AAON, Inc. — Q3 2020 Form 10-Q
Business and period: AAON engineers, manufactures and sells commercial HVAC equipment, principally rooftop units. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $134.8 | $113.5 | $397.9 | $346.8 |
| Gross profit / margin | $40.8 / 30.3% | $27.4 / 24.1% | $121.9 / 30.6% | $83.0 / 23.9% |
| Operating income / margin | $26.1 / 19.4% | $15.0 / 13.2% | $76.1 / 19.1% | $43.8 / 12.6% |
| Net income | $20.5 | $14.3 | $60.1 | $36.4 |
| Diluted EPS | $0.38 | $0.26 | $1.14 | $0.69 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $97.0 | $70.6 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $49.0 | $30.8 |
- Q3 sales rose 18.7% and units sold increased 26.6%. Nine-month sales grew 14.7%, while total units rose 1.3%.
- Rooftop units were the largest product category: $102.8 million of Q3 sales and $312.7 million for nine months. Management attributed growth to increased sheet-metal capacity and prior price increases.
- Nine-month net cash increased $34.2 million. At September 30, cash and cash equivalents were $70.6 million, restricted cash was $8.0 million, and current assets were $225.5 million versus current liabilities of $61.5 million.
- No revolving-credit borrowings were outstanding; $28.3 million was available under the $30 million facility, subject to a $1.7 million standby letter of credit. The facility expires July 26, 2021. The balance sheet also reports a $6.4 million New Markets Tax Credit obligation.
- Stock repurchases totaled $22.5 million and dividends paid were $9.9 million in the first nine months. The declared dividend was $0.19 per share in 2020 versus $0.16 in 2019.
Changes, outlook and risks
- Profitability improved substantially as higher production enhanced labor and overhead efficiency and raw-material costs were generally lower. Nine-month SG&A increased to $45.9 million from $39.0 million, including higher profit sharing, salaries and benefits, and donations; warranty expense declined.
- Backlog fell to $84.9 million at September 30, 2020, from $142.7 million at year-end 2019 and $165.3 million a year earlier. Management said capacity improvements shortened lead times and brought backlog to a more manageable level.
- COVID-19 caused significant employee absenteeism in late June, reducing Q2 shipments and lengthening lead times; attendance improved in Q3. The company maintained operations and reported minimal supply-chain disruption, but warned that future absenteeism, supply interruptions, added health costs and broader economic effects remain uncertain.
- Management reported record sales for the first nine months, including some demand tied to temporary hospitals, but described the 2021 outlook as uncertain. It cited weakness in the Architecture Billings Index and said it did not see significant near-term growth opportunities. Replacement-market demand and filtration, UV-light and ionization options were identified as potential opportunities.
- Management expected 2020 capital expenditures of approximately $73.2 million, including the Longview, Texas expansion, additional fabrication equipment and R&D lab work. The Longview expansion was expected to be operational by January 2021. Management said liquidity and expected operating cash flows should meet foreseeable needs.
- COVID-19, construction-market cycles, commodity and component prices, interest rates, and concentration of operations—most of which are at Tulsa facilities—are key risks. Management noted that commodity prices could rise and that insurance may not cover all losses from disasters.
- The 2020 nine-month effective tax rate was 21.1%; management estimated an annual rate of about 24% excluding discrete items. The 2019 comparison includes tax-credit benefits.
- The filing corrects previously reported 2019 share-based compensation accounting for retirement-eligible employees and directors. Corrected nine-month 2019 net income was $36.4 million, down $1.3 million from the previously reported amount; the correction did not change reported operating cash flow.
- Management assessed pending litigation as unlikely to have a material adverse effect and reported no material contractual purchase obligations. The filing says the company was in compliance with revolving-credit covenants.
Important facts for investors to verify
- Whether improved production efficiency and margins can be sustained as material costs and demand conditions change.
- Whether backlog, order intake and lead times stabilize amid the uncertain commercial construction outlook.
- Progress, cost and expected operational contribution of the Longview expansion and other planned capital projects.
- COVID-19 effects on staffing, supply chains, customers and 2021 demand, alongside the company’s stated liquidity and credit-facility availability.
- Details and implications of the 2019 share-based compensation correction, the 2020 tax-rate assumptions, and the New Markets Tax Credit compliance and recapture terms.