Rexhall Industries, Inc (REXL) - Description of business
Rexhall Industries, Inc. (the Company) designs, manufactures and sells to dealers Class A motorhomes. Class A motorhomes are self-contained and self-powered recreational vehicles used primarily in conjunction with leisure travel and outdoor activities. The Company began operations in July 1986 as a general partnership and conducted business in that form until December 31, 1986, when the assets and business of the partnership were contributed to Rexhall Industries, Inc., a California corporation, which assumed the liabilities of the partnership. Rexhall Industries, Inc. was incorporated in California in June 1986, but except for organizational activities, conducted no operations until January 1, 1987. As used herein, the Company refers to Rexhall Industries, Inc. and its wholly-owned subsidiary, Price I, Inc. Price I, Inc. which the Company organized in June 2000 to operate a retail dealership for Class A motorhomes and other recreational vehicles, ceased retail operations in December 2000 and then ceased all other operations (consisting of operating a service facility) in December 2003. The following are trademarks of the Company: Rexhall®, RoseAir, RexAir®, Aerbus, Vision®, American Clipper, Anthem, Concord, Minibus, EntrySlide, and T-Rex Double & Wide. The Company produces all of its products from its manufacturing facility in Lancaster, California, which also serves as its corporate headquarters. These facilities and the Companys corporate headquarters are located at 46147 7th Street West, Lancaster, CA 93534 and the Companys telephone number is (661) 726-0565.Class A Motorhomes Based upon industry standards established by the Recreation Vehicle Industry Association (RVIA), the Company manufactures certain product lines classified as conventional or Class A motorhomes. Conventional or Class A motorhomes are self-powered vehicles built on a motor vehicle chassis, with engine and drive train components which are supplied by a motor vehicle manufacturer, such as Ford Motor Co., Spartan Motors Chassis, Inc. and Workhorse Custom Chassis LLC. The interior of the completed vehicle typically includes a kitchen and bathroom, as well as drivers, dining and sleeping areas. Class A motorhomes are self-contained with their own electrical generation, lighting, heating, cooking and refrigeration facilities, waste disposal and water storage tanks, permitting occupancy without requiring connection to utilities. While not designed or intended as permanent housing, Class A motorhomes do provide comfortable living quarters for short periods, particularly for people interested in travel and outdoor recreational activities. Class A motorhomes are different from mobile homes, which are manufactured housing designed for permanent or semi-permanent residential dwelling and, although movable, are not used for transportation. Class A motorhomes are also different from other recreational vehicles, such as Class B van campers, which are smaller and do not provide all of the features that typically are standard on Class A motorhomes; Class C mini-low profile and compact motorhomes, which are built on a van or small truck chassis that is supplied with an engine and finished cab section and are differentiated by size; and travel trailers, which are non-motorized vehicles designed to be towed by automobiles, pick-up trucks and vans, and generally by law may not be used as living quarters unless stationary. Travel trailers are further classified as conventional, fifth wheel and hybrid, and are generally differentiated by the method and vehicle employed for towing, their size, configuration and use. Other recreational vehicle categories include folding camping trailers, park trailers, truck campers, and van conversions. As Class A motorhomes are self-contained with kitchen, bathroom facilities and sleeping quarters, it is eligible to be treated as a qualified residence under the Internal Revenue Code of 1986, as amended. Thus, as in the case of other recreational vehicles suitable for overnight use, a purchaser may generally deduct interest on debt incurred to acquire a ClassA motorhome provided the purchaser designates and uses it as one of no more than two residences and otherwise meets the requirements of the Internal Revenue Code of 1986.IndustryBased on information furnished in March 2004 by the Recreation Vehicle Industry Association in Reston, Virginia, the following table sets forth comparisons of units and dollar sales of all recreational vehicles and Class A motorhomes in the United States compared with units and dollar sales of the Company during the years ended December 31, 2003, 2002 and 2001: % Change % Change Unit From Prior Revenues From Prior Sales Year (000) Year Total Recreational Vehicles 2003 377,800 (0.2 %) $ 11,509,273 5.9 % 2002 378,700 18.0 % $ 10,868,487 24.1 % 2001 321,000 (23.3 %) $ 8,760,483 (20.8 %) Class A Motorhomes 2003 41,500 4.8 % $ 4,775,281 11.0 % 2002 39,600 18.6 % $ 4,302,382 23.4 % 2001 33,400 (18.5 %) $ 3,486,492 (9.5 %) Rexhall Industries, Inc. (1) 2003 448 (41.3 %) $ 38,892 (38.6 %) 2002 763 5.2 % $ 63,303 11.7 % 2001 725 (20.3 %) $ 56,680 (15.3 %) (1) All Company data is reported net of repurchases Approximately 77 million Americans were born between the years of 1946 and 1964. Commonly known as baby boomers, the Company believes that baby boomers have been the historical group of potential Class A motorhome purchasers. Although the typical Class A motorhome buyers are over the age of 60, increasing disposable income in the 40 to 60 year old age group is expanding the potential Class A market. The Companys continued product development combined with the unified efforts of the recreational vehicle industry as a whole to capture the attention of the 40 year old and greater population heralds the future growth potential of the Companys target market.The Companys Motorhomes The Companys motorhomes are built with attention to quality. The materials used by the Company in constructing its motorhomes are commonly found on more expensive models and, in the opinion of management, generally are superior to those found on motorhomes in the same price range as the Companys motorhomes. The Company uses only steel, as opposed to wood or aluminum, in framing its cage. The Company uses gel-coated, high gloss, one-piece fiberglass panels for the sidewalls, and molded fiberglass front caps, rear caps and roofs, which are construction techniques used in more expensive motorhomes and eliminating many of the seams commonly found in most motorhomes. Fiberglass is generally easier to repair collision marks and scrapes than aluminum, which is the other material commonly used in sidewall construction. The Company uses polyurethane foam and polystyrene for insulation. The Companys motorhomes are also built with attention to aerodynamics, by using a streamlinedbus-style front cap that tapers to a width broader at the junction with the sidewalls than at the leading edge of the nose. This styling, coupled with rounded corners throughout the coach, contributes to a smooth ride, even in high winds or when large trucks or trailers pass the motorhome. The Company currently offers five lines of Class A motorhomes: RoseAir, RexAir®, Aerbus, American Clipper and Vision®. The Companys Class A line offers many models and floor plans with multiple decors. These various models come with the following chassis and engine types: Ford F-53 chassis with a 310 H.P. 6.8L Triton sequential electronic fuel injection (SEFI) gas engine Workhorse chassis with a 340 H.P. V8 General Motors Vortec 8100 (L18) gas engine Spartan Mountain Master chassis with a 300, 350 or 370 H.P. 8.3 liter ISC diesel engine Workhorse chassis with a 400 H.P. 8.9 liter Cummins ISL turbocharged electronic diesel engine Models range in size from an overall length of approximately 27 feet to approximately 40 feet with wheelbase ranging from 178 inches to 252 inches. All models have an overall maximum width of eight and one half feet (102 widebody) with a height (including air conditioner) of approximately thirteen feet. In addition to size of chassis, RoseAir, RexAir®, Aerbus, American Clipper and Vision® models are differentiated by exterior graphics, floor plans and sleeping accommodations. Depending on the model, each motorhome is equipped to sleep four to six adults comfortably. Standard features and equipment on all the Companys models include a 75 or 100 gallon fuel tank (depending on chassis and model), halogen headlights, dash air conditioning, power steering, automatic transmission, radial tires, stabilizing air bags, 34,000 or 35,000 BTU furnace, water heater, batteries mounted on a slide-out tray for easy access and service, and a powered entry step. Standard interior features include a double-door, flush-mounted refrigerator/freezer, a three-burner range with automatic pilot light, a large two-bowl kitchen sink, a toilet, a fiberglass shower surround, a bathroom sink, coordinating designer accents, and day/night shades. Additional standard equipment includes a television with antenna, an AM/FM stereo radio with cassette player, auxiliary power generators, a microwave oven, roof air conditioners, and a videocassette recorder. Optional equipment items that may be ordered include a back up camera, washer and dryer, hydraulic leveling jacks, electric and heated mirrors, 50 AMP service, entertainment center, satellite dish, patio awning, ducted roof air conditioning, dual-pane windows, and a simulated fireplace. Some models may vary in standard equipment. In third quarter of 2003, the Company announced its new T-Rex Double & Wide floor plan. Available in both gas and diesel models, the T-Rex incorporates slideouts that extend nearly the length of the motorhome on both sides, from behind the drivers and passengers seats, to the rear cap. When fully extended, the opposing slides provide a considerable increase (nearly double) to the interior space without compromising safety, structural integrity or value. The suggested retail prices of the Companys diesel models range from $148,000 to $206,000 with standard equipment, while the suggested retail prices for the Companys gas models range from $76,000 to $132,000 with standard equipment.Specialty Vehicles In addition to its line of Class A motorhomes, the Company also manufactures and sells specialty vehicles. These vehicles are designed for diverse purposes and varied users, some of which include mobile command posts for police and fire departments, and mobile classrooms. Some of the Companys specialty units are also modified to be wheelchair accessible. During 2003, 2002, and 2001, sales of specialty vehicles amounted to less than 1% of total revenues. Although the Company has no intention of phasing out its specialty vehicle business, it anticipates that such business will continue to constitute a low percentage of the Companys overall revenues in the future.Production The Companys manufacturing facility has been designed to permit production of motorhomes on an assembly-line basis. At the beginning of the line, in an effort to achieve uniformity, a partial steel cage is pre-assembled on a jig. The steel cage is welded together on the jig, which is then welded to a wall that is welded directly to the chassis to form what the Company terms a uni-body design. Steel outriggers are welded in place to support floor and basement storage compartments. Seamless, gel-coated fiberglass is vacuum bonded to a steel frame to form the exterior walls. Additionally, the roof structure is vacuum bonded. When all the exterior walls are in place, polyurethane foam insulation is sprayed inside the ceiling radius to fill voids and further bond the exterior shell to the frame. Exterior doors and interior decorative wallboard complete the basic construction. Vehicle components, cabinetwork, auxiliary power units, appliances, plumbing fixtures, floor coverings, window treatments, hardware, furniture and furnishings are then added. These components are generally purchased in finished form from various suppliers, none of which are a sole source. The Company manufactures its own driver-side doors, compartment doors, cabinetwork, draperies, and fiberglass parts and also makes some of the furniture used in its motorhomes. The Company expects to continue this practice of producing many of the components used in the manufacturing of its motorhomes as long as such practice is practical and results in cost savings and better quality. The Company operated one production shift, producing an average of 38 units per month during 2003. Total gross units produced in 2003 were 456 units. Increases in production can be achieved at a relatively low incremental cost on the existing production shift by increasing the number of production employees.Raw Materials and Chassis The principal raw materials used in the manufacturing process are steel, fiberglass, aluminum, lumber, plywood and plastic. These materials are purchased from third parties and are generally available from numerous sources. The Company has not experienced any significant delays or problems in acquiring raw materials needed for production. The principal component used in the manufacturing process is the chassis, which includes the engine and drive train. The Company obtains front-engine gas chassis from Ford Motor Company (Ford) and Workhorse Custom Chassis, LLC (Workhorse). Rear-engine diesel chassis are purchased from Workhorse Custom Chassis, LLC (Workhorse) and Spartan Motors Chassis (Spartan). The Company acquires Ford products under a converters agreement, which is used by the Company to purchase the chassis with financing provided by the suppliers affiliate. The financing provided to obtain Ford chassis under the converters agreement bears interest at the prime rate plus 1% (5.00% at December 31, 2003) and is secured by the Ford chassis obtained. Upon starting production of the motorhome, or 90 days after receipt of chassis, whichever comes first, the Company is required to pay to the lender the amount advanced for the purchase of the underlying chassis plus accrued interest. Similarly, the Company acquires its Workhorse products under a financing agreement with GE Capital Corporation (GE). The financing agreement with GE bears interest at the prime rate plus 1% (5.00% at December 31, 2003) and is secured by the Workhorse chassis obtained. The Company is required to pay the lender the amount advanced plus accrued interest upon the earliest to occur of starting production of the motorhome, or 120 days. The terms of sale for the chassis purchased from Spartan are on net 30-day basis. As is standard in the industry, arrangements with chassis suppliers provide that either the Company or the chassis supplier may terminate their relationship at any time. To date, the Company has not experienced any substantial shortages of chassis. The recreational vehicle industry as a whole has from time to time experienced shortages of chassis due to the concentration or allocation of available resources by suppliers of chassis to the manufacturers of vehicles other than recreational vehicles or for other causes. If Ford were to discontinue the manufacturing of motorhome chassis orsubstantially reduce the current chassis allocation, or if as a group all of the Companys chassis suppliers significantly reduced the availability of chassis to the industry, the Companys business and financial results could be materially adversely affected.Sales and Distribution The Company sells motorhomes in most of the states in the continental United States. Additionally, the Company sells to dealers in Canada and Europe. Sales outside the U.S. were less than $1 million during each of the last three years. Consistent with industry practice, most of the Companys dealers also stock previously owned recreational vehicles and carry recreational vehicles manufactured by competitors. For information on sales to dealers accounting for 10 percent or more of the Companys total net revenues, see Note 8 to Notes to Consolidated Financial Statements. Sales are usually made to dealers on terms requiring payments within ten days or less of the dealers receipt of the unit. Most dealers have floor plan financing arrangements with banks or other financing institutions under which the lender advances all, or substantially all, of the purchase price of the motorhome to the Company upon shipment to the dealer. The loan is collateralized by a lien on the purchased motorhome. As is customary in the industry, the Company has entered into repurchase agreements with these lenders. In general, the repurchase agreements provide that in the event of default by the dealer on its agreement to the lending institution, the Company will repurchase the motorhome so financed. Dealers do not have the right to return motorhomes to the Company, except by statute in some states. For information on the Companys contingent liability and repurchase history, see Note 7 to Notes to Consolidated Financial Statements.Advertising and Promotion The Company advertises its motorhomes to consumers in recreational vehicle magazines and to dealers in trade publications, and uses point-of-purchase promotional materials. Its promotional activities generally consist of participation at major recreational vehicle shows (e.g., the California RV Show in Pomona, California; the RVIA Trade Show in Louisville, Kentucky; and the Tampa Super Show in Florida) held during the year, as well as local recreational vehicle shows held by its dealers. The company also advertises its product on the World Wide Web under the following site: http://www.rexhall.com. E-Mail responses from consumers show great promise for this advertising medium.Seasonality and Backlog The recreational vehicle business generally has been seasonal with most sales occurring in the months of February through October, with sales from November through January generally being considerably slower. Generally, the Companys sales follow the industrys pattern. Historically, the Company has not maintained a significant inventory of finished motorhomes. Production is based on dealer orders and shipments that usually occur within four to eight weeks of the receipt of an order. At December 31, 2003, 2002 and 2001, the Companys backlog of dealer orders, which it believed were firm, were $2,820,000, $4,205,000 and $15,133,000, respectively. The Company believes that backlog is not necessarily a reliable indication of future sales because dealer orders fluctuate and, by industry customs, may be canceled without penalty.Product Warranty The Company currently provides retail purchasers of its motorhomes with a limited warranty against defects in materials and workmanship for 12 months or 12,000 miles, and a limited structural warranty on the steel cage for five years or 50,000 miles. Both are measured from date of purchase, or upon the transfer of the vehicle by the original owner, whichever occurs first. The Companys warranty excludes certain specified components, including chassis, engines and power train, which are warranted separately by the suppliers. Warranty expense was $1,755,000, $1,904,000, and$1,070,000 for the years ended December 31, 2003, 2002 and 2001 respectively. In most cases, warranty work is performed by a member of the Companys dealer network or by the Companys own service facility.Competition Competition in the manufacture and sale of motorhomes and other recreational vehicles is intense. The Company has been manufacturing Class A motorhomes for over 17 years and competes with many manufacturers of recreational vehicles, such as Coachmen Industries, Fleetwood Enterprises, Monaco Coach Corporation, National RV Holdings, Thor Industries, and Winnebago Industries. Several of the Companys competitors have multiple product lines of Class A motorhomes and other recreational vehicles and most, including all of those competitors previously named, are larger and have substantially greater financial, marketing and other resources than the Company, as well as larger and more developed dealer networks. In addition, sales of used Class A motorhome create additional competition for the Company. The Company believes that the principal competitive factors that affect the market for the Companys Class A motorhomes include price, product design and features, product quality, reliability and performance, quality of support and customer service, loyalty of customers and brand recognition. The Company believes its pricing and quality may help it to remain competitive.Regulation The Company is subject to the provisions of the National Traffic and Motor Vehicle Safety Act and the safety standards for recreational vehicles and components which have been promulgated thereunder by the Department of Transportation. The regulations under that legislation permit the National Highway Traffic Safety Administration to require a manufacturer to remedy vehicles containing defects related to motor vehicle safety or vehicles that fail to conform to all applicable Federal Motor Vehicles Safety Standards. The National Traffic and Motor Vehicles Safety Act also provides for the recall and repair of recreational vehicles that contain certain hazards or defects. The Company is subject to the provisions of Transport Canada for vehicles exported to Canada. The regulations under that legislation are similar in nature and design to its American counterparts. The Company relies on certifications obtained from chassis suppliers with respect to compliance of the Companys vehicles with applicable emission control standards and load bearing capacity. The Company believes that its facilities and products comply in all material respects with applicable environmental regulations and standards. The Companys manufacturing operations are subject to a variety of federal and state environmental regulations relating to the use, generation, storage, treatment, emissions, and disposal of hazardous materials and wastes and noise pollution. Such laws and regulations are becoming more stringent, and it is likely that future amendments to these environmental statutes and additional regulations promulgated thereunder will be applicable to the Company, its manufacturing operations and its products in the future. The failure of the Company to comply with present or future regulations could result in fines being imposed on the Company, civil and criminal liability, suspension of operations, alterations to the manufacturing process or costly cleanup or capital expenditures. Many states regulate the sale, transportation, and marketing of recreational vehicles. The Company is also subject to state consumer protection laws and regulations, which in many cases require manufacturers to repurchase or replace chronically malfunctioning recreational vehicles. Some states also legislate additional safety and construction standards for recreational vehicles. The Company is also increasingly subject to regulations by the various states with respect to relations with its dealers. The Company is a member of the RVIA (Recreational Vehicle Industry Association). This association has promulgated stringent standards for construction in connection with the manufacture of recreational vehicles. Each of theunits manufactured by the Company has an RVIA seal placed upon it to certify that such standards have been met. The Companys facility is periodically inspected by government agencies and the RVIA to ensure that the Companys motorhomes comply with applicable governmental and industry standards.Patents and Trademarks The Company has been awarded two patents from the United States Patent and Trademark Office covering the ornamental design for its T-Rex Double & Wide motorhomes. While the Company claims Rexhall®, RoseAir, RexAir®, Aerbus, Vision®, American Clipper, Anthem, Concord, Minibus, T Rex Double & Wide and EntrySlide as trademarks, it does not believe its business is dependent on these names or any other marketing device.Employees At December 31, 2003, the Company had a total of 205 employees. None of the Companys employees are represented by a labor union. The Company considers its relations with its employees to be good.