AAON, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. This discussion contains or incorporates by reference “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the SEC or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled “Forward-Looking Statements” in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law. Overview We engineer, manufacture, market, and sell premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data center cooling solutions, cleanroom systems, 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 $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. 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, 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. - 26 - We sell our products to property owners and contractors mainly through a network of independent manufacturers’ Representatives. This go-to-market strategy is unique compared to most of our larger competitors in that most control their sales channel. We value the independent sales channel as we think it is a more effective way of increasing market share. Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople. Furthermore, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer. We also have a small internal sales force that supports the relationships between the Company and our sales channel partners. BASX sells highly customized products for unique applications 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 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, 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. 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 through April 1, 2023. Backlog The following table shows our historical backlog levels: September 30, 2023 December 31, 2022 September 30, 2022 (in thousands) $ 490,591 $ 548,022 $ 514,735 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 September 30, Nine months ended September 30, 2023 2022 2023 2022 (in thousands) Net Sales $ 311,970 $ 242,605 $ 861,880 $ 634,190 Cost of Sales 195,861 177,014 574,599 475,159 Gross Profit 116,109 65,591 287,281 159,031 Selling, general and administrative expenses 51,470 28,891 123,684 78,880 Loss (gain) on disposal of assets (25) — (13) (12) Income from operations $ 64,664 $ 36,700 $ 163,610 $ 80,163 - 27 - The following are recent highlights and items that impacted our results of operations, cash flows and financial condition: • 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: AAON Oklahoma, AAON Coil Products, and BASX, which are further described in "Segments" (Note 19) within our notes to the consolidated financial statements. The Company's chief operating decision maker ("CODM"), our CEO, allocates resources and assesses the performance of each operating segment using information about the operating segment's net sales and income from operations. The CODM does not evaluate operating segments using asset or liability information. Segment Operating Results for Three Months Ended September 30, 2023 and Three Months Ended September 30, 2022 Three Months Ended September 30, 2023 Percent of Sales 1 September 30, 2022 Percent of Sales 1 $ Change % Change (in thousands) Net Sales 2 AAON Oklahoma $ 246,454 79.0 % $ 179,169 73.9 % $ 67,285 37.6 % AAON Coil Products 25,769 8.3 % 30,504 12.6 % (4,735) (15.5) % BASX 39,747 12.7 % 32,932 13.6 % 6,815 20.7 % Net sales $ 311,970 $ 242,605 $ 69,365 28.6 % Cost of Sales 2 AAON Oklahoma $ 152,280 61.8 % 133,526 74.5 % $ 18,754 14.0 % AAON Coil Products 17,462 67.8 % 19,940 65.4 % (2,478) (12.4) % BASX 26,119 65.7 % 23,548 71.5 % 2,571 10.9 % Cost of sales $ 195,861 62.8 % $ 177,014 73.0 % $ 18,847 10.6 % Gross Profit 2 AAON Oklahoma $ 94,174 38.2 % $ 45,643 25.5 % $ 48,531 106.3 % AAON Coil Products 8,307 32.2 % 10,564 34.6 % (2,257) (21.4) % BASX 13,628 34.3 % 9,384 28.5 % 4,244 45.2 % Gross profit $ 116,109 37.2 % $ 65,591 27.0 % $ 50,518 77.0 % 1 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment's net sales. Total cost of sales and total gross profit are calculated as a percentage of total net sales. 2 Presented after intercompany eliminations. 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. 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. - 28 - As shown in the table below, we've experienced year over year increases in the cost of several raw materials. We implemented multiple price increases during 2022 and 2023 to counteract the increased cost of material. Some of the price increases have yet to be realized. Additionally, in order to retain our existing employees, we continue to award periodic raises in addition to our annual merit raises to our employees. Raw Material Costs Three-month average raw material cost per pound as of September 30: 2023 2022 % Change Copper $ 5.45 $ 5.83 (6.5) % Galvanized steel $ 0.59 $ 0.82 (28.0) % Stainless steel $ 3.31 $ 2.94 12.6 % Aluminum $ 2.45 $ 2.55 (3.9) % Selling, General and Administrative Expenses Three Months Ended Percent of Sales September 30, 2023 September 30, 2022 2023 2022 (in thousands) Warranty $ 4,248 $ 3,046 1.4 % 1.3 % Profit sharing 6,954 3,744 2.2 % 1.5 % Salaries & benefits 13,106 11,644 4.2 % 4.8 % Stock compensation 2,476 1,537 0.8 % 0.6 % Advertising 646 375 0.2 % 0.2 % Depreciation & amortization 3,943 2,015 1.3 % 0.8 % Insurance 1,403 902 0.4 % 0.4 % Professional fees 9,914 1,304 3.2 % 0.5 % Donations 226 232 0.1 % 0.1 % Other 8,554 4,092 2.7 % 1.7 % Total SG&A $ 51,470 $ 28,891 16.5 % 11.9 % 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. 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. Income Taxes Three Months Ended Effective Tax Rate September 30, 2023 September 30, 2022 2023 2022 (in thousands) Income tax provision $ 15,413 $ 8,327 24.3 % 23.3 % The Company’s estimated annual 2023 effective tax rate, excluding discrete events, is expected to be approximately 24.1%. 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. - 29 - 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 Net Sales 2 AAON Oklahoma $ 666,670 77.4 % $ 476,517 75.1 % $ 190,153 39.9 % AAON Coil Products 89,262 10.4 % 79,193 12.5 % 10,069 12.7 % BASX 105,948 12.3 % 78,480 12.4 % 27,468 35.0 % Net sales $ 861,880 $ 634,190 $ 227,690 35.9 % Cost of Sales 2 AAON Oklahoma $ 435,267 65.3 % 365,301 76.7 % $ 69,966 19.2 % AAON Coil Products 66,314 74.3 % 52,849 66.7 % 13,465 25.5 % BASX 73,018 68.9 % 57,009 72.6 % 16,009 28.1 % Cost of sales $ 574,599 66.7 % $ 475,159 74.9 % $ 99,440 20.9 % Gross Profit 2 AAON Oklahoma $ 231,403 34.7 % $ 111,216 23.3 % $ 120,187 108.1 % AAON Coil Products 22,948 25.7 % 26,344 33.3 % (3,396) (12.9) % BASX 32,930 31.1 % 21,471 27.4 % 11,459 53.4 % Gross profit $ 287,281 33.3 % $ 159,031 25.1 % $ 128,250 80.6 % 1 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment's net sales. Total cost of sales and total gross profit are calculated as a percentage of total net sales. 2 Presented after intercompany eliminations. 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 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. The cost of our material fluctuates month-to-month. We implemented multiple price increases during 2022 and 2023 to counteract the increased cost of material. Some of the price increases have yet to be realized. 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 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. - 30 - Raw Material Costs Nine-month average raw material cost per pound as of September 30: 2023 2022 % Change Copper $ 5.68 $ 5.61 1.2 % Galvanized steel $ 0.68 $ 0.97 (29.9) % Stainless steel $ 3.33 $ 3.17 5.0 % Aluminum $ 2.44 $ 2.09 16.7 % Selling, General and Administrative Expenses Nine Months Ended Percent of Sales September 30, 2023 September 30, 2022 2023 2022 (in thousands) Warranty $ 9,782 $ 6,556 1.1 % 1.0 % Profit sharing 17,772 8,559 2.1 % 1.3 % Salaries & benefits 39,229 31,419 4.6 % 5.0 % Stock compensation 6,825 5,220 0.8 % 0.8 % Advertising 2,505 2,006 0.3 % 0.3 % Depreciation & amortization 9,812 5,768 1.1 % 0.9 % Insurance 3,834 2,477 0.4 % 0.4 % Professional fees 11,895 3,686 1.4 % 0.6 % Donations 780 557 0.1 % 0.1 % Other 21,250 12,632 2.5 % 2.0 % Total SG&A $ 123,684 $ 78,880 14.4 % 12.4 % 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. 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). Income Taxes Nine months ended Effective Tax Rate September 30, 2023 September 30, 2022 2023 2022 (in thousands) Income tax provision $ 29,447 $ 17,286 18.4 % 21.9 % 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 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. - 31 - 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 $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. 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. This has increased our cash paid for income taxes. Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides for maximum borrowings of $200.0 million. 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. 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). Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. The weighted average interest rate on borrowings outstanding on the Revolver was 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 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 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”). In connection with the NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2019 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 2019 NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities, and a guarantee from the Company, including an unconditional guarantee of 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”). 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. 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 the NMTCs. - 32 - 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. 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. Our open market repurchase programs are as follows: Effective Date Authorized Repurchase $ Expiration Date March 13, 2020 $20 million November 9, 2022 November 3, 2022 $50 million ** 1, 2 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. 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. 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. The 401(k) Plan was amended in June 2022 to discontinue this program. No additional shares have been purchased by the Company under this arrangement since June 2022. Our repurchase activity is as follows: Nine Months Ended September 30, 2023 September 30, 2022 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Shares 1 Total $ $ per share 1 Open market 402,873 $ 25,009 $ 62.08 53,218 $ 2,030 $ 38.14 401(k) — — — 155,904 5,913 37.93 Employees 20,218 1,202 59.45 24,889 978 39.29 Total 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 September 30, 2023 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Open market 6,893,924 $ 106,625 $ 15.47 401(k) 12,462,552 171,789 13.78 Directors and employees 3,087,651 24,562 7.95 Total 22,444,127 $ 302,976 $ 13.50 1 Reflects three-for-two stock split effective August 16, 2023. - 33 - 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 2 Annualized Dividend per Share 2 May 18, 2022 June 3, 2022 July 1, 2022 $0.13 $0.26 November 8, 2022 November 28, 2022 December 16, 2022 $0.16 $0.32 March 1, 2023 March 13, 2023 March 31, 2023 $0.08 $0.32 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. 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. - 34 - Statement of Cash Flows 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. Nine Months Ended September 30, 2023 September 30, 2022 (in thousands) Operating Activities Net Income $ 130,574 $ 61,478 Income statement adjustments, net 44,706 37,206 Changes in assets and liabilities: Accounts receivable (32,040) (63,593) Income taxes (12,472) 3,782 Inventories (18,547) (47,998) Contract assets (10,155) (3,843) Prepaid expenses and other long-term assets (896) (70) Accounts payable (15,631) 18,616 Contract liabilities (1,848) 24,249 Extended warranties 2,049 730 Accrued liabilities & other long-term liabilities 21,405 12,857 Net cash provided by operating activities 107,145 43,414 Investing Activities Capital expenditures (82,900) (41,586) Cash paid for building (Note 18) — (22,000) Cash paid in business combination, net of cash acquired — (249) Other 168 53 Net cash used in investing activities (82,732) (63,782) Financing Activities Proceeds from financing obligations, net of issuance costs 6,061 — Payment related to financing costs (398) — Borrowings under revolving credit facility 444,072 151,103 Payments under revolving credit facility (436,656) (114,812) Principal payments on financing lease — (115) Stock options exercised 25,251 10,990 Repurchase of stock (25,009) (7,943) Employee taxes paid by withholding shares (1,202) (978) Cash dividends paid to stockholders (19,946) (10,096) Net cash (used in) provided by financing activities $ (7,827) $ 28,149 Cash Flows Provided by Operating Activities The Company currently manages cash needs through working capital as well as drawing on its line of credit. Collections and payments cycles are on a normal pattern and fluctuate due to timing of receipts and payments. 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. Increases in the timing of our customer prepayment as well as increases in our employee bonuses pools and benefits (as a result of our positive operating results) increased our cash provided by accrued liabilities. 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. - 35 - 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 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. 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 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 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 third quarter dividend was paid on September 29, 2023. 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 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 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 nine months ended September 30, 2023. Recent Accounting Pronouncements See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements. - 36 - 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; and • 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. 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. - 37 -