AAON, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. AAON engineers, manufactures, markets, and sells commercial heating and air-conditioning equipment. Figures below are in millions of dollars except per-share data and unit counts.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $101.3 | $102.3 | $187.4 | $187.7 |
| Gross profit | $31.7 | $32.7 | $56.7 | $58.5 |
| Gross margin | 31.3% | 32.0% | 30.2% | 31.1% |
| Operating income | $19.7 | $22.2 | $34.1 | $39.0 |
| Net income | $13.8 | $14.7 | $24.0 | $26.3 |
| Diluted EPS | $0.26 | $0.27 | $0.45 | $0.47 |
- Q2 sales fell 1.0%; six-month sales fell 0.2%. Units sold rose 5.3% in Q2 and 9.5% for the first half, but management attributed nearly flat sales to a mix shift toward smaller, less expensive products.
- Operating income declined 11.4% in Q2 and 12.6% for the first half. Gross margin contracted by 0.7 and 0.9 percentage points, respectively; higher steel costs and increased warranty expense were cited as factors.
- Six-month operating cash flow was $33.8 million, up from $29.6 million. Capital expenditures were $16.8 million; inventory growth used $16.0 million of cash.
- Cash and cash equivalents were $33.6 million at June 30, versus $24.2 million at year-end. Cash and investments totaled $51.8 million, up $8.1 million from year-end. Total assets were $285.0 million.
- No revolving-credit borrowings were outstanding. $29.2 million remained available under the $30 million facility, subject to a $0.8 million standby letter of credit. The facility expires July 27, 2018; the company reported covenant compliance.
Material changes, outlook, and risks
- Warranty expense rose to $3.1 million in Q2 from $1.3 million a year earlier, and to $4.3 million for the first half from $1.6 million. AAON said warranty-policy refinements increased the reserve and expense, and characterized the effect as expected to be short-term.
- Backlog was $83.5 million at June 30, up from $49.1 million at December 31, 2016 and $69.3 million at June 30, 2016. Sales are moderately seasonal, with the peak period from July through November.
- Management estimated 2017 capital expenditures of approximately $48.5 million, including a new research and development laboratory, the water-source heat pump line, and other projects. The lab was expected to be completed in 2018. Management said available cash, operating cash flow, the credit facility, and expected capital-market access should support liquidity needs in 2017 and the foreseeable future.
- No earnings or revenue guidance was provided. Management estimated a 2017 effective tax rate of approximately 36%, excluding discrete items; reported first-half effective tax rate was 30.0%, including share-based compensation tax benefits.
- Risks highlighted include cyclical and uncertain commercial/industrial construction demand, general economic conditions, commodity and component price changes, and interest-rate and competitive factors. Galvanized steel prices were up 7.9% year over year; copper was down 3.7%.
- Pending ordinary-course claims and litigation were assessed by management as unlikely to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether higher unit volume can translate into sales growth despite the shift toward lower-priced product mix.
- Whether warranty-policy changes are temporary and how claims, payments, and reserves develop.
- Execution, timing, and returns on the planned $48.5 million capital expenditure program and the new product line and laboratory.
- Inventory growth, raw-material costs, and seasonal backlog conversion into revenue and cash flow.
- Availability and renewal terms of the credit facility, which is scheduled to expire in July 2018.