AAON, Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited interim results. AAON engineers and manufactures commercial heating and air-conditioning equipment.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $138.6 million | $134.8 million | $398.2 million | $397.9 million |
| Gross profit / margin | $36.0 million / 26.0% | $40.8 million / 30.3% | $111.3 million / 27.9% | $121.9 million / 30.6% |
| Operating income | $20.1 million | $26.1 million | $63.8 million | $76.1 million |
| Net income | $15.6 million | $20.5 million | $52.6 million | $60.1 million |
| Diluted EPS | $0.29 | $0.38 | $0.98 | $1.14 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $74.7 million | $97.0 million |
Liquidity and capital: September 30 cash and cash equivalents were $101.8 million, versus $79.0 million at December 31, 2020; restricted cash was $0.7 million. Current assets were $270.6 million and current liabilities $74.2 million. No revolver borrowings were outstanding; $28.2 million remained available under the $30 million facility after a $1.8 million standby letter of credit. The balance sheet also includes a $6.4 million New Markets Tax Credit obligation. Stockholders’ equity was $400.3 million.
Cash uses: Nine-month capital expenditures were $42.6 million, repurchases and employee withholding-share purchases totaled $16.6 million, and dividends paid were $10.0 million. Management estimated full-year 2021 capital expenditures of approximately $60 million.
Material changes and drivers
- Q3 sales increased 2.8%, but total units sold fell 11.2%. Price increases and 15% growth in parts sales supported revenue despite lower unit volume. Nine-month sales were essentially flat, while units sold declined 1.3%.
- Profitability weakened: Q3 gross margin fell 4.3 percentage points and nine-month gross margin fell 2.7 points. Management cited higher raw-material costs, wage increases, labor shortages, production inefficiencies, and intermittent supply-chain delays. Twelve-month average prices for copper, galvanized steel, stainless steel, and aluminum rose 38.3%, 79.5%, 39.8%, and 56.7%, respectively, year over year.
- Q3 net income declined about 24%; nine-month net income declined about 13%. Nine-month operating cash flow fell about 23%, with cash tied up in receivables and inventory; inventory increased $22.7 million in the period.
- Backlog reached $181.8 million at September 30, up 144% from December 31, 2020 and 114% from September 30, 2020. Q3 bookings rose approximately 60% year over year, partly reflecting orders placed ahead of announced price increases.
- Warranty expense declined 38% in Q3, which management attributed to quality-control improvements. The nine-month effective tax rate was 17.6%, aided by excess stock-award tax benefits and Oklahoma’s enacted corporate tax-rate reduction; management estimated a 2021 annual rate of approximately 25%, excluding discrete items.
Outlook, risks, and contingencies
- Management expected higher average raw-material and component costs for the remainder of 2021, and planned to increase production through the rest of 2021 and into 2022. It described order intake as strong and liquidity as favorable.
- Labor availability remains a constraint. AAON raised production starting wages 7% in July and implemented a 3.5% cost-of-living increase for employees below Director level in October. COVID-related absenteeism at Longview also reduced coil output needed at Tulsa.
- COVID-19, inflation, tariffs, supply disruption, commodity prices, and commercial-construction cycles could affect costs, production, demand, and margins. The company reported several days of plant closures during February 2021 winter storms but said the event was not expected to materially harm 2021 results.
- The filing discusses potential employee attrition or hiring difficulty from government COVID-19 vaccination or testing requirements. It also identifies evolving environmental and energy-efficiency regulations, including refrigerant-related rules, as risks.
- Management said pending ordinary-course litigation was unlikely to have a material adverse effect. No material contractual purchase obligations or material off-balance-sheet arrangements were reported. The company was in compliance with revolver covenants at quarter-end.
Important facts for investors to verify
- Whether price increases can catch up with continued materials, labor, and component-cost inflation—and restore gross margins.
- Whether AAON can convert the record backlog and strong bookings into shipments despite labor and supply constraints, and whether cancellations or lead times change.
- How working-capital investment, particularly inventory and receivables, affects operating cash flow and liquidity.
- Whether the $60 million 2021 capital-expenditure estimate and production-growth plans remain on track.
- The realized tax rate versus management’s approximately 25% annual estimate excluding discrete items, and the effect of stock-award tax benefits.
- Any material effect from COVID-19 workforce rules, refrigerant or efficiency regulations, commodity exposure, or the New Markets Tax Credit compliance and guarantee provisions.