UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q | | | | | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20212022
or | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ____________________
Commission file number: 0-18953
AAON, INC.
(Exact name of registrant as specified in its charter) | | | | | | | | | | | | | | | | | | | | | | | |
| Nevada | 87-0448736 | |
| (State or other jurisdiction | (IRS Employer | |
| of incorporation or organization) | Identification No.) | |
| 2425 South Yukon Ave., | Tulsa, | Oklahoma | 74107 | | |
(Address of principal executive offices) (Zip Code) | |
(918) 583-2266
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "small reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | |
Large accelerated filer | ☑ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | AAON | NASDAQ |
As of August 2, 2021,4, 2022, registrant had outstanding a total of 52,403,73353,158,601 shares of its $.004 par value Common Stock.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements. | | | | | | | | | | | |
AAON, Inc. and Subsidiaries |
Consolidated Balance Sheets |
(Unaudited) |
| June 30, 2021 | | December 31, 2020 |
Assets | (in thousands, except share and per share data) |
Current assets: | | | |
Cash and cash equivalents | $ | 111,427 | | | $ | 79,025 | |
Restricted cash | 692 | | | 3,263 | |
| | | |
| | | |
Accounts receivable, net of allowance for credit losses of $518 and $506, respectively | 53,311 | | | 47,387 | |
Income tax receivable | 3,339 | | | 4,587 | |
Note receivable | 32 | | | 31 | |
Inventories, net | 87,399 | | | 82,219 | |
Prepaid expenses and other | 2,940 | | | 3,739 | |
| | | |
Total current assets | 259,140 | | | 220,251 | |
Property, plant and equipment: | | | |
Land | 5,016 | | | 4,072 | |
Buildings | 129,607 | | | 122,171 | |
Machinery and equipment | 301,964 | | | 281,266 | |
Furniture and fixtures | 20,726 | | | 18,956 | |
Total property, plant and equipment | 457,313 | | | 426,465 | |
Less: Accumulated depreciation | 217,549 | | | 203,125 | |
Property, plant and equipment, net | 239,764 | | | 223,340 | |
| | | |
| | | |
Goodwill and intangible assets, net | 3,229 | | | 3,267 | |
| | | |
Right of use assets | 1,472 | | | 1,571 | |
Note receivable | 579 | | | 579 | |
Total assets | $ | 504,184 | | | $ | 449,008 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 21,250 | | | $ | 12,447 | |
Dividends payable | 9,970 | | | 0 | |
Accrued liabilities | 47,291 | | | 46,586 | |
Total current liabilities | 78,511 | | | 59,033 | |
Deferred tax liabilities | 31,071 | | | 28,324 | |
Other long-term liabilities | 4,493 | | | 4,423 | |
New market tax credit obligation (a) | 6,383 | | | 6,363 | |
Commitments and contingencies | 0 | | 0 |
Stockholders' equity: | | | |
Preferred stock, $.001 par value, 5,000,000 shares authorized, 0 shares issued | 0 | | | 0 | |
Common stock, $.004 par value, 100,000,000 shares authorized, 52,416,014 and 52,224,767 issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 210 | | | 209 | |
Additional paid-in capital | 10,998 | | | 5,161 | |
Retained earnings | 372,518 | | | 345,495 | |
Total stockholders' equity | 383,726 | | | 350,865 | |
Total liabilities and stockholders' equity | $ | 504,184 | | | $ | 449,008 | |
(a) Held by variable interest entities (Note 14) | | | |
| | | | | | | | | | | |
AAON, Inc. and Subsidiaries |
Consolidated Balance Sheets |
(Unaudited) |
| June 30, 2022 | | December 31, 2021 |
Assets | (in thousands, except share and per share data) |
Current assets: | | | |
Cash and cash equivalents | $ | 17,647 | | | $ | 2,859 | |
Restricted cash | 563 | | | 628 | |
| | | |
| | | |
Accounts receivable, net of allowance for credit losses of $563 and $549, respectively | 124,335 | | | 70,780 | |
Income tax receivable | 7,618 | | | 5,723 | |
| | | |
Inventories, net | 164,001 | | | 130,270 | |
Contract assets | 8,569 | | | 5,749 | |
Prepaid expenses and other | 4,679 | | | 2,071 | |
| | | |
Total current assets | 327,412 | | | 218,080 | |
Property, plant and equipment: | | | |
Land | 7,916 | | | 5,016 | |
Buildings | 162,962 | | | 135,861 | |
Machinery and equipment | 332,178 | | | 318,259 | |
Furniture and fixtures | 24,571 | | | 23,072 | |
Total property, plant and equipment | 527,627 | | | 482,208 | |
Less: Accumulated depreciation | 235,163 | | | 224,146 | |
Property, plant and equipment, net | 292,464 | | | 258,062 | |
| | | |
Intangible assets, net | 66,409 | | | 70,121 | |
Goodwill | 81,892 | | | 85,727 | |
Right of use assets | 5,886 | | | 16,974 | |
Other long-term assets | 2,649 | | | 1,216 | |
Total assets | $ | 776,712 | | | $ | 650,180 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 36,189 | | | $ | 29,020 | |
Dividends payable | 10,096 | | | — | |
Accrued liabilities | 60,125 | | | 50,206 | |
Contract liabilities | 29,759 | | | 7,542 | |
Total current liabilities | 136,169 | | | 86,768 | |
Revolving credit facility, long-term | 106,249 | | | 40,000 | |
Deferred tax liabilities | 31,866 | | | 31,993 | |
Other long-term liabilities | 5,495 | | | 18,843 | |
New market tax credit obligation (a) | 6,427 | | | 6,406 | |
Commitments and contingencies | 0 | | 0 |
Stockholders' equity: | | | |
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued | — | | | — | |
Common stock, $.004 par value, 100,000,000 shares authorized, 53,127,055 and 52,527,985 issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 213 | | | 210 | |
Additional paid-in capital | 82,078 | | | 81,654 | |
Retained earnings | 408,215 | | | 384,306 | |
Total stockholders' equity | 490,506 | | | 466,170 | |
Total liabilities and stockholders' equity | $ | 776,712 | | | $ | 650,180 | |
(a) Held by variable interest entities (Note 17) | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries |
Consolidated Statements of Income | Consolidated Statements of Income | Consolidated Statements of Income |
(Unaudited) | (Unaudited) | (Unaudited) |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands, except share and per share data) | | (in thousands, except share and per share data) |
Net sales | Net sales | $ | 143,876 | | | $ | 125,596 | | | $ | 259,664 | | | $ | 263,079 | | Net sales | $ | 208,814 | | | $ | 143,876 | | | $ | 391,585 | | | $ | 259,664 | |
Cost of sales | Cost of sales | 101,769 | | | 87,465 | | | 184,400 | | | 182,001 | | Cost of sales | 161,438 | | | 101,769 | | | 298,145 | | | 184,400 | |
Gross profit | Gross profit | 42,107 | | | 38,131 | | | 75,264 | | | 81,078 | | Gross profit | 47,376 | | | 42,107 | | | 93,440 | | | 75,264 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 16,895 | | | 15,939 | | | 31,591 | | | 31,153 | | Selling, general and administrative expenses | 26,933 | | | 16,895 | | | 49,989 | | | 31,591 | |
Gain on disposal of assets | Gain on disposal of assets | 0 | | | 0 | | | 0 | | | (62) | | Gain on disposal of assets | (10) | | | — | | | (12) | | | — | |
Income from operations | Income from operations | 25,212 | | | 22,192 | | | 43,673 | | | 49,987 | | Income from operations | 20,453 | | | 25,212 | | | 43,463 | | | 43,673 | |
Interest (expense) income, net | (4) | | | 19 | | | (1) | | | 80 | | |
Other income (expense), net | 39 | | | 32 | | | 56 | | | 5 | | |
Interest expense, net | | Interest expense, net | (550) | | | (4) | | | (740) | | | (1) | |
Other income, net | | Other income, net | 220 | | | 39 | | | 241 | | | 56 | |
Income before taxes | Income before taxes | 25,247 | | | 22,243 | | | 43,728 | | | 50,072 | | Income before taxes | 20,123 | | | 25,247 | | | 42,964 | | | 43,728 | |
Income tax provision | Income tax provision | 4,632 | | | 4,439 | | | 6,737 | | | 10,415 | | Income tax provision | 4,177 | | | 4,632 | | | 8,959 | | | 6,737 | |
Net income | Net income | $ | 20,615 | | | $ | 17,804 | | | $ | 36,991 | | | $ | 39,657 | | Net income | $ | 15,946 | | | $ | 20,615 | | | $ | 34,005 | | | $ | 36,991 | |
Earnings per share: | Earnings per share: | | | | | | | | Earnings per share: | | | | | | | |
Basic | Basic | $ | 0.39 | | | $ | 0.34 | | | $ | 0.71 | | | $ | 0.76 | | Basic | $ | 0.30 | | | $ | 0.39 | | | $ | 0.64 | | | $ | 0.71 | |
Diluted | Diluted | $ | 0.38 | | | $ | 0.34 | | | $ | 0.69 | | | $ | 0.75 | | Diluted | $ | 0.30 | | | $ | 0.38 | | | $ | 0.63 | | | $ | 0.69 | |
Cash dividends declared per common share: | Cash dividends declared per common share: | $ | 0.19 | | | $ | 0.19 | | | $ | 0.19 | | | $ | 0.19 | | Cash dividends declared per common share: | $ | 0.19 | | | $ | 0.19 | | | $ | 0.19 | | | $ | 0.19 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | | | | | | | Weighted average shares outstanding: | | | | | | | |
Basic | Basic | 52,432,822 | | | 52,099,694 | | | 52,389,989 | | | 52,160,348 | | Basic | 53,095,286 | | | 52,432,822 | | | 52,992,439 | | | 52,389,989 | |
Diluted | Diluted | 53,603,932 | | | 52,750,401 | | | 53,736,134 | | | 52,885,491 | | Diluted | 53,661,876 | | | 53,603,932 | | | 53,944,616 | | | 53,736,134 | |
The accompanying notes are an integral part of these consolidated financial statements.
| AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries |
Consolidated Statements of Stockholders' Equity | Consolidated Statements of Stockholders' Equity | Consolidated Statements of Stockholders' Equity |
(Unaudited) | (Unaudited) | (Unaudited) |
| | | | Six Months Ended June 30, 2022 |
| | | Common Stock | | Paid-in | | Retained | | |
| | | Shares | | Amount | | Capital | | Earnings | | Total |
| | | (in thousands) |
Balances at December 31, 2021 | | Balances at December 31, 2021 | 52,528 | | | $ | 210 | | | $ | 81,654 | | | $ | 384,306 | | | $ | 466,170 | |
Net income | | Net income | — | | | — | | | — | | | 34,005 | | | 34,005 | |
Stock options exercised, restricted stock awards | | Stock options exercised, restricted stock awards | 719 | | | 3 | | | 6,382 | | | — | | | 6,385 | |
granted, and contingent shares issued (Note 16) | | granted, and contingent shares issued (Note 16) | | | | | | | | | |
Share-based compensation | | Share-based compensation | — | | | — | | | 6,908 | | | — | | | 6,908 | |
Stock repurchased and retired | | Stock repurchased and retired | (120) | | | — | | | (6,866) | | | — | | | (6,866) | |
Contingent consideration (Note 3) | | Contingent consideration (Note 3) | — | | | — | | | (6,000) | | | — | | | (6,000) | |
Dividends net of refunds for cancelled cash dividends | | Dividends net of refunds for cancelled cash dividends | — | | | — | | | — | | | (10,096) | | | (10,096) | |
Balances at June 30, 2022 | | Balances at June 30, 2022 | 53,127 | | | $ | 213 | | | $ | 82,078 | | | $ | 408,215 | | | $ | 490,506 | |
| | | | Three Months Ended June 30, 2022 |
| | | Common Stock | | Paid-in | | Retained | |
| | | Shares | | Amount | | Capital | | Earnings | | Total |
| | | (in thousands) |
Balances at March 31, 2022 | | Balances at March 31, 2022 | 53,065 | | | $ | 212 | | | $ | 77,574 | | | $ | 402,370 | | | $ | 480,156 | |
Net income | | Net income | — | | | — | | | — | | | 15,946 | | | 15,946 | |
Stock options exercised and restricted | | Stock options exercised and restricted | 114 | | | 1 | | | 3,492 | | | — | | | 3,493 | |
stock awards granted | | stock awards granted | |
Share-based compensation | | Share-based compensation | — | | | — | | | 3,796 | | | — | | | 3,796 | |
Stock repurchased and retired | | Stock repurchased and retired | (52) | | | — | | | (2,784) | | | — | | | (2,784) | |
Dividends net of refunds for cancelled cash dividends | | Dividends net of refunds for cancelled cash dividends | — | | | — | | | — | | | (10,101) | | | (10,101) | |
Balances at June 30, 2022 | | Balances at June 30, 2022 | 53,127 | | | $ | 213 | | | $ | 82,078 | | | $ | 408,215 | | | $ | 490,506 | |
| | | | | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | Common Stock | | Paid-in | | Retained | | | | Common Stock | | Paid-in | | Retained | |
| | Shares | | Amount | | Capital | | Earnings | | Total | | Shares | | Amount | | Capital | | Earnings | | Total |
| | (in thousands) | | (in thousands) |
Balances at December 31, 2020 | Balances at December 31, 2020 | 52,225 | | | $ | 209 | | | $ | 5,161 | | | $ | 345,495 | | | $ | 350,865 | | Balances at December 31, 2020 | 52,225 | | | $ | 209 | | | $ | 5,161 | | | $ | 345,495 | | | 350,865 | |
Net income | Net income | — | | | — | | | — | | | 36,991 | | | 36,991 | | Net income | — | | | — | | | — | | | 36,991 | | | 36,991 | |
Stock options exercised and restricted | Stock options exercised and restricted | 361 | | | 2 | | | 11,846 | | | — | | | 11,848 | | Stock options exercised and restricted | 361 | | | 2 | | | 11,846 | | | — | | | 11,848 | |
stock awards granted | stock awards granted | | | | | | | | | | stock awards granted | |
Share-based compensation | Share-based compensation | — | | | — | | | 5,793 | | | — | | | 5,793 | | Share-based compensation | — | | | — | | | 5,793 | | | — | | | 5,793 | |
Stock repurchased and retired | Stock repurchased and retired | (170) | | | (1) | | | (11,802) | | | 0 | | | (11,803) | | Stock repurchased and retired | (170) | | | (1) | | | (11,802) | | | — | | | (11,803) | |
Dividends | — | | | — | | | — | | | (9,968) | | | (9,968) | | |
Dividends net of refunds for cancelled cash dividends | | Dividends net of refunds for cancelled cash dividends | — | | | — | | | — | | | (9,968) | | | (9,968) | |
Balances at June 30, 2021 | Balances at June 30, 2021 | 52,416 | | | $ | 210 | | | $ | 10,998 | | | $ | 372,518 | | | $ | 383,726 | | Balances at June 30, 2021 | 52,416 | | | $ | 210 | | | $ | 10,998 | | | $ | 372,518 | | | $ | 383,726 | |
| | | Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2021 |
| | Common Stock | | Paid-in | | Retained | | | Common Stock | | Paid-in | | Retained | |
| | Shares | | Amount | | Capital | | Earnings | | Total | | Shares | | Amount | | Capital | | Earnings | | Total |
| | (in thousands) | | (in thousands) |
Balances at March 31, 2021 | Balances at March 31, 2021 | 52,424 | | | $ | 210 | | | $ | 10,957 | | | $ | 361,871 | | | $ | 373,038 | | Balances at March 31, 2021 | 52,424 | | | $ | 210 | | | $ | 10,957 | | | $ | 361,871 | | | $ | 373,038 | |
Net income | Net income | — | | | — | | | — | | | 20,615 | | | 20,615 | | Net income | — | | | — | | | — | | | 20,615 | | | 20,615 | |
Stock options exercised and restricted | Stock options exercised and restricted | 75 | | | 0 | | | 2,410 | | | — | | | 2,410 | | Stock options exercised and restricted | 75 | | | — | | | 2,410 | | | — | | | 2,410 | |
stock awards granted | stock awards granted | | stock awards granted | |
Share-based compensation | Share-based compensation | — | | | — | | | 3,032 | | | — | | | 3,032 | | Share-based compensation | — | | | — | | | 3,032 | | | — | | | 3,032 | |
Stock repurchased and retired | Stock repurchased and retired | (83) | | | 0 | | | (5,401) | | | 0 | | | (5,401) | | Stock repurchased and retired | (83) | | | — | | | (5,401) | | | — | | | (5,401) | |
Dividends | — | | | — | | | — | | | (9,968) | | | (9,968) | | |
Dividends net of refunds for cancelled cash dividends | | Dividends net of refunds for cancelled cash dividends | — | | | — | | | — | | | (9,968) | | | (9,968) | |
Balances at June 30, 2021 | Balances at June 30, 2021 | 52,416 | | | $ | 210 | | | $ | 10,998 | | | $ | 372,518 | | | $ | 383,726 | | Balances at June 30, 2021 | 52,416 | | | $ | 210 | | | $ | 10,998 | | | $ | 372,518 | | | $ | 383,726 | |
| | | | Six Months Ended June 30, 2020 | |
| Common Stock | | Paid-in | | Retained | | |
| Shares | | Amount | | Capital | | Earnings | | Total | |
| (in thousands) | |
Balances at December 31, 2019 | 52,079 | | | $ | 208 | | | $ | 3,631 | | | $ | 286,301 | | | 290,140 | | |
Net income | — | | | — | | | — | | | 39,657 | | | 39,657 | | |
Stock options exercised and restricted | 490 | | | 2 | | | 14,171 | | | — | | | 14,173 | | |
stock awards granted | | |
Share-based compensation | — | | | — | | | 5,694 | | | — | | | 5,694 | | |
Stock repurchased and retired | (335) | | | (1) | | | (17,045) | | | 0 | | | (17,046) | | |
Dividends | — | | | — | | | — | | | (9,923) | | | (9,923) | | |
Balances at June 30, 2020 | 52,234 | | | $ | 209 | | | $ | 6,451 | | | $ | 316,035 | | | $ | 322,695 | | |
| | Three Months Ended June 30, 2020 | |
| Common Stock | | Paid-in | | Retained | | |
| Shares | | Amount | | Capital | | Earnings | | Total | |
| (in thousands) | |
Balances at March 31, 2020 | 52,044 | | | $ | 208 | | | $ | 0 | | | $ | 306,115 | | | $ | 306,323 | | |
Net income | — | | | — | | | — | | | 17,804 | | | 17,804 | | |
Stock options exercised and restricted | 278 | | | 1 | | | 9,675 | | | — | | | 9,676 | | |
stock awards granted | | |
Share-based compensation | — | | | — | | | 3,343 | | | — | | | 3,343 | | |
Stock repurchased and retired | (88) | | | 0 | | | (6,567) | | | 2,039 | | | (4,528) | | |
Dividends | — | | | — | | | — | | | (9,923) | | | (9,923) | | |
Balances at June 30, 2020 | 52,234 | | | $ | 209 | | | $ | 6,451 | | | $ | 316,035 | | | $ | 322,695 | | |
The accompanying notes are an integral part of these consolidated financial statements.
| AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries | AAON, Inc. and Subsidiaries |
Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows |
(Unaudited) | (Unaudited) | (Unaudited) |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Operating Activities | Operating Activities | (in thousands) | Operating Activities | (in thousands) |
Net income | Net income | $ | 36,991 | | | $ | 39,657 | | Net income | $ | 34,005 | | | $ | 36,991 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | |
Depreciation and amortization | Depreciation and amortization | 14,924 | | | 12,340 | | Depreciation and amortization | 16,300 | | | 14,924 | |
Amortization of debt issuance cost | Amortization of debt issuance cost | 20 | | | 20 | | Amortization of debt issuance cost | 21 | | | 20 | |
| Amortization of right of use assets | | Amortization of right of use assets | 143 | | | — | |
Provision for credit losses on accounts receivable, net of adjustments | Provision for credit losses on accounts receivable, net of adjustments | 12 | | | 76 | | Provision for credit losses on accounts receivable, net of adjustments | 181 | | | 12 | |
Provision (recoveries) for excess and obsolete inventories | 292 | | | (193) | | |
Provision for excess and obsolete inventories | | Provision for excess and obsolete inventories | 148 | | | 292 | |
Share-based compensation | Share-based compensation | 5,793 | | | 5,694 | | Share-based compensation | 6,908 | | | 5,793 | |
(Gain) loss on disposition of assets | 0 | | | (62) | | |
Gain on disposition of assets | | Gain on disposition of assets | (12) | | | — | |
Foreign currency transaction (gain) loss | Foreign currency transaction (gain) loss | (11) | | | 30 | | Foreign currency transaction (gain) loss | 9 | | | (11) | |
Interest income on note receivable | Interest income on note receivable | (19) | | | (12) | | Interest income on note receivable | (11) | | | (19) | |
Deferred income taxes | Deferred income taxes | 2,747 | | | 5,061 | | Deferred income taxes | (127) | | | 2,747 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | | | Changes in assets and liabilities: | | | |
Accounts receivable | Accounts receivable | (5,936) | | | 10,929 | | Accounts receivable | (53,736) | | | (5,936) | |
Income taxes | 1,248 | | | (4,382) | | |
Income tax receivable | | Income tax receivable | (1,895) | | | 1,248 | |
Inventories | Inventories | (5,472) | | | (11,617) | | Inventories | (33,879) | | | (5,472) | |
Prepaid expenses and other | 799 | | | (568) | | |
Contract assets | | Contract assets | (2,820) | | | — | |
Prepaid expenses and other long-term assets | | Prepaid expenses and other long-term assets | (3,066) | | | 799 | |
Accounts payable | Accounts payable | 10,650 | | | 2,893 | | Accounts payable | 6,490 | | | 10,650 | |
Contract liabilities | | Contract liabilities | 22,217 | | | — | |
Deferred revenue | Deferred revenue | 574 | | | 473 | | Deferred revenue | 421 | | | 574 | |
Accrued liabilities | 300 | | | 2,423 | | |
Net cash provided by operating activities | 62,912 | | | 62,762 | | |
Accrued liabilities and other long-term liabilities | | Accrued liabilities and other long-term liabilities | 7,123 | | | 300 | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (1,580) | | | 62,912 | |
Investing Activities | Investing Activities | | | | Investing Activities | | | |
Capital expenditures | Capital expenditures | (33,157) | | | (33,510) | | Capital expenditures | (27,227) | | | (33,157) | |
| Cash paid for building (see Note 3) | | Cash paid for building (see Note 3) | (22,000) | | | — | |
Cash paid in business combination, net of cash acquired | | Cash paid in business combination, net of cash acquired | (249) | | | — | |
Proceeds from sale of property, plant and equipment | Proceeds from sale of property, plant and equipment | 2 | | | 61 | | Proceeds from sale of property, plant and equipment | 12 | | | 2 | |
| Principal payments from note receivable | Principal payments from note receivable | 29 | | | 25 | | Principal payments from note receivable | 27 | | | 29 | |
Net cash used in investing activities | Net cash used in investing activities | (33,126) | | | (33,424) | | Net cash used in investing activities | (49,437) | | | (33,126) | |
Financing Activities | Financing Activities | | | | Financing Activities | | | |
| Borrowings under revolving credit facility | | Borrowings under revolving credit facility | 94,900 | | | — | |
Payments under revolving credit facility | | Payments under revolving credit facility | (28,651) | | | — | |
Principal payments on financing lease | | Principal payments on financing lease | (28) | | | — | |
Stock options exercised | Stock options exercised | 11,848 | | | 14,173 | | Stock options exercised | 6,385 | | | 11,848 | |
Repurchase of stock | Repurchase of stock | (10,271) | | | (15,937) | | Repurchase of stock | (5,912) | | | (10,271) | |
Employee taxes paid by withholding shares | Employee taxes paid by withholding shares | (1,532) | | | (1,102) | | Employee taxes paid by withholding shares | (954) | | | (1,532) | |
| Net cash provided by (used in) financing activities | 45 | | | (2,866) | | |
Net cash provided by financing activities | | Net cash provided by financing activities | 65,740 | | | 45 | |
Net increase in cash, cash equivalents and restricted cash | Net increase in cash, cash equivalents and restricted cash | 29,831 | | | 26,472 | | Net increase in cash, cash equivalents and restricted cash | 14,723 | | | 29,831 | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 82,288 | | | 44,373 | | Cash, cash equivalents and restricted cash, beginning of period | 3,487 | | | 82,288 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 112,119 | | | $ | 70,845 | | Cash, cash equivalents and restricted cash, end of period | $ | 18,210 | | | $ | 112,119 | |
The accompanying notes are an integral part of these consolidated financial statements.
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., an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BasX, Inc. (dba BasX Solutions), an Oregon corporation (collectively, the “Company”). The accompanying unaudited consolidated financial statements of AAON, Inc., a Nevada corporation, and our operating subsidiaries, all of which are wholly-owned, (collectively, the “Company”) 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”).
On December 10, 2021, we closed on the acquisition of all of the issued and outstanding equity ownership of BasX, LLC, doing business as BasX Solutions ("BasX") (Note 3). We began including the results of BasX’s operations in our consolidated financial statements on December 11, 2021. On December 29, 2021, BasX, LLC converted to a C-Corporation, BasX, Inc., and is subject to income tax.
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 2 variable interest entities ("VIEs") (Note 14)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, 20202021 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, 2020.2021. 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 center cooling solutions, cleanroom systems, chillers, 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 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 reserves, warranty accrual, worker'sworkers' compensation accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, share-based compensation.compensation, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates.
Change in Estimate
During the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at our Longview, Texas location resulted in a change in estimate that increased the useful lives from between ten and twelve years to fifteen years. This determination was based on recent and estimated future production levels as well as management’s knowledge of the equipment and historical and future use of the equipment. The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $1.8 million during the six months ended June 30, 2022.
Impact of FebruaryCOVID-19 Pandemic
The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business.
We had continuous operations during the six months ended June 30, 2022. Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics. The Company also utilizes sanitation stations and performs additional cleaning and sanitation throughout the day.
Although future disruptions and costs are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations. We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and its potential effect on our financial position, results of operations and cash flows.
Inflation and Labor Market
We have witnessed increases of our raw material prices, especially in copper and steel, which appear to be a residual effect of COVID-19, and we continue to make strategic purchases of materials when we see opportunities. We have managed the increase 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 existing vendor relationships, expanding our list of vendors, and our favorable liquidity position.
Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. In July 2021, we increased starting wages for our production workforce by 7.0%. We also put a cost of living increase of 3.5% in place in October 2021 for all employees below the Director level. In March 2022, we awarded annual merit raises resulting in a 3.0% increase in overall wages. We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.
Despite efforts to mitigate the impact of inflation, supply chain issues, and the tight labor market, future disruptions, while temporary, could negatively impact our financial position, results of operations and cash flows.
First Quarter 2021 Planned Maintenance and Adverse Weather
During the fourth quarter of 2020, we made the strategic decision to shut down our Tulsa, OK and Longview, TX manufacturing facilities to perform planned and necessary maintenance during the last week of December 2020 as well several days in early January 2021.
In February 2021, record-breaking winter storms affected Oklahoma and Texas, causing sustained below freezing temperatures, hazardous driving conditions, rolling blackouts, water main breaks, and a host of other weather related issues. In addition to significant absenteeism as a result of employees being unable to travel to and from work due to inadequate transportation and/or hazardous road conditions, the Company made the decision to shut down the Tulsa, OK and Longview, TX plants for several days. This decision was based on the expected employee absenteeism as well as the expected rolling blackouts caused by the increased demand on the electrical and natural gas power grids. Although we lost several production days in mid-February 2021, we do not believe that the impact of this weather event will have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ending December 31, 2021.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.
Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher employee absenteeism, mostly in June 2020, in our manufacturing facilities. We maintained continuous operations during the six months ended June 30, 2021, except for the weather related shutdown in February 2021. For the most part, our workers are able to socially distance themselves during the manufacturing process. Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics. The Company utilizes sanitation stations and performs additional cleaning and sanitation throughout the day and deep cleaning overnight.
The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, some employee absenteeism, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business.
Although these disruptions and costs are expected to be temporary, there is uncertainty concerning the duration and overall impact to our business operations. The Company experienced decreased demand in late 2020, however that demand began to rebound in the first quarter of 2021. As COVID-19 restrictions lessened in 2021, we experienced increases in our order intake and minimal disruption to our operations. We witnessed increases in some of our raw material prices which appear to be an impact of COVID-19, and have put in place price increases in our products and continue to make strategic purchases of materials when we see opportunities. We do not believe that the impact of the COVID-19 pandemic will have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ended December 31, 2021.
However, we are continually monitoring the progression of the COVID-19 pandemic and its potential effects on our 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, 2020.2021.
Fair Value Measurements
We adopted ASU No. 2018-13, Fair Value Measurements (Topic 820), as amended, asThe carrying amounts of January 1, 2020. The ASU includes additional disclosure requirements for unrealized gainscash and losses for Level 3cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value measurementsbecause of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and significant observable inputs usedother payables, approximate their fair values either due to develop Level 3 fair value measurements. There was not a material impacttheir short term nature, the variable rates associated with the debt, or based on current rates offered to financial statements upon adoption. 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 property, plant and equipment, 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 our February 2018 business combination. We amortize our intangible assets on a straight-line basis over the estimated useful lives of the assets.combinations (Note 3). We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. As of March 31, 2021, our intangible assets were fully amortized. As of December 31, 2020, our intangible assets, net of amortization, were approximately $38.0 thousand. The amount of amortization was $58.0 thousand for
Amortization is computed using the three months ended June 30, 2020 and $38.0 thousand and $117.0 thousand forstraight-line method over the six months ended June 30, 2021 and 2020, respectively.following estimated useful lives:
| | | | | |
Intellectual property | 30 years |
Customer relationships | 14 years |
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the consideration paid for the acquired business, in our February 2018 business combination,businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill atAt June 30, 20212022 $50.3 million of goodwill is deductible for income tax purposes. Our indefinite-lived intangible assets consist of trademark and trade names. Goodwill isand indefinite-lived intangible assets are not amortized, but instead isare 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. As of June 30, 2021 and December 31, 2020, our goodwill was approximately $3.2 million.
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, 2021, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.
2. Revenue Recognition
DisaggregatedThe following tables show disaggregated net sales by reportable segment (see Note 20) by major source:source, net of intercompany sales eliminations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| (in thousands) |
Rooftop units | $ | 107,370 | | | $ | 99,145 | | | $ | 194,795 | | | $ | 209,975 | |
Condensing units | 7,302 | | | 4,505 | | | 13,833 | | | 9,003 | |
Air handlers | 7,265 | | | 6,016 | | | 13,679 | | | 12,263 | |
Outdoor mechanical rooms | 764 | | | 434 | | | 975 | | | 1,349 | |
Water source heat pumps | 6,425 | | | 3,796 | | | 11,090 | | | 7,499 | |
Part sales | 10,717 | | | 7,565 | | | 18,223 | | | 14,078 | |
Other | 4,033 | | | 4,135 | | | 7,069 | | | 8,912 | |
Net Sales | $ | 143,876 | | | $ | 125,596 | | | $ | 259,664 | | | $ | 263,079 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| AAON Oklahoma | | AAON Coil Products | | BasX | | Total |
| (in thousands) |
Rooftop Units | $ | 138,616 | | | $ | — | | | $ | — | | | $ | 138,616 | |
Condensing Units | — | | | 11,949 | | | — | | | 11,949 | |
Air Handlers | — | | | 11,540 | | | 2,945 | | | 14,485 | |
Outdoor Mechanical Rooms | — | | | 260 | | | — | | | 260 | |
Cleanroom Systems | — | | | — | | | 8,246 | | | 8,246 | |
Data Center Cooling Solutions | — | | | — | | | 12,837 | | | 12,837 | |
Water-Source Heat Pumps | 1,876 | | | 1,798 | | | — | | | 3,674 | |
Part Sales | 13,857 | | | — | | | 331 | | | 14,188 | |
Other2 | 3,132 | | | 1,207 | | | 220 | | | 4,559 | |
| $ | 157,481 | | | $ | 26,754 | | | $ | 24,579 | | | $ | 208,814 | |
| | | | | | | |
| Three Months Ended June 30, 2021 |
| AAON Oklahoma | | AAON Coil Products | | BasX1 | | Total |
| (in thousands) |
Rooftop Units | $ | 107,370 | | | $ | — | | | $ | — | | | $ | 107,370 | |
Condensing Units | 393 | | | 6,909 | | | — | | | 7,302 | |
Air Handlers | — | | | 7,265 | | | — | | | 7,265 | |
Outdoor Mechanical Rooms | 578 | | | 186 | | | — | | | 764 | |
Water-Source Heat Pumps | 4,069 | | | 2,356 | | | — | | | 6,425 | |
Part Sales | 10,717 | | | — | | | — | | | 10,717 | |
Other2 | 3,139 | | | 894 | | | — | | | 4,033 | |
| $ | 126,266 | | | $ | 17,610 | | | $ | — | | | $ | 143,876 | |
Disaggregated units sold by major source:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Rooftop units | 4,657 | | | 3,746 | | | 7,616 | | | 7,807 | |
Condensing units | 618 | | | 446 | | | 1,136 | | | 854 | |
Air handlers | 707 | | | 501 | | | 1,200 | | | 1,011 | |
Outdoor mechanical rooms | 13 | | | 6 | | | 20 | | | 16 | |
Water source heat pumps | 1,908 | | | 1,645 | | | 3,532 | | | 3,262 | |
Total Units | 7,903 | | | 6,344 | | | 13,504 | | | 12,950 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| AAON Oklahoma | | AAON Coil Products | | BasX | | Total |
| (in thousands) |
Rooftop Units | $ | 260,322 | | | $ | — | | | $ | — | | | $ | 260,322 | |
Condensing Units | 242 | | | 20,925 | | | — | | | 21,167 | |
Air Handlers | — | | | 20,978 | | | 4,284 | | | 25,262 | |
Outdoor Mechanical Rooms | 554 | | | 370 | | | — | | | 924 | |
Cleanroom Systems | — | | | — | | | 16,285 | | | 16,285 | |
Data Center Cooling Solutions | — | | | — | | | 23,705 | | | 23,705 | |
Water-Source Heat Pumps | 4,862 | | | 4,151 | | | — | | | 9,013 | |
Part Sales | 24,073 | | | — | | | 331 | | | 24,404 | |
Other2 | 7,295 | | | 2,265 | | | 943 | | | 10,503 | |
| $ | 297,348 | | | $ | 48,689 | | | $ | 45,548 | | | $ | 391,585 | |
| | | | | | | |
| Six Months Ended June 30, 2021 |
| AAON Oklahoma | | AAON Coil Products | | BasX1 | | Total |
| (in thousands) |
Rooftop Units | $ | 194,795 | | | $ | — | | | $ | — | | | $ | 194,795 | |
Condensing Units | 642 | | | 13,191 | | | — | | | 13,833 | |
Air Handlers | — | | | 13,679 | | | — | | | 13,679 | |
Outdoor Mechanical Rooms | 641 | | | 334 | | | — | | | 975 | |
Water-Source Heat Pumps | 6,457 | | | 4,633 | | | — | | | 11,090 | |
Part Sales | 18,223 | | | — | | | — | | | 18,223 | |
Other2 | 5,484 | | | 1,585 | | | — | | | 7,069 | |
| $ | 226,242 | | | $ | 33,422 | | | $ | — | | | $ | 259,664 | |
| | | | | | | |
1 BasX was acquired by the Company on December 10, 2021. As the BasX segment was not applicable for the three and six months ended June 30, 2022, it has been excluded from the tables for those periods. |
2 Other sales include freight, extended warranties and miscellaneous revenue. |
The Company recognizes revenue, presented net
Due to the highly customized nature of sales tax, when it satisfies the performance obligation in its contracts. The primary performance obligation in our contract is delivery of the requested manufactured equipment. Mostmany of the Company’s products are highly customized, cannot be resoldand each product not having an alternative use to other customers and the costCompany without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of rework to be resold is not economical.each contract. The Company has a formal cancellation policypolicies 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.
For all other products that are part sales or standardized units, the Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. As the primary performance obligation in such a contract is
delivery of the requested manufactured equipment, 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.
Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being May-October of each year.
Product Warranties
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, most of which areincluding those initiated by our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing heating, ventilation, and air conditioning ("HVAC")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 without limitation, controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All of these items 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 an AAON 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 sheet.
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 $14.0$11.4 million and $14.9$14.0 million for the three months ended June 30, 20212022 and 2020,2021, respectively. The amount of payments to our Representatives were $25.0$17.9 million and $27.5$25.0 million for the six months ended June 30, 2022 and 2021, respectively.
3. Business Combination
On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire of all of the issued and 2020, respectively.outstanding equity ownership of BasX, LLC, an Oregon limited liability company, doing business as BasX Solutions. We closed this transaction on December 10, 2021 for a purchase price of (i) $100.0 million payable in cash (not including working capital adjustments), and (ii) up to $80.0 million in the aggregate of contingent consideration payable in shares of the Company's common stock, par value $0.004 per share (the "Shares").
The $80.0 million of contingent consideration payable consists of $78.0 million payable to the former owners of BasX and $2.0 million payable to key employees of BasX whom are now employed by the Company. The potential future issuance of the Shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of 2021, 2022, and 2023 under the terms of the MIPA Agreement. The Company funded the BasX acquisition cash portion of the purchase price and related transaction costs with cash on hand.
Additionally, as a condition to closing, the Company entered into a real estate purchase agreement with BasX Properties, LLC, an affiliate of BasX, to acquire the principal real property and improvements utilized by BasX for an additional $22.0 million, subject to customary closing conditions and adjustments. The Company closed this real estate transaction on May 31, 2022, which terminated the related lease (Note 4).
BasX specializes in the design, engineering and manufacturing of custom, energy efficient cooling solutions for the rapidly growing hyperscale data center market. BasX also designs and manufactures custom solutions for cleanroom environments for
the bio-pharmaceutical, semiconductor, medical and agriculture markets, as well as custom, energy efficient air handlers and modular solutions for a vast array of markets. The acquisition of BasX brings the Company exposure to attractive end-markets into which the Company has historically had minimal exposure. The products BasX manufactures are highly engineered, customized products, fully complimenting AAON's existing business.
We applied pushdown accounting, allowable under ASC 805 "Business Combinations," to "pushdown" our stepped-up basis in the assets acquired and liabilities assumed to BasX's subsidiary financial statements. The decision to apply pushdown accounting is irrevocable. Goodwill was calculated and recognized consistent with acquisition accounting, resulting in the pushdown of $78.7 million in goodwill.
The following table presents the final allocation of the consideration paid to the assets acquired and liabilities assumed in the acquisition of BasX described above, which was still preliminary at December 31, 2021. The revisions indicated below were recorded during the six months ended June 30, 2022. The revisions were the results of updates to our preliminary estimates and third party valuation models. The impact of such revisions on net income were not significant.
| | | | | | | | | | | | | | | | | |
| Final Allocation | | Estimated Allocation as of December 31, 2021 | | Revision |
| | | (in thousands) | | |
Accounts receivable | $ | 13,699 | | | $ | 13,699 | | | $ | — | |
Inventories | 2,725 | | | 2,725 | | | — | |
Contract assets | 7,635 | | | 7,635 | | | — | |
Prepaid expenses and other | 341 | | | 341 | | | — | |
Property, plant and equipment | 13,169 | | | 13,169 | | | — | |
Right of use assets | 15,611 | | | 15,611 | | | — | |
Intangible assets | 68,413 | | | 70,329 | | | (1,916) | |
Goodwill | 78,663 | | | 82,498 | | | (3,835) | |
Accounts payable | (9,388) | | | (9,388) | | | — | |
Accrued liabilities | (3,807) | | | (3,807) | | | — | |
Contract liabilities | (7,771) | | | (7,771) | | | — | |
Lease liabilities | (15,611) | | | (15,611) | | | — | |
Contingent Consideration - shares of AAON, Inc. | (60,000) | | | (66,000) | | | 6,000 | |
Consideration paid | $ | 103,679 | | | $ | 103,430 | | | $ | 249 | |
The Company also sells extended warranties on partsrecognized the following definite and indefinite-lived intangible assets as part of the acquisition of BasX:
| | | | | | | | | | | | | | | | | |
| Final Allocation | | Estimated Allocation as of December 31, 2021 | | Revision |
| | | (in thousands) | | |
Definite-lived intangible assets | | | | | |
Intellectual property | $ | 6,295 | | | $ | 6,479 | | | $ | (184) | |
Customer relationships | 47,547 | | | 48,684 | | | (1,137) | |
| 53,842 | | | 55,163 | | | (1,321) | |
| | | | | |
Indefinite-lived intangible assets | | | | | |
Trademarks | 14,571 | | | 15,166 | | | (595) | |
Total intangible assets acquired | $ | 68,413 | | | $ | 70,329 | | | $ | (1,916) | |
Goodwill is the excess of the consideration paid 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 basisthe acquired businesses over the separately priced warranty period.
fair value of the individual assets acquired, net of liabilities assumed. Goodwill represents a premium paid to acquire the skilled workforce and expanded market opportunities. Goodwill of $47.1 million was tax deductible upon the completion of the final allocation of consideration paid to
the assets acquired and liabilities assumed. Future additional amounts of goodwill related to the contingent consideration may become tax deductible in the future if the earn out provisions of the MIPA Agreement are achieved.
3.Pro Forma Results of Operations (unaudited)
The operations of BasX have been included in our statements of income since the closing date on December 10, 2021. The following unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2021 are presented as if the combination had been made on January 1, 2021.
| | | | | | | | | | | |
| (unaudited) |
| Three months ended | | Six months ended |
| June 30, 2021 | | June 30, 2021 |
| (in thousands, except per share data) |
Revenues | $ | 162,368 | | | $ | 292,999 | |
Net income | $ | 21,522 | | | $ | 38,494 | |
Earnings per share: | | | |
Basic | $ | 0.41 | | | $ | 0.73 | |
Dilutive | $ | 0.40 | | | $ | 0.72 | |
These unaudited pro forma results include adjustments necessary in connection with the acquisition.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.
4. Leases
The following table presents the balances by lease type:
| | | | | | | | | | | | | | | | | | | | |
| | Balance Sheet Classification | | June 30, 2022 | | December 31, 2021 |
Operating Leases | | | | | | |
Right of use assets | | Right of use assets | | $ | 1,638 | | | $ | 16,974 | |
Current lease liability | | Accrued liabilities | | $ | 434 | | | $ | 1,580 | |
Noncurrent lease liability | | Other long-term liabilities | | $ | 1,246 | | | $ | 15,467 | |
| | | | | | |
Financing Lease | | | | | | |
Right of use assets | | Right of use assets | | $ | 4,248 | | | $ | — | |
Current lease liability | | Accrued liabilities | | $ | 4,236 | | | $ | — | |
Noncurrent lease liability | | Other long-term liabilities | | $ | — | | | $ | — | |
Since 2018, we lease our manufacturing and office space used by our operations in Parkville, MO, which is classified as an operating lease.
During the acquisition of BasX on December 10, 2022 (Note 3), we acquired various leases for plant/office space and equipment, which are classified as operating leases. Through May 2022, BasX's manufacturing and office facility in Redmond, Oregon was leased from a related party (Note19). As as result of the purchase of the manufacturing and office facility on May 31, 2022 the lease was terminated.
On June 1, 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma to support our manufacturing operations. This lease has been classified as a finance lease as the Company has the option to and is reasonably certain to purchase the underlying assets in 2023.
5. Accounts Receivable
Accounts receivable and the related allowance for credit losses are as follows:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (in thousands) | | (in thousands) |
Accounts receivable | Accounts receivable | $ | 53,829 | | | $ | 47,893 | | Accounts receivable | $ | 124,898 | | | $ | 71,329 | |
Less: Allowance for credit losses | Less: Allowance for credit losses | (518) | | | (506) | | Less: Allowance for credit losses | (563) | | | (549) | |
Total, net | Total, net | $ | 53,311 | | | $ | 47,387 | | Total, net | $ | 124,335 | | | $ | 70,780 | |
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Allowance for credit losses: | Allowance for credit losses: | (in thousands) | Allowance for credit losses: | (in thousands) |
Balance, beginning of period | Balance, beginning of period | $ | 493 | | | $ | 647 | | | $ | 506 | | | $ | 353 | | Balance, beginning of period | $ | 837 | | | $ | 493 | | | $ | 549 | | | $ | 506 | |
Provisions (recoveries) for expected credit | 25 | | | (218) | | | 12 | | | 76 | | |
Provisions for (recoveries of) expected credit | | Provisions for (recoveries of) expected credit | (107) | | | 25 | | | 181 | | | 12 | |
losses, net of adjustments | losses, net of adjustments | | losses, net of adjustments | |
| Accounts receivable written off, net of recoveries | | Accounts receivable written off, net of recoveries | (167) | | | — | | | (167) | | | — | |
Balance, end of period | Balance, end of period | $ | 518 | | | $ | 429 | | | $ | 518 | | | $ | 429 | | Balance, end of period | $ | 563 | | | $ | 518 | | | $ | 563 | | | $ | 518 | |
4.6. 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:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (in thousands) | | (in thousands) |
Raw materials | Raw materials | $ | 85,514 | | | $ | 76,238 | | Raw materials | $ | 156,265 | | | $ | 124,480 | |
Work in process | Work in process | 1,557 | | | 2,088 | | Work in process | 3,534 | | | 3,049 | |
Finished goods | Finished goods | 3,054 | | | 7,154 | | Finished goods | 6,073 | | | 4,528 | |
Total, gross | Total, gross | 90,125 | | | 85,480 | | Total, gross | 165,872 | | | 132,057 | |
Less: Allowance for excess and obsolete inventories | Less: Allowance for excess and obsolete inventories | (2,726) | | | (3,261) | | Less: Allowance for excess and obsolete inventories | (1,871) | | | (1,787) | |
Total, net | Total, net | $ | 87,399 | | | $ | 82,219 | | Total, net | $ | 164,001 | | | $ | 130,270 | |
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Allowance for excess and obsolete inventories: | Allowance for excess and obsolete inventories: | (in thousands) | Allowance for excess and obsolete inventories: | (in thousands) |
Balance, beginning of period | Balance, beginning of period | $ | 2,304 | | | $ | 2,365 | | | $ | 3,261 | | | $ | 2,644 | | Balance, beginning of period | $ | 2,007 | | | $ | 2,304 | | | $ | 1,787 | | | $ | 3,261 | |
Provisions (recoveries) for excess and | 486 | | | 81 | | | 292 | | | (193) | | |
Provision for (recovery of) excess and | | Provision for (recovery of) excess and | (72) | | | 486 | | | 148 | | | 292 | |
obsolete inventories | obsolete inventories | | obsolete inventories | |
Inventories written off | Inventories written off | (64) | | | (73) | | | (827) | | | (78) | | Inventories written off | (64) | | | (64) | | | (64) | | | (827) | |
Balance, end of period | Balance, end of period | $ | 2,726 | | | $ | 2,373 | | | $ | 2,726 | | | $ | 2,373 | | Balance, end of period | $ | 1,871 | | | $ | 2,726 | | | $ | 1,871 | | | $ | 2,726 | |
7. Intangible assets
Our intangible assets consist of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Definite-lived intangible assets | (in thousands) |
Intellectual property | $ | 6,295 | | | $ | 6,479 | |
Customer relationships | 47,547 | | | 48,684 | |
Less: Accumulated amortization | (2,004) | | | (208) | |
Total, net | 51,838 | | | 54,955 | |
| | | |
Indefinite-lived intangible assets | | | |
Trademarks | 14,571 | | | 15,166 | |
Total intangible assets, net | $ | 66,409 | | | $ | 70,121 | |
Amortization expense recorded in cost of sales is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (in thousands) |
Amortization expense | $ | 901 | | | $ | — | | | $ | 1,796 | | | $ | 38 | |
Excluding the impact of any future acquisitions, the Company anticipates amortization expense to be $3.6 million for each of the years ending 2022 through 2026.
8. Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Supplemental disclosures: | (in thousands) |
| | | | | | | |
Interest paid | $ | 418 | | | $ | — | | | $ | 533 | | | $ | — | |
Income taxes paid | $ | 10,805 | | | $ | 2,529 | | | $ | 10,981 | | | $ | 2,742 | |
Non-cash investing and financing activities: | | | | | | | |
Non-cash capital expenditures | $ | 221 | | | $ | (2,109) | | | $ | 679 | | | $ | (1,845) | |
Dividends declared | $ | 10,096 | | | $ | 9,970 | | | $ | 10,096 | | | $ | 9,970 | |
| | | | | | | |
5. Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Supplemental disclosures: | (in thousands) |
| | | | | | | |
| | | | | | | |
Income taxes paid | $ | 2,529 | | | $ | 6,711 | | | $ | 2,742 | | | $ | 9,735 | |
Non-cash investing and financing activities: | | | | | | | |
Non-cash capital expenditures1 | $ | (2,109) | | | $ | 6,046 | | | $ | (1,845) | | | $ | 5,046 | |
Dividends declared | 9,970 | | | $ | 9,930 | | | $ | 9,970 | | | $ | 9,930 | |
1 Includes non-cash changes in accrued capital expenditures | | | | | | |
| | | | | | | |
6.9. Warranties
The Company has product warranties with various terms ranging 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 | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Warranty accrual: | Warranty accrual: | (in thousands) | Warranty accrual: | (in thousands) |
Balance, beginning of period | Balance, beginning of period | $ | 13,525 | | | $ | 12,940 | | | $ | 13,522 | | | $ | 12,652 | | Balance, beginning of period | $ | 13,707 | | | $ | 13,525 | | | $ | 13,769 | | | $ | 13,522 | |
Payments made | Payments made | (1,545) | | | (1,617) | | | (3,009) | | | (2,794) | | Payments made | (1,679) | | | (1,545) | | | (2,898) | | | (3,009) | |
Provisions | Provisions | 2,028 | | | 1,837 | | | 3,495 | | | 3,302 | | Provisions | 2,353 | | | 2,028 | | | 3,510 | | | 3,495 | |
Balance, end of period | Balance, end of period | $ | 14,008 | | | $ | 13,160 | | | $ | 14,008 | | | $ | 13,160 | | Balance, end of period | $ | 14,381 | | | $ | 14,008 | | | $ | 14,381 | | | $ | 14,008 | |
| Warranty expense: | Warranty expense: | $ | 2,028 | | | $ | 1,837 | | | $ | 3,495 | | | $ | 3,302 | | Warranty expense: | $ | 2,353 | | | $ | 2,028 | | | $ | 3,510 | | | $ | 3,495 | |
7.10. Accrued Liabilities and Other Long-Term Liabilities
Accrued liabilities were comprised of the following:
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (in thousands) | | (in thousands) |
Warranty | Warranty | $ | 14,008 | | | $ | 13,522 | | Warranty | $ | 14,381 | | | $ | 13,769 | |
Due to representatives | Due to representatives | 7,980 | | | 8,296 | | Due to representatives | 12,227 | | | 7,995 | |
Payroll | Payroll | 8,509 | | | 8,155 | | Payroll | 11,274 | | | 8,423 | |
Profit sharing | Profit sharing | 2,920 | | | 2,902 | | Profit sharing | 2,329 | | | 1,489 | |
Worker's compensation | 429 | | | 594 | | |
Workers' compensation | | Workers' compensation | 271 | | | 308 | |
Medical self-insurance | Medical self-insurance | 1,236 | | | 1,546 | | Medical self-insurance | 1,256 | | | 1,943 | |
Customer prepayments | Customer prepayments | 5,070 | | | 5,067 | | Customer prepayments | 3,092 | | | 5,931 | |
| Donations | Donations | 224 | | | 570 | | Donations | 293 | | | 438 | |
| Employee vacation time | Employee vacation time | 3,520 | | | 3,321 | | Employee vacation time | 5,337 | | | 4,362 | |
Lease liability, short-term | | Lease liability, short-term | 4,670 | | | 1,580 | |
Other | Other | 3,395 | | | 2,613 | | Other | 4,995 | | | 3,968 | |
Total | Total | $ | 47,291 | | | $ | 46,586 | | Total | $ | 60,125 | | | $ | 50,206 | |
Other long-term liabilities were comprised of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (in thousands) |
Long-term operating lease obligation | $ | 1,246 | | | $ | 15,467 | |
Extended warranties | 3,562 | | | 3,042 | |
Long-term donations and other | 687 | | | 334 | |
Total | $ | 5,495 | | | $ | 18,843 | |
8.11. Revolving Credit Facility
Our revolving credit facility, asOn May 27, 2022, we amended providesour $100 million Amended and Restated Loan Agreement dated November 24, 2021 (“Revolver”), to provide for maximum borrowings of $30.0$200.0 million. UnderAs of June 30, 2022 and December 31, 2021, we had $106.2 million and $40.0 million outstanding under the line of credit, there isRevolver, respectively. We have one standby letter of credit totaling $1.8 million.$0.8 million as of June 30, 2022. Borrowings available under the revolving credit facilityRevolver at June 30, 20212022 were $28.2$92.9 million. InterestThe Revolver expires on borrowings is payable monthly at LIBOR plus 2.0%. NaN fees are associated with the unused portion of the committed amount. We had 0 outstanding balance under the revolving credit facility at June 30, 2021 and December 31, 2020.May 27, 2027.
On July 26, 2021,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 entered into a new revolving credit facility. The lender, borrowing terms, interest terms on borrowings, standbyis also subject to letter of credit fees, ranging from 1.25% - 1.75%, and feesa 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 our the Revolver was 1.9% and 1.7% for the three and six months ended June 30, 2022, respectively. Fees associated with the unused portion of the committed amount are similar toincluded in interest expense on our consolidated statements of income and were not material for the previous revolving credit facility. Additionally, the new revolving credit facility includes fallback language clearly defining an alternative reference rate which provides for specified replacement rates, as defined in the revolving credit facility agreement, upon a LIBOR cessation event. At the time of a LIBOR cessation event, the replacement rate self-executes without the need for negotiations or a formal amendment process.three and six months ended June 30, 2022.
The new revolving credit facility also contains financial covenants. AsIf SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate ("ABR") loans. ABR loans would bear interest at a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.
At June 30, 2021,2022, we were in compliance with our financial covenants, related toas defined by the new revolving credit facility.Revolver. These financial covenants require that we meet certain parameters related to our consolidated leverage ratio and our consolidated total liabilities to tangible net worth ratio. At June 30, 2021,2022, our consolidated leverage ratio was 0.011.06 to 1 and met1.0, which meets the requirement of not being less than 2 to 1. Our consolidated total liabilities to tangible net worth ratio was 0.3 to 1, and met the requirement of being less than 2above 3 to 1.
9.12. Income Taxes
The provision (benefit) for income taxes consists of the following:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands) | | (in thousands) |
Current | Current | $ | 6,543 | | | $ | (789) | | | $ | 3,990 | | | $ | 5,354 | | Current | $ | 9,365 | | | $ | 6,543 | | | $ | 9,086 | | | $ | 3,990 | |
Deferred | Deferred | (1,911) | | | 5,228 | | | 2,747 | | | 5,061 | | Deferred | (5,188) | | | (1,911) | | | (127) | | | 2,747 | |
Income tax provision | Income tax provision | $ | 4,632 | | | $ | 4,439 | | | $ | 6,737 | | | $ | 10,415 | | Income tax provision | $ | 4,177 | | | $ | 4,632 | | | $ | 8,959 | | | $ | 6,737 | |
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 | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Federal statutory rate | Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % | Federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of Federal benefit | State income taxes, net of Federal benefit | (0.2) | | | 4.4 | | | 3.0 | | | 4.8 | | State income taxes, net of Federal benefit | 6.3 | | | (0.2) | | | 4.5 | | | 3.0 | |
| Excess tax benefits | Excess tax benefits | (1.9) | | | (3.8) | | | (7.8) | | | (3.8) | | Excess tax benefits | (1.0) | | | (1.9) | | | (1.7) | | | (7.8) | |
Return to provision adjustments | Return to provision adjustments | (0.3) | | | 0 | | | (0.3) | | | 0 | | Return to provision adjustments | (1.2) | | | (0.3) | | | (0.6) | | | (0.3) | |
Other | Other | (0.3) | | | (1.6) | | | (0.5) | | | (1.2) | | Other | (4.3) | | | (0.3) | | | (2.3) | | | (0.5) | |
Effective tax rate | Effective tax rate | 18.3 | % | | 20.0 | % | | 15.4 | % | | 20.8 | % | Effective tax rate | 20.8 | % | | 18.3 | % | | 20.9 | % | | 15.4 | % |
On May 21, 2021, the State of Oklahoma enacted House Bill 2960, effectively reducing the corporate income tax rate in Oklahoma from 6% to 4%. As a resultThis resulted in an overall reduction of these changes, the Company adjusted itsour effective state deferredincome tax assets and liabilities in the second quarter of 2021 using the newly enacted rate for the periods when they are expected to be realized. This resulted in a benefit of $0.8 million included in the table above under State income taxes,three and six months ended June 30, 2021, net of Federal benefit.
During the six months ended June 30, 2021,2022, the Company recorded an excess tax benefit of $3.4$0.7 million as compared to $1.9$3.4 million during the same period in 2020, an increase2021, a decrease of 78%79%. The increasedecrease was primarily due to timing of stock option exercises as a result of our high stock price during the threesix months ended March 31,June 30, 2021.
We earn 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 of June 30, 2021,2022, we have investment tax credit carryforwards of approximately $2.8$3.7 million. These credits have estimated expirations ranging from the year 2036 through 2040.
The Company's estimated annual 20212022 effective tax rate, excluding discrete events, is approximately 25%. We file income tax returns in the U.S., as well as various state and foreign income tax returns jurisdictions. We are subject to U.S. income tax examinations for tax years 20172018 to present, and to non-U.S. income tax examinations for the tax years 20162017 to present. In addition, we are subject to state and local income tax examinations for the tax years 20162017 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.
Coronavirus Aid, Relief, and Economic Security Act
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020, and includes a retroactive correction to the 2017 Tax Cuts and Jobs Act that allows for much faster depreciation of qualified improvement property that is placed in service after December 31, 2017. Under current rules, the calculation of depreciation or repair deductions for prior years can be recomputed and a one-time catch-up adjustment is allowed in the current tax year for missed deductions. The adjustment is the difference between depreciation or repair deductions claimed versus depreciation or repair deductions that could have been claimed by the end of the prior tax year and does not require amending any prior year tax returns. The Company completed the prior year adjustment and the current-year catch up with the 2019 tax return as filed in the fourth quarter of 2020 resulting in a increase to our deferred tax liability of $4.7 million. For tax years 2020 and forward, the Company includes this treatment for our qualified property placed in service.
American Rescue Plan Act
On March 11, 2021, the American Rescue Plan Act (the “ARPA”) was enacted and signed into law. The ARPA is an economic stimulus package in response to the COVID-19 pandemic, which contains tax provisions that are not expected to have a material impact to our consolidated financial statements. In accordance with accounting standards for income taxes, the impact of this new tax legislation was taken into account in the first quarter of 2021, the period in which it was enacted.
10.13. Share-Based Compensation
On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 3.3 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards, in addition to the shares from the previous plan, the 1992 Plan. 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 8.9 million shares, comprised of 3.4 million new shares provided for under the 2016 Plan, approximately 0.4 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 2.6 million shares that were approved by the stockholders on May 15, 2018, and an additional 2.5 million shares that were approved by the stockholders on May 12, 2020.
Under the 2016 Plan, 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 2016 Plan, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant. The 2016 Plan is 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 will determine the persons to whom awards are to be made, determine the type, size and terms of awards, interpret the 2016 Plan, establish and revise rules and regulations relating to the 2016 Plan and make any other determinations that it believes necessary for the administration of the 2016 Plan. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan.
Options
The total pre-tax compensation cost related to unvested stock options not yet recognized as of June 30, 2021 is $22.0 million and is expected to be recognized over a weighted average period of approximately 2.7 years.
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 six months ended June 30, 20212022 and 20202021 using a Black Scholes-Merton Model:
| | | Six months ended | | Six months ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 |
Directors and SLT1: | Directors and SLT1: | | | | Directors and SLT1: | | | |
Expected dividend rate | Expected dividend rate | $0.38 | | $0.33 | Expected dividend rate | $0.38 | | $0.38 |
Expected volatility | Expected volatility | 35.78% | | 31.63% | Expected volatility | 35.95% | | 35.78% |
Risk-free interest rate | Risk-free interest rate | 0.51% | | 0.64% | Risk-free interest rate | 2.17% | | 0.51% |
Expected life (in years) | Expected life (in years) | 4.0 | | 5.0 | Expected life (in years) | 4.0 | | 4.0 |
Employees: | Employees: | | | | Employees: | | | |
Expected dividend rate | Expected dividend rate | $0.38 | | $0.32 | Expected dividend rate | $0.38 | | $0.38 |
Expected volatility | Expected volatility | 38.70% | | 31.23% | Expected volatility | 37.29% | | 38.70% |
Risk-free interest rate | Risk-free interest rate | 0.30% | | 0.69% | Risk-free interest rate | 2.11% | | 0.30% |
Expected life (in years) | Expected life (in years) | 3.0 | | 5.0 | Expected life (in years) | 3.0 | | 3.0 |
1 Senior Leadership Team ("SLT") consist of officers and key members of management. | |
1 Senior Leadership Team ("SLT") consists of officers and key members of management. | | 1 Senior Leadership Team ("SLT") 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.
The following is a summary of stock options vested and exercisable as of June 30, 2021:2022:
| Range of Exercise Prices | Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Intrinsic Value (in thousands) | Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Intrinsic Value (in thousands) |
$ | 7.18 | | - | $ | 40.87 | | | 628,083 | | | 5.17 | | $ | 30.25 | | | $ | 20,313 | | 8.17 | | - | $ | 41.37 | | | 1,344,401 | | | 5.66 | | $ | 36.47 | | | $ | 24,583 | |
$ | 41.37 | | - | $ | 41.37 | | | 441,965 | | | 7.00 | | 41.37 | | | 9,379 | | 42.42 | | - | $ | 54.20 | | | 320,338 | | | 7.59 | | 44.68 | | | 3,229 | |
$ | 42.42 | | - | $ | 75.00 | | | 146,869 | | | 8.61 | | 44.84 | | | 2,607 | | 54.29 | | - | $ | 79.81 | | | 115,256 | | | 8.63 | | 72.52 | | | — | |
| | Total | | 1,216,917 | | | 6.25 | | $ | 36.05 | | | $ | 32,299 | | | Total | | 1,779,995 | | | 6.20 | | $ | 40.29 | | | $ | 27,812 | |
The following is a summary of stock options vested and exercisable as of June 30, 2020:2021:
| Range of Exercise Prices | Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Intrinsic Value (in thousands) | Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Intrinsic Value (in thousands) |
$ | 7.18 | | - | $ | 36.95 | | | 592,236 | | | 5.76 | | $ | 27.90 | | | $ | 15,632 | | 7.18 | | - | $ | 40.87 | | | 628,083 | | | 5.17 | | $ | 30.25 | | | $ | 20,313 | |
$ | 37.00 | | - | $ | 40.87 | | | 6,518 | | | 3.29 | | 38.16 | | | 105 | | 41.37 | | - | $ | 41.37 | | | 441,965 | | | 7.00 | | 41.37 | | | 9,379 | |
$ | 41.37 | | - | $ | 57.82 | | | 260,412 | | | 8.30 | | 41.46 | | | 3,340 | | 42.42 | | - | $ | 75.00 | | | 146,869 | | | 8.61 | | 44.84 | | | 2,607 | |
| | Total | | 859,166 | | | 6.51 | | $ | 32.09 | | | $ | 19,077 | | | Total | | 1,216,917 | | | 6.25 | | $ | 36.05 | | | $ | 32,299 | |
A summary of stock option activity under the plans is as follows:
| Stock Options | Stock Options | Shares | | Weighted Average Exercise Price | Stock Options | Shares | | Weighted Average Exercise Price |
Outstanding at December 31, 2020 | 3,752,945 | | | $ | 39.00 | | |
Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | 3,365,469 | | | $ | 42.88 | |
Granted | Granted | 352,258 | | | 73.08 | | Granted | 402,145 | | | 54.26 | |
Exercised | Exercised | (335,563) | | | 35.31 | | Exercised | (174,684) | | | 36.54 | |
Forfeited or Expired | Forfeited or Expired | (95,846) | | | 48.92 | | Forfeited or Expired | (46,878) | | | 51.19 | |
Outstanding at June 30, 2021 | 3,673,794 | | | $ | 42.35 | | |
Exercisable at June 30, 2021 | 1,216,917 | | | $ | 36.05 | | |
Outstanding at June 30, 2022 | | Outstanding at June 30, 2022 | 3,546,052 | | | $ | 44.38 | |
Exercisable at June 30, 2022 | | Exercisable at June 30, 2022 | 1,779,995 | | | $ | 40.29 | |
The total pre-tax compensation cost related to unvested stock options not yet recognized as of June 30, 2022 is $17.8 million and is expected to be recognized over a weighted average period of approximately 2.1 years.
The total intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 and 2020 was $12.7$3.5 million and $8.8$12.7 million, respectively. The cash received from options exercised during the six months ended June 30, 2022 and 2021 and 2020 was $11.8$6.4 million and $14.2$11.8 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statementsconsolidated statements of Cash Flows.cash flows.
Performance Awards
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 June 30, 2022, 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 2.0 years.
A summary of the unvested restricted stock awards is as follows:
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 31, 2021 | 161,225 | | | $ | 46.08 | |
Granted | 59,461 | | | 53.06 | |
Vested | (68,199) | | | 44.78 | |
Forfeited | (1,225) | | | 49.41 | |
Unvested at June 30, 2022 | 151,262 | | | $ | 49.38 | |
PSUs
We have awarded performance restricted stock units ("PSUs") to certain officers and key 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 three year 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 the three years ending December 31, 2023.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 June 30, 20212022 is $1.3$2.6 million and is expected to be recognized over a weighted average period of approximately 2.42.5 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 six months ended June 30, 2022 and 2021 using a Monte Carlo Model:
| | | | | |
| Six months ended |
| June 30, 2021 |
| |
Expected dividend rate | $0.38 |
Expected volatility | 39.10% |
Risk-free interest rate | 0.28% |
Expected life (in years) | 2.80 |
| | | | | | | | | | | |
| Six months ended |
| June 30, 2022 | | June 30, 2021 |
| | | |
Expected dividend rate | $0.38 | | $0.38 |
Expected volatility | 37.60% | | 39.10% |
Risk-free interest rate | 2.00% | | 0.28% |
Expected life (in years) | 2.8 | | 2.8 |
The expected term of the PSUs is based on thetheir remaining performance period ending December 31, 2023.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 | | Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 31, 2020 | 0 | | | $ | 0 | | |
Unvested at December 31, 2021 | | Unvested at December 31, 2021 | 16,851 | | | $ | 87.78 | |
Granted | Granted | 18,114 | | | 87.78 | | Granted | 46,521 | | | 44.74 | |
Vested | Vested | 0 | | | 0 | | Vested | — | | | — | |
Forfeited | Forfeited | (1,632) | | | 87.78 | | Forfeited | — | | | — | |
Unvested at June 30, 2021 | 16,482 | | | $ | 87.78 | | |
Unvested at June 30, 2022 | | Unvested at June 30, 2022 | 63,372 | | | $ | 56.18 | |
Restricted StockKey Employee Awards
Subject to the MIPA Agreement (Note 3), the Company granted 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 potential future issuance of the Key Employee Awards is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the 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 will vest and be converted into common stock. The fair value of restricted stock awardsKey Employee 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 June 30, 2021, unrecognizeddate.
The total pre-tax compensation cost related to unvested restricted stock awards was approximately $5.4Key Employee Awards not yet recognized as of June 30, 2022 is $1.6 million whichand is expected to be recognized over a weighted average period of approximately 2.61.5 years.
A summary of the unvested restricted stock awardsKey Employee Awards is as follows:
| | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Unvested at December 31, 2020 | 224,691 | | | $ | 38.22 | | |
Unvested at December 31, 2021 | | Unvested at December 31, 2021 | 26,599 | | | $ | 80.18 | |
Granted | Granted | 31,397 | | | 69.22 | | Granted | — | | | — | |
Vested | Vested | (89,295) | | | 35.84 | | Vested | — | | | — | |
Forfeited | Forfeited | (5,690) | | | 51.19 | | Forfeited | — | | | — | |
Unvested at June 30, 2021 | 161,103 | | | $ | 45.12 | | |
Unvested at June 30, 2022 | | Unvested at June 30, 2022 | 26,599 | | | $ | 80.18 | |
Share-Based Compensation
A summary of share-based compensation is as follows:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Grant date fair value of awards during the period: | Grant date fair value of awards during the period: | (in thousands) | Grant date fair value of awards during the period: | (in thousands) |
Options | Options | $ | 205 | | | $ | 1,169 | | | $ | 6,718 | | | $ | 12,074 | | Options | $ | 650 | | | $ | 205 | | | $ | 5,499 | | | $ | 6,718 | |
Performance awards | 84 | | | 0 | | | 1,590 | | | 0 | | |
PSUs | | PSUs | 219 | | | 84 | | | 2,081 | | | 1,590 | |
Restricted stock | Restricted stock | 773 | | | 806 | | | 2,173 | | | 3,316 | | Restricted stock | 1,018 | | | 773 | | | 3,155 | | | 2,173 | |
| Total | Total | $ | 1,062 | | | $ | 1,975 | | | $ | 10,481 | | | $ | 15,390 | | Total | $ | 1,887 | | | $ | 1,062 | | | $ | 10,735 | | | $ | 10,481 | |
| Share-based compensation expense: | Share-based compensation expense: | | Share-based compensation expense: | |
Options | Options | $ | 2,264 | | | $ | 2,296 | | | $ | 4,427 | | | $ | 3,928 | | Options | $ | 2,339 | | | $ | 2,264 | | | $ | 4,379 | | | $ | 4,427 | |
Performance awards | 148 | | | 0 | | | 189 | | | 0 | | |
PSUs | | PSUs | 292 | | | 148 | | | 477 | | | 189 | |
Restricted stock | Restricted stock | 620 | | | 1,047 | | | 1,177 | | | 1,766 | | Restricted stock | 843 | | | 620 | | | 1,522 | | | 1,177 | |
Key employee awards | | Key employee awards | 322 | | | — | | | 530 | | | — | |
Total | Total | $ | 3,032 | | | $ | 3,343 | | | $ | 5,793 | | | $ | 5,694 | | Total | $ | 3,796 | | | $ | 3,032 | | | $ | 6,908 | | | $ | 5,793 | |
| Income tax benefit/(deficiency) related to share-based compensation: | Income tax benefit/(deficiency) related to share-based compensation: | Income tax benefit/(deficiency) related to share-based compensation: |
Options | Options | $ | 275 | | | $ | 680 | | | $ | 2,570 | | | $ | 1,411 | | Options | $ | 198 | | | $ | 275 | | | $ | 491 | | | $ | 2,570 | |
Restricted stock | Restricted stock | 204 | | | 160 | | | 819 | | | 494 | | Restricted stock | 9 | | | 204 | | | 228 | | | 819 | |
Total | Total | $ | 479 | | | $ | 840 | | | $ | 3,389 | | | $ | 1,905 | | Total | $ | 207 | | | $ | 479 | | | $ | 719 | | | $ | 3,389 | |
Share-based compensation expense is recognized on a straight-line basis over the service period of the related stock options and restricted stock awards.share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vest at a rate of 20% per year. Restricted stock awards granted to directors historically vest 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 or 2016 Plan) or becomes retirement eligible during service period of the related stock options and restricted stockshare-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-yearone-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 the performance awards.PSUs. The performance awards cliff vest at the end of the performance period. The performance awardsPSUs are subject to several service conditions and market conditions, as defined by the performance restricted stock unitPSU 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.
The Key Employee Awards cliff vest on December 31, 2023. Share-based compensation expense is recognized on a straight-line basis over the service period of the Key Employee Awards when it is probable that the performance conditions will be satisfied. The Key Employee Awards are subject to several service and performance conditions, as defined by the Key Employee Award agreement, which allows the holder to retain an amount of the awards as a result of certain termination conditions or change in common control. Forfeitures are accounted for as they occur.
11.14. 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% deferral rate and currently contributing employees deferral rates will be increased to 6% unless their current rate is at or above 6% 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 six months ended June 30, 20212022 and 2020.2021.
The Company matches 175% up to 6% of employee contributions of eligible compensation. Additionally, Plan participant forfeitures are used to reduce the cost of the Company contributions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| (in thousands) |
Contributions, net of forfeitures, made to the defined contribution plan | $ | 2,118 | | | $ | 2,099 | | | $ | 4,398 | | | $ | 4,549 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (in thousands) |
Contributions, net of forfeitures, made to the defined contribution plan | $ | 3,273 | | | $ | 2,118 | | | $ | 6,579 | | | $ | 4,398 | |
Profit Sharing Bonus Plan
We maintain a discretionary profit sharing bonus plan under which approximately 10% of pre-tax profit from consolidated AAON Oklahoma and AAON Coil Products is paid to eligible employees on a quarterly basis in order to reward employee productivity. Eligible employees are regular full-time employees of AAON Oklahoma or AAON Coil Products who are actively employed and working on the first and last days of the calendar quarter and who were employed full-time for at least three full months prior to the beginning of the calendar quarter, excluding the Company's SLT.senior leadership team.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| (in thousands) |
Profit sharing bonus plan expense | $ | 2,919 | | | $ | 2,524 | | | $ | 5,051 | | | $ | 5,691 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (in thousands) |
Profit sharing bonus plan expense | $ | 2,146 | | | $ | 2,919 | | | $ | 4,815 | | | $ | 5,051 | |
Employee Medical Plan
We self-insure for our employees' health insurance. 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 Plan. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. In addition, the Company matches 175% of a participating employee's allowed contributions to a qualified health saving account to assist employees with our health insurance plan deductibles.
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands) | | (in thousands) |
Medical claim payments | Medical claim payments | $ | 2,033 | | | $ | 1,983 | | | $ | 3,846 | | | $ | 3,858 | | Medical claim payments | $ | 2,043 | | | $ | 2,033 | | | $ | 3,989 | | | $ | 3,846 | |
Health saving account contributions | Health saving account contributions | 876 | | | 899 | | | 1,733 | | | 1,773 | | Health saving account contributions | 964 | | | 876 | | | 1,903 | | | 1,733 | |
12.15. 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:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Numerator: | Numerator: | (in thousands, except share and per share data) | Numerator: | (in thousands, except share and per share data) |
Net income | Net income | $ | 20,615 | | | $ | 17,804 | | | $ | 36,991 | | | $ | 39,657 | | Net income | $ | 15,946 | | | $ | 20,615 | | | $ | 34,005 | | | $ | 36,991 | |
Denominator: | Denominator: | | | | | | | | Denominator: | | | | | | | |
Basic weighted average shares | Basic weighted average shares | 52,432,822 | | | 52,099,694 | | | 52,389,989 | | | 52,160,348 | | Basic weighted average shares | 53,095,286 | | | 52,432,822 | | | 52,992,439 | | | 52,389,989 | |
Effect of dilutive stock options and restricted stock | 1,171,110 | | | 650,707 | | | 1,346,145 | | | 725,143 | | |
Effect of dilutive shares related to stock based compensation1 | | Effect of dilutive shares related to stock based compensation1 | 566,590 | | | 1,171,110 | | | 747,998 | | | 1,346,145 | |
Effect of dilutive shares related to contingent consideration2 | | Effect of dilutive shares related to contingent consideration2 | — | | | — | | | 204,179 | | | — | |
Diluted weighted average shares | Diluted weighted average shares | 53,603,932 | | | 52,750,401 | | | 53,736,134 | | | 52,885,491 | | Diluted weighted average shares | 53,661,876 | | | 53,603,932 | | | 53,944,616 | | | 53,736,134 | |
Earnings per share: | Earnings per share: | | | | | | | | Earnings per share: | | | | | | | |
Basic | Basic | $ | 0.39 | | | $ | 0.34 | | | $ | 0.71 | | | $ | 0.76 | | Basic | $ | 0.30 | | | $ | 0.39 | | | $ | 0.64 | | | $ | 0.71 | |
Diluted | $ | 0.38 | | | $ | 0.34 | | | $ | 0.69 | | | $ | 0.75 | | |
Dilutive | | Dilutive | $ | 0.30 | | | $ | 0.38 | | | $ | 0.63 | | | $ | 0.69 | |
Anti-dilutive shares: | Anti-dilutive shares: | | | | | | | | Anti-dilutive shares: | | | | | | | |
Shares | Shares | 397,656 | | | 1,047,616 | | | 249,140 | | | 650,526 | | Shares | 879,554 | | | 397,656 | | | 658,595 | | | 249,140 | |
1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 13) | | 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 3 & Note 16) | | 2 Dilutive shares related to contingent shares issued to the former owners of BasX (Note 3 & Note 16) |
13.16. Stockholders’ Equity
Stock Repurchases
The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.
Our open market repurchase programs are as follows:
| | | | | | | | | | | | | | |
Effective Date | | Authorized Repurchase $ | | Expiration Date |
| | | | |
May 16, 2018 1 | | $15 million | | March 1, 2019 |
March 5, 2019 1 | | $20 million | | March 4, 2020 |
March 13, 2020 | | $20 million | | ** 2 |
1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs. |
2 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 hashad a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan arewere entitled to have shares ofin AAON, Inc. stock in their accounts sold to the Company. The maximum number of401(k) Plan was amended in June 2022 to discontinue this program. No additional shares to be repurchased is contingent uponhave been purchased by the number of shares sold by employee-participants.Company under this arrangement since June 2022.
Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and 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.
Our repurchase activity is as follows:
| | | Six Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands, except share and per share data) | | (in thousands, except share and per share data) |
Program | Program | | Shares | | Total $ | | $ per share | | Shares | | Total $ | | $ per share | Program | | Shares | | Total $ | | $ per share | | Shares | | Total $ | | $ per share |
Open market | Open market | | 0 | | | $ | 0 | | | $ | 0 | | | 103,689 | | | $ | 4,987 | | | $ | 48.10 | | Open market | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
401(k) | 401(k) | | 148,317 | | | 10,271 | | | 69.25 | | | 208,604 | | | 10,957 | | | 52.53 | | 401(k) | | 103,936 | | | 5,913 | | | 56.89 | | | 148,317 | | | 10,271 | | | 69.25 | |
Directors and employees | Directors and employees | | 21,706 | | | 1,532 | | | 70.58 | | | 22,147 | | | 1,102 | | | 49.76 | | Directors and employees | | 16,183 | | | 953 | | | 58.89 | | | 21,706 | | | 1,532 | | | 70.58 | |
Total | Total | | 170,023 | | | $ | 11,803 | | | $ | 69.42 | | | 334,440 | | | $ | 17,046 | | | $ | 50.97 | | Total | | 120,119 | | | $ | 6,866 | | | $ | 57.16 | | | 170,023 | | | $ | 11,803 | | | $ | 69.42 | |
Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows: | | | Inception to | | June 30, 2021 | | Inception to | | June 30, 2022 |
| | (in thousands, except share and per share data) | | (in thousands, except share and per share data) |
Program | Program | | Shares | | Total $ | | $ per share | Program | | Shares | | Total $ | | $ per share |
Open market | Open market | | 4,205,255 | | | $ | 74,793 | | | $ | 17.79 | | Open market | | 4,205,255 | | | $ | 74,793 | | | $ | 17.79 | |
401(k) | 401(k) | | 8,054,977 | | | 155,271 | | | 19.28 | | 401(k) | | 8,308,368 | | | 171,789 | | | 20.68 | |
Directors and employees | Directors and employees | | 2,026,907 | | | 22,283 | | | 10.99 | | Directors and employees | | 2,043,910 | | | 23,294 | | | 11.40 | |
Total | Total | | 14,287,139 | | | $ | 252,347 | | | $ | 17.66 | | Total | | 14,557,533 | | | $ | 269,876 | | | $ | 18.54 | |
Subsequent to June 30, 2021 and through August 2, 2021, the Company repurchased 20,970 shares for $1.3 million from our 401(k) savings and investment plan.
Dividends
At the discretion of the Board, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment.
Our recent dividends are as follows:
| | | | | | | | | | | |
Declaration Date | Record Date | Payment Date | Dividend per Share |
May 15, 2020 | June 3, 2020 | July 1, 2020 | $0.19 |
November 10, 2020 | November 27, 2020 | December 18, 2020 | $0.19 |
May 17, 2021 | June 3, 2021 | July 1, 2021 | $0.19 |
November 9, 2021 | November 26, 2021 | December 17, 2021 | $0.19 |
May 18, 2022 | June 3, 2022 | July 1, 2022 | $0.19 |
Contingent Shares Issued in BasX Acquisition
On December 10, 2021, we closed on the acquisition of BasX (Note 3). 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 1,037,000 shares of the Company's common stock, par value $0.004 per share. The shares do not accrue dividends.
Under the MIPA Agreement, the potential future issuance of the shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023. Based on the final allocation of the consideration paid (Note 3), we estimated the fair value of contingent consideration related to these shares to be approximately $60.0 million, which is included in additional paid-in capital on the consolidated balance sheets. As of June 30, 2022, 486,268 shares related to the year ended 2021 earn-out milestone had been issued to the former owners of BasX as part of a private placement exempt from registration with the SEC under Rule 506(b), which are included in common stock on the consolidated statements of stockholders' equity. No additional shares have been issued as of August 4, 2022.
14.17. 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 “Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“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 “Project”). In connection with the 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 Project.
Upon closing of the NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of NMTCs.
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 Investor's interest of $6.3 million is recorded in New market tax credit obligation on the consolidated balance sheet. 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.
The Investor is subject to 100 percent recapture of the NMTC 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 NMTC arrangement. Noncompliance with applicable requirements could result in the Investor’s projected tax benefits not being realized and, therefore, require the Company to indemnify the Investor for any loss or recapture of the NMTC 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 this financing arrangement.
The 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 transactiontransactions in these VIEs outside of the financing transactions executed as part of the NMTC arrangement.
15.18. Commitments and 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. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company's business, financial position, results of operations and/or cash flows.
We are occasionally party to short-term, cancellable and occasionally non-cancellable, fixed price 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. We had no material contractual purchase obligations as of June 30, 2021.2022 except as described below.
On April 27, 2022, the Company entered into a purchase sales agreement with a third party manufacturer to purchase the intellectual property rights to design and manufacture fan wheels for the purchase price of approximately $6.5 million. The purchase price will be paid in three installments over the next 18 months. As of August 4, 2022 we have paid approximately $1.0 million related to this agreement.
19. Related Parties
The Company purchases some supplies from an entity controlled by the Company’s Executive Chairman. The Company sometimes makes sales to the Executive Chairman for parts. Additionally, the Company sells units to an entity owned by a member of the CEO/President'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. Additionally, the Company purchases some supplies from entities controlled by two of the Company’s board members and the Company sometimes makes sales to a board member for parts. From December 10, 2021 through May 31, 2022 (Note 3), the Company leased a manufacturing and office facility in Redmond, Oregon from an entity in which certain members of BasX management have an ownership interest. This facility was purchased 100% by the Company on May 31, 2022.
The following is a summary of transactions and balance with affiliates:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands) | | (in thousands) |
Sales to affiliates | Sales to affiliates | $ | 246 | | | $ | 1,235 | | | $ | 812 | | | $ | 1,888 | | Sales to affiliates | $ | 2,327 | | | $ | 246 | | | $ | 3,079 | | | $ | 812 | |
Payments to affiliates | Payments to affiliates | 57 | | | 38 | | | 130 | | | 97 | | Payments to affiliates | 639 | | | 57 | | | 1,003 | | | 130 | |
| | | June 30, 2021 | | December 31, 2020 | | June 30, 2022 | | December 31, 2021 |
| | (in thousands) | | (in thousands) |
Due from affiliates | Due from affiliates | | $ | 39 | | | $ | 342 | | Due from affiliates | | $ | 1,180 | | | $ | 547 | |
Due to affiliates | Due to affiliates | | 0 | | | 0 | | Due to affiliates | | — | | | — | |
17.20. 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 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 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. Through the NAIC research and development laboratory facility, AAON Oklahoma is able test units units under various environmental conditions. AAON Oklahoma includes the operations of both 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. In addition, AAON Coil Products 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 solutions, HVAC systems and modular solutions. 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. Sales of units represent the selling price of our units plus freight and other miscellaneous charges less any returns and allowances. Parts include sales of purchased and fabricated parts including our coils along with the related freight and less any returns and allowances. The “Other” category in the tableGross Profit amounts shown below includes certain expenses that are not allocated to the reportable segments and are primarily engineering related expenses.
Asset information by segment is not easily identifiable or reviewed by the chief operating decision maker. As such, this information is not included below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
| (in thousands) |
Sales | | | | | | | |
Units | $ | 132,861 | | | $ | 117,720 | | | $ | 240,735 | | | $ | 248,440 | |
Parts - External | 11,411 | | | 8,060 | | | 19,392 | | | 14,940 | |
Parts - Inter-segment | 6,790 | | | 5,629 | | | 12,680 | | | 12,415 | |
Other | (396) | | | (184) | | | (463) | | | (301) | |
Eliminations | (6,790) | | | (5,629) | | | (12,680) | | | (12,415) | |
Net sales | $ | 143,876 | | | $ | 125,596 | | | $ | 259,664 | | | $ | 263,079 | |
| | | | | | | |
Gross Profit | | | | | | | |
Units | $ | 42,122 | | | $ | 40,794 | | | $ | 76,080 | | | $ | 86,848 | |
Parts - External | 4,363 | | | 3,547 | | | 7,313 | | | 6,724 | |
Parts - Inter-segment | (192) | | | (434) | | | (161) | | | (829) | |
Other | (4,378) | | | (6,210) | | | (8,129) | | | (12,494) | |
Eliminations | 192 | | | 434 | | | 161 | | | 829 | |
Net gross profit | $ | 42,107 | | | $ | 38,131 | | | $ | 75,264 | | | $ | 81,078 | |
| | | | | | | |
|
|
presented after elimination entries.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | |
Net Sales | | | | | (in thousands) | |
AAON Oklahoma | | | | | | | | |
External sales | $ | 157,481 | | | $ | 126,266 | | | $ | 297,348 | | | $ | 226,242 | | |
Inter-segment sales | 770 | | | 703 | | | 1,159 | | | 1,209 | | |
AAON Coil Products | | | | | | | | |
External sales | 26,754 | | | 17,610 | | | 48,689 | | | 33,422 | | |
Inter-segment sales | 8,093 | | | 6,087 | | | 16,010 | | | 11,471 | | |
BasX1 | 24,579 | | | — | | | 45,548 | | | — | | |
Eliminations | (8,863) | | | (6,790) | | | (17,169) | | | (12,680) | | |
Net sales | $ | 208,814 | | | $ | 143,876 | | | $ | 391,585 | | | $ | 259,664 | | |
| | | | | | | | |
Gross Profit | | | | | | | | |
AAON Oklahoma | $ | 31,737 | | | $ | 38,223 | | | $ | 65,573 | | | $ | 67,995 | | |
AAON Coil Products | 8,474 | | | 3,884 | | | 15,780 | | | 7,269 | | |
BasX1 | 7,165 | | | — | | | 12,087 | | | — | | |
Gross profit | $ | 47,376 | | | $ | 42,107 | | | $ | 93,440 | | | $ | 75,264 | | |
1 BasX was acquired on December 10, 2021. | |
| | | | | | | | |
| |
| |
| | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | |
Long-lived assets | (in thousands) | |
AAON Oklahoma | $ | 197,428 | | | $ | 183,840 | | |
AAON Coil Products | 65,485 | | | 62,534 | | |
BasX | 35,437 | | | 28,662 | | |
Total long-lived assets | $ | 298,350 | | | $ | 275,036 | | |
| | | | |
Intangible assets and goodwill | | | | |
AAON Oklahoma | $ | 3,229 | | | $ | 3,229 | | |
AAON Coil Products | — | | | — | | |
BasX | 145,072 | | | 152,619 | | |
Total intangible assets and goodwill | $ | 148,301 | | | $ | 155,848 | | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto, which are included in this report, and our audited consolidated financial statements and the notes thereto, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021.
This discussion contains or incorporates by reference “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but rather are based on expectations, estimates, assumptions and projections about our industry, business and future financial results, based on information available at the time this report is filed with the SEC or, with respect to any document incorporated by reference, available at the time that such document was prepared. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those identified in the section entitled “Forward-Looking Statements” in this Item 2 of this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. We do not assume any obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or circumstances or otherwise, except as required by law.
Overview
We engineer, manufacture, market, and marketsell premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data center cooling solutions, cleanroom systems, chillers, 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 retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, and other commercial industries. We market our products to all 50 states in the United States and allcertain provinces in Canada. Foreign sales were approximately $5.8$10.2 million of our total net sales for the six months just ended June 30, 2022 and $5.3$5.8 million of our sales during the same period of 2020.2021.
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 has negatively impacted the commercial and industrial new construction markets. A further declinemarkets in recent years. However, architectural billings and nonresidential construction starts began rebounding in 2021, signaling a 2022 recovery in nonresidential construction. Furthermore, general economic activitygrowth combined with pent-up demand from customers that delayed replacing old equipment in 2020 and 2021 has been driving accelerated replacement demand. Nevertheless, both the new construction and replacement markets are cyclical. If the domestic economy were to slow or enter a recession, this could result in a decrease in our sales volume and profitability. Sales in the commercial and industrial new construction markets correlate closely to the number of new homes and buildings that are built, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, and other macroeconomic factors over which we have no control.
We sell our products to property owners 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 contractors through a network of manufacturers’ representativesstimulus, changes in market demand between more customized higher performing HVAC equipment and our internal sales force.lower priced standard equipment, as well as many other factors. When new construction is down, we emphasize the replacement market. The demand for our products is influenced by national and regional economic and demographic factors. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of six to 18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth, and the relative age of the population. Our sales strategy is currently balanced between new construction and replacement applications. The new construction market through the second quarter of 2021 is showing signs of improvement compared to 2020.
We continue to emphasize the benefits of AAON equipmentsell 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 replacement market.independent sales channel as we think it is a more effective way of increasing market share. Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople. Furthermore, the independent sales channel sells different types of equipment from various manufacturers, allowing it to operate with more of a solutions-based mindset, as opposed to an internal sales department of a manufacturing company that is incentivized to only sell its equipment regardless if it is the best solution for the end customer. We also have a small internal sales force that supports the relationships between the Company and our sales channel partners.
Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for isolated higher employee absenteeism, especially in June 2020, in our manufacturing facilities. We maintained continuous operations during the six months ended June 30, 2021 except for the shutdown for planned maintenance in January and weather related event described in Note 1. For the most part, our workers are able to socially distance themselves during the manufacturing process. Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics. The Company utilizes sanitation stations and performs additional cleaning and sanitation throughout the day and deep cleaning overnight.
While the Company's operations are primarily in Oklahoma and Texas, our domestic sales to customers cover almost all 50 states. Only the state of Texas is responsible for more than 10% of our revenues. The outlook for 2021 presents some uncertainty but looks positive as COVID-19 restrictions begin to lessen. The Architecture Billings Index ("ABI") was down for most of 2020, indicating a decline in construction, which started to impact the new nonresidential construction market in late 2020. This slightly impacted the Company with a slower order intake level and caused us to slow down some of our production in the beginning of the first quarter 2021. However, beginning in February 2021, the ABI index began a historic rebound with the May and June 2021 ABI Index being two of the highest scores in the index's 25-year history. Even if new construction declines, our equipment is uniquely positioned to address COVID-19 challenges by providing heightened filtration and sanitation through the use of MERV 13 filters, UV lights and bi-polar ionization installed in the factory. With approximately 50% of our total sales already represented by the replacement market, we are confident of our ability to grow our market share in the replacement market while we continue to pursue opportunities in the new construction market.
We had unrestricted cash and cash equivalents of $111.4 million as of June 30, 2021. Our capital expenditures during the six months ended June 30, 2021 were $33.2 million, as compared to $33.5 million for the same period a year ago, and we anticipate our full-year 2021 capital expenditures will total approximately $70.7 million. The expansion of our Longview, Texas facility was completed and operational during the first quarter 2021. The Company also has $28.2 million available under its line of credit.
The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper, and aluminum, and are obtained from domestic suppliers. We also purchase from domestic manufacturers certain components, including compressors, motors, and electrical controls. We have experienced minimal disruption to our supply chain due to COVID-19.
The price levels of mostour raw materials were stable priorfluctuate given that the market continues to 2020, but we are seeing increases in raw material costs which we are managing through price increasesbe volatile and unpredictable as a result of the uncertainty related to counteract their impact. There is also a possibility prices could rise in the future depending on the impact COVID-19 has on our supply chain.U.S. economy and global economy. At June 30, 2021,2022, the price (twelve month trailing average) for copper, galvanized steel, stainless steel and aluminum increased 10.1%33.1%, 49.0%35.5%, 7.4%69.2%, and 11.2%8.1%, respectively, as compared to the price (twelve month trailing average) at June 30, 2020.2021.
We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable fixed price contracts with our major suppliers for periods of six to 18 months. We expect to receive delivery of raw materials from our fixed price contracts for use in our manufacturing operations.
We occasionally increase the price of our equipment to help offset any inflationary headwinds. In 2021, we implemented three price increases. In 2022, we implemented three additional price increases effective January 1, 2022, March 29, 2022, and June 1, 2022.
Backlog
The following table shows our historical backlog levels:
| | | | | | | | | | | | | | |
June 30, 2022 | | December 31, 2021 | | June 30, 2021 |
(in thousands) |
$ | 464,025 | | | $ | 260,164 | | | $ | 138,131 | |
The Company has increased our backlog both through the acquisition of BasX and organic growth. Excluding BasX's backlog at June 30, 2022, organic backlog increased 163.6% compared to June 30, 2021, due in part to price increases implemented throughout 2021 and 2022 and our favorable lead times.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
Net Sales | $ | 208,814 | | | $ | 143,876 | | | $ | 391,585 | | | $ | 259,664 | |
Cost of Sales | 161,438 | | | 101,769 | | | 298,145 | | | 184,400 | |
Gross Profit | 47,376 | | | 42,107 | | | 93,440 | | | 75,264 | |
Selling, general and administrative expenses | 26,933 | | | 16,895 | | | 49,989 | | | 31,591 | |
Gain on disposal of assets | (10) | | | — | | | (12) | | | — | |
Income from operations | $ | 20,453 | | | $ | 25,212 | | | $ | 43,463 | | | $ | 43,673 | |
The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:
•Our second quarter 2021 results demonstrated an increasedbacklog is at a record level due primarily to strong end-market demand foralong with our products with overall units sold increasing approximately 24.6%ability to produce and meet customer lead times.
•Sales for the three months ended and 4.3% for the six months ended, respectively, as compared to the same periods last year.
•Bookings increased approximately 70% in the second quarter of 2021 compared to 2020 indicating an improved demand for our products as well as increase in orders in advance of our announced June 1, 2021 price increase.
•Our three months ended June 30, 2021 results demonstrated increased productivity compared to 2020. Our second quarter of 2020 was impacted by high absenteeism in our production facilities2022 grew due to COVID-19.organic growth, the addition of BasX revenues, and price increases realized during the periods.
•We invested $33.2 million in capital expenditures, including completing our work on projects suchGross profit as our Longview, TX expansiona percentage of sales decreased for the three and six months ended June 30, 2022 due to increased material costs and the purchaseadverse effect of additional Salvagnini machines that will increase our sheet metal capacity. supply chain issues on operations.
•In 2021,2022, we continue to invest in projects that will improve our production capabilities and efficiencies.
Backlog
The following table showsefficiencies evidenced by our historical backlog levels:
| | | | | | | | | | | | | | |
June 30, 2021 | | December 31, 2020 | | June 30, 2020 |
(in thousands) |
$ | 138,131 | | | $ | 74,417 | | | $ | 103,508 | |
The Company started 2020 with a high backlog due to challenges maintaining adequate sheet-metal production capacity$27.2 million in 2019. The Company started to increase its sheet-metal production capacity at the end of 2019 and into 2020 with the additioncapital expenditures.
We report our financial results based on three reportable segments: AAON Oklahoma, AAON Coil Products, and BasX, which are further described in "Segments" (Note 20) within our notes to the consolidated financial statements. The Company's chief decision maker ("CODM"), our CEO, allocates resources and assesses the performance of new Salvagnini machines. This led in part to all time recordeach operating segment using information about the operating segment's net sales and earningsincome from operations. The CODM does not evaluate operating segments using asset or liability information.
Segment Operating Results for Three Months Ended June 30, 2022 and Three Months Ended June 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | |
| June 30, 2022 | | Percent of Sales2 | | June 30, 2021 | | Percent of Sales2 | | $ Change | | % Change | |
| (in thousands) | |
Net Sales3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 157,481 | | | 75.4 | % | | $ | 126,266 | | | 87.8 | % | | $ | 31,215 | | | 24.7 | % | |
AAON Coil Products | 26,754 | | | 12.8 | % | | 17,610 | | | 12.2 | % | | 9,144 | | | 51.9 | % | |
BasX1 | 24,579 | | | 11.8 | % | | — | | — | | 24,579 | | | — | |
Net sales | $ | 208,814 | | | | | $ | 143,876 | | | | | $ | 64,938 | | | 45.1 | % | |
| | | | | | | | | | | | |
Cost of Sales3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 125,744 | | | 79.8 | % | | 88,043 | | | 69.7 | % | | $ | 37,701 | | | 42.8 | % | |
AAON Coil Products | 18,280 | | | 68.3 | % | | 13,726 | | | 77.9 | % | | 4,554 | | | 33.2 | % | |
BasX1 | 17,414 | | | 70.8 | % | | — | | — | | 17,414 | | | — | |
Cost of sales | $ | 161,438 | | | 77.3 | % | | $ | 101,769 | | | 70.7 | % | | $ | 59,669 | | | 58.6 | % | |
| | | | | | | | | | | | |
Gross Profit3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 31,737 | | | 20.2 | % | | $ | 38,223 | | | 30.3 | % | | $ | (6,486) | | | (17.0) | % | |
AAON Coil Products | 8,474 | | | 31.7 | % | | 3,884 | | | 22.1 | % | | 4,590 | | | 118.2 | % | |
BasX1 | 7,165 | | | 29.2 | % | | — | | — | | 7,165 | | | — | |
Gross profit | $ | 47,376 | | | 22.7 | % | | $ | 42,107 | | | 29.3 | % | | $ | 5,269 | | | 12.5 | % | |
1 BasX was acquired on December 10, 2021. We have included the results of BasX's operations in our consolidated financial statements for the three months ended June 30, 2022. |
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2 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. |
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3 Presented after intercompany eliminations. | |
Total net sales increased $64.9 million or 45.1%, with the year-ended December 31, 2020 that helped reduceaddition of BasX sales being the largest contributing factor to our backloggrowth. Excluding BasX sales of $24.6 million, net sales grew through price increases of $22.5 million and organic volume of $14.8 million. AAON Coil Products had an increase of 43.3% in organic unit sales, or $4.7 million, during the three months ended June 30, 2022 due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021.
As shown in the end of 2020. In 2021, as a resulttable below, we've experienced year over year increases in the cost of our decreased lead time,raw materials. We implemented multiple price increases during 2021 and 2022 to counteract the increased cost of material. Some of the 2022 price increases have yet to be realized. Additionally, in order to attract new employees, we increased starting wages for our production workforce by 7.0% in July 2021; and to retain our existing employees, we also put a cost of living increase of 3.5% in demand, andplace in October 2021 for all employees below the Director level. In March 2022, we awarded annual merit raises for an overall 3.0% increase to wages.
While our gross profit has declined, we did see sequential improvement in orders in advance of our announced June 1, 2021 price increase, bookings increased approximately 70% inmargin during the second quarter of 2021 compared2022. The backlog for AAON Coil Products had better pricing which shows in their improved gross margin of 31.7% for the quarter as they are able to 2020.
Resultsrealize price increases faster than AAON Oklahoma. BasX has been able to reprice their backlog in order to maintain a healthy gross profit of Operations
Three months ended June 30, 2021 vs. Three months ended June 30, 2020
Units Sold
| | | | | | | | | | | |
| Three Months Ended |
| June 30, 2021 | | June 30, 2020 |
Rooftop units | 4,657 | | | 3,746 | |
Condensing units | 618 | | | 446 | |
Air handlers | 707 | | | 501 | |
Outdoor mechanical rooms | 13 | | | 6 | |
Water source heat pumps | 1,908 | | | 1,645 | |
Total Units | 7,903 | | | 6,344 | |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | June 30, 2021 | | June 30, 2020 | | | | |
| | | | Change | | % Change |
| | (in thousands, except unit data) |
Net sales | | $ | 143,876 | | | $ | 125,596 | | | $ | 18,280 | | | 14.6 | % |
Total units | | 7,903 | | | 6,344 | | | 1,559 | | | 24.6 | % |
The second quarter of 2021 benefited from increased demand and increased employee attendance that allowed29.2% for the Companyquarter. AAON Oklahoma continued to run at a higher capacity. This included a 24.6% increase in total units sold, mostly related to our rooftop units. Shifts in product mix offset the increases we saw in volume of units.
Cost of Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Percent of Sales |
| | June 30, 2021 | | June 30, 2020 | |
| | | | 2021 | | 2020 |
| | (in thousands) | | | | |
Cost of sales | | $ | 101,769 | | | $ | 87,465 | | | 70.7 | % | | 69.6 | % |
Gross profit | | 42,107 | | | 38,131 | | | 29.3 | % | | 30.4 | % |
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, which are obtained from domestic suppliers. We continue to see overall raw material costs increase. The increasework through its remaining lower
priced backlog and as a result had costs increases in overall raw material costs, resulted in a slight decrease in gross profitexcess of realized price increases during the three months ended June 30, 2021 as compared to 2020.quarter that impacted its gross profit.
Raw Material Costs
Twelve-month average raw material cost per pound as of June 30:
| | | 2021 | | 2020 | | % Change | | 2022 | | 2021 | | % Change |
| Copper | Copper | | $ | 4.02 | | | $ | 3.65 | | | 10.1 | % | Copper | | $ | 5.35 | | | $ | 4.02 | | | 33.1 | % |
Galvanized steel | Galvanized steel | | $ | 0.76 | | | $ | 0.51 | | | 49.0 | % | Galvanized steel | | $ | 1.03 | | | $ | 0.76 | | | 35.5 | % |
Stainless steel | Stainless steel | | $ | 1.46 | | | $ | 1.36 | | | 7.4 | % | Stainless steel | | $ | 2.47 | | | $ | 1.46 | | | 69.2 | % |
Aluminum | Aluminum | | $ | 1.98 | | | $ | 1.78 | | | 11.2 | % | Aluminum | | $ | 2.14 | | | $ | 1.98 | | | 8.1 | % |
Selling, General and Administrative Expenses
| | | Three Months Ended | | Percent of Sales | | Three Months Ended | | Percent of Sales |
| | June 30, 2021 | | June 30, 2020 | | | June 30, 2022 | | June 30, 2021 | |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | (in thousands) | | | | | | (in thousands) | | | | |
Warranty | Warranty | | $ | 2,028 | | | $ | 1,837 | | | 1.4 | % | | 1.5 | % | Warranty | | $ | 2,353 | | | $ | 2,028 | | | 1.1 | % | | 1.4 | % |
Profit sharing | Profit sharing | | 2,919 | | | 2,524 | | | 2.0 | % | | 2.0 | % | Profit sharing | | 2,146 | | | 2,919 | | | 1.0 | % | | 2.0 | % |
Salaries & benefits | Salaries & benefits | | 6,025 | | | 4,796 | | | 4.2 | % | | 3.8 | % | Salaries & benefits | | 10,383 | | | 6,025 | | | 5.0 | % | | 4.2 | % |
Stock compensation | Stock compensation | | 1,368 | | | 1,654 | | | 1.0 | % | | 1.3 | % | Stock compensation | | 2,014 | | | 1,368 | | | 1.0 | % | | 1.0 | % |
Advertising | Advertising | | 261 | | | 91 | | | 0.2 | % | | 0.1 | % | Advertising | | 1,290 | | | 261 | | | 0.6 | % | | 0.2 | % |
Depreciation | | 635 | | | 493 | | | 0.4 | % | | 0.4 | % | |
Depreciation & amortization | | Depreciation & amortization | | 2,062 | | | 635 | | | 1.0 | % | | 0.4 | % |
Insurance | Insurance | | 730 | | | 240 | | | 0.5 | % | | 0.2 | % | Insurance | | 866 | | | 730 | | | 0.4 | % | | 0.5 | % |
Professional fees | Professional fees | | 682 | | | 714 | | | 0.5 | % | | 0.6 | % | Professional fees | | 900 | | | 682 | | | 0.4 | % | | 0.5 | % |
Donations | | 273 | | | 1,606 | | | 0.2 | % | | 1.3 | % | |
Bad debt expense | | (4) | | | (218) | | | — | % | | (0.2) | % | |
| Subscriptions as a service | | Subscriptions as a service | | 974 | | | 514 | | | 0.5 | % | | 0.4 | % |
Other | Other | | 1,978 | | | 2,202 | | | 1.4 | % | | 1.8 | % | Other | | 3,945 | | | 1,733 | | | 1.9 | % | | 1.2 | % |
Total SG&A | Total SG&A | | $ | 16,895 | | | $ | 15,939 | | | 11.7 | % | | 12.7 | % | Total SG&A | | $ | 26,933 | | | $ | 16,895 | | | 12.9 | % | | 11.7 | % |
The Company's warranty expense continuesExcluding salaries and benefits at BasX of $3.0 million, salaries and benefits increased $1.4 million due to improve, with payments decreasing 4.5% inpay increases that went into effect during the secondthird and fourth quarters of 2021 and first quarter of 2022. Advertising increased $1.0 million due various sponsorships and customer promotions, which were still mostly on hold during early 2021 compared to 2020, after making significant quality control improvements in the past two years. Profit sharing expenses increased due to our increased earningsCOVID-19 restrictions. Depreciation and amortization expense at BasX was $1.1 million, accounting for the majority of the change from period to period. SalariesExcluding $1.0 million of Other SG&A at BasX, Other SG&A increased $1.2 million attributable mostly to consulting services and benefits are up slightlyincreased travel expenses due to increases in bonuses and employee incentives. Insurance expense increased due to an increase in overall premiumsdecreased COVID-19 restrictions during the period.2022.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Effective Tax Rate |
| | June 30, 2021 | | June 30, 2020 | |
| | | | 2021 | | 2020 |
| | (in thousands) | | | | |
Income tax provision | | $ | 4,632 | | | $ | 4,439 | | | 18.3 | % | | 20.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Effective Tax Rate |
| | June 30, 2022 | | June 30, 2021 | |
| | | | 2022 | | 2021 |
| | (in thousands) | | | | |
Income tax provision | | $ | 4,177 | | | $ | 4,632 | | | 20.8 | % | | 18.3 | % |
The Company’s estimated annual 20212022 effective tax rate, excluding discrete events, is expected to be approximately 25%. On May 21, 2021,During the State of Oklahoma reduced its corporate tax rate from 6% to 4%. As a result of these changes, the Company adjusted its state deferred tax assets and liabilities in the second quarter of 2021 using the newly enacted rate for the periods when they are expected to be realized.
Six Months Ended June 30, 2021 vs. Six Months Ended June 30, 2020
Units Sold
| | | | | | | | | | | |
| Six Months Ended |
| June 30, 2021 | | June 30, 2020 |
Rooftop units | 7,616 | | | 7,807 | |
Condensing units | 1,136 | | | 854 | |
Air handlers | 1,200 | | | 1,011 | |
Outdoor mechanical rooms | 20 | | | 16 | |
Water source heat pumps | 3,532 | | | 3,262 | |
Total Units | 13,504 | | | 12,950 | |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, 2021 | | June 30, 2020 | | | | |
| | | | Change | | % Change |
| | (in thousands, except unit data) |
Net sales | | $ | 259,664 | | | $ | 263,079 | | | $ | (3,415) | | | (1.3) | % |
Total units | | 13,504 | | | 12,950 | | | 554 | | | 4.3 | % |
The first half of 2020, benefited from a high backlog that allowed the Company to run at full capacity and set all time record highs for revenues in the first quarter of 2020 as well as a strong second quarter. The order intake began to slow in late 2020 and the Company intentionally slowed production in January 2021 to keep its backlog at a healthy level. Additionally, the Company lost production days in January for planned maintenance and in February due to impacts of bad weather. Although overall units sold increased approximately 4.3% for the six months ended 2021 vs 2020, the increase in units were mostly related to our lower sale price per units as compared to the previous period.
Cost of Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Percent of Sales |
| | June 30, 2021 | | June 30, 2020 | |
| | | | 2021 | | 2020 |
| | (in thousands) | | | | |
Cost of sales | | $ | 184,400 | | | $ | 182,001 | | | 71.0 | % | | 69.2 | % |
Gross profit | | 75,264 | | | 81,078 | | | 29.0 | % | | 30.8 | % |
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, which are obtained from domestic suppliers. We continue to see overall raw material costs increase. In addition, the decrease in overall production in early 2021 compared to 2020, driven by slower demand and order intake, resulted in unfavorable labor and overhead inefficiencies, including the Company's ability to absorb certain fixed costs in early 2021.
Combined with the increase in overall raw material costs, this resulted in an overall decrease in gross profit during sixthree months ended June 30, 20212022, the Company recorded an excess tax benefit of $0.2 million as compared to 2020.
Twelve-month average raw material cost per pound as of June 30:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | % Change |
| | | | | | |
Copper | | $ | 4.02 | | | $ | 3.65 | | | 10.1 | % |
Galvanized steel | | $ | 0.76 | | | $ | 0.51 | | | 49.0 | % |
Stainless steel | | $ | 1.46 | | | $ | 1.36 | | | 7.4 | % |
Aluminum | | $ | 1.98 | | | $ | 1.78 | | | 11.2 | % |
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Percent of Sales |
| | June 30, 2021 | | June 30, 2020 | |
| | | | 2021 | | 2020 |
| | (in thousands) | | | | |
Warranty | | $ | 3,495 | | | $ | 3,302 | | | 1.3 | % | | 1.3 | % |
Profit sharing | | 5,051 | | | 5,691 | | | 1.9 | % | | 2.2 | % |
Salaries & benefits | | 11,059 | | | 10,196 | | | 4.3 | % | | 3.9 | % |
Stock compensation | | 2,659 | | | 2,690 | | | 1.0 | % | | 1.0 | % |
Advertising | | 467 | | | 217 | | | 0.2 | % | | 0.1 | % |
Depreciation | | 1,334 | | | 955 | | | 0.5 | % | | 0.4 | % |
Insurance | | 1,461 | | | 479 | | | 0.6 | % | | 0.2 | % |
Professional fees | | 1,407 | | | 1,254 | | | 0.5 | % | | 0.5 | % |
Donations | | 226 | | | 1,786 | | | 0.1 | % | | 0.7 | % |
Bad debt expense | | (17) | | | 76 | | | — | % | | — | % |
Other | | 4,449 | | | 4,507 | | | 1.7 | % | | 1.7 | % |
Total SG&A | | $ | 31,591 | | | $ | 31,153 | | | 12.2 | % | | 11.8 | % |
Our SG&A expense is stable year over year. Insurance expense increased due to an increase in overall premiums$0.5 million during the period. Donations are down as the second quartersame period in 2021, a decrease of 2020 had a one time donation of $1.25 million to Winifred Public Schools. Salaries and benefits are up slightly due to increases in bonuses and employee incentives.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Effective Tax Rate |
| | June 30, 2021 | | June 30, 2020 | |
| | | | 2021 | | 2020 |
| | (in thousands) | | | | |
Income tax provision | | $ | 6,737 | | | $ | 10,415 | | | 15.4 | % | | 20.8 | % |
The Company’s estimated annual 2021 effective tax rate, excluding discrete events, is expected to be approximately 25%56.8%. The six months ended June 30, 2021 had a lower tax rate, compared to 2020, due to an increase in our excess tax benefit related to stock awards of $1.5 million or 78%. The increasedecrease was primarily due to timing of stock awards as a result of our high stock price during the three months ended June 30, 2021.
Segment Operating Results for Six Months Ended June 30, 2022 and Six Months Ended June 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | |
| June 30, 2022 | | Percent of Sales2 | | June 30, 2021 | | Percent of Sales2 | | $ Change | | % Change | |
| (in thousands) | |
Net Sales3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 297,348 | | | 75.9 | % | | $ | 226,242 | | | 87.1 | % | | $ | 71,106 | | | 31.4 | % | |
AAON Coil Products | 48,689 | | | 12.4 | % | | 33,422 | | | 12.9 | % | | 15,267 | | | 45.7 | % | |
BasX1 | 45,548 | | | 11.6 | % | | — | | — | | 45,548 | | | — | |
Net sales | $ | 391,585 | | | | | $ | 259,664 | | | | | $ | 131,921 | | | 50.8 | % | |
| | | | | | | | | | | | |
Cost of Sales3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 231,775 | | | 77.9 | % | | 158,247 | | | 69.9 | % | | $ | 73,528 | | | 46.5 | % | |
AAON Coil Products | 32,909 | | | 67.6 | % | | 26,153 | | | 78.3 | % | | 6,756 | | | 25.8 | % | |
BasX1 | 33,461 | | | 73.5 | % | | — | | — | | 33,461 | | | — | |
Cost of sales | $ | 298,145 | | | 76.1 | % | | $ | 184,400 | | | 71.0 | % | | $ | 113,745 | | | 61.7 | % | |
| | | | | | | | | | | | |
Gross Profit3 | | | | | | | | | | | | |
AAON Oklahoma | $ | 65,573 | | | 22.1 | % | | $ | 67,995 | | | 30.1 | % | | $ | (2,422) | | | (3.6) | % | |
AAON Coil Products | 15,780 | | | 32.4 | % | | 7,269 | | | 21.7 | % | | 8,511 | | | 117.1 | % | |
BasX1 | 12,087 | | | 26.5 | % | | — | | — | | 12,087 | | | — | |
Gross profit | $ | 93,440 | | | 23.9 | % | | $ | 75,264 | | | 29.0 | % | | $ | 18,176 | | | 24.1 | % | |
1 BasX was acquired on December 10, 2021. We have included the results of BasX's operations in our consolidated financial statements for the six months ended June 30, 2022. |
|
2 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. |
|
3 Presented after intercompany eliminations. | |
Total net sales increased $131.9 million or 50.8%, due in part to increased organic volumes of $39.5 million. AAON Coil Products saw a 41.9% increase in units sold, or approximately $7.9 million, during the six months ended June 30, 2022 due to the increase in capacity with the completion of the new manufacturing building at our Longview, Texas facility in early 2021. The quarter also benefited from $39.0 million of price increases put in place throughout 2021 and early 2022 which began being realized at end of the six months ended June 30, 2021. The acquisition of BasX in December 2021 added $45.5 million to net sales for the six months ended June 30, 2022.
During the six months ended June 30, 2021, several production days were lost due to planned maintenance and due to impacts of bad weather at both AAON Oklahoma and AAON Coil Products, resulting in lower volumes. Additionally, the expansion at our Longview facility was completed and production began during the first quarter of 2021.
As shown in the table below, we've experienced increases in the cost of our raw materials. We implemented multiple price increases during 2021 and 2022 to counteract the increased cost of material; however, it has taken longer than expected for our price increases to roll out of the backlog into production causing erosion of our gross profit. As already mentioned, we also have put multiple wage increases in place in late 2021 and early 2022 that have increased our labor costs. Additionally, during the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at AAON Coil Products resulted in a change in estimate (Note 1) that increased the useful lives from between ten and twelve years to fifteen years. The change was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $1.8 million during the three months ended March 31, 2021. In addition, in May 2021, the State of Oklahoma reduced corporate tax rate from 6% to 4%. As a result of these changes, the Company adjusted its state deferred tax assets and liabilities in the second quarter of 2021 using the newly enacted rate for the periods when they are expected to be realized.2022.
Raw Material Costs
Twelve-month average raw material cost per pound as of June 30:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | % Change |
| | | | | | |
Copper | | $ | 5.35 | | | $ | 4.02 | | | 33.1 | % |
Galvanized steel | | $ | 1.03 | | | $ | 0.76 | | | 35.5 | % |
Stainless steel | | $ | 2.47 | | | $ | 1.46 | | | 69.2 | % |
Aluminum | | $ | 2.14 | | | $ | 1.98 | | | 8.1 | % |
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Percent of Sales |
| | June 30, 2022 | | June 30, 2021 | |
| | | | 2022 | | 2021 |
| | (in thousands) | | | | |
Warranty | | $ | 3,510 | | | $ | 3,495 | | | 0.9 | % | | 1.3 | % |
Profit sharing | | 4,815 | | | 5,051 | | | 1.2 | % | | 1.9 | % |
Salaries & benefits | | 19,775 | | | 11,059 | | | 5.0 | % | | 4.3 | % |
Stock compensation | | 3,683 | | | 2,659 | | | 0.9 | % | | 1.0 | % |
Advertising | | 1,631 | | | 467 | | | 0.4 | % | | 0.2 | % |
Depreciation & amortization | | 3,753 | | | 1,334 | | | 1.0 | % | | 0.5 | % |
Insurance | | 1,575 | | | 1,461 | | | 0.4 | % | | 0.6 | % |
Professional fees | | 2,382 | | | 1,407 | | | 0.6 | % | | 0.5 | % |
| | | | | | | | |
| | | | | | | | |
Subscriptions as a service | | 1,773 | | | 1,093 | | | 0.5 | % | | 0.4 | % |
Other | | 7,092 | | | 3,565 | | | 1.8 | % | | 1.4 | % |
Total SG&A | | $ | 49,989 | | | $ | 31,591 | | | 12.8 | % | | 12.2 | % |
Excluding salaries and benefits at BasX of $5.7 million, salaries and benefits increased $3.0 million due to pay increases that went into effect during the third and fourth quarters of 2021 and the first quarter of 2022. Advertising increased $1.1 million due various sponsorships and customer promotions, which were still mostly on hold during early 2021 due to COVID-19 restrictions. Depreciation and amortization expense at BasX was $2.0 million, accounting for the majority of the change from period to period. Professional fees increased mostly due to continued transaction costs and audit fees. Excluding $2.0 million of Other SG&A at BasX, Other SG&A increased $1.5 million attributable mostly to consulting services and increased travel expenses due to decreased COVID-19 restrictions.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Effective Tax Rate |
| | June 30, 2022 | | June 30, 2021 | |
| | | | 2022 | | 2021 |
| | (in thousands) | | | | |
Income tax provision | | $ | 8,959 | | | $ | 6,737 | | | 20.9 | % | | 15.4 | % |
The Company’s estimated annual 2022 effective tax rate, excluding discrete events, is expected to be approximately 25%. During the six months ended June 30, 2022, the Company recorded an excess tax benefit of $0.7 million as compared to $3.4 million during the same period in 2021, a decrease of 78.8%. The decrease was primarily due to timing of stock awards as a result of our high stock price during the six months ended June 30, 2021.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through net cash provided by operations and the occasional use of the revolving bank line of credit based on our current liquidity at the time.
Working Capital - Our unrestricted cash increased $32.4$14.8 million from December 31, 20202021 to June 30, 20212022 and totaled $111.4$17.6 million at June 30, 2021.2022.
Revolving Line of Credit - Under theOur revolving credit facility there was("Revolver"), as amended and restated, provides for maximum borrowings of $200.0 million. As of June 30, 2022 and December 31, 2021, we had $106.2 million and $40.0 million, respectively, outstanding under the Revolver. We had one standby letter of credit of $1.8totaling $0.8 million as of June 30, 2021.2022. At June 30, 2021,2022, we have $28.2$92.9 million of borrowings available under the revolvingRevolver. The Revolver expires May 27, 2027.
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 facility. No fees, areranging 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 our the Revolver was 1.9% and 1.7% for the three and six months ended June 30, 2022. Fees associated with the unused portion of the committed amount.amount are included in interest expense on our consolidated statements of income and were not material for the three and six months ended June 30, 2022.
We had noIf SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding balance undereffected 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 revolving credit facility at June 30, 2021 and December 31, 2020. Interesthighest of (a) the Prime Rate in effect on borrowings is payable monthly at LIBORsuch day, (b) the Federal Funds Rate in effect on such day plus 2.0%0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.
As ofAt June 30, 2021,2022, we were in compliance with our financial covenants, related toas defined by the new revolving credit facility.Revolver. These financial covenants require that we meet certain parameters related to our consolidated leverage ratio and our consolidated total liabilities to tangible net worth ratio. At June 30, 2021,2022, our consolidated leverage ratio was 0.011.06 to 1 and met1.0, which meets the requirement of not being less than 2above 3 to 1. Our consolidated total liabilities to tangible net worth ratio was 0.3 to 1, and met the requirement
As of being less than 2 to 1.August 4, 2022, we had $102.5 million of outstanding borrowings under our Revolver.
New Market Tax Credit Obligation - On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“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 “Project”). In connection with the 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 expansion of its Longview, Texas facilities.
Upon closing of the NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities, and a guarantee from the Company, including an unconditional guarantee of NMTCs.
Stock Repurchases - The Board has authorized three stock repurchase programs for the Company. The Company may purchase shares on the open market from time to time, up to a total of 5.7 million shares. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.
Our open market repurchase programs are as follows:
| | | | | | | | | | | | | | |
Effective Date | | Authorized Repurchase $ | | Expiration Date |
| | | | |
May 16, 2018 1 | | $15 million | | March 1, 2019 |
March 5, 2019 1 | | $20 million | | March 4, 2020 |
March 13, 2020 | | $20 million | | ** 2 |
1 The 2018 and 2019 purchase authorizations were executed under 10b5-1 programs. |
2 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 hashad a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan arewere entitled to have shares ofin AAON, Inc. stock in their accounts sold to the Company. The maximum number of401(k) Plan was amended in June 2022 to discontinue this program. No additional shares to be repurchased is contingent uponhave been purchased by the number of shares sold by employee-participants.Company under this arrangement since June 2022.
Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and 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.
Our repurchase activity is as follows:
| | | Six Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands, except share and per share data) | | (in thousands, except share and per share data) |
Program | Program | | Shares | | Total $ | | $ per share | | Shares | | Total $ | | $ per share | Program | | Shares | | Total $ | | $ per share | | Shares | | Total $ | | $ per share |
Open market | Open market | | — | | | $ | — | | | $ | — | | | 103,689 | | | $ | 4,987 | | | $ | 48.10 | | Open market | | — | | | $ | — | | | $ | — | | | — | | | $ | — | | | $ | — | |
401(k) | 401(k) | | 148,317 | | | 10,271 | | | 69.25 | | | 208,604 | | | 10,957 | | | 52.53 | | 401(k) | | 103,936 | | | 5,913 | | | 56.89 | | | 148,317 | | | 10,271 | | | 69.25 | |
Directors and employees | Directors and employees | | 21,706 | | | 1,532 | | | 70.58 | | | 22,147 | | | 1,102 | | | 49.76 | | Directors and employees | | 16,183 | | | 953 | | | 58.89 | | | 21,706 | | | 1,532 | | | 70.58 | |
Total | Total | | 170,023 | | | $ | 11,803 | | | $ | 69.42 | | | 334,440 | | | $ | 17,046 | | | $ | 50.97 | | Total | | 120,119 | | | $ | 6,866 | | | $ | 57.16 | | | 170,023 | | | $ | 11,803 | | | $ | 69.42 | |
Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows: | | | Inception to | | June 30, 2021 | | Inception to | | June 30, 2022 |
| | (in thousands, except share and per share data) | | (in thousands, except share and per share data) |
Program | Program | | Shares | | Total $ | | $ per share | Program | | Shares | | Total $ | | $ per share |
Open market | Open market | | 4,205,255 | | | $ | 74,793 | | | $ | 17.79 | | Open market | | 4,205,255 | | | $ | 74,793 | | | $ | 17.79 | |
401(k) | 401(k) | | 8,054,977 | | | 155,271 | | | 19.28 | | 401(k) | | 8,308,368 | | | 171,789 | | | 20.68 | |
Directors and employees | Directors and employees | | 2,026,907 | | | 22,283 | | | 10.99 | | Directors and employees | | 2,043,910 | | | 23,294 | | | 11.40 | |
Total | Total | | 14,287,139 | | | $ | 252,347 | | | $ | 17.66 | | Total | | 14,557,533 | | | $ | 269,876 | | | $ | 18.54 | |
Dividends - At the discretion of the Board, we pay semi-annual cash dividends. Board approval is required to determine the date of declaration and amount for each semi-annual dividend payment.
Our recent dividends are as follows:
| | | | | | | | | | | |
Declaration Date | Record Date | Payment Date | Dividend per Share |
May 15, 2020 | June 3, 2020 | July 1, 2020 | $0.19 |
November 10, 2020 | November 27, 2020 | December 18, 2020 | $0.19 |
May 17, 2021 | June 3, 2021 | July 1, 2021 | $0.19 |
November 9, 2021 | November 26, 2021 | December 17, 2021 | $0.19 |
May 18, 2022 | June 3, 2022 | July 1, 2022 | $0.19 |
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 20212022 and the foreseeable future.
Statement of Cash Flows
The following table reflects the major categories of cash flows for the six months ended June 30, 20212022 and 2020.2021. For additional details, see the consolidated financial statements.
| | | Six Months Ended | | Six Months Ended |
| | June 30, 2021 | | June 30, 2020 | | June 30, 2022 | | June 30, 2021 |
| | (in thousands) | | (in thousands) |
Operating Activities | Operating Activities | | Operating Activities | |
Net Income | Net Income | $ | 36,991 | | | $ | 39,657 | | Net Income | $ | 34,005 | | | $ | 36,991 | |
Income statement adjustments, net | Income statement adjustments, net | 23,758 | | | 22,954 | | Income statement adjustments, net | 23,560 | | | 23,758 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (5,936) | | | 10,929 | | Accounts receivable | (53,736) | | | (5,936) | |
Income taxes | Income taxes | 1,248 | | | (4,382) | | Income taxes | (1,895) | | | 1,248 | |
Inventories | Inventories | (5,472) | | | (11,617) | | Inventories | (33,879) | | | (5,472) | |
Prepaid expenses and other | 799 | | | (568) | | |
Contract assets | | Contract assets | (2,820) | | | — | |
Prepaid expenses and other long-term assets | | Prepaid expenses and other long-term assets | (3,066) | | | 799 | |
Accounts payable | Accounts payable | 10,650 | | | 2,893 | | Accounts payable | 6,490 | | | 10,650 | |
Contract liabilities | | Contract liabilities | 22,217 | | | — | |
Deferred revenue | Deferred revenue | 574 | | | 473 | | Deferred revenue | 421 | | | 574 | |
Accrued liabilities & donations | 300 | | | 2,423 | | |
Net cash provided by operating activities | 62,912 | | | 62,762 | | |
Accrued liabilities & other long-term assets | | Accrued liabilities & other long-term assets | 7,123 | | | 300 | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (1,580) | | | 62,912 | |
Investing Activities | Investing Activities | | | | Investing Activities | | | |
Capital expenditures | Capital expenditures | (33,157) | | | (33,510) | | Capital expenditures | (27,227) | | | (33,157) | |
Cash paid for building (see Note 3) | | Cash paid for building (see Note 3) | (22,000) | | | — | |
Cash paid in business combination, net of cash acquired | | Cash paid in business combination, net of cash acquired | (249) | | | — | |
| Other | Other | 31 | | | 86 | | Other | 39 | | | 31 | |
Net cash used in investing activities | Net cash used in investing activities | (33,126) | | | (33,424) | | Net cash used in investing activities | (49,437) | | | (33,126) | |
Financing Activities | Financing Activities | | | | Financing Activities | | | |
Borrowings under revolving credit facility | | Borrowings under revolving credit facility | 94,900 | | | — | |
Payments under revolving credit facility | | Payments under revolving credit facility | (28,651) | | | — | |
Principal payments on financing lease | | Principal payments on financing lease | (28) | | | — | |
Stock options exercised | Stock options exercised | 11,848 | | | 14,173 | | Stock options exercised | 6,385 | | | 11,848 | |
Repurchase of stock | Repurchase of stock | (10,271) | | | (15,937) | | Repurchase of stock | (5,912) | | | (10,271) | |
Employee taxes paid by withholding shares | Employee taxes paid by withholding shares | (1,532) | | | (1,102) | | Employee taxes paid by withholding shares | (954) | | | (1,532) | |
| Net cash provide by (used in) financing activities | $ | 45 | | | $ | (2,866) | | |
Net cash provided by financing activities | | Net cash provided by financing activities | $ | 65,740 | | | $ | 45 | |
Cash Flows Provided by Operating Activities
The Company currently manages cash needs through working capital rather thanas 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. The Company has been able to improve its collections of outstanding receivables due in part through prepayment of orders.
The decrease in cash flows from receivables was due to the increase ina result of increased sales, in June 2021 and due to the lower overall accounts receivable at December 31, 2020,both as a result of the planned Company shutdown2021 and 2022 price increases realized during the last week of December 2020.period and volumes, in the six months ended June 30, 2022 that have not been collected. The Company has also strategically purchasesincreased the purchase of inventory when we continue to see overall raw material costs increase, to take advantage of favorable pricing opportunities and also to minimizemitigate the impact of future supply chain disruptions.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.
Cash Flows Used in Investing Activities
The capital expenditures for 2020the six months ended June 30, 2022 relate to our continued investment in our production capabilities. The cash paid for building during the six months ended June 30, 2022 related primarily to the purchase of the BasX office
and manufacturing facility related to the December 2021 acquisition (see Note 3). The capital expenditures for the six months ended June 30, 2021 related to the completion of the expansion ofat our Longview, Texas facility, which was completed and became operational during early 2021. Additionally in 2020, we purchased Salvagnini sheet metal fabrication machines and completed our R&D lab as well as other operational improvements. The capital expenditure program for 20212022 is estimated to be approximately $70.7$73.3 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 Used in Financing Activities
Cash flows from financing activities is historically affected by the timing of stock options exercised by our employees and repurchases of the Company's stock. However, for the six months ended June 30, 2022 the increase in cash from financing activities is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid future supply chain delays, and the funding for the purchase of the BasX building in the second quarter. Stock options exercised fluctuatedecreased due to timingthe decrease in the number of employee exercises. The Company purchased approximately $5.0 million ofoptions exercised and decrease in our outstandingaverage stock through the open market buyback program (Note 13) price during the six months ended June 30, 2020. There were no open market buybacks of our outstanding stock during2022 compared to the six months ended six months ended June 30, 2021.
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.
Contractual Obligations
We had no material contractual purchase obligations as of June 30, 2021.2022 except as described below.
On April 27, 2022, the Company entered into a purchase sales agreement with a third party manufacturer to purchase the intellectual property rights to design and manufacture fan wheels for the purchase price of approximately $6.5 million. The purchase price will be paid in three installments over the next 18 months. As of August 4, 2022 we have paid approximately $1.0 million related to this agreement.
Critical Accounting Policies
There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2021.2022.
Recent Accounting Pronouncements
See Note1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “will”, “should”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, (4) general economic, market or business conditions, and (5) the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Price Risk
We are exposed to volatility in the prices of commodities used in some of our products and we may use fixed price cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer with the oversight of the Audit Committee, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures were effective.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
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. We have concluded that the likelihood is remote that the ultimate resolution of any pending litigation or claims will be material or have a material adverse effect on the Company's business, financial position, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. The risk factors described in our Annual Report could materially adversely affect our business, financial condition or future results. There have been no material changes to the risk factors included in our 20202021 Annual Report.
Item 2. Unregistered Sales of Equity and Securities and Use of Proceeds.
The Company may repurchase AAON, Inc. stock on the open market from time to time, up to a total of 5.7 million shares. WeFrom inception through June 30, 2022, we have repurchased a total of approximately 4.2 million shares (at current market prices) under the various open market stock buyback programs for an aggregate price of $74.8 million, or an average price of $17.79 per share. 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.
On July 1, 2005, we entered into a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan are entitled to have shares of AAON, Inc. stock in their accounts sold to the Company. The maximum number of shares to be repurchased is contingent upon the number of shares sold by employees. From inception through June 30, 2021,2022, we repurchased approximately 8.18.3 million shares (at current market prices) for an aggregate price of $155.3$171.8 million, or an average price of $19.28$20.68 per share. The 401(k) stock repurchase arrangement was discontinued in June 2022.
Lastly, the Company repurchases shares of AAON, Inc. stock from certain of its directors and 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. From inception through June 30, 2021,2022, we repurchased approximately 2.0 million shares (at current market prices) for an aggregate price of $22.3$23.3 million, or an average price of $10.99$11.40 per share.
Repurchases during the second quarter of 20212022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ISSUER PURCHASES OF EQUITY SECURITIES |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid Per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs |
April 2021 | | 13,642 | | | $ | 69.18 | | | 13,642 | | | — | |
May 2021 | | 30,372 | | | 66.58 | | | 30,372 | | | — | |
June 2021 | | 38,687 | | | 62.92 | | | 38,687 | | | — | |
Total | | 82,701 | | | $ | 65.31 | | | 82,701 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ISSUER PURCHASES OF EQUITY SECURITIES |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid Per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs |
April 2022 | | 16,124 | | | $ | 52.39 | | | 16,124 | | | — | |
May 2022 | | 16,236 | | | 51.83 | | | 16,236 | | | — | |
June 2022 | | 20,095 | | | 54.69 | | | 20,095 | | | — | |
Total | | 52,455 | | | $ | 53.10 | | | 52,455 | | | — | |
Under the membership interest purchase agreement ("MIPA Agreement") entered into for the acquisition of BasX, LLC ("BasX," Note 3), we committed to $78.0 million in the aggregate of contingent consideration to the former owners of BasX, which is payable in approximately 1,037,000 shares of the Company's stock, par value $0.004 per share. Under the MIPA Agreement, the potential future issuance of the shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023. As of June 30, 2022, 486,268 shares related to the year ended 2021 earn-out milestone had been issued to the former owners of BasX as part of a private placement exempt from registration with the SEC under Rule 506(b). No additional shares have been issued as of August 4, 2022.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 4A. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
| | | | | |
Exhibit # | Description |
| Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline Extensible Business Reporting Language): (i) our Consolidated Balance Sheets as of June 30, 20212022 and December 31, 2020;2021; (ii) our Consolidated Statements of Income for the three and six months ended June 30, 20212022 and 2020;2021; (iii) our Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 20212022 and 2020;2021; (iv) our Consolidated Statements of Cash Flows for the six months ended June 30, 20212022 and 2020;2021; and (vi) the notes to our Consolidated Financial Statements. |
| |
104 | Cover Page Interactive Data File pursuant to Rule 406 of Regulation S-T formatted in iXBRL (Inline Extensible Business Reporting Language) and contained in Exhibit 101. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| AAON, INC. |
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Dated: August 5, 202108, 2022 | By: | /s/ Gary D. Fields |
| | Gary D. Fields Chief Executive Officer |
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Dated: August 5, 202108, 2022 | By: | /s/ Rebecca A. Thompson |
| | Rebecca A. Thompson Chief Financial Officer |