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 $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. 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 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. - 28 - 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, through February 1, 2024. Backlog The following table shows our historical backlog levels: June 30, 2024 December 31, 2023 June 30, 2023 (in thousands) $ 650,005 $ 510,028 $ 526,209 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 June 30, Six months ended June 30, 2024 2023 2024 2023 (in thousands) Net sales $ 313,566 $ 283,957 $ 575,665 $ 549,910 Cost of sales 200,472 189,939 370,329 378,738 Gross profit 113,094 94,018 205,336 171,172 Selling, general and administrative expenses 45,895 39,272 91,183 72,214 Loss (gain) on disposal of assets — 6 (16) 12 Income from operations $ 67,199 $ 54,740 $ 114,169 $ 98,946 The following are recent highlights and items that impacted our results of operations, cash flows and financial condition: • 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. - 29 - 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. Segment Operating Results for Three Months Ended June 30, 2024 and Three Months Ended June 30, 2023 Three Months Ended June 30, 2024 Percent of Sales 1 June 30, 2023 Percent of Sales 1 $ Change % Change (in thousands) Net Sales 2 AAON Oklahoma $ 225,727 72.0 % $ 218,214 76.8 % $ 7,513 3.4 % AAON Coil Products 31,373 10.0 % 30,081 10.6 % 1,292 4.3 % BASX 56,466 18.0 % 35,662 12.6 % 20,804 58.3 % Net sales $ 313,566 $ 283,957 $ 29,609 10.4 % Cost of Sales 2 AAON Oklahoma $ 141,857 62.8 % 142,835 65.5 % $ (978) (0.7) % AAON Coil Products 18,214 58.1 % 22,598 75.1 % (4,384) (19.4) % BASX 40,401 71.5 % 24,506 68.7 % 15,895 64.9 % Cost of sales $ 200,472 63.9 % $ 189,939 66.9 % $ 10,533 5.5 % Gross Profit 2 AAON Oklahoma $ 83,870 37.2 % $ 75,379 34.5 % $ 8,491 11.3 % AAON Coil Products 13,159 41.9 % 7,483 24.9 % 5,676 75.9 % BASX 16,065 28.5 % 11,156 31.3 % 4,909 44.0 % Gross profit $ 113,094 36.1 % $ 94,018 33.1 % $ 19,076 20.3 % 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 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. 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. - 30 - Raw Material Costs Three-month average raw material cost per pound as of June 30: 2024 2023 % Change Copper $ 5.28 $ 5.91 (10.7) % Galvanized steel $ 0.57 $ 0.64 (10.9) % Stainless steel $ 2.56 $ 3.34 (23.4) % Aluminum $ 2.40 $ 2.58 (7.0) % Selling, General and Administrative Expenses Three Months Ended Percent of Sales June 30, 2024 June 30, 2023 2024 2023 (in thousands) Warranty $ 3,320 $ 3,126 1.1 % 1.1 % Profit sharing 6,477 5,952 2.1 % 2.1 % Salaries & benefits 14,089 13,390 4.5 % 4.7 % Stock compensation 2,841 2,476 0.9 % 0.9 % Advertising 1,005 1,013 0.3 % 0.4 % Depreciation & amortization 4,266 3,224 1.4 % 1.1 % Insurance 2,037 1,198 0.6 % 0.4 % Professional fees 1,241 876 0.4 % 0.3 % Donations 755 429 0.2 % 0.2 % Other 9,864 7,588 3.1 % 2.7 % Total SG&A $ 45,895 $ 39,272 14.6 % 13.8 % 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. Income Taxes Three Months Ended Effective Tax Rate June 30, 2024 June 30, 2023 2024 2023 (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. - 31 - 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) Net Sales 2 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. 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. 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) % - 32 - Selling, General and Administrative Expenses Six Months Ended Percent of Sales June 30, 2024 June 30, 2023 2024 2023 (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 $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. Income Taxes Six Months Ended Effective Tax Rate June 30, 2024 June 30, 2023 2024 2023 (in thousands) Income tax provision $ 22,571 $ 14,034 19.8 % 14.5 % The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 25.2%. 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 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. - 33 - Revolving Line of Credit - Our revolving credit facility (as amended, "Revolver"), provides for maximum borrowings of $200.0 million. 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. 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% 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 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 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”). 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 - 34 - 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 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 1 February 27, 2024 February 27, 2024 $50 million 1 June 4, 2024 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 other repurchases from directors or employees are contingent upon Board approval and are repurchased at current market prices. Our repurchase activity is as follows: Six Months Ended June 30, 2024 June 30, 2023 (in thousands, except share and per share data) Program Shares 1 Total $ $ per share 1 Shares 1 Total $ $ per share 1 Open market 1,353,564 $ 100,034 $ 73.90 — $ — $ — Employees 42,573 3,493 82.05 19,624 1,162 59.21 Total 1,396,137 $ 103,527 $ 74.15 19,624 $ 1,162 $ 59.21 1 Reflects three-for-two stock split effective August 16, 2023. 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 May 24, 2024 June 7, 2024 June 28, 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. - 35 - Statement of Cash Flows 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. Six Months Ended June 30, 2024 June 30, 2023 (in thousands) Operating Activities Net Income $ 91,244 $ 82,496 Income statement adjustments, net 38,359 25,996 Changes in assets and liabilities: Accounts receivable (12,210) (26,782) Income taxes (6,139) (15,171) Inventories 29,903 (17,927) Contract assets (22,977) (4,711) Prepaid expenses and other long-term assets (2,708) (2,502) Accounts payable (1,804) (14,874) Contract liabilities 13,105 (1,162) Extended warranties 1,195 1,526 Accrued liabilities & other long-term liabilities (56) 33,051 Net cash provided by operating activities 127,912 59,940 Investing Activities Capital expenditures (65,381) (60,629) Software development expenditures (10,058) — Other 42 132 Net cash used in investing activities (75,397) (60,497) Financing Activities Proceeds from financing obligations, net of issuance costs 4,186 6,061 Payment related to financing costs (417) (398) Borrowings under revolving credit facility 272,526 279,961 Payments under revolving credit facility (224,970) (272,429) Stock options exercised 15,821 23,244 Repurchase of stock (100,034) — Employee taxes paid by withholding shares (3,493) (1,162) Cash dividends paid to stockholders (13,079) (13,004) Net cash (used in) provided by financing activities $ (49,460) $ 22,273 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, 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. - 36 - Cash Flows Used in Investing Activities 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. 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. 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 six months ended June 30, 2024, compared to the six months ended June 30, 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 June 30, 2024, except as described below. In 2023, the Company executed a five-year purchase commitment for refrigerants. 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 June 30, 2024. Critical Accounting Policies There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 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; - 37 - • 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.