Back to GetFilings.com
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 September 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 October 31, 2004, Registrant had outstanding a total of 12,411,958 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 certain 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
Company's results of operations include the results 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.
On July 29, 2004, AAON Properties Inc., a Canadian corporation organized as a
wholly-owned subsidiary of AAON, Inc. for the purpose of the acquisition,
purchased property in Burlington, Ontario, Canada to relocate AAON Canada Inc.
The facilities consist of an 82,000 square foot building (71,000 sq. ft. of
manufacturing/warehouse space and 11,000 sq. ft. of office space) located at 279
Sumach Drive.
-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 September 30, 2004, and 2003:
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
Sept. 30, 2004* Sept. 30, 2003* Sept. 30, 2004* Sept. 30, 2003*
---------------------------------------------------------------------------------
(In thousands)
Net sales $ 47,733 $ 41,003 $ 128,246 $ 111,081
Cost of sales 41,639 31,491 108,096 84,064
---------------- ------------------ ------------------ ------------------
Gross profit 6,094 9,512 20,150 27,017
Selling, general and
administrative expenses 3,405 3,861 11,163 10,569
---------------- ------------------ ------------------ ------------------
Income from operations 2,689 5,651 8,987 16,448
Interest expense 8 6 35 21
Interest income (10) (84) (174) (259)
Other expense (income) (13) (45) 12 (167)
---------------- ------------------ ------------------ ------------------
Income before income taxes 2,704 5,774 9,114 16,853
Income tax provision 1,177 2,139 3,679 6,366
---------------- ------------------ ------------------ ------------------
Net income $ 1,527 $ 3,635 $ 5,435 $ 10,487
================ ================== ================== ==================
*Unaudited
-2-
Results of Operations. Net sales increased $6,730,000 (16.4%) to $47,733,000
from $41,003,000 for the three months ended September 30, 2004, and $17,165,000
(15.5%) to $128,246,000 from $111,081,000 for the nine months ended September
30, 2004, compared to the same periods 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 has
contributed $1,500,000 (1.2%) to sales since May 4, 2004.
Gross profit decreased 35.9% from $9,512,000 to $6,094,000 for the three months
ended September 30, 2004, and 25.4% from $27,017,000 to $20,150,000 for the nine
months ended September 30, 2004, compared to 2003. The decrease in margins for
the three months ended September 30, 2004, compared to the same period in 2003,
was attributable to increases in steel, copper and aluminum at a rate
significantly higher than the price increases incurred in the first six months
of the year. The Company instituted a product price increase to its customers in
April in an attempt to offset the increases in steel, copper and aluminum. Due
to the Company's high backlog, orders with old pricing had to flow through the
system before new orders began to reflect the new pricing. 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. In addition, the Company has initiated another product price increase to
its customers because the April price increase has not kept pace with interim
material price increases. It is unclear what impact further price increases
could have on order volume. The decrease in margins for the nine months ended
September 30, 2004, compared to 2003, was due to price increases in steel,
copper and aluminum, startup costs associated with a new 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.
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. The
company also purchases from other domestic manufacturers certain components,
including compressors, electric motors and electrical controls used in its
products. The suppliers of these components are significantly affected by the
rising raw material costs as steel, copper and aluminum are used in the
manufacturing of their products. The Company is also experiencing price
increases from component part suppliers. The Company believes that price
increases will continue for the remainder of the year.
Selling, general and administrative expenses decreased $456,000 from $3,861,000
to $3,405,000 for the three months ended September 30, 2004, and increased
$594,000 from $10,569,000 to $11,163,000 for the nine months ended September 30,
2004, compared to the same periods in 2003. The decrease for the three months
was due primarily to lower warranty expense and the increase for the nine months
was due primarily to increases in bad debt and advertising expenses.
Financial Condition and Liquidity. Accounts receivable increased $8,739,000 from
$22,553,000 at December 31, 2003, to $31,292,000 at September 30, 2004, due to
an increase in sales.
Inventories increased $1,946,000 from $19,711,000 to $21,657,000 at September
30, 2004 compared to December 31, 2003, due to procurement of inventory to
accommodate increased sales.
Property, plant and equipment increased $13,467,000 from $68,735,000 to
$82,202,00 with $380,000 related to a land acquisition in Longview, $1,100,000
related to a land and building acquisition in Burlington, Ontario, Canada,
$4,674,000 to the addition of the sheet metal facility in Tulsa and building
renovations, $7,034,000 of manufacturing equipment additions and $64,000 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 increased $3,982,000 compared to
December 31, 2003, due primarily to commissions payable.
-3-
The Company generated $6,495,000 and $15,915,000 cash from operating activities
during the nine months ended September 30, 2004, and September 30, 2003,
respectively. The decrease in 2004 was primarily due to a decrease in net income
and an increase in accounts receivable, inventory, partially offset by an
increase in accrued liabilities.
Cash flows used in investing activities were $6,971,000 for the nine months
ended September 30, 2004, and $3,964,000 for the nine months ended September 30,
2003. Cash flows used in investing activities in 2004 were related primarily to
$13,206,000 of 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, the Canada acquisition, and the Canadian
property purchase in Burlington, Ontario. 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
were financed out of cash generated from operations and from $8 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 are expected to
be financed out of cash flow from operations.
Cash flows used in financing activities were $5,721,000 and $12,406,000 during
the nine months ended September 30, 2004, and September 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 LIBOR plus 1.6% (3.27% at September 30, 2004), at
the election of the Company, with a maturity date of July 31, 2005. The credit
facility prohibits the declaration and payment of dividends. There were
$3,203,000 borrowings under the revolving credit facility and $11,347,000
available on the credit facility at September 30, 2004. The Company had no
borrowings under the revolving credit facility at September 30, 2003.
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.
-4-
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 issues. 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 employee stock options. To date, all
options granted to employees qualify for fixed plan accounting as described in
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 raw material and component parts prices, (2) the
effects of fluctuations in the commercial/industrial new construction market,
(3) the timing and extent of changes in interest rates, as well as other
competitive factors during the year and (4) general economic, market or business
conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to interest rate risk on its revolving credit facility,
which bears variable interest based upon a prime or LIBOR rate.
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 subsidiaries, which uses the Canadian dollar. Adjustments
arising from translation of the Canadian subsidiaries' financial statements are
reflected in accumulated other comprehensive income. Transaction gains or losses
that arise from exchange rate fluctuations applicable to transactions are
denominated in Canadian currency and are included in the results of operations
as incurred.
-5-
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 material
and components, consistent with meeting specified quality standards. 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 pricing and significant increases in aluminum pricing during the nine
months ended September 30, 2004. The Company believes that price increases will
continue 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.
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 September 30,
2004, the Company had acquired 1,014,664 shares of its stock pursuant to its
current buyback program.
Stock repurchases during the third 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
July 1-31 10,500 $17.84 10,500 359,736
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #2
August 1-31 38,300 $17.00 38,300 321,436
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #3
September 1-30 11,100 $17.31 11,100 310,336
2004
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Total 59,900 $17.21 59,900
- ----------------- ------------------- ---------------- --------------------- --------------------------------
-7-
AAON, Inc.
Consolidated Balance Sheets
September 30, December 31,
2004* 2003
---------------------------------------------------------
(In thousands, except share and per share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13 $ 6,186
Certificate of deposit 2,000 10,000
Accounts receivable, net 31,292 22,553
Inventories, net 21,657 19,711
Prepaid expenses 440 2,653
Deferred income tax 3,781 3,532
------------------------ ------------------------
Total current assets 59,183 64,635
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 2,045 874
Buildings 24,914 19,588
Machinery and equipment 51,363 44,329
Furniture and fixtures 3,880 3,944
------------------------ ------------------------
Total property, plant & equipment 82,202 68,735
Less: accumulated depreciation 35,760 31,285
------------------------ ------------------------
Net property, plant & equipment 46,442 37,450
------------------------ ------------------------
Total assets $ 105,625 $ 102,085
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 3,203 $ 5,356
Accounts payable 11,020 11,553
Accrued liabilities 16,872 12,357
------------------------ ------------------------
Total current liabilities 31,095 29,266
------------------------ ------------------------
DEFERRED TAX LIABILITY 4,685 5,391
------------------------ ------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par, 5,000,000 shares
authorized, no shares issued - -
Common Stock, $.004 par, 50,000,000 shares
authorized, and 12,405,598 and 12,519,733
issued and outstanding at September 30, 2004,
and December 31, 2003, respectively 50 50
Additional paid-in capital - -
Accumulated other comprehensive income 24 -
Retained earnings 69,771 67,378
------------------------ ------------------------
Total stockholders' equity 69,845 67,428
------------------------ ------------------------
Total liabilities and stockholders' equity $ 105,625 $ 102,085
======================== ========================
*Unaudited
See accompanying notes.
-8-
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
Sept. 30, 2004* Sept. 30, 2003* Sept. 30, 2004* Sept. 30, 2003*
-------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net sales $ 47,733 $ 41,003 $ 128,246 $ 111,081
Cost of sales 41,639 31,491 108,096 84,064
---------------- ---------------- ---------------- ----------------
Gross profit 6,094 9,512 20,150 27,017
Selling, general and
administrative expenses 3,405 3,861 11,163 10,569
---------------- ---------------- ---------------- ----------------
Income from operations 2,689 5,651 8,987 16,448
Interest expense 8 6 35 21
Interest income (10) (84) (174) (259)
Other expense (income) (13) (45) 12 (167)
---------------- ---------------- ---------------- ----------------
Income before income taxes 2,704 5,774 9,114 16,853
Income tax provision 1,177 2,139 3,679 6,366
---------------- ---------------- ---------------- ----------------
Net income $ 1,527 $ 3,635 $ 5,435 $ 10,487
================ ================ ================ ================
Earnings Per Share:
Basic $ 0.12 $ 0.29 $ 0.44 $ 0.82
================ ================ ================ ================
Diluted $ 0.12 $ 0.27 $ 0.42 $ 0.79
================ ================ ================ ================
Weighted Average Shares Outstanding:
Basic 12,420,941 12,593,711 12,453,360 12,736,140
================ ================ ================ ================
Diluted 12,898,497 13,292,444 12,954,207 13,314,563
================ ================ ================ ================
*Unaudited
See accompanying notes
-9-
AAON INC.
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
Sept. 30, 2004* Sept. 30, 2003* Sept. 30, 2004* Sept. 30, 2003*
-------------------------------------------------------------------------------------
(in thousands)
Net income $ 1,527 $ 3,635 $ 5,435 $ 10,487
Other comprehensive income, net of tax:
Foreign currency translation adjustment 30 - 24 -
---------------- ---------------- ---------------- -----------------
Comprehensive income $ 1,557 $ 3,635 $ 5,459 $ 10,487
================ ================ ================ =================
*Unaudited
See accompanying notes
-10-
AAON, Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Additional 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* 88 - 965 - - 965
Foreign currency translation* - - - 24 - 24
Repurchase of common stock* (202) - (965) - (3,042) (4,007)
Net income* - - - - 5,435 5,435
------------ ----------- -------------- ------------------- ------------ -------------
Balance, September 30, 2004* 12,406 $ 50 $ - $ 24 $69,771 $69,845
============ =========== ============== =================== ============ =============
*Unaudited
See accompanying notes
-11-
AAON, Inc.
Consolidated Statements of Cash Flows
Nine Months Nine Months
Ended Ended
Sept. 30, 2004* Sept. 30, 2003*
---------------------------------------------------
(in thousands)
Operating Activities
Net income $ 5,435 $ 10,487
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,474 3,894
Provision for losses on accounts receivable 486 (224)
Loss on disposition of assets 4 -
Deferred income taxes (955) -
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable (8,138) (1,876)
Inventories (1,487) 158
Prepaid expenses 2,213 (491)
Accounts payable (533) 1,166
Accrued liabilities 4,996 2,801
---------------------------------------------------
Net cash provided by operating activities 6,495 15,915
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 (2,000) -
Capital expenditures (13,206) (3,964)
---------------------------------------------------
Net cash used in investing activities (6,971) (3,964)
Financing Activities
Borrowings under revolving credit facility 42,759 26,862
Payments under revolving credit facility (44,912) (30,428)
Stock options exercised 439 292
Repurchase of stock (4,007) (9,132)
---------------------------------------------------
Net cash used in financing activities (5,721) (12,406)
---------------------------------------------------
Effect of exchange rate on cash 24 -
---------------------------------------------------
Net decrease in cash and cash equivalents (6,173) (455)
---------------------------------------------------
Cash and cash equivalents, beginning of year 6,186 5,071
---------------------------------------------------
Cash and cash equivalents, end of year $ 13 $ 4,616
===================================================
*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 nine months ended September 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 subsidiaries, which use the Canadian dollar.
Adjustments arising from translation of the Canadian subsidiaries' financial
statements are reflected in accumulated other comprehensive income. Transaction
gains or losses that arise from exchange rate fluctuations applicable to
transactions 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 qualify
for fixed plan accounting and had an exercise price equal to the market value of
the underlying common stock on the date of grant. The 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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
----------------------------------------------------------------------
(in thousands, except share data)
Net income as reported $1,527 $3,635 $5,435 $10,487
Deduct compensation expense determined under fair
value method for all awards, net of related tax
effects (185) (117) (512) (432)
-------------- -------------- -------------- ---------------
Pro forma net income $1,342 $3,518 $4,923 $10,055
============== ============== ============== ===============
Earnings per share:
Basic, as reported $ 0.12 $ 0.29 $ 0.44 $ 0.82
============== ============== ============== ===============
Basic, pro forma $ 0.11 $ 0.28 $ 0.40 $ 0.79
============== ============== ============== ===============
Diluted, as reported $ 0.12 $ 0.27 $ 0.42 $ 0.79
============== ============== ============== ===============
Diluted, pro forma $ 0.10 $ 0.26 $ 0.38 $ 0.76
============== ============== ============== ===============
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 $3.5 million certificate of deposit as of June 2004, which
bore interest at 1.8% per annum and matured on September 18, 2004. The proceeds
of $1.5 million were used for cash flow purposes and a reinvestment of $2
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
September 30, December 31,
2004 2003
-------------------------------------------------
(in thousands)
Accounts receivable $ 32,071 $ 23,698
Less allowance for doubtful accounts 779 1,145
--------------------- ---------------------
Total, net $ 31,292 $ 22,553
===================== =====================
Nine Months Ended
September 30, September 30,
2004 2003
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 1,145 $ 860
Provision for losses on accounts receivable 486 229
Accounts receivable written off, net of
recoveries (852) (50)
--------------------- ---------------------
Balance, end of period $ 779 $ 1,039
===================== =====================
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 September 30, 2004, and December 31, 2003, inventory and the
related inventory reserves are as follows:
As of
September 30, December 31,
2004 2003
-----------------------------------------------
(in thousands)
Raw materials $ 16,021 $ 13,874
Work in process 2,434 2,700
Finished goods 4,252 4,187
--------------------- ---------------------
22,707 20,761
Less: Inventory reserve 1,050 1,050
--------------------- ---------------------
Total, net $ 21,657 $ 19,711
===================== =====================
-15-
7. ACCRUED LIABILITIES:
At September 30, 2004 and December 31, 2003, accrued liabilities were comprised
of the following:
As of
September 30, December 31,
2004 2003
-----------------------------------------------
(in thousands)
Warranty $ 6,204 $ 6,020
Commissions 6,385 5,009
Payroll 1,549 1,023
Other 2,734 305
--------------------- ---------------------
Total $ 16,872 $ 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 nine
months ended September 30, 2004, and 2003, are as follows:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
--------------------------------------------------------------------------
(in thousands)
Balance, beginning of period $ 6,357 $ 5,943 $ 6,020 $ 7,200
Warranties accrued during the period 666 1,033 2,741 2,259
Warranties settled during the period (819) (844) (2,557) (3,327)
-------------- -------------- -------------- ---------------
Balance, end of period $ 6,204 $ 6,132 $ 6,204 $ 6,132
============== ============== ============== ===============
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% (3.27% at September 30,
2004), at the election of the Company with a maturity date of July 31, 2005. On
July 31, 2004, the Company renewed the line of credit with a new maturity date
of July 31, 2005. The credit facility prohibits the declaration and payment of
dividends. At September 30, 2004, the Company had $3,203,000 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 that expires December 31, 2004. The
company had $11,347,000 available on its credit facility at September 30, 2004.
-16-
10. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
Sept. 30, 2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
----------------------------------------------------------------------------
(in thousands, except share and per share data)
Numerator:
Net income $ 1,527 $ 3,635 $ 5,435 $10,487
Denominator:
Denominator for basic earnings per share -
Weighted average shares 12,420,941 12,593,711 12,453,360 12,736,140
Effect of dilutive employee stock options 477,556 698,733 500,847 578,423
---------------- ---------------- ---------------- ----------------
Denominator for diluted earnings per share -
Weighted average shares 12,898,497 13,292,444 12,954,207 13,314,563
================ ================ ================ ================
Basic earnings per share $ 0.12 $ 0.29 $ 0.44 $ 0.82
================ ================ ================ ================
Diluted earnings per share $ 0.12 $ 0.27 $ 0.42 $ 0.79
================ ================ ================ ================
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 September 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
1,014,664 shares for an aggregate price of $17,918,475 or an average price of
$17.66 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
$1,778,000. 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. Subsequent to May 4, 2004, AAON Canada Inc.'s activity is
included in the Company's financial statements for the three and nine months
ended September 30, 2004.
-17-
The Air Wise acquisition purchase price was allocated as of May 4, 2004, as
follows:
U.S.
Dollar
---------------------
(in thousands)
Accounts receivable $ 1,087
Inventory 459
Fixed assets 277
Accrued warranty liability (45)
---------------------
Total purchase price $ 1,778
=====================
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 purchase price totaled
$1,100,000.
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.
-18-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Reports on Form 8-K: Registrant filed four reports on Form 8-K
during the three -month period ended September 30, 2004. Filings
reported Registrant's pre-release on quarterly earnings, results
of operations and financial conditions for the three months ended
June 30, 2004, appointment of Jack E. Short to the Board of
Directors and designation of Mr. Short as the "financial expert",
and an amendment of its Second Revolving Credit Loan Agreement on
July 30, 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: November 10, 2004 By: /s/ Norman H. Asbjornson
------------------------------------
Norman H. Asbjornson
President/CEO
Dated: November 10, 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
November 10, 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
November 10, 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 September 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: November 10, 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 September 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: November 10, 2004
-23-