AAON, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the same periods of 2012 unless otherwise stated. AAON manufactures and sells commercial heating and air-conditioning equipment in the United States and Canada. Foreign sales were 6.1% of first-half sales, versus 5.0% a year earlier. Results are unaudited interim figures. Per-share and share data reflect the three-for-two stock split effective July 2, 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $91.2 million | $83.3 million | $158.1 million | $148.3 million |
| Gross profit | $27.7 million | $21.1 million | $43.0 million | $34.6 million |
| Gross margin | 30.3% | 25.3% | 27.2% | 23.3% |
| Operating income | $18.6 million | $14.2 million | $27.0 million | $21.8 million |
| Operating margin | 20.4% | 17.0% | 17.1% | 14.7% |
| Net income | $12.1 million | $9.3 million | $19.3 million | $13.9 million |
| Basic and diluted EPS | $0.33 | $0.25 | $0.52 basic; $0.52 diluted | $0.38 basic; $0.37 diluted |
| Operating cash flow | Not separately stated for Q2 | $27.7 million | $19.6 million |
Liquidity, debt, and cash flow
- Cash and cash equivalents were $19.4 million at June 30, up from $3.2 million at December 31, 2012. Working capital was $67.8 million, up $15.9 million, or 30.6%, from year-end.
- No revolver borrowings were outstanding at June 30; $29.1 million was available under the $30 million facility, net of a $0.9 million standby letter of credit. The company reported compliance with its financial covenants.
- First-half cash flows: $27.7 million provided by operations, $9.6 million used in investing, and $1.9 million used in financing. Investing included $1.9 million of capital expenditures and purchases of certificates of deposit and investments, partly offset by maturities.
- Total current assets were $121.4 million and current liabilities $53.6 million. The balance sheet reported no outstanding debt; accrued liabilities included $14.0 million due to representatives and a $6.8 million warranty accrual.
Changes and management commentary
- Q2 sales rose 9.5%; management attributed growth primarily to market-share gains in new construction and replacement markets and earlier product price increases. First-half sales increased 6.6%; management also cited warm winter weather that pulled construction and manufacturing spending into the first half.
- Gross margin expanded 5.0 percentage points in Q2 and 3.9 points for the first half, mainly due to lower raw-material costs and price increases. Q2 SG&A rose 31.7% to $9.1 million and increased to 10.0% of sales from 8.3%; the company cited higher warranty, profit-sharing, share-based compensation, sales-tax, and employee-benefit costs.
- First-half net income increased 38.9%. The effective tax rate was 29.5%, compared with 36.2% a year earlier, reflecting reinstated R&D and Indian Employment Credits and a change in the estimate of recoverable 2012 tax credits. Q2 tax rate was 36.1%, versus 34.2%.
- Management said operating cash flow and the revolver, or comparable financing, should provide adequate liquidity for 2013 and the foreseeable future. No specific revenue or earnings guidance was provided. The business is seasonal, with peak sales generally July through November.
Risks, contingencies, and unusual items
- Key cited risks include economic weakness and cyclicality in commercial and industrial construction, raw-material and component price volatility, interest-rate changes, and competition. Copper, steel, and aluminum prices were lower year over year for the first half, but management described commodity markets as volatile and unpredictable.
- Q2 other income included a $0.266 million gain because insurance proceeds for prior-year ice-storm repairs exceeded repair costs. The filing also reports a $0.2 million additional state income-tax expense in Q2 related to an updated assessment of required state filings.
- The company reported a previously identified material weakness in internal control over financial reporting related to review procedures for intercompany activity, income taxes, and inventory. Remediation actions were underway, but management said the weakness would be considered remediated only after revised controls operated for a sufficient period; testing was expected during the remainder of 2013. Management separately concluded disclosure controls were effective.
- Management said ordinary-course legal claims were not expected to have a material effect. No material off-balance-sheet arrangements or material changes in contractual obligations were reported. The revolver maturity was extended to July 27, 2014 by an amendment effective July 28, 2013.
Important facts for investors to verify
- Whether sales growth and margin expansion persist after the first-half pull-forward effect, price increases, and lower input costs.
- Whether the disclosed material weakness is fully remediated following the planned control testing.
- How warranty costs, SG&A growth, and receivables develop as sales increase; first-half receivables used $6.3 million of cash.
- The repeatability of the lower first-half tax rate, given the discrete tax credits and estimate change, and the effect of the $0.266 million insurance-related gain.
- Available liquidity and covenant compliance, as well as exposure to construction-market cycles and commodity-price volatility.