May 8, 2012
Operator
Welcome to AAON's First Quarter Earnings Report for 2012 Conference Call. I will now turn the call over to Mr.
Norman Asbjornson.
Norman Asbjornson
Good afternoon. Thanks for joining us this afternoon.
Before going on, I'd like to read a disclaimer.
Norman Asbjornson
To the extent any statement presented herein deals with information that's not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995.
Norman Asbjornson
As such, it is subject to the occurrence of many events outside 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, the quarterly report on 10-Q.
Thank you. And now, I'd like to introduce our Vice President of finance, Kathy Sheffield, who will go over some of the statistics with us.
Kathy Sheffield
Good afternoon. Welcome to our conference call.
Thank you for joining us for this review of AAON's financial performance for the first quarter of 2012.
Kathy Sheffield
I'd like to begin by discussing the comparative results for the 3 months ended March 31, 2012, to March 31, 2011. Our revenues were up 8.4% to $64.9 million from $59.9 million.
The increase in our revenues is the result of our continuation of gains and market shares due to the favorable reception of our new products.
Kathy Sheffield
Gross profit increased 16.2% to $13.5 million from $11.6 million. As a percentage of sales, gross profit for the quarter was 20.8% compared to 19.4% a year ago.
Kathy Sheffield
The increase in gross profit is attributable to the improved productivity from our new sheet metal fabrication equipment that we put into service at the end of last year and our revamp production lines.
Kathy Sheffield
Selling, general and administrative expenses increased 8% to $5.9 million from $5.5 million for the same period a year ago. As a percentage of sales, SG&A remain constant at 9.2% of sales.
Kathy Sheffield
Operating income increased approximately 24% to $7.6 million or 11.6% of sales from $6.1 million or 10.2% of sales. Net income increased 25.1% to $4.6 million or 6.9% of sales from $3.7 million or 6.1% of sales.
Kathy Sheffield
Diluted earnings per share was $0.18 per share versus $0.15 per share in the same period a year ago. Earnings per share were based on 24,772,000 shares versus 24,939,000 shares.
Moving to the balance sheet, we see that we ended the quarter with a cash balance of $3.2 million and we had no long-term debt. We had a working capital balance of $48.1 million, current asset ratio was 2
1, our capital expenditures were approximately $3 million related to new equipment and the continuation of a building addition. Our shareholders' equity per share was $5.13 compared to $4.85 a year ago.
Moving to the balance sheet, we see that we ended the quarter with a cash balance of $3.2 million and we had no long-term debt. We had a working capital balance of $48.1 million, current asset ratio was 2
I'd now like to turn the call back over to Norm who will discuss our results in further detail along with our new products and the outlook for the remainder of the year. Norm?
Norman Asbjornson
Yes. We'd like to talk a little bit about the -- basically, the differences in the 2 major places where we got our orders, namely new construction and the second one being replacement market.
Norman Asbjornson
We had, coming into this year, quite a different situation due to things which occurred last year, most namely the replacement markets. The replacement market last year was distorted toward the first part of the year on orders entered due to the 100% write-off that was given to certain capital and the product such as the heating air conditioning equipment by the federal government.
And therefore, the first part of last year was very good bookings year -- year the last half was a very poor one, which bring that up kind of set the stage for what has happened in the first quarter of this year.
Norman Asbjornson
We namely came into this first quarter of this year with a pretty low backlog due to the fact that we had shipped everything to the people who were buying it because they wanted it badly last year to get into the tax break for many of them. And they were not giving us a lot of the orders.
So it didn't look really too promising coming off of last year relative to the backlog.
Norman Asbjornson
And in the first 10 days of January, it kind of continued that way, and then the world changed, the remarkable way. Orders started coming in very rapidly and continued to do so and still continue to do so.
They're coming in not at the same rapid rate that they have at various times during the past few months, but consistently been good booking months.
Norman Asbjornson
January turned out to be a very, very good booking month even though it started out very slow for 10 days. Net result of all that was that, of course, in January because we came into it with a low backlog, it does take time to ramp up your manufacturing and have the people and everything going.
So January was kind of a slow shipment month.
Norman Asbjornson
February was a much improved one and March was even more improved, getting a total for the 3 months, within 500,000 of the best first quarter we've ever had. Now because of the tightness of the marketplace, we were not doing very much in pricing last year at the end of last year as far as raising prices because we didn't want to -- we were having a hard time, basically, getting enough volume to keep everything the way we wanted it to do.
And we didn't want to endanger with the price increase. However, once the orders started flowing well in January, we started increasing prices.
Norman Asbjornson
It did not seem to have a noticeable effect on the price -- on what went in, but we were making marginal small price increases in a number of different areas that we felt we can do that. And it did not slow orders down appreciably.
So as we came through the quarter, we came out of it with a very nice backlog right up among the best backlogs we've ever had at any time in the year. And we ended up having it at the end of the first quarter, which is quite unusual.
Norman Asbjornson
So with that all looks very good day on. Now looking around and trying to figure out what was happening and trying to be able to define it so we understood it ourselves, as well as being able to tell you what we think went on.
We've looked at what happened in the 2 areas I've mentioned, the one which is the replacement market which did not do very much the last half of last year because they had to have a product in and installed in order to qualify for the 100% depreciation.
Norman Asbjornson
However, this year has a 50% depreciation and we believe that there was some people who could not move fast enough to get the equipment ordered and produced and shipped and installed last year since the bill was not passed until December 17, 2010. And therefore, there was not a lot of time to take action.
Norman Asbjornson
We believe that there's some of those people who decided to move forward and go ahead and let it come into this year because there's still a 50% depreciation allowance, instant depreciation allowance. So we believe there's some -- even though there were some sucked out of this year because of the 100% last year, we think it might be being offset by the fact that 50% is in there this year.
Norman Asbjornson
So that being said, we're of the opinion that the replacement market has kind of normalized because anything that went forward last year has been offset by something that's being bought this year, which wouldn't be bought if it weren't for the 50% thing. If I look at the new construction and going into Architectural Billings Index, I find that they've upgraded their graphics and made it much easier to discern what has been taking place.
And according to their analysis and one I would believe in, they're billing index precedes the actual spending on a building by some 9 to 12 months. So in order to see what's happening today, you drop back somewhere between 9 and 12 months and you can see in the Architectural Billings Index whether it was a growth market as for as how much work the architecture are doing or whether it was declining market.
And if I look at last year, from, say, March through the end of October, with one very small exception, it was a declining market throughout that entire time period. On an average of I tried to average the graph, they give us, I would say, it was a 2% to 3% decline month-over-month throughout the time interval.
Norman Asbjornson
It past over at the end of October into the positive arena and has stayed positive since March -- or October of last year through till March 12 of this year, which is the latest date on the graph, but it has been something less than 1% positive. So if you look at that and you wash that through the negative 2% or 3% that was in right now, but going into a positive less than 1%, then the total is negative.
So the industry from statistics doesn't look very bright.
Norman Asbjornson
But then let's take a look at one other place to see what is actually happening in the arena of what we're doing on the types of buildings that we're involved in and for that we go to one put out by Census Bureau. It shows what the bookings or the actual dollars spent by month are, our year-to-date compared to a year ago.
And we find a little more positive image at that point.
Norman Asbjornson
For instance, the only one in the negative column there is at this point in time, which March is again the most recent thing that they give us was religious buildings, which were negative 8.2. The others were in the low-single digits for the most part with the exception of commercial space, which was 11.5% improvement from a year ago.
And the most notable one in the improvement area, which portends well, is manufacturing was up 42.5%.
Norman Asbjornson
So that would explain for whatever reason that discrepancy is to the Architects Billing Index or apparently a small discrepancy there. It would explain some of the growth that we're seeing.
However, it doesn't explain the totality of it because we have had substantially more growth than that. So the only other thing to which we can attribute that is the improved relationship that we have created with our customers, both through the new products, which we brought out that had been well-received, as well as all the other things, which make up a relationship between a supplier and the customer.
And we apparently are doing a better job across-the-board and that, basically, what's going on.
Norman Asbjornson
That is good sign, very good sign from our perspective because it says we're not totally connected to what's going on in our industry. We're rising above what's happening to the industry to some degree.
And so we believe that there's nothing that we're doing at the present time to change that course of direction. So we're anticipating that, that will stay with us for a long time to come far beyond this year and, therefore, will give us a better year.
Norman Asbjornson
Consequently, we're pretty optimistic much more so as I said in my news release that -- about the middle of the news release, I said that the new products, improved manufacturing equipment and facilities would give us more advantageous, as well as the improvement we have gotten from training and in some cases, replacing our sales outlets and trying to improve our responsiveness to our customers in our communications and in all other areas.
Norman Asbjornson
So at this point in time, we're pretty confident that, that's going forward. We also are sitting at this point, as I mentioned, with a $58.7 million backlog at the end of March.
You say, well, how is that going on since that point? And I will tell you that it is larger now than it was at that point in time.
Norman Asbjornson
So things are looking positive. We are hiring personnel.
We're gearing up for higher level of sales and of course, while we're doing that, we've been implementing some price increases at both of our facilities on virtually all of our product line. However, there's a bad side to that because with this $58 million backlog we had at the end of March before the price increases that weren't already built into that a little bit earlier, in other words, some of that market -- some of that $58 million have some price increase in it, some of it did not.
That which did not, of course, has to be produced in order to get us into some of the better priced products.
Norman Asbjornson
And that has been occurring and additional price increases have gone in since the end of March. So the net result is that we are improving our selling price, which will relate to bottom line as it gets moved through the system.
Norman Asbjornson
We don't -- just because the backlog is moving, we don't immediately realized that on the bottom line for a whole host of reasons, one of which to start out with a lot of the customers that give us an order who don't want it for some period of time. But also, we don't have the capability to instantaneously turn it around and ship it because we do not have it built in stock.
We build to order and, therefore, we have to build the product.
Norman Asbjornson
Therefore, we will be accelerating our sales throughout this quarter and the second quarter will just definitely be an upswing over the first quarter because we already have all the backlog and all the dollars we're going to shipped are already in the backlog. So we know where the orders are.
Norman Asbjornson
And we're building up a nice reserve of orders for the third quarter and it has a promising look at this point as well. So I would say that we're optimistic about the balance of the year.
Not because we think the marketplace is going to be good, we do not believe that. We believe it will be mediocre at best.
It will probably be a little better than going negative, but it's not going to be very positive for many things that we can see. Because if you don't design -- if the architects don’t design buildings, there's no building going to be built for the most part.
Now there are some exceptions but percentage-wise, it's pretty small and if the architects are not designing in 9 to 12 months before you expect to see them on the bottom line, they're not going to be there.
Norman Asbjornson
And so right now, we're basically far enough along that we can look at the Architects Billing Index and we can see what the rest of this year is likely to be on new buildings and since it only turned positive in the end of October of last year, if you go by the 12-month thing, that says that we won't be getting anything out there until October, November of this year to make additional volume possible.
Norman Asbjornson
And if you back it off 3 months, that's the most optimistic. So it will only been in the fourth quarter or in the very late part of the third quarter that any improved volume might even begin to appear.
And since it's only a little, not even 1%, it's not going to be dramatic. So everything that we have to look at has to do with either replacement market or taking market share.
Norman Asbjornson
And of those 2, we believe that the taking of the market share is where our ballgame is going to be played. And consequently, we're going to give you pretty optimistic view of what's going on in that arena.
Norman Asbjornson
Now one of the things, which we've been doing for the past several years has been building buildings, buying machinery and redesigning equipment. The vast bulk of our dollars are coming all from equipment that has been recently redesigned and the smaller part, which is on the products, which haven't been recently redesigned are in the process of being redesigned now.
But the impact they will have on the short-term even after they are out there is less than the ones which we have just done because the volume isn't high.
Norman Asbjornson
But it will give us, going forward, an entirely new product line for both the Longview and the Tulsa facility and they have been being received very well by the customers. They are obviously pleased with what we're doing as is evidenced by our upswing in orders.
Norman Asbjornson
So that's kind of the picture that we see and hear at this point in time. We have no big issues out there that we're aware of.
We, as far as our marketing of the product, we know no issues out there, we know no big warranty issues. We've stumbled a little bit internally on our internal reporting systems and we will be noting that.
But it's not a consequence and it has not had and will not have any big effect on us and we have it resolved. We had a mistake made in a way that required that we notify you of it, which we will do.
But it was not one that is going to have any long-term nor -- or very much short-term effect on us.
Norman Asbjornson
So that being said, I'd like to open the conversation for questions now. If we may have them.
Operator
[Operator Instructions] Our first question comes from the line of Jon Braatz with Kansas City Capital.
Jon Braatz
Can you talk a little bit more about the price increase in the first quarter and what you're expecting in the second quarter, the size of the price increase? And maybe do that in the context of what you're also seeing in terms of some -- maybe component cost increases or steel cost increases whatever.
And we'd be able to fully offset some of those costs out increases, if indeed there are some?
Norman Asbjornson
Certainly. If I just had to give you a percentage because what we've done, we've done a number of things.
Where we were thinking that we had some things which were underpriced, we priced them up a little bit. And we did a lot of spot pricings just trying to correct some problems we felt we had in our pricing structure.
But then, we also went in and did a pretty much in generalized price increase. So we had a variety of small incremental price increases going on.
When it's all into the system and recognized it with the backlog, we have right now, it's not all going to come out in the second quarter. Some of it is going to drift into the third quarter before it gets out of the backlog.
But it probably is somewhere in the vicinity of a 5% price increase. And as far as what's going on in the commodity business, that's a non-issue.
For the first time in a long time, steel was up very modestly, copper and aluminum are down modestly. Net result, nothing.
In other words, I don't see that as being an issue to be discussed on commodities. There is price increases coming through from component manufacturers.
Some of them have been fairly substantial. The biggest probably has been about an 8% one.
But the most of them are down in the low-single digits, meaning in the 2%, 3%, 4%, 5% area. And since the component part of the material cost is just a portion of the material cost, not includes the commodity part, it's the net result and that's probably down somewhere around 3%.
And we got probably somewhere around the 5% increase. So we'll be improving our margin for that reason, if no other reason.
And along with it's own work we've done and all the money we spent on new machinery and rearranging the factory is paying off and improved productivity, both in our sheet metal fabrication, as well as our assembly areas. So we don't see that as being negative.
So all in all, we have probability at this point in time, everything we can see have been modestly increasing, gross margin coming all the way to the bottom line.
Jon Braatz
Okay, going back to the new machinery that you installed most recently. How far along are you and maybe, say, reaping the entire benefits of that -- the improved productivity, you mentioned that you're seeing some of it, but will we see additional gains throughout the year from this new equipment?
Norman Asbjornson
Well, what we did because as we were doing this, we had to take out some old machinery before we can put in the new machinery. So we have a problem of how do you do that and not affect your production last year?
The way to do it is we had excess building on the west side of the street here in Tulsa. And so we put in some of the machinery over here so that we could take it out on the east side and not lose our ability to satisfy our customers.
And by doing that and then by refilling the east side backup, what we have done is we didn't just replace the machinery that we got rid off, we actually increased our capacities rather significantly. So we are at the present time realizing virtually all the benefits of the new product, of the new machinery on the production we're doing.
However, we're not realizing all of its future because we're not using all of it. So as we get more volume, we will continue to be benefiting from that new machinery.
Operator
Your next question comes from the line of Joe Mondillo.
Joseph Mondillo
I was wondering if you guys -- if you had any idea on how the mild temperatures affected the first quarter at all?
Norman Asbjornson
Well, I've thought that the effect to this was a very positive manner. However, we have a newspaper and it's called the Air Conditioning News, and I would just reading in the most recent April issue that in the third quarter, in the nonresidential construction by the association of the contractors that their business was down 3.24%.
And the most recent month was into January, and it was down another 0.8%. And they were trying to figure that out in this article.
Like I said, I just received that news magazine here, in just recently. And the general consensus was that they couldn't figure out why it wasn't there.
That's what they say in there and they have a pretty broad spectrum -- visibility into it. I don’t think that was true totally and maybe it didn't get going until further along in the year namely February or March, but I'd truly believe we had some people start building buildings much sooner than they normally would have.
Some of them in January probably just didn't think that the weather could really be that good and they probably just sat, they're waiting for the big snowstorm, which never occurred. Eventually, they got to believe, well, we just want to get going and start building the building.
And they did so, I'm quite certain.
Joseph Mondillo
Okay, and then in terms of the orders and what you saw throughout the quarter, so February, I believe, you said -- second half of January, February were extremely strong and I believe you said on the last call that things settled a little bit from such a strong February and March. Did things sort of stabiliz from the March levels into April?
Or how did the order trend look throughout the quarter and into April?
Norman Asbjornson
Well we kind of distorted to a point that I have a hard time giving you a good answer to that because that's when we put the price increases into effect in April. Whenever you do that, you bring in some orders prematurely because people don't want to pay that extra money.
And so we give them 30 days from the time we announced the price increase until it becomes effective that they can't order anything anymore. So it gives them time to cover the orders that they've made bids on to their contractors or to the customers so that they can go on and claim those up because they bid it based upon the premise of our old pricing.
So that 30 days gives them the time to put a lot in and they did. Well, they gave us a lot of orders in April and then what you normally expect is that there's a little bit of a drought that will follow that.
And so since we've just closed April, and we're just getting well into May, we're looking for the drought and so far, it doesn't appear to be very bad. So we had a fantastic April and bookings due to the price increases and so far, it doesn't look like we're going to pay too big at penalty for it in May.
If we don't pay a very big penalty for it in May, then we're just going to be talking more optimistically than I am right now.
Joseph Mondillo
Okay, and in terms of the price increases, I'm not sure if I'd heard you wrong or what but I thought you said maybe that you had a problem with price increases last year? Or some sort of issue with price increases, did I get that wrong?
Norman Asbjornson
No, what happened last year, the first 7 months of last year, we were up 19% on orders. We felt we had a great year going and we put some price increases in.
But then out there in the eighth month, it seems that all the world has changed dramatically and from there on until the end of the year, the average for those last 5 months was down 9% compared to the previous year. So we went from having a plus 19% to a negative 9%.
So during that negative 9%, we felt that bottom was falling out of the marketplace except we had pretty well figured that it was the replacement portion of it that was doing so and we didn't want to raise prices in a declining -- in severely declining market because that would have only lost us more volume and the lost of the volume would have been more than the gain we would have realized from price increase. So we did that throughout the last half of last year and into the first 10 days of this year before orders started flowing the way they did.
That's what I was saying is we didn't have price increases very much in the last half of last year because of the downturn we were experiencing.
Joseph Mondillo
Okay, got you. And then I don't know if you talk about maybe a little more color on sort of the demand that you're seeing right now.
What kind of size products are you seeing? What kind of regions in the country are sort of heavier than others?
And then also end markets in terms of where the demand is coming from?
Norman Asbjornson
Okay, the majority of our growth and the best part of our growth has been in our larger tonnage units that we redesigned. Now, I can't say that's because of the market conditions necessarily because that's where we started our redesign efforts was in the largest ones and we worked to the bottom ones.
So they had had more time out in the marketplace to develop a positive image and a more of a customer following and a smaller ones. But the bigger ones have led our price, our order input and the small ones have come along very well, but I would still say that it's been in the larger tonnages where we've done the best.
At this point, that's what we think we're seeing. As far as parts of the country, in general, I would say it's a pretty uniform thing.
I would say the Western part of the country may be suffering more than the rest of the country is. But really California is suffering quite a bit to some degree.
I think Oregon and Washington state are also. But those would be the only ones that I would say might noticeably be showing problems with growth is region.
Now in those -- the other parts of the areas, there probably our individual states that are having problems for whatever reason. But in general, it's just the Western issue.
Joseph Mondillo
Then any color on end markets such as education, healthcare, or where are you seeing the demand?
Norman Asbjornson
Well, if I to believe the Census Bureau here, the strongest demand of all is in manufacturing. And it's pretty spectacular.
The next strongest demand is in commercial, which is your retail, your office, your retail in stores and things of that nature. And then the next one down from that is the healthcare is the next.
I'll give you some numbers. The manufacturing, this is on a March-to-March basis, 42.5% up.
Spectacular. commercial, 11.5%; healthcare, 7.1%; educational, 3.4%; religious, negative 8.2%; office building, 1.8%; lodging, 1.3%.
So those are the buildings that we furnish equipment to and that's what they are. And that's what I'd say, if you add it all that up, it's not a bad growth from these things.
Now these are buildings normally speaking that could have been started at any point in time because this is the dollars that are spent on those buildings. So some of them are in the final stages of completion and they're spending the money on it, some of them are at the beginning stages of building.
But that's where they're spending money in March of this year.
Joseph Mondillo
Okay, and then just last question and it may have to do with sort of your comments on sort of the larger tonnage, potentially in the mix. But if you could just address the gross margin you obviously saw close to 21% this quarter.
Do you think that's sustainable or what are you looking at the gross margin?
Norman Asbjornson
Well, I'll be very disappointed if it doesn't grow bigger than that. I think we've got everything in place to see a continuation, not a huge continuation but a modest continuation of improving gross margins.
Operator
The next question comes from the line of Jon Braatz.
Jon Braatz
Just a follow-up. Kathy, I see, that your tax rate went up as you weren't able to take advantage of some tax credits and also you didn't qualify for the production activity tax credit.
Is that the accelerated depreciation that you missed out on?
Kathy Sheffield
Yes, it is, Jon.
Jon Braatz
Okay, all right. And then secondly, I assume tax rate goes back to normal and the remaining 3 quarters, which is right around 37% or something to that effect?
Kathy Sheffield
That's correct. We're anticipating it would be around 37% and then always looking, waiting for the government to possibly approve the R&D credit, if which it could lower that to 36%.
Norman Asbjornson
The mix, however, will have to include what we just furnished, which is right at 40%. So the net, the mix for the year is probably going to be more like 38% or 37.5%.
Operator
[
Operator
Operator Instructions] We have a question from the line of Joe Mondillo.
Joseph Mondillo
Norman, I guess had a one quick question. First off, do you have the backlog at the and of 2011?
Norman Asbjornson
Yes, I do. One moment here.
The backlog at the end of 2011 was $43,993,763.
Joseph Mondillo
Okay, and then I guess just looking at the backlog, so the backlog was up 20% year-over-year. And that's roughly, you should realize all of that backlog within the quarter.
Having said that, and the fact that you continue to seem to receive solid orders continued through April, which is essentially would be the entire second quarter. Are we expecting -- could we be expecting a 20% year-over-year top line growth in the second quarter?
Norman Asbjornson
That's pretty big growth.
Joseph Mondillo
Because I mean, essentially -- if the fact...
Norman Asbjornson
Here's the only problem. I've got to hire people to do that.
And I am hiring people as fast as we can. However, our unemployment in Oklahoma right now is sitting at 5.4%.
So you're getting down into a group of people that aren't very much enthusiastic about working and in some cases, aren't really qualified to work. And so we're not able to just hire people because we're trying to hire them.
We're having some difficulty, not big difficulty, I'm not saying that, but we cannot just ramp the place up as fast as we might, and that would be the primary reason we wouldn't be able to do 20% over. And the other thing is I don't want to just take a bubble and squash it real quickly, if it isn't going to be followed on by additional orders.
And that's not to say I don't think that additional orders are coming. I just don’t feel real comfortable in this economic environment to say that they definitely are.
But if it's because we're taking the business from other people, then I see no reason why we shouldn't continue to do so.
Joseph Mondillo
Okay, and then just one more question. In terms of the first quarter, sort of the upper earning leverage that you saw, it seems a little weak considering you saw the improvement in the gross margin, the top line grew by 8%, but SG&A seem to be very bloated compared to last year, as a percent of sales, the SG&A was very comparable.
So you didn't get the leverage down -- fully down to the bottom line. You saw top line grow 8%, EPS grow just 2%.
So could you comment on that? And should that improve throughout the year and why did that -- why didn't you get that the leverage there?
Norman Asbjornson
To some degree, that will improve. One of the things that we had was profit-sharing expenses went up on it.
And the other thing is that we have replenished some of our warranty throughout the things we had in warranty and everything. So we've improved some of our reserves and everything to it.
Joseph Mondillo
Okay, and so compared -- you do that on annual basis though, right? So was the warranty expense higher than last year for some reason?
Norman Asbjornson
Yes, it was. What happened to us with new products, you always take a chance that you're going to have some problems and we did have 2 problems.
And to that, you might say that we did a recall. We sent people out in vehicles to go to those job sites and do some work.
One of them was a manufacturing design -- manufacturing problem, a quality issue, if you will. On one side of the street, the people doing the work built the product correctly.
On the other side, they did not. And so we had to go correct that.
And the other thing was an engineering, a minor engineering error that we didn't want to leave out there. Both of these were connected to heating, and we didn't want to leave somebody having problems with their heating system.
So we did spend an unusual amount of money. Those things are all behind us now.
And so the product is basically considering that we redesigned all the product. It was pretty trouble-free and it's kind of like where they tell you don't buy a brand new, the first of the new cars because it's going to have some problems.
Well, that holds true in air conditioners, too. There are some potential problems on the brand new product as manufacturing gives everything under way.
And so we did have a little bit more on warranty costs than would be normal.
Operator
And there are no more questions in queue.
Norman Asbjornson
Okay. Well, thank you for coming with us to talk things about the first quarter of 2012.
We're looking forward to, as we've said, an even more promising fall when we have it in -- with the August for the second quarter. We're optimistic that we will bring you even better news.
And thank you for staying with us and being our stockholders and being part of our operation. Thanks.
Goodbye.
Operator
This concludes today's conference call. You may now disconnect your lines.