What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 133 added, 69 removed, 182 unchanged (53% 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 $2.0 million of our total net sales for the three months just ended and $2.8 million of our sales during the same period of 2020.

Foreign sales were approximately $5.8 million of our total net sales for the six months just ended and $5.3 million of our sales during the same period of 2020.

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 through the first quarter of 2021 is showing signs of improvement compared to 2020.

The new construction market through the second quarter of 2021 is showing signs of improvement compared to 2020.

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 historical higher employee absenteeism, especially in June 2020, in our manufacturing facilities.

We maintained continuous operations during the three months ended March 31, 2021 except for the shut-down for planned maintenance in January and weather related event described in Note 1.

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 isolated higher employee absenteeism, especially in June 2020, in our manufacturing facilities.

We maintained continuous operations during the six months ended June 30, 2021 except for the shutdown for planned maintenance in January and weather related event described in Note 1.

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 when unable to socially distance, performs daily temperature scanning, and performs additional cleaning and sanitation throughout the day and deep cleaning overnight.

Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics.

The Company utilizes sanitation stations and performs additional cleaning and sanitation throughout the day and deep cleaning overnight.

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.

Only the state of Texas is responsible for more than 10% of our revenues.

The outlook for 2021 presents some uncertainty but looks positive as COVID-19 restrictions begin to lessen.

The Architecture Billings Index ("ABI") was down for most of 2020, indicating a decline in construction, which started to impact the new nonresidential construction market in late 2020.

This did slightly affect the Company with a slower order intake and caused us to slow down some of our production in the first quarter.

At the end of March, the ABI published its monthly index making February 2021 the first month since February 2020 that the ABI exceeded 50, indicating an expansion in the market.

Even if construction may decline, our equipment is uniquely positioned to address COVID-19 challenges by providing heightened filtration and sanitation through the use of MERV 13 filters, UV lights and bi-polar ionization installed in the factory.

This slightly impacted the Company with a slower order intake level and caused us to slow down some of our production in the beginning of the first quarter 2021.

However, beginning in February 2021, the ABI index began a historic rebound with the May and June 2021 ABI Index being two of the highest scores in the index's 25-year history.

Even if new construction declines, our equipment is uniquely positioned to address COVID-19 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.

We had unrestricted cash and cash equivalents of $97.0 million as of March 31, 2021.

Our capital expenditures during the three months ended March 31, 2021 were $16.4 million, as compared to $21.9 million for the same period a year ago, and we anticipate our full-year 2021 capital expenditures will total approximately $70.7 million.

Our expansion of our Longview, Texas facility was completed and operational during the first quarter 2021.

We had unrestricted cash and cash equivalents of $111.4 million as of June 30, 2021.

Our capital expenditures during the six months ended June 30, 2021 were $33.2 million, as compared to $33.5 million for the same period a year ago, and we anticipate our full-year 2021 capital expenditures will total approximately $70.7 million.

The expansion of our Longview, Texas facility was completed and operational during the first quarter 2021.

The Company also has $28.2 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.

2 unchanged sentences

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

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.

The price levels of most raw materials were stable prior to 2020, but we are seeing increases in raw material costs which we are managing through price increases to counteract their impact.

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

At March 31, 2021, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 2.5%, 20.4%, 9.9%, and 8.4%, respectively, as compared to the price (twelve month trailing average) at March 31, 2020.

At June 30, 2021, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 10.1%, 49.0%, 7.4%, and 11.2%, respectively, as compared to the price (twelve month trailing average) at June 30, 2020.

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:

• Our first quarter results demonstrated a slowed demand as we started the quarter.

Due to the slowed demand, we shut-down for several days in January and performed planned maintenance.

Then, we encountered extreme weather conditions in February that resulted in additional days of plant shut-down.

• Bookings increased 21% in the first quarter of 2021 compared to 2020 indicating an improved demand for our products.

• Our second quarter 2021 results demonstrated an increased demand for our products with overall units sold increasing approximately 24.6% for the three months ended and 4.3% for the six months ended, respectively, as compared to the same periods last year.

• Bookings increased approximately 70% in the second quarter of 2021 compared to 2020 indicating an improved demand for our products as well as increase in orders in advance of our announced June 1, 2021 price increase.

• Our three months ended June 30, 2021 results demonstrated increased productivity compared to 2020.

Our second quarter of 2020 was impacted by high absenteeism in our production facilities due to COVID-19.

• We invested $33.2 million in capital expenditures, including completing our work on projects such as our Longview, TX expansion and the purchase of additional Salvagnini machines that will increase our sheet metal capacity.

• The first quarter of 2021, had a lower tax rate compared to the first quarter of 2020, due to an increase in our excess tax benefit related to stock awards of $1.8 million.

In 2021, we continue to invest in projects that will improve our production capabilities and efficiencies.

The following table shows our historical backlog levels:

2021 December 31,

2020 March 31,

2020 June 30,

(in thousands)

$ 138,131 $ 74,417 $ 103,508

The Company started 2020 with a high backlog from challenges in maintaining adequate sheet-metal production capacity in 2019.

The Company started to increase its sheet-metal production at the end of 2019 and into 2020 with the addition of new

Salvagnini machines.

This led in part to a all time record sales and earnings for the year-ended December 31, 2020 that helped reduce our backlog.

Since then, the Company improved lead times and reduced our backlog to the current, more manageable level.

The Company started 2020 with a high backlog due to challenges maintaining adequate sheet-metal production capacity in 2019.

The Company started to increase its sheet-metal production capacity at the end of 2019 and into 2020 with the addition

of new Salvagnini machines.

This led in part to all time record sales and earnings for the year-ended December 31, 2020 that helped reduce our backlog at the end of 2020.

In 2021, as a result of our decreased lead time, increase in demand, and increase in orders in advance of our announced June 1, 2021 price increase, bookings increased approximately 70% in the second quarter of 2021 compared to 2020.

Results of Operations

Three Months Ended March 31, 2021 vs.

Three Months Ended March 31, 2020

Three months ended June 30, 2021 vs.

Three months ended June 30, 2020

Three Months Ended

2021 March 31,

2021 June 30,

Rooftop units 4,657 3,746

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Three Months Ended

2021 March 31,

2021 June 30,

Change % Change

2 unchanged sentences

Total units 7,903 6,344 1,559 24.6 %

The first quarter of 2020, benefited from a high backlog that allowed the Company to run at full capacity and set all time record highs for revenues in the first quarter.

The order intake began to slow in late 2020 and the Company intentionally slowed production to keep its backlog at a healthy level.

Additionally, the Company lost production days in January for planned maintenance and in February due to impacts of bad weather.

The second quarter of 2021 benefited from increased demand and increased employee attendance that allowed the Company to run at a higher capacity.

This included a 24.6% increase in total units sold, mostly related to our rooftop units.

Shifts in product mix offset the increases we saw in volume of units.

Cost of Sales

Three Months Ended Percent of Sales

2021 March 31,

2021 June 30,

(in thousands)

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We continue to see overall raw material costs increase.

The decrease in overall production, driven by slowing demand and order intake at the beginning of the period, resulted in unfavorable labor

and overhead inefficiencies, including the Company's ability to absorb certain fixed costs.

This resulted in a overall decrease in gross margin during three months ended March 31, 2021 as compared to 2020.

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

in overall raw material costs, resulted in a slight decrease in gross profit during the three months ended June 30, 2021 as compared to 2020.

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

2021 2020 % Change

5 unchanged sentences

Three Months Ended Percent of Sales

2021 March 31,

2021 June 30,

(in thousands)

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Total SG&A $ 16,895 $ 15,939 11.7 % 12.7 %

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

Insurance increased due to an increase in overall premiums during the period.

The Company's warranty expense continues to improve, with payments decreasing 4.5% in the second quarter of 2021 compared to 2020, after making significant quality control improvements in the past two years.

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

Salaries and benefits are up slightly due to increases in bonuses and employee incentives.

Insurance expense increased due to an increase in overall premiums during the period.

Three Months Ended Effective Tax Rate

2021 March 31,

2021 June 30,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2021 effective tax rate, excluding discrete events, is expected to be approximately 25%.

During the three months ended March 31, 2021, the Company recorded an excess tax benefit of $2.9 million as compared to $1.1 million during the same period in 2020, an increase of 173%.

On May 21, 2021, the State of Oklahoma reduced its corporate tax rate from 6% to 4%.

As a result of these changes, the Company adjusted its state deferred tax assets and liabilities in the second quarter of 2021 using the newly enacted rate for the periods when they are expected to be realized.

Six Months Ended June 30, 2021 vs.

Six Months Ended June 30, 2020

Six Months Ended

2021 June 30,

Rooftop units 7,616 7,807

Condensing units 1,136 854

Air handlers 1,200 1,011

Outdoor mechanical rooms 20 16

Water source heat pumps 3,532 3,262

13,504 12,950

Six Months Ended

2021 June 30,

Change % Change

(in thousands, except unit data)

Net sales $ 259,664 $ 263,079 $ (3,415) (1.3) %

Total units 13,504 12,950 554 4.3 %

The first half of 2020, benefited from a high backlog that allowed the Company to run at full capacity and set all time record highs for revenues in the first quarter of 2020 as well as a strong second quarter.

The order intake began to slow in late 2020 and the Company intentionally slowed production in January 2021 to keep its backlog at a healthy level.

Additionally, the Company lost production days in January for planned maintenance and in February due to impacts of bad weather.

Although overall units sold increased approximately 4.3% for the six months ended 2021 vs 2020, the increase in units were mostly related to our lower sale price per units as compared to the previous period.

Cost of Sales

Six Months Ended Percent of Sales

2021 June 30,

(in thousands)

Cost of sales $ 184,400 $ 182,001 71.0 % 69.2 %

Gross profit 75,264 81,078 29.0 % 30.8 %

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

The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers.

We continue to see overall raw material costs increase.

In addition, the decrease in overall production in early 2021 compared to 2020, driven by slower demand and order intake, resulted in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs in early 2021.

Combined with the increase in overall raw material costs, this resulted in an overall decrease in gross profit during six months ended June 30, 2021 as compared to 2020.

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

2021 2020 % Change

Copper $ 4.02 $ 3.65 10.1 %

Galvanized steel $ 0.76 $ 0.51 49.0 %

Stainless steel $ 1.46 $ 1.36 7.4 %

Aluminum $ 1.98 $ 1.78 11.2 %

Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2021 June 30,

(in thousands)

Warranty $ 3,495 $ 3,302 1.3 % 1.3 %

Profit sharing 5,051 5,691 1.9 % 2.2 %

Salaries & benefits 11,059 10,196 4.3 % 3.9 %

Stock compensation 2,659 2,690 1.0 % 1.0 %

Advertising 467 217 0.2 % 0.1 %

Depreciation 1,334 955 0.5 % 0.4 %

Insurance 1,461 479 0.6 % 0.2 %

Professional fees 1,407 1,254 0.5 % 0.5 %

Donations 226 1,786 0.1 % 0.7 %

Bad debt expense (17) 76 — % — %

Other 4,449 4,507 1.7 % 1.7 %

Total SG&A $ 31,591 $ 31,153 12.2 % 11.8 %

Our SG&A expense is stable year over year.

Insurance expense increased due to an increase in overall premiums during the period.

Donations are down as the second quarter of 2020 had a one time donation of $1.25 million to Winifred Public Schools.

Salaries and benefits are up slightly due to increases in bonuses and employee incentives.

Six Months Ended Effective Tax Rate

2021 June 30,

(in thousands)

Income tax provision $ 6,737 $ 10,415 15.4 % 20.8 %

The Company’s estimated annual 2021 effective tax rate, excluding discrete events, is expected to be approximately 25%.

The six months ended June 30, 2021 had a lower tax rate, compared to 2020, due to an increase in our excess tax benefit related to stock awards of $1.5 million or 78%.

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.

In addition, in May 2021, the State of Oklahoma reduced corporate tax rate from 6% to 4%.

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 $18.0 million from December 31, 2020 to March 31, 2021 and totaled $97.0 million at March 31, 2021.

Revolving Line of Credit - Under the line of credit, there was one standby letter of credit of $1.8 million as of March 31, 2021.

At March 31, 2021, we have $28.2 million of borrowings available under the revolving credit facility.

Working Capital - Our unrestricted cash increased $32.4 million from December 31, 2020 to June 30, 2021 and totaled $111.4 million at June 30, 2021.

Revolving Line of Credit - Under the revolving credit facility, there was one standby letter of credit of $1.8 million as of June 30, 2021.

At June 30, 2021, we have $28.2 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, 2021 and December 31, 2020.

We had no outstanding balance under the revolving credit facility at June 30, 2021 and December 31, 2020.

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, 2021, 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, 2021, our tangible net worth was $373.0 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.

As of June 30, 2021, we were in compliance with our financial covenants related to the new revolving credit facility.

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

At June 30, 2021, our consolidated leverage ratio was 0.01 to 1 and met the requirement of being less than 2 to 1.

Our consolidated total liabilities to tangible net worth ratio was 0.3 to 1, and met the requirement of being less than 2 to 1.

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”).

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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.

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 of AAON, Inc.

stock in their accounts sold to the Company.

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Our repurchase activity is as follows:

Three Months Ended

March 31, 2021 March 31, 2020

Six Months Ended

June 30, 2021 June 30, 2020

(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 March 31, 2021

Inception to June 30, 2021

(in thousands, except share and per share data)

10 unchanged sentences

November 10, 2020 November 27, 2020 December 18, 2020 $0.19

May 17, 2021 June 3, 2021 July 1, 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 2021 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, 2021 and 2020.

The following table reflects the major categories of cash flows for the six months ended June 30, 2021 and 2020.

For additional details, see the consolidated financial statements.

Three Months Ended

2021 March 31,

Six Months Ended

2021 June 30,

(in thousands)

23 unchanged sentences

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

The decrease cash flows from receivables was due to the planned Company shut down during the last week of December 2020 which lowered overall accounts receivable at December 31, 2020.

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

The decrease in cash flows from receivables was due to the increase in sales in June 2021 and due to the lower overall accounts receivable at December 31, 2020, as a result of the planned Company shutdown during the last week of December 2020.

The Company also strategically purchases inventory, when we continue to see overall raw material costs increase, to take advantage of favorable pricing and also to minimize future supply chain disruptions.

Cash Flows Used in Investing Activities

The capital expenditures for 2020 related to the expansion of our Longview, Texas facility, which was completed and became operational during early 2021.

The capital expenditures for 2020 related primarily to the expansion of our Longview, Texas facility, which was completed and became operational during early 2021.

Additionally in 2020, we purchased Salvagnini sheet metal fabrication machines and completed our R&D lab as well as other operational improvements.

2 unchanged sentences

Cash Flows Used in Financing Activities

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

The Company also purchased approximately $5.0 million of our outstanding stock through the open market buyback program (Note 13 ) during the three months ended March 31, 2020.

Stock options exercised fluctuate due to timing of employee exercises.

The Company purchased approximately $5.0 million of our outstanding stock through the open market buyback program (Note 13 ) during the six months ended June 30, 2020.

There were no open market buybacks of our outstanding stock during the six months ended June 30, 2021.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

We had no material contractual purchase obligations as of March 31, 2021.

We had no material contractual purchase obligations as of June 30, 2021.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2021.

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2021.

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