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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INFORMATION SPECIFIED 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 September 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 September 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.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AIRXCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, 2004 December 31, 2003
------------------------- -------------------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 223 $ 33
Accounts receivable, net of allowances for doubtful accounts
of $497 and $550, in 2004 and 2003, respectively 17,736 13,472
Inventories 25,457 19,811
Deferred income taxes 2,402 2,533
Other current assets 539 409
------------------------- -------------------------
Total current assets 46,357 36,258
------------------------- -------------------------
Deferred income taxes 1,561 2,233
Property, plant and equipment, net 15,120 15,906
Loan financing costs, net 1,279 1,583
Other identifiable intangible assets, net 1,479 1,645
Goodwill and other indefinite lived intangible assets 15,873 15,873
Notes receivable from Holdings 3,447 3,447
------------------------- -------------------------
Total assets $ 85,116 $ 76,945
========================= =========================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 71 $ 64
Cash overdraft 5,192 --
Accounts payable 11,520 7,021
Warranty reserve 2,718 2,186
Accrued interest 3,327 1,243
Accrued payroll 3,534 2,620
Income tax payable 845 631
Accrued expenses and other current liabilities 3,107 2,386
------------------------- -------------------------
Total current liabilities 30,314 16,151
------------------------- -------------------------
Pension liability 2,421 2,394
Long-term debt, less current portion 84,287 94,884
Commitments and contingencies
Stockholder's equity (deficiency):
Common stock 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (57,813) (62,391)
Accumulated other comprehensive loss (1,416) (1,416)
------------------------- -------------------------
Total stockholder's equity (deficiency) (31,906) (36,484)
------------------------- -------------------------
Total liabilities and stockholder's equity (deficiency) $ 85,116 $ 76,945
========================= =========================
See accompanying notes.
2
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net sales $ 49,683 $ 44,155 $ 143,635 $ 124,062
Cost of sales 40,518 35,247 115,595 99,713
--------------- --------------- --------------- ---------------
Gross profit 9,165 8,908 28,040 24,349
Selling, general and administrative expense 4,393 3,941 12,784 11,783
--------------- --------------- --------------- ---------------
Income from operations 4,772 4,967 15,256 12,566
Interest expense, net 2,507 2,667 7,773 8,100
Premium on bond repurchase 367 -- 367 --
Other expense, net 16 43 130 54
--------------- --------------- --------------- ---------------
Income before income tax expense 1,882 2,257 6,986 4,412
Income tax expense 622 867 2,408 1,705
--------------- --------------- --------------- ---------------
Net income $ 1,260 $ 1,390 $ 4,578 $ 2,707
=============== =============== =============== ===============
See accompanying notes.
3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
----------------------------------
September 30, September 30,
2004 2003
------------- -------------
Cash flows from operating activities:
Net income $ 4,578 $ 2,707
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,292 2,293
Amortization of financing costs 354 347
Amortization of premium on bond repurchase 367 --
Deferred income taxes 803 1,465
Provision for bad debts 153 144
Loss on sale of property, plant and equipment 63 34
Changes in operating assets and liabilities:
Accounts receivable (4,417) (4,905)
Inventories (5,646) 2,727
Other assets (130) (145)
Accounts payable 4,499 (7)
Accrued expenses and other liabilities 4,492 2,881
------------- -------------
Net cash provided by operating activities 7,408 7,541
------------- -------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 4 45
Capital expenditures (1,361) (700)
Purchase of notes receivable from Holdings -- (3,447)
Other (46) (1)
------------- -------------
Net cash used in investing activities (1,403) (4,103)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 135,534 111,140
Principal payments on long-term debt (146,124) (115,792)
Cash overdraft 5,192 1,506
Financing costs incurred (50) (92)
Premium on bond repurchase (367) --
Dividend to parent -- (5)
------------- -------------
Net cash used in financing activities (5,815) (3,243)
------------- -------------
Net increase in cash and cash equivalents 190 195
Cash and cash equivalents at beginning of period 33 179
------------- -------------
Cash and cash equivalents at end of period $ 223 $ 374
============= =============
See accompanying notes.
4
AIRXCEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(Unaudited)
Nine Months Ended
---------------------------------
September 30, September 30,
2004 2003
------------- -------------
Supplemental non-cash financing information:
Basis reduction of certain assets related to Holdings
taxable income on note purchase recorded as a non-cash
distribution and a decrease in deferred income taxes. $ -- $ 1,471
============= =============
5
AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
(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 consolidated 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.
6
3. INVENTORIES:
Inventories consist of the following:
September 30, 2004 December 31, 2003
-------------------- --------------------
Raw materials $ 13,012 $ 8,744
Work-in-process 2,293 2,013
Finished goods 10,152 9,054
-------------------- --------------------
$ 25,457 $ 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 Nine months ended
September 30, 2004 September 30, 2004
-------------------- --------------------
Balance at beginning of period $ 2,593 $ 2,186
Warranties issued during the period 608 1,670
Settlements made during the period (639) (1,729)
Changes in estimated liability for pre-existing warranties
during the period, including expirations 156 591
-------------------- --------------------
Balance at end of period $ 2,718 $ 2,718
==================== ====================
6. LONG-TERM DEBT:
On August 9, 2004, the Company redeemed $10,000 of the principal amount of
Senior Subordinated Notes at a redemption price of 103.667% plus accrued and
unpaid interest totaling $10,623. On August 6, 2004, the Company amended its
Credit Facility with a bank which extended the maturity date to March 31, 2007.
7
7. INCOME TAXES:
The effective income tax rate decreased during the quarter ended September
30, 2004 as a result of the use of a federal tax credit.
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 nine months ended
September 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:
September 30, 2004 September 30, 2003
---------------------------- ----------------------------
Plan 1 Plan 2 Plan 1 Plan 2
---------- ---------- ---------- ----------
Service cost $ 171 $ 270 $ 138 $ 207
Interest cost 207 162 189 141
Expected return on plan assets (180) (138) (147) (120)
Amortization of net loss 75 72 48 51
Expected employee contributions (24) (48) (24) (42)
---------- ---------- ---------- ----------
Net periodic benefit cost $ 249 $ 318 $ 204 $ 237
========== ========== ========== ==========
10. LITIGATION:
During September 2004, the Company agreed to settle a pending lawsuit with an
individual and acquire a non-exclusive license under the individual's patent.
The Company paid a license fee associated with the patent and will pay a one
dollar royalty for each licensed product sold by the Company during the life of
the patent. The license fee is included in selling, general, and administrative
expense in the accompanying 2004 condensed consolidated statement of operations.
No current product of the Company requires the payment of the one dollar
royalty, and no royalty is due for any previously sold product.
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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales. Net sales increased 12.4% from $44.2 million to $49.7 million in
the quarter ended September 30, 2003 as compared to the corresponding quarter of
2004. For the nine month periods, net sales increased 15.7% from $124.1 million
to $143.6 million in the nine months of 2004. For the quarter and nine months
ended September 30, 2004, net sales increased in comparison to the same period
of 2003 primarily due to growth within the RV industry.
Gross profit. Gross profit increased 3.4% from $8.9 million (20% of net
sales) to $9.2 million (19% of net sales) in the quarter ended September 30,
2003 as compared to the corresponding quarter of 2004. For the nine month
periods, gross profit increased 15.2% from $24.3 million (20% of net sales) in
2003 to $28.0 million (20% of net sales) in the nine months of 2004. For the
quarter and nine months ended September 30, 2004, gross profit increased in
comparison to the same period of 2003 primarily due to increased sales volume.
The decline in gross profit as a percent of sales is due to the increased cost
of raw material components including steel, copper and aluminum.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense increased 12.8% from $3.9 million (9% of net sales) to $4.4 million (9%
of net sales) in the quarter ended September 30, 2003 as compared to the
corresponding quarter of 2004. For the nine month periods, selling, general and
administrative expense increased 8.5% from $11.8 million (10% of net sales) in
2003 to $12.8 million (9% of net sales) in 2004. The increase was primarily due
to 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 7.4% from $2.7 million to $2.5
million in the quarter ended September 30, 2003 as compared to the corresponding
quarter of 2004. For the nine month periods, interest expense decreased 3.7%
from $8.1 million in 2003 to $7.8 million in the nine months of 2004. The
decrease is primarily due to reductions in average long term borrowings
outstanding resulting from improved operating cash flows, including the
redemption of $10 million in Senior Subordinated Notes in August 2004.
Premium on bond repurchase. Premium on bond repurchase increased to $.4
million in the quarter ended September 30, 2004 as compared to the corresponding
quarter of 2003 due to bond premium associated with the redemption of $10
million of Senior Subordinated Notes.
Income tax expense. Income tax expense decreased from $.9 million to $.6
million in the quarter ended September 30, 2003 as compared to the corresponding
quarter of 2004 and increased from $1.7 million to $2.4 million in the nine
months ended September 30, 2003 as compared to the same nine months in 2004, due
primarily to the related decreases and increases in pretax income for these
periods. The effective income tax rate decreased during the quarter ended
September 30, 2004 as a result of the use of a federal tax credit.
9
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2004, the Company generated $7.4
million in net cash flow from operating activities compared to $7.5 million for
the comparable period in 2003. Increased profitability in the 2004 period and
greater use of accounts payable, cash overdraft positions and accrued expenses
substantially offset the growth of accounts receivable and inventory as volume
increases. The significant increase in inventory was also due in part to a large
volume purchase of a key raw material at advantageous pricing. Capital
expenditures totaled $1.4 million for the nine months ended September 30, 2004
compared to $.7 million for the same period in 2003.
On August 9, 2004, the Company redeemed $10 million of the principal amount
of Senior Subordinated Notes at a redemption price of 103.667% plus accrued and
unpaid interest totaling $10.6 million. On August 6, 2004, the Company amended
its Credit Facility with a bank which extends the maturity date to March 31,
2007.
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.
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 September 30, 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 will
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,
10
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 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. 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. Based on the Company's
current outstanding borrowings under the credit facility at an average interest
rate of 3.6% per annum, a 1% increase in market interest rates would increase
interest expense and decrease earnings before income taxes by approximately
$42,000 annually.
Market risk on fixed-rate financial instruments: Included in long-term debt
at September 30, 2004 are $80 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.
11
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.
12
PART 2 - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. 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
13
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.
- ------------------------------------- -------------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
- ------------------------------------- -------------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
14