AAON, INC. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. AAON, Inc. engineers, manufactures, and markets air-conditioning and heating equipment, including rooftop units, chillers, and boilers, primarily for the commercial and industrial markets in the United States and Canada. The company operates manufacturing facilities in Tulsa and Longview, Texas, and recently closed its Canadian facility in Burlington, Ontario, in September 2009.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $58,492 | $191,054 |
| Gross Profit | $17,728 | $52,766 |
| Gross Margin % | 30.3% | 27.6% |
| Net Income | $7,741 | $21,566 |
| Diluted EPS | $0.45 | $1.25 |
| Cash and Equivalents | $17,894 | $17,894 (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $36,329 |
| Working Capital | $57,217 | $57,217 |
| Long-Term Debt | $8 | $8 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 26% ($20.8 million) for the quarter and 13% ($28.4 million) for the nine months compared to 2008. This was driven by a weaker economic environment affecting commercial construction and the closure of Canadian operations.
- Margin Expansion: Despite lower sales, gross margins improved significantly to 30.3% (quarter) and 27.6% (nine months) from 25.3% and 24.4% in 2008. This was primarily due to a 49% drop in steel prices, 56% drop in aluminum, and 27% drop in copper, alongside a $1.0 million unrealized gain on copper derivative assets.
- Liquidity Improvement: Cash and cash equivalents surged from $269,000 at year-end 2008 to $17.9 million at September 30, 2009, driven by strong operating cash flows and reduced debt.
- Debt Reduction: The company paid off its entire revolving credit facility balance, reducing it from $2.9 million in 2008 to $0 in 2009.
Outlook, Risks, and Unusual Items
- Canadian Facility Closure: The company closed its Canadian manufacturing operations in September 2009. Assets with a net book value of $1.5 million were reclassified as "held for sale." Closure costs of approximately $0.3 million were accrued.
- Derivative Gains: The company entered into a copper futures contract in Q3 2009 to hedge price volatility. This resulted in a $1.0 million unrealized gain recorded in cost of sales, artificially boosting gross margins for the period.
- Capital Expenditures: Capital spending increased to $8.6 million for the nine months (vs. $5.5 million in 2008) to expand Tulsa facilities and replace production previously done in Canada. Management expects total 2009 CapEx to be between $8.0 million and $9.0 million.
- Dividends: The Board increased the semi-annual cash dividend from $0.16 to $0.18 per share in May 2009.
- Risks: Key risks include counterparty default on derivative contracts, continued volatility in raw material prices, and the cyclical nature of the commercial construction market.
Investor Verification Checklist
- Derivative Impact: Verify the sustainability of gross margins by excluding the $1.0 million non-cash gain from copper derivatives.
- Canadian Asset Sale: Monitor the timeline and proceeds from the sale of the Canadian facility assets currently held for sale.
- Raw Material Hedging: Review the effectiveness of fixed-price contracts and derivatives in managing future cost of goods sold as commodity prices fluctuate.
- Construction Market Exposure: Assess the company's exposure to delayed or cancelled commercial construction projects in the current economic climate.
- Cash Flow Sustainability: Confirm that operating cash flows remain sufficient to fund the $8.0M-$9.0M capital expenditure budget without relying on the credit facility.