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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 March 31, 2005
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 March 31, 2005
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)
March 31, 2005 December 31, 2004
-------------- -----------------
(Unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 174 $ 239
Accounts receivable, net of allowances for doubtful accounts
of $295 and $399, in 2005 and 2004, respectively 19,920 12,868
Inventory 24,274 24,339
Prepaid expenses and other current assets 3,182 3,190
-------------- -----------------
Total current assets 47,550 40,636
-------------- -----------------
Deferred income taxes 1,840 1,878
Property, plant and equipment, net 14,264 14,855
Loan financing costs, net 1,074 1,156
Trademarks 2,900 2,900
Other identifiable intangible assets, net 1,383 1,418
Goodwill 12,973 12,973
-------------- -----------------
Total assets $ 81,984 $ 75,816
============== =================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 74 $ 72
Cash overdraft 2,789 -
Accounts payable 11,746 7,452
Warranty reserve 2,806 2,707
Accrued interest 3,331 1,131
Accrued payroll 2,204 3,776
Accrued expenses and other current liabilities 3,528 3,560
-------------- -----------------
Total current liabilities 26,478 18,698
-------------- -----------------
Pension liability 2,898 2,877
Long-term debt, net of current portion 85,679 89,088
-------------- -----------------
Total liabilities 115,055 110,663
-------------- -----------------
Commitments and contingencies
Stockholder's equity (deficiency):
Common stock 1 1
Additional paid-in capital 27,322 27,322
Accumulated deficit (55,488) (57,264)
Accumulated other comprehensive loss (1,459) (1,459)
Notes receivable from Holdings (3,447) (3,447)
-------------- -----------------
Total stockholder's equity (deficiency) (33,071) (34,847)
-------------- -----------------
Total liabilities and stockholder's equity (deficiency) $ 81,984 $ 75,816
============== =================
See accompanying notes.
2
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
March 31, 2005 March 31, 2004
-------------- --------------
Net sales $ 48,678 $ 43,907
Cost of sales 39,449 34,808
-------------- --------------
Gross profit 9,229 9,099
Selling, general and administrative expense 4,108 4,261
-------------- --------------
Income from operations 5,121 4,838
Interest expense, net 2,418 2,631
Other expense, net 16 26
-------------- --------------
Income before income tax expense 2,687 2,181
Income tax expense 911 838
-------------- --------------
Net income $ 1,776 $ 1,343
============== ==============
See accompanying notes.
3
AIRXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
March 31, 2005 March 31, 2004
-------------- --------------
Cash flows from operating activities:
Net income $ 1,776 $ 1,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 771 759
Amortization of financing costs 129 118
Deferred income taxes 112 838
Provision for doubtful accounts (58) 16
Loss on disposition of property, plant and equipment 2 5
Changes in operating assets and liabilities:
Accounts receivable (6,994) (4,764)
Inventories 65 (1,327)
Other assets (66) (244)
Accounts payable 4,294 4,076
Accrued expenses and other liabilities 718 1,386
-------------- --------------
Net cash provided by operating activities 749 2,206
-------------- --------------
Cash flows from investing activities:
Capital expenditures (141) (374)
Other (6) (12)
-------------- --------------
Net cash used in investing activities (147) (386)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 36,002 36,276
Principal payments on long-term debt (39,411) (39,091)
Cash overdraft 2,789 1,364
Financing costs incurred (47) -
-------------- --------------
Net cash used in financing activities (667) (1,451)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (65) 369
Cash and cash equivalents, beginning of period 239 33
-------------- --------------
Cash and cash equivalents, end of period $ 174 $ 402
============== ==============
See accompanying notes.
4
AIRXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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. 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, 2004 included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 18, 2005. The results of operations for any interim
period are not necessarily indicative of results for the full year or for any
subsequent 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,
formerly known as Recreation Vehicle Products, Inc. is engaged in designing,
manufacturing and marketing recreation vehicle air conditioning equipment in the
United States, Canada and certain international markets. On November 10, 1997,
the Company acquired substantially all of the net assets, properties and rights
and assumed certain related liabilities of Crispaire Corporation, currently
operating as Marvair ("Marvair"), a division of Airxcel, Inc., which designs,
manufactures and markets specialty wall mount air conditioners, packaged
terminal air conditioners with gas heat, environmental control units, heat pumps
for the heating, ventilating and air conditioning (HVAC) industry and marine
reverse cycle air conditioners. Marvair markets its products to companies
involved in modular construction, telecommunications, utilities, pleasure yacht
manufacturers and school districts located throughout the United States and
selected foreign markets. On March 17, 1998 the Company acquired 100% of the
outstanding stock of Suburban Manufacturing Company, formerly KODA Enterprises
Group, Inc. ("Suburban"). Suburban, a wholly-owned subsidiary is a designer and
manufacturer of heating, water heating, and cooking appliances for the
recreation vehicle industry and other specialty products for the HVAC industry.
On November 3, 2000 the Company acquired substantially all of the net assets,
properties and rights and assumed certain related liabilities of Instafreeze,
Inc. ("Insta Freeze"). The operations of Insta Freeze were consolidated into the
Company and the Insta Freeze entity was dissolved December 22, 2003. The Company
and its subsidiaries collectively sell HVAC and appliance related groups of
products, as defined by Statement of Financial Accounting Standards (SFAS) No.
131, to the RV, telecommunications and school customers, as described above. 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
5
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.
3. INVENTORIES:
Inventory consists of the following:
March 31, 2005 December 31, 2004
-------------- -----------------
Raw materials $ 11,319 $ 11,309
Work-in-process 2,202 1,991
Finished goods 10,753 11,039
-------------- -----------------
$ 24,274 $ 24,339
============== =================
4. 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:
Balance, beginning of period $ 2,707
Warranties provided for during the period 556
Settlements made during the period (607)
Changes in liability for pre-existing warranties
during the period, including expirations 150
------------
Balance, end of period $ 2,806
============
5. INCOME TAXES:
The effective income tax rate decreased during the quarter ended March 31,
2005 as a result of the use of certain federal tax credits.
6. CONTINGENCY:
On February 1, 2005 the Company amended two existing letters of credit.
One letter of credit was amended which decreased the amount to $376. Another
letter of credit was amended which increased the amount to $1,931. 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.
6
7. BENEFIT PLAN
The Company's funding policy is to contribute amounts that are sufficient,
when added to participants' contributions, to fund the retirement benefits of
all participants in accordance with the requirements of the Internal Revenue
Code. On December 31, 2004, the Company elected to freeze the Suburban
Manufacturing Company Retirement Plan for Bargaining Employees.
The components of net periodic pension benefit for the three months ended
March 31, 2005 and 2004 for Suburban Manufacturing Company Retirement Plan
("Plan 1") and the Suburban Manufacturing Company Retirement Plan for Bargaining
Employees ("Plan 2") were:
March 31, 2005 March 31, 2004
---------------------------- --------------------------
Plan 1 Plan 2 Plan 1 Plan 2
----------- ---------- ---------- ----------
Service cost $ - $ 95 $ 57 $ 90
Interest cost 68 57 69 54
Expected return on plan assets (62) (53) (60) (46)
Amortization of net loss 20 20 25 24
Expected employee contributions - (17) (8) (16)
----------- ---------- ---------- ----------
Net periodic benefit cost $ 26 $ 102 $ 83 $ 106
=========== ========== ========== ==========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Net sales. Net sales increased 10.9% from $43.9 million in 2004 to $48.7
million in 2005. Approximately 35% of the net sales increase was due to
increased sales volume within the telecommunication industry. Increases due to
volume growth in appliance related products within the RV industry contributed
23% of the net sales increase while the remaining increase is attributable to
increased HVAC sales volume within the RV industry. The effects of pricing
changes on net sales were not significant during the year.
Gross Profit. Gross profit increased 1.1% from $9.1 million (21% of net
sales) in 2004 to $9.2 million (19% of net sales) in 2005. The increase was
attributable to the effects of higher sales volume described above which was
substantially offset by $1.1 million of higher commodity prices for key raw
materials such as steel, aluminum and copper of which only $.3 million was
passed on to customers through price increases. Unfavorable changes in the mix
of products sold also contributed to the decline in gross profit percent.
Selling, general and administrative expense (including amortization of
intangible assets and computer software). Selling, general and administrative
expense decreased 4.7% from $4.3 million in 2004 (10% of net sales) to $4.1
million in 2005 (8% of net sales), primarily due to decreased promotional
expenses in an effort to mitigate the effects of the gross profit erosion due to
the commodity price increases described above.
Interest expense. Interest expense decreased 7.7% from $2.6 million in
2004 to $2.4 million in 2005 primarily due to reductions in average long term
borrowings outstanding resulting from improved operating cash flows.
Income tax expense. Income tax expense increased from $.8 million in 2004
to $.9 million in 2005, related principally to higher pretax income, offset
slightly by the use of certain federal tax credits.
Net income. Net income improved from $1.3 million in 2004 to $1.8 million
in 2005 primarily as a result of an increase in gross profit and a decrease in
selling, general and administrative expense and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2005, the Company generated $.7
million in net cash flow from operating activities compared to $2.2 million in
the three months ended March 31, 2004. The decline was primarily the result of
the effects of an increase in accounts receivable on higher sales volume being
more than offset by the higher net income.
Capital expenditures totaled $.1 million for three months ended March 31,
2005 compared to $.4 million for the same period in 2004.
8
The outstanding borrowing on the Company's credit facility at March 31,
2005 is $5.6 million which is approximately $3.4 million less than that
outstanding at December 31, 2004. The net repayment was made possible from
operating cash flows in 2005.
Covenants under the Company's revolving credit facility with the bank
restrict the 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 of 1.00 and maintain a minimum effective capital balance (defined
as accumulated deficit plus the $80 million in senior subordinated notes
payable) of $36 million.
The Company was in compliance with these ratios at March 31, 2005 and
2004. The Company anticipates that they will continue to comply in 2005 with the
financial covenants. 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 2005. 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. In the event that a
waiver cannot be obtained, the Company would be required to refinance the debt
or would be in default of the credit agreement which, in turn, could have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
The revolving credit facility also contains a subjective acceleration
clause but does not require a lock-box or other account by which the bank can
apply cash receipts against the revolver balance unless an event of default
occurs. As such, amounts outstanding under this revolving credit facility are
classified as long-term liabilities on the accompanying consolidated balance
sheets, as the application of the subjective acceleration is not anticipated.
The revolving credit facility is collateralized by accounts receivable,
equipment, general intangibles, inventory, and investment property.
Certain covenants under the $80 million Indenture must be met in the event
the Company incurs any Indebtedness (including Acquired Indebtedness) except for
Permitted Indebtedness, as defined in the Indenture agreement as of November 10,
1997. In such event, the Company must meet a Consolidated Coverage Ratio greater
than 2.25. The calculation of Consolidated Coverage Ratio is defined as Adjusted
EBITDA divided by interest expense. At March 31, 2005, no Indebtedness requiring
such covenant compliance was outstanding. The Company anticipates that, in the
event the Company incurred any Indebtedness, as defined by the Indenture
agreement, it will be in compliance with the financial covenant. The possibility
exists that the covenant 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 covenant; however, there can be no assurance that such amendment
or waiver will be obtained. In the event that a waiver cannot be obtained, the
Company would be required to refinance the debt or would be in default of the
Indenture agreement which, in turn, could have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
The Company meets its working capital, capital equipment requirements and
cash requirements
9
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. However, this is dependent
upon the future performance of the Company and its subsidiaries which, in turn,
is subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control.
The Company did not have any other relationships with unconsolidated
entities or financial partnerships, such entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, the Company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the Company were engaged in such relationships.
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 financial information contained herein, this
Form 10-Q contains certain forward-looking statements. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact may be 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
fuel 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.
10
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 outstanding borrowings under the credit facility of $5.6 million as of
March 31, 2005 and an average interest rate of 4.2% per annum, a 1% increase in
market interest rates would increase interest expense and decrease earnings
before income taxes by approximately $56,000 annually.
Market risk on fixed-rate financial instruments: Included in long-term
debt 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) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on such evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective.
(b) Internal Controls Over Financial Reporting. There have not been any
changes in the Company's internal controls over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
12
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
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.
5-2-05 /s/ Melvin L. Adams
- ----------------------------- -------------------------------------
Date Melvin L. Adams
President and Chief Executive Officer
5-2-05 /s/ Richard L. Schreck
- ----------------------------- -------------------------------------
Date Richard L. Schreck
Secretary/Treasurer and
Chief Financial Officer
14