AAON, Inc. — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020. The filing also reports fourth-quarter results. AAON designs and manufactures commercial and industrial heating, ventilation, and air-conditioning equipment, primarily for U.S. markets.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net sales | $514.6 million | $469.3 million | +9.6% |
| Gross profit / margin | $155.8 million / 30.3% | $119.4 million / 25.4% | Margin +4.9 percentage points |
| Income from operations | $101.8 million | $67.0 million | +52.0% |
| Net income | $79.0 million | $53.7 million | +47.1% |
| Diluted EPS | $1.49 | $1.02 | +46.1% |
| Operating cash flow | $128.8 million | $97.9 million | +$30.9 million |
| Capital expenditures | $67.8 million | $37.2 million | +$30.6 million |
Gross-margin improvement reflected pricing, lower-cost inventory acquired earlier, and improved labor and overhead efficiency from new sheet-metal equipment. Sales rose despite total units sold being nearly flat: 26,231 versus 26,307. Rooftop-unit sales increased $51.5 million; water-source heat-pump sales declined.
At year-end, cash, cash equivalents, and restricted cash totaled $82.3 million; working capital was $161.2 million. The $30 million revolving facility had no borrowings outstanding, with $28.2 million available after a standby letter of credit. The balance sheet included a $6.4 million New Markets Tax Credit obligation. Total assets were $449.0 million and stockholders’ equity was $350.9 million. Cash dividends declared increased to $0.38 per share from $0.32.
Fourth quarter: Net sales were $116.7 million versus $122.6 million in Q4 2019; gross profit was $33.9 million versus $36.4 million; net income was $18.9 million versus $17.3 million; diluted EPS was $0.35 versus $0.33. The quarterly-results note attributes $0.08 of 2020 EPS to the roof-insurance gain.
Material changes, outlook, and risks
- A $6.4 million net insurance gain related to hail damage at the Tulsa facility was recognized in 2020. The proceeds are intended for roof improvements.
- Capital spending was $67.8 million, more than half related to the Longview, Texas expansion. Management estimated 2021 capital expenditures at approximately $70.7 million. The Longview expansion became operational in early 2021.
- Backlog at February 1, 2021 was approximately $103.8 million, down from $129.2 million a year earlier. Management generally targets shipment within 60–90 days after orders become firm; orders may be cancelled subject to charges.
- Management said cash, operating cash flow, the credit facility, and expected capital-market access should meet working-capital, capital-spending, and other liquidity needs in 2021 and the foreseeable future. No specific revenue or earnings guidance was provided.
- COVID-19 caused significant employee absenteeism in late June, reducing shipments and lengthening lead times in Q2; attendance strengthened in Q3 and Q4. Management warned that further supply-chain disruption, absenteeism, and health-and-safety costs remain possible.
- Key exposures include cyclical construction demand, customer concentration (Texas AirSystems exceeded 10% of sales), competition, volatile steel/copper/aluminum and component costs, and reliance on operations concentrated largely in Tulsa. Raw-material prices increased year over year in 2020.
- The filing reports no material pending legal matter or material purchase commitments and no material off-balance-sheet arrangements. Management and the auditor reported effective internal controls at year-end; a 2019 weakness involving retirement-eligible share-based compensation was reported as remediated in March 2020. The auditor identified manual inventory adjustments and valuation as a critical audit matter.
Most important facts for investors to verify
- How much of 2020 earnings and margin expansion is sustainable after excluding the $6.4 million insurance gain and considering input-cost changes.
- Whether the lower backlog and uneven construction demand affect 2021 shipments, utilization, and pricing.
- Execution, returns, and remaining spending associated with the Longview expansion and planned 2021 capital expenditures.
- Supplier availability and cost trends, and the extent to which fixed-price contracts protect margins.
- Inventory valuation assumptions, warranty accrual trends, and continued remediation and effectiveness of financial-reporting controls.