AAON, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. AAON designs, manufactures, and sells commercial heating and air-conditioning equipment, including rooftop units, data-center cooling solutions, and cleanroom systems. Results are unaudited; per-share data reflect the three-for-two stock split effective August 16, 2023. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $312.0 | $242.6 | $861.9 | $634.2 |
| Gross profit / margin | $116.1 / 37.2% | $65.6 / 27.0% | $287.3 / 33.3% | $159.0 / 25.1% |
| Income from operations | $64.7 | $36.7 | $163.6 | $80.2 |
| Net income | $48.1 | $27.5 | $130.6 | $61.5 |
| Diluted EPS | $0.58 | $0.34 | $1.57 | $0.76 |
- Q3 sales grew 28.6%; management attributed the increase to price realization (16.7 percentage points) and organic volume growth (11.9 points). Nine-month sales grew 35.9%, from price increases and organic volume growth of approximately 19.3% and 16.6%, respectively.
- Q3 operating margin was approximately 20.7% versus 15.1% a year earlier; nine-month operating margin was approximately 19.0% versus 12.6%. Higher production volumes, improved overhead absorption, and realized price increases supported gross-margin expansion.
- Operating cash flow was $107.1 million for the nine months, compared with $43.4 million. Capital expenditures were $82.9 million, implying a simple operating-cash-flow-less-capex measure of $24.2 million, versus $1.8 million in the prior-year period. Working-capital outflows included receivables, inventory, and contract assets.
- At September 30, cash and cash equivalents were $0.2 million and restricted cash was $22.3 million; the restricted balance largely related to the 2023 New Markets Tax Credit project. Revolver debt was $78.4 million, with $119.3 million available. The company reported compliance with covenants and a 0.33:1 leverage ratio against a maximum of 3:1.
- Total assets were $944.5 million and stockholders’ equity was $682.5 million. Inventory was $214.5 million; accounts receivable, net, were $160.1 million. The current ratio was approximately 3.0:1, though unrestricted cash was limited.
Material changes and operating developments
- AAON Oklahoma was the principal growth driver: Q3 external sales rose 37.6% year over year. BASX sales increased 20.7%; AAON Coil Products sales declined 15.5% in Q3, and its nine-month gross margin fell to 25.7% from 33.3% amid weaker overhead absorption and a slower-than-expected production ramp for BASX units.
- Q3 SG&A rose to $51.5 million from $28.9 million, including $7.5 million for the Havtech litigation settlement. Professional fees increased $8.6 million year over year. Nine-month SG&A was $123.7 million versus $78.9 million.
- Backlog was $490.6 million, down from $548.0 million at December 31, 2022 and $514.7 million at September 30, 2022. Management said bookings remained strong, while higher capacity and production rates helped reduce backlog and improve lead times.
- Capital expenditures rose to $82.9 million from $41.6 million for the nine-month period. The company continued investing in production equipment, facilities, and expansion projects.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management estimated 2023 capital expenditures at approximately $100 million and said liquidity, operating cash flows, the revolver, and expected access to capital should meet requirements for 2023 and the foreseeable future. Management expected most restricted cash from the 2023 tax-credit transaction to be released by year-end and used to repay revolver borrowings.
- Management cited inflation and volatility in raw-material costs, supply-chain disruptions, and difficulty hiring production labor. It noted price increases to offset costs, while some increases had yet to be realized. Risks also include cyclical construction demand, interest rates, customer credit, production execution, and weather or other disruptions.
- The $7.5 million Havtech dispute settlement was agreed to in September, accrued in Q3 SG&A and liabilities, and paid October 26, 2023; the case was dismissed with prejudice. The original complaint sought at least $48.6 million plus fees and costs.
- The nine-month effective tax rate was 18.4%, compared with 21.9%, including a one-time $3.1 million benefit from reversal of an Oklahoma investment-credit valuation allowance and a $6.3 million excess tax benefit related to share-based compensation. Management estimated an approximately 24.1% 2023 effective tax rate excluding discrete items.
- Variable-rate revolver borrowings had a 6.3% weighted-average rate for the first nine months, versus 2.5% in the prior-year period. A one-percentage-point increase in the rate would reduce annual pretax income by approximately $0.8 million.
Important facts for investors to verify
- Whether strong bookings convert to sales and whether backlog continues to decline without weakening demand.
- Whether gross-margin gains persist as price increases are realized, material and labor costs change, and AAON Coil Products addresses ramp-up inefficiencies.
- How the planned capital spending affects operating cash generation, revolver usage, and the release and application of restricted cash.
- The settlement’s final financial effect and whether warranty, inventory, or other estimates require further adjustment.
- Whether growth, labor availability, supply conditions, and interest rates support management’s stated liquidity outlook.