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 September 30, 2008
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 a non-accelerated filer, or a smaller reporting company.
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
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 October 29, 2008 registrant had outstanding a total of 17,195,869 shares
of its $.004 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
(unaudited)
September 30, 2008 December 31, 2007
------------------------------------------------
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 330 $ 879
Accounts receivable, net 48,029 38,813
Inventories, net 34,112 31,849
Prepaid expenses and other 516 442
Deferred tax assets 4,782 4,312
------------------------------------------------
Total current assets 87,769 76,295
Property, plant and equipment
Land 2,297 2,354
Buildings 34,365 32,211
Machinery and equipment 85,781 82,872
Furniture and fixtures 7,085 6,912
------------------------------------------------
Total property, plant and equipment 129,528 124,349
Less: Accumulated depreciation 70,551 63,579
------------------------------------------------
Property, plant and equipment, net 58,977 60,770
Notes receivable, long-term 75 75
------------------------------------------------
Total assets $ 146,821 $ 137,140
================================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ 2,440 $ -
Current maturities of long-term debt 91 91
Accounts payable 21,271 15,059
Dividends payable - 2,943
Accrued liabilities 25,471 19,414
------------------------------------------------
Total current liabilities 49,273 37,507
Other long-term liabilities 171 239
Deferred tax liabilities 3,751 3,974
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 7,500,000 shares authorized,
no shares issued - -
Common stock, $.004 par value, 75,000,000 shares authorized,
17,150,949 and 18,054,246 issued and outstanding at
September 30, 2008 and December 31, 2007, respectively 71 73
Additional paid-in capital - -
Accumulated other comprehensive income, net of tax 1,559 1,942
Retained earnings 91,996 93,405
------------------------------------------------
Total stockholders' equity 93,626 95,420
------------------------------------------------
Total liabilities and stockholders' equity $ 146,821 $ 137,140
================================================
The accompanying notes are an integral part of these statements.
-1-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 79,279 $ 70,907 $ 219,516 $ 200,370
Cost of sales 59,261 57,267 165,856 155,410
---------------- ---------------- ---------------- ----------------
Gross profit 20,018 13,640 53,660 44,960
Selling, general and
administrative expenses 7,294 5,492 19,325 16,509
---------------- ---------------- ---------------- ----------------
Income from operations 12,724 8,148 34,335 28,451
Interest expense (39) (3) (58) (10)
Interest income - 1 27 7
Other income (expense), net 169 (346) 416 (76)
---------------- ---------------- ---------------- ----------------
Income before income taxes 12,854 7,800 34,720 28,372
Income tax provision 4,499 2,418 12,171 9,796
---------------- ---------------- ---------------- ----------------
Net income $ 8,355 $ 5,382 $ 22,549 $ 18,576
================ ================ ================ ================
Earnings per share:
Basic $ 0.49 $ 0.29 $ 1.28 $ 1.00
================ ================ ================ ================
Diluted $ 0.47 $ 0.28 $ 1.25 $ 0.98
================ ================ ================ ================
Cash dividends declared per common share: $ 0.00 $ 0.00 $ 0.16 $ 0.16
================ ================ ================ ================
Weighted average shares outstanding:
Basic 17,264 18,741 17,683 18,665
================ ================ ================ ================
Diluted 17,484 19,003 18,028 18,976
================ ================ ================ ================
The accompanying notes are an integral part of these statements.
-2-
AAON, Inc., and Subsidiaries
Consolidated Statements 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, 2007 18,054 $ 73 $ - $ 1,942 $ 93,405 $ 95,420
Comprehensive income:
Net income - - - - 22,549 22,549
Foreign currency translation
adjustment - - - (383) - (383)
-------------
Total comprehensive income 22,166
Stock options exercised and restricted
stock awards vested, including tax
benefits 268 - 2,367 - - 2,367
Share-based compensation - - 603 - - 603
Stock repurchased and retired (1,171) (2) (2,970) - (21,110) (24,082)
Dividends paid - - - - (2,848) (2,848)
--------------------------------------------------------------------------------------
Balance at September 30, 2008 17,151 $ 71 $ - $ 1,559 $ 91,996 $ 93,626
======================================================================================
The accompanying notes are an integral part of these statements.
-3-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2008 September 30, 2007
---------------------------------------------------------
(in thousands)
Operating Activities
Net income $ 22,549 $ 18,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,151 7,153
Provision for losses on accounts receivable 568 221
Share-based compensation 603 466
Excess tax benefits from stock options exercised and
restricted stock awards vested (1,262) (2,743)
Gain on disposition of assets (11) (11)
Deferred income taxes (832) (662)
Changes in assets and liabilities:
Accounts receivable (9,904) (4,975)
Inventories, net (2,340) (3,032)
Prepaid expenses and other (75) (139)
Accounts payable 6,687 (3,303)
Accrued liabilities 6,951 6,300
---------------------------------------------------------
Net cash provided by operating activities 30,085 17,851
---------------------------------------------------------
Investing Activities
Proceeds from sale of property, plant and equipment 1 21
Capital expenditures (5,475) (8,650)
---------------------------------------------------------
Net cash used in investing activities (5,474) (8,629)
---------------------------------------------------------
Financing Activities
Borrowings under revolving credit facility 30,090 12,142
Payments under revolving credit facility (27,650) (12,142)
Payments of long-term debt (68) (59)
Stock options exercised 1,105 2,404
Excess tax benefits from stock options exercised and
restricted stock awards vested 1,262 2,743
Repurchase of stock (24,082) (7,149)
Cash dividends paid to stockholders (5,791) (4,958)
---------------------------------------------------------
Net cash used in financing activities (25,134) (7,019)
---------------------------------------------------------
Effect of exchange rate on cash (26) 224
---------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (549) 2,427
---------------------------------------------------------
Cash and cash equivalents, beginning of year 879 288
---------------------------------------------------------
Cash and cash equivalents, end of period $ 330 $ 2,715
=========================================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2008
(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. AAON, Inc. ("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, 2007, filed by the Company with the SEC. In the
opinion of management, the accompanying financial statements include all normal,
recurring adjustments required for a fair presentation of the results of the
periods presented. Operating results for the nine months ended September 30,
2008, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008.
Revenue Recognition
The Company recognizes revenues from sales of products when the products are
shipped and the title and risk of ownership pass to the customer. Selling prices
are fixed based on purchase orders or contractual agreements. Sales allowances
and customer incentives are treated as reductions to sales and are provided for
based on historical experiences and current estimates. For sales initiated by
independent manufacturer representatives, the Company recognizes revenues net of
the representatives' commission. The Company's policy is to record the
collection and payment of sales taxes through a liability account.
Common Stock Split
On July 12, 2007, the Company's Board of Directors approved a three-for-two
stock split of the Company's outstanding stock for shareholders of record as of
August 3, 2007. The stock split was treated as a 50% stock dividend which was
distributed on August 21, 2007. The applicable share and per share data for all
periods included herein has been restated to reflect the stock split.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Financial Accounting Standards Board ("FASB") Statement 52,
Foreign Currency Translations. The Company uses the U.S. dollar as its
functional currency, except for the 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.
New Accounting Pronouncements
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value and establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"), 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. Adoption of SFAS 157 did not 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 ("SFAS 159"), 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 did not have a
material impact on the Company's Consolidated Financial Statements. The Company
did not elect the fair value option for any assets or liabilities.
In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS
141R"), which replaced FASB Statement 141, Business Combinations. This statement
significantly changed the accounting for business combinations and
noncontrolling interests. Among other things, when compared to the predecessor
guidance SFAS 141R will require (i) more assets acquired and liabilities assumed
to be measured at fair value as of the acquisition date, (ii) liabilities
related to contingent consideration to be remeasured to fair value each
subsequent reporting period, and (iii) acquirer in preacquisition periods to
expense all acquisition-related costs. SFAS 141R must be applied prospectively
for fiscal years beginning after December 15, 2008. The Company does not expect
the adoption of SFAS 141 to have a material impact on the Company's Consolidated
Financial Statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 must be adopted by the Company no later than January 1, 2009.
The Company does not expect the adoption of SFAS 160 to have a material impact
on the Company's Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities--an Amendment of FASB Statement No. 133
("SFAS 161"), which requires enhanced disclosures about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133") and its related
interpretations and (iii) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
SFAS 161 will be effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company does not expect
the adoption of SFAS 161 to have a material impact on the Company's Consolidated
Financial Statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3
Determination of the Useful Life of Intangible Assets ("FSP No. FAS 142-3"),
which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No. 141
(revised 2007), "Business Combinations," and other GAAP. This FSP will be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Company
does not expect the adoption of SFAS 142 to have a material impact on the
Company's Consolidated Financial Statements.
In June 2008, the Emerging Issues Task Force ("EITF") issued Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities ("EITF 03-6-1"), which addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share ("EPS") under the two-class method. EITF 03-6-1
will be effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented will be adjusted retrospectively to conform with
the provisions of EITF 03-6-1. We are evaluating the expected impact of adoption
of EITF 03-6-1.
-6-
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 and the related allowance for doubtful accounts are as
follows:
September 30, December 31,
2008 2007
------------------------------------------------------
(in thousands)
Accounts receivable $ 48,876 $ 39,220
Less: Allowance for doubtful accounts (847) (407)
------------------------------------------------------
Total, net $ 48,029 $ 38,813
======================================================
Nine Months Ended
September 30, September 30,
2008 2007
------------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 407 $ 266
Provision for losses on accounts receivable 526 580
Adjustments to provision 41 (359)
Accounts receivable written off, net of recoveries (127) (4)
------------------------------------------------------
Balance, end of period $ 847 $ 483
======================================================
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 September 30, 2008 and December 31, 2007, and the related changes in
the allowance for excess and obsolete inventories account for the nine months
ended September 30, 2008 and 2007 are as follows:
September 30, December 31,
2008 2007
------------------------------------------------------
(in thousands)
Raw materials $ 30,249 $ 27,651
Work in process 1,795 1,760
Finished goods 2,418 2,788
------------------------------------------------------
34,462 32,199
Less: Allowance for excess and obsolete inventories (350) (350)
------------------------------------------------------
Total, net $ 34,112 $ 31,849
======================================================
Nine Months Ended
September 30, September 30,
2008 2007
------------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350
Provision for excess and obsolete inventories 600 600
Adjustments to reserve (600) (600)
------------------------------------------------------
Balance, end of period $ 350 $ 350
======================================================
-7-
4. ACCRUED LIABILITIES
Accrued liabilities are as follows:
September 30, December 31,
2008 2007
------------------------------------------------------
(in thousands)
Warranty $ 6,800 $ 6,308
Commissions 10,773 8,851
Payroll 4,183 2,175
Workers' compensation 827 1,127
Medical self-insurance 572 608
Employee benefits and other 2,316 345
------------------------------------------------------
Total $ 25,471 $ 19,414
======================================================
5. SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments of $58,000 and $10,000 were made for the nine months ended
September 30, 2008 and 2007, respectively. Payments for income taxes of $8.8
million and $6.4 million were made during the nine months ended September 30,
2008 and 2007, respectively. Dividends payable of $2.8 million and $2.5 million
were accrued as of June 30, 2008 and 2007 and paid in July 2008 and 2007,
respectively. Dividends payable of $2.9 million were accrued as of December 31,
2007 and paid in January 2008.
6. 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
$1.3 million. The letter of credit is a requirement of the Company's workers
compensation insurance which has been renewed and will expire December 31, 2008.
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 (4.09% at September
30, 2008). No fees are associated with the unused portion of the committed
amount. At September 30, 2008, the Company had $2.4 million borrowed under the
revolving credit facility and had no borrowings outstanding under the revolving
credit facility at December 31, 2007. Borrowings available under the revolving
credit facility at September 30, 2008, were $11.4 million. The credit facility
requires the Company to maintain certain financial ratios. At September 30,
2008, the Company was in compliance with its financial ratio covenants. On July
30, 2008, the Company renewed the line of credit with a maturity date of July
30, 2009.
7. STOCK COMPENSATION
The Company had historically maintained a stock option plan for key employees,
directors and consultants (the "1992 Plan"). The 1992 Plan provided for 4.4
million shares of common stock to be issued under the plan. Under the terms of
the 1992 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 year, commencing one year after the date of grant. 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.
On May 22, 2007, the stockholders of the Company adopted a Long-Term Incentive
Plan ("LTIP") which provides an additional 750,000 shares that can be granted in
the form of stock options, stock appreciation rights, restricted stock awards,
performance units and performance awards. Since inception of the LTIP,
non-qualified stock options and restricted stock awards have been granted with
the same vesting schedule as the previous plan. Under the LTIP, the exercise
price of shares granted may not be less than 100% of the fair market value at
the date of the grant.
-8-
The Company applies the provisions of Statement of Financial Accounting
Standards No. 123(R) Share-Based Payment ("SFAS 123R"). The compensation cost is
based on the grant date fair value of stock options issued calculated using a
Black-Scholes-Merton Option Pricing Model, or the grant date fair value of a
restricted stock award less the present value of dividends, in accordance with
the provisions of SFAS 123R.
The Company recognized approximately $107,000 and $139,000 for the three months,
and approximately $336,000 and $442,000 for the nine months ended September 30,
2008 and 2007, respectively, in pre-tax compensation expense related to stock
options in the Consolidated Statements of Income. The total pre-tax compensation
cost related to unvested stock options not yet recognized as of September 30,
2008, is $1.1 million and is expected to be recognized over a weighted-average
period of 2.0 years.
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 nine months ended September 30, 2008 and 2007.
Nine Months Ended
September 30, 2008 September 30, 2007
-------------------------------------------------
Directors and Officers:
Expected dividend yield 1.69% N/A
Expected volatility 43.52% N/A
Risk-free interest rate 2.84% N/A
Expected life 8.0 yrs N/A
Forfeiture rate 0% N/A
Employees:
Expected dividend yield 1.69% 1.66%
Expected volatility 42.55% 41.89%
Risk-free interest rate 2.84% 4.68%
Expected life 6.3 yrs 6.3 yrs
Forfeiture rate 28% 28%
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 initiated a
dividend payout in the second quarter of 2006. Previously, the Company used
Board of Director approved semi-annual dividend payouts of $0.20 per share
through July 3, 2007, to calculate the expected dividend yield. The Board of
Directors has approved future dividend payments of $0.16 per share related to
the stock split effective August 21, 2007 and the table above was adjusted to
reflect the rate change.
A summary of stock options outstanding as of September 30, 2008, is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Aggregate Number Average
Range of Outstanding at Contractual Exercise Intrinsic Exercisable at Exercise
Exercise Prices September 30, 2008 Life Price Value September 30, 2008 Price
-------------------------------------------------------------------------------------------------------------------------------
$3.85 - $3.85 138,570 1.03 $ 3.85 $ 14.34 138,570 $ 3.85
$5.73 - $11.29 204,738 4.32 8.79 9.40 169,938 8.37
$11.40 - $12.00 43,500 6.86 11.67 6.52 27,600 11.78
$12.68 - $15.55 49,000 7.14 14.34 3.85 24,600 14.45
$15.99 - $21.01 232,100 8.20 17.34 0.85 49,050 17.76
------------------------------------------------------------------------------------------------------
Total 667,908 5.36 $ 11.33 $ 9.63 409,758 $ 8.56
======================================================================================================
-9-
A summary of option activity as of September 30, 2008, is as follows:
Weighted
Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
Stock Options Shares Exercise Price Term Value ($000)
---------------- ------------------ ---------------- --------------
Outstanding at January 1, 2008 928,933 $ 9.47
Granted 24,000 16.96
Exercised (252,025) 4.39
Forfeited or Expired (33,000) 15.94
---------------- ------------------
Outstanding at September 30, 2008 667,908 11.33 5.36 $ 4,580
================ ================== ================ ==============
Exercisable at September 30, 2008 409,758 $ 8.56 3.77 $ 3,945
================ ================== ================ ==============
The weighted average grant date fair value of options granted during the nine
months ended September 30, 2008 and 2007 was $6.69 and $6.95, respectively. The
total intrinsic value of options exercised during the nine months ended
September 30, 2008 and 2007 was $3.6 million and $8.5 million, respectively. The
cash received from options exercised during the nine months ended September 30,
2008 and 2007, was $1.1 million and $2.4 million, respectively. The impact of
these cash receipts is included in financing activities in the accompanying
Consolidated Statements of Cash Flows.
A summary of the unvested stock options for the nine month period ended
September 30, 2008, is as follows:
Weighted Average
Grant Date
Shares Fair Value
----------------- ----------------------
Unvested at January 1, 2008 335,300 $ 6.49
Granted 24,000 6.69
Vested (68,150) 6.24
Forfeited (33,000) 6.48
----------------- ----------------------
Unvested at September 30, 2008 258,150 $ 6.58
================= ======================
During 2008 and 2007, the Compensation Committee of the Board of Directors
authorized and issued restricted stock awards to the officers and directors of
the Company. The restricted stock award program offers the opportunity to earn
shares of AAON common stock over time, rather than options that give the right
to purchase stock at a set price. Restricted stock awards granted to directors
vest one-third each year. All other restricted stock awards vest at a rate of
20% per year. Restricted stock awards are grants that entitle the holder to
shares of common stock subject to certain terms. The fair value of restricted
stock awards is based on the fair market value of AAON common stock on the
respective grant dates, reduced for the present value of dividends.
These awards are recorded at their fair values on the date of grant and
compensation cost is recorded using straight-line vesting over the service
period. The Company recognized approximately $83,000 and $23,000 for the three
months, and approximately $267,000 and $27,000 for the nine months ended
September 30, 2008 and 2007, respectively in pre-tax compensation expense
related to restricted stock awards in the Consolidated Statements of Income. In
addition, as of September 30, 2008, unrecognized compensation cost related to
unvested restricted stock awards was approximately $741,000 which is expected to
be recognized over a weighted average period of 1.8 years.
-10-
A summary of the unvested restricted stock awards for the nine month period
ended September 30, 2008, is as follows:
Shares
----------------------
Unvested at January 1, 2008 37,850
Granted 14,850
Vested (11,550)
Forfeited (700)
----------------------
Unvested at September 30, 2008 40,450
======================
8. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share assumes the conversion of all potentially dilutive
securities and is calculated by dividing net income by the sum of the weighted
average number of shares of common stock outstanding plus all potentially
dilutive securities. Dilutive common shares consist primarily of stock options
and restricted stock awards.
Three Months Ended Nine Months Ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
---------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
Numerator:
Net income $ 8,355 $ 5,382 $ 22,549 $ 18,576
Denominator:
Denominator for basic earnings per share -
Weighted average shares 17,264,120 18,740,666 17,682,711 18,665,035
Effect of dilutive employee stock
options and restricted stock awards 220,372 262,484 345,338 311,058
-------- -------- -------- ---------
Denominator for diluted earnings per share -
Weighted average shares 17,484,492 19,003,150 18,028,049 18,976,093
===================== ==================== ==================== ====================
Earnings per share:
Basic $ 0.49 $ 0.29 $ 1.28 $ 1.00
Diluted $ 0.47 $ 0.28 $ 1.25 $ 0.98
Anti-dilutive shares 297,450 277,100
Weighted average exercise price $ 16.82 $ 17.73
9. 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. The total amount of unrecognized tax benefits
at September 30, 2008, is forty-six thousand dollars 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 intercompany charges.
-11-
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in income tax expense. At September 30, 2008, the Company had no
accruals for the potential payment of interest and penalties.
As of September 30, 2008, the Company is subject to U.S. Federal income tax
examinations for the tax years 2005 through 2007, and to non-U.S. income tax
examinations for the tax years of 2005 through 2007. In addition, the Company is
subject to state and local income tax examinations for the tax years 2002
through 2007.
The total amount of unrecognized tax benefits that if recognized would affect
the effective tax rate is forty- six thousand dollars.
10. STOCK REPURCHASE
Following repurchases of approximately 12% of its outstanding common stock
between September 1999 and September 2001, the Company announced and began
another stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (2.0 million shares) of its outstanding stock. On
February 14, 2006, the Board of Directors approved the suspension of the
Company's repurchase program. Through February 14, 2006, the Company had
repurchased a total of 1,886,796 shares under this program for an aggregate
price of $22,034,568, or an average price of $11.68 per share. The Company
purchased the shares at the then current market price.
On November 6, 2007, the Board authorized a new stock buyback program, targeting
repurchases of up to approximately 10% (1.8 million shares) of the outstanding
stock of the Company from time to time in open market transactions. The Company
purchases the shares at the current market price. Through September 30, 2008,
the Company repurchased a total of 1,692,258 shares under this program for an
aggregate price of $33,710,939, or an average price of $19.92 per share.
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 September 30, 2008, the Company
repurchased 590,640 shares for an aggregate price of $9,424,780, or an average
price of $15.96 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. 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 directors. Through
September 30, 2008, the Company repurchased 340,375 shares for an aggregate
price of $6,957,423, or an average price of $20.44 per share. The Company
purchases the shares at the current market price.
11. 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.
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AAON, Inc. ("the Company") 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. Custom units are marketed and sold to retail,
manufacturing, educational, medical and other commercial industries. The Company
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.
The Company 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 the Company's manufacturing processes are steel,
copper and aluminum. The Company experienced raw materials price increases of
approximately 105% for steel, 40% for aluminum and 170% for copper from
September 30, 2006, to September 30, 2008. The Company reviewed and adjusted
current pricing strategies and 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: the earlier of one year from the date of
first use or 18 months from date of shipment for parts; an additional four years
on compressors; 15 years on gas-fired heat exchangers; and 25 years on stainless
steel heat exchangers. Warranty charges on heat exchangers occur infrequently.
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.
-13-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended September 30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
-------------------- -------------------- -------------------- --------------------
(In thousands)
Net sales $ 79,279 100% $ 70,907 100% $219,516 100% $200,370 100%
Cost of sales 59,261 74.7% 57,267 80.8% 165,856 75.6% 155,410 77.6%
-------------------- -------------------- -------------------- --------------------
Gross profit 20,018 25.3% 13,640 19.2% 53,660 24.4% 44,960 22.4%
Selling, general and
administrative
expenses 7,294 9.3% 5,492 7.7% 19,325 8.8% 16,509 8.2%
-------------------- -------------------- -------------------- --------------------
Income from operations 12,724 16.0% 8,148 11.5% 34,335 15.6% 28,451 14.2%
Interest expense (39) 0.0% (3) 0.0% (58) 0.0% (10) 0.0%
Interest income - 0.0% 1 0.0% 27 0.0% 7 0.0%
Other income (expense), net
169 0.2% (346) (0.5)% 416 0.2% (76) 0.0%
-------------------- -------------------- -------------------- --------------------
Income before income taxes 12,854 16.2% 7,800 11.0% 34,720 15.8% 28,372 14.2%
Income tax provision 4,499 5.7% 2,418 3.4% 12,171 5.5% 9,796 4.9%
-------------------- -------------------- -------------------- --------------------
Net income $ 8,355 10.5% $ 5,382 7.6% $ 22,549 10.3% $ 18,576 9.3%
==================== ==================== ==================== ====================
Results of Operations
Key events impacting our cash balance, financial condition, and results of
operations for the nine months ended September 30, 2008, include the following:
o An increase in sales on product lines due to commercial construction
growth and market share gains, and effective moderation of commodity
costs with purchase agreements and pricing strategies.
o The Company remained the leader in the industry for
environmentally-friendly, energy efficient and quality innovations,
utilizing R410A refrigerant and phasing out pollutant causing R22
refrigerant. The phase out of R22 began in early 2004. The Company
also utilizes a high performance composite foam panel to eliminate
over half of the heat transfer from typical fiberglass insulated
panels. The Company continues to utilize sloped condenser coils, and
access compartments to filters, motor, and fans. All of these
innovations increase the demand for the Company's products thus
increasing market share.
o In February 2006, the Board of Directors initiated a program of
semi-annual cash dividend payments. Cash payments of $5.0 million were
made in 2007 and $ 5.8 million in 2008.
o Stock repurchases of Company stock from employee's 401(k) savings and
investments plan was authorized in 2005. Stock repurchases of Company
stock from directors was authorized in 2006. Stock repurchases of
Company stock from the open market was authorized in 2007. Total
purchases resulted in cash payments of $24.1 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 nine months ended September 30, 2008 from options exercised was
$1.1 million.
o Purchases of equipment to create efficiencies remained a priority. The
Company's capital expenditures were $5.5 million. Equipment purchases
create significant efficiencies, lower production costs and allow
continued growth in production. The Company currently estimates it
will spend approximately $7.0 million to $10.0 million on capital
expenditures in 2008 for continued growth.
-14-
Net Sales
Net sales increased $8.4 million or 11.8% to $79.3 million from $70.9 million
for the three months, and increased $19.1 million or 9.5% to $219.5 million from
$200.4 million for the nine months ended September 30, 2008, compared to the
same periods in 2007. Increased sales were attributable to an increase in volume
of product sold related to the Company's new and redesigned products being
favorably received by its customers, the diversified customer mix of products,
active marketing by sales representatives and from certain pricing strategies.
Management anticipates continued growth throughout 2008.
Gross Profit
Gross profit increased $6.4 million or 47.1% to $20.0 million from $13.6 million
for the three months, and increased $8.7 million or 19.3% to $53.7 million from
$45.0 million for the nine months ended September 30, 2008, compared to the same
periods in 2007. Gross margins were 25.3% compared to 19.2% for the three
months, and 24.4% compared to 22.4% for the nine months ended September 30, 2008
and 2007, respectively. The increase in gross margins for the three months and
the nine months was a result of pricing strategies implemented, higher sales
volume and production and labor efficiencies.
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 experienced raw materials price increases of approximately 105% for
steel, 40% for aluminum and 170% for copper from September 30, 2006 to September
30, 2008, 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 continues to monitor these costs and price units
accordingly. The Company instituted several price increases to customers from
2005 to 2008 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 increased $1.8 million or 32.7% to
$7.3 million from $5.5 million for the three months, and increased $2.8 million
or 17.0% to $19.3 million from $16.5 million for the nine months ended September
30, 2008, compared to the same periods in 2007. The increase was primarily
caused by an increase in selling related expenses, warranty expense related to
increased sales, profit sharing due to increased net income and an overall
increase in general and administrative expenses.
Other Income (expense)
Other income was approximately $169,000 for the three months and $416,000 for
the nine months ended September 30, 2008. Other expense was approximately
$346,000 for the three months and $76,000 for the nine months ended September
30, 2007. The change in other income (expense) was primarily related to foreign
currency losses that result from operations in Canada. Other income (expense) 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 (expense). The Company
plans to continue to rent the expansion facility until it is needed for
increased capacity.
Analysis of Liquidity and Capital Resources
The Company'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 increased in the nine months ended September 30, 2008 by $12.2
million from the nine months ended September 30, 2007. The increase was due
primarily to changes in net income, accounts receivable and accounts payable.
-15-
Cash Flows Used in Investing Activities. Cash flows used in investing activities
were $5.5 million and $8.6 million for the nine months ended September 30, 2008
and 2007, respectively. The decrease in cash flows used in investing activities
in 2008 was primarily related to lower capital expenditures of $5.5 million for
additions to manufacturing facilities, machinery and equipment compared to $8.7
million for the same period in 2007. 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 increase growth and create
efficiencies. The Company is currently in line with budgeted capital
expenditures of approximately $7.0 million to $10.0 million in 2008 for
equipment requirements. The Company expects its cash requirements to be provided
from cash flows from operations.
Cash Flows Used in Financing Activities. Cash flows used in financing activities
were $25.1 million and $7.0 million for the nine months ended September 30, 2008
and 2007, respectively. The increase of cash used in financing activities
primarily relates to the continued repurchase of the Company's stock, borrowings
under the revolving credit facility and cash dividends paid to stockholders.
The Company repurchased shares of stock from employees' 401(k) savings and
investment plan and other incentive plans, the open market and directors for the
nine months ended September 30, 2008, in the amount of $24.1 million for
1,171,272 shares of stock. There were shares of stock repurchased for a total of
$7.1 million for the same period in 2007.
The Company received cash from stock options exercised of $1.1 million and
classified the excess tax benefit of stock options exercised and restricted
stock awards vested of $1.3 million in financing activities for the nine months
ended September 30, 2008. The cash received for options exercised and income tax
effect partially offset the stock repurchase and dividend payments for the nine
months ended September 30, 2008. The cash received from stock options exercised
for the same period in 2007 was $2.4 million and the excess tax benefit of stock
options exercised was $2.7 million.
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
$1.3 million. The letter of credit is a requirement of the Company's workers
compensation insurance which has been renewed and will expire December 31, 2008.
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 (4.09% at September
30, 2008). No fees are associated with the unused portion of the committed
amount. At September 30, 2008, the Company had $2.4 million borrowed under the
revolving credit facility and had no borrowings outstanding under the revolving
credit facility at December 31, 2007. Borrowings available under the revolving
credit facility at September 30, 2008, were $11.4 million. The credit facility
requires the Company to maintain certain financial ratios. At September 30,
2008, the Company was in compliance with its financial ratio covenants. On July
30, 2008, the Company renewed the line of credit with a maturity date of July
30, 2009.
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 2008 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 heating,
ventilation, and air conditioning ("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 September 30, 2008, see Note 6 to the Company's Consolidated
Financial Statements, Revolving Credit Facility.
In February 2006, the Board of Directors authorized a semi-annual cash dividend
payment. Cash dividends were declared in December 2007 and were paid in January
2008 in the amount of $2.9 million. Cash dividends of $2.8 million and $2.5
million were declared and accrued for in June 2008 and 2007, and paid in July
2008 and 2007, respectively. Prior to 2006, no cash dividends had been declared
or paid. Board of Director approval is required to determine the date of
declaration for each semi-annual payment.
-16-
On July 12, 2007, the Company's Board of Directors approved a three-for-two
stock split of AAON's outstanding stock for shareholders of record as of August
3, 2007. The stock split was treated as a 50% stock dividend which was
distributed on August 21, 2007. As a result of the stock split, the Company
adjusted the dividend paid per share to $0.16. The applicable share and per
share data for all periods included herein has been restated to reflect the
stock split.
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.
There have been no significant changes in critical accounting policies or
management estimates since the year ended December 31, 2007. 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, 2007.
New Accounting Pronouncements
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value and establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"), 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. Adoption of SFAS 157 did not 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 ("SFAS 159"), 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 did not have a
material impact on the Company's Consolidated Financial Statements. The Company
did not elect the fair value option for any assets or liabilities.
In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS
141R"), which replaced FASB Statement 141, Business Combinations. This statement
significantly changed the accounting for business combinations and
noncontrolling interests. Among other things, when compared to the predecessor
guidance SFAS 141R will require (i) more assets acquired and liabilities assumed
to be measured at fair value as of the acquisition date, (ii) liabilities
related to contingent consideration to be remeasured to fair value each
subsequent reporting period, and (iii) an acquirer in preacquisition periods to
expense all acquisition-related costs. SFAS 141R must be applied prospectively
for fiscal years beginning after December 15, 2008. The Company does not expect
the adoption of SFAS 141 to have a material impact on the Company's Consolidated
Financial Statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 must be adopted by the Company no later than January 1, 2009.
The Company does not expect the adoption of SFAS 160 to have a material impact
on the Company's Consolidated Financial Statements.
-17-
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities--an Amendment of FASB Statement No. 133
("SFAS 161"), which requires enhanced disclosures about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133") and its related
interpretations and (iii) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
SFAS 161 will be effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company does not expect
the adoption of SFAS 161 to have a material impact on the Company's Consolidated
Financial Statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3
Determination of the Useful Life of Intangible Assets ("FSP No. FAS 142-3"),
which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS No. 141
(revised 2007), "Business Combinations," and other GAAP. This FSP will be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Company
does not expect the adoption of SFAS 142 to have a material impact on the
Company's Consolidated Financial Statements.
In June 2008, the Emerging Issues Task Force ("EITF") issued Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities ("EITF 03-6-1"), which addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share ("EPS") under the two-class method. EITF 03-6-1
will be effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented will be adjusted retrospectively to conform with
the provisions of EITF 03-6-1. We are evaluating the expected impact of adoption
of EITF 03-6-1.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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. While the recent adverse economic climate has not yet impacted the
business of AAON, there can be no assurances that economic conditions will not
adversely affect the Company's business in the future. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. Important factors that
could cause 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.
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. At September 30,
2008, the Company had $2.4 million borrowed under the revolving credit facility.
-18-
Foreign sales accounted for less than 5% of the Company's sales for the nine
months ended September 30, 2008, 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
FASB Statement No. 52, Foreign Currency Translation. The Company uses the U.S.
dollar as its functional currency, except for the Canadian subsidiaries, which
use the Canadian dollar. Adjustments arising from translation of the Canadian
subsidiaries' financial statements are reflected in accumulated other
comprehensive income in the Consolidated Statements 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 the results of operations as incurred. The exchange rate of the
United States dollar to the Canadian dollar was $0.9624 and $0.9970 at September
30, 2008 and 2007, 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; in 2007
cost increases in basic commodities, such as steel, copper and aluminum,
severely impacted profit margins. Continued volatility in prices may impact
profit margins in future periods.
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.
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 September 30, 2008.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during 2008 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
-19-
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in
the Company's Form 10-K in response to Item 1A, to Part I of its 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
another stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (2.0 million shares) of its outstanding stock. On
February 14, 2006, the Board of Directors approved the suspension of the
Company's repurchase program. Through February 14, 2006, the Company had
repurchased a total of 1,886,796 shares under this program for an aggregate
price of $22,034,568, or an average price of $11.68 per share. The Company
purchased the shares at the then current market price.
On November 6, 2007, the Board authorized a new stock buyback program, targeting
repurchases of up to approximately 10% (1.8 million shares) of the outstanding
stock of the Company from time to time in open market transactions at prevailing
market prices. The Company purchases the shares at the current market price.
Through September 30, 2008, the Company repurchased a total of 1,692,258 shares
under this program for an aggregate price of $33,710,939, or an average price of
$19.92 per share.
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's 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 September 30, 2008, the Company
repurchased 590,640 shares for an aggregate price of $9,424,780, or an average
price of $15.96 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. 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 directors. Through
September 30, 2008, the Company repurchased 340,375 shares for an aggregate
price of $6,957,423, or an average price of $20.44 per share. The Company
purchases the shares at the current market price.
Repurchases during the third quarter of 2008 were as follows:
(d) Maximum
(c) Total Number Number (or
of Shares (or Approximate Dollar
(a)Total (b) Units) Purchased Value) of Shares (or
Number of Average as Part of Units) that May Yet
Shares (or Price Paid Publicly Be Purchased Under
Units) Per Share Announced Plans the Plans or
Period Purchased (or Unit) or Programs Programs
--------------------------------------------------------------------------------------------------
July 2008 14,556 $ 17.96 14,556 -
August 2008 191,739 $ 21.67 191,739 -
September 2008 120,179 $ 19.94 120,179 -
------------------------------------------------------------------------------
Total 326,474 $ 20.87 326,474 -
==============================================================================
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Board of Directors voted to initiate a semi-annual cash dividend of $0.16
per share to the holders of the outstanding Common Stock of the Company as of
the close of business on June 12, 2008, the record date, and payable on July 3,
2008.
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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: November 4, 2008 By: /s/ Norman H. Asbjornson
-------------------------------
Norman H. Asbjornson
President/CEO
Dated: November 4, 2008 By: /s/ Kathy I. Sheffield
-------------------------------
Kathy I. Sheffield
Vice President/CFO
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