AAON, Inc. — Q1 2023 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. AAON designs and manufactures HVAC equipment and related products through AAON Oklahoma, AAON Coil Products and BASX. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $266.0 | $182.8 | +45.5% |
| Gross profit / margin | $77.2 / 29.0% | $46.1 / 25.2% | Margin +3.8 percentage points |
| Operating income / margin | $44.2 / 16.6% | $23.0 / 12.6% | +92.1% |
| Net income | $36.8 | $18.1 | +103.8% |
| Diluted EPS | $0.67 | $0.33 | +$0.34 |
| Operating cash flow | $4.8 | ($6.8) | Improved |
| Capital expenditures | $28.9 | $14.0 | More than doubled |
Management attributed sales growth to higher organic volume and 2022 price increases: volume accounted for 23.5% of the sales increase and pricing for 22.0%. Gross-margin expansion reflected price realization offsetting material and labor costs. Q1 gross profit was reduced by approximately $3.7 million from paid-time-off policy changes and payroll taxes and 401(k) matching tied to profit-sharing payments and stock transactions.
Segments and demand
- AAON Oklahoma: sales $202.0 million, up 44.4%; gross profit $61.9 million, up 82.8%.
- AAON Coil Products: sales $33.4 million, up 52.3%; gross profit $7.2 million, down 2.0%.
- BASX: sales $30.5 million, up 45.6%; gross profit $8.1 million, up 65.5%.
- Backlog was $599.9 million at March 31, up 9.5% from year-end and 30.0% year over year. Management described bookings as strong and cited record production rates.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.5 million at March 31, versus $5.5 million at December 31, 2022; restricted cash was $0.5 million. Operating cash flow was positive, but receivables increased and accounts payable declined during the quarter.
- Revolver borrowings were $83.7 million, up from $71.0 million at year-end; $116.0 million remained available under the $200 million facility. The weighted-average borrowing rate was 6.0%, versus 1.3% in Q1 2022. The company reported covenant compliance and a 0.47-to-1.0 leverage ratio against a maximum of 3-to-1.
- Capital expenditures were $28.9 million. Management estimated 2023 capital expenditures at approximately $135 million, primarily for production capacity; many projects may be reviewed or canceled without substantial charges.
- The company declared and paid a $0.12-per-share dividend and moved from semiannual to quarterly dividends. Financing cash flow included $6.5 million of dividends paid and $15.9 million of proceeds from stock-option exercises.
- Management said cash, projected operating cash flows, the revolver and expected capital-market access should meet working-capital, capital-expenditure and other requirements in 2023 and the foreseeable future.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management cited strong bookings, backlog growth and favorable lead times, while noting that some previously implemented price increases had yet to be realized.
- Cost and execution risks include volatile raw-material prices, supply-chain disruption and a tight labor market. Year-to-date average prices versus Q1 2022 rose for copper (6.1%), stainless steel (5.3%) and aluminum (16.0%), while galvanized steel fell 39.8%. Management cited wage increases and hiring/retention initiatives.
- The business is exposed to cyclical commercial and industrial construction demand, replacement-market trends, customer creditworthiness, interest rates and broader economic conditions. A one-percentage-point increase in the rate on outstanding debt would reduce annual pretax income by approximately $0.8 million, according to the filing.
- The Q1 effective tax rate was 14.7%, including a $3.8 million excess tax benefit related primarily to stock-option exercises. Management estimated a 2023 effective rate of approximately 24.3%, excluding discrete events.
- Subsequent events: on April 25, 2023, AAON completed a $23 million New Markets Tax Credit allocation supporting Longview expansion, including a $23.8 million loan to a subsidiary. In April, it also purchased Tulsa-area properties for approximately $10.4 million.
- Havtech litigation seeks at least $48.6 million plus fees and costs over termination of a sales-representative relationship. AAON disputes the claims and intends to defend itself; the filing does not provide a clear quantified loss accrual.
- AAON discontinued production of its WH/WV water-source heat pump series, with remaining backlog expected to be produced through the first half of 2023. The 2023 NMTC arrangements carry seven-year tax-credit recapture requirements; the company said it does not anticipate recapture.
Important facts for investors to verify
- Whether the substantial backlog converts to sales on schedule, and whether volume and pricing gains persist.
- Whether gross-margin improvement can be sustained as labor, input costs and price increases evolve, particularly at AAON Coil Products.
- Cash conversion and working-capital trends, given low cash balances, rising receivables and higher capital spending.
- Debt, variable-rate exposure and capacity to fund the approximately $135 million 2023 capital program while maintaining dividends.
- Developments in the Havtech litigation and compliance with NMTC requirements, including potential recapture exposure.
- Actual effective tax rate versus the stated approximately 24.3% annual estimate, excluding discrete items.