AAON, Inc. — 2012 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparative figures are for the corresponding 2011 periods. AAON manufactures and markets commercial heating and air-conditioning equipment in the U.S. and Canada. Foreign sales were approximately 6% of third-quarter revenue. Figures below are in millions of dollars except per-share amounts.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $76.8 | $73.8 | $225.1 | $202.8 |
| Gross profit / margin | $17.1 / 22.3% | $14.3 / 19.3% | $51.8 / 23.0% | $37.6 / 18.6% |
| Operating income / margin | $10.4 / 13.5% | $8.8 / 11.9% | $32.2 / 14.3% | $20.9 / 10.4% |
| Net income / margin | $6.0 / 7.8% | $5.6 / 7.6% | $19.9 / 8.8% | $13.1 / 6.5% |
| Diluted EPS | $0.24 | $0.23 | $0.80 | $0.53 |
For the nine months, operating cash flow was $38.4 versus $11.3 in 2011; investing cash outflow was $20.8 versus $20.3; financing cash outflow was $10.6 versus $8.9 provided in 2011. Cash increased by $7.0 from year-end 2011 to $7.0. Capital expenditures were $12.6 for the nine-month period. The filing attributes stronger operating cash flow to higher earnings and favorable working-capital movements, including increased accrued liabilities and payables; receivables growth used $8.2 of cash.
At September 30, total assets were $196.3 and stockholders’ equity was $137.0. Working capital was $54.0. There were no revolver borrowings outstanding, compared with $4.6 at December 31, 2011; $29.1 remained available under the $30.0 facility, net of a $0.9 standby letter of credit. The facility was renewed through July 28, 2013. The company reported compliance with its financial covenants.
Material changes and management commentary
- Third-quarter sales rose 4%; nine-month sales rose 11%. Management cited market-share gains in non-residential construction and replacement markets, plus earlier price increases. Management described market conditions as tight, with customers cautious about new projects.
- Gross margin improved in both periods. Management cited raw-material savings, pricing, product mix, improved productivity, and production efficiencies. The comparison also benefited from prior-year snowstorm-related production disruption and facility damage.
- SG&A increased 23.8% in Q3 and 17.5% year to date, reflecting higher profit-sharing and incentive compensation, salaries, warranty charges, and insurance costs.
- The nine-month effective tax rate rose to 38% from 35%; the Q3 rate was 43% versus 35%. Management attributed the increase to the loss of certain tax credits.
- Management gave no specific numerical earnings or revenue guidance. It expected operating cash flows and the credit facility or comparable financing to meet liquidity needs for 2012 and the foreseeable future, while noting that expectations depend on sales, pricing, industry and economic conditions, and access to financing.
Risks, contingencies, and unusual items
- Internal controls: Management reported material weaknesses involving review procedures for intercompany activities, income taxes, and inventory, in addition to an inventory-valuation weakness identified earlier in 2012. Disclosure controls were deemed ineffective at quarter-end. Management reported additional post-close procedures and was developing remediation; it warned that unresolved weaknesses could lead to material misstatements or a restatement.
- Business risks: Results are exposed to cyclical commercial and industrial construction demand, broader economic conditions, competition, and volatility in steel, copper, and aluminum costs. The company uses supplier contracts, generally for 6–18 months, to manage commodity exposure; it reported no derivative contracts for key raw materials in the quarters presented.
- Investments: The company held $5.3 of corporate notes and bonds rated A- to BBB-, with maturities of two years or less, and $3.2 of certificates of deposit. Management described the notes and bonds as moderate risk.
- Taxes and legal matters: Tax examinations cover federal, state, local, and non-U.S. periods specified in the filing; management believed recorded liabilities were adequate. Ordinary-course claims and legal actions were not expected by management to have a material effect. No material off-balance-sheet arrangements were reported.
- Subsequent event: On November 7, 2012, the board declared a regular semi-annual dividend of $0.12 per share and a special dividend of $0.12 per share, payable December 24 to holders of record December 3.
Key facts for investors to verify
- Progress and independent validation of remediation for the disclosed internal-control weaknesses, particularly given the stated risk of financial-statement misstatement or restatement.
- Whether improved gross margins and operating cash generation are sustainable as commodity prices, production volumes, and construction-market demand change.
- Receivables, inventory, and accrued-liability trends, which materially affected working capital and operating cash flow.
- Liquidity after payment of the regular and special dividends, and renewal of the revolving facility before its July 2013 maturity.
- The filing’s reported absence of revolver borrowings at September 30 alongside substantial intra-period revolver draws and repayments; confirm period-end versus intra-period balances when assessing cash and debt.