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 June 30, 2009
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes |_| No |_| Not Applicable |X|
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 July 29, 2009 registrant had outstanding a total of 17,161,633 shares of
its $.004 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
2009 2008
-----------------------------------------------
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 13,920 $ 269
Accounts receivable, net 41,262 38,804
Inventories, net 31,357 36,382
Prepaid expenses and other 718 428
Deferred tax assets 4,996 4,235
-----------------------------------------------
Total current assets 92,253 80,118
Property, plant and equipment
Land 2,197 2,153
Buildings 39,284 36,371
Machinery and equipment 90,084 87,219
Furniture and fixtures 7,195 7,076
-----------------------------------------------
Total property, plant and equipment 138,760 132,819
Less: Accumulated depreciation 76,885 72,269
-----------------------------------------------
Property, plant and equipment, net 61,875 60,550
Notes receivable, long-term 75 75
-----------------------------------------------
Total assets $ 154,203 $ 140,743
===============================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ - $ 2,901
Current maturities of long-term debt 91 91
Accounts payable 15,617 14,715
Dividends payable 3,101 2,773
Accrued liabilities 24,638 19,038
-----------------------------------------------
Total current liabilities 43,447 39,518
Other long-term liabilities 76 121
Deferred tax liabilities 4,093 4,582
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,
17,156,400 and 17,208,733 issued and outstanding at June 30, 2009
and December 31, 2008, respectively 71 71
Additional paid-in capital - 538
Accumulated other comprehensive income, net of tax 1,059 778
Retained earnings 105,457 95,135
-----------------------------------------------
Total stockholders' equity 106,587 96,522
-----------------------------------------------
Total liabilities and stockholders' equity $ 154,203 $ 140,743
===============================================
The accompanying notes are an integral part of these statements.
-1-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three Months Ended Six Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
-------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 68,597 $ 74,781 $ 132,562 $ 140,237
Cost of sales 50,493 56,791 97,524 106,595
---------------- ---------------- ---------------- ----------------
Gross profit 18,104 17,990 35,038 33,642
Selling, general and
administrative expenses 6,793 6,129 13,328 12,031
---------------- ---------------- ---------------- ----------------
Income from operations 11,311 11,861 21,710 21,611
Interest expense - (16) (9) (19)
Interest income 7 6 7 27
Other income (expense), net (71) 117 174 247
---------------- ---------------- ---------------- ----------------
Income before income taxes 11,247 11,968 21,882 21,866
Income tax provision 4,150 4,208 8,057 7,672
---------------- ---------------- ---------------- ----------------
Net income $ 7,097 $ 7,760 $ 13,825 $ 14,194
================ ================ ================ ================
Earnings per share:
Basic $ 0.41 $ 0.43 $ 0.80 $ 0.79
================ ================ ================ ================
Diluted $ 0.41 $ 0.43 $ 0.80 $ 0.78
================ ================ ================ ================
Cash dividends declared per common share: $ 0.18 $ 0.16 $ 0.18 $ 0.16
================ ================ ================ ================
Weighted average shares outstanding:
Basic 17,170 17,740 17,179 17,894
================ ================ ================ ================
Diluted 17,315 18,145 17,325 18,302
================ ================ ================ ================
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, 2008 17,209 $ 71 $ 538 $ 778 $ 95,135 $ 96,522
Comprehensive income:
Net income - - - - 13,825 13,825
Foreign currency translation
adjustment - - - 281 - 281
-------------
Total comprehensive income 14,106
Stock options exercised and restricted
stock awards vested, including tax
benefits 47 - 503 - - 503
Share-based compensation - - 419 - - 419
Stock repurchased and retired (100) - (1,460) - (402) (1,862)
Dividends declared - - - - (3,101) (3,101)
--------------------------------------------------------------------------------------
Balance at June 30, 2009 17,156 $ 71 $ - $ 1,059 $ 105,457 $ 106,587
======================================================================================
The accompanying notes are an integral part of these statements.
-3-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30, 2009 June 30, 2008
--------------------------------------------------------
(in thousands)
Operating Activities
Net income $ 13,825 $ 14,194
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,564 4,838
Provision for losses on accounts receivable 634 13
Share-based compensation 419 413
Excess tax benefits from stock options exercised
and restricted stock awards vested (180) (229)
Gain on disposition of assets - (1)
Deferred income taxes (1,103) (615)
Changes in assets and liabilities:
Accounts receivable (3,047) (10,832)
Inventories, net 5,058 414
Prepaid expenses and other (290) (283)
Accounts payable 808 3,393
Accrued liabilities 5,763 5,279
--------------------------------------------------------
Net cash provided by operating activities 26,451 16,584
--------------------------------------------------------
Investing Activities
Proceeds from sale of property, plant and equipment - 1
Capital expenditures (5,803) (1,390)
--------------------------------------------------------
Net cash used in investing activities (5,803) (1,389)
--------------------------------------------------------
Financing Activities
Borrowings under revolving credit facility 9,972 12,853
Payments under revolving credit facility (12,873) (8,766)
Payments of long-term debt (45) (45)
Stock options exercised 323 394
Excess tax benefits from stock options exercised
and restricted stock awards vested 180 229
Repurchase of stock (1,862) (17,264)
Cash dividends paid to stockholders (2,773) (2,943)
--------------------------------------------------------
Net cash used in financing activities (7,078) (15,542)
--------------------------------------------------------
Effect of exchange rate on cash 81 (27)
--------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 13,651 (374)
--------------------------------------------------------
Cash and cash equivalents, beginning of year 269 879
--------------------------------------------------------
Cash and cash equivalents, end of period $ 13,920 $ 505
========================================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
June 30, 2009
(unaudited)
1. Basis of Presentation
AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987.
Our subsidiaries include AAON, Inc., an Oklahoma corporation, AAON Coil
Products, Inc., a Texas corporation, AAON Canada, Inc., d/b/a Air Wise, an
Ontario corporation and AAON Properties, Inc., an Ontario corporation. AAON
Properties is the lessor of property in Burlington, Ontario, Canada, to AAON
Canada. The Consolidated Financial Statements include our accounts and the
accounts of our subsidiaries. Unless the context otherwise requires, references
in this Quarterly Report to "AAON," the "Company", "we," "us," "our" or "ours"
refer to AAON, Inc., and our subsidiaries.
We have prepared the financial statements included herein 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. We believe 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 our latest audited financial statements which were included in the Form 10-K
Report for the fiscal year ended December 31, 2008, filed with the SEC. In the
opinion of management, the accompanying financial statements include all normal,
recurring adjustments required for a fair presentation of the results of the
periods presented. Operating results for the six months ended June 30, 2009, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2009.
Revenue Recognition
We recognize 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, we recognize revenues net of the
representatives' commission. Our policy is to record the collection and payment
of sales taxes through a liability account.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Financial Accounting Standards Board ("FASB") Statement 52,
Foreign Currency Translations. We use the U.S. dollar as our 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.
Subsequent Events
We have determined that no subsequent events which require recognition or
disclosure in our Consolidated Financial Statements exist as of August 10, 2009,
the date of issuance for the financial statements.
New Accounting Pronouncements
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 requires (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. Adoption of SFAS 141R did not have a
material impact on our Consolidated Financial Statements.
-5-
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 was required to be adopted no later than January 1, 2009.
Adoption of SFAS 160 did not have a material impact on our 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 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Adoption of SFAS 161 did not
have a material impact on our Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"), which
requires entities to disclose the date through which they have evaluated
subsequent events and whether the date corresponds with the release of their
financial statements. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009. Adoption of SFAS 165 did not have a material impact
on our Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46 ("SFAS 167"), which alters how a company determines when an entity that
is insufficiently capitalized or not controlled through voting should be
consolidated. SFAS 167 will be effective for fiscal years beginning after
November 15, 2009. We do not expect the adoption of SFAS 167 to have a material
impact on our Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("SFAS 168"), which will supersede all accounting standards in U.S. GAAP, aside
from those issued by the SEC. SFAS 168 will be effective for reporting periods
ending after September 15, 2009.
2. Accounts Receivable
We grant credit to customers and perform ongoing credit evaluations. We
generally do not require collateral or charge interest. We establish 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:
June 30, December 31,
2009 2008
------------------------------------------------------
(in thousands)
Accounts receivable $ 42,689 $ 39,599
Less: Allowance for doubtful accounts (1,427) (795)
------------------------------------------------------
Total, net $ 41,262 $ 38,804
======================================================
-6-
Six Months Ended
June 30, 2009 June 30, 2008
------------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 795 $ 407
Provision for losses on accounts receivable 330 326
Adjustments to provision 304 (313)
Accounts receivable written off, net of recoveries (2) (126)
------------------------------------------------------
Balance, end of period $ 1,427 $ 294
======================================================
3. Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out ("FIFO") method. We establish 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 and the related changes in the allowance for excess and obsolete
inventories account are as follows:
June 30, December 31,
2009 2008
------------------------------------------------------
(in thousands)
Raw materials $ 29,055 $ 32,212
Work in process 1,686 2,545
Finished goods 1,605 1,975
------------------------------------------------------
32,346 36,732
Less: Allowance for excess and obsolete inventories (989) (350)
------------------------------------------------------
Total, net $ 31,357 $ 36,382
======================================================
Six Months Ended
June 30, June 30,
2009 2008
------------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350
Provision for excess and obsolete inventories 1,039 200
Adjustments to reserve (400) (200)
------------------------------------------------------
Balance, end of period $ 989 $ 350
======================================================
We increased our allowance for excess and obsolete inventories due to materials
from our Canadian facility that will not be utilized at either our Tulsa or
Longview locations.
4. Accrued Liabilities
Accrued liabilities are as follows:
June 30, December 31,
2009 2008
------------------------------------------------------
(in thousands)
Warranty $ 7,000 $ 6,589
Commissions 9,811 8,816
Payroll 3,754 1,883
Income taxes 69 -
Workers' compensation 613 610
Medical self-insurance 1,191 886
Employee benefits and other 2,200 254
------------------------------------------------------
Total $ 24,638 $ 19,038
======================================================
-7-
5. Supplemental Cash Flow Information
Interest payments of approximately $9,000 and $19,000 were made for the six
months ended June 30, 2009 and 2008, respectively. Payments for income taxes of
$5.7 million and $4.7 million were made during the six months ended June 30,
2009 and 2008, respectively. Dividends payable of $3.1 million and $2.8 million
were accrued as of June 30, 2009 and 2008 and paid in July 2009 and 2008,
respectively.
6. Revolving Credit Facility
Our 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 $1.0 million. The
letter of credit was a requirement of our workers compensation insurance and has
been renewed and will expire December 31, 2009. Interest on borrowings is
payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus
1.6%, at our election (1.92% at June 30, 2009). No fees are associated with the
unused portion of the committed amount.
At June 30, 2009, we did not have an outstanding balance under the revolving
credit facility. At December 31, 2008, we had $2.9 million borrowed under the
revolving credit facility. Borrowings available under the revolving credit
facility at June 30, 2009 were $14.2 million. At June 30, 2009, we were in
compliance with our financial ratio covenants. The covenants are related to our
tangible net worth, total liabilities to tangible net worth ratio and working
capital. At June 30, 2009 our tangible net worth was $106.6 million. Our total
liabilities to tangible net worth ratio was 2:5. Our working capital was $48.8
million. On July 30, 2009, we renewed the line of credit with a maturity date of
July 30, 2010 with terms substantially consistent with the previous agreement.
7. Share-Based Compensation
We have 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, our stockholders 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.
We apply 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.
We recognized approximately $124,000 and $105,000 for the three months ended and
approximately $228,000 and $229,000 for the six months ended June 30, 2009 and
2008, 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 June 30, 2009 is $1.2
million and is expected to be recognized over a weighted-average period of 2.2
years.
-8-
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:
Six Months Ended
June 30, 2009 June 30, 2008
--------------------------------------------------------
Directors and Officers:
Expected dividend yield 1.93% 1.71%
Expected volatility 47.47% 43.52%
Risk-free interest rate 2.53% 2.84%
Expected life 7.0 years 8.0 years
Forfeiture rate 0% 0%
Employees:
Expected dividend yield 1.93% 1.71%
Expected volatility 46.94% 42.55%
Risk-free interest rate 2.62% 2.84%
Expected life 8.0 years 6.3 years
Forfeiture rate 31% 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 our stock.
A summary of stock options outstanding 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 June 30, 2009 Life Price Value June 30, 2009 Price
-------------------------------------------------------------------------------------------------------------------------------
$ 0.00 - $ 3.85 72,388 0.28 $ 3.85 $ 16.07 72,388 $ 3.85
$ 5.73 - $11.29 151,963 3.79 9.21 10.71 133,663 8.98
$11.40 - $12.00 33,900 6.21 11.60 8.32 22,500 11.64
$13.60 - $15.55 134,500 8.74 15.13 4.79 30,900 14.66
$15.99 - $19.46 219,250 7.53 17.25 2.67 84,300 17.44
$21.01 - $21.42 12,500 9.25 21.20 (1.28) 900 21.01
------------------------------------------------------------------------------------------------------
Total 624,501 6.00 $ 13.06 $ 9.23 344,651 $ 10.69
======================================================================================================
A summary of stock option activity is as follows:
Weighted
Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
Shares Exercise Price Term Value ($000)
---------------- ------------------ ---------------- --------------
Outstanding at January 1, 2009 579,576 $ 12.29
Granted 93,000 15.92
Exercised (40,675) 7.93
Forfeited or Expired (7,400) 16.92
---------------- ------------------
Outstanding at June 30, 2009 624,501 13.06 6.00 $ 4,285
================ ================== ================ ==============
Exercisable at June 30, 2009 344,651 $ 10.69 4.19 $ 3,182
================ ================== ================ ==============
-9-
The weighted average grant date fair value of options granted during the six
months ended June 30, 2009 and 2008 was $6.87 and $6.69, respectively. The total
intrinsic value of options exercised during the six months ended June 30, 2009
and 2008 was $0.9 million and $0.7 million, respectively. The cash received from
options exercised during the six months ended June 30, 2009 and 2008, was $0.3
million and $0.4 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 is as follows:
Weighted Average
Grant Date
Shares Fair Value
----------------- ----------------------
Unvested at January 1, 2009 242,600 $ 6.68
Granted 93,000 6.87
Vested (50,350) 6.51
Forfeited (5,400) 6.41
----------------- ----------------------
Unvested at June 30, 2009 279,850 $ 6.78
================= ======================
The Compensation Committee of the Board of Directors has authorized and issued
restricted stock awards to our officers and key employees. 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 vests 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. We recognized approximately $89,000 and $68,000 for the three months
ended and approximately $173,000 and $184,000 for the six months ended June 30,
2009 and 2008, respectively in pre-tax compensation expense related to
restricted stock awards in the Consolidated Statements of Income. In addition,
as of June 30, 2009, unrecognized compensation cost related to unvested
restricted stock awards was approximately $658,000 which is expected to be
recognized over a weighted average period of 1.6 years.
A summary of the unvested restricted stock awards is as follows:
Shares
----------------------
Unvested at January 1, 2009 42,450
Granted 7,350
Vested (14,550)
Forfeited -
----------------------
Unvested at June 30, 2009 35,250
======================
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.
-10-
Three Months Ended Six Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
-------------------------------------------------------------------------
(in thousands, except share and per share data)
Numerator:
Net income $ 7,097 $ 7,760 $ 13,825 $ 14,194
Denominator:
Denominator for basic earnings
per share -
Weighted average shares 17,170,274 17,740,165 17,179,402 17,894,388
Effect of dilutive employee stock options
and restricted stock awards 145,191 405,321 145,864 407,821
-------------- -------------- -------------- --------------
Denominator for diluted earnings per
share -
Weighted average shares 17,315,465 18,145,486 17,325,266 18,302,209
============== ============== ============== ==============
Earnings per share:
Basic $ 0.41 $ 0.43 $ 0.80 $ 0.79
============== ============== ============== ==============
Diluted $ 0.41 $ 0.43 $ 0.80 $ 0.78
============== ============== ============== ==============
Anti-dilutive shares 319,800 309,400
============== ==============
Weighted average exercise price $ 16.25 $ 16.78
============== ==============
9. Income Taxes
We file income tax returns in the U.S. federal jurisdiction, and various state
and foreign jurisdictions. Effective January 1, 2007, we adopted FIN 48. The
total amount of unrecognized tax benefits at June 30, 2009, is approximately
$50,000 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 and intercompany charges.
We recognize accrued interest and penalties related to unrecognized tax benefits
in income tax expense. At June 30, 2009, we had accrued approximately $6,000 for
the potential payment of interest and did not have any accruals for penalties.
As of June 30, 2009, we are subject to U.S. Federal income tax examinations for
the tax years 2005 through 2008, and to non-U.S. income tax examinations for the
tax years of 2005 through 2008. In addition, we are subject to state and local
income tax examinations for the tax years 2004 through 2008.
The total amount of unrecognized tax benefits that if recognized would affect
the effective tax rate is approximately $50,000.
10. Stock Repurchase
Following repurchases of approximately 12% of our outstanding common stock
between September 1999 and September 2001, we announced and began another stock
repurchase program on October 17, 2002, targeting repurchases of up to an
additional 10% (2.0 million shares) of our outstanding stock. On February 14,
2006, the Board of Directors approved the suspension of our repurchase program.
Through February 14, 2006, we 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. We 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 our outstanding
stock from time to time in open market transactions. Through June 30, 2009, we
repurchased a total of 1,717,804 shares under this program for an aggregate
price of $34,192,008, or an average price of $19.90 per share. We purchased the
shares at the current market price.
-11-
On July 1, 2005, we 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 us 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 June 30, 2009, we repurchased
695,718 shares for an aggregate price of $11,296,248, or an average price of
$16.24 per share. We purchased the shares at the current market price.
On November 7, 2006, the Board of Directors authorized us to repurchase shares
from certain directors and officers 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. Through June 30, 2009, we
repurchased 350,375 shares for an aggregate price of $7,167,623, or an average
price of $20.46 per share. We purchased the shares at the current market price.
11. Contingencies
We are 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 our results of operations or financial position.
12. Commitments and Contractual Agreements
We are a party to several short-term, cancelable and noncancelable, fixed price
contracts with major suppliers for the purchase of raw material and component
parts. In the normal course of business we expect to purchase approximately
$11.2 million in the form of legally binding copper and aluminum (3.7 million
pounds of aluminum or $2.9 million) commitments during 2009 and 2010.
We are locked into the following legally binding copper commitments:
Pounds Price Total
-----------------------------------------------------------
(in thousands, except pricing data)
2,250 2.3830 $ 5,362
720 2.4090 1,734
180 2.0225 363
150 2.2458 337
75 1.8200 136
75 1.8195 136
36 1.8160 65
25 1.8260 46
25 1.8290 46
25 1.8315 46
--------------------
$ 8,271
====================
13. Canadian Facility
On May 18, 2009 we announced the closure of our Canadian facility and filed an
8-K to that effect. At the same time, we notified the 47 Canadian employees of
the expected closure date of July 23, 2009. We accrued and expect to pay $0.3
million, to the 42 remaining full-time employees as of June 30, 2009, in closure
costs related to employee termination benefits in accordance with Canadian labor
laws and regulations. The full amount was charged to expense in the second
quarter. The closure costs are included in income from continuing operations in
the income statement. As of June 30, 2009, no benefits have been charged against
the liability.
-12-
We will also incur costs related to the business assets as a result of the
facility closure. These costs are primarily composed of costs to move and sell
equipment, costs to move and dispose of inventory and fees to sell the facility.
Before the facility is closed, we will transfer some of its equipment to our
Tulsa location and sell any remaining equipment. Additionally, we will transfer
any remaining inventory that can be utilized at our Tulsa and Longview
locations. We increased our allowance for excess and obsolete inventories for
items that we do not plan to transfer to our other locations. The facility will
be available for sale upon completion of our manufacturing operations in third
quarter 2009. We have not yet contracted with a realtor; however we plan to sell
the property within one year of the Canadian facility's closure.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We engineer, manufacture and market 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. We market 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.
We sell our products to property owners and contractors through a network of
manufacturers' representatives and our internal sales force. Demand for our
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, we emphasize 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 high volume raw materials used in our manufacturing processes are
steel, copper and aluminum, which are obtained from domestic suppliers. The raw
materials market was volatile during 2009 and 2008 due to the economic
environment. We attempt to limit the impact of price fluctuations on these
materials by entering cancelable and noncancelable fixed price contracts with
our major suppliers for periods of 6 - 18 months. We have entered into contracts
that are both above and below the average index price as of June 30, 2009.
Prices decreased by approximately 47% for steel, 74% for aluminum and 38% for
copper from June 30, 2008 to June 30, 2009. The lower commodity prices have
contributed to our lower cost of goods sold and higher gross profit.
Selling, general, and administrative ("SG&A") costs include our internal sales
force, warranty costs, profit sharing and administrative expense. Warranty
expense is estimated based on historical trends and other factors. Our product
warranty 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.
Our office facilities 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. We previously leased 61% of the expansion
facility to a third party. Upon expiration of the lease on May 31, 2009, we
began renovations on the expansion facility to give us increased manufacturing
capacity. Our 2009 capital expenditures budget reflects the projected outlay to
remodel the facility.
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.
Our 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. The facility will be available for sale upon completion of our
manufacturing operations in third quarter 2009. We have not yet contracted with
a realtor; however we plan to sell the property within one year of the Canadian
facility's closure.
-14-
Set forth below is unaudited income statement information for the periods ended
June 30, 2009 and 2008:
Three Months Ended Six Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
------------------- ------------------- --------------------- ---------------------
(In thousands)
Net sales $68,597 100% $74,781 100% $132,562 100% $140,237 100%
Cost of sales 50,493 73.6% 56,791 75.9% 97,524 73.6% 106,595 76.0%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Gross profit 18,104 26.4% 17,990 24.1% 35,038 26.4% 33,642 24.0%
Selling, general and administrative
expenses 6,793 9.9% 6,129 8.2% 13,328 10.0% 12,031 8.6%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Income from operations 11,311 16.5% 11,861 15.9% 21,710 16.4% 21,611 15.4%
Interest expense - 0.0% (16) 0.0% (9) 0.0% (19) 0.0%
Interest income 7 0.0% 6 0.0% 7 0.0% 27 0.0%
Other income (expense), net (71) (0.1)% 117 0.1% 174 0.1% 247 0.2%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Income before income taxes 11,247 16.4% 11,968 16.0% 21,882 16.5% 21,866 15.6%
Income tax provision 4,150 6.1% 4,208 5.6% 8,057 6.1% 7,672 5.5%
---------- -------- ---------- -------- ------------ -------- ------------ --------
Net income $ 7,097 10.3% $ 7,760 10.4% $ 13,825 10.4% $ 14,194 10.1%
========== ======== ========== ======== ============ ======== ============ ========
Results of Operations
Key events impacting our cash balance, financial condition, and results of
operations for the six months ended June 30, 2009, include the following:
o We 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. We also utilize a high performance composite
foam panel to eliminate over half of the heat transfer from typical
fiberglass insulated panels. We continue to utilize sloped condenser
coils, and access compartments to filters, motor, and fans. All of
these innovations increase the demand for our products thus increasing
market share.
o In February 2006, the Board of Directors initiated a program of
semi-annual cash dividend payments. Cash dividend payments of $5.8
million were made in 2008 and $2.8 million in 2009. Cash dividends of
$3.1 million were declared and accrued for in June 2009, and paid in
July 2009. In May 2009, the Board of Directors increased the
semi-annual cash dividend from $0.16 per share to $0.18 per share.
o Stock repurchases from employee's 401(k) savings and investments plan
were authorized in 2005. Stock repurchases from directors and officers
were authorized in 2006. Stock repurchases from the open market were
authorized in 2007. Total purchases resulted in cash payments of $1.9
million for the first six months of 2009. The cash received in the six
months ended June 30, 2009 from options exercised was $0.3 million.
o Purchases of equipment and expansion of facilities to create
efficiencies remained a priority. Our capital expenditures were $5.8
million. Equipment purchases create significant efficiencies, lower
production costs and allow continued growth in production. We
currently expect to spend approximately $7.0 million to $8.0 million
on capital expenditures during 2009 for continued growth. A portion of
our budgeted capital expenditures will be spent expanding our
manufacturing facilities in Tulsa. Such expansion provides
manufacturing capacity to increase production of our products
traditionally manufactured in Tulsa. The expansion also provides
operational flexibility for us to establish production lines in Tulsa
to manufacture custom products which are currently being manufactured
at our Canadian facilities. We expect to close our Canadian facility
in third quarter of 2009.
-15-
Net Sales
Net sales decreased $6.2 million or 8.3% to $68.6 million from $74.8 million for
the three months ended, and decreased $7.6 million or 5.4% to $132.6 million
from $140.2 million for the six months ended June 30, 2009, compared to the same
periods in 2008. The decrease in net sales was a result of the current economic
environment and lower sales from our Canadian operations.
Gross Profit
Gross profit increased $0.1 million or 0.6% to $18.1 million from $18.0 million
for the three months ended, and increased $1.4 million or 4.2% to $35.0 million
from $33.6 million for the six months ended June 30, 2009, compared to the same
periods in 2008. As a percentage of sales, gross margins were 26.4% compared to
24.1% for the three months ended, and 26.4% compared to 24.0% for the six months
ended June 30, 2009 and 2008, respectively. The increase in gross margins for
the three months and six months was primarily a result of lower material costs
and production and labor efficiencies which offset expenses related to the
Canadian facility closure.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight out and engineering expense. The
principal high volume raw materials used in our manufacturing processes are
steel, copper and aluminum, which are obtained from domestic suppliers. The raw
materials market was volatile during 2009 and 2008 due to the economic
environment. We attempt to limit the impact of price fluctuations on these
materials by entering cancelable and noncancelable fixed price contracts with
our major suppliers for periods of 6 - 18 months. We have entered into contracts
that are both above and below the average index price as of June 30, 2009.
Prices decreased by approximately 47% for steel, 74% for aluminum and 38% for
copper from June 30, 2008 to June 30, 2009. The lower commodity prices have
contributed to our lower cost of goods sold and higher gross profit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.7 million or 11.5% to
$6.8 million from $6.1 million for the three months ended, and increased $1.3
million or 10.8% to $13.3 million from $12.0 million for the six months ended
June 30, 2009, compared to the same periods in 2008. The change was primarily
due to an increase in warranty expense related to higher trade sales, bad debt
expense to increase the bad debt reserve and sales related expenses.
Other Income (Expense)
Other expense increased approximately $188,000 to $71,000 compared to other
income of approximately $117,000 for the three months ended June 30, 2009 and
2008, respectively. Other income decreased approximately $73,000 to $174,000
from $247,000 for the six months ended June 30, 2009, compared to the same
periods in 2008. The increase in other expense was primarily related to foreign
currency losses that resulted from operations in Canada in 2009 and 2008.
Other income is primarily attributable to rental income from our expansion
facility which we received through the lease expiration on May 31, 2009. All
expenses associated with the facility that are allocated to the rental portion
of the building are included in other income. We previously leased 61% of the
expansion facility to at third party. Upon expiration of the lease, we began
renovations on the expansion facility to give us increased manufacturing
capacity. Our 2009 capital expenditures budget reflects the projected outlay to
remodel the facility.
Analysis of Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met
through net cash provided by operations and occasionally, based on current
liquidity at the time, the revolving bank line of credit.
Our 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 $1.0 million. The
letter of credit was a requirement of our workers compensation insurance which
has been renewed and will expire December 31, 2009. Interest on borrowings is
payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus
1.6%, at our election (1.92% at June 30, 2009). No fees are associated with the
unused portion of the committed amount.
-16-
At June 30, 2009, we did not have an outstanding balance under the revolving
credit facility. At December 31, 2008, we had $2.9 million borrowed under the
revolving credit facility. Borrowings available under the revolving credit
facility at June 30, 2009 were $14.2 million. At June 30, 2009 and 2008, we were
in compliance with our financial ratio covenants. The covenants are related to
our tangible net worth, total liabilities to tangible net worth ratio and
working capital. At June 30, 2009 our tangible net worth was $106.6 million. Our
total liabilities to tangible net worth ratio was 2:5. Our working capital was
$48.8 million. On July 30, 2009, we renewed the line of credit with a maturity
date of July 30, 2010 with terms substantially consistent with the previous
agreement.
Management believes our projected cash flows from operations and bank revolving
credit facility, or comparable financing, will provide the necessary liquidity
and capital resources for fiscal year 2009 and the foreseeable future. Our
belief that we will have the necessary liquidity and capital resources is based
upon our knowledge of the heating, ventilation, and air conditioning ("HVAC")
industry and our place in that industry, our ability to limit the growth of our
business if necessary, our ability to adjust dividend cash payments, and our
relationship with the existing bank lender. For information concerning our
revolving credit facility at June 30, 2009, see Note 6 to our Consolidated
Financial Statements, Revolving Credit Facility.
Cash Flows Provided by Operating Activities. Net cash provided by operating
activities increased in the six months ended June 30, 2009, by $9.9 million from
the six months ended June 30, 2008. The increase was primarily due to changes in
accounts receivable and provision for losses on accounts receivable,
inventories, accrued liabilities and accounts receivable.
Cash Flows Used in Investing Activities. Cash flows used in investing activities
were $5.8 million and $1.4 million for the six months ended June 30, 2009 and
2008, respectively. The increase in cash flows used in investing activities in
2009 was related to higher capital expenditures of $5.8 million for additions to
machinery and equipment and manufacturing facilities, compared to $1.4 million
for the same period in 2008. Capital expenditures in 2008 related to a building
expansion and additions of 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. We have budgeted capital expenditures of approximately $7.0
million to $8.0 million in 2009 to complete the building expansion that started
in 2008, for our building renovation of the previously third party leased
production facility, and for machinery and equipment purchases. We expect our
cash requirements to be provided from cash flows from operations.
Cash Flows Used in Financing Activities. Cash flows used in financing activities
were $7.1 million and $15.5 million for the six months ended June 30, 2009 and
2008, respectively. The decrease of cash used in financing activities is
primarily due to fewer repurchases of our stock during the period.
We repurchased shares of stock from employees' 401(k) savings and investment
plan, from directors and officers and the open market for the six months ended
June 30, 2009 in the amount of $1.9 million for 100,358 shares of stock. There
were shares of stock repurchased for a total of $17.3 million for the same
period in 2008.
We received cash from stock options exercised of $0.3 million and classified the
excess tax benefit of stock options exercised and restricted stock awards vested
of $0.2 million in financing activities for the six months ended June 30, 2009.
The cash received for options exercised and income tax effect partially offset
the stock repurchase and dividend payments for the six months ended June 30,
2009. The cash received from stock options exercised for the same period in 2008
was $0.4 million and the excess tax benefit of stock options exercised and
restricted stock awards vested was approximately $0.2 million.
Cash dividends were declared in December 2008 and were paid in January 2009 in
the amount of $2.8 million. Cash dividends of $3.1 million were declared on May
19, 2009, and accrued then paid on July 2, 2009, to shareholders of record on
June 11, 2009. Cash dividends of $2.8 million were declared on May 20, 2008, and
accrued then paid on July 3, 2008 to shareholders of record on June 12, 2008.
Board of Director approval is required to determine the date of declaration and
amount for each semi-annual payment.
-17-
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 our results of operations, financial position and cash
flows. We reevaluate our 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, 2008. A comprehensive
discussion of our critical accounting policies and management estimates is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2008.
New Accounting Pronouncements
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 requires (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. Adoption of SFAS 141R did not have a
material impact on our 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 was required to be adopted no later than January 1, 2009.
Adoption of SFAS 160 did not have a material impact on our 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 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Adoption of SFAS 161 did not
have a material impact on our Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"), which
requires entities to disclose the date through which they have evaluated
subsequent events and whether the date corresponds with the release of their
financial statements. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009. Adoption of SFAS 165 did not have a material impact
on our Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46 ("SFAS 167"), which alters how a company determines when an entity that
is insufficiently capitalized or not controlled through voting should be
consolidated. SFAS 167 will be effective for fiscal years beginning after
November 15, 2009. We do not expect the adoption of SFAS 167 to have a material
impact on our Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("SFAS 168"), which will supersede all accounting standards in U.S. GAAP, aside
from those issued by the SEC. SFAS 168 will be effective for reporting periods
ending after September 15, 2009.
-18-
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 resulted in a significant
decline in our operations, there can be no assurances that economic conditions
will not adversely affect our business in the future. We undertake 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.
We are subject to interest rate risk on the revolving credit facility which
bears variable interest based upon a prime or LIBOR rate. At June 30, 2009, we
did not have an outstanding balance under the revolving credit facility.
Foreign sales accounted for less than 5% of our sales for the three months ended
June 30, 2009, and we accept payment for such sales in U.S. and Canadian
dollars; therefore, we believe we are 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. We use the U.S. dollar as our 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 $0.8635 and $0.9881 at June 30, 2009 and 2008, respectively.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight out and engineering expense. The
principal high volume raw materials used in our manufacturing processes are
steel, copper and aluminum, which are obtained from domestic suppliers. The raw
materials market was volatile during 2009 and 2008 due to the economic
environment. We attempt to limit the impact of price fluctuations on these
materials by entering cancelable and noncancelable fixed price contracts with
our major suppliers for periods of 6 - 18 months. We have entered into contracts
that are both above and below the average index price as of June 30, 2009.
Prices decreased by approximately 47% for steel, 74% for aluminum and 38% for
copper from June 30, 2008 to June 30, 2009. The lower commodity prices have
contributed to our lower cost of goods sold and higher gross profit.
We do not utilize derivative financial instruments to hedge 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, our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of our disclosure controls and procedures. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer believe
that:
-19-
o Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we file
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 Our 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 our management, and made known to our
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.
Our Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures and concluded that these controls and
procedures were effective as of June 30, 2009.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes from risk factors as previously disclosed in
our 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 our outstanding Common Stock
between September 1999 and September 2001, we announced and began another stock
repurchase program on October 17, 2002, targeting repurchases of up to an
additional 10% (2.0 million shares) of our outstanding stock. On February 14,
2006, the Board of Directors approved the suspension of our repurchase program.
Through February 14, 2006, we 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. We 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 our outstanding
stock from time to time in open market transactions at prevailing market prices.
Through June 30, 2009, we repurchased a total of 1,717,804 shares under this
program for an aggregate price of $34,192,008, or an average price of $19.90 per
share. We purchased the shares at the current market price.
On July 1, 2005, we 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 us 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 June 30, 2009, we repurchased
695,718 shares for an aggregate price of $11,296,248, or an average price of
$16.24 per share. We purchased the shares at the current market price.
On November 7, 2006, the Board of Directors authorized us to repurchase shares
from certain directors and officers 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. Through June 30, 2009, we
repurchased 350,375 shares for an aggregate price of $7,167,623, or an average
price of $20.46 per share. We purchased the shares at the current market price.
-20-
Repurchases during the second quarter of 2009 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
------------------------------------------------------------------------------
April 2009 10,426 $ 17.77 10,426 -
May 2009 4,894 20.40 4,894 -
June 2009 45,619 19.67 45,619 -
------------------------------------------------------------------------------
Total 60,939 $ 19.40 60,939 -
==============================================================================
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on May 19, 2009, Norman H.
Asbjornson was reelected as a director for a three-year term by a vote of
12,188,282 shares "For", 4,107,288 shares "Against" and 299,368 shares
"Abstain". In addition, at the Annual Meeting John B. Johnson, Jr. was reelected
as a director for a three-year term by a vote of 12,558,321 shares "For",
3,737,241 shares "Against" and 299,376 shares "Abstain". Also, at the Annual
Meeting Charles C. Stephenson, Jr. was reelected as a director for a three-year
term by a vote of 16,291,177 shares "For", 3,706 shares "Against" and 300,055
shares "Abstain". Other directors whose terms of office continued after the
meeting are: Paul K. Lackey, Jr. and A. H. McElroy II whose terms end in 2010,
and Jack E. Short and Jerry R. Levine whose terms end in 2011.
Item 5. Other Information.
On May 19, 2009, the Board of Directors voted to initiate a semi-annual cash
dividend of $0.18 per share to the holders of our outstanding Common Stock as of
the close of business on June 11, 2009, the record date, and payable on July 2,
2009. This semi-annual dividend reflects an increase from the prior year's
semi-annual dividend of $0.16 per share.
-21-
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: August 10, 2009 By: /s/ Norman H. Asbjornson
--------------------------------
Norman H. Asbjornson
President/CEO
Dated: August 10, 2009 By: /s/ Kathy I. Sheffield
--------------------------------
Kathy I. Sheffield
Vice President/CFO
-22-