AAON, Inc. — 2016 Form 10-K Summary
Business context and reporting period
AAON engineers, manufactures and sells commercial and industrial heating and air-conditioning equipment. This 10-K covers the fiscal year ended December 31, 2016; it also reports unaudited quarterly results. Sales are primarily domestic, with roughly 55% from renovation and replacement markets and 45% from new construction. The market is seasonal, with peak sales generally from July through November.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $384.0 million | $358.6 million |
| Gross profit / margin | $118.1 million / 30.8% | $108.7 million / 30.3% |
| Income from operations | $79.6 million | $71.3 million |
| Net income | $53.4 million | $45.7 million |
| Diluted EPS | $1.00 | $0.84 |
| Cash from operating activities | $63.9 million | $55.4 million |
| Capital expenditures | $26.6 million | $21.0 million |
Revenue rose 7.1%, while units sold increased 12.5% to 20,898; lower average selling prices partly offset higher volume. Gross margin improved 0.5 percentage points. Cash and cash equivalents were $24.2 million at year-end, alongside $5.5 million of certificates of deposit and $14.1 million of short-term held-to-maturity investments. Working capital was $101.9 million. The company had no revolving-credit borrowings and reported $29.2 million available under its $30 million facility. Total assets were $256.5 million and stockholders’ equity was $205.9 million.
FY 2016 investing cash outflow was $16.9 million and financing cash outflow was $30.8 million. Cash dividends paid were $12.7 million; stock repurchases totaled $20.1 million. The company’s supplemental non-GAAP EBITDAX was $97.1 million, versus $85.8 million in 2015; the filing cautions it is not a GAAP substitute.
For Q4 2016, sales were $91.7 million, gross profit $26.5 million and net income $11.4 million, compared with $97.2 million, $29.6 million and $12.9 million, respectively, in Q4 2015.
Material changes versus the prior period
- Annual sales, net income and diluted EPS increased from 2015. Higher shipment volume drove sales growth despite lower average price per unit.
- Warranty expense declined to $3.6 million from $4.3 million, which management attributed to continued quality-control improvements. SG&A rose modestly to $38.5 million, including higher compensation and share-based compensation.
- Research and development expense increased to $12.0 million from $7.5 million. Capital spending increased mainly for a new R&D laboratory, a water-source heat-pump production line and other development projects.
- Year-end cash increased by $16.2 million. Inventory rose to $47.4 million from $38.5 million; the cash-flow statement shows a $9.5 million inventory cash use.
- The effective tax rate fell to 33.3% from 35.9%. The 2016 provision included a $2.1 million tax benefit from early adoption of share-based-payment accounting guidance.
Outlook, risks and unusual items
- Management estimated 2017 capital expenditures of approximately $41.8 million, principally for the laboratory, production line and other internal development. It stated that many projects could be reviewed or cancelled without substantial charges.
- Backlog was approximately $53.5 million on February 1, 2017, versus $52.3 million a year earlier. Management said firm orders generally ship within 60–90 days, but are subject to customer cancellation.
- Management said it expected cash, operating cash flows and the revolving facility to meet foreseeable liquidity needs. This is not a specific earnings or sales forecast.
- Key risks include cyclical new construction and replacement demand, commodity and component availability and pricing, competitive pressures, product development, warranty and product liability claims, regulation, cybersecurity, workforce retention, and concentration of operations at Tulsa-area facilities. One customer, Texas AirSystems, represented at least 10% of sales in both 2016 and 2015.
- The company early adopted ASU 2016-09 in 2016. It disclosed that first- and second-quarter 2016 net income would be recast upward by $0.8 million and $0.4 million, respectively, when the 2017 quarterly reports were filed.
- Management reported no material pending litigation expected to adversely affect the company. The independent auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether higher unit volumes can continue without further pressure on average selling prices or margins.
- Execution, timing and returns from the planned $41.8 million of 2017 capital expenditures.
- Backlog conversion, cancellation experience and the impact of the major customer concentration.
- Whether inventory growth, warranty estimates and self-insurance reserves remain appropriate as operations expand.
- The effect of the $2.1 million tax benefit and the required quarterly recasting on comparisons of reported earnings.
- Continued access to the credit facility, covenant compliance and allocation of cash among investment, dividends and share repurchases.