10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
[a]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
or
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________
 
Commission file number:  0-18953

AAON, INC.
(Exact name of registrant as specified in its charter) 
Nevada
87-0448736
(State or other jurisdiction
(IRS Employer
of incorporation or organization)
Identification No.)
2425 South Yukon, Tulsa, Oklahoma  74107
(Address of principal executive offices)
(Zip Code)
 
(918) 583-2266
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    a                                      No            


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     a                                     No                                             Not Applicable            
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer     a  
Accelerated filer            
Non-accelerated filer           
Smaller reporting company           
                                                   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes                                             No     a    

As of April 29, 2016, registrant had outstanding a total of 53,023,242 shares of its $.004 par value Common Stock.




PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
March 31, 2016
 
December 31, 2015
Assets
(in thousands, except share and per share data)
Current assets:
 
 
 
Cash and cash equivalents
$
17,248

 
$
7,908

Certificates of deposit
10,760

 
10,080

Investments held to maturity at amortized cost
15,195

 
12,444

Accounts receivable, net
42,001

 
50,024

Income tax receivable

 
4,702

Note receivable
25

 
23

Inventories, net
42,479

 
38,499

Prepaid expenses and other
2,483

 
533

Total current assets
130,191

 
124,213

Property, plant and equipment:
 

 
 

Land
2,233

 
2,233

Buildings
70,655

 
68,806

Machinery and equipment
148,645

 
143,100

Furniture and fixtures
11,661

 
11,270

Total property, plant and equipment
233,194

 
225,409

Less:  Accumulated depreciation
127,417

 
124,348

Property, plant and equipment, net
105,777

 
101,061

Certificates of deposit

 
1,880

Investments held to maturity at amortized cost

 
5,039

Note receivable
701

 
661

Total assets
$
236,669

 
$
232,854

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Revolving credit facility
$

 
$

Accounts payable
3,604

 
6,178

Accrued liabilities
34,435

 
37,235

Total current liabilities
38,039

 
43,413

Deferred revenue
1,154

 
698

Deferred tax liabilities
7,676

 
8,706

Donations
1,130

 
1,119

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued

 

Common stock, $.004 par value, 100,000,000 shares authorized, 53,059,669 and 53,012,363 issued and outstanding at March 31, 2016 and December 31, 2015, respectively
212

 
212

Additional paid-in capital

 

Retained earnings
188,458

 
178,706

Total stockholders' equity
188,670

 
178,918

Total liabilities and stockholders' equity
$
236,669

 
$
232,854

The accompanying notes are an integral part of these consolidated financial statements.

- 1 -




AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(in thousands, except share and per share data)
Net sales
$
85,422

 
$
76,768

Cost of sales
59,691

 
54,970

Gross profit
25,731

 
21,798

Selling, general and administrative expenses
8,913

 
8,317

(Gain) loss on disposal of assets
(8
)
 
5

Income from operations
16,826

 
13,476

Interest income, net
74

 
44

Other income (expense), net
117

 
(75
)
Income before taxes
17,017

 
13,445

Income tax provision
6,211

 
5,046

Net income
$
10,806

 
$
8,399

Earnings per share:
 

 
 

Basic
$
0.20

 
$
0.16

Diluted
$
0.20

 
$
0.15

Cash dividends declared per common share:
$

 
$

Weighted average shares outstanding:
 

 
 

Basic
53,061,058

 
54,083,897

Diluted
53,430,103

 
54,640,389

 
The accompanying notes are an integral part of these consolidated financial statements.

- 2 -



AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Total
 
(in thousands)
Balances at December 31, 2015
53,012

 
$
212

 
$

 
$
178,706

 
$
178,918

Net income

 

 

 
10,806

 
10,806

Stock options exercised and restricted
194

 
1

 
1,453

 

 
1,454

stock awards vested, including tax benefits
 

 
 

 
 

 
 

 
 

Share-based compensation

 

 
948

 

 
948

Stock repurchased and retired
(146
)
 
(1
)
 
(2,401
)
 
(1,054
)
 
(3,456
)
Dividends

 

 

 

 

Balances at March 31, 2016
53,060

 
$
212

 
$

 
$
188,458

 
$
188,670


The accompanying notes are an integral part of these consolidated financial statements.

- 3 -



AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Operating Activities
(in thousands)
Net income
$
10,806

 
$
8,399

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
3,171

 
2,804

Amortization of bond premiums
83

 
61

Provision for losses on accounts receivable, net of adjustments
123

 
(59
)
Provision for excess and obsolete inventories
137

 
41

Share-based compensation
948

 
438

Excess tax benefits from stock options exercised and restricted stock awards vested
(745
)
 
(1,098
)
(Gain) loss on disposition of assets
(8
)
 
5

Foreign currency transaction (gain) loss
(48
)
 
70

Interest income on note receivable
(7
)
 
(8
)
Deferred income taxes
(1,030
)
 
(443
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
7,900

 
4,286

Income taxes
6,734

 
1,286

Inventories
(4,117
)
 
(6,969
)
Prepaid expenses and other
(1,950
)
 
(301
)
Accounts payable
(3,129
)
 
(1,316
)
Deferred revenue
110

 
64

Accrued liabilities and donations
(3,730
)
 
(2,925
)
Net cash provided by operating activities
15,248

 
4,335

Investing Activities
 

 
 

Capital expenditures
(7,332
)
 
(3,587
)
Proceeds from sale of property, plant and equipment
8

 

Maturities of certificates of deposits
1,200

 
2,638

Maturities of investments
1,700

 
8,445

Proceeds from called investments
505

 
504

Principal payments from note receivable
13

 
14

Net cash (used in) provided by investing activities
(3,906
)
 
8,014

Financing Activities
 

 
 

Stock options exercised
709

 
1,082

Excess tax benefits from stock options exercised and restricted stock awards vested
745

 
1,098

Repurchase of stock
(3,456
)
 
(2,955
)
Net cash used in financing activities
(2,002
)
 
(775
)
Net increase in cash and cash equivalents
9,340

 
11,574

Cash and cash equivalents, beginning of period
7,908

 
21,952

Cash and cash equivalents, end of period
$
17,248

 
$
33,526


The accompanying notes are an integral part of these consolidated financial statements.

- 4 -



AAON, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)

1. General

Basis of Presentation
 
The accompanying unaudited consolidated financial statements of AAON, Inc., a Nevada corporation, and our operating subsidiaries, all of which are wholly-owned, (collectively, the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2015 is derived from audited consolidated financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year. Certain disclosures have been condensed in or omitted from these consolidated financial statements. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. All intercompany balances and transactions have been eliminated in consolidation.
 
We are engaged in the engineering, manufacturing, marketing and sale of air conditioning and heating equipment consisting of standard, semi-custom and custom rooftop units, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal heat pumps and coils.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP  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, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, the allowance for doubtful accounts, inventory reserves, warranty accrual, worker's compensation accrual, medical insurance accrual, income taxes and share-based compensation. Actual results could differ materially from those estimates.
 
Accounting Policies
 
A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no significant changes in our critical accounting policies.

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification.

We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, with the issuance of ASU 2015-14, the FASB amended the effective date for us to January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently assessing how ASU 2014-09 will impact our consolidated financial statements and notes thereto.


- 5 -



In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which will address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The ASU becomes effective in the annual reporting period beginning after December 31, 2017, including interim reporting periods. We do not expect ASU 2016-01 will have a material effect on our consolidated financial statements and notes thereto.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes several modifications to Topic 718. See further discussion in Note 11 of the Notes to the Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provides implementation guidance for Topic 606 on principal versus agent considerations. The effective date and transition requirements for the ASU are the same as ASU 2014-09. We are currently assessing how ASU 2016-08 will impact our consolidated financial statements and notes thereto.

In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which provides clarification for two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. The effective date and transition requirements for the ASU are the same as ASU 2014-09. We are currently assessing how ASU 2016-10 will impact our consolidated financial statements and notes thereto.

2.  Revenue Recognition
 
We recognize revenues from sales of products when the title and risk of ownership pass to the customer. Final sales prices are fixed based on purchase orders. Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being July - November of each year.
 
In addition, the Company presents revenues net of sales tax and net of certain payments to our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing HVAC units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer.

We are responsible for billings and collections resulting from all sales transactions, including those initiated by our Representatives. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. The Company is under no obligation related to Third Party Products.

The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives were $14.0 million and $14.0 million for the three months ended March 31, 2016 and 2015, respectively.

The Company also sells extended warranties on parts for various lengths of time ranging from 6 months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period.
 
3.  Investments
 
Certificates of Deposit – We held $10.8 million and $12.0 million in certificates of deposit at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, the certificates of deposit bear interest ranging from 0.30% to 0.90% per annum and have various maturities ranging from less than one month to approximately 12 months.
 
Investments Held to Maturity – Our investments held to maturity are comprised of $15.2 million of corporate notes and bonds with original maturities ranging from less than one month to approximately 12 months. The investments have moderate risk with S&P ratings ranging from AA+ to BBB-.
 

- 6 -



We record the amortized cost basis and accrued interest of the corporate notes and bonds in the Consolidated Balance Sheets. We record the interest and amortization of bond premium to interest income in the Consolidated Statements of Income.
 
The following summarizes the amortized cost and estimated fair value of our investments held to maturity as of
March 31, 2016 and December 31, 2015:
 
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
(Loss)
 
Fair
Value
March 31, 2016:
(in thousands)
Current assets:
 
 
 
 
 
 
 
 Investments held to maturity
$
15,195

 
$
5

 
$

 
$
15,200

Non current assets:
 

 
 

 
 

 
 

Investments held to maturity

 

 

 

Total
$
15,195

 
$
5

 
$

 
$
15,200

 
 
 
 
 
 
 
 
December 31, 2015:
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

Investments held to maturity
$
12,444

 
$

 
$
(16
)
 
$
12,428

Non current assets:
 

 
 

 
 

 
 

Investments held to maturity
5,039

 

 
(17
)
 
5,022

Total
$
17,483

 
$

 
$
(33
)
 
$
17,450


4.  Accounts Receivable

Accounts receivable and the related allowance for doubtful accounts are as follows:
 
 
March 31,
2016
 
December 31, 2015
 
(in thousands)
Accounts receivable
$
42,239

 
$
50,139

Less:  Allowance for doubtful accounts
(238
)
 
(115
)
Total, net
$
42,001

 
$
50,024

 
 
Three months ended
 
March 31,
2016
 
March 31,
2015
Allowance for doubtful accounts:
(in thousands)
Balance, beginning of period
$
115

 
$
171

Provisions for losses on accounts receivables, net of recoveries
123

 
(51
)
Accounts receivable written off

 
(8
)
Balance, end of period
$
238

 
$
112

 

- 7 -



5.  Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts.
 
 
March 31,
2016
 
December 31, 2015
 
(in thousands)
Raw materials
$
36,152

 
$
33,853

Work in process
3,741

 
2,522

Finished goods
3,480

 
2,881

 
43,373

 
39,256

Less:  Allowance for excess and obsolete inventories
(894
)
 
(757
)
Total, net
$
42,479

 
$
38,499

 
The related changes in the allowance for excess and obsolete inventories account are as follows:

  
Three months ended
 
March 31,
2016
 
March 31,
2015
Allowance for excess and obsolete inventories:
(in thousands)
Balance, beginning of period
$
757

 
$
714

Provisions for excess and obsolete inventories
137

 
41

Inventories written off

 

Balance, end of period
$
894

 
$
755


6.  Supplemental Cash Flow Information
 
 
Three months ended
 
March 31,
2016

March 31,
2015
Supplemental disclosures:
(in thousands)
Interest paid
$


$

Income taxes paid
$
518


$
4,203







Non-cash investing and financing activities:
 


 

Non-cash capital expenditures
(555
)

(71
)
 

- 8 -



7.  Warranties

The Company has warranties with various terms ranging from 18 months for parts to 25 years for certain heat exchangers. The Company has an obligation to replace parts or service its products if conditions under the warranty are met. 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.  

Changes in the warranty accrual are as follows:
 
 
Three months ended
 
March 31,
2016
 
March 31,
2015
Warranty accrual:
(in thousands)
Balance, beginning of period
$
8,469

 
$
8,130

Payments made
(653
)
 
(886
)
Provisions
314

 
861

Balance, end of period
$
8,130

 
$
8,105

 
 
 
 
Warranty expense:
$
314

 
$
861

 
8.  Accrued Liabilities

Accrued liabilities are as follows:

 
March 31,
2016
 
December 31, 2015
 
(in thousands)
Warranty
$
8,130

 
$
8,469

Due to representatives
9,575

 
10,597

Payroll
4,879

 
3,954

401(k) Contributions
966

 
3,054

Profit sharing
1,930

 
2,220

Worker's compensation
348

 
366

Medical self-insurance
699

 
676

Customer prepayments
2,497

 
2,895

Donations
600

 
600

Income tax payable
1,287

 

Employee benefits and other
3,524

 
4,404

Total
$
34,435

 
$
37,235

 
9.  Revolving Credit Facility

Our revolving credit facility provides for maximum borrowings of $30.0 million which is provided by BOKF, NA dba Bank of Oklahoma, formerly known as Bank of Oklahoma, N.A. ("Bank of Oklahoma"). Under the line of credit, there is one standby letter of credit totaling $0.8 million. Borrowings available under the revolving credit facility at March 31, 2016 were $29.2 million. Interest on borrowings is payable monthly at LIBOR plus 2.5%. No fees are associated with the unused portion of the committed amount. We had no outstanding balance under the revolving credit facility at March 31, 2016 and December 31, 2015. The termination date of the revolving credit facility is July 27, 2016.

As of March 31, 2016, we were in compliance with our financial covenants. These covenants require that we meet certain parameters related to our tangible net worth, total liabilities to tangible net worth ratio and working capital. At March 31, 2016, our tangible net worth was $188.7 million and met the requirement of being at or above $95.0 million. Our total liabilities to tangible net worth ratio was 0.25 to 1, and met the requirement of not being above 2 to 1. Our working capital was $92.2 million and met the requirement of being at or above $40.0 million.

- 9 -



10.  Income Taxes

Income tax expense for each of the three months ended March 31, 2016 and 2015 was $6.2 million, or 36.5% of pre-tax income, and $5.0 million, or 37.5% of pre-tax income, respectively. The Company’s estimated annual 2016 effective tax rate is approximately 36.0%. This differs from the U.S. federal statutory rate of 35% due principally to items such as state and local income taxes, the federal domestic activities deduction and state income tax credits. The Indian Employment Credit and Research and Development Credit were not extended until December 2015 for the 2015 and 2016 tax years. As such, the effective rate for the three months ended March 31,2016 is reduced for the impact of these credits while the effective rate for the three months ended March 31,2015 does not reflect these credits.
 
We file income tax returns in the U.S., state and foreign income tax returns jurisdictions. We are subject to U.S. examinations for tax years 2012 to present, and to non-U.S. income tax examinations for the tax years of 2011 to present. In addition, we are subject to state and local income tax examinations for the tax years 2011 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Taxes, which requires presentation of deferred tax assets and liabilities as non-current in a classified balance sheet. The ASU becomes effective in the annual reporting period beginning after December 31, 2016, including interim reporting periods. Early adoption is allowed as of the beginning of any interim or annual reporting period. The standard permits the use of the retrospective or prospective transition method. We early adopted the standard effective October 1, 2015, and have applied the retrospective transition method.

There are no prior period quantitative effects on the consolidated statements of income, stockholders' equity or cash flows.
 
11. Share-Based Compensation

We have historically maintained a stock option plan for key employees, directors and consultants (“the 1992 Plan”). The 1992 Plan provided for 14.9 million shares to be issued under the plan in the form of stock options. Under the terms of the 1992 Plan, the exercise price of shares granted may not be less than 85% of the fair market value at the date of the grant. Options granted to directors prior to May 25, 2004 vest one year from the date of grant and are exercisable for nine years thereafter. Options granted to directors on or after May 25, 2004 vest one-third each year, commencing one year after the date of grant. All other options granted vest at a rate of 20% per year, commencing one year after date of grant, and are exercisable during years 2-10.

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provides an additional 3.3 million 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 LTIP, non-qualified stock options and restricted stock awards have been granted with the same vesting schedule as the previous plan. Under the LTIP, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant.

The compensation cost related to unvested stock options not yet recognized as of March 31, 2016 is $2.9 million and is expected to be recognized over a weighted-average period of 2.2 years.

- 10 -




The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the three months ended March 31, 2016 and 2015 using a Black Scholes Model:
 
 
Three months ended
 
March 31, 2016
 
March 31, 2015
Director and Officers:
 
 
 
Expected dividend rate
$
0.22

 
$
0.18

Expected volatility
42.38
%
 
44.14
%
Risk-free interest rate
2.02
%
 
1.96
%
Expected life (in years)
8

 
8

 
 
 
 
Employees:
 

 
 

Expected dividend rate
$
0.22

 
$
0.18

Expected volatility
42.34
%
 
44.13
%
Risk-free interest rate
2.03
%
 
2.08
%
Expected life (in years)
8

 
8

 
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.
 
The following is a summary of stock options vested and exercisable as of March 31, 2016:
 
Range of
Exercise
Prices
 
Number
of
Shares
 
Weighted
Average
Remaining
Contractual Life
(in years)
 
Weighted
Average
Exercise
Price
 
Intrinsic
Value
(in thousands)
$4.31-$8.65
 
317,618

 
4.99
 
$
7.34

 
$
6,563

$8.70-$22.76
 
32,987

 
7.59
 
15.95

 
398

$23.57-$25.84
 
7,664

 
8.91
 
23.57

 
34

Total
 
358,269

 
5.31
 
$
8.48

 
$
6,995

 
The following is a summary of stock options vested and exercisable as of March 31, 2015:

Range of
Exercise
Prices
 
Number
of
Shares
 
Weighted
Average
Remaining
Contractual Life
(in years)
 
Weighted
Average
Exercise
Price
 
Intrinsic
Value
(in thousands)
$4.31-$7.18
 
331,944

 
4.04
 
$
5.71

 
$
6,246

$7.44-$8.17
 
15,300

 
6.19
 
7.65

 
258

$8.65-$23.57
 
152,175

 
6.98
 
8.84

 
2,388

Total
 
499,419

 
5.00
 
$
6.73

 
$
8,892


- 11 -




A summary of option activity under the plans is as follows:

Options
Shares
 
Weighted
Average
Exercise
Price
Outstanding at December 31, 2015
1,130,910

 
$
13.38

Granted
81,400

 
21.85

Exercised
(107,945
)
 
6.57

Forfeited or Expired
(20,132
)
 
17.22

Outstanding at March 31, 2016
1,084,233

 
$
14.63

Exercisable at March 31, 2016
358,269

 
$
8.48

 
The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $2.0 million and $3.2 million, respectively. The cash received from options exercised during the three months ended March 31, 2016 and 2015 was $0.7 million and $1.1 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.

Since 2007, as part of the LTIP, the Compensation Committee of the Board of Directors has authorized and issued restricted stock awards to directors and key employees. Restricted stock awards granted to directors vest one-third each year. All other restricted stock awards vest at a rate of 20% per year. The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends.

These awards are recorded at their fair value on the date of grant and compensation cost is recorded using straight-line vesting over the service period. At March 31, 2016, unrecognized compensation cost related to unvested restricted stock awards was approximately $6.0 million, which is expected to be recognized over a weighted average period of 2.2 years.

A summary of the unvested restricted stock awards is as follows:
 
Restricted stock
Shares
 
Weighted
Average
Grant Date
Fair Value
Unvested at December 31, 2015
410,023

 
$
18.78

Granted
91,385

 
20.78

Vested
(22,237
)
 
19.51

Forfeited
(5,740
)
 
18.53

Unvested at March 31, 2016
473,431

 
$
19.13


- 12 -




A summary of share-based compensation is as follows:
 
 
Three months ended
 
March 31,
2016
 
March 31,
2015
Grant date fair value of awards during the period:
(in thousands)
Options
$
780

 
$
657

Restricted stock
1,899

 
1,722

Total
$
2,679

 
$
2,379

Share-based compensation expense:
 
 
 
Options
$
337

 
$
152

Restricted stock
611

 
286

Total
$
948

 
$
438

Income tax benefit related to share-based compensation:
 
 
 
Options
$
713

 
$
1,076

Restricted stock
32

 
22

Total
$
745

 
$
1,098

 
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes several modifications to Topic 718 including: accounting for excess tax benefits and deficiencies; classifying excess tax benefits on the statement of cash flows; accounting for forfeitures; classifying awards that permit share repurchases to satisfy statutory tax-withholding requirement; and classifying tax payments on behalf of employees on the statement of cash flows. The ASU becomes effective for interim and annual reporting periods beginning after December 31, 2016.
The impact of adopting this ASU may be material. The Company cannot predict the impact as it is dependent of the Company’s stock price in the future, the timing of when restricted stock vests and the timing of when employees choose to exercise stock options. The changes for excess tax benefits and tax deficiencies will be applied prospectively. These changes will require the Company to report excess tax benefits and tax deficiencies as an income tax benefit or expense on the income statement rather than as a component of additional paid-in capital as it does now. Excess tax benefits and deficiencies will be treated as discrete items to the tax provision in the reporting period in which they occur.
Additionally, ASU 2016-09 will impact the calculation of diluted weighted average shares under the treasury stock method as the Company will no longer increase or decrease the assumed proceeds from an employee vesting in, or exercising, a share-based payment award by the amount of excess tax benefits or deficiencies taken to additional paid-in capital.
The Company plans to retrospectively apply the guidance for classification of the excess tax benefits in the statement of cash flows. The excess tax benefits are classified currently as both a cash inflow from financing activities and a cash outflow from operating activities in the statement of cash flows. Upon adoption, these will be classified as cash flows in operating activities as part of cash payments for taxes. The Company does not believe this change will have a material impact on the prior periods in the consolidated statement of cash flows.
The Company plans to retrospectively apply the guidance for classification of tax payments on employee’s behalf to classify these payments as cash outflows from financing activities. This is not expected to have a material impact of the consolidated statement of cash flows.

- 13 -



12.  Earnings Per Share

Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards.
 
 
Three months ended
 
March 31,
2016
 
March 31,
2015
 
(in thousands, except share and per share data)
Numerator:
 
 
 
Net income
$
10,806

 
$
8,399

Denominator:
 

 
 

Basic weighted average shares
53,061,058

 
54,083,897

Effect of dilutive stock options and restricted stock
369,045

 
556,492

Diluted weighted average shares
53,430,103

 
54,640,389

Earnings per share:
 

 
 

Basic
$
0.20

 
$
0.16

Diluted
$
0.20

 
$
0.15

Anti-dilutive shares:
 

 
 

Shares
481,572

 
124,114


13. Stockholders’ Equity

Stock Repurchase - The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases. The Company also has a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares in AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employee-participants. Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and employees for payment of statutory tax withholdings on stock transactions. Any other repurchases from directors or employees is contingent upon Board approval. All repurchases are done at current market prices.

Our repurchase activity is as follows:
 
Three months ended March 31,
Inception to date
 
2016
2015
Program
Shares
Total $
$ per share
Shares
Total $
$ per share
Shares
Total $
$ per share
Open market

$

$


$

$

3,669,221

$
56,507,802

$
15.40

401(k)
138,680

3,275,139

23.62

128,830

2,906,355

22.56

5,680,622

54,139,398

9.53

Directors and employees
7,604

180,362

23.72

2,100

48,295

23.00

1,851,164

15,020,523

8.11

Total
146,284

$
3,455,501

$
23.62

130,930

$
2,954,650

$
22.57

11,201,007

$
125,667,723

$
11.22


Dividends - At the discretion of the Board of Directors, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment.

Our dividends are as follows:
Declaration Date
Record Date
Payment Date
Dividend per Share
May 19, 2015
June 12, 2015
July 1, 2015
$
0.11

October 29, 2015
December 2, 2015
December 23, 2015
$
0.11




- 14 -



14. Commitments and Contingencies
 
We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company's business, financial position, results of operations or cash flows.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. This discussion contains or incorporates by reference “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the SEC or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled “Forward-Looking Statements” in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.

Overview

We engineer, manufacture and market air conditioning and heating equipment consisting of standard, semi-custom and custom rooftop units, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal heat pumps and coils. These products are marketed and sold to retail, manufacturing, educational, lodging, supermarket, medical and other commercial industries. We market our products to all 50 states in the United States and certain provinces in Canada. Foreign sales were approximately $4.3 million of our total net sales for the three months just ended and $2.8 million of our sales during the same period of 2015.

Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate. The uncertainty of the economy has negatively impacted the commercial and industrial new construction markets. A further decline in economic activity could result in a decrease in our sales volume and profitability. Sales in the commercial and industrial new construction markets correlate closely to the number of new homes and buildings that are built, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates and other macroeconomic factors over which we have no control.

We sell our products to property owners and contractors through a network of manufacturers’ representatives and our internal sales force. The demand for our products is influenced by national and regional economic and demographic factors. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of six to 18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth and the relative age of the population. When new construction is down, we emphasize the replacement market. The new construction market in 2015 through the first quarter of 2016 continued to be unpredictable and uneven. Thus, we continue to emphasize promotion of the benefits of AAON equipment to property owners in the replacement market.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, and are obtained from domestic suppliers. We also purchase from domestic manufacturers certain components, including compressors, motors and electrical controls.

The price levels of our raw materials have remained relatively consistent the past few years, but the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and a weakening global economy. For the three months ended March 31, 2016, the price for copper, galvanized steel, stainless steel and aluminum decreased by approximately 8.1%, 14.9%, 20.3% and 2.9%, respectively, from the three months ended March 31, 2015.


- 15 -



In 2011, we began using an all aluminum microchannel condenser coil on our small rooftop unit product line and, in 2013, we began using this condenser coil in our larger rooftop product line as well. The condenser coil is the outdoor coil of a conventional air conditioning system. We expect to be using this type of condenser coil throughout the complete rooftop unit product line. This will reduce our copper tube usage in this component of the product, however, copper will remain a high volume raw material because of its use throughout the equipment.

The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:

Overall unit sales increased approximately 11.1% as compared to the same period last year, driving the increase in sales for the quarter.
Cash and cash equivalents increased $9.3 million primarily from cash inflows from operations.
We invested $7.3 million in capital expenditures as we construct our new research and development lab and water source heat pump line.


Results of Operations

Three Months Ended March 31, 2016 vs. Three Months Ended March 31, 2015

Units Sold
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
 
 
 
Rooftop Units
3,559

 
3,323

Split Systems
800

 
593

Outdoor Mechanical Rooms
9

 
17

Total Units
4,368

 
3,933


Net Sales
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
 
Change
% Change
 
 
(in thousands, except unit data)
Net sales
 
$
85,422

 
$
76,768

 
$
8,654

11.3
%
Total units
 
4,368

 
3,933

 
435

11.1
%

Sales increased primarily due to increased volume as compared to the prior year.

Cost of Sales
 
 
Three Months Ended 
 March 31,
 
Percent of Sales
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
 
 
 
 
Cost of sales
 
$
59,691

 
$
54,970

 
69.9
%
 
71.6
%
Gross Profit
 
25,731

 
21,798

 
30.1
%
 
28.4
%

The principal components of cost of sales are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. Cost of sales increased overall due to the corresponding increase in sales.


- 16 -



Twelve-month average raw material cost per pound as of March 31:

 
 
2016
 
2015
 
% Change
 
 
 
 
 
 
 
Copper
 
$
3.62

 
$
3.94

 
(8.1
)%
Galvanized Steel
 
$
0.40

 
$
0.47

 
(14.9
)%
Stainless Steel
 
$
1.22

 
$
1.53

 
(20.3
)%
Aluminum
 
$
1.65

 
$
1.70

 
(2.9
)%

Selling, General and Administrative Expenses
 
 
Three Months Ended 
 March 31,
 
Percent of Sales
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
 
 
 
 
Warranty
 
$
314

 
$
861

 
0.4
%
 
1.1
%
Profit Sharing
 
1,933

 
1,523

 
2.3
%
 
2.0
%
Salaries & Benefits
 
3,042

 
2,435

 
3.6
%
 
3.2
%
Stock Compensation
 
656

 
307

 
0.8
%
 
0.4
%
Advertising
 
309

 
202

 
0.4
%
 
0.3
%
Depreciation
 
223

 
229

 
0.3
%
 
0.3
%
Insurance
 
328

 
305

 
0.4
%
 
0.4
%
Professional Fees
 
558

 
642

 
0.7
%
 
0.8
%
Donations
 
109

 
111

 
0.1
%
 
0.1
%
Other
 
1,441

 
1,702

 
1.7
%
 
2.2
%
Total SG&A
 
8,913

 
8,317

 
10.4
%
 
10.8
%

The overall increase in SG&A was primarily due to increased compensation and profit sharing expenses due to better results versus the same period last year. The increase was partially offset by a decrease in warranty expense related to continued improvement in quality control.
 
Income Taxes
 
 
Three Months Ended 
 March 31,
 
Effective Tax Rate
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
 
 
 
 
Income tax provision
 
$
6,211

 
$
5,046

 
36.5
%
 
37.5
%

The Company’s estimated annual 2016 effective tax rate is expected to be approximately 36.0%. The Indian Employment Credit and Research and Development Credit were not extended until December 2015 for the 2015 and 2016 tax years. As such, the effective rate for the three months ended March 31,2016 is reduced for the impact of these credits while the effective rate for the three months ended March 31,2015 does not reflect these credits.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through net cash provided by operations and the occasional use of our revolving credit facility.

Our cash and short-term investments increased $12.8 million from December 31, 2015 to March 31, 2016 and totaled $43.2 million at March 31, 2016; while long-term investments decreased $6.9 million, from $6.9 million to $0.0 million, respectively.


- 17 -



Under the line of credit, there was one standby letter of credit of $0.8 million as of March 31, 2016. At March 31, 2016, we have $29.2 million of borrowings available under the revolving credit facility. No fees are associated with the unused portion of the committed amount.

We had no outstanding balance under the revolving credit facility at March 31, 2016 and December 31, 2015. Interest on borrowings is payable monthly at LIBOR plus 2.5%. The termination date of the revolving credit facility is July 27, 2016.

At March 31, 2016, we were in compliance with all of the covenants under the revolving credit facility. We are obligated to comply with certain financial covenants under the revolving credit facility. These covenants require that we meet certain parameters related to our tangible net worth, total liabilities to tangible net worth ratio and working capital. At March 31, 2016, our tangible net worth was $188.7 million, which meets the requirement of being at or above $95.0 million. Our total liabilities to tangible net worth ratio was 0.25 to 1.0 which meets the requirement of not being above 2 to 1. Our working capital was $92.2 million, which meets the requirement of being at or above $40.0 million.

The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases. The Company also has a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares in AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employee-participants. Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and employees for payment of statutory tax withholdings on stock transactions. Any other repurchases from directors or employees is contingent upon Board approval. All repurchases are done at current market prices.

Our repurchase activity is as follows:
 
Three months ended March 31,
Inception to date
 
2016
2015
Program
Shares
Total $
$ per share
Shares
Total $
$ per share
Shares
Total $
$ per share
Open market

$

$


$

$

3,669,221

$
56,507,802

$
15.40

401(k)
138,680

3,275,139

23.62

128,830

2,906,355

22.56

5,680,622

54,139,398

9.53

Directors and employees
7,604

180,362

23.72

2,100

48,295

23.00

1,851,164

15,020,523

8.11

Total
146,284

$
3,455,501

$
23.62

130,930

$
2,954,650

$
22.57

11,201,007

$
125,667,723

$
11.22


Dividends - At the discretion of the Board of Directors, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment.

Our dividends are as follows:
Declaration Date
Record Date
Payment Date
Dividend per Share
May 19, 2015
June 12, 2015
July 1, 2015
$
0.11

October 29, 2015
December 2, 2015
December 23, 2015
$
0.11


Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing) and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations in 2016 and the foreseeable future.


- 18 -



Statement of Cash Flows

The following table reflects the major categories of cash flows for the three months ended March 31, 2016 and 2015. For additional details, see the Condensed Consolidated Statements of Cash Flows in the condensed consolidated financial statements.

 
Three months ended March 31,
 
2016
 
2015
 
(in thousands)
Operating Activities
 
 
 
Net Income
$
10,806

 
$
8,399

Income statement adjustments, net
2,624

 
1,811

Changes in assets and liabilities:
 
 
 
Accounts receivable
7,900

 
4,286

Income taxes
6,734

 
1,286

Inventories
(4,117
)
 
(6,969
)
Prepaid expenses and other
(1,950
)
 
(301
)
Accounts payable
(3,129
)
 
(1,316
)
Deferred revenue
110

 
64

Accrued liabilities & donations
(3,730
)
 
(2,925
)
Net cash provided by operating activities
15,248

 
4,335

Investing Activities
 
 
 
Capital expenditures
(7,332
)
 
(3,587
)
Maturities of investments and proceeds from called investments
3,405

 
11,587

Other
21

 
14

Net cash (used in) provided by investing activities
(3,906
)
 
8,014

Financing Activities
 
 
 
Stock options exercised and excess tax benefits from stock options exercised and restricted stock awards vested
1,454

 
2,180

Repurchase of stock
(3,456
)
 
(2,955
)
Net cash used in financing activities
$
(2,002
)
 
$
(775
)

Cash Flows Provided by Operating Activities

The increase in cash flows from operations is primarily due to a decrease in estimated tax payments during the quarter in 2016 versus 2015 and better collections resulting in days sales outstanding of approximately 45 days as compared to approximately 47 days for the same period last year. This was partially offset by faster payment to vendors and representatives.

Cash Flows (Used in) Provided by Investing Activities

Maturities of investments decreased compared to the prior year due to an overall decreased investment portfolio. Capital expenditures increased compared to the prior year due to continued investment in our new research and development lab as well as other construction projects. The capital expenditure program for 2016 is estimated to be approximately $32.7 million.

Cash Flows Used in Financing Activities

Options exercised by employees decreased compared to last year, which decreased the related excess tax benefits as well. Buyback activity remained relatively consistent, with the increase in dollars driven by a higher stock price over the period as compared to the prior year.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

- 19 -




Contractual Obligations

We had no material contractual purchase agreements as of March 31, 2016.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2016.

Recent Accounting Pronouncements

See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q 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”, “should”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

We are exposed to volatility in the prices of commodities used in some of our products and we may use fixed price cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.
 
Item 4.  Controls and Procedures.
 
(a) Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer with the oversight of the Audit Committee, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures were effective.

(c) Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


- 20 -



PART II – OTHER INFORMATION
Item 1. Legal Proceedings.

We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations, or cash flows and we accrue and/or disclose loss contingencies as appropriate. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company's business, financial position, results of operations or cash flows.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. The risk factors described in our Annual Report could materially adversely affect our business, financial condition or future results. There have been no material changes to the risk factors included in our 2015 Annual Report.

Item 2.  Unregistered Sales of Equity and Securities and Use of Proceeds.

On May 17, 2010, the Board authorized a stock buyback program, targeting repurchases of up to approximately 5% (2.9 million shares) of the Company's outstanding stock. In May 2015, the Board authorized repurchases up to an additional 2.75 million shares, or a total of approximately 5.7 million shares. In October 2015, the Board authorized $25.0 million for use under the Company's stock buyback program. We repurchased a total of approximately 3.7 million shares under this program for an aggregate price of $56.5 million, or an average price of $15.40 per share. We purchased the shares at current market prices.

On July 1, 2005, we entered into a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares of AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employees. Through March 31, 2016, we repurchased approximately 5.7 million shares for an aggregate price of $54.1 million, or an average price of $9.53 per share. We purchased the shares at current market prices.

Periodically, the Company repurchases shares of AAON, Inc. stock from certain of its directors and employees. The number of shares to be repurchased is contingent upon Board approval. Through March 31, 2016, we repurchased approximately 1.8 million shares for an aggregate price of $15.0 million, or an average price of $8.11 per share. We purchased the shares at current market prices.

Repurchases during the first quarter of 2016 were as follows:
 
 
 
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a)
Total
Number
of Shares
(or Units)
Purchased
 
(b)
Average
Price
Paid
Per Share
(or Unit)
 
(c)
Total Number
of Shares (or
Units) Purchased
as part of
Publicly Announced
Plans or Programs
 
(d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that may yet be
Purchased under the
Plans or Programs
January 2016
 
36,800

 
$
20.76

 
36,800

 

February 2016
 
41,392

 
22.22

 
41,392

 

March 2016
 
68,092

 
26.13

 
68,092

 

Total     
 
146,284

 
$
23.62

 
146,284

 

 

Item 3. Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

Not applicable.


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Item 4A.  Submission of Matters to a Vote of Security Holders.

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits.
 
 
(a)          Exhibits
 
 
 
 
 
(i)
Exhibit 31.1
Section 302 Certification of CEO
 
(ii)
Exhibit 31.2
Section 302 Certification of CFO
 
(iii)
Exhibit 32.1
Section 1350 Certification of CEO
 
(iv)
Exhibit 32.2
Section 1350 Certification of CFO
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AAON, INC.
 
 
 
 
 
 
Dated: May 5, 2016
By:
/s/ Norman H. Asbjornson
 
 
Norman H. Asbjornson
  President/CEO
 
 
 
 
 
 
Dated: May 5, 2016
By:
/s/ Scott M. Asbjornson
 
 
Scott M. Asbjornson
Chief Financial Officer

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