What changed in this filing

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Item 1A. Risk Factors

2021-02-25 compared with 2020-02-27 · 78 added, 55 removed, 60 unchanged (69% of the section changed)

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Additionally, the ability of our competitors to react to material risks will affect our future results.

Risks Related to the Covid-19 Pandemic

Our business, results of operations, financial condition, cash flows, and stock price can be adversely affected by pandemics, epidemics, or other public health emergencies, such as COVID-19.

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.

The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are considered a critical infrastructure industry, as defined by the U.S.

Department of Homeland Security.

Although we have continued to operate our facilities to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have a material adverse effect on our operations, supply chain, customers, and transportation networks, including business shutdowns or disruptions.

The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects.

Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition, and cash flows.

Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression.

Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which may adversely impact our stock price and our ability to access capital markets.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this Annual Report, such as those relating to our products and financial performance.

Risks Related to Our Business

Our business can be hurt by economic conditions .

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Further, the addition of new major customers in the future could increase our customer concentration risks as described above.

We may be adversely affected by problems in the availability, or increases in the prices, of raw materials and components .

Problems in the availability, or increases in the prices, of raw materials or components could depress our sales or increase the costs of our products.

We are dependent upon components purchased from third parties, as well as raw materials such as steel, copper and aluminum.

Occasionally, we enter into cancellable and non-cancellable contracts on terms from six to 18 months for raw materials and components at fixed prices.

However, if a key supplier is unable or unwilling to meet our supply requirements, we could experience supply interruptions or cost increases, either of which could have an adverse effect on our gross profit.

We risk having losses resulting from the use of non-cancellable fixed price contracts.

Historically, we have attempted to limit the impact of price fluctuations on commodities by entering into non-cancellable fixed price contracts with our major suppliers for periods of six to 18 months.

We expect to receive delivery of raw materials from our fixed price contracts for use in our manufacturing operations.

These fixed price contracts are not accounted for using hedge accounting since they meet the normal purchases and sales exemption.

We may not be able to successfully develop and market new products .

Our future success will depend upon our continued investment in research and new product development and our ability to continue to achieve new technological advances in the HVAC industry.

Our inability to continue to successfully develop and market new products or our inability to implement technological advances on a pace consistent with that of our competitors could lead to a material adverse effect on our business and results of operations.

We may incur material costs as a result of warranty and product liability claims that would negatively affect our profitability .

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In addition, warranty claims are not covered by our product liability insurance and there may be types of product liability claims that are also not covered by our product liability insurance.

We depend on our senior leadership team and the loss of our chief executive officer or one or more key employees or an inability to attract and retain highly skilled employees could adversely affect our business .

Our success depends largely upon the continued services of our officers and senior leadership team.

In particular, our chief executive officer, Gary D.

Fields, is critical to our vision, strategic direction, culture, and overall business success.

Furthermore, Mr.

Fields' extensive industry knowledge and sales-channel experience would be difficult to replace.

We also rely on our senior leadership team in the areas of research and development, marketing, production, sales, and general and administrative functions.

From time to time, there may be changes in our senior leadership team resulting from the hiring or departure of senior leadership team members, which could disrupt our business.

While we have have a robust succession plan in place for each one of our officers and senior leadership team members, the loss of one or more could have a serious adverse effect on our business.

We do not maintain key-man insurance for Gary D.

Fields or any other member of our senior leadership team.

We do not have employment agreements with our officers or senior leadership team members that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time.

Operations may be affected by natural disasters, especially since most of our operations are performed at a single location.

Natural disasters such as tornadoes and ice storms, as well as accidents, acts of terror, infection, and other factors beyond our control could adversely affect our operations.

Especially, as our facilities are in areas where tornadoes are likely to occur, and the majority of our operations are at our Tulsa facilities, the effects of natural disasters and other events could damage our facilities and equipment and force a temporary halt to manufacturing and other operations, and such events could consequently cause severe damage to our business.

We maintain insurance against these sorts of events ($100 million of total coverage with a per occurrence deductible of $7.5 million);

however, this is not guaranteed to cover all the losses and damages incurred.

Furthermore, we may experience increases in our insurance premium costs in relation to these matters that may have a material adverse effect upon our business, liquidity, financial condition, or results of operations.

If we are unable to hire, develop or retain employees, it could have an adverse effect on our business.

We compete to hire new employees and then seek to train them to develop their skills.

We may not be able to successfully recruit, develop, and retain the personnel we need.

Unplanned turnover or failure to hire and retain a diverse, skilled workforce, could increase our operating costs and adversely affect our results of operations.

Variability in self-insurance liability estimates could impact our results of operations.

We self-insure for employee health insurance and workers’ compensation insurance coverage up to a predetermined level, beyond which we maintain stop-loss insurance from a third-party insurer for claims over $225,000 and $750,000 for employee health insurance claims and workers’ compensation insurance claims, respectively.

Our aggregate exposure varies from year to year based upon the number of participants in our insurance plans.

We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience.

Our accruals for insurance reserves reflect these estimates and other management judgments, which are subject to a high degree of variability.

If the number or severity of claims for which we self-insure increases, it could cause a material and adverse change to our reserves for self-insurance liabilities, as well as to our earnings.

Risks Related to Our Brand and Product Offerings

We may not be able to compete favorably in the highly competitive HVAC business .

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We may not be able to compete successfully against current and future competition and current and future competitive pressures faced by us may materially adversely affect our business and results of operations.

The loss of Norman H.

Asbjornson could impair the growth of our business .

Asbjornson, our founder, has served as our Chief Executive Officer from inception to date and President from inception to November 2016.

He has provided the leadership and vision for our strategy and growth.

Although important responsibilities and functions have been delegated to other highly experienced and capable management personnel, and our products are technologically advanced and well positioned for sales well into the future, the death, disability or retirement of Mr.

Asbjornson could impair the growth of our business.

We do not have an employment agreement with Mr.

The Board of Directors attempts to manage this risk by continually engaging in succession planning concerning Mr.

Asbjornson (as well as other key management personnel), as demonstrated by the Board’s appointment of Gary D.

Fields as President of AAON in November 2016.

We may not be able to successfully develop and market new products .

Our future success will depend upon our continued investment in research and new product development and our ability to continue to achieve new technological advances in the HVAC industry.

Furthermore, our continued investment in new product development may render certain legacy products and components obsolete resulting in increased inventory obsolescence expense that may have a material adverse effect upon our financial condition or results of operations.

Risks Related to Material Sourcing and Supply

We may be adversely affected by problems in the availability, or increases in the prices, of raw materials and components .

Problems in the availability, or increases in the prices, of raw materials or components could depress our sales or increase the costs of our products.

We are dependent upon components purchased from third parties, as well as raw materials such as steel, copper and aluminum.

Occasionally, we enter into cancellable and non-cancellable contracts on terms from six to 18 months for raw materials and components at fixed prices.

We risk having losses resulting from the use of non-cancellable fixed price contracts.

We expect to receive delivery of raw materials from our fixed price contracts for use in our manufacturing operations.

These fixed price contracts are not accounted for using hedge accounting since they meet the normal purchases and sales exemption.

Risks Related to Electronic Data Processing and Digital Information

Our business is subject to the risks of interruptions by cybersecurity attacks.

We depend upon information technology infrastructure, including network, hardware and software systems to conduct our business.

Despite our implementation of network and other cybersecurity measures, our information technology system and networks could be disrupted or experience a security breach from computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems.

Our security measures may not be adequate to protect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information.

Despite our implementation of network and other cybersecurity measures, our information technology system and networks could be disrupted due to technological problems, a cyber-attack, acts of terrorism, severe weather, a solar event, an electromagnetic event, a natural disaster, the age and condition of information technology assets, human error, or other reasons.

To date, we have not experienced a material impact to our business or operations resulting from cyber-security or other similar information attacks, but due to the ever-evolving attack methods, as well as the increased amount and level of sophistication of these attacks, our security measures may not be adequate to protect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information.

Additionally, we may have access to confidential or other sensitive information of our customers, which, despite our efforts to protect, may be vulnerable to security breaches, theft, or other improper disclosure.

Any cyber-related attack or other improper disclosure of confidential information could have a material adverse effect on our business, as well as other negative consequences, including significant damage to our reputation, litigation, regulatory actions, and increased cost.

The Company maintains cyber-security insurance, however, the coverage may not be sufficient to cover all financial losses.

Risks Related to Governmental Regulation and Policies

Exposure to environmental liabilities could adversely affect our results of operations .

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We always face the possibility of new governmental regulations, policies and trade agreements which could have a substantial or even extreme negative effect on our operations and profitability.

Negotiations during the summer of 2013 mitigated some of the negative effects of the Department of Energy Final Rule, Regulatory Identification No.

1904-AC23, published on March 7, 2011.

However, certain additional testing and listing requirements are still in place and scheduled to be phased in.

Several other intrusive component part governmental regulations are in process.

Several intrusive component part governmental regulations are in process.

If these proposals become final rules, the effect would be the regulation of compressors and fans in products for which the Department of Energy does not have current authority.

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Unfavorable conditions resulting from such changes could have a material adverse effect on our business, financial condition and results of operations.

In the fourth quarter of 2019, we identified a material weakness in our internal control over financial reporting.

Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our outstanding stock to decline.

During the year ended December 31, 2019, we identified a material weakness in our internal control over financial reporting related to the appropriate policies and procedures in place to properly recognize share-based compensation for retirement eligible participants in our Long-Term Incentive Plans.

For further information regarding this matter, please refer to Item 9A.

Controls and Procedures.

As a result of such weakness, management, with the oversight of the Audit Committee, determined to correct our consolidated financial statements at December 31, 2018 and for the years ended December 31, 2018 and December 31, 2017, selected financial data at and for the years ended December 31, 2016 and 2015, each of the unaudited quarterly periods for September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, September 31, 2018, June 30, 2018 and March 31, 2018 and the impacted amounts within the accompanying footnotes thereto.

Management’s ongoing assessment of internal control over financial reporting may in the future identify additional weaknesses and conditions that need to be addressed.

Any failure to improve our internal control over financial reporting to address identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering material accounting errors, which in turn, could adversely affect our business and the value of our outstanding stock.

We reached a determination to correct certain of our previously issued consolidated financial statements, which may affect investor confidence and raise reputational issues .

As discussed in the Explanatory Note preceding Item 1, Business , in Note 2, Error Correction , and in Note 25, Quarterly Results (Unaudited) , in this Annual Report on Form 10-K, we reached a determination to correct our consolidated financial statements at December 31, 2018 and for the years ended December 31, 2018 and December 31, 2017, selected financial data at and for the year ended December 31, 2016 and 2015, and each of the unaudited quarterly periods September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, September 31, 2018, June 30, 2018 and March 31, 2018.

As a result, we have become subject to a number of additional risks and uncertainties, which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational issues for our business.

We are subject to adverse changes in tax laws.

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Violations of these laws, which are complex, may result in criminal penalties or sanctions that could have a material adverse effect on our business, financial condition and results of operations.

Operations may be affected by natural disasters, especially since most of our operations are performed at a single location.

Natural disasters such as tornadoes and ice storms, as well as accidents, acts of terror, infection and other factors beyond our control could adversely affect our operations.

We maintain insurance against these sorts of events;

however, this is not guaranteed to cover all the losses and damages incurred.

If we are unable to hire, develop or retain employees, it could have an adverse effect on our business.

We compete to hire new employees and then seek to train them to develop their skills.

We may not be able to successfully recruit, develop and retain the personnel we need.

Unplanned turnover or failure to hire and retain a diverse, skilled workforce, could increase our operating costs and adversely affect our results of operations.

Variability in self-insurance liability estimates could impact our results of operations.

Our aggregate exposure varies from year to year based upon the number of participants in our insurance plans.

We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical

claims experience.

Our accruals for insurance reserves reflect these estimates and other management judgments, which are subject to a high degree of variability.

If the number or severity of claims for which we self-insure increases, it could cause a material and adverse change to our reserves for self-insurance liabilities, as well as to our earnings.

Risks Inherent to an Investment in AAON, Inc.

In the fourth quarter of 2019, we identified a material weakness in our internal control over financial reporting.

For further information regarding this matter, please refer to Item 9A.

Controls and Procedures in the 2019 Annual Report on Form 10-K for further information and Item 4b.

Controls and Procedures in the March 31, 2020 Quarterly Report on Form 10-Q for remediation efforts in 2020.

We concluded that this material weakness was remediated as of March 31, 2020.

Management’s ongoing assessment of internal control over financial reporting may in the future identify additional weaknesses and conditions that need to be addressed.

We corrected certain of our previously issued consolidated financial statements, which may affect investor confidence and raise reputational issues .

As discussed in the Explanatory Note preceding Item 1, Business , in Note 2, Error Correction , and in Note 25, Quarterly Results (Unaudited) , in the 2019 Annual Report on Form 10-K, we reached a determination to correct our consolidated financial statements at December 31, 2018 and for the years ended December 31, 2018 and December 31, 2017, selected financial data at and for the year ended December 31, 2016 and 2015, and each of the unaudited quarterly periods September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, September 31, 2018, June 30, 2018 and March 31, 2018.

These corrections were presented in the 2019 Annual Report on Form 10-K.

Unresolved Staff Comments.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors