AAON, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. This discussion contains or incorporates by reference “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the SEC or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled “Forward-Looking Statements” in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law. Overview We 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. Both the new construction and replacement markets are cyclical. If the domestic economy were to slow or enter a recession, this could result in a decrease in our sales volume and profitability. Sales in the commercial and industrial new construction markets generally lag the housing market, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, the state of the economy and other macroeconomic factors over which we have no control. Sales in the replacement markets are driven by various factors, including general economic growth, the Company's new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, 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. This go-to-market strategy is unique compared to most of our larger competitors in that most control their sales channel. We value the independent sales channel as we think it is a more effective way of increasing market share. Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople. Furthermore, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer. We also have a small internal sales force that supports the relationships between the Company and our sales channel partners. BASX sells highly customized products for unique applications 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. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, and are obtained from domestic suppliers. We also purchase from domestic manufacturers certain components, including coils, compressors, motors, and electrical controls. The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and global economy. At 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. - 27 - We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months. We expect to receive delivery of raw materials from our contracts for use in our manufacturing operations. We occasionally increase the price of our products to help offset any inflationary headwinds. In 2022, we implemented 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. Backlog The following table shows our historical backlog levels: March 31, 2024 December 31, 2023 March 31, 2023 (in thousands) $ 558,443 $ 510,028 $ 599,912 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 continue to improve. Results of Operations Three months ended March 31, 2024 2023 (in thousands) Net sales $ 262,099 $ 265,953 Cost of sales 169,857 188,799 Gross profit 92,242 77,154 Selling, general and administrative expenses 45,288 32,942 Loss (gain) on disposal of assets (16) 6 Income from operations $ 46,970 $ 44,206 The following are recent highlights and items that impacted our results of operations, cash flows and financial condition: • 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: AAON Oklahoma, AAON Coil Products, and BASX, which are further described in "Segments" (Note 19) within our notes to the consolidated financial statements. The Company's chief operating decision maker ("CODM"), our CEO, allocates resources and assesses the performance of each operating segment using information about the operating segment's net sales and income from operations. The CODM does not evaluate operating segments using asset or liability information. - 28 - Segment Operating Results for Three Months Ended March 31, 2024 and Three Months Ended March 31, 2023 Three Months Ended March 31, 2024 Percent of Sales 1 March 31, 2023 Percent of Sales 1 $ Change % Change (in thousands) Net Sales 2 AAON Oklahoma $ 210,140 80.2 % $ 202,002 76.0 % $ 8,138 4.0 % AAON Coil Products 24,247 9.3 % 33,412 12.6 % (9,165) (27.4) % BASX 27,712 10.6 % 30,539 11.5 % (2,827) (9.3) % Net sales $ 262,099 $ 265,953 $ (3,854) (1.4) % Cost of Sales 2 AAON Oklahoma $ 131,729 62.7 % 140,152 69.4 % $ (8,423) (6.0) % AAON Coil Products 16,107 66.4 % 26,254 78.6 % (10,147) (38.6) % BASX 22,021 79.5 % 22,393 73.3 % (372) (1.7) % Cost of sales $ 169,857 64.8 % $ 188,799 71.0 % $ (18,942) (10.0) % Gross Profit 2 AAON Oklahoma $ 78,411 37.3 % $ 61,850 30.6 % $ 16,561 26.8 % AAON Coil Products 8,140 33.6 % 7,158 21.4 % 982 13.7 % BASX 5,691 20.5 % 8,146 26.7 % (2,455) (30.1) % Gross profit $ 92,242 35.2 % $ 77,154 29.0 % $ 15,088 19.6 % 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 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 March 31: 2024 2023 % Change Copper $ 5.56 $ 5.71 (2.6) % Galvanized steel $ 0.59 $ 0.71 (16.9) % Stainless steel $ 2.73 $ 3.35 (18.5) % Aluminum $ 2.33 $ 2.32 0.4 % - 29 - Selling, General and Administrative Expenses Three Months Ended Percent of Sales March 31, 2024 March 31, 2023 2024 2023 (in thousands) Warranty $ 3,398 $ 2,408 1.3 % 0.9 % Profit sharing 4,600 4,866 1.8 % 1.8 % Salaries & benefits 15,810 12,733 6.0 % 4.8 % Stock compensation 2,244 1,873 0.9 % 0.7 % Advertising 599 846 0.2 % 0.3 % Depreciation & amortization 3,870 2,645 1.5 % 1.0 % Insurance 1,971 1,233 0.8 % 0.5 % Professional fees 4,620 1,105 1.8 % 0.4 % Donations 170 125 0.1 % — % Other 8,006 5,108 3.1 % 1.9 % Total SG&A $ 45,288 $ 32,942 17.3 % 12.4 % 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 $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. Income Taxes Three Months Ended Effective Tax Rate March 31, 2024 March 31, 2023 2024 2023 (in thousands) Income tax provision $ 7,792 $ 6,356 16.6 % 14.7 % The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.6%. 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 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. 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. - 30 - Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides for maximum borrowings of $200.0 million. 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. 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. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% 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 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 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”). In connection with the NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2019 Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities. Upon closing of the 2019 NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities, and a guarantee from the Company, including an unconditional guarantee of the NMTCs. 2023 New Markets Tax Credit - On April 25, 2023, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2023 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2023 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2023 Project”). In connection with the 2023 NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2023 Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities. Upon closing of the 2023 NMTC transaction, the Company provided an aggregate of approximately $16.7 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $16.7 million in proceeds plus capital contributed from the Investor was used to make an aggregate $23.8 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. 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 - 31 - 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 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. Our open market repurchase programs are as follows: Effective Date Authorized Repurchase $ Expiration Date 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 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 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. 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: Three Months Ended March 31, 2024 March 31, 2023 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Shares 1 Total $ $ per share 1 Employees 36,860 3,041 82.50 17,509 1,030 58.83 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 March 31, 2024 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Open market 6,893,924 $ 106,625 $ 15.47 401(k) 12,462,552 171,789 13.78 Directors and employees 3,126,197 27,703 8.86 Total 22,482,673 $ 306,117 $ 13.62 1 Reflects three-for-two stock split effective August 16, 2023. - 32 - Dividends - At the discretion of the Board, we pay cash dividends. Board approval is required to determine the date of declaration and amount for each cash dividend payment. Our recent cash dividends are as follows: Declaration Date Record Date Payment Date Dividend per Share 1 Annualized Dividend per Share 1 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 March 5, 2024 March 18, 2024 March 29, 2024 $0.08 $0.32 1 Reflects three-for-two stock split effective August 16, 2023. On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company's common stock that was paid in the form of a stock dividend. Stockholders of record at the close of business on July 28, 2023 received one additional share for every two shares they held as of that date on August 16, 2023 (ex-dividend date August 17, 2023). All share and per share information has been updated to reflect the effects of this stock split. Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing) and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures, and other liquidity requirements associated with our operations in 2024 and the foreseeable future. - 33 - Statement of Cash Flows 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. Three Months Ended March 31, 2024 March 31, 2023 (in thousands) Operating Activities Net Income $ 39,016 $ 36,814 Income statement adjustments, net 17,380 14,917 Changes in assets and liabilities: Accounts receivable 28,334 (33,740) Income taxes 8,221 5,262 Inventories 16,699 (861) Contract assets (5,387) 25 Prepaid expenses and other long-term assets (4,349) (3,613) Accounts payable (9,968) (16,318) Contract liabilities 2,770 713 Extended warranties 698 777 Accrued liabilities & other long-term liabilities (1,044) 847 Net cash provided by operating activities 92,370 4,823 Investing Activities Capital expenditures (34,688) (28,935) Software development expenditures (4,055) — Other 29 116 Net cash used in investing activities (38,714) (28,819) Financing Activities Proceeds from financing obligations, net of issuance costs 4,186 — Payment related to financing costs (417) — Borrowings under revolving credit facility 115,130 105,172 Payments under revolving credit facility (153,458) (92,512) Stock options exercised 9,844 15,856 Employee taxes paid by withholding shares (3,041) (1,030) Cash dividends paid to stockholders (6,556) (6,459) Net cash (used in) provided by financing activities $ (34,312) $ 21,027 Cash Flows Provided by Operating Activities The Company currently manages cash needs through working capital as well as drawing on its line of credit. Collections and payments cycles are on a normal pattern and fluctuate due to timing of receipts and payments. 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. - 34 - Cash Flows Used in Investing Activities 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. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges. Cash Flows Provided by Financing Activities The change in cash from financing activities in 2024 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of certain capital expenditures, offset by repayments we were able to make due to our increased operating results and financial condition. Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees. Stock options exercises decreased during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Commitments and Contractual Obligations We are occasionally party to short-term and long-term, cancellable and occasionally non-cancellable, contracts with suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw material and component parts for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of 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 three months ended March 31, 2024. Recent Accounting Pronouncements See Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements. Forward-Looking Statements This Quarterly Report on Form 10-Q (or statements otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, website postings, presentations or otherwise) includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not historical facts are forward-looking statements and involve risks and uncertainties. For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “confident”, “outlook”, “project”, “should”, “will”, and variations of such words and other words of similar meaning or similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Important factors that could cause results to differ materially from those in the forward-looking statements include, among others: • market conditions and customer demand for our products; • the timing and extent of changes in raw material and component prices; - 35 - • naturally-occurring events, pandemics, and other disasters causing disruption to our manufacturing operations, product deliveries and production capacity; • the impact caused by inflationary cost pressures, national or global health issues, such as the coronavirus pandemic (“COVID-19”), any variants or similar outbreaks (including the response thereto) and their effects on, among other things, demand for our products, supply chain disruptions, our liquidity and financial position, results of operations, stock price, payment of dividends, our ability to secure new orders, our ability to convert backlog to revenue and impacts to the operations status of our facilities; • natural disasters and extreme weather conditions, including, without limitation, their effects on locations where our products are manufactured; • the effects of fluctuations in the commercial/industrial new construction market; • the timing of introduction and market acceptance of new products; • the timing and extent of changes in interest rates, as well as other competitive factors during the year; • general economic, market or business conditions; • tightening of labor markets and the ability to hire employees for continued growth • creditworthiness of our customers and their access to capital; • changing technologies; • the material failure, interruption of service, compromised data or information technology security, phishing emails, cybersecurity breaches or other impacts to our information technology and related systems and networks (including any of the foregoing of third-party vendors and other contractors who provide information technology or other services); • costs and results of litigation, including trial and appellate costs; • economic, market or business conditions in the specific industry and market in which our businesses operate; • future levels of capital expenditures, research and development and indebtedness, including, without limitation, our ability to reduce indebtedness and risks associated with the same; • legal, regulatory, and environmental issues, including, without limitation, compliance of our products with mandated standards and specifications; and • integration of acquired businesses and our ability to realize synergies and cost savings. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Except as required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events, occurrences or developments after the date on which such statement is made. For a discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, please see Item 1A “Risk Factors” included in our Annual Report on Form 10-K, and as otherwise disclosed from time to time in our other filings with the SEC.