FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number: 33-183336-LA
AAON, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0448736
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(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(918) 583-2266
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(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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date. 13,216,834 shares of
$.004 par value Common Stock.
(1)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
On pages 6 through 12 of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
AAON, Inc. engineers, manufactures and markets commercial rooftop
air-conditioning, heating and heat recovery equipment, air conditioning coils,
and air handling and condensing units. AAON's primary products are its RK, RF,
and RL (which was designed to replace the RF) series units, and the Company
began producing water chillers in late 2001. In the second quarter of 2002, the
new, highly energy-efficient RM was introduced to replace the RK. In 2002, AAON
also introduced an expanded air-handler product.
AAON sells its products to property owners and contractors through a
network of manufacturers' representatives and its internal sales force. The
demand for AAON'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 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 period is generally one year from the date of first use or 15
months from date of shipment; however, compressors (if applicable) carry an
additional four-year warranty and gas-fired heat exchangers (if applicable) have
a 15-year warranty.
In late 1997, the Company began receiving additional machinery to allow
for continued expansion of its production. At the end of 1997, the Company
bought a 40-acre tract of land across the street from its original plant,
containing 457,000 sq. ft. of manufacturing/warehouse space and a 22,000 sq. ft.
office building (the "expansion facility"). In 1999 an enlargement of slightly
over 90,000 sq. ft. was begun on the Longview, Texas, facility, which was
completed in 2000. During 2001 the Company began producing its new, larger
tonnage RL series units in 100,000 sq. ft. of the expansion facility. Throughout
this time period, machinery was added in both the Tulsa and Longview facilities,
which allowed the Company to increase sales by 93% from 1997 to 2001. In
addition, these facilities have allowed the Company to install assembly areas
specifically designed for a particular product, thus improving assembly labor.
The new machinery additions have permitted better utilization of manufacturing
personnel. Also during this period, the Company invested heavily in creating new
computer software to improve its operations. These improvements and expansions
contributed to the increase in gross profit from 16.0% in 1997 to 24.7% in 2001.
(2)
Set forth below is income statement information with respect to the
Company for the three-month and six-month periods ended June 30, 2002, and 2001:
Three Months Ended Six Months Ended
June 30, 2002* June 30, 2001* June 30, 2002* June 30, 2001*
(in thousands)
Net sales $ 40,181 $ 41,520 $ 76,171 $ 80,955
Cost of sales 30,444 30,638 56,817 58,811
---------------- ---------------- ---------------- -----------------
Gross profit 9,737 10,882 19,354 22,144
Selling, general and
administrative expenses 4,079 4,669 8,015 10,019
---------------- ---------------- ---------------- -----------------
Income from operations 5,658 6,213 11,339 12,125
Interest expense 27 312 30 608
Other income (94) (135) (157) (235)
---------------- ---------------- ---------------- -----------------
Income before income
taxes 5,725 6,036 11,466 11,752
Income tax provision 2,059 2,220 4,153 4,360
---------------- ---------------- ---------------- -----------------
Net income $ 3,666 $ 3,816 $ 7,313 $ 7,392
======== ======== ======== ========
*Unaudited
Results of Operations. In the second quarter of 2002, net sales
decreased by 3.2% from $41,520,000 to $40,181,000 as compared to the same period
in 2001. Net sales decreased by $4,784,000 (6%) from $80,955,000 to $76,171,000
during the six-month period ended June 30, 2002, compared to the same period in
2001. The decrease in sales, for the three months ended June 30, 2002, compared
to the three months ended June 30, 2001, resulted from a slowdown in production
caused by the heavy volume of new products being produced. In addition, the
decrease in sales for the six months ended June 30, 2002, compared to the same
period in 2001, resulted from a slowdown in the construction market and overall
economic conditions. Sales to existing customers in the first half of 2002,
accounted for 85% of the Company's business, with the balance coming from new
business.
Gross profit decreased 10.5% from $10,882,000 to $9,737,000 for the
three months ended June 30, 2002, and 12.6% from $22,144,000 to $19,354,000 for
the six months ended June 30, 2002, compared to the same periods in 2001. The
decrease in margins for the quarter ended June 30, 2002, was attributable to the
start-up costs related to the production of new products, and for the six months
ended June 30, 2002, compared to June 30, 2001, resulted from lower plant
utilization attributable to the decrease in sales noted above.
SG&A expenses decreased $590,000 (13%) from the quarters ended June 30,
2001, compared to June 30, 2002, due to a decrease in warranty expense. SG&A
expenses decreased $2,004,000 (20%) from the six-month periods ended June 30,
2001, compared to June 30, 2002, due primarily to decreases in warranty and bad
debt expenses.
(3)
Interest expense decreased $285,000 (91%) for the quarters ended June
30, 2002, compared to June 30, 2001, due to reduction of the revolving credit
line balance. Interest expense decreased $578,000 (95%) from the six-month
periods ended June 30, 2001, compared to June 30, 2002, due to the retirement of
all long-term debt.
Other income decreased $41,000 (30%) from the quarter ended June 30,
2001, and $78,000 (33%) from the six months ended June 30, 2001, primarily due
to a decrease in rental income.
Financial Condition and Liquidity. The Company generated $11,664,000
and $5,945,000 in cash from operating activities during the six months ended
June 30, 2002, and June 30, 2001, respectively. These increases in cash allowed
the investment of $10 million on a long-term basis. These funds and subsequent
cash flows will be retained for general working capital purposes and future
business opportunities.
Accounts receivable decreased by $1,188,000 at June 30, 2002, compared
to December 31, 2001, due to increased collection efforts.
Inventories increased by $1,188,000 at June 30, 2002, compared to
December 31, 2001, due to the procurement of inventory levels needed to meet
projected production demands. However, the inventory did not turn as expected
due to the slowdown in production caused by the manufacturing of new products.
Property, plant and equipment additions totaled $1,403,000 for the six
months ended June 30, 2002, reflecting primarily additions to machinery and
equipment and building renovations. All capital expenditures and building
renovations in the first six months of 2002 were financed out of cash generated
from operations.
Accounts payable and accrued liabilities increased by $2,724,000 at
June 30, 2002, compared to December 31, 2001, due primarily to an increase in
income taxes payable and timing of payments to vendors.
Management believes the Company's bank revolving credit facility (or
comparable financing), term loans and projected profits from operations will
provide the necessary liquidity and capital resources to the Company for the
foreseeable future. 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 long-term debt at June 30, 2002, see Note 4
to the Financial Statements.
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. Actual results could differ
from those estimates. The Company re-evaluates its estimates and assumptions on
a monthly basis.
The following accounting policies may involve a higher degree of
estimate or assumption:
(4)
Allowance for Doubtful Accounts - The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, economic and market conditions, the age of the
receivable and other information.
Allowance for Excess and Obsolete Inventories - The Company establishes
an allowance for excess and obsolete inventories based on the change in
inventory due to product line changes, the feasibility of substituting parts and
the need for part supply sales and replacement parts.
Warranty - A provision is made for the estimated cost of warranty
obligation at the time the products are sold. Warranty expense is estimated
based on the Company's warranty period, historical trends, new products in the
field, any known identifiable warranty issues and other factors.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Words such as "expects,"
"anticipates," "intends," "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 actual results to differ
materially from those in the forward-looking statements include (1) the timing
and extent of changes in material 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.
Foreign sales account for less than 2% of the Company's total sales and
the Company accepts payment for such sales only in U.S. dollars; hence, the
Company is not exposed by any foreign currency exchange rate risk.
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 negotiating with each of its
major suppliers on a term basis from six months to one year.
Item 5. Other Events.
On April 24, 2002, the Company declared a 3-for-2 stock split that was
paid in the form of a 50% stock dividend on June 4, 2002, to stockholders of
record at the close of business on May 17, 2002.
(5)
AAON, Inc.
Consolidated Balance Sheets
June 30, 2002* December 31, 2001
(In Thousands, except share
and per share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 164 $ 1,123
Accounts receivable 22,204 23,392
Inventories 15,156 13,471
Prepaid expenses 511 220
Deferred income tax 4,067 4,067
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Total current assets 42,102 42,273
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PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 874 874
Buildings 17,462 16,893
Machinery and equipment 36,097 35,331
Furniture and fixtures 3,265 3,197
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Total Property, Plant & Equipment 57,698 56,295
Less: accumulated depreciation 24,688 22,273
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Net property, plant & equipment 33,010 34,022
Long-term investments 10,000 -
Total Assets $ 85,112 $ 76,295
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,584 $ 8,005
Accrued liabilities 15,641 13,496
Current maturities of long-term debt - 884
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Total Current Liabilities 24,225 22,385
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DEFERRED TAX LIABILITY 2,884 2,884
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LONG-TERM DEBT - 985
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STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par,
5,000,000 shares authorized,
no shares issued - -
Common Stock, $.004 par,
50,000,000 shares authorized,
13,216,834 and 12,999,310
issued and outstanding
at June 30, 2002, and
December 31, 2001, respectively** 53 53
Additional paid-in capital 1,712 1,063
Retained earnings** 56,238 48,925
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Total stockholders' equity 58,003 50,041
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Total Liabilities and Stockholders' Equity $ 85,112 $ 76,295
========== ==========
*Unaudited **Reflects stock split effective June 4, 2002
(6)
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, 2002* June 30, 2001* June 30, 2002* June 30, 2001*
(In Thousands, except share and per share data)
Net sales $ 40,181 $ 41,520 $ 76,171 $ 80,955
Cost of Sales 30,444 30,638 56,817 58,811
--------------- --------------- --------------- ---------------
Gross profit 9,737 10,882 19,354 22,144
Selling, general and
administrative expenses 4,079 4,669 8,015 10,019
--------------- --------------- --------------- ---------------
Income from operations 5,658 6,213 11,339 12,125
Interest expense 27 312 30 608
Other income (94) (135) (157) (235)
--------------- --------------- --------------- ---------------
Income before income taxes 5,725 6,036 11,466 11,752
Income tax provision 2,059 2,220 4,153 4,360
--------------- --------------- --------------- ---------------
Net Income $ 3,666 $ 3,816 $ 7,313 $ 7,392
=============== =============== =============== ===============
Earnings Per Share**:
Basic $ 0.28 $ 0.29 $ 0.56 $ 0.57
=============== =============== =============== ===============
Diluted $ 0.27 $ 0.28 $ 0.53 $ 0.54
=============== =============== =============== ===============
Weighted Average Shares Outstanding**:
Basic 13,208,004 12,955,295 13,137,613 12,948,534
=============== =============== =============== ===============
Diluted 13,782,289 13,580,863 13,722,352 13,589,258
=============== =============== =============== ===============
*Unaudited
**Reflects stock split effective June 4, 2002
(7)
AAON, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Paid In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
(In Thousands)
Balance, December 31, 2001** 12,999 $ 53 $ 1,063 $ 48,925 $ 50,041
Exercise of Common Stock Options* 218 - 649 - 649
Net Income* - - - 7,313 7,313
------------- -------------- ------------------ ------------------ ----------------
Balance, June 30, 2002*, ** 13,217 $ 53 $ 1,712 $ 56,238 $ 58,003
============= ============== ================== ================== ================
* Unaudited
**Reflects stock split effective June 4, 2002
(8)
AAON, Inc.
Consolidated Statements of Cash Flows
Six Months Ended Six Months Ended
June 30, 2002* June 30, 2001*
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,313 $ 7,392
---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and Amortization 2,415 2,004
Change in assets and liabilities:
(Increase) decrease in:
Accounts Receivable 1,188 (2,782)
Inventories (1,685) 30
Prepaid Expenses (291) (292)
Increase (decrease) in:
Accounts Payable 579 (3,342)
Accrued Liabilities 2,145 2,935
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Total Adjustments 4,351 (1,447)
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Net cash provided by
Operating Activities 11,664 5,945
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (1,403) (7,036)
Long-term Investments (10,000) -
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Net cash used in
Investing Activities (11,403) (7,036)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under Revolving Credit Agreement 16,686 38,205
Payments under Revolving Credit Agreement (17,132) (36,472)
Changes in long-term debt (1,423) (504)
Exercise of Stock Options 649 248
Repurchase of Common Stock - (390)
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Net cash provided by (used in)
Financing Activities (1,220) 1,087
---------- ----------
NET CHANGE IN CASH (959) (4)
CASH, beginning of period 1,123 17
---------- ----------
CASH, end of period $ 164 $ 13
========== ==========
*Unaudited
(9)
AAON, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
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, 2001, filed by AAON, Inc. with the SEC. Certain
reclassifications of prior year amounts have been made to conform to current
year presentations. These reclassifications had no impact on net income.
Management believes that no adjustments to the financial statements are
necessary.
Cash and Cash Equivalents
Cash and cash equivalents of $164 thousand consist of bank deposits and highly
liquid, interest-bearing money market funds with initial maturities of three
months or less.
2. INVENTORIES:
-----------
Inventories at June 30, 2002 (unaudited), and December 31, 2001, consist of the
following:
June 30, 2002 December 31, 2001
------------------- ------------------
Raw Materials $10,026,000 $ 9,526,000
Work in Process 2,723,000 2,258,000
Finished Goods 2,407,000 1,687,000
------------------- ------------------
$15,156,000 $13,471,000
=========== ===========
Raw material inventory is net of an allowance for excess and obsolete
inventories of $1,100,000 and $850,000 at June 30, 2002 and December 31, 2001,
respectively.
3. LONG-TERM INVESTMENTS:
---------------------
Long-term investments consist of a $10 million certificate of deposit bearing
interest at 3.25% per annum with a maturity date of June 12, 2004. There is a
three-month interest penalty for early withdrawal.
(10)
4. LONG-TERM DEBT:
--------------
Long-term debt at June 30, 2002 (unaudited), and December 31, 2001, consists of
the following:
June 30, 2002 Dec. 31, 2001
------------- -------------
$15,150,000 bank line of credit
with interest payable monthly
at LIBOR plus 1.60% (3.44%
at June 30, 2002) due July 31, 2002 -0- $ 446,000
Three notes payable due in 84 equal
installments totaling $36,489, plus
interest at 7.47%, and 7.52%,
collateralized by machinery and
equipment -0- 1,423,000
------------- --------------
-0- 1,869,000
Less: Current Maturities -0- 884,000
------------- --------------
-0- $ 985,000
=== =========
On July 30, 2002, the bank renewed the line of credit with a maturity
date of July 31, 2003.
5. NEW ACCOUNTING PRONOUNCEMENTS:
-----------------------------
In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" (Statement 141), Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
142), and Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" (Statement 143). In October 2001, the FASB issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal for Long-Lived Assets" (Statement 144).
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of Statement 142. The Company was required to adopt the
provisions of Statement 142 effective January 1, 2002. The adoption of Statement
142 had no material impact on the Company's results of operations or financial
condition.
Statement 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the long-lived asset. Statement
143 is effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of Statement 143 on its financial condition and
results of operations.
Statement 144 supersedes, but retains the basic framework of SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," including provisions relating to asset impairment, and the
requirement to report discontinued operations separately and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The Company was required to adopt Statement 144
effective January 1, 2002. The adoption of Statement 144 had no material impact
on the Company's results of operations or financial condition.
(11)
6. FOOTNOTES INCORPORATED BY REFERENCE:
-----------------------------------
Certain footnotes are applicable to the financial statements, but would be
substantially unchanged from those presented in the December 31, 2001, 10-K
filed with the SEC. Accordingly, reference should be made to this statement for
the following:
Note Description
=========== ==========================================================
1 Business and Summary of Significant Accounting Policies
4 Income Taxes
5 Benefit Plans
6 Shareholder Rights Plan
7 Contingencies
(12)
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 99.1 - Certification of CEO
99.2 - Certification of CFO
(b) Reports on Form 8-K: Registrant filed one report on
Form 8-K during the three-month period ended June 30,
2002. It reported Registrant's change of auditors
effective June 20, 2002.
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: August 13, 2002 By: /s/ Norman H. Asbjornson
----------------------------
Norman H. Asbjornson
President
Dated: August 13, 2002 By: /s/ Kathy I. Sheffield
----------------------------
Kathy I. Sheffield
Treasurer
(13)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AAON, Inc. (the "Company"),
on Form 10-Q for the period ended June 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Norman H.
Asbjornson, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Norman H. Asbjornson
Norman H. Asbjornson
Chief Executive Officer
August 13, 2002
(14)
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AAON, Inc. (the "Company"),
on Form 10-Q for the period ended June 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Kathy I.
Sheffield, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Kathy I. Sheffield
Kathy I. Sheffield
Chief Financial Officer
August 13, 2002
(15)