AAON INC
For the period ended Jun 30, 2024. Filed Aug 1, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 1, 2024
AAON$57.19+5.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-02.
0000824142-24-000120
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-01.
0000824142-24-000187
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 93 previous paragraphs and 105 current paragraphs.
66 unchanged; 24 reworded; 10 added; 3 removed; 0 previous and 5 current paragraphs rearranged.
Tables are not compared: 11 previous and 14 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (10)
Current report
At June 30, 2024, we had a record backlog of $650.0 million, up sequentially for a third straight quarter. Compared to a year ago, backlog was up 23.5% from $526.2 million, driven by the BASX and AAON Coil Products segments. The increase in bookings for the quarter primarily related to solutions for the data center market.
Current report
•We completed the repurchase of 1.4 million shares for $103.5 million during the six months ended June 30, 2024.
Current report
•We continued construction on our expansion projects for our Longview and Redmond facilities to build out capacity for the growing data center markets.
Current report
For the three months ended June 30, 2024, total net sales increased $29.6 million or 10.4%, due to a increase in volumes of approximately 4.7% and price increases of approximately 5.7%. For thethree months ended June 30, 2024, our BASX segment increased by 58.3% primarily related to data center cooling solutions.
Current report
The 14.4% overall effective tax rate for the three months ended June 30, 2023, was primarily due to the change in our valuation allowance from the discontinuation of our participation in the state of Oklahoma’s manufacturing property investment program. This change will allow the Company to utilize existing credit carryforwards in future tax years, eliminating the need for a valuation allowance against this deferred tax asset. The related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the estimated income tax provision for the three months ended June 30, 2023.
Current report
Segment Operating Results for Six Months Ended June 30, 2024 and Six Months Ended June 30, 2023
Current report
Raw Material Costs
Current report
Selling, General and Administrative Expenses
Current report
Income Taxes
Current report
The 14.5% overall effective tax rate for the six months ended June 30, 2023, was primarily due to the change in our valuation allowance from the discontinuation of our participation in the state of Oklahoma’s manufacturing property investment program. This change will allow the Company to utilize existing credit carryforwards in future tax years, eliminating the need for a valuation allowance against this deferred tax asset. The related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the estimated income tax provision for the six months ended June 30, 2023.
Removed paragraphs (3)
Previous report
Our bookings remain strong. Investments made in our facilities and workforce have significantly improved our capacity and operational efficiencies. Production rates are at all time highs, trimming our backlog down to a more manageable size and allowing our lead times to continue to improve.
Previous report
Lastly, the Company also had a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan were entitled to have shares in AAON, Inc. stock in their accounts sold to the Company. The 401(k) Plan was amended in June 2022 to discontinue this program. No additional shares have been purchased by the Company under this arrangement since June 2022.
Previous report
Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows:
Reworded paragraphs (24)
Previous wording
We are engaged in the engineering, manufacturing, and selling of premium heating, ventilation, and air conditioning equipment consisting primarily of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. These products are marketed and sold to a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets. We sell our products to all 50 states in the United States and certain provinces in Canada. Foreign sales were approximately $7.4 million of our total net sales for the three months ended March 31, 2024 and $12.6 million of our sales during the same period of 2023.
Current wording
We are engaged in the engineering, manufacturing, and selling of premium heating, ventilation, and air conditioning equipment consisting primarily of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. These products are marketed and sold to a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets. We sell our products to all 50 states in the United States and certain provinces in Canada. Foreign sales were approximately $14.5 million of our total net sales for the six months ended June 30, 2024, and $20.3 million of our sales during the same period of 2023.
Previous wording
The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and global economy. At March 31, 2024, the price (year to date average) for copper, galvanized steel, and stainless steel decreased 2.6%, 16.9%, and 18.5%, respectively, as compared to the price (year to date average) at March 31, 2023, while the price (year to date average) for aluminum increased 0.4% as compared to the price (year to date average) at March 31, 2023.
Current wording
The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and global economy. At June 30, 2024, the price (year to date average) for copper, galvanized steel, stainless steel and aluminum decreased 6.7%, 19.4%, 20.7%, and 3.3%, respectively, as compared to the price (year to date average) at June 30, 2023.
Previous wording
We occasionally increase the price of our products to help offset any inflationary headwinds. In 2022, we implemented a recurring 1% monthly price increase beginning June 1, 2022 and ending on April 1, 2023. We reinstated the recurring 1% monthly price increase on October 1, 2023 and carried that through February 1, 2024.
Current wording
We occasionally increase the price of our products to help offset any inflationary headwinds. In 2022, we implemented a recurring 1% monthly price increase beginning June 1, 2022, and ending on April 1, 2023. We reinstated the recurring 1% monthly price increase on October 1, 2023, through February 1, 2024.
Previous wording
•Sales for the three months ended March 31, 2024 decreased 1.4%, respectively, due to decreased production rates during the period as compared to the same period in 2023.
Current wording
•Net sales for the three and six months ended June 30, 2024, increased 10.4% and 4.7%, respectively, compared to the same period in 2023.
Previous wording
•Our gross profit margin for the quarter ended March 31, 2024 of 35.2% increased 620 basis points from the quarter ended March 31, 2023 due to price increases, product mix for operational efficiencies, lower material costs, and better overhead absorption.
Current wording
•Our gross profit margin for three and six months ended June 30, 2024, increased 300 and 460 basis points, respectively, from the three and six months ended June 30, 2023, due to price increases, product mix for operational efficiencies, lower material costs, and better overhead absorption.
Previous wording
As shown in the table below, the cost of raw materials has started to come down but we still have seen inflation in our component parts that typically lag raw materials by 6-18 months. Additionally, in order to retain our existing employees, we have increased our starting wage rate considerably in recent years and continue to award periodic wage increases to our employees. These additional costs have been offset by the various price increases we have put in place in the past two years and increases in our production efficiency that has led to increased overhead absorption.
Current wording
As shown in the table below, the cost of raw materials has started to come down but we still have seen inflation in our component parts that typically lag raw materials by six to 18 months. Additionally, in order to retain our existing employees, we have increased our starting wage rate considerably in recent years and continue to award periodic wage increases to our employees. These additional costs have been offset by the various price increases we have put in place in the past two years and increases in our production efficiency that has led to increased overhead absorption.
Previous wording
The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.6%.
Current wording
The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.2%.
Previous wording
For the three months ended March 31, 2024 total net sales decreased $3.9 million or 1.4%, due to a decrease in volumes of approximately 5.7%, offset by price increases of approximately 4.3%. While our AAON Oklahoma segment increased by 4.0% for the three months ended March 31, 2024, our AAON Coil Products and BASX segments experienced some production timing delays in early 2024 which contributed to the overall decrease in sales.
Current wording
For the six months ended June 30, 2024, total net sales increased $25.8 million or 4.7%, due primarily to increases in price. AAON Coil Products segment experienced some production timing delays in early 2024 which contributed to the overall decrease in sales. BASX continues to see increased demand for data cooling solutions, increasing their sales year-over-year.
Previous wording
Gross profit as a percent of sales increased to 35.2% for the three months ended March 31, 2024 as compared to 29.0% for the three months ended March 31, 2023. As noted above, realization of price increases has improved our margin profile along with the slowing of inflation for raw materials, especially in our AAON Oklahoma segment, improving overall consolidated margin performance. As discussed above, production timing delays at our AAON Coil Products and BASX locations contributed to less overhead absorption and margin performance, which resulted in a period over period decline in gross margin for our BASX segment.
Current wording
Gross profit as a percent of sales increased to 35.7% for the six months ended June 30, 2024, as compared to 31.1% for the six months ended June 30, 2023. As noted above, realization of price increases has improved our margin profile along with the slowing of inflation for raw materials, especially in our AAON Oklahoma and AAON Coil Products segments, improving overall consolidated margin performance. Production timing delays at our BASX location during the first quarter of 2024 contributed to less overhead absorption and margin performance, which resulted in a period over period decline in gross margin for our BASX segment.
Previous wording
Selling, general and administrative expenses increased $12.3 million for the three months ended March 31, 2024 from the prior year period. Salaries and benefits increased $3.1 million or 24.2%, which is primarily attributable to overall increased headcount as well as the the impact of employee pay increases and benefit improvements discussed above. Included in the benefit improvements was a one-time charge of $0.8 million related to integration of BASX benefits. Depreciation and amortization has increased due to increased investments in back office technology and automation. Professional fees increased $3.5 million during the three months ended March 31, 2024 due various professional, regulatory, and legal corporate requirements. Other expenses increased $2.9 million or 56.7% during the three months ended March 31, 2024 due to increased travel, the closing of our New Markets Tax Credit transaction and consulting expenses.
Current wording
Selling, general and administrative expenses increased $19.0 million for the six months ended June 30, 2024, from the prior year period. Salaries and benefits increased $3.8 million or 14.5%, which is primarily attributable to overall increased headcount as well as the the impact of employee pay increases and benefit improvements discussed above. Included in the benefit improvements was a one-time charge of $0.8 million related to integration of BASX benefits. Depreciation and amortization has increased $2.3 million due to investments in back office technology and automation. Professional fees increased $3.9 million during the six months ended June 30, 2024, due to various professional, regulatory, and legal corporate requirements. Other expenses increased $5.2 million or 40.8% during the six months ended June 30, 2024, due to increased travel, bad debts, the closing of our New Markets Tax Credit transaction and consulting expenses.
Previous wording
During the three months ended March 31, 2024, the Company recorded an excess tax benefit of $4.4 million as compared to $3.8 million during the same period in 2023. The excess tax benefit is related to the timing of stock option exercises as a result of our high stock price during the three months ended March 31, 2024 and 2023, respectively.
Current wording
During the six months ended June 30, 2024, the Company recorded an excess tax benefit of $6.7 million as compared to $5.8 million during the same period in 2023. The excess tax benefit is related to the timing of stock option exercises as a result of our high stock price during the six months ended June 30, 2024 and 2023, respectively.
Previous wording
Working Capital - Our unrestricted cash increased $8.1 million from December 31, 2023 to March 31, 2024 and totaled $8.4 million at March 31, 2024. Our restricted cash increased $11.2 million from the closing of our recent New Markets Tax Credit related to our Longview, Texas expansion. We expect most funds will be released from this account by the end of 2024. We have also seen increases in our current income tax payable due to the tax law changes surrounding the capitalization of research and development costs. This has increased our cash paid for income taxes.
Current wording
Working Capital - Our unrestricted cash decreased $0.3 million from December 31, 2023 to June 30, 2024. Our restricted cash increased $3.3 million from the closing of our recent New Markets Tax Credit related to our Longview, Texas expansion. We expect most funds will be released from this account by the end of 2024.
Previous wording
Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides for maximum borrowings of $200.0 million. As of March 31, 2024 we had no amounts outstanding under our Revolver. As of December 31, 2023, we had $38.3 million outstanding under the Revolver. We had two standby letters of credit totaling $2.3 million as of March 31, 2024. At March 31, 2024, we have $197.7 million of borrowings available under the Revolver. The Revolver expires May 27, 2027. We have amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit transactions (Note 16).
Current wording
Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides for maximum borrowings of $200.0 million. As of June 30, 2024 and December 31, 2023, we had $85.9 million and $38.3 million outstanding under the Revolver, respectively. We had two standby letters of credit totaling $2.3 million as of June 30, 2024. At June 30, 2024, we have $111.8 million of borrowings available under the Revolver. The Revolver expires May 27, 2027. We have amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit transactions (Note 16).
Previous wording
Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% and 6.0% for the three months ended March 31, 2024. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three months ended March 31, 2024 and 2023.
Current wording
Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% for both the three and six months ended June 30, 2024, respectively, as compared to 6.3% and 6.2% for the three and six months ended June 30, 2023, respectively. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and six months ended June 30, 2024 and 2023.
Previous wording
At March 31, 2024, we were in compliance with our financial covenants, as defined by the Revolver. These covenants require that we meet certain parameters related to our leverage ratio. At March 31, 2024, our leverage ratio was 0.01 to 1.0, which meets the requirement of not being above 3 to 1.
Current wording
At June 30, 2024, we were in compliance with our financial covenants, as defined by the Revolver. These covenants require that we meet certain parameters related to our leverage ratio. At June 30, 2024, our leverage ratio was 0.3 to 1.0, which meets the requirement of not being above 3 to 1.
Previous wording
31 - in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. The unused net proceeds from the closing of the 2024 NMTC are included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.
Current wording
34 - in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. The unused net proceeds from the closing of the 2024 NMTC are included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.
Previous wording
Stock Repurchases -The Board has authorized one active stock repurchase program for the Company. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market. On February 27, 2024, the Board of Directors approved an updated stock repurchase plan with repurchases under the plan not to exceed $50 million. The current repurchase plan will expire at the Board of Directors' discretion.
Current wording
Stock Repurchases -The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.
Previous wording
The Company repurchases shares of AAON, Inc. stock from employees for payment of statutory tax withholdings on stock transactions. All repurchases from directors or employees are contingent upon Board approval and all shares are repurchased at current market prices.
Current wording
The Company also repurchases shares of AAON, Inc. stock from employees for payment of statutory tax withholdings on stock transactions. All other repurchases from directors or employees are contingent upon Board approval and are repurchased at current market prices.
Previous wording
The following table reflects the major categories of cash flows for the three months ended March 31, 2024 and 2023. For additional details, see the consolidated financial statements.
Current wording
The following table reflects the major categories of cash flows for the six months ended June 30, 2024 and 2023. For additional details, see the consolidated financial statements.
Previous wording
Historically, the Company increased the purchase of inventory to take advantage of favorable pricing opportunities and also to mitigate the impact of future supply chain disruptions on our operations, however, as inflationary and supply chain disruptions have decreased, the Company has been able to reduce inventory levels. Additionally, increases in the timing of our customer prepayment as well as increases in our employee bonuses pools and benefits (as a result of our positive operating results) increased our cash provided by accrued liabilities.
Current wording
Historically, the Company increased the purchase of inventory to take advantage of favorable pricing opportunities and also to mitigate the impact of future supply chain disruptions on our operations, however, as inflationary and supply chain disruptions have decreased, the Company has been able to reduce inventory levels. Additionally, timing of our customer prepayment as well as increases in our employee bonuses pools and benefits (as a result of our positive operating results) increased our cash provided by accrued liabilities during the six months ended June 30, 2023.
Previous wording
The capital expenditures for the three months ended March 31, 2024 relate to our continued investment in our production capabilities. Purchases during the three months ended March 31, 2024 relate to additional infrastructure and machinery for both replacement and growth, additional production space in our Redmond, Oregon and Longview, Texas locations, additional equipment and production capacity in Parkville, Missouri, and additional land in Tulsa, Oklahoma for future growth. We have also made investments to purchase or develop software for internal use in anticipation of future Company growth. The capital expenditure program for 2024 is estimated to be approximately $125.0 million. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.
Current wording
The capital expenditures for the six months ended June 30, 2024, relate to our continued investment in our production capabilities. Purchases during the six months ended June 30, 2024, relate to additional infrastructure and machinery for both replacement and growth, additional production space in our Redmond, Oregon and Longview, Texas locations, additional equipment and production capacity in Parkville, Missouri, and additional land in Tulsa, Oklahoma for future growth. We have also made investments to purchase or develop software for internal use in anticipation of future Company growth. The capital expenditure program for 2024 is estimated to be approximately $125.0 million. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.
Previous wording
Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees. Stock options exercises decreased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.
Current wording
During the six months ended June 30, 2024, we repurchased $100.0 million under our open market share repurchase programs. Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees. Stock options exercises decreased during the six months ended June 30, 2024, compared to the six months ended June 30, 2023.
Previous wording
In 2023, the Company executed a five-year purchase commitment for refrigerants. For the three months ended March 31, 2024 and 2023, the Company made payments of $3.6 million and $2.4 million, respectively, on this contract. Estimated minimum future payments are $8.3 million, $9.1 million, $10.5 million, and $11.2 million for 2024, 2025, 2026, and 2027, respectively. We had no other material contractual purchase obligations as of March 31, 2024.
Current wording
In 2023, the Company executed a five-year purchase commitment for refrigerants. Payments made in satisfaction of the purchase commitment were approximately $3.0 million and $6.6 million the three and six months ended June 30, 2024, respectively, as compared to$2.7 million and $5.1 million for the three and six months ended June 30, 2023, respectively. Estimated minimum future payments are $5.3 million, $9.1 million, $10.5 million, and $11.2 million for 2024, 2025, 2026, and 2027, respectively. We had no other material contractual purchase obligations as of June 30, 2024.
Previous wording
There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2024.
Current wording
There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2024.
Rearranged current paragraphs (5)
Current report — wording carried from elsewhere
Gross profit as a percent of sales increased to 36.1% for the three months ended June 30, 2024, as compared to 33.1% for the three months ended June 30, 2023. As noted above, realization of price increases has improved our margin profile along with the slowing of inflation for raw materials, especially in our AAON Oklahoma and AAON Coil Products segments, improving overall consolidated margin performance. BASX saw a decrease in gross profit improvement as a percent of sales due to expansion related disruptions within the quarter.
Current report — wording carried from elsewhere
Selling, general and administrative expenses increased $6.6 million for the three months ended June 30, 2024, from the prior year period. Depreciation and amortization has increased $1.0 million during the three months ended June 30, 2024, due to increased investments in back office technology and automation. Professional fees increased $0.4 million during the three months ended June 30, 2024, due to various professional, regulatory, and legal corporate requirements. Other expenses increased $2.3 million or 30.0% during the three months ended June 30, 2024, due to increased travel, bad debt and consulting expenses.
Current report — wording carried from elsewhere
As shown in the table below, the cost of raw materials has started to come down but we still have seen inflation in our component parts that typically lag raw materials by six to 18 months. Additionally, in order to retain our existing employees, we have increased our starting wage rate considerably in recent years and continue to award periodic wage increases to our employees. These additional costs have been offset by the various price increases we have put in place in the past two years and increases in our production efficiency that has led to increased overhead absorption.
Current report — wording carried from elsewhere
Six-month average raw material cost per pound as of June 30:
Current report — wording carried from elsewhere
The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.2%.