AAON, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015, compared with the corresponding 2014 periods. AAON manufactures and sells commercial heating and air-conditioning equipment. Results are unaudited; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $90.3 | $92.3 | $167.0 | $168.7 |
| Gross profit | $27.1 | $27.9 | $48.9 | $49.7 |
| Gross margin | 30.0% | 30.2% | 29.3% | 29.5% |
| Income from operations | $17.9 | $17.3 | $31.4 | $31.5 |
| Net income | $11.1 | $11.4 | $19.5 | $21.2 |
| Diluted EPS | $0.20 | $0.20 | $0.36 | $0.38 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $12.0 | $17.5 |
- Q2 sales declined 2.2%, while unit sales increased 3.9% to 4,897. Management attributed lower revenue to product mix.
- First-half sales declined 1.0%, despite unit sales rising 4.8% to 8,830; lower average selling price per unit offset volume growth. Foreign sales were $7.0 million, versus $11.3 million.
- First-half gross margin eased 0.2 percentage points. Operating income was nearly flat; net income fell 7.8%, with the effective tax rate rising to 37.9% from 33.1%. The prior-year period included a $0.7 million tax benefit from a change in state investment-credit accounting.
- First-half operating cash flow fell to $12.0 million from $17.5 million. Inventory growth used $9.6 million of cash; capital expenditures were $9.3 million, versus $5.9 million. Cash and cash equivalents increased $15.6 million to $37.6 million, partly reflecting investment maturities.
Liquidity, debt, and capital
- At June 30, cash, current certificates of deposit, and current held-to-maturity investments totaled approximately $49.9 million. Working capital was $105.7 million, compared with current liabilities of $47.3 million.
- No revolving-credit borrowings were outstanding. The $30.0 million facility had $29.2 million available after a $0.8 million standby letter of credit; it expires July 27, 2016. AAON reported compliance with its financial covenants.
- First-half share repurchases were $6.4 million; the company declared a $0.11-per-share semiannual dividend, paid July 1, 2015. The board expanded its repurchase authorization in May 2015.
Outlook, risks, and notable items
- Management estimated 2015 capital expenditures at approximately $22 million and an annual effective tax rate of approximately 37.9%. It expected cash, operating cash flows, the credit facility, and potential capital-market access to meet liquidity needs for 2015 and the foreseeable future. No specific revenue or earnings guidance was provided.
- Management described commercial and industrial construction demand as unpredictable and uneven, and continued to emphasize the replacement market. Product sales are moderately seasonal, with peak demand from July through November.
- Risks cited include economic and construction-market weakness, interest-rate changes, competition, and raw-material and component-price volatility. Year-over-year average material prices rose 12.5% for aluminum and 2.8% for stainless steel, while copper and galvanized steel declined 7.7% and 2.2%, respectively. Supplier fixed-price contracts may help manage exposure.
- Management said pending litigation or claims were unlikely to have a material adverse effect. There were no material contractual purchase agreements or material changes to reported risk factors. The company stated it had no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether unit growth can translate into higher sales and average selling prices, particularly as the construction market remains uneven.
- Whether gross margins withstand changes in product mix, material costs, and production growth.
- Whether inventory investment and planned capital spending support demand without weakening operating cash generation.
- The sustainability of the higher effective tax rate and the timing and terms of the revolving-credit facility’s July 2016 expiration.