AAON, Inc. (NASDAQ:AAON) Q2 2023 Earnings Conference Call August 4, 2023 5:00 PM ET Company Participants Joseph Mondillo - Director, Investor Relations Gary Fields - President & CEO Rebecca Thompson - Chief Financial Officer & Treasurer Conference Call Participants Julio Romero - Sidoti & Company Chris Moore - CJS Securities Brent Thielman - DA Davidson Jon Braatz - Oppenheimer Operator Welcome to the AAON Inc. Second Quarter 2023 Earnings Conference Call. Our host for today's call is Joseph Mondillo, Direc ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number: 0-18953 AAON, INC. (Exact name of registrant as specified in its charter) Nevada 87-0448736 (State or ...

Financial Data and Key Metrics Changes - Net sales increased by 45.5% to $266 million from $182.8 million, driven by organic volume growth of 23.5% and pricing contributing 22% [10] - Gross profit rose by 67.5% to $77.2 million, with a gross profit margin of 29% compared to 25.2% in Q1 2022 [10] - Income from operations increased by 92.1% to $44.2 million, with an operating margin expanding to 16.6% from 12.6% [11] - Diluted earnings per share increased by 103% to $0.67 from $0.33 [12] Business Line Data and Key Metrics Changes - Parts sales grew by 38.5% in the quarter, with a two-year stack increase of 88.6%, although it declined to 5.3% of total sales due to robust equipment sales growth [20] - The backlog continued to grow, marking the seventh consecutive quarter of record backlog, up 30% year-over-year and 9.5% sequentially [17] Market Data and Key Metrics Changes - Demand remains strong across various markets, including data centers, semiconductor markets, K-12 education, healthcare, and manufacturing [19] - Construction spending is now well beyond pre-pandemic levels, with construction starts at their strongest levels in years [20] Company Strategy and Development Direction - The company is focused on increasing production capacity and productivity, with capital expenditures expected to be approximately $135 million, representing over 150% year-over-year growth [13][22] - The company opened a new exploration center to support sales channel partners, enhancing customer understanding of AAON products [15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the operating environment, noting that bookings trends are still on the rise and channel partners remain positive [7][19] - Supply chain issues are gradually improving, but challenges still exist, impacting productivity and output [14][56] - The company anticipates sales and earnings will improve sequentially through at least Q3, with gross margin expected to improve throughout the year [21] Other Important Information - The company reported a strong balance sheet with unrestricted cash of $2.5 million and total debt of $83.7 million [12] - Working capital increased to $246.3 million, up from $203.5 million at the end of 2022 [12] Q&A Session Summary Question: Can you discuss the underlying demand for both business lines and the strongest end market drivers? - Management noted brisk demand in both business lines, with strong bookings and a backlog that continues to accumulate [25] Question: Can AAON sustain market share gains as industry lead times normalize? - Management believes that the value of AAON equipment will sustain customer loyalty, even as lead times normalize [28] Question: What is the outlook for pricing for the remainder of the year? - The company paused price increases in May, believing that current pricing will support continued gross margin improvement [33] Question: How has the operating environment changed since the last call? - Management indicated that supply chain issues have begun to ease, with expectations for continued improvement throughout 2023 [56]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number: 0-18953 AAON, INC. (Exact name of registrant as specified in its charter) Nevada 87-0448736 (State o ...

AAON, Inc. (NASDAQ:AAON) Q4 2022 Earnings Conference Call February 27, 2023 5:15 PM ET Company Participants Joseph Mondillo - Director, Investor Relations Matt Tobolski - President & Co-Founder, BasX Solutions Rebecca Thompson - Chief Financial Officer & Treasurer Conference Call Participants Julio Romero - Sidoti & Company Jean Ramirez - D.A. Davidson Chris Moore - CJS Securities Jon Braatz - Kansas City Capital Operator Good day, and welcome to the AAON Incorporated Fourth Quarter 2022 Earnings Conference ...

[Part I - Business and Risk Factors](index=6&type=section&id=Part%20I) This section details AAON's HVAC business, operational risks, property holdings, and ongoing legal challenges [Business Overview](index=6&type=section&id=Item%201.%20Business) AAON designs, manufactures, and sells premium HVAC equipment across three segments, focusing on mass customization, energy efficiency, and indoor air quality for commercial and industrial markets [Overview and Business Segments](index=6&type=section&id=1.1%20Overview%20and%20Business%20Segments) AAON engineers and manufactures premium HVAC equipment, operating through its AAON Oklahoma, AAON Coil Products, and BASX segments - The company is engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment, including rooftop units, data center cooling solutions, and cleanroom systems[9](index=9&type=chunk) - AAON operates through three business segments: - **AAON Oklahoma:** Designs and manufactures a wide range of HVAC systems and controls - **AAON Coil Products:** Focuses on HVAC systems and manufacturing heating/cooling coils - **BASX:** Specializes in custom-engineered air handling systems for data centers, cleanrooms, and other industrial applications[10](index=10&type=chunk)[11](index=11&type=chunk) [Business Strategy, Products, and Marketing](index=6&type=section&id=1.2%20Business%20Strategy,%20Products,%20and%20Marketing) The company's strategy emphasizes mass customization, energy efficiency, and indoor air quality for its diverse HVAC product lines, primarily serving domestic markets - The company's business strategy is centered on "mass customization," using flexible manufacturing to produce standard, semi-custom, and custom equipment that emphasizes high performance, energy efficiency, and superior indoor air quality[13](index=13&type=chunk)[14](index=14&type=chunk) - Sales are primarily domestic, with foreign sales accounting for only **3.1% of net sales in 2022**[15](index=15&type=chunk) - Product offerings include rooftop units with cooling capacities from **2 to 261 tons**, Zero Degree Cold Climate Air-Source Heat Pumps, and specialized data center and cleanroom solutions from the BASX segment[18](index=18&type=chunk)[19](index=19&type=chunk)[24](index=24&type=chunk)[25](index=25&type=chunk) - The company is well-positioned to meet heightened demand for indoor air quality features, offering solutions for humidity control, MERV 13 filtration, increased outdoor air ventilation, and air disinfection to mitigate virus transmission[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [Sales, Customers, and Competition](index=9&type=section&id=1.3%20Sales,%20Customers,%20and%20Competition) AAON markets products through independent representatives, faces customer concentration, and competes with larger industry players despite significant backlog growth - The company utilizes approximately **64 independent manufacturer representative organizations** with **127 offices** to market its products, primarily in the U.S. and Canada[30](index=30&type=chunk) - A single customer, Texas AirSystems LLC, accounted for **10% or more of sales** in 2022, 2021, and 2020, representing a significant customer concentration[35](index=35&type=chunk) Order Backlog Growth | Date | Backlog (approx.) | | :--- | :--- | | February 1, 2023 | $547.3 million | | February 1, 2022 | $347.6 million | - Key competitors include larger, well-resourced companies such as Lennox, Trane, Carrier, and Johnson Controls, with Vertiv and STULZ competing in the BASX segment[37](index=37&type=chunk) [Resources, R&D, and ESG](index=11&type=section&id=1.4%20Resources,%20R%26D,%20and%20ESG) The company manages raw material costs, significantly increased R&D investments, and actively pursues environmental, social, and governance initiatives - The most important raw materials are steel, copper, and aluminum, with the company using contracts to limit price fluctuation impacts[40](index=40&type=chunk) Research & Development Expenses (2020-2022) | Year | R&D Expense (approx.) | | :--- | :--- | | 2022 | $46.8 million | | 2021 | $16.6 million | | 2020 | $17.4 million | - The significant increase in 2022 R&D spending was driven by the inclusion of a full year of BASX operations and a continued commitment to innovation, supported by the advanced Norman Asbjornson Innovation Center (NAIC) laboratory[43](index=43&type=chunk)[44](index=44&type=chunk) - The company is focused on ESG initiatives, including reducing greenhouse gas emissions, increasing hazardous waste recycling (over **14,928 tons of metal in 2022**), and developing non-fossil fuel consuming products[55](index=55&type=chunk)[57](index=57&type=chunk) [Human Capital](index=13&type=section&id=1.5%20Human%20Capital) AAON has experienced significant employee headcount growth, maintains positive employee relations, and offers competitive benefits without union representation Employee Headcount Growth | Date | Total Employees | | :--- | :--- | | Feb 22, 2023 | 3,666 | | Feb 22, 2022 | 2,881 | | Feb 23, 2021 | 2,268 | - The company's employees are not represented by unions, and management considers employee relations to be good, offering competitive benefits including a **401(k) with a 175% employer match** and a profit-sharing bonus plan[58](index=58&type=chunk)[61](index=61&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) AAON faces risks from economic downturns, customer concentration, supply chain disruptions, cybersecurity threats, and evolving environmental regulations, particularly refrigerant transition costs - **Pandemic & Economic Risks:** Business can be adversely affected by public health emergencies like COVID-19 and is sensitive to economic conditions that influence the new construction and replacement markets[64](index=64&type=chunk)[67](index=67&type=chunk) - **Customer & Channel Risks:** The company has a significant customer concentration, with one customer accounting for over **10% of sales**, and is dependent on its network of third-party representatives to market and sell products[68](index=68&type=chunk)[69](index=69&type=chunk) - **Operational & Supply Chain Risks:** The company may be adversely affected by the availability and price of raw materials (steel, copper, aluminum) and components, with a majority of operations concentrated in Tulsa, OK, posing a risk from natural disasters[74](index=74&type=chunk)[80](index=80&type=chunk) - **Technology & Cybersecurity Risks:** The business is subject to risks from cybersecurity attacks and is reliant on its information technology infrastructure[82](index=82&type=chunk)[84](index=84&type=chunk) - **Regulatory Risks:** The company is subject to extensive environmental regulations, with a key challenge being the mandated transition to a new, lower global warming potential refrigerant by **2025**, which is expected to incur costs for product redesign, facility updates, and materials[85](index=85&type=chunk)[91](index=91&type=chunk)[92](index=92&type=chunk) [Properties](index=19&type=section&id=Item%202.%20Properties) AAON owns and leases substantial manufacturing and R&D facilities in Oklahoma, Texas, and Oregon, with ongoing expansion efforts across its operational footprint - **AAON Oklahoma:** Owns multiple facilities in Tulsa, OK, including a **940,000 sq. ft. manufacturing building** and the **134,000 sq. ft. NAIC R&D laboratory**, and also leases a **51,000 sq. ft. plant** in Parkville, MO, which is being expanded[95](index=95&type=chunk)[97](index=97&type=chunk)[99](index=99&type=chunk) - **AAON Coil Products:** Owns two main buildings in Longview, TX, totaling **485,000 sq. ft. of manufacturing/warehouse space**, and purchased an additional **64,000 sq. ft. warehouse** in January 2023[100](index=100&type=chunk) - **BASX:** Operates in a **194,000 sq. ft. plant/office** in Redmond, OR, and leases smaller additional spaces[101](index=101&type=chunk) [Legal Proceedings](index=20&type=section&id=Item%203.%20Legal%20Proceedings.) AAON is defending against a lawsuit from a former sales representative, Havtech, LLC, seeking at least $48.6 million in damages following a business relationship termination - A former sales representative, Havtech, LLC, filed a complaint challenging the termination of its business relationship and is seeking damages of at least **$48.6 million**, which the company believes are without merit[340](index=340&type=chunk) [Part II - Market, Financials, and Controls](index=21&type=section&id=Part%20II) This section details AAON's stock market activity, management's financial analysis, market risk exposures, consolidated financial statements, and internal controls [Stock Market, Dividends, and Share Repurchases](index=21&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) AAON's common stock trades on NASDAQ, with the company increasing cash dividends and conducting share repurchases while maintaining equity compensation plans Cash Dividends Declared per Share (2020-2022) | Declaration Date | Dividend per Share | | :--- | :--- | | May 15, 2020 | $0.19 | | Nov 10, 2020 | $0.19 | | May 17, 2021 | $0.19 | | Nov 9, 2021 | $0.19 | | May 18, 2022 | $0.19 | | Nov 8, 2022 | $0.24 | Share Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | Oct 2022 | 87,049 | $55.33 | | Nov 2022 | 23 | $65.00 | | Dec 2022 | 196 | $76.66 | | **Total** | **87,268** | **$55.38** | - As of December 31, 2022, there were **3,599,896 securities** remaining available for future issuance under the 2016 Long-Term Incentive Plan[105](index=105&type=chunk) [Management's Discussion and Analysis (MD&A)](index=22&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) AAON achieved record 2022 results with strong sales growth and improved margins, driven by acquisitions and pricing, while managing liquidity and planning significant capital expenditures [Results of Operations](index=24&type=section&id=7.1%20Results%20of%20Operations) AAON's 2022 operations saw significant net sales growth and improved gross margins, driven by acquisitions and pricing, despite rising raw material costs and SG&A expenses Consolidated Results of Operations (2021-2022) | Metric | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $888.8 | $534.5 | 66.3% | | Gross Profit | $237.6 | $137.8 | 72.4% | | *Gross Margin* | *26.7%* | *25.8%* | *+90 bps* | | Income from Operations | $126.8 | $69.3 | 83.0% | - Net sales growth of **$354.3 million** was driven by the BASX acquisition (**19.5% of growth**), price increases (**$100.0 million**), and organic sales volume/mix (**$149.8 million**)[127](index=127&type=chunk) - AAON Coil Products segment gross margin increased significantly to **31.0%** from **15.1% in 2021**, primarily due to faster realization of price increases and increased operational efficiencies from its new manufacturing building[127](index=127&type=chunk) Raw Material Cost Increases (2022 vs 2021 Avg.) | Material | % Change | | :--- | :--- | | Copper | +13.4% | | Galvanized Steel | +14.5% | | Stainless Steel | +61.0% | | Aluminum | +14.0% | - SG&A expenses increased by **$42.2 million** to **$110.8 million**, largely due to a full year of BASX operations, increased salaries and benefits from headcount growth and wage hikes, and higher profit-sharing expenses[130](index=130&type=chunk)[131](index=131&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=7.2%20Liquidity%20and%20Capital%20Resources) The company manages liquidity through a revolving credit facility, adjusted share repurchase activity, and plans substantial capital expenditures for 2023 - The company maintains a **$200.0 million revolving credit facility**, which had an outstanding balance of **$71.0 million** and available borrowings of **$128.2 million** as of December 31, 2022[135](index=135&type=chunk) Stock Repurchase Activity | Year | Total Repurchase (in millions) | | :--- | :--- | | 2022 | $13.8 | | 2021 | $22.5 | - The decrease in stock repurchases in 2022 was primarily due to the discontinuation of the 401(k) buyback program in June 2022[152](index=152&type=chunk) - The capital expenditure program for 2023 is estimated to be approximately **$135.0 million**[151](index=151&type=chunk) [Cash Flow Analysis](index=30&type=section&id=7.3%20Cash%20Flow%20Analysis) Cash flow analysis reveals stable operating cash, reduced investing outflows due to the prior year's BASX acquisition, and impacts from inventory and accounts receivable growth Summary of Cash Flows (2021-2022) | Activity | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net cash from operating activities | $61.3 | $61.2 | | Net cash used in investing activities | ($76.2) | ($158.7) | | Net cash from financing activities | $17.4 | $18.7 | - Cash used in investing activities decreased significantly in 2022 because 2021 included the **$103.4 million cash payment** for the BASX acquisition[150](index=150&type=chunk) - Operating cash flow was impacted by a **$71.4 million increase in inventories** to mitigate supply chain disruptions and a **$56.3 million increase in accounts receivable** due to higher sales volume[147](index=147&type=chunk)[149](index=149&type=chunk) [Critical Accounting Estimates](index=32&type=section&id=7.4%20Critical%20Accounting%20Estimates) Management's critical accounting estimates involve significant judgment for inventory valuation, warranty accruals, share-based compensation, and goodwill impairment assessments - Management identifies several critical accounting estimates requiring significant judgment, including: - **Inventory:** Valued at lower of cost or net realizable value, with reserves for obsolescence and shrinkage - **Warranty Accrual:** Estimated based on historical trends and known issues - **Share-Based Compensation:** Fair value is estimated using Black-Scholes-Merton and Monte Carlo models, which require subjective assumptions - **Goodwill and Intangible Assets:** Assessed for impairment annually (in Q4) or when triggering events occur, with the 2022 qualitative assessment indicating no impairment[157](index=157&type=chunk)[160](index=160&type=chunk)[163](index=163&type=chunk)[165](index=165&type=chunk) [Market Risk Disclosures](index=34&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) AAON faces market risks from commodity price volatility and interest rate fluctuations on its variable-rate debt, with a 1% rate increase impacting pre-tax income by $0.7 million - The company is exposed to price volatility in commodities such as steel, copper, and aluminum[172](index=172&type=chunk) - The company is exposed to interest rate risk on its **$71.0 million of outstanding variable-rate debt**, where a **1% increase** in the interest rate would reduce annual income before taxes by about **$0.7 million**[173](index=173&type=chunk) [Financial Statements and Supplementary Data](index=35&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data.) This section presents the audited consolidated financial statements, including balance sheets, income statements, and cash flows, with notes detailing key accounting policies and transactions [Independent Auditor's Report](index=36&type=section&id=8.1%20Independent%20Auditor's%20Report) Grant Thornton LLP issued an unqualified audit opinion, highlighting manual inventory adjustments as a critical audit matter due to valuation complexities - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[179](index=179&type=chunk)[180](index=180&type=chunk) - The auditor identified "manual inventory adjustments" as a critical audit matter due to the substantial management judgment and estimation uncertainty involved in inventory valuation, particularly given recent raw material price changes and supply chain challenges[184](index=184&type=chunk)[185](index=185&type=chunk) [Consolidated Financial Statements](index=38&type=section&id=8.2%20Consolidated%20Financial%20Statements) This section provides key consolidated financial statements, including balance sheet accounts and income statement performance metrics for recent fiscal years Key Balance Sheet Data (as of Dec 31) | Account | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $349.1 | $218.1 | | Total Assets | $813.9 | $650.2 | | Total Current Liabilities | $145.6 | $86.8 | | Total Stockholders' Equity | $560.7 | $466.2 | Key Income Statement Data (Year Ended Dec 31) | Account | 2022 (in millions) | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | :--- | | Net Sales | $888.8 | $534.5 | $514.6 | | Gross Profit | $237.6 | $137.8 | $155.8 | | Net Income | $100.4 | $58.8 | $79.0 | | Diluted EPS | $1.86 | $1.09 | $1.49 | [Notes to Financial Statements](index=42&type=section&id=8.3%20Notes%20to%20Financial%20Statements) The notes detail significant accounting policies, including the BASX acquisition's financial impact, share-based compensation, and segment-level performance data - **Note 4 (Business Combination):** The acquisition of BASX closed on Dec 10, 2021, with the final allocation of the **$103.7 million consideration** resulting in **$78.7 million of goodwill** and **$68.4 million of intangible assets** (customer relationships, intellectual property, trademarks)[254](index=254&type=chunk)[259](index=259&type=chunk)[260](index=260&type=chunk) - **Note 14 (Share-Based Compensation):** Total share-based compensation expense was **$13.7 million in 2022**, compared to **$11.8 million in 2021**, including costs for stock options, restricted stock, PSUs, and special awards for key BASX employees[315](index=315&type=chunk) - **Note 22 (Segments):** Provides a detailed breakdown of external sales, inter-segment sales, and gross profit for the three reportable segments, with AAON Oklahoma having external sales of **$663.8 million**, AAON Coil Products **$107.3 million**, and BASX **$117.7 million** in 2022[356](index=356&type=chunk) [Controls and Procedures](index=74&type=section&id=Item%209A.%20Controls%20and%20Procedures.) Management and the independent auditor concluded that AAON's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report (December 31, 2022)[358](index=358&type=chunk) - Management's annual report on internal control over financial reporting concluded that the company maintained effective internal control as of December 31, 2022[359](index=359&type=chunk)[360](index=360&type=chunk) - The independent registered public accounting firm, Grant Thornton LLP, audited and issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022[361](index=361&type=chunk)[363](index=363&type=chunk) [Part III - Corporate Governance and Executive Compensation](index=76&type=section&id=Part%20III) This section's content on corporate governance, executive compensation, and related matters is incorporated by reference from the company's 2023 Proxy Statement - Information required by Items 10, 11, 12, 13, and 14 of Form 10-K is incorporated by reference from the company's definitive Proxy Statement to be filed for the 2023 Annual Meeting of Stockholders[370](index=370&type=chunk)[372](index=372&type=chunk)[373](index=373&type=chunk)[374](index=374&type=chunk) [Part IV - Exhibits and Schedules](index=77&type=section&id=Part%20IV) This section provides a comprehensive list of all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This part lists all exhibits filed with the Form 10-K, including the Amended and Restated Loan Agreement, various long-term incentive plans, a list of subsidiaries, and CEO/CFO certifications[375](index=375&type=chunk)

AAON, Inc. (NASDAQ:AAON) Q3 2022 Results Conference Call November 7, 2022 5:15 PM ET Company Participants Joe Mondillo - Director, IR Gary Fields - President and CEO Rebecca Thompson - CFO and Treasurer Conference Call Participants Chris Moore - CJS Securities Brent Thielman - D.A. Davidson Julio Romero - Sidoti Jon Braatz - Kansas City Capital Operator Ladies and gentlemen, thank you for standing by and welcome to AAON’s Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to pre ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number: 0-18953 AAON, INC. (Exact name of registrant as specified in its charter) Nevada 87-0448736 (Sta ...

AAON, Inc. (NASDAQ:AAON) Q2 2022 Earnings Conference Call August 8, 2022 5:15 PM ET Company Participants Joe Mondillo - Director, Investor Relations Rebecca Thompson - Chief Financial Officer & Treasurer Gary Fields - President & Chief Executive Officer Conference Call Participants Julio Romero - Sidoti & Company Brent Thielman - D.A. Davidson Jon Braatz - Kansas City Capital Operator Good day, and welcome to the AAON Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-on ...

[PART I – FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents AAON, Inc.'s unaudited consolidated financial statements for Q2 2022, detailing balance sheets, income, equity, and cash flows, reflecting sales growth, decreased profitability, and significant cash usage Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $327,412 | $218,080 | | Total Assets | $776,712 | $650,180 | | Total Current Liabilities | $136,169 | $86,768 | | Revolving credit facility, long-term | $106,249 | $40,000 | | Total Liabilities | $286,206 | $183,990 | | Total Stockholders' Equity | $490,506 | $466,170 | Consolidated Statement of Income Highlights (Unaudited) | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $208,814 | $143,876 | $391,585 | $259,664 | | Gross Profit | $47,376 | $42,107 | $93,440 | $75,264 | | Income from Operations | $20,453 | $25,212 | $43,463 | $43,673 | | Net Income | $15,946 | $20,615 | $34,005 | $36,991 | | Diluted EPS | $0.30 | $0.38 | $0.63 | $0.69 | Consolidated Statement of Cash Flows Highlights (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(1,580) | $62,912 | | Net cash used in investing activities | $(49,437) | $(33,126) | | Net cash provided by financing activities | $65,740 | $45 | [Notes to the Consolidated Financial Statements](index=6&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) Detailed notes explain accounting policies, the BasX acquisition's impact, disaggregated revenue by segment, and challenges from inflation, supply chain, and debt - The company acquired BasX, LLC on December 10, 2021, and began including its results in the consolidated financial statements from December 11, 2021, with the acquisition costing **$100.0 million** in cash and up to **$80.0 million** in contingent stock consideration[13](index=13&type=chunk)[44](index=44&type=chunk) - The company is facing challenges from raw material price inflation (copper, steel), supply chain disruptions, and a tight labor market, which has led to multiple wage increases in 2021 and 2022[22](index=22&type=chunk)[23](index=23&type=chunk) Disaggregated Net Sales by Segment (Q2 2022 vs Q2 2021) | Segment | Q2 2022 Net Sales (in thousands) | Q2 2021 Net Sales (in thousands) | | :--- | :--- | :--- | | AAON Oklahoma | $157,481 | $126,266 | | AAON Coil Products | $26,754 | $17,610 | | BasX | $24,579 | $0 | | **Total** | **$208,814** | **$143,876** | - The revolving credit facility was amended on May 27, 2022, increasing the maximum borrowing capacity to **$200.0 million**, with the outstanding balance growing from **$40.0 million** at year-end 2021 to **$106.2 million** as of June 30, 2022[76](index=76&type=chunk) - As of June 30, 2022, **486,268 shares** related to the 2021 earn-out milestone for the BasX acquisition had been issued to the former owners[126](index=126&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=30&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) Management discusses record backlog, 45.1% Q2 sales growth driven by BasX and price increases, but declining gross margins due to inflation, and liquidity strategy using cash and an expanded $200 million credit facility [Overview](index=30&type=section&id=MD%26A%20-%20Overview) AAON's business overview covers HVAC manufacturing, market factors, go-to-market strategy, raw material inflation, six price increases, and a record **$464.0 million** backlog - The company's backlog reached a record level of **$464.0 million** at June 30, 2022, a **236%** increase from **$138.1 million** at June 30, 2021, with organic backlog (excluding BasX) increasing **163.6%**[156](index=156&type=chunk) - Significant raw material price inflation continues, with the 12-month trailing average price for copper, galvanized steel, stainless steel, and aluminum increasing **33.1%**, **35.5%**, **69.2%**, and **8.1%**, respectively, as of June 30, 2022 compared to the prior year[153](index=153&type=chunk) - To offset inflationary pressures, the company implemented **three price increases in 2021** and **three additional price increases in 2022** (effective January 1, March 29, and June 1)[155](index=155&type=chunk) [Results of Operations](index=31&type=section&id=MD%26A%20-%20Results%20of%20Operations) Q2 2022 net sales grew **45.1%** to **$208.8 million**, but gross profit margin declined to **22.7%** due to rising costs, while SG&A expenses increased to **12.9%** of sales Segment Gross Profit Margin Comparison (Q2 2022 vs Q2 2021) | Segment | Q2 2022 Gross Profit Margin | Q2 2021 Gross Profit Margin | | :--- | :--- | :--- | | AAON Oklahoma | 20.2% | 30.3% | | AAON Coil Products | 31.7% | 22.1% | | BasX | 29.2% | N/A | - The decline in AAON Oklahoma's gross profit was due to working through lower-priced backlog while costs increased, whereas AAON Coil Products and BasX were able to reprice their backlogs more quickly, resulting in improved or healthy margins[163](index=163&type=chunk)[165](index=165&type=chunk) - For the six months ended June 30, 2022, total net sales increased **50.8%** to **$391.6 million**, while gross profit margin decreased to **23.9%** from **29.0%** in the prior-year period[169](index=169&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=MD%26A%20-%20Liquidity%20and%20Capital%20Resources) Liquidity is managed via operating cash flow and an expanded **$200.0 million** credit facility, with negative operating cash flow of **$1.6 million** in H1 2022 due to increased working capital and **$49.4 million** in investing activities - The company's revolving credit facility was increased to **$200.0 million**, with **$106.2 million** outstanding as of June 30, 2022[175](index=175&type=chunk) - Net cash used in operating activities was **$1.6 million** for H1 2022, compared to **$62.9 million** provided in H1 2021, primarily due to a **$53.7 million** increase in accounts receivable and a **$33.9 million** increase in inventories[189](index=189&type=chunk)[191](index=191&type=chunk) - Investing activities used **$49.4 million** in H1 2022, which included **$22.0 million** for the purchase of the BasX building and **$27.2 million** in other capital expenditures, with the capital expenditure program for 2022 estimated to be approximately **$73.3 million**[189](index=189&type=chunk)[192](index=192&type=chunk)[193](index=193&type=chunk) - Financing activities provided **$65.7 million** in H1 2022, mainly from **$94.9 million** in borrowings under the revolving credit facility, partially offset by **$5.9 million** in stock repurchases[189](index=189&type=chunk)[194](index=194&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) The company manages commodity price volatility, a key market risk, through fixed-price contracts with major suppliers, typically lasting six to 18 months - The company is exposed to volatility in commodity prices and uses fixed-price contracts with suppliers for periods of **six to 18 months** to manage this risk[201](index=201&type=chunk) [Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management, including CEO and CFO, concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[202](index=202&type=chunk) - No changes in internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[203](index=203&type=chunk) [PART II – OTHER INFORMATION](index=41&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings.) The company is involved in routine legal actions, with management concluding that pending litigation is unlikely to materially affect its business or financial position - The company states that the likelihood of any pending litigation having a material adverse effect on its business or financial condition is remote[205](index=205&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors.) This section refers to the 2021 Annual Report on Form 10-K for detailed risk factors, noting no material changes to previously disclosed risks - There have been no material changes to the risk factors included in the company's 2021 Annual Report on Form 10-K[206](index=206&type=chunk) [Unregistered Sales of Equity and Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20and%20Securities%20and%20Use%20of%20Proceeds.) This section details Q2 2022 stock repurchases of **52,455 shares** and the issuance of **486,268** unregistered shares for the BasX acquisition earn-out Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2022 | 16,124 | $52.39 | | May 2022 | 16,236 | $51.83 | | June 2022 | 20,095 | $54.69 | | **Total** | **52,455** | **$53.10** | - As of June 30, 2022, **486,268 shares** related to the BasX acquisition's 2021 earn-out milestone were issued to former owners in a private placement exempt from SEC registration under Rule 506(b)[210](index=210&type=chunk) [Exhibits](index=43&type=section&id=Item%206.%20Exhibits.) This section lists filed exhibits, including CEO and CFO certifications and interactive data files (iXBRL) for the financial statements - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[212](index=212&type=chunk) - Interactive data files (iXBRL) for the consolidated financial statements and notes are included as Exhibit 101[212](index=212&type=chunk)