AAON, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. AAON manufactures commercial and industrial heating and air-conditioning equipment. Sales are primarily domestic; approximately 5% were foreign. About 55% of sales came from renovation and replacement markets and 45% from new construction.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $266.2 million | $244.6 million | Up 8.9% |
| Gross profit / margin | $46.3 million / 17.4% | $55.2 million / 22.6% | Down $8.9 million; margin down 5.2 percentage points |
| Operating income / margin | $22.2 million / 8.3% | $32.7 million / 13.4% | Down 32.2% |
| Net income / margin | $14.0 million / 5.3% | $21.9 million / 9.0% | Down 36.1% |
| Diluted EPS | $0.56 | $0.87 | Down 35.6% |
| Operating cash flow | $26.5 million | $32.2 million | Down $5.7 million |
Sales increased with stronger replacement demand, new-product acceptance and market-share gains. Profitability fell as raw-material and component costs rose about 6% overall, labor costs increased 8%, and freight costs increased 1%; AAON said competition limited its ability to recover costs through pricing. A production-equipment trade-in loss of $1.8 million also reduced operating income.
Fourth-quarter 2011 sales were $63.4 million, compared with $65.8 million a year earlier. Quarterly net income was $0.9 million versus $5.8 million, including the $1.8 million pre-tax equipment trade-in loss. Fourth-quarter gross profit was $8.6 million, versus $14.2 million.
Cash, debt and liquidity
- Cash and cash equivalents were $13,000 at year-end, down from $2.4 million; the company had no certificates of deposit or held-to-maturity investments at year-end, versus $11.0 million combined in 2010.
- Working capital was $45.7 million, down from $55.5 million. Current assets were $84.4 million and current liabilities $38.7 million.
- Revolving-credit borrowings were $4.6 million, with $24.5 million available under a $30 million facility. The variable rate was LIBOR plus 2.5%; the year’s weighted-average rate was 3.4%. The facility matures July 29, 2012, and management expected to renew it.
- Capital expenditures were $35.9 million in cash-flow reporting; a supplemental disclosure reports $39.8 million of capital expenditures, including $3.9 million accrued in accounts payable. Net cash used in investing was $24.5 million; net cash used in financing was $4.3 million.
- Cash dividends paid were $5.9 million. The company reported $3.7 million of share repurchases during 2011, although it stated that no shares were repurchased under its public buyback program during the year.
Outlook, risks and notable items
- Management expected 2012 capital expenditures of approximately $10 million to $12 million and said cash, operating cash flows and the credit facility should meet foreseeable liquidity needs.
- Backlog at March 1, 2012 was approximately $55.3 million, compared with $37.9 million a year earlier. Orders were generally filled within 60–92 days after becoming firm, but remained subject to customer cancellation.
- Management attributed the sales increase partly to customer purchases prompted by 100% bonus tax depreciation for qualifying equipment placed in service through 2011. A related estimated tax receivable of approximately $10.0 million was recorded at year-end.
- In February 2011, a severe snowstorm caused a manufacturing-facility roof collapse. The company reported 8.5 days of lost production and repair expenses; it did not quantify the total effect of the disruption.
- Key risks include economic weakness and cyclical construction demand; commodity and purchased-component prices or availability; competition and pricing pressure; product development and regulatory requirements; warranty and product-liability exposure; and dependence on founder and CEO Norman H. Asbjornson. The company also identified possible adverse effects from a proposed energy-product testing rule.
- The company reported no material pending legal proceedings, no material off-balance-sheet arrangements, compliance with credit-facility covenants, and effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether gross-margin deterioration continues and whether pricing can offset material, labor and freight cost pressures.
- How much of the year-end tax receivable is collected, and the effect of bonus depreciation ending on customer demand and tax payments.
- Whether the credit facility was renewed on acceptable terms before its July 2012 maturity, and whether liquidity remains adequate given year-end cash of just $13,000.
- Whether the $55.3 million backlog converts to revenue as expected, including the impact of cancellations and seasonality.
- The full cash and accounting cost of the roof collapse and equipment replacement, and reconciliation of reported capital expenditures ($35.9 million cash-flow figure versus $39.8 million including accrued amounts).