AAON, Inc. — 2014 Q3 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and nine months ended September 30, 2014, compared with the corresponding 2013 periods. AAON manufactures and sells commercial heating and air-conditioning equipment. Sales are moderately seasonal, with the peak period typically July through November.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $102.9 million | $89.7 million | $271.6 million | $247.8 million |
| Gross profit / margin | $33.4 million / 32.4% | $26.6 million / 29.7% | $83.1 million / 30.6% | $69.6 million / 28.1% |
| Income from operations | $19.5 million | $16.9 million | $51.1 million | $43.9 million |
| Net income | $12.4 million | $10.5 million | $33.6 million | $29.8 million |
| Diluted EPS* | $0.22 | $0.19 | $0.61 | $0.54 |
Sales and margins: Q3 sales rose 14.7%; units sold increased 6.6%, while average price per unit increased about 7%, primarily from product mix. Nine-month sales rose 9.6%, with units up 2.3% and higher pricing and favorable mix. Gross margin improved in both comparisons, which management attributed in part to lower material costs. SG&A rose to $13.8 million in Q3 and $32.0 million year to date, principally reflecting charitable donations, higher headcount and compensation; lower warranty costs partly offset the increase.
Cash flow and liquidity: Nine-month operating cash flow was $39.1 million, versus $38.8 million. Investing activities used $12.1 million, including $13.6 million of capital expenditures, compared with $32.7 million used in 2013. Financing activities used $20.3 million, including $17.3 million of share repurchases and $4.8 million of dividends paid. Cash and cash equivalents were $18.8 million at September 30, up from $12.1 million at year-end. Cash, current certificates of deposit and current held-to-maturity investments totaled approximately $42.1 million; long-term investments totaled approximately $12.6 million. Working capital was $88.5 million.
Debt and balance sheet: No revolving-credit borrowings were outstanding. The $30 million facility had $29.2 million available after a $0.8 million standby letter of credit; its maturity was extended to July 27, 2016. AAON reported compliance with its financial covenants. Total assets were $247.5 million and stockholders’ equity was $179.0 million at September 30, 2014.
Material changes and notable items
- Q3 operating results improved year over year, with higher sales and gross margin; nine-month gross margin increased 2.5 percentage points.
- Charitable donations were $4.0 million for the first nine months, including a $3.0 million pledge to A Gathering Place for Tulsa. Q3 donations were $2.9 million.
- Share repurchases totaled $17.3 million for the first nine months, versus $4.8 million in 2013. The company also paid $4.8 million in dividends. A three-for-two stock split took effect July 16, 2014; reported share and per-share amounts reflect the split.
- Capital expenditures increased to $13.6 million from $6.4 million, primarily for land, manufacturing equipment and production capacity.
- Accounts receivable and inventory increased during the period. Management attributed operating-cash-flow pressures to the timing of large quarter-end sales and higher inventory associated with increased backlog, partly offset by higher payables and accrued liabilities.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management estimated 2014 capital expenditures of approximately $15–$16 million and said available cash, expected operating cash flow, the revolving facility and potential access to capital markets should meet foreseeable liquidity needs. Management noted that some capital projects can be reviewed or canceled without substantial charges.
Management described commercial and industrial new construction as uneven and economically sensitive; a further decline could reduce sales and profitability. Other identified risks include commodity and component-price volatility, interest-rate changes, competition and general economic conditions. Copper and stainless steel prices declined year over year, galvanized steel increased, and aluminum was unchanged; the company uses fixed-price supplier contracts of six to 18 months to manage exposure. The company no longer benefited from certain federal tax credits that expired at year-end 2013 and were not extended for 2014. The estimated annual 2014 effective tax rate was approximately 34.0%.
AAON said pending ordinary-course claims and litigation were unlikely to have a material adverse effect. It did not expect significant assessments from disclosed tax examinations. A material supplier purchase obligation was approximately $0.3 million and due within one year. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether stronger sales, favorable product mix and gross-margin improvement continue beyond the seasonal peak period.
- Whether increased receivables and inventory convert to cash as backlog is fulfilled, and whether warranty costs remain lower.
- Actual capital spending against the $15–$16 million estimate and the returns from expanded production capacity.
- The cash and earnings effects of donations, repurchases and dividends, including the substantial increase in repurchases during 2014.
- Exposure to construction-market weakness, commodity costs, tax-credit changes and the outcome of tax examinations.
*Share and per-share data reflect the July 2014 three-for-two stock split.