AAON, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; financial statements are unaudited. AAON designs, manufactures and sells commercial heating and air-conditioning equipment. The comparable 2019 results were corrected for previously misstated share-based compensation related to retirement-eligible employees and directors.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $137.5 million | $113.8 million | +20.8% |
| Gross profit / margin | $42.9 million / 31.2% | $25.4 million / 22.3% | Margin +8.9 percentage points |
| Operating income / margin | $27.8 million / 20.2% | $11.5 million / 10.1% | |
| Net income | $21.9 million | $8.8 million | +149.5% |
| Diluted EPS | $0.41 | $0.17 | |
| Operating cash flow | $37.6 million | $14.9 million | |
| Capital expenditures | $21.9 million | $8.8 million |
Sales growth reflected added sheet-metal production capacity and price increases, while total units sold fell 6.1% to 6,606. Rooftop-unit sales increased; water-source heat-pump units declined. Management attributed improved gross margin to lower raw-material costs and better labor and overhead efficiency, including increased fixed-cost absorption. SG&A rose to $15.2 million from $13.7 million, but fell as a share of sales to 11.1% from 12.0%.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $35.7 million and restricted cash was $16.5 million, or $52.1 million combined. Unrestricted cash increased $8.9 million from year-end.
- Current assets were $197.0 million and current liabilities $64.2 million. No revolver borrowings were outstanding; $28.3 million was available under the $30 million facility after a $1.7 million standby letter of credit. The facility expires July 26, 2021, and AAON reported covenant compliance.
- Investing cash outflow was $21.8 million, primarily capital expenditures. Financing cash outflow was $8.0 million, including $11.6 million of share repurchases, partly offset by $4.5 million from option exercises.
- Management estimated 2020 capital expenditures of approximately $73.2 million, primarily for the Longview, Texas expansion, additional manufacturing equipment, an R&D lab and other operational improvements. It said projects could generally be reviewed or cancelled without substantial charges.
- The balance sheet includes a $6.3 million New Markets Tax Credit obligation. The related financing supports the Longview project and includes potential debt forgiveness after a seven-year compliance period, subject to program requirements.
Changes, outlook and risks
- Backlog declined to $119.6 million at March 31, 2020, from $142.7 million at December 31, 2019 and $166.6 million a year earlier. Management reported shorter lead times, improved deliveries and reduced backlog.
- Management said the business operated as an essential business with minimal disruption in Q1. It could not determine COVID-19’s future effect on demand, operations, supply chain, financial results or cash flows; the filing warns impacts could be material.
- No full-year revenue or earnings guidance was provided. Management expected raw-material prices to remain stable, while noting COVID-19 could affect supply and costs. Trailing-average prices for copper, galvanized steel, stainless steel and aluminum were down year over year.
- The estimated 2020 effective tax rate, excluding discrete items, was approximately 25%. The company expected to complete accounting for CARES Act tax effects by Q2 2020 and did not expect a material effect.
- On April 22, 2020, hail damaged Tulsa facilities; the company filed an insurance claim with a $500,000 deductible and reported no operational interruption. In May, it entered into three purchase agreements totaling approximately $5.1 million. A separate material purchase obligation outstanding at quarter-end was approximately $1.8 million, expiring in December 2020.
- AAON reported ordinary-course litigation was unlikely to have a material adverse effect. It also disclosed that a material weakness in accounting for share-based compensation had been remediated as of March 31, 2020.
Important facts for investors to verify
- Whether COVID-19 affected subsequent demand, production, supply availability, customer collections or costs, and how backlog developed after quarter-end.
- Whether the Q1 margin improvement and production efficiencies persisted, given lower unit volume and the effect of pricing and raw-material costs.
- Progress, timing and spending on the Longview expansion and other projects against the approximately $73.2 million 2020 capital-expenditure estimate.
- The consequences of the 2019 share-based compensation correction: corrected Q1 2019 net income was $8.8 million versus $10.9 million previously reported; the filing says operating cash flow was unchanged.
- Terms, compliance obligations and potential guarantees or recapture exposure under the New Markets Tax Credit arrangement, as well as the status and insurance recovery for the hail damage.