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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 March 31, 2005
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 May 1, 2005, Registrant had outstanding a total of 12,381,558 shares of
its $.004 par value Common Stock.
PART I
Item 1. Financial Statements.
On pages 8 through 17 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 standardized and custom rooftop units, chillers, air-handling
units, make-up units, heat recovery units, condensing units and coils.
AAON sells its products to property owners and contractors through a network of
manufacturers' representatives and its internal sales force. Demand for the
Company's products is influenced by national and regional economic and
demographic factors. The commercial and industrial new construction market is
subject to cyclical fluctuations in that it is generally tied to housing starts,
but has a lag factor of 6-18 months. Housing starts, in turn, are affected by
such factors as interest rates, the state of the economy, population growth and
the relative age of the population. When new construction is down, the Company
emphasizes the replacement market.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight out and engineering expense. The
principal raw materials used in AAON's manufacturing processes are steel, copper
and aluminum. The major component costs include compressors, electric motors and
electronic controls.
Selling, general, and administrative ("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 14 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., an Ontario corporation organized as a
wholly-owned subsidiary of AAON, Inc., purchased certain assets of Air Wise
Inc., of Mississauga, Ontario, Canada, which engineers, manufactures and sells
custom air-handling units, make-up 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 4, 2004 forward.
On July 29, 2004, AAON Properties Inc., an Ontario corporation organized as a
wholly-owned subsidiary of AAON, Inc., 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 on a 5.6 acres tract of
land.
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 563,000 square foot manufacturing/warehouse building and a
22,000 square foot office building (the "expansion facility") located across the
street from the original facility at 2440 S. Yukon Avenue. The Company utilizes
39% of the expansion facility and the remaining 61% is leased to a third party.
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). In April 2004, AAON Coil Products purchased a 13-acre tract of
land for future expansion.
-1-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended March 31, 2005, and 2004:
Three Months Ended
March 31, March 31,
2005 2004
-------------------------------------
(in thousands)
Net sales $ 42,780 $ 37,494
Cost of sales 32,730 29,793
--------------- ---------------
Gross profit 10,050 7,701
--------------- ---------------
Selling, general and administrative
expenses 4,682 3,967
--------------- ---------------
Income from operations 5,368 3,734
--------------- ---------------
Interest expense (2) (17)
Interest Income 78 81
Other income (expense), net (9) 2
--------------- ---------------
Income before income taxes 5,435 3,800
Income tax provision 2,148 1,463
--------------- ---------------
Net income $ 3,287 $ 2,337
=============== ===============
Results of Operations
Net sales increased $5,286,000 (14.1%) to $42,780,000 from $37,494,000 for the
three months ended March 31, 2005, compared to the same period in 2004.
Increased sales were attributable to both volume and price increases and
$2,000,000 of sales from AAON-Canada.
Gross margins were 23.5% compared to 20.5% for the three months ended March 31,
2005 and March 31, 2004, respectively. Gross profit increased $2,349,000 (30.5%)
to $10,050,000 from $7,701,000 for the three months ended March 31, 2005,
compared to the same period in 2004. The increases in margins and gross profit
were primarily due to the increased volume, price increases and improved
production efficiencies. The increase in margins was attained while component
costs increased.
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 experiencing price increases
from component part suppliers. The Company attempts to limit the impact of price
increases on these materials by entering into cancelable fixed price contracts
with its major suppliers for periods of 6-12 months.
Selling, general and administrative expenses increased $715,000 (18%) to
$4,682,000 from $3,967,000 for the three months ended March 31, 2005 compared to
the same period in 2004, primarily due to AAON-Canada expenses, professional
fees, computer consulting and profit sharing expenses.
-2-
Financial Condition and Liquidity
Accounts receivable increased $1,577,000 from $27,121,000 at December 31, 2004,
to $28,698,000 at March 31, 2005, due to the increase in sales.
Inventories increased $2,628,000 to $23,496,000 at March 31, 2005, compared to
$20,868,000 at December 31, 2004, due to procurement of raw material and
purchased parts required to accommodate increased sales and to manufacture units
that had extended ship dates.
Accounts payable and accrued liabilities increased $751,000 to $28,702,000 at
March 31, 2005, compared to $27,951,000 at December 31, 2004, primarily due to
the increase in inventory and timing of payment to vendors.
The Company generated $1,628,000 and $1,191,000 cash from operating activities
during the three months ended March 31, 2005, and March 31, 2004, respectively.
The increase in 2005 primarily related to an increase in net income. The
increase in net income resulted from increased sales volume, price increases and
improved production efficiencies. The decrease in 2004 was primarily due to a
decrease in net income and an increase in inventories.
Cash flows used in investing activities were $3,337,000 for the three months
ended March 31, 2005, and $663,000 for the three months ended March 31, 2004.
Cash flows used in investing activities in 2005 were primarily related to
capital expenditures for additions of machinery and equipment. Cash used in
investing activities in 2004 were primarily related to machinery and equipment
additions and the construction of the Company's sheet metal facility at the
Tulsa plant. All capital expenditures and the building expansion were financed
out of cash generated from operations.
Cash flows provided by and used in financing activities were $1,097,000 and
$6,513,000 during the three months ended March 31, 2005, and March 31, 2004,
respectively. The cash provided by financing activities in 2005 was primarily
related to net borrowings under the revolving credit agreement. The cash used in
2004 was primarily related 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%, at the election of the Company. Borrowings under the revolving credit
facility at March 31, 2005, were $1,347,000 compared to $882,000 at March 31,
2004. In addition, the Company has a $600,000 Letter of Credit that expires
December 31, 2005. The credit facility requires that the Company maintain a
certain financial ratio and prohibits the declaration of dividends.
Management believes the Company's bank revolving credit facility (or comparable
financing), and projected cash flows from operations will provide the necessary
liquidity and capital resources to the Company for the foreseeable future. The
Company's belief that it will have the necessary liquidity and capital resources
is based upon its knowledge of the HVAC industry and its place in that industry,
its ability to limit the growth of its business if necessary, and its
relationship with its existing bank lender. For information concerning the
Company's revolving credit facility at March 31, 2005, see Note 9 to the
financial statements included in this report.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because these estimates and assumptions require significant
judgment, future actual results could differ from those estimates and could have
a significant impact on the Company's results of operations, financial position
and cash flows. The Company reevaluates its estimates and assumptions on a
monthly basis.
-3-
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 14 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, reserves 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 "fixed plan"
accounting 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. The Company has adopted pro forma disclosures of SFAS
123.
New Accounting Pronouncements
FASB Statement 123 (R) replaces FASB Statement No.123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Statement requires measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The compensation cost will be
recognized over the period of time during which an employee is required to
provide service in exchange for the award, which will be the vesting period. The
Statement applies to all awards granted and any unvested awards at December 31,
2005. SFAS 123 (R) will be effective for interim reporting beginning after
December 31, 2005. The Company has not determined the impact of the adoption of
SFAS 123 (R).
Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
"will", and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. The Company undertakes no obligations to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that could cause results to differ
materially from those in the forward-looking statements include (1) the timing
and extent of changes in raw material and component prices, (2) the effects of
fluctuations in the commercial/industrial new construction market, (3) the
timing and extent of changes in interest rates, as well as other competitive
factors during the year, and (4) general economic, market or business
conditions.
-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. The Company's
outstanding balance as of March 31, 2005, was $1,347,000.
Foreign sales accounted for only 2% of the Company's sales in 2004 and the
Company accepts payment for such sales in U.S. and Canadian dollars; therefore,
the Company believes it is not exposed to significant foreign currency exchange
rate risk on these sales. Foreign currency transactions and financial statements
are translated in accordance with 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 use the Canadian
dollar. Adjustments arising from translation of the Canadian subsidiaries'
financial statements are reflected in Consolidated Statements of Stockholders'
Equity. 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 cancelable fixed price
contracts with its major suppliers for periods of 6 -12 months. However, in 2004
cost increases in basic commodities, such as steel, copper and aluminum, were
unprecedented in magnitude and severely impacted profit margins. In many
instances, due to significant price increases this year, the supplier refused to
supply materials at the originally negotiated six month or one year purchase
order price.
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, has evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer believe that:
o The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the
reports it files under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms; and
o The Company's disclosure controls and procedures operate such that
important information flows to appropriate collection and disclosure
points in a timely manner and are effective to ensure that such
information is accumulated and communicated to the Company's
management, and made known to the Company's Chief Executive Officer
and Chief Financial Officer, particularly during the period when this
Quarterly Report was prepared, as appropriate to allow timely
decisions regarding the required disclosure.
-5-
However, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as of March 31,
2005, are ineffective because of the material weaknesses that existed in
information technology general controls that impaired the reliability of AAON's
manufacturing and inventory processing, application processing functions and
automated controls. These weaknesses, in turn, undermined the reliability of
user controls over manufacturing processing, which were dependent upon the
integrity of computer-generated reports. The specific factors giving rise to
these material weaknesses include a) deficiencies in the authorization,
development, testing and movement of changes to AAON's inventory and
manufacturing applications and b) significant functional complexity of the
inventory and manufacturing applications that create user dependence upon
application-based controls to prevent or detect errors, omissions and
irregularities in processing.
Changes in internal controls.
As of March 31, 2005, the Company has corrected one of the material weaknesses
disclosed in its Form 10-K for the year ended December 31, 2004, regarding the
Company's design of internal control over financial reporting with respect to
the preparation of certain adjustments recorded by management related to the
valuation of inventory and the capitalization of certain purchase price
variances and absorption of manufacturing overhead. The Company is currently in
the process of correcting the other material weaknesses regarding the Company's
design of internal controls to develop controls over production program changes
that will assure that only authorized changes to production programs have been
properly designed, tested and moved into production. No other changes in the
Company's internal control over financial reporting identified in connection
with the evaluation required by Exchange Act Rule 13a-15(d) or 15d-15(d) have
come to management's attention that have materially affected the Company's
internal control over financial reporting.
-6-
PART II - OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On September, 17, 2002, the Company initiated a stock buyback program to
repurchase up to 10% (1,325,000 shares) of its outstanding stock. Through March
31, 2005, the Company had acquired 1,108,464 shares of its stock pursuant to its
current buyback program.
Repurchases during the first quarter of 2005 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
January 1-31, - $ - - -
2005
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #2
February 1-28, 14,900 $15.06 14,900 232,036
2005
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Month #3
March 1-31, 15,500 $15.52 15,500 216,536
2005
- ----------------- ------------------- ---------------- --------------------- --------------------------------
Total 30,400 $15.30 30,400
- ----------------- ------------------- ---------------- --------------------- --------------------------------
-7-
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2005 2004
--------------------------------------
(in thousands, except for share data)
Assets
Current assets:
Cash and cash equivalents $ 370 $ 994
Certificate of deposit 3,000 3,000
Accounts receivable, net 28,698 27,121
Inventories, net 23,496 20,868
Prepaid expenses and other 583 478
Deferred tax asset 3,537 3,537
--------------------------------------
Total current assets 59,684 55,998
Property, plant and equipment, net 50,608 49,229
Notes receivable, long-term 75 -
--------------------------------------
Total assets $ 110,367 $ 105,227
======================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ 1,347 $ -
Current maturities of long-term debt 108 108
Accounts payable 11,018 12,882
Accrued liabilities 17,684 15,069
--------------------------------------
Total current liabilities 30,157 28,059
Long-term debt, less current maturities 140 167
Deferred tax liabilities 5,630 5,830
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, no shares issued - -
Common stock, $.004 par value, 50,000,000 shares
authorized, 12,376,333 and 12,349,583 issued and
outstanding at March 31, 2005, December 31, 2004,
respectively 50 49
Accumulated other comprehensive income 235 247
Retained earnings 74,155 70,875
--------------------------------------
Total stockholders' equity 74,440 71,171
--------------------------------------
Total liabilities and stockholders' equity $ 110,367 $ 105,227
======================================
See accompanying notes.
-8-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
------------------------------------------------------
(in thousands, except share and per share data)
Net sales $ 42,780 $ 37,494
Cost of sales 32,730 29,793
--------------------- ---------------------
Gross profit 10,050 7,701
Selling, general and administrative expenses 4,682 3,967
--------------------- ---------------------
Income from operations 5,368 3,734
Interest expense (2) (17)
Interest income 78 81
Other income (expense), net (9) 2
--------------------- ---------------------
Income before income taxes 5,435 3,800
Income tax provision 2,148 1,463
--------------------- ---------------------
Net income $ 3,287 $ 2,337
===================== =====================
Earnings per share:
Basic $ 0.27 $ 0.19
===================== =====================
Diluted $ 0.26 $ 0.18
===================== =====================
Weighted average shares outstanding:
Basic 12,386,840 12,482,186
===================== =====================
Diluted 12,795,125 12,997,022
===================== =====================
See accompanying notes.
-9-
AAON, Inc., and Subsidiaries
Consolidated Statements of Stockholders' Equity
(unaudited)
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
--------------------------------------------------------------------------------------------
(in thousands)
--------------------------------------------------------------------------------------------
Balance at December 31, 2004 12,350 $ 49 $ - $ 247 $ 70,875 $ 71,171
Comprehensive income:
Net income - - - - 3,287 3,287
Foreign currency translation
adjustment - - - (12) - (12)
--------------
Total comprehensive income 3,275
Stock options exercised, including
tax benefits 56 2 457 - - 459
Stock repurchased and retired (30) (1) (457) - (7) (465)
--------------------------------------------------------------------------------------------
Balance at March 31, 2005 12,376 $ 50 $ - $ 235 $ 74,155 $ 74,440
============================================================================================
See accompanying notes.
-10-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
--------------------- ---------------------
(in thousands)
Operating Activities
Net income $ 3,287 $ 2,337
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,883 1,552
Provision for losses on accounts receivable 39 475
Loss on disposition of assets - 4
Deferred income taxes (200) -
Changes in assets and liabilities:
Accounts receivable (1,616) (45)
Inventories (2,628) (2,512)
Prepaid expenses and other (105) (295)
Accounts payable (1,864) (566)
Accrued liabilities 2,832 241
--------------------- ---------------------
Net cash provided by operating activities 1,628 1,191
--------------------- ---------------------
Investing Activities
Proceeds from sale of property, plant and equipment - 1
Proceeds from matured certificate of deposit 3,000 -
Investment in certificate of deposit (3,000) -
Note receivable, long-term (75) -
Capital expenditures (3,262) (664)
--------------------- ---------------------
Net cash used in investing activities (3,337) (663)
--------------------- ---------------------
Financing Activities
Borrowings under revolving credit agreement 5,304 12,968
Payments under revolving credit agreement (3,957) (17,442)
Payments on long-term debt (27) -
Stock options exercised 242 224
Repurchase of stock (465) (2,263)
--------------------- ---------------------
Net cash provided by (used in) financing activities 1,097 (6,513)
--------------------- ---------------------
Effects of exchange rate of cash (12) -
--------------------- ---------------------
Net decrease in cash (624) (5,985)
--------------------- ---------------------
Cash and cash equivalents, beginning of year 994 6,186
--------------------- ---------------------
Cash and cash equivalents, end of year $ 370 $ 201
===================== =====================
See accompanying notes.
-11-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 2005
(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, 2004, 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 three months ended March 31, 2005,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
Acquisition
On May 4, 2004, the Company (through AAON Canada Inc.) 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, make-up 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 results of operations for the year
ended December 31, 2004.
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
=====================
The Air Wise acquisition is not material for pro forma disclosure purposes.
On July 29, 2004, the Company (through AAON Properties Inc.) purchased property
in Burlington, Canada, to relocate AAON Canada Inc. The purchase will allow the
Company to enlarge and further expand its production capabilities. The purchase
price totaled $1,100,000.
-12-
Currency
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 the Consolidated Statement of Stockholders' Equity.
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 maintains a stock option plan for key employees and directors. The
Company accounts for the plan under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan 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:
Three Months Ended
March 31, 2005 March 31, 2004
-------------------------------------------
(in thousands, except share data)
Net income as reported $3,287 $2,337
Deduct compensation expense determined
under fair value method for all awards,
net of related tax effects (83) (157)
----------------- ----------------
Pro forma net income $3,204 $2,180
================= ================
Earnings per share:
Basic, as reported $ 0.27 $ 0.19
================= ================
Basic, pro forma $ 0.26 $ 0.17
================= ================
Diluted, as reported $ 0.26 $ 0.18
================= ================
Diluted, pro forma $ 0.25 $ 0.17
================= ================
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
At March 31, 2005, the Company had invested in a 30-day certificate of deposit
that bears interest at 2.1% per annum.
-13-
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.
Accounts receivable and the related allowance for doubtful accounts are as
follows:
March 31, December 31,
2005 2004
-------------------------------------------------
(in thousands)
Accounts receivable $ 29,453 $ 27,838
Less: allowance for doubtful accounts (755) (717)
--------------------- ---------------------
Total, net $ 28,698 $ 27,121
===================== =====================
Three Months Ended
March 31, March 31,
2005 2004
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 717 $ 1,145
Provision for losses on accounts receivable 39 475
Accounts receivable written off, net of
recoveries (1) -
--------------------- ---------------------
Balance, end of period $ 755 $ 1,620
===================== =====================
-14-
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 an allowance for
excess and obsolete inventories based on product line changes, the feasibility
of substituting parts and the need for supply and replacement parts. At March
31, 2005, and December 31, 2004, inventory balances and the related changes in
the allowance for excess and obsolete inventories account are as follows:
March 31, December 31,
2005 2004
-------------------------------------------------
(in thousands)
Raw materials $ 17,010 $ 16,397
Work in process 2,393 2,305
Finished goods 5,143 3,216
--------------------- ---------------------
24,546 21,918
Less: Inventory reserve (1,050) (1,050)
--------------------- ---------------------
Total, net $ 23,496 $ 20,868
===================== =====================
7. ACCRUED LIABILITIES
At March 31, 2005, and December 31, 2004, accrued liabilities were comprised of
the following:
March 31, December 31,
2005 2004
-------------------------------------------------
(in thousands)
Warranty $ 6,791 $ 6,301
Commissions 5,795 5,921
Payroll 1,058 1,115
Income taxes 1,988 309
Workers' compensation 522 457
Medical self-insurance 882 933
Other 648 33
--------------------- ---------------------
Total $ 17,684 $ 15,069
===================== =====================
-15-
8. WARRANTIES
A provision is made for the estimated cost of warranty obligations at the time
the related products are sold based upon the warranty period, historical trends,
new products and any known identifiable warranty issues.
Changes in the Company's warranty liability during the three months ended March
31, 2005, and 2004, are as follows:
Three Months Ended
March 31, March 31,
2005 2004
--------------------------------
(in thousands)
Balance, beginning of period $ 6,301 $ 6,020
Warranties accrued during the period 1,111 979
Warranties settled during the period (621) (848)
------------- -------------
Balance, end of period $ 6,791 $ 6,151
============= =============
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% (4.27% at March 31, 2005) at
the election of the Company with a maturity date of July 30, 2005. The credit
facility prohibits the declaration and payment of dividends. At March 31, 2005,
the Company had $1,347,000 on the bank line of credit and as of December 31,
2004, the Company had no borrowings under the revolving credit facility. In
addition, the Company has a $600,000 Letter of Credit expiring December 31,
2005. The company had $13,203,000 available on its credit facility at March 31,
2005.
-16-
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31, 2005 March 31, 2004
----------------------------------------------
(in thousands, except for share
and per share data)
Numerator:
Net income $ 3,287 $ 2,337
Denominator:
Denominator for basic earnings per share -
Weighted average shares 12,386,840 12,482,186
Effect of dilutive employee stock options 408,285 514,836
------------------ ------------------
Denominator for diluted earnings per share -
Weighted average shares 12,795,125 12,997,022
================== ==================
Basic earnings per share $ 0.27 $ 0.19
================== ==================
Diluted earnings per share $ 0.26 $ 0.18
Anti-dilutive shares 92,250 -
================== ==================
Weighted Average Exercise Price $ 18.48 $ -
================== ==================
11. STOCK REPURCHASE
On October 17, 2002, the Company initiated a stock buyback program to repurchase
up to 10% (1,325,000 shares) of its outstanding stock. Through December 31,
2004, and March 31, 2005, the Company had repurchased 1,078,064 shares for an
aggregate price of $18,889,535, or an average price of $17.52 per share and
1,108,464 shares for an aggregate price of $19,354,519 or an average price of
$17.46 per share, respectively.
12. 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.
-17-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
Reports on Form 8-K: Registrant filed one report on Form 8-K
during the three months ended March 31, 2005. The filing reported
Registrant's 2004 operating results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AAON, INC.
Dated: May 5, 2005 By: /s/ Norman H. Asbjornson
-----------------------------------
Norman H. Asbjornson
President/CEO
Dated: May 5, 2005 By: /s/ Kathy I. Sheffield
-----------------------------------
Kathy I. Sheffield
Treasurer
-18-
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
May 5, 2005
-19-
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
May 5, 2005
-20-
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 March 31, 2005, 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: May 5, 2005
-21-
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 March 31, 2005, 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: May 5, 2005
-22-