AAON, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. This discussion contains or incorporates by reference “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the SEC or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled “Forward-Looking Statements” in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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. Overview 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 pumps, 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 $18.0 million of our total net sales for the nine months ended September 30, 2022 and $11.0 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 negatively impacted the commercial and industrial new construction markets in 2020 and the first half of 2021. Since August 2021, however, nonresidential construction has been recovering. In the third quarter of 2022, the market returned to pre-pandemic levels. Currently, architectural billings and nonresidential construction starts are at historically high levels, signaling the nonresidential construction market will continue to be strong over the next nine to 12 months. Furthermore, although some economic indicators are suggesting the general economy is slowing, the replacement market remains strong. Nevertheless, 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 generally lag the housing market, 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. 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. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of six to 18 months. 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. 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. BasX sells highly customized products for unique applications for a more concentrated customer base and an internal sales force is more effective for such products. - 30 - The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum, and are obtained from domestic suppliers. We also purchase from domestic manufacturers certain components, including compressors, motors, and electrical controls. The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and global economy. At September 30, 2022, the price (year to date average) for copper, galvanized steel, stainless steel and aluminum increased 16.6%, 36.6%, 91.0%, and 14.8%, respectively, as compared to the price (year to date average) at September 30, 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. We occasionally increase the price of our equipment to help offset any inflationary headwinds. In 2021, we implemented three price increases. In 2022, we implemented additional price increases effective January 1, 2022; March 29, 2022; June 1, 2022; July 1, 2022; August 1, 2022; and September 1, 2022. Backlog The following table shows our historical backlog levels: September 30, 2022 December 31, 2021 September 30, 2021 (in thousands) $ 514,735 $ 260,164 $ 181,813 The Company has increased our backlog both through the acquisition of BasX and organic growth. Excluding BasX's backlog at September 30, 2022, organic backlog increased 109.6% compared to September 30, 2021, due primarily to our favorable lead times. Results of Operations Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 (in thousands) Net Sales $ 242,605 $ 138,571 $ 634,190 $ 398,235 Cost of Sales 177,014 102,552 475,159 286,952 Gross Profit 65,591 36,019 159,031 111,283 Selling, general and administrative expenses 28,891 15,897 78,880 47,488 Gain on disposal of assets — (15) (12) (15) Income from operations $ 36,700 $ 20,137 $ 80,163 $ 63,810 The following are recent highlights and items that impacted our results of operations, cash flows and financial condition: • We continue to have a record backlog. New bookings for BasX in the quarter were by far a record for the business as it benefited from a strong pipeline of projects in the data center and semiconductor markets. Revenue synergies from the BasX acquisition has also increased bookings for AAON Coil Products. • Sales for the three and nine months ended September 30, 2022 grew due to organic growth, the addition of BasX revenues, and price increases realized during the periods. • Our gross profit margin for the quarter increased 430 basis points since the quarter ended June 30, 2022 as a result of better pricing from the legacy business and increased production from BasX. - 31 - • Our cashflows from operations returned to normal levels experienced prior to the BasX acquisition, allowing us to make net payments of $30.0 million on our Revolver during the three months ended September 30, 2022. 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 September 30, 2022 and Three Months Ended September 30, 2021 Three Months Ended September 30, 2022 Percent of Sales 2 September 30, 2021 Percent of Sales 2 $ Change % Change (in thousands) Net Sales 3 AAON Oklahoma $ 179,169 73.9 % $ 122,136 88.1 % $ 57,033 46.7 % AAON Coil Products 30,504 12.6 % 16,435 11.9 % 14,069 85.6 % BasX 1 32,932 13.6 % — — 32,932 — Net sales $ 242,605 $ 138,571 $ 104,034 75.1 % Cost of Sales 3 AAON Oklahoma $ 133,526 74.5 % 90,406 74.0 % $ 43,120 47.7 % AAON Coil Products 19,940 65.4 % 12,146 73.9 % 7,794 64.2 % BasX 1 23,548 71.5 % — — 23,548 — Cost of sales $ 177,014 73.0 % $ 102,552 74.0 % $ 74,462 72.6 % Gross Profit 3 AAON Oklahoma $ 45,643 25.5 % $ 31,730 26.0 % $ 13,913 43.8 % AAON Coil Products 10,564 34.6 % 4,289 26.1 % 6,275 146.3 % BasX 1 9,384 28.5 % — — 9,384 — Gross profit $ 65,591 27.0 % $ 36,019 26.0 % $ 29,572 82.1 % 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 September 30, 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 $104.0 million or 75.1%, with the addition of BasX sales contributing to 31.7% of our growth. Excluding BasX sales of $32.9 million, net sales grew through price increases of $33.9 million and organic volume, product mix and other of $37.2 million. As shown in the table below, we've experienced year over year increases in the cost of several raw materials. We implemented multiple price increases during 2021 and 2022 to counteract the increased cost of material. Some of the 2022 price increases have yet to be realized. Additionally, in order to retain our existing employees, we 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. We have seen continued improvement in our overall margin since the second quarter of 2022. The backlog for AAON Coil Products had better pricing which shows in their improved gross margin of 34.6% for the quarter as they are able to realize price increases faster than AAON Oklahoma. BasX has been able to reprice their backlog in order to maintain a healthy gross profit of 28.5% for the quarter. AAON Oklahoma continued to work through its remaining lower priced backlog at the beginning of the third quarter of 2022, increasing its gross profit margin from 20.2% in the second quarter of 2022 to 25.5% for the third quarter of 2022. - 32 - Raw Material Costs Three-month average raw material cost per pound as of September 30: 2022 2021 % Change Copper $ 5.83 $ 5.37 8.6 % Galvanized steel $ 0.82 $ 0.97 (15.5) % Stainless steel $ 2.94 $ 1.99 47.7 % Aluminum $ 2.55 $ 1.99 28.1 % Selling, General and Administrative Expenses Three Months Ended Percent of Sales September 30, 2022 September 30, 2021 2022 2021 (in thousands) Warranty $ 3,046 $ 1,272 1.3 % 0.9 % Profit sharing 3,744 2,358 1.5 % 1.7 % Salaries & benefits 11,644 6,029 4.8 % 4.4 % Stock compensation 1,537 1,418 0.6 % 1.0 % Advertising 375 225 0.2 % 0.2 % Depreciation & amortization 2,015 645 0.8 % 0.5 % Insurance 902 733 0.4 % 0.5 % Professional fees 1,304 851 0.5 % 0.6 % Other 4,324 2,366 1.8 % 1.7 % Total SG&A $ 28,891 $ 15,897 11.9 % 11.5 % Selling, general and administrative expenses at BasX for the three months ended September 30, 2022 totaled $6.4 million. Excluding salaries and benefits at BasX of $3.8 million, salaries and benefits increased $1.8 million due to pay increases that went into effect during the third and fourth quarters of 2021 and first quarter of 2022. Depreciation and amortization expense at BasX was $1.2 million, accounting for the majority of the change from period to period. Excluding $0.7 million of Other SG&A at BasX, Other SG&A increased $1.2 million attributable mostly to increased travel and meeting expenses due to lighter COVID-19 restrictions during 2022 and increased charitable contributions. Income Taxes Three Months Ended Effective Tax Rate September 30, 2022 September 30, 2021 2022 2021 (in thousands) Income tax provision $ 8,327 $ 4,527 23.3 % 22.5 % The Company’s estimated annual 2022 effective tax rate, excluding discrete events, is expected to be approximately 25%. During the three months ended September 30, 2022, the Company recorded an excess tax benefit of $0.5 million as compared to $0.4 million during the same period in 2021. - 33 - Segment Operating Results for Nine Months Ended September 30, 2022 and Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2022 Percent of Sales 2 September 30, 2021 Percent of Sales 2 $ Change % Change (in thousands) Net Sales 3 AAON Oklahoma $ 476,517 75.1 % $ 348,378 87.5 % $ 128,139 36.8 % AAON Coil Products 79,193 12.5 % 49,857 12.5 % 29,336 58.8 % BasX 1 78,480 12.4 % — — 78,480 — Net sales $ 634,190 $ 398,235 $ 235,955 59.3 % Cost of Sales 3 AAON Oklahoma $ 365,301 76.7 % 248,653 71.4 % $ 116,648 46.9 % AAON Coil Products 52,849 66.7 % 38,299 76.8 % 14,550 38.0 % BasX 1 57,009 72.6 % — — 57,009 — Cost of sales $ 475,159 74.9 % $ 286,952 72.1 % $ 188,207 65.6 % Gross Profit 3 AAON Oklahoma $ 111,216 23.3 % $ 99,725 28.6 % $ 11,491 11.5 % AAON Coil Products 26,344 33.3 % 11,558 23.2 % 14,786 127.9 % BasX 1 21,471 27.4 % — — 21,471 — Gross profit $ 159,031 25.1 % $ 111,283 27.9 % $ 47,748 42.9 % 1 BasX was acquired on December 10, 2021. We have included the results of BasX's operations in our consolidated financial statements for the nine months ended September 30, 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 $236.0 million or 59.3%, due in part to increased organic volumes, product mix and other of $84.6 million. AAON Coil Products saw a 52.7% increase in units sold, or approximately $16.1 million, during the nine months ended September 30, 2022 due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021. The nine months ended September 30, 2022 also benefited from $72.9 million of price increases put in place throughout 2021 and early 2022 which began being realized at the end of the second quarter of 2022. The acquisition of BasX in December 2021 added $78.5 million to net sales for the nine months ended September 30, 2022. 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; however, it has taken longer than expected for our price increases to roll out of the backlog into production causing erosion of our gross profit during the nine months ended September 30, 2022, especially during the first two quarters of 2022. As already mentioned, we also have put multiple wage increases in place in late 2021 and early 2022 that have increased our labor costs. 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 nine months ended September 30, 2022. - 34 - Raw Material Costs Nine-month average raw material cost per pound as of September 30: 2022 2021 % Change Copper $ 5.61 $ 4.81 16.6 % Galvanized steel $ 0.97 $ 0.71 36.6 % Stainless steel $ 3.17 $ 1.66 91.0 % Aluminum $ 2.09 $ 1.82 14.8 % Selling, General and Administrative Expenses Nine Months Ended Percent of Sales September 30, 2022 September 30, 2021 2022 2021 (in thousands) Warranty $ 6,556 $ 4,767 1.0 % 1.2 % Profit sharing 8,559 7,409 1.3 % 1.9 % Salaries & benefits 31,419 17,088 5.0 % 4.3 % Stock compensation 5,220 4,077 0.8 % 1.0 % Advertising 2,006 692 0.3 % 0.2 % Depreciation & amortization 5,768 1,979 0.9 % 0.5 % Insurance 2,477 2,194 0.4 % 0.6 % Professional fees 3,686 2,258 0.6 % 0.6 % Other 13,189 7,024 2.1 % 1.8 % Total SG&A $ 78,880 $ 47,488 12.4 % 11.9 % Selling, general and administrative expenses at BasX totaled $17.4 million for the nine months ended September 30, 2022. Warranty expense increased consistent with our increase in net sales but decreased as a percentage of sales, as we continue to focus on our commitment to reliability and quality. Excluding salaries and benefits at BasX of $9.5 million, salaries and benefits increased $4.8 million due to pay increases that went into effect during the third and fourth quarters of 2021 and the first quarter of 2022. Advertising increased $1.3 million due to various sponsorships and customer promotions, which were still mostly on hold during early 2021 due to COVID-19 restrictions. Depreciation and amortization expense at BasX was $3.2 million, accounting for the majority of the change from period to period. Excluding $2.7 million of Other SG&A at BasX, Other SG&A increased $3.5 million attributable mostly to consulting services and increased travel expenses due to lighter COVID-19 restrictions. Income Taxes Nine Months Ended Effective Tax Rate September 30, 2022 September 30, 2021 2022 2021 (in thousands) Income tax provision $ 17,286 $ 11,264 21.9 % 17.6 % The Company’s estimated annual 2022 effective tax rate, excluding discrete events, is expected to be approximately 25%. During the nine months ended September 30, 2022, the Company recorded an excess tax benefit of $1.3 million as compared to $3.8 million during the same period in 2021, a decrease of 67.3%. The decrease was primarily due to timing of stock awards as a result of our high stock price during the nine months ended September 30, 2021. - 35 - Liquidity and Capital Resources 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 $7.9 million from December 31, 2021 to September 30, 2022 and totaled $10.7 million at September 30, 2022. Revolving Line of Credit - Our revolving credit facility ("Revolver"), as amended and restated, provides for maximum borrowings of $200.0 million. As of September 30, 2022 and December 31, 2021, we had $76.3 million and $40.0 million, respectively, outstanding under the Revolver. We had one standby letter of credit totaling $0.8 million as of September 30, 2022. At September 30, 2022, we have $122.9 million of borrowings available under the Revolver. The Revolver expires May 27, 2027. 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. The weighted average interest rate on borrowings outstanding on the Revolver was 3.5% and 2.5% for the three and nine months ended September 30, 2022. 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 and nine months ended September 30, 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 September 30, 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 September 30, 2022, our leverage ratio was 0.65 to 1.0, which meets the requirement of not being above 3 to 1. As of November 3, 2022, we had $73.0 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”). In connection with the NMTC transaction, the Company received a $23.0 million NMTC allocation for the Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities. Upon closing of the NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities, and a guarantee from the Company, including an unconditional guarantee of NMTCs. Stock Repurchases - The Board has authorized three stock repurchase programs for the Company. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market. On November 3, 2022, the Board of Directors approved an updated stock repurchase plan with repurchases under the plan not to exceed $50 million. The current repurchase plan will expire at the Board of Directors discretion. - 36 - Our open market repurchase programs are as follows: Effective Date Authorized Repurchase $ Expiration Date May 16, 2018 1 $15 million March 1, 2019 March 5, 2019 1 $20 million March 4, 2020 March 13, 2020 $20 million November 9, 2022 November 3, 2022 $50 million ** 2 1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs. 2 Expiration Date is at Board's discretion. The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board. The Company also had a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan were entitled to have shares in AAON, Inc. stock in their accounts sold to the Company. The 401(k) Plan was amended in June 2022 to discontinue this program. No additional shares have been purchased by the Company under this arrangement since June 2022. Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and employees for payment of statutory tax withholdings on stock transactions. All other repurchases from directors or employees are contingent upon Board approval. All repurchases are done at current market prices. Our repurchase activity is as follows: Nine Months Ended September 30, 2022 September 30, 2021 (in thousands, except share and per share data) Program Shares Total $ $ per share Shares Total $ $ per share Open market 35,479 $ 2,030 $ 57.22 — $ — $ — 401(k) 103,936 5,913 56.89 220,336 15,014 68.14 Directors and employees 16,593 978 58.94 21,779 1,537 70.57 Total 156,008 $ 8,921 $ 57.18 242,115 $ 16,551 $ 68.36 Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows: Inception to September 30, 2022 (in thousands, except share and per share data) Program Shares Total $ $ per share Open market 4,240,734 $ 76,823 $ 18.12 401(k) 8,308,368 171,789 20.68 Directors and employees 2,044,320 23,319 11.41 Total 14,593,422 $ 271,931 $ 18.63 - 37 - Dividends - At the discretion of the Board, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment. Our recent dividends are as follows: Declaration Date Record Date Payment Date Dividend per Share May 17, 2021 June 3, 2021 July 1, 2021 $0.19 November 9, 2021 November 26, 2021 December 17, 2021 $0.19 May 18, 2022 June 3, 2022 July 1, 2022 $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. - 38 - Statement of Cash Flows The following table reflects the major categories of cash flows for the nine months ended September 30, 2022 and 2021. For additional details, see the consolidated financial statements. Nine Months Ended September 30, 2022 September 30, 2021 (in thousands) Operating Activities Net Income $ 61,478 $ 52,572 Income statement adjustments, net 37,206 34,456 Changes in assets and liabilities: Accounts receivable (63,593) (11,369) Income taxes 3,782 2,588 Inventories (47,998) (22,712) Contract assets (3,843) — Prepaid expenses and other long-term assets (70) 937 Accounts payable 18,616 16,390 Contract liabilities 24,249 — Deferred revenue 730 316 Accrued liabilities & other long-term liabilities 12,857 1,525 Net cash provided by operating activities 43,414 74,703 Investing Activities Capital expenditures (41,586) (42,636) Cash paid for building (see Note 3 ) (22,000) — Cash paid in business combination, net of cash acquired (249) — Other 53 60 Net cash used in investing activities (63,782) (42,576) Financing Activities Borrowings under revolving credit facility 151,103 — Payments under revolving credit facility (114,812) — Principal payments on financing lease (115) — Stock options exercised 10,990 14,573 Repurchase of stock (7,943) (15,014) Employee taxes paid by withholding shares (978) (1,537) Cash dividends paid to stockholders (10,096) (9,964) Net cash provided by (used in) financing activities $ 28,149 $ (11,942) Cash Flows Provided by Operating Activities 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 decrease in cash flows from receivables was a result of increased sales, both as a result of 2021 and 2022 price increases realized during the period and volumes, in the nine months ended September 30, 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. Payment terms for BasX jobs typically require upfront cash to fund the job resulting in cash inflows related to our contract liabilities. - 39 - Cash Flows Used in Investing Activities The capital expenditures for the nine months ended September 30, 2022 relate to our continued investment in our production capabilities. The cash paid for building during the nine months ended September 30, 2022 related to the purchase of the BasX office and manufacturing facility related to the December 2021 acquisition (see Note 3). The capital expenditures for the nine months ended September 30, 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 $73.3 million. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges. Cash Flows Used in Financing Activities 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, for the nine months ended September 30, 2022 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, and the funding for the purchase of the BasX building in the second quarter. Stock options exercised decreased due to the decrease in the number of employee options exercised and decrease in our average stock price during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Repurchases of stock decreased due to the discontinuance of our 401(k) stock buyback activity in June 2022. Off-Balance Sheet Arrangements We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations We had no material contractual purchase obligations as of September 30, 2022 except as described below. On April 27, 2022, the Company entered into a purchase and sale 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 November 3, 2022 we have paid approximately $3.5 million related to this agreement. Critical Accounting Policies There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2022. Recent Accounting Pronouncements See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements. - 40 - Forward-Looking Statements This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “will”, “should”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, (4) general economic, market or business conditions, and (5) the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Commodity Price Risk We are exposed to volatility in the prices of commodities used in some of our products and we may use fixed price cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.