10-Q 1 aaon-20240331.htm 10-Q aaon-20240331
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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 March 31, 2024
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) 
Nevada87-0448736
(State or other jurisdiction(IRS Employer
of incorporation or organization)Identification No.)
2425 South Yukon Ave.,Tulsa,Oklahoma74107
(Address of principal executive offices) (Zip Code)
(918) 583-2266
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.004 par value per shareAAONNASDAQ

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 filerSmaller 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 

As of April 30, 2024, registrant had outstanding a total of 82,209,281 shares of its $.004 par value Common Stock.



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 March 31, 2024December 31, 2023
Assets(in thousands, except share and per share data)
Current assets:  
Cash and cash equivalents$8,385 $287 
Restricted cash19,982 8,736 
Accounts receivable, net109,662 138,108 
Inventories, net196,252 213,532 
Contract assets50,581 45,194 
Prepaid expenses and other7,365 3,097 
Total current assets392,227 408,954 
Property, plant and equipment:  
Land15,918 15,438 
Buildings224,128 205,841 
Machinery and equipment401,637 391,366 
Furniture and fixtures42,861 40,787 
Total property, plant and equipment684,544 653,432 
Less:  Accumulated depreciation293,980 283,485 
Property, plant and equipment, net390,564 369,947 
Intangible assets, net70,664 68,053 
Goodwill81,892 81,892 
Right of use assets16,696 11,774 
Other long-term assets878 816 
Total assets$952,921 $941,436 
Liabilities and Stockholders' Equity  
Current liabilities:  
Accounts payable$15,438 $27,484 
Accrued liabilities93,198 85,508 
Contract liabilities16,527 13,757 
Total current liabilities125,163 126,749 
Revolving credit facility, long-term 38,328 
Deferred tax liabilities5,030 12,134 
Other long-term liabilities21,926 16,807 
New markets tax credit obligations1
15,994 12,194 
Commitments and contingencies
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, 82,117,680 and 81,508,381 issued and outstanding at March 31, 2024 and December 31, 2023, respectively
329 326 
Additional paid-in capital139,184 122,063 
Retained earnings645,295 612,835 
Total stockholders' equity784,808 735,224 
Total liabilities and stockholders' equity$952,921 $941,436 
1 Held by variable interest entities (Note 16)
The accompanying notes are an integral part of these consolidated financial statements.

- 1 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 Three Months Ended 
 March 31,
 20242023
(in thousands, except share and per share data)
Net sales$262,099 $265,953 
Cost of sales169,857 188,799 
Gross profit92,242 77,154 
Selling, general and administrative expenses45,288 32,942 
(Gain) loss on disposal of assets(16)6 
Income from operations46,970 44,206 
Interest expense, net(239)(1,150)
Other income, net77 114 
Income before taxes46,808 43,170 
Income tax provision7,792 6,356 
Net income$39,016 $36,814 
Earnings per share:  
Basic1
$0.48 $0.46 
Diluted1
$0.46 $0.44 
Cash dividends declared per common share1:
$0.08 $0.08 
Weighted average shares outstanding:  
Basic1
81,661,972 80,460,897 
Diluted1
84,044,670 82,860,958 
1 Reflects three-for-two stock split effective August 16, 2023.
The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
Three Months Ended March 31, 2024
 Common StockPaid-inRetained 
1 Reflects three-for-two stock split effective August 16, 2023
Shares1
Amount1
Capital
Earnings1
Total
 (in thousands)
Balance at December 31, 2023
81,508 $326 $122,063 $612,835 $735,224 
Net income— — — 39,016 39,016 
Stock options exercised and restricted403 2 9,842 — 9,844 
stock awards granted
     
Contingent shares issued (Note 15)
243 1 6,363 — 6,364 
Share-based compensation— — 3,957 — 3,957 
Stock repurchased and retired(36) (3,041)— (3,041)
Dividends— — — (6,556)(6,556)
Balance at March 31, 202482,118 $329 $139,184 $645,295 $784,808 
Three Months Ended March 31, 2023
Common StockPaid-inRetained
Shares1
Amount1
Capital
Earnings1
Total
(in thousands)
Balances at December 31, 202280,138 $322 $98,735 $461,657 560,714 
Net income— — — 36,814 36,814 
Stock options exercised and restricted1,183 3 15,853 — 15,856 
stock awards granted
Share-based compensation— — 3,519 — 3,519 
Stock repurchased and retired(18) (1,030)— (1,030)
Dividends— — — (6,459)(6,459)
Balance at March 31, 202381,303 $325 $117,077 $492,012 $609,414 
The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended 
 March 31,
 20242023
Operating Activities(in thousands)
Net income
$39,016 $36,814 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Depreciation and amortization13,437 10,274 
Amortization of debt issuance costs31 11 
Amortization of right of use assets12 29 
Provision for (recoveries of) credit losses on accounts receivable, net of adjustments
112 (56)
Provision for excess and obsolete inventories, net of write-offs
581 221 
Share-based compensation3,957 3,519 
(Gain) loss on disposition of assets
(16)6 
Foreign currency transaction loss (gain)
11 (2)
Interest income on note receivable
(5)(6)
Deferred income taxes(740)921 
Changes in assets and liabilities:  
Accounts receivable28,334 (33,740)
Income taxes8,221 5,262 
Inventories16,699 (861)
Contract assets(5,387)25 
Prepaid expenses and other long-term assets(4,349)(3,613)
Accounts payable(9,968)(16,318)
Contract liabilities2,770 713 
Extended warranties698 777 
Accrued liabilities and other long-term liabilities(1,044)847 
Net cash provided by operating activities
92,370 4,823 
Investing Activities  
Capital expenditures(34,688)(28,935)
Proceeds from sale of property, plant and equipment16 102 
Software development expenditures(4,055) 
Principal payments from note receivable13 14 
Net cash used in investing activities
(38,714)(28,819)
Financing Activities  
Proceeds from financing obligation, net of issuance costs4,186  
Payment related to financing costs(417) 
Borrowings under revolving credit facility115,130 105,172 
Payments under revolving credit facility(153,458)(92,512)
Stock options exercised9,844 15,856 
Employee taxes paid by withholding shares(3,041)(1,030)
Cash dividends paid to stockholders(6,556)(6,459)
Net cash (used in) provided by financing activities
(34,312)21,027 
Net increase (decrease) in cash, cash equivalents and restricted cash19,344 (2,969)
Cash, cash equivalents and restricted cash, beginning of period9,023 5,949 
Cash, cash equivalents and restricted cash, end of period$28,367 $2,980 
The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)


1. General
Basis of Presentation
AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc. ("AAON Oklahoma"), an Oklahoma corporation, AAON Coil Products, Inc. ("AAON Coil Products"), a Texas corporation, and BASX, Inc. ("BASX"), an Oregon corporation (collectively, the “Company”). The accompanying unaudited consolidated financial statements of AAON, Inc. and our operating subsidiaries, all of which are wholly-owned, have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”).
Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of eight variable interest entities ("VIEs") (Note 16) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs.
These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2023 is derived from audited consolidated financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year. Certain disclosures have been condensed in or omitted from these consolidated financial statements. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. All intercompany balances and transactions have been eliminated in consolidation.
We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data centers cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position, and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, inventory valuation, inventory reserves, warranty accrual, workers' compensation accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates.
Inflation and Labor Market
In 2023, we saw the slowing of inflation and some stabilization of raw material and component prices. Due to our favorable liquidity position, we continue to make strategic purchases of materials when we see opportunities. We continue to monitor and manage increases in the cost of raw materials through price increases for our products. We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong vendor relationships as well as expanding our list of vendors.
Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. We have implemented the following wage increases to remain competitive and to attract and retain employees:
In March 2023, we awarded annual merit raises for an overall 3.9% increase to wages.
In March 2024, we awarded annual merit raises for an overall 3.3% increase to wages.

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We continue to implement human resource initiatives to retain and attract labor to further increase production capacity. Beginning in 2023, initiatives included changing our employee paid time off policy, historically awarded in arrears at the beginning of each quarter, to accrue ratably over each pay period. Additionally, we enhanced our benefits for short-term disability, life insurance, paid parental leave, and paid military leave.
Despite efforts to mitigate the impact of inflation, supply chain issues and the tight labor market, future disruptions, while temporary, could negatively impact our consolidated financial position, results of operations and cash flows.
WH Series and WV Series Water Source Heat Pump Units
As part of the normal course of business, management continually monitors the profitability of the Company's various product series offerings. During the third quarter of 2022, management made the decision to no longer produce our small packaged geothermal/water-source heat pump units consisting of the WH Series horizontal configuration and WV Series vertical configuration, from one-half to 12 1/2 tons ("WH/WV"). These WH/WV units were produced solely out of the AAON Oklahoma facility. Production of the remaining WH/WV backlog was completed during the second quarter 2023.
Accounting Policies
A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.
Fair Value Measurements
The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt or based on current rates offered to the Company for debt with similar characteristics.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels:
Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date.
Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means.
Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of intangible assets, contingent consideration, and goodwill acquired in a business combination.
The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability.
Definite-Lived Intangible Assets
Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations or asset acquisitions. We amortize our definite-lived intangible assets on a straight-line basis over the estimated

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useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. 
Amortization is computed using the straight-line method over the following estimated useful lives:
Intellectual property
6 - 30 years
Customer relationships14 years

Software Development Costs
We capitalize costs incurred to purchase or develop software for internal use. Internal-use software development costs are capitalized during the application development stage. These capitalized costs are reflected in intangible assets, net on the consolidated balance sheets and are amortized over the estimated useful life of the software. The useful life of our internal-use software development costs is generally 1-6 years.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.
The changes in the carrying amount of goodwill were as follows:
Three Months Ended March 31,
20242023
(in thousands)
Balance, beginning of period
$81,892 $81,892 
Additions (decreases) during the period
  
Balance, end of period$81,892 $81,892 
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC"). We consider the applicability and impact of all ASUs. ASUs not listed or included within the Company's Annual Report on Form 10-K for the year ended December 31, 2023, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.

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2.  Revenue Recognition
The following tables show disaggregated net sales by reportable segment (Note 19) by major source, net of intercompany sales eliminations.
Three Months Ended March 31, 2024
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$191,265 $ $ $191,265 
Condensing units 10,909  10,909 
Air handlers 9,547 2,187 11,734 
Outdoor mechanical rooms    
Cleanroom systems  7,313 7,313 
Data center cooling solutions 206 17,673 17,879 
Water-source heat pumps 1,581  1,581 
Part sales15,317 6 278 15,601 
Other1
3,558 1,998 261 5,817 
$210,140 $24,247 $27,712 $262,099 
Three Months Ended March 31, 2023
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$180,026 $ $ $180,026 
Condensing units 15,278  15,278 
Air handlers 12,221 3,038 15,259 
Outdoor mechanical rooms208 151  359 
Cleanroom systems  12,622 12,622 
Data center cooling solutions 1,446 14,476 15,922 
Water-source heat pumps2,730 3,080  5,810 
Part sales13,904 1 248 14,153 
Other1
5,134 1,235 155 6,524 
$202,002 $33,412 $30,539 $265,953 
 1 Other sales include freight, extended warranties and miscellaneous revenue.
Due to the highly customized nature of many of the Company’s products and each product not having an alternative use to the Company without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract. The Company has formal cancellation policies and generally does not accept returns on these units. As a result, many of the Company’s products do not have an alternative use and therefore, for these products we recognize revenue over the time it takes to produce the unit.

Contract costs include direct materials, direct labor, installation, freight and delivery, commissions and royalties. Other costs not related to contract performance, such as indirect labor and materials, small tools and supplies, operating expenses, field rework and back charges are charged to expense as incurred. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are estimated and recognized by the Company throughout the life of the contract. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of billings is shown as a contract asset within our consolidated

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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.

Historically, sales of our products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather. However, in recent years, given the increases in demand of our product and increases in our backlog, sales has become more constant throughout the year.
Product Warranties
A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year.
The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period.
Representatives and Third Party Products
We are responsible for billings and collections resulting from all sales transactions, including those initiated by our independent manufacturer representatives (“Representatives”). Representatives are national companies that are in the business of providing HVAC units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use 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 sheets.
The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives were $10.8 million and $13.3 million for the three months ended March 31, 2024 and 2023, respectively.
3. Leases
The Company has various lease arrangements for certain manufacturing and warehousing facilities, equipment rental, as well as administrative facilities. Lease expiration dates, including expected renewal options, range from April 2025 to November 2033.

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The discount rates used to calculate the present value of lease payment range from 1.3% to 6.6% as of March 31, 2024. Currently, all leases are classified as operating leases.
The following table presents the balances by lease type:
Balance Sheet ClassificationMarch 31, 2024December 31, 2023
Operating Leases
Right of use assetsRight of use assets$16,696 $11,774 
Lease liability, short-termAccrued liabilities$2,274 $2,021 
Lease liability, long-termOther long-term liabilities$14,882 $10,201 
Since 2018, the Company has leased the manufacturing, engineering, and office space used by our operations in Parkville, Missouri. The lease provides approximately 86,000 square feet of manufacturing and office space. The lease expires December 31, 2032.
In November 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma which provides an additional 198,000 square feet to support our operations. In January 2024, we amended the lease for an additional 157,550 square feet for operations and parts distribution. The amended lease term will expire November 30, 2029.
In July 2023, the Company entered into a lease agreement with a start date of September 1, 2023, for land and approximately 72,000 square feet of facilities in Redmond, Oregon to support our manufacturing operations. The lease term is approximately five years with additional renewal options.
We also lease several properties near our Redmond, Oregon location. In the aggregate, these leases contain approximately 104,500 square feet of additional warehouse space. These leases have expiring terms from February 2025 to November 2033.
Total undiscounted future lease payments are as follows:
 (in thousands)
2024$2,415 
20253,100 
20263,046 
20273,136 
20283,130 
Thereafter6,403 

4.  Accounts Receivable
Accounts receivable and the related allowance for credit losses are as follows:
 
 March 31,
2024
December 31, 2023
 (in thousands)
Accounts receivable$110,097 $138,431 
Less:  Allowance for credit losses(435)(323)
Total, net
$109,662 $138,108 

 
 Three Months Ended
 March 31,
2024
March 31,
2023
Allowance for credit losses:(in thousands)
Balance, beginning of period$323 $477 
Provisions for (recoveries of) expected credit
112 (56)
losses, net of adjustments
Balance, end of period$435 $421 

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5.  Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts.
The components of inventories and related changes in the allowance for excess and obsolete inventories account are as follows:
 March 31,
2024
December 31, 2023
 (in thousands)
Raw materials$192,446 $211,259 
Work in process7,497 5,523 
Finished goods3,050 2,910 
Total, gross
202,993 219,692 
Less:  Allowance for excess and obsolete inventories(6,741)(6,160)
Total, net
$196,252 $213,532 
  Three Months Ended
 March 31,
2024
March 31,
2023
Allowance for excess and obsolete inventories:(in thousands)
Balance, beginning of period$6,160 $4,527 
Provision for (recoveries of) excess and960 664 
     obsolete inventories
Inventories written off(379)(443)
Balance, end of period$6,741 $4,748 
6.  Intangible assets
Our intangible assets consist of the following:
 March 31, 2024December 31, 2023
Definite-lived intangible assets(in thousands)
Intellectual property$12,450 $12,450 
Customer relationships47,547 47,547 
Capitalized internal-use software7,640 3,323 
Less:  Accumulated amortization(11,544)(9,838)
               Total, net56,093 53,482 
Indefinite-lived intangible assets
Trademarks14,571 14,571 
Total intangible assets, net$70,664 $68,053 
Amortization expense recorded in selling, general and administrative expenses is as follows:
 Three Months Ended
 March 31,
2024
March 31,
2023
(in thousands)
Amortization expense$1,706 $902 



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Total future amortization expense for finite-lived intangible assets was estimated as follows:
 (in thousands)
2024$3,662 
20254,656 
20264,656 
20274,656 
20284,552 
Thereafter29,073 
Total future amortization expense51,255 
Internal-use software projects in process4,838 
Total$56,093 


7.  Supplemental Cash Flow Information
 Three Months Ended
 March 31,
2024
March 31,
2023
Supplemental disclosures:(in thousands)
Interest paid$395 $1,121 
Income taxes paid$311 $172 
Non-cash investing and financing activities:
Non-cash capital expenditures$(2,078)$366 
Contingent shares issued (Note 15)
$6,364 

8.  Warranties
The Company has product warranties with various terms from one year from the date of first use or 18 months for parts, data center cooling solutions, and cleanroom systems to 25 years for certain heat exchangers. The Company has an obligation to replace parts if conditions under the warranty are met. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products, and any known identifiable warranty issues.  
Changes in the warranty accrual are as follows:
 Three Months Ended
 March 31,
2024
March 31,
2023
Warranty accrual:(in thousands)
Balance, beginning of period$20,573 $15,682 
Payments made(2,622)(1,881)
Warranty expense3,398 2,408 
Balance, end of period$21,349 $16,209 

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9.  Accrued Liabilities and Other Long-Term Liabilities
Accrued liabilities were comprised of the following:
 March 31,
2024
December 31, 2023
 (in thousands)
Warranty$21,349 $20,573 
Due to representatives17,608 14,428 
Payroll12,532 18,829 
Profit sharing4,600 7,596 
Workers' compensation446 338 
Medical self-insurance2,014 1,460 
Customer prepayments5,856 2,621 
Donations, short-term381 381 
Accrued income taxes9,391 1,170 
Employee vacation time10,670 10,315 
Extended warranties, short-term2,614 2,387 
Lease liability, short-term2,274 2,021 
Property taxes1,164  
Other2,299 3,389 
Total
$93,198 $85,508 
Other long-term liabilities were comprised of the following:
 
 March 31,
2024
December 31, 2023
 (in thousands)
Lease liability$14,882 $10,201 
Extended warranties6,553 6,082 
Donations and other491 524 
Total
$21,926 $16,807 
10.  Revolving Credit Facility
On May 27, 2022, we amended our $100.0 million Amended and Restated Loan Agreement dated November 24, 2021 (as amended, “Revolver”), to provide for maximum borrowings of $200.0 million. As of March 31, 2024 we had no amounts outstanding under our Revolver. As of December 31, 2023, we had $38.3 million outstanding under the Revolver. We have two standby letters of credit totaling $2.3 million as of March 31, 2024. Borrowings available under the Revolver at March 31, 2024 were $197.7 million. The Revolver expires on May 27, 2027. We have amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit transactions (Note 16).
Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. The weighted average interest rate on borrowings outstanding on the Revolver was 6.6% and 6.0% for the three months ended March 31, 2024 and 2023, respectively. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three months ended March 31, 2024 and 2023, respectively.
If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding affected loans will be deemed to have been converted into alternative base rate ("ABR") loans. ABR loans would bear interest at a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.

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At March 31, 2024, we were in compliance with our covenants, as defined by the Revolver. Our financial covenants require that we meet certain parameters related to our leverage ratio. At March 31, 2024, our leverage ratio was 0.01 to 1.0, which meets the requirement of not being above 3 to 1.
11.  Income Taxes
The provision (benefit) for income taxes consists of the following:
 Three Months Ended
 March 31,
2024
March 31,
2023
 (in thousands)
Current$8,532 $5,435 
Deferred(740)921 
     Income tax provision$7,792 $6,356 
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
 March 31,
2024
March 31,
2023
Federal statutory rate21.0 %21.0 %
State income taxes, net of Federal benefit5.3 4.0 
Excess tax benefits related to share-based compensation (Note 12)
(9.4)(8.8)
Return to provision(0.2)(0.3)
Non-deductible executive compensation1.0  
Research and development credits(1.4)(1.5)
Other0.3 0.3 
     Effective tax rate16.6 %14.7 %
We have historically earned investment tax credits from the state of Oklahoma’s manufacturing property investment program. We use the flow-through method to account for investment tax credits earned on eligible tangible asset expenditures. Under this method, the investment tax credits are recognized as a reduction to our Oklahoma income tax expense in the year they are used. As part of our expansion projects in Oklahoma, we identified a separate, more advantageous Oklahoma credit program (not income tax related) which resulted in us discontinuing our accumulation of credits for Oklahoma’s manufacturing property investment program after the 2022 tax year. As of March 31, 2024, we have investment tax credit carryforwards of approximately $2.3 million. These credits have estimated expirations from the year 2039 through 2043.
In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 162(m), the tax deduction for covered executives of public companies is limited to $1.0 million per individual. Because of the increase in our stock price and timing of executive stock option exercises this resulted in an increase to the income tax provision of $0.5 million for the three months ended March 31, 2024.
In accordance with the 2017 Tax Cuts & Jobs Act, under Internal Revenue Code Section 174, research and development expenses incurred after December 31, 2021 are required to be capitalized and amortized over 5 years. The amortization requirements for tax purposes is a mid-year convention, meaning that the tax amortization is 10% in the year of acquisition, 20% in the following 4 years, and 10% in the final year.
The Company's estimated annual 2024 effective tax rate, excluding discrete events, is approximately 25.6%. We file income tax returns in the U.S., state and foreign income tax return jurisdictions. We are subject to U.S. income tax examinations for tax years 2020 to present, and to non-U.S. income tax examinations for the tax years 2019 to present. In addition, we are subject to state and local income tax examinations for the tax years 2019 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.

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12. Share-Based Compensation
As discussed in Note 15, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of this stock split.
On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Under the LTIP, the exercise price of shares granted could not be less than 100% of the fair market value at the date of the grant.
On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 million shares that were approved by the stockholders on May 12, 2020.
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 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 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 three months ended March 31, 2024 and 2023 using a Black Scholes-Merton Model:
 Three months ended
 March 31, 2024March 31, 2023
Directors and SLT1:
  
Expected (annual) dividend rate$0.32$0.32
Expected volatility38.00%37.89%
Risk-free interest rate4.13%4.40%
Expected life (in years)4.04.0
Employees:
Expected (annual) dividend rate$0.32$0.32
Expected volatility33.47%39.55%
Risk-free interest rate4.26%4.48%
Expected life (in years)3.03.0
1 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.

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 The following is a summary of stock options vested and exercisable as of March 31, 2024:
 
Range of
Exercise
Prices
Number
of
Shares
Weighted
Average
Remaining
Contractual Life
(in years)
Weighted
Average
Exercise
Price
Intrinsic
Value
(in thousands)
$13.95 -$27.58 1,542,537 4.14$24.98 $97,351 
$28.28 -$37.07 672,291 6.5131.57 38,038 
$37.09 -$85.52 363,230 7.4350.92 13,505 
Total2,578,058 5.22$30.36 $148,894 
 A summary of stock option activity under the plans is as follows:
Stock OptionsSharesWeighted
Average
Exercise
Price
Outstanding at December 31, 2023
3,619,585 $33.09 
Granted
387,169 79.49 
Exercised
(293,760)33.51 
Forfeited or Expired
(7,502)50.27 
Outstanding at March 31, 2024
3,705,492 $37.84 
Exercisable at March 31, 2024
2,578,058 $30.36 
The total pre-tax compensation cost related to unvested stock options not yet recognized as of March 31, 2024 is $14.7 million and is expected to be recognized over a weighted average period of approximately 2.3 years.
The total intrinsic value of options exercised during the three months ended March 31, 2024 and 2023 was $14.2 million and $16.7 million, respectively. The cash received from options exercised during the three months ended March 31, 2024 and 2023 was $9.8 million and $15.9 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows.
Restricted Stock
The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends. At March 31, 2024, unrecognized compensation cost related to unvested restricted stock awards was approximately $7.6 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.
A summary of the unvested restricted stock awards is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2023
187,084 $44.07 
Granted
53,479 78.38 
Vested
(71,757)38.63 
Forfeited
(1,230)48.79 
Unvested at March 31, 2024
167,576 $57.28 

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PSUs
We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index. The TSR measurement period is three years. At the end of the measurement period, each award will be converted into common stock at 0% to 200% of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies.
The total pre-tax compensation cost related to unvested PSUs not yet recognized as of March 31, 2024 is $8.5 million and is expected to be recognized over a weighted average period of approximately 2.0 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 three months ended March 31, 2024 and 2023 using a Monte Carlo Model:
 Three months ended
 March 31, 2024March 31, 2023
 
Expected (annual) dividend rate$0.32$0.32
Expected volatility33.99%32.71%
Risk-free interest rate4.31%4.66%
Expected life (in years)2.82.8
The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.
A summary of the unvested PSUs is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2023
152,112 $54.88 
Granted
46,699 106.24 
Additional target payout1
2,059 58.53 
Vested
(21,919)58.53 
Forfeited
(2,362)58.53 
Unvested at March 31, 20242
176,589 $68.01 
1 The additional number of PSUs earned based on a 110% achievement at December 31, 2023 for awards vesting in 2024.
2 Consists of 71,760 PSUs cliff vesting December 31, 2024, 58,130 PSUs cliff vesting December 31, 2025, and 46,699 PSUs cliff vesting December 31, 2026.
Key Employee Awards
As part of the December 2021 acquisition of BASX, 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 issuance of the Key Employee Awards was contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award vested and was converted into common stock. The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date. All pre-tax compensation cost has been recognized as of December 31, 2023 and all awards vested in March 2024.

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A summary of the unvested Key Employee Awards is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2023
39,899 $53.45 
Granted
  
Vested
(39,899)53.45 
Forfeited
  
Unvested at March 31, 2024
 $ 

Share-Based Compensation
A summary of share-based compensation is as follows:
Three Months Ended
 March 31,
2024
March 31,
2023
Grant date fair value of awards during the period:(in thousands)
Options$8,708 $4,673 
PSUs4,961 3,241 
Restricted stock4,192 2,906 
Total$17,861 $10,820 
Share-based compensation expense:
Options$2,207 $2,065 
PSUs624 367 
Restricted stock1,126 826 
Key Employee Awards 261 
Total$3,957 $3,519 
Income tax benefit related to share-based compensation:
Options$3,147 $3,321 
PSUs169  
Restricted stock808 465 
Key Employee Awards282  
Total$4,406 $3,786 
Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20% per year. Restricted stock awards granted to directors historically vested one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year. As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3% per year. Forfeitures are accounted for as they occur.
Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP or 2016 Plan) or becomes retirement eligible during the service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All stock options and restricted stock awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur.
The PSUs cliff vest on December 31, at the end of the third year from the date of grant. Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs. The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur.



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13. 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 three months ended March 31, 2024 and 2023.
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
 March 31,
2024
March 31,
2023
(in thousands)
Contributions, net of forfeitures, made to the defined contribution plan$5,710 $5,259 
Profit Sharing Bonus Plans
We maintain a discretionary profit sharing bonus plan under which approximately 8.5% of pre-tax profit (10% prior to January 1, 2024) from the Company is paid to eligible employees on a quarterly basis in order to reward employee productivity. Eligible employees are regular full-time non-exempt employees of the Company who are actively employed and working on the first and last day of the calendar quarter. BASX employees are eligible to participate in the discretionary profit sharing bonus plan on January 1, 2024.
Prior to January 1, 2024, BASX had a separate employee incentive program (EIP) under which 5% of BASX's pre-tax profit, plus certain add backs, is paid ratably to eligible employees based on days-of-pay during the fiscal year. Eligible employees are regular full-time and part-time employees who have worked during the year and are still employed when the EIP payment is made following the end of the fiscal year, excluding members of BASX's senior leadership team and any employee paid commissions or royalties. This incentive program ended December 31, 2023.

Three Months Ended
 March 31,
2024
March 31,
2023
(in thousands)
Profit sharing bonus plan and employee incentive plan expense$4,600 $4,866 

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Employee Medical Plan
We self-insure for our employees' health insurance, and make medical claim payments up to certain stop-loss amounts. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans. In addition, the Company matches 175% of a participating employee's allowed contributions to a qualified health saving account to assist employees with health insurance plan deductibles. BASX employees joined the Company's medical plan and benefits on January 1, 2024.
BASX was insured for healthcare coverage through a third party through December 31, 2023. Eligible employees are regular full-time employees who are actively employed and working. Participants are expected to pay a portion of the premium costs for coverage of the benefits provided under the Plans. In addition, the Company contributes certain amounts for BASX's employees enrolled in a high deductible plan to a qualified health savings account to assist employees with health insurance plan deductibles. This healthcare coverage ended December 31, 2023.
Three Months Ended
 March 31,
2024
March 31,
2023
(in thousands)
Medical premium payments$3,371 $2,668 
Health saving account contributions2,166 1,060 
14.  Earnings Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share assumes the conversion of all potentially dilutive securities and is calculated by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all potentially dilutive securities. Dilutive common shares consist primarily of stock options and restricted stock awards.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023:
 Three Months Ended
 March 31,
2024
March 31,
2023
Numerator:(in thousands, except share and per share data)
Net income
$39,016 $36,814 
Denominator:  
Basic weighted average shares3
81,661,972 80,460,897 
Effect of dilutive shares related to stock based compensation1,3
2,193,000 1,972,145 
Effect of dilutive shares related to contingent consideration2 ,3
189,698 427,916 
Diluted weighted average shares3
84,044,670 82,860,958 
Earnings per share:  
Basic3
$0.48 $0.46 
Dilutive3
$0.46 $0.44 
Anti-dilutive shares:  
Shares3
112,717 180,442 
1 Dilutive shares related to stock options, restricted stock, PSUs and Key Employee Awards (Note 12)
2 Dilutive shares related to contingent shares issued to the former owners of BASX (Note 15)
3 Reflects three-for-two stock split effective August 16, 2023.


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15. Stockholders’ Equity
Stock Repurchases
The Board has authorized one active stock repurchase program for the Company. The Company may purchase shares on the open market from time to time. The Board must authorize the timing and amount of these purchases and all repurchases are in accordance with the rules and regulations of the SEC allowing the Company to repurchase shares from the open market.
Our open market repurchase programs are as follows:
Effective DateAuthorized Repurchase $Expiration Date
November 3, 2022$50 millionFebruary 27, 2024
February 27, 2024$50 million
** 1, 2
1 Expiration Date is at Board's discretion. The Company is authorized to effectuate repurchases of the Company's common stock on terms and conditions approved in advance by the Board.
2 As of March 31, 2024, there is approximately $50.0 million remaining under the current stock repurchase program. The remaining amount available is subject to a Board authorized 10b5-1 plan requiring certain market conditions and requirements.
The Company repurchases shares of AAON, Inc. stock from employees for payment of statutory tax withholdings on stock transactions. All other repurchases from directors or employees are contingent upon Board approval. All repurchases are done at current market prices.
Lastly, the Company also had a stock repurchase arrangement by which employee-participants in our 401(k) savings and investment plan were entitled to have shares in AAON, Inc. stock in their accounts sold to the Company. The 401(k) Plan was amended in June 2022 to discontinue this program. No additional shares have been purchased by the Company under this arrangement since June 2022.
Our repurchase activity is as follows:
Three Months Ended
March 31, 2024March 31, 2023
(in thousands, except share and per share data)
Program
Shares1
Total $
$ per share1
Shares1
Total $
$ per share1
Employees36,860 3,041 82.50 17,509 1,030 58.83 
1 Reflects three-for-two stock split effective August 16, 2023.
Our repurchase activity since Company inception, including our current authorized stock repurchase programs, are as follows:
Inception toMarch 31, 2024
(in thousands, except share and per share data)
Program
Shares1
Total $
$ per share1
Open market6,893,924 $106,625 $15.47 
401(k)12,462,552 171,789 13.78 
Directors and employees3,126,197 27,703 8.86 
Total
22,482,673 $306,117 $13.62 
1 Reflects three-for-two stock split effective August 16, 2023.

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Cash Dividends
At the discretion of the Board, we pay cash dividends. Board approval is required to determine the date of declaration and amount for each cash dividend payment.
Our recent cash dividends are as follows:
Declaration DateRecord DatePayment Date
Dividend
per Share1
 Annualized Dividend
per Share1
March 1, 2023March 13, 2023March 31, 2023$0.08$0.32
May 18, 2023June 9, 2023June 30, 2023$0.08$0.32
August 18, 2023September 8, 2023September 29, 2023$0.08$0.32
November 10, 2023November 29, 2023December 18, 2023$0.08$0.32
March 5, 2024March 18, 2024March 29, 2024$0.08$0.32
1 Reflects three-for-two stock split effective August 16, 2023.
Stock Split
On July 7, 2023, the Board of Directors declared a three-for-two stock split of the Company's common stock to be paid in the form of a stock dividend. Stockholders of record at the close of business on July 28, 2023 received one additional share for every two shares they held as of that date on August 16, 2023 (ex-dividend date August 17, 2023). Cash was paid in lieu of fractional shares (approximately $0.5 million). All share and per share information has been updated to reflect the effects of this stock split. The retroactive effect of the stock split resulted in an approximately $0.1 million reclass between common stock and retained earnings within stockholders' equity on the consolidated balance sheet.
Contingent Shares Issued in BASX Acquisition
As discussed above, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of this stock split.
In December 2021, we closed on the acquisition of BASX. Under the MIPA Agreement, we committed to $78.0 million in the aggregate of contingent consideration to the former owners of BASX, which is payable in approximately 1.56 million shares of the Company's common stock, par value $0.004 per share. The shares do not accrue dividends.
Under the MIPA Agreement, the issuance of shares to the former owners of BASX was contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ended 2021, 2022, and 2023. In March 2024, we issued the remaining 0.24 million shares related to the earn-out milestone for the year ended 2023. As a result of the shares issued in March 2024, the tax basis exceeded the book basis for consideration paid resulting in a deferred tax asset and an increase to additional paid-in capital of $6.4 million, respectively, on our consolidated balance sheet. The deferred tax asset is expected to be amortized over fifteen years. We previously issued 0.58 million shares in March 2023, related to the earn-out milestone for the year ended 2022. All shares have been issued as private placements exempt from registration with the SEC under Rule 506(b) and are included in common stock on the consolidated statements of stockholders' equity.

16. New Markets Tax Credit
2019 New Markets Tax Credit
On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2019 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2019 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2019 Project”). In connection with the 2019 NMTC transaction, the Company received a $23.0 million NMTC allocation for the Project and secured low interest financing and the potential for future debt forgiveness related to the 2019 Project.
Upon closing of the 2019 NMTC transaction, the Company provided an aggregate of approximately $15.9 million to the 2019 Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $15.9 million in proceeds plus capital contributed from the 2019 Investor was used to make an aggregate $22.5 million loan to a subsidiary of the Company. This financing arrangement is secured by equipment at the Company's Longview, Texas facilities and a guarantee from the Company, including an unconditional guarantee of the NMTCs.

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This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2019 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2019 Investor's interest of $6.5 million is recorded in New market tax credit obligation on the consolidated balance sheets. The Company incurred approximately $0.3 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction.
2023 New Markets Tax Credit
On April 25, 2023, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2023 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2023 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2023 Project”). In connection with the 2023 NMTC transaction, the Company received a $23.0 million NMTC allocation for the 2023 Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities.
Upon closing of the 2023 NMTC transaction, the Company provided an aggregate of approximately $16.7 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $16.7 million in proceeds plus capital contributed from the 2023 Investor was used to make an aggregate $23.8 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. The net proceeds from the closing of the 2023 NMTC are included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.
This transaction also includes a put/call feature either of which can be exercised at the end of the seven-year compliance period. The 2023 Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2023 Investor's interest of $5.7 million is recorded in New market tax credit obligation on the consolidated balance sheets. The Company incurred approximately $0.4 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction.
2024 New Markets Tax Credit
On February 27, 2024, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2024 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2024 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in real estate to facilitate 2023 Project. In connection with the 2024 NMTC transaction, the Company received a $15.5 million NMTC allocation for the 2023 Project and secured low interest financing and the potential for future debt forgiveness related to the expansion of its Longview, Texas facilities.
Upon closing of the 2024 NMTC transaction, the Company provided an aggregate of approximately $11.0 million to the Investor, in the form of a loan receivable, with a term of twenty-five years, bearing an interest rate of 1.0%. This $11.0 million in proceeds plus capital contributed from the Investor was used to make an aggregate $16.0 million loan to a subsidiary of the Company. This financing arrangement is secured by a guarantee from the Company, including an unconditional guarantee of the NMTCs. The net proceeds from the closing of the 2024 NMTC are included in restricted cash on our consolidated balance sheets required to be used for the 2023 Project.
This transaction also includes a put/call feature that either of which can be exercised at the end of the seven-year compliance period. The Investor may exercise its put option or the Company can exercise the call, both of which could serve to trigger forgiveness of a portion of the debt. The 2024 Investor's interest of $3.8 million is recorded in New market tax credit obligations on the consolidated balance sheets. The Company incurred approximately $0.4 million of debt issuance costs related to the above transactions, which are being amortized over the life of the transaction.
The 2019 Investor, 2023 Investor, and 2024 Investor are each subject to 100 percent recapture of the 2019, 2023, and 2024 NMTC, respectively, it receives for a period of seven years, as provided in the Internal Revenue Code and applicable U.S. Treasury regulations in the event that the financing facility of the Borrower under the transaction (AAON Coil Products, Inc.) becomes ineligible for NMTC treatment per the Internal Revenue Code requirements. The Company is required to be in compliance with various regulations and contractual provisions that apply to the 2019 NMTC arrangements, 2023 NMTC arrangements, and 2024 NMTC arrangements, respectively. Noncompliance with applicable requirements could result in the 2019 and/or 2023 and/or 2024 Investors' projected tax benefits not being realized and, therefore, require the Company to indemnify the 2019 Investor, 2023 Investor, and 2024 Investor for any loss or recapture of the 2019 NMTC, 2023 NMTC, and 2024 NMTC, respectively, related to the financing until such time as the recapture provisions have expired under the applicable statute of limitations. The Company does not anticipate any credit recapture will be required in connection with any of these financing arrangements.
The 2019 Investor, 2023 Investor, and 2024 Investor and its majority owned community development entity are considered VIEs and the Company is the primary beneficiary of the VIEs. Because the Company is the primary beneficiary of the VIEs,

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they have been included in the consolidated financial statements. There are no other assets, liabilities or transactions in these VIEs outside of the financing transactions executed as part of the 2019 NMTC, 2023 NMTC, or 2024 NMTC arrangements, respectively.
17. Commitments and Contingencies
Havtech Litigation
On January 24, 2022, one of the Company’s former independent sales representative firms, Havtech, LLC (and its affiliate, Havtech Parts Division, LLC, collectively “Plaintiffs”), filed a complaint (the “Complaint”) in the Circuit Court for Howard County, Maryland (Havtech, LLC, et al., v. AAON, Inc., et al.). The Complaint challenged the Company’s termination of its business relationship with Plaintiffs. The Company removed the action to the United States District Court for the District of Maryland (Northern Division) and moved to dismiss the Complaint. Plaintiffs’ First Amended Complaint (“First Amended Complaint”) was entered by the court on July 28, 2022. The First Amended Complaint asserts that the Company improperly terminated Plaintiffs and seeks damages alleged to be no less than $48.6 million, plus fees and costs. The Company filed its Answer to First Amended Complaint on January 31, 2023.
On September 28, 2023, the parties attended a court ordered settlement conference and agreed to resolve the case for $7.5 million. A settlement agreement was entered into on October 25, 2023 and the case has been dismissed with prejudice. The settlement of $7.5 million has been included in accrued liabilities on our consolidated balance sheets and selling, general and administrative expenses on our consolidated statement of income. The final payment was made on October 26, 2023.

Other Matters
The Company is involved from time to time in claims and lawsuits incidental to our business arising from various matters, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, tax and other laws. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. We do not believe these matters will have a material adverse effect on our business, financial position, results of operations or cash flows.
We are occasionally party to short-term and long-term, cancellable and occasionally non-cancellable, contracts with major suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw material and component parts for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of March 31, 2024, except as noted below.
In 2023, the Company executed a five-year purchase commitment for refrigerants. For the three months ended March 31, 2024 and 2023, the Company made payments of $3.6 million and $2.4 million, respectively, on this contract. Estimated minimum future payments are $8.3 million, $9.1 million, $10.5 million, and $11.2 million for 2024, 2025, 2026, and 2027, respectively. We had no other material contractual purchase obligations as of March 31, 2024.

18.  Related Parties
The following is a summary of transactions and balances with related parties:
 Three Months Ended
 March 31,
2024
March 31,
2023
(in thousands)
Sales to affiliates$2,196 $1,145 
Payments to affiliates615 392 
March 31,
2024
December 31,
2023
(in thousands)
Due from affiliates$792 $994 
Due to affiliates119 145 

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The nature of our related party transactions is as follows:
The Company sells units to an entity owned by a member of the CEO's immediate family. This entity is also one of the Company’s Representatives and as such, the Company makes payments to the entity for third party products.
The Company purchases some supplies from entities controlled by two of the Company’s board members and a member of the Company's executive management team.
The Company periodically makes part sales and makes payments to a board member related to a consulting agreement.
The Company periodically rents space partially owned by the CEO for various Company meetings.
The Company leases flight time of an aircraft partially owned by our COO and Vice President.
19. Segments
The Company has determined that it has three reportable segments for financial reporting purposes. Management evaluates the performance of its business segments primarily on gross profit. The Company's chief operating decision maker ("CODM"), our CEO, allocates resources and assesses the performance of each operating segment using information about the operating segment's net sales and income from operations. The CODM does not evaluate operating segments using asset or liability information.
AAON Oklahoma: AAON Oklahoma designs, manufactures, sells and services standard, semi-custom and custom heating, ventilation and air conditioning ("HVAC") systems, designs and produces controls solutions for all of our HVAC units and sells retail parts to customers through our two retail part stores in Tulsa, Oklahoma as well as online. Through our Norman Asbjornson Innovation Center ("NAIC") research and development laboratory facility in Tulsa, Oklahoma, the Company is able to test units under various environmental conditions. AAON Oklahoma includes the operations of our Tulsa, Oklahoma and Parkville, Missouri facilities, our NAIC research and development laboratory facility and two retail parts locations.
AAON Coil Products: AAON Coil Products designs and manufactures a selection of our standard, semi-custom and custom HVAC systems. AAON Coil Products also designs and manufactures various heating and cooling coils to be used in HVAC systems, mostly for the benefit of AAON Oklahoma and AAON Coil Products. AAON Coil Products consists of operations at our Longview, Texas facilities.
BASX: BASX provides product development design and manufacturing of custom engineered air handling systems including high efficiency data center cooling solutions, cleanroom HVAC systems, commercial/industrial HVAC systems and modular solutions. Additionally, BASX designs and manufactures cleanroom environmental control systems to support hospital surgical suites, pharmaceutical process facilities, semiconductor and electronics manufacturing, laboratory and isolation modular cleanrooms for facility flexibility. BASX consists of operations at our Redmond, Oregon facility.

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The following table summarizes certain financial data related to our segments. Transactions between segments are recorded based on prices negotiated between the segments. The Gross Profit amounts shown below are presented after elimination entries.
Three Months Ended
 March 31, 2024March 31, 2023
Net Sales
AAON Oklahoma
     External sales$210,140 $202,002 
     Inter-segment sales1,671 1,494 
AAON Coil Products
     External sales24,247 33,412 
     Inter-segment sales9,331 7,317 
BASX
External sales27,712 30,539 
Inter-segment sales2 370 
Eliminations(11,004)(9,181)
             Net sales$262,099 $265,953 
Gross Profit
AAON Oklahoma$78,411 $61,850 
AAON Coil Products8,140 7,158 
BASX5,691 8,146 
            Gross profit$92,242 $77,154 
March 31, 2024December 31, 2023
Long-lived assets(in thousands)
AAON Oklahoma$255,176 $248,556 
AAON Coil Products89,701 83,169 
BASX62,383 49,996 
            Total long-lived assets$407,260 $381,721 
Intangible assets and goodwill
AAON Oklahoma$13,795 $10,282 
AAON Coil Products  
BASX138,761 139,663 
            Total intangible assets and goodwill$152,556 $149,945 

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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, 2023.
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, 2023. 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 are engaged in the engineering, manufacturing, and selling of premium heating, ventilation, and air conditioning equipment consisting primarily of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. These products are marketed and sold to a variety of vertical markets including retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, industrial, and other commercial markets. We sell our products to all 50 states in the United States and certain provinces in Canada. Foreign sales were approximately $7.4 million of our total net sales for the three months ended March 31, 2024 and $12.6 million of our sales during the same period of 2023.
Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate. 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 generally lag the housing market, which in turn is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, the state of the economy and other macroeconomic factors over which we have no control. Sales in the replacement markets are driven by various factors, including general economic growth, the Company's new product introductions, fluctuations in the average age of existing equipment in the market, government regulations and stimulus, change in market demand between more customized, higher performing HVAC equipment and lower priced standard equipment, as well as many other factors. When new construction is down, we emphasize the replacement market.
We sell our products to property owners and contractors mainly through a network of independent manufacturers’ Representatives. This go-to-market strategy is unique compared to most of our larger competitors in that most control their sales channel. We value the independent sales channel as we think it is a more effective way of increasing market share. Although we concede full control of the sales process with this strategy, the entrepreneurial aspect of the independent sales channel attracts the most talent and provides greater financial incentives for its salespeople. 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. BASX sells highly customized products for unique applications for a more concentrated customer base and an internal sales force is more effective for such products.
The principal components of cost of 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 coils, compressors, motors, and electrical controls.
The price levels of our raw materials fluctuate given that the market continues to be volatile and unpredictable as a result of the uncertainty related to the U.S. economy and global economy. At March 31, 2024, the price (year to date average) for copper, galvanized steel, and stainless steel decreased 2.6%, 16.9%, and 18.5%, respectively, as compared to the price (year to date average) at March 31, 2023, while the price (year to date average) for aluminum increased 0.4% as compared to the price (year to date average) at March 31, 2023.

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We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months. We expect to receive delivery of raw materials from our contracts for use in our manufacturing operations.
We occasionally increase the price of our products to help offset any inflationary headwinds. In 2022, we implemented a recurring 1% monthly price increase beginning June 1, 2022 and ending on April 1, 2023. We reinstated the recurring 1% monthly price increase on October 1, 2023 and carried that through February 1, 2024.
Backlog
The following table shows our historical backlog levels:
March 31,
2024
December 31,
2023
March 31,
2023
(in thousands)
$558,443 $510,028 $599,912 
Our bookings remain strong. Investments made in our facilities and workforce have significantly improved our capacity and operational efficiencies. Production rates are at all time highs, trimming our backlog down to a more manageable size and allowing our lead times to continue to improve.
Results of Operations
Three months ended March 31,
20242023
(in thousands)
Net sales$262,099 $265,953 
Cost of sales169,857 188,799 
Gross profit92,242 77,154 
Selling, general and administrative expenses45,288 32,942 
Loss (gain) on disposal of assets(16)
Income from operations$46,970 $44,206 
The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:
Sales for the three months ended March 31, 2024 decreased 1.4%, respectively, due to decreased production rates during the period as compared to the same period in 2023.
Our gross profit margin for the quarter ended March 31, 2024 of 35.2% increased 620 basis points from the quarter ended March 31, 2023 due to price increases, product mix for operational efficiencies, lower material costs, and better overhead absorption.
We report our financial results based on three reportable segments: AAON Oklahoma, AAON Coil Products, and BASX, which are further described in "Segments" (Note 19) within our notes to the consolidated financial statements. The Company's chief operating decision maker ("CODM"), our CEO, allocates resources and assesses the performance of each operating segment using information about the operating segment's net sales and income from operations. The CODM does not evaluate operating segments using asset or liability information.

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Segment Operating Results for Three Months Ended March 31, 2024 and Three Months Ended March 31, 2023
Three Months Ended
March 31, 2024
Percent of Sales1
March 31, 2023
Percent of Sales1
 $ Change% Change
(in thousands)
Net Sales2
AAON Oklahoma$210,140 80.2 %$202,002 76.0 %$8,138 4.0 %
AAON Coil Products24,247