AAON, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. AAON designs, manufactures, and sells commercial heating and air-conditioning equipment. The interim financial statements are unaudited.
Key financial results
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $94.4 | $102.9 | $261.4 | $271.6 |
| Gross profit | $30.2 | $33.4 | $79.1 | $83.1 |
| Gross margin | 32.0% | 32.4% | 30.3% | 30.6% |
| Income from operations | $20.2 | $19.5 | $51.6 | $51.1 |
| Net income | $13.3 | $12.4 | $32.8 | $33.6 |
| Diluted EPS | $0.24 | $0.22 | $0.60 | $0.61 |
- For the nine months, cash provided by operations was $36.2 million, versus $39.1 million in 2014. Capital expenditures were $12.8 million; management estimated full-year 2015 capital expenditures of approximately $22 million.
- Cash and cash equivalents were $29.9 million at September 30. Cash and short-term investments totaled $48.9 million; cash, certificates of deposit, and held-to-maturity investments totaled approximately $62.1 million.
- No revolving-credit borrowings were outstanding. The facility provides up to $30 million, with $29.2 million available after a standby letter of credit. Working capital was $102.7 million, and the company reported compliance with facility covenants.
- Total assets were $255.1 million and stockholders’ equity was $198.4 million at September 30, 2015. The filing reports no outstanding debt.
Changes versus the prior comparable periods
- Q3 sales declined 8.3%, although units sold were nearly unchanged. Nine-month sales fell 3.8% while units sold rose 3.1%. Management attributed lower sales primarily to product mix and a lower average selling price, including fewer larger rooftop units and more condensing units.
- Q3 net income rose to $13.3 million from $12.4 million, helped by lower SG&A; operating income increased despite lower sales. Nine-month net income declined to $32.8 million from $33.6 million.
- Gross margin narrowed by 0.4 percentage points in Q3 and 0.3 points for the nine-month period. SG&A as a share of sales improved to 10.7% from 13.4% in Q3 and to 10.6% from 11.8% for nine months.
- The SG&A comparison benefited from nonrecurring donations recorded in 2014 ($2.8 million in Q3 and $3.8 million for nine months). Nine-month SG&A also benefited from lower warranty expense and salaries and benefits; higher stock compensation and other expense partly offset the decrease.
- Backlog increased to $60.4 million at September 30, 2015, from $54.8 million a year earlier. Operating cash flow declined, which management attributed mainly to faster payments to vendors and representatives, partly offset by improved collections; reported days sales outstanding improved to approximately 48 from 55.
Outlook, risks, and other notable items
- Management gave no specific sales or earnings forecast. It expected its cash, operating cash flows, revolving facility, and anticipated access to capital markets to meet working-capital, capital-expenditure, and other liquidity needs in 2015 and the foreseeable future.
- Management estimated a 2015 effective tax rate of approximately 36.7%; Q3’s 34.1% rate was lower than expected because of return-to-provision adjustments. The nine-month rate was 36.4%.
- Demand is exposed to economic conditions and cyclical commercial and industrial construction activity; management described construction markets as uneven and emphasized the replacement market. Commodity prices are another risk: year-over-year average prices rose 9.7% for aluminum but fell for copper, stainless steel, and galvanized steel. Supplier fixed-price contracts may help manage exposure.
- The company declared a $0.11-per-share dividend on October 29, payable December 23, 2015. It also disclosed an October 2015 authorization of $25 million for its stock-buyback program. These actions occurred after quarter-end.
- Ordinary-course claims and litigation were considered unlikely to have a material adverse effect. The company reported no material contractual purchase agreements or material off-balance-sheet arrangements, and no material changes to its stated risk factors.
Important facts for investors to verify
- Whether product mix and lower average selling prices persist, and how backlog converts into revenue and margins.
- Whether gross-margin pressure, raw-material volatility, warranty costs, and the higher expected annual tax rate affect future profitability.
- Cash conversion and capital spending relative to the approximately $22 million 2015 capex estimate, alongside dividends and buybacks.
- The revolver’s July 27, 2016 termination date, covenant headroom, and the company’s liquidity assumptions.
- Potential tax exposure, warranty-accrual adequacy, and developments in ordinary-course claims; the filing does not quantify a material expected loss for these matters.