What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-03 · 103 added, 84 removed, 295 unchanged (39% of the section changed)

8 unchanged sentences

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

Foreign sales were approximately $20.3 million of our total net sales for the six months ended June 30, 2023 and $10.2 million of our sales during the same period of 2022.

Foreign sales were approximately $29.3 million of our total net sales for the nine months ended September 30, 2023 and $18.0 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.

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economy and global economy.

At June 30, 2023, the price (year to date average) for copper, stainless steel and aluminum increased 5.8%, 1.8%, and 25.8%, respectively, as compared to the price (year to date average) at June 30, 2022, while the price (year to date average) for galvanized steel decreased 30.8% as compared to the price (year to date average) at June 30, 2022.

At September 30, 2023, the price (year to date average) for copper, stainless steel and aluminum increased 1.2%, 5.0%, and 16.7%, respectively, as compared to the price (year to date average) at September 30, 2022, while the price (year to date average) for galvanized steel decreased 29.9% as compared to the price (year to date average) at September 30, 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.

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The following table shows our historical backlog levels:

September 30,

2023 December 31,

2022 June 30,

2022 September 30,

(in thousands)

$ 490,591 $ 548,022 $ 514,735

During the three months ended June 30, 2023, our production began to finally outpace bookings, allowing the size of our backlog to begin to normalize relative to production output.

We have made significant investments in facilities, hiring additional workforce and training our workforce which is increasing our capacity and production rates.

This has allowed our lead times to start and come down to more normal levels and put our backlog at a more manageable level.

While our backlog is down at September 30, 2023 compared to December 31, 2022, our bookings remain strong.

The year-ended December 31, 2022 was a record year for bookings and our backlog was swollen causing us to extend lead times.

Investments made in our facilities and workforce have significantly improved our capacity and operational efficiencies.

Production rates are at all time highs, trimming our backlog down to a more manageable size and allowing our lead times to improve.

Results of Operations

Three months ended June 30, Six months ended June 30,

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

2023 2022 2023 2022

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

• We continue to have a strong backlog despite our record sales for the three and six months ended June 30, 2023.

Total backlog decreased only 4.0% from December 31, 2022 and increased 13.4% from June 30, 2022.

• Sales for the three and six months ended June 30, 2023 grew 36.0% and 40.4%, respectively, due to record production rates and price increases realized during the period as compared to the quarter ended June 30, 2022.

• Our gross profit margin for the quarter ended June 30, 2023 of 33.1% increased 1,040 basis points from the quarter ended June 30, 2022.

• Sales for the three and nine months ended September 30, 2023 grew 28.6% and 35.9%, respectively, due to record production rates and price increases realized during the period as compared to the same periods in the prior year.

• Our gross profit margin for the quarter ended September 30, 2023 of 37.2% increased 1,020 basis points from the quarter ended September 30, 2022 due to increased organic volumes for operational efficiencies and better overhead absorption.

• We completed the repurchase of $25.0 million of shares under our current share repurchase authorization.

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 June 30, 2023 and Three Months Ended June 30, 2022

Segment Operating Results for Three Months Ended September 30, 2023 and Three Months Ended September 30, 2022

Three Months Ended

June 30, 2023 Percent of Sales 1

June 30, 2022 Percent of Sales 1

September 30, 2023 Percent of Sales 1

September 30, 2022 Percent of Sales 1

$ Change % Change

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2 Presented after intercompany eliminations.

For the three months ended June 30, 2023 total net sales increased $75.1 million or 36.0%, with 20.0% of the increase coming from realization of price increases and the remaining 16.0% coming from increases in organic volume.

Revenue synergies and lessening supply chain constraints contributed to the increase in net sales of 45.1% at BASX.

Gross profit as a percent of sales increased to 33.1% for the three months ended June 30, 2023 as compared to 22.7% for the three months ended June 30, 2022.

For the three months ended September 30, 2023 total net sales increased $69.4 million or 28.6%, with 16.7% of the increase coming from realization of price increases and the remaining 11.9% coming from increases in organic volume.

AAON Coil Products had a smaller backlog and realized price increases quicker than AAON Oklahoma.

This along with inefficiencies related to implementing a new production line of BASX product at AAON Coil Products lead to year over year decreases in sales for this segment.

Gross profit as a percent of sales increased to 37.2% for the three months ended September 30, 2023 as compared to 27.0% for the three months ended September 30, 2022.

As noted above, realization of price increases has improved our margin profile along with the slowing of inflation.

AAON Coil Products gross profit as a percent of sales decreased to 24.9% for the three months ended June 30, 2023 as compared to 31.7% for the three months ended June 30, 2022.

The decrease in gross margin at AAON Coil Products is a result of less than optimal overhead absorption from weather related production disruption.

Additionally, AAON Coil Products is more sensitive to changes in the cost of copper, which increased during the quarter.

Additionally, most of the organic growth noted above comes from our AAON Oklahoma segment, significantly improving overhead absorption and margin performance.

BASX has benefited from larger jobs as a result of the revenue synergies created by being part of AAON which allows them to have a higher production rate without increasing personnel.

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

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Raw Material Costs

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

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

2023 2022 % Change

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Three Months Ended Percent of Sales

2023 June 30,

September 30,

2023 September 30,

(in thousands)

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Total SG&A $ 51,470 $ 28,891 16.5 % 11.9 %

Selling, general and administrative expenses increased $12.3 million for the three months ended June 30, 2023 from the prior year period.

Selling, general and administrative expenses increased $22.6 million for the three months ended September 30, 2023 from the prior year period.

Profit sharing increased $3.2 million or 85.7% due to our increased operating results.

Salaries and benefits increased $3.0 million or 29.0% which is primarily attributable to overall increased headcount as well as the impact of employee pay increases and benefit improvements made in the first quarter of 2023.

Other expenses increased $2.8 million or 58.6% during the three months ended June 30, 2023 due mostly to increased travel and consulting expenses.

Depreciation and amortization has increased due to increased investments in back office technology and automation.

Professional fees increased $8.6 million during the three months ended September 30, 2023 due the litigation settlement (Note 17).

Other expenses increased $4.5 million or 109.0% during the three months ended September 30, 2023 due mostly to increased travel and consulting expenses.

Three Months Ended Effective Tax Rate

2023 June 30,

September 30,

2023 September 30,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2023 effective tax rate, excluding discrete events, is expected to be approximately 24.1%.

The decrease in the overall effective tax rate was primarily due to the change in our valuation allowance from the discontinuation of our participation in the state of Oklahoma’s manufacturing property investment program.

This change will allow the Company to utilize existing credit carryforwards in future tax years, eliminating the need for a valuation allowance against this deferred tax asset.

The related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the estimated income tax provision for the three months ended June 30, 2023.

Segment Operating Results for Six Months Ended June 30, 2023 and Six Months Ended June 30, 2022

Six Months Ended

June 30, 2023 Percent of Sales 1

June 30, 2022 Percent of Sales 1

During the quarter, we saw increases in our tax rate due to the finalization and filing of our 2022 tax return that resulted primarily from lower than expected federal research and development tax credit.

This was offset by a decrease in our tax rate as a result of higher estimated income for the State of Oklahoma and thus higher realization of our investment credit.

Segment Operating Results for Nine Months Ended September 30, 2023 and Nine Months Ended September 30, 2022

Nine Months Ended

September 30, 2023 Percent of Sales 1

September 30, 2022 Percent of Sales 1

$ Change % Change

(in thousands)

AAON Oklahoma $ 666,670 77.4 % $ 476,517 75.1 % $ 190,153 39.9 %

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2 Presented after intercompany eliminations.

For the six months ended June 30, 2023 total net sales increased $158.3 million or 40.4%, with approximately half of this increase coming from realization of price increase and half coming from increases in volume.

Gross profit as a percent of sales increased to 31.1% for the six months ended June 30, 2023 as compared to 23.9% for the six months ended June 30, 2022.

Total gross profit increased mostly due to the multiple price increases realized for the six months ended June 30, 2023 counteracting the increasing cost of materials and labor.

For the nine months ended September 30, 2023 total net sales increased $227.7 million or 35.9%, with approximately 19.3% coming from realization of price increase and 16.6% coming from increases in organic volumes.

Gross profit as a percent of sales increased to 33.3% for the nine months ended September 30, 2023 as compared to 25.1% for the nine months ended September 30, 2022.

Total gross profit increased mostly due to the multiple price increases realized for the nine months ended September 30, 2023 counteracting the increasing cost of materials and labor.

The increase in overall unit production volume, resulted in favorable labor and overhead efficiencies, improving absorption of fixed costs.

AAON Coil Products' gross profit as a percent of sales decreased to 23.1% for the six months ended June 30, 2023 as compared to 32.4% for the six months ended June 30, 2022 mostly due to less than optimal overhead absorption as discussed above.

AAON Coil Products' gross profit as a percent of sales decreased to 25.7% for the nine months ended September 30, 2023 as compared to 33.3% for the nine months ended September 30, 2022 mostly due to less than optimal overhead absorption as discussed above.

Start-up of production related to BASX units being built at AAON Coil Products was slower than anticipated and resulted in lower volumes.

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

During the six months ended June 30, 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.

During the nine months ended September 30, 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

Six-month average raw material cost per pound as of June 30:

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

2023 2022 % Change

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Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2023 June 30,

Nine Months Ended Percent of Sales

September 30,

2023 September 30,

(in thousands)

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Total SG&A $ 123,684 $ 78,880 14.4 % 12.4 %

Overall, selling, general and administrative expenses increased $22.2 million for the six months ended June 30, 2023 from the prior year period.

Warranty expense increased consistent with our increase in net sales as we continue to focus on our commitment to reliability and quality.

Overall, selling, general and administrative expenses increased $44.8 million for the nine months ended September 30, 2023 from the prior year period.

Profit sharing increased $9.2 million or 107.6% due to our increased operating results.

Salaries and benefits increased $6.3 million or 32.1% which is primarily attributable to overall increases in our workforce as well as the the impact of employee pay increases and benefit improvements.

Other expenses increased $4.2 million or 48.7% during the six months ended June 30, 2023 due mostly to increased travel and closing costs related to the 2023 New Market Tax Credit (Note 16).

Six months ended Effective Tax Rate

2023 June 30,

Professional fees increased $8.2 million during the three months ended September 30, 2023 due the litigation settlement (Note 17).

Other expenses increased $8.6 million or 68.2% during the nine months ended September 30, 2023 due mostly to increased travel and closing costs related to the 2023 New Market Tax Credit (Note 16).

Nine months ended Effective Tax Rate

September 30,

2023 September 30,

(in thousands)

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This change will allow the Company to utilize existing credit carryforwards in future tax years, eliminating the need for a valuation allowance against this deferred tax asset.

The related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the estimated income tax provision for the three months ended June 30, 2023.

Additionally during the six months ended June 30, 2023, the Company recorded an excess tax benefit of $5.8 million as compared to $0.7 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 six months ended June 30, 2023.

The related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the estimated income tax provision for the nine months ended September 30, 2023.

Additionally during the nine months ended September 30, 2023, the Company recorded an excess tax benefit of $6.3 million as compared to $1.3 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 nine months ended September 30, 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 decreased $0.2 million from December 31, 2022 to June 30, 2023 and totaled $5.2 million at June 30, 2023.

Working Capital - Our unrestricted cash decreased $5.2 million from December 31, 2022 to September 30, 2023 and totaled $0.2 million at September 30, 2023.

Our restricted cash increased $21.8 million from the closing of our recent New Markets Tax Credit related to our Longview, Texas Expansion.

We expect most funds will be released from this account by the end of 2023 and used to pay down our revolving line of credit.

We expect most funds will be released from this account by the end of 2023.

The funds will be used to pay down our revolving line of credit.

We have also seen increases in our current income tax payable due to the tax law changes surrounding the capitalization of research and development costs.

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

As of June 30, 2023 and December 31, 2022, we had $78.5 million and $71.0 million, respectively, outstanding under the Revolver.

We had one standby letter of credit totaling $0.3 million as of June 30, 2023.

At June 30, 2023, we have $121.2 million of borrowings available under the Revolver.

As of September 30, 2023 and December 31, 2022, we had $78.4 million and $71.0 million, respectively, outstanding under the Revolver.

We had two standby letters of credit totaling $2.3 million as of September 30, 2023.

At September 30, 2023, we have $119.3 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 6.3% and 6.2% for the three and six months ended June 30, 2023.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and six months ended June 30, 2023 and 2022.

The weighted average interest rate on borrowings outstanding on the Revolver was 6.5% and 6.3% for the three and nine months ended September 30, 2023.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and nine months ended September 30, 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 June 30, 2023, we were in compliance with our financial covenants, as defined by the Revolver.

At September 30, 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 June 30, 2023, our leverage ratio was 0.37 to 1.0, which meets the requirement of not being above 3 to 1.

At September 30, 2023, our leverage ratio was 0.33 to 1.0, which meets the requirement of not being above 3 to 1.

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”).

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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 the NMTCs.

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 “2023 Project”).

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 “2023 Project”).

In connection with the 2023 NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2023 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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The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board.

2 As of September 30, 2023, there is approximately $25.0 million remaining under the current stock repurchase program.

The Company repurchases shares of AAON, Inc.

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Our repurchase activity is as follows:

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended

September 30, 2023 September 30, 2022

(in thousands, except share and per share data)

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

Program Shares 1

Total $ $ per share 1

Open market 402,873 $ 25,009 $ 62.08 53,218 $ 2,030 $ 38.14

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423,091 $ 26,211 $ 61.95 234,011 $ 8,921 $ 38.12

1 Reflects three-for-two stock split effective August 16, 2023.

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

Inception to June 30, 2023

Inception to September 30, 2023

(in thousands, except share and per share data)

Program Shares Total $ $ per share

Program Shares 1

Total $ $ per share 1

Open market 6,893,924 $ 106,625 $ 15.47

2 unchanged sentences

22,444,127 $ 302,976 $ 13.50

1 Reflects three-for-two stock split effective August 16, 2023.

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

3 unchanged sentences

Record Date Payment Date Dividend

per Share Annualized Dividend

Annualized Dividend

May 18, 2022 June 3, 2022 July 1, 2022 $0.13 $0.26

2 unchanged sentences

May 18, 2023 June 9, 2023 June 30, 2023 $0.08 $0.32

August 18, 2023 September 8, 2023 September 29, 2023 $0.08 $0.32

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.

On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company's common stock to be paid in the form of a stock dividend.

Stockholders of record at the close of business on July 28, 2023 will receive one additional share for every two shares they hold as of that date on August 16, 2023 (ex-dividend date August 17, 2023).

2 Reflects three-for-two stock split effective August 16, 2023.

On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company's common stock that was paid in the form of a stock dividend.

Stockholders of record at the close of business on July 28, 2023 received one additional share for every two shares they held as of that date on August 16, 2023 (ex-dividend date August 17, 2023).

All share and per share information has been updated to reflect the effects of this stock split.

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 six months ended June 30, 2023 and 2022.

The following table reflects the major categories of cash flows for the nine months ended September 30, 2023 and 2022.

For additional details, see the consolidated financial statements.

Six Months Ended

2023 June 30,

Nine Months Ended

September 30,

2023 September 30,

(in thousands)

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Accrued liabilities & other long-term liabilities 21,405 12,857

Net cash provided by (used in) operating activities 59,940 (1,580)

Net cash provided by operating activities

107,145 43,414

Investing Activities

3 unchanged sentences

Net cash used in investing activities

(82,732) (63,782)

Financing Activities

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Cash dividends paid to stockholders (19,946) (10,096)

Net cash provided by financing activities $ 22,273 $ 65,740

Net cash (used in) provided by financing activities

$ (7,827) $ 28,149

Cash Flows Provided by Operating Activities

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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.

We have also seen increases in our current income tax payable due to the tax law changes surrounding the capitalization of research and development costs.

This has increased our cash paid for income taxes.

The increase in our accrued liabilities and other long-term liabilities is due litigation settlement (Note 17) accrued at September 30, 2023.

Cash Flows Used in Investing Activities

The capital expenditures for the six months ended June 30, 2023 relate to our continued investment in our production capabilities.

Purchases during the six months ended June 30, 2023 relate to additional sheetmetal and other machinery for both replacement and growth, additional warehouse space in Longview, Texas, additional office space in Tulsa, Oklahoma, additional land in Tulsa, Oklahoma for future growth, and a partial interest in an airplane.

The capital expenditures for the nine months ended September 30, 2023 relate to our continued investment in our production capabilities.

Purchases during the nine months ended September 30, 2023 relate to additional sheet metal and other machinery for both replacement and growth, additional production and warehouse space in Longview, Texas, additional office space in Tulsa, Oklahoma, additional land in Tulsa, Oklahoma for future growth, and a partial interest in an airplane.

The capital expenditure program for 2023 is estimated to be approximately $100.0 million.

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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 six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Stock options exercised increased due to the increase in the number of employee options exercised and increase in our average stock price during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Additionally, we repurchased approximately 402,873 shares for approximately $25.0 million during the nine months ended September 30, 2023 under our current stock repurchase program (Note 15).

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.

The second quarter dividend was paid on June 30, 2023.

The third quarter dividend was paid on September 29, 2023.

Commitments and Contractual Obligations

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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 June 30, 2023 except as described below.

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

As of September 30, 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 was made on October 30, 2023.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2023.

There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2023.

Recent Accounting Pronouncements

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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