What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-07 · 132 added, 199 removed, 164 unchanged (67% of the section changed)

5 unchanged sentences

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

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

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 pumps, coils, and controls.

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

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

Foreign sales were approximately $18.0 million of our total net sales for the nine months ended September 30, 2022 and $11.0 million of our sales during the same period of 2021.

Foreign sales were approximately $12.6 million of our total net sales for the three months ended March 31, 2023 and $6.0 million of our sales during the same period of 2022.

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

The uncertainty of the economy negatively impacted the commercial and industrial new construction markets in 2020 and the first half of 2021.

Since August 2021, however, nonresidential construction has been recovering.

In the third quarter of 2022, the market returned to pre-pandemic levels.

Currently, architectural billings and nonresidential construction starts are at historically high levels, signaling the nonresidential construction market will continue to be strong over the next nine to 12 months.

Furthermore, although some economic indicators are suggesting the general economy is slowing, the replacement market remains strong.

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

Both the new construction and replacement markets are cyclical.

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

Sales in the commercial and industrial new construction markets generally lag the housing market, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, and other macroeconomic factors over which we have no control.

Sales in the 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, changes in market demand between more customized higher performing HVAC equipment and lower priced standard equipment, as well as many other factors.

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

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

The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of six to 18 months.

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

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

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

BasX sells highly customized products for unique applications for a more concentrated customer base and an internal sales force is more effective for such products.

BASX sells highly customized products for unique applications to a more concentrated customer base.

A combination of our internal sales force and select group of independent sales representatives is most effective for BASX's products.

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

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

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

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.

At September 30, 2022, the price (year to date average) for copper, galvanized steel, stainless steel and aluminum increased 16.6%, 36.6%, 91.0%, and 14.8%, respectively, as compared to the price (year to date average) at September 30, 2021.

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

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

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

In 2021, we implemented three price increases.

In 2022, we implemented additional price increases effective January 1, 2022;

March 29, 2022;

June 1, 2022;

July 1, 2022;

August 1, 2022;

and September 1, 2022.

At March 31, 2023, the price (year to date average) for copper, stainless steel and aluminum increased 6.1%, 5.3%, and 16.0%, respectively, as compared to the price (year to date average) at March 31, 2022, while the price (year to date average) for galvanized steel decreased 39.83% as compared to the price (year to date average) at March 31, 2022.

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

The following table shows our historical backlog levels:

September 30,

2023 December 31,

2021 September 30,

2022 March 31,

(in thousands)

$ 599,912 $ 548,022 $ 461,400

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

Excluding BasX's backlog at September 30, 2022, organic backlog increased 109.6% compared to September 30, 2021, due primarily to our favorable lead times.

Our bookings remain strong in the first quarter of 2023, with an increase in our backlog of 9.5% since December 31, 2022.

While our pricing has been increasing 1% a month since June of 2022 for the legacy business, the growth in the backlog is primarily due to organic volumes as a result of our favorable lead times.

Results of Operations

Three months ended September 30, Nine months ended September 30,

2022 2021 2022 2021

Three months ended March 31,

(in thousands)

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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

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• We continue to have a record backlog.

New bookings for BasX in the quarter were by far a record for the business as it benefited from a strong pipeline of projects in the data center and semiconductor markets.

Revenue synergies from the BasX acquisition has also increased bookings for AAON Coil Products.

• Sales for the three and nine months ended September 30, 2022 grew due to organic growth, the addition of BasX revenues, and price increases realized during the periods.

• Our gross profit margin for the quarter increased 430 basis points since the quarter ended June 30, 2022 as a result of better pricing from the legacy business and increased production from BasX.

• Our cashflows from operations returned to normal levels experienced prior to the BasX acquisition, allowing us to make net payments of $30.0 million on our Revolver during the three months ended September 30, 2022.

Total backlog increased 9.5% from December 31, 2022 and 30.0% from a year ago.

• Sales for the three months ended March 31, 2023 grew 45.5% due to record production rates and price increases realized during the period as compared to the quarter ended March 31, 2022.

• Our gross profit margin for the quarter ended March 31, 2023 of 29.0% increased 380 basis points from the quarter ended March 31, 2022.

We report our financial results based on three reportable segments:

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

Segment Operating Results for Three Months Ended September 30, 2022 and Three Months Ended September 30, 2021

Segment Operating Results for Three Months Ended March 31, 2023 and Three Months Ended March 31, 2022

Three Months Ended

September 30, 2022 Percent of Sales 2

September 30, 2021 Percent of Sales 2

March 31, 2023 Percent of Sales 1

March 31, 2022 Percent of Sales 1

$ Change % Change

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AAON Coil Products 33,412 12.6 % 21,935 12.0 % 11,477 52.3 %

32,932 13.6 % — — 32,932 —

BASX 30,539 11.5 % 20,969 11.5 % 9,570 45.6 %

Net sales $ 265,953 $ 182,771 $ 83,182 45.5 %

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AAON Coil Products 26,254 78.6 % 14,629 66.7 % 11,625 79.5 %

23,548 71.5 % — — 23,548 —

BASX 22,393 73.3 % 16,047 76.5 % 6,346 39.5 %

Cost of sales $ 188,799 71.0 % $ 136,707 74.8 % $ 52,092 38.1 %

2 unchanged sentences

AAON Coil Products 7,158 21.4 % 7,306 33.3 % (148) (2.0) %

9,384 28.5 % — — 9,384 —

BASX 8,146 26.7 % 4,922 23.5 % 3,224 65.5 %

Gross profit $ 77,154 29.0 % $ 46,064 25.2 % $ 31,090 67.5 %

1 BasX was acquired on December 10, 2021.

We have included the results of BasX's operations in our consolidated financial statements for the three months ended September 30, 2022.

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

1 unchanged sentence

2 Presented after intercompany eliminations.

Total net sales increased $104.0 million or 75.1%, with the addition of BasX sales contributing to 31.7% of our growth.

Excluding BasX sales of $32.9 million, net sales grew through price increases of $33.9 million and organic volume, product mix and other of $37.2 million.

Total net sales increased $83.2 million or 45.5%, with increases at all three operating segments driven by increased organic volume growth.

Volume growth accounted for 23.5% of the increase in net sales with the remaining 22.0% increase resulting from realization of price increases put in place during 2022.

Gross profit as a percent of sales increased to 29.0% for the three months ended March 31, 2023 as compared to 25.2% for the three months ended March 31, 2022.

Total gross profit increased mostly due to the multiple price increases realized for the three months ended March 31, 2023 counteracting the increasing cost of materials and labor.

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

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Some of the price increases have yet to be realized.

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

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

We have seen continued improvement in our overall margin since the second quarter of 2022.

The backlog for AAON Coil Products had better pricing which shows in their improved gross margin of 34.6% for the quarter as they are able to realize price increases faster than AAON Oklahoma.

BasX has been able to reprice their backlog in order to maintain a healthy gross profit of 28.5% for the quarter.

AAON Oklahoma continued to work through its remaining lower priced backlog at the beginning of the third quarter of 2022, increasing its gross profit margin from 20.2% in the second quarter of 2022 to 25.5% for the third quarter of 2022.

Additionally, in order to retain our existing employees, we continue to award periodic raises in addition to our

annual merit raises to our employees.

In the first quarter of 2023, our gross profit decreased by approximately $3.7 million for changes in our paid time off policies and for payroll taxes and 401(k) matching contributions related to profit sharing payments and stock transactions as our stock reached record highs consistently during the first quarter.

Raw Material Costs

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

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

2023 2022 % Change

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Three Months Ended Percent of Sales

September 30,

2022 September 30,

2023 March 31,

(in thousands)

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Professional fees 1,105 1,482 0.4 % 0.8 %

Donations 125 189 — % 0.1 %

Other 5,108 3,757 1.9 % 2.1 %

Total SG&A $ 32,942 $ 23,056 12.4 % 12.6 %

Selling, general and administrative expenses at BasX for the three months ended September 30, 2022 totaled $6.4 million.

Excluding salaries and benefits at BasX of $3.8 million, salaries and benefits increased $1.8 million due to pay increases that went into effect during the third and fourth quarters of 2021 and first quarter of 2022.

Depreciation and amortization expense at BasX was $1.2 million, accounting for the majority of the change from period to period.

Excluding $0.7 million of Other SG&A at BasX, Other SG&A increased $1.2 million attributable mostly to increased travel and meeting expenses due to lighter COVID-19 restrictions during 2022 and increased charitable contributions.

Overall, selling, general and administrative expenses increased $9.9 million from the prior year period, but expenses did decrease overall as a percentage of sales for the three months ended March 31, 2023.

Warranty expense increased consistent with our increase in net sales.

We continue to focus on our commitment to reliability and quality.

Profit sharing increased $2.2 million or 82.3% due to our increased operating results.

Salaries and benefits increased $3.3 million or 35.6% which is primarily attributable to overall increased headcount as well as the the impact of employee pay increases and benefit improvements discussed above.

Three Months Ended Effective Tax Rate

September 30,

2022 September 30,

(in thousands)

Income tax provision $ 8,327 $ 4,527 23.3 % 22.5 %

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

During the three months ended September 30, 2022, the Company recorded an excess tax benefit of $0.5 million as compared to $0.4 million during the same period in 2021.

Segment Operating Results for Nine Months Ended September 30, 2022 and Nine Months Ended September 30, 2021

Nine Months Ended

September 30, 2022 Percent of Sales 2

September 30, 2021 Percent of Sales 2

$ Change % Change

(in thousands)

AAON Oklahoma $ 476,517 75.1 % $ 348,378 87.5 % $ 128,139 36.8 %

AAON Coil Products 79,193 12.5 % 49,857 12.5 % 29,336 58.8 %

78,480 12.4 % — — 78,480 —

Net sales $ 634,190 $ 398,235 $ 235,955 59.3 %

Cost of Sales 3

AAON Oklahoma $ 365,301 76.7 % 248,653 71.4 % $ 116,648 46.9 %

AAON Coil Products 52,849 66.7 % 38,299 76.8 % 14,550 38.0 %

57,009 72.6 % — — 57,009 —

Cost of sales $ 475,159 74.9 % $ 286,952 72.1 % $ 188,207 65.6 %

Gross Profit 3

AAON Oklahoma $ 111,216 23.3 % $ 99,725 28.6 % $ 11,491 11.5 %

AAON Coil Products 26,344 33.3 % 11,558 23.2 % 14,786 127.9 %

21,471 27.4 % — — 21,471 —

Gross profit $ 159,031 25.1 % $ 111,283 27.9 % $ 47,748 42.9 %

1 BasX was acquired on December 10, 2021.

We have included the results of BasX's operations in our consolidated financial statements for the nine months ended September 30, 2022.

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

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

3 Presented after intercompany eliminations.

Total net sales increased $236.0 million or 59.3%, due in part to increased organic volumes, product mix and other of $84.6 million.

AAON Coil Products saw a 52.7% increase in units sold, or approximately $16.1 million, during the nine months ended September 30, 2022 due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021.

The nine months ended September 30, 2022 also benefited from $72.9 million of price increases put in place throughout 2021 and early 2022 which began being realized at the end of the second quarter of 2022.

The acquisition of BasX in December 2021 added $78.5 million to net sales for the nine months ended September 30, 2022.

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

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

however, it has taken longer than expected for our price increases to roll out of the backlog into production causing erosion of our gross profit during the nine months ended September 30, 2022, especially during the first two quarters of 2022.

As already mentioned, we also have put multiple wage increases in place in late 2021 and early 2022 that have increased our labor costs.

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

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

Raw Material Costs

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

2022 2021 % Change

Copper $ 5.61 $ 4.81 16.6 %

Galvanized steel $ 0.97 $ 0.71 36.6 %

Stainless steel $ 3.17 $ 1.66 91.0 %

Aluminum $ 2.09 $ 1.82 14.8 %

Selling, General and Administrative Expenses

Nine Months Ended Percent of Sales

September 30,

2022 September 30,

(in thousands)

Warranty $ 6,556 $ 4,767 1.0 % 1.2 %

Profit sharing 8,559 7,409 1.3 % 1.9 %

Salaries & benefits 31,419 17,088 5.0 % 4.3 %

Stock compensation 5,220 4,077 0.8 % 1.0 %

Advertising 2,006 692 0.3 % 0.2 %

Depreciation & amortization 5,768 1,979 0.9 % 0.5 %

Insurance 2,477 2,194 0.4 % 0.6 %

Professional fees 3,686 2,258 0.6 % 0.6 %

Other 13,189 7,024 2.1 % 1.8 %

Total SG&A $ 78,880 $ 47,488 12.4 % 11.9 %

Selling, general and administrative expenses at BasX totaled $17.4 million for the nine months ended September 30, 2022.

Warranty expense increased consistent with our increase in net sales but decreased as a percentage of sales, as we continue to focus on our commitment to reliability and quality.

Excluding salaries and benefits at BasX of $9.5 million, salaries and benefits increased $4.8 million due to pay increases that went into effect during the third and fourth quarters of 2021 and the first quarter of 2022.

Advertising increased $1.3 million due to various sponsorships and customer promotions, which were still mostly on hold during early 2021 due to COVID-19 restrictions.

Depreciation and amortization expense at BasX was $3.2 million, accounting for the majority of the change from period to period.

Excluding $2.7 million of Other SG&A at BasX, Other SG&A increased $3.5 million attributable mostly to consulting services and increased travel expenses due to lighter COVID-19 restrictions.

Nine Months Ended Effective Tax Rate

September 30,

2022 September 30,

2023 March 31,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2023 effective tax rate, excluding discrete events, is expected to be approximately 24.3%.

During the nine months ended September 30, 2022, the Company recorded an excess tax benefit of $1.3 million as compared to $3.8 million during the same period in 2021, a decrease of 67.3%.

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

During the three months ended March 31, 2023, the Company recorded an excess tax benefit of $3.8 million as compared to $0.5 million during the same period in 2022.

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, 2023.

Liquidity and Capital Resources

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

Working Capital - Our unrestricted cash increased $7.9 million from December 31, 2021 to September 30, 2022 and totaled $10.7 million at September 30, 2022.

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

As of September 30, 2022 and December 31, 2021, we had $76.3 million and $40.0 million, respectively, outstanding under the Revolver.

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

At September 30, 2022, we have $122.9 million of borrowings available under the Revolver.

Working Capital - Our unrestricted cash decreased $2.9 million from December 31, 2022 to March 31, 2023 and totaled $2.5 million at March 31, 2023.

Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides 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, respectively, outstanding under the Revolver.

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

At March 31, 2023, we have $116.0 million of borrowings available under the Revolver.

The Revolver expires 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 the Revolver was 3.5% and 2.5% for the three and nine months ended September 30, 2022.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income and were not material for the three and nine months ended September 30, 2022.

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.

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 effected loans will be deemed to have been converted into alternative base rate ("ABR") loans.

ABR loans would bear interest at a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.

At September 30, 2022, we were in compliance with our financial covenants, as defined by the Revolver.

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

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

At September 30, 2022, our leverage ratio was 0.65 to 1.0, which meets the requirement of not being above 3 to 1.

As of November 3, 2022, we had $73.0 million of outstanding borrowings under our Revolver.

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

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).

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 “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.

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

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.

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

The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.

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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

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

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

Our recent dividends are as follows:

Declaration Date Record Date Payment Date Dividend per Share

Dividends - 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.

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.

Statement of Cash Flows

The following table reflects the major categories of cash flows for the nine months ended September 30, 2022 and 2021.

The following table reflects the major categories of cash flows for the three months ended March 31, 2023 and 2022.

For additional details, see the consolidated financial statements.

Nine Months Ended

September 30,

2022 September 30,

Three Months Ended

2023 March 31,

(in thousands)

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Contract liabilities 713 17,998

Deferred revenue 730 316

Extended warranties 777 68

Accrued liabilities & 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)

3 unchanged sentences

Payments under revolving credit facility (92,512) —

Principal payments on financing lease (115) —

Stock options exercised 15,856 2,890

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Cash dividends paid to stockholders (6,459) —

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

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

Cash Flows Provided by Operating Activities

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

The decrease in cash flows from receivables was a result of increased sales, both as a result of 2021 and 2022 price increases realized during the period and volumes, in the nine months ended September 30, 2022 that have not been collected.

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

Payment terms for BasX jobs typically require upfront cash to fund the job resulting in cash inflows related to our contract liabilities.

In early 2022, the Company began increasing 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 and cash inflows fluctuate due to job timing and scheduling.

Cash Flows Used in Investing Activities

The capital expenditures for the nine months ended September 30, 2022 relate to our continued investment in our production capabilities.

The cash paid for building during the nine months ended September 30, 2022 related to the purchase of the BasX office and manufacturing facility related to the December 2021 acquisition (see Note 3).

The capital expenditures for the nine months ended September 30, 2021 related to the completion of the expansion at our Longview, Texas facility, which became operational during early 2021.

The capital expenditures for the three months ended March 31, 2023 relate to our continued investment in our production capabilities.

Purchases for the first quarter relate to a partial interest in an airplane, additional warehouse space in Longview, Texas and additional sheetmetal machinery for both replacement and growth.

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

Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.

Cash Flows Used in Financing Activities

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

However, for the nine months ended September 30, 2022 the increase in cash from financing activities is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid future supply chain delays, and the funding for the purchase of the BasX building in the second quarter.

Stock options exercised decreased due to the decrease in the number of employee options exercised and decrease in our average stock price during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Repurchases of stock decreased due to the discontinuance of our 401(k) stock buyback activity in June 2022.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

We had no material contractual purchase obligations as of September 30, 2022 except as described below.

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

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

As of November 3, 2022 we have paid approximately $3.5 million related to this agreement.

Cash Flows Provided by Financing Activities

The change in cash from financing activities in 2023 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 certain capital expenditures, offset by repayments we were able to make due to our increased operating results and financial condition.

Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees.

Stock options exercised increased due to the increase in the number of employee options exercised and increase in our average stock price during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

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.

Commitments and Contractual Obligations

We are occasionally party to short-term and long-term, cancellable and occasionally non-cancellable, contracts with 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 March 31, 2023 except as described 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.

Total amount paid for these properties was approximately $10.4 million.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2022.

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2023.

Recent Accounting Pronouncements

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Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “will”, “should”, and variations of such words and similar expressions are intended to identify such forward-looking statements.

This Quarterly Report on Form 10-Q (or statements otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings, presentations or otherwise) includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

Any statements contained herein that are not historical facts are forward-looking statements and involve risks and uncertainties.

For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S.

Private Securities Litigation Reform Act of 1995.

Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “confident”, “outlook”, “project”, “should”, “will”, and variations of such words and other words of similar meaning or similar expressions are intended to identify such forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict.

Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

Important factors that could cause results to differ materially from those in the forward-looking statements include, among others:

• market conditions and customer demand for our products;

• the timing and extent of changes in raw material and component prices;

• naturally-occurring events, pandemics, and other disasters causing disruption to our manufacturing operations, product deliveries and production capacity;

• the impact caused by inflationary cost pressures, national or global health issues, such as the coronavirus pandemic (“COVID-19”), any variants or similar outbreaks (including the response thereto) and their effects on, among other things, demand for our products, supply chain disruptions, our liquidity and financial position, results of operations, stock price, payment of dividends, our ability to secure new orders, our ability to convert backlog to revenue and impacts to the operations status of our facilities;

• natural disasters and extreme weather conditions, including, without limitation, their effects on locations where our products are manufactured;

• the effects of fluctuations in the commercial/industrial new construction market;

• the timing of introduction and market acceptance of new products;

• the timing and extent of changes in interest rates, as well as other competitive factors during the year;

• general economic, market or business conditions;

• tightening of labor markets and the ability to hire employees for continued growth

• creditworthiness of our customers and their access to capital;

• changing technologies;

• the material failure, interruption of service, compromised data or information technology security, phishing emails, cybersecurity breaches or other impacts to our information technology and related systems and networks (including any of the foregoing of third-party vendors and other contractors who provide information technology or other services);

• costs and results of litigation, including trial and appellate costs;

• economic, market or business conditions in the specific industry and market in which our businesses operate;

• future levels of capital expenditures, research and development and indebtedness, including, without limitation, our ability to reduce indebtedness and risks associated with the same;

• legal, regulatory, and environmental issues, including, without limitation, compliance of our products with mandated standards and specifications;

• integration of acquired businesses and our ability to realize synergies and cost savings.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made.

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, (4) general economic, market or business conditions, and (5) the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties.

Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

We are exposed to volatility in the prices of commodities used in some of our products and we may use fixed price cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.

Except as required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events, occurrences or developments after the date on which such statement is made.

For a discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, please see Item 1A “Risk Factors” included in our Annual Report on Form 10-K, and as otherwise disclosed from time to time in our other filings with the SEC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis