UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 0-18953
AAON, INC.
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(Exact name of Registrant as specified in its charter)
Nevada 87-0448736
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2425 South Yukon, Tulsa, Oklahoma 74107
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 583-2266
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.004
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(Title of Class)
Rights to Purchase Series A Preferred Stock
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in 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, 2004) was $186,071,000.
As of February 28, 2005, Registrant had outstanding a total of
12,381,833 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 24, 2005, are
incorporated into Part III.
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
1. Business. 1
2. Properties. 4
3. Legal Proceedings. 5
4. Submission of Matters to a Vote of Security Holders. 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 6
6. Selected Financial Data. 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
7A. Quantitative and Qualitative Disclosures About Market Risk. 12
8. Financial Statements and Supplementary Data. 13
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 13
9A. Controls and Procedures. 13
9B. Other Information. 17
PART III
10. Directors and Executive Officers of Registrant. 18
11. Executive Compensation. 18
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. 18
13. Certain Relationships and Related Transactions. 19
14. Principal Accountant Fees and Services. 19
PART IV
15. Exhibits and Financial Statement Schedules. 20
PART I
Item 1. Business.
General Development and Description of Business
AAON, Inc., a Nevada corporation, was incorporated on August 18, 1987.
The Company (including its subsidiaries) is engaged in the manufacture and sale
of air-conditioning and heating equipment consisting of standardized and custom
rooftop units, chillers, air-handling units, make-up air units, heat recovery
units, condensing units and coils.
Products and Markets
The Company's products serve the commercial and industrial new construction and
replacement markets. To date virtually all of the Company's sales have been to
the domestic market, with foreign sales accounting for only 2% of its sales in
2004.
The rooftop and condenser markets consist of units installed on commercial or
industrial structures of generally less than 10 stories in height. Air-handling
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, the Company emphasizes the
replacement market.
Based on its 2004 level of sales of approximately $173 million, the Company
estimates that it has a 13% share of the rooftop market and a 1% share of the
coil market. Approximately 55% of the Company's sales now come from new
construction and 45% from renovation/replacements. The percentage of sales for
new construction vs. replacement to particular customers is related to the
customer's stage of development. In the case of Wal-Mart, due to its growth
posture, the Company's sales to this major customer were approximately 70% for
new construction and 30% replacement.
The Company purchases certain components, fabricates sheet metal and tubing and
then assembles and tests its finished products. The Company's 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. The Company's other finished products are coils consisting
of a sheet metal casing with tubing and fins contained therein, air-handling
units consisting of coils, blowers and filters, condensing units consisting of
coils, fans and compressors, which, with the addition of a refrigerant-to-water
heat exchanger, become chillers, and make-up air units and heat recovery units.
With regard to its standardized products, the Company currently has five groups
of rooftop units: its RM and RN Series offered in 21 cooling sizes ranging from
two to 70 tons; its RL Series, which is offered in 15 cooling sizes ranging from
40 to 230 tons; its HA Series, which is a horizontal discharge package for
either rooftop or ground installation, offered in nine sizes ranging from four
to 50 tons; and its HA/HB Series, which is offered in 11 sizes ranging from two
to 50 tons. The Company manufactures a Model LL chiller, which is available in
both air-cooled condensing and evaporative cooled configurations. The Company's
air-handling units consist of the H/V Series and the Celebrity Series. The
Company's heat recovery option applicable to its RM, RN and RL units, as well as
its Celebrity air handlers, respond to the U.S. Clean Air Act mandate to
increase fresh air in commercial structures. The Company's products are designed
to compete on the higher quality end of standardized products.
-1-
The Company's customized products have extensive flexibility in sizes and
configurations.
Performance characteristics of its products range in cooling capacity from
28,000-4,320,000 BTU's and in heating capacity from 69,000-3,990,000 BTU's. All
of the Company's products meet the Department of Energy's efficiency standards,
which are published to 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.
The Company has developed and is beginning to market a residential condensing
unit (CB Series).
Major Customers
The Company's largest customer last year was Wal-Mart Stores, Inc. Sales to
Wal-Mart were 14%, 18% and 14% of total sales, respectively, in 2004, 2003 and
2002. The Company has no written contract with this customer.
The loss of Wal-Mart would have a material adverse affect on the Company.
However, with the continuing expansion of the Company's customer base,
management believes that the extent of its dependence on sales to this customer
will diminish over a period of time.
In order to diversify its customer base, the Company has added to and/or
upgraded its sales representation in various markets.
Sources and Availability of Raw Materials
The most important materials purchased by the Company are steel, copper and
aluminum, which are obtained from domestic suppliers. The Company also purchases
from other domestic manufacturers certain components, including compressors,
electric motors and electrical controls used in its products. The Company
endeavors to obtain the lowest possible cost in its purchases of raw materials
and components, consistent with meeting specified quality standards. The Company
is not dependent upon any one source for its raw materials or the major
components of its manufactured products. By having multiple suppliers, the
Company believes that it will have adequate sources of supplies to meet its
manufacturing requirements for the foreseeable future.
The Company attempts to limit the impact of increases in raw materials and
purchased component prices on its profit margins by negotiating with each of its
major suppliers on a term basis from six months to one year. However, in 2004
cost increases in basic commodities, such as steel, copper and aluminum, were
unprecedented in magnitude and severely impacted profit margins. In many
instances, due to the significant price increases, suppliers refused to sell
materials at the originally negotiated six-month or one year purchase order
price.
Distribution
The Company employs a sales staff of 12 individuals and utilizes approximately
87 independent manufacturer representatives' organizations having 104 offices to
market its products in the United States and Canada. The Company also has 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 the Company's Tulsa, Oklahoma, Longview, Texas, and Burlington,
Ontario, Canada plants to the job site. Billings are to the contractor or end
user, with a commission paid directly to the manufacturer representative.
-2-
The Company's products and sales strategy focus on "niche" markets. The targeted
markets for its equipment are customers seeking products of better quality than
offered, and/or options not offered, by standardized manufacturers.
To support and service its customers and the ultimate consumer, the Company
provides parts availability through two independent parts distributors and has
factory service organizations at each of its plants. Also, a number of the
manufacturer representatives utilized by the Company have their own service
organizations, which, together with the Company, provide the necessary warranty
work and/or normal service to customers.
The Company's warranty on its products is: for parts only, the earlier of one
year from the date of first use or 14 months from date of shipment; compressors
(if applicable), an additional four years; on gas-fired heat exchangers (if
applicable), 15 years; and on stainless steel heat exchangers (if applicable),
25 years.
Research and Development
All R&D activities of the Company are company-sponsored, rather than
customer-sponsored. R&D has involved the HB, RM, RN and RL (rooftop units), LL
(chillers), CB (condensing units) and WA (wall-hung units), as well as component
evaluation and refinement, development of control systems and new product
development. In the last three years, the Company has incurred an average of
$917,000 per year in research and development expense.
Backlog
The Company had a current backlog as of March 1, 2005, of $33,184,000, compared
to $37,384,000 at March 1, 2004. The current backlog consists of orders
considered by management to be firm and substantially all of which will be
filled by August 1, 2005; 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. The Company regularly reviews its working capital components with a
view to maintaining the lowest level consistent with requirements of anticipated
levels of operation. Its greatest needs arise during the months of
July-November, the peak season for inventory (primarily purchased material) and
accounts receivable. The Company's 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. The Company believes that it
will have sufficient funds available to meet its working capital needs for the
foreseeable future.
Seasonality
Sales of the Company's products are moderately seasonal with the peak period
being July-November of each year.
Competition
In the standardized market, the Company competes primarily with Trane Company, a
division of American Standard, Inc., Carrier Corporation, a subsidiary of United
Technologies Corporation, Lennox International, Inc., and York International
Corporation. All of these competitors are substantially larger and have greater
resources than the Company. In the custom market, the Company competes with many
larger and smaller manufacturers. The Company competes 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, the Company
often is at a competitive disadvantage on sales of its products because of the
emphasis placed on initial cost; whereas, in the replacement market and other
owner-controlled purchases, the Company has a better chance of getting the
business since quality and long-term cost are generally taken into account.
-3-
Employees
As of March 1, 2005, the Company had 1,131 employees and 236 temporaries, none
of whom is represented by unions. Management considers its relations with its
employees to be satisfactory.
Patents, Trademarks, Licenses and Concessions
The Company does not consider any patents, trademarks, licenses or concessions
held by it to be material to its business operations, other than patents issued
regarding its heat recovery wheel option, blower, gas-fired heat exchanger,
wall-hung curb and evaporative condenser desuperheater.
Environmental Matters
Laws concerning the environment that affect or could affect the Company's
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. The Company believes
that it presently complies with these laws and that future compliance will not
materially adversely affect the Company's earnings or competitive position.
Available Information
The Company's Internet website address is http://www.aaon.com. Its 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 the Company's
Internet website as soon as reasonably practical after the Company
electronically files such material with, or furnishes it to, the SEC.
Item 2. Properties.
The plant and office facilities in Tulsa, Oklahoma, consist of a 337,000 square
foot building (322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq.
ft. of office space) located on a 12-acre tract of land at 2425 South Yukon
Avenue (the "original facility"), and a 563,000 square foot
manufacturing/warehouse building and a 22,000 square foot office building (the
"expansion facility") located on a 40-acre tract of land across the street from
the original facility (2440 South Yukon Avenue). Both plants are of sheet metal
construction.
The original facility's manufacturing area is in a heavy industrial type
building, with total coverage by bridge cranes, containing manufacturing
equipment designed for sheet metal fabrication and metal stamping. The
manufacturing equipment contained in the original facility consists primarily of
automated sheet metal fabrication equipment, supplemented by presses, press
breaks and NC 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. Production at this facility averaged approximately $14.4
million per month in 2004, which is 56% of the estimated capacity of the plant.
Management deems this plant to be nearly ideal for the type of rooftop products
being manufactured by the Company.
The expansion facility is 39% (228,000 sq. ft.) utilized by the Company and 61%
leased to a third party. The Company uses 22,000 sq. ft. for office space,
20,000 sq. ft. for warehouse space and 186,000 sq. ft. for manufacturing. The
remaining 357,000 sq. ft. will afford the Company additional plant space for
long-term growth.
The Company's operations in Longview, Texas, are conducted in a plant/office
building at 203-207 Gum Springs Road, containing 226,000 sq. ft. on 14 acres.
The manufacturing area (approximately 219,000 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
13 acres were purchased in 2004 for future expansion.
-4-
The Company's operations in Burlington, Ontario, Canada, are located at 279
Sumach Drive, consisting of an 82,000 sq. ft. office/manufacturing facility on a
5.6 acre tract of land.
Item 3. Legal Proceedings.
The Company is 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 its knowledge, has been threatened against
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through solicitation of
proxies or otherwise, during the period from October 1, 2004, through December
31, 2004.
-5-
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol "AAON". The range of closing prices for the Company's Common Stock during
the last two years, as reported by National Association of Securities Dealers,
Inc., was as follows:
Quarter Ended High Low
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March 31, 2003 $19.36 $12.70
June 30, 2003 $19.64 $12.48
September 30, 2003 $19.84 $16.39
December 31, 2003 $20.49 $17.13
March 31, 2004 $22.40 $18.00
June 30, 2004 $21.24 $18.78
September 30, 2004 $19.54 $15.52
December 31, 2004 $18.20 $14.16
On February 28, 2005, there were 1,034 holders of record, and 2,889 beneficial
owners, of the Company's Common Stock.
Since its inception, no cash dividends have been paid on the Company's Common
Stock and the Company does not anticipate paying cash dividends in the
foreseeable future. There is a negative covenant under the Company's Revolving
Credit and Term Loan Agreement which prohibits the declaration or payment of
such dividends.
Following repurchases of approximately 12% of its outstanding Common Stock
between September 1999 and September 2001, the Company announced and began its
current stock repurchase program on October 17, 2002, targeting repurchases of
up to an additional 10% (1,325,000 shares) of its outstanding stock. Through
December 31, 2004, the Company had repurchased a total of 1,078,064 shares under
the current program for an aggregate price of $18,889,535, or an average of
$17.52 per share.
Repurchases during the fourth quarter of 2004 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------ ------------- ------------ ----------------- ---------------------
(d) Maximum
(c) Total Number Number (or
(a)Total (b) of Shares (or Approximate Dollar
Number of Average Units) Purchased Value) of Shares (or
Period Shares (or Price Paid as Part of Units) that May Yet
Units) Per Share Publicly Be Purchased Under
Purchased (or Unit) Announced Plans the Plans or
or Programs Programs
- ------------------ ------------- ------------ ----------------- ---------------------
Month #1
October 1-31, 14,800 $15.43 14,800 295,536
2004
- ------------------ ------------- ------------ ----------------- ---------------------
Month #2
November 1-30, 21,500 $15.78 21,500 274,036
2004
- ------------------ ------------- ------------ ----------------- ---------------------
Month #3
December 1-31, 27,100 $14.89 27,100 246,936
2004
- ------------------ ------------- ------------ ----------------- ---------------------
Total 63,400 $15.32 63,400
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-6-
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto for the periods indicated, which
are included elsewhere in this report.
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
Results of Operations: 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $173,267 $148,845 $155,075 $157,252 $154,982
Net income $ 7,521 $ 14,227 $ 14,611 $ 14,156 $ 12,794
Basic earnings per share $ 0.60 $ 1.12 $ 1.11 $ 1.09 $ .97
Diluted earnings per share $ 0.58 $ 1.07 $ 1.06 $ 1.04 $ .92
Weighted average shares outstanding:
Basic 12,435 12,685 13,158 12,992 13,190
Diluted 12,923 13,251 13,740 13,641 13,896
December 31,
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data: 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands)
Total assets $105,227 $102,085 $ 91,713 $ 76,295 $ 76,818
Long-term debt $ 167 - - $ 985 $ 5,853
Stockholders' equity $ 71,171 $ 67,428 $ 62,310 $ 50,041 $ 37,012
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 September 28, 2001 and June 4, 2002, the Company
completed three-for-two stock splits. The shares outstanding and earnings per
share disclosures have been restated to reflect the stock splits.
-7-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
AAON engineers, manufactures and markets air-conditioning and heating equipment
consisting of standardized and custom rooftop units, chillers, air-handling
units, make-up units, heat recovery units, condensing units and coils.
AAON sells its products to property owners and contractors through a network of
manufacturers' representatives and its internal sales force. Demand for the
Company's products is influenced by national and regional economic and
demographic factors. The commercial and industrial new construction market is
subject to cyclical fluctuations in that it is generally tied to housing starts,
but has a lag factor of 6-18 months. Housing starts, in turn, are affected by
such factors as interest rates, the state of the economy, population growth and
the relative age of the population. When new construction is down, the Company
emphasizes the replacement market.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight out and engineering expense. The
principal raw materials used in AAON's manufacturing processes are steel, copper
and aluminum. The major component costs include compressors, electric motors and
electronic controls.
Selling, general, and administrative ("SG&A") costs include the Company's
internal sales force, warranty costs, profit sharing and administrative expense.
Warranty expense is estimated based on historical trends and other factors. The
Company's warranty on its products is: for parts only, the earlier of one year
from the date of first use or 14 months from date of shipment; compressors (if
applicable), an additional four years, on gas-fired heat exchangers (if
applicable), 15 years, and on stainless steel heat exchangers (if applicable),
25 years.
On May 4, 2004, AAON Canada Inc., an Ontario corporation organized as a
wholly-owned subsidiary of AAON, Inc., purchased certain assets of Air Wise
Inc., of Mississauga, Ontario, Canada, which engineers, manufactures and sells
custom air-handling units, make-up air units and packaged rooftop units for
commercial and industrial buildings. The purchase price was $1,778,000, and was
financed out of cash flow from operations. The Company's results of operations
include the results of the acquisition from May 4, 2004 forward.
On July 29, 2004, AAON Properties Inc., an Ontario corporation organized as a
wholly-owned subsidiary of AAON, Inc., purchased property in Burlington,
Ontario, Canada to relocate AAON Canada Inc. The facilities consist of an 82,000
square foot building (71,000 sq. ft. of manufacturing/warehouse space and 11,000
sq. ft. of office space) located at 279 Sumach Drive on a 5.6 acres tract of
land.
The office facilities of AAON, Inc. consist of a 337,000 square foot building
(322,000 sq. ft. of manufacturing/warehouse space and 15,000 sq. ft. of office
space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma (the "original
facility"), and a 563,000 square foot manufacturing/warehouse building and a
22,000 square foot office building (the "expansion facility") located across the
street from the original facility at 2440 S. Yukon Avenue. The Company utilizes
39% of the expansion facility and the remaining 61% is leased to a third party.
The operations of AAON Coil Products, Inc., are conducted in a plant/office
building at 203-207 Gum Springs Road in Longview, Texas, containing 226,000
square feet (219,000 sq. ft. of manufacturing/warehouse and 7,000 sq. ft. of
office space). In April 2004, AAON Coil Products purchased a 13-acre tract of
land for future expansion.
-8-
Set forth below is income statement information with respect to the Company for
years 2004, 2003 and 2002:
Year Ended December 31,
2004 2003 2002
---- ---- ----
(in thousands)
Net sales $ 173,267 $ 148,845 $ 155,075
Cost of sales 145,807 112,596 117,193
--------------- --------------- ---------------
Gross profit 27,460 36,249 37,882
--------------- --------------- ---------------
Selling, general and administrative
expenses 15,214 14,909 15,071
--------------- --------------- ---------------
Income from operations 12,246 21,340 22,811
--------------- --------------- ---------------
Interest expense (38) (21) (95)
Interest Income 183 346 214
(12) 188 180
--------------- --------------- ---------------
Income before income taxes 12,379 21,853 23,110
Income tax provision 4,858 7,626 8,499
--------------- --------------- ---------------
Net income $ 7,521 $ 14,227 $ 14,611
=============== =============== ===============
Results of Operations
Net sales increased $24.4 million in 2004 compared to 2003, and decreased $6.2
million in 2003 compared to 2002. The increase in sales in 2004 was primarily
attributable to the introduction of new products, the improving outlook for the
U.S. economy, and the Air Wise acquisition, which has contributed $3,250,000
(1.9%) to sales since May 4, 2004. The increased sales were offset by computer
and electrical outages that caused the closings of the Tulsa facility for four
days, which also affected production at Longview and Canada. The decrease in
sales for 2003 was primarily due to economic conditions in the United States,
production issues with the manufacturing of new products and shipment delays by
the Company's customers in the fourth quarter.
Gross margins in 2004 were 15.8% compared to 24.4% in 2003. Gross profit
decreased $8.8 million (24.2%) to $27.5 million in 2004 from $36.2 million in
2003 and decreased $1.6 million (4.3%) to $36.2 million from $37.9 million in
2003 compared to 2002. The decrease in margins for 2004 compared to 2003 and
2002 was due to price increases in steel, copper and aluminum, startup costs
associated with a new coil project, closings of the Tulsa facility for four days
due to computer and electrical outages, which also affected the Longview and
Canada facilities, and equipment failures at the Company's Longview, Texas,
facility that prevented coil production needed by the Tulsa facility. The
Company instituted a product price increase to its customers in April 2004, in
an attempt to offset the increases in steel, copper and aluminum. Due to the
Company's high backlog, orders with old pricing had to flow through the system
before new orders began to reflect the new pricing. In addition, the Company
initiated another product price increase to its customers in December 2004,
because the April price increase did not keep pace with interim material price
increases. The Company attempts to limit the impact of price increases on these
materials by entering into cancelable fixed price contracts with its major
suppliers for periods of 6-12 months. In many instances, due to significant
price increases in 2004, suppliers refused to sell materials at the originally
negotiated six-month or one year purchase order price. While gross margins
decreased as a result of lower sales in 2003, the margin percentage remained
consistent with those of previous years.
-9-
Steel, copper and aluminum are high volume materials used in the manufacturing
of the Company's products, which are obtained from domestic suppliers. The
Company also purchases from other domestic manufacturers certain components,
including compressors, electric motors and electrical controls used in its
products. The suppliers of these components are significantly affected by the
rising raw material costs, as steel, copper and aluminum are used in the
manufacturing of their products. The Company is also experiencing price
increases from component part suppliers.
Selling, general and administrative expenses increased $300,000 (2.0%) in 2004
compared to 2003 due primarily to increases in bad debt expense. The SG&A
decrease of $200,000 (1.1%) in 2003 compared to 2002 was attributable primarily
to improved product quality, offset by advertising, state taxes and employee
compensation cost increases.
Interest expense was $38,000, $21,000 and $95,000 in 2004, 2003 and 2002,
respectively. The reduction in interest expense was due to the retirement of all
long-term debt in 2002, lower average borrowings under the revolving credit
facility in 2004 and 2003 compared to 2002, and lower average interest rates.
Interest income was $183,000, $350,000 and $210,000 in 2004, 2003, and 2002
respectively, due to investments in short-term money markets and certificates of
deposit.
Other expense was $12,000 in 2004 and other income was $200,000 in 2003 and
2002. Other income is attributable primarily to rental income from the Company's
expansion facility.
Financial Condition and Liquidity
Net accounts receivable increased $4.6 million at December 31, 2004, compared to
December 31, 2003, due to an increase in sales and the Air Wise acquisition.
Inventories increased $1.2 million at December 31, 2004, compared to December
31, 2003, due to procurement of inventory to accommodate increased sales and
increased inventory values related to higher raw material and component parts
costs. With the backlog at $33.2 million, the bulk of the increase in
inventories is committed for future manufacturing.
Prepaid expenses decreased by $2.2 million at December 31, 2004, compared to
December 31, 2003, due to deposits on equipment commitments being placed in
service in 2004.
Accounts payable and accrued liabilities increased $4.0 million at December 31,
2004, compared to December 31, 2003, due to timing of payments to vendors and
commissions payable.
The Company generated $16.2 million, $16.5 million and $21.9 million cash from
operating activities in 2004, 2003 and 2002, respectively. Operating cash flows
in 2004 consisted of $7.5 million of net income, $3.0 million of working capital
and other changes. The decrease in cash provided from operating activities in
2004 is primarily due to an increase in cost of sales and an increase in
accounts receivable. Operating cash flows in 2003 consisted of $14.2 million of
net income, $(3.2) million in working capital and other changes. The decrease in
2003 is primarily due to an increase in inventories. Operating cash flows in
2002 consisted of $14.6 million of net income, $2.4 million in working capital
and other changes.
Cash flows used in investing activities were $11.7 million, $7.6 million and
$16.1 million in 2004, 2003 and 2002, respectively. Cash flows used in investing
activities in 2004 related to capital expenditure additions totaling $17
million, reflecting primarily additions to machinery and equipment, a sheet
metal facility at the Tulsa plant and renovations made to the Company's Tulsa
manufacturing and Longview office facilities. In 2003 and 2002 cash used in
investing activities was comprised primarily of capital expenditures totaling
$7.7 million and $6.1 million, respectively. All capital expenditures and
building renovations were financed out of cash generated from operations. In
2002, the Company invested $10 million in a certificate of deposit that matured
in 2004 and an additional $3 million was invested in certificate of deposits in
2004, which matures in the first quarter of 2005. Due to anticipated production
demands, the Company expects to expend approximately $8 million in 2005 for
equipment requirements. The Company expects the cash requirements to be provided
from cash flow from operations.
-10-
Cash flows used in financing activities were $9.9 million, $7.7 million and $1.9
million in 2004, 2003 and 2002, respectively. In October 2002, the Company's
Board of Directors authorized a stock buyback program to repurchase up to
1,325,000 shares of stock. There were 265,100 shares of stock repurchased for a
total of $5.0 million and 597,001 shares of stock repurchased for a total of
$9.9 million in 2004 and 2003, respectively, with 215,963 shares of stock
repurchased for a total of $4.0 million in 2002. Additionally, during 2004, 2003
and 2002, the Company had net borrowings/(repayments) of $(5.4) million, $1.8
million and $3.1 million, respectively, under its revolving credit facility and
repaid $1.9 million of long-term debt in 2002.
The Company's revolving credit facility (which currently extends to July 30,
2005) provides for maximum borrowings of $15.2 million. Interest on borrowings
is payable monthly at the Wall Street Journal prime rate less .5% or LIBOR plus
1.6%, at the election of the Company. The Company had no borrowings under the
revolving credit facility as of December 31, 2004. Borrowings available under
the revolving credit facility at December 31, 2004 were $14.6 million. In
addition, the Company has a $600,000 Letter of Credit that expires December 31,
2005. The credit facility requires that the Company maintain a certain financial
ratio and prohibits the declaration of dividends.
Management believes the Company's bank revolving credit facility (or comparable
financing), and projected cash flows from operations will provide the necessary
liquidity and capital resources to the Company for the foreseeable future. The
Company's belief that it will have the necessary liquidity and capital resources
is based upon its knowledge of the HVAC industry and its place in that industry,
its ability to limit the growth of its business if necessary, and its
relationship with its existing bank lender. For information concerning the
Company's revolving credit facility at December 31, 2004, see Note 4 to the
financial statements included in this report.
Commitments and Contractual Agreements
The Company is a party to several short-term, cancelable, fixed price contracts
with major suppliers for the purchase of raw material and component parts.
The Company has cancelable commitments to purchase machinery and equipment at a
cost of $1.9 million.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because these estimates and assumptions require significant
judgment, future actual results could differ from those estimates and could have
a significant impact on the Company's results of operations, financial position
and cash flows. The Company reevaluates its estimates and assumptions on a
monthly basis.
The following accounting policies may involve a higher degree of estimation or
assumption:
Allowance for Doubtful Accounts - The Company establishes 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.
-11-
Inventory Reserves - The Company establishes 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: for parts
only, the earlier of one year from the date of first use or 14 months from date
of shipment; compressors (if applicable), an additional four years; on gas-fired
heat exchangers (if applicable), 15 years; and on stainless steel heat
exchangers (if applicable), 25 years. Warranty expense is estimated based on the
Company's warranty period, historical warranty trends and associated costs, and
any known identifiable warranty issue. Due to the absence of warranty history on
new products, an additional provision may be made for such products.
Historically, reserves have been within management's expectations.
Stock Compensation - The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees and
related interpretations in accounting for stock options. Under "fixed plan"
accounting in APB 25, because the exercise price of the Company's options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. The Company has adopted pro forma disclosures of SFAS
123.
New Accounting Pronouncements
FASB Statement 123 (R) replaces FASB Statement No.123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Statement requires measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The compensation cost will be
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. The
Statement applies to all awards granted and any unvested awards at June 15,
2005. SFAS 123 (R) will be effective for interim reporting beginning after June
15, 2005. The Company has not determined the impact of the adoption of SFAS 123
(R).
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. The Company undertakes no obligations to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that could cause results to differ
materially from those in the forward-looking statements include (1) the timing
and extent of changes in raw material and component prices, (2) the effects of
fluctuations in the commercial/industrial new construction market, (3) the
timing and extent of changes in interest rates, as well as other competitive
factors during the year, and (4) general economic, market or business
conditions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to interest rate risk on its revolving credit facility
which bears variable interest based upon a prime or LIBOR rate. The Company had
no outstanding balance as of December 31, 2004.
-12-
Foreign sales accounted for only 2% of the Company's sales in 2004 and the
Company accepts payment for such sales in U.S. and Canadian dollars; therefore,
the Company believes it is not exposed to significant foreign currency exchange
rate risk on these sales. Foreign currency transactions and financial statements
are translated in accordance with Statement of Financial Standards No. 52,
Foreign Currency Translation. The Company uses the U.S. dollar as its functional
currency, except for the Company's 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 are denominated in Canadian currency and are included
in the results of operations as incurred.
Important raw materials purchased by the Company are steel, copper and aluminum,
which are subject to price fluctuations. The Company attempts to limit the
impact of price increases on these materials by entering cancelable fixed price
contracts with its major suppliers for periods of 6 -12 months. However, in 2004
cost increases in basic commodities, such as steel, copper and aluminum, were
unprecedented in magnitude and severely impacted profit margins. In many
instances, due to significant price increases, this year, suppliers refused to
sell materials at the originally negotiated six-month or one year purchase order
price.
The Company does not utilize derivative financial instruments to hedge its
interest rate or raw materials price risks.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included commencing at page
27.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The information called for by Item 304 of Regulation S-K has been previously
reported in the Company's Form 8-K dated June 25, 2004.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
AAON's Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures and concluded that these controls
and procedures were ineffective as of December 31, 2004, because of the material
weaknesses discussed below.
(b) Management's Annual Report on Internal Control over Financial
Reporting
The management of AAON, Inc. and its subsidiaries (AAON), is responsible for
establishing and maintaining adequate internal control over financial reporting.
AAON's internal control system was designed to provide reasonable assurance to
the Company's 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 conducting our evaluation of the effectiveness of our internal control over
financial reporting, we have excluded due to its size and complexity the
acquisition of AAON Canada Inc., which was completed in May, 2004. This
acquisition created a second geographic location distinct from that of our
United States operations in which financial reporting will continue to occur
with their own control environment, control activities and proprietary
information technology systems. Collectively, this acquisition constituted 1.7%
of total assets as of December 31, 2004, 1.9% of total revenues and (11)% of net
earnings for the year then ended (See Note 1 to the consolidated financial
statements which contains further discussion of this acquisition and its impact
on our consolidated financial statements). We plan to fully integrate our
reporting locations into a common reporting framework in 2005.
-13-
An internal control material weakness is a significant deficiency, or
aggregation of deficiencies, that results in a more than remote likelihood that
a material misstatement in annual or interim financial statements will not be
prevented or detected on a timely basis by employees in the normal course of
their work. An internal control significant deficiency, or aggregation of
deficiencies, is a deficiency that results in a more than remote likelihood that
a misstatement in annual or interim financial statements is more than
inconsequential. The management of AAON assessed the effectiveness of the
Company's internal control over financial reporting, as defined in Securities
Exchange Commission Act Rule 13a-15(f) as of December 31, 2004, and this
assessment considered the following material weaknesses in the company's
internal control over financial reporting, specifically relating to inventory
accounting:
1) At December 31, 2004, material weaknesses existed in information technology
general controls that impaired the reliability of AAON's manufacturing and
inventory application processing functions and automated controls. These
weaknesses, in turn, undermined the reliability of user controls over
manufacturing and inventory processing, which were dependent upon the
integrity of computer-generated reports. The specific factors giving rise
to this material weakness include a) deficiencies in the authorization,
development, testing, and movement of changes to AAON's inventory and
manufacturing applications and b) significant functional complexity of the
inventory and manufacturing applications that create user dependence upon
application-based controls to prevent or detect errors, omissions and
irregularities in processing.
2) At December 31, 2004, a material weakness existed with respect to the
preparation of certain adjustments recorded by management related to the
valuation of inventory. Our external auditors discovered during the
completion of the audit of the 2004 financial statements that adjustments
recorded by management inaccurately valued inventory and proposed certain
audit adjustments to correct the misstatement. The proposed audit
adjustments were determined to be material and, by reason of that fact, a
material weakness would be deemed to exist. These adjustments were recorded
in the financial statements of AAON. The proposed audit adjustments related
to a) the capitalization of certain purchase price variances and b)
absorption of manufacturing overhead.
Because of the aforementioned material weaknesses, management determined the
Company's internal control over financial reporting to be ineffective at
December 31, 2004.
We intend to implement changes to our internal controls in the future to address
these material weaknesses. We will consider implementation of the following, as
well as other additional procedures:
o Develop controls over production program changes that will assure that all,
and only, authorized changes to production programs have been properly
designed, tested and moved into production.
o Develop controls to assure non-routine adjustments to inventory are
appropriately tested before they are recorded in the financial statements.
o Develop controls to assure manufacturing overhead related to inventory is
appropriately considered in our financial reporting.
In making its 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.
Because of the material weakness described in the preceding paragraph,
management believes that, as of December 31, 2004, the Company's internal
control over financial reporting was not effective based on those criteria.
-14-
AAON's independent registered public accounting firm has issued an attestation
report on management's assessment of the Company's internal control over
financial reporting.
Date: March 8, 2005 /s/ Norman H. Asbjornson
--------------------------------
Norman H. Asbjornson
Chief Executive Officer
/s/ Kathy I. Sheffield
--------------------------------
Kathy I. Sheffield
Chief Financial Officer
(c) Attestation Report of the Registered Public Accounting Firm
AAON, Inc. stockholders
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting
(Management's Assessment), that AAON, Inc. (a Nevada Corporation) and
subsidiaries (collectively, AAON) did not maintain effective internal control
over financial reporting as of December 31, 2004, because of the effect of
material weaknesses identified in management's assessment, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). AAON'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. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
As indicated in Management's Annual Report on Internal Control over Financial
Reporting, management has excluded the May 4, 2004 acquisition of Airwise, Inc.
from management's evaluation of the effectiveness of internal control over
financial reporting. Accordingly, we did not perform procedures to evaluate the
design and operating effectiveness of internal controls related to the acquired
business.
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.
-15-
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.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses relating to inventory accounting
have been identified and included in management's assessment.
1) At December 31, 2004, material weaknesses existed in information technology
general controls that impaired the reliability of AAON's manufacturing and
inventory application processing functions and automated controls. These
weaknesses, in turn, undermined the reliability of user controls over
manufacturing and inventory processing, which were dependent upon the
integrity of computer-generated reports. The specific factors giving rise
to this material weakness include a) deficiencies in the authorization,
development, testing, and movement of changes to AAON's inventory and
manufacturing applications and b) significant functional complexity of the
inventory and manufacturing applications that create user dependence upon
application-based controls to prevent or detect errors, omissions, and
irregularities in processing.
2) At December 31, 2004, we discovered a material weakness existed with
respect to the preparation of certain adjustments recorded by management
related to the valuation of inventory. Our external auditors discovered
during the completion of the audit of the 2004 financial statements that
the adjustments recorded by management inaccurately valued inventory and
proposed certain audit adjustments to correct the misstatement. The
proposed audit adjustments were determined to be material and were
subsequently recorded in the financial statements of AAON. The proposed
audit adjustments related to a) the capitalization of certain purchase
price variances and b) absorption of manufacturing overhead.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2004 financial statements, and
this report does not affect our report dated March 8, 2005 on those financial
statements.
In our opinion, management's assessment that AAON did not maintain effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, because of
the effects of the material weaknesses described above on the achievement of the
objectives of the control criteria, AAON has not maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on management's
statement referring to intended changes to the Company's system of internal
controls over financial reporting and integration of financial reporting
locations and framework.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2004 and related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended of AAON, Inc. and subsidiaries
and our report dated March 8, 2005 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
March 8, 2005
-16-
(d) Changes in Internal Control over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the fourth quarter of 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 9B. Other information.
None.
-17-
PART III
Item 10. Directors and Executive Officers of Registrant.
The information required by Items 401 and 405 of Regulation S-K is incorporated
by reference to the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 2005 Annual
Meeting of Stockholders.
Code of Ethics
- --------------
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer and principal accounting officer or persons
performing similar functions, as well as its other employees and directors. The
Company undertakes to 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.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2005 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by Item 403 of Regulation S-K is incorporated by
reference to the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Company's 2005 Annual
Meeting of Stockholders.
Summary of All Existing Equity Compensation Plans
- -------------------------------------------------
The following table sets forth information concerning the equity compensation
plans of the Company as of December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
Plan Category exercise of exercise price of equity compensation
outstanding options, outstanding options, plan [excluding
warrants and warrants and securities reflected
rights rights in column (a)]
------------- --------------- -------------- --------------
(a) (b) (c)
Equity compensation plans
approved by security holders(1) 1,159,780 $6.13 296,961
Equity compensation plans not
approved by security holders(2) - - -
--------------- -------------- --------------
Total 1,159,780 $6.13 296,961
(1) Consists of shares covered by the Company's 1992 Stock Option Plan, as
amended.
(2) The Company does not maintain any equity compensation plans that have
not been approved by the stockholders.
-18-
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2005 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services.
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 2005 Annual Meeting of Stockholders.
-19-
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial statements.
See Index to Consolidated Financial Statements on page 24.
(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)
(B) Rights Agreement dated February 19, 1999, as
amended (v)
(10) AAON, Inc. 1992 Stock Option Plan, as amended (vi)
(21) List of Subsidiaries
(23.1) Consent of Grant Thornton LLP
(23.2) Consent of Ernst & Young 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 the
Company's Form S-18 Registration Statement No.
33-18336-LA.
(ii) Incorporated herein by reference to the exhibits to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990, and to the Company's
Forms 8-K dated March 21, 1994, March 10, 1997, and
March 17, 2000.
(iii) Incorporated herein by reference to the Company's Forms
8-K dated March 10, 1997, May 27, 1998 and February 25,
1999, or exhibits thereto.
(iv) Incorporated by reference to exhibit to the Company's
Form 8-K dated July 30, 2004.
(v) Incorporated by reference to exhibits to the Company's
Forms 8-K dated February 25, 1999, and August 20, 2002,
and Form 8-A Registration Statement No. 000-18953, as
amended.
-20-
(vi) Incorporated herein by reference to exhibits to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991, and to the Company's Form
S-8 Registration Statement No. 33-78520, as amended.
-21-
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 14, 2005 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 14, 2005 /s/ Norman H. Asbjornson
----------------------------------------
Norman H. Asbjornson
President and Director
(principal executive officer)
Dated: March 14, 2005 /s/ Kathy I. Sheffield
----------------------------------------
Kathy I. Sheffield
Treasurer
(principal financial officer
and principal accounting officer)
Dated: March 14, 2005 /s/ William A. Bowen
----------------------------------------
William A. Bowen
Director
Dated: March 14, 2005 /s/ John B. Johnson, Jr.
----------------------------------------
John B. Johnson, Jr.
Director
Dated: March 14, 2005 /s/ Thomas E. Naugle
----------------------------------------
Thomas E. Naugle
Director
Dated: March 14, 2005 /s/ Anthony Pantaleoni
----------------------------------------
Anthony Pantaleoni
Director
Dated: March 14, 2005 /s/ Jerry E. Ryan
----------------------------------------
Jerry E. Ryan
Director
-22-
Dated: March 14, 2005 /s/ Jack E. Short
----------------------------------------
Jack E. Short
Director
Dated: March 14, 2005 /s/ Charles C. Stephenson, Jr.
----------------------------------------
Charles C. Stephenson, Jr.
Director
-23-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm
- Grant Thornton LLP 25
Report of Independent Registered Public Accounting Firm
- Ernst & Young LLP 26
Consolidated Balance Sheets 27
Consolidated Statements of Income 28
Consolidated Statements of Stockholders' Equity 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31
-24-
Report of Independent Registered Public Accounting Firm
Stockholders
AAON, Inc.
We have audited the accompanying consolidated balance sheet of AAON, Inc. (a
Nevada corporation) and subsidiaries as of December 31, 2004, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. 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 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AAON, Inc. and subsidiaries as
of December 31, 2004, and the results of their operations and their cash flows
for the year then ended 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), the effectiveness of AAON, Inc. and
subsidiaries' internal control over financial reporting as of December 31, 2004,
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 8, 2004 expressed an unqualified opinion on
Management's assessment of the effectiveness of the Company's internal control
over financial reporting and an adverse opinion on the Company's internal
control over financial reporting.
/s/ Grant Thornton LLP
Tulsa, Oklahoma
March 8, 2005
-25-
Report of Independent Registered Public Accounting Firm
Stockholders
AAON, Inc.
We have audited the accompanying consolidated balance sheet of AAON, Inc. as of
December 31, 2003, and the related consolidated statements of income,
stockholders' equity and cash flows for the two years then ended. 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AAON, Inc. at December
31, 2003, and the consolidated results of its operation and its cash flows for
the two years then ended, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 6, 2004
-26-
AAON, INC., and Subsidiaries
Consolidated Balance Sheets
December 31,
2004 2003
--------------------------------------
(in thousands, except for share data)
Assets
Current assets:
Cash and cash equivalents $ 994 $ 6,186
Certificate of deposit 3,000 10,000
Accounts receivable, net 27,121 22,553
Inventories, net 20,868 19,711
Prepaid expenses and other 478 2,653
Deferred tax asset 3,537 3,532
--------------------------------------
Total current assets 55,998 64,635
Property, plant and equipment, net 49,229 37,450
--------------------------------------
Total assets $ 105,227 $ 102,085
======================================
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ - $ 5,356
Current maturities of long-term debt 108 -
Accounts payable 12,882 11,553
Accrued liabilities 15,069 12,357
--------------------------------------
Total current liabilities 28,059 29,266
Long-term debt, less current maturities 167 -
Deferred tax liability 5,830 5,391
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares issued - -
Common stock, $.004 par value, 50,000,000 shares authorized,
12,349,583 and 12,519,733 issued and outstanding at December 31,
2004 and 2003, respectively 49 50
Accumulated other comprehensive income 247 -
Retained earnings 70,875 67,378
--------------------------------------
Total stockholders' equity 71,171 67,428
--------------------------------------
Total liabilities and stockholders' equity $ 105,227 $ 102,085
======================================
The accompanying notes are an integral part of these statements.
-27-
AAON, Inc., and Subsidiaries
Consolidated Statements of Income
Year Ending December 31,
2004 2003 2002
---------------------------------------------------
(in thousands, except per share data)
Net sales $ 173,267 $ 148,845 $ 155,075
Cost of sales 145,807 112,596 117,193
---------------------------------------------------
Gross profit 27,460 36,249 37,882
Selling, general and administrative expenses 15,214 14,909 15,071
---------------------------------------------------
Income from operations 12,246 21,340 22,811
Interest expense (38) (21) (95)
Interest income 183 346 214
Other income (expense) (12) 188 180
---------------------------------------------------
Income before income taxes 12,379 21,853 23,110
Income tax provision 4,858 7,626 8,499
---------------------------------------------------
Net income $ 7,521 $ 14,227 $ 14,611
===================================================
Earnings per share*:
Basic $ .60 $ 1.12 $ 1.11
===================================================
Diluted $ .58 $ 1.07 $ 1.06
===================================================
Weighted average shares outstanding*:
Basic 12,435 12,685 13,158
===================================================
Diluted 12,923 13,251 13,740
===================================================
* Reflects three-for-two stock split effective June 4, 2002.
The accompanying notes are an integral part of these statements.
-28-
AAON, Inc., and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Common Stock Paid-in Comprehensive Retained
Shares* Amount* Capital* Income Earnings* Total
-------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 2001 12,999 $ 52 $ 1,063 $ - $ 48,926 $ 50,041
Net income - - - - 14,611 14,611
Stock options exercised, including tax
benefits 248 1 1,639 - - 1,640
Stock repurchased and retired (216) (1) (2,702) - (1,279) (3,982)
-------------------------------------------------------------------------------------
Balance at December 31, 2002 13,031 52 - - 62,258 62,310
Net income - - - - 14,227 14,227
Stock options exercised, including tax
benefits 86 - 811 - - 811
Stock repurchased and retired (597) (2) (811) - (9,107) (9,920)
-------------------------------------------------------------------------------------
Balance at December 31, 2003 12,520 50 - - 67,378 67,478
Comprehensive income:
Net income - - - - 7,521 7,521
Foreign currency translation
adjustment - - - 247 - 247
------------
Total comprehensive income 7,768
Stock options exercised, including tax
benefits 95 - 954 - - 954
Stock repurchased and retired (265) (1) (954) - (4,024) (4,979)
-------------------------------------------------------------------------------------
Balance at December 31, 2004 12,350 $ 49 $ - $ 247 $ 70,875 $ 71,171
=====================================================================================
* Reflects three-for-two stock split effective June 4, 2002.
The accompanying notes are an integral part of these statements.
-29-
AAON, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
2004 2003 2002
------------------------------------------
(in thousands)
Operating Activities
Net income $ 7,521 $ 14,227 $ 14,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,732 5,435 4,915
Provision for losses on accounts receivable 521 467 346
Provision for excess and obsolete inventories, net - 50 150
(Gain)/Loss on disposition of assets 4 (28) (6)
Deferred income taxes 434 1,957 1,085
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable (4,002) (714) 740
Inventories (698) (5,423) (1,017)
Prepaid expenses and other 2,175 (2,054) (379)
Accounts payable 1,329 3,135 859
Accrued liabilities 3,143 (583) 627
------------------------------------------
Net cash provided by operating activities 16,159 16,469 21,931
------------------------------------------
Investing Activities
Cash paid for acquisition (1,778) - -
Proceeds from sale of property, plant and equipment 13 74 8
Proceeds from matured certificate of deposit 10,000 - -
Investment in certificate of deposit (3,000) - (10,000)
Capital expenditures (16,976) (7,700) (6,126)
------------------------------------------
Net cash used in investing activities (11,741) (7,626) (16,118)
------------------------------------------
Financing Activities
Borrowings under revolving credit agreement 45,471 33,742 33,855
Payments under revolving credit agreement (50,827) (31,952) (30,735)
Payments on long-term debt - - (1,869)
Stock options exercised 478 402 866
Repurchase of stock (4,979) (9,920) (3,982)
------------------------------------------
Net cash used in financing activities (9,857) (7,728) (1,865)
------------------------------------------
Effects of exchange rate of cash 247 - -
------------------------------------------
Net increase (decrease) in cash (5,192) 1,115 3,948
------------------------------------------
Cash and cash equivalents, beginning of year 6,186 5,071 1,123
------------------------------------------
Cash and cash equivalents, end of year $ 994 $ 6,186 $ 5,071
==========================================
The accompanying notes are an integral part of these statements.
-30-
AAON, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2004
1. Business, Summary of Significant Accounting Policies and Other Financial Data
AAON, Inc. (the Company, a Nevada corporation) is engaged in the manufacture and
sale of commercial rooftop air conditioners, heating equipment and air
conditioning coils through its wholly-owned subsidiaries AAON, Inc. (AAON, an
Oklahoma corporation) AAON Coil Products, Inc. (ACP, a Texas corporation) and
AAON Canada, Inc., d/b/a Air Wise (AAON Canada, an Ontario corporation). AAON
Properties Inc., (an Ontario corporation) is the lessor of property in
Burlington, Ontario, Canada, to AAON Canada. The consolidated financial
statements include the accounts of the Company and its subsidiaries, AAON, ACP,
AAON Canada and AAON Properties Inc. All significant intercompany accounts and
transactions have been eliminated.
Currency
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Standards No. 52, Foreign Currency
Translations. The Company uses the U.S. dollar as its functional currency,
except for the Company's 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 are denominated in Canadian currency and 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 in the consolidated financial
statements and accompanying notes.
The following accounting policies may involve a higher degree of estimation or
assumption:
Allowance for Doubtful Accounts - The Company establishes 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.
Inventory Reserves - The Company establishes 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: for parts
only, the earlier of one year from the date of first use or 14 months from date
of shipment; compressors (if applicable), an additional four years; on gas-fired
heat exchangers (if applicable), 15 years; and on stainless steel heat
exchangers (if applicable), 25 years. Warranty expense is estimated based on the
Company's warranty period, historical warranty trends and associated costs, and
any known identifiable warranty issue. Due to the absence of warranty history on
new products, an additional provision may be made for such products.
Actual results could differ from those estimates.
-31-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Revenue Recognition
The Company recognizes revenues from sales of products at the time of shipment.
For sales initiated by independent manufacturer representatives, the Company
recognizes revenues net of the representatives' commission.
Acquisition
On May 4, 2004, the Company (through AAON Canada, Inc.) acquired certain assets
and assumed certain liabilities of Air Wise Inc. of Mississauga, Ontario, Canada
for a total cost of $1,778,000. Air Wise is engaged in the engineering,
manufacturing, and sale of custom air-handling units, make-up air units and
packaged rooftop units for commercial and industrial buildings. The acquisition
complements and expands the products the Company presently manufactures and adds
significant additional capabilities for future growth. The purchase was paid for
by cash flow generated from operations. Subsequent to May 4, 2004, AAON Canada
Inc.'s activity is included in the Company's results of operations for the year
ended December 31, 2004.
The Air Wise acquisition purchase price was allocated as of May 4, 2004, as
follows:
U.S.
Dollar
---------------------
(in thousands)
Accounts receivable $ 1,087
Inventory 459
Fixed assets 277
Accrued warranty liability (45)
---------------------
Total purchase price $ 1,778
=====================
The Air Wise acquisition is not material for pro forma disclosure purposes.
On July 29, 2004, the Company (through AAON Properties, Inc.) purchased property
in Burlington, Canada, to relocate AAON Canada Inc. The purchase will allow the
Company to enlarge and further expand its production capabilities. The purchase
price totaled $1,100,000.
Concentrations
The Company's customers are concentrated primarily in the domestic commercial
and industrial new construction and replacement markets. To date, virtually all
of the Company's sales have been to the domestic market, with foreign sales
accounting for only 2% of revenues in 2004. At December 31, 2004 and 2003, two
customers represented approximately 5% and 10% respectively, of accounts
receivable.
Sales to customers representing 10% or greater of total sales consist of the
following:
Year Ended December 31,
2004 2003 2002
--------------- ----------- -----------
Wal-Mart Stores, Inc. 14% 18% 14%
Target * * 11%
*Less than 10%
-32-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
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
The Company grants credit to its customers and performs ongoing credit
evaluations. The Company generally does not require collateral or charge
interest. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends,
economic and market conditions and the age of the receivable. Past due accounts
are generally written off against the allowance for doubtful accounts only after
all collection attempts have been exhausted.
Accounts receivable and the related allowance for doubtful accounts are as
follows:
December 31,
2004 2003
---------------------------------
(in thousands)
Accounts receivable $ 27,838 $ 23,698
Less: allowance for doubtful accounts (717) (1,145)
---------------------------------
Total, net $ 27,121 $ 22,553
=================================
Year Ended December 31,
2004 2003 2002
-------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
Balance, beginning of period $ 1,145 $ 860 $ 860
Provision for losses on accounts receivable 521 467 346
Accounts receivable written off, net of
recoveries (949) (182) (346)
-------------------------------------------------
Balance, end of period $ 717 $ 1,145 $ 860
=================================================
-33-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The Company establishes an allowance for
excess and obsolete inventories based on product line changes, the feasibility
of substituting parts and the need for supply and replacement parts. At December
31, 2004 and 2003, and for the three years ending December 31, 2004, inventory
balances and the related changes in the allowance for excess and obsolete
inventories account are as follows:
December 31,
2004 2003
---------------------------------
(in thousands)
Raw materials $ 16,397 $ 13,874
Work in process 2,305 2,700
Finished goods 3,216 4,187
---------------------------------
21,918 20,761
Less: allowance for excess and obsolete inventories (1,050) (1,050)
---------------------------------
Total, net $ 20,868 $ 19,711
=================================
Year Ended December 31,
2004 2003 2002
-------------------------------------------------
(in thousands)
Allowance for excess and obsolete inventories:
Balance, beginning of period $ 1,050 $ 1,000 $ 850
Provision for excess and obsolete inventories 425 250 690
Adjustments to reserve (425) (200) (540)
-------------------------------------------------
Balance, end of period $ 1,050 $ 1,050 $ 1,000
=================================================
-34-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance, repairs and
betterments, 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:
Years
---------------
Buildings 10-30
Machinery and equipment 3-15
Furniture and fixtures 2-5
At December 31, property, plant and equipment were comprised of the following:
2004 2003
-------------------------------
(in thousands)
Land $ 2,082 $ 874
Buildings 26,805 19,588
Machinery and equipment 52,540 44,329
Furniture and fixtures 4,819 3,944
-------------------------------
86,246 68,735
Less: accumulated depreciation (37,017) (31,285)
-------------------------------
Total, net $ 49,229 $ 37,450
===============================
Impairment of Long-Lived Assets
The Company evaluates 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 as of December 31, 2004 or 2003.
-35-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Accrued Liabilities
At December 31, accrued liabilities were comprised of the following:
2004 2003
-------------------------------
(in thousands)
Warranty $ 6,301 $ 6,020
Commissions 5,921 5,009
Payroll 1,115 1,023
Income taxes 309 (708)
Workers' compensation 457 408
Medical self-insurance 933 478
Other 33 127
-------------------------------
Total $ 15,069 $ 12,357
===============================
Warranties
A provision is made for estimated warranty costs at the time the related
products are sold based upon the warranty period, historical trends, new
products and any known identifiable warranty issues. Warranty expense was $3.8
million, $3.2 million and $4.3 million for the years ended December 31, 2004,
2003 and 2002, respectively.
Changes in the Company's warranty accrual during the years ended December 31,
2004, 2003 and 2002 are as follows:
2004 2003 2002
----------------------------------------------
(in thousands)
Balance, beginning of the year $ 6,020 $ 7,220 $ 7,020
Warranties accrued during the year 3,774 3,160 4,300
Warranties settled during the year (3,493) (4,360) (4,100)
----------------------------------------------
$ 6,301 $ 6,020 $ 7,220
==============================================
Stock Split
On June 4, 2002, the Company effected a three-for-two stock split. Share and per
share amounts have been retroactively restated to reflect this stock split.
-36-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Earnings Per Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share are determined based on the assumed exercise
of dilutive options, as determined by applying the treasury stock method. For
the years ended December 31, 2004, 2003 and 2002, 72,250, 41,250 and 41,250
options, respectively, were anti-dilutive. The weighted average exercise price
of the anti-dilutive shares was $19.40 at December 31, 2004 and $19.27 for
December 31, 2003 and 2002. The computation of basic and diluted earnings per
share ("EPS") is as follows:
Year Ended December 31, 2004
----------------------------
(in thousands, except per share data)
Weighted
Net Average Per-Share
Income Shares Amount
--------------------------------------------------
Basic EPS $ 7,521 12,435 $ .60
Effect of dilutive securities - 488 -
--------------------------------------------------
Diluted EPS $ 7,521 12,923 $ .58
==================================================
Year Ended December 31, 2003
----------------------------
(in thousands, except per share data)
Weighted
Net Average Per-Share
Income Shares Amount
--------------------------------------------------
Basic EPS $14,227 12,685 $1.12
Effect of dilutive securities - 566 -
--------------------------------------------------
Diluted EPS $14,227 13,251 $1.07
==================================================
Year Ended December 31, 2002
----------------------------
(in thousands, except per share data)
Weighted
Net Average Per-Share
Income Shares Amount
--------------------------------------------------
Basic EPS $14,611 13,158 $1.11
Effect of dilutive securities - 582 -
--------------------------------------------------
Diluted EPS $14,611 13,740 $1.06
==================================================
-37-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
Stock Compensation
The Company maintains a stock option plan for key employees and directors which
is described more fully in Note 6. The Company accounts for the plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan qualify for "fixed" plan accounting and had an exercise price equal to the
market value of the underlying common stock on the date of grant. The effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation is as follows:
Year Ended December 31,
2004 2003 2002
----------------------------------------------------
(in thousands except per share data)
Net income, as reported $ 7,521 $ 14,227 $ 14,611
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (298) (611) (995)
----------------------------------------------------
Pro forma net income $ 7,223 $ 13,616 $ 13,616
====================================================
Earnings per share:
Basic, as reported $ .60 $ 1.12 $ 1.11
====================================================
Basic, pro forma $ .58 $ 1.07 $ 1.03
====================================================
Diluted, as reported $ .58 $ 1.07 $ 1.06
====================================================
Diluted, pro forma $ .56 $ 1.03 $ 0.99
====================================================
Advertising
Advertising costs are expensed as incurred. Advertising expense was $615,000,
$781,000 and $372,000 for the years ending December 31, 2004, 2003 and 2002,
respectively.
Research and Development
Research and development costs are expensed as incurred. Research and
development expense was $1,072,000, $837,000 and $842,000 for the years ending
December 31, 2004, 2003 and 2002, respectively.
Shipping and Handling
The Company incurs shipping and handling costs in the distribution of products
sold that are recorded in cost of sales. Shipping charges that are billed to the
customer are recorded in revenues.
-38-
1. Business, Summary of Significant Accounting Policies and Other Financial Data
(continued)
New Accounting Pronouncements
FASB Statement 123 (R) replaces FASB Statement No.123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Statement requires measurement of the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The compensation cost will be
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. The
Statement applies to all awards granted and any unvested awards at June 15,
2005. SFAS 123 (R) will be effective for interim reporting beginning after June
15, 2005. The Company has not determined the impact of the adoption of SFAS 123
(R).
Segments
The Company operates under one reportable segment as defined in SFAS 131,
Disclosures about Segments of an Enterprise and Related Information.
2. Supplemental Cash Flow Information
Interest payments of $38,000, $21,000 and $95,000 were made during the years
ending December 31, 2004, 2003 and 2002, respectively. Payments for income taxes
of $3,977,000, $6,750,000 and $7,156,000 were made during the years ending
December 31, 2004, 2003 and 2002, respectively.
3. Certificate of Deposit
The $10 million certificate of deposit bears interest at 3.25% per annum and
matured on June 12, 2004. Proceeds of $7 million were used for cash flow
purposes and a reinvestment of $3 million, and various amounts throughout the
remainder of the year, were made in 30-day certificate of deposits. At December
31, 2004, the Company had invested $3 million in a 30-day certificate of deposit
that bears interest at 1.9% per annum.
4. Revolving Credit Facility
The Company has a $15,150,000 unsecured bank line of credit that matures July
30, 2005. The line of credit requires that the Company maintain a certain
financial ratio and prohibits the declaration or payments of dividends. At
December 31, 2004, the Company was in compliance with its financial ratio
covenants. Borrowings under the credit facility bear interest at prime rate less
..5% or at LIBOR plus 1.60%. At December 31, 2004, the Company had no borrowings
under the revolving credit facility. Borrowings available under the revolving
credit facility at December 31, 2004 were $14.6 million. As of December 31,
2003, the Company had $5,356,000 outstanding under the credit facility bearing
interest at 2.77%. In addition, the Company had a $600,000 bank Letter of Credit
at December 31, 2004 and 2003.
-39-
5. Debt
Long-term debt at December 31, 2004, consisted of notes payable totaling
$275,000, which were due in monthly installments of $9,004, with an interest
rate of 3.7%, related to a computer capital lease.
6. Income Taxes
The Company follows the liability method of accounting for income taxes which
provides that deferred tax liabilities and assets are based on the difference
between the financial statement and income tax bases of assets and liabilities
using currently enacted tax rates.
The income tax provision consists of the following:
Year Ended December 31,
2004 2003 2002
----------------------------------------------------
(in thousands)
Current $ 4,424 $ 5,669 $ 7,414
Deferred 434 1,957 1,085
----------------------------------------------------
$ 4,858 $ 7,626 $ 8,499
====================================================
The reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
2004 2003 2002
----------------------------------------------------
Federal statutory rate 35% 35% 35%
State income taxes, net of federal benefit 5 4 4
Other (1) (4) (2)
----------------------------------------------------
39% 35% 37%
====================================================
The tax effect of temporary differences giving rise to the Company's deferred
income taxes at December 31 is as follows:
2004 2003
-------------------------
(in thousands)
Deferred tax assets relating to:
Valuation reserves $ 670 $ 900
Warranty accrual 2,283 2,342
Other accruals 553 253
Other, net 31 37
-------------------------
$ 3,537 $ 3,532
=========================
Deferred tax liability relating to:
Depreciation and amortization $ 5,830 $ 5,391
=========================
-40-
7. Benefit Plans
The Company's stock option plan reserves 2,925,000 shares of common stock for
issuance 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 after 1-3
years. 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. At December 31,
2004, 296,961 shares were available for future option grants. For the years
ended December 31, 2004 and 2003, the Company reduced its income tax payable by
$476,000 and $409,000, respectively, as a result of nonqualified stock options
exercised under the Company's stock option plan. The number and exercise price
of options granted were as follows:
Weighted
Average
Number Exercise Price
of Shares Per Share
-----------------------------------
Outstanding at December 31, 2001 1,654,949 $ 5.01
Granted - -
Exercised (247,598) 3.57
Cancelled (129,808) 5.20
-----------------------------------
Outstanding at December 31, 2002 1,277,543 $ 5.33
Granted 56,250 13.53
Exercised (85,818) 4.69
Cancelled (20,645) 8.71
-----------------------------------
Outstanding at December 31, 2003 1,227,330 $ 5.70
Granted 31,000 19.58
Exercised (94,950) 4.99
Cancelled (3,600) 5.78
-----------------------------------
Outstanding at December 31, 2004 1,159,780 $ 6.13
===================================
The weighted-average grant date fair value for options granted during 2004 and
2003 was $9.84 and $6.47, respectively.
The following is a summary of stock options outstanding as of December 31, 2004:
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------------
Number Weighted Weighted
Outstanding at Weighted Average Number Average
Range of December 31, Average Remaining Exercisable at Exercise
Exercise Prices 2004 Exercise Price Contractual Life December 31, 2004 Price
- ---------------------- ---------------- -------------- ---------------- ------------------ --------------
2.28 - 3.39 433,725 $ 3.02 2.20 433,725 $ 3.02
4.00 - 5.78 487,305 5.11 4.36 487,305 5.11
8.44 - 12.36 103,500 9.65 6.26 64,350 9.66
13.40 - 20.40 135,250 17.08 7.79 62,050 17.59
---------------- -------------- ------------------ --------------
Total 1,159,780 $ 6.13 1,047,430 $ 5.26
================ ============== ================== ==============
-41-
7. Benefit Plans (continued)
For purposes of the stock compensation information presented in Note 1, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2004 2003 2002
---------------------------------------
Expected dividend yield 0% 0% *
Expected volatility 36.70% 37.80% *
Risk-free interest rate 4.24% 3.73% *
Expected life 8 yrs 8 yrs *
*The Company granted no options in 2002.
The Company sponsors a defined contribution benefit plan. Employees may make
contributions at a minimum of 1% and a maximum of 15% of compensation. The
Company may, on a discretionary basis, contribute a Company matching
contribution not to exceed 6% of compensation. The Company made matching
contributions of $546,000, $585,000 and $535,000 in 2004, 2003 and 2002,
respectively.
The Company maintains 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. Profit sharing expense was $1,408,000, $2,428,000 and
$2,573,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
8. 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 the Company's
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 the Company's common stock. The rights
become exercisable after a person has acquired, or a tender offer is made for,
15% or more of the common stock of the Company. 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 the Company's common
stock having a market value equal to two times the exercise price.
The rights may be redeemed by the Company for $0.001 per right until a person or
group has acquired 15% of the Company's common stock. The rights expire on
August 20, 2012.
-42-
9. Contingencies
The Company is subject to claims and legal actions that arise in the ordinary
course of business. Management believes that the ultimate liability, if any,
will not have a material effect on the Company's results of operations or
financial position.
10. Quarterly Results (Unaudited)
The following is a summary of the quarterly results of operations for the years
ending December 31, 2004 and 2003:
Quarter Ending
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------
(in thousands, except per share data)
2004
- ----
Net sales $ 37,494 $ 43,019 $ 47,733 $ 45,021
Gross profit 7,701 6,355 6,094 7,310
Net income 2,337 1,571 1,527 2,086
Earnings per share:
Basic 0.19 0.13 0.12 0.17
Diluted 0.18 0.12 0.12 0.16
Quarter Ending
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------
(in thousands, except per share data)
2003
- ----
Net sales $ 32,856 $ 37,222 $ 41,003 $ 37,764
Gross profit 8,697 8,808 9,512 9,232
Net income 3,495 3,357 3,635 3,740
Earnings per share:
Basic 0.27 0.26 0.29 0.30
Diluted 0.26 0.25 0.27 0.29
-43-
Exhibit 21
List of Subsidiaries
Name Jurisdiction of Incorporation
---- -----------------------------
AAON, Inc. Oklahoma
AAON Coil Products, Inc. Texas
AAON Canada Inc. Ontario, Canada
AAON Properties Inc. Ontario, Canada
-44-
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 8, 2005, accompanying the consolidated
financial statements and management's assessment of the effectiveness of
internal control over financial reporting included in the Annual Report of AAON,
Inc. on Form 10-K for the year ended December 31, 2004. We hereby consent to the
incorporation by reference of said reports in the Registration Statement
(Post-Effective Amendment No. 2 to Form S-8 (File No. 33-78520)) of AAON, Inc.
/s/ Grant Thornton LLP
Tulsa, Oklahoma
March 11, 2005
-45-
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement
(Post-Effective Amendment No. 2 to Form S-8 No. 33-78520) pertaining to the
AAON, Inc. 1992 Stock Option Plan, as amended, of our report dated February 6,
2004, with respect to the consolidated financial statements of AAON, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 2004.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 11, 2005
-46-
Exhibit 31.1
CERTIFICATION
I, Norman H. Asbjornson, certify that:
1. I have reviewed this Annual Report on Form 10-K of AAON, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 14, 2005
/s/ Norman H. Asbjornson
------------------------
Norman H. Asbjornson
Chief Executive Officer
-47-
Exhibit 31.2
CERTIFICATION
I, Kathy I. Sheffield, certify that:
1. I have reviewed this Annual Report on Form 10-K of AAON, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: March 14, 2005
/s/ Kathy I. Sheffield
-----------------------
Kathy I Sheffield
Chief Financial Officer
-48-
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AAON, Inc. (the "Company"), on
Form 10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Norman H. Asbjornson,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
March 14, 2005 /s/ Norman H. Asbjornson
------------------------
Norman H. Asbjornson
Chief Executive Officer
-49-
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AAON, Inc. (the "Company"), on
Form 10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Kathy I. Sheffield,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
March 14, 2005 /s/ Kathy I. Sheffield
----------------------
Kathy I. Sheffield
Chief Financial Officer
-50-