What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 399 added, 301 removed, 476 unchanged (60% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Assets (in thousands, except share and per share data)

5 unchanged sentences

Income tax receivable 2,092 5,723

Note receivable 32 31

Inventories, net 146,091 130,270

Contract assets 10,001 5,749

Prepaid expenses and other 5,548 2,071

8 unchanged sentences

Property, plant and equipment, net 266,370 258,062

Goodwill and intangible assets, net 3,229 3,267

Intangible assets, net 67,310 70,121

Goodwill 81,892 85,727

Right of use assets 16,862 16,974

Note receivable 557 579

Other long-term assets 1,328 1,216

Total assets $ 717,458 $ 650,180

3 unchanged sentences

Accrued liabilities 52,890 50,206

Contract liabilities 25,540 7,542

Total current liabilities 114,226 86,768

Revolving credit facility, long-term 65,000 40,000

Deferred tax liabilities 32,966 31,993

4 unchanged sentences

Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued

Common stock, $ .004 par value, 100,000,000 shares authorized, 52,420,486 and 52,224,767 issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Common stock, $ .004 par value, 100,000,000 shares authorized, 53,065,081 and 52,527,985 issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 77,574 81,654

7 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

(in thousands, except share and per share data)

6 unchanged sentences

Interest (expense) income, net ( 190 ) 3

Other (expense) income, net ( 19 ) 15 37 20

Other income, net 21 17

Income before taxes 22,841 18,481

4 unchanged sentences

Diluted $ 0.33 $ 0.30

Cash dividends declared per common share:

$ — $ — $ 0.19 $ 0.19

Weighted average shares outstanding:

4 unchanged sentences

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Common Stock Paid-in Retained

2 unchanged sentences

Balances at December 31, 2021

Net income — — — 52,572 52,572

Stock options exercised and restricted 438 2 14,571 — 14,573

stock awards granted

Share-based compensation — — 8,784 — 8,784

Stock repurchased and retired ( 243 ) ( 1 ) ( 16,550 ) — ( 16,551 )

Dividends — — — ( 9,964 ) ( 9,964 )

Balances at September 30, 2021 52,420 $ 210 $ 11,966 $ 388,103 $ 400,279

Three Months Ended September 30, 2021

Common Stock Paid-in Retained

Shares Amount Capital Earnings Total

(in thousands)

Balances at June 30, 2021 52,416 $ 210 $ 10,998 $ 372,518 $ 383,726

52,528 $ 210 $ 81,654 $ 384,306 $ 466,170

Net income — — — 18,059 18,059

Stock options exercised and restricted 77 — 2,725 — 2,725

stock awards granted

Stock options exercised, restricted stock awards 605 2 2,890 — 2,892

granted, and contingent shares issued (Note 16)

Share-based compensation — — 3,112 — 3,112

Stock repurchased and retired ( 68 ) — ( 4,082 ) — ( 4,082 )

Dividends — — — 4 4

Balances at September 30, 2021 52,420 $ 210 $ 11,966 $ 388,103 $ 400,279

Nine Months Ended September 30, 2020

Contingent consideration (Note 3)

— — ( 6,000 ) — ( 6,000 )

Refund for cancelled cash dividends — — — 5 5

Balances at March 31, 2022 53,065 $ 212 $ 77,574 $ 402,370 $ 480,156

Three Months Ended March 31, 2021

Common Stock Paid-in Retained

7 unchanged sentences

Stock repurchased and retired ( 87 ) ( 1 ) ( 6,401 ) — ( 6,402 )

Dividends — — — ( 9,910 ) ( 9,910 )

Balances at September 30, 2020 52,265 $ 209 $ 8,175 $ 336,508 $ 344,892

Three Months Ended September 30, 2020

Common Stock Paid-in Retained

Shares Amount Capital Earnings Total

(in thousands)

Balances at June 30, 2020 52,234 $ 209 $ 6,451 $ 316,035 $ 322,695

Net income — — — 20,460 20,460

Stock options exercised and restricted 126 — 4,346 — 4,346

stock awards granted

Share-based compensation — — 2,852 — 2,852

Stock repurchased and retired ( 95 ) — ( 5,474 ) — ( 5,474 )

Dividends — — — 13 13

Balances at September 30, 2020 52,265 $ 209 $ 8,175 $ 336,508 $ 344,892

Balances at March 31, 2021 52,424 $ 210 $ 10,957 $ 361,871 $ 373,038

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Cash Flows

Nine Months Ended

September 30,

Three Months Ended

Operating Activities (in thousands)

Net income $ 18,059 $ 16,376

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization 7,076 7,398

Amortization of debt issuance cost 11 10

Provision for credit losses on accounts receivable, net of adjustments — 193

Provision for excess and obsolete inventories 378 1,776

Amortization of right of use assets 67 —

Provision for (recovery of) credit losses on accounts receivable, net of adjustments 288 ( 13 )

Provision for (recovery of) excess and obsolete inventories 220 ( 194 )

Share-based compensation 3,112 2,761

(Gain) loss on disposition of assets ( 15 ) ( 61 )

Foreign currency transaction (gain) loss ( 1 ) 18

Gain on disposition of assets ( 2 ) —

Foreign currency transaction gain ( 9 ) ( 8 )

Interest income on note receivable ( 6 ) ( 6 )

2 unchanged sentences

Accounts receivable ( 43,244 ) ( 5,179 )

Income taxes 2,588 ( 3,142 )

Income tax receivable 3,631 ( 2,766 )

Inventories ( 16,041 ) ( 1,627 )

Contract assets ( 4,252 ) —

Prepaid expenses and other ( 3,588 ) 108

Accounts payable 6,325 4,904

Contract liabilities 17,998 —

Deferred revenue 68 2,358

Accrued liabilities 2,511 58

Net cash provided by operating activities 74,703 96,995

Net cash (used in) provided by operating activities ( 6,803 ) 28,838

Investing Activities

Capital expenditures ( 14,031 ) ( 16,404 )

Cash paid in business combination, net of cash acquired ( 249 ) —

Proceeds from sale of property, plant and equipment 2 —

2 unchanged sentences

Financing Activities

Borrowings under revolving credit facility 25,000 —

Stock options exercised 2,890 9,438

1 unchanged sentence

Employee taxes paid by withholding shares ( 804 ) ( 1,217 )

Cash dividends paid to stockholders ( 9,964 ) ( 9,910 )

Net cash used in financing activities ( 11,942 ) ( 13,911 )

Net cash provided by financing activities 23,808 3,036

Net increase in cash, cash equivalents and restricted cash 2,741 15,484

5 unchanged sentences

Basis of Presentation

The accompanying unaudited consolidated financial statements of AAON, Inc., a Nevada corporation, and our operating subsidiaries, all of which are wholly-owned, (collectively, the “Company”) have been prepared in accordance with U.S.

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 accompanying unaudited consolidated financial statements of AAON, Inc.

and our operating subsidiaries, all of which are wholly-owned, have been prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”).

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 3).

We began including the results of BasX’s operations in our consolidated financial statements on December 11, 2021.

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

Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest.

8 unchanged sentences

All intercompany balances and transactions have been eliminated in consolidation.

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

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

Use of Estimates

3 unchanged sentences

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, inventory reserves, warranty accrual, worker's compensation accrual, medical insurance accrual, income taxes and share-based compensation.

Actual results could differ materially from those estimates.

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.

Change in Estimate

During the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at our Longview, Texas location resulted in a change in estimate that increased the useful lives from between ten and twelve years to fifteen years.

This determination was based on recent and estimated future production levels as well as management’s knowledge of the equipment and historical and future use of the equipment.

The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $ 1.8 million during the three months ended March 31, 2022.

Impact of COVID-19 Pandemic

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

The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.

Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S.

Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher employee absenteeism, mostly in June 2020, in our manufacturing facilities.

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

We maintained continuous operations during the nine months ended September 30, 2021, except for planned maintenance in January and the weather related shutdown in February 2021.

For the most part, our workers are able to socially distance themselves during the manufacturing process.

The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business.

We had continuous operations during the three months ended March 31, 2022.

Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics.

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

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

Although, we have experienced some supply chain challenges, 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.

We anticipate that the average cost of raw materials and certain components purchased, including the impact of rising inflation and tariffs, for the remainder of 2021 will be higher than the costs experienced during the year ended December 31, 2020.

The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, some employee absenteeism, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business.

While our supply chain disruptions to date have been minimal and intermittent, they have impacted the production process which creates inefficiencies and can deteriorate our profit margins.

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

Although future 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.

Inflation and Labor Market

We have witnessed increases of our raw material prices, especially in copper and steel, which appear to be a residual 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.

We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong existing vendor relationships, expanding our list of vendors, and our favorable liquidity position.

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 for all employees below the Director level.

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

In March 2022, we awarded annual merit raises resulting in a 3.0 % increase in overall wages.

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

Because we have managed to maintain almost continuous operations with reasonable lead times through 2020 and 2021, our order intake is strong and has increased throughout 2021 as the economy has opened back up and COVID-19 restrictions have lessened.

We expect to increase our production for the remainder of 2021 and into 2022.

We do not believe that the impact of the COVID-19 pandemic will have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ended December 31, 2021.

However, we are continually monitoring the progression of the COVID-19 pandemic, including the recent Delta variant, and its potential effects on our financial position, results of operations, and cash flows.

Despite efforts to mitigate the impact of inflation, supply chain issues, and the tight labor market, future disruptions, while temporary, could negatively impact our financial position, results of operations and cash flows.

First Quarter 2021 Planned Maintenance and Adverse Weather

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.

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.

Accounting Policies

1 unchanged sentence

Fair Value Measurements

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.

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.

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.

2 unchanged sentences

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

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.

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 i dentical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means.

Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability.

Items categorized in Level 3 include the estimated fair values of property, plant and equipment, intangible assets, and goodwill acquired in a business combination.

Items categorized in Level 3 include the estimated fair values of property, plant and equipment, intangible assets, contingent consideration, and goodwill acquired in a business combination.

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).

2 unchanged sentences

Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability.

Intangible Assets

Our intangible assets include various trademarks, service marks and technical knowledge acquired in our February 2018 business combination.

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

Definite-Lived Intangible Assets

Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations (Note 3).

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

As of March 31, 2021, our intangible assets were fully amortized.

As of December 31, 2020, our intangible assets, net of amortization, were approximately $ 38 thousand.

The amount of amortization was $ 58 thousand for the three months ended September 30, 2020 and $ 38 thousand and $ 175 thousand for the nine months ended September 30, 2021 and 2020, respectively.

Goodwill represents the excess of the consideration paid for the acquired business, in our February 2018 business combination, over the fair value of the individual assets acquired, net of liabilities assumed.

Goodwill at September 30, 2021 is deductible for income tax purposes.

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

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 March 31, 2022 $ 50.3 million of goodwill is deductible for income tax purposes.

Our indefinite-lived intangible assets consist of trademark and trade names.

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.

As of September 30, 2021 and December 31, 2020, our goodwill was approximately $ 3.2 million.

Recent Accounting Pronouncements

2 unchanged sentences

We consider the applicability and impact of all ASUs.

ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.

ASUs not listed or included within the Company's Annual Report on Form 10-K for the year ended December 31, 2021, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.

Revenue Recognition

Disaggregated net sales by major source:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

The following tables show disaggregated net sales by reportable segment (see Note 20) by major source, net of intercompany sales eliminations.

As the BasX segment was not applicable during the three months ended March 31, 2021, this segment has been excluded from the table for that period.

Three Months Ended March 31, 2022

AAON Oklahoma AAON Coil Products BasX Total

(in thousands)

3 unchanged sentences

Outdoor Mechanical Rooms 554 110 — 664

Cleanroom Systems — — 8,039 8,039

Data Center Cooling Solutions — — 10,868 10,868

Water-Source Heat Pumps 2,986 2,353 — 5,339

Part Sales 10,216 — — 10,216

Other 4,070 1,792 11,139 10,704

4,163 1,058 723 5,944

Disaggregated units sold by major source:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

$ 139,867 $ 21,935 $ 20,969 $ 182,771

Three Months Ended March 31, 2021

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

Rooftop Units $ 87,425 $ — — $ 87,425

3 unchanged sentences

Water-Source Heat Pumps 2,388 2,277 — 4,665

Part Sales 7,506 — — 7,506

2,345 691 — 3,036

The Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts.

The primary performance obligation in our contract is delivery of the requested manufactured equipment.

Most of the Company’s products are highly customized, cannot be resold to other customers and the cost of rework to be resold is not economical.

The Company has a formal cancellation policy and generally does not accept returns on these units.

$ 99,976 $ 15,812 — $ 115,788

1 BasX was acquired by the Company on December 10, 2021.

2 Other sales include freight, extended warranties and miscellaneous revenue.

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

The Company has formal cancellation policies and generally does not accept returns on these units.

As a result, many of the Company’s products do not have an alternative use and therefore, for these products we recognize revenue over the time it takes to produce the unit.

For all other products that are part sales or standardized units, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment.

The Company measures a contract’s progress on

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

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

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

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

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

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

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

As the primary performance obligation in such a contract is delivery of the requested manufactured equipment, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment.

Final sales prices are fixed based on purchase orders.

1 unchanged sentence

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

We are responsible for billings and collections resulting from all sales transactions, most of which are 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.

Product Warranties

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 HVAC units and other related products and services to customers.

The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order.

These additional products and services may include, without limitation, controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”).

All of these items are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party.

These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”).

All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party.

Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order.

3 unchanged sentences

The Company is considered the principal for the equipment we design and manufacture and records that revenue.

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.

The Company has no control over the Third Party Products to the end customer and the Company is under no obligation related to the Third Party Products.

Amounts related to Third Party Products are not recognized as revenue but are recorded as a liability and are included in accrued liabilities on the consolidated balance sheet.

The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer.

The amount of payments to our Representatives were $ 9.5 million and $ 11.5 million for the three months ended September 30, 2021 and 2020, respectively.

The amount of payments to our Representatives were $ 34.5 million and $ 39.0 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years.

Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period.

The amount of payments to our Representatives were $ 6.5 million and $ 11.0 million for the three months ended March 31, 2022 and 2021, respectively.

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 second 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 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 $ 78.7 million in goodwill.

The following table presents the revised allocation of the consideration paid to the assets acquired and liabilities assumed in the acquisition of BasX described above, which was still preliminary at December 31, 2021.

The revisions indicated below were recorded during the three months ended March 31, 2022.

The revisions were the results of updates to our preliminary estimates and third party valuation models.

The impact of such revisions on net income for prior periods was not significant.

Revised Allocation as of

March 31, 2022 Estimated

Allocation as of

December 31, 2021 Revision

(in thousands)

Accounts receivable $ 13,699 $ 13,699 $ —

Inventories 2,725 2,725 —

Contract assets 7,635 7,635 —

Prepaid expenses and other 341 341 —

Property, plant and equipment 13,169 13,169 —

Right of use assets 15,611 15,611 —

Intangible assets 68,413 70,329 ( 1,916 )

Goodwill 78,663 82,498 ( 3,835 )

Accounts payable ( 9,388 ) ( 9,388 ) —

Accrued liabilities ( 3,807 ) ( 3,807 ) —

Contract liabilities ( 7,771 ) ( 7,771 ) —

Lease liabilities ( 15,611 ) ( 15,611 ) —

Contingent Consideration - shares of AAON, Inc.

( 60,000 ) ( 66,000 ) 6,000

Consideration paid $ 103,679 $ 103,430 $ 249

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

Revised Allocation as of

March 31, 2022 Estimated

Allocation as of

December 31, 2021 Revision

(in thousands)

Definite-lived intangible assets

Intellectual property $ 6,295 $ 6,479 $ ( 184 )

Customer relationships 47,547 48,684 ( 1,137 )

53,842 55,163 ( 1,321 )

Indefinite-lived intangible assets

Trademarks 14,571 15,166 ( 595 )

Total intangible assets acquired $ 68,413 $ 70,329 $ ( 1,916 )

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 $ 47.1 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 Agreement are achieved.

Pro Forma Results of Operations (unaudited)

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

The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2021 are presented as if the combination had been made on January 1, 2021.

Three months ended

March 31, 2021

(in thousands, except per share data)

Revenues $ 130,631

Net income 16,972

Earnings per share:

Dilutive $ 0.32

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.

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

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.

We have elected the short-term lease measurement and recognition exemption which does not require balance sheet presentation these short-term leases.

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 3), 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 March 31, 2022, we had operating lease right-of-use assets of $ 16.9 million, current and noncurrent operating lease obligations of $ 1.7 million and $ 15.3 million within accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets.

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.

Accounts Receivable

Accounts receivable and the related allowance for credit losses are as follows:

September 30,

2022 December 31, 2021

3 unchanged sentences

$ 113,736 $ 70,780

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Allowance for credit losses:

1 unchanged sentence

Balance, beginning of period $ 549 $ 506

Provisions (recoveries) for expected credit ( 12 ) 117 — 193

Provisions for (recoveries of) expected credit 288 ( 13 )

losses, net of adjustments

Accounts receivable written off, net of recoveries

( 29 ) — ( 29 ) —

Balance, end of period $ 837 $ 493

3 unchanged sentences

The components of inventories and related changes in the allowance for excess and obsolete inventories account are as follows:

September 30,

2022 December 31, 2021

6 unchanged sentences

$ 146,091 $ 130,270

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Allowance for excess and obsolete inventories:

1 unchanged sentence

Balance, beginning of period $ 1,787 $ 3,261

Provisions for excess and obsolete 86 1,969 378 1,776

Provision for (recovery of) excess and 220 ( 194 )

obsolete inventories

Inventories written off — ( 763 )

Balance, end of period $ 2,007 $ 2,304

Intangible assets

Our intangible assets consist of the following:

March 31, 2022 December 31, 2021

Definite-lived intangible assets (in thousands)

Intellectual property $ 6,295 $ 6,479

Customer relationships 47,547 48,684

Accumulated amortization ( 1,103 ) ( 208 )

Total, net 52,739 54,955

Indefinite-lived intangible assets

Trademarks 14,571 15,166

Total intangible assets, net $ 67,310 $ 70,121

Amortization expense recorded in cost of sales is as follows:

Three Months Ended

2022 March 31,

(in thousands)

Amortization expense $ 895 $ 38

Excluding the impact of any future acquisitions, the Company anticipates amortization expense to be $ 3.6 million for each of the years ended 2022 through 2026.

Supplemental Cash Flow Information

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Supplemental disclosures:

(in thousands)

Interest paid $ 115 $ —

Income taxes paid $ 176 $ 213

1 unchanged sentence

Non-cash capital expenditures $ 458 $ 264

$ ( 1,052 ) $ ( 4,421 ) $ ( 2,897 ) $ 625

1 Includes non-cash changes in accrued capital expenditures

The Company has product warranties with various terms ranging from one year from the date of first use or 18 months for parts to 25 years for certain heat exchangers.

The Company has product warranties with various terms ranging from one year from the date of first use or 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.

1 unchanged sentence

Changes in the warranty accrual are as follows:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Warranty accrual:

6 unchanged sentences

$ 1,157 $ 1,467

Accrued Liabilities

Accrued Liabilities and Other Long-Term Liabilities

Accrued liabilities were comprised of the following:

September 30,

2022 December 31, 2021

9 unchanged sentences

Employee vacation time 5,000 4,362

Operating lease liability, short-term 1,683 1,580

Other 3,984 3,968

$ 52,890 $ 50,206

Other long-term liabilities were comprised of the following:

2022 December 31, 2021

(in thousands)

Long-term operating lease obligation $ 15,320 $ 15,467

Long-term donations 221 334

Extended warranties 3,152 3,042

$ 18,693 $ 18,843

Revolving Credit Facility

On July 26, 2021, the Company entered into a new revolving credit facility which provides for maximum borrowings of $ 30.0 million.

Under the line of credit, there is one standby letter of credit totaling $ 1.8 million.

Borrowings available under the revolving credit facility at September 30, 2021 were $ 28.2 million.

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

The new revolving credit facility includes fallback language clearly defining an alternative reference rate which provides for specified replacement rates, as defined in the revolving credit facility agreement, upon a LIBOR cessation event.

At the time of a LIBOR cessation event, the replacement rate self-executes without the need for negotiations or a formal amendment process.

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

The revolving credit facility expires on July 26, 2024.

We had no outstanding balance under our revolving credit facility at September 30, 2021 and December 31, 2020.

As of September 30, 2021, we were in compliance with our financial covenants related to the new revolving credit facility.

These financial covenants require that we meet certain parameters related to our consolidated leverage ratio and our consolidated total liabilities to tangible net worth ratio.

At September 30, 2021, our consolidated leverage ratio was 0.02 to 1 and met the requirement of being less than 2 to 1.

Our consolidated total liabilities to tangible net worth ratio was 0.3 to 1, and met the requirement of being less than 2 to 1.

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

As of March 31, 2022 and December 31, 2021, we had $ 65.0 million and $ 40.0 million outstanding under the Revolver, respectively.

We have one standby letter of credit totaling $ 0.8 million as of March 31, 2022.

Borrowings available under the Revolver at March 31, 2022 were $ 34.2 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.

As of and for the three months ended March 31, 2022, 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 three months ended March 31, 2022.

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 March 31, 2022, 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 March 31, 2022, our leverage ratio was 0.63 to 1.0, which meets the requirement of not being above 3 to 1.

The provision (benefit) for income taxes consists of the following:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands)

4 unchanged sentences

The reconciliation of the Federal statutory income tax rate to the effective income tax rate is as follows:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Federal statutory rate 21.0 % 21.0 %

5 unchanged sentences

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 nine months ended September 30, 2021.

During the nine months ended September 30, 2021, the Company recorded an excess tax benefit of $ 3.8 million as compared to $ 2.5 million during the same period in 2020, an increase of 54 %.

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.

This resulted in an overall reduction of our effective state income tax rate, net of Federal benefit.

During the three months ended March 31, 2022, the Company recorded an excess tax benefit of $ 0.5 million as compared to $ 2.9 million during the same period in 2021, a decrease of 82 % The decrease 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.

We earn investment tax credits from the state of Oklahoma’s manufacturing property investment program.

1 unchanged sentence

Under this method, the investment tax credits are recognized as a reduction to our Oklahoma income tax expense in the year they are used.

As of September 30, 2021, we have investment tax credit carryforwards of approximately $ 3.7 million.

These credits have estimated expirations ranging from the year 2036 through 2040.

As of March 31, 2022, we have investment tax credit carryforwards of approximately $ 3.7 million.

These credits have estimated expirations from the year 2036 through 2040.

The Company's estimated annual 2022 effective tax rate, excluding discrete events, is approximately 25 %.

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

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

We are subject to U.S.

4 unchanged sentences

Any interest or penalties would be recognized as a component of income tax expense.

Coronavirus Aid, Relief, and Economic Security Act

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020, and includes a retroactive correction to the 2017 Tax Cuts and Jobs Act that allows for much faster depreciation of qualified improvement property that is placed in service after December 31, 2017.

Under current rules, the calculation of depreciation or repair deductions for prior years can be recomputed and a one-time catch-up adjustment is allowed in the current tax year for missed deductions.

The adjustment is the difference between depreciation or repair deductions claimed versus depreciation or repair deductions that could have been claimed by the end of the prior tax year and does not require amending any prior year tax returns.

The Company completed the prior year adjustment and the current-year catch up with the 2019 tax return as filed in the fourth quarter of 2020 resulting in a increase to our deferred tax liability of $ 4.7 million.

For tax years 2020 and forward, the Company includes this treatment for our qualified property placed in service.

American Rescue Plan Act

On March 11, 2021, the American Rescue Plan Act (the “ARPA”) was enacted and signed into law.

The ARPA is an economic stimulus package in response to the COVID-19 pandemic, which contains tax provisions that did not have a material impact to our consolidated financial statements.

In accordance with accounting standards for income taxes, the impact of this new tax legislation was taken into account in the first quarter of 2021, the period in which it was enacted.

Share-Based Compensation

1 unchanged sentence

Under the LTIP, the exercise price of shares granted could 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, the "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.

On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("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.

2 unchanged sentences

Membership on the Committee is limited to independent directors.

The Committee determines the persons to whom awards are to be made, 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.

The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan.

The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2021 is $ 19.5 million and is expected to be recognized over a weighted average period of approximately 2.5 years.

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 the nine months ended September 30, 2021 and 2020 using a Black Scholes-Merton Model:

Nine months ended

September 30, 2021 September 30, 2020

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.

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 the three months ended March 31, 2022 and 2021 using a Black Scholes-Merton Model:

Three months ended

March 31, 2022 March 31, 2021

Directors and SLT 1 :

12 unchanged sentences

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 September 30, 2021:

The following is a summary of stock options vested and exercisable as of March 31, 2022:

Prices Number

7 unchanged sentences

Total 1,697,303 6.25 $ 39.72 $ 28,958

The following is a summary of stock options vested and exercisable as of September 30, 2020:

The following is a summary of stock options vested and exercisable as of March 31, 2021:

Prices Number

15 unchanged sentences

( 25,288 ) 51.58

Outstanding at September 30, 2021

Outstanding at March 31, 2022

3,614,735 $ 44.10

Exercisable at September 30, 2021

Exercisable at March 31, 2022

1,697,303 $ 39.72

The total intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $ 15.1 million and $ 12.1 million, respectively.

The cash received from options exercised during the nine months ended September 30, 2021 and 2020 was $ 14.6 million and $ 18.5 million, respectively.

The total pre-tax compensation cost related to unvested stock options not yet recognized as of March 31, 2022 is $ 19.7 million and is expected to be recognized over a weighted average period of approximately 2.3 years.

The total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021 was $ 1.9 million and $ 10.7 million, respectively.

The cash received from options exercised during the three months ended March 31, 2022 and 2021 was $ 2.9 million and $ 9.4 million, respectively.

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

Performance Awards

We have awarded performance restricted stock units ("PSUs") to certain officers and key employees under our 2016 Plan.

Restricted Stock

The fair value of restricted stock awards is based on the fair market value of AAON, Inc.

common stock on the respective grant dates, reduced for the present value of dividends.

At March 31, 2022, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 5.8 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

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

Shares Weighted

Unvested at December 31, 2021

161,225 $ 46.08

( 48,479 ) 42.20

( 581 ) 49.75

Unvested at March 31, 2022

152,068 $ 49.26

We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan.

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

These 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.

These PSUs vest based on the level of achievement with respect to the Company's 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 three years.

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 September 30, 2021 is $ 1.1 million and is expected to be recognized over a weighted average period of approximately 2.2 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 nine months ended September 30, 2021 using a Monte Carlo Model:

Nine months ended

September 30, 2021

The total pre-tax compensation cost related to unvested PSUs not yet recognized as of March 31, 2022 is $ 2.6 million and is expected to be recognized over a weighted average period of approximately 2.7 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 three months ended March 31, 2022 and 2021 using a Monte Carlo Model:

Three months ended

March 31, 2022 March 31, 2021

Expected dividend rate $ 0.38 $ 0.38

2 unchanged sentences

Expected life (in years) 2.80 2.81

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

The expected term of the PSUs is based on their remaining performance period.

The risk-free interest rate is based on the U.S.

5 unchanged sentences

16,851 $ 87.78

Unvested at September 30, 2021

Unvested at March 31, 2022

58,472 $ 57.14

Restricted Stock

The fair value of restricted stock awards is based on the fair market value of AAON, Inc.

common stock on the respective grant dates, reduced for the present value of dividends.

At September 30, 2021, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 4.8 million, which is expected to be recognized over a weighted average period of approximately 2.3 years.

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

Key Employee Awards

Subject to the MIPA Agreement (Note 3), 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 Key Employee Awards do not accrue dividends.

The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of March 31, 2022 is $ 1.5 million and is expected to be recognized over a weighted average period of approximately 1.8 years.

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

Shares Weighted

1 unchanged sentence

26,599 $ 80.18

( 89,523 ) 35.85

( 7,051 ) 49.81

Unvested at September 30, 2021

Unvested at March 31, 2022

26,599 $ 80.18

1 unchanged sentence

A summary of share-based compensation is as follows:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

Grant date fair value of awards during the period:

8 unchanged sentences

Restricted stock 679 557

Key employee awards 208 —

Total $ 3,112 $ 2,761

3 unchanged sentences

Total $ 512 $ 2,910

Share-based compensation expense is recognized on a straight-line basis over the service period of the related stock options and restricted stock awards.

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.

2 unchanged sentences

Forfeitures are accounted for as they occur.

Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during service period of the related stock options and restricted stock award, the service period (and compensation expense recognition) 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.

Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during service period of the related share-based compensation award, the service period (and compensation expense recognition) 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 stock options and restricted stock 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.

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

The performance awards cliff vest at the end of the performance period.

The performance awards are subject to several service conditions and market conditions, as defined by the performance restricted stock unit 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 PSUs cliff vest on December 31, at the end of the third year from the date of grant.

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.

Employee Benefits

6 unchanged sentences

Administrative expenses are paid for by Plan participants.

The Company paid no administrative expenses during the nine months ended September 30, 2021 and 2020.

The Company matches 175 %, up to 6 %, of employee contributions of eligible compensation in Company stock.

The Company match vests over six years , with 20 % vesting each year after two years of service.

The Company paid no administrative expenses during the three months ended March 31, 2022 and 2021.

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.

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands)

1 unchanged sentence

Profit Sharing Bonus Plan

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

Eligible employees are regular full-time employees who are actively employed and working on the first and last days of the calendar quarter and who were employed full-time for at least three full months prior to the beginning of the calendar quarter, excluding the Company's SLT.

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

We maintain a discretionary profit sharing bonus plan under which approximately 10 % of pre-tax profit from consolidated AAON Oklahoma and AAON Coil Products 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 Coil Products 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.

Three Months Ended

2022 March 31,

(in thousands)

6 unchanged sentences

In addition, the Company matches 175 % of a participating employee's allowed contributions to a qualified health saving account to assist employees with our health insurance plan deductibles.

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands)

4 unchanged sentences

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, restricted stock awards and performance restricted stock units.

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

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

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands, except share and per share data)

2 unchanged sentences

52,613,232 52,293,464

Effect of dilutive stock options, restricted stock

Effect of dilutive shares related to stock based compensation 1

927,137 1,521,180

and performance awards

Effect of dilutive shares related to contingent consideration 2

Diluted weighted average shares

5 unchanged sentences

437,636 100,625

1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 13)

2 Dilutive shares related to contingent shares issued to the former owners of BasX (Note 3 & Note 16)

Stockholders’ Equity

13 unchanged sentences

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.

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 in AAON, Inc.

stock in their accounts sold to the Company.

2 unchanged sentences

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 other repurchases from directors or employees are contingent upon Board

All repurchases are done at current market prices.

Our repurchase activity is as follows:

Nine Months Ended

September 30, 2021 September 30, 2020

Three Months Ended

March 31, 2022 March 31, 2021

(in thousands, except share and per share data)

5 unchanged sentences

Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows:

Inception to September 30, 2021

Inception to March 31, 2022

(in thousands, except share and per share data)

4 unchanged sentences

14,505,077 $ 267,092 $ 18.41

Subsequent to September 30, 2021 and through November 1, 2021, the Company repurchased 19,545 shares for $ 1.3 million from our 401(k) savings and investment plan.

Subsequent to March 31, 2022 and through May 2, 2022, the Company repurchased a total of 16,692 shares for $ 0.9 million from our 401(k) savings and investment plan and from our employees for payment of statutory tax withholdings on stock transactions.

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

4 unchanged sentences

November 9, 2021 November 26, 2021 December 17, 2021 $ 0.19

May 17, 2021 June 3, 2021 July 1, 2021 $ 0.19

Contingent Shares Issued in BasX Acquisition

On December 10, 2021, we closed on the acquisition of BasX (Note 3).

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.

Based on the final allocation of the consideration paid (Note 3), we estimated the fair value of contingent consideration related to these shares to be approximately $ 60.0 million, which is included in additional paid-in capital on the consolidated balance sheets.

As of March 31, 2022, 486,268 shares related to the year ended 2021 earn-out milestone had been issued to the former owners of BasX as part of a private placement exempt from registration with the SEC under Rule 506(b), which are included in common stock on the consolidated statements of stockholders' equity.

No additional shares have been issued as of May 2, 2022.

New Markets Tax Credit

15 unchanged sentences

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.

There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement.

Commitments and Contingencies

5 unchanged sentences

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 September 30, 2021.

We had no material contractual purchase obligations as of March 31, 2022.

On April 27, 2022, the Company entered into a purchase sales agreement with a third party manufacturer to purchase the intellectual property rights to design and manufacture fan wheels for the purchase price of approximately $ 6.5 million.

The purchase price will be paid in three installments over the next 18 months.

As of May 2, 2022 we have paid approximately $ 1.0 million related to this agreement.

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.

The Company sometimes makes sales to the Executive Chairman for parts.

Additionally, the Company sells units to an entity owned by a member of the CEO/President's immediate family.

This entity is also one of the Company’s Representatives and as such, the Company makes payments to the entity for third party products.

Through the acquisition of BasX (Note 3), at March 31, 2022, the Company leased an manufacturing and office facility in Redmond, Oregon from an entity in which certain members of management have an ownership interest.

The following is a summary of transactions and balance with affiliates:

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands)

1 unchanged sentence

Payments to affiliates 364 73

September 30,

2022 December 31,

2 unchanged sentences

Due to affiliates — —

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.

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

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

AAON Oklahoma:

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

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

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

AAON Coil Products:

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

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

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

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

BasX consists of operations at our Redmond, Oregon facility.

The following table summarizes certain financial data related to our segments.

Transactions between segments are recorded based on prices negotiated between the segments.

Sales of units represent the selling price of our units plus freight and other miscellaneous charges less any returns and allowances.

Parts include sales of purchased and fabricated parts including our coils along with the related freight and less any returns and allowances.

The “Other” category in the table below includes certain expenses that are not allocated to the reportable segments and are primarily engineering related expenses.

Asset information by segment is not easily identifiable or reviewed by the chief operating decision maker.

As such, this information is not included below.

Three Months Ended Nine Months Ended

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

(in thousands)

Units $ 125,862 $ 123,827 $ 366,597 $ 372,267

Parts - External 12,977 11,222 32,369 26,162

Parts - Inter-segment 6,325 5,659 19,005 18,074

Other ( 268 ) ( 277 ) ( 731 ) ( 578 )

The Gross Profit amounts shown below are presented after elimination entries.

Three Months Ended

March 31, 2022 March 31, 2021

Net Sales (in thousands)

AAON Oklahoma

External sales $ 139,867 $ 99,976

Inter-segment sales 389 506

AAON Coil Products

External sales 21,935 15,812

Inter-segment sales 7,917 5,384

Eliminations ( 8,306 ) ( 5,890 )

Net sales $ 182,771 $ 115,788

Units $ 35,167 $ 41,675 $ 111,247 $ 128,523

Parts - External 5,072 4,917 12,385 11,641

Parts - Inter-segment ( 366 ) ( 758 ) ( 527 ) ( 1,587 )

Other ( 4,220 ) ( 5,744 ) ( 12,349 ) ( 18,238 )

Eliminations 366 758 527 1,587

Net gross profit $ 36,019 $ 40,848 $ 111,283 $ 121,926

AAON Oklahoma $ 33,836 $ 29,772

AAON Coil Products 7,306 3,385

Gross profit $ 46,064 $ 33,157

1 BasX was acquired on December 10, 2021.

March 31, 2022 December 31, 2021

Long-lived assets (in thousands)

AAON Oklahoma $ 190,621 $ 183,840

AAON Coil Products 63,957 62,534

BasX 28,654 28,662

Total long-lived assets $ 283,232 $ 275,036

Intangible assets and goodwill

AAON Oklahoma $ 3,229 $ 3,229

AAON Coil Products — —

BasX 145,973 152,619

Total intangible assets and goodwill $ 149,202 $ 155,848

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

What changed 10-Q

Item 1. Financial Statements