AAON, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The interim financial statements are unaudited. AAON engineers, manufactures and sells commercial heating and air-conditioning equipment.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $113.7 million | $104.6 million | $301.1 million | $292.3 million |
| Gross profit | $35.7 million | $33.1 million | $92.3 million | $91.6 million |
| Gross margin | 31.4% | 31.6% | 30.7% | 31.3% |
| Operating income | $22.6 million | $22.7 million | $56.7 million | $61.7 million |
| Net income | $14.7 million | $15.7 million | $38.7 million | $42.0 million |
| Diluted EPS | $0.28 | $0.29 | $0.73 | $0.78 |
Q3 sales increased 8.7% year over year, while net income declined about 6%. For the nine-month period, sales grew 3.0%, but net income fell about 7.7%. Unit sales rose 7.7% in Q3 and 8.8% year to date; much of the year-to-date unit growth came from the newer, lower-priced water-source heat pump line.
Cash flow and liquidity: Nine-month operating cash flow was $41.9 million, versus $47.0 million a year earlier. Capital expenditures were $26.4 million; investing cash outflow was $23.2 million and financing cash outflow was $19.3 million. Cash and cash equivalents ended at $23.5 million, down $0.6 million from year-end 2016. Cash plus certificates of deposit and held-to-maturity investments totaled approximately $39.9 million.
Debt: No revolver borrowings were outstanding. Approximately $29.2 million was available under the $30 million facility, which expires July 27, 2018. The company reported compliance with its financial covenants. Total assets were $303.1 million and stockholders’ equity was $230.3 million at September 30, 2017.
Material changes and notable items
- Q3 SG&A rose to $13.0 million from $10.4 million; nine-month SG&A rose to $35.5 million from $29.9 million. The principal stated driver was higher warranty expense following changes that clarified eligible claims and introduced a claim-submission deadline.
- Warranty expense was $3.3 million in Q3 and $7.6 million year to date, compared with $1.0 million and $2.7 million in the comparable 2016 periods. The warranty accrual reached $9.6 million at quarter-end.
- Higher commodity costs weighed on margins. Reported year-over-year increases in average raw-material costs included galvanized steel up 13.5%, copper up 2.7%, stainless steel up 2.6% and aluminum up 1.8%.
- Backlog was $73.8 million at September 30, 2017, compared with $62.2 million a year earlier and $49.1 million at December 31, 2016.
- Cash used for stock repurchases was $13.0 million and dividends paid were $6.8 million during the first nine months. The company repurchased 407,360 shares for $14.2 million, including employee-related repurchases.
Outlook, risks and contingencies
- Management estimated 2017 capital expenditures at approximately $48.5 million, including investment in a research and development laboratory, the water-source heat pump line and other projects. The laboratory was expected to be completed in 2018.
- Management stated that cash, expected operating cash flow, the committed credit facility and anticipated access to capital markets should meet working-capital and capital needs for 2017 and the foreseeable future. No earnings or revenue guidance was provided.
- The company described commercial and industrial new construction as uneven and cyclical, and said weaker economic activity could reduce sales and profitability. Raw-material and component price changes, interest rates, competition and general economic conditions were identified as risks.
- Management characterized the increased warranty costs as expected to be short-term. The filing also notes that actual warranty costs and other estimates may differ from assumptions.
- Pending ordinary-course claims and litigation were assessed by the company as remote from having a material adverse effect. No material contractual purchase agreements or material off-balance-sheet arrangements were reported.
- AAON planned to adopt the new revenue-recognition standard on January 1, 2018 using the retrospective method and expected no material financial-statement impact, though additional revenue disclosures were anticipated.
Important facts for investors to verify
- Whether warranty expense and the $9.6 million warranty accrual stabilize after the policy changes, and how claims develop.
- Whether rising input costs can be offset through pricing, productivity or sourcing, and the resulting effect on gross margins.
- Whether increased unit volumes translate into comparable revenue and profit growth, particularly as the water-source heat pump line expands.
- Progress, cost and timing of the laboratory and other capital projects against the 2017 capital-spending estimate.
- Operating cash conversion, especially the growth in accounts receivable and inventory, and the continued availability of the revolver beyond its stated 2018 maturity.