AAON
Annual Report 2007

Plain-text annual report

2007 AAON ANNUAL REPORT AAON is a global leader in providing equipment with environmentally responsible designs. AAON utilizes ex- tensive product knowledge and state of the art manufac- turing to continuously provide a wide variety of energy efficient and earth friendly features to the dynamic mar- ketplace. The success of our commitments can be seen in the consistent growth of our sales and the increasing profitability of the company. innova– tion implementation = Possibilities Company Profile Financial Highlights OutdOOR AiR HANdLiNg uNitS iNdOOR AiR HANdLiNg uNitS RM SeRieS RL SeRieS H2 SeRieS HB SeRieS RN SeRieS M2 SeRieS M3 SeRieS F1 SeRieS V2 SeRieS CONdeNSiNg uNitS BOiLeR CHiLLeRS CL SeRieS CA SeRieS CC SeRieS CB SeRieS BL SeRieS LL SeRieS AiR–CONdeNSed LL SeRieS eVApORAtiVe– CONdeNSed ROOFtOp uNitS CuStOM uNitS dt SeRieS RL SeRieS RN SeRieS RM SeRieS HB SeRieS MN SeRieS NJ SeRieS AAON is engaged in the engineering, manufacturing, marketing and sales of air conditioning and heating equipment consisting of residential and commercial semi–custom and custom products, including: air handling units, condensing units, chillers, boilers, rooftop units, make–up air units, heat recovery units and coils. Since the founding of AAON in 1988, AAON has maintained a commitment to design, develop, manufacture and deliver heating and cooling products to perform beyond all expectations and demonstrate the value of AAON to our customers. AAON provides specific and unique solutions for individual customer requirements. Income Data ($000) Net Sales Gross Profit Operating Income Interest Expense Interest Income Depreciation Pre–Tax Income Net Income Earnings Per Share (Basic)1 (Diluted)1 Balance Sheet ($000) Working Capital Current Assets Net Fixed Assets Accumulated Depreciation Cash & Cash Investment Total Assets Current Liabilities Long–Term Debt Stockholders’ Equity Stockholders’ Equity per Diluted Share3 Funds Flow Data ($000) Operations Investments Financing Net Increase (Decrease) in Cash Ratio Analysis Return on Average Equity Return on Average Assets Pre–Tax Income on Sales Net Income on Sales Total Liabilities to Equity Quick Ratio2 Current Ratio Year–End Price Earnings Ratio1 2007 2006 2005 2004 2003 $262,517 $57,369 $35,666 $10 $8 $9,665 $35,343 $23,156 $1.24 $1.22 $38,788 $76,295 $60,770 $63,579 $879 $137,140 $37,507 $239 $95,420 $231,460 $43,890 $25,831 $81 $24 $9,146 $26,198 $17,133 $0.93 $0.90 $36,356 $70,759 $59,222 $54,182 $288 $130,056 $34,403 $– $91,592 $185,195 $35,291 $17,814 $16 $67 $8,503 $18,332 $11,462 $0.62 $0.60 $33,372 $62,950 $50,581 $45,062 $1,837 $113,606 $29,578 $59 $79,495 $171,885 $26,864 $11,650 $38 $183 $5,732 $12,379 $7,521 $0.40 $0.39 $27,939 $55,998 $49,229 $37,017 $3,994 $105,227 $28,059 $167 $71,171 $147,890 $35,885 $20,976 $21 $346 $5,435 $21,853 $14,227 $0.75 $0.72 $35,369 $64,635 $37,450 $31,285 $16,186 $102,085 $29,266 $– $67,428 $5.29 $4.95 $4.33 $3.84 $3.59 $31,247 $19,428 $(10,751) $(20,036) $591 $(16,781) $(3,333) $(549) $11,966 $(8,189) $(4,200) $(157) $16,159 $(11,741) $(9,857) $(5,192) $16,469 $(7,626) $(7,728) $1,115 24.8% 16.9% 13.5% 8.8% 0.4 1.1 2.0 16 20.0% 13.2% 11.3% 7.4% 0.4 1.1 2.1 19 15.2% 10.1% 9.9% 6.2% 0.4 1.2 2.1 20 10.9% 7.1% 7.2% 4.4% 0.5 1.1 2.0 27 21.9% 13.9% 14.8% 9.6% 0.5 1.3 2.2 18 1 Reflects 3–for–2 stock splits in August 2007. 2 Cash, cash investments + receivables/current liabilities.3 Actual dollars and diluted number of shares for all years reflect both 3–for–2 stock splits. Norman H. Asbjornson President/CEO President’s Letter Dear Shareholder, Aided by continuing strength in non-residential construction in 2007, which increased 15.7% to $671.1 billion from $579.9 billion in 2006, and particularly in the new office, manufacturing, healthcare and educational sectors, AAON once again attained record levels in both sales and earnings this past year. Our gross margins widened, benefiting from price increases and relatively stable raw material prices, and, despite higher SG&A expenses, we witnessed a strong improvement in operating margins. Assisted by strong demand for both our large tonnage units (45-230 tons) and from our chiller products, we posted a 13.4% increase in total sales to $262.5 million, and a dividend payout of $5 million, while The Company’s having minimal long-term debt. In 1999 and 2002, continued strong the Company initiated stock repurchase programs performance has pursuant to which 1.1 million shares and 1.9 million not gone unnoticed. shares, respectively, were repurchased at a total cost In October, AAON was of $36 million. On February 14, 2006, the 2002 selected to the Forbes Best stock repurchase program was suspended and the Small Company list, ranking Board of Directors voted to initiate a semi-annual cash 133rd. Inclusion on the Forbes list dividend. On August 21, 2007, we paid a 50% stock requires companies to meet a series dividend (3-2 stock split), the third such split in the past of financial benchmarks including annual six years. Furthermore, we raised our dividend by 20%, sales criteria and profit margins greater than 5%, on a post-split basis, to $0.32 per share annually. In for both the last five years and the last 12 months. This November, the Board of Directors authorized a new marks the fourth time AAON has been honored with repurchase program of up to 10% (approximately 1.8 this listing, with the three previous consecutive listings million shares) of the outstanding common stock. By in 2000-2002. the end of the year we had acquired 690,300 shares million from $231.5 million. Gross profits rose 30.8% a three-day business interruption in December at the at a cost of approximately $13.0 million. In addition, CAPITAL EXPENDITURES to $57.4 million (21.9% of sales) from $43.9 million Tulsa facility due to a severe ice storm. These factors we bought 260,625 of shares of stock from certain (19.0% of sales). SG&A expenses climbed 19.9% to cost us approximately $1.6 million or $0.08 per share. directors of the Company and 131,811 shares from We continue to plan for future growth by increasing $21.7 million (8.3% of sales) from $18.1 million (7.8% AAON’s 401(k) savings and investment plan by which both our plant and manufacturing capacity. In 2007, of sales). This increase was due primarily to higher While we took important steps during the past year employee participants are entitled to have shares of we spent $10.9 million on capital improvements with warranty accruals based on increased sales and from to price our custom product line more realistically, the AAON stock in their accounts sold to the Company the majority of these expenditures directed toward the the extension of warranties on our product line from business (based in Burlington, Ontario, Canada) was to provide diversification of their investments. We purchase of new machinery to expand both our sheet 14 to 18 months. Nevertheless, operating income severely impacted by currency translations which had a funded the stock purchases out of free cash flow. We metal fabricating and coil manufacturing capabilities. gained 38.4% to $35.7 million (13.6% of sales) from negative effect on the bottom line. We are carefully and believe our sizeable cash flow can be best utilized by For 2008, our capital expenditure budget stands at $25.8 million (11.1% of sales). Net income climbed extensively re-evaluating this business. repurchasing our stock at prices that do not reflect the $7-10 million, with emphasis on continuing to expand 35.7% to $23.2 million or $1.22 per diluted share Company’s true value. from $17.1 million or $0.90 per diluted share. The per STRONG FINANCIAL CONDITION our plant capacity. We plan to double our RL (45-230 tons) production line, double our RN (26-70 tons) share calculations are based upon 18.9 million diluted Total shareholders’ equity climbed to $95.4 million (up production line and add two new air handler lines. shares outstanding in 2007 and 19 million diluted Our financial condition at December 31, 2007, was 4.1%) equal to $5.29 per share compared to $91.6 In addition we plan to enlarge our storage space to shares outstanding in 2006. It should be noted that strong. Total current assets were $76.3 million with a million or $4.95 per share a year earlier. In 2006, our accommodate our new split system product, a 2 to 5 our net income and earnings per share performance current ratio of 2:1. We maintained our strong liquid return on average shareholders’ equity was 20% and ton unit which can be used in both the light commercial in 2007 were negatively affected by both the losses position despite $10.9 million of capital expenditures, for 2007 this important measurement reached 24.8%. or residential markets. incurred in our custom manufacturing business and by the repurchase of our common stock at a cost of $20.8 HB Series of our total sales include the new foam cabinetry as a WHAT’S NEW!! GROWTH THROUGH INNOVATION standard feature and we anticipate by the third quarter We realize our future growth will be partially dependent upon our ability to react, respond and manufacture products that meet both the regulatory and customer demands in today’s marketplace. The complete redesign of our existing product line which took place over the past three years has enabled us to introduce innovative products that are more environmentally friendly and energy efficient. In addition we are planning to introduce new products that will give us entry into new markets. At the end of 2007 our manufacturing capabilities could accommodate annual volume of up to $330 million to $350 million depending upon our product mix. Ten years ago, we purchased a 40-acre tract of land including a 457,000 square foot manufacturing/ warehouse building. That property has been expanded to 563,000 square feet and at the end of 2007 we utilized 39% of this property with the remainder leased to a third party. Eventually, we expect to utilize this total space which could double our manufacturing capacity to $700-750 million. We consistently recognize the need to manufacture products which adhere to regulatory mandates regarding the environment. In addition, there is By 2010, the EPA has mandated that all manufactured HVAC equipment must use refrigerants that do not contain chlorine, thereby reducing the affect of ozone depletion in the atmosphere. In 2001, we introduced a number of products designed to use R410A, an environmentally friendly refrigerant. By the end of last year, our entire product line, including our new chiller product, was completely R410A compatible. increasing demand to manufacture products that are Over the past two years, AAON more energy efficient and that reduce the utilization of water. During the past three years we have spent $6.1 million on research and development engineering. Our growing market share is a testament that our Company continues to be recognized as one of the most technologically innovative in the industry. has become the industry leader in the manufacture of double wall composite foam panels for the cabinets of our products. The use of foam rather than fiberglass creates a cabinet which is lighter and a better insulator. The R-value of these new cabinets is over four times the traditional fiberglass product. Approximately 32% of 2009, our entire product line will be manufactured We are excited by the introduction of a number of using foam cabinetry as a standard feature. new products this year, as well as the addition of new components to our existing product lines. In 2005, we introduced our direct drive blower assemblies that operate without drive belts, eliminating The Digital Scroll Compressor the need to adjust or replace fan belts. Additionally, these products operate with our airfoil backward This type of compressor is presently being offered as an curved fan creating increased efficiency over the option on both our RN and RM product lines. These two traditional fan design. Presently, these assemblies are product lines constitute approximately 60% of our total available on approximately 32% of our sales. By 2010, sales. This compressor varies the volume of refrigerant the remainder of our product line will include the direct that flows through the cooling system, allowing the drive blower assemblies as a standard feature. compressor to match the load needed by the unit. This LL Series unit has a tighter temperature control than conventional products, enabling the compressor to modulate from 10 to 100% of its cooling capacity. In addition, the compressor will run for a longer period of time, thereby dehumidifying the air and cycling the compressor on and off less, which creates sizeable energy savings. This is a R410A system. In 2001, we introduced a number of products designed to use R410A, an environmentally friendly refrigerant. By the end of last year, our entire product line including our new chiller product, was completely R410A compatible. RN Series Residential Split System Commercial Self Contained (“Floor by Floor”) SALES REPRESENTATIVES’ PERFORMANCE OUR EMPLOYEES We have begun to market our 2-5 ton split system This new product enables AAON to enter into the high- Our sales representatives continue to be the significant The ongoing success of our Company can be directly product directed toward the residential and light rise office building market. It is available in 20-80 tons driver of our revenue growth as well as enabling us to attributed to our employees. To that end we have commercial customer. This product is a R410A system and is manufactured with double wall cabinetry and further diversify our customer mix. At the end of 2007, created a number of programs which provide for and is equipped with our direct drive blower assembly. direct drive blower assemblies. Its modular design our representatives’ network had 106 offices in all 50 their financial enhancement, health care needs and It has a SEER rating of up to 17.Optional in the product for retrofit and renovation projects will enable the states and Canada. Our manufacturer representatives vocational enrichment. is an additional coil used for dehumidification. This installer to negotiate existing hallways, elevators and produced a gain of 13.9% of sales in 2007 sales to allows the unit to control temperature and humidity doorways. This product offers tenants of each floor the $238 million or 91% of total corporate sales. This Our most powerful motivational tool is the Profit Sharing independently. By dehumidifying the indoor air, mold ability to control the energy usage of their floor with a compares with 2006 sales of $209 million or 90.3% of program. For employees who work from the beginning and mildew can be prevented. We believe this optional commercial self-contained unit. Sizeable downtime can total corporate sales. Our expanded innovative product to the end of a calendar quarter, we distribute 10% feature is unique to the residential market and provides be reduced versus a system using a chiller that serves line will enable the manufacturer representatives to of the Company’s pre-tax earnings. This bonus is us with significant growth potential. multiple floors. increase their presence in existing markets as well as calculated at the operating subsidiary level and all gain entrance into new markets such as residential and eligible employees share equally in those funds. This high-rise office buildings. We expect our manufacturer program helps to focus employees on the profitability representative network will continue to make substantial of the Company, whereas the equity owned by the contributions to AAON’s future growth. employees through the 401(k) plan ties them to longer- term shareholder interests. The ongoing success of our Company can be directly attributed to our employees. September Purchase of John Zink Air Conditioning Division. Spring AAON purchased, renovated and moved into a 184,000 square foot plant in Tulsa, Oklahoma. Introduced a new product line of rooftop heating and air conditioning units 2-140 tons. December Formed AAON Coil Products, a Texas Corporation, as a subsidiary to AAON, Inc. (Nevada) and purchased coil making assets of Coils Plus. September One-for-four reverse stock split. Retired $1,927,000 of subordinated debt. March Purchase of property with 26,000 square foot building adjacent to AAON Coil Products plan in Longview, Texas. Issued a 10% stock dividend. September Completed expansion of the Tulsa facility to 332,000 square feet. April AAON received U.S. patent for Blower Housing assembly. October U.S. patent granted to AAON for air conditioner with energy recovery heat wheel. Spring Completed Tulsa, Oklahoma, and Longview, Texas, plant additions yielding a total exceeding one million square feet. Fall Expanded rooftop product line to 230 tons. Introduced evaporative condensing energy savings feature. 3-for-2 stock split. June 3-for-2 stock split. July AAON added as a member of the Russell 2000® Index. May Purchase of the assets of Air Wise, of Mississauga, Ontario, Canada. November Introduction of light commercial/residential product lines. June Initiation of a semi-annual cash dividend for AAON shareholders. March Modular air handlerproduct extended to 50,000 CFM October AAON Listed in Forbes ‘200 Best Small Companies’ 1988 89 1990 91 1992 93 1994 95 1996 97 1998 99 2000 01 2002 03 2004 05 2006 07 December Listed on NASDAQ Small Cap—Symbol “AAON.” Summer Became a publicly traded company with the reverse acquisition of Diamond Head Resources (now “AAON, Inc.”), a Nevada corporation. August AAON, an Oklahoma corporation, was founded. November Listed on the NASDAQ National Market System. January Introduced a desiccant heat recovery wheel option available on all AAON rooftop units. Spring AAON Coil Products purchased, renovated and moved into a 110,000 square foot plant in Longview, Texas. December Purchased 40 acres with 457,000 square foot plan and 22,000 square foot office space located across from Tulsa facility. November AAON yearly shipments exceed $100 million. Received U.S. patent for Dimpled Heat Exchanger Tube. July Started production of polyurethane foam-filled double-wall construction panels for rooftop and chiller products using newly purchased manufacturing equipment. October AAON, listed in FORBES Magazine’s “Hot Shots 200 Up & Comers.” Fall Industry introduction of the modular air handler and chiller products. April AAON introduces factory engineered and assembled packaged mechanical room, which includes a boiler and all piping and pumping accessories. December AAON rings closing bell at NASDAQ August AAON received U.S. Patent for Plenum Fan Banding. August 3-for-2 stock split Since 2004, we have made changes to our 401(k) We have expanded our efforts to engage employees OUTLOOK plan by eliminating the waiting period, increasing in the cost control process by adding a high-deductible the Company’s matching contributions, automatically health plan option matched with available Health Concerns regarding the environment as well as energy and enrolling employees and increasing permitted Savings Accounts and a Company match which water conservation have increased significantly in the past participant contributions. Furthermore, we allow allow employees to directly and immediately benefit few years and, we believe, will accelerate in the future. We participants to sell and thereby diversify their holdings from improved health care cost trends while building have and will continue to provide the necessary capital of AAON stock provided by the Company’s matching a cushion for future health care needs. Aggressive and manufacturing effort to produce technologically contributions. As a result of these changes, participation management of our health programs has allowed us innovative products that address these concerns in order in the plan has increased nearly 50% and contributions to maintain competitive plan costs while promoting the to enable us to sustain our growth. by the Company have doubled. The plan now owns wellness of our employees. over 3% of the Company’s outstanding stock. We have attained a unique reputation as a manufacturer Lastly, we support continuing training through both with some of the most advanced and innovative products We continue to support and encourage adequate on-site and off-site options. We provide a variety of in our industry. This lofty position could not have been retirement planning, which helps our employees reduce industry-specific training at our facilities and encourage achieved without the cooperation and commitment of our some of their longer term concerns. the pursuit of a broader-range of skills through our customers, sales representatives and shareholders, and We provide a health insurance program focused upon personal growth of our employees, we intend to develop whose names appear at the end of this report. On behalf wellness and prevention, a Health Risk Assessment knowledgeable personnel who can be promoted of the Board of Directors, we thank all of you for your past program to allow our employees to better understand through the organization to provide a deep pool of contributions and continuing belief in AAON. tuition reimbursement program. By supporting the particularly, our loyal and dedicated employees, all of their particular needs and to help them determine talent. We believe that the efforts to train employees, the correct approach to solving their concerns, as not only for their current position but also for potential Sincerely, well as on-site clinics at our U.S. facilities to provide advancement, will benefit our shareholders through convenient, basic care and enable employees to increased profitability. manage risks identified by the Health Risk Assessment. Norman H. Asbjornson President & CEO April 14, 2008 M2 Series UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10–K Table of Contents 3 [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Item Number and Caption Page Number [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________________ to _____________________________ For the fiscal year ended December 31, 2007 or Commission file number: 0–18953 AAON, INC. (Exact name of registrant as specified in its charter) Nevada (State or other jurisdiction of incorporation or organization) 2425 South Yukon, Tulsa, Oklahoma (Address of principal executive offices) 87–0448736 (IRS Employer Identification No.) 74107 (Zip Code) Registrant’s telephone number, including area code: (918) 583–2266 Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.004 (Title of Class) Rights to Purchase Series A Preferred Stock (Title of Class) Indicate by check mark if the registrant is a well–known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 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 No 3 Yes No 3 3 Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. 3 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non–accelerated filer (as defined in Rule 12b–2 of the Securities Exchange Act of 1934). Large accelerated filer Accelerated filer 3 Non–accelerated filer Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b–2 of the Act). Yes No 3 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, 2007) was $397.3 million. As of February 29, 2008, registrant had outstanding a total of 18,061,272 shares of its $.004 par value Common Stock. DOCUMENTS INCORPORATED BY REFERENCE PART I 1. Business. 1 1A. Risk Factors. 1B. Unresolved Staff Comments. 5 2. Properties. 6 3. Legal Proceedings. 6 4. Submission of Matters to a Vote of Security Holders. PART II 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 7 6. Selected Financial Data. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 7A. Quantitative and Qualitative Disclosures About Market Risk. 8. Financial Statements and Supplementary Data. 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 9A. Controls and Procedures. 9B. Other Information. PART III 10. Directors, Executive Officers and Corporate Governance. 11. Executive Compensation. 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 13. Certain Relationships and Related Transactions. 14. Principal Accountant Fees and Services. PART IV 4 6 10 11 19 19 19 19 21 22 22 22 22 24 Portions of registrant’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held May 20, 2008, are incorporated into Part III. 15. Exhibits and Financial Statement Schedules. 25 2007 AAON Annual Report 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, coils and boilers. Products and Markets The Company’s heat recovery option applicable to its RM, RN and RL units, as well as its M2, M3 and NJ Series 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. Performance characteristics of its products range in cooling capacity from 28,000–4,320,000 BTU’s and in heating capacity from 69,000–6,000,000 BTU’s. All of the Company’s products meet the Department of Energy’s efficiency standards, which define the maximum amount of energy to be used in producing a given amount of cooling. A typical commercial building installation requires a ton of air–conditioning for every 300–400 square feet or, for a 100,000 square foot building, 250 tons of air–conditioning, which can involve multiple units. The Company has developed and is beginning to market a residential condensing unit (CB Series) and air handlers (F1 Series) as well as boilers (BL Series). 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 less than 5% of its sales in 2007. Major Customers 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, coils and boilers are applicable to all sizes of commercial and industrial buildings. Sources and Availability of Raw Materials No customer accounted for 10% of the Company’s sales during 2007, 2006 or 2005. 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 2007 level of sales of $263 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. 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, make–up air units, heat recovery units and boilers consisting of boilers and a sheet metal cabinet. With regard to its standardized products, the Company currently has five groups of rooftop units: its HB Series consisting of four cooling sizes ranging from two to five tons; 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; and its HA Series, which is a horizontal discharge package for either rooftop or ground installation, offered in eight sizes ranging from seven and one–half to 50 tons. The Company also produces customized rooftop products with direct (MN Series) and indirect (DT Series) heating in sizes as required. 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 F1 and H/V Series, the modular (M2 and M3) Series and a customized NJ Series. 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 each of the last three years cost increases in basic commodities, such as steel, copper and aluminum, negatively impacted profit margins. Distribution The Company employs a sales staff of 20 individuals and utilizes approximately 91 independent manufacturer representatives’ organizations having 106 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. 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 its 106 sales offices 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 18 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, RL, NJ, DT and MN (rooftop units), F1, H/V, M2, M3 and NJ (air handlers), LL (chillers), CB (condensing units) and BL (boilers), as well as component evaluation and refinement, development of control systems and new product development. The Company incurred research and development expenses of approximately $2,483,000, $1,974,000 and $1,681,000 in 2007, 2006 and 2005. 1 2 2007 AAON Annual Report Backlog Item 1A. Risk Factors. The Company had a current backlog as of March 1, 2008, of approximately $51,365,000 compared to $62,798,000 at March 1, 2007. The current backlog consists of orders considered by management to be firm and substantially all of which will be filled by August 1, 2008; 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 with a view to maintaining the lowest level consistent with requirements of anticipated levels of operation. The Company’s 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. The Company expects to renew its revolving credit agreement in July 2008. 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 Ingersoll–Rand Company Limited, Lennox International, Inc., Mestek Inc, LSB Industries and Carrier Corporation, a subsidiary of United Technologies 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. Employees As of March 1, 2008, the Company had 1,313 permanent employees and 78 temporary employees, none of whom is represented by unions. Management considers its relations with its employees to be good. 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 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. The following risks and uncertainties may affect the Company’s performance and results of operations. Our business can be hurt by an economic downturn. Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. A decline in economic activity in the United States could materially affect our financial condition and results of operations. Sales in the commercial and industrial new construction markets correlate closely to the number of new homes and buildings that are built, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates and other macroeconomic factors over which we have no control. In the Heating, Ventilation, and Air Conditioning (“HVAC”) business, a decline in economic activity as a result of these cyclical or other factors typically results in a decline in new construction and replacement purchases, which would result in a decrease in our sales volume and profitability. We may be adversely affected by problems in the availability, or increases in the prices, of raw materials and components. Problems in the availability, or increases in the prices, of raw materials or components could depress our sales or increase the costs of our products. We are dependent upon components purchased from third parties, as well as raw materials such as steel, copper and aluminum. We enter into cancelable contracts on terms from six months to one year for raw materials and components at fixed prices. However, if a key supplier is unable or unwilling to meet our supply requirements, we could experience supply interruptions or cost increases, either of which could have an adverse effect on our gross profit. We may not be able to successfully develop and market new products. Our future success will depend upon our continued investment in research and new product development and our ability to continue to realize new technological advances in the HVAC industry. Our inability to continue to successfully develop and market new products or our inability to achieve technological advances on a pace consistent with that of our competitors could lead to a material adverse effect on our business and results of operations. We may incur material costs as a result of warranty and product liability claims that would negatively affect our profitability. The development, manufacture, sale and use of our products involve a risk of warranty and product liability claims. Our product liability insurance policies have limits that, if exceeded, may result in material costs that would have an adverse effect on our future profitability. In addition, warranty claims are not covered by our product liability insurance and there may be types of product liability claims that are also not covered by our product liability insurance. We may not be able to compete favorably in the highly competitive HVAC business. Competition in our various markets could cause us to reduce our prices or lose market share, or could negatively affect our cash flow, which could have an adverse effect on our future financial results. Substantially all of the markets in which we participate are highly competitive. The most significant competitive factors we face are product reliability, product performance, service and price, with the relative importance of these factors varying among our product line. Other factors that affect competition in the HVAC market include the development and application of new technologies and an increasing emphasis on the development of more efficient HVAC products. Moreover, new product introductions are an important factor in the market categories in which our products compete. Several of our competitors have greater financial and other resources than we have, allowing them to invest in more extensive research and development. We may not be able to compete successfully against current and future competition and current and future competitive pressures faced by us may materially adversely affect our business and results of operations. 3 4 2007 AAON Annual Report The loss of Norman H. Asbjornson could impair the growth of our business. Item 2. Properties. Norman H. Asbjornson, the founder of AAON, Inc., has served as the President and Chief Executive Officer of the Company from inception to date. He has provided the leadership and vision for our growth. Although important responsibilities and functions have been delegated to other highly experienced and capable management personnel, our products are technologically advanced and well positioned for sales into the future and we carry key man insurance on Mr. Asbjornson, his death, disability or retirement, could impair the growth of our business. We do not have an employment agreement with Mr. Asbjornson. Our stockholder rights plan and some provisions in our bylaws and Nevada law could delay or prevent a change in control. Our stockholder rights plan and some provisions in our bylaws and Nevada law could delay or prevent a change in control, which could adversely affect the price of our common stock. AAON’s business is subject to the risks of interruptions by problems such as computer viruses. Despite our company’s implementation of network security measures, its services are vulnerable to computer viruses, break–ins and similar disruptions from unauthorized tampering with its computer systems. Any such event could have a material adverse affect on our business. Exposure to environmental liabilities could adversely affect our results of operations. Our future profitability could be adversely affected by current or future environmental laws. We are subject to extensive and changing federal, state and local laws and regulations designed to protect the environment in the United States and in other parts of the world. These laws and regulations could impose liability for remediation costs and result in civil or criminal penalties in case of non–compliance. Compliance with environmental laws increases our costs of doing business. Because these laws are subject to frequent change, we are unable to predict the future costs resulting from environmental compliance. Item 1B. Unresolved Staff Comments. None. 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. 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 80,000 sq. ft. for two production lines; an additional 106,000 square feet is utilized for sheet metal fabrication. The remaining 357,000 sq. ft. (presently leased) will afford 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 258,000 sq. ft. on 14 acres. The manufacturing area (approximately 251,000 sq. ft.) is located in three 120–foot wide sheet metal buildings connected by an adjoining structure. The facility is built for light industrial manufacturing. An additional, contiguous 15 acres were purchased in 2004 and 2005 for future expansion. 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. Production at these facilities averaged approximately $21.9 million per month in 2007, which is approximately 62% of the estimated current production capacity. Management deems its facilities to be nearly ideal for the type of products being manufactured by the Company. 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, 2007, through December 31, 2007. 5 6 2007 AAON Annual Report Part II On November 7, 2006, the Board of Directors authorized the Company to repurchase shares from certain directors following their exercise of stock options. The maximum number of shares to be repurchased is unknown under the program as the amount is contingent on the number of shares sold by directors. Through December 31, 2007, the Company repurchased 260,625 shares for an aggregate price of $5,232,188, or an average price of $20.08 per share. The Company purchases the shares at the current market price. Repurchases during the fourth quarter of 2007 were as follows: ISSUER PURCHASES OF EQUITY SECURITIES (a) Total Number of Shares (or Units) Purchased (b) Average Price Paid Per Share (or Unit) (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs Period Month #1 – October 1–31, 2007 Month #2 – November 1–30, 2007 Month #3 – December 1–31, 2007 20,303 $18.60 20,303 372,688 $18.50 372,688 330,747 $19.27 330,747 – – – – Total 723,738 $18.85 723,738 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 March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006 March 31, 2007 June 30, 2007 September 30, 2007 December 31, 2007 High (1) Low (1) $ 15.94 $ 12.07 $ 19.02 $ 13.97 $ 17.87 $ 14.27 $ 19.34 $ 14.32 $ 19.67 $ 16.46 $ 21.38 $ 16.47 $ 23.01 $ 18.61 $ 21.96 $ 16.60 (1) All prices adjusted to reflect a 3 for 2 stock split effected August 21, 2007 On February 29, 2008, there were 735 holders of record, and 2,860 beneficial owners, of the Company’s Common Stock. On February 14, 2006, the Board of Directors voted to initiate a semi–annual cash dividend of $0.20 per share to the holders of the outstanding Common Stock of the Company to be declared at dates of the Board’s discretion. In 2007, dividends were declared to shareholders of record at the close of business on June 11, 2007 and paid on July 2, 2007 and declared to shareholders of record at the close of business on December 13, 2007 and paid on January 3, 2008. Following the 3 for 2 stock split in August 2007 (which was effected by means of a 50% stock dividend), the Board voted to increase the post–split dividend by 20% to $0.16 per share. The Company paid cash dividends of approximately $4,998,000 and declared dividends payable of approximately $2,943,000 for the year ended December 31, 2007. Following repurchases of approximately 12% of its outstanding Common Stock between September 1999 and September 2001, the Company announced and began another stock repurchase program on October 17, 2002, targeting repurchases of up to approximately 1,987,500 shares of its outstanding stock. On February 14, 2006, the Board of Directors approved the suspension of the Company’s repurchase program. Through December 31, 2006, the Company had repurchased a total of 1,886,796 shares under this program for an aggregate price of $22,034,568, or an average of $11.68 per share. The Company purchased the shares at the current market price. On November 6, 2007, the Board authorized a new stock buyback program, targeting repurchases of up to approximately 10% (1.8 million shares) of the outstanding stock of the Company from time to time in open market transactions at prevailing market prices. Between November 6, 2007 and December 31, 2007, the Company repurchased a total of 690,300 shares under this program for an aggregate price of $13,012,199, or an average of $18.85 per share. On July 1, 2005, the Company entered into a stock repurchase arrangement by which employee–participants in AAON’s 401(k) savings and investment plan are entitled to have shares of AAON stock in their accounts sold to the Company to provide diversification of their investments. The maximum number of shares to be repurchased is unknown under the program as the amount is contingent on the number of shares sold by employees. Through December 31, 2007, the Company repurchased 501,075 shares for an aggregate price of $7,712,287, or an average price of $15.39 per share. The Company purchases the shares at the current market price. 7 8 2007 AAON Annual Report Stock Performance Graph (1) Item 6. Selected Financial Data. The following graph compares the cumulative total shareholder return of the Company, the NASDAQ Composite and its peer group named below. The graph assumes a $100 investment at the closing price on January 1, 2002, and reinvestment of dividends on the date of payment without commissions. This table is not intended to forecast future performance of the Company’s Common Stock. 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. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 300.00 250.00 200.00 150.00 100.00 50.00 0.00 2002 2003 2004 2005 2006 2007 AAON INC NASDAQ Composite - Total Returns Peer Group The peer group consists of Trane, Inc.; Lennox International, Inc.; Mestek, Inc.; LSB Industries, Inc.; and United Technologies Corporation, all of which are in the business of manufacturing air conditioning and heat exchange equipment. (1) Securities and Exchange Commission (“SEC”) filings sometimes “incorporate information by reference.” This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this Stock Performance Graph shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933 as amended, or the Securities Exchange act of 1934, as amended. Results of Operations: Net sales Net income Earnings per share: Basic Diluted Cash dividends declared per common share Weighted average shares outstanding: Basic Diluted Financial Position at End of Fiscal Year: Year Ended December 31, 2007 2006 2005 2004 2003 (in thousands, except per share data) $ 262,517 $ 231,460 $ 185,195 $ 171,885 $ 147,890 7,521 $ 14,227 $ 23,156 $ 11,462 $ 17,133 $ $ $ $ 1.24 $ 1.22 $ 0.93 $ 0.90 $ 0.62 $ 0.60 $ 0.40 $ 0.39 $ 0.75 0.72 0.32 $ 0.32 $ – $ – $ – 18,628 18,927 18,456 18,968 18,510 19,125 18,653 19,385 19,027 19,877 December 31, 2007 2006 2005 2004 2003 (in thousands) Working capital Total assets Long–term and current debt Total stockholders’ equity $ $ $ $ 38,788 $ 36,356 $ 137,140 $ 130,056 $ 59 $ 91,592 $ 330 $ 95,420 $ 33,372 $ 27,939 $ 35,369 113,606 $ 105,227 $ 102,085 – 167 $ 67,428 79,495 $ 275 $ 71,171 $ Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per common share were determined on the assumed exercise of dilutive options, as determined by applying the treasury stock method. Effective August 21, 2007, the Company completed a three– for–two stock split. The shares outstanding and earnings per share disclosures have been restated to reflect the stock split. 9 10 2007 AAON Annual Report Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview 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, coils and boilers. Custom units are marketed and sold to retail, manufacturing, educational, medical and other commercial industries. AAON markets units to all 50 states in the United States and certain provinces in Canada. Foreign sales are less than 5% of the Company’s 2007 sales as the majority of all sales are domestic. 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. Prices increased by approximately 50% for steel, 75% for aluminum and 190% for copper from 2005 to 2007. The increases resulted in economic challenges to AAON. AAON reviewed and adjusted current pricing strategies, created efficiencies in production, and continued relationships with suppliers in order to mitigate the economic factors of increasing commodity prices. The major component costs include compressors, electric motors and electronic controls, which also increased due to increases in commodities. 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 18 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 charges on heat exchangers do not occur frequently. 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. Other operations are conducted in a plant/office building at 203–207 Gum Springs Road in Longview, Texas, containing 258,000 square feet (251,000 sq. ft. of manufacturing/warehouse and 7,000 sq. ft. of office space). An additional 15 acres of land was purchased for future expansion in 2004 and 2005 in Longview, Texas. 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. Set forth below is income statement information and as a percentage of sales with respect to the Company for years 2007, 2006 and 2005: 2007 Year Ended December 31, 2006 (in thousands) 2005 $262,517 205,148 57,369 100.0% 78.1% 21.9% $231,460 187,570 43,890 100.0% 81.0% 19.0% $185,195 149,904 35,291 21,703 35,666 (10) 8 8.3% 13.6% 0.0% 0.0% 18,059 25,831 (81) 24 7.8% 11.2% 0.0% 0.0% 17,477 17,814 (16) 67 100.0% 81.0% 19.0% 9.4% 9.6% 0.0% 0.0% (321) (0.1%) 424 0.1% 467 0.3% 35,343 12,187 $23,156 13.5% 4.7% 8.8% 26,198 9,065 $17,133 11.3% 3.9% 7.4% $ 18,332 6,870 11,462 9.9% 3.7% 6.2% Net sales Cost of sales Gross profit Selling, general and administrative expenses Income from operations Interest expense Interest income Other income (expense), net Income before income taxes Income tax provision Net income Results of Operations Key events impacting AAON’s cash balance, financial condition, and results of operations in 2007 include the following: • An increase in the volume of sales on all product lines due to commercial construction growth and market share gains, and effective moderation of commodity costs with purchase agreements and pricing strategies affecting gross margin, positively resulted in significantly higher revenues and net income. The large volume of sales also lowered the effect of major fixed costs in general and administrative expenses and occupancy expenses. • AAON remained the leader in the industry for environmentally–friendly, energy efficient and quality innovations, utilizing R410A refrigerant and phasing out pollutant causing R22 refrigerant. The phase out of R22 began at the beginning of 2004. AAON also utilizes a high performance composite foam panel to eliminate over half of the heat transfer from typical fiberglass insulated panels. AAON continues to utilize sloped condenser coils, and access compartments to filters, motor, and fans. All of these innovations increase the demand for AAON’s products thus increasing market share. In February 2006, the Board of Directors initiated a program of semi–annual cash dividend payments. Cash payments of $5.0 million were made in 2007 ($2.5 million paid in January and July 2007, respectively), and $2.9 million was accrued as a liability for payment in January 2008. • • Stock repurchases of AAON stock from employee’s 401(k) savings and investments plan was authorized in 2005. Stock repurchases of AAON stock from directors was authorized in 2006. Stock repurchases of AAON stock from the open market was authorized and initiated in November 2007. Total repurchases resulted in cash payments of $20.8 million. This cash outlay is partially offset by cash received from options exercised by employees as a part of an incentive bonus program. The cash received in 2007 from options exercised was $2.4 million. • Borrowings under the line of credit were approximately $12.1 million, and approximately $10,000 in interest expense was paid in 2007. Borrowings under the line of credit where interest is accrued are relatively short and generally paid off within the month incurred or the following month. At the end of 2007 there were no borrowings owed on the line of credit. • Purchases of equipment and renovations to manufacturing facilities remained a priority. AAON’s capital expenditures were $10.9 million. Equipment purchases create significant efficiencies, lower production costs and allow continued growth in production. The Company currently estimates to dedicate $7.0 million to $10.0 million to capital expenditures in 2008 for continued growth. 11 12 2007 AAON Annual Report Net Sales Other Income (Expense) Net sales were $262.5 million, $231.5 million and $185.2 million in 2007, 2006 and 2005. The highest level of sales occurred in 2007. This increase in sales of $31.0 million or 13.4% was attributable to an increase in volume of product sold related to the Company’s new and redesigned products being favorably received by its customers, active marketing by sales representatives and pricing strategies implemented on 90% of the Company’s product lines in the second quarter in order to keep up with increasing raw materials costs. New commercial construction steadily improved throughout 2007 and 2006, contributing to growth of the market. The increase in sales in 2006 of $46.3 million or 25% was attributable to both volume and price increases. The increased sales were offset by computer and electrical outages that caused the closing of the Tulsa facility for four days. Management anticipates continued growth throughout 2008. Gross Profit Gross margins in 2007, 2006 and 2005 were $57.4 million, $43.9 million and $35.3 million, respectively. As a percentage of sales, gross margins were 21.9%, 19.0% and 19.0% for the years ended 2007, 2006 and 2005. The increase in gross profit for 2007, resulted from pricing strategies becoming fully utilized and production and labor efficiencies, as sales volume increased. The Company saw a leveling off of raw material increases in the first half of the year, which also contributed to higher gross profits. The increase in margins was attained despite increased pricing on certain materials in the last half of the year. Management anticipates the moderation of commodity costs through relationships with suppliers and price decreases in certain commodity costs will only enhance already increased margins. The stable gross profit percentage from 2005 to 2006 resulted from adjusting pricing strategies for continued high material costs for raw materials and components. Certain labor efficiencies were also experienced in 2006 adding to the positive gross margin. Due to an increase in the volume of sales, actual gross profit for 2007 increased by $13.5 million from 2006, and by $8.6 million from 2005 to 2006. Steel, copper and aluminum are high volume materials used in the manufacturing of the Company’s products, which are obtained from domestic suppliers. Raw materials pricing increased approximately 50% for steel, 75% for aluminum and 190% for copper from 2005 to 2007, causing increased inventory costs. 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; therefore, the Company is also experiencing price increases from component part suppliers. The Company instituted several price increases from 2005 to 2007 to customers in an attempt to offset the continued increases in steel, copper and aluminum. 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. Selling, General and Administrative Expenses Selling, general and administrative expenses were $21.7 million, $18.1 million and $17.5 million for the years ended 2007, 2006 and 2005. The increase in selling, general and administrative expenses is due primarily to an increase in warranty expense caused by increased sales and an increase in profit sharing resulting from an increase in net income. In 2006, the increase in selling, general and administrative expenses was caused primarily by an increase in sales expenditures for an increased sales force and active marketing, increases in salaries for selling, general and administrative personnel and an increase in profit sharing. There were additional non–cash compensation costs for the fair value of stock options granted to employees in accordance with the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share–Based Payment (“SFAS 123(R)”). Interest Expense Interest expense was approximately $10,000, $81,000 and $16,000 for the years ended 2007, 2006 and 2005. The decrease in interest expense of approximately $71,000 in 2007 was due to less average borrowings under the revolving credit facility as a result of an increase in net cash provided by operations. The increase in interest expense of approximately $65,000 in 2006 was due to an increase in average borrowings under the revolving credit facility and increases in interest rates. Interest on borrowings is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus 1.6%, at the election of the Company (6.84% at December 31, 2007). Average borrowings under the revolving credit facility are typically paid in full within the month of borrowing or the following month. Interest Income Interest income was approximately $8,000, $24,000 and $67,000 in 2007, 2006 and 2005 respectively. The decrease in interest income is due to lower balances in certificates of deposit and short–term money markets. Other expense was approximately $321,000 in 2007. Other income (expense) also includes foreign currency gains and losses that result from operations in Canada. The weakened U.S. dollar was the primary reason for the decrease in other income (expense) in 2007. Other income was approximately $424,000 and $467,000 in 2006 and 2005, respectively. Other income is attributable primarily to rental income from the Company’s expansion facility. All expenses associated with the facility that are allocated to the rental portion of the building are included in other income. The Company plans to continue to monetize the expansion facility until it is needed for increased capacity. Analysis of Liquidity and Capital Resources AAON’s working capital and capital expenditure requirements are generally met through net cash provided by operations and the revolving bank line of credit. Cash Provided by Operating Activities. Net cash provided from operating activities has fluctuated from year to year. Net cash provided by operating activities was $31.2 million, $19.4 million and $12.0 million in fiscal years 2007, 2006 and 2005, respectively. The year–to–year variances are primarily from results of changes in net income, accounts receivable, inventories held by the Company, accounts payable and accrued liabilities. Net income for fiscal year 2007 was $23.2 million, an increase of $6.1 million from 2006. The increase in net income during fiscal years 2007 and 2006 compared to fiscal years 2006 and 2005 was primarily due to increased volume of sales, adjusted pricing strategies to compensate for higher raw materials costs, innovative and efficient products, as well as strong economic growth of the commercial construction industry. Depreciation expense was $9.7 million, $9.1 million and $8.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. The continued increase is due to capital expenditure purchases for growth and production efficiencies. The Company adopted SFAS 123(R) in 2006, which decreased net income by $0.6 million in 2007 and by $0.5 million in 2006. Share–based compensation was not applicable in 2005. Both depreciation expense and share–based compensation expense decreased net income but had no effect on operating cash. Accounts receivable balances have continued to increase in 2007, 2006 and 2005 from the increase in sales. Accounts receivable increased by $1.6 million at December 31, 2007 compared to December 31, 2006. The increase at December 31, 2006 from December 31, 2005 was $4.3 million. Inventories increased by $2.1 million, $5.8 million and $2.8 million at December 31, 2007, 2006 and 2005, respectively. The leading factor in the increase is primarily related to the valuation of inventories since 2005 due to higher raw material and component parts costs. The increase is also attributable to procurement of inventory to accommodate an increase of sales. Prepaid expenses increased by $0.2 million as compared to a decrease of $0.8 million at December 31, 2006 and an increase of $0.6 million at December 31, 2005. The increase in 2007 was related to multiple accounts, none of which experienced a significant increase. The decrease in 2006 was primarily related to prepaid copper inventory at 2005 pricing for 2006 material requirements that was included in prepaid expenses at December 31, 2005. Accounts payable and accrued liabilities increased by $4.9 million, $4.3 million and $2.3 million at December 31, 2007, 2006 and 2005. The increase in 2007 is due to an increase in commissions payable related to the increase in sales, timing of commissions payable and payments to vendors. The change from December 31, 2006, compared to December 31, 2005, was attributable to timing of commissions payable and payments to vendors. 13 14 2007 AAON Annual Report Cash Flows Used in Investing Activities. Cash flows used in investing activities were $10.8 million, $16.8 million and $8.2 million in 2007, 2006 and 2005, respectively. The decrease in cash flows used in investing activities in 2007 was $6.0 million, and primarily related to a decrease in capital expenditures. The increase in cash flows used in investing activities in 2006 was primarily related to capital expenditures of $17.8 million for additions of machinery and equipment for increased efficiency and a manufacturing addition at the Longview facility. Cash flows used in investing activities in 2005 consisted primarily of capital expenditures of $10.1 million for additions of machinery and equipment and an office renovation for the facility located in Longview. Management utilizes cash flows provided from operating activities to fund capital expenditures that are expected to spur growth and create efficiencies. Due to anticipated production demands, the Company expects to expend approximately $7.0 million to $10.0 million in 2008 for equipment requirements, a building renovation and a building expansion. The Company expects the cash requirements to be provided from cash flows from operations. In 2007, the Company did not invest in any certificates of deposits. In 2006, the Company invested a total of $2 million in certificates of deposit, the latest one maturing in July 2006. In 2005, the Company invested $1 million in a certificate of deposit, which matured in the first quarter of 2006. In 2002, the Company invested $3 million in a certificate of deposit that matured in the first quarter of 2005. Cash Flows Used in Financing Activities. Cash flows used in financing activities were $20.0 million, $3.3 million and $4.2 million in 2007, 2006 and 2005, respectively. The increase of cash used in financing activities primarily relates to cash dividends declared and paid and the continued repurchase of the Company’s stock. The Company utilizes the revolving line of credit as described below in ”General” to meet certain short–term cash demands based on current liquidity at the time. The Company accessed $12.1 million, and $53.7 million of borrowings under the line of credit and paid each separate borrowing within the month the borrowing occurred or the following month, resulting in no net borrowings under the revolving line of credit at December 31, 2007 and 2006, respectively. The Company utilized the revolving line of credit in 2005 for short–term cash demands in the amount of $21.1 million. The Company received cash from stock options exercised of $2.4 million and $1.3 million and classified the tax benefit of stock options exercised of $3.0 million and $1.9 million in financing activities in 2007 and 2006, respectively. The Company received cash from stock options exercised for the year ended 2005 of approximately $0.8 million. The Company repurchased shares of stock under the Board of Directors authorized stock buyback programs in 2007, 2006 and 2005. The Company repurchased shares of stock from employees’ 401(k) savings and investment plan, Directors, and the open market in 2007 in the amount of $20.8 million for 1,082,736 shares of stock. The Company repurchased shares of stock from employees’ 401(k) savings and investment plan and Directors in 2006 in the amount of $3.9 million for 250,500 shares of stock. The Company repurchased shares of stock from employees’ 401(k) savings and investment plan in 2005 in the amount of $4.9 million for 274,350 shares of stock. In February 2006, the Board of Directors authorized a semi–annual cash dividend payment. Cash dividend payments of $5.0 million were made in 2007, and $2.9 million in dividends were declared and accrued as a liability in December 2007 for payment in January 2008. Cash dividend payments of $2.5 million were made in 2006, and $2.5 million in dividends were declared and accrued as a liability in December 2006 for payment in January 2007. Board approval is required to determine the date of declaration for each semi–annual payment. Prior to 2006, no cash dividends had been declared or paid. General The Company’s revolving credit facility provides for maximum borrowings of $15.2 million which is provided by the Bank of Oklahoma, National Association. Under the line of credit, there is one standby letter of credit totaling $1.3 million. The letter of credit is a requirement of the Company’s workers compensation insurance and was extended in 2007 and will expire on December 31, 2008. Interest on borrowings is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus 1.6%, at the election of the Company (6.84% at December 31, 2007). No fees are associated with the unused portion of the committed amount. At December 31, 2007 and 2006, the Company had no borrowings outstanding under the revolving credit facility. Borrowings available under the revolving credit facility at December 31, 2007, were $13.9 million. The credit facility previously required the Company to maintain a certain financial ratio and prohibited the declaration of cash dividends. On February 14, 2006, the Board of Directors voted to initiate a semi–annual cash dividend of $0.20 per share to the holders of the outstanding Common Stock. In conjunction with the Board’s vote on February 14, 2006, the restriction of payments of dividends was waived by the lender and removed from the covenants with the renewal of the line of credit on July 30, 2006. At December 31, 2007 and 2006, the Company was in compliance with its financial ratio covenants. On July 30, 2007, the Company renewed the line of credit with a maturity date of July 30, 2008. On July 12, 2007, the Company’s Board of Directors approved a three–for–two stock split of AAON’s outstanding stock for shareholders of record as of August 3, 2007. The stock split was treated as a 50% stock dividend which was distributed on August 21, 2007. As a result of the stock split, the Company adjusted the dividend paid per share to $0.16. The applicable share and per share data for all periods included herein has been restated to reflect the stock split 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 fiscal year 2008 and 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, its ability to authorize dividend cash payments, and its relationship with its existing bank lender. For information concerning the Company’s revolving credit facility at December 31, 2007, see Note 4 to the Consolidated Financial Statements, Revolving Credit Facility. 15 16 2007 AAON Annual Report Commitments and Contractual Agreements The following table summarizes the Company’s long–term debt and other contractual agreements as of December 31, 2007: Payments Due By Period (in thousands) Contractual Financial Obligations Total Less Than 1 Year 1–3 Years 4–5 Years After 5 years Long–term debt and capital leases Total contractual obligations $ $ 258 258 $ $ 91 91 $ $ 167 167 $ $ – – $ $ – – The fixed rate interest on long–term debt includes the amount of interest due on the Company’s fixed rate long–term debt. These amounts do not include interest on the Company’s variable rate obligation related to the Company’s revolving credit facility. 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. 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’s allowance for doubtful accounts is estimated to cover the risk of loss related to accounts receivable. 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. The evaluation of these factors involves complex, subjective judgments. Thus, changes in these factors or changes in economic circumstances may significantly impact the Company’s Consolidated Financial Statements. 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 18 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. Warranty charges associated with heat exchanges do not occur frequently. Due to the absence of warranty history on new products, an additional provision may be made for such products. The Company’s estimated future warranty cost is subject to adjustment from time to time depending on changes in actual warranty trends and cost experience. Should actual claim rates differ from the Company’s estimates, revisions to the estimated product warranty liability would be required. Medical Insurance–A provision is made for medical costs associated with the Company’s Medical Employee Benefit Plan, which is primarily a self–funded plan. A provision is made for estimated medical costs based on historical claims paid and potential significant future claims. The plan is supplemented by employee contributions and an excess policy for claims over $100,000 each. Stock Compensation–The Company adopted SFAS 123(R), effective January 1, 2006. Applying this standard to value equity– based compensation requires the Company to use significant judgment and to make estimates, particularly for the assumptions used in the Black–Scholes valuation model, such as stock price volatility and expected option lives, as well as for the expected option forfeiture rates. In accordance with SFAS 123(R) the Company measures the cost of employee services received in exchange for an award of equity instruments using the Black–Scholes valuation model to calculate the grant–date fair value of the award. The compensation cost is recognized over the period of time during which an employee is required to provide service in exchange for the award, which will be the vesting period. Historically, actual results have been within management’s expectations. New Accounting Pronouncements In July 2006, the FASB released Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions as described in SFAS No. 109, Accounting for Income Taxes, and requires a company to recognize, in its financial statements, the impact of a tax position only if that position is “more likely than not” of being sustained on an audit basis solely on the technical merits of the position. FIN 48 also requires qualitative and quantitative disclosures including a discussion of reasonably possible changes that might occur in the recognized tax benefits over the next twelve months as well as a roll–forward of all unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s Consolidated Financial Statements. In September 2006, the FASB released SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Although SFAS 157 applies to (and amends) the provisions of existing authoritative literature, it does not, of itself, require any new fair value measurements or establish valuation standards. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Adoption of SFAS 157 is not expected to have a material impact on the Company’s Consolidated Financial Statements. In February, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”), which creates an alternative measurement treatment for certain financial assets and financial liabilities. SFAS 159 permits fair value to be used for both the initial and subsequent measurements on an instrument by instrument basis, with changes in the fair value to be recognized in earnings as those changes occur. This election is referred to as the fair value option. SFAS 159 also requires additional disclosures to compensate for the lack of comparability that will arise from the use of the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS 159 did not have a material impact on the Company’s Consolidated Financial Statements. Forward–Looking Statements This Annual Report includes “forward–looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “will”, and variations of such words and similar expressions are intended to identify such forward–looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward–looking statements. Readers are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date on which they are made. 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. 17 18 2007 AAON Annual Report Item 7A. Quantitative and Qualitative Disclosures About Market Risk. (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 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. Based on our assessment, we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria. AAON’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting. Date: March 11, 2008 /s/ Norman H. Asbjornson Norman H. Asbjornson Chief Executive Officer /s/ Kathy I. Sheffield Kathy I. Sheffield Chief Financial Officer 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, 2007. Foreign sales accounted for less than approximately 5% of the Company’s sales in 2007 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 SFAS 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 denominated in Canadian currency are included in the results of operations as incurred. The exchange rate of the Canadian dollar to the United States dollar was $0.862 and $1.019 at December 31, 2006 and 2007, respectively. 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, from 2005 to 2007 cost increases in basic commodities, such as steel, aluminum and copper, rose by 50%, 75% and 190%, and impacted profit margins. The Company does not utilize derivative financial instruments to hedge its interest rate, foreign currency exchange rate or raw materials price risks. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data are included commencing at page 30. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures At the end of the period covered by this Annual Report on Form 10–K, the Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe that: • • The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and The Company’s disclosure controls and procedures operate such that important information flows to appropriate collection and disclosure points in a timely manner and are effective to ensure that such information is accumulated and communicated to the Company’s management, and made known to the Company’s Chief Executive Officer and Chief Financial Officer, particularly during the period when this Annual Report was prepared, as appropriate to allow timely decisions regarding the required disclosure. AAON’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures and concluded that these controls and procedures were effective as of December 31, 2007. 19 20 2007 AAON Annual Report (c) Report of Independent Registered Public Accounting Firm PART III Report of Independent Registered Public Accounting Firm Item 10. Directors, Executive Officers and Corporate Governance. Board of Directors and Stockholders of AAON, Inc. We have audited AAON, Inc. (a Nevada corporation) and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S–K is incorporated by reference to the information contained in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company’s 2008 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. The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S–K is incorporated by reference to the information contained in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company’s 2008 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 403 and Item 201(d) of Regulation S–K is incorporated by reference to the information contained in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company’s 2008 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. Transactions with Related Persons AAON’s Code of Conduct guides the Board of Directors in its actions and deliberations with respect to related party transactions. Under the Code, conflicts of interest, including any involving the directors or any Named Officers, are prohibited except under any guidelines approved by the Board of Directors. Only the Board of Directors may waive a provision of the Code of Conduct for a director or a Named Officer, and only then in compliance with all applicable laws and rules and regulations. The Company did not enter into any new related party transactions and has no preexisting related party transactions in 2007 or 2006, respectively. In our opinion, AAON, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by COSO. Director Independence We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AAON, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 10, 2008 expressed an unqualified opinion on those consolidated financial statements. /s/ GRANT THORNTON LLP Tulsa, Oklahoma March 10, 2008 (d) Changes in Internal Control over Financial Reporting There have been no changes in internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information. None. 21 The Board has adopted director independence standards that meets and/or exceed listing standards set by NASDAQ. NASDAQ has set forth six applicable tests and requires that a director who fails any of the tests be deemed not independent. In 2007, the Board affirmatively determined, considering the standards described more fully below, that Messrs. Naugle, Pantaleoni, Ryan, Short and Stephenson are independent. Upon the resignations of Messrs. Naugle and Ryan, followed by the subsequent elections of Messrs. Lackey and McElroy, the Board affirmatively determined that Messrs. Lackey and McElroy are independent. As a result of his position as the President of the Company, Mr. Asbjornson does not qualify as independent under the standards set forth below. The Board has determined that Mr. Johnson should not be deemed independent, because he is a member of the law firm that serves as General Counsel to the Company. In addition, each member of the Audit Committee and the Compensation Committee is independent. 22 The Board undertakes an annual review of the independence of all non–employee directors. In advance of the meeting at which this review occurs, each non–employee director is asked to provide the Board with full information regarding the director’s business and other relationships with the Company and its affiliates and with senior management and their affiliates to enable the Board to evaluate the director’s independence. Directors have an affirmative obligation to inform the Board of any material changes in their circumstances or relationships that may impact their designation by the Board as “independent.” This obligation includes all business relationships between, on the one hand Directors or members of their immediate family, and, on the other hand, the Company and its affiliates or members of senior management and their affiliates, whether or not such business relationships are subject to any other approval requirements of the Company. 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 2008 Annual Meeting of Stockholders. 2007 AAON Annual Report The Company’s director independence standards are as follows: It is the policy of the Board of Directors that a majority of the members of the Board consist of directors independent of the Company and of the Company’s management. For a director to be deemed “independent,” the Board shall affirmatively determine that the director has no material relationship with the Company or its affiliates or any member of the senior management of the Company or his or her affiliates. In making this determination, the Board applies, at a minimum and in addition to any other standards for independence established under applicable statutes and regulations as outlined by the NASDAQ listing standards Rule 4200, the following standards, which it may amend or supplement from time to time: •A director who is, or has been within the last three years, an employee of the Company, or whose immediate family member is, or has been within the last three years a Named Officer, of the Company can not be deemed independent. Employment as an interim Chairman or Chief Executive Officer will not disqualify a director from being considered independent following that employment. •A director who has received, or who has an immediate family member who has received, during any twelve–month period within the last three years, more than $60,000 in direct compensation from the Company, other than director and committee fees and benefits under a tax–qualified retirement plan, or non–discretionary compensation for prior service (provided such compensation is not contingent in any way on continued service), can not be deemed independent. Compensation received by a director for former service as an interim Chairman or Chief Executive Officer and compensation received by an immediate family member for service as a non–executive employee of the Company will not be considered in determining independence under this test. •A director who (A) is, or whose immediate family member is, a current partner of a firm that is the Company’s external auditor; (B) is a current employee of such a firm; or (C) was, or whose immediate family member was, within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company’s audit within that time can not be deemed independent. •A director who is, or whose immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present Named Officers at the time serves or served on that company’s compensation committee can not be deemed independent. •A director who is a current employee or general partner, or whose immediate family member is a current executive officer or general partner, of an entity that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $200,000 or 5% of such other entity’s consolidated gross revenues, other than payments arising solely from investments in the Company’s securities or payments under non–discretionary charitable contribution matching programs, can not be deemed independent. For purposes of the independence standards set forth above, the terms: •“affiliate” means any consolidated subsidiary of the Company and any other Company or entity that controls, is controlled by or is under common control with the Company; •“executive officer” means an “officer” within the meaning of Rule 16a–1(f) under the Securities Exchange Act of 1934, as amended; and •“immediate family” means spouse, parents, children, siblings, mothers– and fathers–in–law, sons– and daughters–in– law, brothers– and sisters–in–law and anyone (other than employees) sharing a person’s home, but excluding any person who is no longer an immediate family member as a result of legal separation or divorce, death or incapacitation. 23 24 Part III 2007 AAON Annual Report PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial statements. See Index to Consolidated Financial Statements on page 28. (b) Exhibits: (3) (A) Articles of Incorporation (i) (A–1) Article Amendments (ii) (B) (B–1) Amendments of Bylaws (iii) Bylaws (i) (4) (A) Third Restated Revolving Credit and Term Loan Agreement and related documents (iv) (A–1) Third Amendment to Third Restated Revolving Credit and Term Loan Agreement (v) (B) Rights Agreement dated February 19, 1999, as amended (vi) (10.1) AAON, Inc. 1992 Stock Option Plan, as amended (vii) (10.2) AAON, Inc. 2007 Long–Term Incentive Plan, as amended (viii) (21) List of Subsidiaries (ix) (23) Consent of Grant Thornton LLP (31.1) Certification of CEO (31.2) Certification of CFO (32.1) Section 1350 Certification–CEO (32.2) Section 1350 Certification–CFO 2007 AAON Annual Report (i) (ii) Incorporated herein by reference to the exhibits to the Company’s Form S–18 Registration Statement No. 33–18336–LA 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 herein by reference to exhibit to the Company’s Form 8–K dated August 7, 2007 (vi) 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. (vii) 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. (viii) Incorporated herein by reference to Appendix B to the Company’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders filed April 23, 2007. (ix) Incorporated herein by reference to exhibits to the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2004. 25 26 2007 AAON Annual Report Part IV SIGNATURES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm–Grant Thornton LLP Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders’ Equity and Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page 29 30 31 32 33 34 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. Dated: March 11, 2008 AAON, INC. 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 11 2008 Dated: March 11, 2008 Dated: March 11, 2008 Dated: March 11, 2008 Dated: March 11, 2008 Dated: March 11, 2008 Dated: March 11, 2008 Dated: March 11, 2008 /s/ Norman H. Asbjornson Norman H. Asbjornson President and Director (principal executive officer) /s/ Kathy I. Sheffield Kathy I. Sheffield Treasurer (principal financial officer and principal accounting officer) /s/ John B. Johnson, Jr. John B. Johnson, Jr. Director /s/ Anthony Pantaleoni Anthony Pantaleoni Director /s/ Charles C. Stephenson, Jr. Charles C. Stephenson, Jr. Director /s/ Jack E. Short Jack E. Short Director /s/ Paul K. Lackey, Jr. Paul K. Lackey, Jr. Director /s/ A.H. McElroy II A.H. McElroy II Director 27 28 2007 AAON Annual Report Report of Independent Registered Public Accounting Firm AAON, Inc., and Subsidiaries Consolidated Balance Sheets Board of Directors and Stockholders of AAON, Inc. We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada Corporation) and subsidiaries (collectively, the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAON, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AAON, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2008 expressed an unqualified opinion thereon. Tulsa, Oklahoma March 10, 2008 /s/ GRANT THORNTON LLP Assets Current assets: Cash and cash equivalents Accounts receivable, net Inventories, net Prepaid expenses and other Deferred tax asset Total current assets Property, plant and equipment, net Note receivable, long–term Total assets Liabilities and Stockholders’ Equity Current liabilities: Current maturities of long–term debt Accounts payable Dividends payable Accrued liabilities Total current liabilities Other long–term liabilities Deferred tax liability Commitments and contingencies Stockholders’ equity: December 31, 2007 2006 (in thousands, except per share and share data) $ 879 38,813 31,849 442 4,312 76,295 60,770 75 137,140 $ 288 36,748 29,502 267 3,954 70,759 59,222 75 130,056 91 15,059 2,943 19,414 37,507 59 15,821 2,465 16,058 34,403 239 3,974 – 4,061 Preferred stock, $.001 par value, 7,500,000 shares authorized, no shares issued* Common stock, $.004 par value, 75,000,000 shares authorized, 18,054,246 and 18,508,248 issued and outstanding at December 31, 2007 and 2006, respectively* Additional paid in capital Accumulated other comprehensive income Retained earnings Total stockholders’ equity – – 73 – 1,942 93,405 95,420 74 185 667 90,666 91,592 Total liabilities and stockholders’ equity $ 137,140 $ 130,056 * Reflects three–for–two stock split effective August 21, 2007. The accompanying notes are an integral part of these statements. 29 30 2007 AAON Annual Report AAON, Inc., and Subsidiaries Consolidated Statements of Income Year Ending December 31, 2007 2006 (in thousands, except per share data) 2005 Net sales Cost of sales Gross profit Selling, general and administrative expenses Income from operations Interest expense Interest income Other income (expense), net Income before income taxes Income tax provision Net income Earnings per share: Basic* Diluted* Cash dividends declared per common share* Weighted average shares outstanding: Basic* Diluted* $ 262,517 205,148 57,369 21,703 35,666 (10) 8 (321) 35,343 12,187 $ 231,460 $ 185,195 187,570 43,890 18,059 25,831 (81) 24 424 26,198 9,065 149,904 35,291 17,477 17,814 (16) 67 467 18,332 6,870 $ 23,156 $ 17,133 $ 11,462 $ $ $ 1.24 1.22 0.32 18,628 18,927 $ $ $ 0.93 0.90 0.32 $ $ $ 18,456 18,968 0.62 0.60 – 18,510 19,125 AAON, Inc., and Subsidiaries Consolidated Statements of Stockholders’ Equity and Comprehensive Income Common Stock Shares * Amount Accumulated Other Comprehensive Income Paid–in Capital (in thousands) Retained Earnings Total 18,525 $ 74 $ – $ 247 $ 70,850 $ 71,171 – – 243 (417) 18,351 – – 408 – (251) – 18,508 – – 613 – (1,067) – 18,054 – – 1 (1) 74 – – 1 – (1) – 74 – – 4 – (5) – $ 73 – – 1,507 (1,507) – – – 3,107 500 (3,422) – 185 – – 5,420 582 (6,187) – $ – – 266 – – 513 – 154 – – – – 667 11,462 11,462 – – (3,404) 78,908 266 11,728 1,508 (4,912) 79,495 17,133 17,133 – – – (432) (4,943) 90,666 154 17,287 3,108 500 (3,855) (4,943) 91,592 (396) (396) – 23,156 23,156 1,275 – – – – $ 1,942 – 1,275 24,431 – – (14,581) (5,440) 5,424 582 (20,773) (5,440) $ 93,405 $ 95,420 Balance at December 31, 2004 Comprehensive income: Net income Foreign currency translation adjustment Total comprehensive income Stock options exercised, including tax benefits Stock repurchased and retired Balance at December 31, 2005 Comprehensive income: Net income Foreign currency translation adjustment Total comprehensive income Stock options exercised, including tax benefits Share–based compensation Stock repurchased and retired Dividends Balance at December 31, 2006 Adjustment for the adoption of FASB Interpretation (FIN) No. 48 Comprehensive income: Net income Foreign currency translation adjustment Total comprehensive income Stock options exercised, including tax benefits Share–based compensation Stock repurchased and retired Dividends Balance at December 31, 2007 * Reflects three–for–two stock split effective August 21, 2007 * Reflects three–for–two stock split effective August 21, 2007 The accompanying notes are an integral part of these statements. The accompanying notes are an integral part of these statements. 31 32 2007 AAON Annual Report AAON, Inc., and Subsidiaries Consolidated Statements of Cash Flows Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for losses on accounts receivable Share–based compensation Excess tax benefits from stock options exercised (Gain) loss on disposition of assets Deferred income taxes Changes in assets and liabilities: Accounts receivable Inventories, net Prepaid expenses and other Accounts payable Accrued liabilities Net cash provided by operating activities Investing Activities Proceeds from sale of property, plant and equipment Proceeds from matured certificate of deposit Investment in certificate of deposit Notes receivable, long–term Capital expenditures Net cash used in investing activities Financing Activities Borrowings under revolving credit facility Payments under revolving credit facility Borrowings (payments) of long–term debt Stock options exercised Excess tax benefit from stock options exercised Repurchase of stock Cash dividends paid to stockholders Net cash used in financing activities Effects of exchange rate of cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Year Ended December 31, 2007 2006 2005 (in thousands) $ 23,156 $ 17,133 $ 11,462 9,665 203 582 (2,998) (108) (124) (1,760) (2,095) (172) (1,370) 6,268 31,247 9,146 (59) 500 (1,852) – (510) (4,197) (5,790) 776 4,178 103 19,428 8,503 68 – – 130 (1,696) (5,366) (2,840) (563) (1,269) 3,537 11,966 123 – – – (10,874) (10,751) – 3,000 (2,000) – (17,781) (16,781) 30 3,000 (1,000) (75) (10,144) ( 8,189) 12,142 (12,142) 271 2,426 2,998 (20,773) (4,958) (20,036) 53,706 (53,706) (108) 1,256 1,852 (3,855) (2,478) (3,333) 21,143 (21,143) (108) 820 – (4,912) – (4,200) 131 591 288 $ 879 $ 137 (549) 837 288 $ 266 (157) 994 837 AAON, Inc., and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007 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 air conditioning and heating equipment consisting of standardized and custom rooftop units, chillers, air–handling units, make–up air units, heat recovery units, condensing units, coils and boilers, 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., (AAON Properties, 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. 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 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 denominated in Canadian currency are included in the results of operations as incurred. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on the Company’s results of operations, financial position and cash flows. The Company reevaluates its estimates and assumptions on a monthly basis. The most significant estimates include the allowance for doubtful accounts, inventory reserves, warranty accrual, medical insurance accrual, and stock–based compensation. Actual results could differ materially from those estimates. Revenue Recognition The Company recognizes revenues from sales of products when the products are shipped and the title and risk of ownership pass to the customer. Selling prices are fixed based on purchase orders or contractual agreements. Sales allowances and customer incentive are treated as reductions to sales and are provided for based on historical experiences and current estimates. For sales initiated by independent manufacturer representatives, the Company recognizes revenues net of the representatives’ commission. The Company’s policy is to record the collection and payment of sales taxes through a liability account. The accompanying notes are an integral part of these statements. 33 34 2007 AAON Annual Report 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) Concentrations Inventories 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 less than 5% of revenues in 2007. No customer accounted for 10% of the Company’s sales during 2007, 2006 or 2005 or more than 5% of the Company’s accounts receivable balance at December 31, 2007 or 2006. 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: Accounts receivable Less: Allowance for doubtful accounts Total, net Allowance for doubtful accounts: Balance, beginning of period Provisions for losses on accounts receivable Adjustments to provision Accounts receivable written off, net of recoveries Balance, end of period December 31, 2007 2006 (in thousands) $ 39,220 (407) $ 38,813 $ 37,014 (266) $ 36,748 Year Ended December 31, 2007 $ $ 266 625 (422) (62) 407 2006 (in thousands) 2005 $ $ 685 589 (648) (360) 266 $ $ 717 634 (566) (100) 685 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. Inventory balances at December 31, 2007 and 2006, and the related changes in the allowance for excess and obsolete inventories account for the three years ended December 31, 2007, 2006 and 2005, are as follows: December 31, 2007 2006 (in thousands) $ $ 27,651 1,760 2,788 32,199 (350) 31,849 $ 25,977 2,226 1,649 29,852 (350) $ 29,502 2007 Year Ended December 31, 2006 (in thousands) 2005 $ $ 350 – – 350 $ $ 350 – – 350 $ 1,050 – (700) 350 $ Raw materials Work in progress Finished goods Less: Allowance for excess and obsolete inventories Total, net Allowance for excess and obsolete inventories: Balance, beginning of period Provision for excess and obsolete inventories Adjustments to reserve Balance, end of period Property, Plant and Equipment Property, plant and equipment are stated at cost. Maintenance and repairs, including replacement of minor items, are charged to expense as incurred; major additions to physical properties are capitalized. Property, plant and equipment are depreciated using the straight–line method over the following estimated useful lives: Description Buildings Machinery and equipment Furniture and fixtures Years 10–40 3–15 2–5 35 36 2007 AAON Annual Report 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) Property, Plant and Equipment (continued) Warranties At December 31, property, plant and equipment were comprised of the following: 2007 2006 (in thousands) Land Buildings Machinery and equipment Furniture and fixtures Less: Accumulated depreciation Total, net Impairment of Long–Lived Assets $ $ 2,196 2,354 31,272 32,211 74,053 82,872 5,883 6,912 113,404 124,349 (63,579) (54,182) $ 60,770 $ 59,222 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 during 2007, 2006 and 2005. 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. Accrued Liabilities At December 31, accrued liabilities were comprised of the following: Warranty Commissions Payroll Workers’ compensation Medical self–insurance Other Total 2007 2006 (in thousands) $ $ 6,308 8,851 2,175 1,127 608 345 19,414 $ 5,572 6,862 1,890 494 837 403 $ 16,058 A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products and any known identifiable warranty issues. Warranty expense was $4.0 million, $2.4 million and $3.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. Changes in the Company’s warranty accrual during the years ended December 31, 2007, 2006 and 2005 are as follows: 2007 2006 (in thousands) 2005 Balance, beginning of the year Payments made Warranties issued Changes in estimate related to preexisting warranties Balance, end of period $ 5,572 (3,321) 3,757 300 $ 6,308 $ 6,282 (3,128) 4,343 (1,925) $ 5,572 $ 6,301 (3,641) 3,622 – $ 6,282 In 2007, the provision for warranties was increased due to an extension in the warranty period. In 2006, the provision for warranties was decreased due to a change in estimate related to preexisting warranties occurring in the fourth quarter of 2006. The change in estimate was due to factors stated above, such as current information on historical trends and a reduction in identifiable warranty issues. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: 2007 Years Ended, 2005 2006 (in thousands, except share and per share data) $ 23,156 $ 17,133 $ 11,462 18,628,029 299,015 18,456,108 511,486 18,509,997 614,700 Numerator: Net income Denominator: Denominator for basic earnings per share – Weighted average shares* Effect of dilutive stock options* Denominator for diluted earnings per share – Weighted average shares* 18,927,044 18,967,594 19,124,697 Earnings per share Basic* Diluted* $1.24 $1.22 $ 0.93 $ 0.90 Anti–dilutive shares* Weighted average exercise price* 282,100 $ 17.81 269,250 $ 16.19 $ 0.62 $ 0.60 172,875 $ 12.57 * Reflects three–for–two stock split effective August 21, 2007. 37 38 2007 AAON Annual Report 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) 1. Business, Summary of Significant Accounting Policies and Other Financial Data (continued) Advertising Advertising costs are expensed as incurred. Advertising expense was approximately $784,000, $549,000 and $506,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Research and Development Research and development costs are expensed as incurred. Research and development expense was $2.5 million, $2.0 million and $1.7 million for the years ended December 31, 2007, 2006 and 2005, 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. Profit Sharing Bonus Plan 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 in order to reward employee productivity. Eligible employees are regular full–time employees who are actively employed and working on the first day of the calendar quarter and remain continuously, actively employed and working on the last day of the quarter and who work at least 80% of the quarter. Profit sharing expense was $4.2 million, $3.3 million and $2.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. Defined Contribution Plan – 401(k) The Company sponsors a defined contribution benefit plan (“401(k) Plan”). Eligible employees may make contributions in accordance with the 401(k) Plan and IRS guidelines. In addition, effective May 30, 2005, the Plan was amended to provide for automatic enrollment in the Plan and provided for an automatic increase to the deferral percent at January 1st of each year and each year thereafter, unless the employee elects to decline the automatic increase and enrollment. Beginning with pay periods after May 30, 2005, the one year enrollment waiting period was waived. Administrative expenses paid by the Company for the plan were approximately $98,000, $85,000 and $69,000 for the years ended 2007, 2006 and 2005, respectively. After January 1, 2006, the Company matching increased to 50% of the employee’s salary deferral up to the first 7% of compensation. Prior to January 1, 2006 the Company matched 100% of the employee’s salary deferral up to the first 3% of compensation. The Company contributes in the form of cash and directs the investment to shares of AAON Stock. No other purchases of AAON stock are permitted. Employees are 100% vested in salary deferral contributions and vest proportionately over 6 years in employer matching contributions. The Company made matching contributions of $1.3 million, $1.0 million and $0.8 million in 2007, 2006 and 2005, respectively. New Accounting Pronouncements In July 2006, Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 (“FIN 48”) was released. FIN 48 clarifies the accounting for uncertain tax positions as described in SFAS No. 109, Accounting for Income Taxes, and requires a company to recognize, in its financial statements, the impact of a tax position only if that position is “more likely than not” of being sustained on an audit basis solely on the technical merits of the position. FIN 48 also requires qualitative and quantitative disclosures including a discussion of reasonably possible changes that might occur in the recognized tax benefits over the next twelve months as well as a roll–forward of all unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s Consolidated Financial Statements. New Accounting Pronouncements (continued) In September 2006, the FASB released SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Although SFAS 157 applies to (and amends) the provisions of existing authoritative literature, it does not, of itself, require any new fair value measurements or establish valuation standards. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Adoption of SFAS 157 is not expected to have a material impact on the Company’s Consolidated Financial Statements. In February, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”), which creates an alternative measurement treatment for certain financial assets and financial liabilities. SFAS 159 permits fair value to be used for both the initial and subsequent measurements on an instrument by instrument basis, with changes in the fair value to be recognized in earnings as those changes occur. This election is referred to as the fair value option. SFAS 159 also requires additional disclosures to compensate for the lack of comparability that will arise from the use of the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS 159 did not have a material impact on the Company’s Consolidated Financial Statements. Segments Management has reviewed its business operations and determined that it operates in a single homogeneous business segment as defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information. The Company sells similar products with similar economic characteristics to similar classes of customers. The technologies and operations are highly integrated. Revenues and costs are reviewed monthly by management on a product line basis as a single business segment. 2. Supplemental Cash Flow Information Interest payments of approximately $10,000, $81,000 and $16,000 were made during the years ended December 31, 2007, 2006 and 2005, respectively. Payments for income taxes of $10.2 million, $6.5 million and $7.2 million were made during the years ended December 31, 2007, 2006 and 2005, respectively. Dividends payable of $2.9 million and $2.5 million were accrued as of December 31, 2007 and 2006 and paid on January 3, 2008 and 2007, respectively. 3. Certificate of Deposit At December 31, 2007 and 2006 there were no investments in certificate of deposits. The Company invested $500,000 in a 30–day certificate of deposit at January 31, 2006 bearing interest at 4.1% per annum. The Company reinvested the proceeds in April 2006 in a 60–day certificate of deposit bearing interest at 4.7% per annum. At December 31, 2005, the Company had invested $1.0 million in a 30–day certificate of deposit bearing interest at 4% per annum. Proceeds from the $1.0 million certificate of deposit were reinvested in April 2006 in a 90–day certificate of deposit bearing interest at 4.6% per annum. 4. Revolving Credit Facility The Company’s revolving credit facility provides for maximum borrowings of $15.2 million which is provided by the Bank of Oklahoma, National Association. Under the line of credit, there is one standby letter of credit totaling $1.3 million. The letter of credit was a requirement of the Company’s workers compensation insurance and has been renewed and will expire December 31, 2008. Interest on borrowings is payable monthly at the Wall Street Journal prime rate less 0.5% or LIBOR plus 1.6%, at the election of the Company (6.84% at December 31, 2007). No fees are associated with the unused portion of the committed amount. At December 31, 2007 and 2006, the Company had no borrowings outstanding under the revolving credit facility. Borrowings available under the revolving credit facility at December 31, 2007, were $13.9 million. The credit facility previously required the Company to maintain a certain financial ratio and prohibited the declaration of cash dividends. On February 14, 2006, the Board of Directors voted to initiate a semi–annual cash dividend of $0.20 per share to the holders of the outstanding Common Stock. In conjunction with the Board’s vote on February 14, 2006, the restriction of payments of dividends was waived by the lender and removed from the covenants with the renewal of the line of credit July 30, 2006. At December 31, 2007 and 2006, the Company was in compliance with its financial ratio covenants. On July 30, 2007, the Company renewed the line of credit with a maturity date of July 30, 2008. 39 40 2007 AAON Annual Report 5. Debt The total amount of unrecognized tax benefits is as follows: Short–term debt at December 31, 2007 and 2006 consisted of notes payable totaling approximately $91,000 and $59,000 due in 2008 and 2007, respectively. In 2007, the notes payable are due in monthly installments of $7,588, with an interest rate of 4.148%. In 2006, the notes payable are due in monthly installments of $9,004, with an interest rate of 3.53%, 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: Current Deferred 2007 Year Ending December 31, 2006 (in thousands) 2005 $ 12,631 (444) $ 12,187 $ 9,556 (491) $ 9,065 $ 8,566 (1,696) $ 6,870 The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: The “Other” tax rate primarily relates to certain domestic credits. Federal statutory rate State income taxes, net of federal benefit Other Year Ending December 31, 2007 2006 2005 35% 3% (3%) 35% 35% 4% (4%) 35% 35% 4% (2%) 37% The tax effect of temporary differences giving rise to the Company’s deferred income taxes at December 31 is as follows: Net current deferred assets and (liabilities) relating to: Valuation reserves Warranty accrual FIN 48 Other accruals Other, net Net long–term deferred (assets) and liabilities relating to: Depreciation and amortization NOL Share–based compensation 2007 2006 (in thousands) 2005 $ 295 2,456 83 1,430 48 $ 4,312 $ 6,376 (2,019) (383) $ 3,974 $ 240 2,172 – 1,492 50 $ 3,954 $ 5,492 (1,242) (189) $ 4,061 $ 391 2,284 – 1,170 32 $ 3,877 $ 5,027 (695) 142 $ 4,474 The total net operating loss (NOL) deferred tax asset of approximately $5.5 million relates to AAON Canada. The NOL’s originating in 2007 and 2006 will expire in twenty years. The NOL’s originating in 2005 will expire in nine years. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Effective January 1, 2007 the Company adopted FIN 48. Balance at January 1, 2007 Change as a result of tax positions taken during an earlier period Change as a result of tax positions taken during the current period Change as a result of settlements with tax authorities Change as a result of a lapse of the applicable statue of limitation Balance at December 31, 2007 (in thousands) $ $ 551 – – (156) (142) 253 The total amount of unrecognized tax benefits that if recognized would impact the effective tax rate is approximately $190,000. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At December 31, 2007 and 2006, the Company had accrued approximately $110,000 and $0 for the potential payment of interest and penalties, respectively. The total amount of unrecognized tax benefits at December 31, 2007 is approximately $253,000 related to tax positions for which it is reasonably possible that the total amounts could significantly decrease during the next twelve months. This amount represents the unrecognized tax benefits comprised of items related to determination of state nexus. Resolution of these tax benefits will occur through a voluntary compliance program, which it is reasonably possible will be completed during the next twelve months. As of December 31, 2007, the Company is subject to U.S. Federal income tax examinations for the tax years 2004 through 2007, and to non–U.S. income tax examinations for the tax years of 2004 through 2007. In addition, the Company is subject to state and local income tax examinations for the tax years 2001 through 2007. 7. Stock–Based Compensation The Company maintains a stock option plan for key employees, directors and consultants. The Company’s stock option plan provided for 4.4 million shares of Common Stock to be issued under the plan. Under the terms of the plan, the exercise price of shares granted may not be less than 85% of the fair market value at the date of the grant. Options granted to directors prior to May 25, 2004, vest one year from the date of grant and are exercisable for nine years thereafter. Options granted to directors on or after May 25, 2004, vest one–third each 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. On May 22, 2007, the stockholders of the Company adopted a Long–Term Incentive Plan which provides an additional 750,000 shares that can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Since inception of the Plan, non–qualified stock options and restricted stock awards have been granted with the same vesting schedule as the previous plan. Prior to January 1, 2006, the Company accounted for its nonqualified stock options under the recognition and measurement principles of APB 25 and related interpretations. Under APB 25, no stock–based employee compensation cost was reflected in net income, as all options granted under the plan qualified 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 Company had adopted the disclosure–only provisions of FAS 123. No stock based compensation cost was recognized in the Consolidated Statements of Income for the year ended December 31, 2005. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) using the modified– prospective transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2007 and 2006 includes all share–based payments granted prior to, but not yet vested as of January 1, 2006, and compensation cost for all share–based payments granted subsequent to January 1, 2006. The compensation cost is based on the grant date fair value calculated using a Black–Scholes–Merton Option Pricing Model in accordance with provisions of SFAS 123(R). 41 42 2007 AAON Annual Report For the year ended December 31, 2007 and 2006, the Company recognized approximately $526,000 and $500,000 in pre–tax compensation expense in the Consolidated Statements of Income related to the stock option plan. The total pre–tax compensation cost related to nonvested stock options not yet recognized as of December 31, 2007 and 2006, is $1.5 million and $1.9 million, respectively. The nonvested stock options are expected to be recognized over a weighted–average period of 2.3 years. Prior to the adoption of SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. FAS 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flows. The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock–based employee compensation in prior years is as follows: Year Ended December 31, 2005 (in thousands except per share data) Net income, as reported Deduct: Total stock–based employee compensation expense determined under fair value method for all awards, net of related tax effects Pro forma net income Earnings per share: Basic, as reported Basic, pro forma Diluted, as reported Diluted, pro forma $ 11,462 (438) $ 11,024 $ 0.62 $ 0.60 $ 0.60 $ 0.58 The following assumptions were used to determine the fair value of the unvested stock options on the original grant date for expense recognition purposes for options granted during the years ended December 31, 2007 and 2006 and for pro forma disclosure purposes for the year ended December 31, 2005: Directors and Officers: Expected dividend yield Expected volatility Risk–free interest rate Expected life Forfeiture Rate Employees: Expected dividend yield Expected volatility Risk–free interest rate Expected life Forfeiture Rate 2007 2006 2005 N/A N/A N/A N/A N/A 1.67% 41.92% 4.61% 6.3 yrs 28% 2.05% 42.76% 5.05% 8.0 yrs 0% 2.05% 42.33% 4.84% 6.3 yrs 28% – 32.15% 4.39% 8.0 yrs 0% – 32.15% 4.39% 8.0 yrs 0% The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk–free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Company’s stock. The Company had not declared dividends in prior years, but initiated a dividend payout in 2006. Previously, the Company used the Board of Director approved semi–annual dividend payout of $0.20 per share to calculate the expected dividend yield. The Board of Directors approved future dividend payments of $0.16 per share related to the stock split effective August 21, 2007 and the table above was adjusted to reflect the change. The following is a summary of stock options outstanding as of December 31, 2007: Options Outstanding Options Exercisable Number Outstanding at December 31, 2007 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Aggregate Intrinsic Value Number Exercisable at December 31, 2007 Weighted Average Exercise Price 21,750 307,320 241,613 46,500 67,500 244,250 928,933 0.04 1.34 4.84 7.59 7.89 8.81 4.97 $ 2.26 3.20 8.45 11.69 14.34 17.23 $ 9.47 $17.56 16.62 11.37 8.13 5.48 2.59 $13.67 21,750 307,320 180,413 24,400 23,300 36,450 593,633 $2.26 3.20 7.69 11.75 14.18 16.81 $6.15 Range of Exercise Prices 2.26–2.26 2.67–3.85 5.73–11.29 11.40–12.00 12.68–15.55 15.99–21.01 Total A summary of option activity under the plan as of December 31, 2007, is as follows: Options Outstanding at December 31, 2004 Granted Exercised Forfeited or Expired Outstanding at December 31, 2005 Granted Exercised Forfeited or Expired Outstanding at December 31, 2006 Granted Exercised Forfeited or Expired Outstanding at December 31, 2007 Exercisable at December 31, 2007 Shares 1,739,670 199,500 (243,600) (25,050) 1,670,520 269,251 (406,950) (71,325) 1,461,496 139,188 (573,374) (98,377) 928,933 593,633 Weighted Average Exercise Price $ 4.09 11.09 3.37 5.58 $ 5.01 15.93 3.09 11.11 $ 7.33 15.98 4.24 14.80 9.47 $ 6.15 Weighted Average Remaining Contractual Term Aggregate Intrinsic Value ($000) 4.97 3.07 $ 9,617 $ 8,116 43 44 2007 AAON Annual Report The weighted average grant date fair value of options granted during 2007 and 2006 was $7.07 and $6.70, respectively. The total intrinsic value of options exercised during the year ended December 31, 2007 and 2006 was $8.7 million and $5.0 million, respectively. The cash received from options exercised during the year ended December 31, 2007 and 2006 was $2.4 million and $1.3 million, respectively. The impact of these cash receipts is included in financing activities in the accompany Consolidated Statements of Cash Flows. A summary of the status of the non–vested stock option shares as of December 31, 2007, is as follows: Weighted Average Nonvested at January 1, 2007 Granted Vested Forfeited Nonvested at December 31, 2007 Shares 415,980 108,250 (100,678) (88,252) 335,300 Grant Date Fair Value $ 6.09 7.50 6.10 6.68 $ 6.49 The total fair value of shares vested during the year ended December 31, 2007 was approximately $449,000. The Company also grants restricted stock awards to key employees and directors. These awards are recorded at their fair value on the date of grant and compensation cost is recorded using straight–line vesting over the service period. The weighted average grant date fair value of restricted stock awards granted during 2007 was $20.85 per share, total grant date fair value of approximately $811,000. As of December 31, 2007, there was no aggregate intrinsic value of restricted stock awards. For the year ended December 31, 2007, the Company recognized approximately $56,000 in pre–tax compensation expense in the Consolidated Statements of Income related to restricted stock awards. In addition, as of December 31, 2007, unrecognized compensation cost related to non–vested restricted stock awards was approximately $734,000 which is expected to be recognized over a weighted average period of 2.0 years. A summary of restricted stock activity under the plan as of December 31, 2007, is as follows: Options Shares Nonvested at January 1, 2007 Granted Exercised Forfeited or Expired Outstanding at December 31, 2007 Exercisable at December 31, 2007 – 38,900 – (1,050) 37,850 – Weighted Average Remaining Contractual Term Aggregate Intrinsic Value ($000) 9.50 – $ – $ – During 2007, the Compensation Committee of the Board of Directors authorized and issued restricted stock awards to the key employees and directors of the Company. The restricted stock award program offers the opportunity to earn shares of AAON Common Stock over time, rather than options that give the right to purchase stock at a set price. Restricted stock awarded to directors vest one–third each year. All other restricted stock awards vests at a rate of 20% per year. Restricted stock awards are grants that entitle the holder to shares of Common Stock subject to certain terms. The fair value of option grants is based on the fair market value of AAON Common Stock on the respective grant dates, reduced for the present value of dividends. SFAS 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation costs (excess tax benefits) be classified as financing cash flows. For the twelve months ended December 31, 2007 and 2006, $3.0 million and $1.9 million respectively, of such excess tax benefits from share based payment plans was classified as financing cash flows. 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 Company’s Common Stock. If either of these events occurs, upon exercise the holder (other than a holder owning more than 15% of the outstanding stock) will receive the number of shares of 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. 9. Stock Repurchase Following repurchases of approximately 12% of its outstanding Common Stock between September 1999 and September 2001, the Company announced and began another stock repurchase program on October 17, 2002, targeting repurchases of up to approximately 2.0 million shares of its outstanding stock. On February 14, 2006, the Board of Directors approved the suspension of the Company’s repurchase program. Through December 31, 2006, the Company had repurchased a total of 1,886,796 shares under this program for an aggregate price of $22,034,568, or an average of $11.68 per share. The Company purchased the shares at the current market price. On November 6, 2007, the Company began a new stock repurchase program, targeting repurchases of up to approximately 10% (1.8 million shares) of the outstanding stock of the Company from time to time in open market transactions at prevailing market prices. Through December 31, 2007, the Company had repurchased a total of 690,300 shares under this program for an aggregate price of $13,012,199, or an average price of $18.85 per share. On July 1, 2005, the Company entered into a stock repurchase arrangement by which employee participants in AAON’s 401(k) savings and investment plan are entitled to have shares of AAON stock in their accounts sold to the Company to provide diversification of their investments. The maximum number of shares to be repurchased is unknown under the program as the amount is contingent on the number of shares sold by employees. Through December 31, 2007, the Company repurchased 501,075 shares for an aggregate price of $7,712,287, or an average price of $15.39 per share. The Company purchases the shares at the current market price. On November 7, 2006, the Board of Directors authorized the Company to repurchase shares from certain directors following their exercise of stock options. The maximum number of shares to be repurchased is unknown under the program as the amount is contingent on the number of shares sold by directors. Through December 31, 2007, the Company repurchased 260,625 shares for an aggregate price of $5,232,188, or an average price of $20.08 per share. The Company purchases the shares at the current market price. 45 46 2007 AAON Annual Report 10. Dividends On February 14, 2006, the Board of Directors voted to initiate a semi–annual cash dividend. Previously, the Company paid Board of Director approved semi–annual dividend payout of $0.20 per share. The Board of Directors approved future dividend payments of $0.16 per share related to the stock split effective August 21, 2007. Dividends were declared to shareholders of record at the close of business on June 11, 2007 and December 13, 2007 and paid on July 2, 2007 and January 3, 2008. The company paid cash dividends of $5.0 million ($2.5 million paid in January and July 2007, respectively) and declared dividends payable of $2.9 million for the year ended December 31, 2007. The Company paid cash dividends of $2.5 million and declared dividends payable of $2.5 million for the year ended December 31, 2006. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated March 10 2008, accompanying the consolidated financial statements and management’s assessment of the effectiveness of internal controls over financial reporting included in the Annual Report of AAON, Inc. on Form 10–K for the year ended December 31, 2007. We hereby consent to the incorporation by reference of said reports in the Registration Statement of AAON, Inc. on Form S–8 (File No. 333–52824, effective December 28, 2000). Exhibit 23.1 11. 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. Tulsa, Oklahoma March 10, 2008 12. Quarterly Results (Unaudited) The following is a summary of the quarterly results of operations for the years ending December 31, 2007 and 2006: /s/ Grant Thornton LLP 2007 Net sales Gross profit Net income Earnings per share: Basic Diluted 2006 Net sales Gross profit Net income Earnings per share: Basic Diluted March 31 June 30 September 30 (in thousands, except per share data) December 31 Quarter Ended $58 ,628 15,722 6,317 0.34* 0.33* $70,835 15,598 6,877 0.37* 0.36* $70,907 13,640 5,382 0.29* 0.28* $62,147 12,409 4,580 0.25 0.24 March 31 June 30 September 30 (in thousands, except per share data) December 31 Quarter Ended $53,620 10,384 3,743 0.20* 0.20* $59,137 10,119 3,455 0.19* 0.18* $64,153 13,591 5,397 0.29* 0.28* $54,550 9,796 4,538 0.25* 0.24* *Reflects three–for–two stock split effective August 21, 2007. 47 48 2007 AAON Annual Report I, Norman H. Asbjornson, certify that: I, Kathy I. Sheffield, certify that: 1. I have reviewed this Annual Report on Form 10–K of AAON, Inc. 1. I have reviewed this Annual Report on Form 10–K of AAON, Inc. CERTIFICATION CERTIFICATION Exhibit 31.1 Exhibit 31.2 2. Based on my knowledge, this 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 report; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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; 3. Based on my knowledge, the financial statements, and other financial information included in this 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: 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; 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; 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 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 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): 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 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. 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 11, 2008 49 /s/ Norman H. Asbjornson Norman H. Asbjornson Chief Executive Officer Date: March 11, 2008 /s/ Kathy I. Sheffield Kathy I. Sheffield Chief Financial Officer 50 2007 AAON Annual Report CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002 Exhibit 32.1 Exhibit 32.2 In connection with the Annual Report of AAON, Inc. (the “Company”), on Form 10–K for the year ended December 31, 2007, 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. § 1350, as adopted pursuant to § 906 of the Sarbanes–Oxley Act of 2002, that: In connection with the Annual Report of AAON, Inc. (the “Company”), on Form 10–K for the year ended December 31, 2007, 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. § 1350, as adopted pursuant to § 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 (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. (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. March 11, 2008 /s/ Norman H. Asbjornson March 11, 2008 Norman H. Asbjornson Chief Executive Officer /s/ Kathy I. Sheffield Kathy I. Sheffield Chief Financial Officer 51 52 2007 AAON Annual Report Officers Board of Directors Norman H. Asbjornson has served as President and a director of the Company since 1988. Mr. Asbjornson has been in senior management positions in the heating and air conditioning industry for over 40 years. Kathy I. Sheffield became treasurer of the Company in 1999 and Vice President in June of 2002. Ms. Sheffield previously served as Accounting Manager of the Company from 1988 to 1999. Robert G. Fergus has served as Vice President of the Company since 1988. Mr. Fergus has been in senior management positions in the heating and air conditioning industry for over 40 years. Norman H. Asbjornson President/CEO John B. Johnson, Jr. Secretary Anthony Pantaleoni has served as a director of the Company since 1989. Mr. Pantaleoni is of counsel to Fulbright & Jaworski LLP in New York, New York. Charles C. Stephenson, Jr. has served as a director of the Company since 1996. From 1987 to January 2006, Mr. Stephenson served as Chairman of the Board of Vintage Petroleum, Inc., based in Tulsa, Oklahoma. David E. Knebel has served as Vice President of Sales for the company since 2005. Mr. Knebel has been in the heating and air conditioning industry for 38 years, holding positions in design, research, software development, engineering, teaching, sales and senior management. John B. Johnson, Jr. has served as Secretary and a director of the Company since 1988. Mr. Johnson is a member of the firm of Johnson, Jones, Dornblaser, Coffman & Shorb, which serves as General Counsel of the Company. 53 Jack E. Short was elected to the Board in July 2004 and is the Chairman of the Audit Committee. Mr. Short was employed by PriceWaterhouseCoopers for 29 years and retired as the managing partner of the Oklahoma practice in 2001. Arthur (Chip) H. McElroy, II was elected as a director of the company in 2007. From 1997 to present, Mr. McElroy has served as President and CEO of McElroy Manufacturing, Inc., a manufacturer of fusion equipment and fintube machines. Ken Lackey was elected as a director of the Company in 2007. From 2001 to present, Mr. Lackey has served as CEO and president of NORDAM, a privately held aerospace company. Corporate Data Transfer Agent and Registrar–Progressive Transfer Company, 1981 East Murray-Holladay Road, Suite 200, Salt Lake City, Utah 84117 Auditors–Grant Thornton LLP, 2431 East 61st Street, Suite 500, Tulsa, Oklahoma 74136 Investor Relations–Jerry Levine, 105 Creek Side Road, Mt. Kisco, New York 10549, Ph: 914-244-0292, Fax: 914-244-0295, Jerry.levine@worldnet.att.net Executive Offices–2425 South Yukon Avenue, Tulsa, Oklahoma 74107 General Counsel–Johnson, Jones, Dornblaser, Coffman & Shorb–2200 Bank of America Center, 15 West Sixth Street, Tulsa, Oklahoma 74119 Common Stock–NASDAQ-AAON 54 2007 AAON Annual Report THANKS TO OUR EMPLOYEES WILLIAM ABBOTT MARIA ARREDONDO SHARRON ABERCROMBIE MARIA ARROYO DE CIRIACO DAVID ARTIAGA Y NORMAN ASBJORNSON SCOTT ASBJORNSON ROBERT ASHBY GARY ASHMORE DWIGHT AUSTIN IVAN AVALOS JESUS AVELAR SALDIVAR ERNESTO AVILA JOSEPH AVILA NORA BACKUS RICHARD BACKUS JASWINDER BADESHA JAHANGIR BAHRAQMI DWIGHT BAKER ERIC BAKER JOHN BALDWIN SARBJIT BANWAIT CARLOS BARAJAS CAROLYN BARBER RAY BARBER CANDY BARBOSA JUSTIN BARLETT KIONTE BARNES DAVID BARNETT CESAR BARRAZA MARIBEL BARRIOS MARCUS BLACK VICKIE BLACK KEVIN BLACKBOROW BRIAN BLACKMON MARIA BLANCO DAVID BLEVINS JIMMY BLEVINS JUSTIN BLEVINS AARON BODOVSKY GENE BOESE JAMES BOND ALEXANDER BOTELLO ANTHONY BOTELLO ROSENDO BOTELLO SHAWN BOUGH KAY BOX DEMETRIUS BOYD JOHN BOYD BRIAN BRADFORD MYOSHIA BRADLEY CHRISTOPHER BRANTLEY RAYNOR BRENTON ARLANDO BREWER BOBBY BREWER DAVID BRICE JASPER BRITT ARLUNDA BROOKS MITCHELL BROOKS NEREYDA BARRIOS DE PEREZ DAVID BROWN ROSA BARRO ESTHER BARRON ANDREW BASS MICHAEL BASS JUSTIN BATEMAN STUART BAUGH ELLIOTT BAYHYLLE JASON BAZAN SHANNON BECK ELOY BELLO-CRUZ GUZMAN BENITEZ OFELIA BENITEZ BONNIE BENSON IDA BERMUDEZ ROLAND BERRY SERGIO BESERRA THOMAS BIRD JESSICA BIRDWELL CHERYL BIRMINGHAM JERMAINE BROWN MITCHELL BROWN JAMES BRUCE PHILLIP BRUCE MACEO BRUMLEY WILLIAM BRYANT ANNA BUI BANG BUI KELLI BURKES BILLY BURNS MONICA BURNS SHANNON BURTCH DOUGLAS BURTRUM JOSEPH BUSH TINA BUSH WAYNE BUSH ANGELICA BUSTOS JOHN BUTLER JOHNNIE BUTLER LUIS ACOSTA MARIA D. ACOSTA MARIA L. ACOSTA MARTHA ACOSTA ROGELIO ACOSTA GUERRERO ANDRES ACOSTA-LUJAN DANIEL ADAIR ENRIGUETA ADAME GARY ADAMS RODNEY ADAMS ISAAC ADERINBOYE RITA ADIMARI MARIA AGUAYO ARTURO AGUILAR HUMBERTO AGUILAR PRITESH AHLUWALI ROSHANLAL AHLUWALIA JAMES AKINS DANIEL ALAGDON MARTHA ALANIS ENRIQUE ALAVALA IMELDA ALBA SOCORRO ALBA JULIO ALBINO NORMAN ALBRIGHT DEMARCO ALEXANDER JAMES ALEXANDER SHANNON ALFORD BRENDAN ALLEN DONALD ALLEN KEVIN ALLEN NORMAN ALLEN RAFAEL ALONZO TARIK ALSAADI FELIPE ALVARADO LINDA ALVARADO MICHAEL AMBURGEY CYNTHIA AMENT JEHAD AMIREH MARGARITO ANGELES WESLEY ANSELME ALFREDO ANTONIO URIEL ARELLANO GUERRA JOSE ARGUMEDO-RUIZ SESAR ARIAS RONDELL ARMSTRONG GARY ARNOLD 55 ROSA BUTLER BERRY BUZZARD DORA CADENA CLEVELAND CAGE, JR. STEVEN COATNEY KENNETH COCHRAN BARBARA COLEMAN DARREN COLEMAN MARTHA CALDERAS-MOSQUEDA LATOYA COLEMAN MARGARITO CALDERON DANIELLE CALHOUN JORGE CALIXTO ELIZABETH CALVILLO LAZARO CAMA JOSE CAMAS-PADILLA DAVID CAMPBELL ARTHUR CANDLER JORGE CARCAMO RONALD COLLINS CHRISTOPHER COMBS KATHLEEN COMPTON DALE CONKWRIGHT JONATHAN CONNELL GERARDO CONTRERAS MARK COOK SHERITTA COOKS MICHAEL COOLIDGE HERMES CARCAMO-CASTRO SCOTT COON ERIC CARDENAS MARIA CARDENAS JUSTIN CARDOZA CARL CARPENTER SHAWN CARR MODESTO CARRERA VINCENT CARSON ALEJANDRO CARTAGENA JAMES CARTER ALFREDO CASIMIRO SOLEDAD CASTRO JOSE CASTRO M MARIA CERDA JUSTO CHAGOYA GUADALUPE CHAIREZ-GALAN PATRICK CHAPMAN SERGIO CHARLES RASEAN CHARVIS CLARK CHASE JOSH CHATTILLON ADALBERTO CHAVEZ GREGORY CHAVEZ JOHN CHAVEZ DALE CHERRY DANIEL CHERRY MICHAEL CHERRY ADAN CHICAS DONNA COONFIELD JAMES COOPER ELAINE CORKHILL ALBERTO CORONA BLANCA CORONA HERON CORONA ROBERTO CORONA EDUARDO CORTEZ ROSA CORTEZ SERGIO COTERO JOHN COTTON, III WESLEY COVEY BILLY COX CHRISTINE COX JERRY COX JOHN COX PATRICK COX ADRIAN CRABTREE RICHARD CRAITE STEVEN CRASE DEVIN CREECH JUAN CRESPO-MAISONET DALE CREVAR MIKEL CREWS DARRELL CROW DARRELL CROW, JR. DRUMMOND CROWE CAROLYN CRUTCHFIELD WILLIAM CHRISTOPHER MAGNOLIA CUADROS DE SANCHEZ GEORGE CLARK JOHN CLARK MORRIS CLARK FLOYD CLEGHORN WILLIAM CLEVELAND VICTORY CULLOM, II ROBERT CUMMINGS JAMES CURLEY GENE CURTIS BOGDAN CZEMIAWSKI CARLOS BRISENO GUERRERO WARREN CASTLEBERRY ANGEL GARCIA JESUS GARCIA LAURA GARCIA MARIO GARCIA MAXIMO GARCIA NICKLAUS GARCIA ROBERTO GARCIA WILSON GARCIA MARIA GARCIA GARCIA GLITER GARCIA LOPEZ MIGUEL GARCIA-SUAREZ JOHNNY GARDNER, JR. NORMA GARIBAY JAMIE GARLISI STACY GARRETT PATRICK GARRETT, SR. CARLOS GARZA JORDON GARZA RALPH GASAWAY MIKE GATELEY STEVE GEARY JAMES GEORGE SANTONIA GIBSON AMRIK GILL DARRYL GILLIAM, II WILBERT GILMORE VINCENT GLOVER GARY GOFF EMMETT GOINS HECTOR GOMEZ HUMBERTO GOMEZ JOSE GOMEZ MARIA GOMEZ MOISES GOMEZ JOSE GOMEZ-MORENO NICK DABIJA CANDY DAILEY CHANH DANG GWENDOLYN DANIELS JOHN DANIELS MARQUES DARBY WILLIAM DAUGHERTY ANGELA DAVIS BYRON DAVIS CAROLYN DAVIS CATHY DAVIS JERRY DAVIS MARLEITTA DAVIS RICHARD DAVIS JAMES DAVIS, III WILFREDO DE JESUS OTILIA DE JONES MATILDE DE LA TORRE GWENDOLYN DECKARD BOBBY DEGRAFFENREID MAGALI DEJESUS ISMAEL DELAPAZ EVA DELATORRE LUCERO DELEON MENDOZA ALBERTO DELEON-CASTILLO ALVARO DELEON-MEDOZA GUADALUPE DELGADO LUIS DELGADO JUANA DELOBO ANDRES DELOS SANTOS RAQUEL DELUNA RODRIGO DELUNA JATINDER DEOL SURJIT DEOL EUFEMIO DEPAZ VICENTE DEPAZ-MEDINA DERRICK DESTRO AUDENCIA DEVILLA ROY DEVILLE CHARLES DEWEESE SOLEDAD DIAZ HEATHER DIETLIN CARL DIKA MELANIE DIXON HOMER DODD RICKEY DODSON MARTIN DOMINGUEZ PABLO DOMINGUEZ WILBER DOMINGUEZ SEAN DONALD JENNIFER DOSSMAN JODI DOTY HAROLD DOUGLAS ERIC DOWNING JUAN DUARTE CATHRYN DUBBS JERROLD DUBBS BRIAN DUCKETT CAROLYN DUESLER CRAIG DUKE LINDA DUNEC BUDDY DUNN CORTNEY DUNN ISAAC DUNPHY JASON DUNPHY RALPH DURBIN ALEJANDRO DURON RANDY DWIGGINS ADRIAN DYE WENDELL EASILEY DAVID ECHEVARIA ANDREW ECKERT ALSON EDWARDS GARY EDWARDS ABBAS ELHORCHI BETTY ELI EARL ELLIOTT HARVEY ELLIS TINISHA ENGLISH CARL EPPS, II NORBERTO ESPARZA-TORRES JOSE ESPINOSA JOSE ESQUIVEL EARL ESTEP JESUS ESTRADA-GONZALEZ STEPHEN ETTER GILDA ETUMUDOR GREGORY EUBANKS OTIS EVANS REGINALD EVERIDGE, JR. SHAWN FAIRLEY KATHY FALCONER JOSE FELIX-GALVAN ROBERT FERGUS ELIZABETH FERGUSON CATALINA FERNANDEZ DAVID FERNANDEZ SALVADOR FERNANDEZ ANDREW FINCH JESSE FINCH STERLYN FINCH BRUCE FISHER JASON FISHER ANTHONY FIZER WAYNE FLASKA RAY FLETCHER COPOTENIA FLETCHER, JR. CAROLINA FLORES EFIGENIA FLORES JUANA FLORES LAURA FLORES DEBRA FLOYD MITCHELL FLOYD RUBY FLOYD VICKY FLOYD MARK FLY HECTOR FONTANEZ-ZAYAS KENNETH FONTENOT SHARON FONTENOT SHEILA FORREST CHRISTOPHER FOSTER FREDERICK FOSTER JOSEPH FOWLER LORETTA FOWLKES KENNETH FOX KENNETH FOYIL DUDLEY FRANCIS PHILLIP FRANK JASON FRANKLIN WARREN FRANKLIN REVONDA FRANKS CURTIS FRAZEE GARY FREDERIKSEN, JR. OLGA FRENCH ANGEL FRIAS DANIEL FRIAS ELBERT FULLER WADE FULLER REGINALD FULSOM, JR. ANGELIA FULTON CREWS RONY GADIWALLA RANULFO GALICIA MALISSA GALINDO MARIA GALINDO MA GALVAN MARIA GALVAN YOLANDA GALVAN ALVARO GARCIA AMBER GARCIA ANDRES GARCIA 56 2007 AAON Annual Report JUAN GOMEZ-OLMOS DANIEL GOMEZ-SIGALA CHRISTOPHER GONZALES ADRIAN GONZALEZ ALEX GONZALEZ MANUEL GONZALEZ MARTIN GONZALEZ NAYELI GONZALEZ VICTOR GONZALEZ BARRY GOODSON JAMES GOREE STEPHEN GOTCHER DALE GRAHAM BUENAS GRANADOS CARLA GRAVES ZAINAB GRAVES MARIA GRAY TYRA GRAY JESSE GREEN, JR. KELLI GREER BRANDON GRIFFIN CODY GRIFFIN JOHN GRIFFIN RONALD GRIMES DAN GRINBERGS DANIEL GROFF RAMON GUERRERO JOSHUA GUITAR REMIA GUTHERY MANUEL GUTIEREZ ISAAC GUTIERREZ RAQUEL GUTIERREZ EVELYN GUTIERREZ LAINEZ ERASMO GUZMAN NANCY HACKNEY JACK HALL KELLY HALL STEPHEN HALL LESLIE HALL, JR. RITA HALLER SCOTT HAMILTON OTIS HAMILTON JEFFREY HAMMER SAM HAMMOUD ROBERT HANNA DONALD HARDEN MARQUIS HARLIN DONALD HARMON KENNY HARRIS STACEY HARRIS ROBI HARTMANN HEATHER HASKINS DONALD HATLEY JEREMY HAWKE BILLY HAWLEY, JR. WILLIE HAYES BRADLEY HAYNES TEMESIA HEATH THEODORE HEATH TIM HEFFLIN STEPHEN HEGVOLD DANIEL HENDERSON TYSON HINTHER CLYDE HITCHYE BON HOANG SANDRA HOFFMAN BRYAN HOLLAND JAMES HOLLINGSWORTH DONNA HOLLOWAY LAWRENCE HONEL STEPHEN HOOVER SAMANTHA HOPKINS TERRI HORN VICTORIA HORNER WILBURN HORNER, JR. DANIEL HORRELL JOSHUA HORST JERRY HOUSTON DAVID HOWARD LARRY HOWARD CLARENCE HUBBELL LYDIA HUDSON PHILIP HUDSON PHILIP HUDSON, JR. ANTHONY HUFFMAN BILLY HUGHART JIMMY HUGHES ROSARIO HUIZAR ROBERTO HUNT DEMETRIUS HENDERSON BRENDA HURTADO MIKE HENSLEY ALVARO HERNANDEZ ARMANDO HERNANDEZ CORCINA HERNANDEZ EDUARDO HERNANDEZ FRANCISCO D. HERNANDEZ FRANCISCO O. HERNANDEZ JOSE HERNANDEZ LILY HERNANDEZ LUIS HERNANDEZ MARIA HERNANDEZ MARIANO HERNANDEZ MAYTE HERNANDEZ OSCAR HERNANDEZ DONALD HICKMAN DANNY HIDALGO TAKEO HIGA BRENDA HIGGINS DEWAYNE HIGHTOWER PAUL HILL JEFFERY HINES JUAN HINOJOSA RONALD HUTCHCRAFT GARY HUTCHINS GARY HUTCHINSON TAN HUYNH OKECHUKWU IBEH SAMUEL INGRAM ANTHONY INKTON FIRDOUS IRANI TIM IRWIN MELHAM JABR BELINDA JACKSON JEFF JACKSON MAVIS JACKSON, JR. DELLA JACOBS DANNY JACOT JOSE JAMAICA RITA JAMAICA MCKINLEY JAMES WILBUR JAMES FRANCES JARAMILLO JASON JEWELL GENELLE JIMBOY ALEJANDRO JIMENEZ J. ROSARIO JIMENEZ MARIA JIMENEZ RAUL JIMENEZ VINCENT JIMENEZ JUAN JIMENEZ, JR. RICARDO JIMENEZ MONTELONGO PEDRO JIMENEZ-DELFIN FREDERICK JIMMERSON KAREN JOBE ED JOHNSON JESSICA JOHNSON LEROY JOHNSON REX JOHNSON SYLVIA JOHNSON WILL JOHNSON THURLIN JOHNSON, II PETE JOHNSON, JR. WILLIAM JOHNSON, JR. ANTONIO JONES DANNY JONES DAVID JONES DJUAN JONES JAMIETRIS JONES KELLI JONES RENEE JONES ROSE JONES GEORGE JONES, JR. JAMES JONES, JR. JASON JORDAN FERNANDO JUAREZ JAIME JUAREZ PATRICK KAISER BRIAN KASTL RICHARD KEATON DONALD KEELER AARON KELLY DANIEL KEMP GREGG KENNEDY CHRISTINE KEY GO KHAM MOHAMMED KHAN PAVEL KHARABORA KIRK KHILLINGS NANG KHUP RENA KIGHT ALAN KILGORE ANDREW KILGORE BOBBY KILGORE THANG KIM MICHAEL KIMMONS LORI KING RUSSELL KING STEPHEN KINSEY ALEKSANDR KIRYUKHIN GEORGE KLICK FEDIR KLYUCHNYK DAVID KNEBEL CLYDE KNOX ROBERT KNUTH ANATOLI KONOVALCHUK JAMES KOSS EDWARD KRACKE, II ROBERT KRAFJACK MIKHAIL KRUPENYA KARL KUENEMANN MIKE LAFOND JEANETTE LAIRD RENATO LALATA GEORGE LAM COLE LAMBERT LISA LONG LINDA LONGORIA ALONZO LOPEZ ANA LOPEZ ARTURO LOPEZ MARGARITO LOPEZ RAUL LOPEZ THOMAS LOPEZ MA DE LOPEZ CUEVA JOHNNY LOPEZ, JR. NICK LORBETSKIE VINCENT LOWE PAUL LOWERY CHEVONCO LUCAS ROBERT LUCIDI JARRAD LUDLOW QUANNAH LUDLOW ANDREA LUECK JAMES LUKER ANA LULE KAREN MARTINEZ OBDULIA MARTINEZ JOHNNY MERRELL AUBREY METCALF, JR. FRANCISCO MARTINEZ LEON VIVIAN MEYER JUAN MARTINEZ-RUIZ BEVERLEY MASON JAMES MASON ARTURO MATUL RON MAUCH ANTONIO MAURICIO LEONARD MAXWELL DUANE MAYFIELD JACQUELINE MAYFIELD TERRELL MAYFIELD VLADO MAZILICA COURTNEY McAFEE DEBORAH McATEER TINA McBEATH ROBERT McBOWMAN CHRISTOPHER McCLAIN DIRK McCLELLAN MOMCILO MIJAKOVAC RONALD MIKEL BRENDA MIKESKA RUSSELL MILE RANULFA MILIAN CHRIS MILLER MYKEA MILLER DUANE MILLS MICHAEL MILTON BRIAN MINGLE BRUCE MINTON SCARLETT MIRANDA RUSSELL MITCHELL JOHNNY MIZE JAY MODISETTE RONALD MODLIN IRMA MOGUEL ERIC MULLINIKS ALLEN MUMPHREY TUAL MUNG JESUS MUNOZ EDUARDO MURILLO JOHNNY MUSGRAVE JUNE MUSGRAVE DAVID MYERS ASAD NAKHAEI SING NANG VINCENT NASH GO NAULAK MARIA NAVA MAHENDRAN NAVARATNAM ABEL NAVEJAS CLAYTON NEAL SAMUEL NEALE NATALIE NEILSON NATHANIEL NELSON RONALD NELSON CHRISTOPHER LUMBERT MICHAEL McCLELLAND BRAULIO MOISES-LEE CARLOS NEVARA NEGRON JOSE DEL CARMEN LANDERO SANCHEZ MARIANA LUNA DORIS McCLOUD ROY McCONNELL DEBRA McCOWAN KEVIN McCOWAN JOSE MOLINA STAN MOLOUCH STEVEN MOLSTER JOSE MONREAL WESLEY McCOWAN, JR. MARIA MONSIVAIS PEDRO NEVAREZ DUNG NGUYEN HOANG-CHI NGUYEN THANH NGUYEN TIEN NGUYEN DEBORAH LANE DONALD LANEY UGIN LANG MICHAEL LAVALLEE JEFFREY LAWSON RONALD LAWSON MICHEL LEBEL JOSE LEBRON JACQUELINE LEE RHONDA LEE MATTHEW LEEPER PATRICIA LENNOX ALBERTO LEON-BENITEZ RONALD LESTER TIMOTHY LEWIS JIMMY LEWIS JR GILBERTO LEYVA MARC LICHTBLAU PING LIN JERRY LINCOLN THOMAS LINCOLN WILLIAM LINDSAY ANTHONY LITTLE JARED LITTLEJOHN MIKE LO VAN JOEL LOCKMILLER FRANKLIN LOGAN, JR. MASSOUD LOLOYAN KELLY LYBARGER GREGORY MACK JORGE MADRIGAL MONICA MAGANA OCTAVIO MAGANA N MAI BARBARA MALONE CARLOS MALONE NGIN MANG SUAN MANG ERIC MANN KENNETH MANN EVELYN MANNING PAULA McCRARY SHAWN McCRARY ROBERT McCULLEY KATHY McCULLOCH FLORENCE McDANIEL LOYD McDANIEL SHARRON McDANIEL JAMES McELROY DEBORAH McFARLIN GEORGINA MANZO DE BARRERA DEXTER McKINLEY ALVINO MARES CHRISTINA MARK WILLIAM MARKWARDT MA MARQUEZ DE-GILBREATH RANDY McKINNEY DOMINGO McKNIGHT JOSHUA McLAIN GINA MEANS MARGARITO MARQUINA-GONZALEZ JESUS MEDRANO ANA MARROQUIN JUANA MARROQUIN ECO MARSHALL JOSE MEJIA JIMMY MEKSAVANH JAMES MELDA FLORENTINO MARTIN-ROMO KEVIN MENDENHALL ALFREDO MARTINEZ BARBARA MARTINEZ JAVIER MARTINEZ JOSE MARTINEZ JUAN MARTINEZ MARIO MENDEZ JESUS MENDOZA JOSE MENDOZA ARTHUR MENDOZA, JR. VERNON MERCEAL, JR. PRIMITIVO MONTELONGO SANCHEZ CHRISTOPHER NICKOLES ENOC MONTES KASEY MONTGOMERY JON MOODY JAMES MOORE MARC MOORE MARIA MOORE TONY MOORE ISRAEL MORA JUAN MORA LAURA MORALES CARLOS MORAN RON MOREHEAD DAVID MORELAND BERTA MORENO MATTHEW MORGAN DAVID MORGERSON BRANDON MORRIS MATTHEW MORRISON MARCUS MORROW CLAYTON MOTE DARRELL MOTE ISSA MOUID THERESA MUISE KAREN NILES-BLAYER HANK NOESKE JERRY NOLAN ABDOLHOSSEIN NOORI CHRISTOPHER NORFLEET WILLIE NORFLEET ROBERT NORFLEET, JR. DEBRA NOTHNAGEL JESUS NUNEZ JOHN NUTT CHARLES NYLANDER MICHAEL O’BRIEN JAMES O’NEILL, JR. JAMES O’NEILL, SR. DEANGELO OAKLEY JOSE OCHOA ALEXANDER OFOSU CHRIS OGANS JOHN OGLE RUBEN OLAN GARCIA DUSTIN OLDEN MARIA OLIVAS DE TORRES LEE OLIVER, JR. 57 58 ISAGANI SAN AGUSTIN VIENCHA SIMMALAVONG JOSE RECIO-GOMES CAROLINA ROJAS-GONZALEZ VIVIAN SCROGGINS 2007 AAON Annual Report ANTHONY OLIVERAS JISEL OLIVEROS ERIC OLSON JOSE PINEDA WALTER PINTO KOSTA PIRUZESKI LUIS OQUENDO ALBERTO CLIFFORD PITCHFORD LETICIA ORONA MARGARITA ORONA KEVIN PITTSER BASANT POKHREL MARGARITA OROZCO DEHUIZAR RENU POKHREL VELMA POLLEY BLAKE POMEROY MICHAEL POOL PEGGY REDDEN JAMES REED FREEMAN REED, JR. MARGARET REEVES EVERETT REITZ ALBERTO RENDON DAVID RENEAU ISAGANI REQUINTINA OVIEDO REYES GONZALES TERRY ROMBACH RICHARD ROMO BOBBY ROSS DELINA ROSS ADAM ROUGELY DMITRI RUDNITSKI RICARDO RUIZ VICENTE RUIZ AVA RUSSELL GERARDO PORTILLO ALFREDO REYNA-MENERA NARINDER SAHOTA ADAN SALAZAR NORA SALAZAR WALTER SALAZAR J SALDIVAR JOSE SALDIVAR MIGUEL SALDIVAR VICTOR SALDIVAR DIANA SALINAS BEATRIZ SANCHEZ BETTY SANCHEZ ESTEVAN SANCHEZ EVA SANCHEZ SERAFIN SANCHEZ LUIS SANCHEZ-LOPEZ EDWIN SANCHEZ-MONTEZ IVELISSE SANCHEZ-RIVERA ALICIA SANDERS TANISHA SANDERS DAVINDERPAL SANDHU HARNEK SANDHU CARLOS OROZCO-TORRES CECILIO ORTEGA DANIEL OSBERN SANDRA OSBERN KATIE OSBORNE JENNIFER OVERMEYER ROBERT OWENS MARTIN OZURA-CARRILLO GUILLERMO PACHECO LUIS PACHECO EDMUNDO PAIZ J PANIAGUA NOEMI PANIAGUA BELMONTE JOSE PARDINAS JOSE PARRA SAUL PARRA XOCHIL PARTIDA CORRY PATTERSON VADEN PAULSEN TRAVIS PEARSON KIMBERLY PEEKS JOSE PENA CHRIS PENCZAK VLADIMIR PENIAZ SERGIO PERALTA ROLANDO PERES OSORIO CESAR PEREZ JUANA PEREZ JUSTINA PEREZ MARIA PEREZ SERGIO PEREZ ANDREW POSAS PHILLIP POWELL RUDY POWELL SHELDON POWELL GREG POWERS JEFFERY POWERS JOSE PRADO-HUERTA CODY PRATT TONY PRATT LEON PRICE, JR. SCOTT PRIES ALMA PUGA DAVID QUANG VAN GIOAN QUANG JESUS QUINONES JOSE QUINTERO JOHN QUINTON JAMES RAFUSE HEATHER REYNOLDS DAVID RICHARDS KIMBERLY RICHARDS DARWIN RICHARDSON SYLVESTER RICHARDSON ANGELA RIDEOUT DELMECIO RISER SHANNON RISER STEPHEN RISER FRANKLIN RISNER JAMES RITCHIE VERONICA RIVAS GENOVEVA RIVERA LAURA ROBERSON PAUL ROBERTS JOHN ROBERTS PHILLIP ROBERTSON, JR. ANN ROBINSON NIMALAKIRTHI RAJASINGHE BENTON ROBINSON MARY ROBINSON MICHAEL ROBINSON FERDINAN RALAT ANTONIA RAMIREZ JOSE RAMIREZ RAYMON RAMIREZ NANDY RAMIREZ B JOSE RAMON MARTINA RAMOS-RAMOS BRANDON RAMSEY MA LOURDES PEREZ PEREZ JERRY RAMSEY JOSEPH PERKINS LADRUE PETERS EMIL PETROV DANIEL PEURIFOY SONG PHAN RANDY PHELPS MAURICE PHENIX LOUIS PHILLIPS JEFF PICKERING MARK PIERCE PEDRO PINA-VALLES 59 JOSE RANGEL-ALVARADO MARIWAN RASUL SAFWAN RASUL ROBERT RATLIFF TERRY RATZLOFF ROBERT RAYNO THOMAS READ SANDRA READER JOSEPH REAGH DIEGO REBOLLAR FLOR REBOLLAR VOLODYMYR RODOVNSKY MICHAEL SANDOR, JR. DANIEL RODRIGUEZ DIANA RODRIGUEZ GILBERTO RODRIGUEZ HECTOR RODRIGUEZ JOHNNY RODRIGUEZ KARLA RODRIGUEZ MARIA RODRIGUEZ MELVIN RODRIGUEZ RIVELINO RODRIGUEZ ROSE RODRIGUEZ RUBEN RODRIGUEZ TERESA RODRIGUEZ AGUSTIN SANTANA REINALDO SANTANA HECTOR SANTIAGO MIGUEL SANTIAGO WENCESLAO SANTIAGO HUMBERTO SANTILLAN PEDRO SANTILLAN DAVID SAPICO DAVID SARANT RICHARD SATTERFIELD ERICK SAWYER WILLIAM SCHAROSCH JOSE RODRIGUEZ-CINTION RUSSELL SCHOONOVER J RODRIGUEZ-FLORES DWAYNE SCHWARTZ DON ROGERS LIDIA ROJAS NELSON ROJAS BRUMMETT SCOTT KENNETH SCOTT ROSMOND SCOTT MARCUS SEIP EDUARDO SERRANO HUGHGO SEWELL CARROL SHACKELFORD PEGGY SHANNON ALEXSANDR SHAPOVALOV VANESSA SHARP GREGORY SHAW MATTHEW SHAW THOMAS SHAW KATHY SHEFFIELD STEPHANIE SHELL KATHLEEN SHEPARD JACKIE SHEPHARD BARBARA SHIPMAN CONSUELA SHORE RASCHID SHOWOLE NELSON SIERRA CORY SIMMONS PATRICK SIMPSON KULWINDER SINGH MYRON SINGLETON RUSSELL SINGLETON RONALD SISNEROS MICHAEL SKINNER LARRY SLONE ADAM SMITH BRETT SMITH RENALDO SMITH RICARDO SMITH RYAN SMITH SWEETIE SMITH MICHAEL SMOLINIEC JULIO SOBERANIS MALCOLM SOLES IMELDA SOLIS IRASEMA SOLIS MARIA SOLIS NEMISIA SOLIS FELIX SOLORZANO-ROMO KEVIN SOUVANNASING ELDA SPEARS SUSAN SPENCER ALAN SPILLERS MICHAEL SPORTEL JESS ST GEORGE MIKE ST PIERRE LAWANA STANE DANIEL WILSON ISAAC WILSON JAMES WILSON WILLIAM WILSON THOMAS WIND MARK WINGER THOMAS WINGO WANDA WINKFIELD WHITNEY WINN MICAH WISDOM EDWARD WOFFORD CURTIS WOOD SAM WOOD JIM WYRICK LINDA WYRICK ECTOR YANCEY, JR. SHANA YINGLING KATHRYN YOUNG PATRICIA YOUNG DINAH YOUNGBLOOD JOSH YOUNGS NIKOLAY ZAGORODNIY AURORA ZAVALETA MERCEDES ZAVALETA JUAN ZERMENO VIRGINIA ZERMENO JUSTIN ZIMMERMAN SONDRA STANSELL MICHAEL STAPLETON CHARLES STARLING STEPHEN STEPP MICKEAL STEVENSON ARTNEY STEWART BRENT STOCKTON ADAM STOKER ALBERT STOKER TABATHA STOKLEY DEBRA STRASBOURG MICHAEL STRAUB BILLY STRENGTH CREMERIS TOWNS HA TRAN HAI TRAN PHUOC TRAN QUAN TRAN UT TRAN ROBERTO TREBINO ERIC TREIBER MARISOL TREJO CHARLES TREMBLAY MARTIN TREVINO-SALDANA HA TRINH ROSA TRUJILLO CARMEN SUAREZ BONILLA CHRISTOPHER TUBBS ROSA SUMMERS GARY SWARER SHBRONE SWYGERT MARCUS SYAS WASEEM SYED UD-DIN SYEDBASHIR ERIC SYPERT JAMES TABER PEDRO TALAVERA BRIAN TALLEY WILLIAM TANKERSLEY JESUS TAPIA JOE TART TENNA TATUM CHARLES TAYLOR DEBORAH TAYLOR ERIC TAYLOR JEFF TAYLOR THOMAS TAYLOR ANDREA TEAKELL KEVIN TEAKELL ROBERT TEIS JOSE TERRAZAS LEE THOMAS CHARLES THOMASON ASMOND THOMPSON TWJUAN THOMPSON WESLEY THURMOND, II CRYSTAL TINER WILLIAM TOBAR CHRISTOPHER TOLES MOLLY TOMPKINS GERARDO TORRES REINALDO TORRES GIRALDO TORRES-CHAVES MANUEL TORRES-TORRES JOSEPH TUBBS STEVE TULLOCH PAUL TURBE JEFFREY TURNER ARMANDO TUY PHYLLIS TYISKA JAMES TYO PERNELL UNDERWOOD MARIA URQUIZA YADIRA URQUIZA CARLOS VALDEZ RAQUEL VALDEZ DANG VANG SHANNON VANN JOHN VANNESS JOEL VANSCOY, JR. SALVADOR VAQUERA JULIO VASQUEZ DANNY VEGA ANTONIO VELASCO ROMAN VELASQUEZ JAMES VELDE ANGEL VENEGAS RUDY VENEGAS SALOME VERA LAURA VERGARA JAMES VERHAMME EFRAIN VILLA JAVIER VILLARREAL FRANCISCO VILLEDA SELINA VIRAMONTES CUONG VO SUONG VO TONG VO NING VUNG ROBERT WAGONER STEPHEN WAKEFIELD DIANA WALKER JERMAINE WALKER RODERICK WALKER THEODORE WALKER DAVID WALKUP PHILLIP WALLACE WILLIAM WALLACE LESLIE WALLIS, JR. MERLYN WALTERS STACEY WALTERS CHARLES WALTON YAN WANG GAYLE WARD BILLY WARDEN, II PERRY WARNER DONALD WASHINGTON SAM WASHINGTON VIELKA WASHINGTON JAMES WATLEY, JR. JOHN WEAVER DEMETRIA WEBB CHARLES WEEDEN ANTHONY WELCH DERRICK WELLESLEY DELORENCE WELLS SUSAN WERNER CAROLYN WESLEY SHARON WEST DEBORAH WHITAKER DAVID WHITE SARAH WHITE TIAJUANNA WHITE TIMOTHY WHITE CHRISTOPHER WHITESELL DAVID WHITLOCK TIMOTHY WHITTEN STEVEN WHORTON BILLY WILBURN SHAWN WILDE JACKIE WILES JERRY WILES RONALD WILKERSON SHERRI WILKINS JAMES WILKINSON DONNA WILLIAMS ROBERT WILLIAMS TOMMY WILLIAMS JAMES WILLIAMSON JARVORIS WILLIS 60 AAON, Inc. 2425 South Yukon Avenue • Tulsa, OK 74107 918.583.2266 • Fax: 918.583.6094 AAON Coil Products, Inc. 203 Gum Springs Road • Longview, TX 75602 903.236.4403 • Fax: 903.236.4463 AAON Canada Inc. 279 Sumach Drive • Burlington, Ontario Canada L7R3X5 905.631.9161 • Fax: 905.631.5753 aaon.com 

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