AAON, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. AAON engineers and manufactures commercial and industrial HVAC equipment, primarily for U.S. new-construction and replacement markets.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $433.9 million | $405.2 million |
| Gross profit / margin | $103.5 million / 23.9% | $123.4 million / 30.5% |
| Operating income | $55.8 million | $74.1 million |
| Net income / diluted EPS | $42.6 million / $0.81 | $54.5 million / $1.03 |
| Operating cash flow | $54.9 million | $58.0 million |
| Capital expenditures | $37.3 million | $41.7 million |
Revenue increased 7.1%, while net income declined 21.9%. Gross margin fell 6.6 percentage points; net margin was approximately 9.8%, compared with 13.4% in 2017. The company reported non-GAAP EBITDAX of $80.8 million, down from $95.7 million.
Fourth quarter: Sales were $112.3 million versus $104.2 million a year earlier; gross profit was $27.8 million versus $31.1 million; net income was $12.5 million versus $15.8 million; diluted EPS was $0.24 versus $0.30.
At year-end, cash and cash equivalents were $2.0 million, working capital was $92.8 million, and stockholders’ equity was $247.5 million. There was no revolving-credit borrowing; $28.7 million was available under the $30 million facility, net of a standby letter of credit. The company had no long-term or current debt reported.
Material changes and operating developments
- FY sales growth reflected a price increase, higher parts sales (up $6.4 million) and water-source heat-pump sales (up $4.7 million). Total units sold rose 7.6%; water-source heat-pump units more than doubled.
- Gross profit was pressured by higher material costs, elevated staffing and operational changes. Average prices rose 18.2% for galvanized steel, 11.8% for stainless steel, 6.4% for aluminum and 4.7% for copper.
- AAON paid a one-time $1,000 employee bonus in January 2018, adding $1.9 million to cost of sales before taxes and benefits.
- Warranty expense declined to $8.8 million from $11.2 million. A revised failure-rate estimate reduced expense by $0.9 million; the year-end warranty accrual nevertheless rose to $11.4 million from $10.5 million.
- In February 2018, AAON acquired substantially all of WattMaster Controls’ assets for $6.4 million, including goodwill of $3.2 million, to accelerate development of in-house electronic controllers.
- Cash fell $19.5 million to $2.0 million. Investing outflows included $37.3 million of capital expenditures and the WattMaster acquisition; financing outflows included $26.8 million of share repurchases and $16.7 million of dividends.
Outlook, risks and contingencies
- Management forecast approximately $40 million of capital expenditures in 2019, principally for completing the Tulsa research and development laboratory, water-source heat-pump production lines and Tulsa expansion. No revenue or earnings guidance was provided.
- Backlog at February 1, 2019 was approximately $147.0 million, versus $64.9 million a year earlier. Management said firm orders are generally targeted for shipment within 60–90 days, but customers may cancel subject to cancellation charges.
- Management described new construction as uneven and unpredictable, and said it emphasized replacement-market demand. It expects available cash, operating cash flow and credit access to meet foreseeable liquidity needs.
- Key risks include cyclical construction demand, material-price and component-supply volatility, competition, dependence on a major customer (Texas AirSystems exceeded 10% of sales in 2018), tariffs and regulatory changes, warranty/product-liability exposure, cybersecurity, and concentration of operations around Tulsa.
- One material purchase obligation of approximately $2.2 million was due to expire in December 2019. Management considered pending litigation and claims unlikely to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Assess whether sales growth and the substantially higher backlog convert to shipments and earnings without further margin deterioration.
- Track material costs, staffing and production efficiency, and whether price increases offset input-cost inflation.
- Review warranty claims and the assumptions behind the $0.9 million estimate reduction and $11.4 million reserve.
- Monitor cash generation against planned capital spending, buybacks and dividends, given the $2.0 million year-end cash balance.
- Evaluate major-customer concentration and the strategic and financial contribution of the WattMaster acquisition.