AAON, Inc. — Q2 2014 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. Unaudited interim results. AAON manufactures and sells commercial air-conditioning and heating equipment in the U.S., Canada, and other markets.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $92.3 million | $91.2 million | $168.7 million | $158.1 million |
| Gross profit / margin | $27.9 million / 30.2% | $27.7 million / 30.3% | $49.7 million / 29.5% | $43.0 million / 27.2% |
| Operating income | $17.3 million | $18.6 million | $31.5 million | $27.0 million |
| Net income | $11.4 million | $12.1 million | $21.2 million | $19.3 million |
| Diluted EPS* | $0.20 | $0.22 | $0.38 | $0.35 |
| Operating cash flow | — | $17.5 million | $27.7 million |
*Per-share figures reflect the three-for-two stock split effective July 16, 2014. Q2 operating income and net income declined despite modest sales growth; year-to-date operating income and net income increased. Q2 SG&A rose to $10.6 million from $9.1 million, including a $1.0 million charitable donation, higher headcount and compensation, and higher stock compensation; lower warranty expense partly offset the increases. For the first half, lower material costs improved gross margin, while SG&A increased to $18.2 million from $16.1 million.
Financial position and liquidity
- At June 30, cash and cash equivalents were $16.5 million; current certificates of deposit and held-to-maturity investments totaled $29.2 million. Management reported cash and short-term investments of $45.6 million, up $9.4 million from year-end 2013.
- Working capital was $92.4 million. Current assets were $141.9 million and current liabilities were $49.5 million.
- No revolving-credit borrowings were outstanding. $29.2 million was available under the $30 million facility, net of a standby letter of credit. The company was in compliance with its covenants.
- Operating cash flow fell year over year to $17.5 million. Increased accounts receivable used $13.8 million, versus $6.3 million in the prior-year period; inventory also used $4.6 million. Management attributed weaker collections to large sales near quarter-end and the average collection period rising from 50 to 52 days.
- Capital expenditures were $5.9 million, versus $1.9 million in the first half of 2013. Investing cash use was $9.3 million; financing cash use was $3.8 million, including $5.1 million of share repurchases.
Material changes, outlook, and risks
- Q2 sales increased 1.2% while units sold declined 1.9%; management attributed the sales increase to a 3–4% price increase introduced in 2013. First-half sales rose 6.7% with unit volume essentially flat, reflecting product mix and pricing.
- First-half raw-material prices were lower year over year: copper 5.2%, galvanized steel 2.1%, stainless steel 8.3%, and aluminum 3.8%. Management noted commodity prices remain volatile and may use fixed-price supplier contracts to manage exposure.
- Management estimated 2014 capital expenditures of approximately $13 million, primarily for land and manufacturing equipment. It said cash, operating cash flows, the credit facility, and expected access to capital markets should meet 2014 and foreseeable liquidity needs; no formal earnings or revenue guidance was provided.
- Management described commercial and industrial new construction as unpredictable and uneven, and noted that economic activity, interest rates, construction cycles, competition, and raw-material and component prices could affect results. Sales are moderately seasonal, with peak demand generally July through November.
- The company no longer benefits from certain federal tax credits that expired at the end of 2013 and were not extended for 2014. First-half 2014 tax expense included a $0.7 million benefit from a state investment-credit accounting-method change; the prior-year comparison included discrete federal tax-credit benefits.
- Subsequent events: the revolving-credit facility was amended July 25, extending its termination date to July 27, 2016. The declared $0.09-per-share semiannual dividend was paid July 1; the three-for-two stock split took effect July 16.
- The filing reports ordinary-course legal claims and a $0.7 million fixed-price aluminum-ingot purchase obligation due within one year. Management said it did not expect significant assessments from current tax examinations. No material changes to the risk factors in the 2013 Form 10-K were reported.
Key facts for investors to verify
- Whether weaker operating cash flow and slower receivable collections persist as sales grow.
- Whether the planned capital spending produces the expected capacity and efficiency benefits, and whether spending approaches the $13 million estimate.
- Whether sales, product mix, pricing, and seasonal demand support margins amid uncertain construction markets and commodity-price volatility.
- How the absence of expired federal tax credits affects the effective tax rate in subsequent periods.
- Whether warranty accruals, inventory reserves, and other significant estimates remain adequate; the filing identifies these as judgment-sensitive estimates.