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Aaon Inc (AAON 2.11%)
Q1Â 2020 Earnings Call
May 7, 2020, 4:15 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen. Welcome to AAON Inc. first quarter sales and earnings call. [Operator Instructions]
I would like to turn the meeting over to Mr. Gary Fields.
Gary D. Fields -- President and Director
Good afternoon. I'd like to start by reading a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year. Such statement is necessarily forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause Aaon's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.
Now I'd like to turn it over to Scott Asbjornson to discuss the first quarter numbers.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Welcome to our conference call. I'd like to begin by discussing comparative results of the three months ended March 31, 2020, versus March 31, 2019. Net sales were up 20.8% to $137.5 million from $113.8 million. Net sales for the quarter are up due primarily to our increased sheet metal production from the additional Salvagnini machines that were placed into operation.
Our gross profit increased 68.9% to $42.9 million from $25.4 million. As a percentage of sales gross profit was 31.2% in the quarter just ended compared to 22.3% in 2019. We continue to see overall raw material cost decrease. The company has improved its labor and overhead efficiencies through increased production and absorption of fixed costs.
Selling, general and administrative expenses increased 11.2% to $15.2 million from $13.7 million in 2019. I additionally, as a percentage of sales, SG&A decreased to 11.1% of total sales in the quarter just ended from 12% in 2019. Income from operations increased 142.3% to $27.8 million or 20.2% of sales from $11.5 million or 10.1% of sales in 2019.
Our effective tax rate decreased to 21.5% from 23.5%. The company's estimated annual 2020 effective tax rate, excluding discrete events, is expected to be approximately 25%.
Net income increased to $21.9 million or 15.9% of sales compared to $8.8 million or 7.7% of sales in 2019.
Diluted earnings per share increased by 141.2% to $0.41 per share from $0.17 per share. Diluted earnings per share were based on 52,871,000 shares versus 52,370,000 shares in the same period a year ago.
At this time, I'll turn it over to Rebecca Thompson, our Chief Accounting Officer and Treasurer, to discuss our balance sheet.
Rebecca A. Thompson -- Chief Accounting Officer and Treasurer
Thank you, Scott. Looking at the balance sheet. You'll see that we had a working capital balance of $132.8 million versus $131.5 million at December 31, 2019. Unrestricted cash totaled $35.7 million at March 31, 2020. Our current ratio is approximately 3.1:1.
Our capital expenditures were $21.9 million. We expect capital expenditures for the year to be approximately $73.2 million. The company had stock repurchases of $5.1 million during the first quarter.
Shareholders' equity per diluted share is $5.79 at March 31, 2020, compared to $5.51 at December 31, 2019.
I'd now like to turn the call over to Gary Fields, our President.
Gary D. Fields -- President and Director
I'd like to talk about some of the sales activity and some of the general environment that we're working in right now. So AAON was a company that was deemed an essential manufacturer, so we've continued to operate through some of the shutdowns that have occurred for others. Our essential nature was proven when we were tasked with providing over 4,000 tons of air conditioning units, a total of 80 50-ton units for two projects in New York. Stony Brook was one of them, and Westbury was the other one. We received the request for that equipment on the 29th of March and within nine days, all of it was on-site. So that was a rather heroic effort by all of our AAON employees and all of the sales channel participants that had to work their portion of the project.
We've continued with a total of 124 units that have gone to the specific coronavirus emergency temporary facilities. But beyond that, we're seeing some new activity recently for support facilities going into the future. We received an order just this week for a project in the state of Maine, it's called Puritan. And it's these people make the swabs that we've heard so much about from President Trump's coronavirus task force that are used in the quick turnaround testing. That project also required us to manufacture specific units for the specific application and provide those in about a week or 10 days. So the order came in just a couple of days ago, and it will go out in the next couple of days.
Now I want to talk about our water-source heat pumps a little bit. So our numbers of water-source heat pumps in Q1 were less than what they had been on a quarterly basis. We had some growing pains in that heat pump business. Some of those growing pains were related to components that we selected, some material suppliers, some of them were just the growing pains that occur when you're developing at a quick rate a new product. So we lost just a little bit of momentum. But we began to regain that. The lead time is very short, so all of this happened rather quickly. At the April bookings on water-source heat pumps strengthened considerably, so the momentum is going the right way. So we've reestablished our momentum, and we look for that to get back on track to improving.
But at the same time, we evaluated the entire team that we have here on staff at AAON, realizing that this was a product that was a bit different than our legacy product and realizing that we didn't have as broad-based of experienced and knowledgeable people in that to flesh out our entire strategic plan for that. So we've been negotiating with some people that were in the final throes of negotiating with that have extensive experience in water-source heat pumps to join our team. And we expect in the next week or 10 days to have these people join our team. And this will allow us to execute the strategic plan that we put together and achieve things that we had talked about for quite a while with this.
The next thing I want to talk about is our Norman Asbjornson Innovation Center. Those of you that have followed us for a few years know that we built a magnificent laboratory. And we've had a grand opening of it and so on and so forth. The physical facility itself is unequaled in the world. The capabilities of that are just not available anywhere else. And we had a core group of people that had been with the company for many years that had great experience with that, but they didn't have enough bandwidth in order to utilize that laboratory to its full capabilities as far as production capacity. But they for the last two years, they've been building that knowledge base in that team. And we finally got to a spot where we could spread those experienced people out time-wise and put on more shifts. So we are, in the next few days, enabling an around the clock, 7-day a week operation of the Norman Asbjornson Innovation Center.
So this goes hand-in-hand with our efforts to accelerate our footprint with water-source heat pumps. And all of it dovetails very nicely together. And I'll have to say from a timing standpoint, concerning the innovation center, that we're doing it just in time, but we didn't wait too long. There was really no effective way to do it any quicker than we did due to construction schedule and training and so on and so forth. So we're very excited about the potential of compressing our road map product development road map. The schedule that we have will be accelerated greatly by this new activity.
I've spoken with our Director of Sales, and he's pooled all of his regional sales managers and they have updated me. They maintain a very close relationship with the sales channel. And I've had a lot of personal phone calls with the sales channel myself, just seeing, where are we? This coronavirus has caused a lot of angst in the world. And so where are we at? Well, at the end of Q1, we were at 90% of our plan on booked orders. So there was a slight impact from it, but it wasn't anything substantial. When they pooled these people to see, were those projects canceled or were they delayed? The overwhelming response is, delayed, not canceled. There's been very, very few cancellations in the pipeline. We've had essentially no cancellations that I'm aware of in our backlog. It's just that the forward-looking pipeline, the forelog, if you will. There was one or two projects that I was made aware of that they had anticipated being July, August, September projects that they've delayed until 2021, but they're very insignificant in the overall scope of things.
As I read through the regional sales managers' comments, it's unanimous, market strength of commercial, healthcare, industrial is very good. Market strength for hospitality has been hit the most. We have been fortunate over the years to participate in a lot of hotels and casinos, both. And some of the casino projects that we knew were out there in the future are on hold. And some of the hotels have hit the pause button as well. I think that's very understandable. We've spoken over the last few quarters about the grow market. The grow market, according to each of the sales managers that participate with their sales channel in that remains neutral. K-12 has been neutral to increasing. And in the Northeast, things are a little bit more constrained than they are in the rest of the United States in that the schools are even at a pause right now. However, I did talk to one of the major players in our sales channel. He's in Philadelphia and Harrisburg, Pennsylvania. And he gave me notice last night that they have quite a few schools that they're about to be able to get released. So not exactly as dire as what the initial thoughts might have been. So overall, we're looking at bookings for the remainder of the year maybe not being exactly on plan, but not being substantially lower-than-planned either. There'll be off just a little bit, it looks like.
When I look at the various markets, I just told you a bit about those. The one thing that I want to emphasize that I've seen some clarity on is healthcare. In this coronavirus situation, it was recognized that while in the urban areas, they have large hospitals and they were able to construct some of these temporary facilities, either using large convention centers, the ship in the case of New York City, or the tents that we participated in. But when you got into the more distributed areas across North America, the rural areas, the suburban areas, then there was a substantial weakness. Over the last several years, there's been a lot of consolidation of healthcare facilities to these urban areas, leaving people to drive maybe as much as 150 miles to get any appropriate care. We're already seeing activity in these areas to reestablish some of those facilities that were mothballed, which gives us an opportunity to update them...
Okay. So I'm not sure how we were interrupted there. So the story on healthcare is that we're going to see a lot of facilities that were mothballed that are going to be renovated and put back in operation. Some of these have sat dormant for quite a while, and it will be a good replacement opportunity. This is an area that AAON participates in substantially with our legacy products.
So I want to talk about the backlog next. March 31, it was $119.6 million versus $166.6 million in one year ago. The $166.6 million, while it seems attractive, was actually a bit detrimental. The real crux of that was that we didn't have our production rate high enough to meet the demand and so we had accumulated and our lead times had lengthened. With the addition of all the Salvagnini machines and appropriate labor force efficiency gains, then, we have been able to increase our production rates considerably. And thus, we've been able to reduce the backlog, which is a favorable thing so that we can get it in alignment with lead time expectations. Since the beginning of Q4, we've begun reducing lead times our published lead times. We've had multiple announcements of lead time reductions. And I would say today that we're probably ranging about probably about 60% less in shorter lead times than we were a year ago. Does that look about yes. eight weeks is our goal. And we're probably we have some products that are six to eight weeks right now. But if you took the whole tranche, we're probably closer to 10 weeks right now. Is that about right, Scott? Yes. Okay. So our goal is eight weeks. While our goal is not to bring in less orders, it's to produce more. So we have put a lot of those Salvagnini machines in and in operation. We have four more yet coming throughout the year. So our production capacity has not yet peaked. And we will be monitoring the two things as they come together, the order volume and the production capacity, but it's very manageable.
So I want to talk a little bit about the supply chain. We've had some minor, I'll call them, dustups with supply chain. They've all been manageable. One of the primary things that's occurred is we have various models of compressors available in our units, going from a base model, and then there's at least 3, we'll call them, upgrade models, of various duties, while we've had a few units that we've upgraded one or two models of compressors in order to produce the equipment because of the availability of them. The other thing that we've done is we've worked with our sales channel and when we had any difficulty due to supply chain, and we've been able to help them work through the custom selections and select something that still met the project requirements. And we were able to meet the needs with the supply chain. Speaking to our purchasing department earlier today, the outlook is fairly stable, but it's not without its challenges, I'll say. But it's all manageable.
The next thing I'd like to talk about is attendance and disruptions. So at our Longview facility, early on in the kind of the row of this coronavirus, we had one employee in the office in Longview at AAON Coil Products that began to show symptoms. And that person quarantined themselves right away, and ended up being positive. And fortunately, they came through it just fine. But we contact-traced everyone that she had been in contact with, and we quarantined those people, and there were no further positive cases. So we've only experienced, knock on wood, one case, and that was in the Longview facility. Longview being one of the company's it's a separate entity, AAON Coil Products, and it has less than it has fewer than 500 employees. So the rules that the government made for that were very favorable for the employees to take off and still be paid quite nicely by these programs. Our attendance went down to a low of 42%. But as of today, we're back up to 80%, and it's been trending upward for the last two nearly well, about two weeks solid, yes. And we're expecting that to continue to trend up.
But there's one other interesting aspect of it. While we were had the opportunity to be on the television news stations to talk about our participation in these temporary hospitals, our newly appointed President of AAON Coil Products, Gene Stewart, was interviewed and they gave him the opportunity to say that we were hiring and that we needed to hire 100 people in order to meet our production requirements. Within four or five days, we had 400 applicants. Now the only problem with that is, is in this situation with social distancing and all, it's very hard to get these people interviewed and onboarded in the same manner that you would in prior to coronavirus. So we have been working on that diligently. So while we're only at 80% of our desired attendance right now, in addition to those people that we expect to be coming back, we'll be hiring more people on top of that. And that effort is going fairly well as far as I know.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Yes.
Gary D. Fields -- President and Director
Scott's verifying that for me. It's going quite well. In Tulsa, we have 0 cases of coronavirus, again, knock on wood. As of April 1, we had 95% attendance. Well, 92% to 95% is kind of our historic range. There's always people that are out for vacation, standard illnesses, just different reasons that they want to be gone. So you'll never be at 100%. So we were at 95%. Well, we had people that have extensive PTO. Scott, is the number 480 hours what we allow them to accrue?
Scott M. Asbjornson -- Chief Financial Officer and Vice President
That's the limit? Yes.
Gary D. Fields -- President and Director
Yes. So we allow them to accrue up to 480 hours of PTO time, which, as you know, that would be 12 weeks. Well, we normally manage this in a real diligent manner so that we don't have a substantial people out a number of people out at one time. But again, we're doing the right thing, with the coronavirus, if people want to take off and have the PTO time, then of course, we're granting that request. So we went to a low of 64%. I think that date was April 25, was the low. But again, these people used their PTO. They left for a little while. They're coming back. And as of today, we're at 89%. And my understanding of the prospects of coming back to more like full strength is within the next 2...
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Next week.
Gary D. Fields -- President and Director
Next week. Okay.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
The end of next week.
Gary D. Fields -- President and Director
The end of next week. That we're fairly confident that they're coming back. But again, we want to hire approximately 100 people here in Tulsa as well. Correct, Scott?
Scott M. Asbjornson -- Chief Financial Officer and Vice President
We're making good progress. We're down to about 55 left.
Gary D. Fields -- President and Director
Okay. When I first opened that opportunity with Scott and the HR department, it was 100. Now we're down to 55 left, he just informed me. So we're making good progress on that. So with all of that said, with the lower attendance in both operations, miraculously, April was nearly at our expectations for total production. So our efficiency has been just improving over and over and over. I'm very proud of the efficiency. Q1 financial numbers tell you that the efficiency has returned to numbers that you are accustomed to seeing from the AAON of the old. With that, I've finished everything I wanted to say, I would like to welcome Norm to have a few comments here.
Norman H. Asbjornson -- Chairman & Chief Executive Officer
Welcome. Many of you I've been speaking with for several years. I would just kind of like to refresh you and give you a little bit of feel for where we are. When we bought the John Zink Company in October 1, 1988, we bought 92 people along with it. We're doing about $10 million worth of manufacturing and about the similar amount of contract work. We were in the process of getting out of the contract business at that time. We now have slightly over 2,400 people, and you know what we're doing in the dollar. We've enjoyed some spectacular success in that other than for the first three months when we did have a losing time, we have never had another losing quarter since October 1, 1989. And we've had some of the highest success ratios of anybody in the history of the heating and air conditioning industry.
Now if you looked at what we just produced for the quarter, we have an all-time high profitability. That's due to the fact that there was a lot of things changing in the past year. We've gotten back into an inflationary environment. And while we were going through the change from one managerial group to another, we changed out a huge number of people in various levels of management. And while you can teach the new people what the fundamentals are, all the little nuances that are known by the people who have been here for a long time aren't easily transferable. And therefore, those things collectively gave us considerable problems for the past two years.
We have now gone past that. So people now that are have been the replacement people now know those little areas to avoid to cause us problems with our productivity. And so consequently, our productivity has been rising back to its historical range. And the people we have in those replacement positions, I believe, ultimately have at least as good a skill level as those the people who they replaced. And in some cases, they have better skill levels. So the company has transitioned from one generational group to another. It has dropped the average age by a considerable amount. So we now have a fairly young managerial group, whereas three or four years ago, we had a very old managerial group. So the company is much better positioned going forward.
In addition, the new people with the given vigor that is so characteristic of younger people, have moved us along a great deal in our methodologies, in our documentation of what's to be done, and our infrastructure is much stronger than it has ever been. The company has never been in as fine a condition it is with people, systems, infrastructure of all kinds, financials. In other words, we're about the top of the place we've ever been in the past. And so it gives me great pleasure as I bow out of the role of managerial and be just more of a consulting person to work with these people because I see great things potential in the future. We do recognize that we've got a formidable challenge running against the virus, and we, all of us, are somewhat new in this, and it's not going to go away, probably never for almost never. And certainly, it's not going to be contained and put into what you might call a normal sequence for some period of time until the medical community gets some better handles on a medication to control it.
So we believe we're on top of it. Well, we recognize that we could easily have flare ups. We can easily have some problems, but I have very little concern with having it get out of control. We've got too many controls. We've got too much work going on. We've got too many things going on to try and keep ourselves healthy. So I don't expect anything is going to get real bad. Undoubtedly, we are going to have some flare ups. That is for certain. But they're not going to be too detrimental to the future of the company, I guess. So if the industry and the economy holds in, and I believe it will, we came out of when the virus started, we had the strongest economy in the construction industry that we've ever had. And I'm just in the month of May, I am finishing my 60th year in this industry. So I speak with probably the most long-term knowledge in this industry of anybody who's still active.
And I can tell you that it looks very promising to me with one big question mark, and that is, how much damage is the virus doing to our economy? I certainly hope it's not going to destroy too much, but I do have the belief that with the strength that it had prior to going into that, that strength is still out there. And I think it's fairly easily reclaimable, but we do have a lot of challenges in working with it. We believe as far as AAON is concerned, we've got it under control. We know how to work with it. So speaking for one company, I think we're in great condition going forward and more than ready to get back with continued growth in the industry.
I'd like to thank all of you who have helped me make this company what as a fine company it is and look forward to being around and talking to you periodically in the future. Thank you. Bye.
Gary D. Fields -- President and Director
Okay. With that, we'd like to open it up to questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question will come from the line of Mr. Brent Thielman from D.A. Davidson.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Congrats on the quarter and challenging times, and congrats on the transitions, I guess, officially here as well. Yes, I guess a lot to talk about. Maybe I'll just start with the orders that were deferred, I think you only mentioned here maybe one or 2. I can't imagine that's more than a few million dollar of that. I'm just curious, when you guys see that, does that stay in the backlog, do you keep it in the backlog for something that shifts out kind of beyond the year? How the mechanics of that work?
Gary D. Fields -- President and Director
The ones that I talked about deferred were not in the backlog. Those were in the pipeline for the sales channel. They were talking about them that they were pending orders. We had one small order for a grow facility that they had had it in the backlog and had put a hold on it long before coronavirus. And I don't know what their actual difficulty was. I told them it was time to either fish or cut bait here about three weeks ago. And they decided to cancel that order, and then that representative immediately replaced it with two more. So that's the only cancellation that I'm aware of. It was an order for I think, it was about $500,000, if I remember right. Does that right a bell with...
Scott M. Asbjornson -- Chief Financial Officer and Vice President
I don't recall the number.
Gary D. Fields -- President and Director
Okay. Yes. My recollection was it was about $500,000. But again, he replaced it within a couple of days with another one. So the only order in our backlog canceled is just that I'm aware of, is that one order.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
There are some orders which have been delayed due to shutdowns in construction in various states. And those, because the equipment has not left our facility and has not been shipped, still are reflected within our backlog.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Right. And can you guys remind me, I guess this is really more specifically to new construction projects, kind of the timing of when someone comes to you with an order, is it preceding when there's a hole in the ground or sometime after that? Just trying to kind of understand the time line there.
Gary D. Fields -- President and Director
Well, so it varies just a bit based on the pace of the project. If it is new construction, like you just asked for, then the traditional process is the owner solicits bids from general contractors or construction managers, they solicit bids from subcontractors who then solicit bids simultaneously from our sales channel. So pretty much all the bids come together on the same day. It usually takes them the 30- to 45-day time frame to analyze those bids. Then when they're awarded, we go through a submittal process, which is about another 45 days. So about 90 days after bid is when there's an award. And then usually within about 30 to 45 days of that, is when we get a release to manufacture. So somewhere in this award time, some of the trade starts, and it's usually the excavation. And if it's a slab on grade kind of a building, single story, like our plant that we're building in Longview, then we're going to get an order for equipment about the time the slab is in place. If it's a high-rise building where you're putting units on, say, every floor, the timing is the same. But if it's a high-rise building, say, a 10-storey building that your unit goes up on the very top floor, then a lot of times, you'll see three to four floors of steel or structure that are up before we see the order.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Okay. Okay. That's helpful, Gary. And then it sounds like January and February I mean just thinking about the last call, things were trending along fine. It sounds like you might have seen a relatively steep drop in March, but it sounds like April has kind of returned to normal. Just from an order intake perspective. Is that the right way to characterize it, Gary?
Gary D. Fields -- President and Director
It's not quite normal. It's just a little bit short of that. But yes. It's not a drastic change but it's beginning to we could feel when people started reopening their states because things became more efficient. Now all of our sales channel partners, when we talked to them said, we didn't quit working. We have been working remotely from home, but it's very inefficient with time because it's hard to get everyone together in those scenarios to make those decisions. So it just strings out the process. For instance, I was talking to one of the sales channel partners yesterday, that they had intended on sending us orders for a bunch of K-12 schools for the replacement of units for the summertime activity. They had intended on having those into us in early April. Yet, we got the first of them this week, and they said, by next week, we'd have all of them. So their paperwork is running, say, 20 to 30 days behind schedule.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Okay. Maybe one more and I'll get back in line. The hospital-related orders, what's the revenue contribution to that, Gary?
Gary D. Fields -- President and Director
I think our traditional slice of the pie is around 9% of our revenue goes to hospitals. And...
Scott M. Asbjornson -- Chief Financial Officer and Vice President
He's giving the orders.
Norman H. Asbjornson -- Chairman & Chief Executive Officer
The whole job is about $4 million.
Gary D. Fields -- President and Director
You're talking about one specific job.
Norman H. Asbjornson -- Chairman & Chief Executive Officer
On those two jobs.
Gary D. Fields -- President and Director
No, no, that's for about he's talking hospitals in general, the whole market. The whole market runs about you are talking about the whole market, not just the specific two jobs we did?
Brent Edward Thielman -- D.A. Davidson -- Analyst
Well, I guess that's helpful. You said 9% for, I think, hospitals. But the two jobs I'd be interested, too, if you're able to share.
Gary D. Fields -- President and Director
Well, those two jobs in New York, those coronavirus that we delivered in the 1-week time frame, that was $4 million.
Operator
[Operator Instructions] Presenters, your question will come from the line of Mr. Joe Mondillo from Sidoti & Company.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
So Gary, I just wanted to ask regarding your comments on attendance employee attendance and that you finished with sort of production in April meeting your expectations. Were those expectations sort of pre-COVID. So have you changed the expectations based on the economic the markets coming down and the volatility in the stock market and economic downturn? Or was that sort of a pre-COVID April expectations and they're meeting your expectations despite the employee attendance. Could you just clarify expectations that you're referring to?
Gary D. Fields -- President and Director
I am talking pre-COVID. We have not had any reslating of our expectations at this point. With our backlog the way it is, we have not reslated anything yet.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
We're not to the 8-week goal yet.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Okay. So that brings me to sort of the lead times and backlog. You mentioned that your ideal or your lead time goal is eight weeks. What would your what would that translate in the sort of an ideal backlog size? I'm just trying to I want you to frame that because backlog is coming down, and so I just want to get a sense of where should backlog sort of stabilize on an ideal size, given your capacity that you have right now?
Gary D. Fields -- President and Director
It would be like 2/3 of a quarter would be the ideal backlog, and understand that our production rate is increasing. So that's a moving target. So if I took a snapshot in time today, and did 2/3 what's 2/3 of $137 million? It's about $100 million, right? And if you'll go back and look at transcripts from the past, I was asked this question maybe a year ago and said, if you had the ideal backlog when you ended 2019, what would that be? And I said at that point in time, $100 million. So we remain thinking that somewhere between $100 million and $110 million is the ideal backlog because that serves our clients best with lead time but it's also a reflection of the increased production capacity we have.
Now I want to while we're talking about backlog, I want to talk about one or two other things that you some of you might capture, some of you might not. The backlog is for units that are ordered to be built-to-suit. They're built-to-order. We also have a substantial inventory of water-source heat pumps that we sell from the inventory. Those are not in backlog because we ship them within one or two days of the order. So they are in consequential to it. The other thing is our parts business has begun to materialize as something that's fairly substantial for the company, and that doesn't go into backlog. So that's two revenue streams that you put on top of what our production capacity is.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
If I could, they would appear in the backlog to the extent that the order was in-house and had not shipped at the end of the period. So they do show up in the backlog, but only for a blink of an eye, practically.
Gary D. Fields -- President and Director
Correct. That's what I was trying to say. Because of the two day all right.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Got it. And so going back to sort of your April expectations and your conversation about hiring 100 people at Tulsa, and I believe you said 100 at each facility?
Gary D. Fields -- President and Director
Yes, 100 in Longview. Yes.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
I would assume your expectations relative to pre-COVID, which I guess are maintained, would be that orders would be rising in April seasonally and they generally rise into the summer, which I suppose it's correct to imply that's why you're hiring into May and June to handle that increase in order rates. Is that fair?
Gary D. Fields -- President and Director
Well, it the order rate has been stable, but it's we're working on an awful lot of overtime, particularly in Longview. For in excess of a year, we've been running the plant floor probably 20%-plus overtime? Yes, Scott's nodding his head, yes in excess of 20% overtime. So we'd like to gain the efficiency of these people working a standard 40-hour week and have more people rather than wearing them out. Because after people work over time for so long, then their productivity goes down. Tulsa has some overtime as well, and we're trying to eliminate that. But we're still trying to increase capacity, yes.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Okay. So I guess that would bring me to the gross margins, which finally on track, I guess, congratulations, finally getting there. One of your best quarters in a long time. So how would that sort of translate into gross margin? You're bringing on more people, but then your overtime is coming down. And then, I guess, essentially, hopefully, your productivity actually increases. So how are you thinking about the gross margin at this point in time, especially relative to you were talking about a goal of 32% in a seasonally light gross margin quarter being the March quarter, you are almost there. So how do you think about that?
Gary D. Fields -- President and Director
Well, I have said that I was working for a range of 28% to 32%, that that was the historic range of the company, that I actually targeted 30% as being ideal. So we've already gotten beyond what's ideal. And but we're going to see that stabilize. It will go up and down just a little bit. But like I talked about adding some overhead staff in order to develop more water-source heat pump product, for instance. So if I can gain some efficiency by doing away with some overtime and trade that for some people that can develop product for the future, I could probably keep my goal of 30% pretty solidified. So I got a teeter totter here I'm trying to keep balanced. I'm trying to add some assets to the company that will provide for future growth, but I'm also trying to fund them by making this thing more efficient.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Got it. So also, I wanted to ask about the revenue that you saw in the first quarter relative to, I guess, maybe near-term expectations because usually, we see the head and shoulder shape where the out quarters are sort of slightly down and the June and September quarter are a little higher. Is this an abnormal year? You mentioned you stated that orders are sort of stable, and is this a little bit of an abnormal year where maybe the June quarter is comparable to the first quarter? Or do you think you could still see that typical seasonality that you generally see historically?
Gary D. Fields -- President and Director
No, you categorized it first by calling it abnormal. So we've been in an abnormal situation for a couple of years now. We've had more orders than we could produce. So we went into the first day of 2020 with a backlog that was much higher than what was ideal and conducive to good lead times and best practices. So we were able to keep the throttles full. And we went into Q4 the same way because Q4, we typically start turning down. Q4 and Q1 are the two that are usually lower and Q2 and Q3 are usually the top ones that you're talking about. So because we were still gaining capacity, we were able to keep the throttles full forward in Q4 and full forward in Q1. So I would say that if we were so lucky as to duplicate Q1 and Q2, then I would call that a great achievement. Normally, you would say Q2 would be larger, but having some labor challenges just a little bit, and this, that and the other, I don't want to get our hopes up that Q2 is going to outrun Q1 because I just don't see that happening. But I also don't see any substantial decline. I mean it's going to be nip and tuck Q2, possibly looking similar to Q1.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Okay. Yes, I just wanted to clarify that because I wasn't sure. I have one more question. Well, I have a few more questions, but I'll one more question.
Gary D. Fields -- President and Director
No. You go ahead.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
The CARES this is for Scott, I guess. The CARES Act benefit that I read in the 10-Q, I guess this is a tax benefit where you can retroactive full depreciation or something related to going back to 2018. And so I thought your tax rate would benefit, but you stated sort of a guidance of 25%, which is, I think, what you've sort of been talking about over the past year or so. Is there a chance that is lower than 25%?
Rebecca A. Thompson -- Chief Accounting Officer and Treasurer
No. What we would be doing is getting accelerated depreciation on the qualified improvement property. So it'll just be a timing difference between our current payable and our deferred tax liability. So it doesn't really impact our overall effective tax rate. It's just the timing of when we would be paying those taxes.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Okay. So your cash taxes? Okay.
Operator
And presenters, your next question will come from the line of Mr. Brian Gaines from Springhouse Capital.
Brian Gaines -- Springhouse Capital Management -- Analyst
I just you had a nice quarter in terms of pricing of the rooftop units. Is are we kind of through the cycle of price increases? You're kind of catching up to where you had to be to get to the margin? Or is there still further pricing to come?
Gary D. Fields -- President and Director
We have not announced any further price increases. We don't see any need to on the near-term horizon. Some raw materials, I just got an analysis from my purchasing department today. We track nine substantial materials that we purchase, copper, steel, aluminum, stainless steel, heat exchanger tubes, coils and compressors. And anyhow, these nine things, they were down 0.8% as a tranche versus a year ago. But they also make up about 70% of all the materials that we purchase. So the other 30% of materials we purchase are harder to scrutinize to that same level, but our feeling is that they are up just a little bit. So I would say our material cost is flat.
Now the one thing I do want to say about price increases is on we had two categories of equipment that we had a price increase on in December of 2019. One of those categories was the equipment that we build in our Longview facility. And since we have a shorter lead time, that didn't fully get into Q1 but part of it did. But Longview is only about, what, 10% to 12% of our revenue. So even if they got a little bump, it's not going to be anything that's going to show up very much. Then another product group that comprises another 10% to 12%. That's our very, very large tonnage units. It got a price increase at the same date. But it's lead time's a little longer, so we're probably looking at a very, very small tweak of that product entering the production floor some time in Q2. And so there is just a very small adjustment yet to be had at the bottom line because of that, but there's nothing further on the horizon.
Brian Gaines -- Springhouse Capital Management -- Analyst
Got it. And you feel pretty good competitively? I know you've had big price increases, but I imagine the industry has as well, so you've kind of just kept up?
Gary D. Fields -- President and Director
Yes. We've done quite well. We had a what we call a rep council meeting. We have six regions, and we select two or three representative organizations from each region, and then we have at least an annual, if not semiannual conference with these people. And that way, we can explore good feedback from the field as a big group. Are we seeing any pricing pressures? We just had that meeting last week, virtually, by the way. Normally, we have it at a nice resort, but the resort's closed and we're all social distancing. So we had it virtually. There was one rep that talked about a little bit of competitive pressure on one particular solid unit. And the rest of the group kind of chimed in and told him how he could position himself better to overcome at that he really didn't need a discount. So I would say the pressure for discounts, the pressure on pricing is very quiet. Our primary driver has been lead time. Until we got this lead time down to a desirable number, and we're nearly there, not quite, I don't think pricing is an issue at all.
Brian Gaines -- Springhouse Capital Management -- Analyst
Okay. And is there any way you can, kind of, give dollar value of orders in March and April, of what it is kind of year-over-year?
Gary D. Fields -- President and Director
No. That's kind of forward-looking information that we don't talk about.
Brian Gaines -- Springhouse Capital Management -- Analyst
Okay. Can you give any kind of expectation for 2Q, kind of, overall, what you're thinking?
Gary D. Fields -- President and Director
Well, I already did when I when Joe was asking questions, maybe you overlooked that. Historically, before I got here, the company had a swing that Q4 and Q1 were usually somewhere in the range of 10% to 20% lower than Q2 and Q3. And so you always saw a 10% to 20% swing between those. And so since I've been here, we've got more orders in, we've lagged on production. So we've kept the production throttles full forward. So we've not seen that same bell curve. So Joe, a minute ago, was asking, do we think the bell curve's back? In other words, you did really good Q1, but is Q2 going to go up 10% or 20%? And I said, no. If we were able to duplicate Q2 what we did in Q1, I think that would be more than a reasonable expectation. And I think it's a possibility, but it's not a promise.
Brian Gaines -- Springhouse Capital Management -- Analyst
No, no. I heard that. I was talking more orders and less, kind of, revenue.
Gary D. Fields -- President and Director
Orders, orders, yes, they have also been most affected by lead time. As we brought lead times down, then orders were beginning to gather some momentum. Then the coronavirus came along and kind of nip that in the bud. And so basically, at the end of March, we were at 92% of our plan or our expectations on orders booked. And we remain kind of in that same range right now.
Brian Gaines -- Springhouse Capital Management -- Analyst
Okay. And is it fair to say, were you kind of heading into COVID into at the end of February, were you at 100% of plan or you're well ahead of plan?
Gary D. Fields -- President and Director
We were really close to plan.
Operator
And presenters, you do have a follow-up question from Mr. Brent Thielman from D.A. Davidson.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Gary, the water-source heat pump sounds like a category, it sounds like you've obviously made some changes, appreciate the comments and what you're trying to do there. I don't think you mentioned this, but are you expecting that product line to get back to kind of growth mode here in the coming quarter? Or is it you're going to take a few more quarters to get there?
Gary D. Fields -- President and Director
I'm going to tell you, it's going to take a little while for this reason, coronavirus probably affected that product category as much and more so than anything. Because the largest target market for us with our current product offering has been high-rise condominiums and hotels, which both are going to be under substantial pressure going forward. But I do have the story of why we got into water-source heat pumps and how we thought we would leverage our legacy product to sales of these. Our sales representative in Albuquerque, New Mexico, also covers El Paso, Texas. Earlier this week, he sent in a very, very nice order for water-source heat pumps, and it was half of the total order volume roughly was our legacy product configured as water-source heat pumps. But these were unique operating characteristics. They were 100% outside air called dedicated outside air water-source heat pumps that were roof-mounted. But it was coupled with a good group of the indoor units that are what we call the WH and WV models, which are the new ones that we've had all this commentary about. Well, all along, the strategy was that those rooftop-style units, we are unique in that there's very few people that make those, if anyone, there are certain operating strategies and certain sizes that we're the only ones that make. That when we have that, that very often they were accompanied by this other water-source heat pump. Well, prior to us going to this effort and putting this new product together, other manufacturers on their line sheet were getting that business. So now they're beginning to give that business to us. And so I was very, very pleased to see this. They did a case study on it on their LinkedIn page. That's how I discovered it, and then I went and looked up the order and saw what a nice deal it was.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Got it. Maybe one quick follow-up. I mean this goal target lead times that you guys want to get it to, do you think you'll be there in the second quarter?
Gary D. Fields -- President and Director
It's going to be really close, really close. I walk the plant floor nearly every day. The people that are out there are working very hard even though we're a little understaffed. And like I said, they met our very close to met our expectations in April. So that helps a lot. Being the orders slowed down to about the 92% level, that's going in the wrong direction for that. But now those orders are going to start coming in. As I said, we've got school orders and things that are beginning to accelerate as the world opens back up. But at the same time, I noticed that we had another new Salvagnini machine that I was quite pleasantly surprised to see that it was here. It was in place. The Salvagnini people were here commissioning it. And they told me that by the end of this week, I would have that. Well, each Salvagnini machine adds appreciably to our production capability. So we're going to have increasing production capability. If we can get these people back in here and get to work, which I think we're going to do, everything's pointing very nicely to that, that by the end of Q2, I think our demand and our production capability will come in alignment to get that lead time right where we want it.
Brent Edward Thielman -- D.A. Davidson -- Analyst
Okay. And by virtue of that, I mean then the sales line is probably going to mimic the order line a little closer, I mean, versus what we've seen.
Gary D. Fields -- President and Director
That would be ideal. That would be ideal.
Operator
[Operator Instructions] Presenters, you also have a follow-up question from Mr. Joe Mondillo from Sidoti & Company.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
So I first wanted to ask about SG&A. It's down year-over-year, but the big thing that I noticed when I looked at the Q, when you add up, I guess, it's profit sharing, salaries and stock comp, you add up those three line items, and they have increased pretty substantially as a percent of sales over the last four or five quarters. Is that just standard sort of wage compensation inflation? And should that sort of stabilize? And I guess, just in a more broad question, just as a whole of SG&A, should we expect SG&A as a usually, you tend to see SG&A as a percent of sales decline as your revenue, you can leverage that. Should we expect that?
Gary D. Fields -- President and Director
Well, I'm going to pick one out of the three that you asked about. I'm going to let Scott or Rebecca handle the other 2. Profit sharing is the one I'm going to pick. Profit sharing is a fixed formula. It's 10% of our profit goes to pre-tax profit, goes to our employees. I'm very proud to say that on Monday, we will be issuing checks for $1,643 per employee that qualifies for our profit sharing. That's for this quarter.
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Virtually everybody.
Gary D. Fields -- President and Director
Virtually everyone except the C-suite. I mean there's some qualifications as to how long you have to be here, but it's roughly, what, six months, roughly?
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Six to nine months.
Gary D. Fields -- President and Director
Sixto nine months depending on when you onboarded. So virtually, anyone that's been here six months-plus is eligible for that profit sharing. So that's $1,643 per employee that are getting that. So that's 10% of our pre-tax profit that goes to that. So that number will always vary with the profit. So as our sales become more profitable, then and sale the profit is a bigger percentage, then that will be as well. And then one other thing to keep in mind is we have a 175% match on their 401k. And so if they'll put in 6%, we'll put in 10.5%. So that also goes for another $172 for all of those employees that are in that 6% category, which again, I walked the plant floor this morning because we announced profit sharing, and I was asking people about it, I did not find one employee that did not contributed the full 6%. So they're all getting that $172. All of them I talked to. Now Scott, would you like to talk about the other two items?
Scott M. Asbjornson -- Chief Financial Officer and Vice President
I will. If you'll notice, our stock comp, what we issued out this first quarter was substantially less than what it was same time last year. As we reduced these volume of options that we issued out, a large part of that was driven by our changes in base wages for our entry-level personnel as we converted more of their total compensation package at the entry-level of the organization into a cash basis and a little bit less of it into the equity platform. So you did see actually our grants decline. But that's the overall comp program that we have. And our base pay is seeing some upward pressure in terms of wages up in all positions. And that was mostly driven by last year. This year, we're already seeing some indications within our database that says that wages are going to back off from the growth rate that they had last year. We're not quite sure how that will play out as the year progresses, but we're already starting to see that inflation rate on the data set declining.
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Okay. Got it. I also wanted to ask about going out, essentially, your independent sales reps and selling the product over the last month or 1.5 months, given sort of the shutdowns and people social distancing, you sort of indicated that your orders have stabilized or whatnot. But, I mean, I would have thought they would have been down even more. And I guess the read-through should be that as it the read-through should be a really good positive, I think, just the fact that your orders are stable and not down. So how have they been able to sell the product without seeing their customers? Or...
Gary D. Fields -- President and Director
I'm going to well, there's several ways. Some of them are pretty crafty. Our representative in Chicago, Windy City reps, led by Jim Wilson. He called me and said, "Gary, I want to share this story with you, and I want you to share this story with some others." He said, we had sales presentation seminars to our community. And we did it by Webex, but we gave them a Grubhub voucher, where we bought their lunch, but they had a Grubhub voucher. So these people, if they logged in, then they validated their Grubhub voucher. They got their lunch brought to them. Now I thought that was pretty clever. I don't remember the exact participation numbers he had, but it was substantial. But that keeps the early part of the sales process rolling. That's the design part of the process you do with consulting engineers. Then as I've heard others speak, other than the very largest projects that require an on-site interview of the contractors. So you're midsized to smaller projects, which tend to be more in our wheelhouse anyhow. Those projects are still being awarded, absent of a long interview process that you might see on a very, very large project.
So it's not as efficient time-wise as it is person to person. But over the years, we've evolved into a business method where with mobile phones and Internet and Webex and Zoom and all these other things, we've been conducting business this way to some degree all along, but not as intensely as we're doing now. So like I say, there's some places that have slowed up a bit more, and there's some that have slowed up a bit less. When I look at it, Pennsylvania, for instance, prior to coronavirus in their region in the Northeast, they were one of the top performers as far as percentage of expectation, and they've fallen back just a little bit. But again, I talked to them yesterday, and they've got school orders coming in to me right away. So they still managed to do the work. It's just it's difficult, but I'm going to fall back to one thing that I've told many of you. We have the finest sales channel partners in the industry, unequivocally. There is no other sales channel that's as good as our guys. They are aggressive. They are innovative, and they are they're just great performers. And so I'm very proud of them. Very proud to be associated with them. And our performance on bookings is a testament to that.
Operator
And presenters, there are no further questions at this time. Please continue.
Gary D. Fields -- President and Director
Well, we want to thank you for joining us. We will talk to some of you again next week when we have our annual meeting of our stockholders on May 12. Until then, have a nice week. Stay safe. Bye-bye.
Operator
And again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Have a lovely day, and stay safe.
Duration: 70 minutes
Call participants:
Gary D. Fields -- President and Director
Scott M. Asbjornson -- Chief Financial Officer and Vice President
Rebecca A. Thompson -- Chief Accounting Officer and Treasurer
Norman H. Asbjornson -- Chairman & Chief Executive Officer
Brent Edward Thielman -- D.A. Davidson -- Analyst
Joseph Logan Mondillo -- Sidoti & Company -- Analyst
Brian Gaines -- Springhouse Capital Management -- Analyst
