AAON grows on despite challenges
Tulsa-based AAON Inc., No. 8 in Oklahoma Inc., emerged from its 30th year in business last year growing, but dealing with the lingering effects of increased raw materials costs, labor cost increases, an unwieldy order backlog and production inefficiencies, despite continuing to add capacity.
AAON makes semi-custom commercial and residential heating, air-conditioning and ventilation equipment and trades as AAON on the Nasdaq Stock Market.
AAON earnings per share rose 9% over the year ending June 30, and revenues rose 7.5%. Total return per share increased 52.1% over the same period.
The $2.6 billion company had total revenues of nearly $458.5 million and net income of $50.5 million during the period.
"This past year marked our 30th anniversary in business. We also witnessed our total sales reach an all-time record. Operating margins were restricted by increased inflation affecting both raw material and labor costs," according to founder and CEO Norman H. Asbjornson and President Gary D. Fields.
In the company's annual report in March, Asbjornson and Fields said AAON was "behind the pricing curve" throughout 2018 "due to a backlog in excess of four months’ of shipments rather than the normal two months’ of shipments. In 2018, we began to implement an aggressive pricing posture which we believe will beneficially impact our bottom line for the remainder of 2019 and into 2020."
The executives said the tight labor market have made the recruitment and retention of experienced labor difficult.
"Beginning earlier this year, we initiated new practices that should improve and remedy our hiring and retention efforts," they said. "With a record backlog and a strong incoming order rate, we believe we are on the threshold of sustainable revenue and earnings growth."
- Related to this story
- Article: Per-share revenue growth made Devon Energy No. 6 on the 2019 Oklahoma Inc. list
- Article: Magellan Midstream Partners continues success
- Article: Oklahoma Inc. 2019: How the rankings are calculated
- Article: NGL Energy Partners serves clients both upstream and down
- Article: Paycom's Texas expansion under construction
Sales growth brought growing pains, the executives wrote.
"Inflation of raw material prices and the lack of experienced labor took a significant toll on our operating margins," Asbjornson and Fields said in the report. "During 2018 we incurred raw material price increases of 4.7%, 18.2%, 11.8% and 6.4% in copper, galvanized steel, stainless steel and aluminum, respectively. In an attempt to offset these costs, we implemented three price increases, one in late 2017 and two during the past year. They were admittedly, too little too late."
Despite the price hikes, AAON manufactured and shipped the lower-priced products for all of 2018 and the beginning of 2019.
"We believe inflation is back in the picture. With our aggressive price increases, we are getting the backlog to return to historic profitability," Asbjornson and Fields said. "However, our normal backlog is two times our monthly sales, but due to the economy and the sales improvements we have made, we have in excess of four months’ of business. Therefore, the price increases must work their way through the backlog. The profitability returned in the last half of 2018 and we expect that it will continue to do so in 2019. How fast this occurs will depend upon inflation. Price increases as required will continue."
AAON kept its long-term vision, marking it with the February grand opening of the Norman Asbjornson Innovation Center, a 65-foot-tall, 134,000-square-foot research-and-development laboratory at its Tulsa plant. The lab measures both acoustics and thermal performance of AAON products.
A more recent highlight came in August with groundbreaking on a new facility at AAON's manufacturing plant in Longview, Texas, part of a $28 million capital investment there. The first phase, a 195,000-square-foot building for expanded coil warehouse storage and equipment manufacturing, is expected to be completed in October 2020.
"We are very excited about the decision to expand our Longview plant and the growth opportunities it provides both AAON and the Longview community," Cory Simmons, vice president of AAON Coil Products, said in a release. "Additionally, a new, state-of-the-art manufacturing facility allows us to provide a higher level of service to our customers and team members, supporting our vision for growth."
Fields called the expansion "an important step in growing our overall company."
However, Wall Street equity analyst Sidoti & Co. lowered its earnings estimates and issued a neutral recommendation in an October research note, citing an apparent slowdown in demand for AAON's products and the likelihood of continued operational inefficiencies as manufacturing capacity is installed.
"After speaking with management and accounting for industry trends, we trim our estimates, noting that efficiencies continued to lag slightly in recent months as the company is bringing on additional capacity," Sidoti & Co. reported. "Management had four new machines on order heading into last quarter and announced an additional four would be ordered to increase capacity at company facilities. Before the first machine was installed, efficiencies continued to lag in July and August, which causes us to lower our estimates.
Still, the analysts said they expect the company will meet its targets.
"Despite the lower adjustments, our estimates are still optimistic, in our opinion, as the new capacity should be fully installed by (the second quarter of 2020), providing AAON with roughly 20% additional capacity over that indicated by peak monthly orders," the Sidoti & Co. report stated.
"As a result, we think the company can achieve the higher end of the gross margin target of 28% to 32% by mid-2020. We will continue to monitor order trends closely, as we believe some portion of the company’s record backlog is attributable to less-than-favorable gross margins, as price-cost dynamics were distorted by tariff-related issues and commodities pricing."