AAON, INC. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 34 Consolidated Balance Sheets 35 Consolidated Statements of Income 36 Consolidated Statements of Stockholders’ Equity 37 Consolidated Statements of Cash Flows 38 Notes to Consolidated Financial Statements 39 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders AAON, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2024 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2004. Tulsa, Oklahoma February 28, 2024 34 AAON, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2023 2022 Assets (in thousands, except share and per share data) Current assets: Cash and cash equivalents $ 287 $ 5,451 Restricted cash 8,736 498 Accounts receivable, net 138,108 127,158 Inventories, net 213,532 198,939 Contract assets 45,194 15,151 Prepaid expenses and other 3,097 1,919 Total current assets 408,954 349,116 Property, plant and equipment: Land 15,438 8,537 Buildings 205,841 169,156 Machinery and equipment 391,366 342,045 Furniture and fixtures 40,787 30,033 Total property, plant and equipment 653,432 549,771 Less: Accumulated depreciation 283,485 245,026 Property, plant and equipment, net 369,947 304,745 Intangible assets, net 68,053 64,606 Goodwill 81,892 81,892 Right of use assets 11,774 7,123 Other long-term assets 816 6,421 Total assets $ 941,436 $ 813,903 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 27,484 $ 45,513 Accrued liabilities 85,508 78,630 Contract liabilities 13,757 21,424 Total current liabilities 126,749 145,567 Revolving credit facility, long-term 38,328 71,004 Deferred tax liabilities 12,134 18,661 Other long-term liabilities 16,807 11,508 New markets tax credit obligations 1 12,194 6,449 Commitments and contingencies (Note 18) Stockholders’ equity: Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued — — Common stock, $ .004 par value, 100,000,000 shares authorized, 81,508,381 and 80,137,776 issued and outstanding at December 31, 2023 and 2022, respectively 2 326 322 Additional paid-in capital 122,063 98,735 Retained earnings 2 612,835 461,657 Total stockholders’ equity 735,224 560,714 Total liabilities and stockholders’ equity $ 941,436 $ 813,903 1 Held by variable interest entities (Note 17) 2 Reflects three-for-two stock split effective August 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 35 AAON, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2023 2022 2021 (in thousands, except share and per share data) Net sales $ 1,168,518 $ 888,788 $ 534,517 Cost of sales 769,498 651,216 396,687 Gross profit 399,020 237,572 137,830 Selling, general and administrative expenses 171,539 110,823 68,598 Gain on disposal of assets ( 13 ) ( 12 ) ( 21 ) Income from operations 227,494 126,761 69,253 Interest expense, net ( 4,843 ) ( 2,627 ) ( 132 ) Other income, net 503 399 61 Income before taxes 223,154 124,533 69,182 Income tax provision 45,531 24,157 10,424 Net income $ 177,623 $ 100,376 $ 58,758 Earnings per share: Basic 1 $ 2.19 $ 1.26 $ 0.75 Diluted 1 $ 2.13 $ 1.24 $ 0.73 Cash dividends declared per common share 1 : $ 0.32 $ 0.29 $ 0.25 Weighted average shares outstanding: Basic 1 81,156,114 79,582,480 78,606,298 Diluted 1 83,295,290 81,145,610 80,593,484 1 Reflects three-for-two stock split effective August 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 36 AAON, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity Common Stock Paid-in Retained Shares 1 Amount 1 Capital Earnings 1 Total (in thousands) Balance at December 31, 2020 78,337 $ 317 $ 5,161 $ 345,387 $ 350,865 Net income — — — 58,758 58,758 Stock options exercised and restricted 935 2 21,146 — 21,148 stock awards granted Share-based compensation — — 11,812 — 11,812 Stock repurchased and retired ( 480 ) ( 1 ) ( 22,465 ) — ( 22,466 ) Contingent consideration (Note 4) — — 66,000 — 66,000 Dividends — — — ( 19,947 ) ( 19,947 ) Balance at December 31, 2021 78,792 318 81,654 384,198 466,170 Net income — — — 100,376 100,376 Stock options exercised and restricted 1,711 5 23,135 — 23,140 stock awards granted Share-based compensation — — 13,700 — 13,700 Stock repurchased and retired ( 365 ) ( 1 ) ( 13,754 ) — ( 13,755 ) Contingent consideration (Note 4) — — ( 6,000 ) — ( 6,000 ) Dividends — — — ( 22,917 ) ( 22,917 ) Balance at December 31, 2022 80,138 322 98,735 461,657 560,714 Net income — — — 177,623 177,623 Stock options exercised and restricted 1,795 7 33,252 — 33,259 stock awards granted Share-based compensation — — 16,384 — 16,384 Stock repurchased and retired ( 425 ) ( 3 ) ( 26,308 ) — ( 26,311 ) Dividends — — — ( 26,445 ) ( 26,445 ) Balance at December 31, 2023 81,508 $ 326 $ 122,063 $ 612,835 $ 735,224 1 Reflects three-for-two stock split effective August 16, 2023. The accompanying notes are an integral part of these consolidated financial statements. 37 AAON, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2023 2022 2021 Operating Activities (in thousands) Net income $ 177,623 $ 100,376 $ 58,758 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 46,468 35,106 30,343 Amortization of debt issuance costs 82 43 43 Amortization of right of use assets 324 324 73 (Recoveries of) provision for credit losses on accounts receivable, net of adjustments ( 154 ) ( 72 ) 43 Provision for excess and obsolete inventories, net of write-offs 1,633 2,740 629 Share-based compensation 16,384 13,700 11,812 Gain on disposition of assets ( 13 ) ( 12 ) ( 21 ) Foreign currency transaction (gain) loss ( 10 ) 41 ( 1 ) Interest income on note receivable ( 21 ) ( 22 ) ( 24 ) Deferred income taxes ( 6,527 ) ( 13,332 ) 3,669 Changes in assets and liabilities: Accounts receivable ( 9,978 ) ( 56,306 ) ( 9,737 ) Income taxes ( 11,302 ) 18,195 ( 1,136 ) Inventories ( 16,226 ) ( 71,409 ) ( 45,955 ) Contract assets ( 30,043 ) ( 9,402 ) 1,886 Prepaid expenses and other long-term assets ( 1,048 ) ( 2,367 ) 1,374 Accounts payable ( 18,316 ) 11,574 10,899 Contract liabilities ( 7,667 ) 13,882 ( 229 ) Extended warranties 2,600 1,314 447 Accrued liabilities and other long-term liabilities 15,086 16,945 ( 1,690 ) Net cash provided by operating activities 158,895 61,318 61,183 Investing Activities Capital expenditures ( 104,294 ) ( 54,024 ) ( 55,362 ) Cash paid for building (Note 4) — ( 22,000 ) — Cash paid in business combination, net of cash acquired — ( 249 ) ( 103,430 ) Proceeds from sale of property, plant and equipment 129 12 19 Acquisition of intangible assets ( 5,197 ) — — Principal payments from note receivable 51 48 54 Net cash used in investing activities ( 109,311 ) ( 76,213 ) ( 158,719 ) Financing Activities Borrowings under revolving credit facility 597,111 225,758 40,000 Payments under revolving credit facility ( 629,787 ) ( 194,754 ) — Proceeds from financing obligation, net of issuance costs 6,061 — — Payments related to financing costs ( 398 ) — — Principal payments on financing lease — ( 115 ) — Stock options exercised 33,259 23,140 21,148 Repurchase of stock ( 25,009 ) ( 12,737 ) ( 20,876 ) Employee taxes paid by withholding shares ( 1,302 ) ( 1,018 ) ( 1,590 ) Dividends paid to stockholders ( 26,445 ) ( 22,917 ) ( 19,947 ) Net cash (used in) provided by financing activities ( 46,510 ) 17,357 18,735 Net increase (decrease) in cash, cash equivalents and restricted cash 3,074 2,462 ( 78,801 ) Cash, cash equivalents and restricted cash, beginning of year 5,949 3,487 82,288 Cash, cash equivalents and restricted cash, end of year $ 9,023 $ 5,949 $ 3,487 The accompanying notes are an integral part of these consolidated financial statements. 38 AAON, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2023 1. Business Description AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc., an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BASX, Inc., an Oregon corporation (collectively, the “Company”). The consolidated financial statements include our accounts and the accounts of our subsidiaries. We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data centers 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. Inflation and Labor Market In late 2021 and throughout 2022, we witnessed increases in our raw material and component prices. Due to our favorable liquidity position, we continued to make strategic purchases of materials when we see opportunities. We continue to manage the increase in the cost of raw materials through price increases for our products. We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong vendor relationships as well as expanding our list of vendors. Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. We have implemented the following wage increases to remain competitive and to attract and retain employees: • In March 2021, we awarded annual merit raises for an overall 5.0% increase to wages. • In July 2021, we increased starting wages for our production workforce by 7.0%. • In October 2021, we implemented a cost of living increase of 3.5% in place for all employees below our Senior Leadership Team ("SLT"), which consists of officers and key members of management. • In March 2022, we awarded annual merit raises for an overall 3.0% increase to wages. • In October 2022, we implemented a cost of living increase of 3.5% in place for all employees below the 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. Despite efforts to mitigate the impact of inflation, supply chain issues and the tight labor market, future disruptions, while temporary, could negatively impact our consolidated financial position, results of operations and cash flows. First Quarter 2021 Planned Maintenance and Adverse Weather During the fourth quarter of 2020, we made the strategic decision to shut down our Tulsa, OK and Longview, TX manufacturing facilities to perform planned and necessary maintenance during the last week of December 2020 as well several days in early January 2021. In February 2021, record-breaking winter storms affected Oklahoma and Texas, causing sustained below freezing temperatures, hazardous driving conditions, rolling blackouts, water main breaks, and a host of other weather related issues. In addition to significant absenteeism as a result of employees being unable to travel to and from work due to inadequate transportation and/or hazardous road conditions, the Company made the decision to shut down the Tulsa, OK and Longview, TX plants for several days. This decision was based on the expected employee absenteeism, as well as the expected rolling blackouts caused by the increased demand on the electrical and natural gas power grids. 39 WH Series and WV Series Water Source Heat Pump Units As part of the normal course of business, management continually monitors the profitability of the Company's various product series offerings. During the third quarter of 2022, management made the decision to no longer produce our small packaged geothermal/water-source heat pump units consisting of the WH Series horizontal configuration and WV Series vertical configuration, from one-half to 12 1/2 tons ("WH/WV"). These WH/WV units were produced solely out of the AAON Oklahoma facility. Production of the remaining WH/WV backlog was completed during the second quarter 2023. Change in Estimate During the first quarter of 2022, a review of the Company's useful lives for certain sheet metal manufacturing equipment at our Longview, Texas facilities resulted in a change in estimate that increased the useful lives from between ten and twelve years to fifteen years. This determination was based on recent and estimated future production levels as well as management's knowledge of the equipment and historical and future use of the equipment. The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $ 1.8 million during the year ended December 31, 2022. We do not believe the impact of these events had a material adverse effect on our consolidated financial position, results of operations and cash flows. 2. Summary of Significant Accounting Policies Principles of Consolidation These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Our financial statements also consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of five variable interest entities ("VIEs") (Note 17) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs. On December 10, 2021, we closed on the acquisition of all of the issued and outstanding equity ownership of BASX, LLC, doing business as BASX Solutions (Note 4). On December 29, 2021, BASX, LLC converted to a C-Corporation, BASX, Inc. ("BASX"), and is subject to income tax. We have included the results of BASX’s operations in our consolidated financial statements beginning December 11, 2021. C ash and Cash Equivalents We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist of bank deposits and highly liquid, interest-bearing money market funds. The Company’s cash and cash equivalents are held in a few financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. Restricted Cash Restricted cash held at December 31, 2023 and December 31, 2022 consists of bank deposits and highly liquid, interest-bearing money market funds held for the purpose of the Company's qualified New Markets Tax Credit programs (Note 17) to benefit an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations. The Company’s restricted cash is held in financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected. 40 Accounts and Note Receivable Accounts and note receivable are stated at amounts due from customers, net of an allowance for credit losses. We generally do not require that our customers provide collateral; however, our billings and customer payment terms can vary based on product type as a way to manage collections risk. The Company determines its allowance for credit losses by considering a number of factors, including the credit risk of specific customers, the customer’s ability to pay current obligations, historical trends, economic and market conditions, and the age of the receivable. Accounts are considered past due when the balance has been outstanding for ninety days past negotiated credit terms. Past due accounts are generally written-off against the allowance for credit losses only after all collection attempts have been exhausted. Concentration of Credit Risk Our customers are concentrated primarily in the domestic commercial and industrial new construction and replacement markets. To date, our sales have been primarily to the domestic market, with foreign sales accounting for approximately 3.4 %, 3.1 %, and 3.0 % of revenues for the years ended December 31, 2023, 2022, and 2021, respectively. For the years-ended December 31, 2023, 2022, and 2021, Texas AirSystems accounted for approximately 13.8 %, 12.4 %, and 11.7 % of our sales, respectively. Through portfolio groups, Meriton has an ownership interest in Texas AirSystems and certain other of our sales representatives. The aggregate sales percentages through Meriton-affiliated groups that are in addition to Texas AirSystems’ sales for the years-ended December 31, 2023, 2022 and 2021 accounted for an additional 2.3 %, 1.4 % and 2.7 %, respectively. Two other similar groups, Ambient and Hobbs/Insight, share common ownership of some of our other sales representatives through portfolio groups and for the year-ended December 31, 2023, aggregate sales through their portfolio groups accounted for approximately 11.5 % and 10.2 % of our sales, respectively. Sales through the portfolio groups of either Ambient or Hobbs/Insight did not account for 10% or more of our sales for any years-ended prior to December 31, 2023. As of December 31, 2023 and 2022, Texas AirSystems accounted for approximately 13.5 % and 12.3 %, of our accounts receivable balance, respectively. The aggregate percentages through Meriton-affiliated groups that are in addition to Texas AirSystems’ accounts receivable as of December 31, 2023 and 2022, accounted for an additional 2.0 % and 3.2 %, respectively. Two other similar groups, Ambient and Hobbs/Insight, aggregate percentages through their portfolio groups accounted for approximately 16.8 % and 11.5 % of our accounts receivable as of December 31, 2023, respectively. Accounts receivables of the portfolio groups did not account for 10% or more of our accounts receivable as of December 31, 2022, except for Ambient's aggregate percentage of approximately 10.9 %. Inventories Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost method. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts. 41 Property, Plant and Equipment Property, plant, and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation; except for property, plant, and equipment acquired in a business combination which is recorded at fair value. Repairs and maintenance and any gains or losses on disposition are included in operations. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings and leasehold improvements 3 - 40 years Machinery and equipment 3 - 20 years Furniture and fixtures 3 - 15 years Business Combinations The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred. Fair Value Financial Instruments and Measurements The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt or based on current rates offered to the Company for debt with similar characteristics. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels: • Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date. • Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means. • Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of intangible assets, contingent consideration, and goodwill acquired in a business combination. The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability. Software Development Costs We capitalize costs incurred to purchase or develop software for internal use. Internal-use software development costs are capitalized during the application development stage. These capitalized costs are reflected in intangible assets, net on the consolidated balance sheets and are amortized over the estimated useful life of the software. The useful life of our internal-use software development costs is generally 1 - 6 years. 42 Definite-Lived Intangible Assets Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations (Note 4) or asset acquisition. We amortize our definite-lived intangible assets on a straight-line basis over the estimated useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. Amortization is computed using the straight-line method over the following estimated useful lives: Intellectual property 6 - 30 years Customer relationships 14 years 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. Goodwill at December 31, 2023 is expected to be tax deductible in future periods. Indefinite-lived intangible assets consist of trademarks, trade names, and internal-use software. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant. To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired. If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets. We performed a qualitative assessment as of December 31, 2023 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets. 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 market participant considerations and future forecasted 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. 43 The changes in the carrying amount of goodwill were as follows: Years Ended December 31, 2023 2022 (in thousands) Balance, beginning of period $ 81,892 $ 85,727 Additions due to acquisitions — — Decreases due to acquisition adjustments (Note 4) — ( 3,835 ) Balance, end of period 81,892 81,892 The acquisition adjustments were recorded during the first quarter of 2022. The revisions were the result of the finalization of our preliminary estimates and third party valuation models related to the acquisition of BASX (Note 4) in 2021. The impact of such revisions on consolidated net income were not significant. 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 additional paid-in capital on the consolidated balance sheets. Impairment of Long-Lived Assets We review long-lived assets for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to its estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. Research and Development The costs associated with research and development for the purpose of developing and improving new products are expensed as incurred. For the years ended December 31, 2023, 2022, and 2021 research and development costs amounted to approximately $ 43.7 million, $ 46.8 million, and $ 16.6 million, respectively. The significant increase for the year ended December 31, 2022 was related to the inclusion of a full year of operations of BASX (Note 4), as well as our commitment to product performance and innovation. Advertising Advertising costs are expensed as incurred and included in selling, general, and administrative expenses on our consolidated statement of income. Advertising expense for the years ended December 31, 2023, 2022, and 2021 was approximately $ 2.6 million, $ 2.4 million, and $ 1.6 million, respectively. Shipping and Handling We incur shipping and handling costs in the distribution of products sold that are recorded in cost of sales. Shipping charges that are billed to the customer are recorded in revenues and as an expense in cost of sales. For the years ended December 31, 2023, 2022, and 2021 shipping and handling fees amounted to approximately $ 29.0 million, $ 24.4 million, and $ 14.4 million, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Excess tax benefits and deficiencies are reported as an income tax benefit or expense on the statement of income and are treated as discrete items to the income tax provision in the reporting period in which they occur. We establish accruals for unrecognized tax positions when it is more likely than not that our tax return positions may not be fully sustained. The Company records a valuation allowance for deferred tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized. 44 Share-Based Compensation The Company recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The Company’s share-based compensation plans provide for the granting of stock options, restricted stock, and performance stock units ("PSUs"). In conjunction with the acquisition of BASX (Note 4), we awarded performance awards to key employees ("Key Employee Awards") of BASX. The fair values of stock options are estimated at the date of grant using the Black-Scholes-Merton option valuation model. The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, expected market performance, risk-free rate, and expected dividend yield for stock options. The fair va lue of restricted stock awards and Key Employee Awards is based on the fair market value of AAON common stock on the respective grant dates. The fair value of restricted stock awards is reduced for the present value of dividends. The Key Employee Awards and PSUs do not accrue dividends. Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20 % per year. Restricted stock awards granted to directors historically vest over the shorter of directors' remaining elected term or one-third each year. Beginning March 2021, all new grants of stock options and restricted stock awards granted to employees, vest at a rate of 33.3 % per year. Forfeitures are accounted for as they occur. Historically, if the employee or director is retirement eligible (as defined by the Long Term Incentive Plans) or becomes retirement eligible during service period of the related share-based compensation award, the service period is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All share-based compensation awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur. The PSUs cliff vest at the end of their respective service period. Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs. The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur. The Key Employee Awards cliff vest on December 31, 2023. Share-based compensation expense is recognized on a straight-line basis over the service period of the Key Employee Awards when it is probable that the performance conditions will be satisfied. The Key Employee Awards are subject to several service and performance conditions, as defined by the Key Employee Award agreement, which allows the holder to retain an amount of the awards as a result of certain termination conditions or change in common control. Forfeitures are accounted for as they occur. Derivative Instruments In the course of normal operations, the Company occasionally enters into contracts such as forward priced physical contracts for the purchase of raw materials that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. The Company does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes. Revenue Recognition Due to the highly customized nature of many of the Company’s products and each product not having an alternative use to the Company without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract. The Company has formal cancellation policies and generally does not accept returns on these units. As a result, many of the Company’s products do not have an alternative use and therefore, for these products we recognize revenue over the time it takes to produce the unit. Contract costs include direct materials, direct labor, installation, freight and delivery, commissions and royalties. Other costs not related to contract performance, such as indirect labor and materials, small tools and supplies, operating expenses, field rework and back charges are charged to expense as incurred. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are estimated and recognized by the 45 Company throughout the life of the contract. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of billings is shown as a contract asset within our consolidated balance sheets, and the aggregate of billings on uncompleted contracts in excess of related costs incurred and income recognized is shown as a contract liability within our consolidated balance sheets. For all other products that are part sales or standardized units, the Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. As the primary performance obligation in such a contract is delivery of the requested manufactured equipment, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders. Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Historically, sales of our products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather. However, in recent years, given the increases in demand of our product and increases in our backlog, sales has become more constant throughout the year. Product Warranties A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year. The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period. Representatives and Third Party Products We are responsible for billings and collections resulting from all sales transactions, including those initiated by our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing heating, ventilation, and air conditioning (“HVAC”) units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These other related products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. The Company is considered the principal for the equipment we design and manufacture and records that revenue gross. The Company has no control over the Third Party Products to the end customer and the Company is under no obligation related to the Third Party Products. Amounts related to Third Party Products are not recognized as revenue but are recorded as a liability and are included in accrued liabilities on the consolidated balance sheets. The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives was $ 59.2 million, $ 39.1 million, and $ 43.9 million for each of the years ended December 31, 2023, 2022, and 2021, respectively. 46 Insurance Reserves Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and medical liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred. Leases New leases entered into by the Company are assessed at lease inception for proper lease classification. At December 31, 2023 and 2022, all of our leases are classified as operating leases. We have entered into various short-term operating leases with an initial term of twelve months or less. These leases are not recorded on our consolidated balance sheets as of December 31, 2023 and 2022, and the rent expense for these short-term leases is not significant. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate represents the interest rate which we would pay to borrow an amount equal to the lease payments over a similar term in a similar economic environment. Expense related to these leases is recognized on straight-line basis over the lease term. Certain of our leases contain escalating lease payments based on predefined increases. Most leases contain options to renew or terminate. Right-of-use assets and lease liabilities reflect only the options which the Company is reasonably certain to exercise. The Company’s leases generally require us to pay for insurance, taxes, utilities, and other operating costs. These payments are not included in the right-of-use asset or lease liability and are expensed as incurred. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position, and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, inventory valuation, inventory reserves, warranty accrual, workers' compensation accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates. 47 3. Revenue Recognition The following tables show disaggregated net sales by reportable segment (Note 22) by major source, net of intercompany sales eliminations. Year Ended December 31, 2023 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop Units $ 804,254 $ — $ — $ 804,254 Condensing Units 61 42,739 — 42,800 Air Handlers — 44,040 17,790 61,830 Outdoor Mechanical Rooms 208 298 — 506 Cleanroom Systems — — 45,191 45,191 Data Center Cooling Solutions — 8,247 93,052 101,299 Water-Source Heat Pumps 3,128 12,770 — 15,898 Part Sales 66,413 6 1,277 67,696 Other 23,855 4,220 969 29,044 $ 897,919 $ 112,320 $ 158,279 $ 1,168,518 Year Ended December 31, 2022 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop Units $ 579,363 $ — $ — $ 579,363 Condensing Units 302 46,287 — 46,589 Air Handlers — 47,442 14,434 61,876 Outdoor Mechanical Rooms 612 855 — 1,467 Cleanroom Systems — — 47,020 47,020 Data Center Cooling Solutions — — 53,522 53,522 Water-Source Heat Pumps 11,529 8,797 — 20,326 Part Sales 52,927 — 671 53,598 Other 19,112 3,909 2,006 25,027 $ 663,845 $ 107,290 $ 117,653 $ 888,788 Year Ended December 31, 2021 AAON Oklahoma AAON Coil Products BASX 1 Total (in thousands) Rooftop Units $ 398,461 $ — $ — $ 398,461 Condensing Units 762 25,989 — 26,751 Air Handlers — 26,589 95 26,684 Outdoor Mechanical Rooms 820 464 — 1,284 Cleanroom Systems — — 2,288 2,288 Data Center Cooling Solutions — — 1,688 1,688 Water-Source Heat Pumps 10,831 10,343 — 21,174 Part Sales 41,127 1 — 41,128 Other 11,844 3,203 12 15,059 $ 463,845 $ 66,589 $ 4,083 $ 534,517 1 BASX was acquired on December 10, 2021. We have included the results of BASX's operations in our consolidated financial statements beginning December 11, 2021. Other sales include freight, extended warranties and miscellaneous revenue. 48 4. Business Combination On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire of all of the issued and outstanding equity ownership of BASX, LLC, an Oregon limited liability company, doing business as BASX Solutions. We closed this transaction on December 10, 2021 for a purchase price of (i) $ 100.0 million payable in cash (not including working capital adjustments), and (ii) up to $ 80.0 million in the aggregate of contingent consideration payable in shares of the Company's stock, par value $ 0.004 per share (the "Shares"). The $ 80.0 million of contingent consideration payable consists of $ 78.0 million payable to the former owners of BASX, LLC and $ 2.0 million payable to key employees of BASX, LLC whom are now employed by the Company. The potential future issuance of the Shares is contingent upon BASX meeting certain post-closing earn-out milestones during each of 2021, 2022, and 2023 under the terms of the MIPA Agreement (Note 16). The Company funded the acquisition cash portion of the purchase price and related transaction costs with cash on hand. Additionally, as a condition to closing, the Company entered into a real estate purchase agreement with BASX Properties, LLC, an affiliate of BASX, LLC, to acquire the principal real property and improvements utilized by BASX for an additional $ 22.0 million, in cash, subject to customary closing conditions and adjustments. The Company closed this real estate transaction on May 31, 2022, which terminated the related lease (Note 5). We applied pushdown accounting, allowable under ASC 805 "Business Combinations," to "pushdown" our stepped-up basis in the assets acquired and liabilities assumed to BASX's subsidiary financial statements. The decision to apply pushdown accounting is irrevocable. We incurred $ 4.4 million in transaction fees related to the acquisition which are included in selling, general, and administrative expenses on our consolidated statement of income for the year ended December 31, 2021. Pro Forma Results of Operations (unaudited) The operations of BASX have been included in our consolidated statements of income since the closing date on December 10, 2021. The following unaudited pro forma consolidated results of operations for the year ended December 31, 2021 are presented as if the combination had been made on January 1, 2021 and reflects the three-for-two stock split effective August 16, 2023. (unaudited) Year ended December 31, 2021 (in thousands, except per share data) Revenues $ 611,158 Net income 63,491 Earnings per share: Basic $ 0.80 Dilutive $ 0.78 These unaudited pro forma results include adjustments necessary in connection with the acquisition. The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company. The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration. 49 5. Leases The Company has lease arrangements for certain administrative, manufacturing and warehousing facilities and equipment. All leases are classified as operating leases. December 31, Balance Sheet Classification 2023 2022 (in thousands) Right-of-use assets Right of use assets $ 11,774 $ 7,123 Current lease liability Accrued liabilities 2,021 1,254 Noncurrent lease liability Other long-term liabilities 10,201 5,993 Since 2018, the Company has leased the manufacturing, engineering and office space used by our operations in Parkville, Missouri. In October 2022, the Parkville, Missouri lease was amended to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet. The amended lease will provide for 31,000 square feet of additional manufacturing and engineering space and for 4,000 square feet of additional office space. The amended lease extends the lease term through December 31, 2032. Through the acquisition of BASX (Note 4), we acquired various leases for plant/office space and equipment, which were classified as operating leases. Through May 2022, BASX's manufacturing and office facility in Redmond, Oregon was leased from a related party (Note 21). On May 31, 2022, we completed the real estate transaction discussed in Note 4 and the associated operating lease was terminated. In November 2022, the Company entered into a lease arrangement for additional storage facilities in Tulsa, Oklahoma to support our operations. The lease will add an additional 198,000 square feet to our operations. In January 2024, we amended the lease for an additional 157,550 square feet for operations and parts distribution. The amended lease term will expire November 30, 2029. We also lease several properties near our Redmond location. In the aggregate, these leases contain approximately 104,500 square feet of additional warehouse space. These leases have expiring terms from February 2025 to November 2033. In July 2023, the Company entered into a lease agreement with a start date of September 1, 2023, for land and approximately 72,000 square feet of facilities in Redmond, Oregon to support our manufacturing operations. The lease term is approximately five years with additional renewal options. Total undiscounted future lease payments are as follows: (in thousands) 2024 $ 2,647 2025 2,329 2026 1,353 2027 1,393 2028 1,339 Thereafter 6,254 50 6. Accounts Receivable Accounts receivable and the related allowance for credit losses are as follows: December 31, 2023 2022 (in thousands) Accounts receivable $ 138,431 $ 127,635 Less: Allowance for credit losses ( 323 ) ( 477 ) Total, net $ 138,108 $ 127,158 Years Ended December 31, 2023 2022 2021 Allowance for credit losses: (in thousands) Balance, beginning of period $ 477 $ 549 $ 506 Provisions for expected credit losses, net of adjustments ( 142 ) 359 43 Accounts receivable written off, net of recoveries ( 12 ) ( 431 ) — Balance, end of period $ 323 $ 477 $ 549 7. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts. The components of inventories and the related changes in the allowance for excess and obsolete inventories are as follows: December 31, 2023 2022 (in thousands) Raw materials $ 211,259 $ 194,159 Work in process 5,523 3,501 Finished goods 2,910 5,806 219,692 203,466 Less: Allowance for excess and obsolete inventories ( 6,160 ) ( 4,527 ) Total, net $ 213,532 $ 198,939 Years Ended December 31, 2023 2022 2021 Allowance for excess and obsolete inventories: (in thousands) Balance, beginning of period $ 4,527 $ 1,787 $ 3,261 Provisions for excess and obsolete inventories 5,480 2,852 629 Inventories written off ( 3,847 ) ( 112 ) ( 2,103 ) Balance, end of period $ 6,160 $ 4,527 $ 1,787 We continuously evaluate our inventory parts and write off inventory when no alternative use can be found. During the third quarter of 2022, we made the decision to no longer produce our small packaged geothermal/water-source heat pump units consisting of the WH Series horizontal configuration and WV Series vertical configuration. As a result, we have increased our provision for excess and obsolete inventory and written off certain related components and parts that cannot be used in other products or sold through our parts business. 51 8. Intangible Assets Our intangible assets consist of the following: December 31, 2023 2022 Definite-lived intangible assets (in thousands) Intellectual property $ 12,450 $ 6,295 Customer relationships 47,547 47,547 Capitalized internal-use software 3,323 — Less: Accumulated amortization ( 9,838 ) ( 3,807 ) Total, net 53,482 50,035 Indefinite-lived intangible assets Trademarks 14,571 14,571 Total intangible assets, net $ 68,053 $ 64,606 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, 2023, approximately $ 5.5 million is included intangible asset (intellectual property) and approximately $ 1.0 million is included in property, plant and equipment, respectively, on our consolidated balance sheets. Amortization expense recorded in cost of sales is as follows: Years Ended December 31, 2023 2022 2021 (in thousands) Amortization expense $ 5,331 $ 3,599 $ 246 Total future amortization expense for finite-lived intangible assets was estimated as follows: (in thousands) 2024 $ 5,367 2025 4,651 2026 4,651 2027 4,651 2028 4,560 Thereafter 29,081 Total future amortization expense 52,961 Internal-use software projects in process 521 Total $ 53,482 52 9. Supplemental Cash Flow Information Years Ended December 31, 2023 2022 2021 Supplemental disclosures: (in thousands) Interest paid $ 4,817 $ 2,412 $ — Income taxes paid, net 63,376 19,293 7,891 Non-cash investing and financing activities: Non-cash capital expenditures 287 1,919 ( 3,714 ) 10. Warranties The Company has product warranties with various terms from one year from the date of first use or 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers. The Company has an obligation to replace parts if conditions under the warranty are met. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products, and any known identifiable warranty issues. Changes in the warranty accrual are as follows: Years Ended December 31, 2023 2022 2021 Warranty accrual: (in thousands) Balance, beginning of period $ 15,682 $ 13,769 $ 13,522 Payments made ( 11,274 ) ( 6,584 ) ( 6,734 ) Provisions 16,165 8,497 6,351 Assumed in business combination (Note 4) — — 630 Balance, end of period $ 20,573 $ 15,682 $ 13,769 Warranty expense: $ 16,165 $ 8,497 $ 6,351 53 11. Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities were comprised of the following: December 31, 2023 2022 (in thousands) Warranty $ 20,573 $ 15,682 Due to representatives 14,428 15,545 Payroll 18,829 11,901 Profit sharing 7,596 5,451 Workers' compensation 338 367 Medical self-insurance 1,460 1,178 Customer prepayments 2,621 3,750 Donations, short-term 381 637 Accrued income taxes 1,170 12,472 Employee vacation time 10,315 6,329 Extended warranties, short-term 2,387 1,330 Lease liability, short-term 2,021 1,254 Other 3,389 2,734 Total $ 85,508 $ 78,630 Other long-term liabilities were comprised of the following: December 31, 2023 2022 (in thousands) Lease liability $ 10,201 $ 5,993 Extended warranties 6,082 4,539 Donations and other 524 976 Total $ 16,807 $ 11,508 12. Revolving Credit Facility On November 24, 2021, we amended our revolving credit facility to provide for maximum borrowings of $ 100.0 million, with an option to increase to $ 200.0 million. On May 27, 2022, we amended our $ 100.0 million Amended and Restated Loan Agreement dated November 24, 2021 ("Revolver"), to provide for maximum borrowings of $ 200.0 million. As of 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 have 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. The Revolver expires on May 27, 2027. 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. At December 31, 2023, 2022, and 2021, the weighted average interest rate of our Revolver was 6.3 %, 3.0 %, and 1.3 %, respectively. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income and were not material for the years ended December 31, 2023, 2022, and 2021, respectively. 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 %. 54 At December 31, 2023, we were in compliance with our financial covenants as defined by the Revolver. These covenants included a financial covenant that we meet certain parameters related to our leverage ratio. At December 31, 2023, our leverage ratio was 0.15 to 1.0, which meets the requirement of not being above 3 to 1. 13. Income Taxes The provision for income taxes consists of the following: Years Ended December 31, 2023 2022 2021 (in thousands) Current $ 52,058 $ 37,489 $ 6,755 Deferred ( 6,527 ) ( 13,332 ) 3,669 Income tax provision $ 45,531 $ 24,157 $ 10,424 The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate before the provision for income taxes. The reconciliation of the Federal statutory income tax rate to the effective income tax rate is as follows: Years Ended December 31, 2023 2022 2021 Federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of Federal benefit 3.9 % 4.1 % 1.8 % Change in valuation allowance ( 1.4 ) % — % 1.0 % Excess tax benefits related to share-based compensation (Note 14) ( 4.0 ) % ( 2.4 ) % ( 7.8 ) % Return to provision 0.2 % ( 0.3 ) % — % Non-deductible executive compensation 1.7 % — % — % Research and development tax credits ( 1.2 ) % ( 2.1 ) % ( 1.1 ) % Other 0.2 % ( 0.9 ) % 0.2 % Effective tax rate 20.4 % 19.4 % 15.1 % On May 21, 2021, the State of Oklahoma enacted House Bill 2960, effectively reducing the corporate income tax rate in Oklahoma from 6% to 4%. This resulted in a benefit of $ 0.8 million included in the table above under State income taxes, net of Federal benefit, for the year ending December 31, 2021. We have historically earned investment tax credits from the state of Oklahoma’s manufacturing property investment program. We use the flow-through method to account for investment tax credits earned on eligible tangible asset expenditures. Under this method, the investment tax credits are recognized as a reduction to our Oklahoma income tax expense in the year they are used. As part of our expansion projects in Oklahoma, we identified a separate, more advantageous Oklahoma credit program (not income tax related) which will cause us to discontinue our accumulation of credits for Oklahoma’s manufacturing property investment program after the 2022 tax year. The Company had investment tax credit carryforwards with a valuation allowance reserved against them as we did not have sufficient taxable income to utilize the carryforwards, in part because we generated more credit each year than we were able to utilize. Because the Company will not generate additional excess credits after our 2022 tax year, we will be able to use our credit carryforwards against future taxable income and the related valuation allowance was reversed resulting in a one-time benefit of $ 3.1 million to the income tax provision for the year ended December 31, 2023. As of December 31, 2023, we have investment tax credit carryforwards of approximately $ 3.1 million. These credits have estimated expirations from the year 2039 through 2043. 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 the increase in our 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. 55 We also earn 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 identify, document, and support eligible expenses related to qualified research and development activities. Eligible expenses include but are not limited to supplies, materials, contractor expenses and internal employee wages. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2023 2022 (in thousands) Deferred income tax assets (liabilities): Allowance for credit losses and inventory reserves $ 1,724 $ 1,337 Warranty accrual 5,462 4,184 Other accruals 3,989 4,814 Share-based compensation 8,560 7,440 Research & development expenses 18,647 11,265 Oklahoma investment credit carryforward 2,306 3,115 Other, net 1,673 2,339 42,361 34,494 Valuation allowance — ( 3,115 ) Net deferred income tax assets 42,361 31,379 Property & equipment ( 54,495 ) ( 50,040 ) Total deferred income tax liabilities ( 54,495 ) ( 50,040 ) Net deferred income tax liabilities $ ( 12,134 ) $ ( 18,661 ) In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 174, research and development expenses incurred after December 31, 2021 are required to be capitalized and amortized over 5 years. The amortization requirements for tax purposes is a mid-year convention, meaning that the tax amortization is 10% in the year of acquisition, 20% in the following 4 years, and 10% in the final year. The amount of income tax that we pay annually is dependent on various factors, including the timing of certain deductions. These deductions can vary from year to year and, consequently, the amount of income taxes paid in future years will vary from the amounts paid in prior years. We file income tax returns in the U.S., state and foreign income tax jurisdictions. We are subject to U.S. income tax examinations for the tax years 2020 to present, and to non-U.S. income tax examinations for the tax years 2019 to present. In addition, we are subject to state and local income tax examinations for tax years 2019 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense. 14. Share-Based Compensation As discussed in Note 16, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of this stock split. On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (as amended, “LTIP”) which provided an additional 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units, and performance awards. Under the LTIP, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan (“2016 Plan”) which provides for approximately 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that are now authorized 56 for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 million shares that were approved by the stockholders on May 12, 2020. Under the 2016 Plan, shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. The 2016 Plan is administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan. Options The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the years ended December 31, 2023, 2022, and 2021 using a Black Scholes-Merton Model: 2023 2022 2021 Directors and SLT 1 : Expected dividend yield $ 0.32 $ 0.25 $ 0.25 Expected volatility 37.89 % 36.07 % 35.78 % Risk-free interest rate 4.39 % 2.31 % 0.51 % Expected life (in years) 4.0 4.0 4.0 Employees: Expected dividend yield $ 0.32 $ 0.25 $ 0.25 Expected volatility 38.25 % 37.49 % 38.67 % Risk-free interest rate 4.41 % 2.35 % 0.32 % Expected life (in years) 3.0 3.0 3.0 1 Senior Leadership Team ("SLT") consists of officers and key members of management. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. The following is a summary of stock options vested and exercisable as of December 31, 2023: Weighted Average Weighted Range of Number Remaining Average Exercise of Contractual Exercise Intrinsic Prices Shares Life Price Value (in thousands) $ 13.95 - 27.58 1,340,919 4.23 $ 24.46 $ 66,278 $ 28.28 - 37.07 478,793 6.54 31.04 20,509 $ 37.09 - 69.62 204,713 7.30 48.00 5,291 Total 2,024,425 5.09 $ 28.39 $ 92,078 57 A summary of option activity under the plans is as follows: Weighted Average Exercise Options Shares Price Outstanding at December 31, 2022 4,560,520 $ 30.14 Granted 329,173 61.14 Exercised ( 1,142,640 ) 29.10 Forfeited or Expired ( 127,468 ) 34.80 Outstanding at December 31, 2023 3,619,585 $ 33.09 Exercisable at December 31, 2023 2,024,425 $ 28.39 The total pre-tax compensation cost related to unvested stock options not yet recognized as of December 31, 2023 is $ 8.3 million and is expected to be recognized over a weighted-average period of 1.1 years. The total intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $ 39.0 million, $ 16.0 million, and $ 22.6 million, respectively. The cash received from options exercised during the year ended December 31, 2023, 2022, and 2021 was $ 33.3 million, $ 23.1 million, and $ 21.1 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. Restricted Stock The fair value of restricted stock awards is based on the fair market value of AAON common stock on the respective grant dates, reduced for the present value of dividends. At December 31, 2023, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 4.6 million which is expected to be recognized over a weighted average period of 1.3 years. A summary of the unvested restricted stock awards is as follows: Weighted Average Grant Date Restricted stock Shares Fair Value Unvested at December 31, 2022 217,168 $ 33.34 Granted 75,499 59.67 Vested ( 99,309 ) 32.76 Forfeited ( 6,274 ) 39.64 Unvested at December 31, 2023 187,084 $ 44.07 PSUs We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P Smallcap 600 Index. The TSR measurement period is three years . At the end of the measurement period, each award will be converted into AAON common stock at 0 % to 200 % of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies. The total pre-tax compensation cost related to unvested PSUs not yet recognized as of December 31, 2023 is $ 4.3 million and is expected to be recognized over a weighted average period of approximately 1.5 years. 58 The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the years ended December 31, 2023 and 2022, using a Monte Carlo Model: 2023 2022 2021 Expected dividend rate $ 0.32 $ 0.25 $ 0.25 Expected volatility 32.71 % 37.60 % 39.10 % Risk-free interest rate 4.66 % 2.00 % 0.28 % Expected life (in years) 2.80 2.80 2.80 The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. A summary of the unvested PSUs is as follows: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2022 93,982 $ 36.62 Granted 58,130 84.42 Vested — — Forfeited — — Unvested at December 31, 2023 1, 2 152,112 $ 54.88 1 Consists of 22,222 PSUs cliff vesting December 31, 2023, 71,760 PSUs cliff vesting December 31, 2025, and 58,130 PSUs cliff vesting December 31, 2026. 2 The 22,222 PSUs cliff vesting December 31, 2023 were approved by the Compensation Committee and issued to holders in February 2024. Key Employee Awards Subject to the MIPA Agreement (Note 4), the Company granted awards to key employees of BASX ("Key Employee Awards"). Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period. The potential future issuance of the Key Employee Awards is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022, and 2023 as defined by the MIPA Agreement and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award will vest and be converted into AAON common stock. The fair value of Key Employee Awards was based on the fair market value of AAON common stock on the grant date. All pre-tax compensation cost has been recognized as of December 31, 2023. A summary of the unvested Key Employee Awards is as follows: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2022 39,899 $ 53.45 Granted — — Vested — — Forfeited — — Unvested at December 31, 2023 39,899 $ 53.45 59 Summary of Share-based Compensation A summary of share-based compensation is as follows for the years ended December 31, 2023, 2022, and 2021: 2023 2022 2021 Grant date fair value of awards during the period: (in thousands) Options $ 5,259 $ 6,522 $ 7,010 PSUs 4,907 2,275 1,622 Restricted stock 4,505 3,671 2,517 Key employee awards — — 1,572 Total $ 14,671 $ 12,468 $ 12,721 2023 2022 2021 Share-based compensation expense: (in thousands) Options $ 8,810 $ 8,585 $ 8,724 PSUs 2,561 958 525 Restricted stock 3,977 3,105 2,519 Key employee awards 1,036 1,052 44 Total $ 16,384 $ 13,700 $ 11,812 2023 2022 2021 Income tax benefit related to share-based compensation: (in thousands) Options $ 8,138 $ 2,715 $ 4,571 Restricted stock 720 241 837 Total $ 8,858 $ 2,956 $ 5,408 15. Employee Benefits Defined Contribution Plan - 401(k ) We sponsor a defined contribution plan (the “Plan”). Eligible employees may make contributions in accordance with the Plan and IRS guidelines. In addition to the traditional 401(k), eligible employees are given the option of making an after-tax contribution to a Roth 401(k) or a combination of both. The Plan provides for automatic enrollment and for an automatic increase to the deferral percentage at January 1st of each year and each year thereafter. Eligible employees are automatically enrolled in the Plan at a 6.0 % deferral rate and currently contributing employees deferral rates will be increased to 6.0 % unless their current rate is above 6.0 % or the employee elects to decline the automatic enrollment or increase. Administrative expenses are paid for by Plan participants. The Company paid no administrative expenses for the years ended 2023, 2022, and 2021. The Company matches 175.0 % up to 6.0 % of employee contributions of eligible compensation. Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions. Years Ended December 31, 2023 2022 2021 (in thousands) Contributions, net of forfeitures, made to the defined contribution plan $ 18,264 $ 15,475 $ 9,724 60 Profit Sharing Bonus Plans We maintain a discretionary profit sharing bonus plan under which approximately 10.0 % of pre-tax profit from AAON Oklahoma and AAON Coil Products is paid to eligible employees on a quarterly basis in order to reward employee productivity. Eligible employees are regular full-time employees of AAON Oklahoma or AAON Coil Products who are actively employed and working on the first and last days of the calendar quarter and who were employed full-time for at least three full months prior to the beginning of the calendar quarter, excluding the Company's senior leadership team. BASX has a separate employee incentive program ("EIP"), under which 5.0 % of BASX's pre-tax profit, plus certain add backs, is paid ratably to eligible employees based on days-of-pay during the fiscal year. Eligible employees are regular full-time and part-time employees who have worked during the year and are still employed when the EIP payment is made following the end of the fiscal year, excluding members of BASX's senior leadership team and any employee paid commissions or royalties. Years Ended December 31, 2023 2022 2021 (in thousands) Profit sharing bonus plan and employee incentive plan expense $ 24,590 $ 14,009 $ 8,526 Employee Medical Plan At AAON Oklahoma and AAON Coil Products, w e self-insure for our employees' health insurance, and make medical claim payments up to certain stop-loss amounts. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plan. In addition, the Company matches 175.0 % of a participating AAON Oklahoma and AAON Coil Products employee's allowed contributions to a qualified health saving account to assist employees with our heath insurance plan deductibles. BASX is insured for healthcare coverage through a third party. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans. In addition, the Company contributes certain amounts for BASX's employees enrolled in a high deductible plan to a qualified health savings account to assist employees with health insurance plan deductibles. Years Ended December 31, 2023 2022 2021 (in thousands) Medical claim payments $ 14,759 $ 10,459 $ 9,640 Health saving account contributions 4,961 3,862 3,482 61 16. Stockholders’ Equity Stock Repurchase The Board has authorized one active stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time. 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. Our open market repurchase programs are as follows: Agreement Execution 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 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 repurchases shares of AAON 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) Plan were entitled to have shares of AAON 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: 2023 2022 2021 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Shares 1 Total $ $ per share 1 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 37.93 446,658 20,876 46.74 Employees 21,904 1,302 59.44 25,842 1,019 39.43 33,789 1,590 47.06 Total 424,777 $ 26,311 $ 61.94 364,914 $ 13,755 $ 37.69 480,447 $ 22,466 $ 46.76 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 Date (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 & employees 3,089,337 24,662 7.98 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. Board approval is required to determine the date of declaration and amount for each cash dividend payment. 62 Our cash dividends for the three years ended December 31, 2023 are as follows: Dividend Annualized Dividend Declaration Date 1 Record Date Payment Date per Share 2 per Share 2 May 17, 2021 June 3, 2021 July 1, 2021 $ 0.13 $ 0.26 November 9, 2021 November 26, 2021 December 17, 2021 $ 0.13 $ 0.26 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 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. We paid cash dividends of $ 26.4 million, $ 22.9 million, and $ 19.9 million in 2023, 2022, and 2021, respectively. Stock Split 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 received one additional share for every two shares they held as of that date on August 16, 2023 (ex-dividend date August 17, 2023). Cash was paid in lieu of fractional shares (approximately $ 0.5 million). All share and per share information has been updated to reflect the effects of this stock split. The retroactive effect of the stock split resulted in approximately $ 0.1 million reclass between common stock and retained earnings within stockholders' equity on the consolidated balance sheet. Contingent Shares Issued in BASX Acquisition As discussed above, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of the stock split. On December 10, 2021, we closed on the acquisition of BASX (Note 4). Under the MIPA Agreement, we committed to $ 78.0 million in the aggregate of contingent consideration to the former owners of BASX, which is payable in approximately 1.56 million shares of AAON stock, par value $ 0.004 per share. The shares do not accrue dividends. Under the MIPA Agreement, the potential future issuance of the shares is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023. We estimated the fair value of contingent consideration related to these shares to be approximately $ 60.0 million, which is included in additional paid-in capital on the consolidated balance sheets. As of December 31, 2023, 0.58 million and 0.73 million shares related to the earn-out milestones for the years ended 2022 and 2021, respectively, have been issued to the former owners of BASX as private placements exempt from registration with the SEC under Rule 506(b), which are included in common stock on the consolidated statements of stockholders' equity. No additional shares have been issued subsequent to December 31, 2023. 63 17. New Markets Tax Credit 2019 New Markets Tax Credit On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2019 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2019 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2019 Project”). 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. Upon closing of the 2019 NMTC transaction, the Company provided an aggregate of approximately $ 15.9 million to the 2019 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 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 the NMTCs. This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2019 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2019 Investor's interest of $ 6.5 million is recorded in New market tax credit obligation on the consolidated balance sheets. The Company incurred approximately $ 0.3 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. 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. This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2023 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2023 Investor's interest of $ 5.7 million is recorded in New market tax credit obligation on the consolidated balance sheets. The Company incurred approximately $ 0.4 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. The 2019 Investor and the 2023 Investor are each subject to 100 percent recapture of the 2019 and 2023 NMTC, respectively, it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the 2019 NMTC arrangements and 2023 NMTC arrangements, respectively. Noncompliance with applicable requirements could result in the 2019 and/or 2023 Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the 2019 Investor and 2023 Investor for any loss or recapture of the 2019 NMTC and 2023 NMTC, respectively, related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. 64 The 2019 Investor and 2023 Investor and its majority owned community development entity are considered VIEs and the Company is the primary beneficiary of the VIEs. This conclusion was reached based on the following: • the ongoing activities of the VIEs, collecting and remitting interest and fees and NMTC compliance, were all considered in the initial design and are not expected to significantly affect performance throughout the life of the VIE; • contractual arrangements obligate the Company to comply with NMTC rules and regulations and provide various other guarantees to the Investor and community development entity; • the 2019 Investor and 2023 Investor lacks a material interest in the underling economics of the project; and • the Company is obligated to absorb losses of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transaction in these VIEs outside of the financing transactions executed as part of the NMTC arrangement. 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. This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2024 Investor is subject to 100 percent recapture of the 2024 NMTC it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the 2024 NMTC arrangement. Noncompliance with applicable requirements could result in the 2024 Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the 2024 Investor for any loss or recapture of the 2024 NMTC related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. 18. Commitments and Contingencies Havtech Litigation On January 24, 2022, one of the Company’s former independent sales representative firms, Havtech, LLC (and its affiliate, Havtech Parts Division, LLC, collectively “Plaintiffs”), filed a complaint (the “Complaint”) in the Circuit Court for Howard County, Maryland ( Havtech, LLC, et al., v. AAON, Inc., et al. ). The Complaint challenged the Company’s termination of its business relationship with Plaintiffs. The Company removed the action to the United States District Court for the District of Maryland (Northern Division) and moved to dismiss the Complaint. Plaintiffs’ First Amended Complaint (“First Amended Complaint”) was entered by the court on July 28, 2022. The First Amended Complaint asserts that the Company improperly terminated Plaintiffs and seeks damages alleged to be no less than $ 48.6 million, plus fees and costs. The Company filed its Answer to First Amended Complaint on January 31, 2023. 65 On September 28, 2023, the parties attended a court ordered settlement conference and agreed to resolve the case for $ 7.5 million. A settlement agreement was entered into on October 25, 2023 and the case has been dismissed with prejudice. The settlement of $ 7.5 million has been included in selling, general and administrative expenses on our consolidated statement of income. The final payment was made on October 26, 2023. Other Matters The Company is involved from time to time in claims and lawsuits incidental to our business arising from various matters, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, tax and other laws. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We do not believe these matters will have a material adverse effect on our business, financial position, results of operations or cash flows. We are occasionally party to short-term, cancellable and occasionally non-cancellable, fixed price contracts with major suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw materials for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. 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. 19. New Accounting Pronouncements Changes to U.S. GAAP are established by the FASB in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs. 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. 66 20. Earnings Per Share Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards. The following table sets forth the computation of basic and diluted earnings per share: 2023 2022 2021 Numerator: (in thousands, except share and per share data) Net income $ 177,623 $ 100,376 $ 58,758 Denominator: Basic weighted average shares 3 81,156,114 79,582,480 78,606,298 Effect of dilutive shares related to stock based compensation 1, 3 1,972,380 1,264,175 1,952,547 Effect of dilutive shares related contingent consideration 2, 3 166,796 298,955 34,639 Diluted weighted average shares 3 83,295,290 81,145,610 80,593,484 Earnings per share: Basic 3 $ 2.19 $ 1.26 $ 0.75 Dilutive 3 $ 2.13 $ 1.24 $ 0.73 Anti-dilutive shares: Shares 3 314,108 908,221 456,045 1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 14) 2 Dilutive shares related to contingent shares issued to former owners of BASX (Note 4) 3 Reflects three-for-two stock split effective August 16, 2023. 21 . Related Parties The following is a summary of transactions and balances with affiliates: Years Ended December 31, 2023 2022 2021 (in thousands) Sales to affiliates $ 7,860 $ 5,789 $ 3,752 Payments to affiliates 1,476 1,318 185 December 31, 2023 2022 (in thousands) Due from affiliates $ 994 $ 432 Due to affiliates 145 — The nature of our related party transactions is as follows: • The Company sells units to an entity owned by a member of the CEO/President's immediate family. This entity is also one of the Company’s Representatives and as such, the Company makes payments to the entity for third party products. • The Company purchases some supplies from entities controlled by two of the Company’s board members and a member of the Company's executive management team. • The Company periodically makes part sales and makes payments to a board member related to a consulting agreement. • The Company periodically rents space partially owned by the CEO/President for various Company meetings. 67 • The Company purchases flight time for use of an aircraft partially owned by two members of the Company's executive management team. • From December 10, 2021 through May 31, 2022, the Company leased a manufacturing and office facility in Redmond, Oregon from an entity in which certain members of BASX management had an ownership interest. This facility was purchased 100% by the Company on May 31, 2022. 22. Segments The Company has determined that it has three reportable segments for financial reporting purposes. Management evaluates the performance of its business segments primarily on gross profit. The Company's chief 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. AAON Oklahoma: AAON Oklahoma engineers, manufactures, and sells, semi-custom, and custom HVAC systems, designs and manufactures controls solutions, and sells retail parts to customers through retail part stores and online. AAON Oklahoma includes the operations of our Tulsa, OK and Parkville, MO manufacturing facilities, two retail locations, and the Norman Asbjornson Innovation Center ("NAIC") research and development laboratory accredited by the Air Movement and Control Association International, Inc. ("AMCA"). With the NAIC, a world-class research and development ("R&D") laboratory in Tulsa, OK, our products are continuously tested under a variety of extreme environmental conditions to ensure they deliver the ultimate performance, efficiency, and value. Also located in Tulsa, OK, our cutting-edge Customer Exploration Center showcases the engineering, design attributes and premium build quality of our equipment side-by-side the market alternatives. AAON Coil Products: AAON Coil Products engineers and manufactures a selection of our semi-custom, and custom HVAC systems as well as a variety of heating and cooling coils to be used in HVAC systems, mostly for the benefit of AAON Oklahoma, AAON Coil Products, and BASX. AAON Coil Products consists of operations at our Longview, TX manufacturing facilities. BASX: BASX engineers, manufactures, and sells an array of custom, high-performance cooling solutions for the rapidly growing hyperscale data center market, ventilation solutions for cleanroom environments in the bio-pharmaceutical, semiconductor, medical and agriculture markets, and highly custom, air handlers and modular solutions for a vast array of markets. BASX consists of operations at our Redmond, OR manufacturing facilities. 68 The following table summarizes certain financial data related to our segments. Transactions between segments are recorded based on prices negotiated between the segments. The Gross Profit amounts shown below are presented after elimination entries. Years Ended December 31, 2023 2022 2021 (in thousands) Net Sales AAON Oklahoma External sales $ 897,919 $ 663,845 $ 463,845 Inter-segment sales 4,324 3,251 2,504 AAON Coil Products External sales 112,320 107,290 66,589 Inter-segment sales 38,831 30,932 24,250 BASX 1 External sales 158,279 117,653 4,083 Inter-segment sales 1,480 79 — Eliminations ( 44,635 ) ( 34,262 ) ( 26,754 ) Net sales $ 1,168,518 $ 888,788 $ 534,517 Gross Profit AAON Oklahoma $ 320,067 $ 172,983 $ 126,868 AAON Coil Products 29,324 33,311 10,075 BASX 1 49,629 31,278 887 Gross profit $ 399,020 $ 237,572 $ 137,830 1 BASX was acquired on December 10, 2021. We have included the results of BASX's operations in our consolidated financial statements beginning December 11, 2021. December 31, 2023 2022 (in thousands) Long-lived assets AAON Oklahoma $ 248,556 $ 213,731 AAON Coil Products 83,169 68,013 BASX 49,996 35,578 Total long-lived assets $ 381,721 $ 317,322 Intangible assets and goodwill AAON Oklahoma $ 10,282 $ 3,229 AAON Coil Products — — BASX 139,663 143,269 Total intangible assets and goodwill $ 149,945 $ 146,498 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.