AAON, Inc. — Q2 2012 Form 10-Q
Business and period. AAON engineers, manufactures, and sells commercial HVAC equipment in the United States and Canada. This filing covers the quarter and six months ended June 30, 2012; all amounts below are in millions except per-share data. Foreign sales were approximately 5% of second-quarter sales.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $83.3 | $69.1 | $148.3 | $129.0 |
| Gross profit / margin | $21.1 / 25.3% | $11.7 / 17.0% | $34.6 / 23.3% | $23.4 / 18.1% |
| Operating income / margin | $14.2 / 17.0% | $6.0 / 8.7% | $21.8 / 14.7% | $12.1 / 9.4% |
| Net income | $9.3 | $3.8 | $13.9 | $7.5 |
| Diluted EPS | $0.38 | $0.15 | $0.56 | $0.30 |
- Second-quarter sales rose 20.6%; first-half sales rose 14.9%. Management attributed growth to market-share gains in new construction and replacement markets, earlier product price increases, and, for the first half, warm winter weather that pulled spending forward.
- Gross margin improvement reflected higher production volume, improved fixed-cost absorption, new sheet-metal equipment, and production-line changes. Higher steel, component, and labor costs partly offset these gains. Second-quarter SG&A was $6.9 million, up 20.8%, while remaining 8.3% of sales; first-half SG&A was $12.9 million, up 14.5%, and 8.7% of sales.
- First-half effective tax rate was 36.0%, versus 35.0% a year earlier, reflecting the loss of certain tax credits. The company reported a $5.8 million IRS refund and approximately $4.0 million of tax-payment savings from prior overpayments and net operating losses.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $3.1 million. The company also held $4.3 million of certificates of deposit and $5.3 million of held-to-maturity corporate notes and bonds; these investments were not held at year-end 2011.
- Cash-flow statement reports first-half operating cash flow of $19.6 million, investing cash use of $17.4 million, and financing cash flow of $0.9 million. Capital expenditures were $8.1 million. Cash increased $3.1 million from year-end.
- Working capital was $48.3 million. Revolver borrowings were $7.3 million, compared with $4.6 million at December 31, 2011; $21.8 million remained available under the $30 million facility. The weighted average borrowing rate was approximately 2.8% at quarter-end.
- The company renewed its $30 million credit line on July 29, 2012, after quarter-end, through July 28, 2013, at LIBOR plus 2.5%. It reported compliance with financial covenants at June 30.
- A $0.12-per-share dividend, totaling approximately $3.0 million, was paid July 2. Employee 401(k)-related share repurchases were $1.9 million in the first half.
Outlook, risks, and notable items
- Management said operating cash flows and the revolving facility, or comparable financing, should provide liquidity for fiscal 2012 and the foreseeable future. No specific revenue or earnings guidance was provided.
- Management cautioned that commercial and industrial construction is cyclical and sensitive to broader economic conditions. Risks include changes in raw-material and component prices, construction activity, interest rates, and general market conditions. Steel prices rose about 2% year over year in the first half, while aluminum and copper prices fell about 5% and 4%, respectively.
- During Q1, the company identified a material weakness in inventory-costing controls. It said the controls operated effectively as of June 30, but planned additional oversight, personnel, and automated controls; implementation was expected in the second half and had not begun during Q2. The filing warns that ineffective remediation or further control deficiencies could lead to financial-statement misstatements or a restatement.
- Ordinary-course claims and legal actions were not expected by management to have a material effect. No material off-balance-sheet arrangements were reported. The company noted ongoing federal, state, local, and non-U.S. tax examinations and believed its recorded tax liabilities were sufficient.
Important facts for investors to verify
- Reconcile operating cash flow: the cash-flow statement reports $19.6 million for the first half, while a later MD&A paragraph says $15.7 million; other MD&A passages also cite $19.6 million.
- Track whether the planned inventory-costing control remediation was implemented and whether the material weakness was fully resolved.
- Assess how much first-half demand was pulled forward by warm weather, and whether sales and margins remain sustainable as construction activity and input costs change.
- Monitor receivables, which increased to $52.1 million from $34.1 million at year-end, and inventory, which rose to $39.1 million from $34.9 million.
- Review liquidity and covenant headroom under the renewed credit facility, including variable-rate exposure and the July 2013 maturity.