AAON, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; the filing also reports fourth-quarter results. AAON engineers and manufactures commercial and industrial HVAC equipment, primarily for U.S. construction and replacement markets. The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal controls over financial reporting.
Financial results and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $405.2 million | $384.0 million | +5.5% |
| Gross profit / margin | $123.4 million / 30.5% | $118.1 million / 30.8% | Margin down 0.3 percentage point |
| Operating income / margin | $74.1 million / 18.3% | $79.6 million / 20.7% | Income down 6.9% |
| Net income / margin | $54.5 million / 13.4% | $53.4 million / 13.9% | Income up 2.1% |
| Diluted EPS | $1.03 | $1.00 | +3.0% |
| Operating cash flow | $58.0 million | $63.9 million | Down $5.9 million |
| Capital expenditures | $41.7 million | $26.6 million | Up $15.1 million |
- Cash and cash equivalents were $21.5 million at year-end; certificates of deposit and short-term held-to-maturity investments added $9.0 million. Working capital was $103.7 million.
- No revolving-credit borrowings were outstanding. The $30 million facility had $29.2 million available after a $0.8 million standby letter of credit; it matured July 27, 2018. The company reported covenant compliance.
- Total assets were $296.8 million and stockholders’ equity was $237.2 million. The selected financial data reports no current or long-term debt at year-end.
- Cash used in financing was $29.6 million, including $16.6 million of share repurchases and $13.7 million of dividends paid.
Material changes and fourth-quarter results
- Unit sales rose 11.9% to 23,381, but sales grew 5.5%; management attributed the difference largely to higher sales of lower-priced water-source heat pumps.
- Higher raw-material costs and a sharp increase in warranty expense pressured profitability. Warranty expense rose to $11.2 million from $3.6 million, and the warranty accrual increased to $10.5 million from $7.9 million. Management cited changes and refinements to its warranty process.
- Fourth-quarter sales were $104.2 million versus $91.7 million; net income was $15.8 million versus $11.4 million. Fourth-quarter diluted EPS was $0.30 versus $0.21.
- Operating cash flow fell as inventory purchases increased. Inventories rose to $70.8 million from $47.4 million, while accounts receivable rose to $50.3 million from $43.0 million.
Outlook, risks and unusual items
- Management estimated 2018 capital expenditures of approximately $53.2 million, principally for the research and development laboratory, water-source heat-pump production lines and other internal projects. Some projects could be reviewed or cancelled without substantial charges.
- Management said cash, operating cash flow, the revolving facility or comparable financing, and expected capital-market access should meet liquidity needs for 2018 and the foreseeable future. No earnings or revenue guidance was provided.
- Backlog was approximately $64.9 million as of February 1, 2018, versus $53.5 million a year earlier. Orders were generally filled within 60–90 days after becoming firm, but remained subject to customer cancellation.
- The Tax Cuts and Jobs Act generated a $4.4 million deferred-tax remeasurement benefit in 2017 and reduced the reported effective tax rate to 26.8% from 33.3%. The company also took $3.2 million of bonus depreciation in Q4. Management noted the lower federal corporate rate but also the loss of the domestic manufacturing deduction, historically worth about 3–4 percentage points to its effective rate.
- Key risks include cyclical construction demand, commodity and component availability and pricing, competition, product warranties and liability, regulatory changes, cybersecurity, reliance on Tulsa operations, workforce retention and self-insurance estimates. Copper, galvanized steel and stainless-steel average prices increased year over year; aluminum was relatively stable.
- One customer, Texas AirSystems, represented at least 10% of sales in 2017 and 2016. The company reported no pending litigation expected to have a material adverse effect and no material contractual purchase agreements at year-end.
Important facts for investors to verify
- Whether warranty claims and the revised warranty process cause further expense or reserve adjustments.
- Whether the large inventory build supports demand or creates working-capital, obsolescence or cash-flow pressure.
- Execution, timing and returns on the planned $53.2 million 2018 capital program.
- Renewal terms and availability of the revolving credit facility, which was due to mature in July 2018.
- How the tax-law changes affect the effective tax rate after the one-time deferred-tax benefit.
- Backlog conversion, cancellations, customer concentration and the mix of replacement versus new-construction demand.