AAON, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter report. AAON manufactures premium, configurable HVAC equipment, including commercial and industrial systems, data-center cooling, and cleanroom solutions.
Financial performance and position
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Net sales | $1,168.5 million | $888.8 million |
| Gross profit / margin | $399.0 million / 34.1% | $237.6 million / 26.7% |
| Income from operations | $227.5 million | $126.8 million |
| Net income | $177.6 million | $100.4 million |
| Diluted EPS | $2.13 | $1.24 |
| Cash provided by operating activities | $158.9 million | $61.3 million |
| Capital expenditures | $104.3 million | $54.0 million |
| Revolving credit balance at year-end | $38.3 million | $71.0 million |
Derived margins: operating margin was approximately 19.5% and net margin approximately 15.2% in 2023, compared with 14.3% and 11.3%, respectively, in 2022. Operating cash flow less capital expenditures was approximately $54.6 million. At year-end, current assets were $409.0 million and current liabilities $126.7 million; cash and restricted cash totaled $9.0 million. Revolver availability was $159.4 million, and the company reported compliance with its debt covenants.
Changes versus the prior year
- Sales rose 31.5%; management attributed the increase to price realization (17.0 percentage points) and organic volume (14.5 percentage points).
- Gross margin improved 7.4 percentage points, with management citing pricing, moderating inflation, higher production volumes, improved overhead absorption, and stronger BASX sales.
- AAON Oklahoma sales increased 35.3%; BASX sales increased 34.5%, including growth in data-center cooling. AAON Coil Products sales increased 4.7%, while its gross profit declined 12.0% amid production-line implementation inefficiencies and a smaller backlog.
- SG&A rose 54.8% to $171.5 million, including higher profit sharing, professional fees, and other expenses. The professional-fee increase included costs associated with the Havtech litigation settlement.
- Net cash from operations increased, while capital expenditures nearly doubled. Year-end backlog fell to $510.0 million from $548.0 million as production capacity and throughput improved.
Outlook, risks, and unusual items
- Management expects 2024 capital expenditures of approximately $125 million and says available cash, operating cash flows, and committed financing should meet foreseeable liquidity needs. No specific revenue or earnings guidance is provided.
- Management described bookings as strong and backlog as more manageable, with production rates at all-time highs. Backlog was approximately $507.7 million on February 1, 2024; orders are generally considered firm, but cancellations remain possible.
- Management noted strong nonresidential construction spending through 2023 but cited architectural billings and construction starts as signs of possible slowing. A weaker economy could affect construction and replacement demand.
- Key risks include customer and sales-representative concentration; competition; labor availability and costs; supply interruptions and commodity prices; weather or other disruption to manufacturing; cybersecurity; and regulatory changes affecting efficiency standards, refrigerants, and fossil-fuel equipment.
- The company is transitioning to lower-global-warming-potential refrigerant R-454B and expects compliance with applicable regulations by 2025. It disclosed a five-year refrigerant purchase commitment with estimated minimum payments of $11.9 million in 2024, $9.1 million in 2025, $10.5 million in 2026, and $11.2 million in 2027.
- Havtech litigation was settled for $7.5 million; the settlement was recorded in SG&A and paid in October 2023. The filing says other ordinary-course claims are not expected to have a material adverse effect.
- Other notable items: quarterly dividends began in 2023; the company completed a three-for-two stock split; it repurchased $25.0 million of shares under its open-market program; and it recorded a $3.8 million tax-provision increase related to nondeductible executive compensation, partly offset by a $3.1 million one-time benefit from reversing a valuation allowance on Oklahoma tax credits.
Most important facts for investors to verify
- Whether elevated production and the 2023 margin improvement are sustainable, particularly as pricing benefits and input costs change.
- Whether the reported backlog converts to sales on schedule and whether construction indicators signal a meaningful demand slowdown.
- Execution and returns on planned capacity investments, including the $125 million 2024 capital expenditure estimate and Longview expansion.
- Customer and representative concentration, including Texas AirSystems at 13.8% of 2023 sales and two other portfolio groups at 11.5% and 10.2%.
- Exposure to variable-rate borrowing, refrigerant commitments and transition costs, and the terms and compliance obligations of New Markets Tax Credit financing.