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AAON Inc. Reports Operating Results (10-Q)

November 02, 2009 | About:
TraderMark

10qk

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AAON Inc. (AAON) filed Quarterly Report for the period ended 2009-09-30.

Aaon Inc. is a manufacturer of air-conditioning and heating equipment consisting of rooftop units chillers air-handling units condensing units and coils. Its products serve the new construction and replacement markets. The Company has successfully gained market share through its semi-custom product lines which offer the customer value quality function serviceability and efficiency. Aaon Inc. has a market cap of $309.09 million; its shares were traded at around $18.01 with a P/E ratio of 11.12 and P/S ratio of 1.1. The dividend yield of Aaon Inc. stocks is 2%. Aaon Inc. had an annual average earning growth of 14.2% over the past 10 years. GuruFocus rated Aaon Inc. the business predictability rank of 3-star.

Highlight of Business Operations:

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2009 and 2008 due to the economic environment. In addition to our derivative instrument, we attempt to limit the impact of price fluctuations on these materials by entering into cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 - 18 months. We expect to receive delivery of raw materials for use in our manufacturing operations from our fixed price contracts. These contracts are not accounted for as derivative instruments because they meet the normal purchases and sales exemption allowed by GAAP. We have entered into contracts that are both above and below the average index price as of September 30, 2009. Prices decreased by approximately 49% for steel, 56% for aluminum and 27% for copper from September 30, 2008 to September 30, 2009. The lower commodity prices have contributed to our lower cost of goods sold.

Net sales decreased $20.8 million or 26% to $58.5 million from $79.3 million for the three months ended, and decreased $28.4 million or 13% to $191.1 million from $219.5 million for the nine months ended September 30, 2009, compared to the same periods in 2008. The decrease in net sales was a result of the decreased volume related to the current economic environment and lower sales from our Canadian operations. The current economic environment has negatively impacted commercial construction markets with some projects delayed, postponed indefinitely or cancelled. The replacement market has also been affected by customers delaying equipment replacement as a cost saving strategy.

Gross profit decreased $2.3 million or 12% to $17.7 million from $20.0 million for the three months ended, and decreased $0.9 million or 2% to $52.8 million from $53.7 million for the nine months ended September 30, 2009, compared to the same periods in 2008. As a percentage of sales, gross margins were 30.3% compared to 25.3% for the three months ended, and 27.6% compared to 24.4% for the nine months ended September 30, 2009 and 2008, respectively. The 20% increase in gross margin percentages for the three months and 13% increase for the nine months was primarily a result of lower material costs, improved production and labor efficiencies, a reduction in manufacturing related expenses and a $1.0 million unrealized gain from a derivative asset included in cost of sales (see Note 4 Derivatives) despite lower net sales and expenses associated with the Canadian facility closure. Our gross margins as a percentage of sales excluding the unrealized gain were 28.6% compared to 25.3% for the three months ended, and 27.1% compared to 24.4% for the nine months ended September 30, 2009 and 2008, respectively.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2009 and 2008 due to the economic environment. In addition to our derivative instrument, we attempt to limit the impact of price fluctuations on these materials by entering into cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 - 18 months. We expect to receive delivery of raw materials for use in our manufacturing operations from our fixed price contracts. These contracts are not accounted for as derivative instruments since they meet the normal purchases and sales exemption allowed by GAAP. We have entered into contracts that are both above and below the average index price as of September 30, 2009. Prices decreased by approximately 49% for steel, 56% for aluminum and 27% for copper from September 30, 2008 to September 30, 2009. The lower commodity prices have contributed to our lower cost of goods sold and higher gross profit margins.

Selling, general and administrative expenses decreased $2.0 million or 27% to $5.3 million from $7.3 million for the three months ended, and decreased $0.7 million or 4% to $18.6 million from $19.3 million for the nine months ended September 30, 2009, compared to the same periods in 2008. The decrease was primarily due to a lower warranty expense related to fewer sales and sales related expenses.

Our revolving credit facility provides for maximum borrowings of $15.2 million which is provided by the Bank of Oklahoma, National Association. Under the line of credit, there is one standby letter of credit totaling $1.0 million. The letter of credit is a requirement of our workers compensation insurance and will expire December 31, 2009. Interest on borrowings is payable monthly at the rate of 4% or LIBOR plus 2.5%, whichever is higher (4.00% at September 30, 2009). No fees are associated with the unused portion of the committed amount.

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