What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-02-25 · 414 added, 184 removed, 703 unchanged (46% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 29

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 )

Consolidated Balance Sheets 35

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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.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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.

As described in Note 2 to the 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 judgment during the year ended December 31, 2021, 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.

The principal considerations for our determination such manual inventory adjustments as a critical audit matter are 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.

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• 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 recalculated the Company’s standard costing of inventory which 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.

BasX, LLC Acquisition

As described in Note 4 to the financial statements, the Company acquired a controlling interest in BasX, LLC (“BasX”) in December 2021 and the assets acquired, the liabilities assumed and contingent consideration payable were estimated and recorded at fair value as of the transaction date, for which the Company utilized a valuation specialist.

We identified the estimation of the fair value of the intangible assets acquired and contingent consideration payable in the acquisition of BasX as a critical audit matter.

The principal considerations for our determination that the estimation of the fair value of the intangible assets acquired and contingent consideration payable in the acquisition of BasX as a critical audit matter are that there was a high degree of estimation uncertainty due to significant judgments with respect to the selection of the valuation methodologies applied, the assumptions used to estimate the future revenues and cash flows, including revenue growth rates and forecasted costs, discount rates, royalty rates, and obsolescence of intellectual property.

This required an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the fair value of the intangible assets acquired and contingent consideration payable, including the need to involve valuation specialists.

Our audit procedures responsive to the estimation of the fair value of the intangible assets acquired and contingent consideration payable for the acquisition of BasX included the following procedures, among others.

• We tested the design and operating effectiveness of controls relating to management’s review of the assumptions used to develop the future revenues and cash flows, the reconciliation of future revenues and cash flows prepared by management to the data used in the third-party valuation report, and the aforementioned valuation inputs and methodologies applied.

• Utilized a valuation specialist to evaluate:

◦ The methodologies used and whether they were acceptable for the underlying assets or operations by performing an independent calculation.

◦ The appropriateness of the royalty rates attributed to both intellectual property and trademarks and the obsolescence of intellectual property using our understanding of BasX’s business and historical financial results, intellectual property and trademarks and the Company’s future plans.

◦ The appropriateness of the discount rates by recalculating the weighted average costs of capital.

◦ The qualifications of the Company’s valuation specialist based on their credentials and experience.

• Tested the revenue growth rates and forecasted costs of BasX by comparing such items to the historical operating results of the acquired entity and by assessing the likelihood or capability of the acquired entity to undertake activities or initiatives underpinning significant drivers of growth in the forecasted period.

/s/ GRANT THORNTON LLP

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Income tax receivable 5,723 4,587

Note receivable 31 29

Inventories, net 130,270 82,219

Contract assets 5,749 —

Prepaid expenses and other 2,071 3,770

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Right of use assets 16,974 1,571

Note receivable, long-term 579 597

Other long-term assets 1,216 579

Total assets $ 650,180 $ 449,008

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Current liabilities:

Revolving credit facility $ — $ —

Accounts payable $ 29,020 $ 12,447

Accrued liabilities 50,206 46,586

Contract liabilities 7,542 —

Total current liabilities 86,768 59,033

Revolving credit facility, long-term 40,000 —

Deferred tax liabilities 31,993 28,324

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New market tax credit obligation (a) 6,406 6,363

Commitments and contingencies

Commitments and contingencies (Note 19)

Stockholders’ equity:

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

Interest income, net 88 66 196

Other (expense) income, net 51 ( 46 ) ( 47 )

Interest (expense) income, net ( 132 ) 88 66

Other income (expense), net 61 51 ( 46 )

Income before taxes 69,182 101,975 67,031

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Stock repurchased and retired ( 320 ) ( 1 ) ( 22,465 ) — ( 22,466 )

Contingent consideration (Note 4)

— — 66,000 — 66,000

Dividends — — — ( 19,947 ) ( 19,947 )

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Depreciation and amortization 30,343 25,634 22,766

Amortization of bond premiums — — 13

Amortization of debt issuance costs 43 43 7

Amortization of right of use assets 73 — —

Provision for credit losses on accounts receivable, net of adjustments 43 153 91

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Share-based compensation 11,812 11,342 11,799

(Gain) loss on disposition of assets ( 6,478 ) 337 ( 12 )

Foreign currency transaction (gain) loss ( 12 ) ( 27 ) 55

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

Foreign currency transaction gain ( 1 ) ( 12 ) ( 27 )

Interest income on note receivable ( 24 ) ( 24 ) ( 25 )

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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

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Capital expenditures ( 55,362 ) ( 67,802 ) ( 37,166 )

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

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

Proceeds from sale of property, plant and equipment 19 60 69

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Maturities of certificates of deposits — — 6,000

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 54 52 51

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Financing Activities

Borrowings under revolving credit facility 40,000 — —

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

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Dividends paid to stockholders ( 19,947 ) ( 19,815 ) ( 16,645 )

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 )

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

Net (decrease) increase in cash, cash equivalents and restricted cash ( 78,801 ) 37,915 42,379

Cash, cash equivalents and restricted cash, beginning of year 82,288 44,373 1,994

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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”).

Our operating subsidiaries include AAON, Inc., an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BasX, Inc.

(dba BasX Solutions), an Oregon 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.

We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data centers cooling solutions, cleanroom systems, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls.

Recent Developments

On December 10, 2021, we closed on the acquisition of all of the issued and outstanding equity ownership of BasX, LLC, doing business as BasX Solutions ("BasX") (Note 4).

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

On December 29, 2021, BasX, LLC converted to a C-Corporation, BasX, Inc., and is subject to income tax.

Summary of Significant Accounting Policies

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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.

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 than normal employee absenteeism in our manufacturing facilities.

Notable absenteeism occurred the latter part of June 2020 at our Tulsa, OK facilities which resulted in reduced shipments and longer lead times in the second quarter 2020.

Additionally, our Longview, TX facility suffered from COVID-19 related absenteeism during the quarter ending September 30, 2021, which reduced the production of coils that were needed to complete units at both our Longview, TX and Tulsa, OK facilities.

We had continuous operations during the years ended December 31, 2021 and December 31, 2020, except for events unrelated to COVID-19 described below.

Additional precautions have been taken to social distance workers that

work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics.

The Company utilizes sanitation stations and performs additional cleaning and sanitation throughout the day.

We witnessed increases in some of our raw material prices, especially in copper and steel, which appear to be an effect of COVID-19, and we continue to make strategic purchases of materials when we see opportunities.

We have managed the increase in the cost of raw materials through price increases for our products which began to be realized in late 2021.

Although we have experienced some supply chain challenges related to specific manufacturing parts, due to our strong vendor relationships as well as our favorable liquidity position, we have experienced minimal disruption to our supply chain due to COVID-19.

Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor.

In July 2021, we increased starting wages for our production workforce by 7.0 %.

We also have put a cost of living increase of 3.5 % in place in October 2021 for all employees below the Director level.

We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.

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.

However, COVID-19 has had no significant impact on our planned cash outflows for raw materials, dividend payments, or capital expenditures.

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.

We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and its potential effect on our financial position, results of operations and cash flows.

Planned Plant Maintenance

During the fourth quarter of 2020, we made the strategic decision to shut down our Tulsa, OK and Longview, TX manufacturing facilities to perform planned and necessary maintenance during the last week of December 2020 as well several days in early January 2021.

Although we lost several production days due to this shut down, we do not believe that the impact of the shut down had a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ending December 31, 2021.

Impact of February 2021 Weather

In February 2021, record-breaking winter storms affected Oklahoma and Texas, causing sustained below freezing temperatures, hazardous driving conditions, rolling blackouts, water main breaks, and a host of other weather related issues.

In addition to significant absenteeism as a result of employees being unable to travel to and from work due to inadequate transportation and/or hazardous road conditions, the Company made the decision to shut down the Tulsa, OK and Longview, TX plants for several days.

This decision was based on the expected employee absenteeism as well as the expected rolling blackouts caused by the increased demand on the electrical and natural gas power grids.

Although we lost several production days in mid-February 2021, we do not believe that the impact of this weather event had a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ending December 31, 2021.

Cash and Cash Equivalents

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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, 2021 and 2020.

Restricted Cash

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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

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We generally do not require that our customers provide collateral;

however, our billings and customer payment terms can vary based on product type as a way to manage collections risk.

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.

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No other customer accounted for more than 10% of our sales during 2021, 2020, and 2019.

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 are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.

No customers accounted for more than 10% of our accounts receivable balance at December 31, 2021.

Two customers, Texas AirSystems LLC and Johnson Barrow Inc., accounted for more than 10% of our accounts receivable balance at December 31, 2020.

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost method.

Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead.

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Property, plant, and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation;

except for property, plant, and equipment acquired in a business combination which is recorded at fair value.

Repairs and maintenance and any gains or losses on disposition are included in operations.

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Business Combinations

We record the assets acquired and liabilities assumed in a business combination at their acquisition date fair values.

The Company applies the acquisition method of accounting for business acquisitions.

The results of operations of the businesses acquired by the Company are included as of the respective acquisition date.

The acquisition-date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition.

To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill.

The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date.

Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.

Fair Value Financial Instruments and Measurements

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Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date.

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.

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 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.

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.

Items categorized in Level 3 include the estimated fair values of

property, plant and equipment, intangible assets, contingent consideration, 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).

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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.

Definite-Lived Intangible Assets

Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations (Note 4).

We amortize our definite-lived 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.

Amortization is computed using the straight-line method over the following estimated useful lives:

Intellectual property 30 years

Customer relationships 14 years

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.

Goodwill at December 31, 2020 is deductible for income tax purposes.

Goodwill is not amortized, but instead is evaluated for impairment at least annually.

At December 31, 2021, approximately $ 19.7 million of goodwill Indefinite-lived intangible assets consist of trademarks and trade names and are also subject to at least annual impairment testing.

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 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.

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 goodwill impairment assessment included market participant considerations and future forecasted operating results.

The estimates and assumptions we use in the annual impairment assessment included market participant considerations and future forecasted 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 additional paid-in capital on the consolidated balance sheets.

Impairment of Long-Lived Assets

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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 Company’s share-based compensation plans provide for the granting of stock options, restricted stock, and performance stock units ("PSUs").

In conjunction with the acquisition of BasX (Note 4), we awarded performance awards to key employees ("Key Employee Awards") of BasX.

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.

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, expected market performance, risk-free rate, and expected dividend yield for stock options.

The fair va lue 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.

The Key Employee Awards do not accrue dividends.

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

Historically, 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.

As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3 % per year.

Forfeitures are accounted for as they occur.

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.

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Forfeitures are accounted for as they occur.

The PSUs cliff vest on December 31, 2023.

Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs.

The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death.

Forfeitures are accounted for as they occur.

The Key Employee Awards cliff vest on December 31, 2023.

Share-based compensation expense is recognized on a straight-line basis over the service period of the Key Employee Awards when it is probable that the performance conditions will be satisfied.

The Key Employee Awards are subject to several service and performance conditions, as defined by the Key Employee Award agreement, which allows the holder to retain an amount of the awards as a result of certain termination conditions or change in common control.

Forfeitures are accounted for as they occur.

Derivative Instruments

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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.

Due to the highly customized nature of many of the Company’s products and each product not having an alternative use to the Company without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract.

The Company has formal cancellation policies 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.

The Company measures a contract’s progress on the basis of the ratio that costs incurred bear to estimated total costs using the input method because, in the Company’s view, such method best depicts the progress toward completion.

Contract costs include direct materials, direct labor, installation, freight and delivery, commissions and royalties.

Other costs not related to contract performance, such as indirect labor and materials, small tools and supplies, operating expenses, field rework and back charges are charged to expense as incurred.

Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined.

Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are estimated and recognized by the Company throughout the life of the contract.

The aggregate of costs incurred and income recognized on uncompleted contracts in excess of billings is shown as a contract asset within our consolidated balance sheets, and the aggregate of billings on uncompleted contracts in excess of related costs incurred and income recognized is shown as a contract liability within out consolidated balance sheets.

For all other products that are part sales or standardized units, the Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts.

As the primary performance obligation in such a contract is delivery of the requested manufactured equipment, 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.

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Sales of our products are moderately seasonal with the peak period being May-October of each year.

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.

Representatives and Third Party Products

We are responsible for billings and collections resulting from all sales transactions, including those initiated by our independent manufacturer representatives (“Representatives”).

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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”).

These other related 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.

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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.

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 sheets.

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 $ 43.9 million, $ 50.0 million, and $ 46.1 million for each of the years ended December 31, 2021, 2020, and 2019, 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

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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.

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.

The most significant estimates include, but are not limited to:

revenue recognition, business combinations, 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.

Revenue Recognition

Disaggregated net sales by major source:

Years Ended December 31,

The following tables show disaggregated net sales by reportable segment (see Note 23) by major source, net of intercompany sales eliminations.

As the BasX segment was not applicable during the years ended December 31, 2020 and 2019, this segment has been excluded from the tables.

Year Ended December 31, 2021

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

Rooftop Units $ 398,461 $ — $ — $ 398,461

Condensing Units 762 25,989 — 26,751

Air Handlers — 26,589 95 26,684

Outdoor Mechanical Rooms 820 464 — 1,284

Cleanroom Systems — — 2,288 2,288

Data Center Cooling Solutions — — 1,688 1,688

Water-Source Heat Pumps 10,831 10,343 — 21,174

Part Sales 41,127 1 — 41,128

Other 11,844 3,203 12 15,059

$ 463,845 $ 66,589 $ 4,083 $ 534,517

Year Ended December 31, 2020

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

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Other 11,532 2,537 — 14,069

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,

$ 458,957 $ 55,594 — $ 514,551

Year Ended December 31, 2019

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

Rooftop Units $ 349,427 $ — — $ 349,427

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Water-Source Heat Pumps 21,076 4,371 — 25,447

Total Units 26,231 26,307 25,152

Part Sales 33,331 — — 33,331

Other 12,836 3,909 — 16,745

$ 418,669 $ 50,664 — $ 469,333

1 BasX was acquired by the Company on December 10, 2021, as such, the only applicable period presented for BasX is December 11, 2021 through December 31, 2021.

Other sales include freight, extended warranties and miscellaneous revenue.

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:

On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire of all of the issued and outstanding equity ownership of BasX, LLC, an Oregon limited liability company, doing business as BasX Solutions.

We closed this transaction on December 10, 2021 for a purchase price of (i) $ 100.0 million payable in cash (not including working capital adjustments), and (ii) up to $ 80.0 million in the aggregate of contingent consideration payable in shares of the Company's stock, par value $ 0.004 per share (the "Shares").

The $ 80.0 million of contingent consideration payable consists of $ 78.0 million payable to the former owners of BasX and $ 2.0 million payable to key employees of BasX whom are now employed by the Company.

The potential future issuance of the Shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of 2021, 2022, and 2023 under the terms of the MIPA Agreement.

The Company funded the BasX acquisition cash portion of the purchase price and related transaction costs with cash on hand.

Additionally, as a condition to closing, the Company entered into a real estate purchase agreement with BasX Properties, LLC, an affiliate of BasX, to acquire the principal real property and improvements utilized by BasX for an additional $ 22.0 million, subject to customary closing conditions and adjustments.

The Company expects this real estate transaction to close by the end of the first quarter of 2022.

BasX specializes in the design, engineering and manufacturing of custom, energy efficient cooling solutions for the rapidly growing hyperscale data center market.

BasX also designs and manufactures custom solutions for cleanroom environments for the bio-pharmaceutical, semiconductor, medical and agriculture markets, as well as custom, energy efficient air handlers and modular solutions for a vast array of markets.

The acquisition of BasX brings the Company exposure to attractive end-markets into which the Company has historically had minimal exposure.

The products BasX manufactures are highly engineered, customized products, fully complimenting AAON's existing business.

We incurred $ 4.4 million in transaction fees related to the acquisition of BasX which are included in selling, general, and administrative expenses on our consolidated statement of income.

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

We applied pushdown accounting, allowable under ASC 805 "Business Combinations," to "pushdown" our stepped-up basis in the assets acquired and liabilities assumed to BasX's subsidiary financial statements.

The decision to apply pushdown accounting is irrevocable.

Goodwill was calculated and recognized consistent with acquisition accounting, resulting in the pushdown of $ 82.5 million in goodwill as of December 31, 2021.

The following table presents the allocation of the consideration paid to the assets acquired and liabilities assumed, based on their fair values as of December 10, 2021, in the acquisition of BasX described above, which was still preliminary at December 31, 2021.

The provisional amounts are subject to change as the Company continues to evaluate the information required to complete the valuation through the measurement period.

We expect to complete our valuation in the first quarter of 2022.

(in thousands)

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Inventories 2,725

Contract assets 7,635

Prepaid expenses and other 341

Property, plant and equipment 13,169

Intellectual property 700

Right of use assets 15,611

Intangible assets 70,329

Goodwill 82,498

Assumed current liabilities ( 354 )

Accounts payable ( 9,388 )

Accrued liabilities ( 3,807 )

Contract liabilities ( 7,771 )

Lease liabilities ( 15,611 )

Contingent Consideration - shares of AAON ( 66,000 )

Consideration paid $ 103,430

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.

The Company recognized the following definite and indefinite-lived intangible assets as part of the acquisition of BasX:

(in thousands)

Definite-lived intangible assets

Intellectual property $ 6,479

Customer relationships 48,684

Indefinite-lived intangible assets

Trademarks 15,166

Total intangible assets acquired $ 70,329

Goodwill is 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 and expanded market opportunities.

Goodwill of $ 16.5 million is tax deductible upon close of the acquisition.

Future additional amounts of goodwill related to the contingent consideration may become tax deductible in the future if the earn out provisions of the MIPA are achieved.

Pro Forma Results of Operations (unaudited)

The operations of BasX have been included in our statements of income since the closing date on December 10, 2021.

The following unaudited pro forma consolidated results of operations for the years ended December 31, 2021 and 2020 are presented as if the combination had been made on January 1, 2020.

Years ended December 31,

(in thousands, except per share data)

Revenues $ 611,158 $ 562,563

Net income 63,491 80,507

Earnings per share:

Basic $ 1.21 $ 1.54

Dilutive $ 1.18 $ 1.52

These unaudited pro forma results include adjustments necessary in connection with the acquisition.

The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods.

These results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

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.

2016-02 , Leases (Topic 842) , as amended, as of January 1, 2019, using the transition method, which became 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.

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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.

All of our leases are classified as operating leases.

As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

Our incremental borrowing rate represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment.

We have entered into various short-term operating leases with an initial term of twelve months or less.

These leases are not recorded on our consolidated balance sheets as of December 31, 2021 or 2020, and the rent expense for these short-term leases is not significant.

The Company’s leases generally require us to pay for insurance, taxes, utilities, and other operating costs.

These payments are not included in the right-of-use asset or lease liability and are expensed as incurred.

Through the acquisition of BasX (Note 4), we acquired various leases for plant/office space and equipment.

We also lease the plant/office space used by our operations in Parkville, MO.

Expense related to these leases is recognized on straight-line basis over the lease term.

Certain of our leases contain escalating lease payments based on predefined increases.

Most leases contain options to renew or terminate.

Right-of-use assets and lease liabilities reflect only the options which the Company is reasonably certain to exercise.

At December 31, 2021, we had operating lease right-of-use assets of $ 17.0 million and current and noncurrent operating lease obligations of $ 1.6 million and $ 15.5 million within accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets.

At December 31, 2020, we had operating lease right-of-use assets of $ 1.6 million and current and noncurrent operating lease obligations of $ 0.2 million and $ 1.4 million within accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets.

Accounts Receivable

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Accounts receivable written off, net of recoveries

— ( 2 ) ( 29 )

Balance, end of period $ 549 $ 506 $ 353

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Our intangible assets consist of the following:

(in thousands)

Definite-lived intangible assets (in thousands)

Intellectual property $ 6,479 $ 700

Customer relationships 48,684 —

Accumulated amortization ( 208 ) ( 662 )

Total, net 54,955 38

Indefinite-lived intangible assets

Trademarks 15,166 —

Total intangible assets, net $ 70,121 $ 38

Amortization expense recorded in cost of sales is as follows:

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Amortization expense $ 246 $ 234 $ 234

Excluding the impact of any future acquisitions, the Company anticipates amortization expense to be $ 3.7 million for each of the years ended 2022 through 2026.

Note Receivable

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Interest payments are recognized in interest income.

The current and long-term portions of this note receivable are included in other prepaid expenses and other and other long-term assets, respectively, on our balance sheet.

We evaluate the note for impairment on a quarterly basis.

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Non-cash capital expenditures ( 3,714 ) 2,843 863

The Company has warranties with various terms from 18 months for parts to 25 years for certain heat exchangers.

The Company has warranties with various terms from 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers.

The Company has an obligation to replace parts if conditions under the warranty are met.

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Provisions 6,351 6,621 8,047

Change in estimate — — ( 862 )

Assumed in business combination (Note 4)

Balance, end of period $ 13,769 $ 13,522 $ 12,652

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$ 6,351 $ 6,621 $ 8,047

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.

Accrued Liabilities

Accrued Liabilities and Other Long-Term Liabilities

At December 31, accrued liabilities were comprised of the following:

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Customer prepayments 5,931 5,067

Donations 570 354

Donations, short-term 438 570

Employee vacation time 4,362 3,321

Operating lease liability, short-term 1,580 202

Other 3,968 2,411

Total $ 50,206 $ 46,586

At December 31, other long-term liabilities were comprised of the following:

(in thousands)

Long-term operating lease obligation $ 15,467 $ 1,369

Long-term donations 334 496

Extended warranties 3,042 2,558

Total $ 18,843 $ 4,423

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.

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.

On November 24, 2021, we amended our revolving credit facility (“Revolver”), to provide for maximum borrowings of $ 100.0 million, with an option to increase to maximum borrowing of $ 200.0 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 our 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.

The previous revolving credit facility allowed for maximum borrowings of $ 30.0 million with an interest rate of LIBOR plus 2.0 %.

There were no fees associated with the unused portion of committed amounts under the previous revolving credit facility.

As of December 31, 2020, we had no balance outstanding under our previous revolving credit facility.

At December 31, 2020, the weighted average interest rate of our revolving credit facility was 2.6 %.

On January 18, 2022, we updated our standby letter of credit to $ 820,000 .

As of February 28, 2022, we had $ 55,000,000 of outstanding borrowings under our Revolver.

The provision for income taxes consists of the following:

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State income taxes, net of federal benefit 1.8 % 5.3 % 5.2 %

Excess tax benefits ( 3.2 ) % ( 2.6 ) % ( 2.0 ) %

Change in valuation allowance 1.0 % — % — %

Excess tax benefits related to share-based compensation ( 7.8 ) % ( 3.2 ) % ( 2.6 ) %

Return to provision — % 0.1 % ( 1.4 ) %

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15.1 % 22.5 % 20.0 %

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.

This resulted in a benefit of $ 0.8 million included in the table above under State income taxes, net of Federal benefit, for the year ending December 31, 2021.

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.

We earn investment tax credits from the state of Oklahoma’s investment tax credit program for generally 1% of the qualified assets to be taken over 5 years.

We use the flow-through method of accounting for the investment tax credits.

We have credit carryforwards totaling $ 3.7 million that have estimated expirations starting in 2035.

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.

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Share-based compensation 7,568 4,102

Donations 297 194

Intangibles 993 ( 33 )

Oklahoma investment credit carryforward 3,404 —

Other, net 3,119 2,608

Total deferred income tax assets 12,431 12,517

20,790 12,549

Valuation allowance ( 3,404 ) —

Net deferred income tax assets 17,386 12,549

Property & equipment ( 49,379 ) ( 40,873 )

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Net deferred income tax liabilities $ ( 31,993 ) $ ( 28,324 )

We file income tax returns in the U.S., state and foreign income tax returns jurisdictions.

Realization of deferred tax assets, including the associated credit carryforwards, is dependent upon generating sufficient taxable income in the appropriate tax jurisdiction.

We believe that it is more likely than not that we may not realize the benefit of our Oklahoma investment tax credit carryforward and, accordingly, have established a valuation allowance against this deferred tax asset.

The amount of income tax that we pay annually is dependent on various factors, including the timing of certain deductions.

These deductions can vary from year to year and, consequently, the amount of income taxes paid in future years will vary from the amounts paid in prior years.

We file income tax returns in the U.S.

and state 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.

examinations for tax years 2018 to present.

In addition, we are subject to state and local income tax examinations for tax years 2017 to present.

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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”).

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.

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2021 2020 2019

Director and Officers:

Directors and SLT 1 :

Expected dividend yield $ 0.38 $ 0.33 $ 0.32

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Expected life (in years) 3.00 5.00 5.00

1 Senior Leadership Team ("SLT") consists of officers and key members of management.

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior.

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The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows.

Restricted Stock

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.

A summary of the unvested restricted stock awards is as follows:

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At December 31, 2021, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 4.3 million which is expected to be recognized over a weighted average period of 2.05 years.

The Company has awarded performance stock units ("PSUs") to certain officers and employees under our 2016 Plan.

Unlike our restricted stock awards, the PSUs are not considered legally outstanding and do not accrue dividends during the vesting period.

The PSUs vest based on the level of achievement with respect to the Company's three year total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index.

The TSR measurement period is the three years ending December 31, 2023.

At the end of the measurement period, each award will be converted into common stock at 0 % to 200 % of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies.

The total pre-tax compensation cost related to unvested PSUs not yet recognized as of December 31, 2021 is $ 1.0 million and is expected to be recognized over a weighted average period of approximately 1.9 years.

The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the year ended December 31, 2021 using a Monte Carlo Model:

December 31, 2021

Expected dividend rate $ 0.38

Expected volatility 39.10 %

Risk-free interest rate 0.28 %

Expected life (in years) 2.80

The expected term of the PSUs is based on the remaining service period ending December 31, 2023.

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.

A summary of the unvested PSUs is as follows:

Shares Weighted Average Grant Date Fair Value

Unvested at December 31, 2020 — $ —

Granted 18,483 87.78

Forfeited ( 1,632 ) 87.78

Unvested at December 31, 2021 16,851 $ 87.78

Key Employee Awards

Subject to the MIPA Agreement (Note 4), the Company granted awards to key employees of BasX ("Key Employee Awards").

Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period.

The potential future issuance of the Key Employee Awards is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022, and 2023 as defined by the MIPA Agreement and continued employment with the Company.

At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award will vest and be converted into common stock.

The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date.

The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of December 31, 2021 is $ 1.5 million and is expected to be recognized over a weighted average period of approximately 2.0 years.

A summary of the unvested Key Employee Awards is as follows:

Shares Weighted Average Grant Date Fair Value

Unvested at December 31, 2020 — $ —

Granted 26,599 80.18

Forfeited — —

Unvested at December 31, 2021 26,599 $ 80.18

Summary of Share-based Compensation

A summary of share-based compensation is as follows for the years ended December 31, 2021, 2020, and 2019:

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Restricted stock 2,517 3,316 4,631

PSUs 1,622 — —

Key employee awards 1,572 — —

Total $ 12,721 $ 15,931 $ 25,073

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Restricted stock 2,519 3,030 2,654

Key employee awards 44 — —

Total $ 11,812 $ 11,342 $ 11,799

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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.

We maintain a discretionary profit sharing bonus plan under which approximately 10 % of pre-tax profit from consolidated AAON Oklahoma and AAON Texas is paid to eligible employees on a quarterly basis in order to reward employee productivity.

Eligible employees are regular full-time employees of AAON Oklahoma or AAON Texas 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,

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Lastly, the Company repurchases shares of AAON, Inc.

stock from certain of its directors and employees for

payment of statutory tax withholdings on stock transactions.

stock from certain of its directors and employees for payment of statutory tax withholdings on stock transactions.

All other repurchases from directors or employees are contingent upon Board approval.

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Total 14,437,414 $ 263,010 $ 18.22

Subsequent to December 31, 2021 and through February 23, 2022, the Company repurchased 5,120 shares for $ 0.4 million from employees for payment of statutory tax withholdings on stock transactions and 37,923 shares for $ 2.4 million from our 401(k) savings and investment plan.

At the discretion of the Board of Directors, we pay semi-annual cash dividends.

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We paid cash dividends of $ 19.9 million, $ 19.8 million, and $ 16.6 million in 2021, 2020, and 2019, respectively.

Contingent Shares Issued in BasX Acquisition

On December 10, 2021, we closed on the acquisition of BasX (Note 4).

Under the MIPA Agreement, we committed to $ 78.0 million in the aggregate of contingent consideration to the former owners of BasX, which is payable in approximately 1,037,000 shares of the Company's stock, par value $ 0.004 per share.

The shares do not accrue dividends.

Under the MIPA Agreement, the potential future issuance of the shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023.

We estimated the fair value of contingent consideration related to these shares to be approximately $ 66.0 million, which is included in additional paid-in capital on the consolidated balance sheets.

As of February 28, 2022, the Company has not issued any shares related to the contingent consideration to the former owners of BasX.

New Markets Tax Credit

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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 Investor's interest of $ 6.3 million is recorded in New market tax credit obligation on the consolidated balance sheets.

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.

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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.

Earnings Per Share

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Dilutive common shares consist primarily of stock options and restricted stock awards.

Dilutive shares related to the contingent consideration payable to former owners of BasX (Note 4) are included in the calculation of diluted weighted average shares once it is determinable that BasX will satisfy the post-closing earn-out milestones under the terms of the MIPA agreement.

The shares will be included in basic weighted average share once they are legally issued and no longer contingent.

The following table sets forth the computation of basic and diluted earnings per share:

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Basic weighted average shares 52,404,199 52,168,679 52,079,865

Effect of dilutive stock options and restricted stock 892,490 555,550 383,323

Effect of dilutive shares related to stock based compensation 1

1,301,698 892,490 555,550

Effect of dilutive shares related contingent consideration 2

Diluted weighted average shares 53,728,989 53,061,169 52,635,415

4 unchanged sentences

Shares 304,029 364,787 1,868,087

1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 17)

2 Dilutive shares related contingent shares issued to former owners of BasX (Note 4)

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.

The Company sometimes makes sales to the Executive Chairman and CEO/President.

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.

Through the acquisition of BasX (Note 4), at December 31, 2021, the Company leased an office in Redmond, Oregon from an entity in which certain members of management have an ownership interest.

Following is a summary of transactions and balances with affiliates:

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Due from affiliates $ 547 $ 342

Due to affiliates — 2

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.

Quarterly Results (Unaudited)

The following is a summary of the quarterly results of operations for the years ended December 31, 2020 and 2019:

First Second Third Fourth

(in thousands, except per share data)

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

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 .

ASC 280, Segment Reporting , establishes the standards for reporting information about segments in financial statements.

In applying the criteria set forth in ASC 280, the Company has determined that it has three reportable segments for financial reporting purposes.

Management evaluates the performance of its business segments primarily on gross profit.

Beginning in the fourth quarter of 2021, due to the acquisition of BasX and internal leadership reporting changes, the Company reevaluated its reportable segments for disclosure purposes.

The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect this change.

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.

AAON Oklahoma:

AAON Oklahoma designs, manufactures, sells and services standard, semi-custom and custom HVAC systems, designs and produces controls solutions for all of our HVAC units and sells retail parts to customers through our two retail part stores.

Through the NAIC research and development laboratory facility, AAON Oklahoma is able test units units under various environmental conditions.

AAON Oklahoma includes the operations of both our Tulsa, Oklahoma and Parkville, Missouri facilities, our NAIC research and development laboratory facility and two retail parts locations.

AAON Coil Products:

AAON Coil Products designs and manufactures a selection of our standard, semi-custom and custom HVAC systems.

In addition, AAON Coil Products designs and manufactures various heating and cooling coils to be used in HVAC systems, mostly for the benefit of AAON Oklahoma and AAON Coil Products.

AAON Coil Products consists of operations at our Longview, Texas facilities.

BasX provides product development design and manufacturing of custom engineered air handling systems including high efficiency data center cooling solutions, cleanroom solutions, HVAC systems and modular solutions.

BasX consists of operations at our Redmond, Oregon facility.

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.

The “Other and eliminations” category in the Total Assets table below includes assets at our non-operating entity AAON, Inc., Nevada corporation, that are not allocated to the reportable segments, as well as intercompany eliminations.

Years Ended December 31,

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(in thousands)

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 )

AAON Oklahoma

External sales $ 463,845 $ 458,957 $ 418,669

Inter-segment sales 2,504 2,683 2,261

AAON Coil Products

External sales 66,589 55,594 50,664

Inter-segment sales 24,250 21,552 25,792

Eliminations ( 26,754 ) ( 24,235 ) ( 28,053 )

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

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 )

AAON Oklahoma $ 126,868 $ 140,099 $ 107,228

AAON Coil Products 10,075 15,750 12,197

Gross profit $ 137,830 $ 155,849 $ 119,425

(in thousands)

Long-lived assets

AAON Oklahoma $ 183,840 $ 170,603

AAON Coil Products 62,534 54,308

Total long-lived assets $ 275,036 $ 224,911

Intangible assets and goodwill

AAON Oklahoma $ 3,229 $ 3,267

AAON Coil Products — —

Total intangible assets and goodwill $ 155,848 $ 3,267

1 BasX was acquired on December 10, 2021.

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

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

1 unchanged sentence

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 8. Financial Statements and Supplementary Data