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 March 31, 1999
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. 6,227,449 shares of $.004 par
value Common Stock.
<PAGE 1>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
On pages 4 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 $6,531,000, up 28% (from
$23,505,000 to $30,036,000) during the three-month period ended March 31, 1999,
compared to the same period in 1998. The increase in sales in 1999 was
attributable to increased sales to the Company's entire customer base, which is
expected to continue throughout the rest of the year.
Gross profit increased in the first quarter of 1999 to 24.0% compared to
16.4% in the same quarter of 1998. The increase in margins was attributable to
the addition of automated sheet metal equipment, the elimination of outsourcing
of sheet metal production and a slight improvement in labor shortage.
SG&A expenses increased $2,261,000 (113%) during the three months ended
March 31, 1999, compared to 1998, due to higher expenses, including a provision
for warranty charges attributable to the sales increase.
Net income during the first quarter of 1999 ($1,764,000) increased at more
than twice the rate of sales (60% vs. 28%) compared to the first quarter of
1998, due to the improvement in gross margins, which resulted primarily from
improved operating efficiencies rather than price increases.
Financial Condition and Liquidity. The $1,072,000 increase in accounts
receivable at March 31, 1999, compared to December 31, 1998, was due to the
sales increase.
The $1,857,000 decrease in inventories resulted from tighter production and
purchasing controls.
Property, plant and equipment increased $715,000 at March 31, 1999,
reflecting $1.4 million of additions to machinery and equipment (more automated
equipment), offset in part by greater depreciation. All capital expenditures in
the first quarter of 1999 were financed out of cash flow, borrowings under the
Company's revolving credit bank loan and equipment financing.
Current liabilities were up slightly ($385,000) reflecting higher
reserves/accrued liabilities (up $2,279,000), substantially offset by lower
accounts payable (down $1,894,000).
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 at least the next five years.
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.
<PAGE 2>
For information concerning the Company's long-term debt at March 31, 1999,
see Note 3 to the Financial Statements on pages 8 and 9 of this report.
Year 2000 Disclosure ("Y2K")
The Company believes that it is now fully compliant in regard to the "Year
2000 Problem", insofar as its internal operations are concerned, except for
embedded technology in two major sheet metal fabricating machines which are
scheduled to be corrected by June 30, 1999. With regard to its suppliers, in
September, 1998, the Company sent 800 questionnaires to determine their state of
readiness and the readiness of the suppliers' suppliers. To date approximately
410 responses have been received, most indicating that they are in compliance.
The Company is following up with those not in compliance and those who have not
responded. On or before the start of the fourth quarter of 1999, the Company
will be doing business only with suppliers who are in compliance.
The Company does not anticipate incurring material costs in addressing Y2K
issues.
Subject to timely correction of the embedded technology in the sheet metal
fabricating machines mentioned above, the Company does not believe it will
experience any material adverse consequences to its manufacturing operations,
internally or externally, due to Y2K, but management can conceive of problems in
receiving payments from customers if there should be wide-spread defects
affecting the financial/banking industry.
If the Company has any concerns as to specific suppliers, it would commence
a buildup of inventory of such parts starting in the third quarter of 1999 and
establish alternate suppliers for those in question.
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 2. Changes in Securities and Use of Proceeds.
As previously reported in the Company's Current Report on Form 8-K, filed
on February 26, 1999, the Company's Board of Directors adopted a Stockholder
Rights Plan which is designed to protect the Company from unfair or coercive
takeover attempts and to prevent a potential acquirer from gaining control of
the Company without fairly compensating all of the Company's stockholders.
<PAGE 3>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
While the Company is exposed to changes in interest rates regarding
$7,221,000 of its total debt of $9,861,000, 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 only 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.
<PAGE 4>
<TABLE>
AAON, Inc.
Consolidated Balance Sheets
MARCH 31, 1999 * DECEMBER 31, 1998
-------------- -----------------
(In Thousands)
<CAPTION>
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 369 $ 25
Accounts receivable 19,005 17,933
Inventories 10,303 12,160
Prepaid expenses 288 241
Deferred income tax 1,594 1,594
-------- --------
Total current assets 31,559 31,953
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 874 874
Buildings 12,096 12,089
Machinery and equipment 17,684 16,264
Furniture and fixtures 2,024 2,004
-------- --------
32,678 31,231
Less-accumulated depreciation 13,410 12,678
-------- --------
Net property, plant and equipment 19,268 18,553
$ 50,827 $ 50,506
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,584 $ 8,478
Accrued liabilities 8,159 5,880
Current maturities of long-term debt 757 757
-------- --------
Total current liabilities 15,500 15,115
-------- --------
LONG-TERM DEBT 9,104 10,980
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.004 par, 50,000,000
shares authorized, 6,227,449 issued
and outstanding 25 25
Preferred stock, 5,000,000 shares
authorized, no shares issued
Additional paid-in capital 8,272 8,224
Retained earnings 17,926 16,162
-------- --------
Total stockholders' equity 26,223 24,411
-------- --------
$ 50,827 $ 50,506
======== ========
* Unaudited
</TABLE>
<PAGE 5>
<TABLE>
AAON, Inc.
Consolidated Statements of Operations
Three Months Ended Three Months Ended
March 31, 1999* March 31, 1998*
------------------ ------------------
(In Thousands)
<CAPTION>
<S> <C> <C>
Sales, net $ 30,036 $ 23,505
Cost of sales 22,798 19,655
-------- --------
Gross profit 7,238 3,850
Selling, general and administrative expenses 4,266 2,005
-------- --------
Income from operations 2,972 1,845
Interest expense 194 140
Amortization and other expense (2) (28)
-------- --------
Income before income taxes 2,780 1,733
Income tax provision 1,016 629
-------- --------
Net income $ 1,764 $ 1,104
======== ========
Net income per share (Basic) $ .28 $ .18
======== ========
(Diluted) $ .27 $ .17
======== ========
* Unaudited
</TABLE>
<PAGE 6>
<TABLE>
AAON, Inc.
Consolidated Statements of Stockholders' Equity
<CAPTION>
COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 6,219 $ 25 $ 8,224 $16,162 $24,411
ISSUE OF COMMON STOCK* 8 - 48 - 48
NET INCOME* - - - 1,764 1,764
----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1999* 6,227 $ 25 $ 8,272 $17,926 $26,223
=========== =========== =========== =========== ===========
* Unaudited
</TABLE>
<PAGE 7>
<TABLE>
AAON, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999* March 31, 1998*
------------------ ------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,764 $ 1,104
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 732 678
Change in assets and liabilities:
(Increase) decrease in:
Accounts Receivable (1,072) (477)
Inventories 1,857 (951)
Prepaid Expenses (47) (52)
Increase (decrease) in:
Accounts Payable (1,894) 315
Accrued Liabilities 2,279 1,148
------- -------
Total adjustments 1,855 661
------- -------
Net cash provided by (used in)
Operating Activities 3,619 1,765
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (1,447) (1,046)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving credit agreement 13,595 9,000
Payments under revolving credit agreement (15,255) (10,705)
Changes in long-term debt (216) 905
Cash from issue of stock 48 66
------- -------
Net cash provided by (used in)
financing activities (1,828) (734)
------- -------
NET CHANGE IN CASH 344 (15)
CASH, beginning of period 25 26
------- -------
CASH, end of period $ 369 $ 11
======= =======
* Unaudited
</TABLE>
<PAGE 8>
AAON, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
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 generally accepted
accounting principles 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, 1998, filed by AAON,
Inc. with the SEC. Certain reclassifications of prior year amounts have been
made to conform to current year presentations. However, management believes that
no adjustments to the financial statements are necessary.
2. INVENTORIES:
Inventories at March 31, 1999 (unaudited), and December 31, 1998, consist of the
following:
March 31, December 31,
1999 1998
----------- -----------
Raw Materials $ 6,229,000 $ 8,253,000
Work in Process 1,515,000 1,628,000
Finished Goods 2,559,000 2,279,000
----------- -----------
$10,303,000 $12,160,000
----------- -----------
3. LONG-TERM DEBT:
Long-term debt at March 31, 1999 (unaudited), and December 31, 1998, consists of
the following:
March 31, December 31,
1999 1998
----------- -----------
Bank Note, payable in monthly
principal payments of $3,333
through February 2000, with
a balloon payment in March
2000, plus interest payable
monthly at bank's base rate
plus 0.25% (8.0% at
Mar. 31, 1999) collateralized
by real estate $ 240,000 $ 250,000
<PAGE 9>
$15,150,000 bank line of credit
with interest payable monthly
at LIBOR plus 1.70% (6.64% at
March 31, 1999) due
August 31, 2000 collateralized
by accounts receivable,
inventory, and intangibles of
Aaon and Aaon Coil Products $ 5,230,000 $ 6,890,000
Five notes payable due in 84
equal installments totaling
$59,728, plus interest at
7.47%, 7.52% and 7.11%,
collateralized by machinery
and equipment 4,391,000 4,597,000
------------ ------------
9,861,000 11,737,000
Less Current Maturities 757,000 757,000
------------ ------------
$ 9,104,000 $10,980,000
------------ ------------
4. FOOTNOTES INCORPORATED BY REFERENCE:
Certain footnotes are applicable to the financial statements, but would be
substantially unchanged from those presented in the December 31, 1998, 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
<PAGE 10>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) Registrant filed two reports on Form 8-K during the
three month period ended March 31, 1999. The first
(dated February 25, 1999) reported the Company's
adoption of a shareholder rights plan and three Bylaw
amendments. The second (dated March 9, 1999) reported
the Company's execution of Amendment Two to Second
Restated Revolving Credit Loan Agreement.
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: May 11, 1999 By: /s/ Norman H. Asbjornson
----------------------------------------
Norman H. Asbjornson
President
Dated: May 11, 1999 By: /s/ William A. Bowen
----------------------------------------
William A. Bowen
Vice President - Finance
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 369
<SECURITIES> 0
<RECEIVABLES> 19,005
<ALLOWANCES> 0
<INVENTORY> 10,303
<CURRENT-ASSETS> 31,559
<PP&E> 32,678
<DEPRECIATION> 13,410
<TOTAL-ASSETS> 50,827
<CURRENT-LIABILITIES> 15,500
<BONDS> 9,104
0
0
<COMMON> 25
<OTHER-SE> 26,198
<TOTAL-LIABILITY-AND-EQUITY> 50,827
<SALES> 30,036
<TOTAL-REVENUES> 30,036
<CGS> 22,798
<TOTAL-COSTS> 27,064
<OTHER-EXPENSES> (2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> 2,780
<INCOME-TAX> 1,016
<INCOME-CONTINUING> 1,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,764
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
</TABLE>
