FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission file number: 33-183336-LA AAON, INC. ---------- (Exact name of registrant as specified in its charter) Nevada 87-0448736 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 2425 South Yukon, Tulsa, Oklahoma 74107 --------------------------------------- (Address of principal executive offices) (Zip Code) (918) 583-2266 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. 8,657,736 shares of $.004 par value Common Stock. Page
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. On pages 3 through 9 of this report. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations. Net sales increased by $6,534,000, up 5.6% (from $115,823,000 to $122,357,000), during the nine-month period ended September 30, 2001, compared to the same period in 2000. Sales to existing customers in the first three quarters of 2001 accounted for 88% of the Company's business, with 12% coming from new business. The increase in sales in 2001 resulted from increases in the Company's market share in all areas of its business, aided by both new products introductions and newly developed versions of existing product lines. The increase was attributable to more sales generated by manufacturers' representations and replacement business. Gross profit increased in the first nine months of 2001 to 25.2% compared to 22.7% in the same period in 2000. The increase in margins was attributable to growth and stability of the Company's work force which contributed to a significant reduction in overtime expense and improved manufacturing efficiencies. SG&A expenses rose $2,727,000 (26.0%) during the nine months ended September 30, 2001, compared to 2000, primarily due to increases in warranty and bad debt reserves. Net income during the first nine months of 2001 ($10,915,000) increased more than twice the rate of sales (11.6% vs. 5.6%) compared to the same period in 2000, due to the increase in sales and improvement in gross margins. Management expects sales and earnings for the year 2001 to be at record levels. Financial Condition and Liquidity. Accounts receivable and inventories decreased by $3,794,000 at September 30, 2001, compared to December 31, 2000, due to more stringent management controls. Property, plant and equipment increased $7,539,000 at September 30, 2001, reflecting primarily additions to machinery and equipment ($7.3 million). All capital expenditures in the first nine months of 2001 were financed out of cash flow and borrowings under the Company's revolving credit bank loan. Current liabilities were down $7,136,000 due to a $5.1 million reduction is accounts payable (reflecting more timely payments in these times of economic uncertainty in order to continue the Company's outstanding credit reputation with suppliers) and a $3.8 million reduction in current maturities of long-term debt (enabled by earnings), offset in part by a $1.8 million increase in accrued liabilities (resulting from greater reserves due to higher sales volume). The capital needs of the Company are met primarily by its bank revolving credit facility. Management believes this bank debt (or comparable financing), term loans and projected profits 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. (1)
For information concerning the Company's long-term debt at June 30, 2000, see Note 3 to the Financial Statements on pages 7 and 8 of this report. Forward-Looking Statements This 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", variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in material prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions. Item 3. Quantitative and Qualitative Disclosures About Market Risk. While the Company is exposed to changes in interest rates regarding its total debt of $8,894,000, a hypothetical 10% change in interest rates on its variable rate borrowings would not have a material effect on the Company's earnings or cash flow. Foreign sales account for less than 2% of the Company's total sales and the Company accepts payment for such sales only in U.S. dollars; hence, the Company is not exposed to any foreign currency exchange rate risk. 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 negotiating with each of its major suppliers on a term basis from six months to three years. Item 5. Other Events. J. M. Klein, a director of the Company since January 1996, resigned in August of this year in furtherance of his retirement plans. On September 24, 2001, Jerry R. Ryan was elected as a director to fill the vacancy on the Board, for a term ending at the 2004 Annual Meeting of Stockholders. The Company had a 3-for-2 stock split (payable in the form of a 50% stock dividend) effective September 28, 2001. (2)
<TABLE> AAON, Inc. Consolidated Balance Sheets Sept. 30, 2001* December 31, 2000 -------------- ----------------- (In Thousands, except per share data) <CAPTION> <S> <C> <C> ASSETS CURRENT ASSETS Cash $ 28 $ 17 Accounts receivable 26,185 28,247 Inventories 13,408 15,140 Prepaid expenses 225 245 Deferred income tax 3,709 3,709 -------- -------- Total current assets 43,555 47,358 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land 885 885 Buildings 16,720 16,594 Machinery and equipment 35,144 27,869 Furniture and fixtures 3,313 3,175 -------- -------- Total Property, Plant & Equipment 56,062 48,523 Less: accumulated depreciation 22,192 19,063 -------- -------- Net property, plant & equipment 33,870 29,460 -------- -------- Total Assets $ 77,425 $ 76,818 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable $ 6,557 $ 11,691 Accrued liabilities 14,187 12,351 Current maturities of long-term debt 4,022 7,860 -------- -------- Total Current Liabilities 24,766 31,902 -------- -------- DEFFERED TAX LIABILITY 2,051 2,051 -------- -------- LONG-TERM DEBT 4,872 5,853 -------- -------- STOCKHOLDERS' EQUITY ** Common Stock, $.004 par, 50,000,000 shares 35 35 authorized, 8,657,736 issued and outstanding Preferred Stock, 5,000,000 shares authorized, no shares issued Additional paid-in capital - - Retained earnings 45,701 36,977 -------- -------- Total stockholders' equity 45,736 37,012 -------- -------- Total Liabilities and Stockholders' Equity $ 77,425 $ 76,818 ======== ======== * unaudited ** Reflects stock split effective September 30, 2001 </TABLE> (3)
<TABLE> AAON, Inc. Consolidated Statements of Operations Three Months Ended Nine Months Ended Sept. 30, 2001* Sept. 30, 2000 Sept. 30, 2001* Sept. 30, 2000 -------------- -------------- -------------- -------------- (In Thousands, except per share data) <CAPTION> <S> <C> <C> <C> <C> Sales, net $ 41,402 $ 40,970 $ 122,357 $ 115,823 Cost of Sales 32,669 32,081 91,480 89,536 -------- -------- --------- --------- Gross Profit 8,733 8,889 30,877 26,287 Selling, general and administrative expenses 3,210 3,396 13,229 10,502 -------- -------- --------- --------- Income from operations 5,523 5,493 17,648 15,785 Interest expense 115 284 723 666 Other (income) expense (61) (143) (296) (330) -------- -------- --------- --------- Income before income taxes 5,469 5,352 17,221 15,449 Income tax provision 1,946 1,943 6,306 5,667 -------- -------- --------- --------- Net Income $ 3,523 $ 3,409 $ 10,915 $ 9,782 ======== ======== ========= ========= ** Earnings Per Share: Basic $ 0.40 $ 0.39 $ 1.26 $ 1.11 ======== ======== ========= ========= Diluted $ 0.38 $ 0.37 $ 1.20 $ 1.05 ======== ======== ========= ========= ** Weighted Average Shares Outstanding: Basic 8,715,135 8,754,663 8,660,252 8,833,377 ========= ========= ========= ========= Diluted 9,156,939 9,271,755 9,092,287 9,316,154 ========= ========= ========= ========= * unaudited ** Reflects stock split effective September 28, 2001 </TABLE> (4)
<TABLE> AAON, Inc. Consolidated Statements of Stockholders' Equity Common Stock Paid In Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- (In Thousands) <CAPTION> <S> <C> <C> <C> <C> <C> Balance, December 31, 2000 8,645 $ 35 $ - $ 36,977 $ 37,012 Stock Option Exercise* 170 - 586 586 Repurchase of Common Stock,* (157) - (586) (2,191) (2,777) Net of Issuance Net Income* 10,915 10,915 ------------ -------------- --------------- ---------------- --------------- Balance, September 30, 2001* 8,658 $ 35 $ - $ 45,701 $ 45,736 ============ ============== =============== ================ =============== * unaudited ** Reflects stock split effective September 28, 2001 </TABLE> (5)
<TABLE> AAON, Inc. Consolidated Statements of Cash Flows Nine Months Ended Nine Months Ended Sept. 30, 2001* Sept. 30, 2000 ----------------- ----------------- (In Thousands) <CAPTION> <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 10,915 $ 9,782 -------- ------- Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and Amortization 3,129 2,502 Change in assets and liabilities: (Increase) decrease in: Accounts Receivable 2,062 (8,138) Inventories 1,732 (1,114) Prepaid Expenses 20 (413) Accounts Payable (5,134) 599 Accrued Liabilities 1,836 4,956 -------- ------- Total Adjustments 3,645 (1,608) -------- ------- Net cash provided by (used in) Operating Activities 14,560 8,174 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (7,539) (8,830) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under Revolving Credit Agreement 48,993 50,370 Payments under Revolving Credit Agreement (53,043) (44,010) Changes in long-term debt (769) 2,524 Exercise of Stock Options 586 397 Repurchase of Common Stock (2,777) (8,620) -------- ------- Net cash provided by (used in) financing activities (7,010) 661 -------- ------- NET CHANGE IN CASH 11 5 CASH, beginning of period 17 25 -------- ------- CASH, end of period $ 28 $ 30 ======== ======= * unaudited </TABLE> (6)
AAON, INC. NOTES TO FINANCIAL STATEMENTS September 30, 2001 1. BASIS OF PRESENTATION: --------------------- The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made in these financial statements are adequate to make the information presented not misleading when read in conjunction with the financial statements and the notes thereto included in the Company's latest audited financial statements which were included in the Form 10-K Report for the fiscal year ended December 31, 2000, filed by AAON, Inc. with the SEC. Certain reclassifications of prior year amounts have been made to conform to current year presentations. These reclassifications had no impact on net income. However, management believes that no adjustments to the financial statements are necessary. 2. INVENTORIES: ----------- Inventories at September 30, 2001 (unaudited), and December 31, 2000, consist of the following: September 30, 2001 December 31, 2000 -------------------- ------------------- Raw Materials $7,612,000 $9,701,000 Work in Process 2,343,000 1,967,000 Finished Goods 3,453,000 3,472,000 ----------- ----------- $13,408,000 $15,140,000 =========== =========== 3. LONG-TERM DEBT: -------------- Long-term debt at September 30, 2001 (unaudited), and December 31, 2000, consists of the following: September 30, 2001 December 31, 2000 -------------------- ------------------- $15,150,000 bank line of credit with interest payable monthly at LIBOR plus 1.60% (5.18% at September 30, 2001) due July 31, 2002 $ 2,867,000 $ 6,917,000 Three notes payable due in 84 equal installments totaling $36,489, plus interest at 7.47%, and 7.52%, collateralized by machinery and equipment 1,540,000 6,796,000 (7)
One note payable due in 120 equal installments of $18,067, plus interest at the commercial paper rate plus 1.55% (5.26% September 30, 2001), collateralized by machinery and equipment 1,987,000 -0- One note payable due in 60 equal installments of $41,667 plus interest at LIBOR plus 1.20%, collateralized by machinery and equipment 2,500,000 -0- ----------- ----------- 8,894,000 13,713,000 Less: Current Maturities 4,022,000 7,860,000 ----------- ----------- $ 4,872,000 $ 5,853,000 =========== =========== 4. NEW ACCOUNTING PRONOUNCEMENTS: ----------------------------- In June 1998, the Financial Accounting Standards board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Companies must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137 and No. 138, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 cannot be applied retroactively and must be applied to (a) derivative instruments, and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company financial statements. In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations, Statement No. 142, Goodwill and Other Intangible Assets and Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. Under Statement No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. There will be more recognized intangible assets, such as unpatented technology and database content, being separated from goodwill. Those assets will be amortized over their useful lives, other than assets that have an indefinite life. Statement No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001. Management does not believe the adoption of Statement No. 142 will have a material impact on the financial conditions and results of operations. Statement No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. (8)
Statement No. 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of Statement No. 143 on its financial condition and results of operations. In August, 2002, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supercedes the previously issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact of Statement No. 144 on its financial condition and results of operations. 5. FOOTNOTES INCORPORATED BY REFERENCE: ----------------------------------- Certain footnotes are applicable to the financial statements, but would be substantially unchanged from those presented in the December 31, 2000, 10-K filed with the SEC. Accordingly, reference should be made to this statement for the following: Note Description - ---- ------------------------------------------------ 1 Business and Summary of Significant Accounting Policies 4 Income Taxes 5 Benefit Plans 6 Shareholder Rights Plan 8 Litigation (9)
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - None. (b) Registrant filed one report on Form 8-K during the three-month period ended September 30, 2001, reporting its execution of the Seventh Amendment to Second Restated Revolving Credit Loan Agreement on September 4, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AAON, INC. Dated: November 6, 2001 By: /s/ Norman H. Asbjornson ----------------------------- Norman H. Asbjornson President Dated: November 6, 2001 By: /s/ Kathy I. Sheffield ----------------------------- Kathy I. Sheffield Treasurer (10)