What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-06 · 84 added, 167 removed, 231 unchanged (52% of the section changed)

5 unchanged sentences

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

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

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

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

Foreign sales were approximately $29.3 million of our total net sales for the nine months ended September 30, 2023 and $18.0 million of our sales during the same period of 2022.

We are engaged in the engineering, manufacturing, and selling of premium heating, ventilation, and air conditioning equipment consisting primarily of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls.

These products are marketed and sold to a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets.

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

Foreign sales were approximately $7.4 million of our total net sales for the three months ended March 31, 2024 and $12.6 million of our sales during the same period of 2023.

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

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

Sales in the replacement markets are driven by various factors, including general economic growth, the Company’s new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, changes in market demand between more customized higher performing HVAC equipment and lower priced standard equipment, as well as many other factors.

Sales in the replacement markets are driven by various factors, including general economic growth, the Company's new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, change in market demand between more customized, higher performing HVAC equipment and lower priced standard equipment, as well as many other factors.

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

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

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

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

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

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

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

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economy and global economy.

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

At March 31, 2024, the price (year to date average) for copper, galvanized steel, and stainless steel decreased 2.6%, 16.9%, and 18.5%, respectively, as compared to the price (year to date average) at March 31, 2023, while the price (year to date average) for aluminum increased 0.4% as compared to the price (year to date average) at March 31, 2023.

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

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

In 2022, we implemented two significant price increases as well as a recurring 1% monthly price increase effective June 1, 2022 through April 1, 2023.

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

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

The following table shows our historical backlog levels:

September 30,

2024 December 31,

2022 September 30,

2023 March 31,

(in thousands)

$ 558,443 $ 510,028 $ 599,912

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

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

Our bookings remain strong.

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

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

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

Results of Operations

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

2023 2022 2023 2022

Three months ended March 31,

(in thousands)

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

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

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

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

• Sales for the three months ended March 31, 2024 decreased 1.4%, respectively, due to decreased production rates during the period as compared to the same period in 2023.

• Our gross profit margin for the quarter ended March 31, 2024 of 35.2% increased 620 basis points from the quarter ended March 31, 2023 due to price increases, product mix for operational efficiencies, lower material costs, and better overhead absorption.

We report our financial results based on three reportable segments:

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

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

Segment Operating Results for Three Months Ended March 31, 2024 and Three Months Ended March 31, 2023

Three Months Ended

September 30, 2023 Percent of Sales 1

September 30, 2022 Percent of Sales 1

March 31, 2024 Percent of Sales 1

March 31, 2023 Percent of Sales 1

$ Change % Change

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2 Presented after intercompany eliminations.

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

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

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

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

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

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

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

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

We implemented multiple price increases during 2022 and 2023 to counteract the increased cost of material.

Some of the price increases have yet to be realized.

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

For the three months ended March 31, 2024 total net sales decreased $3.9 million or 1.4%, due to a decrease in volumes of approximately 5.7%, offset by price increases of approximately 4.3%.

While our AAON Oklahoma segment increased by 4.0% for the three months ended March 31, 2024, our AAON Coil Products and BASX segments experienced some production timing delays in early 2024 which contributed to the overall decrease in sales.

Gross profit as a percent of sales increased to 35.2% for the three months ended March 31, 2024 as compared to 29.0% for the three months ended March 31, 2023.

As noted above, realization of price increases has improved our margin profile along with the slowing of inflation for raw materials, especially in our AAON Oklahoma segment, improving overall consolidated margin performance.

As discussed above, production timing delays at our AAON Coil Products and BASX locations contributed to less overhead absorption and margin performance, which resulted in a period over period decline in gross margin for our BASX segment.

As shown in the table below, the cost of raw materials has started to come down but we still have seen inflation in our component parts that typically lag raw materials by 6-18 months.

Additionally, in order to retain our existing employees, we have increased our starting wage rate considerably in recent years and continue to award periodic wage increases to our employees.

These additional costs have been offset by the various price increases we have put in place in the past two years and increases in our production efficiency that has led to increased overhead absorption.

Raw Material Costs

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

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

2024 2023 % Change

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Three Months Ended Percent of Sales

September 30,

2023 September 30,

2024 March 31,

(in thousands)

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Total SG&A $ 45,288 $ 32,942 17.3 % 12.4 %

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

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

Selling, general and administrative expenses increased $12.3 million for the three months ended March 31, 2024 from the prior year period.

Salaries and benefits increased $3.1 million or 24.2%, which is primarily attributable to overall increased headcount as well as the the impact of employee pay increases and benefit improvements discussed above.

Included in the benefit improvements was a one-time charge of $0.8 million related to integration of BASX benefits.

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

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

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

Professional fees increased $3.5 million during the three months ended March 31, 2024 due various professional, regulatory, and legal corporate requirements.

Other expenses increased $2.9 million or 56.7% during the three months ended March 31, 2024 due to increased travel, the closing of our New Markets Tax Credit transaction and consulting expenses.

Three Months Ended Effective Tax Rate

September 30,

2023 September 30,

(in thousands)

Income tax provision $ 15,413 $ 8,327 24.3 % 23.3 %

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

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

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

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

Nine Months Ended

September 30, 2023 Percent of Sales 1

September 30, 2022 Percent of Sales 1

$ Change % Change

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

AAON Coil Products 89,262 10.4 % 79,193 12.5 % 10,069 12.7 %

BASX 105,948 12.3 % 78,480 12.4 % 27,468 35.0 %

Net sales $ 861,880 $ 634,190 $ 227,690 35.9 %

Cost of Sales 2

AAON Oklahoma $ 435,267 65.3 % 365,301 76.7 % $ 69,966 19.2 %

AAON Coil Products 66,314 74.3 % 52,849 66.7 % 13,465 25.5 %

BASX 73,018 68.9 % 57,009 72.6 % 16,009 28.1 %

Cost of sales $ 574,599 66.7 % $ 475,159 74.9 % $ 99,440 20.9 %

Gross Profit 2

AAON Oklahoma $ 231,403 34.7 % $ 111,216 23.3 % $ 120,187 108.1 %

AAON Coil Products 22,948 25.7 % 26,344 33.3 % (3,396) (12.9) %

BASX 32,930 31.1 % 21,471 27.4 % 11,459 53.4 %

Gross profit $ 287,281 33.3 % $ 159,031 25.1 % $ 128,250 80.6 %

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

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

2 Presented after intercompany eliminations.

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

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

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

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

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

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

The cost of our material fluctuates month-to-month.

We implemented multiple price increases during 2022 and 2023 to counteract the increased cost of material.

Some of the price increases have yet to be realized.

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

During the nine months ended September 30, 2023, our gross profit decreased by approximately $3.7 million for changes in our paid time off policies and for payroll taxes and 401(k) matching contributions related to profit sharing payments and stock transactions as our stock reached record highs consistently during the first quarter.

Raw Material Costs

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

2023 2022 % Change

Copper $ 5.68 $ 5.61 1.2 %

Galvanized steel $ 0.68 $ 0.97 (29.9) %

Stainless steel $ 3.33 $ 3.17 5.0 %

Aluminum $ 2.44 $ 2.09 16.7 %

Selling, General and Administrative Expenses

Nine Months Ended Percent of Sales

September 30,

2023 September 30,

(in thousands)

Warranty $ 9,782 $ 6,556 1.1 % 1.0 %

Profit sharing 17,772 8,559 2.1 % 1.3 %

Salaries & benefits 39,229 31,419 4.6 % 5.0 %

Stock compensation 6,825 5,220 0.8 % 0.8 %

Advertising 2,505 2,006 0.3 % 0.3 %

Depreciation & amortization 9,812 5,768 1.1 % 0.9 %

Insurance 3,834 2,477 0.4 % 0.4 %

Professional fees 11,895 3,686 1.4 % 0.6 %

Donations 780 557 0.1 % 0.1 %

Other 21,250 12,632 2.5 % 2.0 %

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

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

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

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

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

Nine months ended Effective Tax Rate

September 30,

2023 September 30,

2024 March 31,

(in thousands)

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The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.6%.

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

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

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

Additionally during the nine months ended September 30, 2023, the Company recorded an excess tax benefit of $6.3 million as compared to $1.3 million during the same period in 2022.

The increase was primarily due to timing of stock option exercises as a result of our high stock price during the nine months ended September 30, 2023.

During the three months ended March 31, 2024, the Company recorded an excess tax benefit of $4.4 million as compared to $3.8 million during the same period in 2023.

The excess tax benefit is related to the timing of stock option exercises as a result of our high stock price during the three months ended March 31, 2024 and 2023, respectively.

Liquidity and Capital Resources

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

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

Working Capital - Our unrestricted cash increased $8.1 million from December 31, 2023 to March 31, 2024 and totaled $8.4 million at March 31, 2024.

Our restricted cash increased $11.2 million from the closing of our recent New Markets Tax Credit related to our Longview, Texas expansion.

We expect most funds will be released from this account by the end of 2024.

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

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

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

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

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

At September 30, 2023, we have $119.3 million of borrowings available under the Revolver.

As of March 31, 2024 we had no amounts outstanding under our Revolver.

As of December 31, 2023, we had $38.3 million outstanding under the Revolver.

We had two standby letters of credit totaling $2.3 million as of March 31, 2024.

At March 31, 2024, we have $197.7 million of borrowings available under the Revolver.

The Revolver expires May 27, 2027.

On April 20, 2023 we amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit executed on April 25, 2023 (Note 16).

We have amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit transactions (Note 16).

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin.

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The applicable fee percentage is determined quarterly based on the Company's leverage ratio.

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

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

The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% and 6.0% for the three months ended March 31, 2024.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three months ended March 31, 2024 and 2023.

If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate ("ABR") loans.

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

At September 30, 2023, we were in compliance with our financial covenants, as defined by the Revolver.

At March 31, 2024, we were in compliance with our financial covenants, as defined by the Revolver.

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

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

At March 31, 2024, our leverage ratio was 0.01 to 1.0, which meets the requirement of not being above 3 to 1.

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

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This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs.

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

2024 New Markets Tax Credit

On February 27, 2024, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2024 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2024 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in real estate to facilitate 2023 Project.

In connection with the 2024 NMTC transaction, the Company received a $15.5 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 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 the NMTCs.

The unused net proceeds from the closing of the 2024 NMTC are included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.

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

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

On November 3, 2022, the Board of Directors approved an updated stock repurchase plan with repurchases under the plan not to exceed $50 million.

On February 27, 2024, the Board of Directors approved an updated stock repurchase plan with repurchases under the plan not to exceed $50 million.

The current repurchase plan will expire at the Board of Directors' discretion.

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Effective Date Authorized Repurchase $ Expiration Date

March 13, 2020 $20 million November 9, 2022

November 3, 2022 $50 million ** 1, 2

November 3, 2022 $50 million February 27, 2024

February 27, 2024 $50 million ** 1, 2

1 Expiration Date is at Board's discretion.

The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board.

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

2 As of March 31, 2024, there is approximately $50.0 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, Inc.

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

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

All repurchases are done at current market prices.

All repurchases from directors or employees are contingent upon Board approval and all shares are repurchased at current market prices.

Lastly, the Company also had a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan were entitled to have shares in AAON, Inc.

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Our repurchase activity is as follows:

Nine Months Ended

September 30, 2023 September 30, 2022

Three Months Ended

March 31, 2024 March 31, 2023

(in thousands, except share and per share data)

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Total $ $ per share 1

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

401(k) — — — 155,904 5,913 37.93

Employees 36,860 3,041 82.50 17,509 1,030 58.83

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

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

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

Inception to September 30, 2023

Inception to March 31, 2024

(in thousands, except share and per share data)

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Our recent cash dividends are as follows:

Declaration Date 1

Record Date Payment Date Dividend

Declaration Date Record Date Payment Date Dividend

Annualized Dividend

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

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

1 Effective with the cash dividend declared on March 1, 2023 (paid on March 31, 2023), the Company moved from semi-annual cash dividends to quarterly cash dividends.

November 10, 2023 November 29, 2023 December 18, 2023 $0.08 $0.32

March 5, 2024 March 18, 2024 March 29, 2024 $0.08 $0.32

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

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Statement of Cash Flows

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

The following table reflects the major categories of cash flows for the three months ended March 31, 2024 and 2023.

For additional details, see the consolidated financial statements.

Nine Months Ended

September 30,

2023 September 30,

Three Months Ended

2024 March 31,

(in thousands)

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Net cash provided by operating activities

107,145 43,414

Investing Activities

Capital expenditures (34,688) (28,935)

Cash paid for building (Note 18)

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

Software development expenditures (4,055) —

Net cash used in investing activities

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Payments under revolving credit facility (153,458) (92,512)

Principal payments on financing lease — (115)

Stock options exercised 9,844 15,856

Repurchase of stock (25,009) (7,943)

Employee taxes paid by withholding shares (3,041) (1,030)

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

In early 2022, the Company began increasing the purchase of inventory to take advantage of favorable pricing opportunities and also to mitigate the impact of future supply chain disruptions on our operations.

Increases in the timing of our customer prepayment as well as increases in our employee bonuses pools and benefits (as a result of our positive operating results) increased our cash provided by accrued liabilities.

Historically, the Company increased the purchase of inventory to take advantage of favorable pricing opportunities and also to mitigate the impact of future supply chain disruptions on our operations, however, as inflationary and supply chain disruptions have decreased, the Company has been able to reduce inventory levels.

Additionally, increases in the timing of our customer prepayment as well as increases in our employee bonuses pools and benefits (as a result of our positive operating results) increased our cash provided by accrued liabilities.

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

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

This has increased our cash paid for income taxes.

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

Cash Flows Used in Investing Activities

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

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

The capital expenditures for the three months ended March 31, 2024 relate to our continued investment in our production capabilities.

Purchases during the three months ended March 31, 2024 relate to additional infrastructure and machinery for both replacement and growth, additional production space in our Redmond, Oregon and Longview, Texas locations, additional equipment and production capacity in Parkville, Missouri, and additional land in Tulsa, Oklahoma for future growth.

We have also made investments to purchase or develop software for internal use in anticipation of future Company growth.

The capital expenditure program for 2024 is estimated to be approximately $125.0 million.

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

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

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

Effective with the cash dividend declared on March 1, 2023 (paid on March 31, 2023), the Company moved from semi-annual cash dividends to quarterly cash dividends.

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

Stock options exercises decreased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Commitments and Contractual Obligations

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These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption.

We had no material contractual purchase obligations as of September 30, 2023 except as described below.

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

As of September 30, 2023, we have paid approximately $3.5 million related to this agreement, which is included in other long-term assets and property, plant and equipment, with the remaining $3.0 million included in accounts payable and other long-term assets on our consolidated balance sheets.

The final payment was made on October 30, 2023.

We had no material contractual purchase obligations as of March 31, 2024 except as described below.

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

For the three months ended March 31, 2024 and 2023, the Company made payments of $3.6 million and $2.4 million, respectively, on this contract.

Estimated minimum future payments are $8.3 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 March 31, 2024.

Critical Accounting Policies

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

There have been no material changes in the Company’s critical accounting policies during the three months ended March 31, 2024.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis