AAON, INC.
10-Ks and 10-Qs
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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, 2009
or
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
For the
transition period from _____________________________ to
_____________________________
Commission
file number: 0-18953
AAON,
INC.
(Exact
name of registrant as specified in its charter)
| Nevada | 87-0448736 |
| (State or other jurisdiction | (IRS Employer |
| of incorporation or organization) | Identification No.) |
| 2425 South Yukon, Tulsa, Oklahoma | 74107 |
| (Address of principal executive offices) | (Zip Code) |
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | |
| [ ] Yes [ ] No [X] Not Applicable | |
| 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, 2009) was $341.8 million. | |
| As of February 25, 2010, registrant had outstanding a total of 17,185,037 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 25, 2010, are incorporated into
Part III.
TABLE
OF CONTENTS
| Item Number and Caption |
Page
Number
|
|||
| PART I | ||||
| 1. | Business. | 1 | ||
| 1A. | Risk Factors. | 4 | ||
| 1B. | Unresolved Staff Comments. | 6 | ||
| 2. | Properties. | 6 | ||
| 3. | Legal Proceedings. | 7 | ||
| 4. | Submission of Matters to a Vote of Security Holders. | 7 | ||
| PART II | ||||
| 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | 8 | ||
| 6. | Selected Financial Data. | 10 | ||
| 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 10 | ||
| 7A. | Quantitative and Qualitative Disclosures About Market Risk. | 19 | ||
| 8. | Financial Statements and Supplementary Data. | 21 | ||
| 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | 21 | ||
| 9A. | Controls and Procedures. | 21 | ||
| 9B. | Other Information. | 23 | ||
| PART III | ||||
| 10. | Directors, Executive Officers and Corporate Governance. | 24 | ||
| 11. | Executive Compensation. | 24 | ||
| 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 24 | ||
| 13. | Certain Relationships and Related Transactions. | 24 | ||
| 14. | Principal Accountant Fees and Services. | 25 | ||
| PART IV | ||||
| 15. | Exhibits and Financial Statement Schedules. | 26 | ||
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., 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 closed
our manufacturing operations and reclassified our Canadian facility as held for
sale in September 2009. The products previously manufactured at the
Canadian facility will be produced by the Tulsa, Oklahoma, and Longview, Texas,
facilities in the future.
We are
engaged in the manufacture and sale of air-conditioning and heating
equipment. Our products consist of rooftop units, chillers,
air-handling units, make-up air units, heat recovery units, condensing units,
commercial self contained units and coils.
Products
and Markets
Our
products serve the commercial and industrial new construction and replacement
markets. To date our sales have been primarily to the domestic
market. Foreign sales accounted for less than 5% of our sales in
2009.
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, commercial self contained units,
chillers, and coils 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 2009 level of sales of $245 million, we estimate that we have a 13% share of
the rooftop market and a 1% share of the coil market. Approximately
45% of our sales now come from new construction and 55% from
renovation/replacements. The percentage of sales for new construction
vs. replacement to particular customers is related to the customer’s stage of
development.
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 chillers, coils,
air-handling units, condensing units, make-up air units, heat recovery units and
commercial self-contained units.
We offer
four groups of rooftop units. Our RQ Series consisting of six cooling
sizes ranging from one to six tons; our RN Series offered in 18 cooling sizes
ranging from six 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 offered in eight sizes ranging
from seven and one-half to 50 tons. We also produce the MN Series
rooftop products, in sizes as required.
-1-
We
manufacture a Model LC Chiller, air cooled, and 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 and the modular (M2 and M3)
Series.
Our heat
recovery option applicable to our RQ, RN and RL units, as well as our M2 and M3
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 20,000 -
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).
Major
Customers
No
customer accounted for 10% of our sales during 2009, 2008 or 2007.
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 and by hedging copper
prices in the form of derivatives.
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, prior
to the termination of our operations there in September 2009, 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.
To
support and service our customers and the ultimate consumer, we provide parts
availability through our 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.
-2-
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 self-sponsored, rather than
customer-sponsored. R&D has involved the RQ, RN, RL and MN
(rooftop units), F1, H/V, M2 and M3 (air handlers), LC and LL (chillers), CB and
CC (condensing units), SA (commercial self-contained 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 $3,074,000, $2,577,000 and $2,483,000 in 2009, 2008
and 2007, respectively.
Backlog
Our
current backlog as of March 1, 2010, was approximately $39,844,000 compared to
approximately $45,182,000 at March 1, 2009. The current backlog
consists of orders considered by management to be firm and substantially all of
which will be filled by August 1, 2010; 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 2010. We do not expect 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. 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, 2010, we had 1,165 permanent employees and 13 temporary
employees. Our employees are not currently 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.
The
following risks and uncertainties may affect our performance and results of
operations.
Our business has been 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 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 has resulted 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
risk having losses resulting from the use of noncancelable fixed price contracts
and derivatives.
Historically,
we attempted to limit the impact of price fluctuations on commodities by
entering into noncancelable fixed price contracts with our major suppliers for
periods of 6 - 18 months. We expect to receive delivery of raw
materials from our fixed price contracts for use in our manufacturing
operations. These fixed price contracts are not accounted for as
derivative instruments since they meet the normal purchases and sales
exemption. In the third quarter of 2009, we began hedging copper
prices in the form of derivatives. If future copper prices decline
below our contract prices, a corresponding loss would result.
-4-
Derivative
transactions also involve the risk that our counterparty, which currently is one
financial institution, may be unable to satisfy their obligations to us. If our
counterparty were to default on its obligations to us under a forward purchase
contract or seek bankruptcy protection, it could have a material adverse effect
on our profit margins. In addition, in the current economic environment and
tight financial markets, the risk of counterparty default is heightened, which
could result in a larger percentage of our future production being subject to
commodity price changes.
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.
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, our founder, 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.
-5-
Our
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.
We
are subject to adverse changes in tax laws.
Tax
benefits could be adversely affected by changes in tax provisions, unfavorable
findings in tax examinations or differing interpretations by tax
authorities. We are unable to estimate the impact that current and
future tax proposals and tax laws could have on our results of
operations. We are not currently under audit by any taxing
jurisdiction.
None.
The plant
and office facilities in Tulsa, Oklahoma, consist of a 337,000 sq. ft. 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 693,000 sq. ft. manufacturing/warehouse building and
a 22,000 sq. ft. 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.
In the expansion facility
w
e 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 sq. ft.
is utilized for sheet metal fabrication. The remaining 487,000 sq.
ft. is presently being prepared as additional plant space for long-term
growth.
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
previous operations (closed in September 2009) in Burlington, Ontario, Canada,
were located at 279 Sumach Drive, consisting of an 82,000 sq. ft.
office/manufacturing facility on a 5.6 acre tract of land, currently listed for
sale
-6-
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.
No matter was submitted to a vote of security holders, through solicitation of proxies or otherwise, during the period from October 1, 2009 through December 31, 2009.
-7-
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 Global Select 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, 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
|
||
|
March
31, 2009
|
$20.93
|
$14.81
|
||
|
June
30, 2009
|
$21.86
|
$16.22
|
||
|
September
30, 2009
|
$21.97
|
$18.81
|
||
|
December
31, 2009
|
$20.52
|
$18.01
|
_______________
On
February 25, 2010, there were 1,001 holders of record, and approximately 3,500
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 semi-annual dividends of $0.20 per
share. The Board of Directors approved dividend payments of $0.16 per
share related to the stock split effective August 21, 2007. The Board
of Directors approved future dividend payments of $0.18 per share on May 19,
2009. Board approval is required to determine the date of declaration
and amount for each semi-annual dividend payment.
In 2009,
dividends were declared to shareholders of record at the close of business on
June 11, 2009 and December 14, 2009 and were paid on July 2, 2009 and January 4,
2010. We paid cash dividends of $5.9 million during the year ended
December 31, 2009, and accrued a liability for payment of $3.1 million of
dividends in January 2010.
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 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 current
market prices.
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, 2009, we repurchased a total of 1,717,804 shares under this program
for an aggregate price of $34,192,008, or an average of $19.90 per
share. We purchased the shares at current market
prices.
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, 2009, we repurchased
760,477 shares for an aggregate price of $12,589,311, or an average price of
$16.55 per share. We purchased the shares at current market
prices.
-8-
On
November 7, 2006, the Board of Directors authorized us to repurchase shares from
certain directors and officers following their exercise of stock
options. The maximum number of shares to be repurchased under the
program is unknown as the amount is contingent on the number of shares
sold. Through December 31, 2009, we repurchased 350,375 shares for an
aggregate price of $7,167,623, or an average price of $20.46 per
share. We purchased the shares at current market prices.
Repurchases
during the fourth quarter of 2009 were as follows:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
(a)
Total
Number of Shares (or Units) Purchased
|
(b)
Average
Price Paid Per Share (or Unit)
|
(c)
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
(d)
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be
Purchased Under the Plans or Programs
|
||||||||||||
|
October
2009
|
20,570 | $ | 18.86 | 20,570 | - | |||||||||||
|
November
2009
|
5,163 | $ | 19.70 | 5,163 | - | |||||||||||
|
December
2009
|
4,607 | $ | 19.46 | 4,607 | - | |||||||||||
|
Total
|
30,340 | $ | 19.09 | 30,340 | - | |||||||||||
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, 2004, and reinvestment of
dividends on the date of payment without commissions. This table is
not intended to forecast future performance of our Common Stock.
The peer
group consists of Lennox International, Inc., Ingersoll Rand Limited, Johnson
Controls Inc., and United Technologies Corporation. All companies in
the peer group are in the business of manufacturing air conditioning and heat
exchange equipment.
-9-
(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.
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.
|
Years Ended December
31,
|
||||||||||||||||||||
|
Results
of Operations:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Net
sales
|
$ | 245,282 | $ | 279,725 | $ | 262,517 | $ | 231,460 | $ | 185,195 | ||||||||||
|
Net
income
|
$ | 27,721 | $ | 28,589 | $ | 23,156 | $ | 17,133 | $ | 11,462 | ||||||||||
|
Earnings
per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.61 | $ | 1.63 | $ | 1.24 | $ | 0.93 | $ | 0.62 | ||||||||||
|
Diluted
|
$ | 1.60 | $ | 1.60 | $ | 1.22 | $ | 0.90 | $ | 0.60 | ||||||||||
|
Cash
dividends declared per common share
|
$ | 0.36 | $ | 0.32 | $ | 0.32 | $ | 0.32 | $ | - | ||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||
|
Basic
|
17,187 | 17,560 | 18,628 | 18,456 | 18,510 | |||||||||||||||
|
Diluted
|
17,309 | 17,855 | 18,927 | 18,968 | 19,125 | |||||||||||||||
| December 31, | ||||||||||||||||||||
| Financial Position at End of Fiscal Year: |
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Working
capital
|
$ | 65,354 | $ | 40,600 | $ | 38,788 | $ | 36,356 | $ | 33,372 | ||||||||||
|
Total
assets
|
$ | 156,211 | $ | 140,743 | $ | 137,140 | $ | 130,056 | $ | 113,606 | ||||||||||
|
Long-term
and current debt
|
$ | 76 | $ | 3,113 | $ | 330 | $ | 59 | $ | 167 | ||||||||||
|
Total
stockholders’ equity
|
$ | 117,999 | $ | 96,522 | $ | 95,420 | $ | 91,592 | $ | 79,495 | ||||||||||
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.
Overview
We
engineer, manufacture and market air-conditioning and heating equipment
consisting of rooftop units, chillers, air-handling units, make-up air units,
heat recovery units, condensing units, commercial self-contained units and
coils. These products 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 were less than 5% of our 2009
sales.
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.
-10-
The
principal components of cost of goods sold are labor, raw materials, component
costs, factory overhead, freight out and engineering expense. The
principal high volume raw materials used in our manufacturing processes are
steel, copper and aluminum, which are obtained from domestic
suppliers. The raw materials market was volatile during 2009 and 2008
due to the economic environment. Prices decreased by
approximately 31% for steel, 20% for aluminum and 24% for copper from December
31, 2006 to December 31, 2009. We have entered into contracts that
are below the average index price as of December 31,
2009. The lower commodity prices have contributed to our
lower cost of goods sold and higher gross margins.
We
entered into a derivative instrument in the third quarter of 2009 with a large
financial institution to mitigate our exposure to volatility in copper
prices. The derivative is in the form of a commodity futures
contract. The derivative contract settles monthly beginning in
January 2010 and ending in December 2010. The contract is for a total
of 2,250,000 pounds of copper at $2.383 per pound. The contract is
for quantities equal to or less than those expected to be used in our
manufacturing operations in 2010.
We are
subject to claims and legal actions that arise in the ordinary course of
business. Management believes that the ultimate liability from these
claims and actions, if any, will not have a material effect on our results of
operations or financial position.
In
addition to our derivative instrument, 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 - 18
months. We expect to receive delivery of raw materials from our fixed
price contracts for use in our manufacturing operations. These
contracts are not accounted for as derivative instruments since they meet the
normal purchases and sales exemption.
Selling,
general, and administrative (“SG&A”) costs include our internal sales force,
warranty costs, profit sharing and administrative expenses. 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 plant
and office facilities in Tulsa, Oklahoma, consist of a 337,000 sq. ft. building
(322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office
space) located at 2425 S. Yukon Avenue (the “original facility”), and a 693,000
sq. ft. manufacturing/warehouse building and a 22,000 sq. ft. office building
(the “expansion facility”) located across the street from the original facility
at 2440 S. Yukon Avenue.
In the expansion facility
w
e 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 sq. ft.
is utilized for sheet metal fabrication. The remaining 487,000 sq.
ft. is presently being prepared as additional plant space for long-term
growth.
Our
operations in Longview, Texas, are conducted in a plant/office building at
203-207 Gum Springs Road containing 258,000 sq. ft. (251,000 sq. ft. of
manufacturing/warehouse space and 7,000 sq. ft. of office space). An
additional contiguous 15 acres were purchased in 2004 and 2005 for future
expansion.
Our previous operations in
Burlington, Ontario, Canada, were located at 279 Sumach Drive, consisting of an
82,000 sq. ft. office/manufacturing facility.
The facility was
classified as available for sale upon closure of our manufacturing operations in
September 2009. We plan to sell the property within one
year.
-11-
Set forth
below is income statement information and as a percentage of sales for years
2009, 2008 and 2007:
| Years Ending December 31, | ||||||||||||||||||||||||
|
2009
|
2008 |
2007
|
||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Net
sales
|
$ | 245,282 | 100.0 | % | $ | 279,725 | 100.0 | % | $ | 262,517 | 100.0 | % | ||||||||||||
|
Cost
of sales
|
177,737 | 72.5 | % | 212,549 | 76.0 | % | 205,148 | 78.1 | % | |||||||||||||||
|
Gross
profit
|
67,545 | 27.5 | % | 67,176 | 24.0 | % | 57,369 | 21.9 | % | |||||||||||||||
|
Selling,
general and
administrative
expenses
|
23,791 | 9.7 | % | 23,788 | 8.5 | % | 21,703 | 8.3 | % | |||||||||||||||
|
Income
from operations
|
43,754 | 17.8 | % | 43,388 | 15.5 | % | 35,666 | 13.6 | % | |||||||||||||||
| Interest expense | (9 | ) | 0.0 | % | (71 | ) | 0.0 | % | (10 | ) | 0.0 | % | ||||||||||||
| Interest income | 71 | 0.0 | % | 27 | 0.0 | % | 8 | 0.0 | % | |||||||||||||||
|
Other
income (expense), net
|
76 | 0.1 | % | 724 | 0.3 | % | (321 | ) | (0.1 | %) | ||||||||||||||
| Income before income taxes | 43,892 | 17.9 | % | 44,068 | 15.8 | % | 35,343 | 13.5 | % | |||||||||||||||
|
Income
tax provision
|
16,171 | 6.6 | % | 15,479 | 5.6 | % | 12,187 | 4.7 | % | |||||||||||||||
|
Net
income
|
$ | 27,721 | 11.3 | % | $ | 28,589 | 10.2 | % | $ | 23,156 | 8.8 | % | ||||||||||||
Results
of Operations
Key
events impacting our cash balance, financial condition and results of operations
in 2009 include the following:
|
·
|
We
remained the leader in the industry for environmentally-friendly, energy
efficient and quality innovations, utilizing R410A refrigerant and phasing
out pollutant causing R22 refrigerant. The phase out of R22 began in early
2004. We also utilize a high performance composite foam panel
to eliminate over half of the heat transfer from typical fiberglass
insulated panels. We continue to utilize sloped condenser coils
and access compartments to filters, motor, and fans. All of
these innovations increase the demand for our products thus increasing
market share.
|
|
·
|
We
have attempted to moderate certain commodity costs by utilizing purchase
agreements and pricing strategies which affect our gross
margins.
|
|
·
|
In
February 2006, our Board of Directors initiated a program of semi-annual
cash dividend payments. Cash payments of $5.9 million were made
($2.8 million paid in January 2009 and $3.1 million paid in July 2009),
and accrued a liability for payment of $3.1 million of dividends in
January 2010.
|
|
·
|
Stock
repurchases from our employees’ 401(k) savings and investments plan were
authorized in 2005. Stock repurchases from directors and officers were
authorized in 2006. Repurchases of our stock from the open
market were authorized and initiated in November
2007. Total repurchases resulted in cash payments of $3.1
million. This cash outlay is partially offset by cash received
from options exercised by employees as a part of an incentive bonus
program of $1.2 million.
|
|
·
|
We
have a strong liquidity position with cash on hand of $25.6 million. In
view of the current economic environment, our goal remains to keep a
healthy financial condition.
|
|
·
|
Purchases
of equipment and renovations to manufacturing facilities remained a
priority. Our capital expenditures were $9.8 million. Equipment
purchases create significant efficiencies, lower production costs and
allow continued growth in production. We currently estimate
dedicating
$7-8
million to capital expenditures in 2010 for continued
growth.
|
|
·
|
We
expanded a portion of our manufacturing facility in 2009 for future
growth.
|
|
·
|
We
closed our manufacturing operations and reclassified our Canadian facility
as held for sale in September 2009. The products previously
manufactured at the Canadian facility will be produced by the Tulsa,
Oklahoma, and Longview, Texas, facilities in the
future.
|
-12-
Net
Sales
Net sales
were $245.3 million, $279.7 million and $262.5 million in 2009, 2008 and 2007,
respectively. Sales decreased $34.4 million or 12.3% in 2009 from
2008 which was attributable to the decreased volume related to the current
economic environment and lower sales from our Canadian
operations. The current economic environment has negatively impacted
commercial construction markets with some projects delayed, postponed
indefinitely or cancelled. The replacement market has also been
affected by customers delaying equipment replacement as a cost saving
strategy. The increase in sales in 2008 from 2007 was due to an
increase in volume of products 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 the then increasing raw material costs. New
commercial construction steadily improved throughout 2007, contributing to
growth of the market.
Gross
Profit
Gross
margins were $67.5 million, $67.2 million and $57.4 million in 2009, 2008 and
2007, respectively. Gross margins increased $0.3 million in 2009 from
2008. As a percentage of sales, gross margins were 27.5%, 24.0% and
21.9% in 2009, 2008 and 2007, respectively. The 15% increase in gross
margins percentage in 2009 from 2008 was primarily a result of lower material
costs, improved production and labor efficiencies, a reduction in manufacturing
related expenses and a $2.2 million ($1.4 million net of tax) unrealized gain
from a derivative asset included in cost of sales, despite lower net sales and
expenses associated with the Canadian facility closure. Our gross
margins as a percentage of sales excluding the unrealized gain were 26.6%, 24.0%
and 21.9% in 2009, 2008 and 2007, respectively. The increase in gross profit in
2008 from 2007, resulted from pricing strategies implemented and production and
labor efficiencies, as sales volume increased.
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. 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 of steel, copper and aluminum used in their
products.
The raw
materials market was volatile during 2009 and 2008 due to the economic
environment. Prices decreased by approximately 31% for steel, 20% for aluminum
and 24% for copper from December 31, 2006 to December 31, 2009. We
have entered into contracts that are below the average index price as of
December 31, 2009. The lower commodity prices have
contributed to our lower cost of goods sold and higher gross
margins.
We
entered into a derivative instrument in the third quarter of 2009 with a large
financial institution to mitigate our exposure to volatility in copper
prices. The derivative is in the form of a commodity futures
contract. The derivative contract settles monthly beginning in
January 2010 and ending in December 2010. The contract is for a total
of 2,250,000 pounds of copper at $2.383 per pound. The contract is
for quantities equal to or less than those expected to be used in our
manufacturing operations in 2010.
We are
subject to claims and legal actions that arise in the ordinary course of
business. Management believes that the ultimate liability from these
claims and actions, if any, will not have a material effect on our results of
operations or financial position.
In
addition to our derivative instrument, 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 - 18
months. We expect to receive delivery of raw materials from our fixed
price contracts for use in our manufacturing operations. These
contracts are not accounted for as derivative instruments since they meet the
normal purchases and sales exemption.
-13-
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) were $23.8 million, $23.8
million and $21.7 million in 2009, 2008 and 2007, respectively. In
2009, our SG&A expenses remained consistent with 2008, despite lower sales
volumes in 2009 compared to 2008. Warranty expenses in 2009 increased
due to specific warranty items and sales related expenses increased due to our
expanded marketing to remain competitive in the current
environment. As a percentage of sales, SG&A expenses were 9.7%,
8.5% and 8.3% in 2009, 2008 and 2007, respectively. The increase in
SG&A expenses in 2008 from 2007 was 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.
Interest
Expense
Interest
expense was approximately $9,000, $71,000 and $10,000 in 2009, 2008 and 2007,
respectively. The decrease in interest expense of approximately
$62,000 in 2009 from 2008 was due to fewer borrowings on the revolving credit
facility. We borrowed $10.0 million from the revolving credit
facility during 2009 compared to $46.9 million during 2008. Interest
on borrowings is payable monthly at the greater of 4.0% or LIBOR plus 2.5% (4.0%
at December 31, 2009). The increase in interest expense in 2008 from
2007 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. In 2007, we borrowed $12.1 million from the revolving
credit facility. 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 $71,000, $27,000 and $8,000 in 2009, 2008 and 2007,
respectively. The increase in interest income of approximately
$44,000 in 2009 from 2008 was mainly due to interest income from a tax
refund. The increase in interest income in 2008 from 2007 was due to
interest paid for repurchased stock that was held in transit by the transfer
agent in early 2008.
Other
Income (Expense)
Other
income was approximately $76,000 and $724,000 in 2009 and 2008,
respectively. The decrease in other income of approximately $648,000
in 2009 from 2008 was due to the termination of the lease on our expansion
facility. The increase in other income in 2008 from 2007 was
primarily related to foreign currency translations that resulted from operations
in Canada. Other expense was approximately $321,000 in
2007.
Prior to
the lease expiration in May 2009, other income was primarily attributable to
rental income from our expansion facility. We began renovations on
the expansion facility to give us increased manufacturing capacity upon
expiration of the lease. Our 2010 capital expenditures budget reflects the
projected outlay to remodel the facility.
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 economy has negatively impacted the commercial and industrial new
construction markets. The current decline in economic activity has
resulted in a decrease in our sales volume and profitability. 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.
-14-
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.
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 $0.9
million. Borrowings available under the revolving credit facility at
December 31, 2009, were $14.3 million. The letter of credit is a
requirement of our workers compensation insurance and was extended in 2009 and
will expire December 31, 2010. Interest on borrowings is payable
monthly at the greater of 4.0% or LIBOR plus 2.5% (4.0% at December 31,
2009). No fees are associated with the unused portion of the
committed amount. At December 31, 2009, we had no borrowings
outstanding under the revolving credit facility. 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.
At
December 31, 2009, 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, 2009 our tangible net worth was $118.0 million which meets the
requirement of being at or above $75.0 million. Our total liabilities
to tangible net worth ratio was 1 to 3 which meets the requirement of not being
above 2 to 1. Our working capital was $65.4 million which meets the
requirement of being at or above $30.0 million. On July 30, 2009, we
renewed the line of credit with a maturity date of July 30, 2010 with terms
substantially the same as the previous agreement. We expect to renew
our revolving credit agreement in July 2010. We do not anticipate
that the current situation in the credit market will impact our
renewal.
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 2010 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 adjust dividend cash payments, and our relationship with our existing
bank lender. For information concerning our revolving credit facility
at December 31, 2009, see Note 3,
Revolving Credit
Facility
.
Cash Provided by
Operating Activities.
Net cash provided from operating
activities has fluctuated from year to year. Net cash provided by operating
activities was $45.2 million, $33.4 million and $31.2 million in 2009, 2008 and
2007, respectively. The year-to-year variances are primarily from
changes in net income, accounts receivable, inventories, accounts payable and
accrued liabilities as described below.
Net
income for 2009 was $27.7 million, a decrease of $0.9 million from $28.6 million
in 2008. The decrease in net income in 2009 from 2008 was primarily
due to lower volume of sales which was a result of the current economic
environment and lower sales from our Canadian operations offset by lower
material costs, improved production and labor efficiencies, a reduction in
manufacturing related expenses and a $2.2 million ($1.4 million net of tax)
unrealized gain from a derivative asset. The increase in net income
in 2008 from 2007 was primarily due to increased volume of sales, adjusted
pricing strategies, fluctuations in raw materials costs, innovative and
efficient products and improved production efficiencies.
Depreciation
expense was $9.1 million, $9.4 million and $9.7 million in 2009, 2008 and 2007,
respectively. The decrease in depreciation is due to the realization
of full depreciation of certain capital assets. Share-based compensation was
$0.8 million, $0.8 million and $0.6 million in 2009, 2008 and 2007,
respectively. Both depreciation expense and share-based compensation
expense decreased net income, but had no effect on operating cash.
Accounts
receivable decreased by $5.5 million at December 31, 2009 due to a decrease in
sales during 2009 compared to December 31, 2008. Accounts receivable
increased by $0.9 million at December 31, 2008 compared to December 31,
2007. The increase in accounts receivable in 2008 from 2007 was
attributable to an increase in sales. Accounts receivable increased
by $1.8 million at December 31, 2007 compared to December 31, 2006 due to
increased sales.
-15-
Inventories
decreased by $7.2 million at December 31, 2009 compared to December 31, 2008 due
to a decrease in inventory requirements related to lower sales volumes, a
decrease related to the valuation of inventories due to lower raw material and
component part prices and sales of inventory as part of the Canadian facility
closure. Inventories increased by $4.8 million at December 31, 2008
compared to December 31, 2007. The increase in inventories in 2008
from 2007 was attributable to procurement of inventory to accommodate an
increase of sales. Inventories increased by $2.1 million at December 31, 2007
compared to December 31, 2006 primarily related to the valuation of inventories
due to higher raw material and component part costs.
Accounts
payable decreased by $6.3 million at December 31, 2009 compared to December 31,
2008 due to fewer purchases related to lower sales volumes. Accounts
payable increased by $0.4 million at December 31, 2008 compared to December 31,
2007. The increase in accounts payable in 2008 from 2007 was
attributable to timing of payments to vendors. Accounts payable
decreased by $1.4 million at December 31, 2007 compared to December 31, 2006 due
to the timing of payment to vendors.
Accrued
liabilities increased by $0.8 million at December 31, 2009 compared to December
31, 2008 due to higher warranty and medical self-insurance reserves
related to specific
items
. Accrued liabilities increased by $0.9 million at December 31, 2008
compared to December 31, 2007. The increase in accrued liabilities in
2008 from 2007 is attributable to higher workers compensation expenses and
higher warranty expenses related to increased sales. Accrued
liabilities increased by $6.3 million at December 31, 2007 compared to December
31, 2006 due to an increase in commissions payable related to the increase in
sales and timing of commissions payable.
Cash Flows Used
in Investing Activities.
Cash flows used in investing
activities were $9.6 million, $9.6 million and $10.8 million in 2009, 2008 and
2007, respectively. Cash flows used in investing activities in 2009
did not significantly fluctuate from 2008 and were related to manufacturing and
equipment purchases and costs to expand our manufacturing
facilities. The decrease in cash flows used in investing activities
in 2008 from 2007 was primarily related to lower capital
expenditures. Management utilizes cash flows provided from operating
activities to fund capital expenditures that are expected to increase growth and
create efficiencies. We expect to expend approximately $7-8 million
in 2010 for renovation of the previously leased facility and
equipment. We expect the cash requirements to be provided by cash
flows from operations. We did not invest in any certificates of
deposits in 2009, 2008 or 2007. In January 2010, we invested $15.0
million with a large financial institution. The investments were
allocated to cash and money market funds, mutual funds, certificates of deposit,
corporate notes and bonds and foreign corporate notes and bonds with a maturity
of one year or less.
Cash Flows Used
in Financing Activities.
Cash flows used in financing
activities were $10.1 million, $24.5 million and $20.0 million in 2009, 2008 and
2007, respectively. The decrease in cash flows used in financing
activities of $14.4 million in 2009 from 2008 is primarily related to a lower
volume of stock repurchases. The increase in cash flows used in
financing activities in 2008 from 2007 was primarily related to cash dividends
declared and paid and the continued repurchase of our stock.
We
occasionally utilize our revolving line of credit to meet certain short-term
cash demands based on our liquidity at the time. We had no borrowings
outstanding under the revolving credit facility at December 31,
2009. We had $2.9 million outstanding under the line of credit at
December 31, 2008. We had no borrowings outstanding under the
revolving credit facility at December 31, 2007. We accessed $10.0
million, $46.9 million and $12.1 million of borrowings under the line of credit
during 2009, 2008 and 2007, respectively.
We
received cash from stock options exercised of $1.2 million, $1.7 million and
$2.4 million and classified the excess tax benefit of stock options exercised
and restricted stock awards vested of $0.7 million, $1.6 million and $3.0
million in financing activities in 2009, 2008 and 2007,
respectively.
We
repurchased shares of stock under the Board of Directors authorized stock
buyback programs. We also repurchased shares of stock from our
employees’ 401(k) savings and investment plan, directors and officers and the
open market in the amount of $3.1 million for 165,117 shares, $24.8 million for
1,211,538 shares and $20.8 million for 1,082,736 shares of stock in 2009, 2008
and 2007, respectively.
-16-
On
February 14, 2006, the Board of Directors voted to initiate a semi-annual cash
dividend. We initially paid semi-annual dividends of $0.20 per
share. 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
included herein has been restated to reflect the stock split. The Board of
Directors approved future dividend payments of $0.18 per share on May 19,
2009. Board approval is required to determine the date of declaration
and amount for each semi-annual dividend payment.
Cash
dividend payments of $5.9 million were made in 2009, and we accrued a liability
for payment of $3.1 million of dividends in January 2010. 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.
Commitments
and Contractual Agreements
The
following table summarizes our long-term debt and other contractual agreements
as of December 31, 2009:
| Payments Due By Period | ||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
Than 1
Year
|
1-3
Years
|
4-5
Years
|
After
5 Years
|
|||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Long-term
capital leases
|
$ | 76 | $ | 76 | $ | - | $ | - | $ | - | ||||||||||
|
Purchase
obligations
(1)
|
2,332 | 2,332 | - | - | - | |||||||||||||||
|
Total
contractual obligations
|
$ | 2,408 | $ | 2,408 | $ | - | $ | - | $ | - | ||||||||||
(1)
Purchase obligations consist primarily of copper and aluminum
commitments. We are a party to several short-term, cancelable
and noncancelable, fixed price contracts with major suppliers from our fixed
price contracts for the purchase of raw material and component parts. We expect
to receive delivery of raw materials for use in our manufacturing
operations. These contracts are not accounted for as derivative
instruments because they meet the normal purchases and sales
exemption.
We are
subject to claims and legal actions that arise in the ordinary course of
business. Management believes that the ultimate liability from these
claims and actions, if any, will not have a material effect on our results of
operations or financial position.
The fixed
rate interest on long-term capital leases 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.
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.
-17-
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.
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 exchangers 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 $125,000 each.
Stock
Compensation – We account for equity-based compensation in accordance with FASC
Topic 718,
Compensation –
Stock Compensation
. 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. 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.
Derivative
s
– We use derivatives to
mitigate our exposure to volatility in copper prices. Fluctuations in copper
commodity prices impact the value of the derivatives that we hold. We
are subject to gains which we record as derivative assets if the forward copper
commodity prices increase and losses which we record as derivative liabilities
if they decrease. We record the fair value of the derivative position
in the Consolidated Balance Sheets. We use COMEX index pricing to
support our fair value calculation, which is a Level 2 input per the valuation
hierarchy as the pricing is for instruments similar but not identical to the
contract we will settle. We did not designate the derivative as a
cash flow hedge. We record changes in the derivative’s fair value
currently in earnings based on mark-to-market accounting. The change
in earnings is recorded to cost of sales in the Consolidated Statements of
Income. We do not use derivatives for speculative
purposes.
-18-
Historically,
actual results have been within management’s expectations.
New
Accounting Pronouncements
In
March 2008, the FASB issued FASC Topic 815,
Derivatives and Hedging
,
formerly SFAS No. 161, (“FASC 815”), 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 prior
guidance and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. FASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Adoption
of FASC 815 did not have a material impact on our Consolidated Financial
Statements.
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01,
Topic 105 - Generally Accepted
Accounting Principles
(“GAAP”) (“ASU 2009-01”), which superseded all
accounting standards in U.S. GAAP, aside from those issued by the
SEC. The codification does not change or alter existing
GAAP. ASU 2009-01 is effective for reporting periods ending after
September 15, 2009. We adopted ASU 2009-01 for reporting in the third
quarter of 2009. Adoption of ASU 2009-01 did not have a material
impact on our Consolidated Financial Statements.
In August
2009, the FASB issued ASU 2009-05,
Fair Value Measurement and
Disclosures: Measuring Liabilities at Fair Value
(“ASU 2009-05”), which
provides clarification on measuring liabilities at fair value when a quoted
price in an active market is not available. ASU 2009-05 is effective
for the first reporting period beginning after issuance. We adopted
ASU 2009-05 in the fourth quarter of 2009. Adoption of ASU 2009-05
did not have a material impact on our Consolidated Financial
Statements.
In
February 2010, the FASB issued ASU 2010-09,
Subsequent Events
(“ASU
2010-09”), which discontinues the requirement that entities disclose the date
through which they have evaluated subsequent events. ASU 2010-09 is
effective upon issuance. We adopted ASU 2010-09 for reporting in the
fourth quarter of 2009. Adoption of ASU 2010-09 did not 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. 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.
Interest
Rate Risk
We are
subject to interest rate risk on our revolving credit facility, which bears
variable interest based upon the greater of a rate of 4.0% or LIBOR plus
2.5%
.
We had
no borrowings outstanding under the revolving credit facility as of December 31,
2009.
-19-
Foreign
Currency Exchange Rate Risk
Foreign
sales accounted for less than approximately 5% of our sales in 2009 and we
accept payment for such sales in U.S. and Canadian dollars; therefore, we
believe we are not exposed to significant foreign currency exchange rate risk on
these sales. We believe our foreign currency exchange rate risk has
diminished due to the closure of our manufacturing operations in Canada in
September 2009.
Foreign
currency transactions and financial statements are translated in accordance with
FASC Topic 830,
Foreign
Currency Matters.
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 $0.9505,
$0.8196 and $1.0193 at December 31, 2009, 2008 and 2007,
respectively.
Commodity
Price Risk
We
entered into a derivative instrument in the third quarter of 2009 with a large
financial institution to mitigate our exposure to volatility in copper prices.
We monitor our derivative and the credit worthiness of the financial
institution. We do not anticipate losses due to counterparty
non-performance. We do not use derivatives for speculative
purposes.
Fluctuations
in copper commodity prices impact the value of the derivative we
hold. We are subject to gains which we record as derivative assets if
the forward copper commodity prices increase and losses which we record as
derivative liabilities if they decrease. At December 31, 2009, the
forward copper commodity prices were higher than our contract price resulting in
a gain on derivative assets. The fair value of the derivative
settlements from January through December 2010 is $2.2 million and recognized as
current derivative assets in the Consolidated Balance Sheets.
We use
COMEX index pricing to support our fair value calculation, which is a Level 2
input per the valuation hierarchy as the pricing is for instruments similar but
not identical to the contract we will settle. We did not
designate the derivative as a cash flow hedge. We record changes in
the derivative’s fair value currently in earnings based on mark-to-market
accounting. As of December 31, 2009, we recorded a $2.2 million ($1.4
million net of tax) adjustment to cost of sales from the unrealized gain on
derivative assets at fair value in the Consolidated Statements of
Income.
Information
about our exposure to market risks related to forward copper commodity prices
and a sensitivity analysis related to our derivative is presented
below:
|
December
31, 2009
|
|
|
(in
thousands)
|
|
|
Notional
amount
|
2,250
pounds
|
|
Carrying
amount and fair value of assets
|
$ 2,200
|
|
Fair
value with a 5% decrease in forward copper commodity
prices
|
$ 1,822
|
|
Fair
value with a 10% decrease in forward copper commodity
prices
|
$ 1,444
|
The
principal components of cost of goods sold are labor, raw materials, component
costs, factory overhead, freight out and engineering expense. The
principal high volume raw materials used in our manufacturing processes are
steel, copper and aluminum, which are obtained from domestic suppliers.
The raw
materials market was volatile during 2009 and 2008 due to the economic
environment. Prices decreased by approximately 31% for steel, 20% for
aluminum and 24% for copper from December 31, 2006 to December 31,
2009. We have entered into contracts that are below the average index
price as of December 31, 2009. The lower commodity prices
have contributed to our lower cost of goods sold and higher gross
margins.
-20-
We are
subject to claims and legal actions that arise in the ordinary course of
business. Management believes that the ultimate liability from these
claims and actions, if any, will not have a material effect on our results of
operations or financial position.
In
addition to the derivative instrument described above, 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 -
18 months. We expect to receive delivery of raw materials from our
fixed price contracts for use in our manufacturing operations. These
contracts are not accounted for as derivative instruments since they meet the
normal purchases and sales exemption.
We do not
utilize derivative financial instruments to hedge our interest rate or foreign
currency exchange rate risk. We do use derivatives to economically
hedge our commodity price risk.
The
financial statements and supplementary data are included commencing at page
31.
None.
(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:
|
·
|
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
|
|
·
|
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, 2009.
(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, 2009, our internal
control over financial reporting is effective at the reasonable assurance level
based on those criteria.
-21-
Our
independent registered public accounting firm has issued an attestation report
on our internal control over financial reporting.
| Date: March 15, 2010 | /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
referred to as the “Company”), internal control over financial reporting as of
December 31, 2009, 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.
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.
-22-
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, 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, 2009 and 2008, 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, 2009 and our
report dated March 15, 2010, expressed an unqualified opinion on those
consolidated financial statements.
/s/ Grant
Thornton LLP
Tulsa,
Oklahoma
March 15,
2010
(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 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
None.
-23-
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 2010 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 2010 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 2010 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, rules and regulations. We did not enter
into any new related party transactions and have no preexisting related party
transactions in 2009, 2008 or 2007.
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 2009, the Board affirmatively determined,
considering the standards described more fully below, that Messrs. Short,
Lackey, McElroy, Stephenson, and Levine are 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.
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:
-24-
|
§
|
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, cannot be deemed independent. Employment
as an interim Chairman or Chief Executive Officer will not disqualify a
director from being considered independent following that
employment.
|
|
§
|
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 $120,000 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), cannot 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.
|
|
§
|
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 cannot
be deemed independent.
|
|
§
|
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 cannot be deemed
independent.
|
|
§
|
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, cannot be deemed
independent.
|
For
purposes of the independence standards set forth above, the terms:
| § | “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; |
| § | “executive officer” means an “officer” within the meaning of Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended; and |
| § | “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.
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 2010 Annual Meeting of
Stockholders.
-25-
Item
15.
Exhibits
and Financial Statement Schedules.
|
|
(a)
|
Financial
statements.
|
|
|
See
Index to Consolidated Financial Statements on page
29.
|
|
|
(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) | Fifth 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 March 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 18, 2009. | ||
| (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. | ||
-26-
| (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. | ||
-27-
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 15, 2010 | 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 15, 2010 | /s/ Norman H. Asbjornson |
|
Norman H.
Asbjornson
President
and Director
(principal
executive officer)
|
|
| Dated: March 15, 2010 | /s/ Kathy I. Sheffield |
|
Kathy
I. Sheffield
Vice
President and Treasurer
(principal
financial officer
and
principal accounting officer)
|
|
| Dated: March 15, 2010 | /s/ John B. Johnson, Jr. |
|
John B. Johnson,
Jr.
Director
|
|
| Dated: March 15, 2010 | /s/ Charles C. Stephenson, Jr. |
|
Charles
C. Stephenson, Jr.
Director
|
|
| Dated: March 15, 2010 | /s/ Jack E. Short |
|
Jack
E. Short
Director
|
|
| Dated: March 15, 2010 | /s/ Paul K. Lackey, Jr. |
|
Paul K. Lackey,
Jr.
Director
|
|
| Dated: March 15, 2010 | /s/ A.H. McElroy II |
|
A.H.
McElroy II
Director
|
|
| Dated: March 15, 2010 | /s/ Jerry R. Levine |
|
Jerry
R. Levine
Director
|
-28-
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
| Report of Grant Thornton LLP Independent Registered Public Accounting Firm | 30 |
| Consolidated Balance Sheets | 31 |
| Consolidated Statements of Income | 32 |
| Consolidated Statements of Stockholders’ Equity and Comprehensive Income | 33 |
| Consolidated Statements of Cash Flows | 34 |
| Notes to Consolidated Financial Statements | 35 |
-29-
Report of Grant Thornton LLP
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 referred to as the “Company”) as of
December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009 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. and subsidiaries internal control
over financial reporting as of December 31, 2009, 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 15, 2010,
expressed an unqualified opinion on the effectiveness of internal control over
financial reporting.
/s/ Grant
Thornton LLP
Tulsa,
Oklahoma
March 15,
2010
-30-
AAON,
Inc., and Subsidiaries
Consolidated
Balance Sheets
|
December
31,
2009
|
December
31,
2008
|
|||||||
|
(in thousands except share and
per share
data
)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 25,639 | $ | 269 | ||||
|
Accounts
receivable, net
|
33,381 | 38,804 | ||||||
|
Inventories,
net
|
28,788 | 36,382 | ||||||
|
Prepaid
expenses and other
|
1,087 | 428 | ||||||
|
Derivative
assets
|
2,200 | - | ||||||
|
Assets
held for sale, net
|
1,522 | - | ||||||
|
Deferred
tax assets
|
3,623 | 4,235 | ||||||
|
Total
current assets
|
96,240 | 80,118 | ||||||
|
Property,
plant and equipment:
|
||||||||
|
Land
|
1,328 | 2,153 | ||||||
|
Buildings
|
41,697 | 36,371 | ||||||
|
Machinery
and equipment
|
90,213 | 87,219 | ||||||
|
Furniture
and fixtures
|
7,225 | 7,076 | ||||||
|
Total
property, plant and equipment
|
140,463 | 132,819 | ||||||
|
Less: Accumulated
depreciation
|
80,567 | 72,269 | ||||||
|
Property,
plant and equipment, net
|
59,896 | 60,550 | ||||||
|
Notes
receivable, long-term
|
75 | 75 | ||||||
|
Total
assets
|
$ | 156,211 | $ | 140,743 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Revolving
credit facility
|
$ | - | $ | 2,901 | ||||
|
Current
maturities of long-term debt
|
76 | 91 | ||||||
|
Accounts
payable
|
8,524 | 14,715 | ||||||
|
Dividends
payable
|
3,100 | 2,773 | ||||||
|
Accrued
liabilities
|
19,186 | 19,038 | ||||||
|
Total
current liabilities
|
30,886 | 39,518 | ||||||
|
Long-term
debt, less current maturities
|
- | 121 | ||||||
|
Deferred
tax liabilities
|
7,326 | 4,582 | ||||||
|
Commitments
and contingencies (see Note 10)
|
||||||||
|
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, 17,214,979 and 17,208,733 issued and
outstanding at December 31, 2009 and 2008, respectively
|
71 | 71 | ||||||
|
Additional
paid-in capital
|
644 | 538 | ||||||
|
Accumulated
other comprehensive income, net of tax
|
1,077 | 778 | ||||||
|
Retained
earnings
|
116,207 | 95,135 | ||||||
|
Total
stockholders’ equity
|
117,999 | 96,522 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 156,211 | $ | 140,743 | ||||
The
accompanying notes are an integral part of these statements.
-31-
AAON,
Inc., and Subsidiaries
Consolidated
Statements of Income
|
Years
Ending December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
| Net sales | $ | 245,282 | $ | 279,725 | $ | 262,517 | ||||||
|
Cost
of sales
|
177,737 | 212,549 | 205,148 | |||||||||
|
Gross
profit
|
67,545 | 67,176 | 57,369 | |||||||||
|
Selling,
general and administrative expenses
|
23,791 | 23,788 | 21,703 | |||||||||
|
Income
from operations
|
43,754 | 43,388 | 35,666 | |||||||||
|
Interest
expense
|
(9 | ) | (71 | ) | (10 | ) | ||||||
|
Interest
income
|
71 | 27 | 8 | |||||||||
|
Other
income (expense), net
|
76 | 724 | (321 | ) | ||||||||
|
Income
before income taxes
|
43,892 | 44,068 | 35,343 | |||||||||
|
Income
tax provision
|
16,171 | 15,479 | 12,187 | |||||||||
| Net income | $ | 27,721 | $ | 28,589 | $ | 23,156 | ||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 1.61 | $ | 1.63 | $ | 1.24 | * | |||||
|
Diluted
|
$ | 1.60 | $ | 1.60 | $ | 1.22 | * | |||||
|
Cash
dividends declared per common share
|
$ | 0.36 | $ | 0.32 | $ | 0.32 | * | |||||
|
Weighted
average shares outstanding:
|
||||||||||||
| Basic | 17,187 | 17,560 | 18,628 | * | ||||||||
| Diluted | 17,309 | 17,855 | 18,927 | * | ||||||||
*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 Stockholders’ Equity and Comprehensive Income
|
Common
Stock
|
Paid-in |
Accumulated
Other
Comprehensive
|
Retained
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Income
|
Earnings
|
Total
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
18,508 | * | $ | 74 | * | $ | 185 | $ | 667 | $ | 90,666 | $ | 91,592 | |||||||||||
|
Adjustment for FASC
Topic 740,
Income
Taxes
|
(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 | ||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
– | – | – | – | 27,721 | 27,721 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | 299 | – | 299 | ||||||||||||||||||
|
Total
comprehensive income
|
28,020 | |||||||||||||||||||||||
|
Stock
options exercised and restricted stock awards vested, including tax
benefits
|
170 | 1 | 1,938 | – | – | 1,939 | ||||||||||||||||||
|
Share-based
compensation
|
– | – | 848 | – | – | 848 | ||||||||||||||||||
|
Stock
repurchased and retired
|
(164 | ) | (1 | ) | (2,680 | ) | – | (448 | ) | (3,129 | ) | |||||||||||||
|
Dividends
|
– | – | – | – | (6,201 | ) | (6,201 | ) | ||||||||||||||||
|
Balance
at December 31, 2009
|
17,215 | $ | 71 | $ | 644 | $ | 1,077 | $ | 116,207 | $ | 117,999 | |||||||||||||
* Reflects
three-for-two stock split effective August 21, 2007.
The
accompanying notes are an integral part of these statements.
-33-
AAON,
Inc., and Subsidiaries
Consolidated
Statements of Cash Flows
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income
|
$ | 27,721 | $ | 28,589 | $ | 23,156 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
9,061 | 9,412 | 9,665 | |||||||||
|
Provision
for losses on accounts receivable, net of adjustments
|
10 | 547 | 203 | |||||||||
|
Provision
for excess and obsolete inventories
|
410 | - | - | |||||||||
|
Share-based
compensation
|
848 | 750 | 582 | |||||||||
|
Excess
tax benefits from stock options exercised and restricted stock awards
vested
|
(703 | ) | (1,613 | ) | (2,998 | ) | ||||||
|
Gain
on disposition of assets
|
(59 | ) | (27 | ) | (108 | ) | ||||||
|
Unrealized
gain on derivative assets
|
(2,200 | ) | - | - | ||||||||
|
Deferred
income taxes
|
3,531 | 160 | (124 | ) | ||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
5,495 | (905 | ) | (1,760 | ) | |||||||
|
Inventories
|
7,243 | (4,779 | ) | (2,095 | ) | |||||||
|
Prepaid
expenses and other
|
(660 | ) | 13 | (172 | ) | |||||||
|
Accounts
payable
|
(6,334 | ) | 449 | (1,370 | ) | |||||||
|
Accrued
liabilities
|
842 | 851 | 6,268 | |||||||||
|
Net
cash provided by operating activities
|
45,205 | 33,447 | 31,247 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Proceeds
from sale of property, plant and equipment
|
135 | 17 | 123 | |||||||||
|
Capital
expenditures
|
(9,774 | ) | (9,610 | ) | (10,874 | ) | ||||||
|
Net
cash used in investing activities
|
(9,639 | ) | (9,593 | ) | (10,751 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Borrowings
under revolving credit facility
|
9,972 | 46,865 | 12,142 | |||||||||
|
Payments
under revolving credit facility
|
(12,873 | ) | (43,964 | ) | (12,142 | ) | ||||||
|
Borrowings
(payments) of long-term debt
|
(136 | ) | (118 | ) | 271 | |||||||
|
Stock
options exercised
|
1,236 | 1,696 | 2,426 | |||||||||
|
Excess
tax benefits from stock options exercised and restricted stock awards
vested
|
703 | 1,613 | 2,998 | |||||||||
|
Repurchase
of stock
|
(3,129 | ) | (24,761 | ) | (20,773 | ) | ||||||
|
Cash
dividends paid to stockholders
|
(5,874 | ) | (5,791 | ) | (4,958 | ) | ||||||
|
Net
cash used in financing activities
|
(10,101 | ) | (24,460 | ) | (20,036 | ) | ||||||
|
Effects
of exchange rate on cash
|
(95 | ) | (4 | ) | 131 | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
25,370 | (610 | ) | 591 | ||||||||
|
Cash
and cash equivalents, beginning of year
|
269 | 879 | 288 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 25,639 | $ | 269 | $ | 879 | ||||||
The
accompanying notes are an integral part of these statements.
-34-
AAON,
Inc., and Subsidiaries
Notes to
Consolidated Financial Statements
December
31, 2009
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., 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 closed
our manufacturing operations and reclassified our Canadian facility as held for
sale in September 2009. The products previously manufactured at the
Canadian facility will be produced by the Tulsa, Oklahoma, and Longview, Texas,
facilities in the future.
We are
engaged in the manufacture and sale of air conditioning and heating equipment
consisting of rooftop units, chillers, air-handling units, make-up air units,
heat recovery units, condensing units and coils. 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
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”) Codification (“FASC”) Topic
830,
Foreign Currency
Matters.
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. The most
significant estimates include the allowance for doubtful accounts, inventory
reserves, warranty accrual, medical insurance accrual, share-based compensation
and the fair value of the derivative. Actual results could differ
materially from those estimates.
-35-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Concentrations
Our
customers are concentrated primarily in the domestic commercial and industrial
new construction and replacement markets. To date, our sales have
been primarily to the domestic market, with foreign sales accounting for less
than 5% of revenues in 2009. No customer accounted for 10% of our
sales during 2009, 2008 or 2007 or more than 5% of our accounts receivable
balance at December 31, 2009, 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. Accounts are considered past due when
the balance has been outstanding for greater than ninety days. 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,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Accounts
receivable
|
$ | 34,157 | $ | 39,599 | ||||
|
Less:
Allowance for doubtful accounts
|
(776 | ) | (795 | ) | ||||
|
Total,
net
|
$ | 33,381 | $ | 38,804 | ||||
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||
|
Balance,
beginning of period
|
$ | 795 | $ | 407 | $ | 266 | ||||||
|
Provision
for losses on accounts receivable
|
629 | 674 | 625 | |||||||||
|
Adjustments
to provision
|
(630 | ) | (127 | ) | (422 | ) | ||||||
|
Accounts
receivable written off, net of recoveries
|
(18 | ) | (159 | ) | (62 | ) | ||||||
|
Balance,
end of period
|
$ | 776 | $ | 795 | $ | 407 | ||||||
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.
-36-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Inventories
(continued)
Inventory
balances at December 31, 2009 and 2008, and the related changes in the allowance
for excess and obsolete inventories for the three years ended December 31, 2009,
2008 and 2007, are as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Raw
materials
|
$ | 26,581 | $ | 32,212 | ||||
|
Work
in process
|
1,835 | 2,545 | ||||||
|
Finished
goods
|
1,132 | 1,975 | ||||||
| 29,548 | 36,732 | |||||||
|
Less: Allowance
for excess and obsolete inventories
|
(760 | ) | (350 | ) | ||||
|
Total,
net
|
$ | 28,788 | $ | 36,382 | ||||
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Allowance
for excess and obsolete inventories:
|
||||||||||||
|
Balance,
beginning of period
|
$ | 350 | $ | 350 | $ | 350 | ||||||
|
Provision
for excess and obsolete inventories
|
1,849 | 800 | - | |||||||||
|
Adjustments
to reserve
|
(1,439 | ) | (800 | ) | - | |||||||
|
Balance,
end of period
|
$ | 760 | $ | 350 | $ | 350 | ||||||
We
increased our allowance for excess and obsolete inventories due to materials
from our Canadian facility that will not be utilized at either our Tulsa,
Oklahoma or Longview, Texas locations and materials that were phased out due to
new products that were introduced in January 2010.
Derivative
We
entered into a derivative instrument in the third quarter of 2009 with a large
financial institution to mitigate our exposure to volatility in copper
prices. We monitor our derivative and the credit worthiness of the
financial institution. We do not anticipate losses due to
counterparty non-performance. We do not use derivatives for
speculative purposes.
The
derivative is in the form of a commodity futures contract. The
derivative contract settles monthly beginning in January 2010 and ending in
December 2010. Settlements equal the difference between the monthly
average market price or closing market price of copper on a given day and the
contract price with the financial institution. The contract is for a
total of 2,250,000 pounds of copper at $2.383 per pound. The contract
is for quantities equal to or less than those expected to be used in our
manufacturing operations in 2010.
We are
subject to gains which we record as derivative assets if the forward copper
commodity prices increase and losses which we record as derivative liabilities
if they decrease. At December 31, 2009, the forward copper commodity
prices were higher than our contract price resulting in a gain or derivative
asset. We recognized the following current derivative assets at fair
value in the Consolidated Balance Sheets:
|
Type
of Contract
|
Balance
Sheet Location
|
Fair
Value
|
|||
|
(in
thousands
)
|
|||||
|
Derivatives
not designated as hedging instruments:
|
|||||
|
Commodity
futures contract
|
Derivative
assets
|
$ | 2,200 | ||
|
Total
Derivatives not designated as hedging instruments
|
$ | 2,200 | |||
-37-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Derivatives
(continued)
We did
not designate the derivative as a cash flow hedge. We record changes
in the derivative’s fair value currently in earnings based on mark-to-market
accounting. We recorded the following $2.2 million ($1.4 million
after tax) unrealized gain on derivative assets at fair value in the
Consolidated Statements of Income:
|
Type
of Contract
|
Income
Statement Location
|
Fair
Value
|
|||
|
(in
thousands)
|
|||||
|
Derivatives
not designated as hedging instruments:
|
|||||
|
Commodity
futures contract
|
Cost
of sales
|
$ | 2,200 | ||
|
Total
Derivatives not designated as hedging instruments
|
$ | 2,200 | |||
We use
COMEX index pricing to support our fair value calculation, which is a Level 2
input per the valuation hierarchy as the pricing is for instruments similar but
not identical to the contract we will settle.
Assets
Held For Sale
We
reclassified certain fixed assets with a net book value of $1.5 million to
assets held for sale upon closure of our Canadian manufacturing operations in
September 2009. The assets consist of a building and land valued at
the lower of cost or market. The carrying value of the building net
of accumulated depreciation is $0.6 million. No additional
depreciation expense was taken on the building as of October 1,
2009. The carrying value of the land is $0.9 million. We
have contracted with a realtor and plan to sell the property within one
year. The products previously manufactured at the Canadian facility
will be produced by the Tulsa, Oklahoma and Longview, Texas facilities in the
future.
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 2009,
2008 and 2007.
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. We
expect to receive delivery of raw materials from our fixed price contracts for
use in our manufacturing operations. These contracts are not
accounted for as derivative instruments because they meet the normal purchases
and sales exemption.
-38-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Commitments
and Contractual Agreements (continued)
In the
normal course of business we expect to purchase copper and aluminum in the form
of legally binding commitments as follows:
|
Type
|
Period
|
Pounds
|
Price
|
Total
|
|||||||
|
(in thousands,
except pricing data)
|
|||||||||||
|
Aluminum
|
January
2010 – December 2010
|
2,441 | 0.8000 | $ | 1,953 | ||||||
|
Copper
|
January
2010 – March 2010
|
102 | 2.4090 | 245 | |||||||
|
Copper
|
January
2010
|
23 | 2.0225 | 47 | |||||||
|
Copper
|
January
2010
|
24 | 1.8315 | 45 | |||||||
|
Copper
|
January
2010
|
19 | 2.2458 | 42 | |||||||
|
Total
|
$ | 2,332 | |||||||||
Accrued
Liabilities
At
December 31, accrued liabilities were comprised of the following:
|
2009
|
2008
|
|||||||
|
(in
thousands)
|
||||||||
|
Warranty
|
$ | 7,200 | $ | 6,589 | ||||
|
Commissions
|
7,975 | 8,816 | ||||||
|
Payroll
|
1,633 | 1,883 | ||||||
|
Workers’
compensation
|
591 | 610 | ||||||
|
Medical
self-insurance
|
1,410 | 886 | ||||||
|
Employee
benefits and other
|
377 | 254 | ||||||
|
Total
|
$ | 19,186 | $ | 19,038 | ||||
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.
Despite lower sales volume
in 2009 compared to 2008 warranty expenses increased due to specific warranty
items.
Warranty expense was $4.8 million, $4.0 million and $4.0 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
Changes
in the warranty accrual during the years ended December 31, 2009, 2008 and 2007
are as follows:
|
2009
|
2008
|
2007
|
||||||||||
| (in thousands) | ||||||||||||
|
Balance,
beginning of the year
|
$ | 6,589 | $ | 6,308 | $ | 5,572 | ||||||
|
Payments
made
|
(4,211 | ) | (3,608 | ) | (3,321 | ) | ||||||
|
Warranties
issued
|
4,822 | 3,889 | 3,757 | |||||||||
|
Changes
in estimate related to preexisting warranties
|
- | - | 300 | |||||||||
|
Balance,
end of period
|
$ | 7,200 | $ | 6,589 | $ | 6,308 | ||||||
-39-
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,
|
||||||||||||
|
2009
|
2008
|
2007 | * | |||||||||
|
(in
thousands except share and per share data)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 27,721 | $ | 28,589 | $ | 23,156 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings per share –
Weighted average shares
|
17,186,930 | 17,560,295 | 18,628,029 | |||||||||
|
Effect
of dilutive stock options
|
122,038 | 294,568 | 299,015 | |||||||||
|
Denominator
for diluted earnings per share –
Weighted
average shares
|
17,308,968 | 17,854,863 | 18,927,044 | |||||||||
|
Earnings
per share
|
||||||||||||
|
Basic
|
$ | 1.61 | $ | 1.63 | $ | 1.24 | ||||||
|
Diluted
|
$ | 1.60 | $ | 1.60 | $ | 1.22 | ||||||
|
Anti-dilutive
shares
|
226,950 | 308,250 | 282,100 | |||||||||
|
Weighted
average exercise price
|
$ | 15.64 | $ | 16.63 | $ | 17.81 | ||||||
|
*Reflects
three-for-two stock split effective August 21,
2007.
|
Advertising
Advertising
costs are expensed as incurred. Advertising expense was approximately
$761,000, $635,000 and $784,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
Research
and Development
Research
and development costs are expensed as incurred. Research and
development expense was $3.1 million, $2.6 million and $2.5 million for the
years ended December 31, 2009, 2008 and 2007, 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.
-40-
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 $4.8 million, $5.1 million and $4.2 million for the years
ended December 31, 2009, 2008 and 2007, 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 percentage 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 $81,000, $93,000 and $98,000 for the years ended 2009, 2008 and
2007, 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. 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 $1.2 million, $1.4 million and $1.3 million in 2009,
2008 and 2007, respectively.
Fair
Value Measurements
We follow
the provisions of FASC Topic 820,
Fair Value Measurements and
Disclosures
related to
financial assets and
liabilities that are being measured and reported on a fair value
basis. Fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the principal market at the measurement date (exit price). We
are required to classify fair value measurements in one of the following
categories:
Level 1
inputs which are defined as quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2
inputs which are defined as inputs other than quoted prices included within
Level 1 that are observable for the assets or liabilities, either directly or
indirectly.
Level 3
inputs are defined as unobservable inputs for the assets or
liabilities.
Financial
assets and liabilities are classified based on the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of
a particular input to the fair value measurement requires judgment, and may
affect the valuation of the fair value of assets and liabilities and their
placement within the fair value hierarchy levels.
Derivative
Fair Value Measurements
Our
derivative assets consist of a forward purchase contract that is measured at
fair value using the quoted prices in the COMEX commodity markets which is the
lowest level of input significant to measurement. The fair value and
carrying amount of our derivative assets at December 31, 2009 is $2.2
million. The measurement is based on pricing for instruments similar
but not identical to the contract we will settle. These prices are
based upon regularly traded commodities on COMEX. Therefore
we
consider the market for our commodity futures contract to be active, yet the
fair values are estimates and are not necessarily indicative of the amounts for
which we could settle such instruments currently.
-41-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Derivative
Fair Value Measurements (continued)
We record
changes in the derivative’s fair value currently in earnings based on
mark-to-market accounting. At December 31, 2009, we recorded a $2.2
million ($1.4 million after tax) adjustment to cost of sales from the unrealized
gain on derivative assets at fair value in the Consolidated Statements of
Income.
The
following table presents the fair value of our assets and liabilities measured
at fair value on a recurring basis as of December 31, 2009 in the Consolidated
Balance Sheets:
|
Quoted
Prices in Active Markets for Identical Assets
Level
1
|
Significant
Other Observable Inputs
Level
2
|
Significant
Unobservable Inputs
Level
3
|
Total
|
|
|
(in
thousands)
|
||||
|
Assets:
|
||||
|
Derivative
assets
|
$ -
|
$ 2,200
|
$ -
|
$ 2,200
|
Subsequent
Events
We have
determined that no subsequent events which require recognition or disclosure in
our Consolidated Financial Statements exist.
New
Accounting Pronouncements
In
March 2008, the FASB issued FASC Topic 815,
Derivatives and Hedging
,
formerly SFAS No. 161, (“FASC 815”), 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 prior
guidance and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. FASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Adoption
of FASC 815 did not have a material impact on our Consolidated Financial
Statements.
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01,
Topic 105 - Generally Accepted
Accounting Principles
(“GAAP”) (“ASU 2009-01”), which superseded all
accounting standards in U.S. GAAP, aside from those issued by the
SEC. The codification does not change or alter existing
GAAP. ASU 2009-01 is effective for reporting periods ending after
September 15, 2009. We adopted ASU 2009-01 for reporting in the third
quarter of 2009. Adoption of ASU 2009-01 did not have a material
impact on our Consolidated Financial Statements.
In August
2009, the FASB issued ASU 2009-05,
Fair Value Measurement and
Disclosures: Measuring Liabilities at Fair Value
(“ASU 2009-05”), which
provides clarification on measuring liabilities at fair value when a quoted
price in an active market is not available. ASU 2009-05 is effective
for the first reporting period beginning after issuance. We adopted
ASU 2009-05 in the fourth quarter 2009. Adoption of ASU 2009-05 did
not have a material impact on our Consolidated Financial
Statements.
In
February 2010, the FASB issued ASU 2010-09,
Subsequent Events
(“ASU
2010-09”), which discontinues the requirement that entities disclose the date
through which they have evaluated subsequent events. ASU 2010-09 is
effective upon issuance. We adopted ASU 2010-09 for reporting in the
fourth quarter of 2009. Adoption of ASU 2010-09 did not have a
material impact on our Consolidated Financial Statements.
-42-
1. Business,
Summary of Significant Accounting Policies and Other Financial Data
(continued)
Segments
We have
reviewed our business operations and determined that we have two operating
segments as defined in FASC Topic 280,
Segment
Reporting
. 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 through September 2009 at which time
manufacturing operations closed and AAON Properties (“Canadian
facility”). We have determined that the foreign operating segment
does not constitute a separate reporting segment based on quantitative threshold
tests. 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 $9,000, $71,000 and $10,000 were made during the years
ended December 31, 2009, 2008 and 2007, respectively. Payments for
income taxes of $10.0 million, $12.7 million and $10.2 million were made during
the years ended December 31, 2009, 2008 and 2007, respectively. Dividends
payable of $3.1 million and $2.8 million were accrued as of December 31, 2009
and 2008 and were paid on January 4, 2010 and January 2, 2009,
respectively.
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 $0.9
million. Borrowings available under the revolving credit facility at
December 31, 2009, were $14.3 million. The letter of credit was a
requirement of our workers compensation insurance and was extended in 2009 and
will expire December 31, 2010. Interest on borrowings is payable
monthly at the greater of 4.0% or LIBOR plus 2.5% (4.0% at December 31,
2009). No fees are associated with the unused portion of the
committed amount. We had no borrowings outstanding under the
revolving credit facility at December 31, 2009. We had $2.9 million
outstanding under the revolving credit facility at December 31,
2008. We had no borrowings outstanding under the revolving credit
facility at December 31, 2007.
At
December 31, 2009, 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, 2009 our tangible net worth was $118.0 million which meets the
requirement of being at or above $75.0 million. Our total liabilities
to tangible net worth ratio was 1 to 3 which meets the requirement of not being
above 2 to 1. Our working capital was $65.4 million which meets the
requirement of being at or above $30.0 million. On July 30, 2009, we
renewed the line of credit with a maturity date of July 30, 2010 with terms
substantially the same as the previous agreement. We
expect to renew our revolving credit agreement in July 2010. We do
not anticipate that the current situation in the credit market will impact our
renewal.
4
.
Debt
Short-term
debt at December 31, 2009 and 2008 consisted of notes payable totaling
approximately $76,000 and $91,000 due in 2010 and 2009,
respectively. In 2009 and 2008, 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 provisions of FASC Topic 740,
Income Taxes
, including 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.
-43-
The
income tax provision consists of the following:
|
Years
Ending December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
| Current | $ | 19,529 | $ | 16,163 | $ | 12,631 | ||||||
|
Deferred
|
(3,358 | ) | (684 | ) | (444 | ) | ||||||
| $ | 16,171 | $ | 15,479 | $ | 12,187 | |||||||
The
reconciliation of the federal statutory income tax rate to the effective income
tax rate is as follows:
|
Years
Ending December 31,
|
|||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||
|
Federal
statutory rate
|
35 | % | 35 | % | 35 | % | |||||||
|
State
income taxes, net of federal benefit
|
4 | % | 3 | % | 3 | % | |||||||
|
Other
|
(2 | %) | (3 | %) | (3 | %) | |||||||
| 37 | % | 35 | % | 35 | % | ||||||||
The
“Other” tax rate primarily relates to certain domestic credits.
The tax
effect of temporary differences giving rise to our deferred income taxes at
December 31 is as follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Net
current deferred assets and (liabilities) relating to:
|
||||||||||||
|
Valuation
reserves
|
$ | 572 | $ | 446 | $ | 295 | ||||||
|
Warranty
accrual
|
2,544 | 2,567 | 2,456 | |||||||||
|
Other
accruals
|
1,297 | 1,262 | 1,430 | |||||||||
|
Other,
net
|
(790 | ) | (40 | ) | 131 | |||||||
| $ | 3,623 | $ | 4,235 | $ | 4,312 | |||||||
|
Net
long-term deferred (assets) and liabilities relating to:
|
||||||||||||
|
Depreciation
and amortization
|
$ | 7,820 | $ | 7,247 | $ | 6,376 | ||||||
|
NOL
|
- | (2,265 | ) | (2,019 | ) | |||||||
|
Share-based
compensation
|
(494 | ) | (400 | ) | (383 | ) | ||||||
| $ | 7,326 | $ | 4,582 | $ | 3,974 | |||||||
The net
operating loss (“NOL”) deferred tax asset related to AAON Canada was utilized in
2009. We file income tax returns in the U.S. federal jurisdiction,
and various state and foreign jurisdictions
.
The total
amount of unrecognized tax benefits is as follows:
|
Tax
Benefit
|
||||
|
(in
thousands)
|
||||
|
Balance
at January 1, 2009
|
$ | 50 | ||
|
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
|
- | |||
|
Change
as a result of a lapse of the applicable statute of
limitations
|
(50 | ) | ||
|
Balance
at December 31, 2009
|
$ | 0 | ||
There are
no unrecognized tax benefits that if recognized would impact the effective tax
rate at December 31, 2009.
-44-
We
recognize accrued interest and penalties related to unrecognized tax benefits in
income tax expense. At December 31, 2009 and 2008, we had accrued
approximately $0 and $6,000 for the potential payment of interest and penalties,
respectively.
As of
December 31, 2009, we are subject to U.S. Federal income tax examinations for
the tax years 2006 through 2009, and to non-U.S. income tax examinations for the
tax years of 2006 through 2009. In addition, we are subject to state
and local income tax examinations for the tax years 2005 through
2009.
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.
On May
22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which
provides an additional 750,000 shares that can be granted in the form of stock
options, stock appreciation rights, restricted stock awards, performance units
and performance awards. Since inception of the 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 FASC Topic 718,
Compensation – Stock
Compensation
. 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.
We
recognized approximately $484,000, $400,000 and $526,000 at December 31, 2009,
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, 2009 is $0.9 million and is expected to be recognized over a
weighted-average period of 2.1 years.
The
following weighted average assumptions were used to determine the fair value of
the stock options granted on the original grant date for expense recognition
purposes for options granted during December 31, 2009, 2008 and 2007
:
|
2009
|
2008
|
2007
|
|||
|
Directors
and Officers:
|
|||||
|
Expected
dividend yield
|
1.87%
|
1.72%
|
N/A
|
||
|
Expected
volatility
|
47.47%
|
45.16%
|
N/A
|
||
|
Risk-free
interest rate
|
2.53%
|
3.08%
|
N/A
|
||
|
Expected
life
|
7.0
yrs
|
7.0
yrs
|
N/A
|
||
|
Forfeiture
rate
|
0%
|
0%
|
N/A
|
||
|
Employees:
|
|||||
|
Expected
dividend yield
|
1.87%
|
1.72%
|
1.67%
|
||
|
Expected
volatility
|
46.94%
|
44.47%
|
41.92%
|
||
|
Risk-free
interest rate
|
2.62%
|
3.05%
|
4.61%
|
||
|
Expected
life
|
8.0
yrs
|
8.0
yrs
|
6.3
yrs
|
||
|
Forfeiture
rate
|
31%
|
31%
|
28%
|
-45-
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 over
time periods equal to the expected life at grant date.
The
following is a summary of stock options outstanding as of December 31,
2009:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
December
31, 2009
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Number
Exercisable
at
December
31, 2009
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
| 5. 73 – 11.29 | 120,613 | 3.41 | $ | 9.12 | $ | 10.37 | 104,113 | $ | 8.84 | ||||||||||||||||
| 11.40 – 12.00 | 33,900 | 5.71 | 11.60 | 7.89 | 28,200 | 11.62 | |||||||||||||||||||
| 13.60 – 15.55 | 131,500 | 8.22 | 15.13 | 4.36 | 33,900 | 14.72 | |||||||||||||||||||
| 15.99 – 21.42 | 174,500 | 7.18 | 17.58 | 1.91 | 78,100 | 17.48 | |||||||||||||||||||
|
Total
|
460,513 | 6.38 | $ | 14.22 | $ | 6.75 | 244,313 | $ | 12.74 | ||||||||||||||||
A summary
of option activity under the plan is as follows:
|
Options
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic Value ($000)
|
|||||||
|
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 | |||||||||
|
Granted
|
93,000 | 15.92 | |||||||||
|
Exercised
|
(164,013 | ) | 7.53 | ||||||||
|
Forfeited
or Expired
|
(48,050 | ) | 17.00 | ||||||||
|
Outstanding
at December 31, 2009
|
460,513 | 14.22 |
6.38
|
$ 2,426
|
|||||||
|
Exercisable
at December 31, 2009
|
244,313 | $ | 12.74 |
5.04
|
$ 1,649
|
||||||
The
weighted average grant date fair value of options granted during 2009 and 2008
was $6.87 and $6.95, respectively. The total intrinsic value of
options exercised during December 31, 2009, 2008 and 2007 was $3.3 million, $6.4
million and $8.7 million, respectively. The cash received from
options exercised during December 31, 2009, 2008 and 2007 was $1.2 million, $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.
-46-
A summary
of the status of the unvested stock options is as follows:
|
Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Unvested
at January 1, 2009
|
242,600 | $ | 6.68 | |||||
|
Granted
|
93,000 | 6.87 | ||||||
|
Vested
|
(80,850 | ) | 6.53 | |||||
|
Forfeited
|
(38,550 | ) | 6.97 | |||||
|
Unvested
at December 31, 2009
|
216,200 | $ | 6.77 | |||||
The total
grant date fair value of options vested during December 31, 2009 and 2008 was
$0.5 million and $0.6 million, respectively.
During
2007, the Compensation Committee of the Board of Directors authorized and issued
restricted stock awards to directors and key employees. The restricted stock
award program offers the opportunity to earn shares of AAON Common Stock over
time, rather than options that give the right to purchase stock at a set
price. Restricted stock awards granted to directors vest one-third
each year. All other restricted stock awards 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 2009 and 2008 was $19.72 and $19.34 per share,
respectively. We recognized approximately $364,000, $350,000 and $56,000 at
December 31, 2009, 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, 2009, unrecognized
compensation cost related to unvested restricted stock awards was approximately
$466,000 which is expected to be recognized over a weighted average period of
1.5 years.
A summary
of the unvested restricted stock awards is as follows:
|
Shares
|
||||
|
Unvested
at January 1, 2009
|
42,450 | |||
|
Granted
|
7,350 | |||
|
Vested
|
(16,550 | ) | ||
|
Forfeited
|
- | |||
|
Unvested
at December 31, 2009
|
33,250 | |||
FASC
Topic 718,
Compensation –
Stock Compensation
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. During
December 31, 2009, 2008 and 2007, the excess tax benefits of stock options
exercised and restricted stock awards vested was $0.7 million, $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.
-47-
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 current
market prices.
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, 2009, we
had repurchased a total of 1,717,804 shares under this program for an aggregate
price of $34,192,008, or an average price of $19.90 per
share. We purchased the shares at current market
prices.
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, 2009, we repurchased 760,477 shares for
an aggregate price of $12,589,311, or an average price of $16.55 per share. We
purchased the shares at current market prices.
On
November 7, 2006, the Board of Directors authorized us to repurchase shares from
certain directors and officers following their exercise of stock
options. The maximum number of shares to be repurchased under the
program is unknown as the amount is contingent on the number of shares
sold. Through December 31, 2009, we repurchased 350,375 shares for an
aggregate price of $7,167,623, or an average price of $20.46 per
share. We purchased the shares at current market prices.
9.
Dividends
On
February 14, 2006, the Board of Directors voted to initiate a semi-annual cash
dividend. We initially paid semi-annual dividends of $0.20 per
share. The Board of Directors approved dividend payments of $0.16 per
share related to the stock split effective August 21, 2007. The Board
of Directors approved future dividend payments of $0.18 per share on May 19,
2009. Board approval is required to determine the date of declaration
and amount for each semi-annual dividend payment.
Cash
dividend payments of $5.9 million were made in 2009, and accrued a liability for
payment of $3.1 million of dividends in January 2010. 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.
10
.
Commitments and
Contingencies
We are
subject to claims and legal actions that arise in the ordinary course of
business. Management believes that the ultimate liability from these
claims and actions, if any, will not have a material effect on our results of
operations or financial position.
11. Canadian
Facility
On May
18, 2009 we announced the closure of our Canadian facility and filed an 8-K to
that effect. At the same time, we notified the 47 Canadian employees of the
expected closure date. The actual closure date was at the end of
September 2009. We accrued and charged to expense $0.3 million
through December 31, 2009, in closure costs related to employee termination
benefits in accordance with Canadian labor laws and regulations. We
incurred employee termination costs as well as costs to dispose of
inventory. We accrued and charged to expense $0.4 million as an
adjustment to our inventory reserve in second quarter 2009 to account for
inventory items we did not transfer to our other locations. The
following closure costs were included in income from continuing operations in
the income statement and paid as of December 31, 2009:
-48-
|
|
Balance
at
6/30/09
|
Additional
Accrual
|
Charged
to Expense
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Employee
termination benefits
|
$ | 280 | $ | 26 | $ | 306 | ||||||
|
Inventory
reserve adjustments
|
389 | - | 389 | |||||||||
|
Total
|
$ | 669 | $ | 26 | $ | 695 | ||||||
12.
Quarterly Results
(Unaudited)
The
following is a summary of the quarterly results of operations for the years
ending December 31, 2009 and 2008:
|
Quarter
Ended
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Net
sales
|
$ | 63,965 | $ | 68,597 | $ | 58,492 | $ | 54,228 | ||||||||
|
Gross
profit
|
16,934 | 18,104 | 17,728 | * | 14,779 | * | ||||||||||
|
Net
income
|
6,728 | 7,097 | 7,741 | * | 6,155 | * | ||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
0.39 | 0.41 | 0.45 | * | 0.36 | * | ||||||||||
|
Diluted
|
0.39 | 0.41 | 0.45 | * | 0.36 | * | ||||||||||
|
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 | ||||||||||||
*Includes
the impact of the unrealized gain from the derivative.
-49-
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of EquityItem 6. S Elected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules