UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number: 33-18336-LA
AAON, INC.
(Exact name of Registrant as specified in its charter)
Nevada 87-0448736
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 583-2266
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.004
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(Title of Class)
Rights to Purchase Series A Preferred Stock
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(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Registrant's common equity held by
non-affiliates computed by reference to the closing price of Registrant's common
stock on February 28, 2003, was approximately $121,766,000. For purposes of this
computation, all officers, directors and 5% beneficial owners of Registrant are
deemed to be affiliates.
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the common equity held by non-affiliates
computed by reference to the closing price of Registrant's common stock on the
last business day of Registrant's most recently completed second quarter (June
30, 2002) was $164,919,000.
As of February 28, 2003, Registrant had outstanding a total of
13,032,266 shares of its $.004 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders to be held May 28, 2003, are
incorporated into Part III.
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
1. Business. 1
2. Properties. 5
3. Legal Proceedings. 5
4. Submission of Matters to a Vote of Security Holders. 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. 6
6. Selected Financial Data. 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
7A. Quantitative and Qualitative Disclosures About Market Risk. 12
8. Financial Statements and Supplementary Data. 12
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 12
PART III
10. Directors and Executive Officers of Registrant. 13
11. Executive Compensation. 13
12. Security Ownership of Certain Beneficial Owners and Management. 13
13. Certain Relationships and Related Transactions. 13
14. Controls and Procedures. 13
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 14
PART I
Item 1. Business.
General Development of Business
AAON, Inc., a Nevada corporation ("AAON-Nevada" or, including its subsidiaries,
the "Company" or "AAON"), was incorporated on August 18, 1987.
AAON, Inc., an Oklahoma corporation ("AAON-Oklahoma"), was incorporated on
August 15, 1988, for the purpose of acquiring the assets, subject to certain
liabilities, of the Heating, Ventilation and Air-Conditioning ("HVAC") Division
of John Zink Company in Tulsa, Oklahoma. In June 1989, pursuant to a
Conversion/Exchange Agreement, AAON-Oklahoma became a wholly-owned subsidiary of
AAON-Nevada.
AAON-Oklahoma is engaged in the manufacture and sale of commercial rooftop
air-conditioners and heating equipment.
In December 1991, AAON Coil Products, Inc. ("ACP", formerly CP/AAON, Inc.), a
Texas corporation, was organized as a wholly-owned subsidiary of AAON-Nevada to
purchase most of the assets of Coils Plus, Inc., of Longview, Texas. ACP
manufactures coils used in the Company's products, as well as air handling and
condensing units introduced in 1998.
Products and Markets
The Company engineers, manufactures and markets commercial rooftop
air-conditioning, heating and heat recovery equipment, air-conditioning coils,
air handling and condensing units and chillers. Its products serve the
commercial and industrial new construction and replacement markets. To date
virtually all of the Company's sales have been to the domestic market, with
foreign sales accounting for only 2% of its sales in 2002.
The rooftop and condenser markets consist of units installed on commercial or
industrial structures of generally less than 10 stories in height. Air handling
units, coils and chillers are applicable to all sizes of commercial and
industrial buildings.
The size of these markets is determined primarily by the number of commercial
and industrial building completions. The replacement market consists of products
installed to replace existing units/components which are worn or damaged.
Historically, approximately half of the industry's market has consisted of
replacement units.
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.
Based on its 2002 level of sales, approximately $155 million, the Company has a
13% share of the rooftop market and a 1% share of the coil market. Approximately
60% of the Company's sales now come from new construction and 40% from
renovation/replacements. The percentage of sales for new construction vs.
replacement to particular customers is related to their stage of development. In
the case of Wal-Mart and Target, due to their growth posture, the Company's
sales to these major customers was approximately 80% for new construction and
20% replacement. Sales of air handling and condensing units and chillers in 2002
amounted to approximately $4.5 million.
(1)
The Company purchases certain components, fabricates sheet metal and tubing and
then assembles and tests its finished products. The Company's primary finished
products consist of a single unit system containing heating, cooling and/or heat
recovery components in a self-contained cabinet, referred to in the industry as
"unitary" products. The Company's other finished products are coils consisting
of a sheet metal casing with tubing and fins contained therein, air handling
units consisting of coils, blowers and filters, and condensing units consisting
of coils, fans and compressors, which, with the addition of a refrigerant to
water heat exchanger, become chillers.
The Company currently has five groups of rooftop products: its RK Series offered
in 18 cooling sizes ranging from three to 60 tons, which is being phased out and
will be replaced by the RM and RN Series offered in 21 cooling sizes ranging
from two to 70 tons; its RL Series, which is offered in 15 cooling sizes ranging
from 40 to 230 tons; and its HA Series, which is a horizontal discharge package
for either rooftop or ground installation, offered in nine sizes ranging from
four to 50 tons. The Company's heat recovery option applicable to its RK, RM, RN
and RL units (which responds to the U.S. Clean Air Act mandate to increase fresh
air in commercial structures and increases the capacity of these units by up to
50% with no additional energy cost) has gained significant customer acceptance.
The Company's products are designed to compete on the high side of standardized,
packaged rooftop products. Accordingly, its prices range from $300 to $550 per
ton of cooling, which is approximately 4%, on average, higher than other
standardized products. Performance characteristics of these products range in
cooling capacity from 28,000-2,676,000 BTU's and in heating capacity from
69,000-3,990,000 BTU's. All of the Company's rooftop products meet the
Department of Energy's efficiency standards, which are designed to set the
maximum amount of energy to be used in producing a given amount of cooling.
A typical commercial building installation requires a ton of air-conditioning
for every 300-400 square feet or, for a 100,000 square foot building, 250 tons
of air-conditioning, which would involve multiple units.
The Company has developed a prototype wall-hung heating and air-conditioning
unit which it plans to market for commercial buildings requiring a product
designed for small space(s). Pilot production and testing of this product began
in 2001, but sales to date have not been significant. In December 2001, the
Company began marketing commercial water chillers. The development of these
products did not require a material investment, but could produce material
results.
Major Customers
The Company's largest customers last year were Wal-Mart Stores, Inc., and Target
Stores, Inc. Sales to Wal-Mart and Target were 14% and 11% of total sales,
respectively, in 2002 and 2001. The Company has no written contract with these
customers.
The loss of either of the above customers would have a material adverse affect
on the Company. However, with the continuing expansion of the Company's customer
base, management believes that the extent of its dependence on sales to its
major customers will diminish over a period of time.
In order to diversify its customer base, the Company has added to and/or
upgraded its sales representation in various markets.
Sources and Availability of Raw Materials
The most important materials purchased by the Company are steel, copper and
aluminum, 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 Company
endeavors to obtain the lowest possible cost in its purchases of raw materials
and components, consistent with meeting specified quality standards. The Company
is not dependent upon any one source for its raw material or the major
components of its manufactured products. By having multiple suppliers, the
Company believes that it will have adequate sources of supplies to meet its
manufacturing requirements for the foreseeable future.
(2)
Further, the Company attempts to limit the impact of increases in raw materials
and purchased component prices on its profit margins by negotiating with each of
its major suppliers on a term basis from six months to one year.
Distribution
The Company utilizes a direct sales staff of nine individuals and approximately
84 independent manufacturer representatives' organizations having 101 offices to
market its products in the United States. The Company also has one international
sales organization, which utilizes 12 distributors in other countries. Sales are
made directly to the contractor or end user, with shipments being made from the
Company's Tulsa and Longview plants to the job site. Billings are to the
contractor or end user, with a commission paid directly to the manufacturer
representative.
The Company's products and sales strategy focus on a "niche" market. The
targeted market for its rooftop equipment is customers seeking a product of
better quality than offered, and/or options not offered, by standardized
manufacturers.
To support and service its customers and the ultimate consumer, the Company
provides parts availability through two independent parts distributors and has a
factory service organization at its Tulsa plant. Also, a number of the
manufacturer representatives utilized by the Company have their own service
organizations, which, together with the Company, provide the necessary warranty
work and/or normal service to customers.
The Company's warranty on its products is: for parts only, the earlier of one
year from the date of first use or 15 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.
Research and Development
All R&D activities of the Company are company-sponsored, rather than
customer-sponsored. Ongoing work involves the RM, RN and LL (chiller) Series,
component evaluation and refinement, development of control systems and new
product development. This work will cost approximately $600,000 per year and is
budgeted as a normal, recurring expense.
Backlog
The Company had a current backlog as of March 1, 2003, of $24,972,000, compared
to $28,800,000 at March 1, 2002. The current backlog consists of orders
considered by management to be firm and substantially all of which will be
filled by August 1, 2003; however, the orders are subject to cancellation by the
customers.
(3)
Working Capital Practices
Working capital practices in the industry center on inventories and accounts
receivable. The Company regularly reviews its working capital components with a
view to maintaining the lowest level consistent with requirements of anticipated
levels of operation. Its greatest needs arise during the months of
July-November, the peak season for inventory (primarily purchased material) and
accounts receivable. The Company's working capital requirements are generally
met through a bank revolving credit facility, which currently permits borrowings
up to $15,150,000. The Company believes that it will have sufficient bank credit
available to meet its working capital needs for the foreseeable future.
Seasonality
Sales of the Company's products are moderately seasonal with the peak period
being July-November of each year.
Competition
In the domestic market, the Company competes primarily with Trane Company, a
division of American Standard, Inc., Carrier Corporation, a subsidiary of United
Technologies Corporation, Lennox International, Inc., and York International
Corporation. All of these competitors are substantially larger and have greater
resources than the Company. The Company competes primarily on the basis of total
value, quality, function, serviceability, efficiency, availability of product,
product line recognition and acceptability of sales outlet. However, in new
construction where the contractor is the purchasing decision maker, the Company
often is at a competitive disadvantage on sales of rooftop units because of the
emphasis placed on initial cost; whereas, in the replacement market and other
owner-controlled purchases of such units, the Company has a better chance of
getting the business since quality and long-term cost are generally taken into
account.
Employees
As of March 1, 2003, the Company had 965 employees and 107 temporaries, none of
whom are represented by unions. Management considers its relations with its
employees to be good.
Patents, Trademarks, Licenses and Concessions
The Company does not consider any patents, trademarks, licenses or concessions
held by it to be material to its business operations, other than patents issued
regarding its heat recovery wheel option, blower, gas-fired heat exchanger,
wall-hung curb and evaporative condenser desuperheater.
Environmental Matters
Laws concerning the environment that affect or could affect the Company's
domestic operations include, among others, the Clean Water Act, the Clean Air
Act, the Resource Conservation and Recovery Act, the Occupational Safety and
Health Act, the National Environmental Policy Act, the Toxic Substances Control
Act, regulations promulgated under these Acts, and any other federal, state or
local laws or regulations governing environmental matters. The Company believes
that it presently complies with these laws and that future compliance will not
materially adversely affect the Company's earnings or competitive position.
Available Information
The Company's Internet website address is http://www.aaon.com. Its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act of 1934 will be available through the Company's
Internet website as soon as reasonably practical after the Company
electronically files such material with, or furnishes it to, the SEC.
(4)
Item 2. Properties.
The plant and office facilities of AAON-Oklahoma 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 on a 12-acre tract of land at 2425 South Yukon,
Tulsa, Oklahoma (the "original facility"), and a 457,000 square foot
manufacturing/warehouse building and a 22,000 square foot office building (the
"expansion facility") located on a 40-acre tract of land across the street from
the original facility. Both plants are of sheet metal construction.
The original facility's manufacturing area is in a heavy industrial type
building, with total coverage by bridge cranes, containing manufacturing
equipment designed for sheet metal fabrication and metal stamping. The
manufacturing equipment contained in the original facility consists primarily of
automated sheet metal fabrication equipment, supplemented by presses, press
breaks and NC punching equipment. Assembly lines consist of four cart-type
conveyor lines with variable line speed adjustment, three of which are motor
driven. Subassembly areas and production line manning are based upon line speed.
The manufacturing facility is 1,140 feet in length and varies in width from 390
feet to 220 feet. Production at this facility averaged approximately $12.5
million per month in 2002, which is 60% of the estimated capacity of the plant.
Management deems this plant to be nearly ideal for the type of rooftop products
being manufactured by the Company.
The expansion facility, which was purchased in December 1997, is 25% (122,000
sq. ft.) utilized by the Company and 75% leased to third parties. The Company
uses 22,000 sq. ft. for office space, 20,000 sq. ft. for warehouse space and
80,000 sq. ft. for manufacturing. The remaining 335,000 sq. ft. will afford the
Company additional plant space for long-term growth.
The operations of ACP are conducted in a plant/office building at 203-207 Gum
Springs Road in Longview, Texas, containing 226,000 square feet on 14 acres. The
manufacturing area (approximately 219,000 square feet) is located in three
120-foot wide sheet metal buildings connected by an adjoining structure. The
facility is built for light industrial manufacturing.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceeding which management
believes is likely to result in a material liability and no such action is
contemplated by or, to the best of its knowledge, has been threatened against
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through solicitation of
proxies or otherwise, during the period from October 2, 2002, through December
31, 2002.
(5)
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol "AAON". The range of closing prices for the Company's Common Stock during
the last two years, as reported by National Association of Securities Dealers,
Inc. (adjusted for 3-for-2 stock splits on September 28, 2001, and June 4,
2002), was as follows:
Quarter Ended High Low
March 31, 2001 $ 11.05 $ 8.22
June 30, 2001 $ 12.33 $ 7.45
September 30, 2001 $ 14.22 $ 11.25
December 31, 2001 $ 16.31 $ 10.67
March 31, 2002 $ 18.08 $ 12.97
June 30, 2002 $ 21.54 $ 16.94
September 30, 2002 $ 18.69 $ 15.55
December 31, 2002 $ 21.00 $ 16.00
On February 28, 2003, there were 1,037 holders of record, and 4,048 beneficial
owners, of the Company's Common Stock.
Since its inception, no cash dividends have been paid on the Company's Common
Stock and the Company does not anticipate paying cash dividends in the
foreseeable future. There is a negative covenant under the Company's Revolving
Credit and Term Loan Agreement which prohibits the declaration or payment of
such dividends.
(6)
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto for the periods indicated, which
are included elsewhere in this report.
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------
Results of Operations: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $155,075 $157,252 $154,982 $131,947 $109,624
Net income $ 14,611 $ 14,156 $ 12,794 $ 9,697 $ 5,230
Basic earnings per share $ 1.11 $ 1.09 $ .97 $ .69 $ .37
Diluted earnings per share $ 1.06 $ 1.04 $ .92 $ .67 $ .36
Weighted average shares
outstanding
Basic 13,158 12,992 13,190 14,043 13,955
Diluted 13,740 13,641 13,896 14,535 14,367
December 31,
- ---------------------------------------------------------------------------------------------------------
Balance Sheet Data: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Total assets $91,713 $76,295 $76,818 $58,656 $50,506
Long-term debt - $ 985 $ 5,853 $ 6,630 $10,980
Stockholders' equity $62,310 $50,041 $37,012 $33,618 $24,411
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per common share were determined on the
assumed exercise of dilutive options, as determined by applying the treasury
stock method. Effective September 28, 2001 and June 4, 2002, the Company
completed a three-for-two stock split. The shares outstanding and earnings per
share disclosures have been restated to reflect the stock split.
(7)
Item 7. 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, chillers, air
conditioning coils, air handlers and condensing units. The Company's primary
products are its RK, RL, RM and RN Series units. In the second quarter of 2002,
the new, highly energy-efficient RM was introduced to replace the RK. AAON has
also introduced an expanded air-handler product. In the third quarter of 2002, a
new Modulating Hot Gas Reheat feature was introduced for the rooftop product
lines, condensing units and air handlers. The new feature addresses humidity,
mold and indoor air quality problems that plague many environments due to
excessive moisture.
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 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, gas-fired heat exchangers (if applicable) have a 15-year
warranty, and stainless steel heat exchangers (if applicable) have a 25-year
warranty.
(8)
Set forth below is income statement information with respect to the Company for
years 2002, 2001 and 2000:
Years Ended December 31,
2002 2001 2000
---- ---- ----
(in thousands)
Net sales $155,075 $157,252 $154,982
Cost of sales 117,193 118,399 120,233
-------------- -------------- --------------
Gross profit 37,882 38,853 34,749
-------------- -------------- --------------
Selling, general and
administrative expenses 15,071 16,011 13,922
-------------- -------------- --------------
Income from operations 22,811 22,842 20,827
-------------- -------------- --------------
Interest expense 95 892 904
Interest income (214) - -
Other income (180) (536) (436)
-------------- -------------- --------------
Income before income taxes 23,110 22,486 20,359
Income tax provision 8,499 8,330 7,565
-------------- -------------- --------------
Net income $ 14,611 $ 14,156 $ 12,794
============== ============== ==============
Results of Operations
Net sales decreased by 1% in 2002 compared to 2001, and 2001 sales were 1.5%
greater than in 2000. The decrease in sales for 2002 was caused by a slowdown in
production in the second quarter due to the heavy volume of new products
produced, and from a slowdown in the construction market caused by a downturn in
the economy and uncertainty about future economic conditions. Following the
events of September 11, 2001, the Company experienced a period of minimal sales
activity and many orders were delayed by the Company's customers, resulting in a
decrease in sales for the fourth quarter of 2001 of 11% compared to the same
period in 2000. The increase in sales in 2001 compared to 2000 resulted from
increases in the Company's market share in all areas of its business aided by
both new product introductions and newly developed versions of existing product
lines. The increase was attributable to more sales generated by manufacturer's
representatives and replacement business. Sales to existing customers continued
to account for 85% of the Company's business, with the balance coming from new
business.
Gross profit in 2002 was 24.4% compared to 24.7% in 2001 and 22.4% in 2000. The
decrease in margins for 2002 vs. 2001 was primarily attributable to start-up
costs related to the production of new products and lower plant utilization due
to the decrease in sales. The increase in margins in 2001 compared to 2000 was
due to efficiencies realized from higher plant utilization and a more stable
work force which allowed the Company to reduce the amount of overtime incurred
and also allowed the Company to realize better overall labor efficiencies.
Selling, general and administrative expenses decreased by $.9 million (6%) in
2002 compared to 2001, primarily as a result of a reduction in bad debt and
warranty expense. The SG&A increase of $2.1 million (15%) in 2001 compared to
2000 was primarily due to higher warranty reserves related to the introduction
of new products both within existing and new product lines.
Interest expense was $.1 million, $.9 million and $.9 million in 2002, 2001 and
2000, respectively. The reduction in interest expense was due to the retirement
of all long-term debt in 2002 and lower average borrowings under the revolving
credit facility.
(9)
Interest income in 2002 was $.2 million due to investments in short-term money
markets and certificates of deposits.
Other income was $.2 million, $.5 million and $.4 million in 2002, 2001 and
2000, respectively. Other income is primarily attributable to rental income from
the Company's "expansion facility". The decrease of $.4 million in 2002 compared
to 2001 is due to the expanded company use of its facilities.
The Company's effective tax rate in 2002, 2001 and 2000 was 37%.
Financial Condition and Liquidity
Accounts receivable decreased $1.1 million at December 31, 2002, compared to
December 31, 2001, due to improved collection results.
Inventories increased $.9 million at December 31, 2002, compared to December 31,
2001, due to the procurement of additional inventory required for the
manufacturing of new products.
Prepaid expenses increased by $.4 million at December 31, 2002, compared to
December 31, 2001, due to deposits made on equipment acquisitions.
Accounts payable and accrued liabilities increased $.7 million at December 31,
2002, compared to December 31, 2001, due primarily to timing of payments to
vendors.
The Company generated $21.9 million, $23.9 million and $14.0 million cash from
operating activities in 2002, 2001 and 2000, respectively. Operating cash flows
in 2002 consisted of $14.6 million of net income, $4.9 million of depreciation
and $2.4 million of working capital and other changes. Operating cash flows in
2001 consisted of $14.2 million of net income, $4.4 million of depreciation and
$5.3 million in working capital and other changes.
Cash flows used in investing activities were $16.1 million, $8.8 million and
$10.7 million in 2002, 2001 and 2000, respectively. Cash flows used in investing
activities in 2002 related to investments in certificates of deposit of $10
million and capital expenditure additions totaling $6 million, reflecting
primarily additions to machinery and equipment and renovations made to the
Company's manufacturing and office facilities. In 2001 and 2000 cash used in
investing activities was comprised primarily of capital expenditures totaling
$9.0 million and $10.7 million, respectively. All capital expenditures and
building renovations were financed out of cash generated from operations. The
Company had no long-term debt at December 31, 2002, compared to $1.0 million at
December 31, 2001.
Cash flows used in financing activities were $1.9 million, $14 million and $3.3
million in 2002, 2001 and 2000, respectively. In October the Company's Board of
Directors authorized a stock buy back program to repurchase up to 1,325,000
shares of stock. In 2002, there were 215,963 shares of stock repurchased for a
total of $4 million. The Company repurchased stock in 2001 and 2000 totaling
$2.8 million and $10.4 million, respectively. Additionally, during 2002 the
Company had net borrowings of $3.1 million under its revolving credit facility
and repaid $1.9 million of long-term debt. During 2000 and 2001, the Company had
net (repayments)/borrowings under its revolving credit facility totaling ($6.5
million) and $2.1 million, respectively.
The Company's revolving credit facility (which currently extends to July 31,
2003) 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. Borrowings available under the revolving
credit facility at December 31, 2002 were $11.6 million.
Management believes the Company's bank revolving credit facility (or comparable
financing), term loans, and projected cash flows 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.
(10)
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 re-evaluates 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.
Allowance for Excess and Obsolete Inventories - The Company establishes an
allowance for excess and obsolete 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 and replacement parts.
Warranty - A provision is made for the estimated cost of warranty obligation 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 15
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.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for
Asset Retirement Obligations, 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 related
long-lived asset. This Statement is effective for fiscal years beginning after
June 15, 2002. Management does not expect the adoption of SFAS 143 to have a
significant impact on its results of operations or financial position.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. Under this Statement, a liability for a cost associated
with an exit or disposal activity is recognized at fair value when the liability
is incurred rather than at the date of an entity's commitment to an exit plan.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of this Statement is
not expected to have a significant impact on the Company's results of operations
or financial position.
(11)
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 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 7A. 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.
Foreign sales accounted for only 2% of the Company's sales in 2002 and the
Company accepts payment for such sales only in U.S. dollars; hence, the Company
is not exposed to 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.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included at page 20.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The information called for by Item 304 of Regulation S-K has been previously
reported in the Company's Form 8-K dated June 25, 2002.
(12)
PART III
Item 10. Directors and Executive Officers of Registrant.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2003 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2003 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2003 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2003 Annual Meeting of Stockholders.
Item 14. Controls and Procedures.
Evaluation of disclosure controls and procedures
Within the 90-day period prior to the filing date of this Annual Report on Form
10-K, the Company's management, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, 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 Annual Report was prepared, as appropriate to
allow timely decision regarding the required disclosure.
Changes in internal controls
There have been no significant changes in the Company's internal controls or
other factors that could significantly affect the Company's internal controls
subsequent to their evaluation, nor have there been any corrective actions with
regard to significant deficiencies or material weaknesses.
(13)
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements.
See Index to Consolidated Financial Statements on page 19.
2. Exhibits:
(3) (A) Articles of Incorporation (i)
(A-1) Article Amendments (ii)
(B) Bylaws (i)
(B-1) Amendments of Bylaws (iii)
(4) (A) Second Restated Revolving Credit and Term
Loan Agreement ("Loan Agreement") and
related documents (iv)
(A-1) Latest amendments of Loan Agreement (v)
(B) Rights Agreement dated February 19, 1999, as
amended (vi)
(10) AAON, Inc. 1992 Stock Option Plan, as amended (vii)
(21) List of Subsidiaries (viii)
(23) Consent of Ernst & Young LLP
(99.1) Certification of CEO
(99.2) Certification of CFO
-----------------
(i) Incorporated herein by reference to the exhibits to the Company's
Form S-18 Registration Statement No. 33-18336-LA.
(ii) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990, and to the Company's Forms 8-K dated March 21, 1994, March
10, 1997, and March 17, 2000.
(iii) Incorporated herein by reference to the Company's Forms 8-K
dated March 10, 1997, May 27, 1998 and February 25, 1999, or
exhibits thereto.
(iv) Incorporated by reference to exhibit to the Company's Form 8-K
dated September 25, 1996.
(v) Incorporated herein by reference to exhibits to the Company's
Forms 8-K dated September 26, 1997, March 9, 1999, and March 17,
2000, January 18, 2001, September 24, 2001, and August 19, 2002.
(14)
(vi) Incorporated by reference to exhibits to the Company's Forms 8-K
dated February 25, 1999, and August 20, 2002, and Form 8-A
Registration Statement No. 000-18953, as amended.
(vii) Incorporated herein by reference to exhibits to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991, and to the Company's Form S-8 Registration Statement No.
33-78520, as amended.
(viii) Incorporated herein by reference to exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
(b) The Company did not file any reports on Form 8-K during the period
from October 1, 2002, to December 31, 2002.
(15)
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized.
AAON, INC.
Dated: March 26, 2003 By: /s/ Norman H. Asbjornson
-----------------------------------
Norman H. Asbjornson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 26, 2003 /s/ Norman H. Asbjornson
--------------------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 26, 2003 /s/ Kathy I. Sheffield
--------------------------------------
Kathy I. Sheffield
Treasurer
(principal financial officer
and principal accounting officer)
Dated: March 26, 2003 /s/ John B. Johnson, Jr.
--------------------------------------
John B. Johnson, Jr.
Director
Dated: March 26, 2003 /s/ Thomas E. Naugle
--------------------------------------
Thomas E. Naugle
Director
Dated: March 26, 2003 /s/ Jerry E. Ryan
--------------------------------------
Jerry E. Ryan
Director
(16)
CERTIFICATION
I, Norman H. Asbjornson, certify that:
1. I have reviewed this Annual Report on Form 10-K of AAON, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared:
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Norman H. Asbjornson
------------------------
Norman H. Asbjornson
Chief Executive Officer
March 26, 2003
(17)
CERTIFICATION
I, Kathy I. Sheffield, certify that:
1. I have reviewed this Annual Report on Form 10-K of AAON, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared:
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Kathy I. Sheffield
----------------------
Kathy I. Sheffield
Chief Financial Officer
March 26, 2003
(18)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors - Ernst & Young LLP 20
Report of Independent Public Accountants - Arthur Andersen LLP 21
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
(19)
Report of Independent Auditors
Stockholders
AAON, Inc.
We have audited the accompanying consolidated balance sheet of AAON, Inc. as of
December 31, 2002, and the related consolidated statement of operations,
stockholders' equity and cash flows for the year ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of AAON, Inc. for the years
ended December 31, 2001 and 2000, were audited by other auditors who have ceased
operations and whose report dated February 6, 2002, expressed an unqualified
opinion on those statements before the restatement adjustments described in Note
1.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed above, the financial statements of AAON, Inc. as of December 31,
2001, and for each of the two years then ended, were audited by other auditors
who have ceased operations. As described in Note 1, in 2002 the Company's Board
of Directors approved a three-for-two stock split distributed in the form of a
stock dividend, and all references to number of shares and per share information
in the financial statements have been adjusted to reflect the stock split on a
retroactive basis. We audited the adjustments that were applied to restate the
number of shares and per share information reflected in the 2001 and 2000
financial statements. Our procedures included (a) agreeing the authorization for
the three-for-two stock split to the Company's underlying records obtained from
management, and (b) testing the mathematical accuracy of the restated number of
shares, basic and diluted earnings per share and related stock option
disclosures. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such adjustments and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of AAON, Inc. as of December
31, 2002, and the results of its operations and its cash flows for the year
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 7, 2003
(20)
Report of Independent Public Accountants*
To the Stockholders of AAON, Inc.:
We have audited the accompanying consolidated balance sheets of AAON, Inc. (a
Nevada corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AAON, Inc. and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
February 6, 2002
*This is a copy of a previous report and has not been reissued.
(21)
AAON, INC.
Consolidated Balance Sheets
December 31,
2002 2001
-----------------------------------
(in thousands, except for
share data)
Assets
Current assets:
Cash and cash equivalents $ 5,071 $ 1,123
Accounts receivable, net 22,306 23,392
Inventories, net 14,338 13,471
Prepaid expenses and other 599 220
Deferred tax asset 4,168 4,067
------------------ ----------------
Total current assets 46,482 42,273
Certificate of deposit 10,000 -
Property, plant and equipment, net 35,231 34,022
------------------ ----------------
Total assets $ 91,713 $ 76,295
================== ================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ 3,566 $ 446
Accounts payable 8,418 7,559
Accrued liabilities 13,349 13,496
Current maturities of long-term debt - 884
------------------ ----------------
Total current liabilities 25,333 22,385
Deferred tax liability 4,070 2,884
Long-term debt - 985
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,
13,030,916 and 12,999,310 issued at December 31, 2002 and 2001,
respectively* 52 52
Additional paid-in capital - 1,063
Retained earnings* 62,258 48,926
------------------ ----------------
Total stockholders' equity 62,310 50,041
------------------ ----------------
Total liabilities and stockholders' equity $ 91,713 $ 76,295
================== ================
* Reflects three-for-two stock split effective June 4, 2002.
See accompanying notes.
(22)
AAON, Inc.
Consolidated Statements of Operations
Year Ending December 31,
2002 2001 2000
--------------------------------------------------
(in thousands except per share data)
Net sales $ 155,075 $ 157,252 $ 154,982
Cost of sales 117,193 118,399 120,233
--------------- --------------- ------------------
Gross profit 37,882 38,853 34,749
Selling, general and administrative expenses 15,071 16,011 13,922
--------------- --------------- ------------------
Income from operations 22,811 22,842 20,827
Interest expense 95 892 904
Interest income (214) - -
Other income (180) (536) (436)
--------------- --------------- ------------------
Income before income taxes 23,110 22,486 20,359
Income tax provision 8,499 8,330 7,565
--------------- --------------- ------------------
Net income $ 14,611 $ 14,156 $ 12,794
=============== =============== ==================
Earnings per share*:
Basic $ 1.11 $ 1.09 $ 0.97
=============== =============== ==================
Diluted $ 1.06 $ 1.04 $ 0.92
=============== =============== ==================
Weighted average shares outstanding*:
Basic 13,158 12,992 13,190
=============== =============== ==================
Diluted 13,740 13,641 13,896
=============== =============== ==================
* Reflects three-for-two stock split effective June 4, 2002.
See accompanying notes.
(23)
AAON, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock Paid-in Retained
Shares* Amount Capital Earnings* Total
--------------- ------------- -------------- ---------------- -----------------
(in thousands)
Balance at December 31, 1999 13,964 $ 54 $ 7,722 $ 25,842 $ 33,618
Net income - - - 12,794 12,794
Stock options exercised, including tax benefits
288 1 969 - 970
Stock repurchased and retired (1,284) (3) (8,691) (1,676) (10,370)
--------------- ------------- -------------- ---------------- -----------------
Balance at December 31, 2000 12,968 52 - 36,960 37,012
Net income - - - 14,156 14,156
Stock options exercised, including tax benefits
266 1 1,634 - 1,635
Stock issued to employees 1 - 25 - 25
Stock repurchased and retired (236) (1) (596) (2,190) (2,787)
--------------- ------------- -------------- ---------------- -----------------
Balance at December 31, 2001 12,999 52 1,063 48,926 50,041
Net income - - - 14,611 14,611
Stock options exercised, including tax benefits
248 1 1,639 - 1,640
Stock repurchased and retired (216) (1) (2,702) (1,279) (3,982)
--------------- ------------- -------------- ---------------- -----------------
Balance at December 31, 2002 13,031 $ 52 $ - $ 62,258 $ 62,310
=============== ============= ============== ================ =================
* Reflects three-for-two stock split effective June 4, 2002.
See accompanying notes.
(24)
AAON, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
2002 2001 2000
-------------------------------------------
(in thousands)
Operating Activities
Net income $ 14,611 $ 14,156 $ 12,794
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,915 4,380 3,465
Provision for losses on accounts receivable 346 260 696
Provision for excess and obsolete inventories, net 150 (100) 50
Gain on disposition of assets (6) (125) (11)
Deferred income taxes 1,085 475 (127)
Changes in assets and liabilities:
Accounts receivable 740 4,595 (7,616)
Inventories (1,017) 1,769 (3,324)
Prepaid expenses and other (379) 25 321
Accounts payable 859 (3,686) 2,646
Accrued liabilities 627 2,130 5,146
------------- -------------- --------------
Net cash provided by operating activities 21,931 23,879 14,040
Investing Activities
Proceeds from sale of property, plant and equipment 8 200 11
Investment in certificate of deposit (10,000) - -
Capital expenditures (6,126) (9,017) (10,744)
------------- -------------- --------------
Net cash used in investing activities (16,118) (8,817) (10,733)
Financing Activities
Borrowings under revolving credit agreement 33,855 56,290 68,219
Payments under revolving credit agreement (30,735) (62,761) (66,092)
Proceeds from long-term debt - 2,500 5,048
Payments on long-term debt (1,869) (7,873) (530)
Stock issued to employees - 25 -
Stock options exercised 866 650 410
Repurchase of stock (3,982) (2,787) (10,370)
------------- -------------- --------------
Net cash used in financing activities (1,865) (13,956) (3,315)
------------- -------------- --------------
Net increase (decrease) in cash 3,948 1,106 (8)
------------- -------------- --------------
Cash and cash equivalents, beginning of year 1,123 17 25
------------- -------------- --------------
Cash and cash equivalents, end of year $ 5,071 $ 1,123 $ 17
============= ============== ==============
See accompanying notes.
(25)
AAON, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
1. Business, Summary of Significant Accounting Policies and Other Financial Data
AAON, Inc. (the Company, a Nevada corporation) is engaged in the manufacture and
sale of commercial rooftop air conditioners, heating equipment and air
conditioning coils through its wholly-owned subsidiaries AAON, Inc. (AAON, an
Oklahoma corporation) and AAON Coil Products, Inc. (ACP, a Texas corporation).
The consolidated financial statements include the accounts of the Company and
its subsidiaries, AAON and ACP. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
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 in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenues from sales of products at the time of shipment.
For sales initiated by independent manufacturer representatives, the Company
recognizes revenues net of the representatives' commission. Amounts billed to
customers for shipping and handling costs are included in revenues.
Concentrations
The Company's customers are concentrated primarily in the domestic commercial
and industrial new construction and replacement markets. At December 31, 2002
and 2001, two customers represented approximately 17% and 11%, respectively, of
accounts receivable.
Sales to customers representing 10% or greater of total sales consist of the
following:
Year Ended December 31,
2002 2001 2000
--------------- ----------- -----------
Wal-Mart Stores, Inc. 14% 14% 19%
Target 11% 11% *
Home Depot * 10% 10%
*Less than 10%
(26)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Cash and Cash Equivalents
The Company considers investments with an original maturity of three months or
less to be cash equivalents.
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. Accounts
receivable and the related allowance for doubtful accounts are as follows:
December 31,
2002 2001
---------------------------------
(in thousands)
Accounts receivable $ 23,166 $ 24,252
Less allowance for doubtful accounts 860 860
----------------- ---------------
Total, net $ 22,306 $ 23,392
================= ===============
Year Ended December 31,
2002 2001 2000
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 860 $ 1,050 $ 850
Provision for losses on accounts
receivable
346 260 696
Accounts receivable written off,
net of recoveries
(346) (450) (496)
--------------- ----------------- ---------------
Balance, end of period $ 860 $ 860 $ 1,050
=============== ================= ===============
(27)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
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 December
31, 2002 and 2001, and for the three years ending December 31, 2002, inventory
and the related allowance for excess and obsolete inventories are as follows:
December 31,
2002 2001
--------------------------------
(in thousands)
Raw materials $ 11,508 $ 10,376
Work in process 2,750 2,258
Finished goods 1,080 1,687
---------------- ---------------
15,338 14,321
Less allowance for excess
and obsolete inventories 1,000 850
---------------- ---------------
Total, net $ 14,338 $ 13,471
================ ===============
Year Ended December 31,
2002 2001 2000
-----------------------------------------------
(in thousands)
Allowance for excess and
obsolete inventories:
Balance, beginning of period $ 850 $ 950 $ 900
Provision for excess and obsolete
inventories 690 - 50
Adjustments to reserve (540) (100) -
-------------- ---------------- ---------------
Balance, end of period $ 1,000 $ 850 $ 950
============== ================ ===============
(28)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance, repairs and
betterments, including replacement of minor items, are charged to expense; major
additions to physical properties are capitalized. Property, plant and equipment
are depreciated using the straight-line method over the following estimated
useful lives:
Years
---------------
Buildings 10-30
Machinery and equipment 3-15
Furniture and fixtures 2-5
At December 31, 2002 and 2001, property, plant and equipment were comprised of
the following:
December 31,
2002 2001
-------------------------------
(in thousands)
Land $ 874 $ 874
Buildings 18,394 16,893
Machinery and equipment 39,580 35,331
Furniture and fixtures 3,497 3,197
--------------- ---------------
62,345 56,295
Less accumulated depreciation 27,114 22,273
--------------- ---------------
Total, net $ 35,231 $ 34,022
=============== ===============
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable.
The impairment of long-lived assets is measured pursuant to the guidelines of
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. When an indicator of impairment has
occurred, management's estimate of undiscounted cash flows attributable to the
assets is compared to the carrying value of the assets to determine whether
impairment has occurred. If an impairment of the carrying value has occurred,
the amount of the impairment recognized in the financial statements is
determined by estimating the fair value of the assets and recording a loss for
the amount that the carrying value exceeds the estimated fair value.
(29)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Accrued Liabilities
At December 31, 2002 and 2001, accrued liabilities were comprised of the
following:
December 31,
2002 2001
-------------------------------
(in thousands)
Warranty $ 7,220 $ 7,000
Commissions 3,495 3,295
Payroll 1,069 1,087
Income taxes 533 1,048
Workers' compensation 363 314
Medical self-insurance 437 651
Other 232 101
---------------- --------------
Total $ 13,349 $ 13,496
================ ==============
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. Warranty expense was
$4.3 million and $5.8 million, $4.9 million for the years ended December 31,
2002, 2001 and 2000, respectively.
Changes in the Company's warranty liability during the year ended December 31,
2002, are as follows (in thousands):
Balance, beginning of the year $7,000
Warranties accrued during the year 4,300
Warranties settled during the year (4,100)
--------
$7,200
========
Stock Split
On June 4, 2002, the Company effected a three-for-two stock split. Share and per
share amounts have been retroactively restated to reflect this stock split.
(30)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Earnings Per Share
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per common share were determined based on the
assumed exercise of dilutive options, as determined by applying the treasury
stock method. For the years ended December 31, 2002, 2001 and 2000, 41,250,
22,500 and 5,000 options, respectively, were anti-dilutive. The computation of
basic and diluted earnings per share ("EPS") is as follows:
Year Ended December 31, 2002
----------------------------
(in thousands, except per share data)
Weighted Average Per-Share
Income Shares Amount
-------------- -------------------- --------------
Basic EPS $ 14,611 13,158 $1.11
Effect of dilutive securities - 582 -
-------------- -------------------- --------------
Diluted EPS $ 14,611 13,740 $1.06
============== ==================== ==============
Year Ended December 31, 2001
----------------------------
(in thousands, except per share data)
Weighted Average Per-Share
Income Shares Amount
-------------- -------------------- --------------
Basic EPS $ 14,156 12,992 $1.09
Effect of dilutive securities - 649 -
-------------- -------------------- --------------
Diluted EPS $ 14,156 13,641 $1.04
============== ==================== ==============
Year Ended December 31, 2000
----------------------------
(in thousands, except per share data)
Weighted Average Per-Share
Income Shares Amount
-------------- -------------------- --------------
Basic EPS $ 12,794 13,190 $0.97
Effect of dilutive securities - 706 -
-------------- -------------------- --------------
Diluted EPS $ 12,794 13,896 $0.92
============== ==================== ==============
(31)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Stock Compensation
The Company maintains a stock option plan for key employees and directors which
is described more fully in Note 7. The Company accounts for the plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of grant. 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:
Year Ending December 31,
2002 2001 2000
---------------- ------------------ --------------
(in thousands except per share data)
Net income, as reported $ 14,611 $ 14,156 $ 12,794
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (995) (575) (565)
---------------- ------------------ --------------
Pro forma net income $ 13,616 $ 13,581 $ 12,229
================ ================== ==============
Earnings per share:
Basic, as reported $1.11 $1.09 $0.97
================ ================== ==============
Basic, pro forma $1.03 $1.05 $0.93
================ ================== ==============
Diluted, as reported $1.06 $1.04 $0.92
================ ================== ==============
Diluted, pro forma $0.99 $1.00 $0.88
================ ================== ==============
Advertising
Advertising costs are expensed as incurred. Advertising expense was $372,000,
$454,000 and $362,000 for the years ending December 31, 2002, 2001 and 2000,
respectively.
(32)
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Reclassifications
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform with the 2002 presentation.
New Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, 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 related long-lived asset. This Statement is effective for fiscal
years beginning after June 15, 2002. Management does not expect the adoption of
SFAS 143 to have a significant impact on its results of operations or financial
position.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. Under this Statement, a liability for a cost associated
with an exit or disposal activity is recognized at fair value when the liability
is incurred rather than at the date of an entity's commitment to an exit plan.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of this Statement is
not expected to have a significant impact on the Company's results of operations
or financial position.
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, provides alternative methods of transition to the fair value method
of accounting for stock-based compensation as required by SFAS 123, Accounting
for Stock-Based Compensation. SFAS 148 also amends the disclosure requirements
of SFAS 123 to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS 148 does not require adoption
of the fair value method of accounting for stock-based compensation provided by
SFAS 123. SFAS 148's amendment of the transition and annual disclosure
requirements of SFAS 123 are effective for fiscal years ending after December
15, 2002. The Company intends to continue to utilize the recognition and
measurement principles as allowed under SFAS 123.
Segments
The Company operates under one reportable segment as defined in SFAS 131,
Disclosures about Segments of an Enterprise and Related Information.
2. Supplemental Cash Flow Information
Interest payments of $95,000, $892,000 and $889,000 were made during the years
ending December 31, 2002, 2001 and 2000, respectively. Payments for income taxes
of $7,156,000, $6,754,000 and $6,375,000 were made during the years ending
December 31, 2002, 2001 and 2000, respectively.
3. Certificate of Deposit
The $10 million certificate of deposit bears interest at 3.25% per annum and has
a maturity date of June 12, 2004. There is a three-month interest penalty for
early withdrawal.
(33)
4. Revolving Credit Facility
The Company has a $15,150,000 unsecured bank line of credit which matures July
31, 2003. The line of credit has certain financial covenants and prohibits the
declaration or payments of dividends. Borrowings under the credit facility bear
interest at prime rate less .5% or at LIBOR plus 1.60%. At December 31, 2002 and
2001, the Company had $3,566,000 and $446,000, respectively, outstanding under
the credit facility bearing interest at 3.04% and 3.47%, respectively.
5. Debt
Long-term debt at December 31, 2001, consisted of notes payable totaling
$1,869,000, which were due in monthly installments of $36,000. Interest rates
ranged from 7.47% to 7.52%, and the notes were collateralized by machinery and
equipment.
6. Income Taxes
The Company follows the liability method of accounting for income taxes which
provides that deferred tax liabilities and assets are based on the difference
between the financial statement and income tax bases of assets and liabilities
using currently enacted tax rates.
The income tax provision consists of the following:
Year Ending December 31,
2002 2001 2000
------------------------------------------
(in thousands)
Current $ 7,414 $ 7,855 $ 7,692
Deferred 1,085 475 (127)
-------------- -------------- ------------
$ 8,499 $ 8,330 $ 7,565
============== ============== ============
The reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Year Ending December 31,
2002 2001 2000
------------------------------------------
Federal statutory rate 35% 35% 35%
State income taxes, net
of federal benefit 4 4 4
Other (2) (2) (2)
-------------- ------------- -------------
37% 37% 37%
============== ============= =============
(34)
6. Income Taxes (continued)
The tax effect of temporary differences giving rise to the Company's deferred
income taxes at December 31 is as follows:
2002 2001
-------------------------
(in thousands)
Deferred tax assets:
Valuation reserves $ 705 $ 648
Warranty accrual 2,737 2,653
Other accruals 708 746
Other, net 18 20
------------ ------------
$ 4,168 $ 4,067
============ ============
Deferred tax liability:
Depreciation and amortization $ 4,070 $ 2,884
============ ============
7. Benefit Plans
The Company's stock option plan reserves 2,925,000 shares of common stock for
issuance 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 vest one year from the date of grant and
are exercisable for nine years thereafter. 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. At December 31, 2002, 1,124,890 shares were
available for future option grants. For the years ended December 31, 2002 and
2001, the Company reduced its income tax payable by $774,000 and $985,000,
respectively, as a result of nonqualified stock options exercised under the
Company's stock option plan. The number and exercise price of options granted
were as follows:
(35)
7. Benefit Plans (continued)
Weighted
Average
Number Exercise Price
of Shares Per Share
---------------- -------------------
Outstanding at January 1, 2000 2,184,300 $ 3.50
Granted 11,250 9.83
Exercised (288,113) 1.43
Cancelled (112,950) 5.00
---------------- -------------------
Outstanding at December 31, 2000 1,794,487 $ 3.77
Granted 196,875 11.49
Exercised (266,813) 2.47
Cancelled (69,600) 5.46
---------------- -------------------
Outstanding at December 31, 2001 1,654,949 $ 5.01
Granted - -
Exercised (247,598) 3.57
Cancelled (129,808) 5.20
---------------- -------------------
Outstanding at December 31, 2002 1,277,543 $ 5.33
================ ===================
The following is a summary of stock options outstanding as of December 31, 2002:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted Weighted
Outstanding at Weighted Average Number Average
Range of December 31, Average Remaining Exercisable at Exercise
Exercise Prices 2002 Exercise Price Contractual Life December 31, 2002 Price
- ---------------------- ----------------- --------------- ----------------- -- ------------------ --------------
$ 2.28 - $ 3.39 542,168 $ 3.06 4.34 Years 519,384 $ 3.05
$ 4.00 - $ 5.78 556,625 5.17 6.44 Years 408,225 5.04
$ 8.59 - $ 12.36 108,000 9.93 8.34 Years 23,850 9.92
$ 13.29 - $ 19.27 70,750 16.81 8.70 Years 47,150 18.53
----------- ----- -------- -----
1,277,543 $ 5.33 998,609 $ 4.76
(36)
7. Benefit Plans (continued)
For purposes of the stock compensation information presented in Note 1, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2002 2001 2000
-------------- ------------ ------------
Expected dividend yield * 0% 0%
Expected volatility * 45.38% 51.99%
Risk-free interest rate * 5.04% 5.50%
Expected life * 8 yrs 8 yrs
*The Company granted no options in 2002.
The Company sponsors a defined contribution benefit plan. Employees may make
contributions at a minimum of 1% and a maximum of 15% of compensation. The
Company may, on a discretionary basis, contribute a Company matching
contribution not to exceed 6% of compensation. The Company made matching
contributions of $535,000 $504,000 and $493,000 in 2002, 2001 and 2000,
respectively. The Company made additional discretionary contributions of
$325,000 and $1,308,000 during 2001 and 2000, respectively.
The Company maintains a discretionary profit sharing bonus plan under which 10%
of pre-tax profit at each subsidiary is paid to eligible employees on a
quarterly basis. Profit sharing expense was $2,573,000, $2,507,000 and
$2,277,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
8. Stockholder Rights Plan
During 1999, the Board of Directors adopted a Stockholder Rights Plan (the
"Plan") which was amended in 2002. Under the Plan, stockholders of record on
March 1, 1999, received a dividend of one right per share of the Company's
common stock. Stock issued after March 1, 1999, contains a notation
incorporating the rights. Each right entitles the holder to purchase one
one-thousandth (1/1,000) of a share of Series A Preferred Stock at an exercise
price of $90. The rights are traded with the Company's common stock. The rights
become exercisable after a person has acquired, or a tender offer is made for,
15% or more of the common stock of the Company. If either of these events occur,
upon exercise the holder (other than a holder owning more than 15% of the
outstanding stock) will receive the number of shares of the Company's common
stock having a market value equal to two times the exercise price.
(37)
8. Stockholder Rights Plan (continued)
The rights may be redeemed by the Company for $0.001 per right until a person or
group has acquired 15% of the Company's common stock. The rights expire on
August 20, 2012.
9. 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. Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the years
ending December 31, 2002 and 2001:
Quarter Ending
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------
(in thousands, except per share data)
2002
Net sales $ 35,990 $ 40,181 $ 41,702 $ 37,202
Gross profit 9,617 9,737 10,401 8,127
Net income 3,647 3,666 4,186 3,112
Earnings per share:
Basic 0.27 0.28 0.32 0.24
Diluted 0.27 0.27 0.30 0.23
Quarter Ending
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------
(in thousands, except per share data)
2001
Net sales $ 39,435 $ 41,520 $ 41,402 $ 34,895
Gross profit 11,262 10,882 8,733 7,976
Net income 3,576 3,816 3,523 3,241
Earnings per share:
Basic 0.28 0.29 0.27 0.25
Diluted 0.26 0.28 0.26 0.24
(38)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-52824 and 333-23479) pertaining to the AAON, Inc. 1992 Stock
Option Plan of our report dated February 7, 2003, with respect to the
consolidated financial statements of AAON, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 2002.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 26, 2003
(39)
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 Annual Report of AAON, Inc. (the "Company"), on
Form 10-K for the year ended December 31, 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
March 26, 2003
(40)
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 Annual Report of AAON, Inc. (the "Company"), on
Form 10-K for the year ended December 31, 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
March 26, 2003
(41)