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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________
 
Commission file number:  0-18953
AAON, INC.
(Exact name of registrant as specified in its charter) 
Nevada87-0448736
(State or other jurisdiction(IRS Employer
of incorporation or organization)Identification No.)
2425 South Yukon Ave.,Tulsa,Oklahoma74107
(Address of principal executive offices) (Zip Code)
(918) 583-2266
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes                   No   
                             
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "small reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
                                                   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                       No 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockAAONNASDAQ

As of May 2, 2022, registrant had outstanding a total of 53,071,178 shares of its $.004 par value Common Stock.



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 March 31, 2022December 31, 2021
Assets(in thousands, except share and per share data)
Current assets:  
Cash and cash equivalents$5,633 $2,859 
Restricted cash595 628 
Accounts receivable, net of allowance for credit losses of $837 and $549, respectively
113,736 70,780 
Income tax receivable2,092 5,723 
Inventories, net146,091 130,270 
Contract assets10,001 5,749 
Prepaid expenses and other5,548 2,071 
Total current assets283,696 218,080 
Property, plant and equipment:  
Land5,016 5,016 
Buildings139,089 135,861 
Machinery and equipment326,306 318,259 
Furniture and fixtures23,817 23,072 
Total property, plant and equipment494,228 482,208 
Less:  Accumulated depreciation227,858 224,146 
Property, plant and equipment, net266,370 258,062 
Intangible assets, net67,310 70,121 
Goodwill81,892 85,727 
Right of use assets16,862 16,974 
Other long-term assets1,328 1,216 
Total assets$717,458 $650,180 
Liabilities and Stockholders' Equity  
Current liabilities:  
Accounts payable$35,796 $29,020 
Accrued liabilities52,890 50,206 
Contract liabilities25,540 7,542 
Total current liabilities114,226 86,768 
Revolving credit facility, long-term65,000 40,000 
Deferred tax liabilities32,966 31,993 
Other long-term liabilities18,693 18,843 
New market tax credit obligation (a)6,417 6,406 
Commitments and contingencies
Stockholders' equity:  
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued
  
Common stock, $.004 par value, 100,000,000 shares authorized, 53,065,081 and 52,527,985 issued and outstanding at March 31, 2022 and December 31, 2021, respectively
212 210 
Additional paid-in capital77,574 81,654 
Retained earnings402,370 384,306 
Total stockholders' equity480,156 466,170 
Total liabilities and stockholders' equity$717,458 $650,180 
 (a) Held by variable interest entities (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.

- 1 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 Three Months Ended 
 March 31,
 20222021
(in thousands, except share and per share data)
Net sales$182,771 $115,788 
Cost of sales136,707 82,631 
Gross profit46,064 33,157 
Selling, general and administrative expenses23,056 14,696 
Gain on disposal of assets(2) 
Income from operations23,010 18,461 
Interest (expense) income, net(190)3 
Other income, net21 17 
Income before taxes22,841 18,481 
Income tax provision4,782 2,105 
Net income$18,059 $16,376 
Earnings per share:
Basic$0.34 $0.31 
Diluted$0.33 $0.30 
Weighted average shares outstanding:
Basic52,613,232 52,293,464 
Diluted53,950,995 53,814,644 
 
The accompanying notes are an integral part of these consolidated financial statements.

- 2 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
Three Months Ended March 31, 2022
 Common StockPaid-inRetained 
SharesAmountCapitalEarningsTotal
 (in thousands)
Balances at December 31, 2021
52,528 $210 $81,654 $384,306 $466,170 
Net income— — — 18,059 18,059 
Stock options exercised, restricted stock awards605 2 2,890 — 2,892 
granted, and contingent shares issued (Note 16)
     
Share-based compensation— — 3,112 — 3,112 
Stock repurchased and retired(68) (4,082)— (4,082)
Contingent consideration (Note 3)
— — (6,000)— (6,000)
Refund for cancelled cash dividends— — — 5 5 
Balances at March 31, 202253,065 $212 $77,574 $402,370 $480,156 
Three Months Ended March 31, 2021
Common StockPaid-inRetained
SharesAmountCapitalEarningsTotal
(in thousands)
Balances at December 31, 202052,225 $209 $5,161 $345,495 350,865 
Net income— — — 16,376 16,376 
Stock options exercised and restricted286 2 9,436 — 9,438 
stock awards granted
Share-based compensation— — 2,761 — 2,761 
Stock repurchased and retired(87)(1)(6,401) (6,402)
Balances at March 31, 202152,424 $210 $10,957 $361,871 $373,038 
The accompanying notes are an integral part of these consolidated financial statements.

- 3 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended 
 March 31,
 20222021
Operating Activities(in thousands)
Net income$18,059 $16,376 
Adjustments to reconcile net income to net cash (used in) provided by operating activities: 
Depreciation and amortization7,076 7,398 
Amortization of debt issuance cost11 10 
Amortization of right of use assets67  
Provision for (recovery of) credit losses on accounts receivable, net of adjustments288 (13)
Provision for (recovery of) excess and obsolete inventories220 (194)
Share-based compensation3,112 2,761 
Gain on disposition of assets(2) 
Foreign currency transaction gain(9)(8)
Interest income on note receivable(6)(6)
Deferred income taxes973 4,658 
Changes in assets and liabilities:  
Accounts receivable(43,244)(5,179)
Income tax receivable3,631 (2,766)
Inventories(16,041)(1,627)
Contract assets(4,252) 
Prepaid expenses and other(3,588)108 
Accounts payable6,325 4,904 
Contract liabilities17,998  
Deferred revenue68 2,358 
Accrued liabilities2,511 58 
Net cash (used in) provided by operating activities(6,803)28,838 
Investing Activities  
Capital expenditures(14,031)(16,404)
Cash paid in business combination, net of cash acquired(249) 
Proceeds from sale of property, plant and equipment2  
Principal payments from note receivable14 14 
Net cash used in investing activities(14,264)(16,390)
Financing Activities  
Borrowings under revolving credit facility25,000  
Stock options exercised2,890 9,438 
Repurchase of stock(3,278)(5,185)
Employee taxes paid by withholding shares(804)(1,217)
Net cash provided by financing activities23,808 3,036 
Net increase in cash, cash equivalents and restricted cash2,741 15,484 
Cash, cash equivalents and restricted cash, beginning of period3,487 82,288 
Cash, cash equivalents and restricted cash, end of period$6,228 $97,772 

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

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


1. General

Basis of Presentation

AAON, Inc. is a Nevada corporation which was incorporated on August 18, 1987. Our operating subsidiaries include AAON, Inc., an Oklahoma corporation, AAON Coil Products, Inc., a Texas corporation, and BasX, Inc. (dba BasX Solutions), an Oregon corporation (collectively, the “Company”). The accompanying unaudited consolidated financial statements of AAON, Inc. and our operating subsidiaries, all of which are wholly-owned, have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”).

On December 10, 2021, we closed on the acquisition of all of the issued and outstanding equity ownership of BasX, LLC, doing business as BasX Solutions ("BasX") (Note 3). We began including the results of BasX’s operations in our consolidated financial statements on December 11, 2021. On December 29, 2021, BasX, LLC converted to a C-Corporation, BasX, Inc., and is subject to income tax.

Our financial statements consolidate all of our affiliated entities in which we have a controlling financial interest. Because we hold certain rights that give us the power to direct the activities of two variable interest entities ("VIEs") (Note 17) that most significantly impact the VIEs economic performance, combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses, we have a controlling financial interest in those VIEs.

These financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2021 is derived from audited consolidated financial statements. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for a full year. Certain disclosures have been condensed in or omitted from these consolidated financial statements. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. All intercompany balances and transactions have been eliminated in consolidation.
 
We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data centers cooling solutions, cleanroom systems, chillers, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We reevaluate our estimates and assumptions as needed, but at a minimum on a quarterly basis. The most significant estimates include, but are not limited to, inventory reserves, warranty accrual, worker's compensation accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, and share-based compensation. Actual results could differ materially from those estimates.





- 5 -


Change in Estimate

During the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at our Longview, Texas location resulted in a change in estimate that increased the useful lives from between ten and twelve years to fifteen years. This determination was based on recent and estimated future production levels as well as management’s knowledge of the equipment and historical and future use of the equipment. The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $1.8 million during the three months ended March 31, 2022.

Impact of COVID-19 Pandemic

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

We had continuous operations during the three months ended March 31, 2022. Additional precautions have been taken to social distance workers that work in close environments and we have facilitated voluntary on-site COVID-19 vaccine clinics. The Company also utilizes sanitation stations and performs additional cleaning and sanitation throughout the day.

Although future disruptions and costs are expected to be temporary, there is significant uncertainty around the duration and overall impact to our business operations. We are continually monitoring the progression of the pandemic, including new COVID-19 variants, and its potential effect on our financial position, results of operations and cash flows.

Inflation and Labor Market

We have witnessed increases of our raw material prices, especially in copper and steel, which appear to be a residual effect of COVID-19, and we continue to make strategic purchases of materials when we see opportunities. We have managed the increase in the cost of raw materials through price increases for our products. We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong existing vendor relationships, expanding our list of vendors, and our favorable liquidity position.

Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. In July 2021, we increased starting wages for our production workforce by 7.0%. We also put a cost of living increase of 3.5% in place in October 2021 for all employees below the Director level. In March 2022, we awarded annual merit raises resulting in a 3.0% increase in overall wages. We will continue to implement human resource initiatives to retain and attract labor to further improve productivity and production efficiencies.

Despite efforts to mitigate the impact of inflation, supply chain issues, and the tight labor market, future disruptions, while temporary, could negatively impact our financial position, results of operations and cash flows.

First Quarter 2021 Planned Maintenance and Adverse Weather

During the fourth quarter of 2020, we made the strategic decision to shut down our Tulsa, OK and Longview, TX manufacturing facilities to perform planned and necessary maintenance during the last week of December 2020 as well several days in early January 2021.

In February 2021, record-breaking winter storms affected Oklahoma and Texas, causing sustained below freezing temperatures, hazardous driving conditions, rolling blackouts, water main breaks, and a host of other weather related issues. In addition to significant absenteeism as a result of employees being unable to travel to and from work due to inadequate transportation and/or hazardous road conditions, the Company made the decision to shut down the Tulsa, OK and Longview, TX plants for several days. This decision was based on the expected employee absenteeism as well as the expected rolling blackouts caused by the increased demand on the electrical and natural gas power grids.

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Accounting Policies
 
A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

Fair Value Measurements

The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short-term maturity of the items. The carrying amount of the Company’s revolving line of credit, and other payables, approximate their fair values either due to their short term nature, the variable rates associated with the debt, or based on current rates offered to the Company for debt with similar characteristics.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Fair value is based upon assumptions that market participants would use when pricing an asset or liability. We use the following fair value hierarchy, which prioritizes valuation technique inputs used to measure fair value into three broad levels:

Level 1: Quoted prices in active markets for identical assets and liabilities that we have the ability to access at the measurement date.
Level 2: Inputs (other than quoted prices included within Level 1) that are either directly or indirectly observable for the asset or liability, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived from observable market data by correlation or other means.
Level 3: Unobservable inputs for the asset or liability including situations where there is little, if any, market activity for the asset or liability. Items categorized in Level 3 include the estimated fair values of property, plant and equipment, intangible assets, contingent consideration, and goodwill acquired in a business combination.

The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall into different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to a fair value measurement requires judgment, considering factors specific to the asset or liability.

Definite-Lived Intangible Assets

Our definite-lived intangible assets include various trademarks, service marks, and technical knowledge acquired in business combinations (Note 3). We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. 

Amortization is computed using the straight-line method over the following estimated useful lives:

Intellectual property30 years
Customer relationships14 years

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. At March 31, 2022 $50.3 million of goodwill is deductible for income tax purposes. Our indefinite-lived intangible assets consist of trademark and trade names. Goodwill and indefinite-lived intangible assets are not amortized, but instead are evaluated for impairment at least annually. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant.


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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 or included within the Company's Annual Report on Form 10-K for the year ended December 31, 2021, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.


2.  Revenue Recognition
 
The following tables show disaggregated net sales by reportable segment (see Note 20) by major source, net of intercompany sales eliminations. As the BasX segment was not applicable during the three months ended March 31, 2021, this segment has been excluded from the table for that period.

Three Months Ended March 31, 2022
AAON OklahomaAAON Coil ProductsBasXTotal
(in thousands)
Rooftop Units$121,706 $ $ $121,706 
Condensing Units242 8,976  9,218 
Air Handlers 9,438 1,339 10,777 
Outdoor Mechanical Rooms554 110  664 
Cleanroom Systems  8,039 8,039 
Data Center Cooling Solutions  10,868 10,868 
Water-Source Heat Pumps2,986 2,353  5,339 
Part Sales10,216   10,216 
Other2
4,163 1,058 723 5,944 
$139,867 $21,935 $20,969 $182,771 
Three Months Ended March 31, 2021
AAON OklahomaAAON Coil Products
BasX1
Total
(in thousands)
Rooftop Units$87,425 $  $87,425 
Condensing Units249 6,282  6,531 
Air Handlers 6,414  6,414 
Outdoor Mechanical Rooms63 148  211 
Water-Source Heat Pumps2,388 2,277  4,665 
Part Sales7,506   7,506 
Other2
2,345 691  3,036 
$99,976 $15,812  $115,788 
1 BasX was acquired by the Company on December 10, 2021.
2 Other sales include freight, extended warranties and miscellaneous revenue.

Due to the highly customized nature of many of the Company’s products and each product not having an alternative use to the Company without significant costs to the Company, the Company recognizes revenue over time as progress is made toward satisfying the performance obligations of each contract. The Company has formal cancellation policies and generally does not accept returns on these units. 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. The Company measures a contract’s progress on

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the basis of the ratio that costs incurred bear to estimated total costs using the input method because, in the Company’s view, such method best depicts the progress toward completion.

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

For all other products that are part sales or standardized units, the Company recognizes revenue, presented net of sales tax, when it satisfies the performance obligation in its contracts. As the primary performance obligation in such a contract is delivery of the requested manufactured equipment, we satisfy the performance obligation when the control is passed to the customer, generally at time of shipment. Final sales prices are fixed based on purchase orders.

Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates. Sales of our products are moderately seasonal with the peak period being May-October of each year.

Product Warranties

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

Representatives and Third Party Products

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

The Representatives’ fee and Third Party Products amounts (“Due to Representatives”) are paid only after all amounts associated with the order are collected from the customer. The amount of payments to our Representatives were $6.5 million and $11.0 million for the three months ended March 31, 2022 and 2021, respectively.

 

3. Business Combination

On November 18, 2021, the Company entered into a membership interest purchase agreement (the “MIPA Agreement”) to acquire 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").

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The $80.0 million of contingent consideration payable consists of $78.0 million payable to the former owners of BasX and $2.0 million payable to key employees of BasX whom are now employed by the Company. The potential future issuance of the Shares is contingent upon BasX meeting certain post-closing earn-out milestones during each of 2021, 2022, and 2023 under the terms of the MIPA Agreement. The Company funded the BasX acquisition cash portion of the purchase price and related transaction costs with cash on hand.

Additionally, as a condition to closing, the Company entered into a real estate purchase agreement with BasX Properties, LLC, an affiliate of BasX, to acquire the principal real property and improvements utilized by BasX for an additional $22.0 million, subject to customary closing conditions and adjustments. The Company expects this real estate transaction to close by the end of the second quarter of 2022.

BasX specializes in the design, engineering and manufacturing of custom, energy efficient cooling solutions for the rapidly growing hyperscale data center market. BasX also designs and manufactures custom solutions for cleanroom environments for the bio-pharmaceutical, semiconductor, medical and agriculture markets, as well as custom, energy efficient air handlers and modular solutions for a vast array of markets. The acquisition of BasX brings the Company exposure to attractive end-markets into which the Company has historically had minimal exposure. The products BasX manufactures are highly engineered, customized products, fully complimenting AAON's existing business.

We applied pushdown accounting, allowable under ASC 805 "Business Combinations," to "pushdown" our stepped-up basis in the assets acquired and liabilities assumed to BasX's subsidiary financial statements. The decision to apply pushdown accounting is irrevocable. Goodwill was calculated and recognized consistent with acquisition accounting, resulting in the pushdown of $78.7 million in goodwill.

The following table presents the revised allocation of the consideration paid to the assets acquired and liabilities assumed in the acquisition of BasX described above, which was still preliminary at December 31, 2021. The revisions indicated below were recorded during the three months ended March 31, 2022. The revisions were the results of updates to our preliminary estimates and third party valuation models. The impact of such revisions on net income for prior periods was not significant.

Revised Allocation as of
March 31, 2022
Estimated
Allocation as of
December 31, 2021
Revision
(in thousands)
Accounts receivable$13,699 $13,699 $— 
Inventories2,725 2,725 — 
Contract assets7,635 7,635 — 
Prepaid expenses and other341 341 — 
Property, plant and equipment13,169 13,169 — 
Right of use assets15,611 15,611 — 
Intangible assets68,413 70,329 (1,916)
Goodwill78,663 82,498 (3,835)
Accounts payable(9,388)(9,388)— 
Accrued liabilities(3,807)(3,807)— 
Contract liabilities(7,771)(7,771)— 
Lease liabilities(15,611)(15,611)— 
Contingent Consideration - shares of AAON, Inc.(60,000)(66,000)6,000 
  Consideration paid$103,679 $103,430 $249 


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The Company recognized the following definite and indefinite-lived intangible assets as part of the acquisition of BasX:
Revised Allocation as of
March 31, 2022
Estimated
Allocation as of
December 31, 2021
Revision
(in thousands)
Definite-lived intangible assets
Intellectual property$6,295 $6,479 $(184)
Customer relationships47,547 48,684 (1,137)
53,842 55,163 (1,321)
Indefinite-lived intangible assets
Trademarks14,571 15,166 (595)
Total intangible assets acquired$68,413 $70,329 $(1,916)


Goodwill is the excess of the consideration paid for the acquired businesses over the fair value of the individual assets acquired, net of liabilities assumed. Goodwill represents a premium paid to acquire the skilled workforce and expanded market opportunities. Goodwill of $47.1 million is tax deductible upon close of the acquisition. Future additional amounts of goodwill related to the contingent consideration may become tax deductible in the future if the earn out provisions of the MIPA Agreement are achieved.

Pro Forma Results of Operations (unaudited)

The operations of BasX have been included in our statements of income since the closing date on December 10, 2021. The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2021 are presented as if the combination had been made on January 1, 2021.

(unaudited)
Three months ended
March 31, 2021
(in thousands, except per share data)
Revenues$130,631 
Net income16,972 
Earnings per share:
Basic$0.32 
Dilutive$0.32 

These unaudited pro forma results include adjustments necessary in connection with the acquisition.

The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

4. Leases

All of our leases are classified as operating leases. 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

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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.

We have entered into various short-term operating leases with an initial term of twelve months or less. We have elected the short-term lease measurement and recognition exemption which does not require balance sheet presentation these short-term leases. The rent expense for these short-term leases is not significant.

The Company’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.

Through the acquisition of BasX (Note 3), we acquired various leases for plant/office space and equipment. We also lease the plant/office space used by our operations in Parkville, MO. 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.

At March 31, 2022, we had operating lease right-of-use assets of $16.9 million, current and noncurrent operating lease obligations of $1.7 million and $15.3 million within accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets. At December 31, 2021, we had operating lease right-of-use assets of $17.0 million and current and noncurrent operating lease obligations of $1.6 million and $15.5 million within accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets.


5.  Accounts Receivable

Accounts receivable and the related allowance for credit losses are as follows:
 
 March 31,
2022
December 31, 2021
 (in thousands)
Accounts receivable$114,573 $71,329 
Less:  Allowance for credit losses(837)(549)
Total, net
$113,736 $70,780 

 
 Three Months Ended
 March 31,
2022
March 31,
2021
Allowance for credit losses:(in thousands)
Balance, beginning of period$549 $506 
Provisions for (recoveries of) expected credit288 (13)
losses, net of adjustments
Balance, end of period$837 $493 
 

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6.  Inventories

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

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

 March 31,
2022
December 31, 2021
 (in thousands)
Raw materials$140,424 $124,480 
Work in process3,003 3,049 
Finished goods4,671 4,528 
Total, gross
148,098 132,057 
Less:  Allowance for excess and obsolete inventories(2,007)(1,787)
Total, net
$146,091 $130,270 

  Three Months Ended
 March 31,
2022
March 31,
2021
Allowance for excess and obsolete inventories:(in thousands)
Balance, beginning of period$1,787 $3,261 
Provision for (recovery of) excess and220 (194)
     obsolete inventories
Inventories written off (763)
Balance, end of period$2,007 $2,304 



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7.  Intangible assets

Our intangible assets consist of the following:
 March 31, 2022December 31, 2021
Definite-lived intangible assets(in thousands)
Intellectual property$6,295 $6,479 
Customer relationships47,547 48,684 
Less:  Accumulated amortization(1,103)(208)
               Total, net52,739 54,955 
Indefinite-lived intangible assets
Trademarks14,571 15,166 
Total intangible assets, net$67,310 $70,121 

Amortization expense recorded in cost of sales is as follows:
 Three Months Ended
 March 31,
2022
March 31,
2021
(in thousands)
Amortization expense$895 $38 

Excluding the impact of any future acquisitions, the Company anticipates amortization expense to be $3.6 million for each of the years ended 2022 through 2026.


8.  Supplemental Cash Flow Information

 
 Three Months Ended
 March 31,
2022
March 31,
2021
Supplemental disclosures:(in thousands)
Interest paid$115 $ 
Income taxes paid$176 $213 
Non-cash investing and financing activities:
Non-cash capital expenditures$458 $264 
 

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9.  Warranties

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

Changes in the warranty accrual are as follows:
 Three Months Ended
 March 31,
2022
March 31,
2021
Warranty accrual:(in thousands)
Balance, beginning of period$13,769 $13,522 
Payments made(1,219)(1,464)
Provisions1,157 1,467 
Balance, end of period$13,707 $13,525 
Warranty expense:$1,157 $1,467 
 

10.  Accrued Liabilities and Other Long-Term Liabilities

Accrued liabilities were comprised of the following:
 March 31,
2022
December 31, 2021
 (in thousands)
Warranty$13,707 $13,769 
Due to representatives13,453 7,995 
Payroll7,601 8,423 
Profit sharing2,670 1,489 
Worker's compensation261 308 
Medical self-insurance1,208 1,943 
Customer prepayments2,870 5,931 
Donations453 438 
Employee vacation time5,000 4,362 
Operating lease liability, short-term1,683 1,580 
Other3,984 3,968 
Total
$52,890 $50,206 


Other long-term liabilities were comprised of the following:
 
 March 31,
2022
December 31, 2021
 (in thousands)
Long-term operating lease obligation$15,320 $15,467 
Long-term donations221 334 
Extended warranties3,152 3,042 
Total
$18,693 $18,843 

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11.  Revolving Credit Facility

On November 24, 2021, we amended our revolving credit facility (“Revolver”), to provide for maximum borrowings of $100.0 million, with an option to increase to maximum borrowing of $200.0 million. As of March 31, 2022 and December 31, 2021, we had $65.0 million and $40.0 million outstanding under the Revolver, respectively. We have one standby letter of credit totaling $0.8 million as of March 31, 2022. Borrowings available under the Revolver at March 31, 2022 were $34.2 million.  The Revolver expires on November 24, 2026.

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate ("SOFR") plus the applicable margin. Applicable margin, ranging from 1.25% - 1.75%, is determined quarterly based on the Company's leverage ratio. The Company is also subject to letter of credit fees, ranging from 1.25% - 1.75%, and a commitment fee, ranging from 0.10% - 0.20%. The applicable fee percentage is determined quarterly based on the Company's leverage ratio. As of and for the three months ended March 31, 2022, the weighted average interest rate of our the Revolver was 1.3%. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income and were not material for the three months ended March 31, 2022.

If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate ("ABR") loans. ABR loans would bear interest at a rate per annum equal to the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50%, or (c) daily simple SOFR for a one-month tenor in effect on such day plus 1.00%.

At March 31, 2022, we were in compliance with our financial covenants, as defined by the Revolver. These covenants require that we meet certain parameters related to our leverage ratio. At March 31, 2022, our leverage ratio was 0.63 to 1.0, which meets the requirement of not being above 3 to 1.


12.  Income Taxes

The provision (benefit) for income taxes consists of the following:

 Three Months Ended
 March 31,
2022
March 31,
2021
 (in thousands)
Current$3,809 $(2,553)
Deferred973 4,658 
     Income tax provision$4,782 $2,105 

The provision for income taxes differs from the amount computed by applying the Federal statutory income tax rate before the provision for income taxes.

The reconciliation of the Federal statutory income tax rate to the effective income tax rate is as follows:

 Three Months Ended
 March 31,
2022
March 31,
2021
Federal statutory rate21.0 %21.0 %
State income taxes, net of Federal benefit3.0 7.5 
Excess tax benefits(2.2)(15.8)
Return to provision adjustments (0.4)
Other(0.9)(0.9)
     Effective tax rate20.9 %11.4 %




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On May 21, 2021, the State of Oklahoma enacted House Bill 2960, effectively reducing the corporate income tax rate in Oklahoma from 6% to 4%. This resulted in an overall reduction of our effective state income tax rate, net of Federal benefit.

During the three months ended March 31, 2022, the Company recorded an excess tax benefit of $0.5 million as compared to $2.9 million during the same period in 2021, a decrease of 82% The decrease was primarily due to timing of stock option exercises as a result of our high stock price during the three months ended March 31, 2021.

We earn investment tax credits from the state of Oklahoma’s manufacturing property investment program. We use the flow-through method to account for investment tax credits earned on eligible tangible asset expenditures. Under this method, the investment tax credits are recognized as a reduction to our Oklahoma income tax expense in the year they are used. As of March 31, 2022, we have investment tax credit carryforwards of approximately $3.7 million. These credits have estimated expirations from the year 2036 through 2040.

The Company's estimated annual 2022 effective tax rate, excluding discrete events, is approximately 25%. We file income tax returns in the U.S., state and foreign income tax returns jurisdictions. We are subject to U.S. income tax examinations for tax years 2018 to present, and to non-U.S. income tax examinations for the tax years 2017 to present. In addition, we are subject to state and local income tax examinations for the tax years 2017 to present. The Company continues to evaluate its need to file returns in various state jurisdictions. Any interest or penalties would be recognized as a component of income tax expense.



13. Share-Based Compensation

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 3.3 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards, in addition to the shares from the previous plan, the 1992 Plan. Under the LTIP, the exercise price of shares granted could not be less than 100% of the fair market value at the date of the grant.

On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 8.9 million shares, comprised of 3.4 million new shares provided for under the 2016 Plan, approximately 0.4 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 2.6 million shares that were approved by the stockholders on May 15, 2018, and an additional 2.5 million shares that were approved by the stockholders on May 12, 2020.

Under the 2016 Plan, shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant. The 2016 Plan is administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the 2016 Plan, establishes and revises rules and regulations relating to the 2016 Plan and makes any other determinations that it believes necessary for the administration of the 2016 Plan.


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Options

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the three months ended March 31, 2022 and 2021 using a Black Scholes-Merton Model:
 Three months ended
 March 31, 2022March 31, 2021
Directors and SLT1:
  
Expected dividend rate$0.38$0.38
Expected volatility35.87%35.78%
Risk-free interest rate2.11%0.50%
Expected life (in years)4.04.0
Employees:  
Expected dividend rate$0.38$0.38
Expected volatility37.16%38.70%
Risk-free interest rate1.98%0.30%
Expected life (in years)3.03.0
1 Senior Leadership Team ("SLT") consists of officers and key members of management.
 
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.
 
The following is a summary of stock options vested and exercisable as of March 31, 2022:

 
Range of
Exercise
Prices
Number
of
Shares
Weighted
Average
Remaining
Contractual Life
(in years)
Weighted
Average
Exercise
Price
Intrinsic
Value
(in thousands)
$8.17 -$41.37 1,323,510 5.73$36.12 $25,953 
$42.42 -$65.24 271,925 7.8244.72 3,005 
$65.29 -$79.81 101,868 8.8673.22  
Total1,697,303 6.25$39.72 $28,958 
 
The following is a summary of stock options vested and exercisable as of March 31, 2021:
Range of
Exercise
Prices
Number
of
Shares
Weighted
Average
Remaining
Contractual Life
(in years)
Weighted
Average
Exercise
Price
Intrinsic
Value
(in thousands)
$7.18 -$40.87 621,552 5.58$30.01 $24,863 
$41.37 -$41.37 427,899 7.8641.37 12,255 
$41.78 -$75.00 143,232 8.7544.45 3,661 
Total1,192,683 6.78$35.82 $40,779 

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A summary of stock option activity under the plans is as follows:

Stock OptionsSharesWeighted
Average
Exercise
Price
Outstanding at December 31, 2021
3,365,469 $42.88 
Granted
353,723 54.52 
Exercised
(79,169)36.51 
Forfeited or Expired
(25,288)51.58 
Outstanding at March 31, 2022
3,614,735 $44.10 
Exercisable at March 31, 2022
1,697,303 $39.72 
 
The total pre-tax compensation cost related to unvested stock options not yet recognized as of March 31, 2022 is $19.7 million and is expected to be recognized over a weighted average period of approximately 2.3 years.

The total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021 was $1.9 million and $10.7 million, respectively. The cash received from options exercised during the three months ended March 31, 2022 and 2021 was $2.9 million and $9.4 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows.


Restricted Stock

The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends. At March 31, 2022, unrecognized compensation cost related to unvested restricted stock awards was approximately $5.8 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

A summary of the unvested restricted stock awards is as follows:

SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2021
161,225 $46.08 
Granted
39,903 53.55 
Vested
(48,479)42.20 
Forfeited
(581)49.75 
Unvested at March 31, 2022
152,068 $49.26 


PSUs

We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index. The TSR measurement period is three years. At the end of the measurement period, each award will be converted into common stock at 0% to 200% of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies.


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The total pre-tax compensation cost related to unvested PSUs not yet recognized as of March 31, 2022 is $2.6 million and is expected to be recognized over a weighted average period of approximately 2.7 years.

The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the three months ended March 31, 2022 and 2021 using a Monte Carlo Model:
 Three months ended
 March 31, 2022March 31, 2021
 
Expected dividend rate$0.38$0.38
Expected volatility37.60%39.10%
Risk-free interest rate2.00%0.28%
Expected life (in years)2.802.81
 
The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.

A summary of the unvested PSUs is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2021
16,851 $87.78 
Granted
41,621 44.74