AAON, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. AAON designs, manufactures and sells commercial heating and air-conditioning equipment. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $115.8 | $137.5 | Down 15.8% |
| Gross profit / margin | $33.2 / 28.6% | $42.9 / 31.2% | Margin down 2.6 percentage points |
| Operating income | $18.5 | $27.8 | Down 33.6% |
| Net income | $16.4 | $21.9 | Down 25.1% |
| Diluted EPS | $0.30 | $0.41 | Down 26.8% |
| Operating cash flow | $28.8 | $37.6 | Down $8.8 |
| Capital expenditures | $16.4 | $21.9 | Down $5.5 |
Gross margin contracted as lower production caused labor and overhead absorption inefficiencies, while raw-material costs increased. Rooftop-unit sales fell to $87.4 million from $110.8 million, and total units sold declined 15.2% to 5,601.
Cash, cash equivalents and restricted cash totaled $97.8 million at quarter-end, including $97.0 million of unrestricted cash. Current assets were $245.4 million against current liabilities of $66.7 million. The company had no borrowings on its $30 million revolving facility and reported $28.2 million available after a standby letter of credit. The facility expires July 26, 2021; AAON said it expects renewal on similar terms. The balance sheet also includes a $6.4 million New Markets Tax Credit obligation.
Material changes and operating developments
- Sales declined from a strong prior-year quarter, when high backlog supported full-capacity production. Management said it slowed production after order intake softened in late 2020, and lost additional production days to planned maintenance in January and severe weather in February.
- Bookings increased 21% year over year. Backlog was $96.7 million at March 31, up from $74.4 million at December 31, 2020, but below $119.6 million a year earlier.
- Raw-material costs rose year over year on a trailing-average basis: galvanized steel 20.4%, aluminum 8.4%, stainless steel 9.9%, and copper 2.5%. AAON uses fixed-price supplier contracts, generally for six to 18 months, and said it had implemented product price increases.
- The effective tax rate was 11.4%, versus 21.5%, reflecting a $2.9 million excess tax benefit related to stock awards. Management estimated the 2021 effective tax rate, excluding discrete items, at approximately 27%.
- Cash from operations was lower year over year, including working-capital uses for receivables, taxes and inventory. The company invested in capital expenditures and received cash from stock-option exercises; it repurchased $6.4 million of shares, including employee-plan and tax-withholding repurchases.
Outlook, risks and contingencies
Management described the 2021 outlook as uncertain but positive: order intake was improving as COVID-19 restrictions eased, and the Architecture Billings Index exceeded 50 in February for the first time since February 2020. The company highlighted replacement-market opportunities and equipment features such as enhanced filtration and sanitation. It did not provide revenue or earnings guidance.
Management projected approximately $70.7 million of 2021 capital expenditures and said cash, expected operating cash flow and available financing should meet foreseeable liquidity needs. The Longview, Texas expansion was completed and operational in Q1.
- COVID-19 may cause supply-chain disruption, absenteeism and additional health and safety costs. Management reported rising raw-material prices and said the pandemic’s duration and overall business impact remained uncertain.
- February storms led to several days of shutdown at Tulsa and Longview facilities. Management did not expect a material adverse effect on full-year 2021 results, financial position or cash flows.
- Key stated risks include commodity and component prices, cyclical commercial and industrial construction demand, interest rates, general economic conditions, and COVID-19 effects.
- AAON reported no material contractual purchase obligations, no material off-balance-sheet arrangements, and no material change to the risk factors in its 2020 Form 10-K. It said pending litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the 21% bookings increase converts into sustained sales growth and backlog conversion.
- Whether raw-material inflation and production efficiency continue to pressure gross margins, and whether announced price increases offset those costs.
- Progress on the approximately $70.7 million capital expenditure plan and the returns from the completed Longview expansion and added manufacturing capacity.
- Renewal terms and availability of the revolving credit facility before its July 2021 expiration.
- The effect of the unusually low Q1 tax rate on comparisons; management’s estimated full-year rate excluding discrete items was approximately 27%.