What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 136 added, 77 removed, 238 unchanged (47% of the section changed)

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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.

Foreign sales were approximately $14.5 million of our total net sales for the six months ended June 30, 2024, and $20.3 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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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.

At June 30, 2024, the price (year to date average) for copper, galvanized steel, stainless steel and aluminum decreased 6.7%, 19.4%, 20.7%, and 3.3%, respectively, as compared to the price (year to date average) at June 30, 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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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.

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

The following table shows our historical backlog levels:

2024 December 31,

2023 March 31,

2023 June 30,

(in thousands)

$ 650,005 $ 510,028 $ 526,209

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.

At June 30, 2024, we had a record backlog of $650.0 million, up sequentially for a third straight quarter.

Compared to a year ago, backlog was up 23.5% from $526.2 million, driven by the BASX and AAON Coil Products segments.

The increase in bookings for the quarter primarily related to solutions for the data center market.

Results of Operations

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2024 2023 2024 2023

(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 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.

• Net sales for the three and six months ended June 30, 2024, increased 10.4% and 4.7%, respectively, compared to the same period in 2023.

• Our gross profit margin for three and six months ended June 30, 2024, increased 300 and 460 basis points, respectively, from the three and six months ended June 30, 2023, due to price increases, product mix for operational efficiencies, lower material costs, and better overhead absorption.

• We completed the repurchase of 1.4 million shares for $103.5 million during the six months ended June 30, 2024.

• We continued construction on our expansion projects for our Longview and Redmond facilities to build out capacity for the growing data center markets.

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 March 31, 2024 and Three Months Ended March 31, 2023

Segment Operating Results for Three Months Ended June 30, 2024 and Three Months Ended June 30, 2023

Three Months Ended

March 31, 2024 Percent of Sales 1

March 31, 2023 Percent of Sales 1

June 30, 2024 Percent of Sales 1

June 30, 2023 Percent of Sales 1

$ Change % Change

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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.

For the three months ended June 30, 2024, total net sales increased $29.6 million or 10.4%, due to a increase in volumes of approximately 4.7% and price increases of approximately 5.7%.

F or the three months ended June 30, 2024, our BASX segment increased by 58.3% primarily related to data center cooling solutions .

Gross profit as a percent of sales increased to 36.1% for the three months ended June 30, 2024, as compared to 33.1% for the three months ended June 30, 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 and AAON Coil Products segments, improving overall consolidated margin performance.

BASX saw a decrease in gross profit improvement as a percent of sales due to expansion related disruptions within the quarter.

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 six to 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.

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Raw Material Costs

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

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

2024 2023 % Change

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Three Months Ended Percent of Sales

2024 March 31,

2024 June 30,

(in thousands)

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Total SG&A $ 45,895 $ 39,272 14.6 % 13.8 %

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

Selling, general and administrative expenses increased $6.6 million for the three months ended June 30, 2024, from the prior year period.

Depreciation and amortization has increased $1.0 million during the three months ended June 30, 2024, due to increased investments in back office technology and automation.

Professional fees increased $0.4 million during the three months ended June 30, 2024, due to various professional, regulatory, and legal corporate requirements.

Other expenses increased $2.3 million or 30.0% during the three months ended June 30, 2024, due to increased travel, bad debt and consulting expenses.

Three Months Ended Effective Tax Rate

2024 June 30,

(in thousands)

Income tax provision $ 14,779 $ 7,678 22.1 % 14.4 %

The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.2%.

The 14.4% overall effective tax rate for the three months ended June 30, 2023, 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 three months ended June 30, 2023.

Segment Operating Results for Six Months Ended June 30, 2024 and Six Months Ended June 30, 2023

Six Months Ended

June 30, 2024 Percent of Sales 1

June 30, 2023 Percent of Sales 1

$ Change % Change

(in thousands)

AAON Oklahoma $ 435,867 75.7 % $ 420,216 76.4 % $ 15,651 3.7 %

AAON Coil Products 55,620 9.7 % 63,493 11.5 % (7,873) (12.4) %

BASX 84,178 14.6 % 66,201 12.0 % 17,977 27.2 %

Net sales $ 575,665 $ 549,910 $ 25,755 4.7 %

Cost of Sales 2

AAON Oklahoma $ 273,586 62.8 % 282,987 67.3 % $ (9,401) (3.3) %

AAON Coil Products 34,322 61.7 % 48,852 76.9 % (14,530) (29.7) %

BASX 62,421 74.2 % 46,899 70.8 % 15,522 33.1 %

Cost of sales $ 370,329 64.3 % $ 378,738 68.9 % $ (8,409) (2.2) %

Gross Profit 2

AAON Oklahoma $ 162,281 37.2 % $ 137,229 32.7 % $ 25,052 18.3 %

AAON Coil Products 21,298 38.3 % 14,641 23.1 % 6,657 45.5 %

BASX 21,757 25.8 % 19,302 29.2 % 2,455 12.7 %

Gross profit $ 205,336 35.7 % $ 171,172 31.1 % $ 34,164 20.0 %

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

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

2 Presented after intercompany eliminations.

For the six months ended June 30, 2024, total net sales increased $25.8 million or 4.7%, d ue primarily to increases in price.

AAON Coil Products segment experienced some production timing delays in early 2024 which contributed to the overall decrease in sales.

BASX continues to see increased demand for data cooling solutions, increasing their sales year-over-year.

Gross profit as a percent of sales increased to 35.7% for the six months ended June 30, 2024, as compared to 31.1% for the six months ended June 30, 2023.

Production timing delays at our BASX location during the first quarter of 2024 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 six to 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

Six-month average raw material cost per pound as of June 30:

2024 2023 % Change

Copper $ 5.43 $ 5.82 (6.7) %

Galvanized steel $ 0.58 $ 0.72 (19.4) %

Stainless steel $ 2.65 $ 3.34 (20.7) %

Aluminum $ 2.36 $ 2.44 (3.3) %

Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2024 June 30,

(in thousands)

Warranty $ 6,718 $ 5,534 1.2 % 1.0 %

Profit sharing 11,077 10,818 1.9 % 2.0 %

Salaries & benefits 29,899 26,123 5.2 % 4.8 %

Stock compensation 5,085 4,349 0.9 % 0.8 %

Advertising 1,604 1,859 0.3 % 0.3 %

Depreciation & amortization 8,136 5,869 1.4 % 1.1 %

Insurance 4,008 2,431 0.7 % 0.4 %

Professional fees 5,861 1,981 1.0 % 0.4 %

Donations 925 554 0.2 % 0.1 %

Other 17,870 12,696 3.1 % 2.3 %

Total SG&A $ 91,183 $ 72,214 15.8 % 13.1 %

Selling, general and administrative expenses increased $19.0 million for the six months ended June 30, 2024, from the prior year period.

Salaries and benefits increased $3.8 million or 14.5%, 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.

Three Months Ended Effective Tax Rate

2024 March 31,

Depreciation and amortization has increased $2.3 million due to investments in back office technology and automation.

Professional fees increased $3.9 million during the six months ended June 30, 2024, due to various professional, regulatory, and legal corporate requirements.

Other expenses increased $5.2 million or 40.8% during the six months ended June 30, 2024, due to increased travel, bad debts, the closing of our New Markets Tax Credit transaction and consulting expenses.

Six Months Ended Effective Tax Rate

2024 June 30,

(in thousands)

1 unchanged sentence

The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.2%.

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.

The 14.5% overall effective tax rate for the six months ended June 30, 2023, 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 six months ended June 30, 2023.

During the six months ended June 30, 2024, the Company recorded an excess tax benefit of $6.7 million as compared to $5.8 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 six months ended June 30, 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.

Working Capital - Our unrestricted cash decreased $0.3 million from December 31, 2023 to June 30, 2024.

Our restricted cash increased $3.3 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.

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.

As of June 30, 2024 and December 31, 2023, we had $85.9 million and $38.3 million outstanding under the Revolver, respectively.

We had two standby letters of credit totaling $2.3 million as of June 30, 2024.

At June 30, 2024, we have $111.8 million of borrowings available under the Revolver.

The Revolver expires May 27, 2027.

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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 6.6% 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.

The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% for both the three and six months ended June 30, 2024, respectively, as compared to 6.3% and 6.2% for the three and six months ended June 30, 2023, respectively.

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 six months ended June 30, 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.

At June 30, 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.

At June 30, 2024, our leverage ratio was 0.3 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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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.

Stock Repurchases - 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:

Effective Date Authorized Repurchase $ Expiration Date

November 3, 2022 $50 million February 27, 2024

November 3, 2022 $50 million 1

February 27, 2024

February 27, 2024 $50 million 1

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.

June 4, 2024 $50 million 2

June 14, 2024

1 Repurchases made in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

2 Repurchases made in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

The Company also 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.

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

Our repurchase activity is as follows:

Three Months Ended

March 31, 2024 March 31, 2023

Six Months Ended

June 30, 2024 June 30, 2023

(in thousands, except share and per share data)

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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 1,353,564 $ 100,034 $ 73.90 — $ — $ —

401(k) 12,462,552 171,789 13.78

Directors and employees 3,126,197 27,703 8.86

Employees 42,573 3,493 82.05 19,624 1,162 59.21

1,396,137 $ 103,527 $ 74.15 19,624 $ 1,162 $ 59.21

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

May 24, 2024 June 7, 2024 June 28, 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 three months ended March 31, 2024 and 2023.

The following table reflects the major categories of cash flows for the six months ended June 30, 2024 and 2023.

For additional details, see the consolidated financial statements.

Three Months Ended

2024 March 31,

Six Months Ended

2024 June 30,

(in thousands)

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Net cash provided by operating activities

127,912 59,940

Investing Activities

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Stock options exercised 15,821 23,244

Repurchase of stock (100,034) —

Employee taxes paid by withholding shares (3,493) (1,162)

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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.

Additionally, 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 during the six months ended June 30, 2023.

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.

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.

The capital expenditures for the six months ended June 30, 2024, relate to our continued investment in our production capabilities.

Purchases during the six months ended June 30, 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.

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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.

During the six months ended June 30, 2024, we repurchased $100.0 million under our open market share repurchase programs.

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.

Stock options exercises decreased during the six months ended June 30, 2024, compared to the six months ended June 30, 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 March 31, 2024 except as described below.

We had no material contractual purchase obligations as of June 30, 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.

Payments made in satisfaction of the purchase commitment were approximately $3.0 million and $6.6 million the three and six months ended June 30, 2024, respectively, as compared to$2.7 million and $5.1 million for the three and six months ended June 30, 2023, respectively.

Estimated minimum future payments are $5.3 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.

We had no other material contractual purchase obligations as of June 30, 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.

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 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