AAON, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. AAON designs, manufactures and sells commercial heating and air-conditioning equipment. Results are unaudited; interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $76.8 million | $76.4 million | Up 0.5% |
| Gross profit / margin | $21.8 million / 28.4% | $21.8 million / 28.6% | Margin down 0.2 percentage points |
| Income from operations | $13.5 million | $14.2 million | Down 5.4% |
| Net income | $8.4 million | $9.8 million | Down 14.5% |
| Diluted EPS | $0.15 | $0.18 | Down $0.03 |
| Operating cash flow | $4.3 million | $9.1 million | Down $4.7 million |
| Capital expenditures | $3.6 million | $3.6 million | Nearly unchanged |
Sales volume increased as total units sold rose 6.0% to 3,933, but average selling price per unit fell approximately 5.4%. Rooftop unit sales increased to 3,323 from 3,098. Foreign sales were $2.8 million, compared with $4.7 million a year earlier.
SG&A increased to $8.3 million from $7.6 million, including approximately $0.6 million of additional sales-tax expense and payments. The reported effective tax rate was 37.5%, versus 31.3%; the prior-year rate benefited by $0.7 million from a state investment-credit accounting-method change.
Financial position and liquidity
- Cash and cash equivalents were $33.5 million at March 31, 2015, versus $22.0 million at year-end. Cash and short-term investments totaled approximately $42.7 million; the investment portfolio continued to mature without reinvestment.
- Working capital was $98.0 million. Current assets were $136.7 million and current liabilities were $38.6 million.
- No borrowings were outstanding under the $30.0 million revolving credit facility; $29.2 million was available after a $0.8 million standby letter of credit. The facility expires July 27, 2016. The company reported compliance with its financial covenants.
- Inventory increased to $44.5 million from $37.6 million at year-end. Accounts receivable declined to $39.9 million from $44.1 million.
- Operating cash flow was lower year over year, principally reflecting inventory build and decreases in accounts payable and accrued liabilities, partly offset by improved collections. Days sales outstanding were approximately 47, versus 54.
- Financing cash outflow was $0.8 million, including $3.0 million of stock repurchases, offset in part by option-exercise proceeds and related tax benefits. No cash dividends were declared in the quarter.
Outlook, risks and other matters
- No specific revenue or earnings guidance was provided. Management said cash, projected operating cash flows, the credit facility and expected access to capital markets should meet 2015 and foreseeable-future liquidity needs.
- Planned 2015 capital expenditures were estimated at approximately $22 million.
- Management described commercial and industrial new construction as uneven and unpredictable, and said the business is exposed to economic and construction cycles. It continues to emphasize replacement-market demand.
- Raw-material prices were mixed year over year: aluminum up 12.6%, stainless steel up 7.0%, galvanized steel up 2.2%, and copper down 7.3%. Management cited commodity and component prices, construction-market fluctuations, interest rates and general economic conditions as risks.
- Warranty accrual was $8.1 million at quarter-end. Management concluded that pending ordinary-course claims and litigation were unlikely to have a material adverse effect. No material contractual purchase agreements or material off-balance-sheet arrangements were reported.
- Management said the 2017 revenue-recognition standard, potentially deferred to 2018, was not expected to materially affect the financial statements. Disclosure controls were reported effective, with no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether unit growth can persist and offset lower average selling prices, and whether margins stabilize amid input-cost changes.
- Whether inventory growth and planned capital spending convert into sales and operating cash flow as the seasonal high-demand period approaches.
- The effect of sales-tax matters and the higher tax rate on future earnings; the filing cites approximately $0.6 million of additional sales-tax expense and payments in Q1.
- Actual 2015 capital expenditures versus the approximately $22 million estimate, and continued covenant compliance and credit-facility availability.
- The nature and amount of future share repurchases and dividends; the filing reports $2.955 million of repurchases and 130,930 shares purchased in Q1, while separately describing different repurchase arrangements.