Business context and reporting period
AAON, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2022. The company designs and manufactures HVAC equipment and related systems. Its three reportable segments are AAON Oklahoma, AAON Coil Products, and BasX. Acquired in December 2021, BasX adds data-center cooling, cleanroom, and other custom-engineered solutions; its results are included for the full quarter in 2022 but not in the 2021 comparison.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $182.8 million | $115.8 million | +57.8% |
| Gross profit / margin | $46.1 million / 25.2% | $33.2 million / 28.6% | Margin down 3.4 percentage points |
| Operating income | $23.0 million | $18.5 million | +24.6% |
| Net income | $18.1 million | $16.4 million | +10.3% |
| Diluted EPS | $0.33 | $0.30 | +10.0% |
| Net cash from operations | $(6.8) million | $28.8 million | Down $35.6 million |
| Capital expenditures | $14.0 million | $16.4 million | Down $2.4 million |
Revenue growth included $24.6 million of organic volume growth, $21.0 million from BasX, and $16.5 million from price increases. Comparability is also affected by lost production days from planned maintenance and severe weather in Q1 2021. Gross margin declined as higher material costs and supply-chain constraints offset increased sales. A prospective useful-life estimate change reduced Q1 2022 depreciation expense in cost of sales by $1.8 million.
Financial position and liquidity
- At March 31, 2022, cash and cash equivalents were $5.6 million, restricted cash $0.6 million, and total assets $717.5 million. Current assets were $283.7 million and current liabilities $114.2 million.
- Revolver borrowings were $65.0 million, up from $40.0 million at year-end; $34.2 million remained available after a $0.8 million standby letter of credit. The weighted-average rate was 1.3%, and the company was covenant-compliant, with a 0.63-to-1 leverage ratio against a maximum of 3-to-1. Borrowings had risen to $75.0 million by May 5, 2022.
- Operating cash use reflected a $43.2 million increase in receivables and a $16.0 million increase in inventory, partly offset by a $18.0 million increase in contract liabilities. Management attributed working-capital investment to higher sales and strategic inventory purchases amid supply uncertainty.
- Stockholders’ equity was $480.2 million. The balance sheet also included a $6.4 million New Markets Tax Credit obligation.
Outlook, risks, and notable items
- Backlog reached a reported record $461.4 million at March 31, versus $260.2 million at December 31, 2021 and $96.7 million a year earlier. Excluding BasX, organic backlog was up 305% year over year; organic bookings increased 150% year over year in Q1. Backlog includes acquisition effects and is not a guarantee of future sales.
- Management estimated 2022 capital expenditures at approximately $100.4 million. The filing provides no specific revenue or earnings guidance. Management said cash, operating cash flows, revolving credit and expected access to capital markets should meet foreseeable liquidity needs.
- Management cited higher copper, steel and labor costs, supply-chain constraints, hiring challenges, and possible COVID-related disruption. Twelve-month average copper, galvanized steel and stainless steel prices were up 41.2%, 67.8% and 61.8%, respectively, year over year. The company implemented price increases, including one effective January 1, 2022.
- The estimated 2022 effective tax rate, excluding discrete items, was approximately 25%; the Q1 effective rate was 20.9%, versus 11.4% a year earlier. Reduced excess tax benefits contributed to the higher reported rate.
- The BasX acquisition involved up to $80.0 million of contingent stock consideration, subject to earn-out milestones through 2023; 486,268 shares for the 2021 milestone had been issued by March 31. A separate $22.0 million BasX real-estate purchase was expected to close by the end of Q2 2022. On April 27, the company also agreed to buy fan-wheel intellectual property for approximately $6.5 million.
- Management said pending litigation was unlikely to have a material adverse effect; no material changes to the risk factors in the 2021 Form 10-K were reported. The company warned that cyclical construction demand, inflation, interest rates, commodity costs and supply disruption could affect results.
Important facts for investors to verify
- How much of subsequent sales and backlog conversion reflects organic demand versus BasX, price increases, and prior-year production disruptions.
- Whether pricing, productivity and supply-chain improvements can restore gross margins amid elevated input and labor costs; reported Q1 margin also benefited from the $1.8 million depreciation estimate change.
- Receivables, inventory and contract-balance trends, and the resulting operating cash flow and borrowing needs, including the increase in revolver debt to $75.0 million by May 5.
- Progress and spending against the approximately $100.4 million 2022 capital expenditure estimate, and the planned BasX property purchase.
- BasX earn-out performance, contingent share issuance and integration results, as well as the economics of the fan-wheel intellectual-property acquisition.