AAON, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This annual filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial figures below are in millions unless otherwise indicated.
Business context
AAON designs, manufactures and sells commercial and industrial heating and air-conditioning equipment, including rooftop units, chillers and air-handling systems. Sales are primarily domestic and serve new construction and replacement markets; management estimated 55% of 2014 sales came from renovation and replacement. The company described new construction demand as unpredictable and uneven.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $356.3 | $321.1 | +11.0% |
| Gross profit / margin | $108.3 / 30.4% | $89.8 / 28.0% | Margin +2.4 pts |
| Operating income / margin | $68.0 / 19.1% | $55.8 / 17.4% | +21.8% |
| Net income | $44.2 | $37.5 | +17.6% |
| Diluted EPS | $0.80 | $0.68 | +17.6% |
| Cash from operations | $52.3 | $53.6 | −2.4% |
| Capital expenditures | $16.1 | $9.0 | +$7.1 |
Fourth quarter: Sales were $84.7 million versus $73.4 million in Q4 2013; gross profit was $25.2 million versus $20.2 million; net income was $10.5 million versus $7.8 million. Diluted EPS was $0.19 versus $0.14.
At year-end, cash and cash equivalents were $22.0 million, working capital was $88.4 million, total assets were $233.1 million and stockholders’ equity was $174.1 million. The company had no revolving-credit borrowings and reported $29.2 million available under its $30 million facility, after a standby letter of credit. Cash, certificates of deposit and held-to-maturity investments totaled approximately $49.3 million. No long- or short-term debt was reported.
Material changes and unusual items
- Sales growth reflected favorable reception to new products and market-share gains. Unit sales increased 3.9%; management attributed approximately 5.5% of sales growth to average selling-price and product-mix effects.
- Gross margin improved, which management attributed primarily to efficiencies from equipment investment. Warranty expense fell to $4.9 million from $6.0 million.
- SG&A rose to $40.6 million from $34.0 million, including $4.2 million in charitable donations, higher profit-sharing expense and higher compensation. The company’s non-GAAP reconciliation adds back $3.862 million of non-recurring donations, adjusted for profit sharing and taxes; adjusted net income was $46.4 million and adjusted diluted EPS was $0.84.
- Share repurchases totaled $29.3 million for 1.5 million shares; cash dividends were $9.7 million. Cash increased $9.9 million during the year.
Outlook, risks and contingencies
Management projected approximately $22 million of capital expenditures for 2015, principally for capacity and efficiency improvements, and stated that expected operating cash flows, cash balances and available financing should meet foreseeable needs. Backlog was approximately $49.5 million as of February 1, 2015, versus $48.8 million as of March 1, 2014; orders are generally filled within 60–90 days but may be cancelled. No formal earnings guidance was provided.
Key risks include cyclical construction demand, competition, steel/copper/aluminum and component costs, regulatory changes (including DOE requirements), warranty and self-insurance estimates, and reliance on facilities concentrated mainly in Tulsa. The filing also identifies founder/CEO Norman Asbjornson succession as a risk; the Board was developing a succession plan. Management considered material litigation losses remote and reported no material contractual purchase agreements at year-end. The auditor issued unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Whether the improved gross margin and sales growth persist as construction demand remains uneven and commodity prices fluctuate.
- How the planned $22 million 2015 capital program affects capacity, efficiency, cash generation and returns on investment.
- The nature and recurrence of the 2014 charitable donations and the difference between reported donations and the non-GAAP adjustment.
- Whether share repurchases and dividends remain sustainable alongside capital spending and operating needs.
- Execution of the CEO succession plan, regulatory compliance costs and changes in warranty or self-insurance liabilities.