AAON, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited interim results. AAON engineers, manufactures and sells commercial heating and air-conditioning equipment. Sales are seasonal, typically strongest from July through November.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $104.6 million | $94.4 million | $292.3 million | $261.4 million |
| Gross profit / margin | $33.1 million / 31.6% | $30.2 million / 32.0% | $91.6 million / 31.3% | $79.1 million / 30.3% |
| Operating income | $22.7 million | $20.2 million | $61.7 million | $51.6 million |
| Net income | $15.7 million | $13.3 million | $42.0 million | $32.8 million |
| Diluted EPS | $0.29 | $0.24 | $0.78 | $0.60 |
- Q3 sales rose 10.8% year over year while units sold increased 20.4%; management attributed the difference primarily to product mix.
- Nine-month sales increased 11.8% and unit sales increased 17.0%. Nine-month net income rose about 28%.
- Operating margin was approximately 21.7% in Q3 versus 21.4% a year earlier; for the nine months it was 21.1% versus 19.7%. Nine-month SG&A declined as a share of sales to 10.2% from 10.6%.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $47.0 million, compared with $38.4 million in 2015. Investing used $21.1 million and financing used $19.3 million; cash increased $6.7 million to $14.6 million.
- At September 30, cash, certificates of deposit and current held-to-maturity investments totaled approximately $41.3 million. Working capital was approximately $98.0 million.
- No revolving-credit borrowings were outstanding. The $30 million facility had $29.2 million available after a $0.8 million standby letter of credit; it matures July 2018. The company reported covenant compliance.
- Capital expenditures were $23.6 million for the nine months, including investment in a new R&D lab, a water-source heat-pump line and other projects. Management estimated 2016 capital expenditures at approximately $32.7 million.
- Nine-month repurchases totaled $15.1 million, and cash dividends paid totaled $5.8 million. A $25 million open-market repurchase authorization was in place; the company also reported approximately $1.0 million of additional repurchases after quarter-end.
Changes, outlook and risks
- Management cited higher sales volume as the main driver of revenue growth. In Q3, cost of sales rose slightly as a percentage of sales, partly offsetting volume gains; over nine months, gross margin improved by 1.0 percentage point.
- Raw-material prices were lower year over year for copper, galvanized steel, stainless steel and aluminum, but management described commodity markets as volatile and unpredictable.
- No specific revenue or earnings guidance was provided. Management said cash, operating cash generation, the credit facility and expected access to capital should meet working-capital and investment needs for 2016 and the foreseeable future.
- Key disclosed risks include cyclical and uneven commercial/industrial construction demand, broader economic conditions, interest rates, competition, and changes in raw-material and component prices. Management continued to emphasize the replacement market amid unpredictable new construction.
- Management considered the likelihood of pending ordinary-course litigation or claims having a material adverse effect remote. No material contractual purchase agreements or material off-balance-sheet arrangements were reported.
- The company early adopted ASU 2016-09 in Q3. Excess share-based-compensation tax benefits were recognized in income tax expense/benefit, including $0.6 million in Q3 and $1.8 million for the nine months; management estimated an approximately 36% 2016 effective tax rate excluding discrete items.
Investor facts to verify
- Whether unit growth converts to sustained revenue and margin growth, given the Q3 product-mix effect.
- Execution, timing and returns on the R&D lab and other capital projects, and whether capital spending tracks the $32.7 million estimate.
- Warranty and inventory reserves, which depend on estimates; nine-month warranty expense declined to $2.7 million from $3.3 million, while the inventory obsolescence allowance increased.
- Use of the repurchase authorization and its effect on share count, cash resources and per-share results.
- Potential changes in construction demand, commodity costs, interest rates and tax credits; the filing provides no quantified forward sales or earnings guidance.