AAON(AAON) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements 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 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][44] - 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][23] 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] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 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] - 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] - 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] Results of Operations 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][165] - 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] Liquidity and Capital Resources 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] - 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][191] - 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][192][193] - 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][194] Quantitative and Qualitative Disclosures About Market Risk 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] Controls and Procedures 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] - 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] PART II – OTHER INFORMATION Legal Proceedings 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] Risk Factors 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] Unregistered Sales of Equity and Securities and Use of Proceeds 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] Exhibits 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] - Interactive data files (iXBRL) for the consolidated financial statements and notes are included as Exhibit 101[212]