AAON, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the notes thereto, which are included in this report, and our
audited consolidated financial statements and the notes thereto, which are
included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021.

This discussion contains or incorporates by reference "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are not historical facts, but rather
are based on expectations, estimates, assumptions and projections about our
industry, business and future financial results, based on information available
at the time this report is filed with the SEC or, with respect to any document
incorporated by reference, available at the time that such document was
prepared. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those identified in the section entitled "Forward-Looking Statements"
in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled
"Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2021. We do not assume any obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events, new information or circumstances or
otherwise, except as required by law.


We engineer, manufacture, market, and sell premium air conditioning and heating
equipment consisting of standard, semi-custom, and custom rooftop units, data
center cooling solutions, cleanroom systems, chillers, packaged outdoor
mechanical rooms, air handling units, makeup air units, energy recovery units,
condensing units, geothermal/water-source heat pump, coils, and controls. These
products are marketed and sold to retail, manufacturing, educational, lodging,
supermarket, data centers, medical and pharmaceutical, and other commercial
industries. We market our products to all 50 states in the United States and
certain provinces in Canada. Foreign sales were approximately $6.0 million of
our total net sales for the three months ended March 31, 2022 and $2.0 million
of our sales during the same period of 2021.

Our business can be affected by a number of economic factors, including the
level of economic activity in the markets in which we operate. The uncertainty
of the economy has negatively impacted the commercial and industrial new
construction markets in recent years. However, the recent rise in architectural
billings and nonresidential building construction starts signal a 2022 recovery
in nonresidential building construction after experiencing a downturn in 2021.
Furthermore, general economic growth combined with pent-up demand from customers
that delayed replacing old equipment is driving accelerated replacement demand.
However, both the new construction and replacement markets are cyclical. If the
domestic economy were to slow or enter a recession, this could result in a
decrease in our sales volume and profitability. Sales in the commercial and
industrial new construction markets correlate closely to the number of new homes
and buildings that are built, which in turn is influenced by cyclical factors
such as interest rates, inflation, consumer spending habits, employment rates,
and other macroeconomic factors over which we have no control. Sales in the
replacement markets are driven by various factors, including general economic
growth, the Company's new product introductions, fluctuations in the average age
of existing equipment in the market, government regulations and stimulus,
changes in market demand between more customized higher performing HVAC
equipment and lower priced standard equipment, as well as many other factors.
When new construction is down, we emphasize the replacement market. The demand
for our products is influenced by national and regional economic and demographic
factors. The commercial and industrial new construction market is subject to
cyclical fluctuations in that it is generally tied to housing starts, but has a
lag factor of six to 18 months. Housing starts, in turn, are affected by such
factors as interest rates, the state of the economy, population growth, and the
relative age of the population.

We sell our products to property owners and contractors mainly through a network
of independent manufacturers' representatives. This go-to-market strategy is
unique compared to most of our larger competitors in that most control their
sales channel. We value the independent sales channel as we think it is a more
effective way of increasing market share. Although we concede full control of
the sales process with this strategy, the entrepreneurial aspect of the
independent sales channel attracts the most talent and provides greater
financial incentives for its salespeople. Furthermore, the independent sales
channel sells different types of equipment from various manufacturers, allowing
it to operate with more of a solutions-based mindset, as opposed to an internal
sales department of a manufacturing company that is incentivized to only sell
its equipment regardless if it is the best solution for the end customer. We
also have a small internal sales force that supports the relationships between
the Company and our sales channel partners.

                                     - 28 -

The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead, freight and engineering expense. The
principal high volume raw materials used in our manufacturing processes are
steel, copper, and aluminum, and are obtained from domestic suppliers. We also
purchase from domestic manufacturers certain components, including compressors,
motors, and electrical controls.

The price levels of our raw materials fluctuate given that the market continues
to be volatile and unpredictable as a result of the uncertainty related to the
U.S. economy and global economy. At March 31, 2022, the price (twelve month
trailing average) for copper, galvanized steel, stainless steel and aluminum
increased 41.2%, 67.8%, 61.8%, and 1.6%, respectively, as compared to the price
(twelve month trailing average) at March 31, 2021.

We attempt to limit the impact of price fluctuations on these materials by
entering into cancellable and non-cancellable fixed price contracts with our
major suppliers for periods of six to 18 months. We expect to receive delivery
of raw materials from our fixed price contracts for use in our manufacturing

We occasionally increase the price of our equipment to help offset any
inflationary headwinds. In 2021, we implemented three price increases; and on
January 1, 2022, we implemented a fourth price increase.

Recent Developments

On December 10, 2021, we closed on the acquisition of all of the issued and
outstanding equity ownership of BasX, LLC, doing business as BasX Solutions
(“BasX”) (Note 3). We began including the results of BasX’s operations in our
consolidated financial statements beginning December 11, 2021.

On December 29, 2021, BasX, LLC converted to a C-Corporation, BasX, Inc., and is
subject to income tax.


The following table shows our historical backlog levels:

                         March 31,      December 31,       March 31,
                           2022             2021             2021
                                       (in thousands)
                        $ 461,400$     260,164$  96,733

The Company has increased our backlog both through the acquisition of BasX and
organic growth. Excluding BasX's backlog at March 31, 2022, organic backlog
increased 305.0% compared to March 31, 2021, due in part to the completion of
the Longview, Texas expansion in early 2021, price increases implemented
throughout 2021 and our favorable lead times.

Results of Operations

                                                          Three months ended
                                                 March 31, 2022       March 31, 2021
                                                            (in thousands)
Net Sales                                       $       182,771$       115,788
Cost of Sales                                           136,707               82,631
Gross Profit                                             46,064               33,157
Selling, general and administrative expenses             23,056               14,696
Gain on disposal of assets                                   (2)                   -
Income from operations                          $        23,010$        18,461

The following are recent highlights and items that impacted our results of
operations, cash flows and financial condition:

•Our backlog is at a record level due primarily to strong end-market demand
along with our ability to produce and meet customer lead times.

                                     - 29 -

•Organic bookings increased 150% in the first quarter of 2022 compared to 2021
indicating a strong demand for our products.

•Sales in 2022 grew 57.8% to $182.8 million due to organic volume growth of
$24.6 million, addition of BasX revenue of $21.0 million, and price increases of
$16.5 million.

•Gross profit as a percentage of sales decreased in 2022 to 25.2% from 28.6% in
2021 due to the offset of increased sales by increased material costs and the
adverse effect of supply chain issues on operations.

•Our warranty expense decreased 21.1% in the first quarter of 2022 compared to
2021 as a result of the quality control efforts the Company has put in place in
the past few years.

•We continue to invest in the future growth of the Company evidenced by our
$14.0 million in capital expenditures.

We report our financial results based on three reportable segments: AAON
Oklahoma, AAON Coil Products, and BasX, which are further described in
"Segments" (Note 20) within our notes to the consolidated financial statements.
The Company's chief decision maker ("CODM"), our CEO, allocates resources and
assesses the performance of each operating segment using information about the
operating segment's net sales and income from operations. The CODM does not
evaluate operating segments using asset or liability information.

Segment Operating Results for Three Months Ended March 31, 2022 and Three Months
Ended March 31, 2021

                                                          Three Months Ended
                                                  Percent of                                     Percent of
                          March 31, 2022            Sales2              March 31, 2021             Sales2              $ Change             % Change
                                                                                 (in thousands)
Net Sales3
AAON Oklahoma            $     139,867                  76.5  %       $        99,976                  86.3  %       $  39,891                   39.9  %
AAON Coil Products              21,935                  12.0  %                15,812                  13.7  %           6,123                   38.7  %
BasX1                           20,969                  11.5  %               -                       -                 20,969                 -
   Net sales             $     182,771$       115,788$  66,983                   57.8  %

Cost of Sales3
AAON Oklahoma            $     106,031                  75.8  %                70,204                  70.2  %       $  35,827                   51.0  %
AAON Coil Products              14,629                  66.7  %                12,427                  78.6  %           2,202                   17.7  %
BasX1                           16,047                  76.5  %               -                       -                 16,047                 -
   Cost of sales         $     136,707                  74.8  %       $        82,631                  71.4  %       $  54,076                   65.4  %

Gross Profit3
AAON Oklahoma            $      33,836                  24.2  %       $        29,772                  29.8  %       $   4,064                   13.7  %
AAON Coil Products               7,306                  33.3  %                 3,385                  21.4  %           3,921                  115.8  %
BasX1                            4,922                  23.5  %               -                       -                  4,922                 -
   Gross profit          $      46,064                  25.2  %       $        33,157                  28.6  %       $  12,907                   38.9  %
1 BasX was acquired on December 10, 2021. We have included the results of BasX's operations in our consolidated financial statements for the three
months ended March 31, 2022.
2 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment's net sales. Total cost of sales and total
gross profit are calculated as a percentage of total net sales.
3 Presented after intercompany eliminations.

Total net sales increased $67.0 million or 57.8%, due in part to increased
organic volumes of $24.6 million. The quarter also benefited from $16.5 million
of price increases put in place throughout 2021 that only now were realized. The
acquisition of BasX in December 2021 added $21.0 million to net sales for the
three months ended March 31, 2021. AAON Coil Products saw a 40.0% increase in
units sold, or approximately $3.2 million, due to the increase in capacity with
the completion of the new manufacturing building at our Longview, Texas facility
in early 2021.

                                     - 30 -

During the three months ended March 31, 2021, several production days were lost
due to planned maintenance and due to impacts of bad weather at both AAON
Oklahoma and AAON Coil Products, resulting in lower volumes. Additionally, the
expansion at our Longview facility was completed and production began during the
first quarter of 2021.

As shown in the table below, we've experienced increases in the cost of our raw
materials. We implemented multiple price increases during 2021 and 2022 to
counteract the increased cost of material. Additionally, in order to attract new
employees, we increased starting wages for our production workforce by 7.0% in
July 2021; and to retain our existing employees, we also put a cost of living
increase of 3.5% in place in October 2021 for all employees below the Director
level. In March 2022, we awarded annual merit raises for an overall 3.0%
increase to wages. Additionally, during the first quarter of 2022, a review of
the Company's useful lives for certain sheet metal manufacturing equipment at
AAON Coil Products resulted in a change in estimate (Note 1) that increased the
useful lives from between ten and twelve years to fifteen years. The change was
made prospectively and resulted in a decrease to depreciation expense within
cost of sales on our consolidated statements of income of $1.8 million during
the three months ended March 31, 2022.

Raw Material Costs

Twelve-month average raw material cost per pound as of March 31:

                                               2022        2021       % Change

                     Copper                  $ 5.28$ 3.74         41.2  %
                     Galvanized steel        $ 0.99$ 0.59         67.8  %
                     Stainless steel         $ 2.33$ 1.44         61.8  %
                     Aluminum                $ 1.96$ 1.93          1.6  %

Selling, General and Administrative Expenses

                                            Three Months Ended
                                         March 31,       March 31,           Percent of Sales
                                            2022           2021              2022             2021
                                              (in thousands)
      Warranty                          $    1,157$   1,467                 0.6  %      1.3  %
      Profit sharing                         2,669          2,132                 1.5  %      1.8  %
      Salaries & benefits                    9,392          5,034                 5.1  %      4.3  %
      Stock compensation                     1,669          1,291                 0.9  %      1.1  %
      Advertising                              341            206                 0.2  %      0.2  %
      Depreciation & amortization            1,691            699                 0.9  %      0.6  %
      Insurance                                709            731                 0.4  %      0.6  %
      Professional fees                      1,482            725                 0.8  %      0.6  %
      Donations                                189            (47)                0.1  %        -  %
      Bad debt expense                         288            (13)                0.2  %        -  %
      Other                                  3,469          2,471                 1.9  %      2.1  %
      Total SG&A                        $   23,056$  14,696                12.6  %     12.7  %

Excluding salaries and benefits at BasX of $2.7 million, salaries and benefits
increased $1.6 million due to pay increases that went into effect during the
second and third quarters of 2021. Additionally, profit sharing increased due to
higher pre-tax income for the three months ended March 31, 2022. Depreciation
and amortization expense at BasX was $1.0 million, accounting for the majority
of the change from period to period. Professional fees increased mostly due to
continued transaction costs and audit fees.

                                     - 31 -
Income Taxes

                                       Three Months Ended
                                   March 31,         March 31,            Effective Tax Rate
                                      2022              2021               2022              2021
                                         (in thousands)
      Income tax provision      $    4,782$    2,105                  20.9  %     11.4  %

The Company's estimated annual 2022 effective tax rate, excluding discrete
events, is expected to be approximately 25%. During the three months ended March
31, 2022, the Company recorded an excess tax benefit of $0.5 million as compared
to $2.9 million during the same period in 2021, a decrease of 82.1%. The
increase was primarily due to timing of stock awards as a result of our high
stock price during the three months ended March 31, 2021.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met
through net cash provided by operations and the use of the revolving bank line
of credit based on our current liquidity at the time.

Working Capital – Our unrestricted cash increased $2.8 million from December 31,
to March 31, 2022 and totaled $5.6 million at March 31, 2022.

Revolving Line of Credit - Our revolving credit facility ("Revolver"), as
amended and restated, provides for maximum borrowings of $100.0 million. As of
March 31, 2022 and December 31, 2021, we had $65.0 million and $40.0 million,
respectively, outstanding under the Revolver. We had one standby letter of
credit totaling $0.8 million as of March 31, 2022. At March 31, 2022, we have
$34.2 million of borrowings available under the Revolver. The Revolver expires
November 24, 2026.

Any outstanding loans under the Revolver bear interest at the daily compounded
secured overnight financing rate ("SOFR") plus the applicable margin. Applicable
margin, ranging from 1.25% - 1.75%, is determined quarterly based on the
Company's leverage ratio. The Company is also subject to letter of credit fees,
ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%.
The applicable fee percentage is determined quarterly based on the Company's
leverage ratio. At March 31, 2022, the weighted average interest rate of the
Revolver was 1.3%. Fees associated with the unused portion of the committed
amount are included in interest expense on our consolidated statements of income
and were not material for the three months ended March 31, 2022.

If SOFR cannot be determined pursuant to the definition, as defined by the
Revolver agreement, any outstanding effected loans will be deemed to have been
converted into alternative base rate ("ABR") loans. ABR loans would bear
interest at a rate per annum equal to the highest of (a) the Prime Rate in
effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%,
or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.

At March 31, 2022, we were in compliance with our financial covenants, as
defined by the Revolver. These covenants require that we meet certain parameters
related to our leverage ratio. At March 31, 2022, our leverage ratio was 0.63 to
1.0, which meets the requirement of not being above 3 to 1.

As of May 5, 2022, we had $75.0 million of outstanding borrowings under our

New Market Tax Credit Obligation - On October 24, 2019, the Company entered into
a transaction with a subsidiary of an unrelated third-party financial
institution (the "Investor") and a certified Community Development Entity under
a qualified New Markets Tax Credit ("NMTC") program pursuant to Section 45D of
the Internal Revenue Code of 1986, as amended, related to an investment in plant
and equipment to facilitate the expansion of our Longview, Texas manufacturing
operations (the "Project"). In connection with the NMTC transaction, the Company
received a $23.0 million NMTC allocation for the Project and secured low
interest financing and the potential for future debt forgiveness related to the
expansion of its Longview, Texas facilities.

Upon closing of the NMTC transaction, the Company provided an aggregate of
approximately $15.9 million to the Investor, in the form of a loan receivable,
with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9
million in proceeds plus capital contributed from the Investor was used to make
an aggregate $22.5 million loan to a subsidiary of the Company. This financing
arrangement is secured by equipment at the Company's Longview, Texas facilities,
and a guarantee from the Company, including an unconditional guarantee of NMTCs.

                                     - 32 -

Stock Repurchases - The Board has authorized three stock repurchase programs for
the Company. The Company may purchase shares on the open market from time to
time, up to a total of 5.7 million shares. The Board must authorize the timing
and amount of these purchases and all repurchases are in accordance with the
rules and regulations of the SEC allowing the Company to repurchase shares from
the open market.

Our open market repurchase programs are as follows:

        Effective Date                        Authorized Repurchase $                          Expiration Date

        May 16, 2018 1                              $15 million                                 March 1, 2019
        March 5, 2019 1                             $20 million                                 March 4, 2020
        March 13, 2020                              $20 million                                     ** 2
1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs.
2 Expiration Date is at Board's discretion. The Company is authorized to effectuate repurchases of the Company's common
stock on terms and conditions approved in advance by the Board.

The Company also has a stock repurchase arrangement by which
employee-participants in our 401(k) savings and investment plan are entitled to
have shares in AAON, Inc. stock in their accounts sold to the Company. The
maximum number of shares to be repurchased is contingent upon the number of
shares sold by employee-participants.

Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its
directors and employees for payment of statutory tax withholdings on stock
transactions. All other repurchases from directors or employees are contingent
upon Board approval. All repurchases are done at current market prices.

Our repurchase activity is as follows:

                                                                                   Three Months Ended
                                                       March 31, 2022March 31, 2021

thousands, except share and per share data)

          Program                      Shares             Total $           $ per share             Shares             Total $           $ per share
Open market                                  -           $     -          $          -                    -           $     -          $          -
401(k)                                  54,305             3,278                 60.36               70,350             5,185                 73.70
Directors and employees                 13,358               804                 60.19               16,972             1,217                 71.71
Total                                   67,663           $ 4,082$      60.33               87,322           $ 6,402$      73.31

     Our repurchase activity since Company inception, including our current
             authorized stock repurchase programs, are as follows:
                                                                                Inception to        March 31, 2022
                                                            (in thousands,

except share and per share data)

             Program                               Shares                          Total $                       $ per share
Open market                                             4,205,255          $               74,793              $      17.79
401(k)                                                  8,258,737                         169,154                     20.48
Directors and employees                                 2,041,085                          23,145                     11.34
Total                                                  14,505,077          $              267,092              $      18.41

                                     - 33 -

Dividends - At the discretion of the Board, we pay semi-annual cash dividends.
Board approval is required to determine the date of declaration and amount for
each semi-annual dividend payment.

Our recent dividends are as follows:

      Declaration Date       Record Date          Payment Date      Dividend per Share
        May 17, 2021         June 3, 2021         July 1, 2021            $0.19
      November 9, 2021    November 26, 2021    December 17, 2021          $0.19

Based on historical performance and current expectations, we believe our cash
and cash equivalents balance, the projected cash flows generated from our
operations, our existing committed revolving credit facility (or comparable
financing) and our expected ability to access capital markets will satisfy our
working capital needs, capital expenditures and other liquidity requirements
associated with our operations in 2022 and the foreseeable future.

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