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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 September 30, 2022
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)

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 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockAAONNASDAQ

As of November 3, 2022, registrant had outstanding a total of 53,199,537 shares of its $.004 par value Common Stock.



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 September 30, 2022December 31, 2021
Assets(in thousands, except share and per share data)
Current assets:  
Cash and cash equivalents$10,738 $2,859 
Restricted cash530 628 
Accounts receivable, net of allowance for credit losses of $682 and $549, respectively
134,073 70,780 
Income tax receivable1,941 5,723 
Inventories, net176,888 130,270 
Contract assets9,592 5,749 
Prepaid expenses and other2,302 2,071 
Total current assets336,064 218,080 
Property, plant and equipment:  
Land8,537 5,016 
Buildings166,193 135,861 
Machinery and equipment336,123 318,259 
Furniture and fixtures27,814 23,072 
Total property, plant and equipment538,667 482,208 
Less:  Accumulated depreciation242,213 224,146 
Property, plant and equipment, net296,454 258,062 
Intangible assets, net65,507 70,121 
Goodwill81,892 85,727 
Right of use assets1,684 16,974 
Other long-term assets4,242 1,216 
Total assets$785,843 $650,180 
Liabilities and Stockholders' Equity  
Current liabilities:  
Accounts payable$48,613 $29,020 
Accrued liabilities61,780 50,206 
Contract liabilities31,791 7,542 
Total current liabilities142,184 86,768 
Revolving credit facility, long-term76,291 40,000 
Deferred tax liabilities31,430 31,993 
Other long-term liabilities5,642 18,843 
New market tax credit obligation (a)6,438 6,406 
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, 53,214,971 and 52,527,985 issued and outstanding at September 30, 2022 and December 31, 2021, respectively
213 210 
Additional paid-in capital87,949 81,654 
Retained earnings435,696 384,306 
Total stockholders' equity523,858 466,170 
Total liabilities and stockholders' equity$785,843 $650,180 
 (a) Held by variable interest entities (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.

- 1 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2022202120222021
(in thousands, except share and per share data)
Net sales$242,605 $138,571 $634,190 $398,235 
Cost of sales177,014 102,552 475,159 286,952 
Gross profit65,591 36,019 159,031 111,283 
Selling, general and administrative expenses28,891 15,897 78,880 47,488 
Gain on disposal of assets (15)(12)(15)
Income from operations36,700 20,137 80,163 63,810 
Interest expense, net(954)(10)(1,694)(11)
Other income (expense), net54 (19)295 37 
Income before taxes35,800 20,108 78,764 63,836 
Income tax provision8,327 4,527 17,286 11,264 
Net income$27,473 $15,581 $61,478 $52,572 
Earnings per share:  
Basic$0.52 $0.30 $1.16 $1.00 
Diluted$0.51 $0.29 $1.14 $0.98 
Cash dividends declared per common share:$ $ $0.19 $0.19 
Weighted average shares outstanding:  
Basic53,185,324 52,420,711 53,029,284 52,392,300 
Diluted53,958,715 53,546,513 53,921,865 53,664,997 
 
The accompanying notes are an integral part of these consolidated financial statements.

- 2 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
Nine Months Ended September 30, 2022
 Common StockPaid-inRetained 
SharesAmountCapitalEarningsTotal
 (in thousands)
Balances at December 31, 2021
52,528 $210 $81,654 $384,306 $466,170 
Net income— — — 61,478 61,478 
Stock options exercised, restricted stock awards843 3 10,987 — 10,990 
granted, and contingent shares issued (Note 16)
     
Share-based compensation— — 10,229 — 10,229 
Stock repurchased and retired(156) (8,921)— (8,921)
Contingent consideration (Note 3)
— — (6,000)— (6,000)
Dividends net of refunds for cancelled cash dividends— — — (10,088)(10,088)
Balances at September 30, 202253,215 $213 $87,949 $435,696 $523,858 
Three Months Ended September 30, 2022
Common StockPaid-inRetained
SharesAmountCapitalEarningsTotal
(in thousands)
Balances at June 30, 202253,127 $213 $82,078 $408,215 $490,506 
Net income— — — 27,473 27,473 
Stock options exercised and restricted124  4,605 — 4,605 
stock awards granted
Share-based compensation— — 3,321 — 3,321 
Stock repurchased and retired(36)— (2,055) (2,055)
Dividends net of refunds for cancelled cash dividends— — — 8 8 
Balances at September 30, 202253,215 $213 $87,949 $435,696 $523,858 
Nine Months Ended September 30, 2021
Common StockPaid-inRetained
SharesAmountCapitalEarningsTotal
(in thousands)
Balances at December 31, 202052,225 $209 $5,161 $345,495 350,865 
Net income— — — 52,572 52,572 
Stock options exercised and restricted438 2 14,571 — 14,573 
stock awards granted
Share-based compensation— — 8,784 — 8,784 
Stock repurchased and retired(243)(1)(16,550) (16,551)
Dividends net of refunds for cancelled cash dividends— — — (9,964)(9,964)
Balances at September 30, 202152,420 $210 $11,966 $388,103 $400,279 
Three Months Ended September 30, 2021
Common StockPaid-inRetained
SharesAmountCapitalEarningsTotal
(in thousands)
Balances at June 30, 202152,416 $210 $10,998 $372,518 $383,726 
Net income— — — 15,581 15,581 
Stock options exercised and restricted77  2,725 — 2,725 
stock awards granted
Share-based compensation— — 2,991 — 2,991 
Stock repurchased and retired(73) (4,748)— (4,748)
Dividends net of refunds for cancelled cash dividends— — — 4 4 
Balances at September 30, 202152,420 $210 $11,966 $388,103 $400,279 
The accompanying notes are an integral part of these consolidated financial statements.

- 3 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended 
 September 30,
 20222021
Operating Activities(in thousands)
Net income$61,478 $52,572 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation and amortization25,624 22,532 
Amortization of debt issuance cost32 31 
Amortization of right of use assets191  
Provision for credit losses on accounts receivable, net of adjustments300  
Provision for excess and obsolete inventories1,380 378 
Share-based compensation10,229 8,784 
Gain on disposition of assets(12)(15)
Foreign currency transaction loss (gain)42 (1)
Interest income on note receivable(17)(19)
Deferred income taxes(563)2,766 
Changes in assets and liabilities:  
Accounts receivable(63,593)(11,369)
Income tax receivable3,782 2,588 
Inventories(47,998)(22,712)
Contract assets(3,843) 
Prepaid expenses and other long-term assets(70)937 
Accounts payable18,616 16,390 
Contract liabilities24,249  
Deferred revenue730 316 
Accrued liabilities and other long-term liabilities12,857 1,525 
Net cash provided by operating activities43,414 74,703 
Investing Activities  
Capital expenditures(41,586)(42,636)
Cash paid for building (see Note 3)
(22,000) 
Cash paid in business combination, net of cash acquired(249) 
Proceeds from sale of property, plant and equipment12 19 
Principal payments from note receivable41 41 
Net cash used in investing activities(63,782)(42,576)
Financing Activities  
Borrowings under revolving credit facility151,103  
Payments under revolving credit facility(114,812) 
Principal payments on financing lease(115) 
Stock options exercised10,990 14,573 
Repurchase of stock(7,943)(15,014)
Employee taxes paid by withholding shares(978)(1,537)
Cash dividends paid to stockholders(10,096)(9,964)
Net cash provided by (used in) financing activities28,149 (11,942)
Net increase in cash, cash equivalents and restricted cash7,781 20,185 
Cash, cash equivalents and restricted cash, beginning of period3,487 82,288 
Cash, cash equivalents and restricted cash, end of period$11,268 $102,473 

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., 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. 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”).

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 two variable interest entities ("VIEs") (Note 17) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs.

These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2021 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, 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, 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.





- 5 -


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 nine months ended September 30, 2022.

Impact of COVID-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 nine months ended September 30, 2022. 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.


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WH Series and WV Series Water Source Heat Pump Units

As part of the normal course of business, management is continually monitoring the profitability of the Company's various product lines. 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 are produced solely out of the AAON Oklahoma facility. Production of the remaining WH/WV backlog is expected to continue through the first quarter of 2023.

A majority of the long-lived assets used in the production of the WH/WV units will be immediately reallocated to other product production, providing us additional manufacturing capacity with minimal costs. The workforce from the WH/WV production line will also be reallocated to other product production lines. Management has identified some related components and parts that cannot be used in other products or sold through our parts business; therefore, we have increased our provision for excess and obsolete inventory (Note 6), within cost of sales on our consolidated statements of income, by approximately $1.0 million during the three and nine months ended September 30, 2022.

Management does not believe this decision will have a significant future impact on the AAON Oklahoma reportable segment or the Company's overall operations, financial results 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, 2021.

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 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.


- 7 -


Definite-Lived Intangible Assets

Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations (Note 3). 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 property30 years
Customer relationships14 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. At September 30, 2022 $50.3 million of goodwill is deductible for income tax purposes. Our indefinite-lived intangible assets consist of trademark and trade names. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.

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
 
The following tables show disaggregated net sales by reportable segment (Note 20) by major source, net of intercompany sales eliminations.


- 8 -


Three Months Ended September 30, 2022
AAON OklahomaAAON Coil ProductsBasXTotal
(in thousands)
Rooftop Units$154,171 $ $ $154,171 
Condensing Units 12,720  12,720 
Air Handlers 14,380 2,211 16,591 
Outdoor Mechanical Rooms58 118  176 
Cleanroom Systems  15,283 15,283 
Data Center Cooling Solutions  14,884 14,884 
Water-Source Heat Pumps3,236 2,445  5,681 
Part Sales15,724  176 15,900 
Other2
5,980 841 378 7,199 
$179,169 $30,504 $32,932 $242,605 
Three Months Ended September 30, 2021
AAON OklahomaAAON Coil Products
BasX1
Total
(in thousands)
Rooftop Units$103,900 $ $ $103,900 
Condensing Units120 6,677  6,797 
Air Handlers 6,279  6,279 
Outdoor Mechanical Rooms179 29  208 
Water-Source Heat Pumps2,536 2,679  5,215 
Part Sales12,102   12,102 
Other2
3,299 771  4,070 
$122,136 $16,435 $ $138,571 


- 9 -


Nine Months Ended September 30, 2022
AAON OklahomaAAON Coil ProductsBasXTotal
(in thousands)
Rooftop Units$414,493 $ $ $414,493 
Condensing Units242 33,645  33,887 
Air Handlers 35,358 6,495 41,853 
Outdoor Mechanical Rooms612 488  1,100 
Cleanroom Systems  31,568 31,568 
Data Center Cooling Solutions  38,589 38,589 
Water-Source Heat Pumps8,098 6,596  14,694 
Part Sales39,797  507 40,304 
Other2
13,275 3,106 1,321 17,702 
$476,517 $79,193 $78,480 $634,190 
Nine Months Ended September 30, 2021
AAON OklahomaAAON Coil Products
BasX1
Total
(in thousands)
Rooftop Units$298,695 $ $ $298,695 
Condensing Units762 19,868  20,630 
Air Handlers 19,958  19,958 
Outdoor Mechanical Rooms820 363  1,183 
Water-Source Heat Pumps8,993 7,312  16,305 
Part Sales30,325   30,325 
Other2
8,783 2,356  11,139 
$348,378 $49,857 $ $398,235 
1 BasX was acquired by the Company on December 10, 2021. As the BasX segment was not applicable for the three and nine months ended September 30, 2021, it has been excluded from the tables for those periods.
2 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.

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.

- 10 -



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, 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 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 $10.8 million and $9.5 million for the three months ended September 30, 2022 and 2021, respectively. The amount of payments to our Representatives were $28.7 million and $34.5 million for the nine months ended September 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 all of the issued and 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

- 11 -


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 first quarter of 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 AllocationEstimated
Allocation as of
December 31, 2021
Revisions
(in thousands)
Accounts receivable$13,699 $13,699 $— 
Inventories2,725 2,725 — 
Contract assets7,635 7,635 — 
Prepaid expenses and other341 341 — 
Property, plant and equipment13,169 13,169 — 
Right of use assets15,611 15,611 — 
Intangible assets68,413 70,329 (1,916)
Goodwill78,663 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 recognized the following definite and indefinite-lived intangible assets as part of the acquisition of BasX:
Final AllocationEstimated
Allocation as of
December 31, 2021
Revisions
(in thousands)
Definite-lived intangible assets
Intellectual property$6,295 $6,479 $(184)
Customer relationships47,547 48,684 (1,137)
53,842 55,163 (1,321)
Indefinite-lived intangible assets
Trademarks14,571 15,166 (595)
Total intangible assets acquired$68,413 $70,329 $(1,916)


Goodwill is the excess of the consideration paid for the acquired businesses over the 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.


- 12 -


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 nine months ended September 30, 2021 are presented as if the combination had been made on January 1, 2021.

(unaudited)
Three months endedNine months ended
September 30, 2021September 30, 2021
(in thousands, except per share data)
Revenues$159,636 $452,635 
Net income$17,257 $55,751 
Earnings per share:
Basic$0.33 $1.06 
Dilutive$0.32 $1.04 

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 ClassificationSeptember 30, 2022December 31, 2021
Operating Leases
Right of use assetsRight of use assets$1,684 $16,974 
Current lease liabilityAccrued liabilities$522 $1,580 
Noncurrent lease liabilityOther long-term liabilities$1,153 $15,467 

Since 2018, we lease our manufacturing and office space used by our operations in Parkville, Missouri, which is classified as an operating lease.

During the acquisition of BasX on December 10, 2021 (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 (Note 19). 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. During the second quarter of 2022, this lease was classified as a finance lease as the Company had the option to and was reasonably certain to purchase the underlying assets in 2023. However, during the third quarter of 2022, it was determined that the Company would no longer purchase the land or facility and terminate the lease due to unforeseen facility structural issues. As we currently expect to vacate this property in the next several months and terminate this lease we have reassessed our lease estimate and classified the remaining expected term of the lease as an operating lease. We do not expect the vacating of the leased property to have a significant effect on the Company's overall operations, financial results and cash flows.


- 13 -


Subsequent to September 30, 2022, we amended our Parkville, Missouri lease to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet. The amended lease will provide for approximately 31,000 square feet of additional manufacturing and engineering space and for approximately 4,000 square feet of additional office space. The amended lease extends the lease term through December 31, 2032.


5.  Accounts Receivable

Accounts receivable and the related allowance for credit losses are as follows:
 
 September 30,
2022
December 31, 2021
 (in thousands)
Accounts receivable$134,755 $71,329 
Less:  Allowance for credit losses(682)(549)
Total, net
$134,073 $70,780 

 
 Three Months EndedNine Months Ended
 September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
Allowance for credit losses:(in thousands)
Balance, beginning of period$563 $518 $549 $506 
Provisions for (recoveries of) expected credit119 (12)300  
losses, net of adjustments
Accounts receivable written off, net of recoveries
 (29)(167)(29)
Balance, end of period$682 $477 $682 $477 
 

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:

 September 30,
2022
December 31, 2021
 (in thousands)
Raw materials$171,230 $124,480 
Work in process2,739 3,049 
Finished goods5,984 4,528 
Total, gross
179,953 132,057 
Less:  Allowance for excess and obsolete inventories(3,065)(1,787)
Total, net
$176,888 $130,270 

  Three Months EndedNine Months Ended
 September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
Allowance for excess and obsolete inventories:(in thousands)
Balance, beginning of period$1,871 $2,726 $1,787 $3,261 
Provision for (recovery of) excess and1,232 86 1,380 378 
     obsolete inventories