UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number:  0-18953

AAON, INC.

(Exact name of registrant as specified in its charter) 

	Nevada		87-0448736
	(State or other jurisdiction		(IRS Employer
	of incorporation or organization)		Identification No.)
	2425 South Yukon Ave.,	Tulsa,	Oklahoma	74107
(Address of principal executive offices) (Zip Code)

(918) 583-2266

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☑                 No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑                  No ☐  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "small reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐                      No ☑

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	AAON	NASDAQ

As of August 4, 2020, registrant had outstanding a total of 52,261,676 shares of its $.004 par value Common Stock.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
	June 30, 2020		December 31, 2019
Assets	(in thousands, except share and per share data)
Current assets:
Cash and cash equivalents	$	61,284	$	26,797
Restricted cash	9,561		17,576
Accounts receivable, net	56,394		67,399
Income tax receivable	5,154		772
Note receivable	28		29
Inventories, net	85,411		73,601
Prepaid expenses and other	1,943		1,375
Total current assets	219,775		187,549
Property, plant and equipment:
Land	3,804		3,274
Buildings	112,735		101,113
Machinery and equipment	260,548		236,087
Furniture and fixtures	17,926		16,862
Total property, plant and equipment	395,013		357,336
Less:  Accumulated depreciation	190,585		179,242
Property, plant and equipment, net	204,428		178,094
Intangible assets, net	155		272
Goodwill	3,229		3,229
Right of use assets	1,665		1,683
Note receivable	555		597
Total assets	$	429,807	$	371,424
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility	$	—	$	—
Accounts payable	19,698		11,759
Dividends payable	9,930		—
Accrued liabilities	46,992		44,269
Total current liabilities	76,620		56,028
Deferred tax liabilities	20,358		15,297
Other long-term liabilities	3,794		3,639
New market tax credit obligation (a)	6,340		6,320
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued	—		—
Common stock, $.004 par value, 100,000,000 shares authorized, 52,234,119 and 52,078,515 issued and outstanding at June 30, 2020 and December 31, 2019, respectively	209		208
Additional paid-in capital	6,451		3,631
Retained earnings	316,035		286,301
Total stockholders' equity	322,695		290,140
Total liabilities and stockholders' equity	$	429,807	$	371,424
(a) Held by variable interest entities (Note 16)

The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
	Three Months Ended   June 30,				Six Months Ended   June 30,
	2020		2019		2020		2019
	(in thousands, except share and per share data)
Net sales	$	125,596	$	119,437	$	263,079	$	233,259
Cost of sales	87,465		89,233		182,001		177,625
Gross profit	38,131		30,204		81,078		55,634
Selling, general and administrative expenses	15,939		12,912		31,153		26,589
Loss (gain) on disposal of assets	—		6		(62)		290
Income from operations	22,192		17,286		49,987		28,755
Interest income, net	19		31		80		40
Other income (expense), net	32		17		5		(9)
Income before taxes	22,243		17,334		50,072		28,786
Income tax provision	4,439		3,943		10,415		6,638
Net income	$	17,804	$	13,391	$	39,657	$	22,148
Earnings per share:
Basic	$	0.34	$	0.26	$	0.76	$	0.43
Diluted	$	0.34	$	0.25	$	0.75	$	0.42
Cash dividends declared per common share:	$	0.19	$	0.16	$	0.19	$	0.16
Weighted average shares outstanding:
Basic	52,099,694		52,120,272		52,160,348		52,087,626
Diluted	52,750,401		52,747,199		52,885,491		52,589,845

The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
	Six Months Ended June 30, 2020
	Common Stock			Paid-in		Retained
	Shares	Amount		Capital		Earnings		Total
	(in thousands)
Balances at December 31, 2019	52,079	$	208	$	3,631	$	286,301	$	290,140
Net income	—	—		—		39,657		39,657
Stock options exercised and restricted	490	2		14,171		—		14,173
stock awards granted
Share-based compensation	—	—		5,694		—		5,694
Stock repurchased and retired	(335)	(1)		(17,045)		—		(17,046)
Dividends	—	—		—		(9,923)		(9,923)
Balances at June 30, 2020	52,234	$	209	$	6,451	$	316,035	$	322,695
	Three Months Ended June 30, 2020
	Common Stock			Paid-in		Retained
	Shares	Amount		Capital		Earnings		Total
	(in thousands)
Balances at March 31, 2020	52,044	$	208	$	—	$	306,115	$	306,323
Net income	—	—		—		17,804		17,804
Stock options exercised and restricted	278	1		9,675		—		9,676
stock awards granted
Share-based compensation	—	—		3,343		—		3,343
Stock repurchased and retired	(88)	—		(6,567)		2,039		(4,528)
Dividends	—	—		—		(9,923)		(9,923)
Balances at June 30, 2020	52,234	$	209	$	6,451	$	316,035	$	322,695
	Six Months Ended June 30, 2019
	Common Stock			Paid-in		Retained
	Shares	Amount		Capital		Earnings		Total
	(in thousands)
Balances at December 31, 2018	51,991	$	208	$	—	$	249,235	249,443
Net income	—	—		—		22,148		22,148
Stock options exercised and restricted	384	2		7,683		—		7,685
stock awards granted
Share-based compensation	—	—		7,786		—		7,786
Stock repurchased and retired	(257)	(1)		(11,170)		—		(11,171)
Dividends	—	—		—		(8,380)		(8,380)
Balances at June 30, 2019	52,118	$	209	$	4,299	$	263,003	$	267,511
	Three Months Ended June 30, 2019
	Common Stock			Paid-in		Retained
	Shares	Amount		Capital		Earnings		Total
	(in thousands)
Balances at March 31, 2019	52,099	$	208	$	4,346	$	257,992	$	262,546
Net income	—	—		—		13,391		13,391
Stock options exercised and restricted	147	1		3,674		—		3,675
stock awards granted
Share-based compensation	—	—		2,379		—		2,379
Stock repurchased and retired	(128)	—		(6,100)		—		(6,100)
Dividends	—	—		—		(8,380)		(8,380)
Balances at June 30, 2019	52,118	$	209	$	4,299	$	263,003	$	267,511

The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
	Six Months Ended   June 30,
	2020		2019
Operating Activities	(in thousands)
Net income	$	39,657	$	22,148
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,340		11,760
Amortization of debt issuance cost	20		—
Provision for losses on accounts receivable, net of adjustments	76		128
Provision for excess and obsolete inventories	(193)		1,153
Share-based compensation	5,694		7,786
(Gain) loss on disposition of assets	(62)		290
Foreign currency transaction loss (gain)	30		(13)
Interest income on note receivable	(12)		(26)
Deferred income taxes	5,061		3,318
Changes in assets and liabilities:
Accounts receivable	10,929		(14,983)
Income taxes	(4,382)		2,925
Inventories	(11,617)		(585)
Prepaid expenses and other	(568)		(650)
Accounts payable	2,893		(2,592)
Deferred revenue	473		172
Accrued liabilities	2,423		5,041
Net cash provided by operating activities	62,762		35,872
Investing Activities
Capital expenditures	(33,510)		(16,784)
Proceeds from sale of property, plant and equipment	61		59
Investment in certificates of deposits	—		(6,000)
Maturities of certificates of deposits	—		2,000
Principal payments from note receivable	25		28
Net cash used in investing activities	(33,424)		(20,697)
Financing Activities
Stock options exercised	14,173		7,685
Repurchase of stock	(15,937)		(10,191)
Employee taxes paid by withholding shares	(1,102)		(980)
Net cash used in financing activities	(2,866)		(3,486)
Net increase in cash, cash equivalents and restricted cash	26,472		11,689
Cash, cash equivalents and restricted cash, beginning of period	44,373		1,994
Cash, cash equivalents and restricted cash, end of period	$	70,845	$	13,683

The accompanying notes are an integral part of these consolidated financial statements.

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AAON, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(Unaudited)

1. General

Basis of Presentation

The accompanying unaudited consolidated financial statements of AAON, Inc., a Nevada corporation, and our operating subsidiaries, all of which are wholly-owned, (collectively, the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”).

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

These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2019 is derived from audited consolidated financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year. Certain disclosures have been condensed in or omitted from these consolidated financial statements. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. All intercompany balances and transactions have been eliminated in consolidation.

We are engaged in the engineering, manufacturing, marketing and sale of air conditioning and heating equipment consisting of standard, semi-custom and custom rooftop units, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils and controls.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, inventory reserves, warranty accrual, worker's compensation accrual, medical insurance accrual, income taxes and share-based compensation. Actual results could differ materially from those estimates.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.

Our manufacturing operations are considered a critical infrastructure industry, as defined by the U.S. Department of Homeland Security, as such, the decrees issued by national, state, and local governments in response to the COVID-19 pandemic have had minimal impact on our operations except for higher employee absenteeism in our manufacturing facilities. We had continuous operations during the six months ended June 30, 2020. For the most part, our workers are able to socially distance themselves during the manufacturing process. Additional precautions have been taken to social distance workers that work in close environments. The Company utilizes sanitation stations, requires the use of a facial covering, performs daily temperature scanning, and performs additional cleaning and sanitation throughout the day and deep cleaning overnight. The Company did see significant employee absenteeism in the latter part of June. These unexpected employee absences resulted in reduced shipments and longer lead times.

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The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business.

Although these disruptions and costs are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations. We believe it is possible that the impact of the COVID-19 pandemic could have a material adverse effect on the results of our operations, financial position and cash flows as of and for the year ended December 31, 2020.

However, we are monitoring the progression of the pandemic and its potential effect on our financial position, results of operations and cash flows.

Accounting Policies

A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.

Fair Value Measurements

We adopted ASU No. 2018-13, Fair Value Measurements (Topic 820), as amended, as of January 1, 2020. The ASU includes additional disclosure requirements for unrealized gains and losses for Level 3 fair value measurements and significant observable inputs used to develop Level 3 fair value measurements. There was not a material impact to financial statements upon adoption. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels:

•Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date.

•Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means.

•Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of property, plant and equipment, intangible assets 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.

Intangible Assets

Our intangible assets include various trademarks, service marks and technical knowledge acquired in our February 2018 business combination. We amortize our intangible assets on a straight-line basis over the estimated useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. 

Goodwill

Goodwill represents the excess of the consideration paid for the acquired businesses, in our February 2018 business combination, over the fair value of the individual assets acquired, net of liabilities assumed.  Goodwill at June 30, 2020 is deductible for income tax purposes. Goodwill is not amortized, but instead is 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.

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Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification ("ASC").

We consider the applicability and impact of all ASUs. ASUs not listed 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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. The ASU includes simplification of accounting for income taxes for franchise taxes, step up in tax basis for goodwill as part of a business combination and interim reporting of enacted changes in tax laws. The ASU is effective for the Company beginning after December 15, 2020. We do not expect ASU 2019-12 will have a material effect on our consolidated financial statements and notes thereto.

2.  Revenue Recognition

Disaggregated net sales by major source:

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
	(in thousands)
Rooftop units	$	99,145	$	88,757	$	209,975	$	177,100
Condensing units	4,505		5,156		9,003		9,206
Air handlers	6,016		6,033		12,263		11,627
Outdoor mechanical rooms	434		825		1,349		1,307
Water source heat pumps	3,796		6,822		7,499		12,666
Part sales	7,565		8,799		14,078		15,289
Other	4,135		3,045		8,912		6,064
Net Sales	$	125,596	$	119,437	$	263,079	$	233,259

Disaggregated units sold by major source:

	Three Months Ended		Six Months Ended
	June 30, 2020	June 30, 2019	June 30, 2020	June 30, 2019
Rooftop units	3,746	3,797	7,807	7,559
Condensing units	446	479	854	873
Air handlers	501	537	1,011	1,117
Outdoor mechanical rooms	6	10	16	21
Water source heat pumps	1,645	2,377	3,262	4,666
Total Units	6,344	7,200	12,950	14,236

The Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. The primary performance obligation in our contract is delivery of the requested manufactured equipment. Most of the Company’s products are highly customized, cannot be resold to other customers and the cost of rework to be resold is not economical. The Company has a formal cancellation policy 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. For all other products that are part sales or standardized units, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders. Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being July - November of each year.

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

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HVAC units and other related products and services to customers. The end user customer orders a bundled group of products and services from the Representative and expects the Representative to fulfill the order. These additional products and services may include controls purchased from another manufacturer to operate the unit, start-up services, and curbs for supporting the unit (“Third Party Products”). All are associated with the purchase of a HVAC unit but may be provided by the Representative or another third party. Only after the specifications are agreed to by the Representative and the customer, and the decision is made to use an AAON HVAC unit, will we receive notice of the order. We establish the amount we must receive for our HVAC unit (“minimum sales price”), but do not control the total order price that is negotiated by the Representative with the end user customer. The Representatives submit the total order price to us for invoicing and collection. The total order price includes our minimum sales price and an additional amount which may include both the Representatives’ fee and amounts due for additional products and services required by the customer. The Company is considered the principal for the equipment we design and manufacture and records that revenue gross. The Company has no control over the Third Party Products to the end customer and the Company is under no obliagtion related to the Third Party Products. Amounts related to Third Party Products are not recognized as revenue but are recorded as a liabilitiy and are included in accrued liabilities on the consolidated balance sheet.

The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives were $14.9 million and $10.2 million for the three months ended June 30, 2020 and 2019, respectively. The amount of payments to our Representatives were $27.5 million and $21.7 million for the six months ended June 30, 2020 and 2019, respectively.

The Company also sells extended warranties on parts for various lengths of time ranging from six months to 10 years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period.

3.  Leases

We adopted ASU No. 2016-02, Leases (Topic 842), as amended, as of January 1, 2019, using the transition method, which becomes effective upon the date of adoption. The transition method allows entities to initially apply the new leases standard at the adoption date (January 1, 2019) and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We have also elected the short-term lease measurement and recognition exemption which does not require balance sheet presentation for short-term leases. The Company historically does not enter into numerous or material lease agreements to support its manufacturing operations. Furthermore, any lease agreements entered into are usually less than a year and for leases on non material assets such as warehouse vehicles and office equipment. 

Adoption of the new standard resulted in the recording of additional lease right of use assets and lease liabilities of approximately $1.8 million as of January 1, 2019, which mostly relates to the multi-year facility lease assumed in our February 2018 business combination. The cumulative-effect adjustment to the opening balance was immaterial to the consolidated financial statements as a whole. The standard did not materially impact our consolidated net earnings or cash flows.  As of June 30, 2020, our right of use assets and lease liabilities are approximately $1.7 million.

4.  Accounts Receivable

Accounts receivable and the related allowance for doubtful accounts are as follows:

	June 30, 2020		December 31, 2019
	(in thousands)
Accounts receivable	$	56,823	$	67,752
Less:  Allowance for doubtful accounts	(429)		(353)
Total, net	$	56,394	$	67,399

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	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Allowance for doubtful accounts:	(in thousands)
Balance, beginning of period	$	647	$	379	$	353	$	264
Provisions (recoveries) for losses on accounts	(218)		13		76		128
receivables, net of adjustments
Balance, end of period	$	429	$	392	$	429	$	392

5.  Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method. We establish an allowance for excess and obsolete inventories based on product line changes, the feasibility of substituting parts and the need for supply and replacement parts.

The components of inventories and related changes in the allowance for excess and obsolete inventories account are as follows:

	June 30, 2020		December 31, 2019
	(in thousands)
Raw materials	$	79,902	$	68,842
Work in process	2,275		1,825
Finished goods	5,607		5,578
Total, gross	87,784		76,245
Less:  Allowance for excess and obsolete inventories	(2,373)		(2,644)
Total, net	$	85,411	$	73,601

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Allowance for excess and obsolete inventories:	(in thousands)
Balance, beginning of period	$	2,365	$	1,567	$	2,644	$	1,210
Provisions (recoveries) for excess and	81		796		(193)		1,153
obsolete inventories
Inventories written off	(73)		(13)		(78)		(13)
Balance, end of period	$	2,373	$	2,350	$	2,373	$	2,350

6.  Intangible Assets

Our intangible assets consist of the following:

	June 30, 2020		December 31, 2019
	(in thousands)
Intellectual property	$	700	$	700
Less: Accumulated amortization	(545)		(428)
Total, net	$	155	$	272

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Amortization expense recorded in cost of sales is as follows:

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
	(in thousands)
Amortization expense	$	58	$	58	$	117	$	117

7.  Supplemental Cash Flow Information

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Supplemental disclosures:	(in thousands)
Income taxes paid	$	6,711	$	41	$	9,735	$	394
Non-cash investing and financing activities:
Non-cash capital expenditures	$	6,046	$	(1,232)	$	5,046	$	(164)
Dividends declared	9,930		$	8,355	$	9,930	$	8,355

8.  Warranties

The Company has product warranties with various terms ranging from one year from the date of first use or 18 months for parts to 25 years for certain heat exchangers. The Company has an obligation to replace parts if conditions under the warranty are met. A provision is made for estimated warranty costs at the time the related products are sold based upon the warranty period, historical trends, new products and any known identifiable warranty issues.  

Changes in the warranty accrual are as follows:

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Warranty accrual:	(in thousands)
Balance, beginning of period	$	12,940	$	11,424	$	12,652	$	11,421
Payments made	(1,617)		(2,071)		(2,794)		(3,177)
Provisions	1,837		2,313		3,302		3,422
Balance, end of period	$	13,160	$	11,666	$	13,160	$	11,666
Warranty expense:	$	1,837	$	2,313	$	3,302	$	3,422

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9.  Accrued Liabilities

Accrued liabilities were comprised of the following:

	June 30, 2020		December 31, 2019
	(in thousands)
Warranty	$	13,160	$	12,652
Due to representatives	9,068		11,538
Payroll	7,716		5,058
Profit sharing	2,524