AAON, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with the three months ended March 31, 2013 unless otherwise noted. AAON engineers, manufactures, and sells commercial air-conditioning and heating equipment in the U.S. and Canada. Interim financial statements are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $76.4 million | $66.8 million |
| Gross profit / gross margin | $21.8 million / 28.6% | $15.3 million / 22.9% |
| Operating income | $14.2 million | $8.3 million |
| Net income | $9.8 million | $7.1 million |
| Diluted earnings per share | $0.26 | $0.19 |
| Cash from operating activities | $9.1 million | $8.5 million |
| Capital expenditures | $3.6 million | $1.0 million |
- Net sales rose 14.3%; units sold increased 2.8%. Management attributed the sales gain to more units, a product mix shift toward larger rooftop units, and 3–4% price increases introduced in 2013.
- Gross margin improved 5.7 percentage points. Management cited lower material costs; cost of sales increased less than revenue.
- SG&A increased to $7.6 million from $7.0 million, primarily due to higher profit sharing, headcount and compensation, and warranty costs.
- The effective tax rate was 31.3%, versus 14.6% in Q1 2013. Q1 2014 tax expense included a $0.7 million benefit from a change in state investment-credit accounting; the prior-year rate benefited from reinstated federal credits and a tax-credit estimate change.
Cash, liquidity, and debt
- At March 31, 2014, cash and cash equivalents were $19.7 million; cash and short-term investments totaled $51.6 million. Working capital was $96.4 million.
- Cash from operations was $9.1 million. Receivables and inventory uses of cash partly offset net income and increases in payables and accrued liabilities. Capital expenditures were $3.6 million, making operating cash flow less capital expenditures approximately $5.5 million.
- AAON had no revolving-credit borrowings and $29.2 million of availability under its $30.0 million facility, subject to a $0.8 million standby letter of credit. The facility matures July 27, 2014; management expected renewal on comparable terms.
- Total assets were $228.7 million and stockholders’ equity was $172.1 million. The filing reports no outstanding debt under the revolving facility; it does not present a separate total-debt figure.
Outlook, risks, and other notable items
- Management estimated 2014 capital expenditures at approximately $13.0 million, mainly for land and manufacturing and production equipment. Management said liquidity, expected operating cash flows, the credit facility or comparable financing, and access to capital markets should meet foreseeable needs.
- No numerical revenue or earnings guidance was provided. Management described commercial and industrial new construction as unpredictable and uneven, and emphasized the replacement market. Product sales are moderately seasonal, with a typical peak from July through November.
- Key risks include economic weakness and construction-market cyclicality, volatile raw-material and component prices, interest rates, and general market conditions. Fixed-price supplier contracts of six to 18 months are used to manage commodity exposure. Copper, galvanized steel, stainless steel, and aluminum costs were down 4.3%, 4.2%, 12.3%, and 6.2%, respectively, year over year.
- The revolving facility’s July 2014 maturity is a near-term liquidity item to monitor. The company was covenant-compliant at quarter-end. It disclosed ordinary-course legal claims but no specific material loss estimate; it also had a $1.0 million fixed-price aluminum ingot purchase obligation due within one year.
- Q1 stock repurchases totaled approximately $3.0 million for 101,737 shares. No dividends were declared or paid in the quarter; on May 2, 2014, the board declared a $0.13-per-share dividend payable July 1, 2014. In April, AAON pledged equipment and cash totaling $1.0 million to the Tulsa Library Trust.
Important facts for investors to verify
- Whether the credit facility was renewed at or before its July 27, 2014 maturity, and on what terms.
- Whether margin improvement and sales growth continued after Q1, given the company’s seasonality and uneven construction markets.
- Execution and funding of the approximately $13.0 million 2014 capital-expenditure plan and the effect on cash and investment balances.
- The sustainability of the Q1 effective tax rate, considering the prior-year tax benefits and Q1 2014 accounting change.
- Warranty accrual adequacy and potential effects of ordinary-course claims; actual outcomes may differ from management estimates.