Aaon Inc (AAON) 2003 Q3 法說會逐字稿

Thank you for holding and welcome to the Aaon Inc. third-quarter earnings conference call. Throughout the presentation, all lines will be on a listen-only mode. You'll have an opportunity to ask questions following the presentation. (Operator Instructions) I thank you for your attention, and now I turn the time over to our host, Mr. Norman Asbjornson.

Good afternoon. Welcome to our third quarter report. I would like to introduce our CFO, Kathy Sheffield, who is here with me today.

Good afternoon, ladies and gentlemen.

I would like to read, before we get going, our safe harbor forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of this year, such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside of Aaon's control that could cause Aaon's results to differ materially from those anticipated. Please see the risk factors contained in our most recent Securities and Exchange Commission filings, including the annual report on form 10-K and the quarterly report on form 10-Q.

Now I would like to go ahead and review the third quarter and nine-month results. As you will note, our results are down from a year ago third quarter, both in revenue and in bottom line and are down from a year ago for the nine months, both in revenue and in earnings. For the quarter, our sales diminished by 1.7 percent to 41,003,000, as opposed to 41 million 702 (ph) a year ago. Our earnings declined 13.2 percent to 3 million 635 (ph), compared to 4 million 186 a year ago, down from 30 cents per share to 27 cents per share.

The income for the nine months were down 5.8 percent and the income down 8.8 percent, respectively, to 111 million 081, down to 10 million 487, and sales were down from 117 million -- or excuse me -- 117 million on sales 873 (ph), and 11 million 493 on earnings from 202.

The bulk of this situation is due to a rather adverse business climate, which seems to have turned around during the quarter, but we weren't able to take it to the bottom line. If we look at what took place in the quarter, we have 41 million and 3000 sales versus 40 million 702. And that wasn't (indiscernible) the 1.7 percent, but our earnings were down more. If we take a look to see where our earnings were hurting, compared to the year ago, or against what we had planned on them being, we will find that our standard margin -- in other words, the measure of the material cost, the standard material costs and standard labor versus what we sold it for -- actually for the quarter were up by 2.1 percent. And for the nine months, they were up by 3 percent. The detail where we got in trouble is down in the variance area, so it's the internal problem that was plaguing as on the bottom line. And if we look through the area where the problems were, it all came down to variances from standards in the labor area primarily. A little bit in material, but by and large in labor. And when looking through that to see what took place, we find that our issue revolves primarily around the fact that we are introducing a lot of new products right now and we have not been doing our transition as well as we had anticipated doing it. What takes place in that area is, as you phase out one product and you phase in a new product, you have a management problem of diminishing the purchased material for the product being phased out, and slowly ramping up the -- getting components for the product which you're bringing into existence.

What that does to us internally is, on our coil production, we start having smaller run quantities on the unit being phased out and we start out low with a gradual increase in the number of coils we're building for the new product. Short run quantities play a lot of problems with a manufacturing operation, and we thought we knew how to beat it, but we did not as well as we thought we could. The same thing comes out when we bring the product up to our other factory here in Tulsa where the product is built in that the short run quantities on sheet metal and other factors gave us more problems than what we anticipated. So there is no real other story to be talked about, other than the variance from standards in labor, and that is what caught us for the three months, and that's what's catching us on the nine months.

Now, on a go-forward basis, what are we looking at? We still are not totally into the new product in that we're still building a little of the old product, and therefore, that will continue to plague us for a ways into the fourth quarter. We believe that we're getting better ability to handle it every day, and therefore, it should have a less effect on us than it has had in the year-to-date, and particularly in the third quarter where we did an awful lot of the changeover from the old product to the new product in the third quarter. So we think most of it is behind us, but not all of t is behind us.

Other than that, on operations, there wasn't a lot of story to be told on the operating results once we got past the labor issue. And so the other aspect to look at is to see what the trend line of order input is. In the three months since I last spoke with you, our backlog has increased rather substantially, considering -- particularly the time of the year we're in. At the end of July and in the summer quarter, that is historically -- right at the end of the second quarter is about the time we normally would expect our backlog to be at an all-time high for the year, and then it would gradually diminish through until sometime in the first quarter of the following year, and then it will start building again. What has happened to us this year, however, is we fortunately for -- whether it is an economic upturn, which we believe we see some of, or whether we're doing a better job, our new products are finding more acceptance, or all of the above. The net result is that we are up about 12 percent on our backlog, compared to the end of June when we last spoke with you. In dollar terms, that equates to up by $4 million.

So what that is saying to us is that we have the orders in-house, and therefore, on a go-forward basis, at least so far as what we're doing right now, things look brighter than they looked in back in June, and as a matter of fact, look better than they have looked probably for a couple of years, as far as the order input is concerned. Once we get by the changeover, the new product, I hope that we will start turning the bottom line the same way we have historically, which was to outrun our growth by some margin, and we have not been doing the this year. So we think we're going to be able to turn around. So we're optimistic in that area.

As far as other things that are major in the company, we have bought about $4 million worth of capital goods so far this year. We anticipate we're going to get roughly another $3 billion worth of capital goods delivered in the fourth quarter, so it will be a total of about $7 million. Almost all of that, although there is some work on the buildings going on, almost all of that is in either machinery or computers, so it is all working-type equipment that the money is going into to allow us to continue to grow the Company or do so more efficiently.

Insofar as other aspects of the Company are concerned, our major other issue has been a stock repurchase. And if you look at the stock repurchase which has occurred this year, we are now at total since we began our repurchase in October of last year, we have now repurchased 776,264 shares as of October 3rd. The total dollar involvement that we have bought back has been $13,235,287.01. So we are pretty well along toward our stated buyback of 10 percent, or 1.3 million shares.

As far as where did the money come from for doing this, we've been able to cash flow the money throughout that time element. And if we were to look at our results for the nine months of this year, you will see that we have actually a little bit more -- not a lot -- but a little bit more cash position and we have not touched the $10 million in CDs that we have out there outstanding. So we gradually had a little buildup of cash, buying back stock throughout the year and we are going to be spending about 3 million more on capital before the end of the year. Next year, we will spend a little bit more on capital. Question - what will we be doing next year? There will be more machinery and we anticipate doing a little bit more in the building end as all of the new products start coming online and developing a following for the new product, we anticipate our growth to resume, and therefore, we are preparing for that time element.

The main new products I have been talking about here so that you understand that is the fact that we are redoing our entire basic product line. Our historical rooftop product line is being redone, and that is what is being introduced at the present time. On the smallest units, it was rather minor changes that we made on that, so it was not a big issue. But on all of the larger units of these smaller series of units, the other two sizes, or other two box sizes, were a total redesign. So all of the sheet metal changed, all the coils changed. The other operational machinery in it didn't for the most part change, but the packaging of it changed entirely. And therein is where our problem was for this past quarter.

As far as what we anticipate doing in the future as far as changing of all of these products, we are basically through with the bulk of our major changes on these at the present time, although we do anticipate over the next two years doing some more in sheet metal changes, primarily to obtain more higher efficiency heat transfer factors so that we don't lose so much heat out of the cabinets. So we will be doing some cabinet changing. But the bulk of the main things which cost us problems this past year are behind us and will not be happening in the very near future. We will be introducing other new products, but the ones that we have been building for all of the time we've been in business basically will remain fairly much the way that are right now that we're introducing the new product line.

The strengths and weaknesses of the market marketplace -- that is still ongoing. The strength of the marketplace appears to be in smaller buildings. Smaller buildings mean smaller tonnage units for the most part, means smaller orders, quantities, and that part of the market seems to be gaining strength. It has been doing that for several months now. The large tonnage market just appears to beginning (ph) to go forward now, and therein would be the larger buildings and the larger dollar volume orders. That is just appearing about now, the way it appears. So if that is really in fact happening and we're not just seeing a little blip, then it would appear that our entire marketplace is coming back into strength insofar as the size of the buildings are concerned. Insofar as the type of buildings are concerned, office buildings, which is one of our major markets, still is very sick. Manufacturing buildings, which is another major category, is still quite sick. health buildings, health and education buildings are both strong markets. Retail market is a reasonable market right now. And then miscellaneous other buildings appear to be fairly strong. So we're seeing a general revival, although until office buildings and manufacturing buildings begin to occur, we probably aren't going to have any dramatic upswing. It will be more likely to be a reasonably fast upswing. It could get us to a growth of 10-15 percent, I believe, but it is not likely to get us a 20-25 or 30 percent rate.

The rep (ph) business, as opposed to the national account business, is where we see most of our upswing. The national account business, which is largely a retail business for us, is fairly steady but it is not the one that seems to be getting the growth spurt at the present time. So hopefully, it will come along as time goes on. The outlook at the present time for the year 2004, if we were to project out from what we're seeing occur now, which basically as we started to see an upswing occur in April as near as we could tell of this year, and it has been gaining momentum., particularly in this last quarter, it has gained a substantial amount of additional momentum. That pretty well concludes most of what I have to discuss, so I'm going to open it for a question and answer time at this point in time.

(Operator Instructions). Mark Robbins.

Could you help us out and let us know what the backlog number was for the quarter ending 6/30, as well as 9/30? What was the dollar amount, if you please?

Kathy looked that up. I will let her give you those numbers, in rough numbers anyway.

In rough numbers, it was about 32 million 5.

That was for the end of this --

That was at 6/30, and it is about 36 5 (ph) right now, as of last week.

Norm, help me better understand. I guess you burned through all of your backlog on a quarterly basis, but then how much do you make up, how much is there that comes in as orders over the transom during the period?

Dollar-wise, we obviously do burn through it. But in reality, some of it sits in-house much longer than the ninety-day timeframe. We right now are quoting an average of about six weeks on leadtime, which means we have available manufacturing space six weeks or seven weeks from now. So you can see that we are not going to plan not getting all of that immediately. Now as time goes on, some of those orders that aren't presently released will get released into that timeframe. The net result is I would say we probably would ship somewhere between 80 and 90 percent of what's in-house right now, and the other 20 percent to 10 percent, we will get as new orders between now and the end of the quarter, and we will ship them during the quarter.

And that leads to another question. Usually, you have seen a little seasonal softness in the fourth and first quarter. Were you kind of indicating to us that you might see Q3 kind of levels in the fourth quarter, if not a little higher?

Yes, that's what I am indicating. What we are having happen to us right now is not a historical trend. Normally speaking, if we are sitting with the same backlog figure at this time that we had in June, we would consider that quite good. And in fact, we are sitting with a higher backlog figure, which is a little bit counter to what we're accustomed to seeing.

Another question on just the business, and that is -- when you have -- right now, you have strength in the smaller buildings, that means smaller tonnage equipment being ordered and in smaller sizes. That must mean you must not get nearly the kind of efficiencies that you would see for some of the big orders on big box projects. Is that correct?

That is correct. The market is a more competitive market in the smaller tonnage sizes, and thus, we're dealing from our weak spot, so far as margins.

With the new construction, the new design, does that include the new -- is some of this to accommodate the new refrigerant, or is it mostly just air handling capabilities and design defined capabilities?

Most of all, at this point, the new refrigerant issue has not come into play very much. We are hearing a lot more conversation from our customer base and the industry is moving much closer to going into the new refrigerants. We are all set up internally, we've spent the money necessary to get ready, we've done the engineering work, we're in the final stages of getting some of the machinery for high-volume production that we need. Some of that last machinery is in that last $3 million we expect in this quarter. And so we will be ready component-wise from other people that we have to buy things to make that happen. Our biggest issue comes down to the compressors and our supplier on compressors has gotten all but one compressor available for us by the end of this year, and he will have that in the first quarter of next year. So the new refrigerant will start being a serious issue next year for us.

Lastly, you mentioned a little bit about the home or the retail opportunity that you might be broaching that. I was just wondering if you care to comment, bring us up-to-date on any other facets of that new endeavor?

Yes, I would. The design work on the residential product line, which is basically a condensing unit and a related coil that goes with it, and what we're targeting with that product is replacement air-conditioning market of the residential market. And that, depending upon whose numbers you want to believe, is somewhere 50 percent or thereabouts or a little more of the residential marketplace. So we're going to get into a fairly large marketplace when we enter it.

The things which we're waiting on right now is we are not going to go into it with the old existing refrigerant, the one which is being phased out will not be built by us. We're going into the new refrigerant when we go, which will be the first part of next year. And some of the things we're doing in order to get geared up for that are again dependent upon the equipment we have got coming in this quarter to allow us to be ready in a manufacturing sense to have all of the equipment we need to build it. And we still have to do a little bit of setting up of our distribution lines, which should not take us very long to do. So right now, everything is on track to be ready for when the market really picks up in the residential replacement market in the second and third quarter of next year.

Thank you Norm. I'll let someone else ask questions.

Jim Curo (ph).

I missed what the dollar amount of the backlog is?

Right now, it is 36.5 million.

Thank you.

Do we have any other questions?

Brian Bears (ph).

Hi, Norm. Mark asked most of my questions, but following up on the residential initiative, are you going to use the same rep-based sort of sales channel that you used to target that market as you do with your core products now?

To some degree, yes, we are, but we're also going to do some work on the Internet in that area also.

Is there any other color that you can sort of give us, in terms of competitive positioning, why someone would choose the Aaon products from a residential standpoint over, say, one of the four major brands that they sort of see everyday?

Good question. The thing that we think that we can do is the distribution cost in the residential industry typically depends upon a distributor who has to have a fairly substantial markup in order to take the product to market. We're not going through a conventional distribution system; we're going to go direct from factory to the dealer, and we're going to take that money that historically has been in the distribution system, and we're going to be able to assure that we are cost competitive by using that money to make ourselves more competitive. And when we've paid the cost of doing the distribution in the matter in which we expect to do it at less than half of the cost of the historic methodology. So that is where the money is going to come from to make it appealing.

On the other aspect of it, we are very far into knowing what we're doing on the new refrigerant, which is a refrigerant which has a listing of R-410 (ph). All refrigerants are kind of like oils or anything else -- they carry a number that designate the type of refrigerant it is, and 410 is replacing R-22. That will be what we'll be using. And some of the things, some of the equipment we're getting in is specifically geared toward our 410 refrigerant to give ourselves an ability to lower our cost by employing some capital in the way of equipment which we have ordered to lower our production cost and make us more competitive.

So we have two things going for us on the competitive aspect. And we I believe enjoy to -- in many areas now, we're starting to enjoy a fairly good reputation of high-quality and leading technology in our product line. And the product we're designing is definitely going to be a very energy-efficient -- we think it will be among the most energy-efficient of any equipment out in the marketplace. So we think we're going to have a high-quality, very high efficient -- highly efficient piece of equipment that is going to be fairly cost competitive with things which are less energy-efficient and may be a little less quality. So we believe we're going to offer a high-value to the end-user.

Could you just remind me too, with your core product line that we're talking about, not residential, but what constitutes all of your product sales currently -- does the rep force that you use, do they have the option of representing other products besides Aaon products?

Yes they do, as long as they're not conflicting products with what we have.

Do you fundamentally have a difference incentive structure than your competitors do, so when the rep is making a choice and whom to recommend, they have a financial incentive to recommend you above and beyond the obvious quality advantage that you offer?

As I said, pretty much all of our reps are not with a second product line. They may have one that kind of tips in there a little bit in places. In other words, what I'm saying to that is, on our big equipment, they may also have a custom product and we're not a custom product, but they both are in the same area. But to deal directly with your question there, we use a flat cost figure to our representatives, as opposed to a sliding scale. And therefore, they have more incentive. If they're a good representative, they can actually make a higher income selling our product. We set our minimum, our cost factor high enough to give us a decent profit for the company, and then we try and give them enough selling tools, such as high quality, high energy, efficiency, maintainability, lifecycle, functional advantages such as the ability to control humidity so you don't have mold growth; the ability to handle 100 percent outside air, which is not typical in our industry and a whole host of other things that our product will do with options that they can buy on the product which will allow them to do jobs that otherwise could not be done by one of our competitors.

great, thank you.

James Gentile.

Good afternoon, Norm. I was looking back in my notes, and I was kind of I guess looking at the numbers and the expectations that were out there for this quarter. You put out a pretty positive press release indicating a second half positive comparison. Now, given your number here and I guess the December quarter of last year, which was pretty weak, in general, are we still going to see positive half over half comparison in your opinion?

With the difficulty we had on the bottom line in the third quarter James, it is going to be difficult for us to show a positive from year to year. That is still going to be a possibility, however, because as you mentioned, our fourth quarter last year was not particularly strong and we're looking at a much stronger potential situation for this quarter. How well we can make that come down to the bottom line and how many dollars we can get out the door remains to be seen, obviously, but we have not given up on the possibility of making that happen. It is still looks like it is within reach, but it looks like it's going to be a difficult challenge too.

Are there any pricing implications that could have facilitated the margin decline in the quarter?

No. I mentioned that right up front. Let me go back and kind of reiterate those numbers again for you. The standard margin which tells you what happened to us insofar as our pricing, actually compared to a year ago in the third quarter, we are 2.1 percentage points higher this quarter than we were a year ago. So we did not get hurt there. bear. Going on the year-to-date, we or three point even -- 3.0 -- percentage points higher on our sell price relative to a year ago comparing to our standard cost. Where we got clobbered is in the variance. And none of the variances like scrap -- we did not get hurt on scrap, we didn't get hurt on inventory adjustments, we didn't get hurt on engineering expenses, those things -- it all focused right back on our labor variance. And that is where we got hit and that is where we did not make the numbers come.

That labor variances is not going to recur in the fourth quarter?

We sure hope not. As I explained, a lot of it comes about by the fact that as we're starting up a new product and phasing out the old product, it doesn't lend to efficient operation. We thought we were going to be able to handle it better than we did. We're pretty well through that thing. A lot of it happened to us in the third quarter. People ordered the new product instead of the old product, and therefore, a lot of it occurred to us, particularly in September, as a matter of fact. That's when we really got hit. And we believe that we are pretty well over that startup, but not totally. We're going to be carrying a little bit of it with us into the fourth quarter too.

I guess looking at your new products, I guess it's kind of going to be difficult, given the fact that you're refreshing your legacy, your rooftop air-conditioning product. So is there any way that we can get a kind of revenue number, in terms of its contribution in the second September quarter by the air handlers and by the water chillers and by the large RL unit that had contributed to your backlog over the year-to-date? And how much in those new products had contributed to the September quarter revenue?

I don't have it broken down by quarterly. I have it annualized and I have a couple of other ways here. Let me say that on the RL product line, we had a notable falloff on the year-to-year basis, even though it is a new product, because it sat in that marketplace of the manufacturing buildings and the office buildings. And the market disappeared and so even though the product was great, we actually saw a substantial downturn and that almost cut our volume almost in half in the year-to-year. Not quite, but almost in half on the biggest units. So that was a noticeable negative aspect, and that is a brand-new product line, but the market just was not there in the office buildings and manufacturing places where that normally is sold.

The air handlers -- I don't have split out, but I can tell you that it is up substantially and we're in the process of introducing a new, more involved air handling unit, which also cost us some of the labor problems that I was alluding to earlier. And so that part of it -- I'm going to give you a guess. I think the air handler is up somewhere in the thirty-some percent from a year ago right now from the last time I looked. I don't have the numbers right here in front of me however. The historical smaller tonnage rooftop product, two tons through 60 tons, during the year 2002 when we first started introducing it, we introduced -- we did about a half a million dollars worth of it in the very end of 2002. And so far this year on that product line, we've sold about $10.5 million of that product. So it was up about $10 million on the new product and down a little bit more than that on the old product line being phased out.

Could you entertain us with a contribution of revenue from the residential product next year?

Since we are not in that marketplace, it is going to be a cloudy, hazy ball that I'm looking at. But I don't think the problem is going to relate to the marketplace. The marketplace has stayed healthy in the residential market throughout this entire downturn, one of the bright spots of our economic situation. And because it is such a huge market, I don't think it is going to be hard for us to get the market that we need. Our problem is going to relate to how well we can get ourselves organized in our manufacturing structure and have the product when the customer wants it and getting in contact with them and so on and so forth. My feeling is that we're probably going to be pushing real hard to get $5 million out of next year. So it is not going to be a horrendous amount. I think it's going to be a year of organization and getting going. And then I have much greater hopes for the following year.

Thank you, Norm.

Tony Bowes (ph).

Thank you. First question is -- how much was the variance in dollars?

For the quarter?

Yes.

We had $1,030,000 more variance in the third quarter than we did a year ago. In the nine months, we had -- I'm just doing quick mental arithmetic here -- we had $2,900,000 more variance than we did a year ago. And there is no other really good reason for it, other than what we're doing in the way of changing over things. So it was a very significant amount of dollars we're looking at.

What kind of variance impact do you expect in the fourth quarter?

We believe we're cutting it down relatively speaking, so I am guessing that we are going to have a variance somewhere close to where we were last year, which will result, if that occurs, in a significantly improved bottom-line performance.

Sorry to push this point, but does that mean you're going to be a half of the third quarter's variance, or what kind of --?

I would say, instead of increasing our variance -- I think there's $1 million worth of variance that won't happen in the fourth quarter.

Also, are you implying that fourth quarter sales are going to be what third quarter sells were?

No, because we run into some problems of time to build product. What I'm saying is, compared to our historical fourth quarter, we look that it is going to be a very good fourth quarter compared to a year ago. The fourth quarter has Thanksgiving and the Christmas time in, which both causes considerable amount of problems, not just because we are not operating and we aren't building product for some days there, but also particularly around the Christmas season, a lot of our customers are more or less slowed down and not working very hard either and they're not taking product. So the fourth quarter will not be equal to the third quarter, but it will be, we think strong relative to previous fourth quarters.

So what you're saying is you think you will be up over last year?

Definitely, we believe that's going to happen.

And as far as margins for the fourth quarter, I know we talked about the variance a little bit, nut --

All of the margin problem is in variance.

So, What should I think about as (multiple speakers)

I think you should look for us to have a margin comparable to last year as minimum.

And what about as kind of a maximum?

Oh, boy. I suppose we could maybe get a couple points better.

And you gave an end market description breakdown. Could you give the actual percentages of your end markets? Do you track that by quarter?

You mean dollars of sales?

Sort of, except just like you said office building, manufacturing, health, education.

I don't have any of that data with me right now, and we don't track it tightly. We watch the general trend and we do some spot checking, but we don't monitor it on a dollar per dollar basis by market. I don't have that readily available.

And lastly on Wal-Mart, has there been anything on that front, as far as them wanting to redo a contract or anything like that?

As I explained in the past, Wal-Mart has a contract redo either for one or two reasons. One reason, the primary one is that they want to change something about the product line. And so they want to write a different specification for us to bid to. And the second thing is if one or more of their suppliers are pushing for price increases. At the present time, what is appearing to happen is Wal-Mart is wanting to change the type of product that they have, and they've sent us out a preliminary specification on what they're going to ask us to bid on, and it does have significant changes in what they are asking for. And therefore, presuming that they have indicated that they are definitely going ahead with this, so we're expecting one of these days for them to send us out a finalized specification with a specific bid date, and we will then be rebidding the Wal-Mart account. That is our expectation.

Was this something that happened recently, or has this been in the works for awhile?

They told us a couple of years ago they were intending to do it. They never at that point moved forward with anything specific in a way of a new specification or anything. This time, they have already sent us out a preliminary copy of in general of what they expect it to be. And barring some more changes, we know what they are looking to change right now. And like I said, it is a significant change, so I expect that they will go forward. And they had a construction meeting here about a month ago now. All of their construction people, both specifiers, as well as suppliers had a meeting, and we were in attendance to that 3-day event. They very pointedly said that they going to come out with the new specification and they are going to adhere to the changes that they have shown in it. So it is pretty solid in that they are going to ask us to give them a rebid. But until it happens, we are waiting for it to happen.

In your experience, when they have gotten to this stage, how long does it take for them to ask for a rebidding?

Generally, they allow us somewhere around a month or so to prepare the bid and get it to them, and then it takes them awhile to analyze it before they come back. It might take another month by the time they get done analyzing it to tell us how much we're going to get from them for the future period. So before anything really is finalized in the best case right now, I would expect it to take a couple of months.

So can they ask you for the rebid?

No, they have not.

When do you think they will ask you for the rebid?

Your guess is as good as mine almost. I'm saying that it's going to happen shortly, but what does that mean, I really cannot quantify it too well, because I'm not the one doing it.

Thanks a lot.

Would you like to take additional questions?

Yes, I'll take any more questions.

Greg Weaver.

Most of my stuff has been covered, just a follow-up on the Wal-Mart thing. So what percent of the business are you getting today?

Roughly 50 percent.

And what is your maximum output in a given quarter at this point? I guess what's the constraint on that?

Constraint is machinery, and as we continue to buy more and more machinery, we have more capability of going forward. And part of the constraint will depend upon what the mixture of the equipment is, how many dollars of various types of equipment. In general, we probably have an annualized number somewhere in the $200 million area at the present time. And to go beyond that in general much more, we probably need more machinery. We don't need more facility per se with the exception that, in order to put the machinery in, it doesn't make sense because we have to tear up all of the concrete and we would have to evict a tenant we presently have leasing the facility in order to put it in our existing facility. So the economics would tell us we're better off building a rather inexpensive building to contain this equipment we will have to buy, which is what we will probably do next year.

But for the December quarter, generally speaking, labor is your constraint that you cannot get people to work enough hours, or your buyers aren't working enough hours?

It's kind of the following. We're going into the slower time of the year, so hiring additional people, a significant amount of additional people, and by the time we get them trained, we will be in the slower time of the year, which then puts us in bad position of having too many people. So we really depend upon overtime to make this happen on the short term, which we believe what we're having in the fourth quarter is somewhat short term. Because in the first quarter, it's also one of our weaker quarters if you look back historically, and we have a lot more manufacturing days, so we really don't need a lot more people to make the first quarter happen, but we do in this quarter. So really to answer your question specifically, we're probably going to be people related in trouble. We do not have enough trained people to get what appears to be a significant upturn possibly happen.

Were you doing much overtime in the September quarter?

We did quite a bit. That was part of our variance, as well was because of the overtime we ran in. Variance occurred because we had to run overtime because we weren't getting it done in our standard time that we would normally expect to get it done. So that was a goodly share of what occurred in that variant column.

Has backlog ever increased from Q2 to Q3 before?

I haven't gone back through to analyze all of them, but I would tell you that, historically, it's certainly unlikely that it has if it has in the past. Some of those years where we had very fast growth rate going on, it may have happened to us, but it is not something we would normally expect.

Do you think you can build backlog in the fourth quarter, given your constraint on sales?

If we build backlog in the fourth quarter, I'm really going to be astounded., I'll tell you that.

My last question. In light of the seeming turn in the market here and your company's strong cash flow, has there been any thought on the acquisition front? Do you feel you need to do anything there or want to?

I talked with a company about five weeks ago that I thought would be a good fit. We are still in modest discussion. They really are not looking to sell -- it is a division of a larger corporation, and the larger corporation wasn't really looking to get rid of it. And so it is an ongoing discussion we're having, but I'm not sure whether they're going to want to sell it or not, or whether it would make sense for us when we got into actual buying. But we are looking, but we're not just going to buy something to buy something. We had rather buy stock back or build our company from growth internally than just buy something to get dollars.

Thank you.

Jim Curo.

Hi. Just on the backlog numbers -- do you have handy what the backlog numbers are for a year ago and at the end of the prior two quarters?

We do, but we don't have them right here in front of us. I can tell you that, in general from my memory of the numbers that where we sit right now is stronger than where we set a year ago and maybe two years ago at this point in time. We were diminishing backlog, we ran our backlog down -- we were in up in the high 30s, say, three years ago. And through a combination of two things -- one, we increased our manufacturing capability and we shipped more product, and the market started getting weaker. That weakness began for us, or where we first saw it was in the spring of 2000; not 2001, not 2002, but 2000 was the first bit of weakness we saw in the marketplace. And it was kind of coming back and then 9/11 happened, and that really put a soft spot in it. And so it has been kind of fluttering along up-and-down a little bit ever since, but we have been in a fairly consistent strengthening of the market since April of this year, and it has accelerated in this last quarter. So it gives me more hope than I've had before because everything before was a little bit more spastic. It came up one month and it went right back down the next and that has not been happening to us too much since April.

Thank you very much.

there are currently no further questions.

Okay. I'd like to thank you for your attendance and continuing interest, and I look forward to the next conference call in February to discuss the fourth quarter and the full-year and a look at 2004. And again, I thank you for participating in this conference. Goodbye.

This concludes the Aaon, Inc. third quarter earnings conference call. Thank you for your participation.