AAON(AAON) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, including balance sheets, income statements, statements of stockholders' equity, and cash flows, along with detailed explanatory notes Consolidated Balance Sheets (Unaudited) The consolidated balance sheets present the company's financial position as of September 30, 2023, and December 31, 2022, showing an increase in total assets and stockholders' equity Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Total current assets | $425,292 | $349,116 | | Property, plant & equipment, net | $356,830 | $304,745 | | Total assets | $944,543 | $813,903 | | Total current liabilities | $140,479 | $145,567 | | Total stockholders' equity | $682,484 | $560,714 | Consolidated Statements of Income (Unaudited) The consolidated statements of income reflect strong financial performance for the three and nine months ended September 30, 2023, with significant increases in net sales, gross profit, and net income compared to the prior year Consolidated Statements of Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $311,970 | $242,605 | $861,880 | $634,190 | | Gross profit | $116,109 | $65,591 | $287,281 | $159,031 | | Income from operations | $64,664 | $36,700 | $163,610 | $80,163 | | Net income | $48,078 | $27,473 | $130,574 | $61,478 | | Basic EPS | $0.59 | $0.34 | $1.61 | $0.77 | | Diluted EPS | $0.58 | $0.34 | $1.57 | $0.76 | Consolidated Statements of Stockholders' Equity (Unaudited) The consolidated statements of stockholders' equity detail the changes in equity components, including net income, stock option exercises, share-based compensation, stock repurchases, and dividends, reflecting the impact of a three-for-two stock split effective August 16, 2023 Change in Stockholders' Equity (in thousands) | Change in Stockholders' Equity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------------- | :-------------------------- | :-------------------------- | | Balances at December 31, 2022/2021 | $560,714 | $466,170 | | Net income | $130,574 | $61,478 | | Stock options exercised, restricted stock awards granted, and contingent shares issued | $25,251 | $10,990 | | Share-based compensation | $12,102 | $10,229 | | Stock repurchased and retired | $(26,211) | $(8,921) | | Dividends | $(19,946) | $(10,088) | | Balances at September 30, 2023/2022 | $682,484 | $523,858 | - A three-for-two stock split was effective August 16, 2023, and all share and per share information has been retroactively updated to reflect this change[7] Consolidated Statements of Cash Flows (Unaudited) The consolidated statements of cash flows show a significant increase in cash provided by operating activities and a rise in cash used in investing activities, while financing activities shifted from providing to using cash for the nine months ended September 30, 2023, compared to the prior year Cash Flow Category (in thousands) | Cash Flow Category (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $107,145 | $43,414 | | Net cash used in investing activities | $(82,732) | $(63,782) | | Net cash (used in) provided by financing activities | $(7,827) | $28,149 | | Net increase in cash, cash equivalents and restricted cash | $16,586 | $7,781 | | Cash, cash equivalents and restricted cash, end of period | $22,535 | $11,268 | Notes to the Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, significant estimates, segment information, and other financial and operational details 1. General This note outlines the company's basis of presentation, business operations, use of estimates, impact of inflation and labor market, changes in accounting estimates, product line decisions, fair value measurements, and accounting for intangible assets and goodwill - AAON, Inc. engineers, manufactures, markets, and sells premium air conditioning and heating equipment, including rooftop units, data center cooling solutions, and air handling units, through its wholly-owned subsidiaries AAON, Inc. (Oklahoma), AAON Coil Products, Inc. (Texas), and BasX, Inc. (Oregon)[10] - The company has experienced increases in raw material and component prices, managing these through product price increases. Supply chain challenges have been addressed through strong vendor relationships and expanding vendor lists[12] - To combat a tight labor market, the company implemented wage increases (3.0% in March 2022, 3.5% in October 2022, 3.9% in March 2023) and enhanced employee benefits, including changes to paid time off, short-term disability, life insurance, and parental/military leave[14] - A change in estimate in Q1 2022 increased the useful lives of certain sheet metal manufacturing equipment from 10-12 years to 15 years, decreasing depreciation expense by $1.8 million for the nine months ended September 30, 2022[15] - Management decided in Q3 2022 to discontinue production of small packaged geothermal/water-source heat pump units (WH/WV Series), with backlog completion in Q2 2023[16] Goodwill (in thousands) | Goodwill (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $81,892 | $85,727 | | Decreases due to business combination revisions | — | $(3,835) | | Balance, end of period | $81,892 | $81,892 | 2. Revenue Recognition This note details the company's revenue recognition policies, disaggregated net sales by segment and product type, and policies for sales allowances, customer incentives, product warranties, and representative fees Net Sales by Segment and Product (in thousands) - 3 Months Ended | Net Sales by Segment and Product (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | | AAON Oklahoma | | | | Rooftop units | $221,417 | $154,171 | | Part sales | $17,756 | $15,724 | | Total AAON Oklahoma | $246,454 | $179,169 | | AAON Coil Products | | | | Condensing units | $7,636 | $12,720 | | Air handlers | $9,862 | $14,380 | | Total AAON Coil Products | $25,769 | $30,504 | | BASX | | | | Cleanroom systems | $5,355 | $15,283 | | Data center cooling solutions | $25,726 | $14,884 | | Total BASX | $39,747 | $32,932 | | Total Net Sales | $311,970 | $242,605 | Net Sales by Segment and Product (in thousands) - 9 Months Ended | Net Sales by Segment and Product (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | | AAON Oklahoma | | | | Rooftop units | $597,508 | $414,493 | | Part sales | $47,623 | $39,797 | | Total AAON Oklahoma | $666,670 | $476,517 | | AAON Coil Products | | | | Condensing units | $34,243 | $33,645 | | Air handlers | $34,693 | $35,358 | | Total AAON Coil Products | $89,262 | $79,193 | | BASX | | | | Cleanroom systems | $35,063 | $31,568 | | Data center cooling solutions | $56,079 | $38,589 | | Total BASX | $105,948 | $78,480 | | Total Net Sales | $861,880 | $634,190 | - Revenue for highly customized products is recognized over time as progress is made, while revenue for part sales or standardized units is recognized at the time of shipment when control passes to the customer[28] - Historically seasonal sales (May-October peak) have become more constant throughout the year due to increased product demand and backlog[30] - Payments to independent manufacturer representatives for their fees and Third Party Products were $20.1 million (Q3 2023) and $46.4 million (YTD 2023), up from $10.8 million (Q3 2022) and $28.7 million (YTD 2022)[32] 3. Leases This note provides information on the company's operating lease arrangements for manufacturing, warehousing, and administrative facilities, including recent expansions and new lease agreements Lease Balances (in thousands) | Lease Balances (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | Right of use assets | $12,252 | $7,123 | | Lease liability, short-term | $1,858 | $1,254 | | Lease liability, long-term | $10,684 | $5,993 | - The Parkville, Missouri lease was amended in October 2022 to expand manufacturing and office space from 51,000 to 86,000 square feet, extending the term through December 31, 2032[34] - New lease agreements include 198,000 square feet in Tulsa, Oklahoma (November 2022, expires October 2025) and 72,000 square feet in Redmond, Oregon (July 2023, approximately five-year term)[35] 4. Accounts Receivable This note details accounts receivable balances and the allowance for credit losses, including changes in the allowance during the periods presented Accounts Receivable (in thousands) | Accounts Receivable (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Accounts receivable | $160,493 | $127,635 | | Less: Allowance for credit losses | $(385) | $(477) | | Total, net | $160,108 | $127,158 | Allowance for Credit Losses (in thousands) | Allowance for Credit Losses (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $306 | $563 | $477 | $549 | | Provisions for (recoveries of) expected credit losses, net of adjustments | $79 | $119 | $(92) | $300 | | Accounts receivable written off, net of recoveries | — | — | — | $(167) | | Balance, end of period | $385 | $682 | $385 | $682 | 5. Inventories This note describes inventory valuation methods and provides a breakdown of inventory components and changes in the allowance for excess and obsolete inventories Inventory Components (in thousands) | Inventory Components (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :----------- | :----------- | | Raw materials | $209,697 | $194,159 | | Work in process | $4,379 | $3,501 | | Finished goods | $5,219 | $5,806 | | Total, gross | $219,295 | $203,466 | | Less: Allowance for excess and obsolete inventories | $(4,788) | $(4,527) | | Total, net | $214,507 | $198,939 | Allowance for Excess and Obsolete Inventories (in thousands) | Allowance for Excess and Obsolete Inventories (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $5,281 | $1,871 | $4,527 | $1,787 | | Provision for (recoveries of) excess and obsolete inventories | $1,521 | $1,232 | $2,979 | $1,380 | | Inventories written off | $(2,014) | $(38) | $(2,718) | $(102) | | Balance, end of period | $4,788 | $3,065 | $4,788 | $3,065 | 6. Intangible assets This note presents the company's definite-lived and indefinite-lived intangible assets, their amortization policies, and amortization expense Intangible Assets (in thousands) | Intangible Assets (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------- | :----------- | :----------- | | Intellectual property | $6,295 | $6,295 | | Customer relationships | $47,547 | $47,547 | | Less: Accumulated amortization | $(6,512) | $(3,807) | | Total definite-lived, net | $47,330 | $50,035 | | Trademarks (indefinite-lived) | $14,571 | $14,571 | | Total intangible assets, net | $61,901 | $64,606 | Amortization Expense (in thousands) | Amortization Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Amortization expense | $902 | $902 | $2,705 | $2,698 | - The company anticipates amortization expense of $3.6 million for each of the years ending 2023 through 2027, excluding future acquisitions[41] 7. Supplemental Cash Flow Information This note provides supplemental disclosures for cash paid for interest and income taxes, and non-cash investing and financing activities Supplemental Disclosures (in thousands) | Supplemental Disclosures (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest paid | $1,187 | $974 | $3,814 | $1,507 | | Income taxes paid | $12,081 | $3,086 | $45,724 | $14,067 | | Non-cash capital expenditures | $(1,536) | $306 | $35 | $985 | 8. Warranties This note details the company's product warranty policies, including terms and the method for accruing estimated warranty costs based on historical trends and management's estimates Warranty Accrual (in thousands) | Warranty Accrual (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period | $16,900 | $14,381 | $15,682 | $13,769 | | Payments made | $(3,337) | $(2,196) | $(7,653) | $(5,094) | | Warranty expense | $4,248 | $3,046 | $9,782 | $6,556 | | Balance, end of period | $17,811 | $15,231 | $17,811 | $15,231 | 9. Accrued Liabilities and Other Long-Term Liabilities This note provides a detailed breakdown of accrued liabilities and other long-term liabilities, including warranty accruals, amounts due to representatives, payroll, and lease liabilities Accrued Liabilities (in thousands) | Accrued Liabilities (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Warranty | $17,811 | $15,682 | | Due to representatives | $15,888 | $15,545 | | Payroll | $18,105 | $11,901 | | Profit sharing | $7,349 | $5,451 | | Litigation settlement | $7,500 | — | | Accrued income taxes | $113 | $12,472 | | Employee vacation time | $10,131 | $6,329 | | Lease liability, short-term | $1,858 | $1,254 | | Total | $90,986 | $78,630 | Other Long-Term Liabilities (in thousands) | Other Long-Term Liabilities (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------------- | :----------- | :----------- | | Lease liability | $10,684 | $5,993 | | Extended warranties | $5,009 | $4,539 | | Total | $16,247 | $11,508 | 10. Revolving Credit Facility This note describes the company's revolving credit facility, including maximum borrowings, outstanding balances, interest rates, and compliance with financial covenants - The revolving credit facility provides for maximum borrowings of $200.0 million, with $78.4 million outstanding and $119.3 million available as of September 30, 2023[48] - The weighted average interest rate on borrowings outstanding was 6.5% for the three months and 6.3% for the nine months ended September 30, 2023, up from 3.5% and 2.5% respectively in 2022[48] - The company was in compliance with its financial covenants at September 30, 2023, with a leverage ratio of 0.33 to 1.0, well below the required maximum of 3 to 1[49] 11. Income Taxes This note presents the income tax provision, reconciliation of the federal statutory rate to the effective tax rate, and details on investment tax credits and carryforwards, including a significant one-time benefit Income Tax Provision (in thousands) | Income Tax Provision (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Current | $14,892 | $8,763 | $33,364 | $17,849 | | Deferred | $521 | $(436) | $(3,917) | $(563) | | Income tax provision | $15,413 | $8,327 | $29,447 | $17,286 | Effective Tax Rate Reconciliation | Effective Tax Rate Reconciliation | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Federal statutory rate | 21.0 % | 21.0 % | 21.0 % | 21.0 % | | State income taxes, net of Federal benefit | 3.4 % | 5.0 % | 4.0 % | 4.7 % | | Excess tax benefits related to share-based compensation | (0.8) % | (1.5) % | (3.9) % | (1.6) % | | Research and development credits | (0.2) % | (0.7) % | (0.9) % | (1.0) % | | Change in valuation allowance (Oklahoma Investment Credit) | — | — | (2.0) % | — | | Effective tax rate | 24.3 % | 23.3 % | 18.4 % | 21.9 % | - A one-time benefit of $3.1 million was recognized in the income tax provision for the nine months ended September 30, 2023, due to the reversal of a valuation allowance related to Oklahoma investment tax credit carryforwards, which total approximately $3.8 million[52] 12. Share-Based Compensation This note discusses the company's Long-Term Incentive Plans, including stock options, restricted stock, PSUs, and Key Employee Awards, along with their valuation assumptions, activity, and unrecognized compensation costs. All share and per share information has been updated to reflect a three-for-two stock split effective August 16, 2023 - A three-for-two stock split was effective August 16, 2023, and all share and per share information has been updated to reflect this change[54] Stock Option Activity | Stock Option Activity | Shares Outstanding at Dec 31, 2022 | Granted | Exercised | Forfeited or Expired | Shares Outstanding at Sep 30, 2023 | | :-------------------- | :--------------------------------- | :------ | :-------- | :------------------- | :--------------------------------- | | Stock Options | 4,560,520 | 326,506 | (864,524) | (106,291) | 3,916,211 | - Total pre-tax compensation cost related to unvested stock options not yet recognized is $10.7 million, expected to be recognized over approximately 1.3 years[59] - Unrecognized compensation cost related to unvested restricted stock awards is approximately $5.7 million, expected to be recognized over approximately 1.5 years[60] - Unrecognized compensation cost related to unvested PSUs is $5.0 million, expected to be recognized over approximately 1.7 years[63] - Unrecognized compensation cost related to unvested Key Employee Awards is $0.3 million, expected to be recognized over approximately 0.3 years[66] Share-Based Compensation Expense (in thousands) | Share-Based Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Options | $2,228 | $2,104 | $6,604 | $6,483 | | PSUs | $737 | $188 | $1,820 | $665 | | Restricted stock | $1,053 | $768 | $2,903 | $2,290 | | Key employee awards | $261 | $261 | $775 | $791 | | Total | $4,279 | $3,321 | $12,102 | $10,229 | Income Tax Benefit related to Share-Based Compensation (in thousands) | Income Tax Benefit related to Share-Based Compensation (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Options | $478 | $531 | $5,639 | $1,022 | | Restricted stock | $16 | $3 | $680 | $231 | | Total | $494 | $534 | $6,319 | $1,253 | 13. Employee Benefits This note details the company's employee benefit plans, including the 401(k) defined contribution plan, profit sharing bonus plans, and employee medical plan, highlighting contributions and expenses Employee Benefit Contributions/Expenses (in thousands) | Employee Benefit Contributions/Expenses (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Contributions to defined contribution plan | $4,497 | $4,189 | $13,164 | $10,768 | | Profit sharing bonus plan and employee incentive plan expense | $6,954 | $4,137 | $17,772 | $8,952 | | Medical premium payments | $4,455 | $3,429 | $11,255 | $7,418 | | Health saving account contributions | $1,460 | $968 | $3,718 | $2,871 | - The company matches 175% of employee contributions up to 6% of eligible compensation for the 401(k) plan[71] - Profit sharing bonus plans allocate approximately 10% of pre-tax profit from AAON Oklahoma and AAON Coil Products, and 5% of BASX's pre-tax profit, to eligible employees[73] 14. Earnings Per Share This note provides the calculation of basic and diluted earnings per share, including the weighted average shares outstanding and the effect of dilutive shares, adjusted for the three-for-two stock split Earnings Per Share Data | Earnings Per Share Data | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $48,078 | $27,473 | $130,574 | $61,478 | | Basic weighted average shares | 81,418,800 | 79,777,987 | 81,140,473 | 79,543,925 | | Effect of dilutive shares related to stock based compensation | 1,974,254 | 1,160,087 | 1,993,664 | 1,135,815 | | Effect of dilutive shares related to contingent consideration | — | — | 141,071 | 203,058 | | Diluted weighted average shares | 83,393,054 | 80,938,074 | 83,275,208 | 80,882,798 | | Basic EPS | $0.59 | $0.34 | $1.61 | $0.77 | | Diluted EPS | $0.58 | $0.34 | $1.57 | $0.76 | - All share and per share information has been updated to reflect the three-for-two stock split effective August 16, 2023[77] 15. Stockholders' Equity This note covers stock repurchase programs, cash dividend policies, the recent three-for-two stock split, and contingent shares issued as part of the BASX acquisition Stock Repurchase Activity (9 Months Ended Sep 30) | Stock Repurchase Activity (9 Months Ended Sep 30) | 2023 Shares | 2023 Total $ (in thousands) | 2023 $ per share | 2022 Shares | 2022 Total $ (in thousands) | 2022 $ per share | | :------------------------------------------------ | :---------- | :-------------------------- | :--------------- | :---------- | :-------------------------- | :--------------- | | Open market | 402,873 | $25,009 | $62.08 | 53,218 | $2,030 | $38.14 | | 401(k) | — | — | — | 155,904 | $5,913 | $37.93 | | Employees | 20,218 | $1,202 | $59.45 | 24,889 | $978 | $39.29 | | Total | 423,091 | $26,211 | $61.95 | 234,011 | $8,921 | $38.12 | - As of September 30, 2023, approximately $25.0 million remained under the current $50.0 million stock repurchase program approved on November 3, 2022[80] Cash Dividends per Share | Cash Dividends per Share | May 18, 2022 | Nov 8, 2022 | Mar 1, 2023 | May 18, 2023 | Aug 18, 2023 | | :----------------------- | :----------- | :---------- | :---------- | :----------- | :----------- | | Dividend per Share | $0.13 | $0.16 | $0.08 | $0.08 | $0.08 | | Annualized Dividend per Share | $0.26 | $0.32 | $0.32 | $0.32 | $0.32 | - Effective March 1, 2023, the company transitioned from semi-annual to quarterly cash dividends[85] - A three-for-two stock split was declared on July 7, 2023, paid as a stock dividend on August 16, 2023, with cash paid in lieu of fractional shares (approximately $0.5 million)[86] - For the BASX acquisition, 1.56 million shares of common stock were committed as contingent consideration. As of September 30, 2023, 0.58 million shares (2022 earn-out) and 0.73 million shares (2021 earn-out) have been issued[87] 16. New Markets Tax Credit This note describes the 2019 and 2023 New Markets Tax Credit (NMTC) transactions, which provide low-interest financing and potential debt forgiveness for manufacturing expansion, and the company's role as primary beneficiary of related variable interest entities (VIEs) - The 2019 NMTC transaction provided a $23.0 million allocation, securing low-interest financing and potential debt forgiveness for the Longview, Texas manufacturing expansion. The company provided a $15.9 million loan receivable and received a $22.5 million loan to a subsidiary[88] - The 2023 NMTC transaction also provided a $23.0 million allocation for the Longview, Texas expansion. The company provided a $16.7 million loan receivable and received a $23.8 million loan to a subsidiary, with net proceeds included in restricted cash for the project[90] - Both NMTC transactions include a put/call feature exercisable at the end of a seven-year compliance period, which could trigger debt forgiveness. The company is the primary beneficiary of the related VIEs[89][90] 17. Commitments and Contingencies This note discusses the settlement of the Havtech litigation for $7.5 million and other routine claims and contractual obligations, including an asset purchase agreement - The Havtech litigation, challenging the termination of a sales representative relationship, was settled for $7.5 million on September 28, 2023, and included in accrued liabilities and SG&A expenses[91] - The company entered a $6.5 million purchase agreement to acquire assets for designing and manufacturing fan wheels. As of September 30, 2023, $3.5 million has been paid, with the remaining $3.0 million paid on October 30, 2023[92] 18. Related Parties This note summarizes transactions and balances with related parties, including sales to and payments to affiliates, and amounts due from and to affiliates - Related party transactions include sales of units to an entity owned by the CEO/President's immediate family, purchases of supplies from entities controlled by board members, and payments to a board member for consulting[93] Related Party Transactions (in thousands) | Related Party Transactions (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Sales to affiliates | $1,047 | $450 | $4,811 | $3,529 | | Payments to affiliates | $90 | $30 | $872 | $1,033 | Related Party Balances (in thousands) | Related Party Balances (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :----------- | :----------- | | Due from affiliates | $190 | $432 | | Due to affiliates | $232 | — | 19. Segments This note defines the company's three reportable segments (AAON Oklahoma, AAON Coil Products, BASX) and provides financial data for each, including net sales, gross profit, and long-lived assets, which are evaluated by the CEO - The company operates through three reportable segments: AAON Oklahoma (standard, semi-custom, and custom HVAC systems, controls, retail parts), AAON Coil Products (standard, semi-custom, and custom HVAC systems, heating/cooling coils), and BASX (custom engineered air handling systems, data center cooling, cleanroom HVAC)[96] Segment Financial Data (in thousands) | Segment Financial Data (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Sales | | | | | | AAON Oklahoma | $246,454 | $179,169 | $666,670 | $476,517 | | AAON Coil Products | $25,769 | $30,504 | $89,262 | $79,193 | | BASX | $39,747 | $32,932 | $105,948 | $78,480 | | Total Net Sales | $311,970 | | $242,605 | | $861,880 | $634,190 | | Gross Profit | | | | | | AAON Oklahoma | $94,174 | $45,643 | $231,403 | $111,216 | | AAON Coil Products | $8,307 | $10,564 | $22,948 | $26,344 | | BASX | $13,628 | $9,384 | $32,930 | $21,471 | | Total Gross Profit | $116,109 | $65,591 | $287,281 | $159,031 | Segment Assets (in thousands) | Segment Assets (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | Long-lived assets | | | | AAON Oklahoma | $251,298 | $213,731 | | AAON Coil Products | $77,434 | $68,013 | | BASX | $45,805 | $35,578 | | Total long-lived assets | $374,537 | $317,322 | | Intangible assets and goodwill | | | | AAON Oklahoma | $3,229 | $3,229 | | BASX | $140,564 | $143,269 | | Total intangible assets and goodwill | $143,793 | $146,498 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the company's financial condition, operational results, liquidity, capital resources, and key factors influencing performance Overview This section provides a general overview of the company's business, products, markets, and economic factors affecting its operations, including cyclicality, foreign sales, and its go-to-market strategy through independent representatives - AAON engineers, manufactures, markets, and sells premium air conditioning and heating equipment, including rooftop units, data center cooling solutions, and cleanroom systems, to various commercial industries across the U.S. and Canada[101] - Foreign sales were approximately $29.3 million for the nine months ended September 30, 2023, compared to $18.0 million for the same period in 2022[101] - The business is affected by economic factors and cyclical new construction and replacement markets. The company utilizes a network of independent manufacturers' Representatives for sales, which is considered a more effective strategy for increasing market share[101][103] - Raw material costs (copper, galvanized steel, stainless steel, aluminum) fluctuate, with price increases implemented in 2022 and 2023 to offset inflationary headwinds[103] Backlog This section presents historical backlog levels and discusses the impact of increased production capacity and operational efficiencies on reducing backlog and improving lead times Backlog (in thousands) | Backlog (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :--------------------- | :----------- | :----------- | :----------- | | Backlog | $490,591 | $548,022 | $514,735 | - Backlog decreased at September 30, 2023, compared to December 31, 2022, despite strong bookings. Investments in facilities and workforce have significantly improved capacity and operational efficiencies, leading to record production rates and improved lead times[104] Results of Operations This section highlights key financial performance metrics for the three and nine months ended September 30, 2023, including significant sales growth, gross profit margin improvement, and share repurchases, with detailed analysis by segment and expense category Metric (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Sales | $311,970 | $242,605 | $861,880 | $634,190 | | Cost of Sales | $195,861 | $177,014 | $574,599 | $475,159 | | Gross Profit | $116,109 | $65,591 | $287,281 | $159,031 | | Selling, general and administrative expenses | $51,470 | $28,891 | $123,684 | $78,880 | | Income from operations | $64,664 | $36,700 | $163,610 | $80,163 | - Sales for the three and nine months ended September 30, 2023, grew 28.6% and 35.9% respectively, driven by record production rates and realized price increases[107] - Gross profit margin for Q3 2023 increased by 1,020 basis points to 37.2% from 27.0% in Q3 2022, due to increased organic volumes, operational efficiencies, and better overhead absorption[107] - The company completed the repurchase of $25.0 million of shares under its current share repurchase authorization[107] Segment Operating Results for Three Months Ended September 30, 2023 and Three Months Ended September 30, 2022 This section analyzes net sales and gross profit performance for each segment during the third quarter, noting the impact of price increases, organic volume growth, and operational efficiencies Segment Performance (in thousands) | Segment Performance (in thousands) | Net Sales (Q3 2023) | % of Sales (Q3 2023) | Net Sales (Q3 2022) | % of Sales (Q3 2022) | $ Change | % Change | | :--------------------------------- | :------------------ | :------------------- | :------------------ | :------------------- | :------- | :------- | | AAON Oklahoma | $246,454 | 79.0 % | $179,169 | 73.9 % | $67,285 | 37.6 % | | AAON Coil Products | $25,769 | 8.3 % | $30,504 | 12.6 % | $(4,735) | (15.5)% | | BASX | $39,747 | 12.7 % | $32,932 | 13.6 % | $6,815 | 20.7 % | | Total Net Sales | $311,970 | | $242,605 | | $69,365 | 28.6 % | | Gross Profit | | | | | | | | AAON Oklahoma | $94,174 | 38.2 % | $45,643 | 25.5 % | $48,531 | 106.3 % | | AAON Coil Products | $8,307 | 32.2 % | $10,564 | 34.6 % | $(2,257) | (21.4)% | | BASX | $13,628 | 34.3 % | $9,384 | 28.5 % | $4,244 | 45.2 % | | Total Gross Profit | $116,109 | 37.2 % | $65,591 | 27.0 % | $50,518 | 77.0 % | - Total net sales increased by $69.4 million (28.6%), with 16.7% from price increases and 11.9% from organic volume growth[109] - AAON Coil Products experienced sales decreases due to a smaller backlog and inefficiencies from implementing a new BASX production line[109] - BASX benefited from larger jobs and higher production rates without increasing personnel, contributing to a 45.2% increase in gross profit[109] Raw Material Costs (Three-month average) This section provides a comparison of average raw material costs per pound for key materials for the three months ended September 30, 2023, versus 2022 Raw Material Costs (3-month average per pound) | Raw Material Costs (3-month average per pound) | Sep 30, 2023 | Sep 30, 2022 | % Change | | :--------------------------------------------- | :----------- | :----------- | :------- | | Copper | $5.45 | $5.83 | (6.5)% | | Galvanized steel | $0.59 | $0.82 | (28.0)% | | Stainless steel | $3.31 | $2.94 | 12.6 % | | Aluminum | $2.45 | $2.55 | (3.9)% | Selling, General and Administrative Expenses (Three-month) This section details the changes in SG&A expenses for the three months ended September 30, 2023, highlighting increases in profit sharing, depreciation, professional fees (due to litigation settlement), and other expenses SG&A Expenses (in thousands) | SG&A Expenses (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | % of Sales (2023) | % of Sales (2022) | | :----------------------------- | :-------------------------- | :-------------------------- | :---------------- | :---------------- | | Warranty | $4,248 | $3,046 | 1.4 % | 1.3 % | | Profit sharing | $6,954 | $3,744 | 2.2 % | 1.5 % | | Salaries & benefits | $13,106 | $11,644 | 4.2 % | 4.8 % | | Stock compensation | $2,476 | $1,537 | 0.8 % | 0.6 % | | Depreciation & amortization | $3,943 | $2,015 | 1.3 % | 0.8 % | | Professional fees | $9,914 | $1,304 | 3.2 % | 0.5 % | | Other | $8,554 | $4,092 | 2.7 % | 1.7 % | | Total SG&A | $51,470 | $28,891 | 16.5 % | 11.9 % | - Total SG&A expenses increased by $22.6 million, with profit sharing up 85.7% due to increased operating results. Professional fees increased by $8.6 million due to the litigation settlement (Note 17). Other expenses rose by $4.5 million (109.0%) primarily from increased travel and consulting[113] Income Taxes (Three-month) This section discusses the income tax provision and effective tax rate for the three months ended September 30, 2023, noting factors influencing the tax rate Income Tax Data (in thousands) | Income Tax Data (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | | :----------------------------- | :-------------------------- | :-------------------------- | | Income tax provision | $15,413 | $8,327 | | Effective Tax Rate | 24.3 % | 23.3 % | - The estimated annual 2023 effective tax rate, excluding discrete events, is approximately 24.1%. The tax rate increased due to lower federal research and development tax credit, offset by higher estimated income for Oklahoma and increased realization of investment credit[114][115] Segment Operating Results for Nine Months Ended September 30, 2023 and Nine Months Ended September 30, 2022 This section analyzes net sales and gross profit performance for each segment for the nine months ended September 30, 2023, highlighting overall sales growth, margin improvement, and specific segment performance Segment Performance (in thousands) | Segment Performance (in thousands) | Net Sales (YTD 2023) | % of Sales (YTD 2023) | Net Sales (YTD 2022) | % of Sales (YTD 2022) | $ Change | % Change | | :--------------------------------- | :------------------- | :-------------------- | :------------------- | :-------------------- | :------- | :------- | | AAON Oklahoma | $666,670 | 77.4 % | $476,517 | 75.1 % | $190,153 | 39.9 % | | AAON Coil Products | $89,262 | 10.4 % | $79,193 | 12.5 % | $10,069 | 12.7 % | | BASX | $105,948 | 12.3 % | $78,480 | 12.4 % | $27,468 | 35.0 % | | Total Net Sales | $861,880 | | $634,190 | | $227,690 | 35.9 % | | Gross Profit | | | | | | | | AAON Oklahoma | $231,403 | 34.7 % | $111,216 | 23.3 % | $120,187 | 108.1 % | | AAON Coil Products | $22,948 | 25.7 % | $26,344 | 33.3 % | $(3,396) | (12.9)% | | BASX | $32,930 | 31.1 % | $21,471 | 27.4 % | $11,459 | 53.4 % | | Total Gross Profit | $287,281 | 33.3 % | $159,031 | 25.1 % | $128,250 | 80.6 % | - Total net sales increased by $227.7 million (35.9%), with 19.3% from price increases and 16.6% from organic volume growth[117] - Gross profit margin increased to 33.3% (YTD 2023) from 25.1% (YTD 2022), primarily due to realized price increases counteracting material and labor costs, and favorable labor/overhead efficiencies from increased unit production[117] - AAON Coil Products' gross profit margin decreased to 25.7% due to less optimal overhead absorption and slower-than-anticipated start-up of BASX unit production[117] Raw Material Costs (Nine-month average) This section provides a comparison of average raw material costs per pound for key materials for the nine months ended September 30, 2023, versus 2022 Raw Material Costs (9-month average per pound) | Raw Material Costs (9-month average per pound) | Sep 30, 2023 | Sep 30, 2022 | % Change | | :--------------------------------------------- | :----------- | :----------- | :------- | | Copper | $5.68 | $5.61 | 1.2 % | | Galvanized steel | $0.68 | $0.97 | (29.9)% | | Stainless steel | $3.33 | $3.17 | 5.0 % | | Aluminum | $2.44 | $2.09 | 16.7 % | Selling, General and Administrative Expenses (Nine-month) This section details the changes in SG&A expenses for the nine months ended September 30, 2023, noting significant increases in profit sharing, professional fees (litigation settlement), and other expenses (travel, NMTC closing costs) SG&A Expenses (in thousands) | SG&A Expenses (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | % of Sales (2023) | % of Sales (2022) | | :----------------------------- | :-------------------------- | :-------------------------- | :---------------- | :---------------- | | Warranty | $9,782 | $6,556 | 1.1 % | 1.0 % | | Profit sharing | $17,772 | $8,559 | 2.1 % | 1.3 % | | Salaries & benefits | $39,229 | $31,419 | 4.6 % | 5.0 % | | Stock compensation | $6,825 | $5,220 | 0.8 % | 0.8 % | | Depreciation & amortization | $9,812 | $5,768 | 1.1 % | 0.9 % | | Professional fees | $11,895 | $3,686 | 1.4 % | 0.6 % | | Other | $21,250 | $12,632 | 2.5 % | 2.0 % | | Total SG&A | $123,684 | $78,880 | 14.4 % | 12.4 % | - Overall SG&A expenses increased by $44.8 million. Profit sharing increased by $9.2 million (107.6%) due to improved operating results. Professional fees rose by $8.2 million due to the litigation settlement (Note 17). Other expenses increased by $8.6 million (68.2%) mainly from increased travel and closing costs related to the 2023 New Market Tax Credit (Note 16)[121] Income Taxes (Nine-month) This section discusses the income tax provision and effective tax rate for the nine months ended September 30, 2023, highlighting the impact of valuation allowance reversal and excess tax benefits from share-based compensation Income Tax Data (in thousands) | Income Tax Data (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------- | :-------------------------- | :-------------------------- | | Income tax provision | $29,447 | $17,286 | | Effective Tax Rate | 18.4 % | 21.9 % | - The decrease in the effective tax rate was primarily due to a $3.1 million benefit from the reversal of a valuation allowance related to Oklahoma's manufacturing property investment program, allowing the company to utilize existing credit carryforwards[123] - An excess tax benefit of $6.3 million was recorded for the nine months ended September 30, 2023, compared to $1.3 million in the prior year, mainly due to the timing of stock option exercises at high stock prices[123] Liquidity and Capital Resources This section discusses the company's liquidity position, working capital management, revolving credit facility, New Markets Tax Credit transactions, stock repurchase programs, and dividend policy, affirming its ability to meet future financial obligations - Working capital and capital expenditure requirements are generally met through net cash from operations and the revolving bank line of credit. Unrestricted cash decreased by $5.2 million, while restricted cash increased by $21.8 million due to the 2023 New Markets Tax Credit[124] - The revolving credit facility has a maximum borrowing capacity of $200.0 million, with $78.4 million outstanding and $119.3 million available as of September 30, 2023. The company is in compliance with its leverage ratio covenant (0.33 to 1.0)[125] - The 2019 and 2023 New Markets Tax Credit programs provided $23.0 million allocations each, securing low-interest financing and potential debt forgiveness for the Longview, Texas manufacturing expansion[126][127] - The Board approved a $50.0 million stock repurchase plan on November 3, 2022, with approximately $25.0 million remaining as of September 30, 2023[128][129] - The company transitioned from semi-annual to quarterly cash dividends, with recent dividends of $0.08 per share[133][134] - Management believes current cash, projected cash flows, the revolving credit facility, and access to capital markets will satisfy working capital, capital expenditures, and other liquidity requirements for 2023 and the foreseeable future[134] Statement of Cash Flows This section provides a detailed analysis of cash flows from operating, investing, and financing activities for the nine months ended September 30, 2023, compared to 2022, highlighting the drivers of changes in cash Cash Flow Category (in thousands) | Cash Flow Category (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $107,145 | $43,414 | | Net cash used in investing activities | $(82,732) | $(63,782) | | Net cash (used in) provided by financing activities | $(7,827) | $28,149 | Cash Flows Provided by Operating Activities This section explains the drivers of cash provided by operating activities, including working capital management, inventory purchases, customer prepayments, employee bonuses, and income tax payable - Net cash provided by operating activities increased to $107.1 million (YTD 2023) from $43.4 million (YTD 2022)[137] - The increase was driven by working capital management, strategic inventory purchases, increased customer prepayments, and higher employee bonuses, partially offset by increased current income tax payable due to R&D capitalization changes[138][139] - The increase in accrued liabilities and other long-term liabilities is partly due to the litigation settlement accrued at September 30, 2023[139] Cash Flows Used in Investing Activities This section details the capital expenditures for the nine months ended September 30, 2023, focusing on investments in production capabilities and expansion projects - Net cash used in investing activities was $(82.7) million (YTD 2023), up from $(63.8) million (YTD 2022)[137] - Capital expenditures for the nine months ended September 30, 2023, totaled $82.9 million, primarily for additional sheet metal and other machinery, production/warehouse space in Longview, office space and land in Tulsa, and a partial interest in an airplane[140] - The capital expenditure program for 2023 is estimated to be approximately $100.0 million[140] Cash Flows Provided by Financing Activities This section explains the factors influencing cash flows from financing activities, including revolving credit, stock options, repurchases, and dividends - Net cash used in financing activities was $(7.8) million (YTD 2023), a shift from $28.1 million provided in YTD 2022[137] - Changes were primarily related to borrowings under the revolving credit facility for working capital and capital expenditures, offset by repayments. Stock option exercises increased due to a higher stock price[141] - The company repurchased approximately 402,873 shares for $25.0 million under its current stock repurchase program and transitioned to quarterly cash dividends[141] Commitments and Contractual Obligations This section discusses the company's contractual obligations, including purchase agreements for raw materials and a specific asset purchase - As of September 30, 2023, the company had no material contractual purchase obligations, except for a $6.5 million purchase agreement for assets to design and manufacture fan wheels. $3.5 million had been paid, with the remaining $3.0 million paid on October 30, 2023[142] Critical Accounting Policies This section states that there have been no material changes in the company's critical accounting policies during the nine months ended September 30, 2023 - There have been no material changes in the Company's critical accounting policies during the nine months ended September 30, 2023[143] Recent Accounting Pronouncements This section refers to Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements - Refer to Note 1 of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements[144] Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements, outlining various risks and uncertainties that could cause actual results to differ materially from projections, and clarifies that the company does not undertake to update these statements - The report contains forward-looking statements that involve risks and uncertainties, and actual outcomes may differ materially from forecasts[146] - Important factors that could cause differences include market conditions, raw material prices, natural events, inflation, supply chain disruptions, labor market tightening, litigation, cybersecurity, and integration of acquired businesses[146] - Readers are cautioned not to place undue reliance on these statements, and the company undertakes no obligation to update them, except as required by federal securities laws[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section details the company's exposure to market risks, specifically commodity price fluctuations and interest rate changes, and its strategies for managing these risks Commodity Price Risk This section discusses the company's exposure to volatility in commodity prices used in its products and its strategy to manage this risk through cancellable and non-cancellable contracts with major suppliers - The company is exposed to volatility in the prices of commodities (e.g., steel, copper, aluminum) used in its products. This exposure is managed through cancellable and non-cancellable contracts with major suppliers for periods of six to 18 months[147] Interest Rate Risk This section addresses the company's exposure to changes in interest rates related to its outstanding debt and quantifies the potential impact on income before taxes - As of September 30, 2023, the company had an outstanding debt balance of $78.4 million[148] - For each one percentage point increase in the interest rate applicable to outstanding debt, the company's annual income before taxes would decrease by approximately $0.8 million[148] Item 4. Controls and Procedures. This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting (a) Evaluation of Disclosure Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[149] (c) Changes in Internal Control over Financial Reporting There have been no material changes in internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - There have been no material changes in internal control over financial reporting during the last fiscal quarter[149] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, security holder votes, other information, and exhibits Item 1. Legal Proceedings. This section refers to Note 17 of the Notes to the Consolidated Financial Statements for information on legal proceedings - Refer to Note 17 of the Notes to the Consolidated Financial Statements for details on legal proceedings[150] Item 1A. Risk Factors. This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors included in the 2022 Annual Report on Form 10-K[151] Item 2. Unregistered Sales of Equity and Securities and Use of Proceeds. This section provides details on stock repurchases, including open market, 401(k), and employee repurchases, and the issuance of contingent shares related to the BASX acquisition - From inception through September 30, 2023, the company repurchased approximately 6.9 million shares for $106.6 million under open market programs, 3.1 million shares for $24.6 million from employees, and 12.5 million shares for $171.8 million through a discontinued 401(k) arrangement[152][153] - A new $50.0 million stock repurchase plan was approved on November 3, 2022, with the expiration date at the Board's discretion[152] - For the BASX acquisition, 1.56 million shares were committed as contingent consideration. As of September 30, 2023, 0.58 million shares (2022 earn-out) and 0.73 million shares (2021 earn-out) have been issued[155][156] Stock Repurchases This section details the company's stock repurchase activities, including open market, 401(k), and employee repurchases, and the current repurchase program Repurchases (Q3 2023) | Repurchases (Q3 2023) | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------- | :------------------------------- | :--------------------------- | | July 2023 | 177 | $67.30 | | August 2023 | 403,187 | $62.07 | | September 2023 | 258 | $61.49 | | Total | 403,622 | $61.95 | Contingent Shares Issued in BASX Acquisition This section explains the contingent consideration in the BASX acquisition, payable in common stock based on earn-out milestones - The December 2021 acquisition of BASX included a commitment of $78.0 million in contingent consideration, payable in approximately 1.56 million shares of common stock, contingent on BASX meeting post-closing earn-out milestones for 2021, 2022, and 2023[155][156] - As of September 30, 2023, 0.58 million shares and 0.73 million shares related to the 2022 and 2021 earn-out milestones, respectively, have been issued to the former owners of BASX[156] Item 3. Defaults Upon Senior Securities. This section states that there are no defaults upon senior securities - There are no defaults upon senior securities[157] Item 4. Mine Safety Disclosures. This section states that the item regarding mine safety disclosures is not applicable to the company - This item is not applicable[157] Item 4A. Submission of Matters to a Vote of Security Holders. This section states that there were no matters submitted to a vote of security holders during the period - No matters were submitted to a vote of security holders[157] Item 5. Other Information. This section provides information on Rule 10b5-1 trading arrangements for directors and officers Rule 10b5-1 Trading Arrangements | Rule 10b5-1 Trading Arrangements | Date of Adoption | Duration of Arrangement | Aggregate Number of Securities to be Purchased or Sold | | :------------------------------- | :--------------- | :---------------------- | :----------------------------------------------------- | | Stephen E. Wakefield (VP and COO) | Nov 23, 2022 | Terminated May 17, 2023 | 95,788 | | Stephen E. Wakefield (VP and COO) | Sep 13, 2023 | Expires Aug 30, 2024 | 181,000 | Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q, including certifications, bylaws, and interactive data files - Exhibits include Amended and Restated Bylaws, CEO and CFO certifications (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350), and Interactive Data Files (iXBRL) for financial statements and notes[161] SIGNATURES This section contains the signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - The report was signed by Gary D. Fields, Chief Executive Officer, and Rebecca A. Thompson, Chief Financial Officer, on November 06, 2023[162]