AAON, INC. 10-Q

Item 1. Financial Statements. AAON, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) September 30, 2024 December 31, 2023 Assets (in thousands, except share and per share data) Current assets: Cash and cash equivalents $ 15 $ 287 Restricted cash 6,650 8,736 Accounts receivable, net 143,806 138,108 Income tax receivable 1,125 — Inventories, net 177,731 213,532 Contract assets 95,120 45,194 Prepaid expenses and other 3,389 3,097 Total current assets 427,836 408,954 Property, plant and equipment, net 427,652 369,947 Intangible assets, net and goodwill 158,838 149,945 Right of use assets 15,505 11,774 Other long-term assets 794 816 Total assets $ 1,030,625 $ 941,436 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 27,199 $ 27,484 Accrued liabilities 96,243 85,508 Contract liabilities 16,391 13,757 Total current liabilities 139,833 126,749 Revolving credit facility, long-term 55,677 38,328 Deferred tax liabilities 1,658 12,134 Other long-term liabilities 20,527 16,807 New markets tax credit obligations 1 16,074 12,194 Commitments and contingencies (Note 18 ) Stockholders' equity: Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued — — Common stock, $ .004 par value, 200,000,000 shares authorized 2 , 81,246,902 and 81,508,381 issued and outstanding at September 30, 2024 and December 31, 2023, respectively 325 326 Additional paid-in capital 59,398 122,063 Retained earnings 737,133 612,835 Total stockholders' equity 796,856 735,224 Total liabilities and stockholders' equity $ 1,030,625 $ 941,436 1 Held by variable interest entities (Note 17) 2 Effective July 9, 2024, our authorized common shares increased from 100,000,000 to 200,000,000 (Note 16) The accompanying notes are an integral part of these consolidated financial statements. - 1 - AAON, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands, except share and per share data) Net sales $ 327,252 $ 311,970 $ 902,917 $ 861,880 Cost of sales 213,094 195,861 583,423 574,599 Gross profit 114,158 116,109 319,494 287,281 Selling, general and administrative expenses 48,637 51,470 139,820 123,684 Loss (gain) on disposal of assets 1 ( 25 ) ( 15 ) ( 13 ) Income from operations 65,520 64,664 179,689 163,610 Interest expense, net ( 1,091 ) ( 1,266 ) ( 1,697 ) ( 3,959 ) Other income, net 81 93 333 370 Income before taxes 64,510 63,491 178,325 160,021 Income tax provision 11,885 15,413 34,456 29,447 Net income $ 52,625 $ 48,078 $ 143,869 $ 130,574 Earnings per share: Basic $ 0.65 $ 0.59 $ 1.77 $ 1.61 Diluted $ 0.63 $ 0.58 $ 1.72 $ 1.57 Cash dividends declared per common share: $ 0.08 $ 0.08 $ 0.24 $ 0.24 Weighted average shares outstanding: Basic 81,089,476 81,418,800 81,448,413 81,140,473 Diluted 83,107,077 83,393,054 83,579,989 83,275,208 The accompanying notes are an integral part of these consolidated financial statements. - 2 - AAON, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Unaudited) Nine Months Ended September 30, 2024 Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balance at December 31, 2023 81,508 $ 326 $ 122,063 $ 612,835 $ 735,224 Net income — — — 143,869 143,869 Stock options exercised and restricted 937 4 25,641 — 25,645 stock awards granted Contingent shares issued (Note 16) 243 1 6,363 — 6,364 Share-based compensation — — 12,814 — 12,814 Stock repurchased and retired ( 1,441 ) ( 6 ) ( 107,483 ) — ( 107,489 ) Dividends — — — ( 19,571 ) ( 19,571 ) Balance at September 30, 2024 81,247 $ 325 $ 59,398 $ 737,133 $ 796,856 Nine Months Ended September 30, 2023 Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balances at December 31, 2022 80,138 $ 322 $ 98,735 $ 461,657 560,714 Net income — — — 130,574 130,574 Stock options exercised and restricted 1,517 5 25,246 — 25,251 stock awards granted Share-based compensation — — 12,102 — 12,102 Stock repurchased and retired ( 423 ) ( 2 ) ( 26,209 ) — ( 26,211 ) Dividends — — — ( 19,946 ) ( 19,946 ) Balance at September 30, 2023 81,232 $ 325 $ 109,874 $ 572,285 $ 682,484 Three Months Ended September 30, 2024 Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balances at June 30, 2024 80,951 $ 324 $ 49,174 $ 691,000 $ 740,498 Net income — — — 52,625 52,625 Stock options exercised and restricted 342 1 9,823 — 9,824 stock awards granted Share-based compensation — — 4,363 — 4,363 Stock repurchased and retired ( 46 ) — ( 3,962 ) — ( 3,962 ) Dividends — — — ( 6,492 ) ( 6,492 ) Balance at September 30, 2024 81,247 $ 325 $ 59,398 $ 737,133 $ 796,856 Three Months Ended September 30, 2023 Common Stock Paid-in Retained Shares Amount Capital Earnings Total (in thousands) Balances at June 30, 2023 81,569 $ 326 $ 128,636 $ 531,149 $ 660,111 Net income — — — 48,078 48,078 Stock options exercised and restricted 66 1 2,006 — 2,007 stock awards granted Share-based compensation — — 4,279 — 4,279 Stock repurchased and retired ( 403 ) ( 2 ) ( 25,047 ) — ( 25,049 ) Dividends — — — ( 6,942 ) ( 6,942 ) Balance at September 30, 2023 81,232 $ 325 $ 109,874 $ 572,285 $ 682,484 The accompanying notes are an integral part of these consolidated financial statements. - 3 - AAON, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2024 2023 Operating Activities (in thousands) Net income $ 143,869 $ 130,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 45,185 33,439 Amortization of debt issuance costs 111 57 Amortization of right of use assets 133 166 Provision for (recoveries of) credit losses on accounts receivable, net of adjustments 815 ( 92 ) Provision for excess and obsolete inventories, net of write-offs 1,848 2,979 Share-based compensation 12,814 12,102 Gain on disposition of assets ( 15 ) ( 13 ) Foreign currency transaction loss 10 — Interest income on note receivable ( 14 ) ( 15 ) Deferred income taxes ( 4,112 ) ( 3,917 ) Changes in assets and liabilities: Accounts receivable ( 6,513 ) ( 32,040 ) Income taxes ( 2,295 ) ( 12,472 ) Inventories 33,953 ( 18,547 ) Contract assets ( 49,926 ) ( 10,155 ) Prepaid expenses and other long-term assets ( 304 ) ( 896 ) Accounts payable 1,733 ( 15,631 ) Contract liabilities 2,634 ( 1,848 ) Extended warranties 1,249 2,049 Accrued liabilities and other long-term liabilities 10,512 21,405 Net cash provided by operating activities 191,687 107,145 Investing Activities Capital expenditures ( 99,371 ) ( 82,900 ) Proceeds from sale of property, plant and equipment 21 129 Software development expenditures ( 14,436 ) — Principal payments from note receivable 38 39 Net cash used in investing activities ( 113,748 ) ( 82,732 ) Financing Activities Proceeds from financing obligation, net of issuance costs 4,186 6,061 Payment related to financing costs ( 417 ) ( 398 ) Borrowings under revolving credit facility 410,503 444,072 Payments under revolving credit facility ( 393,154 ) ( 436,656 ) Stock options exercised 25,645 25,251 Repurchase of stock ( 100,034 ) ( 25,009 ) Employee taxes paid by withholding shares ( 7,455 ) ( 1,202 ) Cash dividends paid to stockholders ( 19,571 ) ( 19,946 ) Net cash used in financing activities ( 80,297 ) ( 7,827 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 2,358 ) 16,586 Cash, cash equivalents and restricted cash, beginning of period 9,023 5,949 Cash, cash equivalents and restricted cash, end of period $ 6,665 $ 22,535 The accompanying notes are an integral part of these consolidated financial statements. - 4 - AAON, Inc. and Subsidiaries Notes to the Consolidated Financial Statements (Unaudited) 1. General Basis of Presentation AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc. ("AAON Oklahoma"), an Oklahoma corporation, AAON Coil Products, Inc. ("AAON Coil Products"), a Texas corporation, and BASX, Inc. ("BASX"), an Oregon corporation (collectively, the “Company”). The accompanying unaudited consolidated financial statements of AAON, Inc. and our operating subsidiaries, all of which are wholly-owned, have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of eight variable interest entities ("VIEs") (Note 17) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs. These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2023 is derived from audited consolidated financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year. Certain disclosures have been condensed in or omitted from these consolidated financial statements. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. All intercompany balances and transactions have been eliminated in consolidation. We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data centers 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. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position, and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, inventory valuation, inventory reserves, warranty accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates. Inflation and Labor Market In 2023, we saw the slowing of inflation and some stabilization of raw material and component prices. Due to our favorable liquidity position, we continue to make strategic purchases of materials when we see opportunities. We continue to monitor and manage increases in the cost of raw materials through price increases for our products. We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong vendor relationships as well as expanding our list of vendors. Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. We have implemented the following wage increases to remain competitive and to attract and retain employees: • In March 2023, we awarded annual merit raises for an overall 3.9 % increase to wages. • In March 2024, we awarded annual merit raises for an overall 3.3 % increase to wages. - 5 - We continue to implement human resource initiatives to retain and attract labor to further increase production capacity. Beginning in 2023, initiatives included changing our employee paid time off policy, historically awarded in arrears at the beginning of each quarter, to accrue ratably over each pay period. Additionally, we enhanced our benefits for short-term disability, life insurance, paid parental leave, and paid military leave. Despite efforts to mitigate the impact of inflation, supply chain issues and the tight labor market, future disruptions, while temporary, could negatively impact our consolidated financial position, results of operations and cash flows. Accounting Policies A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023. Fair Value Measurements The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt or based on current rates offered to the Company for debt with similar characteristics. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels: • Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date. • Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means. • Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of intangible assets, contingent consideration, and goodwill acquired in a business combination. The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability. Definite-Lived Intangible Assets Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations or asset acquisitions. We amortize our definite-lived intangible assets on a straight-line basis over the estimated - 6 - useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. Amortization is computed using the straight-line method over the following estimated useful lives: Intellectual property 6 - 30 years Customer relationships 14 years Software Development Costs We capitalize costs incurred to purchase or develop software for internal use. Internal-use software development costs are capitalized during the application development stage. These capitalized costs are reflected in intangible assets, net and goodwill on the consolidated balance sheets and are amortized over the estimated useful life of the software. The useful life of our internal-use software development costs is generally one to six years . Goodwill and Indefinite-Lived Intangible Assets Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant. Recent Accounting Pronouncements Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). We consider the applicability and impact of all ASUs. ASUs not listed or included within the Company's Annual Report on Form 10-K for the year ended December 31, 2023, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto. - 7 - 2. Revenue Recognition The following tables show disaggregated net sales by reportable segment (Note 20) by major source, net of intercompany sales eliminations. Three Months Ended September 30, 2024 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop units $ 203,172 $ — $ — $ 203,172 Condensing units — 16,548 — 16,548 Air handlers — 15,829 414 16,243 Cleanroom systems — — 6,966 6,966 Data center cooling solutions — 599 54,561 55,160 Water-source heat pumps — 1,403 — 1,403 Part sales 20,113 1 984 21,098 Other 1 5,602 852 208 6,662 $ 228,887 $ 35,232 $ 63,133 $ 327,252 Three Months Ended September 30, 2023 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop units $ 221,417 $ — $ — $ 221,417 Condensing units — 7,636 — 7,636 Air handlers — 9,862 7,558 17,420 Outdoor mechanical rooms — 62 — 62 Cleanroom systems — — 5,355 5,355 Data center cooling solutions — 3,284 25,726 29,010 Water-source heat pumps — 3,898 — 3,898 Part sales 17,756 4 371 18,131 Other 1 7,281 1,023 737 9,041 $ 246,454 $ 25,769 $ 39,747 $ 311,970 1 Other sales include freight, extended warranties and miscellaneous revenue. - 8 - Nine Months Ended September 30, 2024 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop units $ 598,079 $ — $ — $ 598,079 Condensing units — 43,814 — 43,814 Air handlers — 38,303 4,972 43,275 Cleanroom systems — — 25,506 25,506 Data center cooling solutions — 1,731 114,141 115,872 Water-source heat pumps — 4,558 — 4,558 Part sales 53,404 7 2,168 55,579 Other 1 13,271 2,439 524 16,234 $ 664,754 $ 90,852 $ 147,311 $ 902,917 Nine Months Ended September 30, 2023 AAON Oklahoma AAON Coil Products BASX Total (in thousands) Rooftop units $ 597,508 $ — $ — $ 597,508 Condensing units 61 34,243 — 34,304 Air handlers — 34,693 13,196 47,889 Outdoor mechanical rooms 208 274 — 482 Cleanroom systems — — 35,063 35,063 Data center cooling solutions — 6,524 56,079 62,603 Water-source heat pumps 3,128 10,064 — 13,192 Part sales 47,623 5 862 48,490 Other 1 18,142 3,459 748 22,349 $ 666,670 $ 89,262 $ 105,948 $ 861,880 1 Other sales include freight, extended warranties and miscellaneous revenue. Due to the highly customized nature of many of the Company’s products and each product not having an alternative use to the Company without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract. The Company has formal cancellation policies and generally does not accept returns on these units. As a result, many of the Company’s products do not have an alternative use and therefore, for these products we recognize revenue over the time it takes to produce the unit. Contract costs include direct materials, direct labor, installation, freight and delivery, commissions and royalties. Other costs not related to contract performance, such as indirect labor and materials, small tools and supplies, operating expenses, field rework and back charges are charged to expense as incurred. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are estimated and recognized by the Company throughout the life of the contract. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of billings is shown as a contract asset within our consolidated balance sheets, and the aggregate of billings on uncompleted contracts in excess of related costs incurred and income recognized is shown as a contract liability within our consolidated balance sheets. The Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. For certain manufactured equipment contracts and part sales, the primary performance obligation is delivery. We satisfy the performance obligation when the control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders. - 9 - Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Historically, sales of our products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather. However, in recent years, given the increases in demand of our product, changes in product mix and increases in our backlog, sales have become more constant throughout the year. Product Warranties A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year. The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period. Representatives and Third Party Products We are responsible for billings and collections resulting from all sales transactions, including those initiated by our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing HVAC units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use a Company HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. The Company is considered the principal for the equipment we design and manufacture and records that revenue. The Company has no control over the Third Party Products to the end customer and the Company is under no obligation related to the Third Party Products. Amounts related to Third Party Products are not recognized as revenue but are recorded as a liability and are included in accrued liabilities on the consolidated balance sheets. The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives were $ 10.7 million and $ 20.1 million for the three months ended September 30, 2024 and 2023, respectively, and $ 31.7 million and $ 46.4 million for the nine months ended September 30, 2024 and 2023, respectively. 3. Leases The Company has various lease arrangements for certain manufacturing and warehousing facilities, equipment rental, as well as administrative facilities. Lease expiration dates, including expected renewal options, range from April 2025 to November 2033. The discount rates used to calculate the present value of lease payment range from 1.3 % to 6.6 % as of September 30, 2024. Currently, all leases are classified as operating leases. The following table presents the balances by lease type: Operating Leases Balance Sheet Classification September 30, 2024 December 31, 2023 (in thousands) Right of use assets Right of use assets $ 15,505 $ 11,774 Lease liability, short-term Accrued liabilities 2,298 2,021 Lease liability, long-term Other long-term liabilities 13,788 10,201 - 10 - Since 2018, the Company has leased the manufacturing, engineering, and office space used by our operations in Parkville, Missouri. The lease provides approximately 86,000 square feet of manufacturing and office space. The lease expires December 31, 2032. In November 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma which provides an additional 198,000 square feet to support our operations. In January 2024, we amended the lease for an additional 157,550 square feet for operations and parts distribution. The amended lease term will expire November 30, 2029. In July 2023, the Company entered into a lease agreement with a start date of September 1, 2023, for land and approximately 72,000 square feet of facilities in Redmond, Oregon to support our manufacturing operations. The lease term is approximately five years with additional renewal options. We also lease several properties near our Redmond, Oregon location. In the aggregate, these leases contain approximately 104,500 square feet of additional warehouse space. These leases have expiring terms from February 2025 to November 2033. Total undiscounted future lease payments are as follows: (in thousands) 2024 $ 822 2025 3,126 2026 3,046 2027 3,136 2028 3,130 Thereafter 6,403 4. Accounts Receivable Accounts receivable and the related allowance for credit losses are as follows: September 30, 2024 December 31, 2023 (in thousands) Accounts receivable $ 144,944 $ 138,431 Less: Allowance for credit losses ( 1,138 ) ( 323 ) Total, net $ 143,806 $ 138,108 Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Allowance for credit losses: (in thousands) Balance, beginning of period $ 1,492 $ 306 $ 323 $ 477 Provisions for (recoveries of) expected credit ( 354 ) 79 820 ( 92 ) losses, net of adjustments Accounts receivable written off, net of recoveries — — ( 5 ) — Balance, end of period $ 1,138 $ 385 $ 1,138 $ 385 - 11 - 5. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts. The components of inventories and related changes in the allowance for excess and obsolete inventories account are as follows: September 30, 2024 December 31, 2023 (in thousands) Raw materials $ 179,368 $ 211,259 Work in process 5,692 5,523 Finished goods 679 2,910 Total, gross 185,739 219,692 Less: Allowance for excess and obsolete inventories ( 8,008 ) ( 6,160 ) Total, net $ 177,731 $ 213,532 Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Allowance for excess and obsolete inventories: (in thousands) Balance, beginning of period $ 6,801 $ 5,281 $ 6,160 $ 4,527 Provision for excess and obsolete inventories 2,075 1,521 4,003 2,979 Inventories written off ( 868 ) ( 2,014 ) ( 2,155 ) ( 2,718 ) Balance, end of period $ 8,008 $ 4,788 $ 8,008 $ 4,788 6. Property, Plant and Equipment Our property, plant and equipment consist of the following: September 30, 2024 December 31, 2023 Property, plant and equipment: (in thousands) Land $ 15,918 $ 15,438 Buildings 257,253 205,841 Machinery and equipment 409,160 391,366 Furniture and fixtures 43,786 40,787 Total property, plant and equipment 726,117 653,432 Less: Accumulated depreciation 298,465 283,485 Property, plant and equipment, net $ 427,652 $ 369,947 Depreciation expense is as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Depreciation expense $ 14,636 $ 11,301 $ 39,104 $ 30,734 - 12 - 7. Intangible Assets and Goodwill Intangible Assets Our intangible assets consist of the following: September 30, 2024 December 31, 2023 Definite-lived intangible assets (in thousands) Intellectual property $ 12,450 $ 12,450 Customer relationships 47,547 47,547 Capitalized internal-use software 18,297 3,323 Less: Accumulated amortization ( 15,919 ) ( 9,838 ) Total, net 62,375 53,482 Indefinite-lived intangible assets Trademarks 14,571 14,571 Total intangible assets, net $ 76,946 $ 68,053 Amortization expense is as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Amortization expense $ 2,626 $ 902 $ 6,081 $ 2,705 Total future amortization expense for finite-lived intangible assets was estimated as follows: (in thousands) 2024 $ 2,627 2025 6,395 2026 4,780 2027 4,763 2028 4,655 Thereafter 29,120 Total future amortization expense 52,340 Internal-use software projects not in service 10,035 Total $ 62,375 Goodwill The changes in the carrying amount of goodwill were as follows: Nine Months Ended September 30, 2024 September 30, 2023 (in thousands) Balance, beginning of period $ 81,892 $ 81,892 Additions (decreases) during the period — — Balance, end of period $ 81,892 $ 81,892 - 13 - 8. Supplemental Cash Flow Information Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Supplemental disclosures: (in thousands) Interest paid $ 1,128 $ 1,187 $ 1,676 $ 3,814 Income taxes paid $ 12,194 $ 12,081 $ 40,864 $ 45,724 Non-cash investing and financing activities: Non-cash capital expenditures $ ( 5,296 ) $ ( 1,536 ) $ ( 2,018 ) $ 35 Contingent shares issued (Note 16) $ — $ — $ 6,364 $ — 9. Warranties The Company has product warranties with various terms from one year from the date of first use or 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers. The Company has an obligation to replace parts if conditions under the warranty are met. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products, and any known identifiable warranty issues. Changes in the warranty accrual are as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Warranty accrual: (in thousands) Balance, beginning of period $ 21,632 $ 16,900 $ 20,573 $ 15,682 Payments made ( 3,672 ) ( 3,337 ) ( 9,331 ) ( 7,653 ) Warranty expense 4,670 4,248 11,388 9,782 Balance, end of period $ 22,630 $ 17,811 $ 22,630 $ 17,811 - 14 - 10. Accrued Liabilities and Other Long-Term Liabilities Accrued liabilities were comprised of the following: September 30, 2024 December 31, 2023 (in thousands) Warranty $ 22,630 $ 20,573 Due to representatives 21,171 14,428 Payroll 18,722 18,829 Profit sharing 6,242 7,596 Workers' compensation 630 338 Medical self-insurance 2,420 1,460 Customer prepayments 1,969 2,621 Donations, short-term 635 381 Accrued income taxes — 1,170 Employee vacation time 11,154 10,315 Extended warranties, short-term 2,979 2,387 Lease liability, short-term 2,298 2,021 Property taxes 3,014 — Other 2,379 3,389 Total $ 96,243 $ 85,508 Other long-term liabilities were comprised of the following: September 30, 2024 December 31, 2023 (in thousands) Lease liability $ 13,788 $ 10,201 Extended warranties 6,739 6,082 Donations and other — 524 Total $ 20,527 $ 16,807 11. Revolving Credit Facility On May 27, 2022, we amended our $ 100.0 million Amended and Restated Loan Agreement dated November 24, 2021 (as amended, “Revolver”), to provide for maximum borrowings of $ 200.0 million. 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. Borrowings available under the Revolver at September 30, 2024 were $ 144.0 million. The Revolver expires on May 27, 2027. We have amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit transactions (Note 17). 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 nine months ended September 30, 2024 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 affected 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 %. - 15 - At September 30, 2024, we were in compliance with our covenants, as defined by the Revolver. Our financial covenants require that we meet certain parameters related to our leverage ratio. At September 30, 2024, our leverage ratio was 0.19 to 1.0, which meets the requirement of not being above 3 to 1. 12. Income Taxes The provision (benefit) for income taxes consists of the following: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Current $ 16,038 $ 14,892 $ 38,568 $ 33,364 Deferred ( 4,153 ) 521 ( 4,112 ) ( 3,917 ) Income tax provision $ 11,885 $ 15,413 $ 34,456 $ 29,447 The provision for income taxes differs from the amount computed by applying the Federal statutory income tax rate before the provision for income taxes. The reconciliation of the Federal statutory income tax rate to the effective income tax rate is as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Federal statutory rate 21.0 % 21.0 % 21.0 % 21.0 % State income taxes, net of Federal benefit 4.9 3.4 5.0 4.0 Excess tax benefits related to share-based compensation (Note 13) ( 7.9 ) ( 0.8 ) ( 6.6 ) ( 3.9 ) Return to provision ( 0.3 ) 0.9 ( 0.2 ) 0.3 Non-deductible executive compensation 1.9 — 1.5 — Research and development credits ( 1.1 ) ( 0.2 ) ( 1.2 ) ( 0.9 ) Change in valuation allowance (Oklahoma Investment Credit) — — — ( 2.0 ) Other ( 0.1 ) — ( 0.2 ) ( 0.1 ) Effective tax rate 18.4 % 24.3 % 19.3 % 18.4 % We have historically earned investment tax credits from the state of Oklahoma’s manufacturing property investment program. We use the flow-through method to account for investment tax credits earned on eligible tangible asset expenditures. Under this method, the investment tax credits are recognized as a reduction to our Oklahoma income tax expense in the year they are used. As part of our expansion projects in Oklahoma, we identified a separate, more advantageous Oklahoma credit program (not income tax related) which resulted in us discontinuing our accumulation of credits for Oklahoma’s manufacturing property investment program after the 2022 tax year. Because the Company will not generate additional excess credits after our 2022 tax year, we will be able to use our credit carryforwards against future taxable income and the related valuation allowance was reversed resulting in a one-time benefit of $ 3.1 million to the income tax provision for the nine months ended September 30, 2023. As of September 30, 2024, we have investment tax credit carryforwards of approximately $ 0.6 million. These credits have estimated expirations from the year 2039 through 2043. 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 $ 1.2 million and $ 2.6 million for the three and nine months ended September 30, 2024, respectively. In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 174, research and development expenses incurred after December 31, 2021 are required to be capitalized and amortized over 5 years. The amortization requirements for tax purposes is a mid-year convention, meaning that the tax amortization is 10% in the year of acquisition, 20% in the following 4 years, and 10% in the final year. The Company's estimated annual 2024 effective tax rate, excluding discrete events, is approximately 24.9 %. We file income tax returns in the U.S., state and foreign income tax return jurisdictions. We are subject to U.S. income tax examinations for tax years 2021 to present, and to non-U.S. income tax examinations for the tax years 2020 to present. In addition, we are subject to - 16 - state and local income tax examinations for the tax years 2020 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense. 13. Share-Based Compensation On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Under the LTIP, the exercise price of shares granted could not be less than 100 % of the fair market value at the date of the grant. On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that were then authorized for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 million shares that were approved by the stockholders on May 12, 2020. On May 21, 2024, our stockholders adopted the 2024 Long-Term Incentive Plan ("2024 Plan") which provides for approximately 2.7 million new shares and approximately 3.7 million shares that were issued and outstanding under the 2016 Plan (as of May 21, 2024) that are now authorized for issuance under the 2024 Plan. The 3.7 million shares issued and outstanding under the 2016 Plan are only eligible for issuance under the 2024 Plan upon forfeiture, expiration, or cancellation. Under the 2024 Plan and previously under the 2016 Plan (collectively, the "Plans"), shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the Plans, the exercise price of shares granted may not be less than 100 % of the fair market value at the date of the grant. The Plans are administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the Plans. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the Plans, establishes and revises rules and regulations relating to the Plans and makes any other determinations that it believes necessary for the administration of the Plans. Options The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the nine months ended September 30, 2024 and 2023, using a Black Scholes-Merton Model: Nine months ended September 30, 2024 September 30, 2023 Senior Leadership 1 : Expected (annual) dividend rate $ 0.32 $ 0.32 Expected volatility 37.90 % 37.89 % Risk-free interest rate 4.14 % 4.39 % Expected life (in years) 4.0 4.0 Employees: Expected (annual) dividend rate $ 0.32 $ 0.32 Expected volatility 33.56 % 38.30 % Risk-free interest rate 4.27 % 4.41 % Expected life (in years) 3.0 3.0 1 Senior Leadership consists of officers and key members of management. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. - 17 - The following is a summary of stock options vested and exercisable as of September 30, 2024: Range of Exercise Prices Number of Shares Weighted Average Remaining Contractual Life (in years) Weighted Average Exercise Price Intrinsic Value ( in thousands ) $ 13.95 - $ 27.58 1,267,078 3.75 $ 25.27 $ 104,618 $ 28.28 - $ 37.07 534,194 6.01 31.63 40,709 $ 37.09 - $ 107.85 332,194 6.97 50.80 18,947 Total 2,133,466 4.82 $ 30.84 $ 164,274 A summary of stock option activity under the plans is as follows: Stock Options Shares Weighted Average Exercise Price Outstanding at December 31, 2023 3,619,585 $ 33.09 Granted 414,016 79.77 Exercised ( 820,177 ) 31.26 Forfeited or Expired ( 44,816 ) 52.50 Outstanding at September 30, 2024 3,168,608 $ 39.34 Exercisable at September 30, 2024 2,133,466 $ 30.84 The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2024, is $ 10.8 million and is expected to be recognized over a weighted average period of approximately 2.0 years. The total intrinsic value of options exercised during the nine months ended September 30, 2024 and 2023, was $ 45.7 million and $ 27.6 million, respectively. The cash received from options exercised during the nine months ended September 30, 2024 and 2023, was $ 25.6 million and $ 25.3 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. Restricted Stock The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends. At September 30, 2024, unrecognized compensation cost related to unvested restricted stock awards was approximately $ 5.9 million, which is expected to be recognized over a weighted average period of approximately 1.8 years. A summary of the unvested restricted stock awards is as follows: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2023 187,084 $ 44.07 Granted 65,187 78.26 Vested ( 96,672 ) 40.87 Forfeited ( 5,560 ) 56.41 Unvested at September 30, 2024 150,039 $ 60.53 - 18 - PSUs We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index. The TSR measurement period is three years . At the end of the measurement period, each award will be converted into common stock at 0 % to 200 % of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies. The total pre-tax compensation cost related to unvested PSUs not yet recognized as of September 30, 2024, is $ 6.0 million and is expected to be recognized over a weighted average period of approximately 1.7 years. The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the nine months ended September 30, 2024 and 2023, using a Monte Carlo Model: Nine months ended September 30, 2024 September 30, 2023 Expected (annual) dividend rate $ 0.32 $ 0.32 Expected volatility 33.99 % 32.71 % Risk-free interest rate 4.31 % 4.66 % Expected life (in years) 2.8 2.8 The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. A summary of the unvested PSUs is as follows: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2023 152,112 $ 54.88 Granted 47,965 106.24 Additional payout 1 2,059 58.53 Vested ( 21,919 ) 58.53 Forfeited ( 5,957 ) 69.81 Unvested at September 30, 2024 2 174,260 $ 68.09 1 The additional number of PSUs earned based on a 110% achievement at December 31, 2023 for awards vesting in 2024. 2 Consists of 70,852 PSUs cliff vesting December 31, 2024, 56,528 PSUs cliff vesting December 31, 2025, and 46,880 PSUs cliff vesting December 31, 2026. Key Employee Awards As part of the December 2021 acquisition of BASX, the Company granted 39,899 awards to key employees of BASX ("Key Employee Awards"). Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period. The issuance of the Key Employee Awards was contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award vested and was converted into common stock. The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date. The weighted average grant date fair value of the key awards was $53.45. All pre-tax compensation cost has been recognized as of December 31, 2023, and all 39,899 awards vested in March 2024. - 19 - Share-Based Compensation A summary of share-based compensation is as follows: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Grant date fair value of awards during the period: (in thousands) Options $ 222 $ 106 $ 9,342 $ 5,224 PSUs 39 — 5,096 4,907 Restricted stock 73 246 5,102 4,396 Total $ 334 $ 352 $ 19,540 $ 14,527 Share-based compensation expense: Options $ 1,960 $ 2,228 $ 6,213 $ 6,604 PSUs 1,238 737 3,089 1,820 Restricted stock 1,165 1,053 3,512 2,903 Key Employee Awards — 261 — 775 Total $ 4,363 $ 4,279 $ 12,814 $ 12,102 Income tax benefit (deficiency) related to share-based compensation: Options $ 5,066 $ 478 $ 10,294 $ 5,639 PSUs — — 169 — Restricted stock 32 16 1,003 680 Key Employee Awards — — 282 — Total $ 5,098 $ 494 $ 11,748 $ 6,319 Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20 % per year. Restricted stock awards granted to directors historically vested one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year. As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3 % per year. Forfeitures are accounted for as they occur. Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP, 2016 Plan or 2024 Plan) or becomes retirement eligible during the service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All stock options and restricted stock awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur. The PSUs cliff vest on December 31, at the end of the third year from the date of grant. Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs. The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur. - 20 - 14. Employee Benefits Defined Contribution Plan - 401(k ) We sponsor a defined contribution plan (the “Plan”). Eligible employees may make contributions in accordance with the Plan and IRS guidelines. In addition to the traditional 401(k), eligible employees are given the option of making an after-tax contribution to a Roth 401(k) or a combination of both. The Plan provides for automatic enrollment and for an automatic increase to the deferral percentage at January 1st of each year and each year thereafter. Eligible employees are automatically enrolled in the Plan at a 6.0 % deferral rate and currently contributing employees deferral rates will be increased to 6.0 % unless their current rate is at or above 6.0 % or the employee elects to decline the automatic enrollment or increase. Administrative expenses are paid for by Plan participants. The Company paid no administrative expenses during the nine months ended September 30, 2024 and 2023. The Company matches 175.0 % up to 6.0 % of employee contributions of eligible compensation. Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions. Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Contributions, net of forfeitures, made to the defined contribution plan $ 4,570 $ 4,497 $ 14,646 $ 13,164 Profit Sharing Bonus Plans We maintain a discretionary profit sharing bonus plan under which approximately 8.5 % of pre-tax profit (10% prior to January 1, 2024) from the Company is paid to eligible employees on a quarterly basis in order to reward employee productivity. Eligible employees are regular full-time non-exempt employees of the Company who are actively employed and working on the first and last day of the calendar quarter. BASX employees are eligible to participate in the discretionary profit sharing bonus plan on January 1, 2024. Prior to January 1, 2024, BASX had a separate employee incentive program (EIP) under which 5 % of BASX's pre-tax profit, plus certain add backs, is paid ratably to eligible employees based on days-of-pay during the fiscal year. Eligible employees are regular full-time and part-time employees who have worked during the year and are still employed when the EIP payment is made following the end of the fiscal year, excluding members of BASX's senior leadership team and any employee paid commissions or royalties. This incentive program ended December 31, 2023. Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Profit sharing bonus plan and employee incentive plan expense $ 6,242 $ 6,954 $ 17,319 $ 17,772 - 21 - Employee Medical Plan W e self-insure for our employees' health insurance, and make medical claim payments up to certain stop-loss amounts. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans. In addition, the Company matches 175 % of a participating employee's allowed contributions to a qualified health saving account to assist employees with health insurance plan deductibles. BASX employees joined the Company's medical plan and benefits on January 1, 2024. BASX was insured for healthcare coverage through a third party through December 31, 2023. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans. In addition, the Company contributes certain amounts for BASX's employees enrolled in a high deductible plan to a qualified health savings account to assist employees with health insurance plan deductibles. This healthcare coverage ended December 31, 2023. Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Medical premium payments $ 5,314 $ 4,455 $ 12,609 $ 11,255 Health saving account contributions 2,568 1,460 6,850 3,718 15. Earnings Per Share Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards. The following table sets forth the computation of basic and diluted earnings per share for the nine months ended September 30, 2024 and 2023: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Numerator: (in thousands, except share and per share data) Net income $ 52,625 $ 48,078 $ 143,869 $ 130,574 Denominator: Basic weighted average shares 81,089,476 81,418,800 81,448,413 81,140,473 Effect of dilutive shares related to stock based compensation 1 2,017,601 1,974,254 2,068,574 1,993,664 Effect of dilutive shares related to contingent consideration 2 — — 63,002 141,071 Diluted weighted average shares 83,107,077 83,393,054 83,579,989 83,275,208 Earnings per share: Basic $ 0.65 $ 0.59 $ 1.77 $ 1.61 Dilutive $ 0.63 $ 0.58 $ 1.72 $ 1.57 Anti-dilutive shares: Shares 385,756 360,408 312,157 296,072 1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 13) 2 Dilutive shares related to contingent shares issued to the former owners of BASX (Note 16) - 22 - 16. Stockholders’ Equity Stock Repurchases The Board authorizes the stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time at current market prices. 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 authorized open market repurchase programs during the periods presented 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 related to our LTIP plans (Note 13) at current market prices. Our repurchase activity is as follows: Nine Months Ended September 30, 2024 September 30, 2023 (in thousands, except share and per share data) Program Shares Total $ $ per share Shares Total $ $ per share Open market 1,353,564 $ 100,034 $ 73.90 402,873 $ 25,009 $ 62.08 LTIP shares 1 87,981 7,455 84.73 20,218 1,202 59.45 Total 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. Cash 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 Annualized Dividend per Share 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 August 15, 2024 September 6, 2024 September 27, 2024 $ 0.08 $ 0.32 Stock Split On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company's common stock to be 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). Cash was paid in lieu of fractional shares (approximately $ 0.5 million). All share and per share information has been updated to reflect the effects of this stock split. The retroactive effect of the stock split resulted in an approximately $ 0.1 million reclass between common stock and retained earnings within stockholders' equity on the consolidated balance sheet. - 23 - Contingent Shares Issued in BASX Acquisition As discussed above, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of this stock split. In December 2021, we closed on the acquisition of BASX. Under the MIPA Agreement, we committed to $ 78.0 million in the aggregate of contingent consideration to the former owners of BASX, which is payable in approximately 1.6 million shares of the Company's common stock, par value $ 0.004 per share. The shares do not accrue dividends. Under the MIPA Agreement, the issuance of shares to the former owners of BASX was contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023. In March 2024, we issued the remaining 0.2 million shares related to the earn-out milestone for the year ended 2023. As a result of the shares issued in March 2024, the tax basis exceeded the book basis for consideration paid resulting in a deferred tax asset and an increase to additional paid-in capital of $ 6.4 million, respectively, on our consolidated balance sheet. The deferred tax asset is expected to be amortized over fifteen years. We previously issued 0.6 million shares in March 2023, related to the earn-out milestone for the year ended 2022. All shares have been issued as private placements exempt from registration with the SEC under Rule 506(b) and are included in common stock on the consolidated statements of stockholders' equity. Authorized Shares Outstanding An amendment to the Company's Articles of Incorporation to increase its total authorized common shares from 100,000,000 to 200,000,000 was approved by our stockholders on May 21, 2024 at the Company's Annual Meeting. On July 9, 2024, a Certificate of Amendment was filed with the Nevada Secretary of State to effectuate the increase in authorized shares. 17. New Markets Tax Credit 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 2019 NMTC transaction, the Company received a $ 23.0 million NMTC allocation for the Project and secured low interest financing and the potential for future debt forgiveness related to the 2019 Project. Upon closing of the 2019 NMTC transaction, the Company provided an aggregate of approximately $ 15.9 million to the 2019 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 2019 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. This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2019 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2019 Investor's interest of $ 6.5 million is recorded in New markets tax credit obligations on the consolidated balance sheets. The Company incurred approximately $ 0.3 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. 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 2023 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 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. - 24 - This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2023 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2023 Investor's interest of $ 5.7 million is recorded in New markets tax credit obligations on the consolidated balance sheets. The Company incurred approximately $ 0.4 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. 2024 New Markets Tax Credit On February 27, 2024, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2024 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2024 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in real estate to facilitate 2023 Project. In connection with the 2024 NMTC transaction, the Company received a $ 15.5 million NMTC allocation for the 2023 Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities. Upon closing of the 2024 NMTC transaction, the Company provided an aggregate of approximately $ 11.0 million to the Investor, in the form of a loan receivable, with a term of twenty-five years , bearing an interest rate of 1.0 %. This $ 11.0 million in proceeds plus capital contributed from the Investor was used to make an aggregate $ 16.0 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. The 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. This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2024 Investor's interest of $ 3.8 million is recorded in New markets tax credit obligations on the consolidated balance sheets. The Company incurred approximately $ 0.4 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction. The 2019 Investor, 2023 Investor, and 2024 Investor are each subject to 100 percent recapture of the 2019, 2023, and 2024 NMTC, respectively, it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the 2019 NMTC arrangements, 2023 NMTC arrangements, and 2024 NMTC arrangements, respectively. Noncompliance with applicable requirements could result in the 2019 and/or 2023 and/or 2024 Investors' projected tax benefits not being realized and, therefore, require the Company to indemnify the 2019 Investor, 2023 Investor, and 2024 Investor for any loss or recapture of the 2019 NMTC, 2023 NMTC, and 2024 NMTC, respectively, related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with any of these financing arrangements. The 2019 Investor, 2023 Investor, and 2024 Investor and its majority owned community development entity are considered VIEs and the Company is the primary beneficiary of the VIEs. Because the Company is the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the 2019 NMTC, 2023 NMTC, or 2024 NMTC arrangements, respectively. 18. Commitments and Contingencies Havtech Litigation On January 24, 2022, one of the Company’s former independent sales representative firms, Havtech, LLC (and its affiliate, Havtech Parts Division, LLC, collectively “Plaintiffs”), filed a complaint (the “Complaint”) in the Circuit Court for Howard County, Maryland ( Havtech, LLC, et al., v. AAON, Inc., et al. ). The Complaint challenged the Company’s termination of its business relationship with the Plaintiffs. The Company removed the action to the United States District Court for the District of Maryland (Northern Division) and moved to dismiss the Complaint. Plaintiffs’ First Amended Complaint (“First Amended Complaint”) was entered by the court on July 28, 2022. The First Amended Complaint asserts that the Company improperly terminated Plaintiffs and seeks damages alleged to be no less than $ 48.6 million, plus fees and costs. The Company filed its Answer to the First Amended Complaint on January 31, 2023. On September 28, 2023, the parties attended a court ordered settlement conference and agreed to resolve the case for $ 7.5 million. A settlement agreement was entered into on October 25, 2023 and the case has been dismissed with prejudice. The final payment was made on October 26, 2023. - 25 - Other Matters The Company is involved from time to time in claims and lawsuits incidental to our business arising from various matters, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, tax and other laws. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We do not believe these matters will have a material adverse effect on our business, financial position, results of operations or cash flows. We are occasionally party to short-term and long-term, cancellable and occasionally non-cancellable, contracts with major 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 September 30, 2024, except as noted below. In 2023, the Company executed a five-year purchase commitment for refrigerants. 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 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. 19. Related Parties The following is a summary of transactions and balances with related parties: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (in thousands) Sales to affiliates $ 2,214 $ 1,047 $ 6,035 $ 4,811 Payments to affiliates 368 90 1,488 872 September 30, 2024 December 31, 2023 (in thousands) Due from affiliates $ 534 $ 994 Due to affiliates 58 145 The nature of our related party transactions is as follows: • The Company sells units to an entity owned by a member of the CEO's immediate family. This entity is also one of the Company’s Representatives and as such, the Company makes payments to the entity for third party products. • The Company purchases some supplies from entities controlled by two of the Company’s board members and a member of the Company's executive management team. • The Company periodically makes part sales and makes payments to a board member related to a consulting agreement. • The Company periodically rents space partially owned by the CEO for various Company meetings. • The Company leases flight time of an aircraft partially owned by our President/COO and Vice President. - 26 - 20. Segments The Company has determined that it has three reportable segments for financial reporting purposes. Management evaluates the performance of its business segments primarily on gross profit. 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. AAON Oklahoma: AAON Oklahoma designs, manufactures, sells and services standard, semi-custom and custom heating, ventilation and air conditioning ("HVAC") systems, designs and produces controls solutions for all of our HVAC units and sells retail parts to customers through our two retail part stores in Tulsa, Oklahoma as well as online. Through our Norman Asbjornson Innovation Center ("NAIC") research and development laboratory facility in Tulsa, Oklahoma, the Company is able to test units under various environmental conditions. AAON Oklahoma includes the operations of our Tulsa, Oklahoma and Parkville, Missouri facilities, our NAIC research and development laboratory facility and two retail parts locations. AAON Coil Products: AAON Coil Products designs and manufactures a selection of our standard, semi-custom and custom HVAC systems. AAON Coil Products also designs and manufactures various heating and cooling coils to be used in HVAC systems, mostly for the benefit of AAON Oklahoma and AAON Coil Products. AAON Coil Products consists of operations at our Longview, Texas facilities. BASX: BASX provides product development design and manufacturing of custom engineered air handling systems including high efficiency data center cooling solutions, cleanroom HVAC systems, commercial/industrial HVAC systems and modular solutions. Additionally, BASX designs and manufactures cleanroom environmental control systems to support hospital surgical suites, pharmaceutical process facilities, semiconductor and electronics manufacturing, laboratory and isolation modular cleanrooms for facility flexibility. BASX consists of operations at our Redmond, Oregon facility. The following table summarizes certain financial data related to our segments. Transactions between segments are recorded based on prices negotiated between the segments. The Gross Profit amounts shown below are presented after elimination entries. Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Net Sales (in thousands) AAON Oklahoma External sales $ 228,887 $ 246,454 $ 664,754 $ 666,670 Inter-segment sales 1,238 768 4,220 3,467 AAON Coil Products External sales 35,232 25,769 90,852 89,262 Inter-segment sales 12,292 11,871 30,565 28,687 BASX External sales 63,133 39,747 147,311 105,948 Inter-segment sales 40 ( 74 ) 262 1,426 Eliminations ( 13,570 ) ( 12,565 ) ( 35,047 ) ( 33,580 ) Net sales $ 327,252 $ 311,970 $ 902,917 $ 861,880 Gross Profit AAON Oklahoma $ 84,119 $ 94,174 $ 246,400 $ 231,403 AAON Coil Products 12,421 8,307 33,719 22,948 BASX 17,618 13,628 39,375 32,930 Gross profit $ 114,158 $ 116,109 $ 319,494 $ 287,281 - 27 - September 30, 2024 December 31, 2023 Long-lived assets 1 (in thousands) AAON Oklahoma $ 252,732 $ 248,556 AAON Coil Products 112,358 83,169 BASX 78,067 49,996 Total long-lived assets $ 443,157 $ 381,721 1 Property, plant and equipment, net & right of use assets Intangible assets, net and goodwill AAON Oklahoma $ 21,880 $ 10,282 AAON Coil Products — — BASX 136,958 139,663 Total intangible assets, net and goodwill $ 158,838 $ 149,945 - 28 -