AAON, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. AAON engineers and manufactures commercial heating and air-conditioning equipment. The company reported a three-for-two stock split effective June 13, 2011; per-share data below reflects the split.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $69.1 million | $64.5 million | $129.0 million | $113.8 million |
| Gross profit / margin | $11.7 million / 17.0% | $15.5 million / 24.0% | $23.4 million / 18.1% | $28.5 million / 25.0% |
| Operating income | $6.0 million | $8.9 million | $12.1 million | $17.1 million |
| Net income | $3.8 million | $5.8 million | $7.5 million | $10.9 million |
| Diluted EPS | $0.15 | $0.23 | $0.30 | $0.43 |
Q2 sales rose 7% year over year, while gross profit fell 24.5% and net income fell about 34%. For the first half, sales increased 13%, but gross profit declined 17.9% and net income declined about 31.5%. SG&A was $5.7 million in Q2 and $11.2 million for the half, down 14% and 2%, respectively, from the comparable periods. Dividends declared were $0.12 per share for the quarter and half-year, split-adjusted.
Cash flow, liquidity, and capital
- First-half operating cash flow was $10.2 million, down from $22.4 million a year earlier. The filing attributes the decline primarily to lower net income, higher inventories, and lower accrued liabilities, partly offset by increased accounts payable.
- Investing cash outflow was $16.5 million, including $24.9 million of capital expenditures. Financing cash inflow was $6.0 million, including net revolving-credit borrowings of $7.6 million.
- At June 30, cash was $2.1 million; certificates of deposit were $0.2 million and current held-to-maturity investments were $2.3 million. Working capital was $39.5 million.
- Outstanding revolving-credit debt was $7.6 million; there was no long-term debt reported. The existing facility had $5.2 million available at June 30, subject to its terms and a $2.4 million standby letter of credit. AAON reported compliance with its financial covenants.
- On July 30, 2011, after quarter-end, AAON renewed and increased the facility’s maximum borrowing capacity to $30 million, with a July 29, 2012 maturity. The renewed agreement sets a LIBOR-plus-2.5% rate and tighter future tangible-net-worth and working-capital minimums.
Changes, outlook, and risks
- Sales growth was attributed to favorable reception of new products, a stronger replacement market, increased market share, and a successful trade show. Replacement-market sales were reported up 10% from 2010.
- Gross margin pressure reflected higher raw-material and component costs, advance purchases of manufacturing supplies, production inefficiencies, and lost production following February snow damage to the Tulsa facility. From June 2010 to June 2011, steel prices increased about 5%, copper 62%, and aluminum declined about 4%.
- The snowstorm damaged the roof over a production area, affected three lines, and caused 8.5 days of lost production. The $0.5 million insurance deductible was recorded as first-quarter other expense; the uninsured equipment damage had not yet been determined. Repairs were expected to be completed in Q3.
- Management said customer price increases would begin in Q3 to help offset cost inflation. It estimated 2011 capital expenditures of $30–$32 million for facility expansion and equipment. Management expected operating cash flow, matured investments, and the expanded credit facility to support planned needs and stated that it believed liquidity would be sufficient for 2011 and the foreseeable future.
- Key disclosed risks include raw-material and component-price changes, cyclical commercial and industrial construction demand, interest rates, and general economic and market conditions. AAON uses supplier fixed-price agreements to moderate commodity exposure. Management said ordinary-course legal claims were not expected to materially affect results or financial position.
Most important facts to verify
- Whether Q3 customer price increases offset higher input costs and improve gross margins.
- Completion and cost of Tulsa roof repairs, including the still-undetermined uninsured equipment damage and any continuing production effects.
- Execution and funding of the $30–$32 million 2011 capital-expenditure plan, and utilization and covenant headroom under the renewed $30 million credit facility.
- Inventory growth and operating cash conversion, given the $11.7 million first-half inventory increase and lower operating cash flow.
- Management’s forward-looking liquidity and renewal expectations, which are subject to the risks and uncertainties described in the filing.