AAON : Sidoti & Company, LLC Equity Research Rating Report

Lower Price Target; Lower Earnings EstimatesMarch 3, 2021 | Morning Meeting Note

AAON, Inc. (AAON)

Sidoti & Company, LLC

Member FINRA & SIPC

Temper Our Estimates And Target To $64 (From $69), As AAON Invests For Growth; Market Share Gain Thesis Intact; Note Clean Financial Profile; Maintain NEUTRAL On Valuation

2019 2020	2021E 2022E
OLD	NEW	OLDNEWOLDNEW
Mar. $0.17 $0.41A	$0.30 $0.26 $0.40 $0.38
June 0.26 0.36A	0.32 0.33 0.46 0.43
Sep. 0.27 0.38A	0.37 0.37 0.52 0.48
Dec. 0.33 0.30	$0.27A	0.34 0.34 0.44 0.39
EPS $1.02 $1.46	$1.42	$1.34 $1.30 $1.82 $1.68
P/E	57.6x 44.6x
EBITDA (mil) $89.8 $123.1 $	122.3	$120.6 $120.2 $155.3 $147.8
EV / EBITDA	32.6x 26.5x

Note: 2019-2022E include stock-based compensation expense of $0.14, $0.15, $0.15, and $0.15, respectively. Sum of quarterly EPS may not equal full-year total due to rounding and/or change in share count. The Russell 2000 Index includes AAON. NC = Not covered by Sidoti & Company, LLC.

Year	2013	2014	2015	2016	2017	2018	2019	2020	2021E	2022E
Rev.(Mil.)	$321.1	$356.3	$358.6	$384.0	$405.2	$430.9	$469.3	$514.6	$505.7	$570.2
GAAP EPS	$0.68	$0.80	$0.84	$0.98	$1.03	$0.86	$1.02	$1.49	$1.30	$1.68

Description: AAON, Inc. (www.aaon.com) is a leading domestic manufacturer of standard and custom heating, ventilating and air conditioning (HVAC) units, including unitary rooftops, chillers, air-handling units, make-up air units, heat recovery units, condensing units, coils and boilers. Products target the nonresidential market, specifically, planned replacement (55% of 2020 revenue) and new construction (45% of 2020 revenue). AAON generates almost all revenue from the U.S. Headquarters are in Tulsa, OK.

•  The reduced $64 price target is based on 38x our 2022 EPS estimate of $1.68, equating to 23x our 2022 EBITDA forecast of $148 million. (The prior $69 target was based on 38x our prior 2022 EPS estimate of $1.82).

•  We lower our estimates following AAON's 4Q:20 release and conference call, during which AAON discussed the effects of winter weather on 1Q:21 sales, as well as increased SG&A investment in 2021-2022.

•  We now estimate an EPS decline of 9% to $1.30 (prior $1.34) in 2021, followed by a 29% rebound to $1.68 (prior $1.82) in 2022.

•  Longer-term, AAON will see above-market growth, in our view, owing to company-specific initiatives as well as its product portfolio benefiting from secular trends.

•  AAON had no debt and $82 million in cash at year-end 2020; we estimate a cash balance of $96 million ($1.83) by year-end 2022.

•  Given the shares trading above our price target, we maintain a NEUTRAL rating.

AAON posted adjusted 4Q:20 EPS of $0.27, an 18% decrease year over year, coming in below our forecast of $0.30 and consensus of $0.29. Revenue of $117 million, a 5% decrease compared to the prior year quarter, was slightly below our projection of $118 million and a similar consensus estimate. Lower-than-expected gross profit (down 5% year over year) was the key variance between our forecast and results; gross margins of 29.1% were down 120 basis points compared to 4Q:19 margins of 30.3%. A planned shutdown to AAON's Tulsa, OK, facility during the final week of December 2020 was partly responsible for the lower volume absorption and increased repairs and maintenance expenses that affected gross margins during the quarter. We note our adjusted EPS number of $0.27 excludes a one-time $0.08 benefit from non-recurring insurance proceeds received during the quarter.

Backlog stood at $74 million at the end of the quarter, down 48% year over year and 12% sequentially. But new bookings were up 6% year over year, marking the second straight quarter of year over year order growth, which we see as a positive. Quarter-to-date,

Price Target: $64

Price: $74.92

Key Statistics

Analysts Covering Market Cap (Mil) Enterprise Value

52-Week Range (NASDAQ) 5-Year EPS CAGR

Avg. Daily Trading Volume Shares Out (Mil)

Float Shares (Mil) Insider Ownership Institutional Holdings

Annualized Dividend Dividend Yield

FCF Per Share (2022E) FCF Yield (2022E)

Net Cash Per Share (2022E)

Price to Book Value Return on Equity (2022E) Total Debt to Capital Interest Coverage Ratio

Short Interest %

Short Interest Days To Cover Russell 2000

Russell 2000 - Last 12 Months AAON - Last 12 Months

$3,899

187,000

52.287

41.234

25%

$0.38 0.5% $0.79 1.1%

$1.83

17.8%

7.1%

2,232 54.1% 40.7%

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Analyst certification appears on page 7	New York, NY 10036	www.sidoti.com

AAON, INC.

inquiries remain strong, relative to management's expectations.

AAON's management does not give formal guidance, but did discuss its outlook qualitatively. Management noted 1Q:21 orders look abnormally strong, likely due to pull-forward demand from customers attempting to get ahead of a 4% price increase AAON implemented on January 11th. AAON expects its order intake to moderate a bit through the remainder of the first half of 2021, but thinks activity will pick up in the second half of the year. From a cost perspective, SG&A is expected to increase in 2021, relative to 2020, due to increased insurance premiums, medical expenses, and reversal of temporary expense reductions (e.g. travel and marketing) realized in 2020. Notably, although AAON is a large consumer of steel and copper (two commodities whose prices have recently risen considerably), the company does not foresee much cost pressure through 1H:21, as AAON enters into fixed price contracts for its raw materials precisely to limit the impact of price fluctuations. If raw material prices do not moderate as we progress through the 1H:21, then we think AAON may have to consider another price increase to offset input costs pressures.

We adjust our estimates. We now model 2021 EPS of $1.30 (from $1.34) and 2022 EPS of $1.68 (from $1.82). The main EPS change to our 2021 estimate is derived from our downward revision for 1Q:20, owing to nine days of negatively affected sales due to the February winter storms that took place in the Texas/Oklahoma area. For 2022, we are tempering our gross margin forecast as we incorporate rising U.S. inflation across materials and labor, while at the same time raising our SG&A forecast, as we think AAON continues to allocate resources to improve sales. AAON is revamping its go-to-market strategy, leveraging CEO Gary Fields' expertise in HVAC equipment sales to strengthen the sales channel. We also think AAON's core semi-custom equipment product lines will outpace overall market growth, given customers' increased focus on (1) improving the energy efficiency of non-residential buildings, and (2) improving indoor air quality (IAQ) to address COVID-19 challenges. Important to note is we maintain our 2022 revenue forecast of $570 million, or 13% growth compared to 2021.

AAON maintains a debt-free balance sheet and generates solid cash flow. At the end of 2020, AAON had $82 million of cash ($1.58 per share) and no debt. The company also has $28 million available on its untapped credit facility. Free cash flow for 2020 totaled $61 million ($1.15 per share), or about an 80% conversion rate to adjusted net income. While the conversion rate is down from 2019's level (113%), we note this is still well above AAON's 5 year-historical average free cash flow conversion rate of 65%. On estimated capital spending of $71 million annually, we project free cash flow of $36 million ($0.67) in 2021 and $42 million ($0.79) in 2022.

Valuation

We maintain a NEUTRAL rating and lower the price target to $64 (from $69), based on 38x our reduced 2022 EPS estimate of $1.68, equating to about 23x our 2022 EBITDA forecast of $148 million. (Previously, we valued AAON shares at 38x our prior 2022 EPS estimate of $1.82 to derive a $69 target). AAON shares rose 41% over the past 12 months, compared with a 54% increase in the Russell 2000 Index. Currently, AAON trades at 45x and 27x our respective 2022 EPS and EBITDA estimates. Given the stock trading above our price target, we maintain a NEUTRAL rating.

Key Risks

Cyclical end-markets

Rising input costs

U.S. economy

Exhibit 1: AAON, Inc. 4Q:20 Variance Analysis
4Q:20 Actual 4Q:20 Estimate Variance % Variance	4Q:19 ActualYoY Change	4Q:20 Consensus
Revenue (thou.) $116,700 $117,671 ($971) (1%)	$122,574	(5%)	$118,500
Gross profit 33,923 35,654 (1,731) (5%)	36,381	(7%)
Margin 29.1% 30.3% -120 bps	29.7% -60 bps
Adjusted Operating income 19,301 21,534 (2,233) (10%)	23,226	(17%)
Margin 16.5% 18.3% -180 bps	18.9% -240 bps
Adjusted EBITDA 25,964 28,034 (2,070) (7%)	28,365	(8%)	27,600
Margin 22.2% 23.8% -160 bps Adjusted net income Profit margin $14,702 12.6% $15,946 13.6% (1,244) (8%) -100 bps Adjusted EPS $0.27 $0.30 ($0.03) (10%)	23.1% -90 bps $17,273 14.1% (15%) -150 bps $0.33 (18%)	$0.29
Source: Sidoti & Co., and Company reports

Sidoti & Company, LLC 2

AAON, INC.

Table 1. AAON, Inc. Income Statement
(in thousands, except where noted) MarAJunASales, net $113,822 $119,437 Cost of sales 88,392 89,233 Gross profit 25,430 30,204 SG&A 13,677 12,912 Other 284 6 Operating income 11,469 17,286 Adjusted operating income 11,469 17,286 EBITDA 17,383 23,132 Adjusted EBITDA 17,383 23,132 Interest expense Other (income) expense (9) (31) 26 (17) Income before income taxes 11,452 17,334 Income tax provision 2,695 3,943 Net Income $8,757 $13,391 Net Income (ex. one-time items) $8,757 $13,391	SepA $113,500 86,090 27,410 12,374 6 15,030 15,030 20,897 20,897 (9) 7 15,032 742 $14,290 $14,290	DecA $122,574 86,193 36,381 2019 $469,333 349,908 119,425 MarA $137,483 94,536 42,947 JunA $125,596 87,465 38,131 SepADecA $134,772 $116,700 93,924 82,777 40,848 33,923 2020A $514,551 358,702 155,849 MarE $112,736 79,930 32,806 JunE $124,340 85,919 38,421 SepEDecE $136,794 $131,871 94,114 90,991 42,680 40,880 2021E $505,741 350,954 154,787 2022E $570,248 385,899 184,349 13,114 41 52,077 337 15,214 (62) 15,939 0 14,716 14,622 1 (6,417) 60,491 (6,478) 13,979 0 14,921 0 16,415 16,352 0 0 61,667 0 65,068 0 23,226 23,226 28,365 28,365 67,011 67,011 89,777 89,777 27,795 27,795 33,797 33,797 22,192 23,442 28,530 29,780 26,131 25,718 26,131 19,301 32,762 32,381 32,762 25,964 101,836 96,669 127,470 122,303 18,827 18,827 25,427 25,427 23,500 23,500 30,200 30,200 26,264 24,528 26,264 24,528 33,064 31,528 33,064 31,528 93,120 93,120 120,220 120,220 119,281 119,281 147,831 147,831 (17) (66) (61) 30 46 27 (19) (32) (10) 2 (15) (31) (88) (51) (25) (25) 10 10 (25) (25) 10 10 (100) (100) 40 40 23,213 67,031 27,829 22,243 26,156 25,747 101,975 18,842 23,515 26,279 24,543 93,180 119,341 5,940 $17,273 $17,273 13,320 $53,711 $53,711 5,976 $21,853 $21,853 4,439 $17,804 $18,805 5,696 6,855 $20,460 $18,892 $20,460 $14,702 22,966 $79,009 $75,819 4,805 $14,037 $14,037 5,996 $17,519 $17,519 6,701 6,258 $19,578 $18,285 $19,578 $18,285 23,761 $69,419 $69,419 30,432 $88,909 $88,909
GAAP diluted EPS Adjusted diluted EPS $0.17 $0.17 $0.26 $0.26 $0.27 $0.33 $0.27 $0.33	$1.02 $1.03	$0.41 $0.41 $0.34 $0.36 $0.38 $0.35 $0.38 $0.27	$1.49 $1.42	$0.26 $0.26 $0.33 $0.33 $0.37 $0.34 $0.37 $0.34	$1.30 $1.30	$1.68 $1.68
Diluted shares outstanding 52,370 52,474 YOY Growth: Revenue 14.9% 9.0%Cost of sales 5.4% 8.9%SG&A 17.4% -1.8% Gross profit 67.3% 9.2% Adjusted operating income 110.4% 19.1%	52,722 0.5% 7.5% -2.3% -16.5% -25.5%	52,701 52,567 -0.19% 52,871 52,750 53,151 53,470 53,061 0.94% 53,426 53,383 53,339 53,296 53,361 0.57% 53,187 -0.33% 9.1% 8.2% 20.8% 5.2% 18.7% -4.8% 9.6% -18.0% -1.0% 1.5% 13.0% -1.7% 12.8% 2.0% 5.9% 7.0% -2.0% 9.1% -4.0% 2.5% -15.5% -1.8% 0.2% 9.9% -2.2% 10.0% 22.3% 8.1% 11.2% 23.4% 18.9% 11.5% 16.2% -8.1% -6.4% 11.5% 11.8% 1.9% 5.5% 30.7% 15.3% 68.9% 26.2% 49.0% -6.8% 30.5% -23.6% 0.8% 4.5% 20.5% -0.7% 19.1% 35.6% 17.0% 142.3% 35.6% 73.9% -16.9% 44.3% -32.3% 0.2% 0.5% 27.1% -3.7% 28.1%
Adjusted EBITDA 81.4% 22.9% -15.0% 29.4%	19.9%	94.4% 28.7% 56.8% -8.5%	36.2%	-24.8% 1.4% 0.9% 21.4%	-1.7%	23.0%
Net income 177.6% 14.5% Adjusted diluted EPS 94.8% 17.2% Margin Analysis: COGS/sales 77.7% 74.7% SG&A/sales 12.0% 10.8% Gross profit margin 22.3% 25.3% Operating margin (ex. one-time items) 10.1% 14.5% Pretax margin 10.1% 14.5% Net margin 7.7% 11.2% Tax rate 23.5% 22.7% Sources: Company reports and Sidoti & Company, LLC estimates	-1.5% -2.1% 75.9% 10.9% 24.1% 13.2% 13.2% 12.6% 4.9%	33.2% 33.4% 26.9% 23.8% 149.5% 141.2% 33.0% 38.5% 43.2% 9.4% 40.7% -18.2% 47.1% 37.9% -35.8% -36.6% -1.6% -8.3% -4.3% -3.2% -2.6% 25.9% -12.1% -8.5% 28.1% 29.2% 70.3% 10.7% 29.7% 18.9% 18.9% 14.1% 25.6% 74.6% 68.8% 69.6% 69.7% 70.9% 11.1% 11.1% 12.7% 10.9% 12.5% 25.4% 31.2% 30.4% 30.3% 29.1% 14.3% 20.2% 17.7% 19.4% 22.0% 14.3% 20.2% 17.7% 19.4% 22.1% 11.4% 15.9% 14.2% 15.2% 16.2% 19.9% 21.5% 20.0% 21.8% 26.6% 69.7% 70.9% 69.1% 68.8% 69.0% 11.8% 12.4% 12.0% 12.0% 12.4% 30.3% 29.1% 30.9% 31.2% 31.0% 19.8% 16.7% 18.9% 19.2% 18.6% 19.8% 16.7% 18.9% 19.2% 18.6% 15.4% 12.5% 14.1% 14.3% 13.9% 22.5% 25.5% 25.5% 25.5% 25.5% 69.4% 67.7% 12.2% 11.4% 30.6% 32.3% 18.4% 20.9% 18.4% 20.9% 13.7% 15.6% 25.5% 25.5%

AAON, INC.

Table 2. AAON, Inc. Cash Flow Statement
(in thousands, except where noted) Mar Jun Cash flows from operating activities Net income $8,757 $15,106	Sep $14,290	1.5% 8.4% 13.0% 29.7% 12.6% 5.7% 5.4% Dec 2019 MarA JunA SepA DecA 2020A 2021E 2022E $15,558 $53,711 $21,853 $17,804 $20,460 $18,892 $79,009 $69,419 $88,909
Depreciation and amortization 5,914 5,846	5,867	5,139	22,766	6,002 6,338 6,631	6,663	25,634	27,100	28,550
Amortization of bond premiums Provision for losses on account receivable Provision for excess and obsolete inventories (Gain)/loss on disposition of assets Share-based compensation - 115 357 284 - 13 796 - 2,030 3,043 Excess tax benefits from stock options exercised Deferred income taxes - 1,887 Other (22) - 2,225 -	- (37) (150) 12 2,785 - 96 (14)	0 0 451 41 3,941 0 1,830 (9)	- 91 1,454 337 11,799 - 6,038 (45)	10 294 (274) (62) 10 (218) 81 - 11 12 117 (40) 1,969 (668) 1 (6,417) 2,351 3,343 - (167) - 5,228 2,852 - 2,796 - 2,615 5,351 45 (27) (19) (35)	43 153 1,108 (6,478) 11,342 - 13,027 (36)	- - - - 11,000 - - -	- - - - 11,000 - - -
Change in assets and liabilities (6,554) (3,914)	12,314	(72)	1,774	7,545 (7,394) (404)	5,265	5,012	(1,029)	(15,638)
Net cash provided by operating activities 12,768 23,115	35,163	26,888	97,925	37,597 25,165 34,233	31,819	128,814	106,489	112,821
Cash flows from investing activities Other Proceeds from sale of property, plant and equipment Investment in certificates of deposit and other - 52 - 7 17 (3,989)	9 4,011	1 12	69 51	6,417 61 12 - 13 - 13 (1) 14	6,417 60 52	- - -	- - -
Capital expenditures (8,772) (8,012)	(14,047)	(6,335)	(37,166)	(21,877) (11,633) (15,445)	(18,847)	(67,802)	(70,700)	(70,700)
Net cash provided by investing activities (8,703) (11,994) Cash flows from financing activites Exercise of stock options 4,010 3,675 Other (588) (403)Repurchase of common stock (4,483) (5,708) Cash dividends paid to stockholders	(10,027) 3,598 (32) (5,246) (8,303)	(6,322) 1,342 6,129 (4,149) (8,342)	(37,046) 12,625 5,106 (19,586) (16,645)	(21,804) (11,620) (15,432) (12,417) 4,497 (953) (11,565) 9,676 (149) 4,346 2,899 (28) (39) (4,372) (5,453) (8,670) (9,910) (9,905)	(61,273) 21,418 (1,169) (30,060) (19,815)	(70,700) - - (12,000) (20,261)	(70,700) - - (12,000) (20,195)
Net cash provided by (used in) financing activities (1,061) (2,436)	(9,983)	(5,020)	(18,500)	(8,021) 5,155 (11,045)	(15,715)	(29,626)	(32,261)	(32,195)
Net change in cash 3,004 8,685 Effects of exchange rate of cash Cash, beginning of period 1,994 4,998	15,153 13,683	15,546 28,836	42,379 1,994	7,772 18,700 7,756 3,687 44,373 52,145 70,845 78,601	37,915 44,373	3,529 82,288	9,926 85,817
Cash, ending of period $4,998 $13,683	$28,836	$44,382	$44,373	$52,145 $70,845 $78,601	$82,288	$82,288	$85,817	$95,743
Free cash flow FCF per share $3,996 $0.08 $15,103 $0.29 Sources: Company reports and Sidoti & Company, LLC estimates	$21,116 $0.40	$20,553 $0.39 60,759 $1.16 $15,720 $0.30 $13,532 $0.26 $18,788 $0.35 $12,972 $0.24 61,012 $1.15 35,789 $0.67 42,121 $0.79