AAON, INC. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 29 Consolidated Balance Sheets 31 Consolidated Statements of Income 32 Consolidated Statements of Stockholders’ Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders AAON, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventory – manual inventory adjustments As described in Note 2 to the Company’s financial statements, the Company reports inventory using the first in, first out (“FIFO”) method, which involves manual adjustments recorded to the general ledger such as inventory variance, inventory allowance and labor and overhead adjustments, which had the potential to be larger or require more judgement during the year ended December 31, 2020, where the Company experienced changes in the prices of certain raw materials due to the COVID-19 pandemic. These manual adjustments have been identified as a critical audit matter. The principal consideration for our determination such manual inventory adjustments as a critical audit matter is these manual adjustments require substantial use of management estimates and requires the Company to have effective inventory valuation processes. Significant management judgments and estimates utilized to determine manual inventory adjustments are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates. 29 Our audit procedures related to the manual inventory adjustments included the following, among others. • We tested the design and operating effectiveness of controls over inventory valuation, including the standard cost updates in the accounting system and the completeness and accuracy of the inputs to the inventory variance calculation and any related adjustments. • We verified the Company’s standard costing of inventory approximated FIFO by obtaining FIFO buildups and inspected underlying documents for a sample of raw materials. • We assessed the reasonableness of management’s inventory reserve by recalculating the reserve using management’s inputs, and evaluated those inputs for reasonableness. • We tested labor and overhead rate changes by recalculating the rates used and tested any adjustments recorded to the general ledger. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2004. Tulsa, Oklahoma February 25, 2021 30 AAON, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2020 2019 Assets (in thousands, except share and per share data) Current assets: Cash and cash equivalents $ 79,025 $ 26,797 Restricted cash 3,263 17,576 Accounts receivable, net of allowance for credit losses of $ 506 and $ 353 , respectively 47,387 67,399 Income tax receivable 4,587 772 Note receivable 31 29 Inventories, net 82,219 73,601 Prepaid expenses and other 3,739 1,375 Total current assets 220,251 187,549 Property, plant and equipment: Land 4,072 3,274 Buildings 122,171 101,113 Machinery and equipment 281,266 236,087 Furniture and fixtures 18,956 16,862 Total property, plant and equipment 426,465 357,336 Less: Accumulated depreciation 203,125 179,242 Property, plant and equipment, net 223,340 178,094 Intangible assets, net 38 272 Goodwill 3,229 3,229 Right of use assets 1,571 1,683 Note receivable, long-term 579 597 Total assets $ 449,008 $ 371,424 Liabilities and Stockholders’ Equity Current liabilities: Revolving credit facility $ — $ — Accounts payable 12,447 11,759 Accrued liabilities 46,586 44,269 Total current liabilities 59,033 56,028 Deferred tax liabilities 28,324 15,297 Other long-term liabilities 4,423 3,639 New market tax credit obligation (a) 6,363 6,320 Commitments and contingencies Stockholders’ equity: Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued — — Common stock, $ .004 par value, 100,000,000 shares authorized, 52,224,767 and 52,078,515 issued and outstanding at December 31, 2020 and 2019, respectively 209 208 Additional paid-in capital 5,161 3,631 Retained earnings 345,495 286,301 Total stockholders’ equity 350,865 290,140 Total liabilities and stockholders’ equity $ 449,008 $ 371,424 (a) Held by variable interest entities (Note 18 ) The accompanying notes are an integral part of these consolidated financial statements. 31 AAON, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2020 2019 2018 (in thousands, except share and per share data) Net sales $ 514,551 $ 469,333 $ 433,947 Cost of sales 358,702 349,908 330,414 Gross profit 155,849 119,425 103,533 Selling, general and administrative expenses 60,491 52,077 48,194 (Gain) loss on disposal of assets and insurance recoveries ( 6,478 ) 337 ( 12 ) Income from operations 101,836 67,011 55,351 Interest income, net 88 66 196 Other (expense) income, net 51 ( 46 ) ( 47 ) Income before taxes 101,975 67,031 55,500 Income tax provision 22,966 13,320 13,171 Net income $ 79,009 $ 53,711 $ 42,329 Earnings per share: Basic $ 1.51 $ 1.03 $ 0.81 Diluted $ 1.49 $ 1.02 $ 0.80 Cash dividends declared per common share: $ 0.38 $ 0.32 $ 0.32 Weighted average shares outstanding: Basic 52,168,679 52,079,865 52,284,616 Diluted 53,061,169 52,635,415 52,667,939 The accompanying notes are an integral part of these consolidated financial statements. 32 AAON, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balance at December 31, 2017 52,422 $ 210 $ — $ 238,715 $ 238,925 Net income — — — 42,329 42,329 Stock options exercised and restricted 353 1 4,986 — 4,987 stock awards granted Share-based compensation — — 7,862 — 7,862 Stock repurchased and retired ( 784 ) ( 3 ) ( 12,848 ) ( 15,092 ) ( 27,943 ) Dividends — — — ( 16,717 ) ( 16,717 ) Balance at December 31, 2018 51,991 208 — 249,235 249,443 Net income — — — 53,711 53,711 Stock options exercised and restricted 542 2 12,623 — 12,625 stock awards granted Share-based compensation — — 11,799 — 11,799 Stock repurchased and retired ( 454 ) ( 2 ) ( 20,791 ) — ( 20,793 ) Dividends — — — ( 16,645 ) ( 16,645 ) Balance at December 31, 2019 52,079 208 3,631 286,301 290,140 Net income — — — 79,009 79,009 Stock options exercised and restricted 712 3 21,415 — 21,418 stock awards granted Share-based compensation — — 11,342 — 11,342 Stock repurchased and retired ( 566 ) ( 2 ) ( 31,227 ) — ( 31,229 ) Dividends — — — ( 19,815 ) ( 19,815 ) Balance at December 31, 2020 52,225 $ 209 $ 5,161 $ 345,495 $ 350,865 The accompanying notes are an integral part of these consolidated financial statements. 33 AAON, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2020 2019 2018 Operating Activities (in thousands) Net income $ 79,009 $ 53,711 $ 42,329 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,634 22,766 17,655 Amortization of bond premiums — — 13 Amortization of debt issuance costs 43 7 — Provision for credit losses on accounts receivable, net of adjustments 153 91 174 Provision for excess and obsolete inventories 1,108 1,454 152 Share-based compensation 11,342 11,799 7,862 (Gain) loss on disposition of assets ( 6,478 ) 337 ( 12 ) Foreign currency transaction (gain) loss ( 12 ) ( 27 ) 55 Interest income on note receivable ( 24 ) ( 25 ) ( 27 ) Deferred income taxes 13,027 6,038 2,641 Changes in assets and liabilities: Accounts receivable 19,859 ( 13,412 ) ( 2,832 ) Income tax receivable ( 3,815 ) 5,129 ( 4,448 ) Inventories ( 9,726 ) 2,557 ( 5,598 ) Prepaid expenses and other ( 2,364 ) ( 329 ) ( 528 ) Accounts payable ( 2,155 ) 280 ( 1,176 ) Deferred revenue 1,010 425 412 Accrued liabilities and donations 2,203 7,124 ( 1,816 ) Net cash provided by operating activities 128,814 97,925 54,856 Investing Activities Capital expenditures ( 67,802 ) ( 37,166 ) ( 37,268 ) Cash paid in business combination — — ( 6,377 ) Proceeds from sale of property, plant and equipment 60 69 13 Insurance proceeds 6,417 — — Investment in certificates of deposits — ( 6,000 ) ( 7,200 ) Maturities of certificates of deposits — 6,000 10,080 Purchases of investments held to maturity — — ( 9,001 ) Maturities of investments held to maturity — — 14,570 Proceeds from called investments — — 495 Principal payments from note receivable 52 51 53 Net cash used in investing activities ( 61,273 ) ( 37,046 ) ( 34,635 ) Financing Activities Proceeds from financing obligation, net of issuance costs — 6,614 — Payment related to financing costs — ( 301 ) — Stock options exercised 21,418 12,625 4,987 Repurchase of stock ( 30,060 ) ( 19,586 ) ( 26,846 ) Employee taxes paid by withholding shares ( 1,169 ) ( 1,207 ) ( 1,097 ) Dividends paid to stockholders ( 19,815 ) ( 16,645 ) ( 16,728 ) Net cash used in financing activities ( 29,626 ) ( 18,500 ) ( 39,684 ) Net increase (decrease) in cash, cash equivalents and restricted cash 37,915 42,379 ( 19,463 ) Cash, cash equivalents and restricted cash, beginning of year 44,373 1,994 21,457 Cash, cash equivalents and restricted cash, end of year $ 82,288 $ 44,373 $ 1,994 The accompanying notes are an integral part of these consolidated financial statements. 34 AAON, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 1. Business Description AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc., an Oklahoma corporation and AAON Coil Products, Inc., a Texas corporation (collectively, the “Company”). The Consolidated Financial Statements include our accounts and the accounts of our subsidiaries. We are engaged in the engineering, manufacturing, marketing and sale of air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. 2. Summary of Significant Accounting Policies Principles of Consolidation These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of two variable interest entities ("VIEs") (Note 18) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs. Impact of COVID-19 Pandemic In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher employee absenteeism in our manufacturing facilities. We had continuous operations during the year ended December 31, 2020 except for a planned (unrelated to COVID-19) shut down at out Tulsa, OK facility during the last week of December 2020. For the most part, our workers are able to socially distance themselves during the manufacturing process. Additional precautions have been taken to social distance workers that work in close environments. The Company utilizes sanitation stations, requires the use of a facial covering when unable to socially distance, performs daily temperature scanning, and performs additional cleaning and sanitation throughout the day and deep cleaning overnight. The Company did see significant employee absenteeism in the latter part of June 2020. These unexpected employee absences resulted in reduced shipments and longer lead times in the second quarter 2020. During the third quarter and fourth quarter 2020, employee attendance levels were stronger than previously anticipated. Additionally, our work force has adapted well to school and childcare related issues. Furthermore, COVID-19 has had no significant impact on our planned cash outflow for raw materials, dividend payments, or capital expenditure including our Longview, Texas expansion project. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, increased employee absenteeism and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. 35 Although these disruptions and costs are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations. We are continually monitoring the progression of the pandemic and its potential effect on our financial position, results of operations and cash flows. Cash and Cash Equivalents We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist of bank deposits and highly liquid, interest-bearing money market funds. The Company’s cash and cash equivalents are held in a few financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. Restricted Cash Restricted cash held at December 31, 2020 consist of bank deposits and highly liquid, interest-bearing money market funds held for the purpose of the Company's qualified New Markets Tax Credit program (Note 18) to benefit an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations. The Company’s restricted cash is held in a financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. Certificates of Deposit We held no certificates of deposit at December 31, 2020 and 2019. Investments Held to Maturity At December 31, 2020 and 2019, we held no investments. We record the amortized cost basis and accrued interest of the corporate notes and bonds in the Consolidated Balance Sheets. We record the interest and amortization of bond premium to interest income in the Consolidated Statements of Income. Accounts and Note Receivable We adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) , as amended, as of January 1, 2020. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected, which would include accounts receivable. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The adoption of this ASU did not have a material effect on our financial statements. Accounts and note receivable are stated at amounts due from customers, net of an allowance for credit losses. We generally do not require that our customers provide collateral. The Company determines its allowance for credit losses by considering a number of factors, including the credit risk of specific customers, the customer’s ability to pay current obligations, historical trends, economic and market conditions, and the age of the receivable. Accounts are considered past due when the balance has been outstanding for ninety days past negotiated credit terms. Past due accounts are generally written-off against the allowance for credit losses only after all collection attempts have been exhausted. Concentration of Credit Risk Our customers are concentrated primarily in the domestic commercial and industrial new construction and replacement markets. To date, our sales have been primarily to the domestic market, with foreign sales accounting for approximately 2 %, 3 %, and 3 % of revenues for the years ended December 31, 2020, 2019, and 2018, respectively. 36 One customer, Texas AirSystems LLC, accounted for more than 10% of our sales during 2020, 2019, and 2018. No other customer accounted for more than 10% of our sales during 2020, 2019, and 2018. Two customers, Texas AirSystems LLC and Johnson Borrow Inc., accounted for more than 10% of our accounts receivable balance at December 31, 2020. One customer, Texas AirSystems LLC, accounted for more than 10% of our accounts receivable balance at December 31, 2019. No single customer accounted for more than 15% of our sales during 2020, 2019, and 2018 or more than 15% of our accounts receivable balance at December 31, 2020 and 2019. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts. Property, Plant and Equipment Property, plant and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation. Repairs and maintenance and any gains or losses on disposition are included in operations. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 3 - 40 years Machinery and equipment 3 - 15 years Furniture and fixtures 3 - 7 years On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $ 500,000 deductible. We did not experience any significant structural damage or any operational interruption as a result of this weather event. In November 2020, we reached a final settlement with our insurance carrier, resulting in a net cumulative gain of $ 6.4 million, which is included in the Consolidated Statements of Income. The received proceeds will be used in future periods to make improvements to the current roof at our plant and office facilities in Tulsa, Oklahoma to extend the overall useful life. Business Combinations We record the assets acquired and liabilities assumed in a business combination at their acquisition date fair values. Fair Value Financial Instruments and Measurements The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt or based on current rates offered to the Company for debt with similar characteristics. We adopted ASU No. 2018-13, Fair Value Measurements (Topic 820), as amended, as of January 1, 2020. The ASU includes additional disclosure requirements for unrealized gains and losses for Level 3 fair value measurements and significant observable inputs used to develop Level 3 fair value measurements. There was not a material impact to financial statements upon adoption. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels: • Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date. • Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active 37 markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means. • Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of property, plant and equipment, intangible assets and goodwill acquired in a business combination. The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability. Intangible Assets Our intangible assets include various trademarks, service marks, and technical knowledge acquired in our February 2018 business combination (Note 4). We amortize our intangible assets on a straight-line basis over the estimated useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. Goodwill Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill at December 31, 2020 is deductible for income tax purposes. Goodwill is not amortized, but instead is evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant. To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit does not exceed its carrying amount, we calculate the fair value for the reporting unit and compare the amount to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered to be impaired and the goodwill balance is reduced by the difference between the fair value and carrying amount of the reporting unit. We performed a qualitative assessment as of December 31, 2020 to determine whether it was more likely than not that the fair value of the reporting unit was greater than the carrying value of the reporting unit. Based on these qualitative assessments, we determined that the fair value of the reporting unit was more likely than not greater than the carrying value of the reporting unit. Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the outcome of the analysis. The estimates and assumptions we use in the annual goodwill impairment assessment included market participant considerations and future forecasted operating results. Changes in operating results and other assumptions could materially affect these estimates. Impairment of Long-Lived Assets We review long-lived assets for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to its estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. 38 Research and Development The costs associated with research and development for the purpose of developing and improving new products are expensed as incurred. For the years ended December 31, 2020, 2019, and 2018 research and development costs amounted to approximately $ 17.4 million, $ 14.8 million, and $ 13.5 million, respectively. Advertising Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2020, 2019, and 2018 was approximately $ 0.8 million, $ 0.8 million, and $ 0.8 million, respectively. Shipping and Handling We incur shipping and handling costs in the distribution of products sold that are recorded in cost of sales. Shipping charges that are billed to the customer are recorded in revenues and as an expense in cost of sales. For the years ended December 31, 2020, 2019, and 2018 shipping and handling fees amounted to approximately $ 14.3 million, $ 14.4 million, and $ 12.6 million, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Excess tax benefits and deficiencies are reported as an income tax benefit or expense on the statement of income and are treated as discrete items to the income tax provision in the reporting period in which they occur. We establish accruals for unrecognized tax positions when it is more likely than not that our tax return positions may not be fully sustained. The Company records a valuation allowance for deferred tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized. Share-Based Compensation The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The Company’s share-based compensation plans provide for the granting of stock options and restricted stock. The fair values of stock options are estimated at the date of grant using the Black-Scholes-Merton option valuation model. The use of the Black-Scholes-Merton option valuation model requires the input of subjective assumptions. The fair value of restricted stock awards is based on the fair market value of AAON common stock on the respective grant dates, reduced for the present value of dividends. Compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Stock options and restricted stock awards, granted to employees, vest at a rate of 20 % per year. Restricted stock awards granted to directors historically vest one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year. Historically, if the employee or director is retirement eligible (as defined by the Long Term Incentive Plans) or becomes retirement eligible during service period of the related share-based compensation award, the service period is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All share-based compensation awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one -year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur. Derivative Instruments In the course of normal operations, the Company occasionally enters into contracts such as forward priced physical contracts for the purchase of raw materials that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. The Company does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes. 39 Revenue Recognition On January 1, 2018, we adopted the new accounting standard FASB ASC Topic 606, Revenue from Contracts with Customers , and all the related amendments to all contracts using the retrospective method. The impact at adoption was not material to the consolidated financial statements. The new accounting policy provides results substantially consistent with prior revenue recognition policies. The Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. The primary performance obligation in our contract is delivery of the requested manufactured equipment. Most of the Company’s products are highly customized, cannot be resold to other customers and the cost of rework to be resold is not economical. The Company has a formal cancellation policy and generally does not accept returns on these units. As a result, many of the Company’s products do not have an alternative use and therefore, for these products we recognize revenue over the time it takes to produce the unit. For all other products that are part sales or standardized units, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders. Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being May-October of each year. We are responsible for billings and collections resulting from all sales transactions, including those initiated by our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing heating, ventilation, and air conditioning (“HVAC”) units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. The Company is considered the principal for the equipment we design and manufacture and records that revenue gross. The Company has no control over the Third Party Products to the end customer and the Company is under no obligation related to the Third Party Products. Amounts related to Third Party Products are not recognized as revenue but are recorded as a liability and are included in accrued liabilities on the consolidated balance sheet. The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our representatives was $ 50.0 million, $ 46.1 million, and $ 47.8 million for each of the years ended December 31, 2020, 2019, and 2018, respectively. The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period. Insurance Reserves Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and medical liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. 40 Product Warranties A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position, and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, the allowance for credit losses, inventory reserves, warranty accrual, workers compensation accrual, medical insurance accrual, share-based compensation, and income taxes. Actual results could differ materially from those estimates. 3. Revenue Recognition Disaggregated net sales by major source: Years Ended December 31, 2020 2019 2018 (in thousands) Rooftop Units $ 400,946 $ 349,427 $ 333,105 Condensing Units 21,149 18,475 18,282 Air Handlers 23,931 24,265 21,905 Outdoor Mechanical Rooms 2,842 1,643 2,408 Water-Source Heat Pumps 19,053 25,447 14,660 Part Sales 32,561 33,331 26,732 Other 14,069 16,745 16,855 Net Sales $ 514,551 $ 469,333 $ 433,947 Other sales include freight, extended warranties and miscellaneous revenue. Disaggregated units sold by major source: Years Ended December 31, 2020 2019 2018 Rooftop Units 15,713 14,448 15,273 Condensing Units 1,920 1,738 2,007 Air Handlers 2,073 2,372 2,500 Outdoor Mechanical Rooms 33 33 38 Water-Source Heat Pumps 6,492 7,716 5,334 Total Units 26,231 26,307 25,152 41 4. Business Combination On February 28, 2018, we closed on the purchase of substantially all of the assets of WattMaster Controls, Inc. (“WattMaster”). The assets acquired consisted primarily of intellectual property, receivables, inventory, and fixed assets. The Company also hired substantially all of the WattMaster employees. These assets and workforce will allow us to accelerate the development of our own electronic controllers for air distribution systems. We funded the business combination with available cash of $ 6.0 million. In May 2018, we paid the final working capital settlement of $ 0.4 million with available cash. We have included the results of WattMaster’s operations in our consolidated financial statements beginning March 1, 2018. The following table presents the allocation of the consideration paid to the assets acquired and liabilities assumed, based on their fair values, in the acquisition of WattMaster described above: (in thousands) Accounts receivable $ 1,082 Inventories 1,380 Property, plant and equipment 340 Intellectual property 700 Goodwill 3,229 Assumed current liabilities ( 354 ) Consideration paid $ 6,377 Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill represents a premium paid to acquire the skilled workforce of the business acquired and is deductible for federal income tax purposes. 5. Leases We adopted ASU No. 2016-02 , Leases (Topic 842) , as amended, as of January 1, 2019, using the transition method, which becomes effective upon the date of adoption. The transition method allows entities to initially apply the new leases standard at the adoption date (January 1, 2019) and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We have also elected the short-term lease measurement and recognition exemption which does not require balance sheet presentation for short-term leases. The Company historically does not enter into numerous or material lease agreements to support its manufacturing operations. Furthermore, any lease agreements entered into are usually less than a year and for leases on non material assets such as warehouse vehicles and office equipment. Adoption of the new standard resulted in the recording of additional lease right of use assets and lease liabilities of approximately $ 1.8 million as of January 1, 2019, which mostly relates to the multi-year facility lease assumed in the 2018 WattMaster acquisition (Note 4). The cumulative-effect adjustment to the opening balance was immaterial to the consolidated financial statements as a whole. The standard did not materially impact our consolidated net earnings or cash flows. As of December 31, 2020, our right of use assets and lease liabilities are approximately $ 1.6 million. 42 6. Accounts Receivable Accounts receivable and the related allowance for credit losses are as follows: December 31, 2020 2019 (in thousands) Accounts receivable $ 47,893 $ 67,752 Less: Allowance for credit losses ( 506 ) ( 353 ) Total, net $ 47,387 $ 67,399 Years Ended December 31, 2020 2019 2018 Allowance for credit losses: (in thousands) Balance, beginning of period $ 353 $ 264 $ 119 Provisions (recoveries) for expected credit losses, net of adjustments 153 91 174 Accounts receivable written off, net of recoveries — ( 2 ) ( 29 ) Balance, end of period $ 506 $ 353 $ 264 7. Inventories The components of inventories and the related changes in the allowance for excess and obsolete inventories are as follows: December 31, 2020 2019 (in thousands) Raw materials $ 76,238 $ 68,842 Work in process 2,088 1,825 Finished goods 7,154 5,578 85,480 76,245 Less: Allowance for excess and obsolete inventories ( 3,261 ) ( 2,644 ) Total, net $ 82,219 $ 73,601 Years Ended December 31, 2020 2019 2018 Allowance for excess and obsolete inventories: (in thousands) Balance, beginning of period $ 2,644 $ 1,210 $ 1,118 Provisions for excess and obsolete inventories 1,108 1,454 152 Inventories written off ( 491 ) ( 20 ) ( 60 ) Balance, end of period $ 3,261 $ 2,644 $ 1,210 43 8. Intangible Assets Our intangible assets consist of the following: December 31, 2020 2019 (in thousands) Intellectual property $ 700 $ 700 Less: Accumulated amortization ( 662 ) ( 428 ) Total, net $ 38 $ 272 Amortization expense recorded in cost of sales is as follows: Years Ended December 31, 2020 2019 2018 (in thousands) Amortization expense $ 234 $ 234 $ 194 9. Note Receivable In connection with the closure of our Canadian facility on May 18, 2009, we sold land and a building in September 2010 and assumed a note receivable from the borrower secured by the property. The C$ 1.1 million, 15 year note has an interest rate of 4.0 % and is payable to us monthly, and has a C$ 0.6 million balloon payment due in October 2025 . Interest payments are recognized in interest income. We evaluate the note for impairment on a quarterly basis. We determine the note receivable to be impaired if we are uncertain of its collectability based on the contractual terms. At December 31, 2020 and 2019, there was no impairment. 10. Supplemental Cash Flow Information Years Ended December 31, 2020 2019 2018 Supplemental disclosures: (in thousands) Interest paid $ — $ — $ 6 Income taxes paid, net 13,754 2,172 14,979 Non-cash investing and financing activities: Non-cash capital expenditures 2,843 863 481 44 11. Warranties The Company has warranties with various terms from 18 months for parts to 25 years for certain heat exchangers. The Company has an obligation to replace parts if conditions under the warranty are met. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products, and any known identifiable warranty issues. Changes in the warranty accrual are as follows: Years Ended December 31, 2020 2019 2018 Warranty accrual: (in thousands) Balance, beginning of period $ 12,652 $ 11,421 $ 10,483 Payments made ( 5,751 ) ( 6,816 ) ( 7,869 ) Provisions 6,621 8,047 9,669 Change in estimate — — ( 862 ) Balance, end of period $ 13,522 $ 12,652 $ 11,421 Warranty expense: $ 6,621 $ 8,047 $ 8,807 The change in estimate relates to the Company’s failure rate calculation. During 2018, in reviewing claims data, the Company noted specific claims that were the result of an isolated incident and not representative of the Company’s historical performance or representative of expected future claims. As such, these claims were accounted for as a specific accrual for warranty liability and excluded from our failure rate that the Company utilizes in estimating future claims. 12. Accrued Liabilities At December 31, accrued liabilities were comprised of the following: December 31, 2020 2019 (in thousands) Warranty $ 13,522 $ 12,652 Due to representatives 8,296 11,538 Payroll 8,155 5,058 Profit sharing 2,902 1,721 Workers' compensation 594 522 Medical self-insurance 1,546 707 Customer prepayments 5,067 4,627 Donations 570 354 Employee vacation time 3,321 3,804 Other 2,613 3,286 Total $ 46,586 $ 44,269 13. Revolving Credit Facility Our revolving credit facility (“BOK Revolver”), as amended, provides for maximum borrowings of $ 30.0 million which is provided by BOKF, NA dba Bank of Oklahoma (“Bank of Oklahoma”). Under the line of credit, there was one standby letter of credit totaling $ 1.8 million as of December 31, 2020. Borrowings available under the revolving credit facility at December 31, 2020, were $ 28.2 million. Interest on borrowings is payable monthly at LIBOR plus 2.0 %. No fees are associated with the unused portion of the committed amount. As of December 31, 2020 and 2019, we had no balance outstanding under our revolving credit facility. The revolving credit facility expires on July 26, 2021. At December 31, 2020 and 2019, the weighted average interest rate of our revolving credit facility was 2.6 % and 4.3 %, respectively. 45 At December 31, 2020, we were in compliance with our financial covenants. These covenants require that we meet certain parameters related to our tangible net worth and total liabilities to tangible net worth ratio. At December 31, 2020 our tangible net worth was $ 350.9 million, which meets the requirement of being at or above $ 175.0 million. Our total liabilities to tangible net worth ratio was 0.3 to 1.0, which meets the requirement of not being above 2 to 1. 14. Income Taxes The provision for income taxes consists of the following: Years Ended December 31, 2020 2019 2018 (in thousands) Current $ 9,939 $ 7,282 $ 10,530 Deferred 13,027 6,038 2,641 Total $ 22,966 $ 13,320 $ 13,171 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before the provision for income taxes. The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Years Ended December 31, 2020 2019 2018 Federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 5.3 % 5.2 % 6.0 % Excess tax benefits ( 3.2 ) % ( 2.6 ) % ( 2.0 ) % Return to provision 0.1 % ( 1.4 ) % — % Oklahoma amended tax returns — % ( 1.3 ) % — % Other ( 0.7 ) % ( 0.9 ) % ( 1.0 ) % 22.5 % 20.0 % 24.0 % Upon completion of the Company's 2018 tax return in 2019, the Company recorded additional benefit due to higher than expected research and development credit of $ 0.6 million. Additionally in 2019, the Company determined it could take advantage of an additional 1 % tax credit in Oklahoma for years in which the Company's location was deemed to be within an enterprise zone. The additional Oklahoma credit for being in an enterprise zone, or otherwise allowable under Oklahoma law, resulted in a benefit of $ 1.2 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. 46 The significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2020 2019 (in thousands) Deferred income tax assets (liabilities): Accounts receivable and inventory reserves $ 1,052 $ 835 Warranty accrual 3,776 3,523 Other accruals 747 1,919 Share-based compensation 4,102 3,906 Donations 297 194 Other, net 2,457 2,140 Total deferred income tax assets 12,431 12,517 Property & equipment ( 40,755 ) ( 27,814 ) Total deferred income tax liabilities $ ( 40,755 ) $ ( 27,814 ) Net deferred income tax liabilities $ ( 28,324 ) $ ( 15,297 ) We file income tax returns in the U.S., state and foreign income tax returns jurisdictions. We are subject to U.S. examinations for tax years 2017 to present, and to non-U.S. income tax examinations for the tax years 2016 to present. In addition, we are subject to state and local income tax examinations for tax years 2016 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense. 15. Share-Based Compensation On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (as amended, “LTIP”) which provided an additional 3.3 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards, in addition to the shares from the previous plan, the 1992 Plan. Since inception of the LTIP, non-qualified stock options and restricted stock awards have been granted with a five year vesting schedule. Under the LTIP, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan (as amended, “2016 Plan”) which provides for approximately 8.9 million shares, comprised of 3.4 million new shares provided for under the 2016 Plan, approximately 0.4 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 2.6 million shares that were approved by the stockholders on May 15, 2018, and an additional 2.5 million shares that were approved by the stockholders on May 12, 2020. Under the 2016 Plan, shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. The 2016 Plan is administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan. 47 The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during December 31, 2020, 2019, and 2018 using a Black Scholes-Merton Model: 2020 2019 2018 Director and Officers: Expected dividend yield $ 0.33 $ 0.32 $ 0.26 Expected volatility 31.63 % 29.54 % 29.73 % Risk-free interest rate 0.64 % 2.40 % 2.20 % Expected life (in years) 5.00 5.00 5.00 Employees: Expected dividend yield $ 0.32 $ 0.32 $ 0.26 Expected volatility 31.39 % 29.54 % 29.82 % Risk-free interest rate 0.67 % 2.38 % 2.51 % Expected life (in years) 5.00 5.00 5.00 The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. The following is a summary of stock options vested and exercisable as of December 31, 2020: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 7.18 - 36.95 543,646 5.33 $ 28.33 $ 20,820 $ 37.00 - 40.87 1,978 7.09 38.50 56 $ 41.37 - 66.98 194,697 7.87 41.59 4,875 Total 740,321 6.00 $ 31.85 $ 25,751 The following is a summary of stock options vested and exercisable as of December 31, 2019: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 7.18 - 34.10 451,077 5.44 $ 23.47 $ 11,702 $ 34.15 - 40.87 86,122 7.82 36.33 1,126 $ 41.37 - 50.68 1,750 1.81 41.59 14 Total 538,949 5.81 $ 21.58 $ 12,842 48 The following is a summary of stock options vested and exercisable as of December 31, 2018: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 5.67 - 32.80 456,223 5.72 $ 20.25 $ 6,757 $ 32.85 - 34.10 42,552 7.47 33.95 47 $ 34.15 - 42.94 17,202 8.30 35.19 7 Total 515,977 5.95 $ 21.88 $ 6,811 A summary of option activity under the plans is as follows: Weighted Average Exercise Options Shares Price Outstanding at December 31, 2019 3,627,047 $ 36.32 Granted 1,053,302 45.13 Exercised ( 644,850 ) 33.21 Forfeited or Expired ( 282,554 ) 40.64 Outstanding at December 31, 2020 3,752,945 $ 39.00 Exercisable at December 31, 2020 740,321 $ 31.85 The total pre-tax compensation cost related to unvested stock options not yet recognized as of December 31, 2020 is $ 20.8 million and is expected to be recognized over a weighted-average period of 2.96 years. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019, and 2018 was $ 15.5 million, $ 8.1 million, and $ 5.4 million, respectively. The cash received from options exercised during the year ended December 31, 2020, 2019, and 2018 was $ 21.4 million, $ 12.6 million, and $ 5.0 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows. A summary of the unvested restricted stock awards is as follows: Weighted Average Grant date Restricted stock Shares Fair Value Unvested at December 31, 2019 267,484 $ 34.42 Granted 76,148 43.54 Vested ( 110,075 ) 32.55 Forfeited ( 8,866 ) 39.72 Unvested at December 31, 2020 224,691 $ 38.22 At December 31, 2020, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 4.7 million which is expected to be recognized over a weighted average period of 2.70 years. 49 A summary of share-based compensation is as follows for the years ended December 31, 2020, 2019, and 2018: 2020 2019 2018 Grant date fair value of awards during the period: (in thousands) Options $ 12,615 $ 20,442 $ 12,932 Restricted stock 3,316 4,631 3,609 Total $ 15,931 $ 25,073 $ 16,541 2020 2019 2018 Share-based compensation expense: (in thousands) Options $ 8,312 $ 9,145 $ 5,344 Restricted stock 3,030 2,654 2,518 Total $ 11,342 $ 11,799 $ 7,862 2020 2019 2018 Income tax benefit related to share-based compensation: (in thousands) Options $ 2,698 $ 1,197 $ 980 Restricted stock 519 575 353 Total $ 3,217 $ 1,772 $ 1,333 16. Employee Benefits Defined Contribution Plan - 401(k ) We sponsor a defined contribution plan (the “Plan”). Eligible employees may make contributions in accordance with the Plan and IRS guidelines. In addition to the traditional 401(k), eligible employees are given the option of making an after-tax contribution to a Roth 401(k) or a combination of both. The Plan provides for automatic enrollment and for an automatic increase to the deferral percentage at January 1st of each year and each year thereafter. Eligible employees are automatically enrolled in the Plan at a 6 % deferral rate and currently contributing employees deferral rates will be increased to 6 % unless their current rate is above 6 % or the employee elects to decline the automatic enrollment or increase. Administrative expenses are paid for by Plan participants. The Company paid no administrative expenses for the years ended 2020, 2019, and 2018. The Company matches 175 % up to 6 % of employee contributions of eligible compensation. Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions. Years Ended December 31, 2020 2019 2018 (in thousands) Contributions, net of forfeitures, made to the defined contribution plan $ 9,091 $ 7,034 $ 8,127 50 Profit Sharing Bonus Plan We maintain a discretionary profit sharing bonus plan under which approximately 10 % of pre-tax profit is paid to eligible employees on a quarterly basis in order to reward employee productivity. Eligible employees are regular full-time employees who are actively employed and working on the first and last days of the calendar quarter and who were employed full-time for at least three full months prior to the beginning of the calendar quarter, excluding the Company's senior leadership team. Years Ended December 31, 2020 2019 2018 (in thousands) Profit sharing bonus plan expense $ 11,593 $ 7,448 $ 6,165 Employee Medical Plan We self-insure for our employees' health insurance. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plan. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. In addition, the Company matches 175 % of a participating employee's allowed contributions to a qualified health saving account to assist employees with our heath insurance plan deductibles. Years Ended December 31, 2020 2019 2018 (in thousands) Medical claim payments $ 9,060 $ 5,898 $ 5,915 Health saving account payments 3,476 3,265 2,948 17. Stockholders’ Equity Stock Repurchase The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market. Our open market repurchase programs are as follows: Agreement Execution Date Authorized Repurchase $ Expiration Date May 16, 2018 1 $ 15 million March 1, 2019 March 5, 2019 1 $ 20 million March 4, 2020 March 13, 2020 $ 20 million ** 2 1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs. 2 Expiration Date is at Board's discretion. The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board. The Company also has a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares of AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employee-participants. Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and employees for 51 payment of statutory tax withholdings on stock transactions. All other repurchases from directors or employees are contingent upon Board approval. All repurchases are done at current market prices. Our repurchase activity is as follows: 2020 2019 2018 (in thousands, except share and per share data) Program Shares Total $ $ per share Shares Total $ $ per share Shares Total $ $ per share Open market 103,689 $ 4,987 $ 48.10 5,799 $ 200 $ 34.46 252,272 $ 8,374 $ 33.19 401(k) 438,921 25,073 57.12 419,963 19,386 46.16 497,753 18,472 37.11 Directors & employees 23,272 1,169 50.23 28,668 1,207 42.11 33,751 1,097 32.49 Total 565,882 $ 31,229 $ 55.19 454,430 $ 20,793 $ 45.76 783,776 $ 27,943 $ 35.65 Inception to Date (in thousands, except share and per share data) Program Shares Total $ $ per share Open market 4,205,255 $ 74,793 $ 17.79 401(k) 7,906,660 145,000 18.34 Directors & employees 2,005,201 20,751 10.35 Total 14,117,116 $ 240,544 $ 17.04 Dividends At the discretion of the Board of Directors, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment. Our recent dividends are as follows: Declaration Date Record Date Payment Date Dividend per Share May 18, 2018 June 8, 2018 July 6, 2018 $ 0.16 November 8, 2018 November 29, 2018 December 20, 2018 $ 0.16 May 20, 2019 June 3, 2019 July 1, 2019 $ 0.16 November 6, 2019 November 27, 2019 December 18, 2019 $ 0.16 May 15, 2020 June 3, 2020 July 1, 2020 $ 0.19 November 10, 2020 November 27, 2020 December 18, 2020 $ 0.19 We paid cash dividends of $ 19.8 million, $ 16.6 million, and $ 16.7 million in 2020, 2019, and 2018, respectively. 18. New Markets Tax Credit On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “Project”). In connection with the NMTC transaction, the Company received a $ 23.0 million NMTC allocation for the Project and secured low interest financing and the potential for future debt forgiveness related to the Project. Upon closing of the NMTC transaction, the Company provided an aggregate of approximately $ 15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years , bearing an interest rate of 1.0 %. This $ 15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $ 22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of NMTCs. 52 This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The value attributable to the put/call is nominal. The Investor's interest of $ 6.3 million is recorded in New market tax credit obligation on the consolidated balance sheet. The Company incurred approximately $ 0.3 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. The Investor is subject to 100 percent recapture of the NMTC it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of the NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. The Investor and its majority owned community development entity are considered VIEs and the Company is the primary beneficiary of the VIEs. This conclusion was reached based on the following: • the ongoing activities of the VIEs--collecting and remitting interest and fees and NMTC compliance--were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE; • contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investor and community development entity; • the Investor lacks a material interest in the underling economics of the project; and • the Company is obligated to absorb losses of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transaction in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. 19. Commitments and Contingencies We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows. We are occasionally party to short-term, cancellable and occasionally non-cancellable, fixed price contracts with major suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw materials for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of December 31, 2020. 20. New Accounting Pronouncements Changes to U.S. GAAP are established by the FASB in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto. In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740) . The ASU includes simplification of accounting for income taxes for franchise taxes, step up in tax 53 basis for goodwill as part of a business combination and interim reporting of enacted changes in tax laws. The ASU is effective for the Company beginning after December 15, 2020. We do not expect ASU 2019-12 will have a material effect on our consolidated financial statements and notes thereto. 21. Earnings Per Share Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards. The following table sets forth the computation of basic and diluted earnings per share: 2020 2019 2018 Numerator: (in thousands, except share and per share data) Net income $ 79,009 $ 53,711 $ 42,329 Denominator: Basic weighted average shares 52,168,679 52,079,865 52,284,616 Effect of dilutive stock options and restricted stock 892,490 555,550 383,323 Diluted weighted average shares 53,061,169 52,635,415 52,667,939 Earnings per share: Basic $ 1.51 $ 1.03 $ 0.81 Dilutive $ 1.49 $ 1.02 $ 0.80 Anti-dilutive shares: Shares 364,787 1,868,087 1,920,313 22. Related Parties The Company purchases some supplies from an entity controlled by the Company’s Executive Chairman. The Company sometimes makes sales to the Executive Chairman for parts. Additionally, the Company sells units to an entity owned by a member of the CEO/President's immediate family. This entity is also one of the Company’s Representatives and as such, the Company makes payments to the entity for third party products. Following is a summary of transactions and balances with affiliates: Years Ended December 31, 2020 2019 2018 (in thousands) Sales to affiliates $ 3,475 $ 886 $ 1,442 Payments to affiliates 256 332 342 December 31, 2020 2019 (in thousands) Due from affiliates $ 342 $ 22 Due to affiliates — 2 23. Subsequent Events Subsequent to December 31, 2020 and through February 22, 2021, the Company repurchased 9,172 shares for $ 0.6 million from employees for payment of statutory tax withholdings on stock transactions and 41,712 shares for $ 3.0 million from our 401(k) savings and investment plan. 54 24. Quarterly Results (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2020 and 2019: Quarter First Second Third Fourth (in thousands, except per share data) 2020 Net sales $ 137,483 $ 125,596 $ 134,772 $ 116,700 Gross profit 42,947 38,131 40,848 33,923 Net income 21,853 17,804 20,460 18,892 1 Earnings per share: Basic $ 0.42 $ 0.34 $ 0.39 $ 0.36 1 Diluted $ 0.41 $ 0.34 $ 0.38 $ 0.35 1 2019 Net sales $ 113,822 $ 119,437 $ 113,500 $ 122,574 Gross profit 25,430 30,204 27,410 36,381 Net income 8,757 13,391 14,290 17,273 Earnings per share: Basic $ 0.17 $ 0.26 $ 0.27 $ 0.33 Diluted $ 0.17 $ 0.26 $ 0.26 $ 0.33 1 The Company had a gain of $ 4.1 million, net of profit sharing and taxes, associated with insurance proceeds (Note 2) related to a damaged roof incurred by adverse weather earlier in the year, which impacted our basic and diluted EPS by $ 0.08 . 55 25. Segments The following table summarizes certain financial data related to our segments. Transactions between segments are recorded based on prices negotiated between the segments. Sales of units represents the selling price of our units plus freight and other miscellaneous charges less any returns and allowances. Parts includes sales of purchased and fabricated parts including our coils along with the related freight and less any returns and allowances. The “Other” category in the table below includes certain sales cost and expenses that are not allocated to the reportable segments. Asset information by segment is not easily identifiable or reviewed by the chief operating decision maker. As such, this information is not included below. Years Ended December 31, 2020 2019 2018 (in thousands) Sales Units $ 480,629 $ 434,283 $ 406,331 Parts - External 34,577 35,424 28,456 Parts - Inter-segment 24,236 28,053 29,385 Other ( 655 ) ( 374 ) ( 840 ) Eliminations ( 24,236 ) ( 28,053 ) ( 29,385 ) Net sales $ 514,551 $ 469,333 $ 433,947 Gross Profit Units $ 164,048 $ 121,878 $ 108,214 Parts - External 15,592 17,301 13,215 Parts - Inter-segment ( 1,461 ) 985 865 Other ( 23,791 ) ( 19,754 ) ( 17,896 ) Eliminations 1,461 ( 985 ) ( 865 ) Gross profit $ 155,849 $ 119,425 $ 103,533 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable.