AAON, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. AAON engineers and manufactures commercial heating and air-conditioning equipment. This unaudited filing covers the quarter and six months ended June 30, 2020; financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $125.6 | $119.4 | $263.1 | $233.3 |
| Gross profit / margin | $38.1 / 30.4% | $30.2 / 25.3% | $81.1 / 30.8% | $55.6 / 23.9% |
| Operating income | $22.2 | $17.3 | $50.0 | $28.8 |
| Net income | $17.8 | $13.4 | $39.7 | $22.1 |
| Diluted EPS | $0.34 | $0.25 | $0.75 | $0.42 |
- Q2 sales increased 5.2%, while units sold fell 11.9%; the company attributed higher sales partly to price increases. Six-month sales rose 12.8% despite units sold declining 9.0%, supported by added sheet-metal capacity and pricing.
- For the six months, operating cash flow was $62.8 versus $35.9 a year earlier. Capital expenditures were $33.5 versus $16.8; cash after capital expenditures was approximately $29.3 versus $19.1.
- At June 30, cash and cash equivalents were $61.3 and restricted cash was $9.6. Current assets were $219.8 and current liabilities $76.6. The company had no revolver borrowings and $28.3 available under its $30.0 facility, net of a standby letter of credit. The revolver expires July 26, 2021.
- Total assets were $429.8 and stockholders’ equity $322.7. The balance sheet also included a $6.3 New Markets Tax Credit obligation; the related financing includes a $22.5 million loan to a subsidiary and a $15.9 million loan receivable from the investor.
- Inventories rose to $85.4 from $73.6 at year-end. Backlog was $103.5 at June 30, down from $142.7 at December 31, 2019 and $179.6 a year earlier.
Changes, outlook and risks
- Management cited improved labor and overhead efficiency, greater production capacity and lower average costs for copper, galvanized steel and aluminum as contributors to margin expansion. Stainless steel costs increased.
- COVID-19 caused significant employee absenteeism late in June, reducing shipments and extending lead times. Management said operations continued, supply-chain disruption had been minimal, and the company was back on schedule; incoming orders had softened slightly.
- Management was cautiously optimistic about modest full-year revenue growth over 2019, while emphasizing that the outlook was difficult to predict. Estimated 2020 capital expenditures were approximately $73.2, including the Longview, Texas expansion, expected to finish in Q4, additional sheet-metal equipment and an R&D lab.
- Management warned that COVID-19 could materially adversely affect 2020 results, financial position and cash flows through absenteeism, supply disruption, added health costs, weaker demand or broader economic effects. New-construction demand and education-sector uncertainty were also risks. Raw-material prices could rise, although management expected them to remain stable.
- The $0.19 semiannual dividend paid July 1 was 18.8% above the prior-year $0.16 payment. Management said dividends and capital spending could be reduced and the credit line used if an unexpected downturn occurred.
- Q2 SG&A rose to $15.9 from $12.9, including an approximately $1.3 donation to Winifred, Montana Public Schools associated with the former CEO’s transition to Executive Chairman, as well as higher profit sharing, employee incentives and stock compensation.
- The filing corrected 2019 comparative results for share-based compensation accounting for retirement-eligible employees and directors, including related tax and profit-sharing effects. Corrected six-month 2019 net income was $22.1, compared with $23.9 previously reported; the correction did not change reported operating cash flow.
- Management assessed ordinary-course litigation as unlikely to have a material adverse effect. The company disclosed potential NMTC recapture/indemnity exposure if program requirements are breached, but said it did not anticipate recapture. No material purchase obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether order trends, backlog and lead times improved after June, and whether absenteeism or supply constraints again affected production and shipments.
- Whether full-year sales growth and the approximately $73.2 capital-spending plan were achieved, including completion and expected benefits of the Longview expansion.
- Whether the elevated gross margin persisted as production, pricing, raw-material costs and product mix changed.
- Whether inventory growth converted into shipments and cash, and whether operating cash flow remained strong after capital spending, dividends and repurchases.
- Whether COVID-19 developments, new-construction and education demand, or commodity-price movements materially changed the company’s outlook or risk profile.
- The company’s compliance with NMTC terms and revolver covenants, including the revolver’s July 2021 expiration; the filing reports covenant compliance at June 30, 2020.