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FORM 10-Q
UNITED STATES
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, 2004
Commission file number: 0-18953
AAON, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0448736
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(918) 583-2266
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
------------- ----------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No
------------- ----------
As of July 30, 2004, Registrant had outstanding a total of 12,448,407 shares of
its $.004 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
On pages 8 through 18 of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AAON engineers, manufactures and markets air-conditioning and heating equipment
consisting of rooftop units, chillers, air-handling units, makeup air units,
condensing units and coils.
The Company currently has four groups of rooftop products: its RM and RN series
offered in 21 cooling sizes ranging from two to 70 tons (the RM and RN units
replaced the RK Series in 2003); 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 13 sizes
ranging from four to 50 tons. The Company manufactures a Model LL chiller, which
is available in both air-cooled condensing and evaporative cooled
configurations. The Company's air-handling units consist of custom air handlers,
the H2/V2 Series and the Celebrity Series. The Company's condensing units
consist of the CA and CL Series. The Company's makeup air units consist of
indirect gas-fired (TBA series) and direct gas-fired (MN series).
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,
purchased part components, factory overhead, freight out and engineering
expense. The principal raw materials used in AAON's manufacturing processes are
steel, copper and aluminum. The major purchased part component costs include
compressors, electric motors and electronic controls.
Selling, general, and administrative ("SG&A") costs include the Company's
internal sales force, warranty costs, profit sharing and administrative expense.
Warranty expense is estimated based on historical trends and other factors. The
Company's warranty on its products is: for parts only, the earlier of one year
from the date of first use or 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.
On May 4, 2004, AAON Canada Inc., a Canadian corporation organized as a
wholly-owned subsidiary of AAON, Inc. for the purpose of the acquisition,
purchased most of the assets of Air Wise Inc. of Mississauga, Ontario, Canada,
which engineers, manufactures, and sells custom air-handling units, makeup air
units and packaged rooftop units for commercial and industrial buildings. The
purchase price was $1,778,000, and was financed out of cash flow from
operations. The results of operations included the result of the acquisition
from May 2004 forward. AAON Canada is currently operating out of a leased
facility of approximately 43,000 square feet at 2230 Bromsgrove Road in
Mississauga, Ontario, Canada.
-1-
The office facilities of AAON, Inc. consist of a 337,000 square foot building
(322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office
space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma (the "original
facility"), and a 457,000 square foot manufacturing/warehouse building and a
22,000 square foot office building (the "expansion facility") that is located
across the street from the original facility. The Company utilizes 25% of the
expansion facility and the remaining 75% is leased to a third party. The
operations of AAON Coil Products, Inc. are conducted in a plant/office building
at 203-207 Gum Springs Road in Longview, Texas, containing 226,000 square feet
(219,000 sq. ft. of manufacturing/warehouse and 7,000 sq. ft. of office space).
Set forth below is income statement information with respect to the Company for
the periods ended June 30, 2004, and 2003:
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, 2004* June 30, 2003* June 30, 2004* June 30, 2003*
---------------------------------------------------------------------------------
(In thousands)
Net sales $ 43,019 $ 37,222 $ 80,513 $ 70,078
Cost of sales 36,664 28,414 66,457 52,573
---------------- ------------------ ------------------ ------------------
Gross profit 6,355 8,808 14,056 17,505
Selling, general and
administrative expenses 3,791 3,512 7,758 6,708
---------------- ------------------ ------------------ ------------------
Income from operations 2,564 5,296 6,298 10,797
Interest expense 10 9 27 15
Interest income (83) (117) (164) (175)
Other expense (income) 27 (38) 25 (122)
---------------- ------------------ ------------------ ------------------
Income before income taxes 2,610 5,442 6,410 11,079
Income tax provision 1,039 2,085 2,502 4,227
---------------- ------------------ ------------------ ------------------
Net income $ 1,571 $ 3,357 $ 3,908 $ 6,852
================ ================== ================== ==================
*Unaudited
Results of Operations. Net sales increased $5,797,000 (15.6%) to $43,019,000
from $37,222,000 for the three months ended June 30, 2004, and $10,435,000
(14.9%) to $80,513,000 from $70,078,000 for the six months ended June 30, 2004,
compared to the same period in 2003. The increase in sales was primarily
attributable to the introduction of new products, the improving outlook for the
U.S. economy, and the Air Wise acquisition, which contributed $441,000 (1%) to
sales since May 4, 2004.
-2-
Gross profit decreased 27.8% from $8,808,000 to $6,355,000 for the three months
ended June 30, 2004, and 19.7% from $17,505,000 to $14,056,000 for the six
months ended June 30, 2004, compared to the same periods in 2003. The decrease
in margins for the three months and six months ended June 30, 2004, compared to
the same period in 2003, was attributable to continued price increases in steel
and copper, startup costs associated with a coil project, closings of the Tulsa
facility for four days due to computer and electrical outages, which also
affected the Longview and Canada facilities, and equipment failures at the
Company's Longview, Texas facility that prevented coil production needed by the
Tulsa facility.
Selling, general and administrative expenses increased $279,000 from $3,512,000
to $3,791,000 for the three months ended June 30, 2004, and $1,050,000 from
$6,708,000 to $7,758,000 for the six months ended June 30, 2004, compared to the
same periods in 2003. The increase for the three months and six months was due
primarily to an increase in warranty expense related to increased sales and bad
debt expense.
Financial Condition and Liquidity. Accounts receivable increased $2,070,000 from
$22,553,000 at December 31, 2003, to $24,623,000 at June 30, 2004, due to an
increase in sales.
Inventories increased $2,321,000 from $22,032,000 to $21,917,000 at June 30,
2004 compared to December 31, 2003, due to procurement of inventory to
accommodate increased sales.
Property, plant and equipment increased $8,459,000 from $68,735,000 to
$77,194,000 with $380,000 related to a land acquisition in Longview, $2,434,000
to the addition of the sheet metal facility in Tulsa and building renovations,
$5,543,000 of manufacturing equipment additions and $102,000 of furniture and
fixture additions. Included in the above additions are the following amounts
relating to the Canada acquisition; $217,000 of machinery and equipment, $47,000
of office furniture and computer equipment, and vehicles totaling $13,000.
Accounts payable and accrued liabilities decreased $999,000 compared to December
31, 2003, due primarily to timing of payments to vendors.
The Company generated $5,002,000 and $7,219,000 cash from operating activities
during the six months ended June 30, 2004, and June 30, 2003, respectively. The
decrease in 2004 was primarily due to a decrease in net income and an increase
in accounts receivable, inventory and timing of payment to vendors.
Cash flows used in investing activities were $3,464,000 for the six months ended
June 30, 2004, and $3,606,000 for the six months ended June 30, 2003. Cash flows
used in investing activities in 2004 were related primarily to capital
expenditures for additions of machinery and equipment, the Company's sheet metal
facility at the Tulsa plant, land purchased in Longview, Texas for future
expansion, and the Canada acquisition. Cash used in investing activities in 2003
were related primarily to machinery and equipment additions and renovations to
the Company's manufacturing and office facilities. All capital expenditures, the
building expansion and Canada acquisition were financed out of cash generated
from operations and from $6.5 million of cash generated from the proceeds of a
matured certificate of deposit. The Company has committed approximately $1.0
million to the completion of the sheet metal facility at the Tulsa plant and
approximately $1.4 million to a land and building acquisition for the Canada
operation. Both expenditures will be financed out of cash flow from operations.
Cash flows used in financing activities were $7,701,000 and $8,007,000 during
the six months ended June 30, 2004, and June 30, 2003, respectively. The cash
used in 2004 and 2003 was related primarily to the repurchase of Company stock
and net payments under the revolving credit agreement. The Company's revolving
credit facility provides for maximum borrowings of $15,150,000. Interest on
borrowings is payable monthly at the Wall Street Journal prime rate less $.5% or
LIOBR plus 1.6%, at the election of the Company. There were no borrowings under
the revolving credit facility at June 30, 2004; borrowings under the revolving
credit facility at June 30, 2003, were $2,125,000.
-3-
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.
Inventory Reserves - The Company establishes a reserve for inventories based on
the change in inventory requirements due to product line changes, the
feasibility of using obsolete parts for upgraded part substitutions, the
required parts needed for part supply sales, replacement parts, and for
estimated shrinkage.
Warranty - A provision is made for estimated warranty costs at the time the
product is shipped and revenue is recognized. The warranty period is: for parts
only, the earlier of one year from the date of first use or 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.
Historically, warranty costs have been within management's expectations.
Stock Compensation - The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees and
related interpretations in accounting for stock options. Under APB 25, because
the exercise price of the Company's options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
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," or
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.
-4-
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to interest rate risk on its revolving credit facility,
which bears variable interest based upon a prime or LIBOR rate.
Foreign sales accounted for only 2% of the Company's sales in 2003 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 on these sales. Foreign
currency transactions and financial statements are translated in accordance with
Statement of Financial Standards No. 52, Foreign Currency Translation. The
Company uses the U.S. dollar as its functional currency, except for the
Company's Canadian subsidiary, which uses the Canadian dollar. Adjustments
arising from translation of the Canadian subsidiary's financial statements are
reflected in accumulated other comprehensive income. Transaction gains or losses
that arise from exchange rate fluctuations applicable to transactions are
denominated in Canadian currency and are included in the results of operations
as incurred.
Important raw materials purchased by the Company are steel, copper and aluminum,
which are subject to price fluctuations. The Company attempts to limit the
impact of price increases on these materials by entering into cancelable fixed
price contracts with its major suppliers for periods of 6-12 months. However,
the Company has experienced sharp increases in steel and copper prices during
the six months ended June 30, 2004, and expects to be further impacted by
increases for the remainder of the year.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this Quarterly Report on Form 10-Q, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer believe that:
o The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the
reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms; and
o The Company's disclosure controls and procedures operate such that
important information flows to appropriate collection and disclosure
points in a timely manner and are effective to ensure that such
information is accumulated and communicated to the Company's
management, and made known to the Company's Chief Executive Officer
and Chief Financial Officer, particularly during the period when this
Quarterly Report was prepared, as appropriate to allow timely
decisions regarding the required disclosure.
-5-
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 has there been any need for any corrective
actions with regard to significant deficiencies or material weaknesses in
internal controls related to financial reporting.
-6-
PART II - OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
On October 17, 2002, the Company announced a stock buyback program to repurchase
up to 10% (1,325,000 shares) of its outstanding stock. Through June 30, 2004,
the Company had acquired 954,764 shares of its stock pursuant to its current
buyback program.
Stock repurchases during the second quarter of 2004 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------- ------------------- ---------------- --------------------- --------------------------------
(c) Total Number of
Shares (or Units) (d) Maximum Number or
(a) Total Number (b) Average Purchased as Approximate Dollar Value
of Shares Price Paid Part of Publicly of Shares (or Units) that
(or Units) Per Share Announced Plans May Yet Be Purchased
Period Purchased (or Unit) Or Programs Under the Plans or Programs
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #1
April 1-31 6,600 $20.11 6,600 399,936
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #2
May 1-31 12,200 $19.51 12,200 387,736
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #3
June 1-30 17,500 $19.59 17,500 370,236
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Total 36,300 $19.66 36,300
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on May 25, 2004, Thomas E.
Naugle and Jerry E. Ryan were reelected as directors for three-year terms by
votes of 11,496,445 and 11,514,072 shares, respectively, "For"; 27,359 and
12,477 shares, respectively, "Against"; and 253,929 and 251,184, respectively,
"Withheld Authority". Other directors whose terms of office continued after the
meeting are: William A. Bowen and Anthony Pantaleoni, whose terms end in 2005,
and Norman H. Asbjornson, John B. Johnson, Jr. and Charles C. Stephenson, Jr.,
whose terms end in 2006.
-7-
AAON, Inc.
Consolidated Balance Sheets
June 30, December 31,
2004* 2003
---------------------------------------------------------
(In thousands, except share and per share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17 $ 6,186
Certificate of deposit 3,500 10,000
Accounts receivable, net 24,623 22,553
Inventories, net 22,032 19,711
Prepaid expenses 762 2,653
Deferred income tax 3,532 3,532
------------------------ ------------------------
Total current assets 54,466 64,635
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 1,254 874
Buildings 22,022 19,588
Machinery and equipment 49,872 44,329
Furniture and fixtures 4,046 3,944
------------------------ ------------------------
Total property, plant & equipment 77,194 68,735
Less: accumulated depreciation 34,373 31,285
------------------------ ------------------------
Net property, plant & equipment 42,821 37,450
------------------------ ------------------------
Total assets $ 97,287 $ 102,085
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility - 5,356
Accounts payable 9,798 11,553
Accrued liabilities 13,113 12,357
------------------------ ------------------------
Total accrued liabilities 22,911 29,266
------------------------ ------------------------
DEFERRED TAX LIABILITY 5,391 5,391
------------------------ ------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par, 5,000,000 shares
authorized, no shares issued - -
Common Stock, $.004 par, 50,000,000 shares
authorized, and 12,441,432 and 12,519,733
issued and outstanding at June 30, 2004,
and December 31, 2003, respectively 50 50
Additional paid-in capital - -
Accumulated other comprehensive loss (6) -
Retained earnings 68,941 67,378
------------------------ ------------------------
Total stockholders' equity 68,985 67,428
------------------------ ------------------------
Total liabilities and stockholders' equity $ 97,287 $ 102,085
======================== ========================
*Unaudited
See accompanying notes.
-8-
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, 2004* June 30, 2003* June 30, 2004* June 30, 2003*
-------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net sales $ 43,019 $ 37,222 $ 80,513 $ 70,078
Cost of sales 36,664 28,414 66,457 52,573
---------------- ---------------- ---------------- ----------------
Gross profit 6,355 8,808 14,056 17,505
Selling, general and
administrative expenses 3,791 3,512 7,758 6,708
---------------- ---------------- ---------------- ----------------
Income from operations 2,564 5,296 6,298 10,797
Interest expense 10 9 27 15
Interest income (83) (117) (164) (175)
Other expense (income) 27 (38) 25 (122)
---------------- ---------------- ---------------- ----------------
Income before income taxes 2,610 5,442 6,410 11,079
Income tax provision 1,039 2,085 2,502 4,227
---------------- ---------------- ---------------- ----------------
Net income $ 1,571 $ 3,357 $ 3,908 $ 6,852
================ ================ ================ ================
Earnings Per Share:
Basic $ 0.13 $ 0.26 $ 0.31 $ 0.53
================ ================ ================ ================
Diluted $ 0.12 $ 0.25 $ 0.30 $ 0.51
================ ================ ================ ================
Weighted Average Shares Outstanding:
Basic 12,457,309 12,738,484 12,469,747 12,808,535
================ ================ ================ ================
Diluted 12,967,457 13,239,864 12,982,239 13,326,803
================ ================ ================ ================
*Unaudited
See accompanying notes
-9-
AAON INC.
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended Six Months Ended
June 30, 2004* June 30, 2003* June 30, 2004* June 30, 2003*
----------------------------------------------------------------------------
(in thousands)
Net income $ 1,571 $ 3,357 $ 3,908 $ 6,852
Other comprehensive income, net of tax:
Foreign currency translation adjustment (6) - (6) -
---------------- ---------------- ---------------- -----------------
Comprehensive income $ 1,565 $ 3,357 $ 3,902 $ 6,852
================ ================ ================ =================
*Unaudited
See accompanying notes
-10-
AAON, Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Loss Earnings Total
----------------------------------------------------------------------------------------------------
(in thousands)
Balance, December 31, 2003 12,520 $ 50 $ - $ - $67,378 $67,428
Stock options exercised
Including tax benefits* 63 - 632 - - 632
Foreign currency translation* - - - (6) - (6)
Repurchase of common stock* (142) - (632) - (2,345) (2,977)
Net income* - - - - 3,908 3,908
------------ ----------- -------------- ------------------- ------------ -------------
Balance, June 30, 2004* 12,441 $ 50 $ - $ (6) $68,941 $68,985
============ =========== ============== =================== ============ =============
*Unaudited
See accompanying notes
-11-
AAON, Inc.
Consolidated Statements of Cash Flows
Six Months Six Months
Ended Ended
June 30, 2004* June 30, 2003*
------------------------------------------------------
(in thousands)
Operating Activities
Net income $ 3,908 $ 6,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,088 2,540
Provision for losses on accounts receivable 578 199
Loss on disposition of assets 4 -
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable (1,561) (5,196)
Inventories (1,862) 429
Prepaid expenses 1,891 272
Accounts payable (1,755) 398
Accrued liabilities 711 1,725
------------------------------------------------------
Net cash provided by operating activities 5,002 7,219
Investing Activities
Cash paid for acquisition (1,778) -
Proceeds from sale of property, plant and equipment 13 -
Proceeds from matured certificate of deposit 10,000 -
Investment in certificate of deposit (3,500) -
Capital expenditures (8,199) (3,606)
------------------------------------------------------
Net cash used in investing activities (3,464) (3,606)
Financing Activities
Borrowings under revolving credit facility 29,265 20,388
Payments under revolving credit facility (34,621) (21,829)
Stock options exercised 632 209
Repurchase of stock (2,977) (6,775)
------------------------------------------------------
Net cash used in financing activities (7,701) (8,007)
------------------------------------------------------
Effect of exchange rate on cash (6) -
------------------------------------------------------
Net decrease in cash and cash equivalents (6,169) (4,394)
------------------------------------------------------
Cash and cash equivalents, beginning of year 6,186 5,071
------------------------------------------------------
Cash and cash equivalents, end of year $ 17 $ 677
------------------------------------------------------
*Unaudited
See accompanying notes.
-12-
Notes to the Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures made in these financial statements are adequate to make the
information presented not misleading when read in conjunction with the financial
statements and the notes thereto included in the Company's latest audited
financial statements which were included in the Form 10-K Report for the fiscal
year ended December 31, 2003, filed by AAON, Inc. with the SEC. In the opinion
of management, the accompanying financial statements include all normal,
recurring adjustments required for a fair presentation of the results of the
periods presented. Operating results for the six months ended June 30, 2004, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Standards No. 52, Foreign Currency
Translations. The Company uses the U.S. dollar as its functional currency,
except for the Company's Canadian subsidiary, which uses the Canadian dollar.
Adjustments arising from translation of the Canadian subsidiary's financial
statements are reflected in accumulated other comprehensive income. Transaction
gains or losses that arise from exchange rate fluctuations applicable to
transactions are denominated in Canadian currency and are included in the
results of operations as incurred.
2. STOCK COMPENSATION:
The Company accounts for its Stock Option 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:
-13-
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------------------------------------------------------------
(in thousands, except share data)
Net income as reported $1,571 $3,357 $3,908 $6,852
Deduct compensation expense determined
under fair value method for all awards,
net of related tax effects (170) (184) (327) (315)
-------------- -------------- -------------- --------------
Pro forma net income $1,401 $3,173 $3,581 $6,537
============== ============== ============== ==============
Earnings per share:
Basic, as reported $ 0.13 $ 0.26 $ 0.31 $ 0.53
============== ============== ============== ==============
Basic, pro forma $ 0.11 $ 0.25 $ 0.29 $ 0.51
============== ============== ============== ==============
Diluted, as reported $ 0.12 $ 0.25 $ 0.30 $ 0.51
============== ============== ============== ==============
Diluted, pro forma $ 0.11 $ 0.24 $ 0.28 $ 0.49
============== ============== ============== ==============
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of bank deposits and highly liquid,
interest-bearing money market funds with initial maturities of three months or
less.
4. CERTIFICATE OF DEPOSIT:
The Company had a $10 million certificate of deposit that bore interest at 3.25%
per annum and matured on June 12, 2004. The proceeds of $6.5 million were used
for cash flow purposes and a reinvestment of $3.5 million was made in a 30-day
certificate of deposit that bears interest at 1.8% per annum.
5. ACCOUNTS RECEIVABLE:
The Company grants credit to its customers and performs ongoing credit
evaluations. The Company generally does not require collateral or charge
interest. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends,
economic and market conditions and the age of the receivable. Past due accounts
are generally written off against the allowance for doubtful accounts only after
all collection attempts have been exhausted.
-14-
Accounts receivable and the related allowance for doubtful accounts are as
follows:
As Of
June 30, December 31,
2004 2003
-------------------------------------------------
(in thousands)
Accounts receivable $ 25,487 $ 23,698
Less allowance for doubtful accounts 864 1,145
--------------------- ---------------------
Total, net $ 24,623 $ 22,553
===================== =====================
Six Months Ended
June 30, June 30,
2004 2003
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 1,145 $ 860
Provision for losses on accounts receivable 578 199
Accounts receivable written off, net of
recoveries (859) (28)
--------------------- ---------------------
Balance, end of period $ 864 $ 1,031
===================== =====================
6. 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 a reserve for excess
and obsolete inventories based on product line changes, the feasibility of
substituting parts, the need for supply replacement parts, and estimated
shrinkage. At June 30, 2004, and December 31, 2003, inventory and the related
inventory reserves are as follows (in thousands):
Six Months Ended
June 30, 2004 December 31, 2003
-----------------------------------------------
Raw materials $ 15,637 $ 13,874
Work in process 1,972 2,700
Finished goods 5,473 4,187
--------------------- ---------------------
23,082 20,761
Less: Inventory reserve 1,050 1,050
--------------------- ---------------------
Total, net $ 22,032 $ 19,711
===================== =====================
-15-
7. ACCRUED LIABILITIES:
At June 30, 2004 and December 31, 2003, accrued liabilities were comprised of
the following:
Six Months Ended
June 30, 2004 December 31, 2003
-----------------------------------------------
Warranty $ 6,357 $ 6,020
Commissions 4,292 5,009
Payroll 1,597 1,023
Other 867 305
--------------------- ---------------------
Total $ 13,113 $ 12,357
===================== =====================
8. WARRANTY
A provision is made for the estimated cost of warranty obligations at the time
the related products are sold based upon the warranty period, historical trends,
new products and any known identifiable warranty issues.
Changes in the Company's warranty liability during the three months and six
months ended June 30, 2004, and 2003, are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------------------------------------------------------------------
Balance, beginning of period $ 6,151 $ 7,309 $ 6,020 $ 7,200
Warranties accrued during
the period 1,096 739 2,075 1,226
Warranties settled during the period (890) (2,105) (1,738) (2,483)
-------------- -------------- -------------- -------------
Balance, end of period $ 6,357 $ 5,943 $ 6,357 $ 5,943
============== ============== ============== =============
9. REVOLVING CREDIT FACILITY:
The Company's $15,150,000 unsecured bank line of credit bears interest payable
monthly at prime rate less .5% or LIBOR plus 1.60% (2.71% at June 30, 2004), at
the election of the Company with a maturity date of July 31, 2004. On July 31,
2004, the Company renewed the line of credit with a new maturity date of July
31, 2005. The credit facility requires that the Company maintain a certain
financial ratio and prohibits the declaration and payment of dividends. At June
30, 2004, the Company had no outstanding balance on the bank line of credit and
had $5,356,000 outstanding at December 31, 2003. In addition, the Company has a
$600,000 Letter of Credit.
-16-
10. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
----------------------------------------------------------------------------
(in thousands, except share and per share data)
Numerator:
Net income $ 1,571 $ 3,357 $ 3,908 $ 6,852
Denominator:
Denominator for basic earnings per share -
Weighted average shares 12,457,309 12,738,484 12,469,747 12,808,535
Effect of dilutive employee stock options 510,148 501,380 512,492 518,268
---------------- ---------------- ---------------- ----------------
Denominator for diluted earnings per share -
Weighted average shares 12,967,457 13,239,864 12,982,239 13,326,803
================ ================ ================ ================
Basic earnings per share $ 0.13 $ 0.26 $ 0.31 $ 0.53
================ ================ ================ ================
Diluted earnings per share $ 0.12 $ 0.25 $ 0.30 $ 0.51
================ ================ ================ ================
11. STOCK REPURCHASE:
On October 17, 2002, the Company announced a stock buyback program to repurchase
up to 10% (1,325,000 shares) of its outstanding stock. Through December 31,
2003, and June 30, 2004, the Company had repurchased 812,964 shares for an
aggregate price of $13,911,017, or an average price of $17.11 per share and
954,764 shares for an aggregate price of $16,887,850,or an average price of
$17.69 per share, respectively.
12. ACQUISITION:
On May 4, 2004, the Company acquired certain assets and assumed certain
liabilities of Air Wise Inc. of Mississauga, Ontario, Canada for a total cost of
$1.8 million. Air Wise is engaged in the engineering, manufacturing, and sale of
custom air-handling units, makeup air units and packaged rooftop units for
commercial and industrial buildings. The acquisition complements and expands the
products the Company presently manufactures and adds significant additional
capabilities for future growth. The purchase was paid for by cash flow generated
from operations. As of May 4, 2004, AAON Canada Inc.'s activity is included in
the Company's financial statements for the three and six months ended June 30,
2004.
-17-
The Air Wise acquisition purchase price was allocated as of May 4, 2004, as
follows:
U.S.
Dollar
---------------------
Accounts receivable $ 1,086,613
Inventory 459,320
Fixed assets 276,515
Accrued warranty liability (44,580)
---------------------
Total purchase price $ 1,777,868
=====================
13. SUBSEQUENT EVENT:
On July 29, 2004, the Company purchased property in Burlington, Canada, to
relocate AAON Canada Inc. The purchase will allow the Company to enlarge and
further expand their production capabilities. The preliminary purchase price
totaled approximately $1,385,000.
On July 30, 2004, the revolving credit facility was amended and restated. The
requirement of the Company to maintain a financial ratio was removed.
14. 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.
-16-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on Form 8-K: Registrant filed two reports on Form 8-K
during the three -month period ended June 30, 2004. One reported
Registrant's results of operation and financial condition for the
three months ended March 31, 2004, and the other a change of
auditors effective June 23, 2004.
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 4, 2004 By: /s/ Norman H. Asbjornson
--------------------------------------
Norman H. Asbjornson
President/CEO
Dated: August 4, 2004 By: /s/ Kathy I. Sheffield
--------------------------------------
Kathy I. Sheffield
Treasurer
-19-
Exhibit 31.1
CERTIFICATION
I, Norman H. Asbjornson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of AAON, Inc.
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the end of the period covered by
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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
President/Chief Executive Officer
August 4, 2004
-20-
Exhibit 31.2
CERTIFICATION
I, Kathy I. Sheffield, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of AAON, Inc.
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the end of the period covered by
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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
August 4, 2004
-21-
Exhibit 32.1
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, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Norman H. Asbjornson,
President/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,
to my knowledge:
(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
President/Chief Executive Officer
Dated: August 4, 2004
-22-
Exhibit 32.2
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, 2004, 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, to my
knowledge:
(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
Dated: August 4, 2004
-23-