
$ 22,240 $ 19,811
============= =============
4. NOTES RECEIVABLE FROM HOLDINGS:
On February 19, 2003, the Company purchased certain notes from the holders
for an aggregate purchase price of $3,447 due from Holdings which mature
November 2008. Although the Company may determine to distribute the notes to
Holdings, subject to compliance with the Company's credit facility, senior
subordinated notes and other debt agreements, the Company does not anticipate
this will occur in the foreseeable future.
5. WARRANTY RESERVE:
The Company offers a one to five year warranty for its products. The
specific terms and conditions of those warranties vary depending upon the
product sold. An estimated cost of product warranty is recognized at the time
the revenue is recognized. The Company estimates the cost of its product
warranty obligation based on historical analysis of sales and warranty costs
incurred. The Company periodically assesses the adequacy of its recorded product
warranty obligation and adjusts the amounts as necessary.
Changes in the Company's product warranty liability during the period are as
follows:
Three months ended Six months ended
June 30, 2004 June 30, 2004
------------------- ----------------
Balance, beginning of period $ 2,200 $ 2,186
Warranties issued during the period 487 1,062
Settlements made during the period (518) (1,090)
Changes in estimated liability for pre-existing warranties
during the period, including expirations 424 435
------------- -------------
Balance, end of period $ 2,593 $ 2,593
============= =============
6. LONG-TERM DEBT:
On June 25, 2004, the Company notified the trustee of the Senior
Subordinated Notes of its intention to redeem $10,000 of the principal amount of
the Notes outstanding on August 9, 2004 at a redemption price of 103.667% plus
accrued and unpaid interest totaling $10,623.
7. INCOME TAXES:
The effective income tax rate decreased during the quarter ended June 30,
2004 as a result of the use of a federal tax credit.
6
8. CONTINGENCY:
On January 6, 2004, the Company entered into a letter of credit totaling
$1,210. On March 5, 2004 and again on August 3, 2004, the Company amended an
existing letter of credit to decrease the amount to $664. The letters of credit
obligate the Company to make payment in the event of default on the agreements
with the insurance companies to pay workers compensation claims incurred.
Management does not expect any material losses to result from this arrangement
because performance is not expected to be required, and therefore, is of the
opinion that the fair value of these instruments is zero.
9. BENEFIT PLAN
The components of net periodic pension benefit for the six months ended
June 30, 2004 and 2003 for Suburban Manufacturing Company Retirement Plan ("Plan
1") and the Suburban Manufacturing Company Retirement Plan for Bargaining
Employees ("Plan 2") were:
June 30, 2004 June 30, 2003
------------------------ ------------------------
Plan 1 Plan 2 Plan 1 Plan 2
-------- -------- -------- --------
Service cost $ 114 $ 180 $ 92 $ 138
Interest cost 138 108 126 94
Expected return on plan assets (120) (92) (98) (80)
Amortization of net loss 50 48 32 34
Expected employee contributions (16) (32) (16) (28)
-------- -------- -------- --------
Net periodic benefit cost $ 166 $ 212 $ 136 $ 158
======== ======== ======== ========
10. LITIGATION:
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
7
10. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales. Net sales increased 23.5% from $40.5 million to $50.0 million
in the quarter ended June 30, 2004 as compared to the corresponding quarter of
2003. For the six months ended June 30, 2004 net sales increased 17.6% from
$79.9 million to $94.0 million in the same six months of 2003. For the quarter
and six months ended June 30, 2004 net sales increased in comparison to the same
period of 2003 primarily due to volume growth within the RV industry.
Gross Profit. Gross profit increased 30.7% from $7.5 million (19% of net
sales) to $9.8 million (20% of net sales) in the quarter ended June 30, 2004 as
compared to the corresponding quarter of 2003. For the six months ended June 30,
2004 gross profit increased 22.7% from $15.4 million (19% of net sales) to $18.9
million (20% of net sales) in the same six months of 2003. The increase was
principally due to the increased sales volume.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense increased 10.8% from $3.7 million (9% of net sales) to $4.1 million (8%
of net sales) in the quarter ended June 30, 2004 as compared to the
corresponding quarter of 2003. For the six months ended June 30, 2004 selling,
general and administrative expense increased 7.7% from $7.8 million (10% of net
sales) to $8.4 million (9% of net sales) in the same six months as 2003. The
increase was primarily due to the growth experienced during the period and
expenses associated with various litigation matters incidental to the conduct of
the Company's business.
Interest expense. Interest expense decreased slightly from $2.7 million to
$2.6 million in the quarter ended June 30, 2004 as compared to the corresponding
quarter of 2003. For the six months ended June 30, 2004 interest expense
decreased from $5.4 million to $5.3 million in the same six months of 2003. The
decrease is primarily due to reductions in average long term borrowings
outstanding resulting from improved operating cash flows.
Income tax expense. Income tax expense increased from $.4 million to $.9
million in the quarter ended June 30, 2004 as compared to the corresponding
quarter of 2003 related to the comparable increase in pre-tax income and
increased from $.8 million to $1.8 million in the six months ended June 30, 2004
as compared to the same six months in 2003. The effective income tax rate
decreased during the quarter ended June 30, 2004 as a result of the use of a
federal tax credit.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2004, the Company generated $4.7 million
in net cash flow from operating activities compared to a use of cash in
operating activities of $.7 million in the six months ended June 30, 2003. The
improvement was primarily the result of increased profitability and better
working capital management specifically related to the use of accounts payable
and accrued expenses to manage the growth of accounts receivable and inventory
as volume increases. Capital expenditures totaled $.7 million for six months
ended June 30, 2004 compared to $.4 million for the same period in 2003.
8
On February 19, 2003, the Company purchased certain notes from the holders
for an aggregate purchase price of $3.4 million due from Holdings which mature
November 2008. Although the Company may determine to distribute the notes to
Holdings, subject to compliance with the Company's credit facility, senior
subordinated notes and other debt agreements, the Company does not anticipate
this will occur in the foreseeable future.
The Company had no outstanding borrowing on its credit facility at June
30, 2004 compared to approximately $4.7 million outstanding at December 31,
2003. The net repayment was made possible from improved operating cash flows in
2004.
Covenants under the Company's credit facility with the bank restrict the
Company's ability, subject to certain exceptions, to dispose of assets, incur
additional indebtedness, guarantee obligations, prepay other indebtedness or
amend other debt instruments, make distributions or pay dividends, redeem or
repurchase capital stock, create liens on assets, make acquisitions, engage in
mergers or consolidations, and change the business conducted by the Company. In
addition, the Company is required to maintain compliance with a fixed charge
coverage ratio and maintain a minimum effective capital balance. The Company is
in compliance with these ratios at March 31, 2004. Management's current business
plan estimates working capital levels and operating profitability. The
achievement of this plan is necessary for compliance with various financial
covenants during 2004. The possibility exists that certain financial covenants
will not be met if business conditions are other than as anticipated. In such
event, the Company would need an amendment or waiver of such financial
covenants; however, there can be no assurance that such amendment or waiver
would be able to be obtained.
The Company meets its working capital, capital equipment requirements and
cash requirements with funds generated internally and funds from agreements with
a bank. Management currently expects its cash on hand, funds from operations and
borrowings available under existing credit facilities to be sufficient to cover
both short-term and long-term operating requirements.
SEASONALITY
A significant part of the Company's operations are directly dependent upon
the conditions in the highly cyclical RV industry, highly competitive
telecommunications industry and the commercial and public construction industry.
Companies within these industries, including the Company's largest customers,
are subject to volatility in operating results due to external factors such as
economic, demographic and political changes. These factors include seasonal
factors, fuel availability and fuel prices, overall consumer confidence and
general economic conditions, the level of discretionary consumer spending,
government regulation, interest rates and unemployment.
CERTAIN IMPORTANT FACTORS
Except for the historical information contained herein, this Form 10-Q
contains forward-looking statements, and any statements contained in this Form
10-Q that are not statements of historical fact are deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may", "will"
"expect", "believe", "anticipate", "estimate", or "continue", the negative or
other variations thereof, or comparable terminology, are intended
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, and actual results may differ materially depending on a
variety
9
of factors, including possible changes in economic conditions, prevailing
interest rates or gasoline prices, or the occurrence of unusually severe weather
conditions, that can affect both the purchase and usage of recreational
vehicles, which, in turn, affects purchases by consumers of the products that
the Company sells.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk on variable rate financial instruments: The Company maintains
a $25 million credit facility which permits borrowings at interest rates based
on either the bank's base rate or LIBOR. No borrowings were outstanding under
the revolving credit facility at June 30, 2004. Increases in market interest
rates would cause interest expense to increase and earnings before income taxes
to decrease. The change in interest expense and earnings before income taxes
would be dependent upon the weighted average outstanding borrowings during the
reporting period following an increase in market interest rates.
Market risk on fixed-rate financial instruments: Included in long-term
debt are $90 million of 11% Senior Subordinated Notes due 2007. Increases in
market interest rates would generally cause a decrease in the fair market value
of the Notes and a decrease in market interest rates would generally cause an
increase in fair value of the Notes.
10
ITEM 4. CONTROLS AND PROCEDURES
(a) Our chief executive officer and chief financial officer have reviewed and
evaluated the Company's disclosure controls and procedures within 90 days of the
filing date of this Quarterly Report. Based on such review and evaluation, the
officers believe that the disclosure controls and procedures are designed
effectively to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (1.) is recorded, processed, summarized and reported
within the time period specified in the SEC's rules and forms and that the
information required to be discussed by the Company in the reports that it files
and submits under the Securities Exchange Act of 1934, as amended, and (2.) is
documented and communicated to the Company's management, including the officers,
as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
11
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6 (a.) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
ITEM 6 (b.) REPORTS ON FORM 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Airxcel, Inc.
8-12-04 /s/ Melvin L. Adams
- ---------------------- -------------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
8-12-04 /s/ Richard L. Schreck
- ---------------------- -------------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
13