AAON, INC. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 33 Consolidated Balance Sheets 35 Consolidated Statements of Income 36 Consolidated Statements of Stockholders’ Equity 37 Consolidated Statements of Cash Flows 38 Notes to Consolidated Financial Statements 39 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders AAON, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2022 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit 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 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 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. 33 Our audit procedures related to the manual inventory adjustments included the following, among others. • We tested the design and operating effectiveness of controls over inventory valuation, including the standard cost updates in the accounting system and the completeness and accuracy of the inputs to the inventory variance calculation and any related adjustments. • We 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 We have served as the Company’s auditor since 2004. Tulsa, Oklahoma February 28, 2022 34 AAON, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2021 2020 Assets (in thousands, except share and per share data) Current assets: Cash and cash equivalents $ 2,859 $ 79,025 Restricted cash 628 3,263 Accounts receivable, net of allowance for credit losses of $ 549 and $ 506 , respectively 70,780 47,387 Income tax receivable 5,723 4,587 Inventories, net 130,270 82,219 Contract assets 5,749 — Prepaid expenses and other 2,071 3,770 Total current assets 218,080 220,251 Property, plant and equipment: Land 5,016 4,072 Buildings 135,861 122,171 Machinery and equipment 318,259 281,266 Furniture and fixtures 23,072 18,956 Total property, plant and equipment 482,208 426,465 Less: Accumulated depreciation 224,146 203,125 Property, plant and equipment, net 258,062 223,340 Intangible assets, net 70,121 38 Goodwill 85,727 3,229 Right of use assets 16,974 1,571 Other long-term assets 1,216 579 Total assets $ 650,180 $ 449,008 Liabilities and Stockholders’ Equity Current liabilities: 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 Other long-term liabilities 18,843 4,423 New market tax credit obligation (a) 6,406 6,363 Commitments and contingencies (Note 19) Stockholders’ equity: Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued — — Common stock, $ .004 par value, 100,000,000 shares authorized, 52,527,985 and 52,224,767 issued and outstanding at December 31, 2021 and 2020, respectively 210 209 Additional paid-in capital 81,654 5,161 Retained earnings 384,306 345,495 Total stockholders’ equity 466,170 350,865 Total liabilities and stockholders’ equity $ 650,180 $ 449,008 (a) Held by variable interest entities (Note 18) The accompanying notes are an integral part of these consolidated financial statements. 35 AAON, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2021 2020 2019 (in thousands, except share and per share data) 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 Interest (expense) income, net ( 132 ) 88 66 Other income (expense), net 61 51 ( 46 ) Income before taxes 69,182 101,975 67,031 Income tax provision 10,424 22,966 13,320 Net income $ 58,758 $ 79,009 $ 53,711 Earnings per share: Basic $ 1.12 $ 1.51 $ 1.03 Diluted $ 1.09 $ 1.49 $ 1.02 Cash dividends declared per common share: $ 0.38 $ 0.38 $ 0.32 Weighted average shares outstanding: Basic 52,404,199 52,168,679 52,079,865 Diluted 53,728,989 53,061,169 52,635,415 The accompanying notes are an integral part of these consolidated financial statements. 36 AAON, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balance at December 31, 2018 51,991 $ 208 $ — $ 249,235 $ 249,443 Net income — — — 53,711 53,711 Stock options exercised and restricted 542 2 12,623 — 12,625 stock awards granted Share-based compensation — — 11,799 — 11,799 Stock repurchased and retired ( 454 ) ( 2 ) ( 20,791 ) — ( 20,793 ) Dividends — — — ( 16,645 ) ( 16,645 ) Balance at December 31, 2019 52,079 208 3,631 286,301 290,140 Net income — — — 79,009 79,009 Stock options exercised and restricted 712 3 21,415 — 21,418 stock awards granted Share-based compensation — — 11,342 — 11,342 Stock repurchased and retired ( 566 ) ( 2 ) ( 31,227 ) — ( 31,229 ) Dividends — — — ( 19,815 ) ( 19,815 ) Balance at December 31, 2020 52,225 209 5,161 345,495 350,865 Net income — — — 58,758 58,758 Stock options exercised and restricted 623 2 21,146 — 21,148 stock awards granted Share-based compensation — — 11,812 — 11,812 Stock repurchased and retired ( 320 ) ( 1 ) ( 22,465 ) — ( 22,466 ) Contingent consideration (Note 4) — — 66,000 — 66,000 Dividends — — — ( 19,947 ) ( 19,947 ) Balance at December 31, 2021 52,528 $ 210 $ 81,654 $ 384,306 $ 466,170 The accompanying notes are an integral part of these consolidated financial statements. 37 AAON, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2021 2020 2019 Operating Activities (in thousands) Net income $ 58,758 $ 79,009 $ 53,711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 30,343 25,634 22,766 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 Provision for excess and obsolete inventories 629 1,108 1,454 Share-based compensation 11,812 11,342 11,799 (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 ) Deferred income taxes 3,669 13,027 6,038 Changes in assets and liabilities: Accounts receivable ( 9,737 ) 19,859 ( 13,412 ) Income tax receivable ( 1,136 ) ( 3,815 ) 5,129 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 and donations ( 1,690 ) 2,203 7,124 Net cash provided by operating activities 61,183 128,814 97,925 Investing Activities Capital expenditures ( 55,362 ) ( 67,802 ) ( 37,166 ) Cash paid in business combination, net of cash acquired ( 103,430 ) — — Proceeds from sale of property, plant and equipment 19 60 69 Insurance proceeds — 6,417 — Investment in certificates of deposits — — ( 6,000 ) Maturities of certificates of deposits — — 6,000 Principal payments from note receivable 54 52 51 Net cash used in investing activities ( 158,719 ) ( 61,273 ) ( 37,046 ) Financing Activities Borrowings under revolving credit facility 40,000 — — Proceeds from financing obligation, net of issuance costs — — 6,614 Payment related to financing costs — — ( 301 ) Stock options exercised 21,148 21,418 12,625 Repurchase of stock ( 20,876 ) ( 30,060 ) ( 19,586 ) Employee taxes paid by withholding shares ( 1,590 ) ( 1,169 ) ( 1,207 ) Dividends paid to stockholders ( 19,947 ) ( 19,815 ) ( 16,645 ) 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 Cash, cash equivalents and restricted cash, end of year $ 3,487 $ 82,288 $ 44,373 The accompanying notes are an integral part of these consolidated financial statements. 38 AAON, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2021 1. Business Description AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc., an Oklahoma corporation, 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 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. 2. Summary of Significant Accounting Policies Principles of Consolidation These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of two variable interest entities ("VIEs") (Note 18) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs. Impact of COVID-19 Pandemic In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher 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 39 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, 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 We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist of bank deposits and highly liquid, interest-bearing money market funds. The Company’s cash and cash equivalents are held in a few financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. 40 Certificates of Deposit We held no certificates of deposit at December 31, 2021 and 2020. Restricted Cash Restricted cash held at December 31, 2021 consist of bank deposits and highly liquid, interest-bearing money market funds held for the purpose of the Company's qualified New Markets Tax Credit program (Note 18) to benefit an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations. The Company’s restricted cash is held in a financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. Accounts and Note Receivable We adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) , as amended, as of January 1, 2020. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected, which would include accounts receivable. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The adoption of this ASU did not have a material effect on our financial statements. Accounts and note receivable are stated at amounts due from customers, net of an allowance for credit losses. We generally do not require that our customers provide collateral; 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. Accounts are considered past due when the balance has been outstanding for ninety days past negotiated credit terms. Past due accounts are generally written-off against the allowance for credit losses only after all collection attempts have been exhausted. Concentration of Credit Risk Our customers are concentrated primarily in the domestic commercial and industrial new construction and replacement markets. To date, our sales have been primarily to the domestic market, with foreign sales accounting for approximately 3 %, 2 %, and 3 % of revenues for the years ended December 31, 2021, 2020, and 2019, respectively. One customer, Texas AirSystems LLC, accounted for more than 10% of our sales during 2021, 2020, and 2019. No other customer accounted for more than 10% of our sales during 2021, 2020, and 2019. 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 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. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts. 41 Property, Plant and Equipment 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. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 3 - 40 years Machinery and equipment 3 - 20 years Furniture and fixtures 3 - 15 years On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $ 500,000 deductible. We did not experience any significant structural damage or any operational interruption as a result of this weather event. In November 2020, we reached a final settlement with our insurance carrier, resulting in a net cumulative gain of $ 6.4 million, which is included in the consolidated statements of income. The received proceeds will be used in future periods to make improvements to the current roof at our plant and office facilities in Tulsa, Oklahoma to extend the overall useful life. Business Combinations 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 The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt or based on current rates offered to the Company for debt with similar characteristics. We adopted ASU No. 2018-13, Fair Value Measurements (Topic 820), as amended, as of January 1, 2020. The ASU includes additional disclosure requirements for unrealized gains and losses for Level 3 fair value measurements and significant observable inputs used to develop Level 3 fair value measurements. There was not a material impact to financial statements upon adoption. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels: • Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date. • Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means. • Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of 42 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). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability. 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. 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 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 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. 43 Impairment of Long-Lived Assets We review long-lived assets for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to its estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. Research and Development The costs associated with research and development for the purpose of developing and improving new products are expensed as incurred. For the years ended December 31, 2021, 2020, and 2019 research and development costs amounted to approximately $ 16.6 million, $ 17.4 million, and $ 14.8 million, respectively. Advertising Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2021, 2020, and 2019 was approximately $ 1.6 million, $ 0.8 million, and $ 0.8 million, respectively. Shipping and Handling We incur shipping and handling costs in the distribution of products sold that are recorded in cost of sales. Shipping charges that are billed to the customer are recorded in revenues and as an expense in cost of sales. For the years ended December 31, 2021, 2020, and 2019 shipping and handling fees amounted to approximately $ 14.4 million, $ 14.3 million, and $ 14.4 million, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Excess tax benefits and deficiencies are reported as an income tax benefit or expense on the statement of income and are treated as discrete items to the income tax provision in the reporting period in which they occur. We establish accruals for unrecognized tax positions when it is more likely than not that our tax return positions may not be fully sustained. The Company records a valuation allowance for deferred tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized. Share-Based Compensation The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The Company’s share-based compensation plans provide for the granting of stock options, 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 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. 44 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. All share-based compensation awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one -year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur. 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 In the course of normal operations, the Company occasionally enters into contracts such as forward priced physical contracts for the purchase of raw materials that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. The Company does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes. Revenue Recognition 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. 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 45 control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders. Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being May-October of each year. 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”). Representatives are national companies that are in the business of providing heating, ventilation, and air conditioning (“HVAC”) units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These 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. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. The Company is considered the principal for the equipment we design and manufacture and records that revenue gross. The Company has no control over the Third Party Products to the end customer and the Company is under no obligation related to the Third Party Products. Amounts related to Third Party Products are not recognized as revenue but are recorded as a liability and are included in accrued liabilities on the consolidated balance 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. Insurance Reserves Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and medical liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. Product Warranties A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ 46 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: 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. 3. Revenue Recognition 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. 47 Year Ended December 31, 2021 AAON Oklahoma AAON Coil Products BasX 1 Total (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 Total (in thousands) Rooftop Units $ 400,946 $ — — $ 400,946 Condensing Units 900 20,249 — 21,149 Air Handlers — 23,931 — 23,931 Outdoor Mechanical Rooms 2,355 487 — 2,842 Water-Source Heat Pumps 10,663 8,390 — 19,053 Part Sales 32,561 — — 32,561 Other 11,532 2,537 — 14,069 $ 458,957 $ 55,594 — $ 514,551 Year Ended December 31, 2019 AAON Oklahoma AAON Coil Products BasX 1 Total (in thousands) Rooftop Units $ 349,427 $ — — $ 349,427 Condensing Units 865 17,610 — 18,475 Air Handlers — 24,265 — 24,265 Outdoor Mechanical Rooms 1,134 509 — 1,643 Water-Source Heat Pumps 21,076 4,371 — 25,447 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. 48 4. Business Combination 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. 49 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) Accounts receivable $ 13,699 Inventories 2,725 Contract assets 7,635 Prepaid expenses and other 341 Property, plant and equipment 13,169 Right of use assets 15,611 Intangible assets 70,329 Goodwill 82,498 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 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 55,163 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. 50 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. (unaudited) Years ended December 31, 2021 2020 (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. 51 5. Leases We adopted ASU No. 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. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We have also elected the short-term lease measurement and recognition exemption which does not require balance sheet presentation for short-term leases. 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. 52 6. Accounts Receivable Accounts receivable and the related allowance for credit losses are as follows: December 31, 2021 2020 (in thousands) Accounts receivable $ 71,329 $ 47,893 Less: Allowance for credit losses ( 549 ) ( 506 ) Total, net $ 70,780 $ 47,387 Years Ended December 31, 2021 2020 2019 Allowance for credit losses: (in thousands) Balance, beginning of period $ 506 $ 353 $ 264 Provisions (recoveries) for expected credit losses, net of adjustments 43 153 91 Accounts receivable written off, net of recoveries — — ( 2 ) Balance, end of period $ 549 $ 506 $ 353 7. Inventories The components of inventories and the related changes in the allowance for excess and obsolete inventories are as follows: December 31, 2021 2020 (in thousands) Raw materials $ 124,480 $ 76,238 Work in process 3,049 2,088 Finished goods 4,528 7,154 132,057 85,480 Less: Allowance for excess and obsolete inventories ( 1,787 ) ( 3,261 ) Total, net $ 130,270 $ 82,219 Years Ended December 31, 2021 2020 2019 Allowance for excess and obsolete inventories: (in thousands) Balance, beginning of period $ 3,261 $ 2,644 $ 1,210 Provisions for excess and obsolete inventories 629 1,108 1,454 Inventories written off ( 2,103 ) ( 491 ) ( 20 ) Balance, end of period $ 1,787 $ 3,261 $ 2,644 53 8. Intangible Assets Our intangible assets consist of the following: December 31, 2021 2020 Definite-lived intangible assets (in thousands) Intellectual property $ 6,479 $ 700 Customer relationships 48,684 — Less: 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: Years Ended December 31, 2021 2020 2019 (in thousands) 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. 9. Note Receivable In connection with the closure of our Canadian facility on May 18, 2009, we sold land and a building in September 2010 and assumed a note receivable from the borrower secured by the property. The C$ 1.1 million, 15 year note has an interest rate of 4.0 % and is payable to us monthly, and has a C$ 0.6 million balloon payment due in October 2025 . Interest payments are recognized in interest income. 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. We determine the note receivable to be impaired if we are uncertain of its collectability based on the contractual terms. At December 31, 2021 and 2020, there was no impairment. 10. Supplemental Cash Flow Information Years Ended December 31, 2021 2020 2019 Supplemental disclosures: (in thousands) Interest paid $ — $ — $ — Income taxes paid, net 7,891 13,754 2,172 Non-cash investing and financing activities: Non-cash capital expenditures ( 3,714 ) 2,843 863 54 11. Warranties 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. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products, and any known identifiable warranty issues. Changes in the warranty accrual are as follows: Years Ended December 31, 2021 2020 2019 Warranty accrual: (in thousands) Balance, beginning of period $ 13,522 $ 12,652 $ 11,421 Payments made ( 6,734 ) ( 5,751 ) ( 6,816 ) Provisions 6,351 6,621 8,047 Assumed in business combination (Note 4) 630 — — Balance, end of period $ 13,769 $ 13,522 $ 12,652 Warranty expense: $ 6,351 $ 6,621 $ 8,047 12. Accrued Liabilities and Other Long-Term Liabilities At December 31, accrued liabilities were comprised of the following: December 31, 2021 2020 (in thousands) Warranty $ 13,769 $ 13,522 Due to representatives 7,995 8,296 Payroll 8,423 8,155 Profit sharing 1,489 2,902 Workers' compensation 308 594 Medical self-insurance 1,943 1,546 Customer prepayments 5,931 5,067 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: December 31, 2021 2020 (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 55 13. Revolving Credit Facility 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. 56 14. Income Taxes The provision for income taxes consists of the following: Years Ended December 31, 2021 2020 2019 (in thousands) Current $ 6,755 $ 9,939 $ 7,282 Deferred 3,669 13,027 6,038 Total $ 10,424 $ 22,966 $ 13,320 The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate before the provision for income taxes. The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Years Ended December 31, 2021 2020 2019 Federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 1.8 % 5.3 % 5.2 % 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 ) % Oklahoma amended tax returns — % — % ( 1.3 ) % Other ( 0.9 ) % ( 0.7 ) % ( 0.9 ) % 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. Additionally in 2019, the Company determined it could take advantage of an additional 1 % tax credit in Oklahoma for years in which the Company's location was deemed to be within an enterprise zone. The additional Oklahoma credit for being in an enterprise zone, or otherwise allowable under Oklahoma law, resulted in a benefit of $ 1.2 million. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. 57 The significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2021 2020 (in thousands) Deferred income tax assets (liabilities): Accounts receivable and inventory reserves $ 625 $ 1,052 Warranty accrual 3,675 3,776 Other accruals 1,406 1,044 Share-based compensation 7,568 4,102 Intangibles 993 ( 33 ) Oklahoma investment credit carryforward 3,404 — Other, net 3,119 2,608 20,790 12,549 Valuation allowance ( 3,404 ) — Net deferred income tax assets 17,386 12,549 Property & equipment ( 49,379 ) ( 40,873 ) Total deferred income tax liabilities ( 49,379 ) ( 40,873 ) Net deferred income tax liabilities $ ( 31,993 ) $ ( 28,324 ) 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 2018 to present. In addition, we are subject to state and local income tax examinations for tax years 2017 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense. 15. Share-Based Compensation On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (as amended, “LTIP”) which provided an additional 3.3 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards, in addition to the shares from the previous plan, the 1992 Plan. Since inception of the LTIP, non-qualified stock options and restricted stock awards have been granted with a five year vesting schedule. Under the LTIP, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan (as amended, “2016 Plan”) which provides for approximately 8.9 million shares, comprised of 3.4 million new shares provided for under the 2016 Plan, approximately 0.4 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 2.6 million shares that were approved by the stockholders on May 15, 2018, and an additional 2.5 million shares that were approved by the stockholders on May 12, 2020. Under the 2016 Plan, shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. The 2016 Plan is 58 administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan. Options The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during December 31, 2021, 2020, and 2019 using a Black Scholes-Merton Model: 2021 2020 2019 Directors and SLT 1 : Expected dividend yield $ 0.38 $ 0.33 $ 0.32 Expected volatility 35.78 % 31.63 % 29.54 % Risk-free interest rate 0.51 % 0.64 % 2.40 % Expected life (in years) 4.00 5.00 5.00 Employees: Expected dividend yield $ 0.38 $ 0.32 $ 0.32 Expected volatility 38.67 % 31.39 % 29.54 % Risk-free interest rate 0.32 % 0.67 % 2.38 % 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. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. The following is a summary of stock options vested and exercisable as of December 31, 2021: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 8.17 - 40.87 538,335 4.84 $ 30.32 $ 26,440 $ 41.37 - 41.37 361,231 6.37 41.37 13,748 $ 42.42 - 79.81 124,098 8.17 45.60 4,198 Total 1,023,664 5.79 $ 36.07 $ 44,386 59 The following is a summary of stock options vested and exercisable as of December 31, 2020: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 7.18 - 36.95 543,646 5.33 $ 28.33 $ 20,820 $ 37.00 - 40.87 1,978 7.09 38.50 56 $ 41.37 - 66.98 194,697 7.87 41.59 4,875 Total 740,321 6.00 $ 31.85 $ 25,751 The following is a summary of stock options vested and exercisable as of December 31, 2019: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 7.18 - 34.10 451,077 5.44 $ 23.47 $ 11,702 $ 34.15 - 40.87 86,122 7.82 36.33 1,126 $ 41.37 - 50.68 1,750 1.81 41.59 14 Total 538,949 5.81 $ 21.58 $ 12,842 A summary of option activity under the plans is as follows: Weighted Average Exercise Options Shares Price Outstanding at December 31, 2020 3,752,945 $ 39.00 Granted 368,501 72.95 Exercised ( 595,057 ) 35.54 Forfeited or Expired ( 160,920 ) 48.44 Outstanding at December 31, 2021 3,365,469 $ 42.88 Exercisable at December 31, 2021 1,023,664 $ 36.07 The total pre-tax compensation cost related to unvested stock options not yet recognized as of December 31, 2021 is $ 17.2 million and is expected to be recognized over a weighted-average period of 2.25 years. The total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019 was $ 22.6 million, $ 15.5 million, and $ 8.1 million, respectively. The cash received from options exercised during the year ended December 31, 2021, 2020, and 2019 was $ 21.1 million, $ 21.4 million, and $ 12.6 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. 60 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: Weighted Average Grant date Restricted stock Shares Fair Value Unvested at December 31, 2020 224,691 $ 38.22 Granted 36,234 69.46 Vested ( 91,923 ) 35.80 Forfeited ( 7,777 ) 49.27 Unvested at December 31, 2021 161,225 $ 46.08 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. PSUs 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: Year Ended 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. 61 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 Vested — — 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 Vested — — Forfeited — — Unvested at December 31, 2021 26,599 $ 80.18 62 Summary of Share-based Compensation A summary of share-based compensation is as follows for the years ended December 31, 2021, 2020, and 2019: 2021 2020 2019 Grant date fair value of awards during the period: (in thousands) Options $ 7,010 $ 12,615 $ 20,442 Restricted stock 2,517 3,316 4,631 PSUs 1,622 — — Key employee awards 1,572 — — Total $ 12,721 $ 15,931 $ 25,073 2021 2020 2019 Share-based compensation expense: (in thousands) Options $ 8,724 $ 8,312 $ 9,145 Restricted stock 2,519 3,030 2,654 PSUs 525 — — Key employee awards 44 — — Total $ 11,812 $ 11,342 $ 11,799 2021 2020 2019 Income tax benefit related to share-based compensation: (in thousands) Options $ 4,571 $ 2,698 $ 1,197 Restricted stock 837 519 575 Total $ 5,408 $ 3,217 $ 1,772 16. Employee Benefits Defined Contribution Plan - 401(k ) We sponsor a defined contribution plan (the “Plan”). Eligible employees may make contributions in accordance with the Plan and IRS guidelines. In addition to the traditional 401(k), eligible employees are given the option of making an after-tax contribution to a Roth 401(k) or a combination of both. The Plan provides for automatic enrollment and for an automatic increase to the deferral percentage at January 1st of each year and each year thereafter. Eligible employees are automatically enrolled in the Plan at a 6 % deferral rate and currently contributing employees deferral rates will be increased to 6 % unless their current rate is above 6 % or the employee elects to decline the automatic enrollment or increase. Administrative expenses are paid for by Plan participants. The Company paid no administrative expenses for the years ended 2021, 2020, and 2019. The Company matches 175 % up to 6 % of employee contributions of eligible compensation. Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions. Years Ended December 31, 2021 2020 2019 (in thousands) Contributions, net of forfeitures, made to the defined contribution plan $ 9,724 $ 9,091 $ 7,034 63 Profit Sharing Bonus Plan 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, 2021 2020 2019 (in thousands) Profit sharing bonus plan expense $ 8,526 $ 11,593 $ 7,448 Employee Medical Plan We self-insure for our employees' health insurance. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plan. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. In addition, the Company matches 175 % of a participating employee's allowed contributions to a qualified health saving account to assist employees with our heath insurance plan deductibles. Years Ended December 31, 2021 2020 2019 (in thousands) Medical claim payments $ 9,640 $ 9,060 $ 5,898 Health saving account payments 3,482 3,476 3,265 17. Stockholders’ Equity Stock Repurchase The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market. Our open market repurchase programs are as follows: Agreement Execution Date Authorized Repurchase $ Expiration Date May 16, 2018 1 $ 15 million March 1, 2019 March 5, 2019 1 $ 20 million March 4, 2020 March 13, 2020 $ 20 million ** 2 1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs. 2 Expiration Date is at Board's discretion. The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board. The Company also has a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares of AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employee-participants. 64 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. All other repurchases from directors or employees are contingent upon Board approval. All repurchases are done at current market prices. Our repurchase activity is as follows: 2021 2020 2019 (in thousands, except share and per share data) Program Shares Total $ $ per share Shares Total $ $ per share Shares Total $ $ per share Open market — $ — $ — 103,689 $ 4,987 $ 48.10 5,799 $ 200 $ 34.46 401(k) 297,772 20,876 70.11 438,921 25,073 57.12 419,963 19,386 46.16 Directors & employees 22,526 1,590 70.59 23,272 1,169 50.23 28,668 1,207 42.11 Total 320,298 $ 22,466 $ 70.14 565,882 $ 31,229 $ 55.19 454,430 $ 20,793 $ 45.76 Inception to Date (in thousands, except share and per share data) Program Shares Total $ $ per share Open market 4,205,255 $ 74,793 $ 17.79 401(k) 8,204,432 165,876 20.22 Directors & employees 2,027,727 22,341 11.02 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. Dividends At the discretion of the Board of Directors, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment. Our recent dividends are as follows: Declaration Date Record Date Payment Date Dividend per Share May 20, 2019 June 3, 2019 July 1, 2019 $ 0.16 November 6, 2019 November 27, 2019 December 18, 2019 $ 0.16 May 15, 2020 June 3, 2020 July 1, 2020 $ 0.19 November 10, 2020 November 27, 2020 December 18, 2020 $ 0.19 May 17, 2021 June 3, 2021 July 1, 2021 $ 0.19 November 9, 2021 November 26, 2021 December 17, 2021 $ 0.19 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. 65 18. New Markets Tax Credit On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “Project”). In connection with the NMTC transaction, the Company received a $ 23.0 million NMTC allocation for the Project and secured low interest financing and the potential for future debt forgiveness related to the Project. Upon closing of the NMTC transaction, the Company provided an aggregate of approximately $ 15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years , bearing an interest rate of 1.0 %. This $ 15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $ 22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of NMTCs. This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The value attributable to the put/call is nominal. The Investor's interest of $ 6.3 million is recorded in New market tax credit obligation on the consolidated balance 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. The Investor is subject to 100 percent recapture of the NMTC it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of the NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. The Investor and its majority owned community development entity are considered VIEs and the Company is the primary beneficiary of the VIEs. This conclusion was reached based on the following: • the ongoing activities of the VIEs, collecting and remitting interest and fees and NMTC compliance, were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE; • contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investor and community development entity; • the Investor lacks a material interest in the underling economics of the project; and • the Company is obligated to absorb losses of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transaction in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. 66 19. Commitments and Contingencies We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows. We are occasionally party to short-term, cancellable and occasionally non-cancellable, fixed price contracts with major suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw materials for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of December 31, 2021. 20. New Accounting Pronouncements Changes to U.S. GAAP are established by the FASB in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto. In 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. 67 21. Earnings Per Share Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards. 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: 2021 2020 2019 Numerator: (in thousands, except share and per share data) Net income $ 58,758 $ 79,009 $ 53,711 Denominator: Basic weighted average shares 52,404,199 52,168,679 52,079,865 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 23,092 — — Diluted weighted average shares 53,728,989 53,061,169 52,635,415 Earnings per share: Basic $ 1.12 $ 1.51 $ 1.03 Dilutive $ 1.09 $ 1.49 $ 1.02 Anti-dilutive shares: 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) 22. Related Parties The Company purchases some supplies from an entity controlled by the Company’s Executive Chairman. The Company sometimes makes sales to the Executive Chairman 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. 68 Following is a summary of transactions and balances with affiliates: Years Ended December 31, 2021 2020 2019 (in thousands) Sales to affiliates $ 3,752 $ 3,475 $ 886 Payments to affiliates 185 256 332 December 31, 2021 2020 (in thousands) Due from affiliates $ 547 $ 342 23. Segments 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: 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. 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. 69 Years Ended December 31, 2021 2020 2019 (in thousands) Net Sales 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 BasX 1 4,083 — — Eliminations ( 26,754 ) ( 24,235 ) ( 28,053 ) Net sales $ 534,517 $ 514,551 $ 469,333 Gross Profit AAON Oklahoma $ 126,868 $ 140,099 $ 107,228 AAON Coil Products 10,075 15,750 12,197 BasX 1 887 — — Gross profit $ 137,830 $ 155,849 $ 119,425 December 31, 2021 2020 (in thousands) Long-lived assets AAON Oklahoma $ 183,840 $ 170,603 AAON Coil Products 62,534 54,308 BasX 1 28,662 — Total long-lived assets $ 275,036 $ 224,911 Intangible assets and goodwill AAON Oklahoma $ 3,229 $ 3,267 AAON Coil Products — — BasX 1 152,619 — 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable.