What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-27 · 123 added, 98 removed, 254 unchanged (47% of the section changed)

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Description of the Company

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

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

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

AAON is a leader in HVAC solutions for commercial and industrial indoor environments.

The company’s industry-leading approach to designing and manufacturing highly configurable equipment to meet exact needs creates a premier ownership experience with greater efficiency, performance, and long-term value.

AAON is headquartered in Tulsa, Oklahoma, where its world-class innovation center and testing capabilities enable continuous advancement toward a cleaner and more sustainable future.

We engineer, manufacture, and sell premium heating, ventilation, and air conditioning equipment consisting of 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 a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets.

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

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.

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

Since mid-2021, nonresidential construction spending has been strong, recovering well beyond pre-2020 levels and finishing 2023 near record levels.

Recently, however, certain leading indicators, including architectural billings and construction starts, signal a slowing in construction spending within the next 12 months.

Furthermore, some economic general indicators are suggesting the general economy is slowing, which could also impact the replacement market.

If the domestic economy were to slow or enter a recession, this could result in a decline 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.

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

The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S.

economy and global economy.

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

The price levels of our raw materials fluctuate due to various economic factors within the U.S.

and global economy.

For the year ended December 31, 2023, the prices for copper, galvanized steel, and stainless steel decreased by approximately 4.5%, 38.9%, and 3.3%, respectively, and aluminum increased by approximately 15.5% from 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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We occasionally increase the price of our products to help offset any inflationary headwinds.

In recent years, price increases have been more frequent due to the amount of inflation the business has endured.

In 2021, we implemented three price increases.

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

In 2022, we implemented two significant price increases as well as a recurring 1% monthly price increase beginning June 1, 2022 and ending on April 1, 2023.

We reinstated a recurring 1% monthly price increase on October 1, 2023 and carried that through February 1, 2024.

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

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below the SLT level.

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

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

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$ 510,028 $ 548,022

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

While our backlog is down at December 31, 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 elevated 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.

Consolidated Results of Operations

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

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

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

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

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

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

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

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

• Net sales for 2023 grew 31.5% to $1,168.5 million due to record production rates and price increases realized during the period as compared to the same period in the prior year.

• Overall gross margin increased 740 basis points in 2023 due to increased organic volumes for operational efficiencies and better overhead absorption.

• We continue to invest in the future growth of the Company as evidenced by our $104.3 million in capital expenditures in 2023, an increase $50.3 million or 93.1% when compared to 2022 .

• 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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AAON Coil Products 112,320 9.6 % 107,290 12.1 % 5,030 4.7 %

117,653 13.2 % 4,083 0.8 % 113,570 2781.5 %

BASX 158,279 13.5 % 117,653 13.2 % 40,626 34.5 %

Net sales $ 1,168,518 $ 888,788 $ 279,730 31.5 %

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AAON Coil Products 82,996 73.9 % 73,979 69.0 % 9,017 12.2 %

86,375 73.4 % 3,196 78.3 % 83,179 2602.6 %

BASX 108,650 68.6 % 86,375 73.4 % 22,275 25.8 %

Cost of sales $ 769,498 65.9 % $ 651,216 73.3 % $ 118,282 18.2 %

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AAON Coil Products 29,324 26.1 % 33,311 31.0 % (3,987) (12.0) %

31,278 26.6 % 887 21.7 % 30,391 3426.3 %

BASX 49,629 31.4 % 31,278 26.6 % 18,351 58.7 %

Gross profit $ 399,020 34.1 % $ 237,572 26.7 % $ 161,448 68.0 %

1 BASX was acquired on December 10, 2021.

We have included the results of BASX's operations in our consolidated financial statements as of December 11, 2021.

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

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2 Presented after intercompany eliminations.

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

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

AAON Coil Products gross profit increased significantly to 31.0%.

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

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

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

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

Total net sales increased $279.7 million, or 31.5%, with 17.0% of the increase coming from realization of price increases and the remaining 14.5% coming from increases in organic volume.

AAON Coil Products had a smaller backlog and along with inefficiencies related to implementing a new production line of BASX product at AAON Coil Products led to smaller year over year increase sales for this segment.

The increase in BASX net sales is primarily related to large jobs in the data center market as a result of the revenue synergies created by being part of AAON.

Gross profit as a percent of sales increased to 34.1% during 2023 as compared 26.7% in 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.

The increase in net sales at BASX has improved their overhead absorption, thus increasing their gross profit margin year over year.

As shown in the table below, we've experienced year over year fluctuations 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 attract new employees and remain competitive in tight labor markets, we implemented several wage increases in late 2021 and throughout 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.

Raw Material Costs

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Total SG&A $ 171,539 $ 110,823 14.7 % 12.5 %

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

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

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

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

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

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

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

Selling, general and administrative expenses increased $60.7 million or 54.8% during 2023 as compared to the prior year.

As a percentage of sales, selling, general and administrative increased from 12.5% to 14.7%.

Most of the increase is due to professional fees that increased $9.6 million due to the litigation settlement (Note 18).

Profit sharing increased $10.6 million or 75.5% due to our increased operating results.

Other expenses increased $11.0 million or 58.0% during year due mostly to increased travel, consulting expenses and closing costs related to the 2023 New Market Tax Credit (Note 17).

Years Ended December 31, Effective Tax Rate

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Income tax provision $ 45,531 $ 24,157 20.4 % 19.4 %

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

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

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

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

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

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

The Company’s estimated annual 2023 effective tax rate, excluding discrete events, was 23.8%.

The increase year over year in the overall effective tax rate was primarily due the non-deductible executive compensation.

In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 162(m), the tax deduction for covered executives of public companies is limited to $1.0 million per individual.

Because of our high stock price and timing of executive stock option exercises this resulted in an increase to the income tax provision of $3.8 million for the year ended December 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 and cash equivalents increased $2.6 million from December 31, 2021 to December 31, 2022.

Working Capital - Our unrestricted cash and cash equivalents decreased $5.2 million from December 31, 2022 to December 31, 2023.

As of December 31, 2023, we had $9.0 million in cash and cash equivalents and restricted cash.

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As of December 31, 2023 and December 31, 2022, we had an outstanding balance under the Revolver of $38.3 million and $71.0 million, respectively.

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

We had two standby letters of credit totaling $2.3 million as of December 31, 2023 and one standby letter of credit totaling $0.8 million as of December 31, 2022.

Borrowings available under the Revolver at December 31, 2023, were $159.4 million.

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At December 31, 2023, our leverage ratio was 0.15 to 1.0, which meets the requirement of not being above 3 to 1.

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”).

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 2019 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 2019 Project.

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This $15.9 million in proceeds plus capital contributed from the 2019 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 NMTCs.

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 2023 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.

The net proceeds from the closing of the 2023 NMTC is included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.

2024 New Markets Tax Credit - On February 27, 2024, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2024 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2024 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in real estate to facilitate the current expansion of our Longview, Texas manufacturing operations (the “Project”).

In connection with the 2024 NMTC transaction, the Company received a $15.5 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 2024 NMTC transaction, the Company provided an aggregate of approximately $11.0 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 $11.0 million in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 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 Repurchase - The Board has authorized stock repurchase programs for the Company.

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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 December 31, 2023, there is approximately $25.0 million remaining under the current stock repurchase program.

The remaining amount available is subject to a Board authorized 10b5-1 plan requiring certain market conditions and requirements.

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

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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.

stock from certain of its employees for payment of statutory tax withholdings on stock transactions.

All other repurchases from directors or employees are contingent upon Board approval.

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(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 $ 62.08 183,168 $ 6,823 $ 37.25

401(k) — — — 155,904 5,913 37.93

Directors and employees 17,228 1,019 59.15 22,526 1,590 70.59

Employees 21,904 1,302 59.44 25,842 1,019 39.43

Total 424,777 $ 26,311 $ 61.94 364,914 $ 13,755 $ 37.69

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

Inception to Date

(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

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Total 22,445,813 $ 303,076 $ 13.50

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

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

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Our recent dividends are as follows:

Declaration Date Record Date Payment Date Dividend per Share

Dividend Annualized Dividend

Declaration Date 1

Record Date Payment Date 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

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

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

November 10, 2023 November 29, 2023 December 18, 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 2024 and the foreseeable future.

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Net cash provided by operating activities

158,895 61,318

Investing Activities

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

Acquisition of intangible assets (5,197) —

Net cash used in investing activities (109,311) (76,213)

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Payments under revolving credit facility (629,787) (194,754)

Proceeds from financing obligation, net of issuance costs 6,061 —

Payment related to financing costs (398) —

Principal payments on financing lease — (115)

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Cash dividends paid to stockholders (26,445) (22,917)

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

Net cash (used in) provided by financing activities $ (46,510) $ 17,357

Cash Flows from Operating Activities

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

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.

The decrease in cash flows from receivables was a result of a larger volume of sales in the fourth quarter of 2022 in addition to higher priced receivables at the end of 2022.

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

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

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

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

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

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.

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

This defers our current period income tax deduction which increased our income tax payments due at the end of 2022.

Cash Flows from Investing Activities

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

The capital expenditures increase during 2023 related to our continued investment in our production capabilities.

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

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Cash Flows from Financing Activities

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

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

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

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

We expect to continue paying cash dividends.

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 2023 as compared to the previous period.

Additionally, we repurchased approximately 424,777 shares for approximately $26.3 million during 2023 (Note 16).

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 Agreements

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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 December 31, 2022, except as noted below.

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

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

The final payment will be made in 2023.

In 2023, the Company executed a five-year purchase commitment for refrigerants.

In 2023, the Company made payments of $10.1 million on this contract.

Estimated minimum future payments are $11.9 million, $9.1 million, $10.5 million, and $11.2 million for 2024, 2025, 2026, and 2027, respectively.

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

Contingencies

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

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

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

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

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

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

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

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

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

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

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

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

These models requires the use of subjective inputs and assumptions such as expected useful lives, growth of existing customers, attrition of customers, future margins and expenses, discount rates, and future revenue growth.

These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.

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

Our definite-lived intangible assets have estimated used lives of between 14 and 30 years.

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

Goodwill and Indefinite-Lived Intangible Assets – Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed.

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

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

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

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

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

The estimates and assumptions we use in the annual impairment assessment

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

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

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

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

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

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

The fair value of the contingent consideration was determined using the Option Pricing Method through a Monte Carlo simulation, as this model is appropriate for contingent considerations for which the payoff structure is nonlinear.

The use of this model requires the input of subjective inputs and assumptions such as:

future earnings, the expected volatility of future earnings, risk-free rate, discount rate, and future stock performance.

These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.

New Accounting Pronouncements

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

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:

Codification Amendments in Response to SEC's Disclosure Update and Simplification Initiative.

The new guidance is intended to update a variety of disclosure requirements.

The effective date for each amendment will be the date on with the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective.

Early adoption is prohibited.

Upon adoption, this ASU is not expected to have a material impact on the Company's financial statements and related disclosures.

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280).

The new guidance improves reportable segment disclosures primarily through enhanced disclosures about significant segment expenses and by requiring current annual disclosures to be provided in interim periods.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

Upon adoption, this ASU is not expected to have a material impact on the Company's financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740).

The new guidance is intended to enhance the transparency and decision usefulness of income tax disclosures.

The amendments in this ASU are effective for annual periods beginning after December 15, 2024.

Upon adoption, this ASU is not expected to have a material impact on the Company's financial statements and related disclosures.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis