AAON, INC. 10-K Summary: Fiscal Year Ended December 31, 2005
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2005. AAON, Inc. is a Nevada corporation engaged in the manufacture and sale of air-conditioning and heating equipment, including rooftop units, chillers, and coils. The company serves commercial and industrial new construction and replacement markets, primarily in the United States (foreign sales were less than 4% in 2005). Operations are conducted through facilities in Tulsa, Oklahoma; Longview, Texas; and Burlington, Ontario, Canada.
Key Financial Metrics
| Metric | 2005 | 2004 | 2003 |
|---|---|---|---|
| Net Sales | $185.2 million | $171.9 million | $147.9 million |
| Gross Profit | $35.3 million | $26.9 million | $35.9 million |
| Gross Margin | 19.1% | 15.6% | 24.3% |
| Net Income | $11.5 million | $7.5 million | $14.2 million |
| Diluted EPS | $0.90 | $0.58 | $1.07 |
| Operating Cash Flow | $12.0 million | $16.2 million | $16.5 million |
| Total Assets | $113.6 million | $105.2 million | $102.1 million |
| Long-Term Debt | $59,000 | $167,000 | $0 |
| Stockholders' Equity | $79.5 million | $71.2 million | $67.4 million |
Liquidity: As of December 31, 2005, the company held $837,000 in cash and cash equivalents and $1.0 million in certificates of deposit. The company maintains a $15.15 million revolving credit facility with no borrowings outstanding at year-end.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.7% ($13.3 million) compared to 2004, driven by volume increases, price increases, and a full year of operations from the AAON Canada acquisition.
- Margin Recovery: Gross margins improved to 19.1% from 15.6% in 2004. This recovery was due to volume leverage, price increases, and production efficiencies, partially offset by high raw material costs (steel, copper, aluminum) and lower margins from the Canadian subsidiary.
- Profitability: Net income increased 52.4% to $11.5 million, reversing the decline seen in 2004 which was impacted by facility outages and raw material cost spikes.
- Working Capital: Accounts receivable increased by $5.4 million and inventories by $2.8 million, reflecting higher sales volume and strategic procurement of copper at 2005 pricing for 2006 needs.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Backlog: As of March 1, 2006, backlog was $48.6 million, a significant increase from $33.2 million at the same time in 2005.
- Capital Expenditures: The company expects to expend approximately $11 million in 2006 for equipment requirements, funded by operating cash flows.
- Dividends: On February 14, 2006, the Board initiated a semi-annual cash dividend of $0.20 per share, payable July 3, 2006. The lender waived the previous dividend restriction.
- Stock Repurchases: The Board suspended the stock repurchase program on February 14, 2006. Approximately 67,136 shares remained available under the program.
Risks and Contingencies:
- Raw Material Costs: Profitability remains sensitive to price fluctuations in steel, copper, and aluminum. While the company uses fixed-price contracts, suppliers have occasionally refused to honor prior pricing due to market volatility.
- Economic Cyclicality: Sales are tied to commercial/industrial construction, which lags housing starts by 6-18 months and is sensitive to interest rates and economic conditions.
- Key Person Risk: The company relies heavily on founder and CEO Norman H. Asbjornson.
- Accounting Changes: The company is preparing for the adoption of SFAS 123(R) regarding stock-based compensation, effective for interim reporting after December 31, 2005.
Investor Verification Checklist
- Raw Material Hedging: Verify the extent of fixed-price contracts for steel, copper, and aluminum entering 2006 and the potential for margin compression if spot prices rise.
- Canadian Operations: Review the specific margin contribution of AAON Canada, which was noted as having lower gross margins than the domestic operations.
- Backlog Conversion: Monitor the conversion rate of the $48.6 million backlog into revenue in 2006, noting that orders are subject to cancellation.
- Dividend Sustainability: Assess whether the new dividend policy and suspension of buybacks align with projected free cash flow given the $11 million planned capital expenditure.
- Customer Concentration: Confirm current sales concentration to Wal-Mart Stores, Inc., which dropped below 10% in 2005 but was 14% in 2004.