What changed in this filing

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Item 1. Financial Statements

2023-05-04 compared with 2022-11-07 · 241 added, 406 removed, 604 unchanged (52% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

4 unchanged sentences

160,954 127,158

Income tax receivable 1,941 5,723

Inventories, net 199,579 198,939

28 unchanged sentences

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

Common stock, $ .004 par value, 100,000,000 shares authorized, 53,214,971 and 52,527,985 issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Common stock, $ .004 par value, 100,000,000 shares authorized, 54,201,863 and 53,425,184 issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 117,077 98,735

7 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(in thousands, except share and per share data)

3 unchanged sentences

Selling, general and administrative expenses 32,942 23,056

Gain on disposal of assets — ( 15 ) ( 12 ) ( 15 )

Loss (gain) on disposal of assets 6 ( 2 )

Income from operations 44,206 23,010

Interest expense, net ( 1,150 ) ( 190 )

Other income (expense), net 54 ( 19 ) 295 37

Other income, net 114 21

Income before taxes 43,170 22,841

5 unchanged sentences

Cash dividends declared per common share:

$ — $ — $ 0.19 $ 0.19

Weighted average shares outstanding:

4 unchanged sentences

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2023

Common Stock Paid-in Retained

8 unchanged sentences

Stock repurchased and retired ( 12 ) — ( 1,030 ) — ( 1,030 )

Contingent consideration (Note 3)

— — ( 6,000 ) — ( 6,000 )

Dividends net of refunds for cancelled cash dividends — — — ( 10,088 ) ( 10,088 )

Balances at September 30, 2022 53,215 $ 213 $ 87,949 $ 435,696 $ 523,858

Three Months Ended September 30, 2022

Common Stock Paid-in Retained

Shares Amount Capital Earnings Total

(in thousands)

Balances at June 30, 2022 53,127 $ 213 $ 82,078 $ 408,215 $ 490,506

Net income — — — 27,473 27,473

Stock options exercised and restricted 124 — 4,605 — 4,605

stock awards granted

Share-based compensation — — 3,321 — 3,321

Stock repurchased and retired ( 36 ) — ( 2,055 ) — ( 2,055 )

Dividends net of refunds for cancelled cash dividends — — — 8 8

Balances at September 30, 2022 53,215 $ 213 $ 87,949 $ 435,696 $ 523,858

Nine Months Ended September 30, 2021

Dividends — — — ( 6,459 ) ( 6,459 )

Balances at March 31, 2023 54,202 $ 217 $ 117,077 $ 492,120 $ 609,414

Three Months Ended March 31, 2022

Common Stock Paid-in Retained

3 unchanged sentences

Net income — — — 18,059 18,059

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

stock awards granted

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

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

Dividends net of refunds for cancelled cash dividends — — — ( 9,964 ) ( 9,964 )

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

Three Months Ended September 30, 2021

Common Stock Paid-in Retained

Shares Amount Capital Earnings Total

(in thousands)

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

Net income — — — 15,581 15,581

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

stock awards granted

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

granted, and contingent shares issued (Note 15)

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

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

Dividends net of refunds for cancelled cash dividends — — — 4 4

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

Contingent consideration

— — ( 6,000 ) — ( 6,000 )

Dividends — — — 5 5

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

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

1 unchanged sentence

Consolidated Statements of Cash Flows

Nine Months Ended

September 30,

Three Months Ended

Operating Activities (in thousands)

4 unchanged sentences

Amortization of right of use assets 29 67

Provision for credit losses on accounts receivable, net of adjustments 300 —

Provision for excess and obsolete inventories 1,380 378

(Recoveries of) provision for credit losses on accounts receivable, net of adjustments ( 56 ) 288

Provision for excess and obsolete inventories, net of write-offs 221 220

Share-based compensation 3,519 3,112

Gain on disposition of assets ( 12 ) ( 15 )

Foreign currency transaction loss (gain) 42 ( 1 )

Loss (gain) on disposition of assets 6 ( 2 )

Foreign currency transaction gain ( 2 ) ( 9 )

Interest income on note receivable ( 6 ) ( 6 )

2 unchanged sentences

Accounts receivable ( 33,740 ) ( 43,244 )

Income tax receivable 3,782 2,588

Income taxes 5,262 3,631

Inventories ( 861 ) ( 16,041 )

3 unchanged sentences

Contract liabilities 713 17,998

Deferred revenue 730 316

Extended warranties 777 68

Accrued liabilities and other long-term liabilities 847 2,511

Net cash provided by operating activities 43,414 74,703

Net cash provided by (used in) operating activities 4,823 ( 6,803 )

Investing Activities

Capital expenditures ( 28,935 ) ( 14,031 )

Cash paid for building (see Note 3 )

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

5 unchanged sentences

Payments under revolving credit facility ( 92,512 ) —

Principal payments on financing lease ( 115 ) —

Stock options exercised 15,856 2,890

2 unchanged sentences

Cash dividends paid to stockholders ( 6,459 ) —

Net cash provided by (used in) financing activities 28,149 ( 11,942 )

Net increase in cash, cash equivalents and restricted cash 7,781 20,185

Net cash provided by financing activities 21,027 23,808

Net (decrease) increase in cash, cash equivalents and restricted cash ( 2,969 ) 2,741

Cash, cash equivalents and restricted cash, beginning of period 5,949 3,487

5 unchanged sentences

is a Nevada corporation which was incorporated on August 18, 1987.

Our operating subsidiaries include AAON, Inc., an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BasX, Inc.

(dba BasX Solutions), an Oregon corporation (collectively, the “Company”).

Our operating subsidiaries include AAON, Inc.

("AAON Oklahoma"), an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BasX, Inc.

("BASX"), an Oregon corporation (collectively, the “Company”).

The accompanying unaudited consolidated financial statements of AAON, Inc.

2 unchanged sentences

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

On December 10, 2021, we closed on the acquisition of all of the issued and outstanding equity ownership of BasX, LLC, doing business as BasX Solutions ("BasX") (Note 3).

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

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

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

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All intercompany balances and transactions have been eliminated in consolidation.

We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data 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.

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

Use of Estimates

3 unchanged sentences

We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis.

The most significant estimates include, but are not limited to, inventory reserves, warranty accrual, workers' compensation accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, revenue percentage of completion and estimated costs to complete.

The most significant estimates include, but are not limited to, inventory valuation, inventory reserves, warranty accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, business combinations, revenue percentage of completion and estimated costs to complete.

Actual results could differ materially from those estimates.

Inflation and Labor Market

In 2022 and continuing into 2023, we have witnessed increases in our raw material and component prices.

Due to our favorable liquidity position, we continue to make strategic purchases of materials when we see opportunities.

We continue to manage the increase in the cost of raw materials through price increases for our products.

We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong vendor relationships as well as expanding our list of vendors.

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 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 Senior Leadership Team ("SLT") level.

• In March 2023, we awarded annual merit raises for an overall 3.9 % increase to wages.

We will continue to implement human resource initiatives to retain and attract labor to further increase production capacity.

Beginning in 2023, initiatives included changing our employee paid time off policy, historically awarded in arrears at the beginning of each quarter, to accrue ratably over each pay period.

Additionally, we enhanced our benefits for short-term disability, life insurance, paid parental leave and paid military leave.

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

Change in Estimate

1 unchanged sentence

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

The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $ 1.8 million during the nine months ended September 30, 2022.

Impact of COVID-19 Pandemic

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

We had continuous operations during the nine months ended September 30, 2022.

Although future disruptions and costs are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations.

We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and its potential effect on our financial position, results of operations and cash flows.

Inflation and Labor Market

We have witnessed increases of our raw material prices, especially in copper and steel, which appear to be a residual effect of COVID-19, and we continue to make strategic purchases of materials when we see opportunities.

We have managed the increase in the cost of raw materials through price increases for our products.

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

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

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

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

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

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

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

First Quarter 2021 Planned Maintenance and Adverse Weather

During the fourth quarter of 2020, we made the strategic decision to shut down our Tulsa, OK and Longview, TX manufacturing facilities to perform planned and necessary maintenance during the last week of December 2020 as well several days in early January 2021.

In February 2021, record-breaking winter storms affected Oklahoma and Texas, causing sustained below freezing temperatures, hazardous driving conditions, rolling blackouts, water main breaks, and a host of other weather related issues.

In addition to significant absenteeism as a result of employees being unable to travel to and from work due to inadequate transportation and/or hazardous road conditions, the Company made the decision to shut down the Tulsa, OK and Longview, TX plants for several days.

This decision was based on the expected employee absenteeism as well as the expected rolling blackouts caused by the increased demand on the electrical and natural gas power grids.

WH Series and WV Series Water Source Heat Pump Units

As part of the normal course of business, management is continually monitoring the profitability of the Company's various product lines.

As part of the normal course of business, management is continually monitoring the profitability of the Company's various product series offerings.

During the third quarter of 2022, management made the decision to no longer produce our small packaged geothermal/water-source heat pump units consisting of the WH Series horizontal configuration and WV Series vertical configuration, from one-half to 12 1/2 tons ("WH/WV").

These WH/WV units are produced solely out of the AAON Oklahoma facility.

Production of the remaining WH/WV backlog is expected to continue through the first quarter of 2023.

A majority of the long-lived assets used in the production of the WH/WV units will be immediately reallocated to other product production, providing us additional manufacturing capacity with minimal costs.

The workforce from the WH/WV production line will also be reallocated to other product production lines.

Management has identified some related components and parts that cannot be used in other products or sold through our parts business;

therefore, we have increased our provision for excess and obsolete inventory (Note 6), within cost of sales on our consolidated statements of income, by approximately $ 1.0 million during the three and nine months ended September 30, 2022.

Management does not believe this decision will have a significant future impact on the AAON Oklahoma reportable segment or the Company's overall operations, financial results and cash flows.

Production of the remaining WH/WV backlog is expected to continue through the first half of 2023.

Accounting Policies

15 unchanged sentences

Definite-Lived Intangible Assets

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

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

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

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

4 unchanged sentences

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

At September 30, 2022 $ 50.3 million of goodwill is deductible for income tax purposes.

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

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

We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.

The changes in the carrying amount of goodwill were as follows:

Three months ended March 31,

(in thousands)

Balance, beginning of period

$ 81,892 $ 85,727

Additions due to acquisitions

Decreases due to business combination revisions 1

Balance, end of period $ 81,892 $ 81,892

1 Revisions related to the December 2021 acquisition of BASX.

Recent Accounting Pronouncements

5 unchanged sentences

The following tables show disaggregated net sales by reportable segment (Note 19) by major source, net of intercompany sales eliminations.

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

AAON Oklahoma AAON Coil Products BASX Total

10 unchanged sentences

$ 202,002 $ 33,412 $ 30,539 $ 265,953

Three Months Ended September 30, 2021

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

Rooftop Units $ 103,900 $ — $ — $ 103,900

Condensing Units 120 6,677 — 6,797

Air Handlers — 6,279 — 6,279

Outdoor Mechanical Rooms 179 29 — 208

Water-Source Heat Pumps 2,536 2,679 — 5,215

Part Sales 12,102 — — 12,102

3,299 771 — 4,070

$ 122,136 $ 16,435 $ — $ 138,571

Nine Months Ended September 30, 2022

Three Months Ended March 31, 2022

AAON Oklahoma AAON Coil Products BASX Total

10 unchanged sentences

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

Nine Months Ended September 30, 2021

AAON Oklahoma AAON Coil Products BasX 1

(in thousands)

Rooftop Units $ 298,695 $ — $ — $ 298,695

Condensing Units 762 19,868 — 20,630

Air Handlers — 19,958 — 19,958

Outdoor Mechanical Rooms 820 363 — 1,183

Water-Source Heat Pumps 8,993 7,312 — 16,305

Part Sales 30,325 — — 30,325

8,783 2,356 — 11,139

$ 348,378 $ 49,857 $ — $ 398,235

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

As the BasX segment was not applicable for the three and nine months ended September 30, 2021, it has been excluded from the tables for those periods.

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

1 unchanged sentence

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

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

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

2 unchanged sentences

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

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

The aggregate of costs incurred and income recognized on uncompleted contracts in excess of billings is shown as a contract asset within our consolidated

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

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

2 unchanged sentences

Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates.

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

Historically, sales of our products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather.

However, in recent years, given the increases in demand of our product and increases in our backlog, sales have become more constant throughout the year.

Product Warranties

A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line.

The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims.

Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year.

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

12 unchanged sentences

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

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

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

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

The amount of payments to our Representatives were $ 10.8 million and $ 9.5 million for the three months ended September 30, 2022 and 2021, respectively.

The amount of payments to our Representatives were $ 28.7 million and $ 34.5 million for the nine months ended September 30, 2022 and 2021, respectively.

Business Combination

On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire all of the issued and outstanding equity ownership of BasX, LLC, an Oregon limited liability company, doing business as BasX Solutions.

We closed this transaction on December 10, 2021 for a purchase price of (i) $ 100.0 million payable in cash (not including working capital adjustments), and (ii) up to $ 80.0 million in the aggregate of contingent consideration payable in shares of the Company's common stock, par value $ 0.004 per share (the "Shares").

The $ 80.0 million of contingent consideration payable consists of $ 78.0 million payable to the former owners of BasX and $ 2.0 million payable to key employees of BasX whom are now employed by the Company.

The potential future issuance of the Shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of 2021, 2022, and 2023 under the terms of the MIPA Agreement.

The Company funded the BasX acquisition cash portion of the purchase price and related transaction costs with cash on hand.

Additionally, as a condition to closing, the Company entered into a real estate purchase agreement with BasX Properties, LLC, an affiliate of BasX, to acquire the principal real property and improvements utilized by BasX for an additional $ 22.0 million, subject to customary closing conditions and adjustments.

The Company closed this real estate transaction on May 31, 2022, which terminated the related lease (Note 4).

BasX specializes in the design, engineering and manufacturing of custom, energy efficient cooling solutions for the rapidly growing hyperscale data center market.

BasX also designs and manufactures custom solutions for cleanroom environments for the bio-pharmaceutical, semiconductor, medical and agriculture markets, as well as custom, energy efficient air handlers and modular solutions for a vast array of markets.

The acquisition of BasX brings the Company exposure to attractive end-markets

into which the Company has historically had minimal exposure.

The products BasX manufactures are highly engineered, customized products, fully complimenting AAON's existing business.

We applied pushdown accounting, allowable under ASC 805 "Business Combinations," to "pushdown" our stepped-up basis in the assets acquired and liabilities assumed to BasX's subsidiary financial statements.

The decision to apply pushdown accounting is irrevocable.

Goodwill was calculated and recognized consistent with acquisition accounting, resulting in the pushdown of $ 78.7 million in goodwill.

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

The revisions indicated below were recorded during the first quarter of 2022.

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

The impact of such revisions on net income were not significant.

Final Allocation Estimated

Allocation as of

December 31, 2021 Revisions

(in thousands)

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

Inventories 2,725 2,725 —

Contract assets 7,635 7,635 —

Prepaid expenses and other 341 341 —

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

Right of use assets 15,611 15,611 —

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

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

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

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

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

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

Contingent Consideration - shares of AAON, Inc.

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

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

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

Final Allocation Estimated

Allocation as of

December 31, 2021 Revisions

(in thousands)

Definite-lived intangible assets

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

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

53,842 55,163 ( 1,321 )

Indefinite-lived intangible assets

Trademarks 14,571 15,166 ( 595 )

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

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

Goodwill represents a premium paid to acquire the skilled workforce and expanded market opportunities.

Goodwill of $ 47.1 million was tax deductible upon the completion of the final allocation of consideration paid to the assets acquired and liabilities assumed.

Future additional amounts of goodwill related to the contingent consideration may become tax deductible in the future if the earn out provisions of the MIPA Agreement are achieved.

Pro Forma Results of Operations (unaudited)

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

The following unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2021 are presented as if the combination had been made on January 1, 2021.

Three months ended Nine months ended

September 30, 2021 September 30, 2021

(in thousands, except per share data)

Revenues $ 159,636 $ 452,635

Net income $ 17,257 $ 55,751

Earnings per share:

Basic $ 0.33 $ 1.06

Dilutive $ 0.32 $ 1.04

These unaudited pro forma results include adjustments necessary in connection with the acquisition.

The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods.

These results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

The amount of payments to our Representatives were $ 13.3 million and $ 6.5 million for the three months ended March 31, 2023 and 2022, respectively.

The Company has various lease arrangements for certain manufacturing and warehousing facilities, equipment rental, as well as administrative facilities.

Currently, all leases are classified as operating leases.

The following table presents the balances by lease type:

Balance Sheet Classification September 30, 2022 December 31, 2021

Balance Sheet Classification March 31, 2023 December 31, 2022

Operating Leases

Right of use assets Right of use assets $ 7,166 $ 7,123

Current lease liability Accrued liabilities $ 522 $ 1,580

Noncurrent lease liability Other long-term liabilities $ 1,153 $ 15,467

Since 2018, we lease our manufacturing and office space used by our operations in Parkville, Missouri, which is classified as an operating lease.

During the acquisition of BasX on December 10, 2021 (Note 3), we acquired various leases for plant/office space and equipment, which are classified as operating leases.

Through May 2022, BasX's manufacturing and office facility in Redmond, Oregon was leased from a related party (Note 19).

As as result of the purchase of the manufacturing and office facility on May 31, 2022 the lease was terminated.

On June 1, 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma to support our manufacturing operations.

During the second quarter of 2022, this lease was classified as a finance lease as the Company had the option to and was reasonably certain to purchase the underlying assets in 2023.

However, during the third quarter of 2022, it was determined that the Company would no longer purchase the land or facility and terminate the lease due to unforeseen facility structural issues.

As we currently expect to vacate this property in the next several months and terminate this lease we have reassessed our lease estimate and classified the remaining expected term of the lease as an operating lease.

We do not expect the vacating of the leased property to have a significant effect on the Company's overall operations, financial results and cash flows.

Subsequent to September 30, 2022, we amended our Parkville, Missouri lease to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet.

The amended lease will provide for approximately 31,000 square feet of additional manufacturing and engineering space and for approximately 4,000 square feet of additional office space.

Lease liability, short-term Accrued liabilities $ 1,459 $ 1,254

Lease liability, long-term Other long-term liabilities $ 5,860 $ 5,993

Since 2018, the Company has leased the manufacturing, engineering and office space used by our operations in Parkville, Missouri, which is classified as an operating lease.

In October 2022, the Parkville, Missouri lease was amended to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet.

The amended lease provides for approximately 31,000 square feet of additional manufacturing and engineering space and approximately 4,000 square feet of additional office space.

The amended lease extends the lease term through December 31, 2032.

In November 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma to support our operations.

The lease provides an additional 198,000 square feet to support our operations.

The lease term will expire October 31, 2025.

Accounts Receivable

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

September 30,

2023 December 31, 2022

3 unchanged sentences

$ 160,954 $ 127,158

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Allowance for credit losses:

1 unchanged sentence

Balance, beginning of period $ 477 $ 549

Provisions for (recoveries of) expected credit 119 ( 12 ) 300 —

(Recoveries of) provisions for expected credit ( 56 ) 288

losses, net of adjustments

Accounts receivable written off, net of recoveries

— ( 29 ) ( 167 ) ( 29 )

Balance, end of period $ 421 $ 837

3 unchanged sentences

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

September 30,

2023 December 31, 2022

6 unchanged sentences

$ 199,579 $ 198,939

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Allowance for excess and obsolete inventories:

1 unchanged sentence

Balance, beginning of period $ 4,527 $ 1,787

Provision for (recovery of) excess and 1,232 86 1,380 378

obsolete inventories

Provision for excess and obsolete 664 220

Inventories written off ( 443 ) —

Balance, end of period $ 4,748 $ 2,007

Management has identified some related components and parts that cannot be used in other production or sold through our parts business;

therefore, we have increased our provision for excess and obsolete inventory, within cost of sales on our consolidated statements of income, by approximately $ 1.0 million during the three and nine months ended September 30, 2022.

Intangible assets

Our intangible assets consist of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Definite-lived intangible assets (in thousands)

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Amortization expense recorded in cost of sales is as follows:

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

2 unchanged sentences

Supplemental Cash Flow Information

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Supplemental disclosures:

4 unchanged sentences

Non-cash capital expenditures $ 366 $ 458

The Company has product warranties with various terms ranging from one year from the date of first use or 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers.

The Company has product warranties with various terms from one year from the date of first use or 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers.

The Company has an obligation to replace parts if conditions under the warranty are met.

1 unchanged sentence

Changes in the warranty accrual are as follows:

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Warranty accrual:

2 unchanged sentences

Payments made ( 1,881 ) ( 1,219 )

Provisions 3,046 1,272 6,556 4,767

Balance, end of period $ 15,231 $ 13,455 $ 15,231 $ 13,455

Warranty expense 2,408 1,157

$ 3,046 $ 1,272 $ 6,556 $ 4,767

Balance, end of period $ 16,209 $ 13,707

Accrued Liabilities and Other Long-Term Liabilities

Accrued liabilities were comprised of the following:

September 30,

2023 December 31, 2022

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Customer prepayments 1,749 3,750

Donations 200 438

Donations, short-term 402 637

Accrued income taxes 17,734 12,472

Employee vacation time 9,572 6,329

5 unchanged sentences

Other long-term liabilities were comprised of the following:

September 30,

2023 December 31, 2022

(in thousands)

Long-term operating lease obligation $ 1,153 $ 15,467

Lease liability $ 5,860 $ 5,993

Extended warranties 4,383 4,539

Long-term donations and other 549 334

Donations and other 680 976

$ 10,923 $ 11,508

Revolving Credit Facility

On May 27, 2022, we amended our $ 100.0 million Amended and Restated Loan Agreement dated November 24, 2021 (“Revolver”), to provide 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 outstanding under the Revolver, respectively.

We have one standby letter of credit totaling $ 0.8 million as of September 30, 2022.

Borrowings available under the Revolver at September 30, 2022 were $ 122.9 million.

On May 27, 2022, we amended our $ 100.0 million Amended and Restated Loan Agreement dated November 24, 2021 (as amended, “Revolver”), to provide for maximum borrowings of $ 200.0 million.

As of March 31, 2023 and December 31, 2022, we had $ 83.7 million and $ 71.0 million outstanding under the Revolver, respectively.

We have one standby letter of credit totaling $ 0.3 million as of March 31, 2023.

Borrowings available under the Revolver at March 31, 2023 were $ 116.0 million.

The Revolver expires on May 27, 2027.

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

The weighted average interest rate on borrowings outstanding on our the Revolver was 3.5 % and 2.5 % for the three and nine months ended September 30, 2022, 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 three and nine months ended September 30, 2022.

The weighted average interest rate on borrowings outstanding on the Revolver was 6.0 % and 1.3 % for the three months ended March 31, 2023 and 2022, 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 three months ended March 31, 2023 and 2022.

If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding affected 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.

At March 31, 2023, we were in compliance with our covenants, as defined by the Revolver.

Our financial covenants require that we meet certain parameters related to our leverage ratio.

At March 31, 2023, our leverage ratio was 0.47 to 1.0, which meets the requirement of not being above 3 to 1.

On April 20, 2023, we amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit executed on April 25, 2023 (Note 16).

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

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

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

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Federal statutory rate 21.0 % 21.0 %

State income taxes, net of Federal benefit 4.0 % 3.0 %

Excess tax benefits ( 1.5 ) ( 2.2 ) ( 1.6 ) ( 6.0 )

Return to provision adjustments ( 0.4 ) 0.6 ( 0.5 ) —

Excess tax benefits related to share-based compensation (Note 12)

( 8.8 ) % ( 2.2 ) %

Return to provision ( 0.3 ) % — %

Research and development credits ( 1.5 ) % ( 0.8 ) %

Other 0.3 % ( 0.1 ) %

Effective tax rate 14.7 % 20.9 %

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%.

This resulted in an overall reduction of our effective state income tax rate for the three and nine months ended September 30, 2021, net of Federal benefit.

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 %.

The decrease was primarily due to timing of stock option exercises as a result of our high stock price during the nine months ended September 30, 2021.

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

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

As of September 30, 2022, we have investment tax credit carryforwards of approximately $ 4.4 million.

As of March 31, 2023, we have investment tax credit carryforwards of approximately $ 6.3 million.

These credits have estimated expirations from the year 2039 through 2043.

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Share-Based Compensation

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 3.3 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards, in addition to the shares from the previous plan, the 1992 Plan.

Under the LTIP, the exercise price of shares granted could not be less than 100 % of the fair market value at the date of the grant.

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The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan.

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the nine months ended September 30, 2022 and 2021 using a Black Scholes-Merton Model:

Nine months ended

September 30, 2022 September 30, 2021

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the three months ended March 31, 2023 and 2022 using a Black Scholes-Merton Model:

Three months ended

March 31, 2023 March 31, 2022

Directors and SLT 1 :

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Expected life (in years) 3.0 3.0

1 Senior Leadership Team ("SLT") consists of officers and key members of management.

1 SLT consists of officers and key members of management.

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior.

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Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.

The following is a summary of stock options vested and exercisable as of September 30, 2022:

Prices Number

Shares Weighted

Contractual Life

Price Intrinsic

( in thousands )

$ 9.79 - $ 41.37 1,233,000 5.29 $ 36.72 $ 21,160

$ 42.42 - $ 54.20 309,531 6.88 44.68 2,848

$ 54.29 - $ 79.81 118,916 7.96 72.20 —

Total 1,661,447 5.78 $ 40.74 $ 24,008

The following is a summary of stock options vested and exercisable as of September 30, 2021:

The following is a summary of stock options vested and exercisable as of March 31, 2023:

Prices Number

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( 24,587 ) 49.88

Outstanding at September 30, 2022

Outstanding at March 31, 2023

2,839,879 $ 48.52

Exercisable at September 30, 2022

Exercisable at March 31, 2023

1,687,153 $ 42.44

The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2022 is $ 14.9 million and is expected to be recognized over a weighted average period of approximately 1.8 years.

The total intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 was $ 6.7 million and $ 15.1 million, respectively.

The cash received from options exercised during the nine months ended September 30, 2022 and 2021 was $ 11.0 million and $ 14.6 million, respectively.

The total pre-tax compensation cost related to unvested stock options not yet recognized as of March 31, 2023 is $ 15.2 million and is expected to be recognized over a weighted average period of approximately 1.8 years.

The total intrinsic value of options exercised during the three months ended March 31, 2023 and 2022 was $ 16.7 million and $ 1.9 million, respectively.

The cash received from options exercised during the three months ended March 31, 2023 and 2022 was $ 15.9 million and $ 2.9 million, respectively.

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

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

At September 30, 2022, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 4.9 million, which is expected to be recognized over a weighted average period of approximately 1.8 years.

At March 31, 2023, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 6.4 million, which is expected to be recognized over a weighted average period of approximately 1.8 years.

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

4 unchanged sentences

( 711 ) 54.93

Unvested at September 30, 2022

Unvested at March 31, 2023

133,908 $ 60.35

4 unchanged sentences

At the end of the measurement period, each award will be converted into common stock at 0 % to 200 % of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies.

The total pre-tax compensation cost related to unvested PSUs not yet recognized as of September 30, 2022 is $ 2.2 million and is expected to be recognized over a weighted average period of approximately 2.2 years.

The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the nine months ended September 30, 2022 and 2021 using a Monte Carlo Model:

Nine months ended

September 30, 2022 September 30, 2021

The total pre-tax compensation cost related to unvested PSUs not yet recognized as of March 31, 2023 is $ 4.8 million and is expected to be recognized over a weighted average period of approximately 2.1 years.

The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the three months ended March 31, 2023 and 2022 using a Monte Carlo Model:

Three months ended

March 31, 2023 March 31, 2022

Expected dividend rate $ 0.48 $ 0.38

11 unchanged sentences

25,598 126.61

Unvested at September 30, 2022

Unvested at March 31, 2023 1

88,257 $ 75.71

1 Consists of 14,817 PSUs cliff vesting December 31, 2023, 47,842 PSUs cliff vesting December 31, 2024, and 25,598 PSUs cliff vesting December 31, 2025.

Key Employee Awards

Subject to the MIPA Agreement (Note 3), the Company granted awards to key employees of BasX ("Key Employee Awards").

As part of the December 2021 acquisition of BASX, the Company granted awards to key employees of BASX ("Key Employee Awards").

Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period.

The potential future issuance of the Key Employee Awards is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the MIPA Agreement and continued employment with the Company.

The potential future issuance of the Key Employee Awards is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company.

At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award will vest and be converted into common stock.

The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date.

The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of September 30, 2022 is $ 1.3 million and is expected to be recognized over a weighted average period of approximately 1.3 years.

The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of March 31, 2023 is $ 0.8 million and is expected to be recognized over a weighted average period of approximately 0.8 years.

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

2 unchanged sentences

26,599 $ 80.18

Unvested at September 30, 2022

Unvested at March 31, 2023

26,599 $ 80.18

1 unchanged sentence

A summary of share-based compensation is as follows:

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

Grant date fair value of awards during the period:

6 unchanged sentences

Options $ 2,065 $ 2,040

PSUs 188 166 665 355

Restricted stock 826 679

1 unchanged sentence

Total $ 3,519 $ 3,112

Income tax benefit/(deficiency) related to share-based compensation:

Income tax benefit related to share-based compensation:

Options $ 3,321 $ 293

2 unchanged sentences

Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award.

Historically, stock options and restricted stock awards, granted to employees, vest at a rate of 20 % per year.

Restricted stock awards granted to directors historically vest one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year.

Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20 % per year.

Restricted stock awards granted to directors historically vested one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year.

As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3 % per year.

Forfeitures are accounted for as they occur.

Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date.

Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during the service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date.

All stock options and restricted stock awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited.

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Administrative expenses are paid for by Plan participants.

The Company paid no administrative expenses during the nine months ended September 30, 2022 and 2021.

The Company paid no administrative expenses during the three months ended March 31, 2023 and 2022.

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

Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions.

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

Contributions, net of forfeitures, made to the defined contribution plan $ 5,259 $ 3,306

Profit Sharing Bonus Plan

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

Profit Sharing Bonus Plans

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

Eligible employees are regular full-time employees of AAON Oklahoma or AAON Coil Products who are actively employed and working on the first and last days of the calendar quarter and who were employed full-time for at least three full months prior to the beginning of the calendar quarter, excluding the Company's senior leadership team.

1 unchanged sentence

Eligible employees are regular full-time and part-time employees who have worked during the year and are still employed when the EIP payment is made following the end of the fiscal year, excluding members of BASX's senior leadership team and any employee paid commissions or royalties.

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

1 unchanged sentence

Employee Medical Plan

At AAON Oklahoma and AAON Texas, we self-insure for our employees' health insurance, and make medical claim payments up to certain stop-loss amounts.

At AAON Oklahoma and AAON Coil Products, we self-insure for our employees' health insurance, and make medical claim payments up to certain stop-loss amounts.

We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience.

1 unchanged sentence

Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans.

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

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

BASX is insured for healthcare coverage through a third party.

2 unchanged sentences

In addition, the Company contributes certain amounts for BASX's employees enrolled in a high deductible plan to a qualified health savings account to assist employees with health insurance plan deductibles.

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

6 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands, except share and per share data)

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1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 12)

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

2 Dilutive shares related to contingent shares issued to the former owners of BASX (Note 15)

Stockholders’ Equity

Stock Repurchases

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

The Board has authorized one active stock repurchase program for the Company.

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

2 unchanged sentences

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 ** 1

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

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 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.

The Company repurchases shares of AAON, Inc.

stock from 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.

Lastly, 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.

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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

Three Months Ended

March 31, 2023 March 31, 2022

(in thousands, except share and per share data)

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

Inception to September 30, 2022

Inception to March 31, 2023

(in thousands, except share and per share data)

4 unchanged sentences

14,692,363 $ 277,795 $ 18.91

Subsequent to September 30, 2022 and through November 3, 2022, the Company repurchased a total of 86,633 shares for $ 4.8 million through our open market repurchase program.

As of November 3, 2022, the Company has approximately $ 8.2 million remaining for open market repurchases under our current stock repurchase program which expires on November 9, 2022 .

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.

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

At the discretion of the Board, we pay cash dividends.

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

Our recent cash dividends are as follows:

Declaration Date 1

Record Date Payment Date Dividend

per Share Annualized Dividend

May 18, 2022 June 3, 2022 July 1, 2022 $ 0.19 $ 0.38

November 8, 2022 November 28, 2022 December 16, 2022 $ 0.24 $ 0.48

May 18, 2022 June 3, 2022 July 1, 2022 $ 0.19

March 1, 2023 March 13, 2023 March 31, 2023 $ 0.12 $ 0.48

1 Effective with the cash dividend declared on March 1, 2023 (paid on March 31, 2023), the Company moved from semi-annual cash dividends to quarterly cash dividends.

Contingent Shares Issued in BASX Acquisition

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

In December 2021, we closed on the acquisition of BASX.

Under the MIPA Agreement, we committed to $ 78.0 million in the aggregate of contingent consideration to the former owners of BASX, which is payable in approximately 1,037,000 shares of the Company's common stock, par value $ 0.004 per share.

1 unchanged sentence

Under the MIPA Agreement, the potential future issuance of the shares is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023.

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

As of September 30, 2022, 486,268 shares related to the year ended 2021 earn-out milestone had been issued to the former owners of BasX as part of a private placement exempt from registration with the SEC under Rule 506(b), which are included in common stock on the consolidated statements of stockholders' equity.

No additional shares have been issued as of November 3, 2022.

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

As of March 31, 2023, 389,013 shares and 486,268 shares related to the earn-out milestones for the years ended 2022 and 2021, respectively, have been issued to the former owners of BASX as private placements exempt from registration with the SEC under Rule 506(b), which are included in common stock on the consolidated statements of stockholders' equity.

No additional shares have been issued as of May 2, 2023.

New Markets Tax Credit

2019 New Markets Tax Credit

On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2019 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2019 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 “2019 Project”).

3 unchanged sentences

This financing arrangement is secured by equipment at the Company's Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of NMTCs.

This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period.

This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period.

The 2019 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt.

The Investor's interest of $ 6.3 million is recorded in New market tax credit obligation on the consolidated balance sheet.

The 2019 Investor's interest of $ 6.5 million is recorded in New market tax credit obligation on the consolidated balance sheets.

The Company incurred approximately $ 0.3 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction.

7 unchanged sentences

There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the 2019 NMTC arrangement.

2023 New Markets Tax Credit

On April 25, 2023, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2023 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2023 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 2023 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 2023 NMTC transaction, the Company provided an aggregate of approximately $ 16.7 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 $ 16.7 million in proceeds plus capital contributed from the Investor was used to make an aggregate $ 23.8 million loan to a subsidiary of the Company.

This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of NMTCs.

This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period.

The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt.

The 2023 Investor is subject to 100 percent recapture of the 2023 NMTC it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S.

Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements.

The Company is required to be in compliance with various regulations and contractual provisions that apply to the 2023 NMTC arrangement.

Noncompliance with applicable requirements could result in the 2023 Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the 2023 Investor for any loss or recapture of the 2023 NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations.

The Company does not anticipate any credit recapture will be required in connection with this financing arrangement.

Commitments and Contingencies

We are subject to various claims and legal actions that arise in the ordinary course of business.

Havtech Litigation

On January 24, 2022, one of the Company’s former independent sales representative firms, Havtech, LLC (and its affiliate, Havtech Parts Division, LLC, collectively “Plaintiffs”), filed a complaint (the “Complaint”) in the Circuit Court for Howard County, Maryland ( Havtech, LLC, et al., v.

AAON, Inc., et al.

The Complaint challenged the Company’s termination of its business relationship with Plaintiffs.

The Company removed the action to the United States District Court for the District of Maryland (Northern Division) and moved to dismiss the Complaint.

Plaintiffs’ First Amended Complaint (“First Amended Complaint”) was entered by the court on July 28, 2022.

The First Amended Complaint asserts that the Company improperly terminated Plaintiffs and seeks damages alleged to be no less than $ 48.6 million, plus fees and costs.

The Company filed its Answer to First Amended Complaint on January 31, 2023.

The Company believes that Plaintiffs’ claims are without merit and intends to vigorously defend itself.

Other Matters

The Company is involved from time to time in claims and lawsuits incidental to our business arising from various matters, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, tax and other laws.

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 and/or cash flows.

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

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

We do not believe these matters will have a material adverse effect on our business, financial position, results of operations or cash flows.

We are occasionally party to short-term and long-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 material and component parts 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 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, which is included in other long-term assets on the consolidated balance sheets.

We had no material contractual purchase obligations as of March 31, 2023, 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 March 31, 2023, 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.

In April 2023, we purchased several properties near our Tulsa, OK location, including four buildings which will add approximately 47,000 square feet of office space and approximately 53,000 square feet of additional warehouse space.

Additionally, we purchased approximately 14.26 acres immediately adjacent to our Tulsa, OK facilities.

The total amount paid for these properties was approximately $ 10.4 million.

Related Parties

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

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

Additionally, the Company purchases some supplies from entities controlled by two of the Company’s board members and the Company sometimes makes sales to a board member for parts.

From December 10, 2021 through May 31, 2022 (Note 3), the Company leased a manufacturing and office facility in Redmond, Oregon from an entity in which certain members of BasX management have an ownership interest.

This facility was purchased 100% by the Company on May 31, 2022.

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

Three Months Ended Nine Months Ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

The following is a summary of transactions and balances with related parties:

Three Months Ended

2023 March 31,

(in thousands)

1 unchanged sentence

Payments to affiliates 392 364

September 30,

2023 December 31,

2 unchanged sentences

Due to affiliates 3 —

The nature of our related party transactions as follows:

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

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

• The Company purchases some supplies from entities controlled by two of the Company’s board members and a member of the Company's executive management team.

• The Company periodically makes part sales and makes payments to a board member related to a consulting agreement.

• From December 10, 2021 through May 31, 2022, the Company leased a manufacturing and office facility in Redmond, Oregon from an entity in which certain members of BASX management have an ownership interest.

This facility was purchased 100% by the Company on May 31, 2022.

The Company has determined that it has three reportable segments for financial reporting purposes.

3 unchanged sentences

AAON Oklahoma:

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

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

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

AAON Oklahoma designs, manufactures, sells and services standard, semi-custom and custom heating, ventilation and air conditioning ("HVAC") systems, designs and produces controls solutions for all of our HVAC units and sells retail parts to customers through our two retail part stores in Tulsa, Oklahoma as well as online.

Through our Norman Asbjornson Innovation Center ("NAIC") research and development laboratory facility in Tulsa, Oklahoma, the Company is able

to test units under various environmental conditions.

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

AAON Coil Products:

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

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

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

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

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

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

Additionally, BASX designs and manufactures cleanroom environmental control systems to support hospital surgical suites, pharmaceutical process facilities, semiconductor and electronics manufacturing, laboratory and isolation modular cleanrooms for facility flexibility.

BASX consists of operations at our Redmond, Oregon facility.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Three Months Ended

March 31, 2023 March 31, 2022

Net Sales (in thousands)

11 unchanged sentences

AAON Coil Products 7,158 7,306

9,384 — 21,471 —

BASX 8,146 4,922

Gross profit $ 77,154 $ 46,064

1 BasX was acquired on December 10, 2021.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Long-lived assets (in thousands)

9 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 1. Financial Statements