AAON, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. AAON manufactures HVAC equipment and related systems; reported results include BasX, acquired in December 2021, for the full 2022 periods but not the comparable 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $242.6 million | $138.6 million | $634.2 million | $398.2 million |
| Gross profit | $65.6 million | $36.0 million | $159.0 million | $111.3 million |
| Gross margin | 27.0% | 26.0% | 25.1% | 27.9% |
| Operating income | $36.7 million | $20.1 million | $80.2 million | $63.8 million |
| Net income | $27.5 million | $15.6 million | $61.5 million | $52.6 million |
| Diluted EPS | $0.51 | $0.29 | $1.14 | $0.98 |
- Q3 sales increased 75.1%; management attributed growth to BasX, organic volume and product mix, and price increases. Excluding BasX, sales growth was attributed to $33.9 million of price increases and $37.2 million of organic volume, product mix and other factors.
- Nine-month sales increased 59.3%, including $78.5 million from BasX. Gross margin declined year over year for the nine-month period as price increases took time to flow through backlog amid higher material and labor costs. Q3 gross margin improved 430 basis points from Q2, which management attributed to better pricing and increased BasX production.
- Nine-month operating cash flow was $43.4 million, down from $74.7 million. Working-capital uses included increases of $63.6 million in receivables and $48.0 million in inventory; contract liabilities provided $24.2 million.
- Nine-month capital expenditures were $41.6 million; the company also paid $22.0 million for BasX’s facility. Management estimated 2022 capital expenditures at approximately $73.3 million.
- At September 30, cash and cash equivalents were $10.7 million, current assets $336.1 million, and current liabilities $142.2 million. Revolver borrowings were $76.3 million, with $122.9 million available under the $200 million facility. The company reported a 0.65-to-1.0 leverage ratio and compliance with covenants. Revolver borrowings bear interest at SOFR plus a margin; weighted-average rates were 3.5% for Q3 and 2.5% for the nine-month period.
- Dividends declared were $0.19 per share for the nine-month period. Nine-month stock repurchases totaled $8.9 million.
Changes, outlook and risks
- Backlog was $514.7 million at September 30, versus $260.2 million at December 31, 2021 and $181.8 million a year earlier. Excluding BasX, organic backlog increased 109.6% year over year. Management reported record BasX bookings, supported by data-center and semiconductor demand, and said the nonresidential construction market had returned to pre-pandemic levels. It expected strong market conditions over the following nine to 12 months; this is commentary, not formal financial guidance.
- Management cited historically high architectural billings and construction starts, but also noted signs of broader economic slowing and the cyclical nature of construction and replacement markets.
- Material risks include volatile copper, steel and aluminum costs; supply-chain disruption; tight labor availability; inflation; COVID-19-related disruption; interest-rate changes; and weaker construction or general economic conditions. The company implemented multiple price increases in 2021 and 2022, but said some 2022 increases had not yet been fully realized.
- In Q3, AAON decided to stop producing its WH/WV small geothermal and water-source heat pump lines; remaining backlog was expected to be produced through Q1 2023. It recorded approximately $1.0 million of additional obsolete-inventory provision. Management did not expect a significant overall future impact.
- A change in estimated useful lives for certain manufacturing equipment reduced nine-month depreciation expense by $1.8 million. The company also recorded a roughly $1.0 million inventory provision related to the product-line discontinuation.
- Management reported no pending litigation or claims expected to have a material adverse effect. No material changes to the 2021 Form 10-K risk factors were reported. Disclosure controls were deemed effective.
Investor verification points
- Assess how much reported growth and backlog reflect BasX, pricing, volume, and mix, and whether backlog converts to revenue at expected margins.
- Track gross-margin recovery against raw-material, wage, and production costs, including the timing and effectiveness of price increases.
- Monitor working-capital conversion, especially receivables and inventory, and the resulting reliance on revolving-credit borrowings.
- Review planned capital spending, BasX integration and bookings, and execution of the WH/WV production wind-down.
- Confirm the effect of floating SOFR-linked debt costs, future share repurchases, and contingent BasX earn-out share issuance.