AAON, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. AAON engineers, manufactures and sells commercial heating and air-conditioning equipment. Results are compared with Q1 2015 unless otherwise noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $85.4 million | $76.8 million |
| Gross profit / gross margin | $25.7 million / 30.1% | $21.8 million / 28.4% |
| Operating income | $16.8 million | $13.5 million |
| Net income | $10.8 million | $8.4 million |
| Diluted EPS | $0.20 | $0.15 |
| Operating cash flow | $15.2 million | $4.3 million |
| Capital expenditures | $7.3 million | $3.6 million |
Revenue increased 11.3%, primarily on higher sales volume; total units sold rose 11.1% to 4,368. Operating margin was approximately 19.7%, versus 17.6%; net margin was approximately 12.6%, versus 10.9%. SG&A rose to $8.9 million from $8.3 million, while SG&A as a share of sales declined to 10.4% from 10.8%. The effective tax rate was 36.5%, compared with 37.5%.
Liquidity, debt and capital
- Cash and cash equivalents were $17.2 million at March 31, up from $7.9 million at year-end. Cash plus current certificates of deposit and held-to-maturity investments totaled approximately $43.2 million.
- Working capital was $92.2 million. The company had no revolving-credit borrowings and reported $29.2 million available, net of a $0.8 million standby letter of credit. The $30 million facility was scheduled to terminate July 27, 2016; the filing does not state whether it was subsequently renewed.
- Long-term debt is not reported. The company was in compliance with credit covenants: tangible net worth was $188.7 million, and liabilities to tangible net worth were 0.25 to 1.
- Q1 financing cash outflow was $2.0 million, including $3.5 million of share repurchases. No dividend was declared in the quarter; the filing lists 2015 semiannual dividends of $0.11 per share each.
Changes, outlook and risks
- Gross margin improved by 1.7 percentage points. Management attributed the sales increase to volume and cited reduced warranty expense, which fell to $0.3 million from $0.9 million, reflecting continued quality-control improvement. Compensation and profit-sharing costs increased.
- Operating cash flow improved mainly because of lower estimated tax payments and better collections; days sales outstanding was approximately 45 days versus 47. Faster payments to vendors and representatives partly offset the benefit.
- Management estimated 2016 capital expenditures at approximately $32.7 million, including investment in a new research and development lab and water-source heat-pump line. It said expected operating cash flows, cash balances and committed or comparable financing should cover foreseeable needs. No specific sales or earnings forecast was provided.
- Management described commercial and industrial new construction as unpredictable and uneven and said it was emphasizing the replacement market. Demand is exposed to economic and construction cycles. Other identified risks include movements in raw-material and component prices, interest rates and competitive conditions. Q1 average prices for copper, galvanized steel, stainless steel and aluminum were lower year over year; management cautioned that commodity markets remain volatile.
- Pending ordinary-course claims and litigation were assessed as remotely likely to have a material adverse effect. The company reported no material changes to the risk factors in its 2015 Form 10-K and no material off-balance-sheet arrangements or contractual purchase agreements.
- ASU 2016-09 on share-based payment accounting may have a material impact, but the company said it could not predict the effect. Adoption of the new revenue-recognition standard was still being assessed.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced before its July 27, 2016 termination date.
- Progress, timing and realized costs of the R&D lab, heat-pump line and approximately $32.7 million 2016 capital plan.
- Whether higher sales volume and improved gross margin persist, particularly as construction demand and raw-material costs fluctuate.
- Warranty claims and reserve adequacy, given the quarter’s lower warranty provision and payments.
- The effects of share repurchases, equity compensation and the forthcoming accounting changes on share count, earnings and cash-flow presentation.