AAON, Inc. — Q1 2012 Form 10-Q
Business and period: AAON engineers, manufactures and markets commercial heating and air-conditioning equipment. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Foreign sales were approximately 6% of quarterly sales.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $65.0 million | $59.9 million | +8.4% |
| Gross profit / margin | $13.5 million / 20.8% | $11.6 million / 19.4% | +16.2%; margin +1.4 percentage points |
| Operating income / margin | $7.6 million / 11.6% | $6.1 million / 10.2% | +24.0% |
| Net income | $4.6 million | $3.7 million | +25.1% |
| Basic / diluted EPS | $0.19 / $0.18 | $0.15 / $0.15 | Higher |
| Operating cash flow | $11.6 million | $1.4 million | Higher |
| Capital expenditures | $3.0 million | $10.3 million | Lower |
SG&A rose 8.0% to $6.0 million and remained 9.2% of sales. The effective tax rate increased to 40.0% from 35.0%; the filing cites state and local taxes, loss of certain tax credits, and return-to-provision adjustments.
Financial position and liquidity
At March 31, 2012, cash was $3.2 million, working capital was $48.1 million, and the company had no revolver borrowings, versus $4.6 million outstanding at December 31, 2011. The $30.0 million revolving facility had $29.1 million available, net of a $0.9 million standby letter of credit. Total assets were $184.8 million and stockholders’ equity was $126.1 million. Operating cash flow benefited in part from a $5.8 million increase in accounts payable and accrued expenses; inventory growth used $1.8 million of cash. Investing activities used $2.7 million, while financing activities used $5.7 million, including revolver repayments and share repurchases.
Material changes and management commentary
- Management attributed sales growth to warmer-than-normal winter weather, increased demand in new construction, market-share gains, and targeted price increases on some rooftop models.
- Gross margin improved with higher production, favorable sales mix and pricing, partly offset by higher steel, component and labor costs. Steel prices were up approximately 9.4% year over year; aluminum and copper were down approximately 2.7% and 1.6%, respectively.
- Other income was $48,000 versus a $503,000 expense in Q1 2011. The prior-year expense primarily reflected approximately $0.5 million of uninsured roof-repair costs after a snowstorm.
- The company repurchased and retired approximately 60,000 shares for $1.18 million during the quarter. No cash dividend was declared.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management said operating cash flows and the revolver, or comparable financing, were expected to meet liquidity needs for 2012 and the foreseeable future. The revolving credit agreement was expected to be renewed in July 2012. The working-capital covenant minimum rises from $35 million to $40 million beginning June 30, 2012; the company reported compliance with all covenants at quarter-end.
Management highlighted exposure to cyclical commercial and industrial construction activity, general economic conditions, and volatile raw-material and component costs. Steel, copper and aluminum prices and variable-rate borrowing are identified market risks. The company uses supplier contracts to manage commodity exposure and reported no new commodity derivative contracts in either comparison quarter. Ordinary-course legal claims were not expected by management to materially affect results or financial position; tax examinations were ongoing, and management believed recorded tax liabilities were adequate.
Control issue: Management identified a material weakness in inventory valuation controls involving manual processes and concluded disclosure controls were ineffective as of March 31, 2012. The company reported additional post-closing procedures and remediation efforts, including stronger oversight of inventory costing and personnel changes; management stated the weakness would remain until revised controls operated effectively for a sufficient period. Management nevertheless concluded the filed financial statements fairly presented the periods shown.
Investor verification points
- Track remediation and independent evidence that inventory-costing controls are operating effectively; assess any risk of future misstatement or restatement.
- Verify renewal of the revolving credit facility and compliance with the higher working-capital covenant effective June 30, 2012.
- Assess whether sales and margin gains persist beyond favorable winter weather, new-construction demand and targeted pricing.
- Monitor steel, copper, aluminum and component costs, and the working-capital contribution from accrued liabilities and payables to operating cash flow.
- Follow tax examinations and the effect of the higher effective tax rate on subsequent earnings.