AAON, INC. Form 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2010, for AAON, Inc., a manufacturer of air-conditioning and heating equipment. The company operates manufacturing facilities in Tulsa, Oklahoma, and Longview, Texas. In September 2010, the company completed the sale of its Canadian facility, which had been closed in 2009 and reclassified as held for sale.
Key Financial Metrics (Nine Months Ended Sept 30, 2010)
| Metric | 2010 (YTD) | 2009 (YTD) |
|---|---|---|
| Net Sales | $178.7 million | $191.1 million |
| Gross Profit | $41.0 million | $52.8 million |
| Gross Margin | 22.9% | 27.6% |
| Net Income | $16.1 million | $21.6 million |
| Diluted EPS | $0.95 | $1.25 |
| Operating Cash Flow | $23.7 million | $36.3 million |
| Cash & Equivalents | $4.1 million | $17.9 million (end of period) |
| Revolving Credit Facility | $4.0 million outstanding | $0 outstanding |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6.5% year-over-year for the nine-month period, attributed to decreased volume in the commercial construction market due to the economic environment.
- Margin Compression: Gross margins declined from 27.6% to 22.9%. Management cited higher raw material costs (copper up 16%, aluminum up 11% over three years), increased labor costs, and an inability to pass costs to customers via price increases.
- Liquidity Shift: Cash and cash equivalents dropped significantly from $25.6 million at year-end 2009 to $4.1 million at September 30, 2010. This was driven by $18.4 million in stock repurchases, $6.2 million in dividends, and $13.1 million in capital expenditures.
- Investment Activity: The company deployed excess cash into $11.5 million of corporate notes and bonds and $1.9 million in certificates of deposit, which were not present in the prior year.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company expects to spend approximately $16.0 million to $17.0 million on capital expenditures for the full year 2010 to expand the Tulsa facility and improve manufacturing efficiencies.
- Commodity Hedging: AAON utilizes a financial derivative (commodity futures) to hedge copper prices. In March 2010, the company locked in a settlement price of $3.3975 per pound for the remainder of 2010, eliminating further mark-to-market volatility for the year.
- Shareholder Returns: The company continues a semi-annual dividend program ($0.18 per share declared in June 2010) and an active stock repurchase program. A new buyback authorization of approximately 850,000 shares was initiated in May 2010.
- Risks: Key risks include volatility in raw material prices (steel, copper, aluminum), cyclical fluctuations in the commercial construction market, and general economic conditions affecting replacement demand.
Investor Verification Checklist
- Verify the sustainability of gross margins given the 11-16% increase in key raw material costs over the last three years.
- Confirm the utilization of the $10.3 million remaining capacity on the revolving credit facility.
- Monitor the impact of the Canadian facility sale on future production capacity and logistics.
- Review the progress of the $16-17 million capital expenditure budget for the Tulsa expansion.
- Assess the company's ability to maintain dividend payments and stock buybacks given the significant reduction in cash reserves.