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

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

For the quarterly period ended September 30, 2023
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.004 par value per shareAAONNASDAQ

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 

As of November 2, 2023, registrant had outstanding a total of 81,244,857 shares of its $.004 par value Common Stock.



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
AAON, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 September 30, 2023December 31, 2022
Assets(in thousands, except share and per share data)
Current assets:  
Cash and cash equivalents$212 $5,451 
Restricted cash22,323 498 
Accounts receivable, net of allowance for credit losses of $385 and $477, respectively
160,108 127,158 
Inventories, net214,507 198,939 
Contract assets25,306 15,151 
Prepaid expenses and other2,836 1,919 
Total current assets425,292 349,116 
Property, plant and equipment:  
Land15,296 8,537 
Buildings193,684 169,156 
Machinery and equipment381,271 342,045 
Furniture and fixtures41,488 30,033 
Total property, plant and equipment631,739 549,771 
Less:  Accumulated depreciation274,909 245,026 
Property, plant and equipment, net356,830 304,745 
Intangible assets, net61,901 64,606 
Goodwill81,892 81,892 
Right of use assets12,252 7,123 
Other long-term assets6,376 6,421 
Total assets$944,543 $813,903 
Liabilities and Stockholders' Equity  
Current liabilities:  
Accounts payable$29,917 $45,513 
Accrued liabilities90,986 78,630 
Contract liabilities19,576 21,424 
Total current liabilities140,479 145,567 
Revolving credit facility, long-term78,420 71,004 
Deferred tax liabilities14,744 18,661 
Other long-term liabilities16,247 11,508 
New market tax credit obligation1
12,169 6,449 
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, 81,231,513 and 80,137,776 issued and outstanding at September 30, 2023 and December 31, 2022, respectively2
325 322 
Additional paid-in capital109,874 98,735 
Retained earnings2
572,285 461,657 
Total stockholders' equity682,484 560,714 
Total liabilities and stockholders' equity$944,543 $813,903 
1 Held by variable interest entities (Note 16)
2 Reflects three-for-two stock split effective August 16, 2023.
The accompanying notes are an integral part of these consolidated financial statements.

- 1 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2023202220232022
(in thousands, except share and per share data)
Net sales$311,970 $242,605 $861,880 $634,190 
Cost of sales195,861 177,014 574,599 475,159 
Gross profit116,109 65,591 287,281 159,031 
Selling, general and administrative expenses51,470 28,891 123,684 78,880 
Loss (gain) on disposal of assets(25) (13)(12)
Income from operations64,664 36,700 163,610 80,163 
Interest expense, net(1,266)(954)(3,959)(1,694)
Other income, net93 54 370 295 
Income before taxes63,491 35,800 160,021 78,764 
Income tax provision15,413 8,327 29,447 17,286 
Net income$48,078 $27,473 $130,574 $61,478 
Earnings per share:  
Basic1
$0.59 $0.34 $1.61 $0.77 
Diluted1
$0.58 $0.34 $1.57 $0.76 
Cash dividends declared per common share1:
$0.08 $ $0.24 $0.13 
Weighted average shares outstanding:  
Basic1
81,418,800 79,777,987 81,140,473 79,543,925 
Diluted1
83,393,054 80,938,074 83,275,208 80,882,798 
1 Reflects three-for-two stock split effective August 16, 2023.
The accompanying notes are an integral part of these consolidated financial statements.

- 2 -


AAON, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
Nine Months Ended September 30, 2023
 Common StockPaid-inRetained 
1 Reflects three-for-two stock split effective August 16, 2023
Shares1
Amount1
Capital
Earnings1
Total
 (in thousands)
Balances at December 31, 2022
80,138 $322 $98,735 $461,657 $560,714 
Net income— — — 130,574 130,574 
Stock options exercised, restricted stock awards1,517 5 25,246 — 25,251 
granted, and contingent shares issued (Note 15)
     
Share-based compensation— — 12,102 — 12,102 
Stock repurchased and retired(423)(2)(26,209)— (26,211)
Dividends— — — (19,946)(19,946)
Balances at September 30, 202381,232 $325 $109,874 $572,285 $682,484 
Three Months Ended September 30, 2023
Common StockPaid-inRetained
Shares1
Amount1
Capital
Earnings1
Total
(in thousands)
Balances at June 30, 202381,569 $326 $128,636 $531,149 $660,111 
Net income— — — 48,078 48,078 
Stock options exercised and restricted66 1 2,006 — 2,007 
stock awards granted
Share-based compensation— — 4,279 — 4,279 
Stock repurchased and retired(403)(2)(25,047)— (25,049)
Dividends— — — (6,942)(6,942)
Balances at September 30, 202381,232 $325 $109,874 $572,285 $682,484 
Nine Months Ended September 30, 2022
Common StockPaid-inRetained
Shares1
Amount1
Capital
Earnings1
Total
(in thousands)
Balances at December 31, 202178,792 $318 $81,654 $384,198 466,170 
Net income— — — 61,478 61,478 
Stock options exercised, restricted stock awards1,265 3 10,987 — 10,990 
granted, and contingent shares issued (Note 15)
Share-based compensation— — 10,229 — 10,229 
Stock repurchased and retired(234)— (8,921)— (8,921)
Contingent consideration
— — (6,000)— (6,000)
Dividends— — — (10,088)(10,088)
Balances at September 30, 202279,823 $321 $87,949 $435,588 $523,858 
Three Months Ended September 30, 2022
Common StockPaid-inRetained
Shares1
Amount1
Capital
Earnings1
Total
(in thousands)
Balances at June 30, 202279,691 $321 $82,078 $408,107 $490,506 
Net income— — — 27,473 27,473 
Stock options exercised and restricted186 — 4,605 — 4,605 
stock awards granted
Share-based compensation— — 3,321 — 3,321 
Stock repurchased and retired(54)— (2,055)— (2,055)
Dividends— — — 8 8 
Balances at September 30, 202279,823 $321 $87,949 $435,588 $523,858 
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)
 Nine Months Ended 
 September 30,
 20232022
Operating Activities(in thousands)
Net income
$130,574 $61,478 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Depreciation and amortization33,439 25,624 
Amortization of debt issuance cost57 32 
Amortization of right of use assets166 191 
(Recoveries of) provision for credit losses on accounts receivable, net of adjustments
(92)300 
Provision for excess and obsolete inventories, net of write-offs
2,979 1,380 
Share-based compensation12,102 10,229 
Gain on disposition of assets
(13)(12)
Foreign currency transaction loss
 42 
Interest income on note receivable
(15)(17)
Deferred income taxes(3,917)(563)
Changes in assets and liabilities:  
Accounts receivable(32,040)(63,593)
Income taxes(12,472)3,782 
Inventories(18,547)(47,998)
Contract assets(10,155)(3,843)
Prepaid expenses and other long-term assets(896)(70)
Accounts payable(15,631)18,616 
Contract liabilities(1,848)24,249 
Extended warranties2,049 730 
Accrued liabilities and other long-term liabilities21,405 12,857 
Net cash provided by operating activities
107,145 43,414 
Investing Activities  
Capital expenditures(82,900)(41,586)
Cash paid for building (Note 18)
 (22,000)
Cash paid in business combination, net of cash acquired (249)
Proceeds from sale of property, plant and equipment129 12 
Principal payments from note receivable39 41 
Net cash used in investing activities
(82,732)(63,782)
Financing Activities  
Proceeds from financing obligation, net of issuance costs6,061  
Payment related to financing costs(398) 
Borrowings under revolving credit facility444,072 151,103 
Payments under revolving credit facility(436,656)(114,812)
Principal payments on financing lease (115)
Stock options exercised25,251 10,990 
Repurchase of stock(25,009)(7,943)
Employee taxes paid by withholding shares(1,202)(978)
Cash dividends paid to stockholders(19,946)(10,096)
Net cash (used in) provided by financing activities
(7,827)28,149 
Net increase in cash, cash equivalents and restricted cash16,586 7,781 
Cash, cash equivalents and restricted cash, beginning of period5,949 3,487 
Cash, cash equivalents and restricted cash, end of period$22,535 $11,268 
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. ("AAON Oklahoma"), an Oklahoma corporation, AAON Coil Products, Inc. ("AAON Coil Products"), a Texas corporation, and BasX, Inc. ("BASX"), 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”).
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 five 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, 2022 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, 2022. All intercompany balances and transactions have been eliminated in consolidation.
We are engaged in the engineering, manufacturing, marketing, and sale of premium air conditioning and heating equipment consisting of standard, semi-custom, and custom rooftop units, data center cooling solutions, cleanroom systems, 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 valuation, inventory reserves, warranty accrual, medical insurance accrual, income taxes, useful lives of property, plant, and equipment, estimated future use of leased property, share-based compensation, business combinations, revenue percentage of completion and estimated costs to complete. Actual results could differ materially from those estimates.
Inflation and Labor Market
In 2022 and continuing into 2023, we have witnessed increases in our raw material and component prices. Due to our favorable liquidity position, we continue to make strategic purchases of materials when we see opportunities. We continue to manage the increase in the cost of raw materials through price increases for our products. We have also experienced supply chain challenges related to specific manufacturing parts, which we have managed through our strong vendor relationships as well as expanding our list of vendors.

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Additionally, we continue to experience challenges in a tight labor market, especially the hiring of both skilled and unskilled production labor. We have implemented the following wage increases to remain competitive and to attract and retain employees:
In March 2022, we awarded annual merit raises for an overall 3.0% increase to wages.
In October 2022, we implemented a cost of living increase of 3.5% in place for all employees
below the Senior Leadership Team ("SLT") level.
In March 2023, we awarded annual merit raises for an overall 3.9% increase to wages.
We will continue to implement human resource initiatives to retain and attract labor to further increase production capacity. Beginning in 2023, initiatives included changing our employee paid time off policy, historically awarded in arrears at the beginning of each quarter, to accrue ratably over each pay period. Additionally, we enhanced our benefits for short-term disability, life insurance, paid parental leave, and paid military leave.
Despite efforts to mitigate the impact of inflation, supply chain issues and the tight labor market, future disruptions, while temporary, could negatively impact our consolidated financial position, results of operations and cash flows.
Change in Estimate
During the first quarter of 2022, a review of the Company’s useful lives for certain sheet metal manufacturing equipment at our Longview, Texas location resulted in a change in estimate that increased the useful lives from between ten and twelve years to fifteen years. This determination was based on recent and estimated future production levels as well as management’s knowledge of the equipment and historical and future use of the equipment. The change in estimate was made prospectively and resulted in a decrease to depreciation expense within cost of sales on our consolidated statements of income of $1.8 million during the nine months ended September 30, 2022.
WH Series and WV Series Water Source Heat Pump Units
As part of the normal course of business, management continually monitors the profitability of the Company's various product series offerings. During the third quarter of 2022, management made the decision to no longer produce our small packaged geothermal/water-source heat pump units consisting of the WH Series horizontal configuration and WV Series vertical configuration, from one-half to 12 1/2 tons ("WH/WV"). These WH/WV units were produced solely out of the AAON Oklahoma facility. Production of the remaining WH/WV backlog was completed during the second quarter 2023.
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, 2022.
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.

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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. We amortize our definite-lived intangible assets on a straight-line basis over the estimated useful lives of the assets. We evaluate the carrying value of our amortizable intangible assets for potential impairment when events and circumstances warrant such a review. 
Amortization is computed using the straight-line method over the following estimated useful lives:
Intellectual 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. 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.
The changes in the carrying amount of goodwill were as follows:
Nine Months Ended September 30,
20232022
(in thousands)
Balance, beginning of period
$81,892 $85,727 
Additions due to acquisitions
  
Decreases due to business combination revisions1
 (3,835)
Balance, end of period$81,892 $81,892 
  1 Revisions related to the December 2021 acquisition of BASX.
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, 2022, were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements and notes thereto.

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2.  Revenue Recognition
The following tables show disaggregated net sales by reportable segment (Note 19) by major source, net of intercompany sales eliminations.
Three Months Ended September 30, 2023
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$221,417 $ $ $221,417 
Condensing units 7,636  7,636 
Air handlers 9,862 7,558 17,420 
Outdoor mechanical rooms 62  62 
Cleanroom systems  5,355 5,355 
Data center cooling solutions 3,284 25,726 29,010 
Water-source heat pumps 3,898  3,898 
Part sales17,756 4 371 18,131 
Other1
7,281 1,023 737 9,041 
$246,454 $25,769 $39,747 $311,970 
Three Months Ended September 30, 2022
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$154,171 $ $ $154,171 
Condensing units 12,720  12,720 
Air handlers 14,380 2,211 16,591 
Outdoor mechanical rooms58 118  176 
Cleanroom systems  15,283 15,283 
Data center cooling solutions  14,884 14,884 
Water-source heat pumps3,236 2,445  5,681 
Part sales15,724  176 15,900 
Other1
5,980 841 378 7,199 
$179,169 $30,504 $32,932 $242,605 
 1 Other sales include freight, extended warranties and miscellaneous revenue.

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Nine Months Ended September 30, 2023
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$597,508 $ $ $597,508 
Condensing units61 34,243  34,304 
Air handlers 34,693 13,196 47,889 
Outdoor mechanical rooms208 274  482 
Cleanroom systems  35,063 35,063 
Data center cooling solutions 6,524 56,079 62,603 
Water-source heat pumps3,128 10,064  13,192 
Part sales47,623 5 862 48,490 
Other1
18,142 3,459 748 22,349 
$666,670 $89,262 $105,948 $861,880 
Nine Months Ended September 30, 2022
AAON OklahomaAAON Coil ProductsBASXTotal
(in thousands)
Rooftop units$414,493 $ $ $414,493 
Condensing units242 33,645  33,887 
Air handlers 35,358 6,495 41,853 
Outdoor mechanical rooms612 488  1,100 
Cleanroom systems  31,568 31,568 
Data center cooling solutions  38,589 38,589 
Water-source heat pumps8,098 6,596  14,694 
Part sales39,797  507 40,304 
Other1
13,275 3,106 1,321 17,702 
$476,517 $79,193 $78,480 $634,190 
 1 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.
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.

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Sales allowances and customer incentives are treated as reductions to sales and are provided for based on historical experiences and current estimates.
Historically, sales of our products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather. However, in recent years, given the increases in demand of our product and increases in our backlog, sales have become more constant throughout the year.
Product Warranties
A provision is made for the estimated cost of maintaining product warranties to customers at the time the product is sold based upon historical claims experience by product line. The Company records a liability and an expense for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the liability and expense in the current year.
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 sheets.
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 $20.1 million and $10.8 million for the three months ended September 30, 2023 and 2022, respectively, and $46.4 million and $28.7 million for the nine months ended September 30, 2023 and 2022, respectively.
3. Leases
The Company has various lease arrangements for certain manufacturing and warehousing facilities, equipment rental, as well as administrative facilities. Currently, all leases are classified as operating leases.
The following table presents the balances by lease type:
Balance Sheet ClassificationSeptember 30, 2023December 31, 2022
Operating Leases
Right of use assetsRight of use assets$12,252 $7,123 
Lease liability, short-termAccrued liabilities$1,858 $1,254 
Lease liability, long-termOther long-term liabilities$10,684 $5,993 
Since 2018, the Company has leased the manufacturing, engineering and office space used by our operations in Parkville, Missouri, which is classified as an operating lease. In October 2022, the Parkville, Missouri lease was amended to expand our manufacturing and office space from 51,000 square feet to 86,000 square feet. The amended lease provides for approximately 31,000 square feet of additional manufacturing and engineering space and approximately 4,000 square feet of additional office space. The amended lease extends the lease term through December 31, 2032.

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In November 2022, the Company entered into a lease agreement for land and facilities in Tulsa, Oklahoma which provides an additional 198,000 square feet to support our operations. The lease term will expire October 31, 2025.
On July 28, 2023, the Company entered into a lease agreement with a start date of September 1, 2023, for land and approximately 72,000 square feet of facilities in Redmond, Oregon to support our manufacturing operations. The lease term is approximately five years with additional renewal options.
4.  Accounts Receivable
Accounts receivable and the related allowance for credit losses are as follows:
 
 September 30,
2023
December 31, 2022
 (in thousands)
Accounts receivable$160,493 $127,635 
Less:  Allowance for credit losses(385)(477)
Total, net
$160,108 $127,158 

 
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Allowance for credit losses:(in thousands)
Balance, beginning of period$306 $563 $477 $549 
Provisions for (recoveries of) expected credit
79 119 (92)300 
losses, net of adjustments
Accounts receivable written off, net of recoveries
   (167)
Balance, end of period$385 $682 $385 $682 
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:
 September 30,
2023
December 31, 2022
 (in thousands)
Raw materials$209,697 $194,159 
Work in process4,379 3,501 
Finished goods5,219 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 
  Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Allowance for excess and obsolete inventories:(in thousands)
Balance, beginning of period$5,281 $1,871 $4,527 $1,787 
Provision for (recoveries of) excess and1,521 1,232 2,979 1,380 
     obsolete inventories
Inventories written off(2,014)(38)(2,718)(102)
Balance, end of period$4,788 $3,065 $4,788 $3,065 

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6.  Intangible assets
Our intangible assets consist of the following:
 September 30, 2023December 31, 2022
Definite-lived intangible assets(in thousands)
Intellectual property$6,295 $6,295 
Customer relationships47,547 47,547 
Less:  Accumulated amortization(6,512)(3,807)
               Total, net47,330 50,035 
Indefinite-lived intangible assets
Trademarks14,571 14,571 
Total intangible assets, net$61,901 $64,606 
Amortization expense recorded in selling, general and administrative expenses is as follows:
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
(in thousands)
Amortization expense$902 $902 $2,705 $2,698 
Excluding the impact of any future acquisitions, the Company anticipates amortization expense to be $3.6 million for each of the years ending 2023 through 2027.
7.  Supplemental Cash Flow Information
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Supplemental disclosures:(in thousands)
Interest paid$1,187 $974 $3,814 $1,507 
Income taxes paid$12,081 $3,086 $45,724 $14,067 
Non-cash investing and financing activities:  
Non-cash capital expenditures$(1,536)$306 $35 $985 
8.  Warranties
The Company has product warranties with various terms 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 EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Warranty accrual:(in thousands)
Balance, beginning of period$16,900 $14,381 $15,682 $13,769 
Payments made(3,337)(2,196)(7,653)(5,094)
Warranty expense4,248 3,046 9,782 6,556 
Balance, end of period$17,811 $15,231 $17,811 $15,231 

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9.  Accrued Liabilities and Other Long-Term Liabilities
Accrued liabilities were comprised of the following:
 September 30,
2023
December 31, 2022
 (in thousands)
Warranty$17,811 $15,682 
Due to representatives15,888 15,545 
Payroll18,105 11,901 
Profit sharing7,349 5,451 
Workers' compensation428 367 
Medical self-insurance1,745 1,178 
Customer prepayments1,462 3,750 
Donations, short-term419 637 
Litigation settlement (Note 17)
7,500  
Accrued income taxes113 12,472 
Employee vacation time10,131 6,329 
Lease liability, short-term1,858 1,254 
Property taxes2,493  
Extended warranties, short-term2,909 1,330 
Other2,775 2,734 
Total
$90,986 $78,630 
Other long-term liabilities were comprised of the following:
 
 September 30,
2023
December 31, 2022
 (in thousands)
Lease liability$10,684 $5,993 
Extended warranties5,009 4,539 
Donations and other554 976 
Total
$16,247 $11,508 
10.  Revolving Credit Facility
On May 27, 2022, we amended our $100.0 million Amended and Restated Loan Agreement dated November 24, 2021 (as amended, “Revolver”), to provide for maximum borrowings of $200.0 million. As of September 30, 2023 and December 31, 2022, we had $78.4 million and $71.0 million outstanding under the Revolver, respectively. We have two standby letters of credit totaling $2.3 million as of September 30, 2023. Borrowings available under the Revolver at September 30, 2023 were $119.3 million. The Revolver expires on May 27, 2027. On April 20, 2023, we amended the Revolver to allow for the occurrence of transactions associated with the New Markets Tax Credit executed on April 25, 2023 (Note 16).
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. The weighted average interest rate on borrowings outstanding on the Revolver was 6.5% and 6.3% for the three and nine months ended September 30, 2023, respectively, as compared to 3.5% and 2.5% for the three and nine months ended September 30, 2022, respectively. Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.
If SOFR cannot be determined pursuant to the definition, as defined by the Revolver agreement, any outstanding affected 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%.

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At September 30, 2023, we were in compliance with our covenants, as defined by the Revolver. Our financial covenants require that we meet certain parameters related to our leverage ratio. At September 30, 2023, our leverage ratio was 0.33 to 1.0, which meets the requirement of not being above 3 to 1.
11.  Income Taxes
The provision (benefit) for income taxes consists of the following:
 Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
 (in thousands)
Current$14,892 $8,763 $33,364 $17,849 
Deferred521 (436)(3,917)(563)
     Income tax provision$15,413 $8,327 $29,447 $17,286 
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 EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Federal statutory rate21.0 %21.0 %21.0 %21.0 %
State income taxes, net of Federal benefit3.4 5.0 4.0 4.7 
Excess tax benefits related to share-based compensation (Note 12)
(0.8)(1.5)(3.9)(1.6)
Return to provision0.9 (0.4)0.3 (0.5)
Research and development credits(0.2)(0.7)(0.9)(1.0)
Change in valuation allowance (Oklahoma Investment Credit)  (2.0) 
Other (0.1)(0.1)(0.7)
     Effective tax rate24.3 %23.3 %18.4 %21.9 %
We have historically earned 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 part of our expansion projects in Oklahoma, we identified a separate, more advantageous Oklahoma credit program (non income tax related) which will cause us to discontinue our accumulation of credits for Oklahoma’s manufacturing property investment program after the 2022 tax year.
The Company had investment tax credit carryforwards with a valuation allowance reserved against them as we did not have sufficient taxable income to utilize the carryforwards, in part because we generated more credit each year than we were able to utilize. Because the Company will not generate additional excess credits after our 2022 tax year, we will be able to use our credit carryforwards against future taxable income and the related valuation allowance was reversed resulting in a one-time benefit of $3.1 million to the income tax provision for the nine months ended September 30, 2023. As of September 30, 2023, we have investment tax credit carryforwards of approximately $3.8 million. These credits have estimated expirations from the year 2039 through 2043.
The Company's estimated annual 2023 effective tax rate, excluding discrete events, is approximately 24.1%. 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 2019 to present, and to non-U.S. income tax examinations for the tax years 2018 to present. In addition, we are subject to state and local income tax examinations for the tax years 2018 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.

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12. Share-Based Compensation
As discussed in Note 15, the Company declared a three-for-two stock split effective August 16, 2023. All share and per share information has been updated to reflect the effect of this stock split.
On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. 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 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that are now authorized for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 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.
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 nine months ended September 30, 2023 and 2022 using a Black Scholes-Merton Model:
 Nine months ended
 September 30, 2023September 30, 2022
Directors and SLT1:
  
Expected (annual) dividend rate$0.32$0.25
Expected volatility37.89%36.00%
Risk-free interest rate4.39%2.21%
Expected life (in years)4.04.0
Employees:
Expected (annual) dividend rate$0.32$0.25
Expected volatility38.30%37.38%
Risk-free interest rate4.41%2.20%
Expected life (in years)3.03.0
1 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.

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 The following is a summary of stock options vested and exercisable as of September 30, 2023:
 
Range of
Exercise
Prices
Number
of
Shares
Weighted
Average
Remaining
Contractual Life
(in years)
Weighted
Average
Exercise
Price
Intrinsic
Value
(in thousands)
$13.95 -$27.58 1,528,983 4.52$24.70 $49,191 
$28.28 -$37.16 534,293 6.7230.91 13,870 
$37.63 -$69.62 210,415 7.4448.06 1,857 
Total2,273,691 5.31$28.32 $64,918 
 A summary of stock option activity under the plans is as follows:
Stock OptionsSharesWeighted
Average
Exercise
Price
Outstanding at December 31, 2022
4,560,520 $30.14 
Granted
326,506 61.16 
Exercised
(864,524)29.19 
Forfeited or Expired
(106,291)33.90 
Outstanding at September 30, 2023
3,916,211 $32.83 
Exercisable at September 30, 2023
2,273,691 $28.32 
The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2023 is $10.7 million and is expected to be recognized over a weighted average period of approximately 1.3 years.
The total intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022 was $27.6 million and $6.7 million, respectively. The cash received from options exercised during the nine months ended September 30, 2023 and 2022 was $25.3 million and $11.0 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 September 30, 2023, unrecognized compensation cost related to unvested restricted stock awards was approximately $5.7 million, which is expected to be recognized over a weighted average period of approximately 1.5 years.
A summary of the unvested restricted stock awards is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2022
217,168 $33.34 
Granted
73,633 59.70 
Vested
(92,977)32.57 
Forfeited
(4,846)38.52 
Unvested at September 30, 2023
192,978 $43.64 

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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.
The total pre-tax compensation cost related to unvested PSUs not yet recognized as of September 30, 2023 is $5.0 million and is expected to be recognized over a weighted average period of approximately 1.7 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 nine months ended September 30, 2023 and 2022 using a Monte Carlo Model:
 Nine months ended
 September 30, 2023September 30, 2022
 
Expected (annual) dividend rate$0.32$0.25
Expected volatility32.71%37.60%
Risk-free interest rate4.66%2.00%
Expected life (in years)2.82.8
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, 2022
93,982 $36.62 
Granted
58,130 84.42 
Vested
  
Forfeited
  
Unvested at September 30, 20231
152,112 $54.88 
1Consists of 22,222 PSUs cliff vesting December 31, 2023, 71,760 PSUs cliff vesting December 31, 2024, and 58,130 PSUs cliff vesting December 31, 2025.
Key Employee Awards
As part of the December 2021 acquisition of BASX, the Company granted awards to key employees of BASX ("Key Employee Awards"). Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period. The potential future issuance of the Key Employee Awards is contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award will vest and be converted into common stock. The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date.
The total pre-tax compensation cost related to unvested Key Employee Awards not yet recognized as of September 30, 2023 is $0.3 million and is expected to be recognized over a weighted average period of approximately 0.3 years.

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A summary of the unvested Key Employee Awards is as follows:
SharesWeighted
Average
Grant Date
Fair Value
Unvested at December 31, 2022
39,899 $53.45 
Granted
  
Vested
  
Forfeited
  
Unvested at September 30, 2023
39,899 $53.45 


Share-Based Compensation
A summary of share-based compensation is as follows:

Three Months EndedNine Months Ended
 September 30,
2023
September 30,
2022
September 30,
2023
September 30,
2022
Grant date fair value of awards during the period:(in thousands)
Options$106 $480 $5,224 $5,979 
PSUs 109 4,907 2,190 
Restricted stock246 164 4,396 3,319 
Total$352 $753 $14,527 $11,488 
Share-based compensation expense:
Options$2,228 $2,104 $6,604 $6,483 
PSUs737 188 1,820 665 
Restricted stock1,053 768 2,903 2,290 
Key employee awards