AAON, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited consolidated results. AAON engineers and manufactures commercial HVAC equipment. Sales are made through manufacturer representatives and an internal sales force, with revenue recognized when products ship and title and risk pass to the customer.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $73.8 million | $64.9 million | $202.8 million | $178.7 million |
| Gross profit | $14.3 million | $12.5 million | $37.6 million | $41.0 million |
| Gross margin | 19.3% | 19.3% | 18.5% | 22.9% |
| Operating income | $8.8 million | $7.3 million | $20.9 million | $24.4 million |
| Net income | $5.6 million | $5.2 million | $13.1 million | $16.1 million |
| Diluted EPS* | $0.23 | $0.21 | $0.53 | $0.63 |
*Per-share and share figures reflect the three-for-two stock split effective June 13, 2011.
- Cash flow: Nine-month operating cash flow was $11.3 million, down from $23.7 million. Investing used $20.3 million, including $30.6 million of cash capital expenditures. Financing provided $8.9 million. Cash declined $0.1 million to $2.3 million.
- Balance sheet and liquidity: At September 30, 2011, total assets were $182.3 million; working capital was $41.7 million. Cash and investments held to maturity totaled about $2.9 million; no certificates of deposit remained. Inventory was $42.3 million, up from $33.6 million at year-end 2010.
- Debt: The revolving facility had $14.0 million outstanding, $13.7 million available, and a $30.0 million maximum; the rate was LIBOR plus 2.5% (2.7% at quarter-end). There were no revolver borrowings at December 31, 2010.
- Dividends and repurchases: The company paid $3.0 million in dividends during the first nine months and repurchased $2.7 million of stock.
Changes and operating drivers
- Q3 sales rose 14% year over year and nine-month sales rose 13%. Management attributed growth to new products, a replacement market described as up 10% from 2010, increased market share, and a Q3 price increase on one product line.
- Q3 gross margin held at 19.3%; nine-month gross margin fell 4.4 percentage points. Management cited higher raw-material and component costs, which it could not fully pass through during the period, as well as snow-related labor inefficiencies and manufacturing rearrangement.
- Nine-month net income fell about 19%, despite higher sales. SG&A was broadly stable. Nine-month other expense increased to $0.7 million, primarily reflecting the $0.5 million insurance deductible for storm damage.
- Steel, copper, and aluminum prices were respectively about 8%, 22%, and 6% higher than a year earlier. Management uses supplier fixed-price contracts, generally covering 6–18 months, and pricing actions to limit commodity exposure.
Outlook, risks, and unusual items
- No quantified sales or earnings guidance was provided. Management expected an additional $0.8 million of capital expenditures in the remainder of 2011, for facility expansion and equipment. It said operating cash flows, matured investments, and the revolver were expected to support liquidity and capital needs; it also said the credit market was not expected to impede the July 2012 facility renewal.
- A February snowstorm damaged the roof over Tulsa production areas, affecting three lines and causing 8.5 days of lost production. Most repairs were completed in Q3; the policy has a $0.5 million deductible, and uninsured equipment damage had not yet been determined.
- Key risks identified include commodity and component-price changes, cyclical commercial and industrial construction demand, interest-rate changes, and general economic and competitive conditions. Management noted that raw-material increases could continue to pressure margins.
- The renewed revolver matures July 29, 2012. Working-capital covenant minimums rise from $30 million to $35 million at December 31, 2011 and $40 million at June 30, 2012. AAON reported compliance at quarter-end; working capital was $41.7 million.
- Management said ordinary-course legal claims were not expected to have a material effect. U.S. tax years 2008 and 2009 were under audit; other tax examinations were also disclosed. No unrecognized tax benefits or related interest and penalty accruals were reported.
Important facts for investors to verify
- Whether sales growth and the replacement-market strength continue, and whether price increases offset rising input costs.
- Progress restoring normal productivity after the Tulsa storm damage, and the final amount of any uninsured equipment loss.
- Inventory growth, operating cash generation, and the funding and returns expected from the substantial manufacturing investment.
- Revolver availability, covenant headroom as working-capital thresholds rise, and the terms of the next facility renewal.
- Outcome of tax audits and any developments in legal claims or other contingencies.