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, 2008
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.
(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 |_| Smaller reporting company |_|
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 March 31, 2008 registrant had outstanding a total of 17,976,956 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, 2008 December 31, 2007
------------------------------------------------
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 5,474 $ 879
Accounts receivable, net 36,502 38,813
Inventories, net 33,003 31,849
Prepaid expenses and other 567 442
Deferred tax assets 4,124 4,312
------------------------------------------------
Total current assets 79,670 76,295
Property, plant, and equipment
Land 2,323 2,354
Buildings 32,340 32,211
Machinery and equipment 83,618 82,872
Furniture and fixtures 6,942 6,912
------------------------------------------------
Total property, plant and equipment 125,223 124,349
Less: Accumulated depreciation 66,010 63,579
------------------------------------------------
Property, plant and equipment, net 59,213 60,770
Notes receivable, long-term 75 75
------------------------------------------------
Total assets $ 138,958 $ 137,140
================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 91 $ 91
Accounts payable 15,457 15,059
Dividends payable - 2,943
Accrued liabilities 19,530 19,414
------------------------------------------------
Total current liabilities 35,078 37,507
Long-term liabilities 216 239
Deferred tax liabilities 3,433 3,974
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 7,500,000 shares
authorized, no shares issued - -
Common stock, $.004 par value, 75,000,000 shares authorized,
17,976,956 and 18,054,246 issued and outstanding at
March 31, 2008, and December 31, 2007, respectively 73 73
Additional paid-in capital - -
Accumulated other comprehensive income, net of tax 1,703 1,942
Retained earnings 98,455 93,405
------------------------------------------------
Total stockholders' equity 100,231 95,420
------------------------------------------------
Total liabilities and stockholders' equity $ 138,958 $ 137,140
================================================
The accompanying notes are an integral part of these statements.
-1-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31, 2008 March 31, 2007
--------------------------------------------------
(in thousands, except per share data)
Net sales $ 65,456 $ 58,628
Cost of sales 49,804 42,906
--------------------------------------------------
Gross profit 15,652 15,722
Selling, general and administrative expenses 5,902 5,747
--------------------------------------------------
Income from operations 9,750 9,975
Interest expense (3) (10)
Interest income 21 3
Other income 130 188
--------------------------------------------------
Income before income taxes 9,898 10,156
Income tax provision 3,464 3,839
--------------------------------------------------
Net income $ 6,434 $ 6,317
==================================================
Earnings per share:
Basic $ 0.36 $ 0.34*
==================================================
Diluted $ 0.35 $ 0.33*
==================================================
Cash dividends declared per common share: - -
==================================================
Weighted average shares outstanding:
Basic 18,049 18,561*
==================================================
Diluted 18,311 18,902*
==================================================
* Reflects three-for-two stock split effective August 21, 2007.
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, 2007 18,054 $ 73 $ - $ 1,942 $ 93,405 $ 95,420
Comprehensive income:
Net income - - - - 6,434 6,434
Foreign currency
translation adjustment - - - (239) - (239)
------------
Total comprehensive income 6,195
Stock options exercised, including
tax benefits 26 - 198 - - 198
Share based compensation - - 241 - - 241
Stock repurchased and retired (103) - (439) - (1,384) (1,823)
--------------------------------------------------------------------------------------
Balance at March 31, 2008 17,977 $ 73 $ - $ 1,703 $ 98,455 $ 100,231
======================================================================================
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
March 31, 2008 March 31, 2007
-------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 6,434 $ 6,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,457 2,273
Provision for losses on accounts receivable 26 186
Share-based compensation 241 163
Excess tax benefits from stock options exercised (119) (1,563)
Gain on disposition of assets - (13)
Deferred income taxes (427) (148)
Changes in assets and liabilities:
Accounts receivable 2,212 (973)
Inventories, net (1,199) (3,179)
Prepaid expenses and other (125) (41)
Accounts payable 824 (955)
Accrued liabilities (134) 4,624
-------------------------------------------------------
Net cash provided by operating activities 10,190 6,691
-------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment - 13
Capital expenditures (972) (4,537)
-------------------------------------------------------
Net cash used in investing activities (972) (4,524)
-------------------------------------------------------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 4,219 8,537
Payments under revolving credit facility (4,219) (8,537)
Payments of long-term debt (23) (27)
Stock options exercised 79 659
Excess tax benefits from stock options exercised 119 1,563
Repurchase of stock (1,823) (1,633)
Cash dividends paid to stockholders (2,943) (2,465)
-------------------------------------------------------
Net cash used in financing activities (4,591) (1,903)
-------------------------------------------------------
Effect of exchange rate on cash (32) (2)
-------------------------------------------------------
Net increase in cash and cash equivalents 4,595 262
-------------------------------------------------------
Cash and cash equivalents, beginning of year 879 288
-------------------------------------------------------
Cash and cash equivalents, end of period $ 5,474 $ 550
=======================================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 2008
(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. AAON, Inc. ("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, 2007, filed by the Company 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, 2008,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.
Revenue Recognition
The Company recognizes revenues from sales of products when the products are
shipped and the title and risk of ownership pass to the customer. Selling prices
are fixed based on purchase orders or contractual agreements. Sales allowances
and customer incentives are treated as reductions to sales and are provided for
based on historical experiences and current estimates. For sales initiated by
independent manufacturer representatives, the Company recognizes revenues net of
the representatives' commission. The Company's policy is to record the
collection and payment of sales taxes through a liability account.
Common Stock Split
On July 12, 2007, the Company's Board of Directors approved a three-for-two
stock split of the Company's outstanding stock for shareholders of record as of
August 3, 2007. The stock split was treated as a 50% stock dividend which was
distributed on August 21, 2007. The applicable share and per share data for all
periods included herein has been restated to reflect the stock split.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Financial Accounting Standards Board ("FASB") Statement 52,
Foreign Currency Translations. The Company uses the U.S. dollar as its
functional currency, except for the Canadian subsidiaries, which use the
Canadian dollar. Adjustments arising from translation of the Canadian
subsidiaries' financial statements are reflected in accumulated other
comprehensive income. Transaction gains or losses that arise from exchange rate
fluctuations applicable to transactions denominated in Canadian currency are
included in the results of operations as incurred.
New Accounting Pronouncements
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value and establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. Although SFAS 157 applies to (and
amends) the provisions of existing authoritative literature, it does not, of
itself, require any new fair value measurements or establish valuation
standards. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Adoption of SFAS 157 did not have a material impact on the Company's
Consolidated Financial Statements.
-5-
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which creates an alternative
measurement treatment for certain financial assets and financial liabilities.
SFAS 159 permits fair value to be used for both the initial and subsequent
measurements on an instrument by instrument basis, with changes in the fair
value to be recognized in earnings as those changes occur. This election is
referred to as the fair value option. SFAS 159 also requires additional
disclosures to compensate for the lack of comparability that will arise from the
use of the fair value option. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS 159 did not have a material impact on
the Company's Consolidated Financial Statements. The Company did not elect the
fair value option for any assets or liabilities.
2. 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,
2008 2007
-------------------------------------------------
(in thousands)
Accounts receivable $ 36,809 $ 39,220
Less: Allowance for doubtful accounts (307) (407)
-------------------------------------------------
Total, net $ 36,502 $ 38,813
=================================================
Three Months Ended
March 31, March 31,
2008 2007
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 407 $ 266
Provision for losses on accounts receivable 160 244
Adjustments to provision (134) (58)
Accounts receivable written off, net of recoveries (126) (1)
-------------------------------------------------
Balance, end of period $ 307 $ 451
=================================================
3. 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. Inventory
balances at March 31, 2008 and December 31, 2007, and the related changes in the
allowance for excess and obsolete inventories account for the three months ended
March 31, 2008 and 2007 are as follows:
March 31, December 31,
2008 2007
-------------------------------------------------
(in thousands)
Raw materials $ 28,322 $ 27,651
Work in process 1,550 1,760
Finished goods 3,481 2,788
-------------------------------------------------
33,353 32,199
Less: Inventory reserve (350) (350)
-------------------------------------------------
Total, net $ 33,003 $ 31,849
=================================================
-6-
Three Months Ended
March 31, March 31,
2008 2007
-------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350
Provision for excess and obsolete inventories - -
Adjustments to reserve - -
-------------------------------------------------
Balance, end of period $ 350 $ 350
=================================================
4. ACCRUED LIABILITIES
At March 31, 2008 and December 31, 2007, accrued liabilities were comprised of
the following:
March 31, December 31,
2008 2007
---------------------------------------------
(in thousands)
Warranty $ 6,420 $ 6,308
Commissions 7,326 8,851
Payroll 3,060 2,175
Workers' compensation 1,129 1,127
Medical self-insurance 580 608
Other 1,015 345
---------------------------------------------
Total $ 19,530 $ 19,414
=============================================
5. SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments of $3,000 and $10,000 were made for the three months ended
March 31, 2008 and 2007, respectively. Payments for income taxes of $2.0 million
and $0 were made during the three months ended March 31, 2008 and 2007,
respectively. Dividends payable of $2.9 million were accrued as of December 31,
2007. These dividends were paid in January 2008.
6. REVOLVING CREDIT FACILITY
The Company's revolving credit facility provides for maximum borrowings of $15.2
million which is provided by the Bank of Oklahoma, National Association. Under
the line of credit, there is one standby letter of credit totaling approximately
$1.3 million. The letter of credit is a requirement of the Company's workers
compensation insurance and has been renewed and will expire December 31, 2008.
Interest on borrowings is payable monthly at the Wall Street Journal prime rate
less 0.5% or LIBOR plus 1.6%, at the election of the Company (4.71% at March 31,
2008). No fees are associated with the unused portion of the committed amount.
At March 31, 2008 and December 31, 2007, the Company had no borrowings
outstanding under the revolving credit facility. Borrowings available under the
revolving credit facility at March 31, 2008, were $13.9 million. The credit
facility requires the Company to maintain certain financial ratios. At March 31,
2008, the Company was in compliance with its financial ratio covenants. On July
30, 2007 the Company renewed the line of credit with a maturity date of July 30,
2008.
7. STOCK COMPENSATION
The Company maintains a stock option plan for key employees, directors and
consultants. The Company's stock option plan provided for 4.4 million 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 year, commencing one year after the date of grant. 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. On May 22, 2007, the
stockholders of the Company adopted a Long-Term Incentive Plan which provides an
additional 750,000 shares that can be granted in the form of stock options,
stock appreciation rights, restricted stock awards, performance units and
performance awards. Since inception of the Plan, non-qualified stock options and
restricted stock awards have been granted with the same vesting schedule as the
previous plan.
-7-
The Company applies the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123(R) Share-Based Payment ("SFAS 123R"). The
compensation cost is based on the grant date fair value of stock options issued
calculated using a Black-Scholes-Merton Option Pricing Model, or the grant date
fair value of a restricted share, in accordance with provisions of SFAS 123R.
For the three month periods ended March 31, 2008 and 2007, the Company
recognized approximately $124,000 and $159,000, respectively, in pre-tax
compensation expense related to stock options in the Consolidated Statements of
Income. The total pre-tax compensation cost related to unvested stock options
and unvested restricted stock not yet recognized as of March 31, 2008, is $1.4
million and is expected to be recognized over a weighted-average period of 2.2
years.
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 during the three months ended March 31, 2007 and 2008.
Three Months Ended
March 31, 2008 March 31, 2007
---------------------------------------------
Directors and Officers:
Expected dividend yield 1.81% N/A
Expected volatility 43.52% N/A
Risk-free interest rate 2.84% N/A
Expected life 8.0 yrs N/A
Forfeiture Rate 0% N/A
Employees:
Expected dividend yield 1.81% 1.76%
Expected volatility 42.55% 42.34%
Risk-free interest rate 2.84% 4.74%
Expected life 6.3 yrs 6.3 yrs
Forfeiture Rate 28% 28%
The expected term of the options is based on evaluations of historical and
expected future employee exercise behavior. The risk-free interest rate is based
on the U.S. Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date. Volatility is based
on historical volatility of the Company's stock. The Company initiated a
dividend payout in the second quarter of 2006. Previously, the Company used
Board of Director approved semi-annual dividend payouts of $0.20 per share
through July 3, 2007, to calculate the expected dividend yield. The Board of
Directors has approved future dividend payments of $0.16 per share and the table
above was adjusted to reflect the rate change.
A summary of stock options outstanding as of March 31, 2008, is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------
Range of Number Weighted Weighted Aggregate Number Weighted
Exercise Prices Outstanding at Average Average Intrinsic Exercisable at Average
March 31, 2008 Remaining Exercise Value March 31, 2008 Exercise
Contractual Price Price
Life
-------------------------------------------------------------------------------------------------------------------------------
$2.67 - $3.85 307,320 1.09 $ 3.20 $ 16.83 307,320 $ 3.20
$5.73 - $11.29 240,913 4.58 8.44 11.59 188,713 7.77
$11.40 - $12.00 46,500 7.34 11.69 8.34 24,400 11.75
$12.68 - $15.55 60,000 7.55 14.27 5.76 26,300 13.98
$15.99 - $21.01 258,650 8.69 17.25 2.78 43,200 16.94
------------------------------------------------------------------------------------------------------
Total 913,383 4.91 $ 9.72 $ 13.53 589,933 $ 6.50
======================================================================================================
-8-
A summary of option activity as of March 31, 2008, is as follows:
Weighted
Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
Stock Options Shares Exercise Price Term Value ($000)
---------------- ------------------ ---------------- --------------
Outstanding at January 1, 2008 928,933 $ 9.47
Granted 24,000 16.96
Exercised (23,950) 3.31
Forfeited or Expired (15,600) 15.56
---------------- ------------------
Outstanding at March 31, 2008 913,383 9.72 4.91 $ 9,416
================ ================== ================ ==============
Exercisable at March 31, 2008 589,933 $ 6.50 3.05 $ 7,980
================ ================== ================ ==============
The weighted average grant date fair value of options granted during the three
months ended March 31, 2008 and 2007 was $6.69 and $7.22, respectively. The
total intrinsic value of options exercised during the three months ended March
31, 2008 and 2007 was approximately $342,000 and $4.1 million, respectively. The
cash received from options exercised during the three months ended March 31,
2008 and 2007, was approximately $79,000 and $0.7 million, respectively. The
impact of these cash receipts is included in financing activities in the
accompanying Consolidated Statements of Cash Flows.
A summary of the unvested stock options for the three month period ended March
31, 2008, is as follows:
Weighted Average
Grant Date
Shares Fair Value
----------------- ----------------------
Unvested at January 1, 2008 335,300 $ 6.49
Granted 24,000 6.69
Vested (20,250) 5.82
Forfeited (15,600) 6.29
----------------- ----------------------
Unvested at March 31, 2008 323,450 $ 6.56
================= ======================
The Company also grants restricted stock awards to employees and directors.
These awards are recorded at their fair values on the date of grant and
compensation cost is recorded using straight-line vesting over the service
period. For the three months ended March 31, 2008, the Company recognized
approximately $117,000, in pre-tax compensation expense related to restricted
stock awards in the Consolidated Statements of Income. In addition, as of March
31, 2008, unrecognized compensation cost related to non-vested restricted stock
awards was approximately $617,000 which is expected to be recognized over a
weighted average period of 1.9 years.
During 2007, the Compensation Committee of the Board of Directors authorized and
issued restricted stock to the officers and directors of the Company. The
restricted stock award program offers the opportunity to earn shares of AAON
common stock over time, rather than options that give the right to purchase
stock at a set price. Restricted stock granted to directors vest one-third each
year. All other restricted stock vest at a rate of 20% per year. Restricted
stock awards are grants that entitle the holder to shares of common stock
subject to certain terms. The fair value of restricted stock grants is based on
the fair market value of AAON common stock on the respective grant dates,
reduced for the present value of dividends.
8. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share assumes the conversion of all potentially dilutive
securities and is calculated by dividing net income by the sum of the weighted
average number of shares of common stock outstanding plus all potentially
dilutive securities. Dilutive common shares consist primarily of stock options
and restricted stock.
-9-
Three Months Ended
March 31, 2008 March 31, 2007
---------------------------------------
(in thousands, except share and per
share data)
Numerator:
Net income $ 6,434 $ 6,317
================ ================
Denominator:
Denominator for basic earnings per share-
Weighted average shares 18,048,683 18,561,096*
Effect of dilutive employee stock options
and restricted stock awards 262,402 341,175*
---------------- ----------------
Denominator for diluted earnings per share-
Weighted average shares 18,311,085 18,902,271*
Earnings per share:
Basic $ 0.36 $ 0.34*
================ ================
Diluted $ 0.35 $ 0.33*
================ ================
Anti-dilutive shares 302,150 298,500*
================ ================
Weighted average exercise price $ 16.87 $ 16.61*
================ ================
*Reflects three-for-two stock split effective August 21, 2007
9. INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state and foreign jurisdictions. Effective January 1,
2007, the Company adopted FIN 48. The total amount of unrecognized tax benefits
at March 31, 2008, is $8,000 related to tax positions for which it is reasonably
possible that the total amounts could significantly decrease during the next
twelve months. This amount represents the unrecognized tax benefits comprised of
items related to determination of state nexus. Resolution of these tax benefits
will occur through a voluntary compliance program, which was initiated during
2007.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in income tax expense. At March 31, 2008, the Company had accrued
$8,000 and $0 for the potential payment of interest and penalties, respectively.
As of March 31, 2008, the Company is subject to U.S. Federal income tax
examinations for the tax years 2005 through 2007, and to non-U.S. income tax
examinations for the tax years of 2005 through 2007. In addition, the Company is
subject to state and local income tax examinations for the tax years 2002
through 2007.
The total amount of unrecognized tax benefits that if recognized would affect
the effective tax rate is $20,000.
-10-
10. STOCK REPURCHASE
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began
another stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (2.0 million shares) of its outstanding stock. On
February 14, 2006, the Board of Directors approved the suspension of the
Company's repurchase program. Through February 14, 2006, the Company had
repurchased a total of 1,886,796 shares under this program for an aggregate
price of $22,034,568, or an average price of $11.68 per share. The Company
purchased the shares at the then current market price.
On November 6, 2007, the Board authorized a new stock buyback program, targeting
repurchases of up to approximately 10% (1.8 million shares) of the outstanding
stock of the Company from time to time in open market transactions at prevailing
market prices. The Company purchases the shares at the current market price.
Through March 31, 2008, the Company repurchased a total of 771,100 shares under
this program for an aggregate price of $14,441,824, or an average price of
$18.73 per share.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee-participants in AAON's 401(k) 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. The maximum number of shares to be
repurchased is unknown under the program as the amount is contingent on the
number of shares sold by employees. Through March 31, 2008, the Company
repurchased 523,316 shares for an aggregate price of $8,108,892, or an average
price of $15.50 per share. The Company purchases the shares at the current
market price.
On November 7, 2006, the Board of Directors authorized the Company to repurchase
shares from certain directors following their exercise of stock options. The
maximum number of shares to be repurchased is unknown under the program as the
amount is contingent on the number of shares sold by directors. Through March
31, 2008, the Company repurchased 260,625 shares for an aggregate price of
$5,232,188, or an average price of $20.08 per share. The Company purchases the
shares at the current market price.
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.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AAON, Inc. ("the Company") 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, coils and boilers. Custom units are marketed and sold to retail,
manufacturing, educational, medical and other commercial industries. AAON
markets units to all 50 states in the United States and certain provinces in
Canada. International sales are less than five percent as the majority of all
sales are domestic.
The Company 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. Raw materials ranged in prices and at times increases were
incurred up to approximately 45% for steel, 40% for aluminum and 85% for copper
from 2006 to 2008. The Company reviewed and adjusted current pricing strategies
and created efficiencies in production and continued relationships with
suppliers in order to mitigate the economic factors of increasing commodity
prices. The major component costs include compressors, electric motors and
electronic controls, which also increased due to increases in commodities.
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 18 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 charges on heat exchangers occur infrequently.
The office facilities of the Company 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.
Other operations 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). An additional 15
acres of land was purchased for future expansion in 2004 and 2005 in Longview,
Texas.
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.
-12-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended March 31, 2008 and 2007:
Three Months Ended
March 31, 2008 March 31, 2007
---------------------------------------------------
(In thousands)
Net sales $ 65,456 100.0% $ 58,628 100.0%
Cost of sales 49,804 76.1% 42,906 73.2%
----------------------- -----------------------
Gross profit 15,652 23.9% 15,722 26.8%
Selling, general and
administrative expenses 5,902 9.0% 5,747 9.8%
----------------------- -----------------------
Income from operations 9,750 14.9% 9,975 17.0%
----------------------- -----------------------
Interest expense (3) 0.0% (10) 0.0%
Interest income 21 0.0% 3 0.0%
Other income 130 0.2% 188 0.3%
----------------------- -----------------------
Income before income taxes 9,898 15.1% 10,156 17.3%
Income tax provision 3,464 5.3% 3,839 6.5%
----------------------- -----------------------
Net income $ 6,434 9.8% $ 6,317 10.8%
======================= =======================
Results of Operations
Key events impacting our cash balance, financial condition, and results of
operations for the three months ended March 31, 2008, include the following:
o An increase in the volume of sales on all product lines due to
commercial construction growth and market share gains, and effective
moderation of commodity costs with purchase agreements and pricing
strategies.
o AAON remained the leader in the industry for environmentally-friendly,
energy efficient and quality innovations, utilizing R410A refrigerant
and phasing out pollutant causing R22 refrigerant. The phase out of
R22 began at the beginning of 2004. AAON also utilizes a high
performance composite foam panel to eliminate over half of the heat
transfer from typical fiberglass insulated panels. AAON continues to
utilize sloped condenser coils, and access compartments to filters,
motor, and fans. All of these innovations increase the demand for
AAON's products thus increasing market share
o In February 2006, the Board of Directors initiated a program of
semi-annual cash dividend payments. Cash payments of $5.0 million were
made in 2007, and $2.9 million were made in January 2008.
o Stock repurchases of AAON stock from employee's 401(k) savings and
investments plan was authorized in 2005. Stock repurchases of AAON
stock from directors was authorized in 2006. Stock repurchases of AAON
stock from the open market was authorized in 2007. Total purchases
resulted in cash payments of $1.8 million. This cash outlay is
partially offset by cash received from options exercised by employees
as a part of an incentive bonus program. The cash received in the
first three months of 2008 from options exercised was approximately
$79,000.
o Purchases of equipment to create efficiencies remained a priority.
AAON's capital expenditures were $1.0 million. Equipment purchases
create significant efficiencies, lower production costs and allow
continued growth in production. The Company currently estimates it
will spend approximately $7.0 million to $10.0 million on capital
expenditures in 2008 for continued growth.
-13-
Net Sales
Net sales increased $6.9 million, or 11.8%, to $65.5 million from $58.6 million
for the three months ended March 31, 2008, compared to the same period in 2007.
Increased sales were attributable to an increase in volume of product sold
related to the Company's new and redesigned products being favorably received by
its customers, active marketing by sales representatives and from certain
pricing strategies implemented on 90% of the Company's product lines. Management
anticipates continued growth throughout 2008.
Gross Profit
Gross profit was $15.7 million for both the three months ended March 31, 2008
and 2007, respectively. As a percentage of sales, gross margins were 23.9%
compared to 26.8% for the three months ended March 31, 2008 and 2007,
respectively. The decrease in gross margins for the three months ended March 31,
2008, compared to the same period in 2007, was a result of higher cost of sales
primarily due to increases in manufacturing expenses.
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. Raw
materials ranged in prices and at times increases were incurred up to
approximately 45% for steel, 40% for aluminum and 85% for copper from 2006 to
2008, causing increased inventory costs. 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;
therefore, the Company is also experiencing price increases from component part
suppliers. The Company continues to monitor these costs and price units
accordingly. The Company instituted several price increases to customers from
2005 to 2008 in an attempt to offset the continued increases in steel, copper
and aluminum. 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
Selling, general and administrative expenses increased to $5.9 million from $5.7
million, a change of approximately $0.2 million, or 3.5%, for the three months
ended March 31, 2008, compared to the same period in 2007. The increase for the
three months ended March 31, 2008, was primarily caused by an increase in
selling related expenses and an overall increase in general and administrative
expenses.
Other Income
Other income was $0.1 million and $0.2 million for the three months ended March
31, 2008 and 2007, respectively. Other income is attributable primarily to
rental income from the Company's expansion facility. All expenses associated
with the facility that are allocated to the rental portion of the building are
included in other income. The Company plans to continue to rent the expansion
facility until it is needed for increased capacity. Other income also includes
foreign currency gains and losses that result from operations in Canada.
Analysis of Liquidity and Capital Resources
AAON's working capital and capital expenditure requirements are generally met
through net cash provided by operations and the revolving bank line of credit.
Cash Flows Provided by Operating Activities. Net cash provided by operating
activities increased in the three months ended March 31, 2008 by $3.5 million
from the three months ended March 31, 2007. The increase was due primarily to
changes in inventories and accrued liabilities.
Cash Flows Used in Investing Activities. Cash flows used in investing activities
were $1.0 million and $4.5 million for the three months ended March 31, 2008 and
2007, respectively. The decrease in cash flows used in investing activities in
2008 was primarily related to lower capital expenditures of $1.0 million for
additions to manufacturing facilities, machinery and equipment compared to $4.5
million for the same period in 2007. Capital expenditures in 2007 related to
building renovations and machinery and equipment to further automate production.
Management utilizes cash flows provided from operating activities to fund
capital expenditures that are expected to spur growth and create efficiencies.
The Company is currently in line with budgeted capital expenditures of
approximately $7.0 million to $10.0 million in 2008 for equipment requirements.
The Company expects its cash requirements to be provided from cash flows from
operations.
-14-
Cash Flows Used in Financing Activities. Cash flows used in financing activities
were $4.6 million and $1.9 million for the three months ended March 31, 2008 and
2007, respectively. The increase of cash used in financing activities primarily
relates to cash dividends declared and paid and the continued repurchase of the
Company's stock.
The Company repurchased shares of stock from employees' 401(k) savings and
investment plan and other incentive plans and the open market for the three
months ended March 31, 2008, in the amount of approximately $1.8 million for
103,040 shares of stock. There were shares of stock repurchased for a total of
$1.6 million for the same period in 2007.
The Company received cash from stock options exercised of approximately $79,000
and classified the tax benefit of stock options exercised of approximately
$119,000 in financing activities for the three months ended March 31, 2008. The
cash received for options exercised and income tax effect partially offset the
stock repurchase and dividend payments for the three months ended March 31,
2008. The cash received from stock options exercised for the same period in 2007
was $0.7 million and the tax benefit of stock options exercised was $1.6
million.
In February 2006, the Board of Directors authorized a semi-annual cash dividend
payment. Cash dividends were declared in December 2007 and were paid in January
2008 in the amount of $2.9 million. Prior to 2006, no cash dividends had been
declared or paid. Board of Director approval is required to determine the date
of declaration for each semi-annual payment.
On July 12, 2007, the Company's Board of Directors approved a three-for-two
stock split of AAON's outstanding stock for shareholders of record as of August
3, 2007. The stock split was treated as a 50% stock dividend which was
distributed on August 21, 2007. As a result of the stock split, the Company
adjusted the dividend paid per share to $0.16. The applicable share and per
share data for all periods included herein has been restated to reflect the
stock split.
General
The Company's revolving credit facility provides for maximum borrowings of $15.2
million which is provided by the Bank of Oklahoma, National Association. Under
the line of credit, there is one standby letter of credit totaling approximately
$1.3 million. The letter of credit is a requirement of the Company's workers
compensation insurance and has been renewed and will expire December 31, 2008.
Interest on borrowings is payable monthly at the Wall Street Journal prime rate
less 0.5% or LIBOR plus 1.6%, at the election of the Company (4.71% at March 31,
2008). No fees are associated with the unused portion of the committed amount.
At March 31, 2008 and December 31, 2007, the Company had no borrowings
outstanding under the revolving credit facility. Borrowings available under the
revolving credit facility at March 31, 2008, were $13.9 million. The credit
facility requires the Company to maintain certain financial ratios. At March 31,
2008, the Company was in compliance with its financial ratio covenants. On July
30, 2007, the line of credit's maturity date was extended to July 30, 2008.
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 fiscal year 2008 and the
foreseeable future. The Company's belief that it will have the necessary
liquidity and capital resources is based upon its knowledge of the heating,
ventilation, and air conditioning ("HVAC") industry and its place in that
industry, its ability to limit the growth of its business if necessary, its
ability to authorize dividend cash payments, and its relationship with its
existing bank lender. For information concerning the Company's revolving credit
facility at March 31, 2008, see Note 6 to the Consolidated Financial Statements,
Revolving Credit Facility.
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.
-15-
There have been no significant changes in critical accounting policies or
management estimates since the year ended December 31, 2007. A comprehensive
discussion of the Company's critical accounting policies and management
estimates is included in Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-K
for the year ended December 31, 2007.
New Accounting Pronouncements
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value and establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. Although SFAS 157 applies to (and
amends) the provisions of existing authoritative literature, it does not, of
itself, require any new fair value measurements or establish valuation
standards. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. Adoption of SFAS 157 did not have a material impact on the Company's
Consolidated Financial Statements.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which creates an alternative
measurement treatment for certain financial assets and financial liabilities.
SFAS 159 permits fair value to be used for both the initial and subsequent
measurements on an instrument by instrument basis, with changes in the fair
value to be recognized in earnings as those changes occur. This election is
referred to as the fair value option. SFAS 159 also requires additional
disclosures to compensate for the lack of comparability that will arise from the
use of the fair value option. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS 159 did not have a material impact on
the Company's Consolidated Financial Statements. The Company did not elect the
fair value option for any assets or liabilities.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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 obligation 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.
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, 2008.
Foreign sales accounted for less than 5% of the Company's sales for the three
months ended March 31, 2008, 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 FASB
Statement No. 52, Foreign Currency Translation. The Company uses the U.S. dollar
as its functional currency, except for the Canadian subsidiaries, which use the
Canadian dollar. Adjustments arising from translation of the Canadian
subsidiaries' financial statements are reflected in accumulated other
comprehensive income in the Consolidated Statements of Stockholders' Equity and
Comprehensive Income. 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. The exchange rate of the
United States dollar to the Canadian dollar was $0.9882 and $0.8637 at March 31,
2008 and 2007, respectively.
-16-
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 2007
cost increases in basic commodities, such as steel, copper and aluminum,
severely impacted profit margins. Continued volatility in prices may impact
profit margins in future periods.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
-17-
Item 4. Controls and Procedures.
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, 2008.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during 2008 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
-18-
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in
the Company's Form 10-K in response to Item 1A, to Part I of its Form 10-K.
Item 2. Unregistered Sales of Equity and Securities and Use of Proceeds.
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began
another stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (2.0 million shares) of its outstanding stock. On
February 14, 2006, the Board of Directors approved the suspension of the
Company's repurchase program. Through February 14, 2006, the Company had
repurchased a total of 1,886,796 shares under this program for an aggregate
price of $22,034,568, or an average price of $11.68 per share. The Company
purchased the shares at the then current market price.
On November 6, 2007, the Board authorized a new stock buyback program, targeting
repurchases of up to approximately 10% (1.8 million shares) of the outstanding
stock of the Company from time to time in open market transactions at prevailing
market prices. Through March 31, 2008, the Company repurchased a total of
771,100 shares under this program for an aggregate price of $14,441,824, or an
average price of $18.73 per share.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee-participants in AAON's 401(k) savings and investment plan are
entitled to have shares of AAON's stock in their accounts sold to the Company to
provide diversification of their investments. The maximum number of shares to be
repurchased is unknown under the program as the amount is contingent on the
number of shares sold by employees. Through March 31, 2008, the Company
repurchased 523,316 shares for an aggregate price of $8,108,892, or an average
price of $15.50 per share. The Company purchases the shares at the current
market price.
On November 7, 2006, the Board of Directors authorized the Company to repurchase
shares from certain directors following their exercise of stock options. The
maximum number of shares to be repurchased is unknown under the program as the
amount is contingent on the number of shares sold by directors. Through March
31, 2008, the Company has repurchased 260,625 shares for an aggregate price of
$5,232,188, or an average price of $20.08 per share. The Company purchases the
shares at the current market price.
Repurchases during the first quarter of 2008 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum
(c) Total Number Number (or
of Shares (or Approximate Dollar
(a) Total (b) Units) Purchased Value) of Shares (or
Number of Average as Part of Units) that May Yet
Shares (or Price Paid Publicly Be Purchased Under
Units) Per Share Announced Plans the Plans or
Period Purchased (or Unit) or Programs Programs
---------------------------------------------------------------------------------------
January 2008 9,288 $ 17.48 9,288 -
February 2008 7,235 $ 17.39 7,235 -
March 2008 86,517 $ 17.78 86,517 -
-----------------------------------------------------------------------
Total 103,040 $ 17.72 103,040 -
=======================================================================
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
-19-
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 6, 2008 By: /s/ Norman H. Asbjornson
------------------------------
Norman H. Asbjornson
President/CEO
Dated: May 6, 2008 By: /s/ Kathy I. Sheffield
------------------------------
Kathy I. Sheffield
Vice President/CFO
-20-