10-Q 1 y00601e10vq.txt FORM 10-Q 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)

See accompanying notes. 2 AIRXCEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

See accompanying notes. 3 AIRXCEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED

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:

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:

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:

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

AIRXCEL INC 10-Q