What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-27 compared with 2024-02-28 · 116 added, 99 removed, 278 unchanged (44% of the section changed)

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Since mid-2021, nonresidential construction spending has been strong, recovering well beyond pre-2020 levels and finishing 2024 near record levels.

Recently, however, certain leading indicators, including architectural billings and construction starts, signal a slowing in construction spending within the next 12 months.

Furthermore, some economic general indicators are suggesting the general economy is slowing, which could also impact the replacement market.

If the domestic economy were to slow or enter a recession, this could result in a decline in our sales volume and profitability.

Sales in the commercial and industrial new construction markets generally lag the housing market, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, the state of the economy and other macroeconomic factors over which we have no control.

However, over the last 18-24 months, certain leading indicators, including architectural billings and construction starts, signal a slowing in construction spending within the next 12 months.

In 2024, the year-over-year growth rate of nonresidential construction spending slowed significantly, reinforcing the signals from these leading indicators.

Furthermore, signals from general economic indicators are mixed regarding the health of the general economy.

If the domestic economy were to slow or enter a recession, this could impact the replacement market, potentially resulting in a decline in our sales volume and profitability.

Sales in the commercial and industrial new construction markets generally lag behind the housing market, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, the state of the economy and other macroeconomic factors over which we have no control.

Sales in the replacement markets are driven by various factors, including general economic growth, the Company's new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, change in market demand between more customized, higher performing HVAC equipment and lower priced standard equipment, as well as many other factors.

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Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople.

Furthermore, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer.

Further, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer.

We also have a small internal sales force that supports the relationships between the Company and our sales channel partners.

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and global economy.

For the year ended December 31, 2023, the prices for copper, galvanized steel, and stainless steel decreased by approximately 4.5%, 38.9%, and 3.3%, respectively, and aluminum increased by approximately 15.5% from 2022.

For the year ended December 31, 2024, the prices for copper and galvanized steel increased by approximately 3.2% and 1.7%, respectively, while stainless steel and aluminum decreased 27.9% and 1.6%, respectively, from 2023.

We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months.

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In recent years, price increases have been more frequent due to the amount of inflation the business has endured.

In 2021, we implemented three price increases.

In 2022, we implemented two significant price increases as well as a recurring 1% monthly price increase beginning June 1, 2022 and ending on April 1, 2023.

We reinstated a recurring 1% monthly price increase on October 1, 2023 and carried that through February 1, 2024.

In 2021, we implemented three price increases for AAON branded products.

In 2022, we implemented two significant price increases as well as a recurring 1% monthly price increase beginning June 1, 2022, and ending on April 1, 2023, for AAON branded products.

We reinstated a recurring 1% monthly price increase on October 1, 2023, and carried that through February 1, 2024, for AAON branded products.

On January 1, 2025, we implemented a one-time 3% price increase for AAON branded products.

BASX branded products are priced by job and in most cases, provide the ability to increase the price if the order is outside normal lead times.

Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor.

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• In March 2023, we awarded annual merit raises for an overall 3.9% increase to wages.

• In July 2021, we increased starting wages for our production workforce by 7.0%.

• In October 2021, we implemented a cost of living increase of 3.5% in place for all employees

below our Senior Leadership Team ("SLT") which consists of officers and key members of management.

• In March 2024, we awarded annual merit raises for an overall 3.3% increase to wages.

• In October 2022, we implemented a cost of living increase of 3.5% in place for all employees

below the SLT level.

• In March 2023, we awarded annual merit raises for an overall 3.9% increase to wages.

We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.

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$ 867,090 $ 510,028

While our backlog is down at December 31, 2023 compared to December 31, 2022, our bookings remain strong.

The year-ended December 31, 2022 was a record year for bookings and our backlog was elevated causing us to extend lead times.

Investments made in our facilities and workforce have significantly improved our capacity and operational efficiencies.

Production rates are at all time highs, trimming our backlog down to a more manageable size and allowing our lead times to improve.

Our backlog increased approximately 70.0%, to $867.1 million at December 31, 2024, compared to December 31, 2023.

Backlog was up from a year ago at all three segments, with the largest increase at the AAON Coil Products segment, which received over $200.0 million of orders in the fourth quarter.

Most of these orders were associated with the BASX branded data center liquid cooling solutions and will be manufactured at our Longview, TX facility.

Consolidated Results of Operations

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The following are highlights of our results of operations, cash flows, and financial condition:

• Net sales for 2023 grew 31.5% to $1,168.5 million due to record production rates and price increases realized during the period as compared to the same period in the prior year.

• Overall gross margin increased 740 basis points in 2023 due to increased organic volumes for operational efficiencies and better overhead absorption.

• We continue to invest in the future growth of the Company as evidenced by our $104.3 million in capital expenditures in 2023, an increase $50.3 million or 93.1% when compared to 2022 .

• We completed the repurchase of $25.0 million of shares under our current share repurchase authorization.

• Net sales for 2024 grew 2.7% to $1,200.6 million due to an increase in sales of our BASX branded products.

BASX branded products increased 35.1%, or $58.5 million when compared to 2023, offset by a decrease of our AAON branded products of 2.6%, or $26.4 million when compared to 2023.

• We have a strong balance sheet with a leverage ratio of 0.57 and available borrowings under our Revolver of $123.2 million.

• We completed the purchase of a building in Memphis, Tennessee for $63.4 million funded with our new Term Loan of $80.0 million, both of which closed in December 2024.

• We continue to invest in the future growth of the Company as evidenced by our $213.2 million in capital expenditures in 2024, an increase of $91.4 million or 87.6% when compared to 2023.

• We completed the repurchase of $108.1 million of shares for the year ended December 31, 2024.

We report our financial results based on three reportable segments:

AAON Oklahoma, AAON Coil Products, and BASX, which are further described in Item 1 and Item 8.

The Company's chief 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 Company’s chief 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 gross profit.

The CODM does not evaluate operating segments using asset or liability information.

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2 Presented after intercompany eliminations.

Total net sales increased $279.7 million, or 31.5%, with 17.0% of the increase coming from realization of price increases and the remaining 14.5% coming from increases in organic volume.

AAON Coil Products had a smaller backlog and along with inefficiencies related to implementing a new production line of BASX product at AAON Coil Products led to smaller year over year increase sales for this segment.

The increase in BASX net sales is primarily related to large jobs in the data center market as a result of the revenue synergies created by being part of AAON.

Gross profit as a percent of sales increased to 34.1% during 2023 as compared 26.7% in 2022.

Total net sales increased $32.1 million, or 2.7%.

BASX increased by 25.1%, or $39.8 million, and AAON Coil Products increased 28.1%, or $31.6 million, both primarily related to demand from the BASX branded data center products.

AAON Oklahoma sales decreased 4.4%, or $39.2 million due to challenges from the industry-regulated refrigerant transition and nonresidential construction activity that experienced weakened demand throughout 2024 as compared to 2023.

Gross profit as a percent of sales decreased to 33.1% during 2024 as compared to 34.1% in 2023.

As noted above, realization of price increases has improved our margin profile along with the slowing of inflation;

Additionally, most of the organic growth noted above comes from our AAON Oklahoma segment, significantly improving overhead absorption and margin performance.

The increase in net sales at BASX has improved their overhead absorption, thus increasing their gross profit margin year over year.

As shown in the table below, we've experienced year over year fluctuations in the cost of several raw materials.

We implemented multiple price increases during 2022 and 2023 to counteract the increased cost of material.

Some of the price increases have yet to be realized.

Additionally, in order to retain our existing employees, we continue to award periodic raises in addition to our annual merit raises to our employees.

however, the price increases were offset by flat volumes and lower overhead absorption for the AAON Oklahoma segment.

In addition, the AAON Coil Products and BASX segments experienced temporary inefficiencies associated with facility construction to increase future production capacity for increased demand of BASX branded data center products.

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.

We occasionally increase the price of our products to help offset any inflationary headwinds.

In 2022, we implemented a recurring 1% monthly price increase beginning June 1, 2022, and ending on April 1, 2023.

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

As shown in the table below, we have experienced year-over-year fluctuations in the cost of several raw materials.

Raw Material Costs

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Total SG&A $ 188,014 $ 171,539 15.7 % 14.7 %

Selling, general and administrative expenses increased $60.7 million or 54.8% during 2023 as compared to the prior year.

Selling, general and administrative expenses increased 9.6%, or $16.5 million, during 2024 as compared to the prior year.

As a percentage of sales, selling, general and administrative increased from 14.7% to 15.7%.

Most of the increase is due to professional fees that increased $9.6 million due to the litigation settlement (Note 18).

Profit sharing increased $10.6 million or 75.5% due to our increased operating results.

Other expenses increased $11.0 million or 58.0% during year due mostly to increased travel, consulting expenses and closing costs related to the 2023 New Market Tax Credit (Note 17).

Depreciation and amortization increased 49.3%, or $6.8 million, as compared to 2023, due to increased investments in back office technology and automation.

Other expenses increased 34.5%, or $10.3 million, due to increased travel, consulting expenses, and closing costs related to the 2023 New Market Tax Credit (Note 18).

Professional fees decreased 42.7%, or $6.6 million, due to the 2023 litigation settlement (Note 19 ) .

Years Ended December 31, Effective Tax Rate

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The Company’s estimated annual 2024 effective tax rate, excluding discrete events, was 24.7%.

The increase year over year in the overall effective tax rate was primarily due the non-deductible executive compensation.

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 our high stock price and timing of executive stock option exercises this resulted in an increase to the income tax provision of $3.8 million for the year ended December 31, 2023.

The decrease year over year in the overall effective tax rate was primarily due to the excess tax benefit of $16.4 million for the year ended December 31, 2024, as compared to $8.9 million during the same period in 2023.

The excess tax benefit is related to the timing of stock option exercises and restricted stock vestings as a result of our high stock price during the year ended December 31, 2024.

Liquidity and Capital Resources

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As of December 31, 2024, we had $6.5 million in cash and cash equivalents and restricted cash.

Revolving Line of Credit - Our revolving credit facility ("Revolver"), as amended and restated, provides for maximum borrowings of $200.0 million.

Outstanding Debt - On December 16, 2024, we amended our Amended and Restated Loan Agreement dated November 24, 2021 (as amended, “Amended Loan Agreement”) to include an $80.0 million term loan (“Term Loan”) in addition to the $200.0 million revolving credit facility (the “Revolver”).

As of December 31, 2024, and December 31, 2023, we had an outstanding balance under the Revolver of $76.5 million and $38.3 million, respectively.

We had two standby letters of credit totaling $2.3 million as of December 31, 2023 and one standby letter of credit totaling $0.8 million as of December 31, 2022.

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

Borrowings available under the Revolver at December 31, 2024, were $123.2 million.

The Revolver expires on May 27, 2027.

As of December 31, 2024, we had an outstanding balance under the Term Loan of $78.4 million.

No amounts were outstanding under the Term Loan at December 31, 2023.

The Term Loan is payable in equal month installments, plus interest, over 60 months, expiring December 16, 2029.

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate (“SOFR”) plus the applicable margin.

The Term Loan bears interest at the SOFR plus a credit spread adjustment of 0.10% per annum plus the Applicable Margin.

Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company’s leverage ratio.

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The applicable fee percentage is determined quarterly based on the Company’s leverage ratio.

At December 31, 2023 and 2022, the weighted average interest rate of our Revolver was 6.3% and 3.0%, respectively.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income and were not material for the years ended December 31, 2023 and 2022.

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.

Weighted average interest rate of our borrowings outstanding are as follows:

Years Ended December 31,

2024 2023 2022

Revolver 6.3% 6.3% 3.0%

1 Funds were borrowed on December 16, 2024.

No borrowings outstanding during the years ended December 31, 2023 and 2022

If SOFR cannot be determined pursuant to the definition, as defined by the Amended Loan 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%.

As of December 16, 2024, as defined by the Amended Loan Agreement, if the SOFR cannot be determined any outstanding balance will bear interest at the Prime Rate in effect on such day.

At December 31, 2024, we were in compliance with our financial covenants, as defined by the Revolver.

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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 $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.

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Upon closing of the 2023 NMTC transaction, the Company provided an aggregate of approximately $16.7 million to the 2023 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 $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 is included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.

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.

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 the current expansion of our Longview, Texas manufacturing operations (the “Project”).

In connection with the 2024 NMTC transaction, the Company received a $15.5 million NMTC allocation for the 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%.

Upon closing the 2024 NMTC transaction, the Company provided an aggregate of approximately $11.0 million to the 2024 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 2024 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 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 2024 Project.

Stock Repurchase - The Board has authorized stock repurchase programs for the Company.

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Agreement Execution Date Authorized Repurchase $ Expiration Date

March 13, 2020 $20 million November 9, 2022

March 13, 2020 $20 million 1

November 9, 2022

November 3, 2022 $50 million 1

February 27, 2024

February 27, 2024 $50 million 1

June 4, 2024 $50 million 2

June 14, 2024

February 25, 2025 $100 million ** 3

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.

3 Expiration Date is at Board's discretion.

The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board.

2 As of December 31, 2023, there is approximately $25.0 million remaining under the current stock repurchase program.

The remaining amount available is subject to a Board authorized 10b5-1 plan requiring certain market conditions and requirements.

The Company also had a stock repurchase arrangement by which employee-participants in our 401(k) Plan were entitled to have shares in AAON, Inc.

stock in their accounts sold to the Company.

The 401(k) Plan was amended in June 2022 to discontinue this program.

No additional shares have been purchased by the Company under this arrangement since June 2022.

Lastly, the Company repurchases shares of AAON, Inc.

The Company also repurchases shares of AAON, Inc.

stock from certain of its employees for payment of statutory tax withholdings on stock transactions.

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

401(k) — — — 155,904 5,913 37.93

Employees 92,444 8,037 86.94 21,904 1,302 59.44

Total 1,446,008 $ 108,071 $ 74.74 424,777 $ 26,311 $ 61.94

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

Inception to Date

(in thousands, except share and per share data)

Program Shares 1

Total $ $ per share 1

Open market 6,893,924 $ 106,625 $ 15.47

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

Directors and employees 3,089,337 24,662 7.98

Total 22,445,813 $ 303,076 $ 13.50

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

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

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Record Date Payment Date per Share

May 18, 2022 June 3, 2022 July 1, 2022 $0.13 $0.26

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

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1 Effective with the cash dividend declared on March 1, 2023 (paid on March 31, 2023), the Company moved from semi-annual cash dividends to quarterly cash dividends.

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

On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company’s common stock that was paid in the form of a stock dividend.

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Capital expenditures (195,660) (104,294)

Cash paid for building (Note 4) — (22,000)

Cash paid in business combination, net of cash acquired — (249)

Acquisition of intangible assets (17,491) (5,197)

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Financing Activities

Borrowings under revolving credit facility 597,111 225,758

Payments under revolving credit facility (629,787) (194,754)

Borrowings of debt

717,897 597,111

Payments of debt

(601,091) (629,787)

Proceeds from financing obligation, net of issuance costs 4,186 6,061

Payment related to financing costs (664) (398)

Principal payments on financing lease — (115)

Stock options exercised 31,861 33,259

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Cash dividends paid to stockholders (26,084) (26,445)

Net cash (used in) provided by financing activities $ (46,510) $ 17,357

Net cash provided by (used in) financing activities $ 18,034 $ (46,510)

Cash Flows from Operating Activities

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In early 2022, the Company began increasing 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;

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.

The decrease in cash flows from income taxes is primarily due to the 2017 Tax Cuts & Jobs Act, which requires research and development expenses incurred after December 31, 2021 to be capitalized and amortized over 5 years.

however, as inflationary and supply chain disruptions have decreased, the Company has been able to reduce overall inventory levels.

At the end of 2024, we made significant purchases of inventory related to data center orders.

These purchases are allocated to customer jobs and show as increases to our contract assets.

Payment terms for BASX jobs may 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.

The decrease in cash flows from income taxes is primarily due to the 2017 Tax Cuts & Jobs Act, which requires research and development expenses incurred after December 31, 2021, to be capitalized and amortized over five years.

This defers our current period income tax deduction which increased our income tax payments due at the end of 2022.

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The capital expenditures increase during 2024 related to our continued investment in our production capabilities.

Purchases during 2023 relate to additional sheet metal and other machinery for both replacement and growth, additional production and warehouse space in Longview, Texas, additional office space in Tulsa, Oklahoma, additional land in Tulsa, Oklahoma for future growth, and a partial interest in an airplane.

The cash paid for building is related to the purchase of the BASX office and manufacturing facility in May 2022 (Note 4).

Purchases during 2024 include additional infrastructure and machinery for both replacement and growth.

We added 237,500 square feet to our Longview, Texas facility primarily for the production of BASX branded data center products.

We also completed the addition of a new Weld Shop in Redmond, Oregon that created more capacity in our manufacturing building.

In Parkville, Missouri, we built an SMT production line to produce our own control boards.

We have also made investments to purchase and develop software for internal use in anticipation of future Company growth.

Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.

In December 2024, the Company purchased a new 787,000 square foot facility in Memphis, Tennessee, which will accommodate incremental demand for both BASX and AAON products over the next several years, at the same time providing more geographic diversification across our manufacturing footprint.

The purchase price for the facility was approximately $63.4 million.

Our capital expenditure program for 2025 is estimated to be approximately $220.0 million.

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Cash Flows from Financing Activities

The change in cash from financing activities in 2023 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of certain capital expenditures, offset by repayments we were able to make due to our increased operating results and financial condition.

Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees.

Stock options exercised increased due to the increase in the number of employee options exercised and increase in our average stock price during 2023 as compared to the previous period.

Additionally, we repurchased approximately 424,777 shares for approximately $26.3 million during 2023 (Note 16).

Effective with the cash dividend declared on March 1, 2023 (paid on March 31, 2023), the Company moved from semi-annual cash dividends to quarterly cash dividends.

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 increased operating results and financial condition.

Additionally, we repurchased approximately 1.4 million shares for approximately $108.1 million during 2024 (Note 17).

Commitments and Contractual Agreements

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In 2023, the Company executed a five-year purchase commitment for refrigerants.

In 2023, the Company made payments of $10.1 million on this contract.

Estimated minimum future payments are $11.9 million, $9.1 million, $10.5 million, and $11.2 million for 2024, 2025, 2026, and 2027, respectively.

The Company made payments of $11.7 million and $10.1 million on this contract in 2024 and 2023, respectively.

Estimated minimum future payments are $9.1 million, $10.5 million, and $11.2 million, for 2025, 2026, and 2027, respectively.

We had no other material contractual purchase obligations as of December 31, 2024.

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We discuss these estimates with the Audit Committee of the Board of Directors periodically.

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 incurring significant costs to the Company and the agreements contain an enforceable right to payment including a reasonable profit margin, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract.

The measurement and recognition of revenue requires us to make judgments and estimates, including the determination of whether we should recognize revenue as we perform or upon the completion of our performance obligation, as these determinations impact the timing and amount of our reported revenue.

Costs used in estimating revenue can include direct materials, direct labor, installation, freight and delivery, commissions and royalties depending on the individual performance obligation.

Other costs not related to the performance obligation, such as indirect labor and materials, small tools and supplies, operating expenses, field rework and back charges are charged to expense as incurred.

Inventor y - Raw material or component inventory typically transfers from one stage of manufacturing to another where it accumulates additional costs directly incurred with the production of finished goods, including estimated standard labor and overhead costs.

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These include certain direct and indirect costs such as compensation, manufacturing, and facility costs associated with manufacturing support functions.

We continually monitor our labor and overhead standard costs to ensure that standard costs reasonably reflects our actual costs and make manual adjusts the value of inventory accordingly.

Our manual adjustments from standard to actual labor and overhead costs contain uncertainties that require management to make assumptions and to apply judgment regarding a number of factors, including inventory turns, supply usage, manufacturing efficiencies, and historical production costs.

We continually monitor our labor and overhead standard costs to ensure that standard costs reasonably reflect our actual costs and make manual adjusts the value of inventory accordingly.

Our manual adjustments from standard to actual labor and overhead costs contain uncertainties that require management to make assumptions and apply judgment regarding a number of factors, including inventory turns, supply usage, manufacturing efficiencies, and historical production costs.

Inventory Reserves – We establish a reserve for inventories based on the change in inventory requirements due to product line changes, the feasibility of using obsolete parts for upgraded part substitutions, the required parts needed for part supply sales and replacement parts, and for estimated shrinkage.

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Warranty Accrual – A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized.

Our product warranty policy is the earlier of one year from the date of first use or 18 months from date of shipment for parts only;

Our product warranty policy is the earlier of one year from the date of first use or 18 months from the date of shipment for parts only;

18 months for data center cooling solutions and cleanroom systems;

an additional four years for compressors (if applicable);

15 years on aluminized steel gas-fired heat exchangers (if applicable);

25 years on stainless steel heat exchangers (if applicable);

and ten years on gas-fired heat exchangers in our historical RL products (if applicable).

Our warranty policy for the RQ series covers parts for two years from date of unit shipment.

an additional four years for compressors;

15 years on aluminized steel gas-fired heat exchangers;

25 years on stainless steel heat exchangers;

and ten years on gas-fired heat exchangers in our historical RL products.

Our warranty policy for the RQ series covers parts for two years from the date of unit shipment.

Our warranty policy for the WH and WV Series geothermal/water-source heat pumps covers parts for five years from the date of installation.

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The new guidance is intended to update a variety of disclosure requirements.

The effective date for each amendment will be the date on with the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective.

The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective.

Early adoption is prohibited.

4 unchanged sentences

The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

Upon adoption, this ASU is not expected to have a material impact on the Company's financial statements and related disclosures.

We adopted this standard for fiscal year ended 2024.

Upon adoption, this ASU did not have a material impact on the Company’s financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740).

2 unchanged sentences

Upon adoption, this ASU is not expected to have a material impact on the Company’s financial statements and related disclosures.

In November 2024, the FASB issued ASU No.

2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40).

The new guidance requires the disaggregated disclosure of specific expense categories, including purchases of inventory, employee compensation, depreciation, and amortization, within relevant income statement captions.

This ASU also requires disclosure of the total amount of selling expenses along with the definition of selling expenses.

This ASU is effective for annual periods beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted.

Upon adoption, this ASU is not expected to have a material impact on the Company's financial statements and related disclosures.

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-K

Item 7. Management’s Discussion and Analysis