AAON, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This annual filing includes full-year results, not standalone fourth-quarter results. AAON designs and manufactures HVAC equipment, including standard, semi-custom and custom systems, and expanded its data-center and cleanroom businesses through its December 2021 acquisition of BasX.
Financial performance
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Net sales | $534.5 million | $514.6 million | +3.9% |
| Gross profit / margin | $137.8 million / 25.8% | $155.8 million / 30.3% | Profit down 11.6% |
| Operating income | $69.3 million | $101.8 million | Down 32.0% |
| Net income | $58.8 million | $79.0 million | Down 25.6% |
| Diluted EPS | $1.09 | $1.49 | Down 26.8% |
| Operating cash flow | $61.2 million | $128.8 million | Down $67.6 million |
Margins and costs: Gross margin fell to 25.8% from 30.3%, while operating margin was approximately 13.0% versus 19.8%. Management cited sharp steel and copper inflation, labor shortages and wage increases, component shortages, production disruption, and higher freight costs. Raw-material price increases were implemented, but took time to flow through the backlog.
Cash, debt and liquidity: Cash, cash equivalents and restricted cash totaled $3.5 million at year-end, down from $82.3 million, primarily reflecting the BasX acquisition. The company had $40.0 million drawn on its $100 million revolving facility and $58.2 million available, net of a standby letter of credit. The facility matures in 2026; its year-end weighted-average interest rate was 1.3%. AAON reported covenant compliance and a 0.42-to-1.0 leverage ratio, below the 3-to-1 maximum.
Cash uses and balance sheet: Capital expenditures were $55.4 million; cash paid for the BasX acquisition, net of cash acquired, was $103.4 million. Inventory increased to $130.3 million from $82.2 million, partly due to higher material costs and purchases to mitigate supply risk. Year-end total assets were $650.2 million and stockholders’ equity was $466.2 million. Dividends declared were $0.38 per share, unchanged from 2020.
Material changes versus the prior period
- Sales rose $20.0 million, mainly due to approximately $26.3 million of price increases realized during 2021 and $4.1 million of BasX sales included after the December 10 acquisition. Production constraints and weather-related shutdowns offset growth.
- AAON Coil Products sales increased 19.8%, while AAON Oklahoma sales increased 1.1%. BasX contributed only a partial-month of results; its reported segment gross profit was $0.9 million.
- Gross profit declined $18.0 million. The prior year included a $6.4 million net gain from insurance proceeds for hail damage; 2021 had no comparable gain.
- Operating cash flow fell substantially, with inventory growth using $46.0 million of cash and acquisition-related funding contributing to the sharp decline in cash balances.
- BasX was acquired for $100 million cash, subject to working-capital adjustments, plus up to $80 million in contingent stock consideration. The acquisition-date fair value recorded for contingent consideration was $66 million. The purchase-price allocation remained preliminary at year-end; a separate $22 million real-estate purchase was expected to close in early 2022.
Outlook, commentary and risks
- Management cited record backlog and organic bookings up approximately 55% year over year. Backlog was approximately $347.6 million on February 1, 2022, versus $103.8 million a year earlier. Management generally aims to fill firm orders within 60–90 days, but orders can be cancelled subject to charges.
- Management pointed to improving replacement demand and signs of a 2022 recovery in nonresidential construction, while noting that both markets are cyclical. No specific revenue or earnings guidance was provided.
- Planned 2022 capital expenditures were approximately $100.4 million. Management expected cash, operating cash flow and committed financing to meet foreseeable needs.
- Key operating risks include continued raw-material and component inflation, supply interruptions, production labor availability, customer and representative concentration, cyclical construction demand, and COVID-related disruption. One customer, Texas AirSystems, represented at least 10% of sales in 2021, 2020 and 2019.
- AAON expects to begin transitioning to a lower-global-warming-potential refrigerant in 2023 and stated it must comply with current regulations by 2025. Potential costs include refrigerant, equipment sensors and facility changes; management did not expect facility costs to be significant but noted possible higher insurance, production and warranty costs.
- The company reported no pending litigation expected to have a material adverse effect. The auditors gave unqualified opinions on the financial statements and internal controls; BasX was excluded from the year-end internal-control assessment while integration proceeds.
Most important facts for investors to verify
- Whether pricing catches up with material, freight and labor inflation and supports a recovery in gross margin.
- How much of the unusually high backlog converts to sales, the timing of fulfillment, and cancellation experience.
- BasX’s performance against earn-out milestones, the final purchase-price allocation, and the expected timing and funding of the additional real-estate purchase.
- Whether operating cash flow and liquidity can support planned capital spending, working-capital needs, dividends and repurchases alongside acquisition integration.
- Progress in resolving supply and labor constraints, and readiness and costs associated with the refrigerant transition.