Investment research report for AAON

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description

AAON, Inc. is a leading manufacturer of energy-efficient air conditioning and heating equipment. The company designs, engineers, manufactures, and markets a wide range of commercial and industrial HVAC systems, including rooftop units, air handlers, condensing units, and coils. AAON’s products are known for their high quality, energy efficiency, and innovative features.

Financial Strength and Growth Potential

AAON has demonstrated strong financial performance, with consistent revenue growth, expanding profit margins, and robust cash flow generation. The company maintains a solid balance sheet with low debt levels and ample liquidity, providing financial flexibility to fund growth initiatives. AAON’s growing backlog and strategic investments in capacity expansion position the company well for continued growth in the commercial HVAC market.

Competitive Advantages

AAON’s competitive advantages include its focus on energy-efficient and innovative product offerings, strong pricing power, and operational excellence. The company’s custom manufacturing model and engineering expertise allow it to adapt to customer needs and industry trends. Additionally, AAON’s diversification into new markets, such as data centers and cleanrooms, through strategic acquisitions like BasX Solutions, has expanded its addressable market and reduced cyclicality risks.

Shareholder Value Creation

AAON has a track record of creating value for shareholders through consistent dividend payments, share repurchase programs, and disciplined capital allocation. The company’s high insider ownership and equity-based compensation align the interests of management with those of long-term investors. AAON’s commitment to sustainability initiatives and environmental, social, and governance (ESG) practices further enhances its long-term value proposition.

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Valuation Analysis

PE Ratio

The PE ratio for the company AAON ranges from a low of 18.402663398645053 to a high of 59.26283823500655, with a base case of 38.8327508168258.

PB Ratio

The PB ratio for the company AAON ranges from a low of 4.995796827502458 to a high of 9.765073565135554, with a base case of 7.380435196319006.

EPS Growth

The EPS growth for the company AAON ranges from a low of -3.26% to a high of 16.73%, with a medium case of 10.47%.

DPS Growth

The DPS growth for the company AAON ranges from a low of -0.75% to a high of 7.41%, with a medium case of 4.04%.

Unable to provide price targets since this company’s financials are highly unstable. We recommend not to hold this stock in your portfolio.

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Industry and Competitors Analysis

AAON’s Industry and Competitive Positioning

Based on the information provided, AAON, Inc. operates in the construction industry, specifically in the engineering, manufacturing, and marketing of air conditioning and heating equipment. Some key points about AAON and its competitive positioning:

AAON operates in three segments: AAON Oklahoma (rooftop units, air handlers, etc.), AAON Coil Products, and BasX. Its products are used in various commercial and industrial settings.

Some of AAON’s major competitors in the construction/HVAC equipment space include Quanex Building Products, Gibraltar Industries, Armstrong World Industries, Beacon Roofing Supply, Janus International Group, Trex Company, Apogee Enterprises, Trane Technologies, Masco Corporation, JELD-WEN, The AZEK Company, Interface, PGT Innovations, Carlisle Companies, and Lennox International.

In terms of financial metrics like revenue, gross margins, and net income margins, AAON appears to be performing reasonably well compared to some peers, though there is variation across companies.

AAON has a relatively focused product portfolio in HVAC equipment, while some competitors like Gibraltar, Masco, and Carlisle have more diversified construction product offerings.

With a market cap around $6 billion, AAON is a mid-sized player compared to larger diversified rivals like Trane ($74 billion) but bigger than some niche players.

Overall, AAON seems to have a solid position in the HVAC equipment market within the broader construction industry, competing with a mix of specialized and diversified players across different product segments and geographies.

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Financial Analysis

Financial Strength

AAON has a strong current ratio (around 3), indicating good liquidity and ability to meet short-term obligations. The company has a low debt-equity ratio (below 0.15 in most recent years), suggesting a conservative capital structure and low financial risk. Interest coverage ratios are generally high, indicating the company can comfortably service its debt obligations.

Potential for Growth

Revenue growth has been inconsistent, with some years showing good growth (e.g., 34% in Q1 2022) and others showing declines. Gross profit growth has also been volatile, which could impact future profitability and growth. Analyst estimates suggest moderate revenue growth expectations for 2024 and 2025.

Competitive Advantage

The company appears to have pricing power, as evidenced by its ability to maintain relatively high gross profit margins (around 30-40%). However, the competitive landscape and AAON’s specific competitive advantages are not clear from the financial data alone.

Quality of Management

Return on equity and return on assets have been generally strong, suggesting efficient use of capital and assets. The conservative capital structure and low debt levels could indicate prudent financial management. However, the inconsistent revenue and profit growth patterns may raise questions about management’s ability to drive consistent growth.

Shareholder Friendliness

AAON has paid dividends in some years, but the dividend yield and payout ratio have been relatively low and inconsistent. Share repurchases or other shareholder-friendly initiatives are not evident from the data provided.

Valuation

Price-to-earnings and price-to-book ratios have varied significantly over time, making it difficult to assess valuation based on this data alone. Analyst estimates for 2024 and 2025 earnings could provide a basis for valuation, but a more comprehensive analysis would be needed.

Overall, AAON appears to have a solid financial position with low debt and good profitability metrics. However, its growth trajectory has been uneven, and its competitive advantages, management quality, and shareholder friendliness are not clearly evident from the financial data alone. A more comprehensive analysis, including qualitative factors and industry dynamics, would be needed to fully assess the company’s prospects and valuation.

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Earnings Call Multi-Year Analysis

Strong Demand and Backlog Growth

AAON is experiencing robust demand across multiple end markets, particularly in data centers, semiconductor manufacturing, and education. The company’s backlog has been growing significantly, providing good visibility into future sales.

Pricing Power and Margin Expansion

Despite inflationary pressures, AAON has been able to implement multiple price increases to offset rising costs, indicating strong pricing power. The company expects gross margins to recover to its target range of 28-32% as higher-priced backlog flows through.

Operational Improvements and Capacity Expansion

AAON has made significant investments in expanding production capacity, improving operational efficiencies, and increasing productivity. These initiatives position the company to meet strong demand and drive margin expansion.

Product Innovation and Diversification

The company is focused on developing innovative, energy-efficient products like commercial heat pumps and new refrigerant-based systems. It is also diversifying into new markets like data center cooling solutions and expanding its high-margin parts and services business.

Strategic Acquisitions

The acquisition of BasX Solutions has been accretive to earnings and provided revenue synergies, particularly in the data center and cleanroom markets. AAON appears to be effectively integrating and leveraging acquired businesses.

Financial Strength and Flexibility

AAON maintains a strong balance sheet, low leverage, and healthy cash flow generation, providing financial flexibility to fund growth initiatives and return capital to shareholders.

Potential Headwinds

While the long-term outlook remains positive, AAON faces near-term challenges such as supply chain disruptions, labor shortages, and potential economic slowdowns, which could impact growth and margins.

Overall, AAON appears to be a well-managed company with a strong competitive position, innovative product offerings, and a focus on operational excellence. The company’s ability to navigate near-term challenges, maintain pricing power, and execute on its growth strategies will be crucial for long-term investors.

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Financial Statements Multi Year

Revenue Growth and Profitability

AAON has demonstrated strong revenue growth over the years, driven by a combination of organic growth, price increases, and strategic acquisitions like BASX. However, profitability has faced some pressure due to rising raw material costs, labor challenges, and supply chain disruptions, leading to gross margin declines in certain periods.

Expanding Production Capacity and Capabilities

The company has been actively investing in capital expenditures to expand its production facilities, enhance automation, and increase capacity to support future growth. Acquisitions like BASX have also diversified AAON’s product offerings and end-market exposure, reducing cyclicality risks.

Strong Financial Position and Cash Flow Generation

AAON maintains a solid balance sheet with ample liquidity, low debt levels, and significant available borrowing capacity. The company generates robust operating cash flows, providing financial flexibility to fund growth initiatives and return capital to shareholders.

Shareholder-Friendly Capital Allocation

AAON has consistently returned capital to shareholders through regular dividend payments and share repurchase programs. The company has demonstrated a disciplined approach to capital allocation, balancing investments for growth with shareholder returns.

Backlog and Demand Visibility

AAON’s backlog has reached record levels in recent years, providing good visibility into future revenue and production. Strong demand for the company’s products, driven by factors like price increases and market share gains, supports the growth outlook.

While AAON has faced some near-term profitability challenges due to inflationary pressures, its strong revenue growth, expanding production capabilities, solid financial position, and shareholder-friendly policies position the company well for long-term success in the commercial HVAC industry.

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Insider Trading Analysis

The CEO, Norman H. Asbjornson, has consistently been the largest insider shareholder, owning over 8.5 million shares as of the latest transactions. This indicates strong long-term alignment between the CEO and shareholders.

Several other executives like Gary D. Fields (CFO) and Rony D. Gadiwalla have also built up substantial ownership stakes over time through a mix of awards, purchases, and gifts.

Overall, the insider ownership at AAON appears to be quite high, suggesting the leadership team has a vested long-term interest in the company’s success.

Recent Transactions

In the most recent transactions, there have been a number of stock option exercises and share awards to executives, indicating ongoing equity-based compensation.

There have also been some open market purchases by executives like David Raymond Stewart, suggesting confidence in the company’s prospects.

However, the CEO and CFO have also engaged in some sales, likely for diversification or personal reasons, but the sales have been relatively modest in size compared to their overall holdings.

Implications

The high and growing insider ownership, along with the mix of purchases, awards, and limited sales, signals that the leadership team has a strong long-term orientation and alignment with shareholders.

This should provide investors with confidence that the executives are focused on driving sustainable value creation for the company over the long run.

The recent transactions do not raise any major red flags, as the activity appears to be routine equity compensation and some modest diversification by the insiders.

Overall, the insider trading patterns at AAON suggest a leadership team that is heavily invested in the company’s long-term success, which should be reassuring for long-term investors. The recent transactions do not indicate any major concerns.

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Management Compensation Benchmark Analysis

Alignment with Shareholder Value Creation

The base salary portion of total compensation for AAON’s executives is relatively low, ranging from 14.9% to 28.7% across the reported years. This suggests that a significant portion of their total compensation is tied to variable, performance-based elements like stock awards and incentive plan compensation. This compensation structure appears to be designed to align the executives’ interests with creating long-term shareholder value, as a large portion of their pay is contingent on the company’s financial and stock price performance.

Compensation Benchmarking

Compared to the other companies provided (ROCK, AWI, BECN, JBI, TREX), AAON’s executives have a lower base salary percentage of total compensation, indicating a more performance-oriented pay structure. For example, the average base salary percentage for ROCK, AWI, BECN, JBI, and TREX executives is around 40-45%, significantly higher than the 14.9% to 28.7% range for AAON.

Consistency Over Time

AAON has maintained a similar compensation structure for its executives over the years, with a relatively low base salary portion and a higher emphasis on variable, performance-based pay. This consistency in the pay structure suggests a deliberate and well-thought-out approach to aligning executive incentives with long-term shareholder value creation.

In summary, the executive compensation details for AAON indicate that the company has designed a compensation structure that strongly incentivizes its executives to focus on driving long-term shareholder value. This is a positive sign for long-term investors, as it suggests the leadership team’s interests are closely aligned with those of the shareholders.

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Proxy Statement Analysis

Lack of transparency

Based on the limited information provided in the DEFA14A filing, it is difficult to determine with confidence whether the executives in this company are compensated in a way that aligns with creating long-term shareholder value. The key insight for a long-term investor is the lack of transparency. The filing does not provide detailed information on the specific metrics used to determine executive compensation, making it challenging to assess the alignment of incentives with long-term value creation.

Need for alignment

As a long-term investor, it would be important to understand the extent to which the compensation structure incentivizes executives to focus on driving long-term value growth for shareholders, such as through metrics like total shareholder return, return on invested capital, or growth in intrinsic business value.

Importance of transparency

The limited information provided suggests that the company could improve the transparency of its executive compensation practices. Clear understanding of how executives are incentivized and the rationale behind the compensation structure is crucial for evaluating the alignment with long-term value creation.

Overall, while the filing lacks sufficient details, a long-term investor would want to see a compensation plan that clearly links a significant portion of executive pay to the achievement of long-term, value-creating goals that are well-aligned with shareholder interests.

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News Analysis

Positive Factors

AAON reported record sales and earnings for Q1 2024, Q4 2023, full year 2023, Q2 2022, and 2020, indicating strong financial performance. Backlog levels remain robust, suggesting continued demand for their products. They announced several dividend increases and share buyback programs, returning cash to shareholders. AAON is making progress on sustainability initiatives like adopting new refrigerants, installing solar panels, and setting environmental goals. They are expanding manufacturing facilities to meet demand. AAON partnered with the DOE to accelerate commercial heat pump technology adoption. The stock has hit multiple new 52-week highs recently.

Potential Concerns

They missed earnings estimates in a few quarters like Q1 2024 and Q1 2022, though often still reported record results. Supply chain challenges and rising costs could pressure margins going forward. Economic slowdown could dampen demand for HVAC equipment.

Overall, the frequent records in sales/earnings, dividend increases, sustainability efforts, and strong backlog point to positive long-term fundamentals for AAON. However, investors need to watch for margin pressures from costs and any slowdown in construction/commercial activity impacting demand. The stock’s recent highs suggest optimism, but valuation may be a consideration.

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Technical Indicators Analysis

Next Week Trading

The recent price action and technical indicators suggest a neutral to slightly bearish outlook for the next week. The TEMA (Triple Exponential Moving Average) has been declining, indicating a potential short-term downtrend. The RSI (Relative Strength Index) is in the neutral range, suggesting the stock is not overbought or oversold. A short-term trader may consider taking a cautious approach and waiting for clearer bullish signals before entering new long positions.

Resistance and Support Levels

The 20-day SMA (Simple Moving Average) at around $74.88 and the 50-day SMA at around $81.90 could act as resistance levels. The 200-day SMA at around $71.76 could provide support. A break above the 50-day SMA or a bounce off the 200-day SMA could signal a potential trend reversal.

Short-Term Investor

The recent decline in the TEMA and the neutral RSI reading suggest a cautious short-term outlook. Short-term investors may want to wait for a clearer bullish signal, such as a reversal in the TEMA trend or a breakout above the 50-day SMA, before considering new long positions.

Long-Term Investor

The long-term technical indicators, such as the 200-day SMA, appear to be in a relatively stable uptrend. This, combined with the company’s fundamentals and growth prospects, could make AAON an attractive investment for long-term investors. However, it’s always important to conduct further research and analysis to ensure the investment aligns with your long-term goals and risk tolerance.

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Strong Revenue Growth

AAON’s net sales grew 31.5% to $1.17 billion in 2023, driven by record production rates and successful price increases.

Significant Margin Expansion

Gross margin increased 740 basis points to 34.1% in 2023, due to increased volumes, operational efficiencies, and better overhead absorption.

Robust Cash Flow and Liquidity

The company generated $158.9 million in operating cash flow in 2023. As of December 31, 2023, AAON had $90 million in cash and cash equivalents and $1.59 billion in available borrowing capacity under its revolving credit facility.

Continued Investment for Growth

AAON invested $104.3 million in capital expenditures in 2023, a 93.1% increase compared to 2022, to expand its production capabilities and facilities.

Shareholder Returns

The company repurchased $263 million of its shares in 2023 and increased its quarterly dividend to $0.32 per share on an annualized basis.

Diversified Customer Base

While Texas AirSystems accounted for 13.8% of sales in 2023, AAON’s sales are diversified across other independent sales representatives and end markets.

Successful BASX Integration

The acquisition of BASX in 2021 has contributed to AAON’s growth, with BASX’s net sales increasing 34.5% in 2023.

Inflationary Pressures Managed

AAON has implemented multiple price increases and wage adjustments to offset the impact of rising raw material costs and a tight labor market.

Overall, AAON demonstrated strong operational and financial performance in 2023, with significant growth, margin expansion, and continued investment for the future. The company’s diversified customer base, successful acquisitions, and proactive management of inflationary pressures position it well for long-term success.

Financial Statements Annual 2023 Q2

Strong Revenue Growth

AAON’s total net sales increased by $354.3 million or 66.3% in 2022 compared to 2021. This was driven by both organic growth as well as the addition of inorganic sales from the acquisition of BASX in December 2021.

Improved Profitability

Gross profit increased by $99.7 million or 72.4% in 2022, with the gross profit margin improving by 90 basis points to 26.7%. This was achieved through price increases, operational efficiencies, and the addition of the higher-margin BASX business.

Backlog at Record Levels

AAON’s backlog increased from $260.2 million at the end of 2021 to $548.0 million at the end of 2022, reflecting strong demand across the business.

Increased Investment for Growth

AAON invested $54.0 million in capital expenditures in 2022 and an additional $22.0 million to purchase the BASX manufacturing facility, demonstrating the company’s commitment to expanding its capabilities and capacity to support future growth.

Solid Financial Position

AAON ended 2022 with $5.5 million in cash and cash equivalents and $71.0 million in long-term debt, providing ample liquidity and financial flexibility to fund operations and strategic initiatives.

Shareholder Returns

AAON returned $22.9 million to shareholders through cash dividends in 2022 and repurchased $13.8 million of its common stock, underscoring the company’s focus on creating shareholder value.

Overall, AAON delivered strong financial performance in 2022, driven by robust demand, operational improvements, and strategic investments. The company appears well-positioned to continue capitalizing on favorable market trends in the commercial HVAC industry.

Financial Statements Annual 2022 Q2

Strong revenue growth

Net sales increased 3.9% in 2021 to $534.5 million, driven primarily by price increases that totaled approximately $263 million. The acquisition of BasX in December 2021 also contributed $41 million in net sales for the short period.

Profitability challenges

Gross profit margin declined from 30.3% in 2020 to 25.8% in 2021 due to significant increases in raw material costs, particularly for copper, steel, and aluminum. The company also faced labor and overhead inefficiencies from COVID-19 related absenteeism and supply chain disruptions.

Diversification through BasX acquisition

The acquisition of BasX, a provider of custom engineered air handling systems, exposes AAON to attractive end-markets like data centers and cleanrooms where the company had minimal prior exposure. This diversification could help offset cyclicality in AAON’s core commercial/industrial HVAC markets.

Strong balance sheet and liquidity

The company had $35 million in cash and cash equivalents at the end of 2021 and $582 million in available borrowing capacity under its revolving credit facility. This provides ample financial flexibility to fund growth initiatives and weather potential economic downturns.

Shareholder-friendly capital allocation

AAON continues to return capital to shareholders through a consistent dividend program and share repurchases. The company repurchased $22.5 million of its stock in 2021.

Overall, the financial statements demonstrate AAON’s ability to grow revenue and generate strong cash flows, though near-term profitability has been pressured by inflationary headwinds. The BasX acquisition provides an avenue for diversification, while the company’s solid balance sheet and capital allocation policies should appeal to long-term investors.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Revenue and Profitability

Revenue decreased 1.4% year-over-year for the first quarter of 2024, primarily due to lower production volumes, though this was partially offset by price increases. Gross profit margin improved significantly, increasing from 29.0% in Q1 2023 to 35.2% in Q1 2024. This was driven by the realization of price increases, lower raw material costs, and improved operational efficiencies. Operating income increased 6.2% year-over-year, demonstrating the company’s ability to maintain profitability despite the revenue decline.

Liquidity and Capital Structure

The company has a strong liquidity position, with $28.4 million in unrestricted cash and $1.98 billion in available borrowing capacity under its revolving credit facility as of March 31, 2024. The company has been actively managing its capital structure, with $33.2 million in total debt as of March 31, 2024, and a very low leverage ratio of 0.01x. The company has been investing in its operations, with $38.7 million in capital expenditures during the first quarter of 2024, primarily for capacity expansion and automation initiatives.

Cash Flows and Capital Allocation

The company generated $92.0 million in operating cash flow during the first quarter of 2024, a significant increase from the prior year period. The company has been actively returning capital to shareholders, with $3.0 million in share repurchases during the first quarter of 2024 and a consistent quarterly dividend of $0.08 per share. The company has also been investing in growth initiatives, including the expansion of its Longview, Texas manufacturing facilities through a series of New Markets Tax Credit transactions.

Segment Performance

The AAON Oklahoma segment, the company’s largest, saw a 4.0% increase in revenue and a 26.8% increase in gross profit, demonstrating the strength of the company’s core business. The AAON Coil Products and BASX segments experienced some production timing delays, leading to lower revenue and profitability in the first quarter of 2024 compared to the prior year period.

Overall, AAON appears to be in a strong financial position, with a focus on operational efficiency, strategic investments, and shareholder returns. The company’s ability to maintain profitability and generate robust cash flows during a period of lower revenue growth is a positive sign for long-term investors.

Financial Statements Quarterly 2024 Q1

Strong revenue and earnings growth

The company reported a 28.6% increase in net sales and a 77.0% increase in gross profit for the three months ended September 30, 2023 compared to the prior year period. For the nine months ended September 30, 2023, net sales increased 35.9% and gross profit increased 80.6% compared to the prior year period. This indicates the company is experiencing robust demand for its products and is effectively managing cost pressures.

Improving profitability

Gross profit margin expanded significantly, increasing from 27.0% in Q3 2022 to 37.2% in Q3 2023. For the nine months, gross margin improved from 25.1% to 33.3%. This margin expansion was driven by the company’s ability to raise prices to offset higher material and labor costs, as well as improved operational efficiencies.

Efficient capital allocation

The company has been actively repurchasing its shares, having bought back $26.2 million worth of stock in the first nine months of 2023. This demonstrates disciplined capital allocation and a commitment to enhancing shareholder value. The company also maintains a strong balance sheet, with $9.0 million in cash and $784 million in available borrowing capacity under its revolving credit facility as of September 30, 2023.

Prudent financial management

The company has been able to manage its working capital effectively, with cash flow from operations of $107.1 million in the first nine months of 2023. This provides the company with the financial flexibility to invest in growth initiatives, such as capacity expansions and new product development, while also returning capital to shareholders.

Favorable tax position

The company’s effective tax rate declined from 21.9% in the first nine months of 2022 to 18.4% in the same period of 2023, primarily due to the utilization of investment tax credits and excess tax benefits related to stock-based compensation. This improved tax position should contribute to higher net income going forward.

Overall, the financial statements demonstrate the company’s ability to navigate a challenging operating environment, maintain strong profitability, and efficiently allocate capital, all of which are positive indicators for long-term investors.

Financial Statements Quarterly 2023 Q4

Strong Revenue and Profitability Growth

Net sales increased 360% and 404% for the 3 and 6 months ended June 30, 2023 respectively compared to the prior year periods. This was driven by a combination of price increases and higher organic volume.

Gross profit margin improved significantly, increasing from 22.7% to 33.1% for the 3 months ended June 30, 2023, as the company was able to offset rising material and labor costs through pricing actions.

Operating income margin increased from 9.8% to 19.3% for the 3 months ended June 30, 2023, demonstrating strong operating leverage.

Net income margin improved from 7.6% to 16.1% for the 3 months ended June 30, 2023.

Robust Backlog and Production Capacity

The company’s backlog remains strong at $526 million as of June 30, 2023, down only 4% from the record level at the end of 2022, despite the significant increase in sales.

AAON has made investments to expand its production capacity, which is allowing it to start reducing lead times and normalizing the backlog.

Healthy Balance Sheet and Cash Flows

The company has ample liquidity, with $212 million in cash and cash equivalents and $1.2 billion in available borrowing capacity under its revolving credit facility as of June 30, 2023.

Free cash flow generation remains robust at $25 million for the 6 months ended June 30, 2023.

The company continues to return capital to shareholders through a newly instituted quarterly dividend and an active share repurchase program.

Effective Capital Allocation

AAON has utilized New Markets Tax Credit financing to fund capacity expansion projects at favorable terms, including the potential for future debt forgiveness.

The company’s disciplined approach to capital expenditures, focused on enhancing production capabilities, should support its long-term growth.

Overall, AAON’s strong financial performance, growing production capacity, healthy balance sheet, and prudent capital allocation decisions position the company well for continued success over the long term.

Financial Statements Quarterly 2023 Q3

Strong Revenue Growth

The company saw a 45.5% increase in net sales year-over-year, driven by both organic volume growth (23.5%) and price increases (22%). This indicates robust demand for the company’s products.

Expanding Gross Margins

Gross profit margin improved from 25.2% to 29.0% year-over-year, as the company was able to offset rising material and labor costs through multiple price increases. This suggests the company has pricing power and is effectively managing inflationary pressures.

Healthy Backlog

The company’s backlog increased 95% from the end of 2022 and 300% year-over-year, reaching a record $599.9 million. This provides good visibility into future revenue and production.

Efficient Capital Allocation

The company continues to invest in its operations, with $31.7 million in capital expenditures during the quarter. It also repurchased $1.0 million of its own shares and paid $6.5 million in dividends, demonstrating a balanced approach to capital allocation.

Strong Liquidity and Leverage

The company has $1.16 billion in available borrowing capacity under its $2.0 billion revolving credit facility and a leverage ratio of 0.47x, providing ample financial flexibility to fund growth initiatives and withstand potential economic headwinds.

Overall, the financial statements indicate the company is executing well, with strong demand, expanding profitability, a robust backlog, and a solid financial position – all positive signs for long-term investors.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

Operational Execution

The company has been executing well on its operational strategy, including capacity expansions, product development, and strengthening its sales channel. This positions AAON well to capitalize on growth opportunities, especially in the data center market.

Data Center Opportunity

The data center market is a significant growth driver for the company, with a robust pipeline of opportunities. AAON is positioning itself as a “best-in-class” provider of both airside and liquid cooling solutions for this market.

Refrigerant Transition

The upcoming refrigerant transition presents both challenges and opportunities for AAON. The company seems well-prepared, with a complete portfolio of equipment offering the new refrigerant, and is competitively positioned from a pricing and cost perspective.

Product Innovation

AAON is ahead of the industry in the development of commercial heat pump technology, which positions the company to benefit from the increasing demand for electrification and decarbonization in buildings.

Temporary Moderation in Growth

The company expects near-term growth to moderate due to economic conditions, but remains confident in its long-term growth prospects, targeting 10%+ annual revenue growth.

Financial Strength

AAON maintains a strong balance sheet and cash flow, allowing it to fund its growth initiatives and return capital to shareholders.

Overall, the key insights suggest that AAON is well-positioned for long-term growth, with a solid operational strategy, innovative product offerings, and a significant opportunity in the data center market. However, investors should be mindful of the potential near-term moderation in growth due to economic conditions.

Earnings Call Analysis 2024 Q1

Strong Competitive Position in HVAC Industry

AAON has a strong competitive position in the HVAC industry, with a focus on providing high-quality, innovative, and cost-effective equipment. The company has expanded its total addressable market over the years by being price-competitive while maintaining leadership in performance and quality.

Investments in Production Capacity and Operational Efficiency

The company is making significant investments to increase production capacity and improve operational efficiency across its facilities. This includes expanding manufacturing space, integrating operations, and enhancing the customer experience. These investments position AAON for continued growth.

AAON is well-positioned to capitalize on secular trends in the HVAC industry, such as decarbonization, electrification, and energy efficiency. The company’s new product offerings, like the Alpha Class heat pump, are designed to leverage these market shifts.

Growth in Parts and Service Business

The company’s parts and service business is expected to be a fast-growing and highly profitable segment, with plans to double its contribution to total sales over the next 3-4 years.

While 2024 is expected to be a slower growth year compared to the last two years, AAON is prepared to navigate the potential challenges, such as the refrigerant transition, and maintain its competitive edge.

Strong Financial Position

The company’s strong balance sheet, with low leverage and ample liquidity, provides financial flexibility to fund its growth initiatives.

Overall, AAON appears to be a well-managed company with a solid competitive position, innovative product pipeline, and long-term growth opportunities. The management team’s focus on operational improvements, customer experience, and leveraging industry trends suggests the company is well-positioned for continued success.

Earnings Call Analysis 2023 Q4

Operational Efficiency and Capacity Expansion

AAON has been aggressively investing in production capacity and improving operational efficiencies, which have driven volume growth and margin expansion. The company has been able to manage supply chain disruptions and increase productivity across its major locations.

Pricing Power and Market Share Gains

AAON has been able to increase pricing to offset cost pressures, with pricing expected to contribute mid-single digits to sales growth in 2024. The company’s high-quality, energy-efficient products have become more compelling as the market focuses on decarbonization and electrification, allowing AAON to take market share.

Backlog and Visibility

AAON’s backlog has become more weighted towards orders that will ship beyond the traditional 2-3 months, providing better visibility. The company expects the backlog at the end of September 2023 that is expected to ship within the next calendar year to be one of the largest compared to previous years.

Regulatory Changes as an Opportunity

The upcoming refrigerant regulation changes in 2025 are expected to disrupt the industry, and AAON is well-positioned to take advantage of this with its early adoption of the new refrigerant.

Leadership Transition and Organizational Enhancements

The company is making changes to its leadership team, with Matt Tobolski taking on the role of President and COO, to further strengthen the management team and drive long-term success. AAON has made significant investments in marketing, sales, and IT infrastructure that are yet to be fully recognized financially.

Overall, the key insights suggest that AAON is well-positioned for continued growth and margin expansion, driven by its operational excellence, pricing power, market share gains, and strategic initiatives. The long-term investor should closely monitor the company’s ability to execute on its growth plans and capitalize on industry disruptions.

Earnings Call Analysis 2023 Q3

Strong Demand Across Multiple End Markets

AAON is seeing strong demand across multiple end markets, with particular strength in data centers, clean rooms, and EV/battery facilities. This provides a positive long-term outlook.

Increased Production Capacity

The company has been investing heavily in production capacity, including new equipment and facilities, which has allowed them to increase output and start reducing lead times. This positions them well to meet demand.

Pricing Power and Margin Protection

AAON has been able to raise prices to offset cost inflation, while maintaining a premium pricing position versus competitors. This suggests they have pricing power and can protect margins. The company is proactively managing pricing to maintain a balance between market competitiveness and margin preservation. They are considering smaller, more frequent price increases rather than large one-time hikes.

Opportunity in Refrigerant Transition

The transition to new, lower global warming potential refrigerants in 2025 presents an opportunity for AAON, as they are already well-positioned with products that meet the new standards.

Diversified and Robust Demand

While there are some pockets of weakness in certain end markets like office and retail, overall demand remains robust across AAON’s diversified customer base.

Strong Financial Position

The company’s strong balance sheet and cash flow generation provide flexibility to continue investing in capacity expansion and new product development to drive long-term growth.

Overall, AAON appears to be executing well, investing for the future, and maintaining its competitive position, which should benefit long-term investors.

Earnings Call Analysis 2023 Q2

Robust Demand and Backlog Growth

AAON is experiencing strong demand and continued growth in its backlog, with bookings outpacing production. This suggests the company has a healthy pipeline of future business.

Capacity Expansion and Productivity Improvements

AAON is investing significantly in capital expenditures (over 150% year-over-year growth) to expand production capacity and improve productivity. This indicates the company is positioning itself for continued growth.

Pricing Power and Margin Expansion

AAON has been able to pass on price increases to offset rising costs, and expects gross margins to improve throughout the year. This suggests the company has pricing power and the ability to maintain profitability.

Diversified End Markets

AAON’s demand is broad-based across various sectors, including data centers, semiconductors, education, healthcare, and manufacturing, reducing reliance on any single market.

Cautious Outlook on Supply Chain

While supply chain issues are improving, they still pose some challenges and disruptions to AAON’s operations. This is something to monitor going forward.

Potential Sustainability of Market Share Gains

AAON believes it can maintain the market share gains it has achieved, even as industry lead times normalize, due to factors like improved energy efficiency regulations and the value proposition of its products.

Increased SG&A Investments

AAON is making investments in SG&A to support long-term growth, which may limit operating leverage in the near term, but could position the company for better performance in the future.

Overall, AAON appears to be in a strong position, with robust demand, capacity expansion plans, pricing power, and diversified end markets. However, the company’s ability to navigate supply chain challenges and maintain its market share gains as industry conditions normalize will be important factors to monitor.

Earnings Call Analysis 2023 Q1

Demand Outlook

Demand remains strong across most end markets, with data centers, semiconductor manufacturing, and K-12 education being particularly robust. The company is not seeing the slowdown that many are anticipating in the broader economy. Construction spending and the pipeline of non-residential projects are at historically high levels, supporting continued strong demand.

Pricing and Margins

AAON has been able to increase prices more moderately compared to its competitors due to its high-quality, energy-efficient product offering. This has narrowed the price premium of AAON’s products, making the value proposition more attractive to customers. Gross profit margins have improved significantly and are expected to continue improving in 2023, though there may be some temporary expenses in Q1 that impact the linearity. The company is managing pricing more to the market rather than just to its own cost structure.

Capacity and Production

AAON is aggressively investing in capacity expansion, with $135 million in CapEx planned for 2023, a 150% increase from 2022. The company is ramping up headcount and improving productivity to meet the strong demand, though backlog continues to grow as orders outpace production. Lead times are expected to start coming down in the second half of 2023 as capacity increases.

Parts Business

The parts business was impacted by supply chain issues in 2022 but is expected to reaccelerate as supply chain normalizes. Longer-term, the parts business is seen as a strategic priority with higher gross margins than the overall company.

Analyst/Management Insights

The management team appears to be proactively addressing challenges and positioning the company for long-term growth. The company is providing detailed guidance and transparency on its outlook, which is positive for long-term investors. The planned Investor Day event is an opportunity for investors to gain further insights into the company’s strategy and execution.

Overall, the key insights suggest AAON is well-positioned to capitalize on favorable industry trends, though the company will need to continue executing well to manage the capacity ramp-up and supply chain challenges. The long-term investor should closely monitor the company’s ability to maintain its strong margins and market position as it transitions to a more mainstream player in the industry.

Earnings Call Analysis 2022 Q4

Demand Remains Strong

AAON is experiencing strong demand across multiple end markets, with backlog continuing to grow sequentially. This suggests the company has good visibility into future sales.

Pricing Power and Margin Recovery

AAON has been able to implement price increases to offset cost inflation, and margins are recovering, with the company expecting to reach its target gross margin range of 28-32% in Q4 2022. This indicates the company has pricing power.

Productivity Improvements

The company has been able to increase production through a combination of headcount growth and productivity improvements, which is helping drive margin expansion.

Capacity Expansion

AAON is investing significantly in capacity expansion through capital expenditures, which should enable it to meet strong demand going forward.

Diversification into New Products

The company’s decision to exit certain water-source heat pump product lines suggests it is willing to make strategic changes to focus on its core, higher-margin offerings.

Analyst Questions Imply

The analysts are focused on AAON’s pricing strategy, margin recovery, demand trends, and capacity expansion plans – all of which are important considerations for long-term investors.

Overall, the key insights point to AAON being well-positioned for continued growth, with a focus on maintaining pricing power, improving productivity, and strategically investing in capacity to meet strong market demand.

Earnings Call Analysis 2022 Q3

Demand remains strong

AAON is seeing robust demand across all its end markets, with organic orders up ~60% in the first half of the year. The company’s backlog continues to grow sequentially and is up 164% year-over-year.

Pricing power and margin expansion

AAON has implemented multiple price increases (8% in January, 7% in March, and 1% per month since June) to offset inflationary pressures. The company expects substantial margin expansion in the second half of the year as the higher-priced backlog flows through.

Operational flexibility and efficiency

AAON’s custom manufacturing model and engineering team have allowed the company to adapt well to supply chain challenges. The company is also finding ways to increase capacity within its existing facilities, allowing it to reduce capital expenditures for 2022.

Accretive acquisition of BasX

The acquisition of BasX has been accretive to earnings and the company is seeing faster-than-expected revenue synergies. BasX’s data center and cleanroom end markets are extremely strong, and AAON is leveraging its Longview facility to support BasX’s growth.

Cautious optimism despite macro uncertainty

While AAON is aware of economic headwinds like rising interest rates and labor shortages, the company is not seeing any material signs of a slowdown in its end markets. The company remains confident in its ability to navigate the current environment.

Overall, AAON appears to be executing well, with strong demand, pricing power, operational flexibility, and an accretive acquisition. The company’s long-term outlook remains positive, though investors should monitor any potential impact from a broader economic slowdown.

Earnings Call Analysis 2022 Q2

Strong Operational Performance

AAON has achieved record production levels and improved operational efficiencies, which have enabled them to address supply chain issues and meet strong demand. This suggests the company has a well-managed and adaptable operations team.

Robust Demand and Backlog Growth

AAON has seen a significant acceleration in order growth, with a 150% year-over-year increase in the first quarter. This has led to a record backlog of $461.4 million, up 305% from the prior year. This indicates strong market demand for AAON’s products.

Margin Pressure but Improvement Ahead

Gross margins have been impacted by higher material and freight costs, but the company expects sequential improvement throughout the year, with a target of 28-32% by the end of 2022. This suggests the company is actively managing cost pressures.

Acquisition Integration and Synergies

The acquisition of BasX Solutions appears to be progressing well, with revenue synergies materializing faster than expected. This indicates the company is effectively integrating and leveraging the acquired business.

Diversified Growth Drivers

AAON is seeing broad-based demand across its product lines and end markets, including strong growth in its parts business. This suggests the company has a diversified and resilient business model.

Critical Points:

  • The company’s ability to maintain its strong operational performance and manage cost pressures will be crucial for sustaining profitability.
  • The continued growth in backlog and order intake should be monitored for any signs of slowing demand or order cancellations.
  • The integration and realization of synergies from the BasX acquisition will be an important factor to watch going forward.

Overall, AAON appears to be well-positioned for long-term growth, with a strong operational foundation, diversified demand drivers, and strategic initiatives to enhance its competitive position. However, investors should closely monitor the company’s ability to navigate the current inflationary and supply chain challenges.

Earnings Call Analysis 2022 Q1

Supply Chain Challenges

AAON faced significant supply chain issues in Q4 2021, leading to production constraints, operational inefficiencies, and higher costs. However, the situation has improved in recent months, with January and February being better than the challenging October-November period.

Pricing Power and Margin Recovery

AAON has implemented multiple price increases to offset inflation, but the full impact was not realized in 2021 due to the backlog. The company expects margins to recover to the 30%+ target range, likely in the second half of 2022 as the higher-priced backlog is fulfilled.

Robust Demand and Backlog Growth

AAON’s backlog grew significantly, up 250% year-over-year, reflecting strong demand for its energy-efficient HVAC equipment. The company remains optimistic about its long-term growth prospects, targeting double-digit organic sales growth.

Acquisition of BasX Solutions

The acquisition of BasX Solutions, AAON’s first substantial acquisition in 20 years, is expected to contribute to accelerated growth and attractive returns.

Increased Investment in Marketing and Innovation

AAON is investing more in marketing efforts, including a new showroom trailer and a customer experience center, to better showcase its innovative products and capabilities.

Cautious Near-Term Outlook

While the long-term outlook remains positive, AAON is cautious about the near-term due to ongoing supply chain and inflation challenges, as well as potential impacts from the Russia-Ukraine conflict.

Overall, the key insights suggest that AAON is a well-positioned company with a strong competitive advantage, robust demand, and a focus on innovation and growth. However, the near-term challenges require close monitoring, and the company’s ability to navigate these issues will be crucial for long-term investors.

Earnings Call Analysis 2021 Q4

Production Constraints

AAON faced labor shortages and supply chain disruptions that limited its ability to ramp up production, resulting in lower unit volumes and inefficient cost leverage. This impacted margins in the short-term.

Strong Demand

Despite the production challenges, AAON saw a 60% year-over-year increase in orders in Q3, with a backlog up 114% year-over-year. This suggests robust demand for the company’s products.

Pricing Power

AAON has been able to implement multiple price increases to offset rising material and labor costs, indicating it has pricing power in the market.

New Product Introductions

The company has introduced new water-source heat pumps and air-source heat pumps designed for cold climates, which could drive future growth.

Aftermarket Opportunity

AAON’s parts and services business has seen strong growth, reaching record quarterly sales, suggesting an attractive aftermarket opportunity.

ESG Focus

AAON is emphasizing its sustainability and ESG initiatives, which could be appealing for long-term investors.

Cautious Outlook

While the company is optimistic about the long-term, it expects Q4 2021 sales to be slightly down from Q3, with margins improving as production constraints are resolved.

Overall, the key insights suggest AAON has strong demand for its products, pricing power, and is investing in new product development and aftermarket opportunities. However, the short-term production challenges need to be closely monitored. A long-term investor should focus on the company’s ability to resolve these issues and capitalize on the favorable demand environment.

Earnings Call Analysis 2021 Q3

Robust Demand and Backlog

AAON is experiencing strong demand and a growing backlog, with orders up 70% year-over-year in Q2. The backlog stood at $138 million at the end of Q2, up 35% year-over-year. Management expects this robust demand to continue through the rest of the year.

Operational Efficiency Gains

The company has made significant improvements in manufacturing efficiency, with revenue per plant floor employee up around 8% year-over-year. The new Longview facility is also contributing to higher productivity.

Pricing Power

AAON has implemented price increases of 4% in January and 5% in September to offset inflationary pressures. Management expects these price increases to help maintain or improve gross margins in the second half of the year.

Water-Source Heat Pump Opportunity

AAON sees a significant long-term opportunity in the water-source heat pump market, which it estimates to be around $100 million. The company is working on a new design to better target the replacement market, which makes up 75% of this segment.

Potential Risks

Management highlighted potential risks such as the impact of the Delta variant, continued labor shortages, and supply chain disruptions. However, the company appears to be managing these challenges well so far.

Overall, AAON seems to be in a strong position, with robust demand, operational improvements, pricing power, and a promising new product opportunity. The long-term investor should closely monitor the company’s ability to execute on its growth plans and manage any potential headwinds.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.