AAON, Inc. (AAON) reported excellent Q1-09 results, especially in light of the current tumultuous economic environment and the poor performance of some of its competitors (e.g., UTX's (UTX) Carrier operations).

Sales were down by 2.3% to $64.0 million (we had been looking for $60.5 million), while EPS rose by 11.4% to 39? (our estimate was 34?) on 11.4% fewer shares. In spite of the Sales reduction, Gross Income was up by 8.2% to $16.9 million -- and the Gross Margin expanded from 23.9% to 26.5%- - as the Company benefited from stability in its workforce (i.e., less turnover) as well as declining raw material costs.

SG&A Expense did rise by 10.7% to $6.6 million and, as a percent of Sales, it went from 9.0% to 10.2%, primarily because of increased bookings of reserves for possible warranty and bad debt expenses, precipitated by the present unsettling business environment. Operating Income was up by 6.7% to $10.4 million, and the Operating Margin widened from 14.9% to 16.3%.? The Tax Rate was up slightly to 36.7% from 35.0%.? Net Income rose by 4.6% to $6.7 million and the Net Margin was 10.5% versus 9.8%.

With respect to some other metrics, the Days in Accounts Receivable rose from 51 to 58 and the Days in Inventory climbed from 60 to 66; consequently, the Current Ratio backed off a smidgeon from 2.3:1 to 2.2:1, all of which we ascribe to the less-than-stellar business conditions. Free Cash Flow rose by $635 thousand to almost $9.9 million.

The Company repurchased $702 thousand of its stock in the quarter compared to over $1.8 million in the same quarter last year. There are still some 107 thousand shares left to buy on the current authorization (all the shares purchased in Q1-09 were related to 401-Ks, not the aforementioned authorization).

The following are some paraphrased tidbits from the Q1-09 conference call:

The Gross Margin going forward is anticipated to be around 24%.

SG&A Expense should be in the 8.5% to 9.0 range for the balance of the year.

Warranty reserves were boosted to cover potential problems that might be encountered with new and redesigned products, which include chillers, air handlers and split (floor-by-floor) systems plus the beginnings of the Company's entry into the residential market.

Bookings in Q1-09 were higher than bookings in Q1-08!

Medical/Healthcare and Education are "respectable"...but everything else is not so good.? However, with Government, there are opportunities (Obama's 787 rehabilitation program)!

While raw material costs have declined, sub-assembly costs have risen somewhat.

Q2-09 is looking good; the rest of year, who knows? P,P&E expenditures will decline during the balance of the year.

The replacement sector - aided by the Federal Government's push to improve the efficiency of existing structures - has now overtaken the new equipment sector, which means it now accounts for more than 50% of AAON's business, where before it was around 45%; this is where AAON shines.

Retailers, in many cases, are also retrofitting to improve efficiency rather than expanding.

AAON's Canadian operation is doing less than $1 million/month in revenues and is "barely surviving; it's looking more dismal every day."? AAON only has about $2.5 million in Canadian assets.

With the cash crunch, current owners are upgrading; speculators (aka new owners) are almost non-existent; this is good for AAON as current owners are quality-driven, while speculators are cost-driven.

Other Income in Q1-09 was up because of foreign (read: Canadian) currency translation; it will be negatively impacted in subsequent quarters by a tenant move out of the Tulsa plant.

The Tax Rate is projected at 37% for the balance of the year.

Zacks currently has a Buy recommendation on AAON.