What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-25 · 215 added, 115 removed, 204 unchanged (62% of the section changed)

2 unchanged sentences

Description of the Company

We engineer, manufacture, market, and sell 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 pump, coils, and controls.

These products are marketed and sold to retail, manufacturing, educational, lodging, supermarket, medical, and other commercial industries.

We engineer, manufacture, market, and sell premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data center cooling solutions, cleanroom systems, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pump, coils, and controls.

These products are marketed and sold to retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, and other commercial industries.

We market our products to all 50 states in the United States and certain provinces in Canada.

Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate.

The recent uncertainty of the economy has negatively impacted the commercial and industrial new construction markets.

A further decline in economic activity could result in a decrease in our sales volume and profitability.

The recent rise in architectural billings and nonresidential building construction starts signal a 2022 recovery in nonresidential building construction after experiencing a downturn in 2021.

Furthermore, general economic growth combined with pent-up demand from customers that delayed replacing old equipment is driving accelerated replacement demand.

However, both the new construction and replacement markets are cyclical.

If the domestic economy were to slow or enter a recession, this could result in a decrease in our sales volume and profitability.

Sales in the commercial and industrial new construction markets correlate closely to the number of new homes and buildings that are built, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, and other macroeconomic factors over which we have no control.

We sell our products to property owners and contractors through a network of independent manufacturers’ representatives and our internal sales force.

Sales in the replacement markets are driven by various factors, including general economic growth, the Company’s new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, changes in market demand between more customized higher performing HVAC equipment and lower priced standard equipment, as well as many other factors.

When new construction is down, we emphasize the replacement market.

The replacement market in 2021 improved compared to 2020, while the new construction market was a bit slower.

We sell our products to property owners and contractors mainly through a network of independent manufacturers’ representatives.

This go-to-market strategy is unique compared to most of our larger competitors in that most control their sales channel.

We value the independent sales channel as we think it is a more effective way of attacking market share.

Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople.

Furthermore, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer.

We also have a small internal sales force that supports the relationships between the Company and our sales channel partners.

BasX sells highly customized products for unique applications for a more concentrated customer base and an internal sales force is more effective for such products.

In total, our internal sales force makes up 65 individuals.

The demand for our products is influenced by national and regional economic and demographic factors.

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Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth, and the relative age of the population.

When new construction is down, we emphasize the replacement market.

The new construction market in 2020 continued to be unpredictable and uneven.

Thus, throughout the year, we emphasized promotion of the benefits of AAON equipment to property owners in the replacement market.

The principal components of cost of sales are labor, raw materials, component costs, factory overhead, freight out, and engineering expense.

The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum.

We also purchase from other manufacturers certain components, including compressors, motors, and electrical controls.

We also purchase from other manufacturers certain components, including coils, compressors, motors, and electrical controls.

The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S.

economy and global economy.

For the year ended December 31, 2020, the prices for copper, galvanized steel, stainless steel and aluminum increased approximately 0.6%, 12.2%, 8.5%, and 12.8%, respectively, from 2019.

For the year ended December 31, 2019, the prices for copper, galvanized steel and stainless steel decreased approximately 3.2%, 5.8%, 2.3%, and 1.6%, respectively, from 2018.

We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable fixed price contracts with our major suppliers for periods of six to 18 months.

For the year ended December 31, 2021, the prices for copper, galvanized steel, and stainless steel increased approximately 35.3%, 50.9%, and 45.4%, respectively, and aluminum decreased approximately 4.5%, from 2020.

For the year ended December 31, 2020, the prices for copper, galvanized steel and stainless steel increased approximately 0.6%, 12.2%, 8.5%, and 12.8%, respectively, from 2019.

We occasionally increase the price of our equipment to help offset any inflationary headwinds.

In 2021, given the unusual amount of inflation in our materials, we implemented three price increases.

We also attempt to limit the impact of price fluctuations on these materials by entering into cancellable and 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.

The following are highlights of our results of operations, cash flows, and financial condition:

• In 2020, we fully realized the price increases put in place during 2019.

• We continued to become more efficient.

Our gross profit percentage improved from 25.4% during the year ended in 2019 to 30.3% in 2020 despite employee absenteeism, mostly in June, related to COVID-19.

• Our warranty expense has continued to improve from 2018 through 2020.

• We honored our founder and Executive Chairman, Norman Asbjornson, with a donation to Winifred Public Schools of $1.25 million.

• With a record year, were able to reward our employees with increased profit sharing and bonuses.

• We spent $67.8 million in capital expenditures in 2020, over half of which was for our new building in Longview, Texas.

• We recognized a gain of $6.4 million from the receipt of insurance proceeds related to our roof on our Tulsa facility that sustained hail damage in the spring.

• Total cash, cash equivalents and restricted cash was $82.3 million at December 31, 2020.

Results of Operations

Units sold for 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

Year Ended December 31, 2020 vs.

Year Ended December 31, 2019

Consolidated Results of Operations

Years Ended December 31,

2021 2020 2019

(in thousands)

Net Sales $ 534,517 $ 514,551 $ 469,333

Cost of Sales 396,687 358,702 349,908

Gross Profit 137,830 155,849 119,425

Selling, general and administrative expenses 68,598 60,491 52,077

(Gain) loss on disposal of assets and insurance recoveries (21) (6,478) 337

Income from operations $ 69,253 $ 101,836 $ 67,011

The following are highlights of our results of operations, cash flows, and financial condition:

• Our backlog is at a record level due primarily to strong end-market demand.

• Organic bookings were up approximately 55% compared to 2020.

• On December 10, 2021, we completed the acquisition of BasX bringing the Company exposure to attractive end-markets into which the Company has historically had minimal exposure.

• Sales in 2021 grew year-over-year 3.9% to $534.5 million driven mainly by price increases.

Beginning in the fourth quarter of 2021, we report our financial results based on three reportable segments:

AAON Oklahoma, AAON Coil Products, and BasX, which are further described in Item 1, due to the acquisition of BasX and internal leadership reporting changes.

The Company's chief decision maker ("CODM"), our CEO, allocates resources and assesses the performance of each operating segment using information about the operating segment's net sales and income from operations.

The CODM does not evaluate operating segments using asset or liability information.

Segment Operating Results for the Years Ended December 31, 2021 and 2020

For the years ended December 31,

2021 Percent of Sales 2

2020 Percent of Sales 2

$ Change % Change

(in thousands, except unit data)

(in thousands)

AAON Oklahoma $ 463,845 86.8 % $ 458,957 89.2 % $ 4,888 1.1 %

AAON Coil Products 66,589 12.5 % 55,594 10.8 % 10,995 19.8 %

4,083 0.8 % — — 4,083 —

Net sales $ 534,517 $ 514,551 $ 19,966 3.9 %

Total units 26,231 26,307 (76) (0.3) %

Our sales increased 9.6%, or $45.2 million mostly due to the increase in rooftop sales which increased by $51.5 million (increase of 15%).

The increase in rooftop units sales was due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation allowing increased production (1,265 units or 9% unit increase over 2019) and from price increases put in place over the last year.

Cost of Sales 3

Years Ended December 31, Percent of Sales

AAON Oklahoma $ 336,977 72.6 % 318,858 69.5 % $ 18,119 5.7 %

AAON Coil Products 56,514 84.9 % 39,844 71.7 % 16,670 41.8 %

3,196 78.3 % — — 3,196 —

(in thousands)

Cost of sales $ 396,687 74.2 % $ 358,702 69.7 % $ 37,985 10.6 %

Gross Profit 3

The principal components of cost of sales are labor, raw materials, component costs, factory overhead, freight out, and engineering expense.

The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum.

As shown below, our average raw material prices increased during the year.

However, the Company had increased its inventory levels in 2019 and early 2020 at lower prices and was able to benefit from these lower priced raw materials as the stock was consumed in 2020.

The Company continues to closely monitor its raw materials prices to try and purchase quantities when there are dips in the market.

The Company improved its labor and overhead efficiencies with our new sheet metal machines that were placed into service in the last quarter of 2019 and early 2020, eliminating any bottlenecks in our sheet metal production.

The Company's headcount was also down compared to 2019, resulting in a higher production output per employee.

AAON Oklahoma $ 126,868 27.4 % $ 140,099 30.5 % $ (13,231) (9.4) %

AAON Coil Products 10,075 15.1 % 15,750 28.3 % (5,675) (36.0) %

887 21.7 % — — 887 —

Gross profit $ 137,830 25.8 % $ 155,849 30.3 % $ (18,019) (11.6) %

1 BasX was acquired on December 10, 2021.

We have included the results of BasX's operations in our consolidated financial statements as of December 11, 2021.

2 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment's net sales.

Total cost of sales and total gross profit are calculated as a percentage of total net sales.

3 Presented after intercompany eliminations.

Total net sales increased $20.0 million or 3.9%, due primarily to price increases that totaled of approximately $26.3 million put into place over the last year that were realized during 2021.

The acquisition of BasX in December 2021 added $4.1 million to net sales for the short period in December.

AAON Coil Products saw a 16.5% increase in units sold, or approximately $9.7 million, due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021.

Those increases were offset by a total decrease in volumes of approximately $10.8 million due to challenges in COVID-19 related absenteeism, supply chain issues for certain parts, and challenges hiring additional production labor to achieve higher production rates.

Additionally, our plants were shut down for several days in January 2021 for planned maintenance and in February 2021 for weather that resulted in lost volume of approximately $18.1 million.

Part sales and other increased $9.6 million or 20.5%.

As shown in the table below, we've experienced increases in the cost of our raw materials.

We put multiple price increases in place during the year to counteract the increased cost of material;

however, it took time for those price increases to work through our backlog and be realized.

For this reason, we started to see erosion in our gross profit.

In the second and third quarters, we encountered challenges in hiring additional production labor, resulting in unfavorable labor and overhead efficiencies, including the Company's ability to absorb certain fixed costs.

In order to attract new employees, we increased starting wages for our production workforce by 7.0% in July 2021.

In order to retain our existing employees, we also put a cost of living increase of 3.5% in place in October 2021 for all employees below the Director level.

The second half of the year was also impacted by various part shortages.

This caused us to rearrange production schedules, incur delays and inefficiencies in production, and incur more expensive freight costs.

All these things combined with lower production volumes resulted in poor absorption of overhead which caused declines in our gross profit.

Raw Material Costs

Twelve month average raw material cost per pound as of December 31:

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Donations 738 2,115 0.1 % 0.4 %

Bad Debt Expense 153 91 — % — %

Other 9,187 8,260 1.7 % 1.6 %

Total SG&A $ 68,598 $ 60,491 12.8 % 11.8 %

The Company experienced a decrease in warranty claims paid of 15.6% in 2020.

Our profit sharing expenses are up due to higher earnings.

Salaries & benefits increased due to additional bonuses and employee incentives.

Stock compensation was lower because the valuation of the Company-wide equity grant awarded in March 2020 was less than the grant awarded in March 2019.

Donations increased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman.

Our profit sharing expenses decreased due to decreased earnings in 2021.

Salaries & benefits increased due to increases in salaries and bonuses.

Professional fees increased mostly due to the transaction costs associated with the acquisition of BasX (Note 4) of $4.4 million.

Donations decreased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman during 2020.

Gain/Loss on Disposals of Assets and Insurance Proceeds

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 for year ended

December 31, 2020.

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.

Years Ended December 31, Effective Tax Rate

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Income tax provision $ 10,424 $ 22,966 15.1 % 22.5 %

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.

Year Ended December 31, 2019 vs.

Year Ended December 31, 2018

Years Ended December 31,

On May 21, 2021, the State of Oklahoma enacted House Bill 2960, effectively reducing the corporate income tax rate in Oklahoma from 6% to 4%.

As a result of these changes, the Company adjusted its state deferred tax assets and liabilities in the second quarter of 2021 using the newly enacted rate for the periods when they are expected to be realized resulting in a benefit of $0.8 million.

During the year ending December 31, 2021, the Company recorded an excess tax benefit of $5.4 million as compared to $3.2 million during 2020, an increase of 68.8%.

The increase was primarily due to timing of stock option exercises as a result of our high stock price during the three months ended March 31, 2021 and three months ended December 31, 2021.

Segment Operating Results for the Years Ended December 31, 2020 and 2019

For the years ended December 31,

2020 Percent of Sales 1

2019 Percent of Sales 1

$ Change % Change

(in thousands, except unit data)

(in thousands)

AAON Oklahoma $ 458,957 89.2 % $ 418,669 89.2 % $ 40,288 9.6 %

AAON Coil Products 55,594 10.8 % 50,664 10.8 % 4,930 9.7 %

Net sales $ 514,551 $ 469,333 $ 45,218 9.6 %

Total units 26,307 25,152 1,155 4.6 %

Most of the increase in revenues was due to our price increases in 2018 which were realized during 2019.

Additionally, our parts sales and water-source heat pumps sales grew with increases of $7.0 million and $10.8 million, respectively.

Cost of Sales 2

Years Ended December 31, Percent of Sales

2019 2018 2019 2018

(in thousands)

AAON Oklahoma $ 318,858 69.5 % 311,441 74.4 % $ 7,417 2.4 %

AAON Coil Products 39,844 71.7 % 38,467 75.9 % 1,377 3.6 %

Cost of sales $ 358,702 69.7 % $ 349,908 74.6 % $ 8,794 2.5 %

Gross Profit 2

AAON Oklahoma $ 140,099 30.5 % $ 107,228 25.6 % $ 32,871 30.7 %

AAON Coil Products 15,750 28.3 % 12,197 24.1 % 3,553 29.1 %

Gross profit $ 155,849 30.3 % $ 119,425 25.4 % $ 36,424 30.5 %

1 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment's net sales.

Total cost of sales and total gross profit are calculated as a percentage of total net sales.

2 Presented after intercompany eliminations.

Total net sales increased $45.2 million or 9.6%, mostly due to the increase of rooftop sales from AAON Oklahoma.

AAON Oklahoma saw a increase in rooftop units volumes of 8.8%, or approximately $30.6 million, due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation allowing increased production and from price increases put in place over the last year.

Part sales and other decreased $3.4 million or 6.9%.

The principal components of cost of sales are labor, raw materials, component costs, factory overhead, freight out, and engineering expense.

The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum.

As shown below, our average raw material prices decreased from 2018 to 2019.

The Company also maintained a steady level of workforce throughout 2019.

As shown below, our average raw material prices increased during the year.

However, the Company had increased its inventory levels in 2019 and early 2020 at lower prices and was able to benefit from these lower priced raw materials as the inventory was consumed in 2020.

The Company's headcount was also down compared to 2019, resulting in a higher production output per employee.

Raw Material Costs

Twelve month average raw material cost per pound as of December 31:

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Donations 2,115 1,137 0.4 % 0.2 %

Bad Debt Expense 91 174 — % — %

Other 8,260 9,476 1.6 % 2.0 %

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The Company experienced a decrease in warranty claims paid of 15.6% in 2020.

Our profit sharing expenses increased due to higher earnings.

Depreciation increased due to the continued expansion of our facilities.

The Company makes company wide equity grants each year that caused our increase in stock compensation.

We raised our minimum wage twice during 2019 to keep our salaries consistent with market rates to help retain employees.

Our profit sharing expenses increased due to higher earnings in 2020.

Salaries and benefits increased due to additional bonuses and employee incentives.

Stock compensation was lower in 2020 because the valuation of the Company-wide equity grant awarded in March 2020 was less than the grant awarded in March 2019.

Donations increased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman.

Gain/Loss on Disposals of Assets and Insurance Proceeds

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 for the year ended December 31, 2020.

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.

Years Ended December 31, Effective Tax Rate

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Our working capital and capital expenditure requirements are generally met through net cash provided by operations and the occasional use of the revolving bank line of credit based on our current liquidity at the time.

Working Capital - Our unrestricted cash and cash equivalents and increased $52.2 million from December 31, 2019 to December 31, 2020.

Working Capital - Our unrestricted cash and cash equivalents decreased $76.2 million from December 31, 2020 to December 31, 2021 primarily due to the use of available cash on hand to fund the acquisition of BasX (Note 4).

As of December 31, 2021, we had $3.5 million in cash and cash equivalents and restricted cash.

Revolving Line of Credit - On July 26, 2018 we renewed our $30.0 million line of credit (“BOK Revolver”) with BOKF, NA dba Bank of Oklahoma (“Bank of Oklahoma”).

Under the line of credit, there was one standby letter of credit of $1.8 million as of December 31, 2020.

At December 31, 2020 we have $28.2 million of borrowings available under the revolving credit facility.

No fees are associated with the unused portion of the committed amount.

As of December 31, 2020 and 2019, there were no outstanding balances under the revolving credit facility.

Interest on borrowings is payable monthly at LIBOR plus 2.0%.

The weighted average interest rate was 2.6% and 4.3% for the years ended December 31, 2020 and 2019, respectively.

At December 31, 2020, we were in compliance with all of the covenants under the BOK Revolver.

We are obligated to comply with certain financial covenants under the BOK Revolver.

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.

Revolving Line of Credit - Our revolving credit facility (“Revolver”), as amended and restated, provides for maximum borrowings of $100.0 million.

As of December 31, 2021, we had a $40.0 million balance outstanding under the Revolver.

We have one standby letter of credit totaling $1.8 million as of December 31, 2021 and 2020.

Borrowings available under the Revolver at December 31, 2021, were $58.2 million.

The Revolver expires on November 24, 2026.

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin.

Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio.

The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%.

The applicable fee percentage is determined quarterly based on the Company's leverage ratio.

At December 31, 2021, the weighted average interest rate of the Revolver was 1.3%.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income and were not material for the year ended December 31, 2021.

If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate ("ABR") loans.

ABR loans would bear interest at a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.

At December 31, 2021, we were in compliance with our financial covenants, as defined by the Revolver.

These covenants require that we meet certain parameters related to our leverage ratio.

At December 31, 2021, our leverage ratio was 0.42 to 1.0, which meets the requirement of not being above 3 to 1.

New Market Tax Credit Obligation - 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”).

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Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing), and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations in 2022 and the foreseeable future.

Off-Balance Sheet Arrangements - We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Statement of Cash Flows

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Inventories (45,955) (9,726) 2,557

Contract assets 1,886 — —

Prepaid expenses and other 1,374 (2,364) (329)

Accounts payable 10,899 (2,155) 280

Contract liabilities (229) — —

Deferred revenue 447 1,010 425

Accrued liabilities 2,203 7,124 (1,816)

Accrued liabilities and donations (1,690) 2,203 7,124

Net cash provided by operating activities 61,183 128,814 97,925

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Insurance proceeds — 6,417 —

Cash paid for business combination — — (6,377)

Cash paid in business combination, net of cash acquired (103,430) — —

Purchases of investments — — (6,000)

3 unchanged sentences

Financing Activities

Borrowings under revolving credit facility 40,000 — —

Proceeds from financing obligation, net of issuance costs — — 6,614

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Cash dividends paid to stockholders (19,947) (19,815) (16,645)

Net cash used in financing activities $ (29,626) $ (18,500) $ (39,684)

Net cash provided by (used in) financing activities $ 18,735 $ (29,626) $ (18,500)

Cash Flows from Operating Activities

Cash flows from operating activities increased in 2020 mainly as a result of our continuing operations which capitalized on our reduced lead times and second full year of benefiting from price increases enacted during 2018 and 2019, combined with an overall decrease in the average cost of inventory raw materials purchased in 2019.

For 2019, the Company saw an increase in customer prepayments and lower warranty claims that decreased our liability payments.

The positive warranty downward trend continued in 2020.

In 2018, the Company's cash flows were tighter due to our capital expenditures and business combination that was completed during the year.

The decrease in cash flows from receivables was due to the increase in sales in the fourth quarter of 2021 as compared to 2020, as a result of the planned Company shutdown during the last week of December 2020.

The decrease in cash flows from inventory is a result of increased costs of materials and some larger purchases made in the year to help deter supply chain issues and long lead times.

The increase in cash flows from accounts payable is primarily driven by the timing of payments.

Cash Flows from Investing Activities

Cash flows from investing activities increased in 2020 as compared to 2019 and 2018.

Cash flows from investing activities are primarily affected by the timing of our capital expenditures.

In November 2020, we received approximately $6.4 million from insurance proceeds which will be utilized to extend the useful life of our facility's roof in Tulsa, Oklahoma.

Additionally, we paid approximately $6.4 million in 2018 related to our February 2018 business combination.

The capital expenditures for 2020 relate to the completion of our Longview facility expansion as well as the addition to and replacement of sheet metal manufacturing equipment.

The capital expenditures for 2019 relate to the completion of our R&D lab and water-source heat pump lines, along with the expansion of our Longview facility.

Cash flows from investing activities increased in 2021 as compared to 2020 and 2019 primarily due to the cash paid for the acquisition of BasX (Note 4) in December 2021.

This increase is offset by decreased capital expenditures in 2021 compared to 2020 and insurance proceeds received in November 2020.

The capital expenditures for 2020

relate to the completion of our Longview facility expansion as well as the addition to and replacement of sheet metal manufacturing equipment.

Our capital expenditure program for 2022 is estimated to be approximately $100.4 million.

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Cash Flows from Financing Activities

Cash flows from financing activities is primarily affected by the timing of stock options exercised by our employees.

Cash flows from stock options exercised increased to the increase in our publically traded stock price.

Additionally, we received approximately $6.6 million in net proceeds in 2019 related to the New Markets Tax Credit transaction (Note 18).

We also increased our dividend per share in 2020 from $0.16 to $0.19.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Cash flows from financing activities is historically affected by the timing of stock options exercised by our employees and repurchases of the Company's stock.

However, in 2021, the increase in cash from financing activities is primarily related to borrowings under our revolving credit facility to manage our working capital needs after our available cash on hand was used to fund the BasX acquisition.

Our stock buyback program and dividends paid were $22.5 million and $19.9 million for the year ended December 31, 2021, respectively.

We expect to continue the buyback program as well as paying semi-annual dividends at historical rates.

The future costs of the buyback program could fluctuate based on market conditions including our published stock price and buyback transaction volume.

Commitments and Contractual Agreements

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We believe the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements.

We discuss these estimates with the Audit Committee of the Board of Directors periodically.

Inventory Reserves – We establish a reserve for inventories based on the change in inventory requirements due to product line changes, the feasibility of using obsolete parts for upgraded part substitutions, the required parts needed for part supply sales and replacement parts, and for estimated shrinkage.

Assumptions used to estimate inventory reserves include future manufacturing requirements and industry trends.

Evolving technology and changes in product mix or customer demand can significantly affect the outcome of this analysis.

Warranty – A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized.

Our product warranty policy is the earlier of one year from the date of first use or 18 months from date of shipment for parts only;

18 months for data center cooling solutions and cleanroom systems;

an additional four years for compressors (if applicable);

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Should actual claim rates differ from our estimates, revisions to the estimated product warranty liability would be required.

Share-Based Compensation – We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including stock options and restricted stock awards, based on their fair values at the time of grant.

Compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award.

Share-Based Compensation – We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including stock options, restricted stock awards, performance stock units ("PSUs"), and key employee awards ("Key Employee Awards") based on their fair values at the time of grant.

Compensation expense is recognized on a straight-line basis over the service period of stock options, restricted stock awards, and PSUs.

Compensation expense is recognized for the Key Employee Awards on a straight line basis over the service period when the performance condition is determined to be probable.

Forfeitures are accounted for as they occur.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model.

The use of the Black-Scholes-Merton option valuation model requires the input of subjective assumptions such as:

the expected volatility, the expected term of the options granted, expected dividend yield and the risk-free rate.

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.

The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model.

The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as:

the expected volatility, the expected term of the grant, forward-looking market conditions, risk-free rate, and expected dividend yield for stock options.

The fair value of restricted stock awards and Key Employee Awards is based on the fair market value of AAON common stock on the respective grant dates.

The fair value of restricted stock awards is reduced for the present value of dividends.

Definite-Lived Intangible Assets

Definite-lived intangible assets include various customer relationships and intellectual property acquired in business combinations.

The fair value of customer relationships and intellectual property is estimated based on management’s judgments and assumptions or third party valuation models.

These models requires the use of subjective inputs and assumptions such as expected useful lives, growth of existing customers, attrition of customers, future margins and expenses, discount rates, and future revenue growth.

These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.

We amortize our definite-lived intangible assets on a straight-line basis over the estimated useful lives of the assets.

Our definite-lived intangible assets have estimated used lives of between 14 and 30 years.

We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review.

Goodwill and Indefinite-Lived Intangible Assets

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.

Indefinite-lived intangible assets consist of trademarks and trade names.

The fair value of trademarks and trade names is estimated based on management’s judgments and assumptions or third party valuations.

These models requires the us of subjective inputs such as royalty rate, discount rate, and terminal value.

Goodwill and indefinite-lived intangible assets are not amortized, but instead are 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 and indefinite-lived intangible assets exceeds their carrying amount.

If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the report unit and indefinite-lived assets and compare the amount to their carrying amount.

If the fair value of a reporting unit and indefinite-lived asset exceeds their

carrying amount, the reporting unit and indefinite-lived assets are not considered impaired.

If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets.

We performed a qualitative assessment as of December 31, 2021 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets.

Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets.

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 impairment assessment included macro-industry trends, market participant considerations, historical profitability, including free cash flows, and forecasted multi-year operating results.

Changes in operating results and other assumptions could materially affect these estimates.

A considerable amount of management judgment and assumptions are required in performing the impairment tests.

Contingent Consideration - As part of a business combination, we agreed to issue shares of the Company's common

stock based on certain milestones in accordance with the acquisition agreement.

This contingent consideration is valued at fair value on the acquisition date and is included in goodwill and additional paid-in capital on the consolidated balance sheets.

The fair value of the contingent consideration was determined using the Option Pricing Method through a Monte Carlo simulation, as this model is appropriate for contingent considerations for which the payoff structure is nonlinear.

The use of this model requires the input of subjective inputs and assumptions such as:

future earnings, the expected volatility of future earnings, risk-free rate, discount rate, and future stock performance.

These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.

New Accounting Pronouncements

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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 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.

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers .

Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree.

Historically, such amounts were recognized by the acquirer at fair value in acquisition accounting.

The guidance should be applied prospectively to acquisitions occurring on or after the effective date.

The guidance is effective for years beginning after December 15, 2022, including interim periods within those years.

Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued.

We adopted this standard at the beginning of the fourth quarter of 2021.

Upon adoption, this update did not have a material effect on our consolidated financial position or result of operations.

Quantitative and Qualitative Disclosures About Market Risk.

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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 7. Management’s Discussion and Analysis