What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 94 added, 72 removed, 235 unchanged (41% 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 $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.

Foreign sales were approximately $8.4 million of our total net sales for the nine months just ended and $11.5 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.

8 unchanged sentences

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.

We continue to emphasize 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.

We maintained continuous operations during the nine months ended September 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 utilizes sanitation stations, requires the use of a facial covering when unable to socially distance, 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 2020.

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

These unexpected employee absences resulted in reduced shipments and longer lead times in the second quarter of 2020.

During the third quarter 2020 employee attendance levels were stronger than previously anticipated.

Additionally, our work force has adapted well to school and childcare related issues.

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.

For the nine months ended September 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 outlook for 2021 continues to present a lot of uncertainty.

The Architecture Billings Index has been down for several months, indicating a decline in construction, which may start to impact the new nonresidential construction market in late 2020.

Although construction may decline, our equipment is uniquely positioned to address COVID challenges by providing heightened filtration and sanitation through the use of MERV 13 filters, UV lights and bi-polar ionization installed in the factory.

With approximately 50% of our total sales already represented by the replacement market, we are confident of our ability to grow our market share in the replacement market while we continue to pursue opportunities in the new construction market.

With our improved lead times, we have been able to continue our planned reduction of our backlog to a more manageable level and we believe this will also allow our order intake to stay consistent but do not see significant growth opportunities in the near term

We had unrestricted cash and cash equivalents of $70.6 million as of September 30, 2020.

Our capital expenditures during the nine months ended September 30, 2020 were $49.0 million, as compared to $30.8 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, Texas facility is on schedule and expected to be operational by January 2021.

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

5 unchanged sentences

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.

We expect our raw material prices to remain stable.

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

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.

The price levels of most raw materials were stable in the past twelve months, but we are beginning to see increases in raw material costs.

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

At September 30, 2020, the price (twelve month trailing average) for copper, galvanized steel and aluminum decreased 4.1%, 2.0% and 2.2% (stainless steel increased 0.8%), respectively, as compared to the price (twelve month trailing average) at September 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 experienced significant employee absenteeism, mostly in June, related to COVID-19 during the quarter that impacted our production.

• We experienced significant employee absenteeism, mostly in June, related to COVID-19 during the nine months ended 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.

Our gross profit percentage improved from 23.9% during the nine months ended in 2019 to 30.6% in 2020.

• We invested $49.0 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.

• Total cash, cash equivalents and restricted cash was $78.6 million at September 30, 2020.

The following table shows our historical backlog levels:

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

(in thousands)

$ 84,885 $ 142,747 $ 165,325

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.

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

The Company started to increase 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.

Since then, the Company has continued to increase its sheet-metal capacity, increase sales, improve lead times and reduce our backlog to a more manageable level.

Results of Operations

Three months ended June 30, 2020 vs.

Three months ended June 30, 2019

Three months ended September 30, 2020 vs.

Three months ended September 30, 2019

Three Months Ended

2020 June 30,

September 30,

2020 September 30,

Rooftop units 4,372 3,520

4 unchanged sentences

Three Months Ended

2020 June 30,

September 30,

2020 September 30,

2019 Change % Change

2 unchanged sentences

Total units 7,352 5,808 1,544 26.6 %

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

Our net sales increased by 18.7% due in part to our price increases in the past year and more so from increases in sheet metal production.

Cost of Sales

Three Months Ended Percent of Sales

2020 June 30,

September 30,

2020 September 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 June 30:

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

2020 2019 % Change

5 unchanged sentences

Three Months Ended Percent of Sales

2020 June 30,

September 30,

2020 September 30,

(in thousands)

11 unchanged sentences

Total SG&A $ 14,716 $ 12,374 10.9 % 10.9 %

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 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.

Profit sharing expenses increased due to our increased earnings for the three months ended 2020 as compared to 2019.

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

Three Months Ended Effective Tax Rate

2020 June 30,

September 30,

2020 September 30,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 24%.

During the three months ended September 2019, upon completion of the Company's 2018 tax return, the Company recorded additional benefit due to higher than expected research and development credit of $0.6 million.

Historically, the Company has taken advantage of the Oklahoma Investment New Jobs Credit ("OK Credit").

This OK Credit allows the Company to take a credit equal to 1% of eligible investments each year for five years, beginning with the year of investment.

The Company determined it could take advantage of an additional 1% tax credit for years in which the Company's location was deemed to be within an enterprise zone.

The additional OK Credit for being in an enterprise zone, or otherwise allowable under Oklahoma law, resulted in a benefit of $0.3 million for 2018 and $0.9 million for our 2015, 2016 and 2017 amended returns, combined.

Results of Operations

Six Months Ended June 30, 2020 vs.

Six Months Ended June 30, 2019

Six Months Ended

2020 June 30,

Nine Months Ended September 30, 2020 vs.

Nine Months Ended September 30, 2019

Nine Months Ended

September 30,

2020 September 30,

Rooftop units 12,179 11,079

4 unchanged sentences

20,302 20,044

Six Months Ended

2020 June 30,

Nine Months Ended

September 30,

2020 September 30,

Change % Change

2 unchanged sentences

Total units 20,302 20,044 258 1.3 %

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.

Our net sales increased by 14.7% due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation allowing increased production in our rooftop units 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,

Nine Months Ended Percent of Sales

September 30,

2020 September 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 June 30:

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

2020 2019 % Change

4 unchanged sentences

Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2020 June 30,

Nine Months Ended Percent of Sales

September 30,

2020 September 30,

(in thousands)

12 unchanged sentences

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.

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

1 unchanged sentence

Asbjornson's transition from CEO to Executive Chairman.

Six Months Ended Effective Tax Rate

2020 June 30,

Nine Months Ended Effective Tax Rate

September 30,

2020 September 30,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 24%.

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.

Historically, the Company has taken advantage of the Oklahoma Investment New Jobs Credit ("OK Credit").

This OK Credit allows the Company to take a credit equal to 1% of eligible investments each year for five years, beginning with the year of investment.

The Company determined it could take advantage of an additional 1% tax credit for years in which the Company's location was deemed to be within an enterprise zone.

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 $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.

Working Capital - Our unrestricted cash increased $43.8 million from December 31, 2019 to September 30, 2020 and totaled $70.6 million at September 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 September 30, 2020.

At September 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 June 30, 2020 and December 31, 2019.

We had no outstanding balance under the revolving credit facility at September 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 June 30, 2020, we were in compliance with all of the covenants under the revolving credit facility.

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

At September 30, 2020, our tangible net worth was $344.9 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.

25 unchanged sentences

Our repurchase activity is as follows:

Six Months Ended

June 30, 2020 June 30, 2019

Nine Months Ended

September 30, 2020 September 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 June 30, 2020

Inception to September 30, 2020

(in thousands, except share and per share data)

13 unchanged sentences

Statement of Cash Flows

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

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

For additional details, see the consolidated financial statements.

Six Months Ended

2020 June 30,

Nine Months Ended

September 30,

2020 September 30,

(in thousands)

13 unchanged sentences

Capital expenditures (48,955) (30,831)

Purchases of investments — (6,000)

Maturities of investments and proceeds from called investments — 6,000

Net cash used in investing activities (48,856) (30,724)

3 unchanged sentences

Employee taxes paid by withholding shares (1,130) (1,023)

Cash dividends paid to stockholders (9,910) (8,303)

Net cash used in financing activities $ (13,911) $ (13,480)

3 unchanged sentences

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.

The Company also has also increased the purchase of inventory to take advantage of current favorable pricing and also to prevent future supply chain disruptions.

Cash Flows Used in Investing Activities

4 unchanged sentences

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 six months ended June 30, 2020.

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

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

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

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

Critical Accounting Policies

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

There have been no material changes in the Company’s critical accounting policies during the nine months ended September 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