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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
cash paid for the acquisition of BASX (Note 4) in December 2021. The cash paid for building is related to the purchase of the BASX office and manufacturing facility in May 2022 (Note 4).
Our capital expenditure program for 2023 is estimated to be approximately $135.0 million. Many of these projects are subject to review and cancellation at the discretion of our CEO and Board of Directors without incurring substantial charges.
Cash Flows from Financing Activities
The change in cash from financing activities in 2022 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of the BASX building in May 2022, offset by repayments we were able to make due to our increased operating results and financial condition.
Cash flow changes related to stock option exercised is affected by the timing of stock options exercised by our employees. The decrease in our repurchase of stock was the result of the discontinuance of the 401(k) buyback program in June 2022. Cash dividends paid to stock holders increased to $22.9 million both due to the increase in number of shares outstanding and the increase in dividend per share from $0
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
we were able to make due to our increased operating results and financial condition.
Cash flow changes related to stock option exercised is affected by the timing of stock options exercised by our employees. The decrease in our repurchase of stock was the result of the discontinuance of the 401(k) buyback program in June 2022. Cash dividends paid to stock holders increased to $22.9 million both due to the increase in number of shares outstanding and the increase in dividend per share from $0.19 to $0.24 for the December 2022 dividend payment. We expect to continue paying cash dividends.
Commitments and Contractual Agreements
We are occasionally party to short-term, cancellable and occasionally non-cancellable, contracts with major suppliers for the purchase of raw material and component parts. We expect to receive delivery of raw materials for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of December 31, 2022, except as noted below.
On April 27, 2022, the Company entered into a purchase and sale agreement with a third party manufacturer to purchase certain assets to design and manufacture fan wheels for the purchase
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
raw material and component parts. We expect to receive delivery of raw materials for use in our manufacturing operations. These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption. We had no material contractual purchase obligations as of December 31, 2022, except as noted below.
On April 27, 2022, the Company entered into a purchase and sale agreement with a third party manufacturer to purchase certain assets to design and manufacture fan wheels for the purchase price of $6.5 million. As of December 31, 2022, we have paid approximately $3.5 million related to this agreement, which is included in other long-term assets and property, plant and equipment with the remaining $3.0 million included in accounts payable and other long-term assets on our consolidated balance sheets. The final payment will be made in 2023.
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Contingencies
We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
accounts payable and other long-term assets on our consolidated balance sheets. The final payment will be made in 2023.
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Contingencies
We are subject to various claims and legal actions that arise in the ordinary course of business. We closely monitor these claims and legal actions and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position, results of operations or cash flows and we accrue and/or disclose loss contingencies as appropriate. See Note 18 of the Consolidated Financial Statements for additional information with respect to specific legal proceedings.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and the Company's discussion and analysis of its financial condition and operating results require management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and related notes. We base our estimates, assumptions, and judgments on historical experience, current trends, and other factors believed to be relevant at the time our consolidated financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
and analysis of its financial condition and operating results require management to make estimates and assumptions about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and related notes. We base our estimates, assumptions, and judgments on historical experience, current trends, and other factors believed to be relevant at the time our consolidated financial statements are prepared. However, because future events and their effects cannot be determined with certainty, actual results could differ from our estimates and assumptions, and such differences could be material. We believe the following critical accounting policies affect our more significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements. We discuss these estimates with the Audit Committee of the Board of Directors periodically.
Inventor
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Raw material or component inventory typically transfers from one stage of manufacturing to another at a standard cost. The standard cost is set by management to reflect the actual costs incurred. We continually monitor standard costs to ensure that standard costs reasonably reflect the FIFO value of the inventory produced and make manual adjusts the value of inventory accordingly. Our manual adjustments from standards to actual inventory costs require applying
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
ventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Raw material or component inventory typically transfers from one stage of manufacturing to another at a standard cost. The standard cost is set by management to reflect the actual costs incurred. We continually monitor standard costs to ensure that standard costs reasonably reflect the FIFO value of the inventory produced and make manual adjusts the value of inventory accordingly. Our manual adjustments from standards to actual inventory costs require applying judgment regarding a number of factors, including changes in inventory quantities during the period and recent versus historical inventory purchase costs.
Raw material or component inventory typically transfers from one stage of manufacturing to another where it accumulates additional costs directly incurred with the production of finished goods, including estimated standard labor and overhead costs. Labor and overhead costs associated with the manufacturing of our products are capitalized into inventory on an estimated standard basis. These include certain direct and indirect costs such as compensation, manufacturing, and facility costs associated with manufacturing support functions. We continually monitor our labor and overhead standard costs to ensure that standard costs reasonably reflects our actual costs and make manual adjusts the value of inventory accordingly. Our manual adjustments from standard to actual labor and overhead costs contain uncertainties that require management to make assumptions and to apply judgment regarding
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
and overhead costs. Labor and overhead costs associated with the manufacturing of our products are capitalized into inventory on an estimated standard basis. These include certain direct and indirect costs such as compensation, manufacturing, and facility costs associated with manufacturing support functions. We continually monitor our labor and overhead standard costs to ensure that standard costs reasonably reflects our actual costs and make manual adjusts the value of inventory accordingly. Our manual adjustments from standard to actual labor and overhead costs contain uncertainties that require management to make assumptions and to apply judgment regarding a number of factors, including inventory turns, supply usage, manufacturing efficiencies, and historical production costs.
Inventory Reserves
– We establish a reserve for inventories based on the change in inventory requirements due to product line changes, the feasibility of using obsolete parts for upgraded part substitutions, the required parts needed for part supply sales and replacement parts, and for estimated shrinkage. Assumptions used to estimate inventory reserves include future manufacturing requirements and industry trends. Evolving technology and changes in product mix or customer demand can significantly affect the outcome of this analysis.
Warranty Accrual
– A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized. Our product warranty policy is the earlier of one year from the date of first use or
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
the required parts needed for part supply sales and replacement parts, and for estimated shrinkage. Assumptions used to estimate inventory reserves include future manufacturing requirements and industry trends. Evolving technology and changes in product mix or customer demand can significantly affect the outcome of this analysis.
Warranty Accrual
– A provision is made for estimated warranty costs at the time the product is shipped and revenue is recognized. Our product warranty policy is the earlier of one year from the date of first use or 18 months from date of shipment for parts only; 18 months for data center cooling solutions and cleanroom systems; an additional four years for compressors (if applicable); 15 years on aluminized steel gas-fired heat exchangers (if applicable); 25 years on stainless steel heat exchangers (if applicable); and ten years on gas-fired heat exchangers in our historical RL products (if applicable). Our warranty policy for the RQ series covers parts for two years from date of unit shipment. Our warranty policy for the WH and WV Series geothermal/water-source heat pumps covers parts for five years from the date of installation. Warranty expense is estimated based on the warranty period, historical warranty trends and associated costs, and any known identifiable warranty issue
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
on stainless steel heat exchangers (if applicable); and ten years on gas-fired heat exchangers in our historical RL products (if applicable). Our warranty policy for the RQ series covers parts for two years from date of unit shipment. Our warranty policy for the WH and WV Series geothermal/water-source heat pumps covers parts for five years from the date of installation. Warranty expense is estimated based on the warranty period, historical warranty trends and associated costs, and any known identifiable warranty issue.
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Due to the absence of warranty history on new products, an additional provision may be made for such products. Our estimated future warranty cost is subject to adjustment from time to time depending on changes in actual warranty trends and cost experience. Should actual claim rates differ from our estimates, revisions to the estimated product warranty liability would be required.
Share-Based Compensation
– We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including stock options, restricted stock awards, performance stock units ("PSUs"), and key employee awards ("Key Employee Awards") based on their fair values at the time of grant. Compensation expense is recognized on a straight-line basis over the service period of stock options, restricted stock awards, and PSUs. Compensation expense
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
our estimates, revisions to the estimated product warranty liability would be required.
Share-Based Compensation
– We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including stock options, restricted stock awards, performance stock units ("PSUs"), and key employee awards ("Key Employee Awards") based on their fair values at the time of grant. Compensation expense is recognized on a straight-line basis over the service period of stock options, restricted stock awards, and PSUs. Compensation expense is recognized for the Key Employee Awards on a straight line basis over the service period when the performance condition is determined to be probable. Forfeitures are accounted for as they occur. The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, forward-looking market conditions, risk-free rate, and expected dividend yield for stock options. The fair value of restricted stock awards and Key Employee Awards is based on the fair market value of
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
-Merton option pricing model. The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, forward-looking market conditions, risk-free rate, and expected dividend yield for stock options. The fair value of restricted stock awards and Key Employee Awards is based on the fair market value of AAON common stock on the respective grant dates. The fair value of restricted stock awards is reduced for the present value of dividends.
Definite-Lived Intangible Assets
– Definite-lived intangible assets include various customer relationships and intellectual property acquired in business combinations. The fair value of customer relationships and intellectual property is estimated based on management’s judgments and assumptions or third party valuation models. These models requires the use of subjective inputs and assumptions such as expected useful lives, growth of existing customers, attrition of customers, future margins and expenses, discount rates, and future revenue growth. These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis. We amortize our definite-lived intangible assets on a straight-line basis over the estimated useful lives of
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
of customer relationships and intellectual property is estimated based on management’s judgments and assumptions or third party valuation models. These models requires the use of subjective inputs and assumptions such as expected useful lives, growth of existing customers, attrition of customers, future margins and expenses, discount rates, and future revenue growth. These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis. We amortize our definite-lived intangible assets on a straight-line basis over the estimated useful lives of the assets. Our definite-lived intangible assets have estimated used lives of between 14 and 30 years. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review.
Goodwill and Indefinite-Lived Intangible Assets
– Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Indefinite-lived intangible assets consist of trademarks and trade names. The fair value of trademarks and trade names is estimated based on management’s judgments and assumptions or third party valuations. These models require the use of subjective inputs such as royalty rate, discount rate, and terminal value.
Goodwill and indefinite-lived intangible assets are not amortized
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
Assets
– Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Indefinite-lived intangible assets consist of trademarks and trade names. The fair value of trademarks and trade names is estimated based on management’s judgments and assumptions or third party valuations. These models require the use of subjective inputs such as royalty rate, discount rate, and terminal value.
Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.
To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired. If the carrying amount
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired. If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets.
We performed a qualitative assessment as of December 31, 2022 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets.
Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
December 31, 2022 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets.
Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the outcome of the analysis. The estimates and assumptions we use in the annual impairment assessment
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included macro-industry trends, market participant considerations, historical profitability, including free cash flows, and forecasted multi-year operating results. Changes in operating results and other assumptions could materially affect these estimates. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
Contingent Consideration
– As part of a business combination, we agreed to issue shares of the Company's common stock based on certain milestones in accordance with the acquisition agreement. This contingent consideration is valued at fair value on the acquisition date and is included in goodwill and additional paid-in capital on the consolidated balance sheets.
The fair value of the contingent consideration was determined using the Option Pricing Method through a Monte Carlo
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
estimates. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
Contingent Consideration
– As part of a business combination, we agreed to issue shares of the Company's common stock based on certain milestones in accordance with the acquisition agreement. This contingent consideration is valued at fair value on the acquisition date and is included in goodwill and additional paid-in capital on the consolidated balance sheets.
The fair value of the contingent consideration was determined using the Option Pricing Method through a Monte Carlo simulation, as this model is appropriate for contingent considerations for which the payoff structure is nonlinear. The use of this model requires the input of subjective inputs and assumptions such as: future earnings, the expected volatility of future earnings, risk-free rate, discount rate, and future stock performance. These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.
New Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
These inputs and assumptions can be inherently uncertain and can significantly affect the outcome of the estimates and analysis.
New Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.
We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Price Risk
We are exposed to volatility in the prices of commodities used in some of our products and, occasionally, we use cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.
Interest Rate Risk
We are exposed to changes in interest rates related to our outstanding debt. As of December 31, 2022, we had an outstanding balance of $71.0 million. For each one percentage point increase in the interest rate applicable to our outstanding debt, our annual income before taxes would decrease by approximately $0.7 million.
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Item 8.
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
able and non-cancellable contracts with our major suppliers for periods of six to 18 months to manage this exposure.
Interest Rate Risk
We are exposed to changes in interest rates related to our outstanding debt. As of December 31, 2022, we had an outstanding balance of $71.0 million. For each one percentage point increase in the interest rate applicable to our outstanding debt, our annual income before taxes would decrease by approximately $0.7 million.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
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Consolidated Balance Sheets
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Consolidated Statements of Income
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Consolidated Statements of Stockholders’ Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
AAON, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 202
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
olidated Statements of Stockholders’ Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
AAON, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of AAON, Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2022 and 2021, and the results of its
operations and its
cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2022 and 2021, and the results of its
operations and its
cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 27, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
OSO”), and our report dated February 27, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter
communicated below is a matter
arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory – manual inventory adjustments
As described in Note 2 to the financial statements, the Company reports inventory using the first in, first out (“FIFO”) method, which
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory – manual inventory adjustments
As described in Note 2 to the financial statements, the Company reports inventory using the first in, first out (“FIFO”) method, which involves manual adjustments recorded to the general ledger such as inventory variance, inventory allowance and labor and overhead adjustments, which had the potential to be larger or require more judgment during the year ended December 31, 2022, where the Company experienced changes in the prices of certain raw materials due to the COVID-19 pandemic, as well as supply chain challenges. These manual adjustments have been identified as a critical audit matter.
The principal considerations
for our determination such manual inventory adjustments are a critical audit matter are these manual adjustments require substantial use of management estimates and require the Company to have effective inventory valuation processes. Significant management judgments and estimates utilized to determine manual inventory adjustments are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.
Our audit
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
due to the COVID-19 pandemic, as well as supply chain challenges. These manual adjustments have been identified as a critical audit matter.
The principal considerations
for our determination such manual inventory adjustments are a critical audit matter are these manual adjustments require substantial use of management estimates and require the Company to have effective inventory valuation processes. Significant management judgments and estimates utilized to determine manual inventory adjustments are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.
Our audit procedures related to the manual inventory adjustments included the following, among others.
We tested the design and operating effectiveness of controls over inventory valuation, including the standard cost updates in the accounting system and the completeness and accuracy of the inputs to the inventory variance calculation and any related adjustments.
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We recalculated the Company’s standard costing of inventory which approximated FIFO by obtaining FIFO buildups and inspected underlying documents for a sample of raw materials.
We assessed the reasonableness of management’s inventory reserve by recalculating the reserve using management’s inputs.
We tested labor and overhead rate changes by recalculating the rates used and tested any adjustments recorded to the general ledger.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2004.
T
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
We recalculated the Company’s standard costing of inventory which approximated FIFO by obtaining FIFO buildups and inspected underlying documents for a sample of raw materials.
We assessed the reasonableness of management’s inventory reserve by recalculating the reserve using management’s inputs.
We tested labor and overhead rate changes by recalculating the rates used and tested any adjustments recorded to the general ledger.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2004.
Tulsa, Oklahoma
February 27, 2023
33
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2022
2021
Assets
(in thousands, except share and per share data)
Current assets:
Cash and cash equivalents
5,451
2,859
Restricted cash
498
628
Accounts receivable, net of allowance for credit losses of $477 and $549, respectively
127,158
70,780
Income tax receivable
5,723
Inventories, net
198,939
130,270
Contract assets
15,151
5,749
Prepaid expenses and other
1,919
2,071
Total current assets
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
:
Cash and cash equivalents
5,451
2,859
Restricted cash
498
628
Accounts receivable, net of allowance for credit losses of $477 and $549, respectively
127,158
70,780
Income tax receivable
5,723
Inventories, net
198,939
130,270
Contract assets
15,151
5,749
Prepaid expenses and other
1,919
2,071
Total current assets
349,116
218,080
Property, plant and equipment:
Land
8,537
5,016
Buildings
169,156
135,861
Machinery and equipment
342,045
318,259
Furniture and fixtures
30,033
23,072
Total property, plant and equipment
549,771
482,208
Less: Accumulated depreciation
245,026
224,146
Property, plant and equipment, net
304,745
258,062
Intangible assets, net
64,606
70,121
Goodwill
81,892
85,727
Right of use assets
7,123
16,974
Other long-term assets
6,421
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
23,072
Total property, plant and equipment
549,771
482,208
Less: Accumulated depreciation
245,026
224,146
Property, plant and equipment, net
304,745
258,062
Intangible assets, net
64,606
70,121
Goodwill
81,892
85,727
Right of use assets
7,123
16,974
Other long-term assets
6,421
1,216
Total assets
813,903
650,180
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
45,513
29,020
Accrued liabilities
78,630
50,206
Contract liabilities
21,424
7,542
Total current liabilities
145,567
86,768
Revolving credit facility, long-term
71,004
40,000
Deferred tax liabilities
18,661
31,993
Other long-term liabilities
11,508
18,843
New market tax credit obligation (a)
6,449
6,406
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred stock, $.001 par value, 5
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
7,542
Total current liabilities
145,567
86,768
Revolving credit facility, long-term
71,004
40,000
Deferred tax liabilities
18,661
31,993
Other long-term liabilities
11,508
18,843
New market tax credit obligation (a)
6,449
6,406
Commitments and contingencies (Note 18)
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, 53,425,184 and 52,527,985 issued and outstanding at December 31, 2022 and 2021, respectively
214
210
Additional paid-in capital
98,735
81,654
Retained earnings
461,765
384,306
Total stockholders’ equity
560,714
466,170
Total liabilities and stockholders’ equity
813,903
650,180
(a) Held by variable interest entities (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
34
AAON, Inc. and Subsidiaries
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
, respectively
214
210
Additional paid-in capital
98,735
81,654
Retained earnings
461,765
384,306
Total stockholders’ equity
560,714
466,170
Total liabilities and stockholders’ equity
813,903
650,180
(a) Held by variable interest entities (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
34
AAON, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2022
2021
2020
(in thousands, except share and per share data)
Net sales
888,788
534,517
514,551
Cost of sales
651,216
396,687
358,702
Gross profit
237,572
137,830
155,849
Selling, general and administrative expenses
110,823
68,598
60,491
Gain on disposal of assets and insurance recoveries
(12)
(21)
(6,478)
Income from operations
126,761
69,253
101,836
Interest (expense) income, net
(2,627)
(132)
88
Other income
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
,687
358,702
Gross profit
237,572
137,830
155,849
Selling, general and administrative expenses
110,823
68,598
60,491
Gain on disposal of assets and insurance recoveries
(12)
(21)
(6,478)
Income from operations
126,761
69,253
101,836
Interest (expense) income, net
(2,627)
(132)
88
Other income, net
399
61
51
Income before taxes
124,533
69,182
101,975
Income tax provision
24,157
10,424
22,966
Net income
100,376
58,758
79,009
Earnings per share:
Basic
1.89
1.12
1.51
Diluted
1.86
1.09
1.49
Cash dividends declared per common share:
0.43
0.38
0.38
Weighted average shares outstanding:
Basic
53,054,986
52,404,199
52,168,679
Diluted
54,097,072
53,728,989
53,061,
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
Earnings per share:
Basic
1.89
1.12
1.51
Diluted
1.86
1.09
1.49
Cash dividends declared per common share:
0.43
0.38
0.38
Weighted average shares outstanding:
Basic
53,054,986
52,404,199
52,168,679
Diluted
54,097,072
53,728,989
53,061,169
The accompanying notes are an integral part of these consolidated financial statements.
35
AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Common Stock
Paid-in
Retained
Shares
Amount
Capital
Earnings
Total
(in thousands)
Balance at December 31, 2019
52,079
208
3,631
286,301
290,140
Net income
79,009
79,009
Stock options exercised and restricted
712
21,415
21,418
stock awards granted
Share-based compensation
11,342
11,342
Stock repurchased and retired
(566)
(2)
(31,227)
(31,229)
Divid
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
Total
(in thousands)
Balance at December 31, 2019
52,079
208
3,631
286,301
290,140
Net income
79,009
79,009
Stock options exercised and restricted
712
21,415
21,418
stock awards granted
Share-based compensation
11,342
11,342
Stock repurchased and retired
(566)
(2)
(31,227)
(31,229)
Dividends
(19,815)
(19,815)
Balance at December 31, 2020
52,225
209
5,161
345,495
350,865
Net income
58,758
58,758
Stock options exercised and restricted
623
21,146
21,148
stock awards granted
Share-based compensation
11,812
11,812
Stock repurchased and retired
(320)
(1)
(22,465)
(22,466)
Contingent consideration (Note 4)
66,000
66,000
Dividends
(19,947)
(19,947)
Balance at December 31, 2021
52,528
210
81,654
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
623
21,146
21,148
stock awards granted
Share-based compensation
11,812
11,812
Stock repurchased and retired
(320)
(1)
(22,465)
(22,466)
Contingent consideration (Note 4)
66,000
66,000
Dividends
(19,947)
(19,947)
Balance at December 31, 2021
52,528
210
81,654
384,306
466,170
Net income
100,376
100,376
Stock options exercised and restricted
1,140
23,135
23,140
stock awards granted
Share-based compensation
13,700
13,700
Stock repurchased and retired
(243)
(1)
(13,754)
(13,755)
Contingent consideration (Note 4)
(6,000)
(6,000)
Dividends
(22,917)
(22,917)
Balance at December 31, 2022
53,425
214
98,735
461,765
560,714
The accompanying notes are an integral part of these consolidated financial statements.
36
AAON, Inc.
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
and retired
(243)
(1)
(13,754)
(13,755)
Contingent consideration (Note 4)
(6,000)
(6,000)
Dividends
(22,917)
(22,917)
Balance at December 31, 2022
53,425
214
98,735
461,765
560,714
The accompanying notes are an integral part of these consolidated financial statements.
36
AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2022
2021
2020
Operating Activities
(in thousands)
Net income
100,376
58,758
79,009
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
35,106
30,343
25,634
Amortization of debt issuance costs
43
43
43
Amortization of right of use assets
324
73
Provision for credit losses on accounts receivable, net of adjustments
(72)
43
153
Provision for excess and obsolete inventories
2,740
629
1,108
Share-based compensation
13
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
income to net cash provided by operating activities:
Depreciation and amortization
35,106
30,343
25,634
Amortization of debt issuance costs
43
43
43
Amortization of right of use assets
324
73
Provision for credit losses on accounts receivable, net of adjustments
(72)
43
153
Provision for excess and obsolete inventories
2,740
629
1,108
Share-based compensation
13,700
11,812
11,342
Gain on disposition of assets and insurance recoveries
(12)
(21)
(6,478)
Foreign currency transaction loss (gain)
41
(1)
(12)
Interest income on note receivable
(22)
(24)
(24)
Deferred income taxes
(13,332)
3,669
13,027
Changes in assets and liabilities:
Accounts receivable
(56,306)
(9,737)
19,859
Income taxes
18,195
(1,136)
(3,815)
Inventories
(71,409)
(45,955)
(9,726)
Contract assets
(9,402)
1,886
Prepaid expenses and
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
)
(24)
(24)
Deferred income taxes
(13,332)
3,669
13,027
Changes in assets and liabilities:
Accounts receivable
(56,306)
(9,737)
19,859
Income taxes
18,195
(1,136)
(3,815)
Inventories
(71,409)
(45,955)
(9,726)
Contract assets
(9,402)
1,886
Prepaid expenses and other long-term assets
(2,367)
1,374
(2,364)
Accounts payable
11,574
10,899
(2,155)
Contract liabilities
13,882
(229)
Extended warranties
1,314
447
1,010
Accrued liabilities and other long-term liabilities
16,945
(1,690)
2,203
Net cash provided by operating activities
61,318
61,183
128,814
Investing Activities
Capital expenditures
(54,024)
(55,362)
(67,802)
Cash paid for building (Note 4)
(22,000)
Cash paid in business combination, net of cash acquired
(249)
(103,430)
Proceed
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
010
Accrued liabilities and other long-term liabilities
16,945
(1,690)
2,203
Net cash provided by operating activities
61,318
61,183
128,814
Investing Activities
Capital expenditures
(54,024)
(55,362)
(67,802)
Cash paid for building (Note 4)
(22,000)
Cash paid in business combination, net of cash acquired
(249)
(103,430)
Proceeds from sale of property, plant and equipment
12
19
60
Insurance proceeds
6,417
Principal payments from note receivable
48
54
52
Net cash used in investing activities
(76,213)
(158,719)
(61,273)
Financing Activities
Borrowings under revolving credit facility
225,758
40,000
Payments under revolving credit facility
(194,754)
Principal payments on financing lease
(115)
Stock options exercised
23,140
21,148
21,418
Repurchase of stock
(12,737)
(20,876)
(30,060)
Employee taxes paid by withholding shares
(1,018)
(1,590)
(1,169)
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
273)
Financing Activities
Borrowings under revolving credit facility
225,758
40,000
Payments under revolving credit facility
(194,754)
Principal payments on financing lease
(115)
Stock options exercised
23,140
21,148
21,418
Repurchase of stock
(12,737)
(20,876)
(30,060)
Employee taxes paid by withholding shares
(1,018)
(1,590)
(1,169)
Dividends paid to stockholders
(22,917)
(19,947)
(19,815)
Net cash provided by (used in) financing activities
17,357
18,735
(29,626)
Net increase (decrease) in cash, cash equivalents and restricted cash
2,462
(78,801)
37,915
Cash, cash equivalents and restricted cash, beginning of year
3,487
82,288
44,373
Cash, cash equivalents and restricted cash, end of year
5,949
3,487
82,288
The accompanying notes are an integral part of these consolidated financial statements.
37
AAON, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
cash equivalents and restricted cash
2,462
(78,801)
37,915
Cash, cash equivalents and restricted cash, beginning of year
3,487
82,288
44,373
Cash, cash equivalents and restricted cash, end of year
5,949
3,487
82,288
The accompanying notes are an integral part of these consolidated financial statements.
37
AAON, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022
1. Business Description
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., an Oregon corporation (collectively, the “Company”). The consolidated financial statements include our accounts and the accounts of our subsidiaries.
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
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
., a Texas corporation, and BasX, Inc., an Oregon corporation (collectively, the “Company”). The consolidated financial statements include our accounts and the accounts of our subsidiaries.
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.
Impact of COVID-19 Pandemic
The magnitude of the impact of the COVID-19 pandemic remains unpredictable and could unfavorably impact our business. However, the direct effects of the COVID-19 pandemic has had no significant impact on our planned cash outflows for raw materials, dividend payments, or capital expenditures.
Although future disruptions and costs are expected to be temporary, there is still significant uncertainty around the duration and overall impacts to our business operations. We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and their potential effect on our consolidated financial position, results of operations and cash flows.
Inflation and Labor Market
In late 2021 and throughout 2022, we have witnessed increases in
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
on our planned cash outflows for raw materials, dividend payments, or capital expenditures.
Although future disruptions and costs are expected to be temporary, there is still significant uncertainty around the duration and overall impacts to our business operations. We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and their potential effect on our consolidated financial position, results of operations and cash flows.
Inflation and Labor Market
In late 2021 and throughout 2022, we have witnessed increases in our 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 manage 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 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 2021, we awarded annual merit raises for an overall 5.0% increase to wages.
In July 2021, we increased starting wages for our production
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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 2021, we awarded annual merit raises for an overall 5.0% increase to wages.
In July 2021, we increased starting wages for our production workforce by 7.0%.
In October 2021, we implemented a cost of living increase of 3.5% in place for all employees
below our Senior Leadership Team ("SLT") which consists of officers and key members of management.
In March 2022, we awarded annual merit raises for an overall 3.0% increase to wages.
In October 2022, we implemented a cost of living increase of 3.5% in place for all employees
below the SLT level.
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 consolidated financial
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
, we awarded annual merit raises for an overall 3.0% increase to wages.
In October 2022, we implemented a cost of living increase of 3.5% in place for all employees
below the SLT level.
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 consolidated financial position, results of operations and cash flows.
38
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
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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.
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 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 are produced solely out of the AAON Oklahoma facility. Production of
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
As part of the normal course of business, management is continually monitoring 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 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 these units will be immediately reallocated to other product production, providing us additional manufacturing capacity with minimal costs. The workforce from the these production lines 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 7), within cost of sales on our consolidated statements of income, by approximately $1.2 million during the year ended December 31, 2022.
Change in Estimate
During the first quarter of 2022, a review of
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
these production lines 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 7), within cost of sales on our consolidated statements of income, by approximately $1.2 million during the year ended December 31, 2022.
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 facilities 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 year ended December 31, 2022.
We do not believe the impact of these events had a material adverse effect on our consolidated financial position, results of operations and cash flows.
2. Summary of Significant Accounting Policies
Principles of Consolidation
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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 year ended December 31, 2022.
We do not believe the impact of these events had a material adverse effect on our consolidated financial position, results of operations and cash flows.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
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.
On December 10, 2021
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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.
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. (Note 4). On December 29, 2021, BasX, LLC converted to a C-Corporation, BasX, Inc. ("BASX"), and is subject to income tax. We have included the results of BASX’s operations in our consolidated financial statements beginning December 11, 2021.
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Cash and Cash Equivalents
We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist of bank deposits and highly liquid, interest-bearing money market funds.
AAON, INC.’s cash and cash equivalents are held in a few financial
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
, Inc. ("BASX"), and is subject to income tax. We have included the results of BASX’s operations in our consolidated financial statements beginning December 11, 2021.
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Cash and Cash Equivalents
We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist of bank deposits and highly liquid, interest-bearing money market funds.
AAON, INC.’s cash and cash equivalents are held in a few financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.
Restricted Cash
Restricted cash held at December 31, 2022 and December 31, 2021 consists of bank deposits and highly liquid, interest-bearing money market funds held for the purpose of the Company's qualified New Markets Tax Credit program (Note 17) to benefit an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations.
AAON, INC.’s restricted cash is held in a financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
31, 2021 consists of bank deposits and highly liquid, interest-bearing money market funds held for the purpose of the Company's qualified New Markets Tax Credit program (Note 17) to benefit an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations.
AAON, INC.’s restricted cash is held in a financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.
Accounts and Note Receivable
Accounts and note receivable are stated at amounts due from customers, net of an allowance for credit losses. We generally do not require that our customers provide collateral; however, our billings and customer payment terms can vary based on product type as a way to manage collections risk. AAON, INC. determines its allowance for credit losses by considering a number of factors, including the credit risk of specific customers, the customer’s ability to pay current obligations, historical trends, economic and market conditions, and the age of the receivable. Accounts are considered past due when the balance has been outstanding for ninety days past negotiated credit terms. Past due accounts are generally written-off against the allowance for credit losses only after all collection attempts
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
vary based on product type as a way to manage collections risk. AAON, INC. determines its allowance for credit losses by considering a number of factors, including the credit risk of specific customers, the customer’s ability to pay current obligations, historical trends, economic and market conditions, and the age of the receivable. Accounts are considered past due when the balance has been outstanding for ninety days past negotiated credit terms. Past due accounts are generally written-off against the allowance for credit losses only after all collection attempts have been exhausted.
Concentration of Credit Risk
Our customers are concentrated primarily in the domestic commercial and industrial new construction and replacement markets. To date, our sales have been primarily to the domestic market, with foreign sales accounting for approximately 3.1%, 3.0%, and 2.0% of revenues for the years ended December 31, 2022, 2021, and 2020, respectively.
One customer, Texas AirSystems LLC, accounted for more than 10.0% of our sales during 2022, 2021, and 2020. No other customer accounted for more than 10.0% of our sales during 2022, 2021, and 2020. One customer, Texas
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
%, and 2.0% of revenues for the years ended December 31, 2022, 2021, and 2020, respectively.
One customer, Texas AirSystems LLC, accounted for more than 10.0% of our sales during 2022, 2021, and 2020. No other customer accounted for more than 10.0% of our sales during 2022, 2021, and 2020. One customer, Texas AirSystems LLC, accounted for more than 10.0% of our accounts receivable balance at December 31, 2022. No customers accounted for more than 10.0% of our accounts receivable balance at December 31, 2021.
Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost method. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. 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.
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Property, Plant and Equipment
Property, plant, and equipment, including significant improvements,
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
ories
Inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost method. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. 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.
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Property, Plant and Equipment
Property, plant, and equipment, including significant improvements, are recorded at cost, net of accumulated depreciation; except for property, plant, and equipment acquired in a business combination which is recorded at fair value. Repairs and maintenance and any gains or losses on disposition are included in operations.
Depreciation is computed using the straight-line method over the following estimated useful lives:
Buildings and leasehold improvements
3 - 40 years
Machinery and equipment
3 - 20 years
Furniture and fixtures
3 - 15 years
On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $500,000 deductible. We did not experience any significant structural damage or any operational interruption as a result of this weather event
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
over the following estimated useful lives:
Buildings and leasehold improvements
3 - 40 years
Machinery and equipment
3 - 20 years
Furniture and fixtures
3 - 15 years
On April 22, 2020, our plant and office facilities in Tulsa, Oklahoma experienced hail related weather damage and we filed a property insurance claim which carried a $500,000 deductible. We did not experience any significant structural damage or any operational interruption as a result of this weather event. In November 2020, we reached a final settlement with our insurance carrier, resulting in a net cumulative gain of $6.4 million, which is included in the consolidated statements of income. The received proceeds were used to make improvements to the current roof at our plant and office facilities in Tulsa, Oklahoma to extend the overall useful life.
In January 2023, we purchased additional real property and improvements for our AAON Coil Products operations in Longview, Texas for $3.6 million. This additional property consists of 64,000 square feet of warehouse space that will enable the continued growth of our AAON Coil Products operations.
Business Combinations
AAON, INC. applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
office facilities in Tulsa, Oklahoma to extend the overall useful life.
In January 2023, we purchased additional real property and improvements for our AAON Coil Products operations in Longview, Texas for $3.6 million. This additional property consists of 64,000 square feet of warehouse space that will enable the continued growth of our AAON Coil Products operations.
Business Combinations
AAON, INC. applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. AAON, INC. may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
Fair Value Financial
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. AAON, INC. may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
Fair Value Financial Instruments and 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
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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,
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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
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property, plant and equipment, intangible assets, contingent consideration, and goodwill acquired in a business combination.
The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability.
Definite-Lived Intangible Assets
Our definite-lived
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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 (Note
4). We amortize our definite-lived intangible assets on a straight-line basis over the estimated 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
30 years
Customer relationships
14 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. Indefinite-lived intangible assets consist of trademarks and trade names and are also subject
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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
30 years
Customer relationships
14 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. Indefinite-lived intangible assets consist of trademarks and trade names and are also subject to at least annual impairment testing. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.
To perform this assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
assessment, we first consider qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit and indefinite-lived intangible assets exceeds their carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit and indefinite-lived assets does not exceed their carrying amount, we calculate the fair value for the reporting unit and indefinite-lived assets and compare the amount to their carrying amount. If the fair value of a reporting unit and indefinite-lived asset exceeds their carrying amount, the reporting unit and indefinite-lived assets are not considered impaired. If the carrying amount of the reporting unit and indefinite-lived assets exceeds their fair value, the reporting unit and indefinite-lived assets are considered to be impaired and the balance is reduced by the difference between the fair value and carrying amount of the reporting unit and indefinite-lived assets.
We performed a qualitative assessment as of December 31, 2022 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
and carrying amount of the reporting unit and indefinite-lived assets.
We performed a qualitative assessment as of December 31, 2022 to determine whether it was more likely than not that the fair value of the reporting unit and indefinite-lived assets was greater than the carrying value of the reporting unit and indefinite-lived assets. Based on these qualitative assessments, we determined that the fair value of the reporting unit and indefinite-lived assets was more likely than not greater than the carrying value of the reporting unit and indefinite-lived assets.
Estimates and assumptions used to perform the impairment evaluation are inherently uncertain and can significantly affect the outcome of the analysis. The estimates and assumptions we use in the annual impairment assessment included market participant considerations and future forecasted operating results. Changes in operating results and other assumptions could materially affect these estimates. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
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The changes in the carrying amount of goodwill were as follows:
Years Ended December 31,
2022
2021
(in thousands)
Balance, beginning of period
85,727
3,229
Additions due to acquisitions (Note 4)
82,498
Decreases due to acquisition adjustments (Note 4)
(3,835)
Balance, end of period
81,
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
these estimates. A considerable amount of management judgment and assumptions are required in performing the impairment tests.
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The changes in the carrying amount of goodwill were as follows:
Years Ended December 31,
2022
2021
(in thousands)
Balance, beginning of period
85,727
3,229
Additions due to acquisitions (Note 4)
82,498
Decreases due to acquisition adjustments (Note 4)
(3,835)
Balance, end of period
81,892
85,727
Contingent Consideration
As part of a business combination, we agreed to issue shares of the Company's common stock based on certain milestones in accordance with the acquisition agreement. This contingent consideration is valued at fair value on the acquisition date and is included in additional paid-in capital on the consolidated balance sheets.
Impairment of Long-Lived Assets
We review long-lived assets for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to its estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the undiscounted cash flows are less
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
in additional paid-in capital on the consolidated balance sheets.
Impairment of Long-Lived Assets
We review long-lived assets for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to its estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value.
Research and Development
The costs associated with research and development for the purpose of developing and improving new products are expensed as incurred. For the years ended December 31, 2022, 2021, and 2020 research and development costs amounted to approximately $46.8 million, $16.6 million, and $17.4 million, respectively. The significant increase for the year ended December 31, 2022 was related to the inclusion of a full year of operations of BASX (Note
4), as well as our commitment to product performance and innovation.
Advertising
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ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
expensed as incurred. For the years ended December 31, 2022, 2021, and 2020 research and development costs amounted to approximately $46.8 million, $16.6 million, and $17.4 million, respectively. The significant increase for the year ended December 31, 2022 was related to the inclusion of a full year of operations of BASX (Note
4), as well as our commitment to product performance and innovation.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2022, 2021, and 2020 was approximately $2.4 million, $1.6 million, and $0.8 million, respectively.
Shipping and Handling
We incur shipping and handling costs in the distribution of products sold that are recorded in cost of sales. Shipping charges that are billed to the customer are recorded in revenues and as an expense in cost of sales. For the years ended December 31, 2022, 2021, and 2020 shipping and handling fees amounted to approximately $24.4 million, $14.4 million, and $14.3 million, respectively.
Income Taxes
Income taxes are accounted for
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
Handling
We incur shipping and handling costs in the distribution of products sold that are recorded in cost of sales. Shipping charges that are billed to the customer are recorded in revenues and as an expense in cost of sales. For the years ended December 31, 2022, 2021, and 2020 shipping and handling fees amounted to approximately $24.4 million, $14.4 million, and $14.3 million, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. AAON, INC. recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. Excess tax benefits and deficiencies are reported as an income tax benefit or expense on the statement of income and are treated as discrete items to the income tax provision in the reporting period in which they occur. We establish accruals for unrecognized tax positions when it is more likely than not that our tax return positions may not be fully sustained. AAON, INC. records a valuation allowance for deferred tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized.
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Share-Based Compensation
AAON, INC. recognizes expense for its share-based compensation based
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
statement of income and are treated as discrete items to the income tax provision in the reporting period in which they occur. We establish accruals for unrecognized tax positions when it is more likely than not that our tax return positions may not be fully sustained. AAON, INC. records a valuation allowance for deferred tax assets when, in the opinion of management, it is more likely than not that deferred tax assets will not be realized.
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Share-Based Compensation
AAON, INC. recognizes expense for its share-based compensation based on the fair value of the awards that are granted. AAON, INC.’s share-based compensation plans provide for the granting of stock options, restricted stock, and performance stock units ("PSUs").
In conjunction with the acquisition of BASX (Note 4), we awarded performance awards to key employees ("Key Employee Awards") of BASX.
The fair values of stock options are estimated at the date of grant using the Black-Scholes-Merton option valuation model.
The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, expected market performance, risk-free rate
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
employees ("Key Employee Awards") of BASX.
The fair values of stock options are estimated at the date of grant using the Black-Scholes-Merton option valuation model.
The fair value of the PSUs is estimated on the date of grant using the Monte Carlo Model. The use of the Black-Scholes-Merton option valuation model and the Monte Carlo Model requires the input of subjective assumptions such as: the expected volatility, the expected term of the grant, expected market performance, risk-free rate, and expected dividend yield for stock options. The fair va
lue of restricted stock awards and Key Employee Awards is based on the fair market value of AAON common stock on the respective grant dates.
The fair value of restricted stock awards is reduced for the present value of dividends. The Key Employee Awards do not accrue dividends.
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 vest over the shorter of directors' remaining elected term or one-third each year. Beginning March 2021, all new grants of stock options and restricted stock awards granted to
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
. The Key Employee Awards do not accrue dividends.
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 vest over the shorter of directors' remaining elected term or one-third each year. Beginning 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 Long Term Incentive Plans) or becomes retirement eligible during service period of the related share-based compensation award, the service period 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 share-based compensation 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 at the
cik:824142
ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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the related share-based compensation award, the service period 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 share-based compensation 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 at the end of their respective service period. 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.
The Key Employee Awards cliff vest on December 31, 2023. Share-based compensation expense is recognized on a straight-line basis over the service period of the Key Employee Awards when it is probable that the performance conditions will be satisfied. The Key Employee Awards are subject to several service and performance conditions, as defined by the Key Employee Award agreement, which
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ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur.
The Key Employee Awards cliff vest on December 31, 2023. Share-based compensation expense is recognized on a straight-line basis over the service period of the Key Employee Awards when it is probable that the performance conditions will be satisfied. The Key Employee Awards are subject to several service and performance conditions, as defined by the Key Employee Award agreement, which allows the holder to retain an amount of the awards as a result of certain termination conditions or change in common control. Forfeitures are accounted for as they occur.
Derivative Instruments
In the course of normal operations, the Company occasionally enters into contracts such as forward priced physical contracts for the purchase of raw materials that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. AAON, INC. does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes.
Revenue Recognition
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
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for the purchase of raw materials that qualify for and are designated as normal purchase or normal sale contracts. Such contracts are exempted from the fair value accounting requirements and are accounted for at the time product is purchased or sold under the related contract. AAON, INC. does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes.
Revenue Recognition
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. AAON, INC. 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,
44
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
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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,
44
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 out 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
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ticker:AAON
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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 out 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. AAON, INC. records a liability
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ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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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. AAON, INC. 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.
AAON, INC. 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 heating, ventilation, and air conditioning (“HVAC”) units and other related products and services to customers
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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 heating, ventilation, and air conditioning (“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 other related 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
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ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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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. AAON, INC. is considered the principal for the equipment we design and manufacture and records that revenue gross. AAON, INC. 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.
45
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
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ticker:AAON
name:AAON, INC.
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and manufacture and records that revenue gross. AAON, INC. 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.
45
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 was $39.1 million, $43.9 million, and $50.0 million for each of the years ended December 31, 2022, 2021, and 2020, respectively.
Insurance Reserves
Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and medical liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred.
Leases
New leases entered into by the Company are assessed at lease inception for proper lease classification. At December
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name:AAON, INC.
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’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and medical liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred.
Leases
New leases entered into by the Company are assessed at lease inception for proper lease classification. At December 31, 2022, all of our leases are classified as operating leases.
We have entered into various short-term operating leases with an initial term of twelve months or less. These leases are not recorded on our consolidated balance sheets as of December 31, 2022 and 2021, and the rent expense for these short-term leases is not significant.
As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment.
Expense related to these leases is recognized on straight-line basis
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name:AAON, INC.
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2021, and the rent expense for these short-term leases is not significant.
As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our incremental borrowing rate represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment.
Expense related to these leases is recognized on straight-line basis over the lease term. Certain of our leases contain escalating lease payments based on predefined increases. Most leases contain options to renew or terminate. Right-of-use assets and lease liabilities reflect only the options which the Company is reasonably certain to exercise.
AAON, INC.’s leases generally require us to pay for insurance, taxes, utilities, and other operating costs. These payments are not included in the right-of-use asset or lease liability and are expensed as incurred.
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
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ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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for insurance, taxes, utilities, and other operating costs. These payments are not included in the right-of-use asset or lease liability and are expensed as incurred.
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, business combinations, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates.
46
3. Revenue Recognition
The following tables show disaggregated net sales by reportable segment (Note 22) by major source,
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ticker:AAON
name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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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, business combinations, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates.
46
3. Revenue Recognition
The following tables show disaggregated net sales by reportable segment (Note 22) by major source, net of intercompany sales eliminations.
Year Ended December 31, 2022
AAON Oklahoma
AAON Coil Products
BASX1
Total
(in thousands)
Rooftop Units
579,363
579,363
Condensing Units
302
46,287
46,589
Air Handlers
47,442
14,434
61,876
Outdoor Mechanical Rooms
612
855
1,467
Cleanroom Systems
47,020
47,020
Data Center Cooling Solutions
53,522
53,522
Water-Source Heat Pumps
11,529
8,797
20,326
Part Sales
52,927
671
53,598
Other
19,112
3
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name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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46,287
46,589
Air Handlers
47,442
14,434
61,876
Outdoor Mechanical Rooms
612
855
1,467
Cleanroom Systems
47,020
47,020
Data Center Cooling Solutions
53,522
53,522
Water-Source Heat Pumps
11,529
8,797
20,326
Part Sales
52,927
671
53,598
Other
19,112
3,909
2,006
25,027
663,845
107,290
117,653
888,788
Year Ended December 31, 2021
AAON Oklahoma
AAON Coil Products
BASX1
Total
(in thousands)
Rooftop Units
398,461
398,461
Condensing Units
762
25,989
26,751
Air Handlers
26,589
95
26,684
Outdoor Mechanical Rooms
820
464
1,284
Cleanroom Systems
2,288
2,288
Data Center Cooling Solutions
1,688
1,688
Water-Source Heat Pumps
10,831
10,343
21,174
Part Sales
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ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
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YOU are a financial analyst. You are reading a report of a company.
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Rooftop Units
398,461
398,461
Condensing Units
762
25,989
26,751
Air Handlers
26,589
95
26,684
Outdoor Mechanical Rooms
820
464
1,284
Cleanroom Systems
2,288
2,288
Data Center Cooling Solutions
1,688
1,688
Water-Source Heat Pumps
10,831
10,343
21,174
Part Sales
41,127
41,128
Other
11,844
3,203
12
15,059
463,845
66,589
4,083
534,517
Year Ended December 31, 2020
AAON Oklahoma
AAON Coil Products
BASX1
Total
(in thousands)
Rooftop Units
400,946
400,946
Condensing Units
900
20,249
21,149
Air Handlers
23,931
23,931
Outdoor Mechanical Rooms
2,355
487
2,842
Water-Source Heat Pumps
10,663
8,390
19,053
Part Sales
32,561
32,561
Other
11,
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ticker:AAON
name:AAON, INC.
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Coil Products
BASX1
Total
(in thousands)
Rooftop Units
400,946
400,946
Condensing Units
900
20,249
21,149
Air Handlers
23,931
23,931
Outdoor Mechanical Rooms
2,355
487
2,842
Water-Source Heat Pumps
10,663
8,390
19,053
Part Sales
32,561
32,561
Other
11,532
2,537
14,069
458,957
55,594
514,551
1 BASX was acquired by the Company on December 10, 2021, as such, the only applicable periods presented for BASX is the year ended December 31, 2022 and December 11, 2021 through December 31, 2021.
Other sales include freight, extended warranties and miscellaneous revenue.
47
4. Business Combination
On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire of all of the issued and outstanding equity ownership of BasX, LLC, an Oregon limited liability company, doing business as BASX Solutions. We closed this transaction on
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YOU are a financial analyst. You are reading a report of a company.
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31, 2022 and December 11, 2021 through December 31, 2021.
Other sales include freight, extended warranties and miscellaneous revenue.
47
4. Business Combination
On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire of all of the issued and 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 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, LLC and $2.0 million payable to key employees of BasX, LLC 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
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name:AAON, INC.
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YOU are a financial analyst. You are reading a report of a company.
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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, LLC and $2.0 million payable to key employees of BasX, LLC 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 (Note 16). AAON, INC. funded the 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, LLC, to acquire the principal real property and improvements utilized by BASX for an additional $22.0 million, subject to customary closing conditions and adjustments. AAON, INC. closed this real estate transaction on May 31, 2022, which terminated the related lease (Note 5).
We incurred $4.4 million in transaction fees related to the acquisition which are included in selling, general, and administrative expenses on our consolidated statement of income
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Properties, LLC, an affiliate of BasX, LLC, to acquire the principal real property and improvements utilized by BASX for an additional $22.0 million, subject to customary closing conditions and adjustments. AAON, INC. closed this real estate transaction on May 31, 2022, which terminated the related lease (Note 5).
We incurred $4.4 million in transaction fees related to the acquisition which are included in selling, general, and administrative expenses on our consolidated statement of income for the year ended December 31, 2021. We have included the results of BASX’s operations in our consolidated financial statements beginning December 11, 2021.
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 as of December 31, 2022.
48
The following table presents the allocation of the consideration paid to the assets acquired and liabilities assumed in the acquisition described above, which was still preliminary at December 31
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" 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 as of December 31, 2022.
48
The following table presents the allocation of the consideration paid to the assets acquired and liabilities assumed in the acquisition 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 result of updates to our preliminary estimates and third party valuation models. The impact of such revisions on consolidated net income were not significant.
Final Allocation
Estimated Allocation as of December 31, 2021
Revisions
(in thousands)
Accounts receivable
13,699
13,699
Inventories
2,725
2,725
Contract assets
7,635
7,635
Prepaid expenses and other
341
341
Property, plant and equipment
15,611
15,611
Right of use assets
13,169
13,169
Intangible assets
68,413
70,329
(
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of December 31, 2021
Revisions
(in thousands)
Accounts receivable
13,699
13,699
Inventories
2,725
2,725
Contract assets
7,635
7,635
Prepaid expenses and other
341
341
Property, plant and equipment
15,611
15,611
Right of use assets
13,169
13,169
Intangible assets
68,413
70,329
(1,916)
Goodwill
78,663
82,498
(3,835)
Accounts payable
(9,388)
(9,388)
Accrued liabilities
(3,807)
(3,807)
Contract liabilities
(7,771)
(7,771)
Lease liabilities
(15,611)
(15,611)
Contingent Consideration - shares of AAON
(60,000)
(66,000)
6,000
Consideration paid
103,679
103,430
249
AAON, INC. recognized the following definite and indefinite-lived intangible assets as part of the acquisition:
Final Allocation
Estimated Allocation as of December 31, 2021
Revisions
(in thousands)
Definite-lived
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(7,771)
Lease liabilities
(15,611)
(15,611)
Contingent Consideration - shares of AAON
(60,000)
(66,000)
6,000
Consideration paid
103,679
103,430
249
AAON, INC. recognized the following definite and indefinite-lived intangible assets as part of the acquisition:
Final Allocation
Estimated Allocation as of December 31, 2021
Revisions
(in thousands)
Definite-lived intangible assets
Intellectual property
6,295
6,479
(184)
Customer relationships
47,547
48,684
(1,137)
53,842
55,163
(1,321)
Indefinite-lived intangible assets
Trademarks
14,571
15,166
(595)
Total intangible assets acquired
68,413
70,329
(1,916)
Goodwill is the excess of the consideration paid for 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 completion of the final allocation of consideration paid to the
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ticker:AAON
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filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
Trademarks
14,571
15,166
(595)
Total intangible assets acquired
68,413
70,329
(1,916)
Goodwill is the excess of the consideration paid for 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 completion of the final allocation of consideration paid to the assets acquired and liabilities acquired. 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 are achieved.
49
Pro Forma Results of Operations (unaudited)
The operations of BASX have been included in our consolidated statements of income since the closing date on December 10, 2021. The following unaudited pro forma consolidated results of operations for the years ended December 31, 2021 and 2020 are presented as if the combination had been made on January 1, 2020.
(unaudited)
Years ended December 31,
2021
2020
(in thousands, except per share data)
Revenues
611,158
562,563
Net income
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
in our consolidated statements of income since the closing date on December 10, 2021. The following unaudited pro forma consolidated results of operations for the years ended December 31, 2021 and 2020 are presented as if the combination had been made on January 1, 2020.
(unaudited)
Years ended December 31,
2021
2020
(in thousands, except per share data)
Revenues
611,158
562,563
Net income
63,491
80,507
Earnings per share:
Basic
1.21
1.54
Dilutive
1.18
1.52
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
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
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.
50
5. Leases
AAON, INC. has lease arrangements for certain administrative, manufacturing and warehousing facilities and equipment.
Currently, all leases are classified as operating leases.
December 31,
Balance Sheet Classification
2022
2021
(in thousands)
Right-of-use assets
Right of use assets
7,123
16,974
Current lease liability
Accrued liabilities
1,254
1,580
Noncurrent lease liability
Other long-term liabilities
5,993
15,467
Through the acquisition of BASX (Note 4), we acquired various leases for plant/office space and equipment, which
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
are classified as operating leases.
December 31,
Balance Sheet Classification
2022
2021
(in thousands)
Right-of-use assets
Right of use assets
7,123
16,974
Current lease liability
Accrued liabilities
1,254
1,580
Noncurrent lease liability
Other long-term liabilities
5,993
15,467
Through the acquisition of BASX (Note 4), we acquired various leases for plant/office space and equipment, which were classified as operating leases. Through May 2022, BASX's manufacturing and office facility in Redmond, Oregon was leased from a related party (Note 21). On May 31, 2022, we completed the real estate transaction discussed in Note 4 and the associated operating lease was terminated.
Since 2018, the Company has leased the manufacturing, engineering and office space used by our operations in Parkville, Missouri. In October 2022, the Parkville, Missouri lease was amended to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet. The amended lease will provide for 31,000 square feet of additional manufacturing and engineering space and for 4,000 square feet of additional office space.
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
the associated operating lease was terminated.
Since 2018, the Company has leased the manufacturing, engineering and office space used by our operations in Parkville, Missouri. In October 2022, the Parkville, Missouri lease was amended to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet. The amended lease will provide for 31,000 square feet of additional manufacturing and engineering space and for 4,000 square feet of additional office space. The amended lease extends the lease term through December 31, 2032.
In November 2022, the Company entered into a lease arrangement for additional storage facilities in Tulsa, Oklahoma to support our operations. The lease will add an additional 198,000 square feet to our operations. The lease term will expire October 31, 2025.
In June 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma to support our manufacturing operations. 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
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
operations. The lease term will expire October 31, 2025.
In June 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma to support our manufacturing operations. 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. We vacated the property and cancelled the lease at the end of 2022.
51
6. Accounts Receivable
Accounts receivable and the related allowance for credit losses are as follows:
December 31,
2022
2021
(in thousands)
Accounts receivable
127,635
71,329
Less: Allowance for credit losses
(477)
(549)
Total, net
127,158
70,780
Years Ended December 31,
2022
2021
2020
Allowance for credit losses:
(in thousands)
Balance, beginning of period
549
506
353
Provisions for expected credit losses, net of adjustments
359
43
153
Accounts receivable
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
(in thousands)
Accounts receivable
127,635
71,329
Less: Allowance for credit losses
(477)
(549)
Total, net
127,158
70,780
Years Ended December 31,
2022
2021
2020
Allowance for credit losses:
(in thousands)
Balance, beginning of period
549
506
353
Provisions for expected credit losses, net of adjustments
359
43
153
Accounts receivable written off, net of recoveries
(431)
Balance, end of period
477
549
506
7. Inventories
The components of inventories and the related changes in the allowance for excess and obsolete inventories are as follows:
December 31,
2022
2021
(in thousands)
Raw materials
194,159
124,480
Work in process
3,501
3,049
Finished goods
5,806
4,528
203,466
132,057
Less: Allowance for excess and obsolete inventories
(4,527)
(1,787)
Total, net
198,939
130,270
Years Ended December 31,
2022
2021
2020
Allow
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
2021
(in thousands)
Raw materials
194,159
124,480
Work in process
3,501
3,049
Finished goods
5,806
4,528
203,466
132,057
Less: Allowance for excess and obsolete inventories
(4,527)
(1,787)
Total, net
198,939
130,270
Years Ended December 31,
2022
2021
2020
Allowance for excess and obsolete inventories:
(in thousands)
Balance, beginning of period
1,787
3,261
2,644
Provisions for excess and obsolete inventories
2,852
629
1,108
Inventories written off
(112)
(2,103)
(491)
Balance, end of period
4,527
1,787
3,261
During the third quarter of 2022, we 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 (Note 1).
Some related components and parts cannot be used in other products or sold through our parts business. As a result, we increased our provision for excess
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
YOU are a financial analyst. You are reading a report of a company.
The report is about the company's financial status.
)
(2,103)
(491)
Balance, end of period
4,527
1,787
3,261
During the third quarter of 2022, we 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 (Note 1).
Some related components and parts cannot be used in other products or sold through our parts business. As a result, we increased our provision for excess and obsolete inventory, within cost of sales on our consolidated statements of income, by approximately $1.2 million during the year ended December 31, 2022.
52
8. Intangible Assets
Our intangible assets consist of the following:
December 31,
2022
2021
Definite-lived intangible assets
(in thousands)
Intellectual property
6,295
6,479
Customer relationships
47,547
48,684
Less: Accumulated amortization
(3,807)
(208)
Total, net
50,035
54,955
Indefinite-lived intangible assets
Trademarks
14,571
15,166
Total intangible assets, net
64,606
70
cik:824142
ticker:AAON
name:AAON, INC.
exchange:Nasdaq
filing_type:10-K
|
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