What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 131 added, 192 removed, 144 unchanged (69% of the section changed)

5 unchanged sentences

We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.

We engineer, manufacture and market 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.

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

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

Foreign sales were approximately $11.0 million of our total net sales for the nine months just ended and $8.4 million of our sales during the same period of 2020.

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

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

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

Foreign sales were approximately $6.0 million of our total net sales for the three months ended March 31, 2022 and $2.0 million of our sales during the same period of 2021.

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

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

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

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

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

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

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

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

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

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

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

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

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

1 unchanged sentence

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

Our sales strategy is currently balanced between new construction and replacement applications.

The new construction market through the third quarter of 2021 has improved compared to 2020.

We continue to emphasize the benefits of AAON equipment to property owners in the replacement market.

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 isolated higher employee absenteeism, especially 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 the shutdown for planned maintenance in January 2021 and the February 2021 weather related event described in Note 1.

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

Additional precautions have been taken to social distance workers that work in close environments 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.

While the Company's operations are primarily in Oklahoma and Texas, our domestic sales to customers cover almost all 50 states.

Only the state of Texas is responsible for more than 10% of our revenues.

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.

The Architecture Billings Index ("ABI") was down for most of 2020, indicating a decline in construction, which started to impact the new nonresidential construction market in late 2020.

This slightly impacted the Company with a slower order intake level and caused us to slow down some of our production in the beginning of the first quarter 2021.

Beginning in February 2021, the ABI index began a historic rebound with the May and June 2021 ABI Index being two of the highest scores in the index's 25-year history.

While the ABI did start to decline in June and July, August and September were two straight months of increases.

Even if new construction declines, our equipment is uniquely positioned to address COVID-19 challenges by providing heightened filtration and sanitation through the use of MERV 13 filters, UV lights and bi-polar ionization installed in the factory.

With approximately 50% of our total sales already represented by the replacement market, we are confident of our ability to grow our market share in the replacement market while we continue to pursue opportunities in the new construction market.

We had unrestricted cash and cash equivalents of $101.8 million as of September 30, 2021.

Our capital expenditures during the nine months ended September 30, 2021 were $42.6 million, as compared to $49.0 million for the same period a year ago, and we anticipate our full-year 2021 capital expenditures will total approximately $60.0 million.

The expansion of our Longview, Texas facility was completed and operational during the first quarter 2021.

The Company also has $28.2 million available under its line of credit.

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

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

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

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

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

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

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

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

1 unchanged sentence

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

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.

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 price levels of most raw materials were stable prior to 2020, but we continue to see increases in raw material costs which we are managing through price increases to counteract their impact.

There is also a possibility prices could rise in the future depending on the impact COVID-19 and subsequent inflation has on our supply chain.

At September 30, 2021, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 38.3%, 79.5%, 39.8%, and 56.7%, respectively, as compared to the price (twelve month trailing average) at September 30, 2020.

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

economy and global economy.

At March 31, 2022, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 41.2%, 67.8%, 61.8%, and 1.6%, respectively, as compared to the price (twelve month trailing average) at March 31, 2021.

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

We expect to receive delivery of raw materials from our fixed price contracts for use in our manufacturing operations.

The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:

• Our backlog is at a record level, 144% higher than it was at December 31, 2020 due to our reasonable lead times and quality products.

• Our third quarter 2021 results demonstrated a positive performance, despite the external challenges, with sales increasing approximately 2.8% for the three months ended as compared to the same period last year.

• Bookings increased approximately 60% in the third quarter of 2021 compared to 2020 indicating an improved demand for our products as well as increase in orders in advance of our announced September 2021 price increases.

• Our warranty expense decreased 38% in the third quarter of 2021 compared to 2020 as a result of the quality control efforts the Company has put in place in the past few years.

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

In 2021, we implemented three price increases;

and on January 1, 2022, we implemented a fourth price increase.

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 3).

We began including 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.

The following table shows our historical backlog levels:

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

(in thousands)

$ 461,400 $ 260,164 $ 96,733

The Company started 2020 with a high backlog due to challenges maintaining adequate sheet-metal production capacity in 2019.

The Company started to increase its sheet-metal production capacity at the end of 2019 and into 2020 with the addition of new Salvagnini machines.

This led in part to all time record sales and earnings for the year-ended December 31, 2020 that helped reduce our backlog at the end of 2020.

In 2021, as a result of our decreased lead time, increase in demand, and increase in orders in advance of our announced June 1, 2021 and September 1, 2021 price increase, bookings increased approximately 60% in the third quarter of 2021 compared to 2020.

The Company has increased our backlog both through the acquisition of BasX and organic growth.

Excluding BasX's backlog at March 31, 2022, organic backlog increased 305.0% compared to March 31, 2021, due in part to the completion of the Longview, Texas expansion in early 2021, price increases implemented throughout 2021 and our favorable lead times.

Results of Operations

Three months ended September 30, 2021 vs.

Three months ended September 30, 2020

Three months ended

September 30,

2021 September 30,

Rooftop units 3,746 4,372

Condensing units 560 593

Air handlers 646 534

Outdoor mechanical rooms 2 6

Water source heat pumps 1,576 1,847

Three Months Ended

September 30,

2021 September 30,

Change % Change

(in thousands, except unit data)

Net sales $ 138,571 $ 134,772 $ 3,799 2.8 %

Total units 6,530 7,352 (822) (11.2) %

While the third quarter of 2021 benefited from an increased demand, challenges hiring additional production labor hindered our ability to produce at the same capacity during the three months ended September 30, 2021 as compared to September 30, 2020.

This resulted in an 11.2% decrease in total units sold, mostly related to our rooftop units.

The quarter benefited from our January and June 2021 price increases, which realized approximately a 5.0% increase in sales in the period.

Our parts sales were also up 15% for the quarter that helped increase our net sales for the period.

Cost of Sales

Three Months Ended Percent of Sales

September 30,

2021 September 30,

March 31, 2022 March 31, 2021

(in thousands)

Net Sales $ 182,771 $ 115,788

Cost of Sales 136,707 82,631

Gross Profit 46,064 33,157

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

The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers.

The increase in raw material costs were approximately 6.9% of sales for the quarter which were not completely offset by the realization of price increases we put in place during the year.

The tightening labor market has caused us to also implement raises in entry level wages ahead of realizing our price increases.

The reduction in overall unit production, due to challenges hiring additional production labor, resulted in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs.

Lastly, the small disruptions to our production schedule from supply chain delays negatively impacted our production efficiency.

All of these factors resulted in a decrease in gross profit during the three months ended September 30, 2021 as compared to 2020.

Twelve-month average raw material cost per pound as of September 30:

2021 2020 % Change

Copper $ 4.95 $ 3.58 38.3 %

Galvanized steel $ 0.79 $ 0.44 79.5 %

Stainless steel $ 1.79 $ 1.28 39.8 %

Aluminum $ 1.88 $ 1.20 56.7 %

Selling, general and administrative expenses 23,056 14,696

Three Months Ended Percent of Sales

September 30,

2021 September 30,

(in thousands)

Warranty $ 1,272 $ 2,054 0.9 % 1.5 %

Profit sharing 2,358 3,000 1.7 % 2.2 %

Salaries & benefits 6,029 4,725 4.4 % 3.5 %

Stock compensation 1,418 1,330 1.0 % 1.0 %

Advertising 225 229 0.2 % 0.2 %

Depreciation 645 515 0.5 % 0.4 %

Insurance 733 254 0.5 % 0.2 %

Professional fees 851 542 0.6 % 0.4 %

Donations 97 106 0.1 % 0.1 %

Bad debt expense (12) 117 — % 0.1 %

Other 2,281 1,844 1.6 % 1.4 %

Total SG&A $ 15,897 $ 14,716 11.5 % 10.9 %

The Company's warranty expense continues to improve after making significant quality control improvements in the past two years.

Profit sharing expenses decreased due to our decreased earnings for the period.

Salaries and benefits are up due to increases in bonuses and employee incentives.

Three Months Ended Effective Tax Rate

September 30,

2021 September 30,

Gain on disposal of assets (2) —

Income from operations $ 23,010 $ 18,461

The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:

• Our backlog is at a record level due primarily to strong end-market demand along with our ability to produce and meet customer lead times.

• Organic bookings increased 150% in the first quarter of 2022 compared to 2021 indicating a strong demand for our products.

• Sales in 2022 grew 57.8% to $182.8 million due to organic volume growth of $24.6 million, addition of BasX revenue of $21.0 million, and price increases of $16.5 million.

• Gross profit as a percentage of sales decreased in 2022 to 25.2% from 28.6% in 2021 due to the offset of increased sales by increased material costs and the adverse effect of supply chain issues on operations.

• Our warranty expense decreased 21.1% in the first quarter of 2022 compared to 2021 as a result of the quality control efforts the Company has put in place in the past few years.

• We continue to invest in the future growth of the Company evidenced by our $14.0 million in capital expenditures.

We report our financial results based on three reportable segments:

AAON Oklahoma, AAON Coil Products, and BasX, which are further described in "Segments" (Note 20) within our notes to the consolidated financial statements.

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

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

Segment Operating Results for Three Months Ended March 31, 2022 and Three Months Ended March 31, 2021

Three Months Ended

March 31, 2022 Percent of Sales 2

March 31, 2021 Percent of Sales 2

$ Change % Change

(in thousands)

Income tax provision $ 4,527 $ 5,696 22.5 % 21.8 %

The Company’s estimated annual 2021 effective tax rate, excluding discrete events, is expected to be approximately 25%.

The effective rate is lower than our estimated rate due to the impact related to excess tax benefits.

Nine Months Ended September 30, 2021 vs.

Nine Months Ended September 30, 2020

Nine Months Ended

September 30,

2021 September 30,

Rooftop units 11,362 12,179

Condensing units 1,696 1,447

Air handlers 1,846 1,545

Outdoor mechanical rooms 22 22

Water source heat pumps 5,108 5,109

AAON Oklahoma $ 139,867 76.5 % $ 99,976 86.3 % $ 39,891 39.9 %

AAON Coil Products 21,935 12.0 % 15,812 13.7 % 6,123 38.7 %

20,969 11.5 % — — 20,969 —

Nine Months Ended

September 30,

2021 September 30,

Change % Change

(in thousands, except unit data)

Net sales $ 182,771 $ 115,788 $ 66,983 57.8 %

Total units 20,034 20,302 (268) (1.3) %

In 2021, the Company lost production days in January for planned maintenance and in February due to impacts of bad weather.

While the second and third quarter of 2021 benefited from an increasing demand, challenges hiring additional production labor hindered our ability to produce units at the same capacity in 2020.

Although overall units sold decreased approximately 1.3% for the nine months ended September 30 2021 vs 2020, sales increased 0.1% due primarily to our January 2021 price increase.

The Company's June price increase has been slower to realize given our large backlog and slightly longer lead times.

Cost of Sales 3

Nine Months Ended Percent of Sales

September 30,

2021 September 30,

(in thousands)

AAON Oklahoma $ 106,031 75.8 % 70,204 70.2 % $ 35,827 51.0 %

AAON Coil Products 14,629 66.7 % 12,427 78.6 % 2,202 17.7 %

16,047 76.5 % — — 16,047 —

Cost of sales $ 136,707 74.8 % $ 82,631 71.4 % $ 54,076 65.4 %

Gross Profit 3

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

The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers.

We continue to see overall raw material costs increase.

reduction in overall unit production due to challenges hiring additional production labor, resulting in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs.

Combined with the increase in overall raw material costs, this resulted in an overall decrease in gross profit during the nine months ended September 30, 2021 as compared to 2020.

Twelve-month average raw material cost per pound as of September 30:

AAON Oklahoma $ 33,836 24.2 % $ 29,772 29.8 % $ 4,064 13.7 %

AAON Coil Products 7,306 33.3 % 3,385 21.4 % 3,921 115.8 %

4,922 23.5 % — — 4,922 —

Gross profit $ 46,064 25.2 % $ 33,157 28.6 % $ 12,907 38.9 %

1 BasX was acquired on December 10, 2021.

We have included the results of BasX's operations in our consolidated financial statements for the three months ended March 31, 2022.

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

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

3 Presented after intercompany eliminations.

Total net sales increased $67.0 million or 57.8%, due in part to increased organic volumes of $24.6 million.

The quarter also benefited from $16.5 million of price increases put in place throughout 2021 that only now were realized.

The acquisition of BasX in December 2021 added $21.0 million to net sales for the three months ended March 31, 2021.

AAON Coil Products saw a 40.0% increase in units sold, or approximately $3.2 million, due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021.

During the three months ended March 31, 2021, several production days were lost due to planned maintenance and due to impacts of bad weather at both AAON Oklahoma and AAON Coil Products, resulting in lower volumes.

Additionally, the expansion at our Longview facility was completed and production began during the first quarter of 2021.

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

We implemented multiple price increases during 2021 and 2022 to counteract the increased cost of material.

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

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

In March 2022, we awarded annual merit raises for an overall 3.0% increase to wages.

Additionally, during the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at AAON Coil Products resulted in a change in estimate (Note 1) that increased the useful lives from between ten and twelve years to fifteen years.

The change 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.

Raw Material Costs

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

2022 2021 % Change

4 unchanged sentences

Selling, General and Administrative Expenses

Nine Months Ended Percent of Sales

September 30,

2021 September 30,

Three Months Ended Percent of Sales

2022 March 31,

(in thousands)

4 unchanged sentences

Advertising 341 206 0.2 % 0.2 %

Depreciation 1,979 1,470 0.5 % 0.4 %

Depreciation & amortization 1,691 699 0.9 % 0.6 %

Insurance 709 731 0.4 % 0.6 %

4 unchanged sentences

Total SG&A $ 23,056 $ 14,696 12.6 % 12.7 %

Profit sharing expenses decreased due to our decreased earnings for the period.

Salaries and benefits are up slightly due to increases in bonuses, severance payouts and employee incentives.

Insurance expense increased due to an increase in overall premiums during the period.

Nine Months Ended Effective Tax Rate

September 30,

2021 September 30,

Excluding salaries and benefits at BasX of $2.7 million, salaries and benefits increased $1.6 million due to pay increases that went into effect during the second and third quarters of 2021.

Additionally, profit sharing increased due to higher pre-tax income for the three months ended March 31, 2022.

Depreciation and amortization expense at BasX was $1.0 million, accounting for the majority of the change from period to period.

Professional fees increased mostly due to continued transaction costs and audit fees.

Three Months Ended Effective Tax Rate

2022 March 31,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2022 effective tax rate, excluding discrete events, is expected to be approximately 25%.

The nine months ended September 30, 2021 had a lower tax rate, compared to 2020, due to an increase in our excess tax benefit related to stock awards of $1.3 million or 54%.

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 82.1%.

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

In addition, in May 2021, the State of Oklahoma reduced corporate tax rate 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.

Liquidity and Capital Resources

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

Working Capital - Our unrestricted cash increased $22.8 million from December 31, 2020 to September 30, 2021 and totaled $101.8 million at September 30, 2021.

Revolving Line of Credit - Under the revolving credit facility, there was one standby letter of credit of $1.8 million as of September 30, 2021.

At September 30, 2021, we have $28.2 million of borrowings available under the revolving credit facility.

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

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

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

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

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

Working Capital - Our unrestricted cash increased $2.8 million from December 31, 2021 to March 31, 2022 and totaled $5.6 million at March 31, 2022.

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

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

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

At March 31, 2022, we have $34.2 million of borrowings available under the Revolver.

The Revolver expires 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 March 31, 2022, the weighted average interest rate of the Revolver was 1.3%.

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

As of May 5, 2022, we had $75.0 million of outstanding borrowings under our Revolver.

New Market Tax Credit Obligation - On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “Project”).

16 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.

5 unchanged sentences

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)

10 unchanged sentences

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

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

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

Statement of Cash Flows

The following table reflects the major categories of cash flows for the nine months ended September 30, 2021 and 2020.

The following table reflects the major categories of cash flows for the three months ended March 31, 2022 and 2021.

For additional details, see the consolidated financial statements.

Nine Months Ended

September 30,

2021 September 30,

Three Months Ended

2022 March 31,

(in thousands)

6 unchanged sentences

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 & donations 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) —

Net cash used in investing activities (14,264) (16,390)

Financing Activities

Borrowings under revolving credit facility.

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

Cash Flows Provided by Operating Activities

The Company manages cash needs through working capital rather than drawing on its line of credit.

The Company currently manages cash needs through working capital as well as drawing on its line of credit.

Collections and payments cycles are on a normal pattern and fluctuate due to timing of receipts and payments.

The Company has been able to improve its collections of outstanding receivables due in part through prepayment of orders.

The decrease in cash flows from receivables was due to the increase in sales in the third quarter of 2021 and due to the lower overall accounts receivable at December 31, 2020, as a result of the planned Company shutdown during the last week of December 2020.

The decrease in cash flows from inventory and increase in cash flows from accounts payable is due the increased raw materials pricing and timing of payments.

The Company strategically purchases inventory to take advantage of favorable pricing and also to minimize future supply chain disruptions.

The decrease in cash flows from receivables was a result of increased sales, both as a result of 2021 price increases realized during the period and volumes, in the three months ended March 31, 2022 that have not been collected.

The Company has also increased the purchase of inventory to take advantage of favorable pricing opportunities and also to mitigate the impact of future supply chain disruptions on our operations.

Cash Flows Used in Investing Activities

The capital expenditures for 2020 related primarily to the expansion of our Longview, Texas facility, which was completed and became operational during early 2021.

Additionally, in 2020 we purchased Salvagnini sheet metal fabrication machines and completed our R&D lab as well as other operational improvements.

The capital expenditures for the three months ended March 31, 2022 relate to our continued investment in our production capabilities.

The capital expenditures for the three months ended March 31, 2021 related to the completion of the expansion at our Longview, Texas facility, which became operational during early 2021.

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

1 unchanged sentence

Cash Flows Used in Financing Activities

Stock options exercised fluctuate due to timing of employee exercises.

The Company purchased approximately $5.0 million of our outstanding stock through the open market buyback program (Note 13) during the nine months ended September 30, 2020.

There were no open market buybacks of our outstanding stock during the nine months ended September 30, 2021.

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

However, the increase in cash from financing activities is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid future supply chain delays, after our available cash on hand was used to fund the BasX acquisition.

Stock options exercised decreased due to the decrease in the number of employee options exercised and decrease in our average stock price during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Off-Balance Sheet Arrangements

1 unchanged sentence

Contractual Obligations

We had no material contractual purchase obligations as of September 30, 2021.

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

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2021.

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2022.

Recent Accounting Pronouncements

12 unchanged sentences

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 2. Management’s Discussion and Analysis