What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-01 · 99 added, 90 removed, 284 unchanged (40% of the section changed)

8 unchanged sentences

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.

Foreign sales were approximately $24.6 million of our total net sales for the nine months ended September 30, 2024, and $29.3 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 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.

At September 30, 2024, the price (year to date average) for copper, galvanized steel, stainless steel and aluminum decreased 5.1%, 13.2%, 23.7%, and 1.6%, respectively, as compared to the price (year to date average) at September 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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The following table shows our historical backlog levels:

September 30,

2024 December 31,

2023 June 30,

2023 September 30,

(in thousands)

$ 647,694 $ 510,028 $ 490,591

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

At September 30, 2024, we had a backlog of $647.7 million.

Compared to a year ago, backlog was up 32.0% from $490.6 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,

At the end of the quarter, a majority of total backlog consisted of orders of data center equipment that will be delivered in 2025.

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

2024 2023 2024 2023

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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.

• Net sales for the three and nine months ended September 30, 2024, increased 4.9% and 4.8%, respectively, compared to the same period in 2023 with increases in our data center solutions of 90.1% and 85.1% for the three and nine months ended September 30, 2024, respectively.

• Our cash flows from operations for the nine months ended September 30, 2024 were $191.7 million, up 78.9% compared to a year ago, giving us the flexibility to continue our investment in capital expenditures and software development of $113.8 million for this period.

• We completed the repurchase of 1.4 million shares for $107.5 million during the nine months ended September 30, 2024.

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 June 30, 2024 and Three Months Ended June 30, 2023

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

Three Months Ended

June 30, 2024 Percent of Sales 1

June 30, 2023 Percent of Sales 1

September 30,

2024 Percent of Sales 1

September 30,

2023 Percent of Sales 1

$ Change % Change

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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.

For the three months ended September 30, 2024, total net sales increased $15.3 million or 4.9%, due to an increase in volumes of approximately 2.8% and price increases of approximately 2.1%.

F or the three months ended September 30, 2024, our BASX segment increased by 58.8% primarily related to data center cooling solutions .

Gross profit as a percent of sales decreased to 34.9% for the three months ended September 30, 2024, as compared to 37.2% for the three months ended September 30, 2023.

AAON Oklahoma's gross profit as a percent of sales decreased due to the lower volumes out of this segment that resulted in less overhead absorption.

AAON Coil products benefited from a favorable product mix of units for the data center market that had significant repetition and resulted in high production efficiencies.

BASX completed construction of its new weld shop expansion in Redmond during the quarter.

The continued construction at this location requires outsourcing of some processes and materials that have lowered the BASX margin temporarily.

As shown in the table below, the cost of raw materials has decreased, or stayed relatively flat, but we continued to experience 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 June 30:

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

2024 2023 % Change

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Three Months Ended Percent of Sales

2024 June 30,

September 30,

2024 September 30,

(in thousands)

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Total SG&A $ 48,637 $ 51,470 14.9 % 16.5 %

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.

Selling, general and administrative expenses decreased $2.8 million for the three months ended September 30, 2024, from the prior year period.

Depreciation and amortization increased $1.9 million during the three months ended September 30, 2024, due to increased investments in back office technology and automation.

Professional fees decreased $8.7 million during the three months ended September 30, 2024, due to the 2023 litigation settlement (Note 18).

Other expenses increased $1.1 million or 13.4% during the three months ended September 30, 2024, due to increased travel and consulting expenses.

Three Months Ended Effective Tax Rate

2024 June 30,

September 30,

2024 September 30,

(in thousands)

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The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 24.9%.

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

During the three months ended September 30, 2024, the Company recorded an excess tax benefit of $5.1 million as compared to $0.5 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 September 30, 2024 and 2023, respectively.

Segment Operating Results for Nine Months Ended September 30, 2024 and Nine Months Ended September 30, 2023

Nine Months Ended

September 30,

2024 Percent of Sales 1

September 30,

2023 Percent of Sales 1

$ Change % Change

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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.

For the nine months ended September 30, 2024, total net sales increased $41.0 million or 4.8%, due primarily to increases in price.

BASX continues to see increased demand for data cooling solutions, increasing their sales year-over-year 39.0%.

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.

Gross profit as a percent of sales increased to 35.4% for the nine months ended September 30, 2024, as compared to 33.3% for the nine months ended September 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.

Production timing delays at our BASX location during the first quarter of 2024, as well as some expansion construction inefficiencies, and materials outsourcing, 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 continued to experience 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.

1 unchanged sentence

Raw Material Costs

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

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

2024 2023 % Change

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Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2024 June 30,

Nine Months Ended Percent of Sales

September 30,

2024 September 30,

(in thousands)

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Total SG&A $ 139,820 $ 123,684 15.5 % 14.4 %

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.

Selling, general and administrative expenses increased $16.1 million for the nine months ended September 30, 2024, from the prior year period.

Depreciation and amortization has increased $4.2 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,

Professional fees decreased $4.8 million during the nine months ended September 30, 2024, primarily due the 2023 litigation settlement (Note 18), offset by increases in various professional, regulatory, and legal corporate requirements.

Other expenses increased $6.3 million or 29.8% during the nine months ended September 30, 2024, due to increased travel, bad debts, the closing of our New Markets Tax Credit transaction, and consulting expenses.

Nine Months Ended Effective Tax Rate

September 30,

2024 September 30,

(in thousands)

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The Company’s estimated annual 2024 effective tax rate, excluding discrete events, is expected to be approximately 24.9%.

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.

The 18.4% overall effective tax rate for the nine months ended September 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.

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

During the nine months ended September 30, 2024, the Company recorded an excess tax benefit of $11.7 million as compared to $6.3 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 nine months ended September 30, 2024 and 2023, respectively.

In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 162(m), the tax deduction for covered executives of public companies is limited to $1.0 million per individual.

Because of the increase in our stock price and timing of executive stock option exercises this resulted in an increase to the income tax provision of approximately $2.6 million for the nine months ended September 30, 2024.

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.

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

Our restricted cash decreased $2.1 million due to funding requirements related to our Longview, Texas expansion.

Our restricted cash originates from the closing of our recent New Markets Tax Credit transaction related to our Longview, Texas expansion.

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

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.

As of September 30, 2024 and December 31, 2023, we had $55.7 million and $38.3 million outstanding under the Revolver, respectively.

We have one standby letter of credit totaling $0.3 million as of September 30, 2024 and two standby letters of credit totaling $2.3 million as of December 31, 2023.

At September 30, 2024, we have $144.0 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% 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.

The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% for both the three and nine months ended September 30, 2024, respectively, as compared to 6.5% and 6.3% for the three and nine months ended September 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 nine months ended September 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.

At September 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.

At September 30, 2024, our leverage ratio was 0.19 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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Upon closing of the 2024 NMTC transaction, the Company provided an aggregate of approximately $11.0 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%.

This $11.0 million

in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 million loan to a subsidiary of the Company.

This $11.0 million in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 million loan to a subsidiary of the Company.

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

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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.

stock related to our LTIP plans (Note 13) at current market prices.

Our repurchase activity is as follows:

Six Months Ended

June 30, 2024 June 30, 2023

Nine Months Ended

September 30, 2024 September 30, 2023

(in thousands, except share and per share data)

Program Shares 1

Total $ $ per share 1

Program Shares Total $ $ per share Shares Total $ $ per share

Open market 1,353,564 $ 100,034 $ 73.90 402,873 $ 25,009 $ 62.08

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

LTIP shares 1

87,981 7,455 84.73 20,218 1,202 59.45

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

1,441,545 $ 107,489 $ 74.57 423,091 $ 26,211 $ 61.95

1 Includes stock repurchased for payment of statutory tax withholding and/or stock repurchased to cover the strike price of stock options.

Dividends - At the discretion of the Board, we pay cash dividends.

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Declaration Date Record Date Payment Date Dividend

Annualized Dividend

per Share Annualized Dividend

March 1, 2023 March 13, 2023 March 31, 2023 $0.08 $0.32

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May 24, 2024 June 7, 2024 June 28, 2024 $0.08 $0.32

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

August 15, 2024 September 6, 2024 September 27, 2024 $0.08 $0.32

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.

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Statement of Cash Flows

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

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

For additional details, see the consolidated financial statements.

Six Months Ended

2024 June 30,

Nine Months Ended

September 30,

2024 September 30,

(in thousands)

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Cash dividends paid to stockholders (19,571) (19,946)

Net cash (used in) provided by financing activities

Net cash used in financing activities

$ (80,297) $ (7,827)

2 unchanged sentences

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.

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 overall inventory levels.

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 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.

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

Purchases during the nine months ended September 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 six months ended June 30, 2024, compared to the six months ended June 30, 2023.

During the nine months ended September 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 employee.

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 June 30, 2024, except as described below.

We had no material contractual purchase obligations as of September 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.

Payments made in satisfaction of the purchase commitment were approximately $3.1 million and $9.7 million the three and nine months ended September 30, 2024, respectively, as compared to $2.4 million and $7.5 million for the three and nine months ended September 30, 2023, respectively.

Estimated minimum future payments are $2.2 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.

We had no other material contractual purchase obligations as of September 30, 2024.

In November 2024, the Company entered into a definitive agreement to purchase a new 787,000 square foot facility in Memphis, Tennessee, which will accommodate incremental demand from the data center market over the next several years, at the same time providing more geographic diversification across our manufacturing footprint.

The purchase price for the facility is approximately $63.0 million.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2024.

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