UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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: 0-18953
AAON, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0448736
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(918) 583-2266
--------------
(Registrant's telephone number, including area code)
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 |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of May 1, 2006, registrant had outstanding a total of 12,305,883 shares of
its $.004 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2006 2005
--------------------------------------
(in thousands, except for share data)
Assets
Current assets:
Cash and cash equivalents $ 3,466 $ 837
Certificate of deposit - 1,000
Accounts receivable, net 34,265 32,487
Inventories, net 23,458 23,708
Prepaid expenses 1,202 1,041
Deferred tax asset 4,003 3,877
--------------------------------------
Total current assets 66,394 62,950
Property, plant and equipment, net 54,419 50,581
Notes receivable, long-term 75 75
--------------------------------------
Total assets $120,888 $113,606
======================================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 108 $ 108
Accounts payable 12,836 11,643
Accrued liabilities 19,909 17,827
--------------------------------------
Total current liabilities $ 32,853 $ 29,578
Long-term debt, less current maturities 32 59
Deferred tax liability 4,205 4,474
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued - -
Common stock, $.004 par value, 50,000,000 shares
authorized, 12,303,779 and 12,233,558 issued and
outstanding at March 31, 2006, and December 31, 2005,
respectively 49 49
Additional paid in capital 547 -
Accumulated other comprehensive income, net of tax 526 513
Retained earnings 82,676 78,933
--------------------------------------
Total stockholders' equity 83,798 79,495
--------------------------------------
Total liabilities and stockholders' equity $120,888 $113,606
======================================
The accompanying notes are an integral part of these statements.
-1-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended
Mar. 31, Mar. 31,
2006 2005
------------------------------------------------
(in thousands, except share and per share data)
Net sales $ 53,620 $ 42,780
Cost of sales 43,236 32,730
---------------- ----------------
Gross profit 10,384 10,050
Selling, general and
administrative expenses 4,565 4,763
---------------- ----------------
Income from operations 5,819 5,287
Interest expense (12) (2)
Interest income 9 78
Other income (expense), net 126 72
---------------- ----------------
Income before income taxes 5,942 5,435
Income tax provision 2,199 2,148
---------------- ----------------
Net income $ 3,743 $ 3,287
================ ================
Earnings Per Share:
Basic $ 0.30 $ 0.27
================ ================
Diluted $ 0.30 $ 0.26
================ ================
Weighted Average Shares Outstanding:
Basic 12,277 12,387
================ ================
Diluted 12,634 12,795
================ ================
The accompanying notes are an integral part of these statements.
-2-
AAON, Inc., and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(unaudited)
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
--------------------------------------------------------------------------------------
(in thousands)
--------------------------------------------------------------------------------------
Balance at December 31, 2005 12,234 $ 49 $ - $ 513 $ 78,933 $ 79,495
Comprehensive income:
Net income - - - - 3,743 3,743
Foreign currency translation
adjustment - - - 13 - 13
--------------
Total comprehensive income 3,756
Stock options exercised, including tax
benefits 107 - 1,165 - - 1,165
Share based compensation - - 129 - - 129
Stock repurchased and retired (37) - (747) - - (747)
--------------------------------------------------------------------------------------
Balance at March 31, 2006 12,304 $ 49 $ 547 $ 526 $ 82,676 $ 83,798
======================================================================================
The accompanying notes are an integral part of these statements.
-3-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Three Months
Ended Ended
Mar. 31, 2006 Mar. 31, 2005
-----------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 3,743 $ 3,287
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,206 1,883
Provision for losses on accounts receivable 57 39
Share-based compensation 129 -
Excess tax benefits from stock options exercised (612) -
Deferred income taxes (395) (200)
Changes in assets and liabilities:
Accounts receivable (1,835) (1,616)
Inventories 250 (2,628)
Prepaid expenses (161) (105)
Accounts payable 1,193 (1,864)
Accrued liabilities 2,695 2,832
-----------------------------------------------
Net cash provided by operating activities 7,270 1,628
INVESTING ACTIVITIES
Proceeds from matured certificate of deposit 1,500 3,000
Investment in certificate of deposit (500) (3,000)
Notes receivable, long-term - (75)
Capital expenditures (6,044) (3,262)
-----------------------------------------------
Net cash used in investing activities (5,044) (3,337)
FINANCING ACTIVITIES
Borrowings under revolving credit facility 8,939 5,304
Payments under revolving credit facility (8,939) (3,957)
Payments of long-term debt (27) (27)
Stock options exercised 552 242
Excess tax benefits from stock options exercised 612 -
Repurchase of stock (747) (465)
-----------------------------------------------
Net cash provided by financing activities 390 1,097
-----------------------------------------------
Effect of exchange rate on cash 13 (12)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,629 (624)
-----------------------------------------------
Cash and cash equivalents, beginning of period 837 994
-----------------------------------------------
Cash and cash equivalents, end of period $ 3,466 $ 370
===============================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 2006
(unaudited)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures made in these financial statements are adequate to make the
information presented not misleading when read in conjunction with the financial
statements and the notes thereto included in the Company's latest audited
financial statements which were included in the Form 10-K Report for the fiscal
year ended December 31, 2005, filed by AAON, Inc. with the SEC. In the opinion
of management, the accompanying financial statements include all normal,
recurring adjustments required for a fair presentation of the results of the
periods presented. Operating results for the three months ended March 31, 2006,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Standards No. 52, Foreign Currency
Translations. The Company uses the U.S. dollar as its functional currency,
except for the Company's Canadian subsidiaries, which use the Canadian dollar.
Adjustments arising from translation of the Canadian subsidiaries' financial
statements are reflected in the Consolidated Statement of Stockholders' Equity.
Transaction gains or losses that arise from exchange rate fluctuations
applicable to transactions are denominated in Canadian currency and are included
in the results of operations as incurred.
New Accounting Pronouncements
FASB (Financial Accounting Standards Board) Statement 123 (R) replaces FASB
Statement No.123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. The Statement requires
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. The
compensation cost will be recognized over the period of time during which an
employee is required to provide service in exchange for the award. The Statement
applies to all awards granted and any unvested awards at December 31, 2005.
Effective January 1, 2006, the Company adopted the fair value recognition method
of Statement of Financial Accounting Standards No. 123(R) Accounting for Stock
Based Compensation (SFAS 123R), using the modified-prospective-transition
method.
FASB Statement 151, Inventory Costs, replaces Accounting Research Bulletin No.
43, Chapter 4, Inventory Pricing. The Statement requires that abnormal amounts
of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead as an inventory cost. The new
statement also requires that allocation of fixed production overhead costs
should be based on normal capacity of the production facilities. The Statement
is effective January 1, 2006. The adoption of this statement did not have a
material impact on the Company's Consolidated Financial Statements.
2. STOCK COMPENSATION
The Company maintains a stock option plan for key employees, directors and
consultants. The Company's stock option plan provided for 2,925,000 shares of
common stock to be issued under the plan. Under the terms of the plan, the
exercise price of shares granted may not be less than 85% of the fair market
value at the date of the grant. Options granted to directors prior to May 25,
2004, vest one year from the date of grant and are exercisable for nine years
thereafter. Options granted to directors on or after May 25, 2004, vest
one-third each after 1-3 years. All other options granted vest at a rate of 20%
per year, commencing one year after date of grant, and are exercisable during
years 2-10.
-5-
Prior to January 1, 2006, the Company accounted for its nonqualified stock
options under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under APB
25, no stock-based employee compensation cost was reflected in net income, as
all options granted under the plan qualified for "fixed" plan accounting and had
an exercise price equal to the market value of the underlying common stock on
the date of grant. The Company had adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). No stock based compensation cost was recognized in the
Consolidated Statements of Income for the three months ended March 31, 2005.
Effective January 1, 2006, the Company adopted the fair value recognition method
of Statement of Financial Accounting Standards No. 123(R) Share-Based Payment
(SFAS 123R), using the modified-prospective-transition method. Under that
transition method, compensation cost recognized in the first three months of
2006 includes all share-based payments granted prior to, but not yet vested as
of January 1, 2006, and compensation cost for all share-based payments granted
subsequent to January 1, 2006. The compensation cost is based on the grant date
fair value calculated using a Black-Scholes-Merton Option Pricing Model in
accordance with provisions of Statement 123(R).
For the three months ended March 31, 2006, the Company recognized approximately
$129,000 in pre-tax compensation expense in the Consolidated Statement of Income
related to the stock option plan. The total pre-tax compensation cost related to
nonvested stock options not yet recognized as of March 31, 2006, is $1.2 million
and is expected to be recognized over a weighted-average period of 2.4 years.
The effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation is as follows:
Three Months Ended
March 31, 2005
-------------------
(in thousands, except per share data)
Net income as reported $3,287
Deduct compensation expense determined under fair
value method for all awards, net of related tax effects (83)
-------------------
Pro forma net income $3,204
===================
Earnings per share:
Basic, as reported $ 0.27
===================
Basic, pro forma $ 0.26
===================
Diluted, as reported $ 0.26
===================
Diluted, pro forma $ 0.25
===================
The following assumptions were used to determine the fair value of the unvested
stock options on the original grant date for expense recognition purposes for
options granted for the three months ended March 31, 2006 and for pro forma
disclosure purposes for the three months ended March 31, 2005:
Three Months Ended
March 31, March 31,
2006 2005
------------- --------------
Expected dividend yield 0% 0%
Expected volatility 32.32% 33.81%
Risk-free interest rate 4.86% 4.50%
Expected life 8 yrs 8 yrs
-6-
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of bank deposits and highly liquid,
interest-bearing money market funds with initial maturities of three months or
less.
4. ACCOUNTS RECEIVABLE
The Company grants credit to its customers and performs ongoing credit
evaluations. The Company generally does not require collateral or charge
interest. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends,
economic and market conditions and the age of the receivable. Past due accounts
are generally written off against the allowance for doubtful accounts only after
all collection attempts have been exhausted.
Accounts receivable and the related allowance for doubtful accounts are as
follows:
March 31, December 31,
2006 2005
-------------------------------------------------
(in thousands)
Accounts receivable $ 34,840 $ 33,172
Less: allowance for doubtful accounts (575) (685)
--------------------- ---------------------
Total, net $ 34,265 $ 32,487
===================== =====================
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 685 $ 717
Provision for losses on accounts receivable 57 39
Accounts receivable written off, net of recoveries (167) (1)
--------------------- ---------------------
Balance, end of period $ 575 $ 755
===================== =====================
-7-
5. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The Company establishes an allowance for
excess and obsolete inventories based on product line changes, the feasibility
of substituting parts and the need for supply and replacement parts. At March
31, 2006, and December 31, 2005, inventory balances and the related changes in
the allowance for excess and obsolete inventories account are as follows:
March 31, December 31,
2006 2005
-------------------------------------------------
(in thousands)
Raw materials $ 18,424 $ 18,256
Work in process 2,454 1,981
Finished goods 2,930 3,821
--------------------- ---------------------
23,808 24,058
Less: Inventory reserve (350) (350)
--------------------- ---------------------
Total, net $ 23,458 $ 23,708
===================== =====================
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 1,050
Provision for excess and obsolete inventories - -
Adjustments to reserve - -
--------------------- ---------------------
Balance, end of period $ 350 $ 1,050
===================== =====================
At March 31, 2006, the Company had prepaid $908,000 for copper, at 2005 pricing,
for 2006 material requirements. This amount is included as prepaid expenses in
the Company's Consolidated Balance Sheet at March 31, 2006.
6. ACCRUED LIABILITIES
At March 31, 2006, and December 31, 2005, accrued liabilities were comprised of
the following:
March 31, December 31,
2006 2005
-------------------------------------------------
(in thousands)
Warranty $ 6,606 $ 6,282
Commissions 7,779 8,037
Payroll 1,245 1,215
Income taxes 1,638 623
Workers' compensation 751 555
Medical self-insurance 896 664
Other 994 451
--------------------- ---------------------
Total $ 19,909 $ 17,827
===================== =====================
-8-
7. WARRANTIES
A provision is made for the estimated cost of warranty obligations at the time
the related products are sold based upon the warranty period, historical trends,
new products and any known identifiable warranty issues.
Changes in the Company's warranty liability during the three months ended March
31, 2006, and 2005, are as follows:
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------
(in thousands)
Balance, beginning of period $ 6,282 $ 6,301
Warranties accrued during the period 939 1,111
Warranties settled during the period (615) (621)
--------------------- ---------------------
Balance, end of period $ 6,606 $ 6,791
===================== =====================
8. REVOLVING CREDIT FACILITY
The Company's revolving credit facility provides for maximum borrowings of $15.2
million. Interest on borrowings is payable monthly at the Wall Street Journal
prime rate less .5% or LIBOR plus 1.6%, at the election of the Company. At March
31, 2006, the Company had no borrowings under the revolving credit facility
compared to $1.3 million at March 31, 2005. The Company had no borrowings under
the revolving credit facility at December 31, 2005. Borrowings available under
the revolving credit facility at March 31, 2006, were $14.6 million. In
addition, the Company has a $600,000 letter of credit that expires December 31,
2006. The credit facility requires that the Company maintain a certain financial
ratio and prohibits the declaration of cash dividends. On February 14, 2006, the
board of Directors voted to initiate a semi-annual cash dividend of $0.20 per
share to the holders of the outstanding Common Stock of the Company as of the
close of business on June 12, 2006, the record date, payable on July 3, 2006.
The restriction of payments of dividends has been waived by the lender. At March
31, 2006, the Company was in compliance with its financial ratio covenants.
-9-
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------
(in thousands, except for share and per share data)
Numerator:
Net income $ 3,743 $ 3,287
Denominator:
Denominator for basic earnings per share -
Weighted average shares 12,277,155 12,386,840
Effect of dilutive employee stock options 356,642 408,285
--------------------- ---------------------
Denominator for diluted earnings per share -
Weighted average shares 12,633,797 12,795,125
===================== =====================
Basic earnings per share $ .30 $ 0.27
===================== =====================
Diluted earnings per share $ .30 $ 0.26
Anti-dilutive shares 79,500 92,250
===================== =====================
Weighted Average Exercise Price $ 18.45 $ 18.48
===================== =====================
10. STOCK REPURCHASE
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began its
current stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (1,325,000 shares) of its outstanding stock. Through
March 31, 2006, the Company had repurchased a total of 1,257,864 shares under
the current program for an aggregate price of $22,034,568, or an average of
$17.52 per share. On February 14, 2006, the Board of Directors approved the
suspension of the Company's repurchase program.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee-participants in AAON's 401K Savings and Investment Plan are
entitled to have shares of AAON stock in their accounts sold to the Company to
provide diversification of their investments. Through March 31, 2006, the
Company repurchased 132,054 shares for an aggregate price of $2,452,476 or an
average price of $18.57 per share.
11. CONTINGENCIES
The Company is subject to claims and legal actions that arise in the ordinary
course of business. Management believes that the ultimate liability, if any,
will not have a material effect on the Company's results of operations or
financial position.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AAON engineers, manufactures and markets air-conditioning and heating equipment
consisting of standardized and custom rooftop units, chillers, air-handling
units, make-up units, heat recovery units, condensing units and coils.
AAON sells its products to property owners and contractors through a network of
manufacturers' representatives and its internal sales force. Demand for the
Company's products is influenced by national and regional economic and
demographic factors. The commercial and industrial new construction market is
subject to cyclical fluctuations in that it is generally tied to housing starts,
but has a lag factor of 6-18 months. Housing starts, in turn, are affected by
such factors as interest rates, the state of the economy, population growth and
the relative age of the population. When new construction is down, the Company
emphasizes the replacement market.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight out and engineering expense. The
principal raw materials used in AAON's manufacturing processes are steel, copper
and aluminum. The major component costs include compressors, electric motors and
electronic controls.
Selling, general, and administrative ("SG&A") costs include the Company's
internal sales force, warranty costs, profit sharing and administrative expense.
Warranty expense is estimated based on historical trends and other factors. The
Company's warranty on its products is: for parts only, the earlier of one year
from the date of first use or 14 months from date of shipment; compressors (if
applicable), an additional four years, on gas-fired heat exchangers (if
applicable), 15 years, and on stainless steel heat exchangers (if applicable),
25 years.
The Company's operations in Burlington, Ontario, Canada, are located at 279
Sumach Drive, consisting of an 82,000 sq. ft. office/manufacturing facility on a
5.6 acre tract of land.
The office facilities of AAON, Inc. consist of a 337,000 square foot building
(322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office
space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma (the "original
facility"), and a 563,000 square foot manufacturing/warehouse building and a
22,000 square foot office building (the "expansion facility") located across the
street from the original facility at 2440 S. Yukon Avenue. The Company utilizes
39% of the expansion facility and the remaining 61% is leased to a third party.
The operations of AAON Coil Products, Inc. are conducted in a plant/office
building at 203-207 Gum Springs Road in Longview, Texas, containing 258,000
square feet (251,000 sq. ft. of manufacturing/warehouse and 7,000 sq. ft. of
office space). In 2004 and 2005, AAON Coil Products purchased an additional 15
acres of land for future expansion.
-11-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended March 31, 2006, and 2005:
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------
(in thousands)
Net sales $ 53,620 $ 42,780
Cost of sales 43,236 32,730
--------------- ----------------
Gross profit 10,384 10,050
Selling, general and administrative
Expenses 4,565 4,763
--------------- ----------------
Income from operations 5,819 5,368
Interest expense (12) (2)
Interest income 9 78
Other income (expense), net 126 72
--------------- ----------------
Income before income taxes 5,942 5,435
Income tax provision 2,199 2,148
--------------- ----------------
Net income $ 3,743 $ 3,287
=============== ================
Results of Operations
Net sales increased $10.8 million (25.3%) to $53.6 million from $42.8 million
for the three months ended March 31, 2006, compared to the same period in 2005.
Increased sales were attributable to an increase in volume of product sold
related to an improvement of the commercial and industrial construction
industry, the Company's new and redesigned products being favorably received by
its customers, and price increases.
Gross margins were 19.4% compared to 23.5% for the three months ended March 31,
2006 and March 31, 2005, respectively. The decrease in gross margins was due
primarily to continuing increases in copper prices, an increase in manufacturing
expense, and low margin jobs and labor inefficiencies at the Canadian subsidiary
which resulted in a pre-tax loss at Canada of $423,000. Gross profit increased
$334,000 (3.2%) to $10.4 million from $10.0 million for the three months ended
March 31, 2006, compared to the same period in 2005. The increase in gross
profits was due primarily to increased volume of product sold and price
increases.
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. The
Company also purchases from other domestic manufacturers certain components,
including compressors, electric motors and electrical controls used in its
products. The suppliers of these components are significantly affected by the
rising raw material costs as steel, copper and aluminum are used in the
manufacturing of their products. The Company is experiencing price increases
from component part suppliers. The Company attempts to limit the impact of price
increases on these materials by entering into cancelable fixed price contracts
with its major suppliers for periods of 6-12 months.
Selling, general and administrative expenses decreased $117,000 (2.50%) to $4.6
million from $4.8 million for the three months ended March 31, 2006 compared to
the same period in 2005, due primarily to a decrease in warranty expense.
The decrease in the income tax provision effective tax rate to 37% from 39.5%
was related to the impact of state and foreign taxes.
-12-
Financial Condition and Liquidity
Net accounts receivable increased $1.8 million from $32.5 million at December
31, 2005, to $34.3 million at March 31, 2006, due to the increase in sales.
Inventories decreased $250,000 to $23.5 million at March 31, 2006, compared to
$23.7 million at December 31, 2005, due to lower inventory levels related to
increased sales.
Accounts payable and accrued liabilities increased $3.3 million to $32.7 million
at March 31, 2006, compared to $29.5 million at December 31, 2005, due primarily
to timing of payments to vendors.
The Company generated $7.3 million and $1.6 million cash from operating
activities during the three months ended March 31, 2006, and March 31, 2005,
respectively. The increase in 2006 related primarily to an increase in net
income and accounts payable and a decrease in inventory. The increase in 2005
related primarily to an increase in net income.
Cash flows used in investing activities were $5.0 million for the three months
ended March 31, 2006, and $3.3 million for the three months ended March 31,
2005. Cash flows used in investing activities in 2006 and in 2005 were related
primarily to capital expenditures for additions of machinery and equipment. All
capital expenditures were financed out of cash generated from operations.
Cash flows provided by financing activities were $394,000 and $1.1 million
during the three months ended March 31, 2006, and March 31, 2005, respectively.
The cash flows provided by financing activities in 2006 were related primarily
to stock options exercised and the related respective excess tax benefits. The
cash provided by financing activities in 2005 was related primarily to net
borrowings under the revolving credit agreement. The Company's revolving credit
facility provides for maximum borrowings of $15.15 million. Interest on
borrowings is payable monthly at the Wall Street Journal prime rate less .5% or
LIBOR plus 1.6%, at the election of the Company. At March 31, 2006, the Company
had no borrowings under the revolving credit facility compared to $1.3 million
at March 31, 2005. Borrowings available under the revolving credit facility at
March 31, 2006, were $14.6 million. In addition, the Company has a $600,000
letter of credit that expires December 31, 2006. The credit facility requires
that the Company maintain a certain financial ratio and prohibits the
declaration of cash dividends. On February 14, 2006, the board of Directors
voted to initiate a semi-annual cash dividend of $0.20 per share to the holders
of the outstanding Common Stock of the Company as of the close of business on
June 12, 2006, the record date, payable on July 3, 2006. The restriction of
payments of dividends has been waived by the lender. At March 31, 2006, the
Company was in compliance with its financial ratio covenants.
Management believes the Company's bank revolving credit facility (or comparable
financing), and projected cash flows from operations will provide the necessary
liquidity and capital resources to the Company for a minimum of the next twelve
months. The Company's belief that it will have the necessary liquidity and
capital resources is based upon its knowledge of the HVAC industry and its place
in that industry, its ability to limit the growth of its business if necessary,
and its relationship with its existing bank lender. For information concerning
the Company's revolving credit facility at March 31, 2006, see Note 8 to the
financial statements included in this report.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because these estimates and assumptions require significant
judgment, future actual results could differ from those estimates and could have
a significant impact on the Company's results of operations, financial position
and cash flows. The Company reevaluates its estimates and assumptions on a
monthly basis.
The following accounting policies may involve a higher degree of estimation or
assumption:
Allowance for Doubtful Accounts - The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends in collections and write-offs, current customer
status, the age of the receivable, economic conditions and other information.
Aged receivables are reviewed on a monthly basis to determine if the reserve is
adequate and adjusted accordingly at that time.
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Inventory Reserves - The Company establishes a reserve for inventories based on
the change in inventory requirements due to product line changes, the
feasibility of using obsolete parts for upgraded part substitutions, the
required parts needed for part supply sales, replacement parts and for estimated
shrinkage.
Warranty - A provision is made for estimated warranty costs at the time the
product is shipped and revenue is recognized. The warranty period is: for parts
only, the earlier of one year from the date of first use or 14 months from date
of shipment; compressors (if applicable), an additional four years; on gas-fired
heat exchangers (if applicable), 15 years; and on stainless steel heat
exchangers (if applicable), 25 years. Warranty expense is estimated based on the
Company's warranty period, historical warranty trends and associated costs, and
any known identifiable warranty issue. Due to the absence of warranty history on
new products, an additional provision may be made for such products.
Medical Insurance - A provision is made for medical costs associated with the
Company's Medical Employee Benefit Plan, which is primarily a self-funded plan.
A provision is made for estimated medical costs based on historical claims paid
and any known potential of significant future claims. The plan is supplemented
by employee contributions and an excess policy for claims over $100,000 each.
Historically, reserves have been within management's expectations.
New Accounting Pronouncements
FASB (Financial Accounting Standards Board) Statement 123(R), Accounting for
Stock-Based Compensation replaces FASB Statement No.123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Statement requires measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The compensation cost will be
recognized over the period of time during which an employee is required to
provide service in exchange for the award, which will be the vesting period. The
Statement applies to all awards granted and any unvested awards at December 31,
2005. Effective January 1, 2006, the Company adopted the fair value recognition
method of Statement of Financial Accounting Standards No. 123(R) Share-Based
Payments (SFAS 123R), using the modified-prospective-transition method.
FASB Statement 151, Inventory Costs, replaces Accounting Research Bulletin No.
43, Chapter 4, Inventory Pricing. The Statement requires that abnormal amounts
of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead as an inventory cost. The new
statement also requires that allocation of fixed production overhead costs
should be based on normal capacity of the production facilities. The Statement
is effective January 1, 2006. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
Forward-Looking Statements
This Annual Report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", "will", and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions, which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. The Company undertakes no obligations to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that could cause results to differ
materially from those in the forward-looking statements include (1) the timing
and extent of changes in raw material and component prices, (2) the effects of
fluctuations in the commercial/industrial new construction market, (3) the
timing and extent of changes in interest rates, as well as other competitive
factors during the year, and (4) general economic, market or business
conditions.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to interest rate risk on its revolving credit facility
which bears variable interest based upon a prime or LIBOR rate. The Company had
no outstanding balance as of March 31, 2006.
Foreign sales accounted for less than 4% of the Company's sales in 2005 and the
Company accepts payment for such sales in U.S. and Canadian dollars; therefore,
the Company believes it is not exposed to significant foreign currency exchange
rate risk on these sales. Foreign currency transactions and financial statements
are translated in accordance with Statement of Financial Standards No. 52,
Foreign Currency Translation. The Company uses the U.S. dollar as its functional
currency, except for the Company's Canadian subsidiaries, which use the Canadian
dollar. Adjustments arising from translation of the Canadian subsidiaries'
financial statements are reflected in Consolidated Statements of Stockholders'
Equity. Transaction gains or losses that arise from exchange rate fluctuations
applicable to transactions are denominated in Canadian currency and are included
in the results of operations as incurred.
Important raw materials purchased by the Company are steel, copper and aluminum,
which are subject to price fluctuations. The Company attempts to limit the
impact of price increases on these materials by entering cancelable fixed price
contracts with its major suppliers for periods of 6 -12 months. However, in 2005
cost increases in basic commodities, such as steel, copper and aluminum,
severely impacted profit margins.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this Quarterly Report on Form 10-Q, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer believe that:
o The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the
reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms; and
o The Company's disclosure controls and procedures operate such that
important information flows to appropriate collection and disclosure
points in a timely manner and are effective to ensure that such
information is accumulated and communicated to the Company's
management, and made known to the Company's Chief Executive Officer
and Chief Financial Officer, particularly during the period when this
Quarterly Report was prepared, as appropriate to allow timely
decisions regarding the required disclosure.
AAON's Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures and concluded that these controls
and procedures were effective as of March 31, 2006.
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(b) Management's Quarterly Report on Internal Control over Financial Reporting
The management of AAON, Inc. and its subsidiaries (AAON), is responsible for
establishing and maintaining adequate internal control over financial reporting.
AAON's internal control system was designed to provide reasonable assurance to
the Company's management and Board of Directors regarding the preparation and
fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
In making its assessment of internal control over financial reporting,
management used the criteria issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control--Integrated Framework.
Based on our assessment, we believe that, as of March 31, 2006, the Company's
internal control over financial reporting is effective based on those criteria.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the first quarter of 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II - OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in
registrant's Form 10-K in response to Item 1A, to Part I of Form 10-K.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began its
current stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (1,325,000 shares) of its outstanding stock. Through
December 31, 2005, the Company had repurchased a total of 1,257,864 shares under
the current program for an aggregate price of $22,034,568, or an average of
$17.52 per share. On February 14, 2006, the Board of Directors approved the
suspension of the Company's repurchase program.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee-participants in AAON's 401K Savings and Investment Plan are
entitled to have shares of AAON stock in their accounts sold to the Company to
provide diversification of their investments. Through March 31, 2006, the
Company repurchased 132,054 shares for an aggregate price of $2,452,476 or an
average price of $18.57 per share.
Item 5. Other Information.
Although the Company has paid no cash dividends from inception to date, on
February 14, 2006, the Board of Directors voted to initiate a semi-annual cash
dividend of $0.20 per share to the holders of the outstanding Common Stock of
the Company as of the close of business on June 12, 2006, the record date,
payable on July 3, 2006.
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Item 6. Exhibits.
(a) Exhibits
(i) Exhibit 31.1 Section 302 Certification of CEO
(ii) Exhibit 31.2 Section 302 Certification of CFO
(iii) Exhibit 32.1 Section 1350 Certification of CEO
(iv) Exhibit 32.2 Section 1350 Certification of CFO
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.
AAON, INC.
Dated: May 4, 2006 By: /s/ Norman H. Asbjornson
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Norman H. Asbjornson
President/CEO
Dated: May 4, 2006 By:
/s/ Kathy I. Sheffield
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Kathy I. Sheffield
Treasurer
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