AAON, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Figures are unaudited and in U.S. dollars; financial statement amounts below are in millions unless noted. AAON manufactures commercial and industrial HVAC equipment and reports three segments: AAON Oklahoma, AAON Coil Products, and BasX.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $208.8 | $143.9 | $391.6 | $259.7 |
| Gross profit / margin | $47.4 / 22.7% | $42.1 / 29.3% | $93.4 / 23.9% | $75.3 / 29.0% |
| Operating income / margin | $20.5 / 9.8% | $25.2 / 17.5% | $43.5 / 11.1% | $43.7 / 16.8% |
| Net income | $15.9 | $20.6 | $34.0 | $37.0 |
| Diluted EPS | $0.30 | $0.38 | $0.63 | $0.69 |
Cash flow and investment: Six-month operating cash flow was negative $1.6 million, versus positive $62.9 million a year earlier, primarily reflecting higher receivables and inventory. Investing cash outflow was $49.4 million, including $27.2 million of capital expenditures and $22.0 million for the BasX facility. Financing provided $65.7 million, including net revolver borrowings. Combined cash, cash equivalents, and restricted cash ended at $18.2 million.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $17.6 million; net receivables $124.3 million; inventory $164.0 million; and current assets $327.4 million. Revolver borrowings were $106.2 million, up from $40.0 million at year-end, with $92.9 million available under the $200 million facility. The company reported a 1.06:1 leverage ratio and compliance with its covenant limit of 3:1. Stockholders’ equity was $490.5 million.
Changes versus the prior comparable period
- Q2 sales rose 45.1%; six-month sales rose 50.8%. Growth reflected BasX, higher organic volumes, and price increases. BasX contributed $24.6 million of Q2 sales and $45.5 million for the six months; it was acquired in December 2021, so reported comparisons are not fully like-for-like.
- Despite higher sales, Q2 gross profit margin fell to 22.7% from 29.3%; the six-month margin declined to 23.9% from 29.0%. Management cited higher material and labor costs, supply-chain impacts, and delays in realizing price increases through previously priced backlog.
- Net income declined 22.6% in Q2 and 8.1% for the six-month period. Q2 operating income fell 18.9%; six-month operating income was nearly flat.
- Backlog reached $464.0 million, versus $260.2 million at December 31, 2021 and $138.1 million a year earlier. Excluding BasX, management reported organic backlog growth of 163.6% year over year.
- Revolver borrowings increased to fund working capital, inventory purchases, and the BasX building acquisition. Accounts receivable and inventory rose substantially from year-end.
Outlook, management commentary, risks, and unusual items
- Management described backlog as a record, citing strong end-market demand and its ability to meet customer lead times. It expects cash, operating cash flows, the revolver, and capital-market access to support working-capital, capital-expenditure, and other needs in 2022 and the foreseeable future. The filing does not provide formal revenue or earnings guidance.
- Management estimated 2022 capital expenditures of approximately $73.3 million and an annual effective tax rate of approximately 25%, excluding discrete items.
- Commodity costs remained elevated: trailing average prices at June 30 were up year over year 33.1% for copper, 35.5% for galvanized steel, 69.2% for stainless steel, and 8.1% for aluminum. The company implemented three price increases in 2022, but acknowledged that price realization takes time.
- Risks cited include supply-chain disruption, raw-material and component price volatility, skilled and unskilled labor shortages, COVID-19-related disruption, and cyclical commercial and industrial construction markets. Higher interest rates and a potential economic slowdown could reduce demand.
- A prospective useful-life estimate change for certain Longview manufacturing equipment reduced six-month depreciation expense by $1.8 million. The BasX facility purchase for $22.0 million closed May 31, 2022.
- The company agreed to buy fan-wheel design and manufacturing intellectual property for approximately $6.5 million, payable over 18 months; approximately $1.0 million had been paid by August 4, 2022. Management said pending litigation or claims were not expected to have a material adverse effect. NMTC-related credit recapture is a contractual exposure; the company said it did not anticipate recapture.
Key investor verification points
- Assess whether pricing can catch up with input and labor inflation, particularly as lower-priced AAON Oklahoma backlog is worked through.
- Track backlog conversion, cancellations, lead times, and organic growth separately from BasX-related growth.
- Monitor receivables, inventory, operating cash flow, and revolver balances as production and investment expand.
- Verify delivery and returns from the approximately $73.3 million 2022 capital-expenditure program and the expected economics of BasX.
- Review the BasX earn-out share issuance milestones for 2022 and 2023, and the fan-wheel intellectual-property purchase installments.
- Monitor commodity prices, labor availability, demand sensitivity to economic conditions and interest rates, and revolver covenant headroom.