AAON, Inc. — Q2 2021 Form 10-Q
Business and period: AAON engineers and manufactures commercial heating and air-conditioning equipment. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Amounts are in millions except per-share data, percentages, units, and where otherwise stated.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $143.9 | $125.6 | $259.7 | $263.1 |
| Gross profit / margin | $42.1 / 29.3% | $38.1 / 30.4% | $75.3 / 29.0% | $81.1 / 30.8% |
| Operating income | $25.2 | $22.2 | $43.7 | $50.0 |
| Net income | $20.6 | $17.8 | $37.0 | $39.7 |
| Diluted EPS | $0.38 | $0.34 | $0.69 | $0.75 |
| Operating cash flow | — | $62.9 | $62.8 |
- Q2 sales rose 14.6% and units sold rose 24.6%; management attributed the increase to stronger demand and improved employee attendance. Net income increased 15.8%.
- For the first half, sales declined 1.3% despite a 4.3% increase in units sold. Net income fell 6.7%; gross margin contracted 1.8 percentage points, reflecting higher material costs and early-year production inefficiencies.
- Raw-material trailing-average prices rose year over year: galvanized steel 49.0%, copper 10.1%, aluminum 11.2%, and stainless steel 7.4%. Q2 SG&A was $16.9 million, up from $15.9 million; first-half SG&A was $31.6 million, broadly similar to $31.2 million.
- First-half capital expenditures were $33.2 million. Cash and cash equivalents were $111.4 million at June 30, versus $79.0 million at year-end; current assets were $259.1 million and current liabilities $78.5 million.
- No borrowings were outstanding under the revolving facility. $28.2 million was available after a $1.8 million standby letter of credit. The balance sheet also included a $6.4 million New Markets Tax Credit obligation. Management reported compliance with facility covenants.
Material changes, outlook, and risks
- Backlog rose to $138.1 million at June 30, from $74.4 million at December 31, 2020 and $103.5 million a year earlier. Q2 bookings increased approximately 70% year over year, partly reflecting orders placed ahead of the June 1 price increase.
- Management described the 2021 outlook as uncertain but positive as restrictions eased and demand improved. It cited a historic rebound in the Architecture Billings Index and said replacement applications represented approximately half of sales. The company gave no specific revenue or earnings forecast.
- Management estimated 2021 capital expenditures of approximately $70.7 million and an annual effective tax rate of approximately 25%, excluding discrete items. The Longview, Texas expansion became operational in Q1.
- First-half operating cash flow was approximately unchanged year over year. Inventory purchases and accounts receivable used cash, partly offset by higher accounts payable. Management said liquidity and expected operating cash flows should meet working-capital and investment needs.
- Oklahoma’s corporate tax-rate reduction generated a $0.8 million benefit in Q2; the first-half effective tax rate was 15.4%, including discrete tax benefits, versus 20.8% a year earlier. Management’s approximately 25% estimate excludes such discrete items.
- COVID-related supply-chain disruption, employee absenteeism, health-and-safety costs, and further commodity-price increases remain uncertainties. The company used product price increases and fixed-price supplier contracts, generally for six to 18 months, to manage input costs. February winter storms caused several production days to be lost; management did not expect a material full-year impact.
- Other items: the company repurchased 170,023 shares for $11.8 million in the first half, principally through its 401(k) arrangement, and declared a $0.19-per-share dividend. Management considered pending ordinary-course litigation unlikely to have a material adverse effect; no material purchase obligations or material changes to reported risk factors were disclosed.
Investor verification points
- Whether stronger bookings and backlog convert to sales, and how much was pulled forward ahead of the June price increase.
- Whether pricing offsets continuing material-cost inflation without further gross-margin erosion.
- How production capacity, labor and overhead absorption recover following the weaker first half and weather-related downtime.
- Progress against the $70.7 million capital-expenditure estimate and the expected returns from Longview and manufacturing upgrades.
- The sustainability of reported earnings after discrete stock-compensation tax benefits and the Oklahoma tax-rate adjustment.
- Future cash generation, share repurchases, dividend decisions, and any changes to credit availability or covenant headroom.