UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________.
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of May 1, 2007, registrant had outstanding a total of 12,450,506 shares of
its $.004 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2007 2006
---------------------------------------
(in thousands, except for share data)
Assets
Current assets:
Cash and cash equivalents $ 550 $ 288
Accounts receivable, net 37,535 36,748
Inventories, net 32,684 29,502
Prepaid expenses and other 307 267
Deferred tax assets 3,783 3,954
------------------- -------------------
Total current assets 74,859 70,759
Property, plant and equipment, net 61,490 59,222
Notes receivable, long-term 75 75
------------------- -------------------
Total assets $ 136,424 $ 130,056
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 32 $ 59
Accounts payable 14,870 15,821
Dividends payable - 2,465
Accrued liabilities 19,413 16,058
------------------- -------------------
Total current liabilities 34,315 34,403
Other long-term liabilities 104 -
Deferred tax liabilities 3,740 4,061
Commitments and contingencies
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, 12,457,383 and 12,338,832 issued and
outstanding at March 31, 2007, and December 31, 2006,
respectively 50 49
Additional paid-in capital 962 210
Accumulated other comprehensive income, net of tax 666 667
Retained earnings 96,587 90,666
------------------- -------------------
Total stockholders' equity 98,265 91,592
------------------- -------------------
Total liabilities and stockholders' equity $ 136,424 $ 130,056
=================== ===================
The accompanying notes are an integral part of these statements.
-1-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31, 2007 March 31, 2006
-----------------------------------------------
(in thousands, except share and per share data)
Net sales $ 58,628 $ 53,620
Cost of sales 42,906 43,236
------------------- -------------------
Gross profit 15,722 10,384
Selling, general and
administrative expenses 5,747 4,565
------------------- -------------------
Income from operations 9,975 5,819
Interest expense (10) (12)
Interest income 3 9
Other income, net 188 126
------------------- -------------------
Income before income taxes 10,156 5,942
Income tax provision 3,839 2,199
------------------- -------------------
Net income $ 6,317 $ 3,743
=================== ===================
Earnings Per Share:
Basic $ 0.51 $ 0.30
=================== ===================
Diluted $ 0.50 $ 0.30
=================== ===================
Weighted Average Shares Outstanding:
Basic 12,374 12,277
=================== ===================
Diluted 12,612 12,634
=================== ===================
The accompanying notes are an integral part of these statements.
-2-
AAON, Inc., and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
(unaudited)
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
--------------------------------------------------------------------------------------
(in thousands)
--------------------------------------------------------------------------------------
Balance at December 31, 2006 12,339 $ 49 $ 210 $ 667 $ 90,666 $ 91,592
Adjustment for the adoption of FASB
Interpretation (FIN) No. 48 - - - - (396) (396)
Comprehensive income:
Net income - - - - 6,317 6,317
Foreign currency translation
adjustment - - - (1) - (1)
--------------
Total comprehensive income 6,316
Stock options exercised, including tax
benefits 179 1 2,222 - - 2,223
Share based compensation - - 163 - - 163
Stock repurchased and retired (61) - (1,633) - - (1,633)
--------------------------------------------------------------------------------------
Balance at March 31, 2007 12,457 $ 50 $ 962 $ 666 $ 96,587 $ 98,265
======================================================================================
The accompanying notes are an integral part of these statements.
-3-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Three Months
Ended Ended
March 31, 2007 March 31, 2006
---------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 6,317 $ 3,743
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,273 2,206
Provision for losses on accounts receivable 186 57
Gain on disposition of assets (13) -
Share-based compensation 163 129
Excess tax benefits from stock options exercised (1,563) (612)
Deferred income taxes (148) (395)
Changes in assets and liabilities:
Accounts receivable (973) (1,835)
Inventories (3,179) 250
Prepaid expenses and other (41) (161)
Accounts payable (955) 1,193
Accrued liabilities 4,624 2,695
---------------------------------------------
Net cash provided by operating activities 6,691 7,270
---------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 13 -
Proceeds from matured certificate of deposit - 1,500
Investment in certificate of deposit - (500)
Capital expenditures (4,537) (6,044)
---------------------------------------------
Net cash used in investing activities (4,524) (5,044)
---------------------------------------------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 8,537 8,939
Payments under revolving credit facility (8,537) (8,939)
Payments of long-term debt (27) (27)
Stock options exercised 659 552
Excess tax benefits from stock options exercised 1,563 612
Repurchase of stock (1,633) (747)
Cash dividends paid to stockholders (2,465) -
---------------------------------------------
Net cash (used in) provided by financing activities (1,903) 390
---------------------------------------------
Effect of exchange rate on cash (2) 13
---------------------------------------------
Net Increase in cash and cash equivalents 262 2,629
---------------------------------------------
Cash and cash equivalents, beginning of year 288 837
---------------------------------------------
Cash and cash equivalents, end of period $ 550 $ 3,466
=============================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
March 31, 2007
(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, 2006, filed by AAON, Inc. with the SEC. In the opinion
of management, the accompanying financial statements include all normal,
recurring adjustments and estimated provisions considered necessary by
management to fairly state the results of the periods presented. Operating
results for the three months ended March 31, 2007, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2007.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Standards ("SFAS") 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 and Comprehensive income. Transaction gains or losses that
arise from exchange rate fluctuations applicable to transactions are denominated
in Canadian currency and are included in Other income in the results of
operations as incurred.
New Accounting Pronouncements
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109, Accounting for Income Taxes.
This interpretation addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, the Company
recorded a $551,000 increase in the liability for unrecognized tax benefits,
which is offset by an increase of the deferred tax assets of $155,000, resulting
in a decrease to the January 1, 2007, retained earnings balance of $396,000 (for
additional information see Note 8 to the Consolidated Financial Statements).
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements. SFAS
157 defines fair value and establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. Although SFAS 157 applies to (and amends) the provisions of
existing authoritative literature, it does not, of itself, require any new fair
value measurements or establish valuation standards. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company will adopt SFAS 157
on January 1, 2008. Adoption of SFAS 157 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
-5-
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which creates an alternative
measurement treatment for certain financial assets and financial liabilities.
SFAS 159 permits fair value to be used for both the initial and subsequent
measurements on an instrument by instrument basis, with changes in the fair
value to be recognized in earnings as those changes occur. This election is
referred to as the fair value option. SFAS 159 also requires additional
disclosures to compensate for the lack of comparability that will arise from the
use of the fair value option. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS 159 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
2. 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 balances at March 31, 2007 and December 31, 2006 and the
changes in the allowance for doubtful accounts for the three months ended March
31, 2007 and 2006 are as follows:
March 31, December 31,
2007 2006
-------------------------------------------
(in thousands)
Accounts receivable $ 37,986 $ 37,014
Less: allowance for doubtful accounts (451) (266)
-------------------- --------------------
Total, net $ 37,535 $ 36,748
==================== ====================
Three Months Ended
March 31, March 31,
2007 2006
-------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 266 $ 685
Provision for losses on accounts receivable 244 106
Adjustments to provision (58) (49)
Accounts receivable written off, net of recoveries (1) (167)
-------------------- --------------------
Balance, end of period $ 451 $ 575
==================== ====================
3. 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. Inventory
balances at March 31, 2007 and December 31, 2006, and the changes in the
allowance for excess and obsolete inventories account for the three months ended
March 31, 2007 and 2006, are as follows:
-6-
March 31, December 31,
2007 2006
-------------------------------------------
(in thousands)
Raw materials $ 27,688 $ 25,977
Work in process 2,650 2,226
Finished goods 2,696 1,649
-------------------- --------------------
33,034 29,852
Less: Inventory reserve (350) (350)
-------------------- --------------------
Total, net $ 32,684 $ 29,502
==================== ====================
Three Months Ended
March 31, March 31,
2007 2006
-------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350
Provision for excess and obsolete inventories - -
Adjustments to reserve - -
-------------------- --------------------
Balance, end of period $ 350 $ 350
==================== ====================
4. ACCRUED LIABILITIES
At March 31, 2007, and December 31, 2006, accrued liabilities were comprised of
the following:
March 31, December 31,
2007 2006
-------------------------------------------
(in thousands)
Warranty $ 6,000 $ 5,572
Commissions 7,310 6,862
Payroll 2,249 1,890
Income taxes 2,129 -
Workers' compensation 415 494
Medical self-insurance 696 837
Other 614 403
-------------------- --------------------
Total $ 19,413 $ 16,058
==================== ====================
5. REVOLVING CREDIT FACILITY
The Company's revolving credit facility provides for maximum borrowings of $15.2
million which is provided by the Bank of Oklahoma, National Association. Under
the line of credit, there is one standby letter of credit totaling approximately
$600,000. The letter of credit is a requirement of the Company's workers
compensation insurance and will expire December 31, 2007. Interest on borrowings
is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus
1.6%, at the election of the Company (6.92% at March 31, 2007). No fees are
associated with the unused portion of the committed amount. At March 31, 2007
and December 31, 2006, the Company had no borrowings outstanding under the
revolving credit facility. Borrowings available under the revolving credit
facility at March 31, 2007, were $14.6 million. The credit facility requires the
Company to maintain certain financial ratios. At March 31, 2007, the Company was
in compliance with its financial ratio covenants. The line of credit has a
maturity date of July 30, 2007.
-7-
6. STOCK COMPENSATION
The Company maintains a stock option plan for key employees, directors and
consultants. The Company's stock option plan provided for 2,925,000 shares of
common stock to be issued under the plan. Under the terms of the plan, the
exercise price of shares granted may not be less than 85% of the fair market
value at the date of the grant. Options granted to directors prior to May 25,
2004, vest one year from the date of grant and are exercisable for nine years
thereafter. Options granted to directors on or after May 25, 2004, vest
one-third each after 1-3 years. All other options granted vest at a rate of 20%
per year, commencing one year after date of grant, and are exercisable during
years 2-10.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R) Share-Based
Payment (SFAS 123R), using the modified-prospective-transition provisions. Under
that transition method, compensation cost recognized in 2006 and the first three
months of 2007 includes all share-based payments granted prior to, but not yet
vested as of January 1, 2006, and compensation cost for all share-based payments
granted subsequent to January 1, 2006. The compensation cost is based on the
grant date fair value calculated using a Black-Scholes-Merton Option Pricing
Model in accordance with provisions of Statement 123(R).
For the three month periods ended March 31, 2007 and 2006, the Company
recognized approximately $163,000 and $129,000, respectively, in pre-tax
compensation expense in the Consolidated Statements of Income related to the
stock option plan. The total pre-tax compensation cost related to nonvested
stock options not yet recognized as of March 31, 2007, is $2.0 million and is
expected to be recognized over a weighted-average period of 2.5 years. Statement
123(R) requires that cash flows from the exercise of stock options resulting
from tax benefits in excess of recognized cumulative compensation cost (excess
tax benefits) be classified as financing cash flows. For the three months ended
March 31, 2007 and 2006, $1,563,000 and $612,000, respectively, of such excess
tax benefits from share-based payment plans was classified as financing cash
flows.
The following assumptions were used to determine the fair value of the unvested
stock options on the original grant date for expense recognition purposes for
options granted during the three months ended March 31, 2007 and March 31, 2006.
No Options were granted to directors or officers for the three months ended
March 31, 2007.
Three Months Ended
March 31, March 31,
2007 2006
--------------------------------
Directors and Officers:
Expected dividend yield N/A -
Expected volatility N/A 32.32%
Risk-free interest rate N/A 4.86%
Expected life N/A 8.0 yrs
Forfeiture Rate N/A 0%
Employees:
Expected dividend yield 1.47% -
Expected volatility 42.24% 32.32%
Risk-free interest rate 4.77% 4.86%
Expected life 6.30 yrs 8.0 yrs
Forfeiture Rate 28% 0%
The expected term of the options is based on evaluations of historical and
expected future employee exercise behavior. The risk-free interest rate is based
on the U.S. Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date. Volatility is based
on historical volatility of the Company's stock. The Company had not declared
dividends in prior years, but initiated a dividend payout in the second quarter
of 2006. The Company used board approved semi-annual dividend payouts of $0.20
per share to calculate the expected dividend yield.
-8-
The following is a summary of stock options outstanding as of March 31, 2007:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------
Range of Number Weighted Weighted Aggregate Number Weighted
Exercise Prices Outstanding at Average Average Intrinsic Exercisable at Average
March 31, 2007 Remaining Exercise Value March 31, 2007 Exercise
Contractual Price Price
Life
-------------------------------------------------------------------------------------------------------------------------------
$3.39 - $3.39 80,698 0.79 $ 3.39 $ 22.74 80,698 $ 3.39
$4.00 - $5.78 250,730 2.18 4.98 21.15 250,730 4.98
$8.59 - $16.94 181,575 5.55 12.59 13.54 129,775 11.20
$17.10 - $18.00 50,000 8.27 17.71 8.42 12,740 17.74
$19.02 - $22.32 82,250 6.38 20.08 6.05 51,490 19.47
$23.32 - $27.65 186,000 9.45 25.18 0.95 - -
------------------------------------------------------------------------------------------------------
Total 831,253 5.19 $ 13.27 $ 12.86 525,433 $ 8.00
======================================================================================================
A summary of option activity under the plan as of March 31, 2007, is as follows:
Weighted
Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
Options Shares Exercise Price Term Value ($000)
---------------- ------------------ ---------------- --------------
Outstanding at January 1, 2007 974,330 $ 11.00
Granted 37,500 25.98
Exercised (179,227) 3.68
Forfeited or Expired (1,350) 5.78
---------------- ------------------
Outstanding at March 31, 2007 831,253 13.27 5.19 $ 10,690
================ ================== ================ ==============
Exercisable at March 31, 2007 525,433 $ 8.00 3.00 $ 9,526
================ ================== ================ ==============
The weighted average grant date fair value of options granted during the three
months ended March 31, 2007 was $11.15. The total intrinsic value of options
exercised during the three months ended March 31, 2007 was $4.12 million. The
cash received from options exercised during the three months ended March 31,
2007 was $659,000. The impact of these cash receipts is included in financing
activities in the accompanying Consolidated Statements of Cash Flows.
A summary of the unvested options for the three month period ended March 31,
2007, is as follows:
Weighted Average
Grant Date Fair
Shares Value
--------------------- --------------------
Nonvested at January 1, 2007 277,320 $ 9.13
Granted 37,500 $ 11.15
Vested (9,000) $ 7.34
Forfeited - $ -
--------------------- --------------------
Nonvested at March 31, 2007 305,820 $ 9.43
===================== ====================
-9-
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31, 2007 March 31, 2006
---------------------------------------
(in thousands, except share and per
share data)
Numerator:
Net income $ 6,317 $ 3,743
================ ================
Denominator:
Denominator for basic earnings per share-
Weighted average shares 12,374,064 12,277,155
Effect of dilutive stock options 237,473 359,642
---------------- ----------------
Denominator for diluted earnings per share-
Weighted average shares 12,611,537 12,633,797
================ ================
Basic earnings per share $ 0.51 $ 0.30
================ ================
Diluted earnings per share $ 0.50 $ 0.30
================ ================
Anti-dilutive shares 172,000 79,500
Weighted average exercise price $ 25.33 $ 18.45
8. INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state and foreign jurisdictions. Effective January 1,
2007, the Company adopted FIN 48. In accordance with FIN 48, the Company
recorded $551,000 increasing its liability for unrecognized tax benefits,
interest, and penalties, which is offset by an increase of the deferred tax
assets of $155,000, resulting in a decrease to the January 1, 2007, retained
earnings balance of $396,000. The total amount of unrecognized tax benefits that
if recognized would affect the effective tax rate is $396,000. Included in the
balance of unrecognized tax benefits at January 1, 2007, is $447,000 related to
tax positions for which it is reasonably possible that the total amounts could
significantly decrease during the next twelve months. This amount represents the
unrecognized tax benefits comprised of items related to determination of state
nexus which should be resolved through a voluntary compliance program to be
initiated during the three months ended June 30, 2007.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in Income tax expense. At January 1, 2007, the Company had accrued
$141,000 and $29,000 for the potential payment of interest and penalties,
respectively.
As of January 1, 2007, the Company is subject to U.S. Federal income tax
examinations for the tax years 2003 through 2006, and to non-U.S. income tax
examinations for the tax years of 2004 through 2006. In addition, the Company is
subject to state and local income tax examinations for the tax years 2001
through 2006.
There were no significant changes to any of these amounts during the first
quarter of 2007.
-10-
9. STOCK REPURCHASE
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began a
stock repurchase program on October 17, 2002, targeting repurchases of up to an
additional 10% (1,325,000 shares) of its outstanding stock. Through December 31,
2006, the Company had repurchased a total of 1,257,864 shares under the current
program for an aggregate price of $22,034,568, or an average of $17.52 per
share. On February 14, 2006, the Board of Directors approved the suspension of
the Company's repurchase program.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee participants in AAON's 401(k) savings and investment plan are
entitled to have shares of AAON stock in their accounts sold to the Company to
provide diversification of their investments. Through March 31, 2007, the
Company repurchased 262,352 shares for an aggregate price of $5,615,000 or an
average price of $21.40 per share.
On November 7, 2006, the Board of Directors authorized the Company to repurchase
shares from certain directors following their exercise of stock options expiring
on March 11, 2007. To date, the Company repurchased 44,875 shares for an
aggregate price of $1,203,000 or an average price of $26.81.
10. 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.
-11-
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, coils and boilers.
The Company has successfully gained market share through its "semi-custom"
product lines, which offer the customer value, quality, function, serviceability
and efficiency. Custom units are marketed and sold to retail, manufacturing,
educational, medical and other commercial industries. AAON markets units to all
50 states in the United States and certain provinces in Canada. International
sales are less than five percent as the majority of all sales are domestic.
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. Raw materials ranged in prices and at times increases were
incurred up to approximately 24% for steel, 42% for aluminum and 400% for copper
from 2004 to March 31, 2007. The increases resulted in economic challenges to
AAON. AAON reviewed and adjusted current pricing strategies, created
efficiencies in production, and continued relationships with suppliers in order
to mitigate the economic factors of increasing commodity prices. The major
component costs include compressors, electric motors and electronic controls,
which also increased due to increases in commodities.
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. Warranty charges on heat exchangers do not occur frequently.
The office facilities of the Company 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.
Other operations are conducted in a plant/office building at 203-207 Gum Springs
Road in Longview, Texas, containing 258,000 square feet (251,000 sq. ft. of
manufacturing/warehouse and 7,000 sq. ft. of office space). An additional 15
acres of land was purchased for future expansion in 2004 and 2005 in Longview,
Texas. The Company's operations in Burlington, Ontario, Canada, are located at
279 Sumach Drive, consisting of an 82,000 sq. ft. office/manufacturing facility
on a 5.6 acre tract of land.
-12-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended March 31, 2007 and 2006:
Three Months Ended March 31,
2007 2006
---- ----
(in thousands)
Net sales $ 58,628 100.0% $ 53,620 100.0%
Cost of sales 42,906 73.2% 43,236 80.6%
-------------- ---------- -------------- ----------
Gross profit 15,722 26.8% 10,384 19.4%
Selling, general and
administrative expenses 5,747 9.8% 4,565 8.5%
-------------- ---------- -------------- ----------
Income from operations 9,975 17.0% 5,819 10.9%
-------------- ---------- -------------- ----------
Interest expense (10) 0.0% (12) 0.0%
Interest income 3 0.0% 9 0.0%
Other income, net 188 0.3% 126 0.2%
-------------- ---------- -------------- ----------
Income before income taxes 10,156 17.3% 5,942 11.1%
Income tax provision 3,839 6.5% 2,199 4.1%
-------------- ---------- -------------- ----------
Net income $ 6,317 10.8% $ 3,743 7.0%
============== ========== ============== ==========
Results of Operations
Key events impacting AAON's cash balance, financial condition, and results of
operations for the three months ended March 31, 2007 include the following:
o Effective moderation of commodity costs with purchase agreements and
pricing strategies affected gross margin positively, which resulted in
significantly higher revenues and income.
o In February 2006, the Board of Directors authorized a semi-annual cash
dividend payment. Cash dividends were declared in the fourth quarter
of 2006, but were not paid until January of 2007, affecting cash by
$2.5 million.
o Stock repurchases of AAON stock from employee's 401(k) savings and
investments plan was authorized in 2005. AAON continued to repurchase
stock from employees and made repurchases from other incentive plans
throughout the three months ended March 31, 2007, resulting in cash
payments of $1.6 million. This cash outlay is partially offset by cash
received from options exercised by employees as a part of an incentive
bonus program. The cash received in the first quarter of 2007 from
options exercised was $659,000.
o Purchases of equipment to create efficiencies remained a priority.
AAON capital expenditures were $4.5 million. Equipment purchases and
proper upkeep of manufacturing facilities create significant
efficiencies, lower production costs and allow continued growth in
production. The Company currently estimates it will spend a total of
approximately $10.0 million on capital expenditures in 2007 for
continued growth.
Net Sales
Net sales were approximately $58.6 million and $53.6 million for the three
months ended March 31, 2007 and 2006, respectively. The increase of 9.3% in
sales is due in part from certain pricing strategies implemented in 2006 and are
now being fully recognized as back orders from 2006 become completed. Management
anticipates continued growth throughout 2007.
Gross Profit
Gross profits for the three months ended March 31, 2007 and 2006 were $15.7
million and $10.4 million, respectively. As a percentage of sales, gross margins
were 26.8% and 19.4% for the three months ended March 31, 2007 and 2006. This
increase in gross profit of 51.0% results from pricing strategies becoming fully
utilized and production and labor efficiencies as volume remains at a high and
steady level. The Company also began to see a leveling off of raw material
increases, thus lowering the cost of raw materials and allowing for higher gross
profits.
-13-
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. Raw
materials ranged in prices and at times increases were incurred up to
approximately 24% for steel, 42% for aluminum and 400% for copper from 2004 to
March 31, 2007, causing increased inventory costs. 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;
therefore the Company is also experiencing price increases from component part
suppliers. The Company is beginning to see some leveling off of the increases in
certain materials, but continues to monitor these costs and price units
accordingly. The Company instituted several price increases from 2004 to 2006 to
customers in an attempt to offset the continued increases in steel, copper and
aluminum. 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
Selling, general and administrative expenses were $5.7 million and $4.6 million
for the three months ended March 31, 2007 and 2006, respectively. The increase
in selling, general and administrative expenses was primarily caused by an
increase in profit sharing due to increased net income. The Company contributes
10% of pre-tax profit to all eligible employees equally on a quarterly basis to
reward employee productivity. Other increases included sales expenditures for an
annual representative meeting and other sales related expenses.
Other Income
Other income was $188,000 and $126,000 for the three months ended March 31, 2007
and 2006, respectively. Other income is attributable primarily to rental income
from the Company's expansion facility. All expenses associated with the facility
that are allocated to the rental portion of the building are included in other
income. The Company plans to continue to monetize the expansion facility until
it is needed for increased capacity.
Analysis of Liquidity and Capital Resources
AAON's working capital and capital expenditure requirements are generally met
through net cash provided by operations and the revolving bank line of credit.
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES. Net cash provided by operating
activities decreased in the three months ended March 31, 2007 by $579,000 from
the prior years three months ended March, 31, 2006. The decrease is primarily
the result of increased inventory due to increased levels to accommodate future
sales. The increased inventory is partially offset by the increase in Net Income
based on factors stated above.
CASH FLOWS USED IN INVESTING ACTIVITIES. Cash flows used in investing activities
were $4.5 million and $5.0 million for the three months ended March 31, 2007 and
2006, respectively. The decrease in cash flows used in investing activities in
2007 was primarily related to lower capital expenditures of $4.5 million for
additions to manufacturing facilities, machinery and equipment compared to $6.0
million for the same period in 2006. Capital expenditures in 2007 related to
building renovations and machinery and equipment to further automate production.
Management utilizes cash flows provided from operating activities to fund
capital expenditures that are expected to spur growth and create efficiencies.
The Company is currently in line with budgeted capital expenditures of
approximately $10.0 million in 2007 for equipment requirements. The Company
expects the cash requirements to be provided from cash flows from operations.
For the three months ended March, 31, 2007, the Company did not invest nor
receive proceeds from any certificate of deposits. For the same period in 2006,
the Company received proceeds from the investment of $1 million invested in 2005
and reinvested another $500 million, which became due within the first quarter
of 2006.
-14-
CASH FLOWS USED IN FINANCING ACTIVITIES. Cash flows used in financing activities
were $1.9 million for the three months ended March 31, 2007 compared to cash
flows provided by financing activities of $390,000 for the same period in 2006.
The increase of cash used in financing activities primarily relates to cash
dividends declared and paid and the continued repurchase of the Company's stock.
The Company repurchased shares of stock from employees' 401(k) savings and
investment plan and other incentive plans for the three months ended March 31,
2007 in the amount of $1.6 million for 60,676 shares of stock. There were 36,529
shares of stock repurchased for a total of $747,000 for the same period in 2006.
In February of 2006, the Board of Directors authorized a semi-annual cash
dividend payment. Cash dividends were declared in December of 2006 and were paid
in January of 2007 in the amount of $2.5 million. Board approval is required to
determine the date of declaration for each semi-annual payment. No cash
dividends were declared or paid in the three months ended March 31, 2006. Prior
to 2006, no cash dividends had been declared or paid.
The Company received cash from stock options exercised of $659,000 and
classified the tax benefit of stock options exercised of $1.6 million in
financing activities for the three months ended March 31, 2007. Due to the
increase in stock price and the exercise price of options, the tax effect of the
gains received by the Company increased significantly for the three months ended
March 31, 2007. The cash received for options exercised and income tax effect
partially offset the stock repurchase and dividend payments for the three months
ended March 31, 2007. The cash received from stock options exercised for the
same period in 2006 was $552,000 and the tax benefit of stock options exercised
was $612,000.
General
The Company's revolving credit facility provides for maximum borrowings of $15.2
million which is provided by the Bank of Oklahoma, National Association. Under
the line of credit, there is one standby letter of credit totaling approximately
$600,000. The letter of credit is a requirement of the Company's workers
compensation insurance and will expire December 31, 2007. Interest on borrowings
is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus
1.6%, at the election of the Company (6.92% at March 31, 2007). No fees are
associated with the unused portion of the committed amount. At March 31, 2007
and December 31, 2006, the Company had no borrowings outstanding under the
revolving credit facility. Borrowings available under the revolving credit
facility at March 31, 2007, were $14.6 million. The credit facility requires the
Company to maintain certain financial ratios. At March 31, 2007, the Company was
in compliance with its financial ratio covenants. The line of credit has a
maturity date of July 30, 2007.
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 fiscal year 2007 and 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, its ability to authorize dividend cash payments, and its
relationship with its existing bank lender. For information concerning the
Company's revolving credit facility at March 31, 2007, see Note 5 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.
Effective January 1, 2007, the Company adopted FIN 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN
48 provides guidance for the recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In accordance with FIN 48, the Company
recognized a cumulative-effect adjustment of $396,000, increasing its liability
for unrecognized tax benefits, interest and penalties and reducing the January
1, 2007 balance of retained earnings. See Note 8 for more information on income
taxes.
-15-
Except for the adoption of FIN 48, there have been no significant changes in
critical accounting policies or management estimates since the year ended
December 31, 2006. A comprehensive discussion of the Company's critical
accounting policies and management estimates is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
New Accounting Pronouncements
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109, Accounting for Income Taxes.
This interpretation addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. The Company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, the Company
recorded a $551,000 increase in the liability for unrecognized tax benefits,
which is offset by an increase of the deferred tax assets of $155,000, resulting
in a decrease to the January 1, 2007, retained earnings balance of $396,000 (for
additional information see Note 8 to the Consolidated Financial Statements).
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements. SFAS
157 defines fair value and establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. Although SFAS 157 applies to (and amends) the provisions of
existing authoritative literature, it does not, of itself, require any new fair
value measurements or establish valuation standards. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company will adopt SFAS 157
on January 1, 2008. Adoption of SFAS 157 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which creates an alternative
measurement treatment for certain financial assets and financial liabilities.
SFAS 159 permits fair value to be used for both the initial and subsequent
measurements on an instrument by instrument basis, with changes in the fair
value to be recognized in earnings as those changes occur. This election is
referred to as the fair value option. SFAS 159 also requires additional
disclosures to compensate for the lack of comparability that will arise from the
use of the fair value option. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS 159 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
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.
-16-
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 had
no outstanding balance as of March 31, 2007.
Foreign sales accounted for less than approximately 5% of the Company's sales
for the three months ended March, 31, 2007 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 SFAS 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
accumulated other comprehensive income. Transaction gains or losses that arise
from exchange rate fluctuations applicable to transactions denominated in
Canadian currency are included in the results of operations as incurred. The
exchange rate of the United States dollar to the Canadian dollar was $0.864 and
$0.860 at March 31, 2007 and March 31, 2006, respectively.
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, from
2004 to March 31, 2007 cost increases in basic commodities, such as steel,
aluminum and copper, ranged in price increases of up to 24%, 42% and 400%,
respectively. These price increases impacted profit margins during those periods
and may impact profit margin in future periods.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
-17-
Item 4. Controls and Procedures.
(a) 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.
AAON's Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures and concluded that these controls
and procedures were effective as of March 31, 2007.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
-18-
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in
registrant's Form 10-K in response to Item 1A, to Part I of Form 10-K.
Item 2. Unregistered Sales of Equity and Securities and Use of Proceeds.
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began a
stock repurchase program on October 17, 2002, targeting repurchases of up to an
additional 10% (1,325,000 shares) of its outstanding stock. Through December 31,
2005, the Company had repurchased a total of 1,257,864 shares under the current
program for an aggregate price of $22,034,568, or an average of $17.52 per
share. On February 14, 2006, the Board of Directors approved the suspension of
the Company's repurchase program.
On July 1, 2005, the Company entered into a stock repurchase arrangement by
which employee-participants in AAON's 401(k) savings and investment plan are
entitled to have shares of AAON stock in their accounts sold to the Company to
provide diversification of their investments. The maximum number of shares to be
repurchased is unknown under the program as the amount is contingent on the
number of shares sold by employees. Through March 31, 2007, the Company
repurchased 262,352 shares for an aggregate price of $5,615,000 or an average
price of $21.40 per share. The Company purchases the shares at the current
market price.
On November 7, 2006, the Board of Directors authorized the Company to repurchase
shares from certain directors following their exercise of stock options expiring
on March 11, 2007. To date, the Company repurchased 44,875 shares for an
aggregate price of $1,203,000 or an average price of $26.81.
Repurchases during the first quarter of 2007 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
------------------ ------------- ------------ ----------------- ---------------------
(d) Maximum
(c) Total Number Number (or
(a) Total (b) of Shares (or Approximate Dollar
Number of Average Units) Purchased Value) of Shares (or
Period Shares (or Price Paid as Part of Units) that May Yet
Units) Per Share Publicly Be Purchased Under
Purchased (or Unit) Announced Plans the Plans or
or Programs Programs
------------------ ------------- ------------ ----------------- ---------------------
Month #1
January 1-31, 11,239 $ 27.18 11,239 -
2007
------------------ ------------- ------------ ----------------- ---------------------
Month #2
February 1-28, 2,016 $ 28.00 2,016 -
2007
------------------ ------------- ------------ ----------------- ---------------------
Month #3
March 1-31, 47,422 $ 26.81 2,547 -
2007
------------------ ------------- ------------ ----------------- ---------------------
Total 60,676 $ 26.91 15,801 -
------------------ ------------- ------------ ----------------- ---------------------
-19-
Item 6. Exhibits.
(a) Exhibits
(i) Exhibit 31.1 Section 302 Certification of CEO
(ii) Exhibit 31.2 Section 302 Certification of CFO
(iii) Exhibit 32.1 Section 1350 Certification of CEO
(iv) Exhibit 32.2 Section 1350 Certification of CFO
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 8, 2007 By: /s/ Norman H. Asbjornson
---------------------------------
Norman H. Asbjornson
President/CEO
Dated: May 8, 2007 By: /s/ Kathy I. Sheffield
---------------------------------
Kathy I. Sheffield
Vice President/CFO
-20-