AAON, INC. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008, 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. The company operates primarily in the United States with limited international sales (less than 5%). The company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $79.3 million | $219.5 million |
| Gross Profit | $20.0 million | $53.7 million |
| Gross Margin | 25.3% | 24.4% |
| Operating Income | $12.7 million | $34.3 million |
| Net Income | $8.4 million | $22.5 million |
| Diluted EPS | $0.47 | $1.25 |
| Cash from Operations (9mo) | $30.1 million | |
| Cash and Equivalents (Sep 30, 2008) | $0.3 million | |
| Revolving Credit Facility Borrowed | $2.4 million | |
| Available Credit | $11.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.8% for the quarter and 9.5% for the nine-month period compared to 2007, driven by volume increases, new product acceptance, and pricing strategies.
- Margin Expansion: Gross margins improved significantly to 25.3% (Q3) and 24.4% (9mo) from 19.2% and 22.4% in the prior year periods. This was achieved despite raw material price increases (steel up 105%, copper up 170% since late 2006) through effective pricing and production efficiencies.
- Profitability: Net income rose 55.2% for the quarter and 21.4% for the nine-month period year-over-year.
- Share Count Reduction: The company aggressively repurchased stock, reducing outstanding shares from approximately 18.05 million (Dec 31, 2007) to 17.15 million (Sep 30, 2008). Total repurchases in the first nine months of 2008 totaled $24.1 million.
- Working Capital: Accounts receivable increased by $9.2 million and inventories by $2.3 million compared to year-end 2007, reflecting higher sales volume.
Outlook, Risks, and Management Commentary
- Guidance: Management anticipates continued growth throughout 2008. Capital expenditures for the full year 2008 are estimated between $7.0 million and $10.0 million to support growth and efficiency.
- Commodity Risks: The company faces significant exposure to steel, copper, and aluminum prices. While fixed-price contracts with suppliers help mitigate this, continued volatility could impact future margins.
- Economic Sensitivity: Demand is tied to commercial and industrial new construction, which lags housing starts by 6-18 months. Management notes that while the recent adverse economic climate has not yet impacted the business, there are no assurances it will not do so in the future.
- Liquidity: The company maintains a $15.2 million revolving credit facility with $11.4 million available. Management believes cash flows from operations and the credit facility are sufficient for fiscal year 2008 needs.
- Dividends: The company pays semi-annual cash dividends. A dividend of $0.16 per share was declared in June 2008 and paid in July 2008.
Investor Verification Checklist
- Verify the sustainability of gross margin expansion given the historical volatility of steel and copper prices.
- Monitor the impact of the slowing commercial construction market on future order volumes.
- Review the company's cash position ($0.3 million) relative to its dividend policy and capital expenditure plans.
- Confirm compliance with financial covenants on the revolving credit facility.
- Assess the impact of the significant share repurchase program on future earnings per share growth.