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, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________.
Commission file number: 0-18953
AAON, INC.
----------
(Exact name of registrant as specified in its charter)
Nevada 87-0448736
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
---------------------------------------
(Address of principal executive offices)
(Zip Code)
(918) 583-2266
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of September 30, 2007 registrant had outstanding a total of 18,770,234 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, December 31,
2007 2006
-----------------------------------------------
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 2,715 $ 288
Accounts receivable, net 41,887 36,748
Inventories, net 32,738 29,502
Prepaid expenses and other 409 267
Deferred tax assets 4,473 3,954
-----------------------------------------------
Total current assets 82,222 70,759
-----------------------------------------------
Property, plant and equipment 122,257 113,404
-----------------------------------------------
Less: Accumulated depreciation 61,254 54,182
-----------------------------------------------
Property, plant and equipment, net 61,003 59,222
Notes receivable, long-term 75 75
-----------------------------------------------
Total assets $ 143,300 $ 130,056
===============================================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ - $ 59
Accounts payable 12,284 15,821
Dividends payable - 2,465
Accrued liabilities 20,448 16,058
-----------------------------------------------
Total current liabilities 32,732 34,403
Other long-term liabilities 72 -
Deferred tax liabilities 3,658 4,061
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,
18,770,234 and 18,508,248 issued and outstanding at
September 30, 2007, and December 31, 2006, respectively* 75 74
Additional paid-in capital* - 185
Accumulated other comprehensive income, net of tax 1,762 667
Retained earnings 105,001 90,666
-----------------------------------------------
Total stockholders' equity 106,838 91,592
-----------------------------------------------
Total liabilities and stockholders' equity $ 143,300 $ 130,056
===============================================
* Reflects three-for-two stock split effective August 21, 2007.
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, 2007 September 30, 2006 September 30, 2007 September 30, 2006
------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 70,907 $ 64,153 $ 200,370 $ 176,910
Cost of sales 57,267 50,562 155,410 142,816
--------------------- --------------------- --------------------- ---------------------
Gross profit 13,640 13,591 44,960 34,094
Selling, general and
administrative expenses 5,492 5,963 16,509 15,381
--------------------- --------------------- --------------------- ---------------------
Income from operations 8,148 7,628 28,451 18,713
Interest expense (3) (36) (10) (58)
Interest income 1 - 7 24
Other income (expense), net (346) 157 (76) 421
--------------------- --------------------- --------------------- ---------------------
Income before income taxes 7,800 7,749 28,372 19,100
Income tax provision 2,418 2,352 9,796 6,505
--------------------- --------------------- --------------------- ---------------------
Net income $ 5,382 $ 5,397 $ 18,576 $ 12,595
===================== ===================== ===================== =====================
Earnings per share:
Basic* $ 0.29 $ 0.29 $ 1.00 $ 0.68
===================== ===================== ===================== =====================
Diluted* $ 0.28 $ 0.28 $ 0.98 $ 0.66
===================== ===================== ===================== =====================
Cash dividends declared per common
share*: $ 0.16 $ 0.16 $ 0.16 $ 0.16
===================== ===================== ===================== =====================
Weighted average shares outstanding:
Basic* 18,741 18,478 18,665 18,456
===================== ===================== ===================== =====================
Diluted* 19,003 18,992 18,976 18,986
===================== ===================== ===================== =====================
* Reflects three-for-two stock split effective August 21, 2007.
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, 2006 18,508* $ 74* $ 185* $ 667 $ 90,666 $ 91,592
Adjustment for the adoption of
FASB Interpretation (FIN) No. 48 (396) (396)
Comprehensive income:
Net income - - - - 18,576 18,576
Foreign currency
translation adjustment - - - 1,095 - 1,095
------------
Total comprehensive income 19,671
Stock options exercised, including
tax benefits 590* 4* 5,147* - - 5,151
Share based compensation - - 466 - - 466
Stock repurchased and retired (328)* (3)* (5,798)* - (1,348) (7,149)
Dividends declared - - - - (2,497) (2,497)
--------------------------------------------------------------------------------------
Balance at September 30, 2007 18,770* $ 75* $ -* $ 1,762 $ 105,001 $ 106,838
======================================================================================
* Reflects three-for-two stock split effective August 21, 2007.
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, 2007 September 30, 2006
-------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 18,576 $ 12,595
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,153 6,836
Net provision for losses on accounts receivable 221 174
Gain on disposition of assets (11) -
Share-based compensation 466 380
Excess tax benefits from stock options exercised (2,743) (1,280)
Deferred income taxes (662) (535)
Changes in assets and liabilities:
Accounts receivable (4,975) (13,935)
Inventories (3,032) (5,949)
Prepaid expenses and other (139) 430
Accounts payable (3,303) 7,570
Accrued liabilities 6,300 4,948
-------------------------------------------------------
Net cash provided by operating activities 17,851 11,234
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 21 -
Proceeds from matured certificate of deposit - 3,000
Investment in certificate of deposit - (2,000)
Capital expenditures (8,650) (15,821)
-------------------------------------------------------
Net cash used in investing activities (8,629) (14,821)
FINANCING ACTIVITIES
Borrowings under revolving credit facility 12,142 42,967
Payments under revolving credit facility (12,142) (36,470)
Payments of long-term debt (59) (81)
Stock options exercised 2,404 1,018
Excess tax benefits from stock options exercised 2,743 1,280
Repurchase of stock (7,149) (3,108)
Cash dividends paid to stockholders (4,958) (2,478)
-------------------------------------------------------
Net cash (used in) provided by financing activities (7,019) 3,128
-------------------------------------------------------
Effect of exchange rate on cash 224 89
-------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,427 (370)
-------------------------------------------------------
Cash and cash equivalents, beginning of year 288 837
-------------------------------------------------------
Cash and cash equivalents, end of period $ 2,715 $ 467
=======================================================
The accompanying notes are an integral part of these statements.
-4-
AAON, Inc., and Subsidiaries
Notes to the Consolidated Financial Statements
September 30, 2007
(unaudited)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. 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, 2006, 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,
2007, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007.
Revenue Recognition
The Company recognizes revenues from sales of products at the time of shipment.
For sales initiated by independent manufacturer representatives, the Company
recognizes revenues net of the representatives' commission. The Company's policy
is to exclude sales taxes from revenue when collected and expenses when paid and
instead, 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 the Consolidated Statement
of Stockholders' Equity and Comprehensive Income. Transaction gains or losses
that arise from exchange rate fluctuations applicable to transactions are
denominated in Canadian currency and are included in other income and expense in
the results of operations as incurred.
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109,
Accounting for Income Taxes ("FIN 48"). This interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, the Company
may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 also provides
guidance on derecognition, classification, interest and penalties on income
taxes, accounting in interim periods and requires increased disclosures. The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recorded a $551,000 increase in the
liability for unrecognized tax benefits, which is offset by an increase of the
deferred tax assets of $155,000, resulting in a decrease to the January 1, 2007,
retained earnings balance of $396,000, for additional information see Note 9 to
the Consolidated Financial Statements.
-5-
In June 2006, the Emerging Issues Task Force reached a consensus on Issue 06-3,
How Sales Tax Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement ("EITF 06-3"). The guidance requires
that a company disclose its accounting policy (i.e., gross or net presentation)
regarding presentation of taxes within the scope of EITF 06-3. If taxes are
reported on a gross basis, a company should disclose the amount of such taxes
for each period for which an income statement is presented. EITF 06-3 is
effective for fiscal periods beginning after December 15, 2006. As disclosed in
the "Revenue Recognition" footnote above, the Company presents sales net of
sales taxes. Accordingly, this issue does not have a financial impact to the
Company.
In September 2006, the FASB issued Statement of Financial Accounting Standards
("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, and expands disclosures about fair value measurements.
Although SFAS 157 applies to (and amends) the provisions of existing
authoritative literature, it does not, of itself, require any new fair value
measurements or establish valuation standards. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company will adopt SFAS 157
on January 1, 2008. Adoption of SFAS 157 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("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. The Company will adopt SFAS 159 on
January 1, 2008. Adoption of SFAS 159 is not expected to have a material impact
on the Company's Consolidated Financial Statements.
2. ACCOUNTS RECEIVABLE
The Company grants credit to its customers and performs ongoing credit
evaluations. The Company generally does not require collateral or charge
interest. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends,
economic and market conditions and the age of the receivable. Past due accounts
are generally written off against the allowance for doubtful accounts only after
all collection attempts have been unsuccessful.
Accounts receivable balances at September 30, 2007 and December 31, 2006, and
the changes in the allowance for doubtful accounts for the nine months ended
September 30, 2007 and 2006 are as follows:
September 30, December 31,
2007 2006
-------------------------------------------------
(in thousands)
Accounts receivable $ 42,370 $ 37,014
Less: allowance for doubtful accounts (483) (266)
--------------------- ---------------------
Total, net $ 41,887 $ 36,748
--------------------- ---------------------
-6-
Nine Months Ended
September 30, September 30,
2007 2006
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 266 $ 685
Provision for losses on accounts receivable 580 426
Adjustments to provision (359) (546)
Accounts receivable written off, net of recoveries (4) (390)
--------------------- ---------------------
Balance, end of period $ 483 $ 175
===================== =====================
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, 2007 and December 31, 2006, and the changes in the
allowance for excess and obsolete inventories account for the nine months ended
September 30, 2007 and 2006 are as follows:
September 30, December 31,
2007 2006
---------------------------------------------
(in thousands)
Raw materials $ 28,394 $ 25,977
Work in process 1,812 2,226
Finished goods 2,882 1,649
------------------- --------------------
33,088 29,852
Less: Inventory reserve (350) (350)
------------------- --------------------
Total, net $ 32,738 $ 29,502
=================== ====================
Nine Months Ended
September 30, September 30,
2007 2006
------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350
Provision for excess and obsolete inventories - -
Adjustments to reserve - -
------------------- -----------------------
Balance, end of period $ 350 $ 350
=================== =======================
-7-
4. ACCRUED LIABILITIES
At September 30, 2007 and December 31, 2006, accrued liabilities were comprised
of the following:
September 30, December 31,
2007 2006
---------------------------------------------
(in thousands)
Warranty $ 6,190 $ 5,572
Commissions 9,078 6,862
Payroll 2,383 1,890
Income taxes 615 -
Workers' compensation 931 494
Medical self-insurance 920 837
Other 331 403
------------------ ------------------
Total $ 20,448 $ 16,058
================== ==================
5. SUPPLEMENTAL CASH FLOW INFORMATION
Interest payments of $10,000 and $58,000 were made for the nine months ended
September 30, 2007 and 2006, respectively. Payments for income taxes of $6.4
million and $5.9 million were made during the nine months ended September 30,
2007 and 2006, respectively. Dividends payable of $2.5 million were accrued as
of December 31, 2006. These dividends were paid in January 2007.
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
$600,000. The letter of credit is a requirement of the Company's workers
compensation insurance. The letter of credit was renewed in January 2007 and
will expire in January 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 (7.32% at September 30, 2007). No fees are associated with the
unused portion of the committed amount. At September 30, 2007 and December 31,
2006, the Company had no borrowings outstanding under the revolving credit
facility. Borrowings available under the revolving credit facility at September
30, 2007, were $14.6 million. The credit facility requires the Company to
maintain certain financial ratios. At September 30, 2007, the Company was in
compliance with its financial ratio covenants. On July 30, 2007 the Company
renewed the line of credit with a maturity date of July 30, 2008.
7. STOCK COMPENSATION
The Company maintains a stock option plan for key employees, directors and
consultants. The Company's stock option plan provided for 4,387,500 shares of
common stock to be issued under the plan. Under the terms of the plan, the
exercise price of shares granted may not be less than 85% of the fair market
value at the date of the grant. Options granted to directors prior to May 25,
2004, vest one year from the date of grant and are exercisable for nine years
thereafter. Options granted to directors on or after May 25, 2004, vest
one-third each 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 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 Plan, non-qualified stock options and
restricted stock awards have been granted with the same vesting schedule as the
previous plan.
-8-
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R) Share-Based
Payment ("SFAS 123R"), using the modified-prospective-transition provisions.
Under that transition method, compensation cost recognized in 2006 and the first
nine months of 2007 includes all share-based payments granted prior to, but not
yet vested as of January 1, 2006, and compensation cost for all share-based
payments granted subsequent to January 1, 2006. The compensation cost is based
on the grant date fair value reduced for the present value of dividends
calculated using a Black-Scholes-Merton Option Pricing Model in accordance with
provisions of SFAS 123R.
For the three month periods ended September 30, 2007 and 2006, the Company
recognized approximately $139,000 and $124,000 and for the nine month periods
ended September 30, 2007 and 2006, the Company recognized approximately $442,000
and $351,000, respectively, in pre-tax compensation expense related to stock
options in the Consolidated Statements of Income related to the stock option
plan. The total pre-tax compensation cost related to nonvested stock options not
yet recognized as of September 30, 2007, is $1.6 million and is expected to be
recognized over a weighted-average period of 2.4 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, 2007 and 2006.
Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Directors and Officers:
Expected dividend yield 1.66% 2.05%
Expected volatility 42.80% 42.76%
Risk-free interest rate 4.87% 5.05%
Expected life 8.0 yrs 8.0 yrs
Forfeiture Rate 0% 0%
Employees:
Expected dividend yield 1.66% 2.05%
Expected volatility 41.89% 42.00%
Risk-free interest rate 4.68% 4.98%
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 and the table above was
adjusted to reflect the rate change.
A summary of stock options outstanding as of September 30, 2007, is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------
Range of Number Weighted Weighted Aggregate Number Weighted
Exercise Prices Outstanding at Average Average Intrinsic Exercisable at Average
September 30, Remaining Exercise Value September 30, Exercise
2007 Contractual Price 2007 Price
Life
-------------------------------------------------------------------------------------------------------------------------------
$2.26 - $2.26 31,875 0.29 $ 2.26 $ 17.47 31,875 $ 2.26
$2.67 - $3.85 311,370 1.61 3.21 16.52 311,370 3.21
$5.73 - $11.29 242,613 5.09 8.45 11.28 181,413 7.70
$11.40 - $12.00 46,500 7.85 11.69 8.04 19,900 11.83
$12.68 - $15.55 67,500 8.14 14.34 5.39 23,300 14.18
$15.99 - $21.01 239,250 9.05 17.17 2.56 15,000 17.97
------------------------------------------------------------------------------------------------------
Total 939,108 5.13 $ 9.31 $ 10.42 582,858 $ 5.67
======================================================================================================
-9-
A summary of option activity as of September 30, 2007, is as follows:
Weighted
Average
Remaining Aggregate
Weighted Average Contractual Intrinsic
Stock Options Shares Exercise Price Term Value ($000)
---------------- ------------------ ---------------- --------------
Outstanding at January 1, 2007 1,461,496 $ 7.33
Granted 129,188 15.64
Exercised (565,624) 4.25
Forfeited or Expired (85,952) 15.46
---------------- ------------------
Outstanding at September 30, 2007 939,108 9.31 5.13 $ 9,787
================ ================== ================ ==============
Exercisable at September 30, 2007 582,858 $ 5.67 3.01 $ 8,197
================ ================== ================ ==============
The weighted average grant date fair value of options granted during the nine
months ended September 30, 2007 and 2006 was $6.95 and $6.97, respectively. The
total intrinsic value of options exercised during the nine months ended
September 30, 2007 and 2006 was $8.5 million and $3.6 million, respectively. The
cash received from options exercised during the nine months ended September 30,
2007 and 2006, was $2.4 million and $1.0 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 options for the nine month period ended September 30,
2007, is as follows:
Weighted Average
Grant Date
Shares Fair Value
----------------- ----------------------
Nonvested at January 1, 2007 415,980 $ 6.09
Granted 98,250 7.40
Vested (74,728) 5.99
Forfeited (83,252) 6.55
----------------- ----------------------
Nonvested at September 30, 2007 356,250 $ 6.44
================= ======================
The Company also grants restricted stock awards to employees and directors.
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 weighted average grant date fair value of restricted stock awards
granted during the nine months ended September 30, 2007, was $10.18 per share
(total grant date fair value of approximately $396,000). As of September 30,
2007, there was no aggregate intrinsic value of restricted stock awards that are
expected to vest. In addition, as of September 30, 2007, unrecognized
compensation cost related to non-vested restricted stock awards was
approximately $345,000 which is expected to be recognized over a weighted
average period of 2.1 years.
A summary of restricted stock activity as of September 30, 2007, is as follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic Value
Restricted Stock Shares Exercise Price Contractual Term ($000)
---------- -------------------- ----------------- ------------------
Outstanding at January 1, 2007 - $ -
Granted 38,900 -
Exercised - -
Forfeited or Expired (1,050) -
---------- --------------------
Outstanding at September 30, 2007 37,850 - 9.75 $ -
========== ==================== ================= ==================
Exercisable at September 30, 2007 - $ - - $ -
========== ==================== ================= ==================
-10-
During 2007, the Compensation Committee of the Board of Directors authorized and
issued restricted stock 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 granted to directors vest one-third each
year. All other restricted stock 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 grants is based on
the fair market value of AAON common stock on the respective grant dates,
reduced for the present value of dividends.
SFAS 123R requires that cash flows from the exercise of stock options resulting
from tax benefits in excess of recognized cumulative compensation cost (excess
tax benefits) be classified as financing cash flows. For the nine months ended
September 30, 2007 and 2006, $2.7 million and $1.3 million, respectively, of
such excess tax benefits from all share-based payment plans was classified as
financing cash flows.
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.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------------
(in thousands, except share and per share data)
Numerator:
Net income $ 5,382 $ 5,397 $ 18,576 $ 12,595
Denominator:
Denominator for basic earnings per share -
Weighted average shares* 18,740,666 18,478,343 18,665,035 18,455,997
Effect of dilutive employee stock options
and restricted stock awards* 262,484 513,446 311,058 529,619
--------------- -------------- -------------- -------------
Denominator for diluted earnings per share -
Weighted average shares* 19,003,150 18,991,789 18,976,093 18,985,616
=============== ============== ============== =============
Basic earnings per share* $ 0.29 $ 0.29 $ 1.00 $ 0.68
=============== ============== ============== =============
Diluted earnings per share $ 0.28 $ 0.28 $ 0.98 $ 0.66
=============== ============== ============== =============
Anti-dilutive shares* 277,100 160,500
============== =============
Weighted average exercise price* $ 17.73 $ 16.02
============== =============
*Reflects three-for-two stock split effective August 21, 2007
-11-
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. In accordance with FIN 48, the Company
recorded a $551,000 increase in its liability for unrecognized tax benefits,
interest, and penalties, which is offset by an increase of the deferred tax
assets of $155,000, resulting in a decrease to the January 1, 2007, retained
earnings balance of $396,000. The total amount of unrecognized tax benefits that
if recognized would affect the effective tax rate is $396,000. The total amount
of unrecognized tax benefits at January 1, 2007, is $447,000 related to tax
positions for which it is reasonably possible that the total amounts could
significantly decrease during the next twelve months. This amount represents the
unrecognized tax benefits comprised of items related to determination of state
nexus. Resolution of these tax benefits will occur through a voluntary
compliance program, which was initiated during the three months ended June 30,
2007.
The Company recognizes accrued interest and penalties related to unrecognized
tax benefits in income tax expense. At January 1, 2007, the Company had accrued
$141,000 and $29,000 for the potential payment of interest and penalties,
respectively.
As of September 30, 2007, the Company is subject to U.S. Federal income tax
examinations for the tax years 2004 through 2006, and to non-U.S. income tax
examinations for the tax years of 2004 through 2006. In addition, the Company is
subject to state and local income tax examinations for the tax years 2001
through 2006.
There were no significant changes to any of these amounts during the nine months
ended September 30, 2007.
10. STOCK REPURCHASE
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began its
most recent stock repurchase program on October 17, 2002, targeting repurchases
of up to an additional 10% (1,987,500 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.
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, 2007, the Company
repurchased 467,637 shares for an aggregate price of $7,081,417, or an average
price of $15.14 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. To date, the
Company repurchased 260,625 shares for an aggregate price of $5,232,188, or an
average price of $20.08 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. The Company has successfully gained market share
through its "semi-custom" product lines, which offer the customer value,
quality, function, serviceability and efficiency. Custom units are marketed and
sold to retail, manufacturing, educational, medical and other commercial
industries. AAON markets units to all 50 states in the United States and certain
provinces in Canada. International sales are less than five percent as the
majority of all sales are domestic.
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 AAON's manufacturing processes are steel, copper
and aluminum. Raw materials ranged in prices and at times increases were
incurred up to approximately 24% for steel, 42% for aluminum and 400% for copper
from 2004 to September 30, 2007. The increases resulted in economic challenges
to AAON. The Company reviewed and adjusted current pricing strategies and
created efficiencies in production in order to mitigate the economic factors of
increasing commodity prices. The major component costs include compressors,
electric motors and electronic controls, which also increased due to increases
in commodities.
Selling, general, and administrative ("SG&A") costs include the Company's
internal sales force, warranty costs, profit sharing and administrative expense.
Warranty expense is estimated based on historical trends and other factors. The
Company's warranty on its products is: for parts only, the earlier of one year
from the date of first use or 14 months from date of shipment; compressors (if
applicable), an additional four years; on gas-fired heat exchangers (if
applicable), 15 years; and on stainless steel heat exchangers (if applicable),
25 years. Warranty charges on heat exchangers do not occur frequently.
The office facilities of the Company consist of a 337,000 square foot building
(322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office
space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma (the "original
facility"), and a 563,000 square foot manufacturing/warehouse building and a
22,000 square foot office building ("the expansion facility") located across the
street from the original facility at 2440 S. Yukon Avenue. The Company utilizes
39% of the expansion facility and the remaining 61% is leased to a third party.
Other operations are conducted in a plant/office building at 203-207 Gum Springs
Road in Longview, Texas, containing 258,000 square feet (251,000 sq. ft. of
manufacturing/warehouse and 7,000 sq. ft. of office space). An additional 15
acres of land was purchased for future expansion in 2004 and 2005 in Longview,
Texas. The Company's operations in Burlington, Ontario, Canada, are located at
279 Sumach Drive, consisting of an 82,000 sq. ft. office/manufacturing facility
on a 5.6 acre tract of land.
-13-
Set forth below is unaudited income statement information with respect to the
Company for the periods ended September 30, 2007 and 2006:
Three Months Ended Nine Months Ended
September 30, 2007 September 30, 2006 September 30, 2007 September 30, 2006
------------------------------------------------- -------------------------------------------------
(In thousands)
Net sales $ 70,907 100.0% $ 64,153 100.0% $ 200,370 100.0% $ 176,910 100.0%
Cost of sales 57,267 80.8% 50,562 78.8% 155,410 77.6% 142,816 80.7%
------------------------------------------------- -------------------------------------------------
Gross profit 13,640 19.2% 13,591 21.2% 44,960 22.4% 34,094 19.3%
Selling, general and
administrative expenses 5,492 7.7% 5,963 9.3% 16,509 8.2% 15,381 8.7%
------------------------------------------------- -------------------------------------------------
Income from
operations 8,148 11.5% 7,628 11.9% 28,451 14.2% 18,713 10.6%
------------------------------------------------- -------------------------------------------------
Interest expense (3) 0.0% (36) 0.0% (10) 0.0% (58) 0.0%
Interest income 1 0.0% - 0.0% 7 0.0% 24 0.0%
Other income (expense) (346) (0.5)% 157 0.2% (76) 0.0% 421 0.2%
------------------------------------------------- -------------------------------------------------
Income before
income taxes 7,800 11.0% 7,749 12.1% 28,372 14.2% 19,100 10.8%
Income tax provision 2,418 3.4% 2,352 3.7% 9,796 4.9% 6,505 3.7%
------------------------------------------------- -------------------------------------------------
Net income $ 5,382 7.6% $ 5,397 8.4% $ 18,576 9.3% $ 12,595 7.1%
================================================= =================================================
Results of Operations
Key events impacting our cash balance, financial condition, and results of
operations for the nine months ended September 30, 2007, include the following:
o Increased sales due to innovative products and effective moderation of
commodity costs with purchase agreements and pricing strategies
affected sales and gross margin positively, which resulted in
significantly higher revenues and income.
o In February 2006, the Board of Directors authorized a semi-annual cash
dividend payment. Cash dividends were paid in January and July 2007,
affecting cash by $5 million.
o Stock repurchases of AAON stock from employee's 401(k) savings and
investments plan were authorized in 2005. AAON continued to repurchase
stock from employees and made repurchases from other incentive plans
throughout the nine months ended September 30, 2007, resulting in cash
payments of $7.1 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 first nine months of 2007 from
options exercised was $2.4 million.
o Purchases of equipment to create efficiencies remained a priority.
Total capital expenditures were $8.7 million. Equipment purchases and
proper upkeep of manufacturing facilities create significant
efficiencies, lower production costs and allow continued growth in
production. The Company currently estimates it will spend a total of
approximately $10.0 million on capital expenditures in 2007 for
continued growth.
o Lower margins on products manufactured in Canada significantly reduced
the Company's overall gross and operating margins. The Company is
considering various strategic options to deal with these problems in
the near future.
-14-
Net Sales
Net sales increased $6.8 million, or 10.5%, to $70.9 million from $64.2 million
for the three months ended September 30, 2007 and $23.5 million, or 13.3%, to
$200.4 million from $176.9 million for the nine months ended September 30, 2007,
compared to the same periods in 2006. 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 and from certain pricing
strategies implemented in 2006 and the second quarter of 2007 that are now being
fully recognized as back orders from 2006 become completed. Management
anticipates continued growth throughout 2007.
Gross Profit
Gross profit was $13.6 for the three months ended September 30, 2007 and 2006
and increased to $45.0 million from $34.1 million, a change of $10.9 million, or
31.9%, for the nine months ended September 30, 2007, compared to the same period
in 2006. Gross margins were 19.2% compared to 21.2% for the three months ended
September 30, 2007 and 2006, respectively. The decrease in gross margin was
primarily due to unfavorable pricing of units and negative labor variances on
units manufactured in Canada. The gross margins were 22.4% compared to 19.3% for
the nine months ended September 30, 2007 and 2006, respectively. The increase in
gross profit for the nine months ended September 30, 2007 results from pricing
strategies becoming fully utilized and production and labor efficiencies as
volume remains at a high and steady level. The Company saw a leveling off of raw
material increases in the first half of the year, thus lowering the cost of raw
materials and allowing for higher gross profits. However, increased pricing on
certain materials was experienced in the third quarter, resulting in a decrease
in gross profit.
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. Raw
materials ranged in prices and at times increases were incurred up to
approximately 24% for steel, 42% for aluminum and 400% for copper from 2004 to
September 30, 2007, causing increased inventory costs. The Company also
purchases from other domestic manufacturers certain components, including
compressors, electric motors and electrical controls used in its products. The
suppliers of these components are significantly affected by the rising raw
material costs, as steel, copper and aluminum are used in the manufacturing of
their products; therefore, the Company is also experiencing price increases from
component part suppliers. The Company saw some leveling off of the increases in
certain materials during the first half of the year, however in the third
quarter the Company began to experience increased pricing. The Company continues
to monitor these costs and price units accordingly. The Company instituted
several price increases to customers from 2004 to 2007 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 decreased to $5.5 million from $6.0
million, a change of approximately $0.5 million, or 7.9%, for the three months
ended September 30, 2007 and increased to $16.5 million from $15.4 million, a
change of $1.1 million, or 7.3%, for the nine months ended September 30, 2007,
compared to the same periods in 2006. The decrease for the three months ended
September 30, 2007, was due to a decrease in professional fees. The increase in
selling, general and administrative expenses for the nine months was primarily
caused by an increase in profit sharing due to increased net income. The Company
contributes 10% of pre-tax profit to all eligible employees equally on a
quarterly basis to reward employee productivity.
Other Income (expense)
Other income (expense) was $0.3 million expense and $0.2 million income for the
three months ended September 30, 2007, and September 30, 2006, respectively.
Other income (expense) was $0.1 million expense and $0.4 million income for the
nine months ended September 30, 2007 and 2006, respectively. 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 monetize the expansion facility until it is
needed for increased capacity. Other income (expense) also includes foreign
currency gains and losses that result from operations in Canada. The weakened
U.S. dollar was the primary reason for the decrease in other income (expense)
for the three months ended September 30, 2007.
-15-
Analysis of Liquidity and Capital Resources
AAON's working capital and capital expenditure requirements are generally met
through net cash provided by operations and the revolving bank line of credit.
Cash Flows Provided by Operating Activities. Net cash provided by operating
activities increased in the nine months ended September 30, 2007, by $6.6
million from the nine months ended September, 30, 2006. The increase was due
primarily to an increase in net income. The increase in inventory and accounts
receivable is partially offset by the increase in net income as well as the
increased accrued liabilities.
Cash Flows Used in Investing Activities. Cash flows used in investing activities
were $8.6 million and $14.8 million for the nine months ended September 30, 2007
and 2006, respectively. The decrease in cash flows used in investing activities
in 2007 was primarily related to lower capital expenditures of $8.7 million for
additions to manufacturing facilities, machinery and equipment compared to $15.8
million for the same period in 2006. Capital expenditures in 2007 related to
building renovations and machinery and equipment to further automate production.
Management utilizes cash flows provided from operating activities to fund
capital expenditures that are expected to spur growth and create efficiencies.
The Company is currently in line with budgeted capital expenditures of
approximately $10.0 million in 2007 for equipment requirements. The Company
expects its cash requirements to be provided from cash flows from operations.
For the nine months ended September 30, 2007, the Company did not invest nor
receive proceeds from any certificate of deposits. For the same period in 2006,
the Company received proceeds from investments of $3.0 million and reinvested a
total of $2.0 million.
Cash Flows Used in Financing Activities. Cash flows used in financing activities
were $7.0 million compared to cash flows provided by financing activities of
$3.1 million for the nine months ended September 30, 2007 and 2006,
respectively. The increase of cash used in financing activities primarily
relates to cash dividends declared and paid and the continued repurchase of the
Company's stock.
The Company repurchased shares of stock from employees' 401(k) savings and
investment plan and other incentive plans for the nine months ended September
30, 2007, in the amount of $7.1 million for 358,998 shares of stock. There were
shares of stock repurchased for a total of $3.0 million for the same period in
2006.
The Company received cash from stock options exercised of $2.4 million and
classified the tax benefit of stock options exercised of $2.7 million in
financing activities for the nine months ended September 30, 2007. Due to the
increase in stock price and the exercise price of options, the tax effect of the
gains received by the Company increased for the nine months ended September 30,
2007. 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, 2007. The cash received from stock options exercised for the same
period in 2006 was $1.0 million and the tax benefit of stock options exercised
was $1.3 million.
In February 2006, the Board of Directors authorized a semi-annual cash dividend
payment. Cash dividends were declared in December 2006 and were paid in January
2007 in the amount of $2.5 million. Cash dividends of $2.5 million were declared
on June 11, 2007, and paid on July 2, 2007. 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.
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.
-16-
General
The Company's revolving credit facility provides for maximum borrowings of $15.2
million which is provided by the Bank of Oklahoma, National Association. Under
the line of credit, there is one standby letter of credit totaling approximately
$600,000. The letter of credit is a requirement of the Company's workers
compensation insurance. 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 (7.32% at September 30, 2007). No fees are associated with the unused
portion of the committed amount. At September 30, 2007 and December 31, 2006,
the Company had no borrowings outstanding under the revolving credit facility.
Borrowings available under the revolving credit facility at September 30, 2007,
were $14.6 million. The credit facility requires the Company to maintain certain
financial ratios. At September 30, 2007, the Company was in compliance with its
financial ratio covenants. On July 30, 2007, the line of credit's maturity date
was extended to July 30, 2008.
Management believes the Company's bank revolving credit facility, or comparable
financing, and projected cash flows from operations will provide the necessary
liquidity and capital resources to the Company for fiscal year 2007 and the
foreseeable future. The Company's belief that it will have the necessary
liquidity and capital resources is based upon its knowledge of the 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, 2007, see Note 6 to the Consolidated Financial
Statements, Revolving Credit Facility.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because these estimates and assumptions require significant
judgment, future actual results could differ from those estimates and could have
a significant impact on the Company's results of operations, financial position
and cash flows. The Company reevaluates its estimates and assumptions on a
monthly basis.
Effective January 1, 2007, the Company adopted FIN 48 which provides guidance
for the recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. In accordance with FIN 48, the Company recognized a
cumulative-effect adjustment of $396,000, increasing its liability for
unrecognized tax benefits, interest and penalties and reducing the January 1,
2007 balance of retained earnings (for additional information see Note 9 to the
Consolidated Financial Statements, Income Taxes).
Except for the adoption of FIN 48 and EITF 06-3, there have been no significant
changes in critical accounting policies or management estimates since the year
ended December 31, 2006. A comprehensive discussion of the Company's critical
accounting policies and management estimates is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109, Accounting for Income Taxes ("FIN
48"). This interpretation addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on
derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The Company
adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recorded a $551,000 increase in the
liability for unrecognized tax benefits, which is offset by an increase of the
deferred tax assets of $155,000, resulting in a decrease to the January 1, 2007,
retained earnings balance of $396,000 (for additional information see Note 9 to
the Consolidated Financial Statements, Income Taxes).
-17-
In June 2006, the Emerging Issues Task Force reached a consensus on Issue 06-3,
How Sales Tax Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement ("EITF 06-3"). The guidance requires
that a company disclose its accounting policy (i.e., gross or net presentation)
regarding presentation of taxes within the scope of EITF 06-3. If taxes are
reported on a gross basis, a company should disclose the amount of such taxes
for each period for which an income statement is presented. EITF 06-3 is
effective for fiscal periods beginning after December 15, 2006. The Company
presents sales net of sales taxes. Accordingly, this issue will not have a
financial impact to the Company.
In September 2006, the FASB released Statement of Financial Accounting Standards
("SFAS") No. 157, Fair Value Measurement ("SFAS 157"). SFAS 157 defines fair
value and establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
Although SFAS 157 applies to (and amends) the provisions of existing
authoritative literature, it does not, of itself, require any new fair value
measurements or establish valuation standards. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company will adopt SFAS 157
on January 1, 2008. Adoption of SFAS 157 is not expected to have a material
impact on the Company's Consolidated Financial Statements.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("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. The Company will adopt SFAS 159 on
January 1, 2008. Adoption of SFAS 159 is not expected to have a material impact
on the Company's Consolidated Financial Statements.
Forward-Looking Statements
This Quarterly Report 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. 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. The Company had
no outstanding balance as of September 30, 2007.
-18-
Foreign sales accounted for less than 5% of the Company's sales for the nine
months ended September 30, 2007, and the Company accepts payment for such sales
in U.S. and Canadian dollars; therefore, the Company believes it is not exposed
to significant foreign currency exchange rate risk on these sales. Foreign
currency transactions and financial statements are translated in accordance with
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 $0.97 and $0.90 at September 30,
2007 and 2006, respectively.
Important raw materials purchased by the Company are steel, copper and aluminum,
which are subject to price fluctuations. The Company attempts to limit the
impact of price increases on these materials by entering cancelable fixed price
contracts with its major suppliers for periods of 6 -12 months, however; in 2006
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.
-19-
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, 2007.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during 2007 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
-20-
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 its
most recent stock repurchase program on October 17, 2002, targeting repurchases
of up to an additional 10% (1,987,500 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 $11.86 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, 2007, the Company
repurchased 467,637 shares for an aggregate price of $7,081,417, or an average
price of $15.14 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. 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. To date, the Company has
repurchased 260,625 shares for an aggregate price of $5,232,188, or an average
price of $20.08 per share. The Company purchases the shares at the current
market price.
Repurchases during the third quarter of 2007 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(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 2007 108,558 $ 21.21 108,558 -
August 2007 10,314 $ 21.62 10,314 -
September 2007 81,071 $ 20.58 81,071 -
---------------------------------------------------------------------------------------
Total 199,943 $ 20.98 199,943 -
=======================================================================================
Item 4. Submission of Matters to a Vote of Security Holders.
None
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Item 5. Other Information.
The Board of Directors voted to initiate a semi-annual cash dividend of $0.20
per share to the holders of the outstanding Common Stock of the Company as of
the close of business on June 11, 2007, the record date, payable on July 2,
2007.
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.
On September 7, 2007, the employees of AAON Canada Inc., voted to unionize with
Sheet Metal Workers' International Association.
On November 6, 2007, the Board of Directors authorized the Company to repurchase
up to 10% (approximately 1.8 million shares) of its outstanding common stock.
Such repurchases may be made from time to time in the open market or through
privately negotiated transactions at prevailing market prices, depending on
market conditions.
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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 7, 2007 By: /s/ Norman H. Asbjornson
------------------------------
Norman H. Asbjornson
President/CEO
Dated: November 7, 2007 By: /s/ Kathy I. Sheffield
------------------------------
Kathy I. Sheffield
Vice President/CFO
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