Aaon Inc (AAON) 2011 Q4 法說會逐字稿

Good afternoon. Norman Asbjornson reporting on the AAON's investor conference call for the fourth quarter and the year 2011. Prior to going forward, I'd like to read a disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filing on Form 10-K. Thank you. I'd like to introduce Kathy Sheffield, our CFO.

Good afternoon, and welcome to our conference call. Thank you for joining us for this review of AAON's financial performance for the fourth quarter and full year of 2011. I'll begin by discussing the comparative results of the three months ended December 31, 2011 to December 31, 2010.

Our revenues were down 4% to $63.4 million from $65.8 million. The decrease in revenues can be attributed to 10 less production days due to plant shutdowns associated with the holidays, and to a decline in orders from customers who were not able to receive their orders before the year end to take advantage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act for equipment that was put into service in 2011. Our gross profit decreased 39.1% to $8.6 million from $14.2 million. As a percentage of sales, gross profit for the quarter was 13.6% compared to 21.5% a year ago.

In addition to the lower productivity that we just discussed, the gross margin for the quarter was also affected by several other factors. Inefficient sheet metal production due to the changing out of approximately 50% of our capacity in a short period of time in order to have our new apartment that we installed in the fourth quarter operable by the end of the year, numerous cost expensed during the change out of the equipment and efficiencies in production due to lack of sheet metal parts in a timely fashion. Costs associated with relocating three assembly lines and rearranging two other assembly lines. A continuation of component part price increases that we were unable to fully pass on to our customers and manufacturing inefficiencies due to the production of new products.

Selling, general and administrative expenses decreased slightly, 4.1% to $5.6 million, or 8% of sales from $5.8 million, or 8.9% of sales. Operating income decreased by approximately 85% to $1.2 million, or 1.9% of sales from $8.3 million, or 12.6% of sales. In addition to the previous discussion, operating income was impacted by a $1.8 million loss on the trade-in of equipment.

Net income decreased 85% to $0.9 million, or 1.4% of sales from $5.8 million, or 8.8% of sales. Diluted earnings per share was $0.04 per share versus $0.23 per share. Earnings per share was based on 24.821 million shares versus 24.950 million shares in the same quarter a year ago.

As we discuss the results for the full year ended December 31, we are pleased to report that our revenues were up 9%, to $266.2 million from $244.5 million. This was accomplished by gaining market share as a result of the favorable reception to our new products and also by signing into law of the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act for qualified capital investments.

Gross profit decreased 16.1% to $46.3 million from $55.2 million. Gross profit as a percent of sales was 17.4% for the year ended 2011 compared to 22.6% in 2010. In addition to the quarter details, year-to-date margins were also impacted by the loss of production for 8.5 days in February and production inefficiencies throughout October due to the building damage caused by the snowstorm and also by increases in raw material and component parts throughout the year.

Selling, general and administrative expenses were $22.3 million, or 8.4% of sales from $22.5 million, or 9.2% of sales. The decrease as a percent of sales was primarily due to lower profit-sharing, which was a result of a decrease in earnings, which was offset by an increase in salaries, employee benefits, selling related expenses and professional fees.

Operating income decreased 32.2% to $22.2 million, or 8.3% of sales from $32.7 million, or 13.4% of sales. Other income and expense was adversely affected by a $500,000 insurance deductible related to the building damage from the snowstorm. Our effective tax rate increased from 33% to a normalized 35% due to fewer federal tax credits that we received in 2011.

Net income decreased 36.1% to $13.9 million, or 5.3% of sales from $21.9 million, or 9% of sales. Diluted earnings per share was $0.56 per share versus $0.87 per share. Earnings per share was based on 24.881 million shares versus 25.339 million shares for the same period a year ago.

Moving to the balance sheet, we see that we had a working capital balance of $45.7 million. Our current asset ratio was two to one. We created a tax refund of $10 million, which will have a positive impact on our liquidity as refunds are converted to cash in 2012. Our capital expenditures were $35.9 million, we had no long-term debt. Shareholders equity per share was $4.92 compared to $4.61, and we paid cash dividends of $5.9 million in 2011.

I would now like to turn the call back over to Norm who will discuss our results in further detail, along with the new products and our outlook for 2012. Norm?

Good afternoon. I can only say that this was a very interesting year we just finished. We started the year out thinking we were going to invest approximately $10 million in capital expenses, and then in December, when the government allowed us to start 100% depreciation on things, it turned our world upside down and it never stopped for the balance of the year for a variety of reasons.

The beginning thing that hit us right away, of course, was the fact that the market did not improve appreciably during the year. It had a little more decline in it. And the market of which I speak is the building market that we are serving. That market is the lodging type buildings, office buildings, commercial buildings, healthcare buildings, educational buildings, religious buildings and manufacturing projects, and then another all-inclusive group called other types of buildings. That was in a continuing down swing which started in 2008 and concluded in being almost flat between 2010 and 2011, but it was still declining during that time period.

Now, I would like to talk just a little bit about the various things which we did during the year. Let's talk about the equipment, first of all. That's where everything in our world starts, is our equipment. As we have been talking for several years, we've been on a very determined goal of accelerating as much as possible during this downturn the development of a new product -- several new products.

We have gone through -- the number of products right now, approximately 70% of our volume is in those new products which we've developed over the last three or four years. And we're in a process now of working on the final 30%, most of which will be concluded this year. That brought us to the point where we determined that we were being very successful with this product line.

It was being well received by the customers and in spite of the downtrend in our business opportunities, we were gaining market share. And so when the government allowed us to take the 100% depreciation, we did some calculations and concluded it was very optimal for us to take advantage of that, even though the machines that we were going to obsolete weren't totally worn out, although they were very, very badly worn, because they had between 60,000-some working hours and almost 100,000 working hours.

To give you a point to that reference, one year has 8,760 hours in it. So, we indeed had put a lot of hours on those machines, but they were still functional. And they were, as you would expect, a little slower because they were older machines and they did break down reasonably often. But we were going to obsolete them over the next two to three years beyond that. But with that offer by the government, we decided to obsolete all of them right away.

However, when we did that, we did not know at that point whether we were going to keep those old machines or whether we were going to trade them in. We got a trade-in price from the vendor of the new equipment, and then we ordered that new equipment with the option to trade in the old equipment with no commitment made at the time we ordered the new machinery.

We were still trying to get our hands around how we were going to do all this, because even though it was highly beneficial to us, we had a few options that we could use on those old machines. The options were, we could leave them where they were and put the new machines in our west building where we had enough room to put those machines in, or we could extract the old machines from the building and sell them on our own, or we could trade them in.

As it turned out, we didn't finally make a final determination to trade them in until the fourth quarter of this past year at which point in time, we finally decided that the only reasonable thing for us to do was to trade them in, even though they hadn't been fully depreciated and had a little bit over $1.8 million worth of undepreciated assets more than what we got on a trade-in value.

That being said, we had also committed to a fairly sizable, roughly a little over 200,000 square foot addition to the facility in the Tulsa vicinity, and we embarked upon that. All this was compounded by a snowfall we had the first week of February that took down about 24,100 square feet of our roof in four different sections. And when we lost the roof, we lost some of it on the east plant and most of it on the west plant. This made the facilities open to the outside air and we hit some 20 below weather concurrent with the snowstorm, which obviously gave us a freezing condition inside the building on the east -- or the west side.

The east side we were able to contain it enough that we didn't look the temperature down to below freezing, but we went well below freezing on the west building which caused equipment damage, plumbing damage, you name it, we had it damaged, and we had no ability to heat the building. And so for 8.5 days we were shut down totally, and when we got back up, we had no temperature control in the west building. We had managed to contain the damage on the east building, but to people -- which our west building in our larger structure, were basically working in outdoor air conditions, very close to it, and it was still quite cold and February.

Then it went into the summertime and it got hot, and the heat not only made it bad for our employees, but the machinery, the sheet metal machinery has high temperature limits, and it started shutting down on us. And so on a real hot day, we'd have machines go down and we couldn't get them running. We'd blow fans on them and things like that and get them back up, but it was rather a challenging environment we lived through.

All that being said, we did still manage to pull off the second best sales year that we've ever had. But the one part that really took a beating was the bottom-line because we had all these extraneous costs that we hadn't anticipated and really money that we had no control over which beat up on us on the financial side. I'm very proud of the employees of AAON because I think they did a superb job in getting us through last year.

Where we are today is, all of that is behind us. The building is behind us, the -- all of the big transitions we've been making are almost all behind us. The only one which is still in progress at this point in time is the building -- the major building we built was some office -- additional office space which is of no problem because we are needing that anyway.

But the other thing which we do badly need is the warehouse. The warehouse is finished as far as the building is concerned, but as far as the interior is concerned, we have probably six months left of finishing the floor, finishing the sealing, wiring it, putting in racks and stocking all the racks, et cetera. So, that portion will be ongoing until sometime in the latter summer before we really start getting beneficial use of that. That will add to our productivity of our operation when we finally get there. However, we will have a cash drain on us between now and then.

However, the really stupendously good thing that did occur to us is our business stayed up fairly well. In the first seven months of last year, we booked orders at a rate 19% better than what we had the previous year, so we were feeling quite good. And then they started diminishing. The bookings we were having, we've concluded were primarily due to the government's 100% depreciation on certain capital goods, and the people were ordering it like we did our machinery, early in the year.

And as the year went on, they'd ordered less and less and it diminished until in the fourth quarter, they weren't ordering any of it, and we were pretty well running out of the orders that we had. The net result that we were up 19% in orders compared to 2010 through August, and then we started going behind. And we -- by the time we finished the last five months of the year, we booked 9% less business than we did in 2010.

So, that gave us a problem of products that we could ship and build and ship in the fourth quarter of last year, as well as all of our other problems which compounded, including the fact that the equipment -- the majority of equipment we ordered from our sheet metal machinery dealer, all of it arrived in the fourth quarter. They were not able to give us some in the third quarter, as was originally promised, so we had basically 50% of our sheet metal equipment to be changed out in the fourth quarter, and try not losing any production time.

That was a real challenging thing for our employees, and they came through very well. But it did definitely impact us in innumerable ways. We are, as I said, totally through that. We had to have them all up and operating by the end of the year, which we did. And so consequently, the 100% depreciation allowance is allowed to us, and we have not collected that money yet.

The money will be collected this year at $7.8 million, and we had another $2.2 million worth of other items, which also gave us tax credits, so we have a total of $10 million coming -- going into this year of tax credits. We will be using some of them, but we are -- and have filed a request for the money back. We don't know how fast that will be acted upon, so we don't know that.

Due to the various things we have to do to file our income tax, we won't get the income tax filed until April. So, if they don't refund it on the paperwork we've already submitted, I would presume we will get it in May or June. The nice thing of it is, of course, that throughout -- throughout this -- excuse me for having a kind of a raspy throat, here, throughout this timeframe, we've been to keep our inventory under control for the year, in total.

As we told you in the past, we pre- bought a lot of things to try to offset cost increases on them, and we pretty well used them all up during the year so that our inventory was pretty well back. We have very good receivables. We got our receivables in excellent condition. And so the only -- the problems were the ones which we've been enumerating to you so far.

The net result is that, going into this year, we were not booking business well because that replacement market was just kind of dead. For the last five months it was diminishing and in December, it got very dead, and the first 10 days of January wasn't real great either. And then the new orders started kicking in and they really came in.

We have had phenomenal order input, and so the question arises, why did you have phenomenal order input? Well, we've had a lot of discussion around here, and they are basically three things that we believe to be possibilities. Looking, first of all, at the architects billing index and knowing that somewhere between, according to them, 9 months and 12 months goes by from the time that they bill something, work that the architects do, before it gets out and gets bid on and started being built. So, you can look at an architect's billing index, as we do all the time, and see that there was no upswing in the billings.

So, 9 to 12 months down the road, there's not going to be any big upswing in buildings being built, because they weren't designed. We know that isn't where it came from. So, then where does that come from? Well, some of those buildings that were built -- or designed maybe several months ago or years ago possibly, and never put under contract, were brought off the shelf this year and put under contract. That is a very real and probable thing, because there is more optimism in the society right now. That's highly likely that there was some of that.

The next thing is that the winter has been very open winter. Some of the business that we wouldn't normally expect to see until springtime, we probably have already started seeing it coming in, and that, we believe, is a very real potential. And the third thing is that our new product is being very, very well received by the customers, by the salespeople, and everyone involved, and they are just getting a bigger share of the market.

Due to the magnitude of the input of the orders that we have received in the first two months of this year, and are continuing to receive, I would give credit to all three scenarios, but I would give the dominance of credit to the new products' reception in the marketplace. If that is the dominant thing, it's reasonable to expect a continuation of that order input. If we were counting on the other two items, those things are one-time event, and they have already come and gone, probably. So, we will see, as we go forward, whether the third option is the one that really is the real world for why we are doing so well in the bookings.

I wouldn't tell you the total percentage bookings because it's unreal, and I would lose credibility with you. All I will say is that we gave you the sum of where we were on March 1, and it is quite, quite satisfying on our part in here. As I said, it is continuing.

There was thing that you have to recognize, that has to be realized, is we had another couple price increases during that timeframe and with those price increases, you always get an influx of orders, so that they beat the price increase. Of that $55.3 million that was in here on March 1, probably about 90% of it was pre-price increase, because the price increase occurred in the February timeframe. And the new orders that came in after the price increase is probably about 10% of that backlog.

We have to work out somewhere about around $40 million-some worth of it at the old price level. However, I will also tell you that at the old price level, we are able to manage to get over the 20% margin on our standard gross margin. It will have a material effect since last year, we were only 17.4% on our gross margin for the year in total.

So, we've already realized one month of business at the higher margin that was in price increases that were done last year, not this year's. And we, like I say, had another price increase in February, which brought in some more of that business. We have got a lot of things going that could explain that input of business. The net result is, we are very optimistic around here that it may not the as wonderful a situation going forward, but we are still quite optimistic that it's going to be a very good situation, considering the marketplace.

I spoke a little bit earlier about the architects billing index, and I am sitting looking at one of their indexes right now. And as I look at it, and I go back, say, to 2010, and look forward through the entire year of 2011 and try and project that into the next 12 months of orders, or the balance of 2012, and what I'm seeing there is that it's sort of a stable situation, as far as how many operating -- how many hours were billed for by the architects in designing buildings, which is probably the best index I know of in the building industry to say what's going to happen in the commercial building market. Since we are talking commercial, recognize we are not really seriously in the residential market, and so I'm not talking at all about the residential market.

The market being stable, then the question comes about, well, what can you really expect if you -- if that's a true case, what can you expect based on your historicals and projecting forward? Well, me walk you through a little bit of history then. From 2003 through 2008, in those buildings that I mentioned, those various building types, the growth in dollars spent according to the US government was construction spending over those period between 2003 in 2008, and those building types went up 64%. AAON sales during 2003, 2008 went up 88%. There was a 14% differential in growth, which was -- had nothing else -- could really -- be material there other than we took that much market share.

Now, starting in 2008 and going through 2011, the market, by those same statistics, declined by 37%. AAON sales declined by 5%. In other words, we somewhere around doubled our marketshare taking during the downturn. Our salespeople did a fantastic job of promoting our new product and doing the things necessary to make that happen.

Now if you look at it, you will see that we went down in 2008 to 2009. We went flat from 2009 to 2010, and we went modestly up between 2010 and 2011, and I've already told you what's happening to our order input. So, even with a flat sequence in the building of those buildings, which is that we anticipate, we still will expect that that growth of marketshare taking that we are experiencing for the past three years is going to continue, which is about the difference between a 37% decline on the construction side and AAON's 5% decline, or 32% difference over three-year timeframe there.

Now, the other factor which someone is probably going to raise is, what about -- isn't the replacement market a major part of your business? Yes, it is. It's somewhere, we think last year, a little more than 50%. Well, how does that work into this? I know of no statistics that tell us anything on replacement market, so I can only assume that it's somewhat tracked new construction.

That may or may not be correct, but at any rate, we did take significant additional market share between 2008 and 2011. We anticipate that's going to continue in 2012. So, with a flat market in the building industry, we expect to grow at a reasonable percent, maybe getting up into the double digits. It's hard to say. Does anybody have any questions at this point in time?

(Operator Instructions) The first question we have is from DeForest Hinman.

Hi. I got on the call a little bit late, Norm, so if this has been answered, I -- or ask and answered, I apologize. With the increase in backlog, have you had to hire additional workers?

Yes, last summer, to give you a feel for it, last summer we were running about -- in Tulsa, we were running about 1,200 people. In Longview, we were running about 400 people. When it started slowing down in the last half of last year, we just didn't hire people, we let attrition diminish our people. And most of our business that we report to you is from the Tulsa facility. Most of Longview's business comes up here in the form of material that gets put into our product. So, I'll talk primarily about the Tulsa facility.

In letting it go down, it went down to -- from right at 1,200, it went down to 1,071 people, and that occurred at about the second week of January, at which point in time, it became obvious to me by the order input, that I'd better stop it. So, I stopped it, I started replacing the people. And about a week later, it became obvious that something bigger was happening, and we started hiring people. We are now back up in Tulsa to 1,121 people at this point in time. So, we've hired back from 1,071 to 1,121. We are not, at the present time, hiring, because we think the increased productivity, which we've accomplished by rearranging all those production lines and buying that machinery, probably we'll be able to stay with about that much personnel and be reasonably able to do about the same volume which we did last year. That remains to be seen, of course, but at that this point in time, we are going to be running with about somewhere around 80 people less than we would have last year.

Okay. And are there any worries there, in terms of efficiencies, taking on the extra workers, or do you think you can you get them trained and up to speed relatively quickly?

We think we have a good way of doing it. We have a lot of training things in place, and we have a logical way of bringing them from an untrained worker on up to as highly skilled as they want to make themselves be and work for us. And so, we are not concerned with that. Although, unemployment in Tulsa, I saw last night in Oklahoma, it had dropped to 6.1%. It's not as -- there is not as many people looking for work around here, and I think we're in the same general area in our Texas facility, as far as unemployment.

And the 50 people that you added, how many of those were rehires?

I don't really know. I would say the majority of them were not.

Okay.

The majority of the ones that -- because recognize the ones that left, left without us letting them go, they left on their own volition. So, the likelihood of them coming back is not very great, I don't think.

Okay. All right, thank you Norm.

The next question comes from the line of Jon Braatz.

Good afternoon, Norm.

Hi, Jon, how are you today?

Pretty good. In 2011, last year you spent about $36 million in new equipment and so on and so forth. Now obviously, there's going to be a nice payback on that equipment, productivity, other cost savings and so on and so forth. And I know this may be a difficult question, but if you would look at maybe your gross margins that you achieved a couple of years ago when things were really rocking and rolling, I think they were 25%, 26%, under similar circumstance, incrementally, how much do think this investment can add to your margins? Maybe not at the peak, but just during any period, I guess, if I could say that. How much --

If we replicated the volume we had last year, we have very easily concluded that it will be in excess of $1 million, just over the machinery we are using, and we bought more machinery than what we need. If we were growing and had the ability to use all the machinery to the fullest extent, and recognize, we run 23 hours per day, 7 days per week on that machinery. If we were able to have that much business, it would be somewhere are up $2 million to $3 million that we would've gained by having this new machinery, as opposed to the old machinery we had. And the primary reason for that is that the machinery had been improved that much by the manufacturer, and it's almost twice as fast as the old machinery that we replaced, not counting the down time.

Okay, and what, if you could, is there a capacity utilization number that you are at in terms of that new machinery? Are you operating at 50% capacity, 60%?

Yes. You know what we did last year, and here is what we are, where we believe we are. In our analysis of our facilities, and recognize some of the facility is ready for more business, but there are choke points in the facility that have not been expanded and would cause us to have to do something to get rid of those choke points. But in general, we think that the buildings would presently handle about $800 million.

Okay, and the machinery, as we have it right today would handle somewhere around $600 million. So, you could say we are way over stocked on building and we're way over stocked on machinery. But here is the reason why that exists. On the building side of it, we can afford the building for the improvement in productivity. And consequently, even though at the present time, in order to complete the building process that we have already planned, we always do our planning several years in advance because initial planning is never very good. And as we get a little older and a little smarter, we keep changing the plan. And so we start out several years before we need to embark on it, so we kind of get it more strict by the time we're ready to build the plant.

We have already planned out the buildings, and we've already done all of the internal work, as far as figuring out what kind of volume we can get out of it, what we were going to have to do, how many forklifts, how many -- everything down to very minute detail we do in this planning. And at the present time, in the Tulsa facility -- Tulsa area, to finish off everything we've got, we need about 59,000 more square feet. That is in two building processes. There will be two different ones. One is just a small extension on the east facility, and the other one is a new laboratory that we need here. The Longview facility, we have a lot more latitude and we're just in the beginning stages in that, and we have 14 acres down there on which we can build adjacent to the 13 acres we already own, that our building is on now. We can -- we know we can put as much as 350,000 square feet on that adjacent acreage. But, we don't know what the first shot will be. So, that's where we are in the building.

And we will proceed on building some things, not because we need more buildings because we are over utilized, we are underutilized or anything, it's because the efficiency can be enhanced in our manufacturing methods. And so when we get to the point that we think we can make money by improving the efficiency adequately, we will go ahead and build some more of that building. On the machinery side of it, that was primarily because, if you recall, and I think you were with us long enough to know we often times ran into machinery limitations, and we ended up not being able to take business because we were short on machinery to build the sheet metal. We didn't want to get caught in that bind again. And so we overdid it a little bit, and then with the government coming along that way, it just made it all the more intelligent for us to go forward and overbuy on the machinery. At this point in time, if the order input is at all anything close to resembling what we are doing out in the world, and that's highly debatable, we may not have so much excess machinery for too long.

Yes. Okay. I listened to couple other related companies and their conference calls. It sounds as if that one particular area of the, let's say the nonresidential construction market, has been strong as new manufacturing facilities. Number one, are you seeing that too? And number two, is that inherently good for you? Are you better in that market niche or stronger in that market niche, or does it really matter?

I'll give you a very specific answer in just one moment. In our manufacturing business, that normally has been about 14% of our marketplace, okay? Now, flipping to the most recent one, which I have the census data on through January of this year and looking down through it and looking at January of 2011 versus January 2012, manufacturing is up 38.3%, which is phenomenal. I don't know what's driving that. In January 2011, there was -- these were all in millions of dollars, $29.79 million was spent in 2011 and in 2012, $41.197 million was spent. And if I go back on this sheet I'm looking at, it only goes back to September, but all of everything from September up to January is all $40 million or more. So yes, there is a very big upswing in manufacturing buildings. By far the biggest upswing, but many times more than anything else. The next biggest one, for instance, educational is our biggest marketplace, and that's up 5.8%.

Okay, okay. All right. Do have a stronger marketshare in the manufacturing segment as opposed to other market segments?

Well, no, I wouldn't say so. I would say we probably have a stronger marketshare in educational. But, what some of the things we are doing or have done recently has put us in a position to enhance our ability to go after the marketshare in that arena more than we were able to before.

Okay.

I think we probably can take some advantage of that.

Okay, Norm, thank you very much.

There are no questions in queue at this time.

All right. Well, thank you very much for your tuning in with us. We appreciate your involvement with AAON stock, and without further ado, I will say goodbye and talk with you next quarter, hopefully. Goodbye.