What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 104 added, 83 removed, 232 unchanged (45% 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 $5.8 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.

Foreign sales were approximately $11.0 million of our total net sales for the nine months just ended and $8.4 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 second quarter of 2021 is showing signs of improvement compared to 2020.

The new construction market through the third quarter of 2021 has improved compared to 2020.

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

1 unchanged sentence

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.

Our Longview, TX facility suffered from COVID-19 related absenteeism in the quarter ending September 30, 2021, which reduced the production of coils that were needed to complete units at our Tulsa, OK facility.

We maintained continuous operations during the nine months ended September 30, 2021 except for the shutdown for planned maintenance in January 2021 and the February 2021 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 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.

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

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 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.

Because we have managed to maintain almost continuous operations with reasonable lead times through 2020 and 2021, our order intake is strong and has increased throughout 2021 as the economy has opened back up and COVID-19 restrictions have lessened.

We expect to increase our production for the remainder of 2021 and into 2022.

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 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.

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.

While the ABI did start to decline in June and July, August and September were two straight months of increases.

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 $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.

We had unrestricted cash and cash equivalents of $101.8 million as of September 30, 2021.

Our capital expenditures during the nine months ended September 30, 2021 were $42.6 million, as compared to $49.0 million for the same period a year ago, and we anticipate our full-year 2021 capital expenditures will total approximately $60.0 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.

Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor.

In July 2021, we increased starting wages for our production workforce by 7.0%.

We also have put a cost of living increase of 3.5% in place in October for all employees below the Director level.

We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.

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 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 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.

Although, we have experienced some supply chain challenges, due to our strong vendor relationships as well as our favorable liquidity position, we have experienced minimal disruption to our supply chain due to COVID-19.

While our supply chain disruptions to date have been minimal and intermittent, they have impacted the production process which creates inefficiencies and can deteriorate our profit margins.

The price levels of most raw materials were stable prior to 2020, but we continue to see 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 and subsequent inflation has on our supply chain.

At September 30, 2021, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 38.3%, 79.5%, 39.8%, and 56.7%, respectively, as compared to the price (twelve month trailing average) at September 30, 2020.

We anticipate that the average cost of raw materials and certain components purchased, including the impact of rising inflation and tariffs, for the remainder of 2021 will be higher than the costs experienced during the year ended December 31, 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 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.

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

• Our backlog is at a record level, 144% higher than it was at December 31, 2020 due to our reasonable lead times and quality products.

• Our third quarter 2021 results demonstrated a positive performance, despite the external challenges, with sales increasing approximately 2.8% for the three months ended as compared to the same period last year.

• Bookings increased approximately 60% in the third quarter of 2021 compared to 2020 indicating an improved demand for our products as well as increase in orders in advance of our announced September 2021 price increases.

• Our warranty expense decreased 38% in the third quarter of 2021 compared to 2020 as a result of the quality control efforts the Company has put in place in the past few years.

The following table shows our historical backlog levels:

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

(in thousands)

1 unchanged sentence

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.

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.

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 and September 1, 2021 price increase, bookings increased approximately 60% in the third quarter of 2021 compared to 2020.

Results of Operations

Three months ended June 30, 2021 vs.

Three months ended June 30, 2020

Three months ended September 30, 2021 vs.

Three months ended September 30, 2020

Three Months Ended

2021 June 30,

September 30,

2021 September 30,

Rooftop units 3,746 4,372

4 unchanged sentences

Three Months Ended

2021 June 30,

September 30,

2021 September 30,

Change % Change

2 unchanged sentences

Total units 6,530 7,352 (822) (11.2) %

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.

While the third quarter of 2021 benefited from an increased demand, challenges hiring additional production labor hindered our ability to produce at the same capacity during the three months ended September 30, 2021 as compared to September 30, 2020.

This resulted in an 11.2% decrease in total units sold, mostly related to our rooftop units.

The quarter benefited from our January and June 2021 price increases, which realized approximately a 5.0% increase in sales in the period.

Our parts sales were also up 15% for the quarter that helped increase our net sales for the period.

Cost of Sales

Three Months Ended Percent of Sales

2021 June 30,

September 30,

2021 September 30,

(in thousands)

3 unchanged sentences

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 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:

The increase in raw material costs were approximately 6.9% of sales for the quarter which were not completely offset by the realization of price increases we put in place during the year.

The tightening labor market has caused us to also implement raises in entry level wages ahead of realizing our price increases.

The reduction in overall unit production, due to challenges hiring additional production labor, resulted in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs.

Lastly, the small disruptions to our production schedule from supply chain delays negatively impacted our production efficiency.

All of these factors resulted in a decrease in gross profit during the three months ended September 30, 2021 as compared to 2020.

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

2021 2020 % Change

5 unchanged sentences

Three Months Ended Percent of Sales

2021 June 30,

September 30,

2021 September 30,

(in thousands)

11 unchanged sentences

Total SG&A $ 15,897 $ 14,716 11.5 % 10.9 %

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.

The Company's warranty expense continues to improve after making significant quality control improvements in the past two years.

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

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

Three Months Ended Effective Tax Rate

2021 June 30,

September 30,

2021 September 30,

(in thousands)

1 unchanged sentence

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

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,

The effective rate is lower than our estimated rate due to the impact related to excess tax benefits.

Nine Months Ended September 30, 2021 vs.

Nine Months Ended September 30, 2020

Nine Months Ended

September 30,

2021 September 30,

Rooftop units 11,362 12,179

4 unchanged sentences

20,034 20,302

Six Months Ended

2021 June 30,

Nine Months Ended

September 30,

2021 September 30,

Change % Change

2 unchanged sentences

Total units 20,034 20,302 (268) (1.3) %

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.

In 2021, the Company lost production days in January for planned maintenance and in February due to impacts of bad weather.

While the second and third quarter of 2021 benefited from an increasing demand, challenges hiring additional production labor hindered our ability to produce units at the same capacity in 2020.

Although overall units sold decreased approximately 1.3% for the nine months ended September 30 2021 vs 2020, sales increased 0.1% due primarily to our January 2021 price increase.

The Company's June price increase has been slower to realize given our large backlog and slightly longer lead times.

Cost of Sales

Six Months Ended Percent of Sales

2021 June 30,

Nine Months Ended Percent of Sales

September 30,

2021 September 30,

(in thousands)

4 unchanged sentences

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:

reduction in overall unit production due to challenges hiring additional production labor, resulting in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs.

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

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

2021 2020 % Change

4 unchanged sentences

Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2021 June 30,

Nine Months Ended Percent of Sales

September 30,

2021 September 30,

(in thousands)

11 unchanged sentences

Total SG&A $ 47,488 $ 45,869 11.9 % 11.5 %

Our SG&A expense is stable year over year.

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

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

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,

Nine Months Ended Effective Tax Rate

September 30,

2021 September 30,

(in thousands)

1 unchanged sentence

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 nine months ended September 30, 2021 had a lower tax rate, compared to 2020, due to an increase in our excess tax benefit related to stock awards of $1.3 million or 54%.

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.

3 unchanged sentences

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 $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.

Working Capital - Our unrestricted cash increased $22.8 million from December 31, 2020 to September 30, 2021 and totaled $101.8 million at September 30, 2021.

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

At September 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 June 30, 2021 and December 31, 2020.

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

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

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

As of September 30, 2021, we were in compliance with our financial covenants related to the 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.

At September 30, 2021, our consolidated leverage ratio was 0.02 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.

25 unchanged sentences

Our repurchase activity is as follows:

Six Months Ended

June 30, 2021 June 30, 2020

Nine Months Ended

September 30, 2021 September 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 June 30, 2021

Inception to September 30, 2021

(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, 2021 and 2020.

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

For additional details, see the consolidated financial statements.

Six Months Ended

2021 June 30,

Nine Months Ended

September 30,

2021 September 30,

(in thousands)

18 unchanged sentences

Employee taxes paid by withholding shares (1,537) (1,130)

Net cash provide by (used in) financing activities $ 45 $ (2,866)

Cash dividends paid to stockholders (9,964) (9,910)

Net cash used in financing activities $ (11,942) $ (13,911)

Cash Flows Provided by Operating Activities

2 unchanged sentences

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

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.

The decrease in cash flows from receivables was due to the increase in sales in the third quarter of 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 decrease in cash flows from inventory and increase in cash flows from accounts payable is due the increased raw materials pricing and timing of payments.

The Company strategically purchases inventory to take advantage of favorable pricing and also to minimize future supply chain disruptions.

Cash Flows Used in Investing Activities

5 unchanged sentences

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.

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

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

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

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

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

Critical Accounting Policies

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

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