What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 134 added, 42 removed, 173 unchanged (50% of the section changed)

8 unchanged sentences

We market our products to all 50 states in the United States and all provinces in Canada.

Foreign sales were approximately $2.8 million of our total net sales for the three months just ended and $4.2 million of our sales during the same period of 2019.

Foreign sales were approximately $5.3 million of our total net sales for the six months just ended and $7.8 million of our sales during the same period of 2019.

Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate.

7 unchanged sentences

Our sales strategy is currently balanced between new construction and replacement applications.

The new construction market in 2019 and through the first quarter of 2020 has been robust, but showing signs of uncertainty.

Thus, we continue to emphasize promotion of the benefits of AAON equipment to property owners in the replacement market.

The new construction market through the third quarter of 2020 is showing signs of uncertainty.

We continue to emphasize promotion of the benefits of AAON equipment to property owners in the replacement market.

Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S.

Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher employee absenteeism in our manufacturing facilities.

We had continuous operations during the six months ended June 30, 2020.

For the most part, our workers are able to socially distance themselves during the manufacturing process.

Additional precautions have been taken to social distance workers that work in close environments.

The Company utilizes sanitation stations, requires the use of a facial covering, performs daily temperature scanning, and performs additional cleaning and sanitation throughout the day and deep cleaning overnight.

The Company did see significant employee absenteeism in the latter part of June.

These unexpected employee absences resulted in reduced shipments and longer lead times.

While the Company's operations are primarily in Oklahoma and Texas, our domestic sales to customers cover almost all 50 states.

Only the state of Texas has more than 10% of our revenues.

For the six months ended June 30, 2020, we've experienced record sales.

We have not seen a significant slow down or disruption in our customer jobs and have benefited from some of the new construction for temporary hospitals due to COVID-19.

Our incoming order rate has recently softened slightly due to less than optimal lead times and turmoil in the market resulting from COVID-19.

We are currently back on schedule and anticipate orders will increase as our lead times improve during our peak selling season.

Uncertainty in the education industry could negatively impact our employee attendance levels as well as our bookings.

The outlook for the remainder of the year is hard to predict during these uncertain times.

Despite this uncertainty, we remain cautiously optimistic that the year will end with modest revenue growth over 2019.

We had unrestricted cash and cash equivalents of $61.3 million as of June 30, 2020, which, along with improved free cash flow, enabled us to declare an $0.19 per share semi-annual cash dividend, paid on July 1, 2020, an 18.8% increase from the $0.16 semi-annual dividend paid last year.

Our capital expenditures during the first half of the year were $33.5 million, as compared to $16.8 million for the same period a year ago, and we anticipate our full-year 2020 capital expenditures will total approximately $73.2 million.

Our expansion to our Longview, TX facility is on schedule and expected to be completed in the fourth quarter of 2020.

The Company also has $28.3 million available under its line of credit.

Should the Company experience an unexpected downturn due to COVID-19;

spending on dividends and capital expenditures can be reduced and the line of credit can be utilized.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight and engineering expense.

1 unchanged sentence

We also purchase from domestic manufacturers certain components, including compressors, motors and electrical controls.

We have experienced minimal disruption to our supply chain due to COVID-19.

The price levels of most raw materials have started to decline in the past twelve months.

1 unchanged sentence

There is a possibility prices could rise in the future depending on the impact COVID-19 will have on our supply chain.

For the three months ended March 31, 2020, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum decreased 2.1%, 5.8%, 1.5% and 2.2%, respectively, as compared to the three months ended March 31, 2019.

At June 30, 2020, the price (twelve month trailing average) for copper, galvanized steel and aluminum decreased 1.6%, 1.9% and 2.2% (stainless steel increased 3.0%), respectively, as compared to the price (twelve month trailing average) at June 30, 2019.

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.

1 unchanged sentence

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

• We continued to operate during the first quarter as an essential business with minimal disruption.

• Net sales were a record for the quarter, increasing by 20.8%.

• Our gross profit percentage improved from 22.3% in 2019 to 31.2%.

• We invested $21.9 million in capital expenditures, continuing our work on projects such as our Longview, TX expansion and additional Salvagnini machines that will increase our sheet metal capacity.

• Total cash, cash equivalents and restricted cash was $52.1 million at March 31, 2020.

• We shortened our lead times, improved deliveries to customers and reduced our backlog.

• We experienced significant employee absenteeism, mostly in June, related to COVID-19 during the quarter that impacted our production.

• We continue to become more efficient.

Our gross profit percentage improved from 23.9% during the six months ended in 2019 to 30.8% in 2020.

• We invested $33.5 million in capital expenditures, continuing our work on projects such as our Longview, TX expansion and the purchase of additional Salvagnini machines that will increase our sheet metal capacity.

• Total cash, cash equivalents and restricted cash was $70.8 million at June 30, 2020.

The following table shows our historical backlog levels:

3/31/2020 12/31/2019 3/31/2019

2020 December 31,

2019 June 30,

(in thousands)

$ 103,508 $ 142,747 $ 179,647

During 2018 and most of 2019, the Company struggled to maintain adequate sheet-metal capacity that resulted in long lead times and a high backlog.

The Company started to turn around its sheet-metal production at the end of 2019 with the addition of new Salvagnini machines.

This led in part to a record fourth quarter of 2019 that helped reduce our backlog.

Since then, the Company continues to increase its sheet-metal capacity, increase sales, improve lead times and get our backlog to a manageable level.

As noted above, in the second quarter of 2020, we have seen some softening of our orders, due in part to increased lead times as a result of COVID-19.

Results of Operations

Three Months Ended March 31, 2020 vs.

Three Months Ended March 31, 2019

Three months ended June 30, 2020 vs.

Three months ended June 30, 2019

Three Months Ended

2020 June 30,

Rooftop units 3,746 3,797

4 unchanged sentences

Three Months Ended

2020 June 30,

2019 Change % Change

2 unchanged sentences

Total units 6,344 7,200 (856) (11.9) %

Our net sales increased by 20.8% due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation and in part from price increases put in place over the last year and a half.

Our net sales increased by 5.2% due in part to our price increases in the past year.

Cost of Sales

Three months ended

March 31, Percent of Sales

2020 2019 2020 2019

Three Months Ended Percent of Sales

2020 June 30,

(in thousands)

3 unchanged sentences

The Company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs.

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

Twelve-month average raw material cost per pound as of June 30:

2020 2019 % Change

4 unchanged sentences

Selling, General and Administrative Expenses

Three months ended

March 31, Percent of Sales

2020 2019 2020 2019

Three Months Ended Percent of Sales

2020 June 30,

(in thousands)

13 unchanged sentences

Salaries & benefits is up as well due in part to additional incentives for our employees as a result of the Company's good performance.

Stock compensation is lower because the valuation of the Company wide equity grant done in March 2020 was less than the grant done in March 2019.

Three months ended

March 31, Effective Tax Rate

Stock compensation increased due to the director grants done in May 2020.

Donations increased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman.

Three Months Ended Effective Tax Rate

2020 June 30,

(in thousands)

Income tax provision $ 4,439 $ 3,943 20.0 % 22.7 %

The Company’s estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25%.

Results of Operations

Six Months Ended June 30, 2020 vs.

Six Months Ended June 30, 2019

Six Months Ended

2020 June 30,

Rooftop units 7,807 7,559

Condensing units 854 873

Air handlers 1,011 1,117

Outdoor mechanical rooms 16 21

Water source heat pumps 3,262 4,666

12,950 14,236

Six Months Ended

2020 June 30,

Change % Change

(in thousands, except unit data)

Net sales $ 263,079 $ 233,259 $ 29,820 12.8 %

Total units 12,950 14,236 (1,286) (9.0) %

Our net sales increased by 12.8% due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation and in part from price increases put in place over the last year and a half.

Cost of Sales

Six Months Ended Percent of Sales

2020 June 30,

(in thousands)

Cost of sales $ 182,001 $ 177,625 69.2 % 76.1 %

Gross profit 81,078 55,634 30.8 % 23.9 %

We continue to see overall raw material costs decrease.

The Company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs.

Twelve-month average raw material cost per pound as of June 30:

2020 2019 % Change

Copper $ 3.65 $ 3.71 (1.6) %

Galvanized steel $ 0.51 $ 0.52 (1.9) %

Stainless steel $ 1.36 $ 1.32 3.0 %

Aluminum $ 1.78 $ 1.82 (2.2) %

Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2020 June 30,

(in thousands)

Warranty $ 3,302 $ 3,422 1.3 % 1.5 %

Profit sharing 5,691 3,264 2.2 % 1.4 %

Salaries & benefits 10,196 7,165 3.9 % 3.1 %

Stock compensation 2,690 5,222 1.0 % 2.2 %

Advertising 217 350 0.1 % 0.2 %

Depreciation 955 692 0.4 % 0.3 %

Insurance 479 376 0.2 % 0.2 %

Professional fees 1,254 1,030 0.5 % 0.4 %

Donations 1,786 864 0.7 % 0.4 %

Bad debt expense 76 128 — % 0.1 %

Other 4,507 4,076 1.7 % 1.7 %

Total SG&A $ 31,153 $ 26,589 11.8 % 11.4 %

Profit sharing expenses increased due to our increased earnings for the period.

Salaries & benefits is up as well due in part to additional incentives for our employees as a result of the Company's good performance.

Stock compensation is lower because the valuation of the Company-wide equity grant awarded in March 2020 was less than the grant awarded in March 2019.

Donations increased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman.

Six Months Ended Effective Tax Rate

2020 June 30,

(in thousands)

Income tax provision $ 10,415 $ 6,638 20.8 % 23.1 %

The Company’s estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25%.

The Company's excess tax benefit in 2020 is larger than the excess tax benefit in 2019, causing the reduction in our overall effective rate.

Liquidity and Capital Resources

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

Working Capital - Our unrestricted cash increased $8.9 million from December 31, 2019 to March 31, 2020 and totaled $35.7 million at March 31, 2020.

Revolving Line of Credit - Under the line of credit with Bank of Oklahoma, there was one standby letter of credit of $1.7 million as of March 31, 2020.

At March 31, 2020, we have $28.3 million of borrowings available under the revolving credit facility.

Working Capital - Our unrestricted cash increased $34.5 million from December 31, 2019 to June 30, 2020 and totaled $61.3 million at June 30, 2020.

Revolving Line of Credit - Under the line of credit with Bank of Oklahoma, there was one standby letter of credit of $1.7 million as of June 30, 2020.

At June 30, 2020, we have $28.3 million of borrowings available under the revolving credit facility.

No fees are associated with the unused portion of the committed amount.

We had no outstanding balance under the revolving credit facility at March 31, 2020 and December 31, 2019.

We had no outstanding balance under the revolving credit facility at June 30, 2020 and December 31, 2019.

Interest on borrowings is payable monthly at LIBOR plus 2.0%.

The termination date of the revolving credit facility is July 26, 2021.

At March 31, 2020, we were in compliance with all of the covenants under the revolving credit facility.

At June 30, 2020, we were in compliance with all of the covenants under the revolving credit facility.

We are obligated to comply with certain financial covenants under the revolving credit facility.

These covenants require that we meet certain parameters related to our tangible net worth and total liabilities to tangible net worth ratio.

At March 31, 2020, our tangible net worth was $306.3 million, which meets the requirement of being at or above $175.0 million.

At June 30, 2020, our tangible net worth was $322.7 million, which meets the requirement of being at or above $175.0 million.

Our total liabilities to tangible net worth ratio was 0.3 to 1.0 which meets the requirement of not being above 2 to 1.

21 unchanged sentences

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.

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.

1 unchanged sentence

Our repurchase activity is as follows:

Three months ended

Six Months Ended

June 30, 2020 June 30, 2019

(in thousands, except share and per share data)

5 unchanged sentences

Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows:

Inception to date

Inception to June 30, 2020

(in thousands, except share and per share data)

10 unchanged sentences

November 6, 2019 November 27, 2019 December 18, 2019 $0.16

May 15, 2020 June 3, 2020 July 1, 2020 $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 2020 and the foreseeable future.

Statement of Cash Flows

The following table reflects the major categories of cash flows for the three months ended March 31, 2020 and 2019.

The following table reflects the major categories of cash flows for the six months ended June 30, 2020 and 2019.

For additional details, see the consolidated financial statements.

Three months ended

Six Months Ended

2020 June 30,

(in thousands)

21 unchanged sentences

The Company manages cash needs through working capital rather than drawing on its line of credit.

Collections and payments cycles are on a normal pattern and fluctuate due to timing of payments and capital expenditure.

Additionally, the Company has accrued for additional employee incentives based on the Company's favorable earnings to be paid after the Company's year-end audit is completed (Note 9).

Collections and payments cycles are on a normal pattern and fluctuate due to timing of receipts and payments.

The Company has been able to improve its collections of outstanding receivables due in part through prepayment of orders.

The Company also has stocked up on inventory to take advantage of favorable pricing and also to prevent future supply chain disruptions.

Cash Flows Used in Investing Activities

The capital expenditure program for 2020 is estimated to be approximately $73.2 million.

The capital expenditures for 2020 relate to the expansion of our Longview, Texas facility, additional Salvagnini sheet metal fabrication machines, completion of our R&D lab and other operational improvements.

The capital expenditures for 2020 relate to the expansion of our Longview, Texas facility, purchase of additional Salvagnini sheet metal fabrication machines, completion of our R&D lab and other operational improvements.

Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.

1 unchanged sentence

Stock options exercised increased due to the increase in the number of employee options exercised and increases in our stock price.

The Company also purchased approximately $5.0 million of our outstanding stock through the open market buyback program (Note 15 ) during the three months ended March 31, 2020.

The Company also purchased approximately $5.0 million of our outstanding stock through the open market buyback program (Note 15 ) during the six months ended June 30, 2020.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

We had one material contractual purchase obligation as of March 31, 2020 for approximately $1.8 million that expires in December 2020.

We had no material contractual purchase obligations as of June 30, 2020.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2020.

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2020.

Recent Accounting Pronouncements

12 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis