UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2008
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number: 0-18953
AAON, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0448736
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 583-2266
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.004
-----------------------------
(Title of Class)
Rights to Purchase Series A Preferred Stock
-------------------------------------------
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. |_| Yes |X| No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. |_| Yes |X| No
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. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |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 (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
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 by Rule 12b-2 of the Act.) |_| Yes |X| No
The aggregate market value of the common equity held by non-affiliates
computed by reference to the closing price of registrant's common stock on the
last business day of registrant's most recently completed second quarter (June
30, 2008) was $332.8 million.
As of February 23, 2009, registrant had outstanding a total of 17,184,764
shares of its $.004 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders to be held May 19, 2009, are
incorporated into Part III.
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
1. Business. 1
1A. Risk Factors. 4
1B. Unresolved Staff Comments. 5
2. Properties. 6
3. Legal Proceedings. 6
4. Submission of Matters to a Vote of Security Holders. 6
PART II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities. 7
6. Selected Financial Data. 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
7A. Quantitative and Qualitative Disclosures About Market Risk. 18
8. Financial Statements and Supplementary Data. 19
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 19
9A. Controls and Procedures. 19
9B. Other Information. 21
PART III
10. Directors, Executive Officers and Corporate Governance. 22
11. Executive Compensation. 22
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 22
13. Certain Relationships and Related Transactions. 22
14. Principal Accountant Fees and Services. 24
PART IV
15. Exhibits and Financial Statement Schedules. 25
PART I
Item 1. Business.
General Development and Description of Business
AAON, Inc., a Nevada corporation, 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. Unless
the context otherwise requires, references in this Annual Report to "AAON," the
"Company", "we," "us," "our" or "ours" refer to AAON, Inc., and our
subsidiaries.
We are engaged in the manufacture and sale of air-conditioning and heating
equipment. Our products consist of both standardized and custom rooftop units,
chillers, air-handling units, make-up air units, heat recovery units, condensing
units, coils and boilers.
Products and Markets
Our products serve the commercial and industrial new construction and
replacement markets. To date virtually all of our sales have been to the
domestic market. Foreign sales accounted for less than 5% of our sales in 2008.
Our rooftop and condenser markets consist of units installed on commercial or
industrial structures of generally less than 10 stories in height. Our
air-handling units, chillers, coils and boilers are applicable to all sizes of
commercial and industrial buildings.
The size of these markets is determined primarily by the number of commercial
and industrial building completions. The replacement market consists of products
installed to replace existing units/components that are worn or damaged.
Historically, approximately half of the industry's market has consisted of
replacement units.
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.
Based on our 2008 level of sales of $280 million, we estimate that we have a 13%
share of the rooftop market and a 1% share of the coil market. Approximately 54%
of our sales now come from new construction and 46% from
renovation/replacements. The percentage of sales for new construction vs.
replacement to particular customers is related to the customer's stage of
development. With the recent economic downturn and decrease in residential
housing starts, the ratio of our sales between new construction and
renovation/replacement could change. Although the volatile economic conditions
did not significantly affect our business in 2008, the impact the economy will
have on us in 2009 is still unknown.
We purchase certain components, fabricate sheet metal and tubing and then
assemble and test the finished products. Our primary finished products consist
of a single unit system containing heating, cooling and/or heat recovery
components in a self-contained cabinet, referred to in the industry as "unitary"
products. Our other finished products are coils, air-handling units, condensing
units, make-up air units, heat recovery units, and boilers. Coils consist of a
sheet metal casing with tubing and fins. Air-handling units consist of coils,
blowers and filters. Condensing units consist of coils, fans and compressors,
which, with the addition of a refrigerant-to-water heat exchanger, become
chillers. Make-up air units, heat recovery units and boilers consist of boilers
and a sheet metal cabinet.
-1-
We offer five groups of rooftop units. Our HB Series consisting of four cooling
sizes ranging from two to five tons; our RM and RN Series offered in 21 cooling
sizes ranging from two to 70 tons; our RL Series, which is offered in 15 cooling
sizes ranging from 40 to 230 tons; and our HA Series, which is a horizontal
discharge package for either rooftop or ground installation, which we offer in
eight sizes ranging from seven and one-half to 50 tons. We also produce
customized rooftop products with direct (MN Series) and indirect (DT Series)
heating in sizes as required.
We also manufacture a Model LL chiller, which is available in both air-cooled
condensing and evaporative cooled configurations.
Our air-handling units consist of the F1 and H/V Series, the modular (M2 and M3)
Series and a customized NJ Series.
Our heat recovery option applicable to our RM, RN and RL units, as well as our
M2, M3 and NJ Series air handlers, respond to the U.S. Clean Air Act mandate to
increase fresh air in commercial structures. Our products are designed to
compete on the higher quality end of standardized products.
Performance characteristics of our products range in cooling capacity from
28,000 - 4,320,000 BTU's and in heating capacity from 69,000 - 6,000,000 BTU's.
All of our products meet the Department of Energy's efficiency standards, which
define the maximum amount of energy to be used in producing a given amount of
cooling.
A typical commercial building installation requires a ton of air-conditioning
for every 300-400 square feet or, for a 100,000 square foot building, 250 tons
of air-conditioning, which can involve multiple units.
We have developed and are beginning to market a residential condensing unit (CB
Series) and air handlers (F1 Series) as well as boilers (BL Series).
Major Customers
No customer accounted for 10% of our sales during 2008, 2007 or 2006.
Sources and Availability of Raw Materials
The most important materials we purchase are steel, copper and aluminum, which
are obtained from domestic suppliers. We also purchase from other domestic
manufacturers certain components, including compressors, electric motors and
electrical controls used in our products. We attempt to obtain the lowest
possible cost in our purchases of raw materials and components, consistent with
meeting specified quality standards. We are not dependent upon any one source
for raw materials or the major components of our manufactured products. By
having multiple suppliers, we believe that we will have adequate sources of
supplies to meet our manufacturing requirements for the foreseeable future.
We attempt to limit the impact of increases in raw materials and purchased
component prices on our profit margins by negotiating with each of our major
suppliers on a term basis from six months to one year.
Distribution
We employ a sales staff of 20 individuals and utilize approximately 91
independent manufacturer representatives' organizations having 106 offices to
market our products in the United States and Canada. We also have one
international sales organization, which utilizes 12 distributors in other
countries. Sales are made directly to the contractor or end user, with shipments
being made from our Tulsa, Oklahoma; Longview, Texas; and Burlington, Ontario,
Canada plants to the job site. Billings are to the contractor or end user, with
a commission paid directly to the manufacturer representative.
Our products and sales strategy focus on niche markets. The targeted markets for
our equipment are customers seeking products of better quality than offered,
and/or options not offered, by standardized manufacturers.
-2-
To support and service our customers and the ultimate consumer, we provide parts
availability through our 106 sales offices and have factory service
organizations at each of our plants. Also, a number of the manufacturer
representatives we utilize have their own service organizations, which, in
connection with us, provide the necessary warranty work and/or normal service to
customers.
Our product warranty policy is: the earlier of one year from the date of first
use or 18 months from date of shipment for parts only; an additional four years
for compressors (if applicable); 15 years on gas-fired heat exchangers (if
applicable); and 25 years on stainless steel heat exchangers (if applicable).
Research and Development
All of our R&D activities are company-sponsored, rather than customer-sponsored.
R&D has involved the HB, RM, RN, RL, NJ, DT and MN (rooftop units), F1, H/V, M2,
M3 and NJ (air handlers), LL (chillers), CB (condensing units) and BL (boilers),
as well as component evaluation and refinement, development of control systems
and new product development. We incurred research and development expenses of
approximately $2,577,000, $2,483,000 and $1,974,000 in 2008, 2007 and 2006,
respectively.
Backlog
Our current backlog as of March 1, 2009, was approximately $45,182,000 compared
to approximately $51,365,000 at March 1, 2008. The current backlog consists of
orders considered by management to be firm and substantially all of which will
be filled by August 1, 2009; however, the orders are subject to cancellation by
the customers.
Working Capital Practices
Working capital practices in the industry center on inventories and accounts
receivable. Our management regularly reviews our working capital with a view to
maintaining the lowest level consistent with requirements of anticipated levels
of operation. Our greatest needs arise during the months of July - November, the
peak season for inventory (primarily purchased material) and accounts
receivable. Our working capital requirements are generally met by cash flow from
operations and a bank revolving credit facility, which currently permits
borrowings up to $15,150,000. We believe that we will have sufficient funds
available to meet our working capital needs for the foreseeable future. We
expect to renew our revolving credit agreement in July 2009. We do not
anticipate that the current situation in the credit market will impact our
renewal.
Seasonality
Sales of our products are moderately seasonal with the peak period being July -
November of each year.
Competition
In the standardized market, we compete primarily with Lennox International,
Inc., Ingersoll Rand Limited, Johnson Controls Inc., Mestek Inc. and United
Technologies Corporation. All of these competitors are substantially larger and
have greater resources than we do. In the custom market, we compete with many
larger and smaller manufacturers. Our products compete on the basis of total
value, quality, function, serviceability, efficiency, availability of product,
product line recognition and acceptability of sales outlet. However, in new
construction where the contractor is the purchasing decision maker, we are often
at a competitive disadvantage because of the emphasis placed on initial cost. In
the replacement market and other owner-controlled purchases, we have a better
chance of getting the business since quality and long-term cost are generally
taken into account.
Employees
As of March 1, 2009, we had 1,303 permanent employees and 57 temporary
employees. The 53 employees of AAON Canada are represented by unions. Management
considers relations with our employees to be good.
-3-
Patents, Trademarks, Licenses and Concessions
We do not consider any patents, trademarks, licenses or concessions to be
material to our business operations, other than patents issued regarding our
heat recovery wheel option, blower, gas-fired heat exchanger and evaporative
condenser desuperheater.
Environmental Matters
Laws concerning the environment that affect or could affect our domestic
operations include, among others, the Clean Water Act, the Clean Air Act, the
Resource Conservation and Recovery Act, the Occupational Safety and Health Act,
the National Environmental Policy Act, the Toxic Substances Control Act,
regulations promulgated under these Acts, and any other federal, state or local
laws or regulations governing environmental matters. We believe that we
presently comply with these laws and that future compliance will not materially
adversely affect our earnings or competitive position.
Available Information
Our Internet website address is http://www.aaon.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act of 1934 will be available through our Internet website as soon as
reasonably practical after we electronically file such material with, or furnish
it to, the SEC.
Item 1A. Risk Factors.
The following risks and uncertainties may affect our performance and results of
operations.
Our business can be hurt by the current economic downturn.
Our business is affected by a number of economic factors, including the level of
economic activity in the markets in which we operate. The current state of the
United States economy has negatively impacted the commercial and industrial new
construction markets. The current decline in economic activity in the United
States could materially affect our financial condition and results of
operations. Sales in the commercial and industrial new construction markets
correlate closely to the number of new homes and buildings that are built, which
in turn is influenced by cyclical factors such as interest rates, inflation,
consumer spending habits, employment rates and other macroeconomic factors over
which we have no control. In the Heating, Ventilation, and Air Conditioning
("HVAC") business, a decline in economic activity as a result of these cyclical
or other factors typically results in a decline in new construction and
replacement purchases, which could result in a decrease in our sales volume and
profitability
We may be adversely affected by problems in the availability, or increases in
the prices, of raw materials and components.
Problems in the availability, or increases in the prices, of raw materials or
components could depress our sales or increase the costs of our products. We are
dependent upon components purchased from third parties, as well as raw materials
such as steel, copper and aluminum. We enter into cancelable and noncancelable
contracts on terms from six months to one year for raw materials and components
at fixed prices. However, if a key supplier is unable or unwilling to meet our
supply requirements, we could experience supply interruptions or cost increases,
either of which could have an adverse effect on our gross profit.
We may not be able to successfully develop and market new products.
Our future success will depend upon our continued investment in research and new
product development and our ability to continue to realize new technological
advances in the HVAC industry. Our inability to continue to successfully develop
and market new products or our inability to achieve technological advances on a
pace consistent with that of our competitors could lead to a material adverse
effect on our business and results of operations.
-4-
We may incur material costs as a result of warranty and product liability claims
that would negatively affect our profitability.
The development, manufacture, sale and use of our products involve a risk of
warranty and product liability claims. Our product liability insurance policies
have limits that, if exceeded, may result in material costs that would have an
adverse effect on our future profitability. In addition, warranty claims are not
covered by our product liability insurance and there may be types of product
liability claims that are also not covered by our product liability insurance.
We may not be able to compete favorably in the highly competitive HVAC business.
Competition in our various markets could cause us to reduce our prices or lose
market share, or could negatively affect our cash flow, which could have an
adverse effect on our future financial results. Substantially all of the markets
in which we participate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price,
with the relative importance of these factors varying among our product line.
Other factors that affect competition in the HVAC market include the development
and application of new technologies and an increasing emphasis on the
development of more efficient HVAC products. Moreover, new product introductions
are an important factor in the market categories in which our products compete.
Several of our competitors have greater financial and other resources than we
have, allowing them to invest in more extensive research and development. We may
not be able to compete successfully against current and future competition and
current and future competitive pressures faced by us may materially adversely
affect our business and results of operations.
The loss of Norman H. Asbjornson could impair the growth of our business.
Norman H. Asbjornson, the founder of AAON, Inc., has served as our President and
Chief Executive Officer from inception to date. He has provided the leadership
and vision for our growth. Although important responsibilities and functions
have been delegated to other highly experienced and capable management
personnel, our products are technologically advanced and well positioned for
sales into the future and we carry key man insurance on Mr. Asbjornson, his
death, disability or retirement, could impair the growth of our business. We do
not have an employment agreement with Mr. Asbjornson.
Our stockholder rights plan and some provisions in our bylaws and Nevada law
could delay or prevent a change in control.
Our stockholder rights plan and some provisions in our bylaws and Nevada law
could delay or prevent a change in control, which could adversely affect the
price of our common stock.
AAON's business is subject to the risks of interruptions by problems such as
computer viruses.
Despite our implementation of network security measures, our services are
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with our computer systems. Any such event could have a
material adverse affect on our business.
Exposure to environmental liabilities could adversely affect our results of
operations.
Our future profitability could be adversely affected by current or future
environmental laws. We are subject to extensive and changing federal, state and
local laws and regulations designed to protect the environment in the United
States and in other parts of the world. These laws and regulations could impose
liability for remediation costs and result in civil or criminal penalties in
case of non-compliance. Compliance with environmental laws increases our costs
of doing business. Because these laws are subject to frequent change, we are
unable to predict the future costs resulting from environmental compliance.
Item 1B. Unresolved Staff Comments.
None.
-5-
Item 2. Properties.
The plant and office facilities in Tulsa, Oklahoma, 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 on a 12-acre tract of land at 2425 South Yukon
Avenue (the "original facility"), and a 563,000 square foot
manufacturing/warehouse building and a 22,000 square foot office building (the
"expansion facility") located on a 40-acre tract of land across the street from
the original facility (2440 South Yukon Avenue). Both plants are of sheet metal
construction.
The original facility's manufacturing area is in a heavy industrial type
building, with total coverage by bridge cranes, containing manufacturing
equipment designed for sheet metal fabrication and metal stamping. The
manufacturing equipment contained in the original facility consists primarily of
automated sheet metal fabrication equipment, supplemented by presses, press
breaks and numerical control punching equipment. Assembly lines consist of four
cart-type conveyor lines with variable line speed adjustment, three of which are
motor driven. Subassembly areas and production line manning are based upon line
speed. The manufacturing facility is 1,140 feet in length and varies in width
from 390 feet to 220 feet. We use 22,000 sq. ft. for office space, 20,000 sq.
ft. for warehouse space and 80,000 sq. ft. for two production lines; an
additional 106,000 square feet is utilized for sheet metal fabrication. The
remaining 357,000 sq. ft. (presently leased) will afford us additional plant
space for long-term growth. The expansion facility is 39% (228,000 sq. ft.)
utilized by us and 61% leased to a third party through May 31, 2009 at which
time the facility will be remodeled to give us increased manufacturing capacity.
The 2009 capital expenditures budget reflects the projected outlay to remodel
the facility.
Our operations in Longview, Texas, are conducted in a plant/office building at
203-207 Gum Springs Road, containing 258,000 sq. ft. on 14 acres. The
manufacturing area (approximately 251,000 sq. ft.) is located in three 120-foot
wide sheet metal buildings connected by an adjoining structure. The facility is
built for light industrial manufacturing. An additional, contiguous 15 acres
were purchased in 2004 and 2005 for future expansion.
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.
Production at these facilities averaged approximately $23.3 million per month in
2008, which is approximately 67% of the estimated current production capacity.
Management deems our facilities to be nearly ideal for the type of products we
manufacture.
Item 3. Legal Proceedings.
We are not a party to any pending legal proceeding which management believes is
likely to result in a material liability and no such action is contemplated by
or, to the best of our knowledge, has been threatened against us.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through solicitation of
proxies or otherwise, during the period from October 1, 2008 through December
31, 2008.
-6-
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our Common Stock is traded on the NASDAQ National Market under the symbol
"AAON". The range of closing prices for our Common Stock during the last two
years, as reported by National Association of Securities Dealers, Inc., was as
follows:
Quarter Ended High Low
------------- ---- ---
March 31, 2007* $19.67 $16.46
June 30, 2007* $21.38 $16.47
September 30, 2007* $23.01 $18.61
December 31, 2007 $21.96 $16.60
March 31, 2008 $20.52 $15.88
June 30, 2008 $22.92 $17.60
September 30, 2008 $22.85 $16.91
December 31, 2008 $21.20 $12.92
---------------
* All prices adjusted to reflect a 3 for 2 stock split effected August 21, 2007
On February 23, 2009, there were 1,003 holders of record, and approximately
2,000 beneficial owners, of our Common Stock.
On February 14, 2006, the Board of Directors voted to initiate a semi-annual
cash dividend. We initially paid Board of Director approved semi-annual
dividends of $0.20 per share. The Board of Directors approved future dividend
payments of $0.16 per share related to the stock split effective August 21,
2007.
In 2008, dividends were declared to shareholders of record at the close of
business on June 12, 2008 and paid on July 3, 2008 and declared to shareholders
of record at the close of business on December 12, 2008 and paid on January 2,
2009. We paid cash dividends of approximately $5.8 million and declared
dividends payable of approximately $2.8 million for the year ended December 31,
2008.
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
approximately 1,987,500 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 of $11.68 per
share. We purchased the shares at the current market price.
On November 6, 2007, our Board of Directors 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
December 31, 2008, we repurchased a total of 1,692,258 shares under this program
for an aggregate price of $33,710,939, or an average of $19.92 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 our 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 December 31, 2008, we repurchased
630,906 shares for an aggregate price of $10,102,687, or an average price of
$16.01 per share. We purchased the shares at the current market price.
-7-
On November 7, 2006, the Board of Directors authorized us to repurchase shares
from certain Directors following their exercise of stock options. The maximum
number of shares to be repurchased is unknown under the program as the amount is
contingent on the number of shares sold by Directors. Through December 31, 2008,
we repurchased 340,375 shares for an aggregate price of $6,957,423, or an
average price of $20.44 per share. We purchased the shares at the current market
price.
Repurchases during the fourth quarter of 2008 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(d)
(a) (c) Maximum Number (or
Total (b) Total Number of Approximate Dollar
Number of Average Shares (or Units) Value) of Shares (or
Period Shares (or Price Paid Purchased as Part of Units) that May Yet
Units) Per Share Publicly Announced Be Purchased Under
Purchased (or Unit) Plans or Programs the Plans or Programs
October 2008 17,395 $15.15 17,395 -
November 2008 18,821 $17.80 18,821 -
December 2008 4,050 $19.62 4,050 -
--------------------------------------------------------------------------------
Total 40,266 $16.84 40,266 -
================================================================================
Stock Performance Graph (1)
The following graph compares our cumulative total shareholder return, the NASDAQ
Composite and the peer group named below. The graph assumes a $100 investment at
the closing price on January 1, 2003, and reinvestment of dividends on the date
of payment without commissions. This table is not intended to forecast future
performance of our Common Stock.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008
2003 2004 2005 2006 2007 2008
---- ---- ---- ---- ---- ----
AAON INC Return % -17.21 11.25 48.10 14.04 7.02
Cum $ 100.00 82.79 92.10 136.41 155.55 166.47
S&P 500 Index Return % 10.87 4.89 15.79 5.50 -36.99
Cum $ 100.00 110.87 116.30 134.66 142.07 89.51
New Peer Group Return % 12.51 9.71 12.22 24.68 -35.85
Cum $ 100.00 112.51 123.44 138.51 172.70 110.78
Old Peer Group Return % 12.66 8.34 14.02 27.88 -28.50
Cum $ 100.00 112.66 122.05 139.16 177.96 127.24
The new peer group consists of Lennox International, Inc.; Ingersoll Rand
Limited; Johnson Controls Inc.; Mestek Inc.; and United Technologies
Corporation. The old peer group consists of Trane, Inc.; Lennox International,
Inc.; Mestek, Inc.; LSB Industries, Inc.; and United Technologies Corporation.
All companies in the peer groups are in the business of manufacturing air
conditioning and heat exchange equipment.
-8-
(1) Securities and Exchange Commission ("SEC") filings sometimes "incorporate
information by reference." This means we are referring you to information that
has previously been filed with the SEC, and that this information should be
considered as part of the filing you are reading. Unless we specifically state
otherwise, this Stock Performance Graph shall not be deemed to be incorporated
by reference and shall not constitute soliciting material or otherwise be
considered filed under the Securities Act of 1933 as amended, or the Securities
Exchange act of 1934, as amended.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto for the periods indicated which
are included elsewhere in this report.
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
Results of Operations: 2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $ 279,725 $ 262,517 $ 231,460 $ 185,195 $ 171,885
Net income $ 28,589 $ 23,156 $ 17,133 $ 11,462 $ 7,521
Earnings per share:
Basic $ 1.63 $ 1.24 $ 0.93 $ 0.62 $ 0.40
Diluted $ 1.60 $ 1.22 $ 0.90 $ 0.60 $ 0.39
Cash dividends declared
per common share $ 0.32 $ 0.32 $ 0.32 $ - $ -
Weighted average shares
outstanding:
Basic 17,560 18,628 18,456 18,510 18,653
Diluted 17,855 18,927 18,968 19,125 19,385
December 31,
---------------------------------------------------------------------------------------------------------------
Financial Position at End of
Fiscal Year: 2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(in thousands)
Working capital $ 40,600 $ 38,788 $ 36,356 $ 33,372 $ 27,939
Total assets $ 140,743 $ 137,140 $ 130,056 $ 113,606 $ 105,227
Long-term and current debt $ 3,113 $ 330 $ 59 $ 167 $ 275
Total stockholders' equity $ 96,522 $ 95,420 $ 91,592 $ 79,495 $ 71,171
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per common share were determined on the
assumed exercise of dilutive options, as determined by applying the treasury
stock method. Effective August 21, 2007, we completed a three-for-two stock
split. The shares outstanding and earnings per share disclosures have been
restated to reflect the stock split.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
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. Foreign sales are less than 5% of
our 2008 sales 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 2008 due to the economic environment. Raw
materials pricing had steadily increased from the beginning of 2006 until the
second half of 2008 when pricing sharply decreased. We experienced raw materials
price increases of approximately 70% for steel, 18% for aluminum and 19% for
copper from 2006 through the second quarter of 2008. Prices decreased by
approximately 40% for steel, 76% for aluminum and 62% for copper from June 30,
2008 to December 31, 2008. We attempt to limit the impact of price increases on
these materials by entering cancelable and noncancelable fixed price contracts
with our major suppliers for periods of 6 -12 months.
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 policy is: the earlier of one year from the date of first use or 18
months from date of shipment for parts only; an additional four years on
compressors (if applicable); 15 years on gas-fired heat exchangers (if
applicable); and 25 years on stainless steel heat exchangers (if applicable).
Warranty charges on heat exchangers do not occur frequently.
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 utilize 39% of the expansion facility and
the remaining 61% is leased to a third party. The third party lease expires May
31, 2009, at which time the facility will be remodeled to give us increased
manufacturing capacity. The 2009 capital expenditures budget reflects the
projected outlay to remodel the facility.
We conduct other operations 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.
-10-
Set forth below is income statement information and as a percentage of sales for
years 2008, 2007 and 2006:
Year Ended December 31,
-----------------------
2008 2007 2006
---- ---- ----
(in thousands)
Net sales $ 279,725 100.0% $ 262,517 100.0% $ 231,460 100.0%
Cost of sales 212,549 76.0% 205,148 78.1% 187,570 81.0%
--------------- ---------- --------------- ---------- --------------- ----------
Gross profit 67,176 24.0% 57,369 21.9% 43,890 19.0%
Selling, general and
administrative expenses 23,788 8.5% 21,703 8.3% 18,059 7.8%
--------------- ---------- --------------- ---------- --------------- ----------
Income from operations 43,388 15.5% 35,666 13.6% 25,831 11.2%
Interest expense (71) 0.0% (10) 0.0% (81) 0.0%
Interest income 27 0.0% 8 0.0% 24 0.0%
Other income (expense), net 724 0.3% (321) (0.1%) 424 0.1%
--------------- ---------- --------------- ---------- --------------- ----------
Income before income taxes 44,068 15.8% 35,343 13.5% 26,198 11.3%
Income tax provision 15,479 5.6% 12,187 4.7% 9,065 3.9%
--------------- ---------- --------------- ---------- --------------- ----------
Net income $ 28,589 10.2% $ 23,156 8.8% $ 17,133 7.4%
=============== ========== =============== ========== =============== ==========
Results of Operations
Key events impacting our cash balance, financial condition, and results of
operations in 2008 include the following:
o An increase in the volume of sales on all product lines due to market
share gains and effective moderation of commodity costs with purchase
agreements and pricing strategies affecting gross margin, resulted in
significantly higher revenues and net income. The large volume of
sales also lowered the effect of major fixed costs in general and
administrative expenses and occupancy expenses.
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 at the beginning of 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, our Board of Directors initiated a program of
semi-annual cash dividend payments. Cash payments of $5.8 million were
made in 2008 ($2.9 million paid in January and July 2008,
respectively), and $2.8 million was accrued as a liability for payment
in January 2009.
o Stock repurchases of our stock from employee's 401(k) savings and
investments plan was authorized in 2005. Stock repurchases of our
stock from directors was authorized in 2006. Stock repurchases of our
stock from the open market was authorized and initiated in November
2007. Total repurchases resulted in cash payments of $24.8 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 2008 from options exercised was $1.7 million.
o Borrowings under the line of credit were $46.9 million and
approximately $71,000 in interest expense was paid in 2008. Borrowings
under the line of credit where interest is accrued are relatively
short and generally paid off within the month incurred or the
following month. At the end of 2008 there was $2.9 million outstanding
on the line of credit.
o Purchases of equipment and renovations to manufacturing facilities
remained a priority. AAON's capital expenditures were $9.6 million.
Equipment purchases create significant efficiencies, lower production
costs and allow continued growth in production. We currently estimate
dedicating $7.0 million to $8.0 million to capital expenditures in
2009 for continued growth.
-11-
Net Sales
Net sales were $279.7 million, $262.5 million and $231.5 million in 2008, 2007
and 2006, respectively. Sales increased $17.2 million or 6.6% which was
attributable to an increase in volume of product sold related to our new and
redesigned products being favorably received by our customers, the diversified
customer mix of products, active marketing by sales representatives and pricing
strategies implemented in order to keep up with increasing raw material costs.
The increase in sales in 2007 of $31.0 million or 13.4% was attributable to an
increase in volume of product sold related to our new and redesigned products
being favorably received by our customers, active marketing by sales
representatives and pricing strategies implemented on 90% of our product lines
in the second quarter in order to keep up with increasing raw material costs.
New commercial construction steadily improved throughout 2007 and 2006,
contributing to growth of the market.
Gross Profit
Gross margins in 2008, 2007 and 2006 were $67.2 million, $57.4 million and $43.9
million, respectively. As a percentage of sales, gross margins were 24.0%, 21.9%
and 19.0% for the years ended 2008, 2007 and 2006. The increase in gross profit
for 2008, resulted from pricing strategies implemented and production and labor
efficiencies, as sales volume increased. We saw a decrease in raw material costs
in the second half of the year, which also contributed to higher gross profits.
Management anticipates the moderation of commodity costs through relationships
with suppliers and price decreases in certain commodity costs, if realized,
should enhance gross margins. Due to an increase in the volume of sales, actual
gross profit for 2008 increased by $9.8 million from 2007, and by $13.5 million
from 2006 to 2007.
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 2008 due to the economic environment. Raw
materials pricing had steadily increased from the beginning of 2006 until the
second half of 2008 when pricing sharply decreased. We experienced raw materials
price increases of approximately 70% for steel, 18% for aluminum and 19% for
copper from 2006 through the second quarter of 2008. Prices decreased by
approximately 40% for steel, 76% for aluminum and 62% for copper from June 30,
2008 to December 31, 2008. We attempt to limit the impact of price increases on
these materials by entering cancelable and noncancelable fixed price contracts
with our major suppliers for periods of 6 -12 months.
We also purchase from other domestic manufacturers certain components, including
compressors, electric motors and electrical controls used in our products. The
suppliers of these components are significantly affected by the raw material
costs as steel, copper and aluminum are used in the manufacturing of their
products. While raw material costs decreased in the last half of the year,
increases in component parts were experienced throughout 2008. We instituted
several price increases to customers from 2006 to 2008 in an attempt to offset
the continued increases in steel, copper, aluminum, and component parts. We
attempt to limit the impact of price fluctuations on these materials by entering
into cancelable and noncancelable fixed price contracts with our major suppliers
for periods of 6-12 months.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $23.8 million, $21.7 million
and $18.1 million for the years ended 2008, 2007 and 2006. The increase in
selling, general and administrative expenses is due primarily to an increase in
selling related expenses, warranty expense caused by increased sales, increase
in profit sharing resulting from an increase in net income, and an overall
increase in general and administrative expenses. In 2007, the increase in
selling, general and administrative expenses was primarily caused by an increase
in sales expenditures for an increased sales force and active marketing,
increases in salaries for selling, general and administrative personnel and an
increase in profit sharing. There were additional non-cash compensation costs
for the fair value of stock options granted to employees in accordance with the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 123R,
Share-Based Payment ("SFAS 123R").
-12-
Interest Expense
Interest expense was approximately $71,000, $10,000 and $81,000 for the years
ended 2008, 2007 and 2006. The increase in interest expense of approximately
$61,000 in 2008 was due to higher average borrowings under the revolving credit
facility as a result of a decrease in net cash provided by operations related to
the stock repurchases. The decrease in interest expense of approximately $71,000
from 2006 to 2007 was due to a decrease in average borrowings under the
revolving credit facility and interest rates. Interest on borrowings is payable
monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus 1.6%, at
our election (3.50% at December 31, 2008). Average borrowings under the
revolving credit facility are typically paid in full within the month of
borrowing or the following month.
Interest Income
Interest income was approximately $27,000, $8,000 and $24,000 in 2008, 2007 and
2006 respectively. The increase in interest income is due to interest paid for
repurchased stock shares that were held in transit by the transfer agent in
early 2008.
Other Income (Expense)
Other income was approximately $724,000 in 2008. Other expense was approximately
$321,000 in 2007. The change in other income (expense) was primarily related to
foreign currency losses that result from operations in Canada in 2008 and 2007.
Other income was approximately $424,000 in 2006. Other income is attributable
primarily to rental income from our expansion facility. All expenses associated
with the facility that are allocated to the rental portion of the building are
included in other income. We plan to continue to rent the expansion facility
until the lease term expires on May 31, 2009.
Impact of Current Economic Conditions
Our business is affected by a number of economic factors, including the level of
economic activity in the markets in which we operate. The current state of the
United States economy has negatively impacted the commercial and industrial new
construction markets. The current decline in economic activity in the United
States could materially affect our financial condition and results of
operations. Sales in the commercial and industrial new construction markets
correlate closely to the number of new homes and buildings that are built, which
in turn is influenced by cyclical factors such as interest rates, inflation,
consumer spending habits, employment rates and other macroeconomic factors over
which we have no control. In the Heating, Ventilation, and Air Conditioning
("HVAC") business, a decline in economic activity as a result of these cyclical
or other factors typically results in a decline in new construction and
replacement purchases, which could result in a decrease in our sales volume and
profitability. Although the volatile economic conditions did not significantly
affect our business in 2008, the impact the economy will have on us in 2009 is
still unknown.
Analysis of Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met
through net cash provided by operations and the occasional use of the revolving
bank line of credit based on our current liquidity at the time.
Cash Provided by Operating Activities. Net cash provided from operating
activities has fluctuated from year to year. Net cash provided by operating
activities was $33.4 million, $31.2 million and $19.4 million in fiscal years
2008, 2007 and 2006, respectively. The year-to-year variances are primarily from
results of changes in net income, accounts receivable, inventories, accounts
payable and accrued liabilities.
Net income for fiscal year 2008 was $28.6 million, an increase of $5.4 million
from 2007. The increase in net income during fiscal years 2008 and 2007 compared
to fiscal years 2007 and 2006 was primarily due to increased volume of sales,
adjusted pricing strategies, fluctuations in raw materials costs, innovative and
efficient products, and improved production efficiencies.
-13-
Depreciation expense was $9.4 million, $9.7 million and $9.1 million for the
years ended December 31, 2008, 2007 and 2006, respectively. The decrease in
depreciation is due to the realization of full depreciation of certain capital
assets. We adopted SFAS 123R in 2006. Share-based compensation was $0.8 million,
$0.6 million and $0.5 million in 2008, 2007 and 2006, respectively. Both
depreciation expense and share-based compensation expense decreased net income
but had no effect on operating cash.
Accounts receivable balances did not significantly fluctuate in 2008 even though
sales increased. Accounts receivable increased during 2007 and 2006 from the
increase in sales. Accounts receivable increased by $0.9 million at December 31,
2008 compared to December 31, 2007. The increase at December 31, 2007 from
December 31, 2006 was $1.8 million.
Inventories increased by $4.8 million, $2.1 million and $5.8 million at December
31, 2008, 2007 and 2006, respectively. The increase in 2008 was attributable to
procurement of inventory to accommodate an increase of sales. The leading factor
in the increase in 2007 and 2006 is primarily related to the valuation of
inventories due to higher raw material and component parts costs.
Accounts payable and accrued liabilities decreased by $1.3 million at December
31, 2008 and increased by $4.9 million and $4.3 million at December 31, 2007 and
2006. The decrease in 2008 is primarily due to timing of payments to vendors and
a decrease in workers' compensation expense. The increase in 2007 is due to an
increase in commissions payable related to the increase in sales, timing of
commissions payable and payments to vendors.
Cash Flows Used in Investing Activities. Cash flows used in investing activities
were $9.6 million, $10.8 million and $16.8 million in 2008, 2007 and 2006,
respectively. The decrease in cash flows used in investing activities in 2008
and 2007 was $1.2 million and $6.0 million, respectively, and primarily related
to a decrease in capital expenditures. Management utilizes cash flows provided
from operating activities to fund capital expenditures that are expected to
increase growth and create efficiencies. Due to anticipated production demands,
we expect to expend approximately $7.0 million to $8.0 million in 2009 for a
building expansion, a building renovation of the leased facility and equipment.
We expect the cash requirements to be provided from cash flows from operations.
We did not invest in any certificates of deposits in 2008 and 2007,
respectively. A previously invested certificate of deposit matured in the first
quarter of 2006.
Cash Flows Used in Financing Activities. Cash flows used in financing activities
were $24.5 million, $20.0 million and $3.3 million in 2008, 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 our
stock.
We occasionally utilize the revolving line of credit as described below in
"General" to meet certain short-term cash demands based on our current liquidity
at the time. We have $2.9 million of borrowings outstanding under the line of
credit at December 31, 2008. We had no net borrowings under the revolving line
of credit at December 31, 2007. We accessed $46.9 million and $12.1 million of
borrowings under the line of credit during 2008 and 2007, respectively. We
utilized the revolving line of credit in 2006 for short-term demands in the
amount of $53.7 million.
We received cash from stock options exercised of $1.7 million and $2.4 million
and classified the excess tax benefit of stock options exercised and restricted
stock awards vested of $1.6 million and $3.0 million in financing activities in
2008 and 2007, respectively. We received cash from stock options exercised for
the year ended 2006 of approximately $1.3 million and classified the excess tax
benefit of stock options exercised of $1.9 million.
We repurchased shares of stock under the Board of Directors authorized stock
buyback programs in 2008, 2007 and 2006. We repurchased shares of stock from
employees' 401(k) savings and investment plan, Directors, and the open market in
2008 in the amount of $24.8 million for 1,211,538 shares of stock. We
repurchased shares of stock from employees' 401(k) savings and investment plan,
Directors, and the open market in 2007 in the amount of $20.8 million for
1,082,736 shares of stock and in 2006 in the amount of $3.9 million for 250,500
shares of stock.
-14-
On February 14, 2006, the Board of Directors voted to initiate a semi-annual
cash dividend. We initially paid Board of Director approved semi-annual
dividends of $0.20 per share. The Board of Directors approved future dividend
payments of $0.16 per share related to the stock split effective August 21,
2007.
Cash dividend payments of $5.8 million were made in 2008, and $2.8 million in
dividends were declared and accrued as a liability in December 2008 for payment
in January 2009. Cash dividend payments of $5.0 million were made in 2007, and
$2.9 million in dividends were declared and accrued as a liability in December
2007 for payment in January 2008. Cash dividend payments of $2.5 million were
made in 2006, and $2.5 million in dividends were declared and accrued as a
liability in December 2006 for payment in January 2007. Board of Director
approval is required to determine the date of declaration for each semi-annual
payment.
General
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 is a requirement of our workers compensation insurance and was
extended in 2008 and will expire on 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 (3.50% at December 31, 2008). No fees are associated with
the unused portion of the committed amount.
At December 31, 2008, we had $2.9 million outstanding under the revolving credit
facility. At December 31, 2007, we had no borrowings outstanding under the
revolving credit facility. Borrowings available under the revolving credit
facility at December 31, 2008, were $11.3 million. At December 31, 2008 and
2007, 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 December 31, 2008 our tangible net worth was $96.5
million. Our total liabilities to tangible net worth ratio was 2.2. Our working
capital was $40.6 million. On July 30, 2008, we renewed the line of credit with
a maturity date of July 30, 2009. We expect to renew our revolving credit
agreement in July 2009. We do not anticipate that the current situation in the
credit market will impact our renewal.
On July 12, 2007, our Board of Directors approved a three-for-two stock split of
our 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, our Board of Directors adjusted the
dividend paid per share to $0.16. The applicable share and per share data for
2007 and 2006 included herein has been restated to reflect the stock split
Management believes projected cash flows from operations and our bank revolving
credit facility (or comparable financing) will provide us the necessary
liquidity and capital resources for fiscal year 2009 and the foreseeable future.
The belief that we will have the necessary liquidity and capital resources is
based upon management's knowledge of the HVAC industry and our place in that
industry, our ability to limit our growth if necessary, our ability to authorize
dividend cash payments, and our relationship with our existing bank lender. For
information concerning our revolving credit facility at December 31, 2008, see
Note 3 to the Consolidated Financial Statements, Revolving Credit Facility.
-15-
Commitments and Contractual Agreements
The following table summarizes our long-term debt and other contractual
agreements as of December 31, 2008:
Payments Due By Period
(in thousands)
Contractual Financial Obligations Less Than 1 After 5
Total Year 1-3 Years 4-5 Years years
--------------- --------------- -------------------------------------------------
Long-term debt and capital leases $ 163 $ 91 $ 72 $ - $ -
Purchase commitments(1) 4,738 4,738 - - -
-----------------------------------------------------------------------------------
Total contractual obligations $ 4,901 $ 4,829 $ 72 $ - $ -
===================================================================================
(1) Purchase commitments consist primarily of copper commitments. In the normal
course of business we expect to purchase approximately $4.7 million of raw
materials in the form of legally binding commitments.
The fixed rate interest on long-term debt includes the amount of interest due on
our fixed rate long-term debt. These amounts do not include interest on our
variable rate obligation related to the revolving credit facility.
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.
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.
The following accounting policies may involve a higher degree of estimation or
assumption:
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.
Allowance for Doubtful Accounts - Our allowance for doubtful accounts is
estimated to cover the risk of loss related to accounts receivable. We establish
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends in collections and write-offs,
current customer status, the age of the receivable, economic conditions and
other information. Aged receivables are reviewed on a monthly basis to determine
if the reserve is adequate and adjusted accordingly at that time. The evaluation
of these factors involves complex, subjective judgments. Thus, changes in these
factors or changes in economic circumstances may significantly impact our
Consolidated Financial Statements.
-16-
Inventory Reserves - We establish a reserve for inventories based on the change
in inventory requirements due to product line changes, the feasibility of using
obsolete parts for upgraded part substitutions, the required parts needed for
part supply sales, replacement parts and for estimated shrinkage.
Warranty - A provision is made for estimated warranty costs at the time the
product is shipped and revenue is recognized. The warranty period is: the
earlier of one year from the date of first use or 18 months from date of
shipment for parts only; an additional four years on compressors (if
applicable); 15 years on gas-fired heat exchangers (if applicable); and 25 years
on stainless steel heat exchangers (if applicable). Warranty expense is
estimated based on the warranty period, historical warranty trends and
associated costs, and any known identifiable warranty issue. Warranty charges
associated with heat exchanges do not occur frequently.
Due to the absence of warranty history on new products, an additional provision
may be made for such products. Our estimated future warranty cost is subject to
adjustment from time to time depending on changes in actual warranty trends and
cost experience. Should actual claim rates differ from our estimates, revisions
to the estimated product warranty liability would be required.
Medical Insurance - A provision is made for medical costs associated with our
Medical Employee Benefit Plan, which is primarily a self-funded plan. A
provision is made for estimated medical costs based on historical claims paid
and potential significant future claims. The plan is supplemented by employee
contributions and an excess policy for claims over $100,000 each.
Stock Compensation - We adopted SFAS 123R, effective January 1, 2006. Applying
this standard to value equity-based compensation requires us to use significant
judgment and to make estimates, particularly for the assumptions used in the
Black-Scholes valuation model, such as stock price volatility and expected
option lives, as well as for the expected option forfeiture rates. In accordance
with SFAS 123R we measure the cost of employee services received in exchange for
an award of equity instruments using the Black-Scholes valuation model to
calculate the grant-date fair value of the award. The compensation cost is
recognized over the period of time during which an employee is required to
provide service in exchange for the award, which will be the vesting period.
Historically, actual results have been within management's expectations.
New Accounting Pronouncements
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"), which 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. Adoption of
SFAS 157 did not have a material impact on our Consolidated Financial
Statements.
In February, 2007, the FASB issued FASB Statement 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 fair value option has not been
elected for any financial assets or liabilities at December 31, 2008.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS
141R"), which replaced FASB Statement 141, Business Combination, which changes
the accounting for business combinations and noncontrolling interests. Among
other things, when compared to the predecessor guidance SFAS 141R will require
(i) more assets acquired and liabilities assumed to be measured at fair value as
of the acquisition date, (ii) liabilities related to contingent consideration to
be remeasured to fair value each subsequent reporting period, and (iii) acquirer
in preacquisition periods to expense all acquisition-related costs. SFAS 141R
must be applied prospectively for fiscal years beginning after December 15,
2008. We do not expect adoption of SFAS 141R to have a material impact on our
Consolidated Financial Statements.
-17-
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 must be adopted no later than January 1, 2009. We do not expect
adoption of SFAS 160 to 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 will be effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do not expect adoption of
SFAS 161 to have a material impact on our Consolidated Financial Statements.
In June 2008, the Emerging Issues Task Force ("EITF") issued No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities ("EITF 03-6-1"), which addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share ("EPS") under the two-class method. EITF 03-6-1
will be effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented will be adjusted retrospectively to conform to
the provisions of EITF 03-6-1. We are evaluating the expected impact of adoption
of EITF 03-6-1.
In December 2008, the FASB issued FSP No. FAS 132 R-1, Employers' Disclosures
about Postretirement Benefit Plan Assets ("FAS 132R-1"), which provides guidance
on an employer's disclosures about plan assets of a defined benefit pension or
other postretirement plan and requires employers to provide more transparency
about the assets held by retirement plan and the concentrations of risk in those
plans. FAS 132 R-1 will be effective for fiscal years beginning after December
15, 2009. We do not expect the adoption of FAS 132 R-1 to have a material impact
on our Consolidated Financial Statements.
Forward-Looking Statements
This Annual Report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", "will", and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions, which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. While the recent adverse economic climate has not yet impacted the
business of AAON, there can be no assurances that economic conditions will not
adversely affect our business in the future. We undertake no obligations to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Important factors that could cause
results to differ materially from those in the forward-looking statements
include (1) the timing and extent of changes in raw material and component
prices, (2) the effects of fluctuations in the commercial/industrial new
construction market, (3) the timing and extent of changes in interest rates, as
well as other competitive factors during the year, and (4) general economic,
market or business conditions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to interest rate risk on our revolving credit facility, which
bears variable interest based upon a prime or LIBOR rate. We had $2.9 million
outstanding as of December 31, 2008.
-18-
Foreign sales accounted for less than approximately 5% of our sales in 2008 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 SFAS 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. Transaction gains or losses that arise
from exchange rate fluctuations applicable to transactions denominated in
Canadian currency are included in the results of operations as incurred. The
exchange rate of the Canadian dollar to the United States dollar was $0.8196 and
$1.0193 at December 31, 2008 and 2007, respectively.
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 2008 due to the economic environment. Raw
materials pricing had steadily increased from the beginning of 2006 until the
second half of 2008 when pricing sharply decreased. We experienced raw materials
price increases of approximately 70% for steel, 18% for aluminum and 19% for
copper from 2006 through the second quarter of 2008. Prices decreased by
approximately 40% for steel, 76% for aluminum and 62% for copper from June 30,
2008 to December 31, 2008. We attempt to limit the impact of price increases on
these materials by entering cancelable and noncancelable fixed price contracts
with our major suppliers for periods of 6 -12 months.
We do not utilize derivative financial instruments to hedge our interest rate,
foreign currency exchange rate or raw materials price risks.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included commencing at page
30.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this Annual Report on Form 10-K, 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:
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 Annual Report was prepared, as appropriate
to allow timely decisions regarding the required disclosure.
AAON's 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 December 31, 2008.
-19-
(b) Management's Annual Report on Internal Control over Financial
Reporting
The management of AAON, Inc. and our subsidiaries is responsible for
establishing and maintaining adequate internal control over financial reporting.
Our internal control system was designed to provide reasonable assurance to our
management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
In making our assessment of internal control over financial reporting,
management used the criteria issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control--Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2008, our internal
control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued an attestation
report on our internal control over financial reporting.
Date: March 10, 2009 /s/ Norman H. Asbjornson
----------------------------
Norman H. Asbjornson
Chief Executive Officer
/s/ Kathy I. Sheffield
----------------------------
Kathy I. Sheffield
Chief Financial Officer
(c) Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Board of Directors and Stockholders
AAON, Inc.
We have audited AAON, Inc. (a Nevada Corporation) and subsidiaries'
(collectively, the Company) internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management's Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
-20-
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control--Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
AAON, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2008 and our report dated March 10, 2009 expressed an unqualified opinion on
those consolidated financial statements.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
March 10, 2009
(d) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that
occurred during the fourth quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
None.
-21-
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5)
of Regulation S-K is incorporated by reference to the information contained in
our definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with our 2009 Annual Meeting of Stockholders.
Code of Ethics
--------------
We adopted a code of ethics that applies to our principal executive officer,
principal financial officer and principal accounting officer or persons
performing similar functions, as well as other employees and directors. We will
provide any person without charge, upon request, a copy of such code of ethics.
Requests may be directed to AAON, Inc., 2425 South Yukon Avenue, Tulsa, Oklahoma
74107, attention Kathy I. Sheffield, or by calling (918) 382-6204.
Item 11. Executive Compensation.
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K
is incorporated by reference to the information contained in our definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with our 2009 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by Item 403 and Item 201(d) of Regulation S-K is
incorporated by reference to the information contained in our definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with our 2009 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
Transactions with Related Persons
Our Code of Conduct guides the Board of Directors in its actions and
deliberations with respect to related party transactions. Under the Code,
conflicts of interest, including any involving the directors or any Named
Officers, are prohibited except under any guidelines approved by the Board of
Directors. Only the Board of Directors may waive a provision of the Code of
Conduct for a director or a Named Officer, and only then in compliance with all
applicable laws and rules and regulations. We did not enter into any new related
party transactions and have no preexisting related party transactions in 2008 or
2007, respectively.
Director Independence
The Board of Directors ("Board") has adopted director independence standards
that meet and/or exceed listing standards set by NASDAQ. NASDAQ has set forth
six applicable tests and requires that a director who fails any of the tests be
deemed not independent. In 2008, the Board affirmatively determined, considering
the standards described more fully below, that Messrs. Short, Lackey, McElroy,
and Stephenson are independent. Upon the resignation of Mr. Pantaleoni, followed
by the subsequent election of Mr. Levine, the Board affirmatively determined
that Mr. Levine is independent. As a result of his position as our President,
Mr. Asbjornson does not qualify as independent under the standards set forth
below. The Board has determined that Mr. Johnson should not be deemed
independent, because he is a member of the law firm that serves as our General
Counsel. In addition, each member of the Audit Committee and the Compensation
Committee is independent.
-22-
Our director independence standards are as follows:
It is the policy of the Board that a majority of the members of the Board
consist of directors independent of the Company and of our management. For a
director to be deemed "independent," the Board shall affirmatively determine
that the director has no material relationship with us or our affiliates or any
member of the senior management or his or her affiliates. In making this
determination, the Board applies, at a minimum and in addition to any other
standards for independence established under applicable statutes and regulations
as outlined by the NASDAQ listing standards Rule 4200, the following standards,
which it may amend or supplement from time to time:
o A director who is, or has been within the last three years, an employee of
the Company, or whose immediate family member is, or has been within the
last three years a Named Officer, can not be deemed independent. Employment
as an interim Chairman or Chief Executive Officer will not disqualify a
director from being considered independent following that employment.
o A director who has received, or who has an immediate family member who has
received, during any twelve-month period within the last three years, more
than $60,000 in direct compensation from us, other than director and
committee fees and benefits under a tax-qualified retirement plan, or
non-discretionary compensation for prior service (provided such
compensation is not contingent in any way on continued service), can not be
deemed independent. Compensation received by a director for former service
as an interim Chairman or Chief Executive Officer and compensation received
by an immediate family member for service as one of our non-executive
employees will not be considered in determining independence under this
test.
o A director who (A) is, or whose immediate family member is, a current
partner of a firm that is our external auditor; (B) is a current employee
of such a firm; or (C) was, or whose immediate family member was, within
the last three years (but is no longer) a partner or employee of such a
firm and personally worked on our audit within that time can not be deemed
independent.
o A director who is, or whose immediate family member is, or has been within
the last three years, employed as an executive officer of another company
where any of our present Named Officers at the time serves or served on
that company's compensation committee can not be deemed independent.
o A director who is a current employee or general partner, or whose immediate
family member is a current executive officer or general partner, of an
entity that has made payments to, or received payments from us for property
or services in an amount which, in any of the last three fiscal years,
exceeds the greater of $200,000 or 5% of such other entity's consolidated
gross revenues, other than payments arising solely from investments in our
securities or payments under non-discretionary charitable contribution
matching programs, can not be deemed independent.
For purposes of the independence standards set forth above, the terms:
o "affiliate" means any of our consolidated subsidiaries and any other
company or entity that controls, is controlled by or is under common
control with us;
o "executive officer" means an "officer" within the meaning of Rule
16a-1(f) under the Securities Exchange Act of 1934, as amended; and
o "immediate family" means spouse, parents, children, siblings, mothers-
and fathers-in-law, sons- and daughters-in-law, brothers- and
sisters-in-law and anyone (other than employees) sharing a person's
home, but excluding any person who is no longer an immediate family
member as a result of legal separation or divorce, death or
incapacitation.
The Board undertakes an annual review of the independence of all non-employee
directors. In advance of the meeting at which this review occurs, each
non-employee director is asked to provide the Board with full information
regarding the director's business and other relationships with us and our
affiliates and with senior management and their affiliates to enable the Board
to evaluate the director's independence.
-23-
Directors have an affirmative obligation to inform the Board of any material
changes in their circumstances or relationships that may impact their
designation by the Board as "independent." This obligation includes all business
relationships between, on the one hand Directors or members of their immediate
family, and, on the other hand, us and our affiliates or members of senior
management and their affiliates, whether or not such business relationships are
subject to any other approval requirements.
Item 14. Principal Accountant Fees and Services.
Incorporated by reference to our definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2009 Annual Meeting of
Stockholders.
-24-
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial statements.
See Index to Consolidated Financial Statements on page 28.
(b) Exhibits:
(3) (A) Articles of Incorporation (i)
(A-1) Article Amendments (ii)
(B) Bylaws (i)
(B-1) Amendments of Bylaws (iii)
(4) (A) Third Restated Revolving Credit and Term Loan
Agreement and related documents (iv)
(A-1) Third Amendment to Third Restated Revolving Credit
and Term Loan Agreement (v)
(B) Rights Agreement dated February 19, 1999, as
amended (vi)
(10.1) AAON, Inc. 1992 Stock Option Plan, as amended (vii)
(10.2) AAON, Inc. 2007 Long-Term Incentive Plan, as amended (viii)
(21) List of Subsidiaries (ix)
(23) Consent of Grant Thornton LLP
(31.1) Certification of CEO
(31.2) Certification of CFO
(32.1) Section 1350 Certification - CEO
(32.2) Section 1350 Certification - CFO
----------
(i) Incorporated herein by reference to the exhibits to our
Form S-18 Registration Statement No. 33-18336-LA.
(ii) Incorporated herein by reference to the exhibits to our
Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, and to our Forms 8-K dated March 21,
1994, March 10, 1997, and March 17, 2000.
(iii) Incorporated herein by reference to our Forms 8-K dated
arch 10, 1997, May 27, 1998 and February 25, 1999, or
exhibits thereto.
(iv) Incorporated by reference to exhibit to our Form 8-K
dated July 30, 2004.
(v) Incorporated herein by reference to exhibit to our
Form 8-K dated August 13, 2008.
(vi) Incorporated by reference to exhibits to our Forms 8-K
dated February 25, 1999, and August 20, 2002, and Form
8-A Registration Statement No. 000-18953, as amended.
-25-
(vii) Incorporated herein by reference to exhibits to our
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991, and to our Form S-8 Registration
Statement No. 33-78520, as amended.
(viii) Incorporated herein by reference to Appendix B to our
definitive Proxy Statement for the 2007 Annual Meeting
of Stockholders filed April 23, 2007.
(ix) Incorporated herein by reference to exhibits to our
Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
-26-
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized.
AAON, INC.
Dated: March 10, 2009 By: /s/ Norman H. Asbjornson
-------------------------------------
Norman H. Asbjornson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 10, 2009 /s/ Norman H. Asbjornson
-------------------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 10, 2009 /s/ Kathy I. Sheffield
-------------------------------------
Kathy I. Sheffield
Vice President and Treasurer
(principal financial officer
and principal accounting officer)
Dated: March 10, 2009 /s/ John B. Johnson, Jr.
-------------------------------------
John B. Johnson, Jr.
Director
Dated: March 10, 2009 /s/ Charles C. Stephenson, Jr.
----------------------------------
Charles C. Stephenson, Jr.
Director
Dated: March 10, 2009 /s/ Jack E. Short
-------------------------------------
Jack E. Short
Director
Dated: March 10, 2009 /s/ Paul K. Lackey, Jr.
-------------------------------------
Paul K. Lackey, Jr.
Director
Dated: March 10, 2009 /s/ A.H. McElroy II
-------------------------------------
A.H. McElroy II
Director
Dated: March 10, 2009 /s/ Jerry Levine
-------------------------------------
Jerry Levine
Director
-27-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm
- Grant Thornton LLP 29
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Stockholders' Equity and Comprehensive Income 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
-28-
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Board of Directors and Stockholders
AAON, Inc.
We have audited the accompanying consolidated balance sheets of AAON, Inc. (a
Nevada corporation) and subsidiaries (collectively, the Company) as of December
31, 2008 and 2007, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AAON, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), AAON, Inc.'s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 10,
2009 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
March 10, 2009
-29-
AAON, Inc., and Subsidiaries
Consolidated Balance Sheets
December 31,
2008 2007
--------------------------------------
(in thousands, except
share and per share data)
Assets
Current assets:
Cash and cash equivalents $ 269 $ 879
Accounts receivable, net 38,804 38,813
Inventories, net 36,382 31,849
Prepaid expenses and other 428 442
Deferred tax assets 4,235 4,312
--------------------------------------
Total current assets 80,118 76,295
Land 2,153 2,354
Buildings 36,371 32,211
Machinery and equipment 87,219 82,872
Furniture and fixtures 7,076 6,912
--------------------------------------
Total property, plant and equipment 132,819 124,349
Less: Accumulated depreciation 72,269 63,579
--------------------------------------
Property, plant and equipment, net 60,550 60,770
Note receivable, long-term 75 75
--------------------------------------
Total assets 140,743 137,140
======================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility 2,901 -
Current maturities of long-term debt 91 91
Accounts payable 14,715 15,059
Dividends payable 2,773 2,943
Accrued liabilities 19,038 19,414
--------------------------------------
Total current liabilities 39,518 37,507
Other long-term liabilities 121 239
Deferred tax liabilities 4,582 3,974
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 7,500,000 shares
authorized, no shares issued - -
Common stock, $.004 par value, 75,000,000 shares
authorized, 17,208,733 and 18,054,246 issued and
outstanding at December 31, 2008 and 2007, respectively 71 73
Additional paid in capital 538 -
Accumulated other comprehensive income, net of tax 778 1,942
Retained earnings 95,135 93,405
--------------------------------------
Total stockholders' equity 96,522 95,420
--------------------------------------
Total liabilities and stockholders' equity $ 140,743 $ 137,140
======================================
The accompanying notes are an integral part of these statements.
-30-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
Year Ending December 31,
2008 2007 2006
---------------------------------------------------
(in thousands, except per share data)
Net sales $ 279,725 $ 262,517 $ 231,460
Cost of sales 212,549 205,148 187,570
---------------------------------------------------
Gross profit 67,176 57,369 43,890
Selling, general and administrative expenses 23,788 21,703 18,059
---------------------------------------------------
Income from operations 43,388 35,666 25,831
Interest expense (71) (10) (81)
Interest income 27 8 24
Other income (expense), net 724 (321) 424
---------------------------------------------------
Income before income taxes 44,068 35,343 26,198
Income tax provision 15,479 12,187 9,065
---------------------------------------------------
Net income $ 28,589 $ 23,156 $ 17,133
===================================================
Earnings per share:
Basic $ 1.63 $ 1.24* $ 0.93*
===================================================
Diluted $ 1.60 $ 1.22* $ 0.90*
===================================================
Cash dividends declared per common share $ 0.32 $ 0.32* $ 0.32*
===================================================
Weighted average shares outstanding:
Basic 17,560 18,628* 18,456*
===================================================
Diluted 17,855 18,927* 18,968*
===================================================
* Reflects three-for-two stock split effective August 21, 2007.
The accompanying notes are an integral part of these statements.
-31-
AAON, Inc., and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
-------------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 2005 18,351* $ 74* $ - $ 513 $ 78,908 $ 79,495
Comprehensive income:
Net income - - - - 17,133 17,133
Foreign currency translation
adjustment - - - 154 - 154
------------
Total comprehensive income 17,287
Stock options exercised, including tax
benefits 408* 1* 3,107 - - 3,108
Share-based compensation - - 500 - - 500
Stock repurchased and retired (251)* (1)* (3,422) - (432) (3,855)
Dividends - - - - (4,943) (4,943)
-------------------------------------------------------------------------------------------
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 - - - - 23,156 23,156
Foreign currency translation
adjustment - - - 1,275 - 1,275
------------
Total comprehensive income 24,431
Stock options exercised, including tax
benefits 613* 4* 5,420 - - 5,424
Share-based compensation - - 582 - - 582
Stock repurchased and retired (1,067)* (5)* (6,187) - (14,581) (20,773)
Dividends - - - - (5,440) (5,440)
-------------------------------------------------------------------------------------------
Balance at December 31, 2007 18,054* 73* - 1,942 93,405 95,420
Comprehensive income:
Net income - - - - 28,589 28,589
Foreign currency translation
adjustment - - - (1,164) - (1,164)
------------
Total comprehensive income 27,425
Stock options exercised and restricted
stock awards vested, including tax
benefits 366 2 3,307 - - 3,309
Share-based compensation - - 750 - - 750
Stock repurchased and retired (1,211) (4) (3,519) - (21,238) (24,761)
Dividends - - - - (5,621) (5,621)
-------------------------------------------------------------------------------------------
Balance at December 31, 2008 17,209 $ 71 $ 538 $ 778 $ 95,135 $ 96,522
===========================================================================================
* Reflects three-for-two stock split effective August 21, 2007
The accompanying notes are an integral part of these statements.
-32-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
2008 2007 2006
-------------------------------------------
(in thousands)
Operating Activities
Net income $ 28,589 $ 23,156 $ 17,133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,412 9,665 9,146
Provision for losses on accounts receivable 547 203 (59)
Share-based compensation 750 582 500
Excess tax benefits from stock options exercised and
restricted stock awards vested (1,613) (2,998) (1,852)
Gain on disposition of assets (27) (108) -
Deferred income taxes 160 (124) (510)
Changes in assets and liabilities:
Accounts receivable (905) (1,760) (4,197)
Inventories, net (4,779) (2,095) (5,790)
Prepaid expenses and other 13 (172) 776
Accounts payable 449 (1,370) 4,178
Accrued liabilities 851 6,268 103
-------------------------------------------
Net cash provided by operating activities 33,447 31,247 19,428
-------------------------------------------
Investing Activities
Proceeds from sale of property, plant and equipment 17 123 -
Proceeds from matured certificate of deposit - - 3,000
Investment in certificate of deposit - - (2,000)
Capital expenditures (9,610) (10,874) (17,781)
-------------------------------------------
Net cash used in investing activities (9,593) (10,751) (16,781)
-------------------------------------------
Financing Activities
Borrowings under revolving credit facility 46,865 12,142 53,706
Payments under revolving credit facility (43,964) (12,142) (53,706)
Borrowings (payments) of long-term debt (118) 271 (108)
Stock options exercised 1,696 2,426 1,256
Excess tax benefits from stock options exercised and
restricted stock awards vested 1,613 2,998 1,852
Repurchase of stock (24,761) (20,773) (3,855)
Cash dividends paid to stockholders (5,791) (4,958) (2,478)
-------------------------------------------
Net cash used in financing activities (24,460) (20,036) (3,333)
-------------------------------------------
Effects of exchange rate on cash (4) 131 137
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (610) 591 (549)
-------------------------------------------
Cash and cash equivalents, beginning of year 879 288 837
-------------------------------------------
Cash and cash equivalents, end of year $ 269 $ 879 $ 288
===========================================
The accompanying notes are an integral part of these statements.
-33-
AAON, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008
1. Business, Summary of Significant Accounting Policies and Other Financial Data
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 Annual Report to "AAON," the "Company", "we," "us," "our" or "ours"
refer to AAON, Inc., and our subsidiaries.
We are engaged in the manufacture and sale of air conditioning and heating
equipment consisting of standardized and custom rooftop units, chillers,
air-handling units, make-up air units, heat recovery units, condensing units,
coils and boilers. All significant intercompany accounts and transactions have
been eliminated.
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.
Common Stock Split
------------------
On July 12, 2007, our Board of Directors approved a three-for-two stock split of
the 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 2007 and 2006 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 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. 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.
Use of Estimates
----------------
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.
-34-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Use of Estimates (continued)
----------------------------
The most significant estimates include the allowance for doubtful accounts,
inventory reserves, warranty accrual, medical insurance accrual, and share-based
compensation. Actual results could differ materially from those estimates.
Concentrations
--------------
Our customers are concentrated primarily in the domestic commercial and
industrial new construction and replacement markets. To date, virtually all of
our sales have been to the domestic market, with foreign sales accounting for
less than 5% of revenues in 2008. No customer accounted for 10% of our sales
during 2008, 2007 or 2006 or more than 5% of our accounts receivable balance at
December 31, 2008 or 2007.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of bank deposits and highly liquid,
interest-bearing money market funds with initial maturities of three months or
less.
Accounts Receivable
-------------------
We grant credit to our 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:
December 31,
2008 2007
---------------------------------
(in thousands)
Accounts receivable $ 39,599 $ 39,220
Less: Allowance for doubtful accounts (795) (407)
---------------------------------
Total, net $ 38,804 $ 38,813
=================================
Year Ended December 31,
2008 2007 2006
---------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 407 $ 266 $ 685
Provision for losses on accounts receivable 674 625 589
Adjustments to provision (127) (422) (648)
Accounts receivable written off, net of
recoveries (159) (62) (360)
---------------------------------------------------
Balance, end of period $ 795 $ 407 $ 266
===================================================
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.
-35-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Inventories (continued)
-----------------------
Inventory balances at December 31, 2008 and 2007, and the related changes in the
allowance for excess and obsolete inventories for the three years ended December
31, 2008, 2007 and 2006, are as follows:
December 31,
2008 2007
---------------------------------
(in thousands)
Raw materials $ 32,212 $ 27,651
Work in process 2,545 1,760
Finished goods 1,975 2,788
---------------------------------
36,732 32,199
Less: Allowance for excess and obsolete inventories (350) (350)
---------------------------------
Total, net $ 36,382 $ 31,849
=================================
Year Ended December 31,
2008 2007 2006
---------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 350 $ 350 $ 350
Provision for excess and obsolete inventories 800 - -
Adjustments to reserve (800) - -
---------------------------------------------------
Balance, end of period $ 350 $ 350 $ 350
===================================================
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Maintenance and repairs,
including replacement of minor items, are charged to expense as incurred; major
additions to physical properties are capitalized. Property, plant and equipment
are depreciated using the straight-line method over the following estimated
useful lives:
Description Years
--------------------------------------------------------------- ---------------
Buildings 10-40
Machinery and equipment 3-15
Furniture and fixtures 2-5
Impairment of Long-Lived Assets
-------------------------------
We evaluate long-lived assets for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. When an indicator of impairment has
occurred, management's estimate of undiscounted cash flows attributable to the
assets is compared to the carrying value of the assets to determine whether
impairment has occurred. If an impairment of the carrying value has occurred,
the amount of the impairment recognized in the financial statements is
determined by estimating the fair value of the assets and recording a loss for
the amount that the carrying value exceeds the estimated fair value. Management
determined no impairment was required during 2008, 2007 and 2006.
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. During 2009, in the normal course of business we expect to purchase
approximately $4.7 million of copper in the form of legally binding commitments.
-36-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Commitments and Contractual Agreements (continued)
--------------------------------------------------
We entered into the following legally binding copper commitments to lock in
pricing due to the volatility in the market during 2008:
Pounds per Month Months Price Total
-------------------------------------------------------------------------
(in thousands) (in thousands)
120 12 2.41 $ 3,469
25 12 2.02 606
25 12 2.21 663
$ 4,738
=====================
Accrued Liabilities
-------------------
At December 31, accrued liabilities were comprised of the following:
2008 2007
---------------------------------
(in thousands)
Warranty $ 6,589 $ 6,308
Commissions 8,816 8,851
Payroll 1,883 2,175
Workers' compensation 610 1,127
Medical self-insurance 886 608
Other 254 345
---------------------------------
Total $ 19,038 $ 19,414
=================================
Warranties
----------
A provision is made for estimated warranty costs at the time the related
products are sold based upon the warranty period, historical trends, new
products and any known identifiable warranty issues. Warranty expense was $4.0
million, $4.0 million and $2.4 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Changes in the warranty accrual during the years ended December 31, 2008, 2007
and 2006 are as follows:
2008 2007 2006
-------------------------------------------------
(in thousands)
Balance, beginning of the year $ 6,308 $ 5,572 $ 6,282
Payments made (3,608) (3,321) (3,128)
Warranties issued 3,889 3,757 4,343
Changes in estimate related to preexisting warranties - 300 (1,925)
-------------------------------------------------
Balance, end of period $ 6,589 $ 6,308 $ 5,572
=================================================
In 2007, the provision for warranties was increased due to an extension in the
warranty period. In 2006, the provision for warranties was decreased due to a
change in estimate related to preexisting warranties occurring in the fourth
quarter of 2006. The change in estimate was due to factors stated above, such as
current information on historical trends and a reduction in identifiable
warranty issues.
-37-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
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.
The following table sets forth the computation of basic and diluted earnings per
share:
Years Ended,
2008 2007* 2006*
------------------------------------------------------
(in thousands except share and per share data)
Numerator:
Net income $ 28,589 $ 23,156 $ 17,133
=============== =============== ===============
Denominator:
Denominator for basic earnings per share -
Weighted average shares 17,560,295 18,628,029 18,456,108
Effect of dilutive stock options 294,568 299,015 511,486
--------------- --------------- ---------------
Denominator for diluted earnings per share -
Weighted average shares 17,854,863 18,927,044 18,967,594
=============== =============== ===============
Earnings per share
Basic $ 1.63 $ 1.24 $ 0.93
=============== =============== ===============
Diluted $ 1.60 $ 1.22 $ 0.90
=============== =============== ===============
Anti-dilutive shares 308,250 282,100 269,250
=============== =============== ===============
Weighted average exercise price $ 16.63 $ 17.81 $ 16.19
=============== =============== ===============
* Reflects three-for-two stock split effective August 21, 2007.
Advertising
-----------
Advertising costs are expensed as incurred. Advertising expense was
approximately $635,000, $784,000 and $549,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
Research and Development
------------------------
Research and development costs are expensed as incurred. Research and
development expense was $2.6 million, $2.5 million and $2.0 million for the
years ended December 31, 2008, 2007 and 2006, respectively.
Shipping and Handling
---------------------
We incur shipping and handling costs in the distribution of products sold that
are recorded in cost of sales. Shipping charges that are billed to the customer
are recorded in revenues.
-38-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Profit Sharing Bonus Plan
-------------------------
We maintain a discretionary profit sharing bonus plan under which 10% of pre-tax
profit at each subsidiary is paid to eligible employees on a quarterly basis in
order to reward employee productivity. Eligible employees are regular full-time
employees who are actively employed and working on the first day of the calendar
quarter and remain continuously, actively employed and working on the last day
of the quarter and who work at least 80% of the quarter. Profit sharing expense
was $5.1 million, $4.2 million and $3.3 million for the years ended December 31,
2008, 2007 and 2006, respectively.
Defined Contribution Plan - 401(k)
----------------------------------
We sponsor a defined contribution benefit plan ("the Plan"). Eligible employees
may make contributions in accordance with the Plan and IRS guidelines. In
addition, effective May 30, 2005, the Plan was amended to provide for automatic
enrollment and provided for an automatic increase to the deferral percent at
January 1st of each year and each year thereafter, unless the employee elects to
decline the automatic increase and enrollment. Beginning with pay periods after
May 30, 2005, the one year enrollment waiting period was waived. Administrative
expenses we paid for the plan were approximately $93,000, $98,000 and $85,000
for the years ended 2008, 2007 and 2006, respectively.
After January 1, 2007, our matching increased to 50% of the employee's salary
deferral up to the first 9% of compensation. From January 1, 2006 to December
31, 2006, we matched 50% of the employee's salary deferral up to the first 7% of
compensation. We contribute in the form of cash and direct the investment to
shares of AAON Stock. No other purchases of AAON stock are permitted. Employees
are 100% vested in salary deferral contributions and vest 20% per year at the
end of years two through six of employment in employer matching contributions.
We made matching contributions of $1.4 million, $1.3 million and $1.0 million in
2008, 2007 and 2006, respectively.
New Accounting Pronouncements
-----------------------------
In September 2006, the FASB released SFAS No. 157, Fair Value Measurements
("SFAS 157"), which 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. Adoption of
SFAS 157 did not have a material impact on our Consolidated Financial
Statements.
In February, 2007, the FASB issued FASB Statement 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 fair value option has not been
elected for any financial assets or liabilities at December 31, 2008.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations ("SFAS
141R"), which replaced FASB Statement 141, Business Combinations, which changes
the accounting for business combinations and noncontrolling interests. Among
other things, when compared to the predecessor guidance SFAS 141R will require
(i) more assets acquired and liabilities assumed to be measured at fair value as
of the acquisition date, (ii) liabilities related to contingent consideration to
be remeasured to fair value each subsequent reporting period, and (iii) acquirer
in preacquisition periods to expense all acquisition-related costs. SFAS 141R
must be applied prospectively for fiscal years beginning after December 15,
2008. We do not expect adoption of SFAS 141R to have a material impact on our
Consolidated Financial Statements.
-39-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
New Accounting Pronouncements (continued)
-----------------------------------------
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"),
which changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 must be adopted by us no later than January 1, 2009. We do not
expect adoption of SFAS 160 to 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 will be effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do not expect adoption of
SFAS 161 to have a material impact on our Consolidated Financial Statements.
In June 2008, the Emerging Issues Task Force ("EITF") issued No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities ("EITF 03-6-1"), which addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share ("EPS") under the two-class method. EITF 03-6-1
will be effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. All
prior-period EPS data presented will be adjusted retrospectively to conform to
the provisions of EITF 03-6-1. We are evaluating the expected impact of adoption
of EITF 03-6-1.
In December 2008, the FASB issued FSP No. FAS 132 R-1, Employers' Disclosures
about Postretirement Benefit Plan Assets ("FAS 132R-1"), which provides guidance
on an employer's disclosures about plan assets of a defined benefit pension or
other postretirement plan and requires employers to provide more transparency
about the assets held by retirement plan and the concentrations of risk in those
plans. FAS 123 R-1 will be effective for fiscal years beginning after December
15, 2009. We do not expect the adoption of FAS 132 R-1 to have a material impact
on our Consolidated Financial Statements.
Segments
--------
Management has reviewed our business operations and determined that we have two
operating segments as defined in SFAS 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). We have a domestic and foreign
operating segment. The domestic operating segment includes the operations of
AAON, Inc. and AAON Coil Products, Inc. The foreign operating segment includes
the operations of AAON Canada and AAON Properties. Management has determined
that the foreign operating segment does not constitute a separate reporting
segment based on the quantitative threshold tests of SFAS 131. We sell similar
products with similar economic characteristics to similar classes of customers.
The technologies and operations are highly integrated. Revenues and costs are
reviewed monthly by management on a product line basis as a single business
segment.
2. Supplemental Cash Flow Information
Interest payments of approximately $71,000, $10,000 and $81,000 were made during
the years ended December 31, 2008, 2007 and 2006, respectively. Payments for
income taxes of $12.7 million, $10.2 million and $6.5 million were made during
the years ended December 31, 2008, 2007 and 2006, respectively. Dividends
payable of $2.8 million and $2.9 million were accrued as of December 31, 2008
and 2007 and paid on January 3, 2009 and 2008, respectively.
-40-
3. 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 (3.50% at December 31, 2008). No fees are associated with
the unused portion of the committed amount.
At December 31, 2008, we had $2.9 million borrowed under the revolving credit
facility. We had no borrowings outstanding under the revolving credit facility
at December 31, 2007. Borrowings available under the revolving credit facility
at December 31, 2008, were $11.3 million. At December 31, 2008 and 2007, 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 December 31, 2008 our tangible net worth was $96.5 million.
Our total liabilities to tangible net worth ratio was 2.2. Our working capital
was $40.6 million. On July 30, 2008, we renewed the line of credit with a
maturity date of July 30, 2009. We expect to renew our revolving credit
agreement in July 2009. We do not anticipate that the current situation in the
credit market will impact our renewal.
4. Debt
Short-term debt at December 31, 2008 and 2007 consisted of notes payable
totaling approximately $91,000 due in 2009 and 2008, respectively. In 2008 and
2007, respectively, the notes payable are due in monthly installments of $7,588,
with an interest rate of 4.148%, related to a computer capital lease.
5. Income Taxes
We follow the liability method of accounting for income taxes, which provides
that deferred tax liabilities and assets are based on the difference between the
financial statement and income tax bases of assets and liabilities using
currently enacted tax rates.
The income tax provision consists of the following:
Year Ending December 31,
2008 2007 2006
------------------------------------------
(in thousands)
Current $ 16,163 $ 12,631 $ 9,556
Deferred (684) (444) (491)
------------------------------------------
$ 15,479 $ 12,187 $ 9,065
==========================================
The reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
The "Other" tax rate primarily relates to certain domestic credits.
Year Ending December 31,
2008 2007 2006
------------------------------------------
Federal statutory rate 35% 35% 35%
State income taxes, net of
federal benefit 3% 3% 4%
Other (3%) (3%) (4%)
------------------------------------------
35% 35% 35%
==========================================
-41-
The tax effect of temporary differences giving rise to our deferred income taxes
at December 31 is as follows:
2008 2007 2006
---------------------------------------
(in thousands)
Net current deferred assets and (liabilities) relating to:
Valuation reserves $ 446 $ 295 $ 240
Warranty accrual 2,567 2,456 2,172
Other accruals 1,262 1,430 1,492
Other, net (40) 131 50
---------------------------------------
$ 4,235 $ 4,312 $ 3,954
=======================================
Net long-term deferred (assets) and liabilities relating to:
Depreciation and amortization $ 7,247 $ 6,376 $ 5,492
NOL (2,265) (2,019) (1,242)
Share-based compensation (400) (383) (189)
---------------------------------------
$ 4,582 $ 3,974 $ 4,061
=======================================
The total net operating loss ("NOL") deferred tax asset of approximately $2.3
million relates to AAON Canada. The NOL's originating in 2008, 2007 and 2006
will expire in twenty years, nineteen years and eighteen years, respectively.
The NOL's originating in 2005 will expire in 7 years.
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 is as follows:
(in thousands)
Balance at January 1, 2008 $ 253
Change as a result of tax positions taken during an earlier period -
Change as a result of tax positions taken during the current period -
Change as a result of settlements with tax authorities (168)
Change as a result of a lapse of the applicable statute of limitations (35)
--------------------
Balance at December 31, 2008 $ 50
====================
The total amount of unrecognized tax benefits that if recognized would impact
the effective tax rate is approximately $50,000.
We recognize accrued interest and penalties related to unrecognized tax benefits
in income tax expense. At December 31, 2008 and 2007, we had accrued
approximately $6,000 and $110,000 for the potential payment of interest and
penalties, respectively.
The total amount of unrecognized tax benefits at December 31, 2008 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.
Resolution of these tax benefits will occur during the year ending December 31,
2009. As of December 31, 2008, 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.
6. 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 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.
-42-
On May 22, 2007, our stockholders 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. 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 ("SFAS")
No. 123R 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 share less the present value of dividends, in accordance with the
provisions of SFAS 123R.
We recognized approximately $400,000 and $526,000 for the year ended December
31, 2008 and 2007, respectively, in pre-tax compensation expense related to
stock options in the Consolidated Statements of Income. The total pre-tax
compensation cost related to unvested stock options not yet recognized as of
December 31, 2008 is $1.1 million and is expected to be recognized over a
weighted-average period of 2.1 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 years ended December 31, 2008, 2007 and 2006:
2008 2007 2006
----------------------------------------
Directors and Officers:
Expected dividend yield 1.72% N/A 2.05%
Expected volatility 45.16% N/A 42.76%
Risk-free interest rate 3.08% N/A 5.05%
Expected life 7.0 yrs N/A 8.0 yrs
Forfeiture rate 0% N/A 0%
Employees:
Expected dividend yield 1.72% 1.67% 2.05%
Expected volatility 44.47% 41.92% 42.33%
Risk-free interest rate 3.05% 4.61% 4.84%
Expected life 8.0 yrs 6.3 yrs 6.3 yrs
Forfeiture rate 31% 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 our stock. We initiated a dividend payout in the
second quarter of 2006. We initially used the Board of Director approved
semi-annual dividends of $0.20 per share through July 3, 2007 to calculate the
expected dividend yield. The Board of Directors approved future dividend
payments of $0.16 per share related to the stock split effective August 21, 2007
and the table above was adjusted to reflect the change.
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The following is a summary of stock options outstanding as of December 31, 2008:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ------------------------------------
Weighted
Number Average Weighted Weighted
Outstanding at Remaining Average Aggregate Number Average
Range of December 31, Contractual Exercise Intrinsic Exercisable at Exercise
Exercise Prices 2008 Life Price Value December 31, 2008 Price
--------------------------------------------------------------------------------------------------------------------------
0.00 - 3.85 82,913 0.78 3.85 17.03 82,913 3.85
5.73 - 11.29 174,563 4.10 8.94 11.94 139,763 8.47
11.40 - 12.00 33,900 6.71 11.60 9.28 22,500 11.64
12.68 - 15.55 54,000 7.69 14.79 6.09 23,600 14.53
15.99 - 21.01 234,200 8.01 17.29 3.59 68,200 17.32
----------------------------------------------------------------------------------------------------
Total 579,576 5.69 $ 12.29 $ 11.12 336,976 $ 9.76
====================================================================================================
A summary of option activity under the plan as of December 31, 2008, is as
follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic Value
Options Shares Exercise Price Contractual Term ($000)
---------------- -------------------- ----------------- ------------------
Outstanding at December 31, 2005 1,670,520 5.01
Granted 269,251 15.93
Exercised (406,950) 3.09
Forfeited or Expired (71,325) 11.11
---------------- --------------------
Outstanding at December 31, 2006 1,461,496 7.33
Granted 139,188 15.98
Exercised (573,374) 4.24
Forfeited or Expired (98,377) 14.80
---------------- --------------------
Outstanding at December 31, 2007 928,933 9.47
Granted 50,000 16.64
Exercised (348,075) 4.87
Forfeited or Expired (51,282) 15.76
---------------- --------------------
Outstanding at December 31, 2008 579,576 12.29 5.69 $ 4,980
================ ==================== ================= ==================
Exercisable at December 31, 2008 336,976 $ 9.76 4.14 $ 3,747
================ ==================== ================= ==================
The weighted average grant date fair value of options granted during 2008 and
2007 was $6.95 and $7.07, respectively. The total intrinsic value of options
exercised during the year ended December 31, 2008 and 2007 was $6.4 million and
$8.7 million, respectively. The cash received from options exercised during the
year ended December 31, 2008 and 2007 was $1.7 million and $2.4 million,
respectively. The impact of these cash receipts is included in financing
activities in the accompany Consolidated Statements of Cash Flows.
A summary of the status of the unvested stock options for the year ended
December 31, 2008, is as follows:
Weighted Average Grant
Shares Date Fair Value
-------------------------------------------
Unvested at January 1, 2008 335,300 $ 6.49
Granted 50,000 6.95
Vested (92,700) 6.23
Forfeited (50,000) 6.48
-------------- ---------------------------
Unvested at December 31, 2008 242,600 $ 6.68
============== ===========================
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The total fair value of shares vested during the year ended December 31, 2008
was approximately $577,000.
During 2007, the Compensation Committee of the Board of Directors authorized and
issued restricted stock awards to key employees and directors. The restricted
stock award program offers the opportunity to earn shares of AAON Common Stock
over time, rather than options that give the right to purchase stock at a set
price. Restricted stock awards granted to directors vest one-third each year.
All other restricted stock awards vest at a rate of 20% per year. Restricted
stock awards are grants that entitle the holder to shares of common stock
subject to certain terms. The fair value of restricted stock awards is based on
the fair market value of AAON common stock on the respective grant dates,
reduced for the present value of dividends.
These awards are recorded at their fair value 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 2008 and 2007 was $19.34 and $20.85 per share, respectively. We
recognized approximately $350,000 and $56,000 for the year ended December 31,
2008 and 2007, respectively in pre-tax compensation expense related to
restricted stock awards in the Consolidated Statements of Income. In addition,
as of December 31, 2008, unrecognized compensation cost related to unvested
restricted stock awards was approximately $685,000 which is expected to be
recognized over a weighted average period of 1.7 years.
A summary of the unvested restricted stock awards for the year ended December
31, 2008, is as follows:
Shares
---------------------
Unvested at January 1, 2008 37,850
Granted 16,850
Vested (11,550)
Forfeited (700)
---------------------
Unvested at December 31, 2008 42,450
=====================
SFAS 123R requires that cash flows from the exercise of stock options resulting
from tax benefits in excess of recognized cumulative compensation costs be
classified as financing cash flows. For the twelve months ended December 31,
2008 and 2007, the excess tax benefits of stock options exercised and restricted
stock awards vested was $1.6 million and $3.0 million respectively.
7. Stockholder Rights Plan
During 1999, the Board of Directors adopted a Stockholder Rights Plan (the
"Plan"), which was amended in 2002. Under the Plan, stockholders of record on
March 1, 1999, received a dividend of one right per share of our Common Stock.
Stock issued after March 1, 1999, contains a notation incorporating the rights.
Each right entitles the holder to purchase one one-thousandth (1/1,000) of a
share of Series A Preferred Stock at an exercise price of $90. The rights are
traded with our Common Stock. The rights become exercisable after a person has
acquired, or a tender offer is made for, 15% or more of our Common Stock. If
either of these events occurs, upon exercise the holder (other than a holder
owning more than 15% of the outstanding stock) will receive the number of shares
of our Common Stock having a market value equal to two times the exercise price.
The rights may be redeemed by us for $0.001 per right until a person or group
has acquired 15% of our Common Stock. The rights expire on August 20, 2012.
8. 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 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 of $11.68 per
share. We purchased the shares at the then current market price.
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On November 6, 2007, we began 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 December 31, 2008, we had
repurchased a total of 1,692,258 shares under this program for an aggregate
price of $33,710,939, or an average price of $19.92 per share. 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 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 December 31, 2008, we repurchased
630,906 shares for an aggregate price of $10,102,687, or an average price of
$16.01 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 following their exercise of stock options. The maximum
number of shares to be repurchased is unknown under the program as the amount is
contingent on the number of shares sold by directors. Through December 31, 2008,
we repurchased 340,375 shares for an aggregate price of $6,957,423, or an
average price of $20.44 per share. We purchased the shares at the current market
price.
9. Dividends
On February 14, 2006, the Board of Directors voted to initiate a semi-annual
cash dividend. We initially paid Board of Director approved semi-annual
dividends of $0.20 per share. The Board of Directors approved future dividend
payments of $0.16 per share related to the stock split effective August 21,
2007.
Dividends were declared to shareholders of record at the close of business on
June 12, 2008 and December 12, 2008 and paid on July 3, 2008 and January 2,
2009. We paid cash dividends of $5.8 million and declared dividends payable of
$2.8 million for the year ended December 31, 2008. Cash dividend payments of
$5.0 million were made in 2007, and $2.9 million in dividends were declared and
accrued as a liability in December 2007 for payment in January 2008.
10. 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.
11. Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the years
ending December 31, 2008 and 2007:
Quarter Ended
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------
(in thousands, except per share data)
2008
Net sales $ 65,456 $ 74,781 $ 79,279 $ 60,209
Gross profit 15,652 17,990 20,018 13,516
Net income 6,434 7,760 8,355 6,040
Earnings per share:
Basic 0.36 0.43 0.49 0.35
Diluted 0.35 0.43 0.47 0.35
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Quarter Ended
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------
(in thousands, except per share data)
2007
Net sales $ 58,628 $ 70,835 $ 70,907 $ 62,147
Gross profit 15,722 15,598 13,640 12,409
Net income 6,317 6,877 5,382 4,580
Earnings per share:
Basic 0.34* 0.37* 0.29 0.25
Diluted 0.33* 0.36* 0.28 0.24
*Reflects three-for-two stock split effective August 21, 2007.
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