AAON, INC. 10-K Summary: Fiscal Year Ended December 31, 2010
Business Context and Reporting Period
Company: AAON, Inc.
Reporting Period: Fiscal year ended December 31, 2010
Industry: Manufacturer of commercial and industrial air-conditioning and heating equipment (rooftop units, chillers, coils, etc.).
Operations: Primary manufacturing facilities in Tulsa, Oklahoma, and Longview, Texas. Sold Canadian facility in September 2010.
Market Exposure: Approximately 55% of sales from new construction and 45% from replacement markets. Foreign sales accounted for approximately 5% of total revenue.
Key Financial Metrics
| Metric (in thousands) | 2010 | 2009 |
|---|---|---|
| Net Sales | $244,552 | $245,282 |
| Gross Profit | $55,188 | $67,545 |
| Gross Margin % | 22.6% | 27.5% |
| Net Income | $21,894 | $27,721 |
| Earnings Per Share (Diluted) | $1.30 | $1.60 |
| Operating Cash Flow | $32,152 | $45,205 |
| Capital Expenditures | $17,470 | $9,774 |
| Working Capital | $55,502 | $65,354 |
| Total Debt (Long-term & Current) | $0 | $76 |
| Cash & Equivalents | $2,393 | $25,639 |
Material Changes vs. Prior Period
- Revenue: Net sales remained substantially flat ($244.6M vs. $245.3M) despite a 14.1% decline in non-residential construction spending, driven by favorable reception of new products and increased market share.
- Profitability: Net income decreased 21% to $21.9M. Gross margin declined from 27.5% to 22.6% primarily due to:
- Absence of a $2.2M unrealized gain from a copper derivative hedge recorded in 2009.
- Higher raw material costs (copper up 210%, aluminum up 155% since 2008) and labor expenses related to production line relocations.
- Inability to implement price increases in a competitive economic environment.
- Cash Position: Cash and cash equivalents dropped significantly from $25.6M to $2.4M due to increased investing activities ($28.3M used) and financing activities ($27.2M used), including $19.5M in stock repurchases and $9.2M in dividends.
- Backlog: Increased to approximately $38.0M as of March 1, 2011, compared to $33.6M the prior year.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates dedicating $28M to $30M in 2011 for a building addition in Tulsa and machinery to accommodate growth.
- Liquidity: The company maintains a $15.2M revolving credit facility with $14.3M available. No borrowings were outstanding at year-end. Management expects to renew the facility in July 2011.
- Risks:
- Economic Sensitivity: Business is heavily tied to commercial/industrial new construction, which is cyclical and affected by interest rates and economic downturns.
- Commodity Prices: Exposure to volatility in steel, copper, and aluminum prices. While fixed-price contracts are used, cost increases can depress margins if not passed to customers.
- Key Person Risk: Dependence on founder and CEO Norman H. Asbjornson.
- Warranty/Liability: Potential for material costs from warranty claims or product liability exceeding insurance limits.
- Unusual Items: A severe snowstorm in February 2011 caused property damage to a roof in Tulsa; management does not expect a material financial impact.
Investor Verification Checklist
- Margin Sustainability: Verify if the company can pass on rising raw material costs (copper/aluminum) to customers in 2011 to restore gross margins.
- Cash Flow Management: Monitor the significant reduction in cash reserves ($23M decrease) against the planned $28M-$30M capital expenditure program for 2011.
- Derivative Accounting: Confirm the absence of the 2009 copper hedge gain is a permanent structural change to earnings or if new hedging strategies are in place.
- Construction Market Trends: Assess the lag effect of the 14.1% decline in non-residential construction on future order volumes.
- Shareholder Returns: Review the sustainability of the dividend policy ($0.36/share in 2010) and ongoing stock repurchase programs given the reduced cash balance.