What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 138 added, 205 removed, 214 unchanged (62% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data .

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of the Company for the year ended December 31, 2022.

This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data .

A detailed discussion of the year to year changes for the years ended December 31, 2021 and 2020 is not included herein and can be found in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Description of the Company

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.

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, 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.

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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 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.

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 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.

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.

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, the state of the economy 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, change 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 replacement market in 2021 improved compared to 2020, while the new construction market was a bit slower.

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 attacking market share.

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.

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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.

In total, our internal sales force makes up 65 individuals.

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.

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.

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

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 coils, 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.

For the year ended December 31, 2021, the prices for copper, galvanized steel, and stainless steel increased approximately 35.3%, 50.9%, and 45.4%, respectively, and aluminum decreased approximately 4.5%, from 2020.

For the year ended December 31, 2020, the prices for copper, galvanized steel and stainless steel increased approximately 0.6%, 12.2%, 8.5%, and 12.8%, respectively, from 2019.

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

In 2021, given the unusual amount of inflation in our materials, we implemented three price increases.

We also 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.

For the year ended December 31, 2022, the prices for copper, galvanized steel, stainless steel and aluminum increased approximately 13.4%, 14.5%, 61.0%, and 14.0%, respectively, from 2021.

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

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

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

In 2021, we implemented three price increases.

In 2022, we implemented two significant price increases as well as a recurring 1% monthly price increase effective June 1, 2022.

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

We have implemented the following wage increases to remain competitive and to attract and retain employees:

• In March 2021, we awarded annual merit raises for an overall 5.0% increase to wages.

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

• In October 2021, we implemented a cost of living increase of 3.5% in place for all employees

below our Senior Leadership Team ("SLT") which consists of officers and key members of management.

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

• In October 2022, we implemented a cost of living increase of 3.5% in place for all employees

below the SLT level.

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

The following table shows our historical backlog levels:

December 31, 2022 December 31, 2021

(in thousands)

$ 548,022 $ 260,164

The Company has increased our backlog both through the acquisition of BASX and organic growth due primarily to favorable lead times and increased overall demand.

Consolidated Results of Operations

Years Ended December 31,

2021 2020 2019

(in thousands)

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Selling, general and administrative expenses 110,823 68,598

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

Gain on disposal of assets (12) (21)

Income from operations $ 126,761 $ 69,253

The following are highlights of our results of operations, cash flows, and financial condition:

• Our backlog is at a record level due primarily to strong end-market demand.

• Organic bookings were up approximately 55% compared to 2020.

• On December 10, 2021, we completed the acquisition of BasX bringing the Company exposure to attractive end-markets into which the Company has historically had minimal exposure.

• Sales in 2021 grew year-over-year 3.9% to $534.5 million driven mainly by price increases.

Beginning in the fourth quarter of 2021, we report our financial results based on three reportable segments:

AAON Oklahoma, AAON Coil Products, and BasX, which are further described in Item 1, due to the acquisition of BasX and internal leadership reporting changes.

• Our backlog has been at record levels during all of 2022.

New bookings from BASX were a record for that business as it benefited from a strong pipeline of projects in the data center and semiconductor markets.

Revenue synergies from the BASX acquisition has increased bookings for AAON Coil Products as well.

Bookings continue to be strong primarily due to our favorable lead times and strong end-market demand.

• Net sales for 2022 grew 66.3% to $888.8 million due to organic growth, the addition of BASX revenues and price increases realized during the year.

• Overall gross margin increased 90 basis points in 2022, as the increased costs of material and labor were offset by increased efficiencies of operations as well as price increases.

• We continue to invest in the future growth of the Company as evidenced by our $54.0 million in capital expenditures and $22.0 million for the purchase of the BASX building.

We report our financial results based on three reportable segments:

AAON Oklahoma, AAON Coil Products, and BASX, which are further described in Item 1 and Item 8.

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.

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3 Presented after intercompany eliminations.

Total net sales increased $20.0 million or 3.9%, due primarily to price increases that totaled of approximately $26.3 million put into place over the last year that were realized during 2021.

The acquisition of BasX in December 2021 added $4.1 million to net sales for the short period in December.

AAON Coil Products saw a 16.5% increase in units sold, or approximately $9.7 million, due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021.

Those increases were offset by a total decrease in volumes of approximately $10.8 million due to challenges in COVID-19 related absenteeism, supply chain issues for certain parts, and challenges hiring additional production labor to achieve higher production rates.

Additionally, our plants were shut down for several days in January 2021 for planned maintenance and in February 2021 for weather that resulted in lost volume of approximately $18.1 million.

Part sales and other increased $9.6 million or 20.5%.

Total net sales increased $354.3 million, or 66.3%, with the addition of inorganic sales from the acquisition of BASX contributing to 19.5% of our growth.

Net sales also grew through price increases of $100.0 million and organic sales volumes, product mix and other of $149.8 million.

AAON Coil Products gross profit increased significantly to 31.0%.

Price increases were realized more quickly for AAON Coil Products given their smaller backlog, which is the primary driver of the increase in gross margin for this segment.

Additionally, the new manufacturing building for AAON Coil Products was completed in early 2021, resulting in increased capacity and operational efficiencies during 2022 as compared to 2021.

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

We put multiple price increases in place during the year to counteract the increased cost of material;

however, it took time for those price increases to work through our backlog and be realized.

For this reason, we started to see erosion in our gross profit.

In the second and third quarters, we encountered challenges in hiring additional production labor, resulting in unfavorable labor and overhead efficiencies, including the Company's ability to absorb certain fixed costs.

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

In order 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.

The second half of the year was also impacted by various part shortages.

This caused us to rearrange production schedules, incur delays and inefficiencies in production, and incur more expensive freight costs.

All these things combined with lower production volumes resulted in poor absorption of overhead which caused declines in our gross profit.

Raw Material Costs

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

2021 2020 % Change

Copper $ 4.94 $ 3.65 35.3 %

Galvanized Steel $ 0.83 $ 0.55 50.9 %

Stainless Steel $ 2.05 $ 1.41 45.4 %

Aluminum $ 1.93 $ 2.02 (4.5) %

Selling, General and Administrative Expenses

Years Ended December 31, Percent of Sales

2021 2020 2021 2020

(in thousands)

Warranty $ 6,351 $ 6,621 1.2 % 1.3 %

Profit Sharing 8,526 11,593 1.6 % 2.3 %

Salaries & Benefits 23,458 20,159 4.4 % 3.9 %

Stock Compensation 5,543 5,341 1.0 % 1.0 %

Advertising 1,616 823 0.3 % 0.2 %

Depreciation 2,924 1,999 0.5 % 0.4 %

Insurance 3,010 1,066 0.6 % 0.2 %

Professional Fees 7,245 2,514 1.4 % 0.5 %

Donations 738 2,115 0.1 % 0.4 %

Other 9,187 8,260 1.7 % 1.6 %

Total SG&A $ 68,598 $ 60,491 12.8 % 11.8 %

Our profit sharing expenses decreased due to decreased earnings in 2021.

Salaries & benefits increased due to increases in salaries and bonuses.

Professional fees increased mostly due to the transaction costs associated with the acquisition of BasX (Note 4) of $4.4 million.

Donations decreased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman during 2020.

Gain/Loss on Disposals of Assets and Insurance Proceeds

On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $500,000 deductible.

We did not experience any significant structural damage or any operational interruption as a result of this weather event.

In November 2020, we reached a final settlement with our insurance carrier, resulting in a net cumulative gain of $6.4 million for year ended

December 31, 2020.

The received proceeds will be used in future periods to make improvements to the current roof at our plant and office facilities in Tulsa, Oklahoma to extend the overall useful life.

Years Ended December 31, Effective Tax Rate

2021 2020 2021 2020

(in thousands)

Income tax provision $ 10,424 $ 22,966 15.1 % 22.5 %

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 resulting in a benefit of $0.8 million.

During the year ending December 31, 2021, the Company recorded an excess tax benefit of $5.4 million as compared to $3.2 million during 2020, an increase of 68.8%.

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

Segment Operating Results for the Years Ended December 31, 2020 and 2019

For the years ended December 31,

2020 Percent of Sales 1

2019 Percent of Sales 1

$ Change % Change

(in thousands)

AAON Oklahoma $ 458,957 89.2 % $ 418,669 89.2 % $ 40,288 9.6 %

AAON Coil Products 55,594 10.8 % 50,664 10.8 % 4,930 9.7 %

Net sales $ 514,551 $ 469,333 $ 45,218 9.6 %

Cost of Sales 2

AAON Oklahoma $ 318,858 69.5 % 311,441 74.4 % $ 7,417 2.4 %

AAON Coil Products 39,844 71.7 % 38,467 75.9 % 1,377 3.6 %

Cost of sales $ 358,702 69.7 % $ 349,908 74.6 % $ 8,794 2.5 %

Gross Profit 2

AAON Oklahoma $ 140,099 30.5 % $ 107,228 25.6 % $ 32,871 30.7 %

AAON Coil Products 15,750 28.3 % 12,197 24.1 % 3,553 29.1 %

Gross profit $ 155,849 30.3 % $ 119,425 25.4 % $ 36,424 30.5 %

1 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.

2 Presented after intercompany eliminations.

Total net sales increased $45.2 million or 9.6%, mostly due to the increase of rooftop sales from AAON Oklahoma.

AAON Oklahoma saw a increase in rooftop units volumes of 8.8%, or approximately $30.6 million, due in part to our increased sheet metal production from the additional Salvagnini machines that were placed into operation allowing increased production and from price increases put in place over the last year.

Part sales and other decreased $3.4 million or 6.9%.

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.

As shown below, our average raw material prices increased during the year.

However, the Company had increased its inventory levels in 2019 and early 2020 at lower prices and was able to benefit from these lower priced raw materials as the inventory was consumed in 2020.

The Company improved its labor and overhead efficiencies with our new sheet metal machines that were placed into service in the last quarter of 2019 and early 2020, eliminating any bottlenecks in our sheet metal production.

The Company's headcount was also down compared to 2019, resulting in a higher production output per employee.

We have 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 attract new employees and remain competitive in tight labor markets, we implemented several wage increases in late 2021 and throughout 2022.

Raw Material Costs

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Advertising 2,353 1,616 0.3 % 0.3 %

Depreciation 1,999 1,524 0.4 % 0.3 %

Depreciation & Amortization 8,050 2,924 0.9 % 0.5 %

Insurance 3,755 3,010 0.4 % 0.6 %

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Total SG&A $ 110,823 $ 68,598 12.5 % 12.8 %

The Company experienced a decrease in warranty claims paid of 15.6% in 2020.

Our profit sharing expenses increased due to higher earnings in 2020.

Salaries and benefits increased due to additional bonuses and employee incentives.

Stock compensation was lower in 2020 because the valuation of the Company-wide equity grant awarded in March 2020 was less than the grant awarded in March 2019.

Donations increased due to the contribution of approximately $1.3 million to Winifred, Montana Public Schools in recognition of Norman H.

Asbjornson's transition from CEO to Executive Chairman.

Gain/Loss on Disposals of Assets and Insurance Proceeds

On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $500,000 deductible.

We did not experience any significant structural damage or any operational interruption as a result of this weather event.

In November 2020, we reached a final settlement with our insurance carrier, resulting in a net cumulative gain of $6.4 million for the year ended December 31, 2020.

The received proceeds will be used in future periods to make improvements to the current roof at our plant and office facilities in Tulsa, Oklahoma to extend the overall useful life.

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.

Salaries and benefits increased $17.9 million, with a full year of BASX included accounting for $10.5 million of the increase.

The remaining increase was primarily attributable to overall increased headcount and the impact of employee pay increases that went into effect during 2021 and in 2022.

Depreciation and amortization expense at BASX was $4.5 million, accounting for the majority of the change period over period.

Profit sharing increased for AAON Oklahoma and AAON Coil Products by $4.8 million due to increased operating results, while profit sharing at BASX increased by $0.7 million as a result of a full year of BASX's employee incentive program.

Professional fees decreased mostly due to the transaction costs associated with the acquisition of BASX (Note 4) of $4.4 million included in 2021.

Excluding $3.8 million of other SG&A at BASX, other SG&A increased $5.9 million attributable mainly to consulting services and increased travel expenses due to lighter COVID-19 restrictions in 2022.

Years Ended December 31, Effective Tax Rate

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Income tax provision $ 24,157 $ 10,424 19.4 % 15.1 %

Upon completion of the Company's 2018 tax return in 2019, the Company recorded additional benefit due to higher than expected research and development credit of $0.6 million.

Additionally in 2019, the Company determined it could take advantage of an additional 1% tax credit in Oklahoma for years in which the Company's location was deemed to be within an enterprise zone.

The additional Oklahoma Credit for being in an enterprise zone, or otherwise allowable under Oklahoma law, resulted in a benefit of $1.2 million.

During the year ended December 31, 2022, the Company recorded an excess tax benefit of $3.0 million as compared to $5.4 million in 2021, a decrease of 45.3%.

The decrease was primarily due to timing of stock option exercises and restricted stock vesting and our high stock price during the first and second quarter of 2021.

The decrease in excess tax benefits was partially offset by an increase of $1.8 million in research and development tax credits as defined under Section 41 of the Internal Revenue Code.

To qualify for the research and development tax credits, we perform annual studies that identifies, documents, and supports eligible expenses related to qualified research and development activities.

Eligible expenses include but are not limited to supplies, material and internal wages.

With the addition of BASX in December 2021 (Note 4), we identified additional eligible expenses related to qualified research and development activities.

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 and cash equivalents decreased $76.2 million from December 31, 2020 to December 31, 2021 primarily due to the use of available cash on hand to fund the acquisition of BasX (Note 4).

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 and cash equivalents increased $2.6 million from December 31, 2021 to December 31, 2022.

As of December 31, 2022, we had $5.9 million in cash and cash equivalents and restricted cash.

Revolving Line of Credit - Our revolving credit facility ("Revolver"), as amended and restated, provides for maximum borrowings of $200.0 million.

As of December 31, 2021, we had a $40.0 million balance outstanding under the Revolver.

We have one standby letter of credit totaling $1.8 million as of December 31, 2021 and 2020.

As of December 31, 2022 and December 31, 2021, we had an outstanding balance under the Revolver of $71.0 million and $40.0 million, respectively.

We had one standby letter of credit totaling $0.8 million as of December 31, 2022 and 2021, respectively.

Borrowings available under the Revolver at December 31, 2022, were $128.2 million.

The Revolver expires on November 24, 2026.

The Revolver expires on May 27, 2027.

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin.

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The applicable fee percentage is determined quarterly based on the Company's leverage ratio.

At December 31, 2021, 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 year ended December 31, 2021.

At December 31, 2022 and 2021, the weighted average interest rate of our Revolver was 3.0% and 1.3%, respectively.

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 years ended December 31, 2022 and 2021.

If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate ("ABR") loans.

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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%.

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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 Repurchase - The Board has authorized three stock repurchase programs for the Company.

The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares.

Stock Repurchase - The Board has authorized stock repurchase programs for the Company.

The Company may purchase shares on the open market from time to time.

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.

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Agreement Execution Date Authorized Repurchase $ Expiration Date

May 16, 2018 1

$15 million March 1, 2019

March 5, 2019 1

$20 million March 4, 2020

March 13, 2020 $20 million ** 2

1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs.

March 13, 2020 $20 million November 9, 2022

November 3, 2022 $50 million ** 1

1 Expiration Date is at Board's discretion.

The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board.

The Company also has a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares in AAON, Inc.

The Company also had a stock repurchase arrangement by which employee-participants in our 401(k) Plan were entitled to have shares in AAON, Inc.

stock in their accounts sold to the Company.

The maximum number of shares to be repurchased is contingent upon the number of shares sold by employee-participants.

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.

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Our repurchase activity is as follows:

2021 2020 2019

(in thousands, except share and per share data)

Program Shares Total $ $ per share Shares Total $ $ per share Shares Total $ $ per share

Program Shares Total $ $ per share Shares Total $ $ per share

Open market 122,112 $ 6,823 $ 55.87 — $ — $ —

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Total 14,680,690 $ 276,765 $ 18.85

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

Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment.

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

Board approval is required to determine the date of declaration and amount for each cash dividend payment.

Our recent dividends are as follows:

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November 8, 2022 November 28, 2022 December 16, 2022 $0.24

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

November 9, 2021 November 26, 2021 December 17, 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 2023 and the foreseeable future.

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Statement of Cash Flows

The table below reflects a summary of our net cash flows provided by operating activities, net cash flows used in investing activities, and net cash flows used in financing activities for the years indicated.

2021 2020 2019

The table below reflects a summary of our net cash flows provided by operating activities, net cash flows used in investing activities, and net cash flows provided by financing activities for the years indicated.

(in thousands)

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Accounts receivable (56,306) (9,737)

Income tax receivable (1,136) (3,815) 5,129

Income taxes 18,195 (1,136)

Inventories (71,409) (45,955)

Contract assets (9,402) 1,886

Prepaid expenses and other 1,374 (2,364) (329)

Prepaid expenses and other long-term assets (2,367) 1,374

Accounts payable 11,574 10,899

Contract liabilities 13,882 (229)

Deferred revenue 447 1,010 425

Accrued liabilities and donations (1,690) 2,203 7,124

Extended warranties 1,314 447

Accrued liabilities and other long-term liabilities 16,945 (1,690)

Net cash provided by operating activities 61,318 61,183

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Capital expenditures (54,024) (55,362)

Insurance proceeds — 6,417 —

Cash paid for building (Note 4) (22,000) —

Cash paid in business combination, net of cash acquired (249) (103,430)

Purchases of investments — — (6,000)

Maturities of investments and proceeds from called investments — — 6,000

Other 73 112 120

Net cash used in investing activities (76,213) (158,719)

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Borrowings under revolving credit facility 225,758 40,000

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

Payment related to financing costs — — (301)

Payments under revolving credit facility (194,754) —

Principal payments on financing lease (115) —

Stock options exercised 23,140 21,148

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Cash dividends paid to stockholders (22,917) (19,947)

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

Net cash provided by financing activities $ 17,357 $ 18,735

Cash Flows from Operating Activities

The decrease in cash flows from receivables was due to the increase in sales in the fourth quarter of 2021 as compared to 2020, as a result of the planned Company shutdown during the last week of December 2020.

The decrease in cash flows from inventory is a result of increased costs of materials and some larger purchases made in the year to help deter supply chain issues and long lead times.

The increase in cash flows from accounts payable is primarily driven by the timing of payments.

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

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 a larger volume of sales in the fourth quarter of 2022 in addition to higher priced receivables at the end of 2022.

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.

The increase in cash flows from income taxes is primarily due to the 2017 Tax Cuts & Jobs Act, which requires research and development expenses incurred after December 31, 2021 to be capitalized and amortized over 5 years.

This defers our current period income tax deduction which increased our income tax payments for 2022.

The increase in cash flows from accrued and other long-term liabilities is primarily related to the increase in amounts due to Representatives (timing of receipts and payments), employee profit sharing, and increases in accrued payroll and employee benefits.

Cash Flows from Investing Activities

Cash flows from investing activities increased in 2021 as compared to 2020 and 2019 primarily due to the cash paid for the acquisition of BasX (Note 4) in December 2021.

This increase is offset by decreased capital expenditures in 2021 compared to 2020 and insurance proceeds received in November 2020.

The capital expenditures for 2020

relate to the completion of our Longview facility expansion as well as the addition to and replacement of sheet metal manufacturing equipment.

Net cash outflows from investing activities decreased in 2022 as compared to 2021 primarily due to the cash paid for the acquisition of BASX (Note 4) in December 2021.

The cash paid for building is related to the purchase of the BASX office and manufacturing facility in May 2022 (Note 4).

Our capital expenditure program for 2023 is estimated to be approximately $135.0 million.

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Cash Flows from 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, in 2021, the increase in cash from financing activities is primarily related to borrowings under our revolving credit facility to manage our working capital needs after our available cash on hand was used to fund the BasX acquisition.

Our stock buyback program and dividends paid were $22.5 million and $19.9 million for the year ended December 31, 2021, respectively.

We expect to continue the buyback program as well as paying semi-annual dividends at historical rates.

The future costs of the buyback program could fluctuate based on market conditions including our published stock price and buyback transaction volume.

The change in cash from financing activities in 2022 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of the BASX building in May 2022, offset by repayments we were able to make due to our increased operating results and financial condition.

Cash flow changes related to stock option exercised is affected by the timing of stock options exercised by our employees.

The decrease in our repurchase of stock was the result of the discontinuance of the 401(k) buyback program in June 2022.

Cash dividends paid to stock holders increased to $22.9 million both due to the increase in number of shares outstanding and the increase in dividend per share from $0.19 to $0.24 for the December 2022 dividend payment.

We expect to continue paying cash dividends.

Commitments and Contractual Agreements

We had no material contractual purchase agreements as of December 31, 2021.

We are occasionally party to short-term, cancellable and occasionally non-cancellable, contracts with major suppliers for the purchase of raw material and component parts.

We expect to receive delivery of raw materials for use in our manufacturing operations.

These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption.

We had no material contractual purchase obligations as of December 31, 2022, except as noted below.

On April 27, 2022, the Company entered into a purchase and sale agreement with a third party manufacturer to purchase certain assets to design and manufacture fan wheels for the purchase price of $6.5 million.

As of December 31, 2022, we have paid approximately $3.5 million related to this agreement, which is included in other long-term assets and property, plant and equipment with the remaining $3.0 million included in accounts payable and other long-term assets on our consolidated balance sheets.

The final payment will be made in 2023.

Contingencies

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We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate.

We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

See Note 18 of the Consolidated Financial Statements for additional information with respect to specific legal proceedings.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and related notes.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and the Company's discussion and analysis of its financial condition and operating results require management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and related notes.

We base our estimates, assumptions, and judgments on historical experience, current trends, and other factors believed to be relevant at the time our consolidated financial statements are prepared.

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We discuss these estimates with the Audit Committee of the Board of Directors periodically.

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

Raw material or component inventory typically transfers from one stage of manufacturing to another at a standard cost.

The standard cost is set by management to reflect the actual costs incurred.

We continually monitor standard costs to ensure that standard costs reasonably reflect the FIFO value of the inventory produced and make manual adjusts the value of inventory accordingly.

Our manual adjustments from standards to actual inventory costs require applying judgment regarding a number of factors, including changes in inventory quantities during the period and recent versus historical inventory purchase costs.

Raw material or component inventory typically transfers from one stage of manufacturing to another where it accumulates additional costs directly incurred with the production of finished goods, including estimated standard labor and overhead costs.

Labor and overhead costs associated with the manufacturing of our products are capitalized into inventory on an estimated standard basis.

These include certain direct and indirect costs such as compensation, manufacturing, and facility costs associated with manufacturing support functions.

We continually monitor our labor and overhead standard costs to ensure that standard costs reasonably reflects our actual costs and make manual adjusts the value of inventory accordingly.

Our manual adjustments from standard to actual labor and overhead costs contain uncertainties that require management to make assumptions and to apply judgment regarding a number of factors, including inventory turns, supply usage, manufacturing efficiencies, and historical production costs.

Inventory Reserves – We establish a reserve for inventories based on the change in inventory requirements due to product line changes, the feasibility of using obsolete parts for upgraded part substitutions, the required parts needed for part supply sales and replacement parts, and for estimated shrinkage.

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Evolving technology and changes in product mix or customer demand can significantly affect the outcome of this analysis.

Warranty – A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized.

Warranty Accrual – A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized.

Our product warranty policy is the earlier of one year from the date of first use or 18 months from date of shipment for parts only;

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The fair value of restricted stock awards is reduced for the present value of dividends.

Definite-Lived Intangible Assets

Definite-lived intangible assets include various customer relationships and intellectual property acquired in business combinations.

Definite-Lived Intangible Assets – Definite-lived intangible assets include various customer relationships and intellectual property acquired in business combinations.

The fair value of customer relationships and intellectual property is estimated based on management’s judgments and assumptions or third party valuation models.

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

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed.

Goodwill 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.

Indefinite-lived intangible assets consist of trademarks and trade names.

The fair value of trademarks and trade names is estimated based on management’s judgments and assumptions or third party valuations.

These models requires the us of subjective inputs such as royalty rate, discount rate, and terminal value.

These models require the use of subjective inputs such as royalty rate, discount rate, and terminal value.

Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually.

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To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount.

If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the report unit and indefinite-lived assets and compare the amount to their carrying amount.

If the fair value of a reporting unit and indefinite-lived asset exceeds their

carrying amount, the reporting unit and indefinite-lived assets are not considered impaired.

If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount.

If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired.

If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets.

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Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the outcome of the analysis.

The estimates and assumptions we use in the annual impairment assessment included macro-industry trends, market participant considerations, historical profitability, including free cash flows, and forecasted multi-year operating results.

The estimates and assumptions we use in the annual impairment assessment

included macro-industry trends, market participant considerations, historical profitability, including free cash flows, and forecasted multi-year operating results.

Changes in operating results and other assumptions could materially affect these estimates.

A considerable amount of management judgment and assumptions are required in performing the impairment tests.

Contingent Consideration - As part of a business combination, we agreed to issue shares of the Company's common

stock based on certain milestones in accordance with the acquisition agreement.

Contingent Consideration – As part of a business combination, we agreed to issue shares of the Company's common stock based on certain milestones in accordance with the acquisition agreement.

This contingent consideration is valued at fair value on the acquisition date and is included in goodwill and additional paid-in capital on the consolidated balance sheets.

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

In October 2021, the FASB issued ASU No.

2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers .

Generally, this new guidance will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree.

Historically, such amounts were recognized by the acquirer at fair value in acquisition accounting.

The guidance should be applied prospectively to acquisitions occurring on or after the effective date.

The guidance is effective for years beginning after December 15, 2022, including interim periods within those years.

Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued.

We adopted this standard at the beginning of the fourth quarter of 2021.

Upon adoption, this update did not have a material effect on our consolidated financial position or result of operations.

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, occasionally, we use fixed price cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis