AAON, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited interim results; comparisons are with the corresponding 2022 periods. AAON designs and manufactures commercial HVAC equipment, including rooftop units, data-center cooling and cleanroom systems.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $284.0 million | $208.8 million | $549.9 million | $391.6 million |
| Gross profit | $94.0 million | $47.4 million | $171.2 million | $93.4 million |
| Gross margin | 33.1% | 22.7% | 31.1% | 23.9% |
| Operating income | $54.7 million | $20.5 million | $98.9 million | $43.5 million |
| Net income | $45.7 million | $15.9 million | $82.5 million | $34.0 million |
| Diluted EPS | $0.82 | $0.30 | $1.48 | $0.63 |
Q2 sales increased 36.0%; first-half sales increased 40.4%. Management attributed growth to higher production volumes and realized pricing. First-half growth was approximately evenly split between price and volume. Q2 gross margin expanded 10.4 percentage points, supported by pricing, easing inflation and improved production efficiency. AAON Coil Products’ gross margin declined to 24.9% in Q2 from 31.7%, with weather-related production disruption, copper costs and overhead absorption cited as pressures.
For the first half, operating cash flow was $59.9 million, versus cash used of $1.6 million in 2022. Capital expenditures were $60.6 million, making operating cash flow less capital expenditures approximately negative $0.7 million. Net cash used in investing was $60.5 million; net cash from financing was $22.3 million.
Financial position and liquidity
- At June 30, 2023, total assets were $930.1 million and stockholders’ equity was $660.1 million. Current assets were $424.2 million against current liabilities of $153.7 million.
- Cash and cash equivalents were $5.2 million; restricted cash was $22.4 million, largely related to the 2023 New Markets Tax Credit project and restricted for project use.
- Revolver borrowings were $78.5 million, up from $71.0 million at year-end 2022. The company reported $121.2 million available under its $200 million facility, which expires in May 2027. The six-month weighted-average borrowing rate was 6.2%; the company was in compliance with covenants and reported a 0.37:1 leverage ratio against a maximum of 3:1.
- Inventory was $215.4 million, up from $198.9 million at year-end; receivables were $154.1 million, up from $127.2 million.
Material changes and operating developments
- Backlog was $526.2 million at June 30, down 4.0% from December 31, 2022, but up 13.4% year over year. Management said production began to outpace bookings, helping normalize backlog and lead times.
- By segment, Q2 external sales increased 38.6% at AAON Oklahoma, 12.4% at AAON Coil Products and 45.1% at BASX. BASX growth included revenue synergies and easing supply constraints.
- SG&A rose to $39.3 million in Q2 from $26.9 million, reflecting higher profit sharing, staffing and compensation, and travel and consulting costs. First-half profit-sharing expense increased to $10.8 million from $4.8 million.
- The effective tax rate was 14.4% for Q2 and 14.5% for the first half, including a one-time $3.1 million benefit from reversing a valuation allowance on Oklahoma investment tax credits. Management estimated a 2023 effective tax rate of approximately 24.1%, excluding discrete items.
Outlook, risks and unusual items
- Management estimated 2023 capital expenditures at approximately $135 million, primarily for production capacity and facilities. It said cash, operating cash flows, credit availability and expected access to capital should meet operating and investment needs in 2023 and the foreseeable future.
- Management cited raw-material price volatility, supply-chain disruption and skilled and unskilled labor hiring challenges. It noted that some previously implemented price increases had yet to be realized. Material prices were mixed year over year: first-half average copper, stainless steel and aluminum prices rose 5.8%, 1.8% and 25.8%, respectively, while galvanized steel fell 30.8%.
- AAON faces litigation brought by former sales representative Havtech seeking at least $48.6 million plus fees and costs. The company disputes the claims and intends to defend itself; the filing does not provide a clear estimate of potential loss.
- The New Markets Tax Credit arrangements include seven-year recapture provisions and company guarantees. AAON said it did not anticipate credit recapture, but noncompliance could require indemnification.
- After quarter-end, the board declared a three-for-two stock split, scheduled for August 16, 2023. The company also moved from semiannual to quarterly cash dividends in 2023; the Q2 dividend was $0.12 per share.
- Other risks identified include economic and construction-market cyclicality, interest-rate exposure, commodity costs, labor availability, extreme weather, cybersecurity and litigation. A one-percentage-point increase in applicable borrowing rates would reduce annual pretax income by approximately $0.8 million.
Important facts for investors to verify
- Whether backlog converts to revenue at expected margins as production capacity and lead times normalize.
- Whether pricing, input costs and production efficiency sustain the substantial gross-margin improvement, particularly given weaker AAON Coil Products margins.
- Capital-spending execution and its effect on cash generation, revolver use and debt costs.
- The status and potential financial exposure of the Havtech litigation, and continued compliance with New Markets Tax Credit requirements.
- The sustainability of reported earnings after the $3.1 million tax benefit and other share-based compensation and tax effects.