AAON, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; quarterly Q4 figures are included below. AAON manufactures and sells commercial and industrial HVAC equipment, primarily in the U.S.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $321.1 million | $303.1 million |
| Gross profit / margin | $89.8 million / 28.0% | $70.5 million / 23.3% |
| Operating income | $55.8 million | $44.2 million |
| Net income | $37.5 million | $27.4 million |
| Diluted EPS | $1.01 | $0.74 |
| Operating cash flow | $53.6 million | $51.2 million |
| Capital expenditures | $9.0 million | $14.1 million |
- Sales increased 5.9%; unit volume rose 5.4%. Management attributed growth roughly equally to price increases and higher unit sales, supported by new products and market-share gains.
- Operating margin was approximately 17.4% versus 14.6%; net margin was approximately 11.7% versus 9.1%.
- Cash and cash equivalents were $12.1 million at year-end. The company also held $10.7 million in certificates of deposit and $27.0 million in held-to-maturity investments.
- Working capital was $77.3 million, compared with $51.9 million a year earlier. No revolving-credit borrowings were outstanding; $29.1 million was available under the $30 million facility, subject to a $0.9 million standby letter of credit.
- Total assets were $215.4 million and stockholders’ equity was $164.1 million. The filing reports no year-end debt balance.
- FY2013 dividends paid were $7.4 million and share repurchases were $8.2 million. Dividends declared were $0.20 per share, post-split.
Q4 and material changes
- Q4 2013 sales were $73.4 million, down from $78.0 million in Q4 2012; net income was $7.8 million, up from $7.6 million. Diluted EPS was $0.21 in both quarters.
- FY2013 gross profit rose despite slightly lower cost of sales, with gross margin improving 4.7 percentage points. Management cited manufacturing efficiencies and lower raw-material prices; steel, copper, stainless steel and aluminum prices declined year over year.
- SG&A increased to $34.0 million from $26.3 million. Higher warranty costs, profit sharing, salaries and other expenses contributed; warranty expense rose to $6.0 million from $3.5 million.
- Effective tax rate fell to 33.3% from 38.1%, reflecting reinstated federal credits, a tax-credit estimate adjustment and a higher domestic manufacturing deduction.
- Operating cash flow increased modestly. Investing cash outflow was $31.3 million, including $31.4 million of investment purchases; financing cash outflow was $13.3 million, primarily dividends and repurchases.
Outlook, risks and unusual items
- Management estimated 2014 capital expenditures of approximately $13 million and said available cash, operating cash flow and the credit facility should support foreseeable working-capital and capital needs. No sales or earnings guidance was provided.
- Backlog at March 1, 2014 was approximately $48.8 million, down from $51.1 million a year earlier; orders are generally filled within 60–90 days but may be canceled.
- Management described new construction demand as unpredictable and uneven and emphasized replacement and renovation markets. Approximately 55% of 2013 sales came from replacement/renovation and 45% from new construction.
- Key risks include construction-market cyclicality, raw-material and component availability or cost, competition, product development, warranty and product-liability exposure, regulatory changes, environmental compliance, cybersecurity, natural disasters, employee retention, self-insurance estimates, and dependence on founder/CEO Norman H. Asbjornson.
- Unusual items included an approximately $0.3 million insurance-related gain after repairs to ice-storm damage, and tax benefits recognized in 2013 relating partly to prior-year credits. The company reported warranty accruals of $7.4 million at year-end.
- The company reported no pending legal proceeding management believed likely to cause a material liability. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether stronger gross margins and operating income are sustainable as material costs, labor, warranty claims and product mix change.
- Whether the lower Q4 sales and declining backlog indicate a broader demand slowdown, particularly in new construction.
- Composition, maturities and credit quality of the $27.0 million investment portfolio; ratings ranged from A+ to BBB-.
- Assumptions underlying the $7.4 million warranty liability and self-insurance reserves, given higher warranty expense in 2013.
- Renewal terms for the revolving credit facility, which was scheduled to mature July 27, 2014, and the execution and returns of planned capital spending.
- Potential effects of DOE efficiency rules and conflict-mineral disclosure requirements on product design, sourcing, costs and compliance.