Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, and liquidity of the Company for the year ended December 31, 2024. This discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data . A detailed discussion of the year-to-year changes for the years ended December 31, 2023, and 2022 is not included herein and can be found in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Description of the Company
AAON is a leader in HVAC solutions for commercial and industrial indoor environments. The company’s industry-leading approach to designing and manufacturing highly configurable equipment to meet exact needs creates a premier ownership experience with greater efficiency, performance, and long-term value. AAON is headquartered in Tulsa, Oklahoma, where its world-class innovation center and testing capabilities enable continuous advancement toward a cleaner and more sustainable future.
We engineer, manufacture, and sell premium heating, ventilation, and air conditioning equipment consisting of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. These products are marketed and sold to a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets. We sell our products to all 50 states in the United States and certain provinces in Canada.
Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate. The uncertainty of the economy negatively impacted the commercial and industrial new construction markets in 2020 and the first half of 2021. Since mid-2021, nonresidential construction spending has been strong, recovering well beyond pre-2020 levels and finishing 2024 near record levels. 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. When new construction is down, we emphasize the replacement market.
We sell our products to property owners and contractors mainly through a network of independent manufacturers’ Representatives. This go-to-market strategy is unique compared to most of our larger competitors in that most control their sales channel. We value the independent sales channel as we think it is a more effective way of increasing market share. Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople. 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. BASX sells highly customized products for unique applications for a more concentrated customer base and an internal sales force is more effective for such products.
The principal components of cost of sales are labor, raw materials, component costs, factory overhead, freight out, and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum, and are obtained from domestic suppliers. We also purchase from domestic manufacturers certain components, including coils, compressors, motors, and electrical controls.
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The price levels of our raw materials fluctuate due to various economic factors within the U.S. and global economy. 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. We expect to receive delivery of raw materials from our contracts for use in our manufacturing operations.
We occasionally increase the price of our products to help offset any inflationary headwinds. In 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 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. 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.
We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.
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Backlog
The following table shows our historical backlog levels:
December 31, 2024 December 31, 2023
(in thousands)
$ 867,090 $ 510,028
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
Years Ended December 31,
2024 2023
(in thousands)
Net sales $ 1,200,635 $ 1,168,518
Cost of sales 803,526 769,498
Gross profit 397,109 399,020
Selling, general and administrative expenses 188,014 171,539
Gain on disposal of assets (23) (13)
Income from operations $ 209,118 $ 227,494
The following are highlights of our results of operations, cash flows, and financial condition:
• 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 gross profit. The CODM does not evaluate operating segments using asset or liability information.
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Segment Operating Results for the Years Ended December 31, 2024 and 2023
For the years ended December 31,
2024 Percent of Sales 1
2023 Percent of Sales 1
$ Change % Change
(in thousands)
Net Sales 2
AAON Oklahoma $ 858,711 71.5 % $ 897,919 76.8 % $ (39,208) (4.4) %
AAON Coil Products 143,871 12.0 % 112,320 9.6 % 31,551 28.1 %
BASX 198,053 16.5 % 158,279 13.5 % 39,774 25.1 %
Net sales $ 1,200,635 $ 1,168,518 $ 32,117 2.7 %
Cost of Sales 2
AAON Oklahoma $ 556,305 64.8 % 577,852 64.4 % $ (21,547) (3.7) %
AAON Coil Products 98,106 68.2 % 82,996 73.9 % 15,110 18.2 %
BASX 149,115 75.3 % 108,650 68.6 % 40,465 37.2 %
Cost of sales $ 803,526 66.9 % $ 769,498 65.9 % $ 34,028 4.4 %
Gross Profit 2
AAON Oklahoma $ 302,406 35.2 % $ 320,067 35.6 % $ (17,661) (5.5) %
AAON Coil Products 45,765 31.8 % 29,324 26.1 % 16,441 56.1 %
BASX 48,938 24.7 % 49,629 31.4 % (691) (1.4) %
Gross profit $ 397,109 33.1 % $ 399,020 34.1 % $ (1,911) (0.5) %
1 Cost of sales and gross profit for each segment are calculated as a percentage of the respective segment’s net sales. Total cost of sales and total gross profit are calculated as a percentage of total net sales.
2 Presented after intercompany eliminations.
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; 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.
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Raw Material Costs
Twelve-month average raw material cost per pound as of December 31:
2024 2023 % Change
Copper $ 5.52 $ 5.35 3.2 %
Galvanized steel $ 0.59 $ 0.58 1.7 %
Stainless steel $ 2.30 $ 3.19 (27.9) %
Aluminum $ 2.50 $ 2.54 (1.6) %
Selling, General and Administrative Expenses
Years Ended December 31, Percent of Sales
2024 2023 2024 2023
(in thousands)
Warranty $ 16,727 $ 16,165 1.4 % 1.4 %
Profit sharing 19,948 24,590 1.7 % 2.1 %
Salaries & benefits 58,154 53,281 4.8 % 4.6 %
Stock compensation 10,390 9,318 0.9 % 0.8 %
Advertising 3,281 2,594 0.3 % 0.2 %
Depreciation & amortization 20,542 13,761 1.7 % 1.2 %
Insurance 8,303 5,354 0.7 % 0.5 %
Professional fees 8,809 15,372 0.7 % 1.3 %
Donations 1,682 1,242 0.1 % 0.1 %
Other 40,178 29,862 3.3 % 2.6 %
Total SG&A $ 188,014 $ 171,539 15.7 % 14.7 %
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%. 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 ) .
Income Taxes
Years Ended December 31, Effective Tax Rate
2024 2023 2024 2023
(in thousands)
Income tax provision $ 38,032 $ 45,531 18.4 % 20.4 %
The Company’s estimated annual 2024 effective tax rate, excluding discrete events, was 24.7%.
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.
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Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through net cash provided by operations and the use of the revolving bank line of credit based on our current liquidity at the time.
Working Capital - Our unrestricted cash and cash equivalents decreased $0.3 million from December 31, 2023, to December 31, 2024. As of December 31, 2024, we had $6.5 million in cash and cash equivalents and restricted cash.
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 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. 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.
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, 2024, 2023, and 2022, respectively.
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%
Term loan 1
0.1% * 1
* 1
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. These covenants require that we meet certain parameters related to our leverage ratio. At December 31, 2024, our leverage ratio was 0.57 to 1.0, which meets the requirement of not being above 3 to 1.
2019 New Markets Tax Credit - On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2019 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2019 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2019 Project”). In connection with the 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
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$22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company’s Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of the NMTCs.
2023 New Markets Tax Credit - On April 25, 2023, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2023 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2023 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2023 Project”). In connection with the 2023 NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2023 Project and secured low-interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities.
Upon closing of the 2023 NMTC transaction, the Company provided an aggregate of approximately $16.7 million to the 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 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.
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 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. The Company may purchase shares on the open market from time to time. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.
Our open market repurchase programs are as follows:
Agreement Execution Date Authorized Repurchase $ Expiration Date
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
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.
The Company also repurchases shares of AAON, Inc. stock from certain of its employees for payment of statutory tax withholdings on stock transactions. All other repurchases from directors or employees are contingent upon Board approval. All repurchases are done at current market prices.
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Our repurchase activity is as follows:
2024 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
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
Dividends - At the discretion of the Board of Directors, we pay cash dividends. Board approval is required to determine the date of declaration and amount for each cash dividend payment.
Our recent dividends are as follows:
Dividend Annualized Dividend
Declaration Date 1
Record Date Payment Date per Share
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
November 13, 2024 November 29, 2024 December 19, 2024 $0.08 $0.32
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.
On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company’s common stock that was paid in the form of a stock dividend. Stockholders of record at the close of business on July 28, 2023, received one additional share for every two shares they held as of that date on August 16, 2023 (ex-dividend date August 17, 2023). All share and per share information has been updated to reflect the effects of this stock split.
Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing), and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations in 2025 and the foreseeable future.
Off-Balance Sheet Arrangements - We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.
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Statement of Cash Flows
The table below reflects a summary of our net cash flows provided by operating activities, net cash flows used in investing activities, and net cash flows provided by financing activities for the years indicated.
2024 2023
(in thousands)
Operating Activities
Net Income $ 168,559 $ 177,623
Income statement adjustments, net 73,343 58,166
Changes in assets and liabilities:
Accounts receivable (10,041) (9,978)
Income taxes (5,285) (11,302)
Inventories 27,080 (16,226)
Contract assets (90,626) (30,043)
Prepaid expenses and other long-term assets (3,707) (1,048)
Accounts payable 16,959 (18,316)
Contract liabilities 1,156 (7,667)
Extended warranties 1,835 2,600
Accrued liabilities and other long-term liabilities 13,259 15,086
Net cash provided by operating activities
192,532 158,895
Investing Activities
Capital expenditures (195,660) (104,294)
Acquisition of intangible assets (17,491) (5,197)
Other 76 180
Net cash used in investing activities (213,075) (109,311)
Financing Activities
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)
Stock options exercised 31,861 33,259
Repurchase of stock (100,034) (25,009)
Employee taxes paid by withholding shares (8,037) (1,302)
Cash dividends paid to stockholders (26,084) (26,445)
Net cash provided by (used in) financing activities $ 18,034 $ (46,510)
Cash Flows from Operating Activities
The Company currently manages cash needs through working capital as well as drawing on its line of credit. Collections and payments cycles are on a normal pattern and fluctuate due to timing of receipts and payments. 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; 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.
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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.
Cash Flows from Investing Activities
The capital expenditures increase during 2024 related to our continued investment in our production capabilities. 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. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.
Cash Flows from Financing Activities
The change in cash from financing activities in 2024 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of certain capital expenditures, offset by repayments we were able to make due to 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
We are occasionally party to short-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 materials 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. In 2023, the Company executed a five-year purchase commitment for refrigerants. 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.
Contingencies
We are subject to various claims and legal actions that arise in the ordinary course of business. 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. See Note 19 of the Consolidated Financial Statements for additional information with respect to specific legal proceedings.
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Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and the Company’s discussion and analysis of its financial condition and operating results require management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and related notes. We base our estimates, assumptions, and judgments on historical experience, current trends, and other factors believed to be relevant at the time our consolidated financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material. We believe the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements. 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. Labor and overhead costs associated with the manufacturing of our products are capitalized into inventory on an estimated standard basis. 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 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. Assumptions used to estimate inventory reserves include future manufacturing requirements and industry trends. Evolving technology and changes in product mix or customer demand can significantly affect the outcome of this analysis.
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 the date of shipment for parts only; 18 months for data center cooling solutions and cleanroom systems; 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. Warranty expense is estimated based on the warranty period, historical warranty trends and associated costs, and any known identifiable warranty issue.
Due to the absence of warranty history on new products, an additional provision may be made for such products. Our estimated future warranty cost is subject to adjustment from time to time depending on changes in actual warranty trends and cost experience. Should actual claim rates differ from our estimates, revisions to the estimated product warranty liability would be required.
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Share-Based Compensation – We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including stock options, restricted stock awards, performance stock units (“PSUs”), and key employee awards (“Key Employee Awards”) based on their fair values at the time of grant. Compensation expense is recognized on a straight-line basis over the service period of stock options, restricted stock awards, and PSUs. Compensation expense is recognized for the Key Employee Awards on a straight-line basis over the service period when the performance condition is determined to be probable. Forfeitures are accounted for as they occur. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, forward-looking market conditions, risk-free rate, and expected dividend yield for stock options. The fair value of restricted stock awards and Key Employee Awards is based on the fair market value of AAON common stock on the respective grant dates. The fair value of restricted stock awards is reduced for the present value of dividends.
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. Indefinite-lived intangible assets consist of trademarks and trade names.
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.
To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired. If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets.
We performed a qualitative assessment as of December 31, 2024, to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets.
Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the outcome of the analysis. The estimates and assumptions we use in the annual impairment assessment included macro-industry trends, market participant considerations, historical profitability, including free cash flows, and forecasted multi-year operating results. Changes in operating results and other assumptions could materially affect these estimates. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
New 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.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to SEC’s Disclosure Update and Simplification Initiative. The new guidance is intended to update a variety of disclosure requirements. 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. Upon adoption, this ASU is not expected to have a material impact on the Company’s financial statements and related disclosures.
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In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280). The new guidance improves reportable segment disclosures primarily through enhanced disclosures about significant segment expenses and by requiring current annual disclosures to be provided in interim periods. 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. 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). The new guidance is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. 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.