Compared to our previous record EPS in the third quarter, EPS was up 39%. Gross profit margins were the highest since 2020. At the same time, backlog has increased throughout the year, finishing 2022 at record levels. We've increased capacity and production output throughout the year and hope the orders continue to outpace production. Now, please turn to slide number four. This is a very interesting time for AAON. For decades, the company focused on a niche of the commercial HVAC market, centered around the design and manufacturing of premium quality, high-performing, high energy efficient equipment. Historically, two factors prevented this niche offering from becoming mainstream, the first factor being price. A historically has had equipment that carried at least a 15% to 20% price premium as compared to market pricing.

This limited the size of our addressable market to specific applications and to our customers. The second factor is value. Up until recently, a vast majority of end users were not focused on total cost of ownership and premium quality, higher performing equipment. However, over the past two years, the market has begun to shift dramatically in AAON's favor with the pandemic creating more focus on indoor air quality, and at the same time, markets adopting an increased focus on energy efficiency due to higher energy prices, decarbonization, electrification and government regulations, the demand for higher performing, higher energy-efficient equipment has accelerated. Meanwhile, the price premium of AAON equipment has narrowed significantly, as government regulations related to the minimum energy efficiency standards have forced most of our competition to reengineer their equipment, causing them to use higher quality, higher priced components in their designs.

AAON's full product portfolio has been in line with these new standards for years. This regulation did not affect us at all from a pricing perspective. As a result, the cost of manufacturing across our industry has gone up significantly more compared to our costs. This has resulted in substantially larger price increases of our competition compared to the price increases that we have initiated. The end result, our higher-quality product offering now sells at a much more competitive price, making the value proposition that much more attractive. On top of all that, we continue to maintain the lowest lead times in the industry with best on-time delivery rates. All in, these dynamics have paved the way for AAON to transition from a niche player to a mainstream player.

I'll now hand the call over to Rebecca Thompson, to go over the financial results.

Rebecca Thompson: Thank you, Matt. I'd like to begin by discussing the comparative results of the three months ended December 31, 2022, versus December 31, 2021. Please turn to slide five. Net sales were up 86.8% to $254.6 million from $136.3 million. The largest driving factor to the growth was organic volume, which contributed 41%. Volume growth reflected the company's strong backlog and the fourth straight quarter of record production. Improved productivity, along with approximate 36.2% increase in total headcount helped drive the increased production. In addition to volume, pricing contributed 26.7% and inorganic growth contributed 19.1%. Similar to the legacy business, BasX performed extremely well in the quarter. BasX realized record sales and EBITDA of any quarter in its history.

Moving to slide six. Our gross profit increased 195.9% to $78.5 million from $26.5 million. As a percentage of sales, gross profit margin was 30.8% compared to 19.5% in 2021. Gross profit margin benefited significantly from multiple price increases initiated throughout the year, reduced impacts from supply chain issues and production efficiency improvements across all of our manufacturing locations. The year-over-year improvement in gross profit margin was also partially attributed to the abnormally low gross profit margin realized in the year ago quarter, a result of supply chain issues at the end of 2021, which constrained production and resulted in unabsorbed fixed costs. Please turn to slide seven. Selling, general and administrative expenses increased 51.3% to $31.9 million from $21.1 million in 2021.

Adjusted SG&A expenses increased year-over-year at 85.9%. As a percentage of sales, adjusted SG&A decreased to 12.5% of total sales compared to 12.6% in the same period in 2021. In dollars, SG&A increased primarily due to our volume growth that created higher earnings, including higher profit sharing expenses, commissions and bonuses. Please turn to slide eight. Adjusted income from operations grew 397.2% to $46.6 million from $9.4 million in the year ago quarter. As a percent of sales, adjusted operating margin expanded to 18.3% from 6.9%. Adjusted operating margin was the highest of any quarter since 2020. That said, pre-pandemic, the company had achieved operating margins of over 20%. We foresee us fully returning to those levels and thus expect further improvement from what we achieved in the fourth quarter.

Moving to slide nine, diluted earnings per share increased 545.5% to $0.71 per share from $0.11 per share. In the quarter, we benefited from a lower-than-normal tax rate due to decreases -- due to increases in our expected R&D tax credits and 179D deduction. Even without this benefit in the fourth quarter, we still experienced growth when compared to our previous record earnings in the third quarter. Turning to slide 10, you'll see that our balance sheet remains quite strong. Cash totaled $5.5 million at December 31st, 2022, and debt was $71 million. Within the quarter, we paid down approximately $5.3 million on our line of credit, lowering our leverage ratio to 0.46 from 0.65 at the end of the third quarter and returning us to a similar leverage ratio we were at one year ago.

The increase in debt from a year ago was primarily to finance investments in working capital. We had a working capital balance of $203.5 million at December 31st, 2022, versus $131.3 million at December 31st, 2021. The investment working capital was made to help facilitate the robust volume growth, while also helping mitigate supply chain issues. Capital expenditures for 2022 were $54 million, down 2.4% from a year ago. Capital investments were less than we expected at the beginning of the year, primarily due to a finding ways of increasing capacity within our current manufacturing square footage allowing us to push out certain projects. Supply chain issues and other economic factors also delayed projects. We have not slowed our growth-related investments at all, and we are still on track with our capacity expansion plans relative to our needs.

We continue to be aggressive with our investment planning to help facilitate the robust organic growth we anticipate over the next several years. In 2023, we anticipate capital expenditures to be $135 million. With that, I'll now turn the call back over to Matt.

Photo by Sigmund on Unsplash

Matt Tobolski: Thanks Rebecca. I'll now turn to slide 11. As I said in my opening remarks, we are very pleased with how we finished the calendar year. Our operations continue to perform well in Q4 and I continue to command the team for their performance. All three of our locations are pushing more volume through their respective plants than we've ever seen before. Organic volume growth of 41% realized in the fourth quarter is pretty much unheard of in its industry and the comp was not easy. Volume in the fourth quarter of the year ago period was up 4% from the fourth quarter in 2020. On a two-year stack, volume was up 46%. This performance is a result of several factors. First, the headcount was up 36.2% from a year ago and up 6% from the third quarter.

We continue to do a great job with our onboarding new employees and efficiently integrating them into our operations. Second, productivity continues to improve. Supply chain issues, while leaning a bit, still very much exist. Throughout the year, we learned to manage through supply chain constraints much better, leading to improved productivity. At the same time, we're ramping up headcount at an aggressive rate, which can result in inefficiencies, if not addable properly. Despite the challenges, our metrics on productivity tell us that our operations are continuing to become even more efficient. The team is fully adapted to the environment and has mitigated most of the financial impact, particularly when it comes to supply chain issues. We should see productivity improve even more as supply chain issues abate.

Lastly, in addition to headcount and productivity improvements, the volume growth was also a reflection of our premier sales channel and the backlog of our partners have been able to generate for us. I'd like to thank all of our channel partners as well as our internal sales support. Our sales channel has never been as strong as it is right now, and we're seeing through the shares like share gains that we've been realizing. Please turn to Slide 12. I want to discuss our pricing and gross margin. For a couple of quarters now, we have been saying the improving margin profile of the backlog had us on track to drive a recovery in gross profit margins. We realized some progress in the third quarter. And as we expected and indicated on our last call, we saw even more progress in the fourth quarter.

The 30.8% gross profit margin realized in the fourth quarter was up 380 basis points from third quarter and 810 basis points from the second quarter. On a year-over-year basis, gross profit margin improved 1,130 basis points. In the last five years, as size in the first quarter of 2020 when we realized gross profit margin of 31.2%, it was the strongest gross profit margin of any other quarter in history. We are certainly happy to see that. This improvement is largely related to a realignment of price versus cost. Improved productivity is also a contributing factor. Historically, we have always managed our pricing through our cost structure while targeting a gross profit margin of about 30%. However, as I addressed at the top of the call, our industry has changed a lot over the last couple of years.

Secular trends related to decarbonization, energy efficiency and new government regulations is causing the cost of manufacturing across the industry to increase much more drastically than it is for us, causing market pricing to increase more than our pricing. At the same time, our product offering is a much higher quality and offers a better total value proposition, justifying a premium price. We will continue to monitor our pricing to cost, and we are also beginning to manage pricing to market. In the end, we will be able to continue to improve our gross profit margin while maintaining a price premium that is smaller than it was a few years ago. Moving to Slide 13. Overall, demand remained strong. Total backlog was up 110.6% from a year ago and up 6.5% from the end of third quarter.

The fact that backlog continues to increase sequentially and is the sign that demand remains strong, particularly because our production is also increasing. Organic bookings in the quarter were up year-over-year 45%. Sequentially, they were up 14%, which is mostly driven by volume. Even if you remove the price increases from orders and sales to look at it on an apples-to-apples basis, orders are still outpacing production. Demand is also very strong at BasX. Backlog of BasX was up 260.9% since the end of 2021. The pipeline of projects among the data center in semiconductor manufacturing end markets have remained extensive, and the team there is doing a great job at winning orders. Likewise, the production team at BasX is doing an outstanding job in increasing capacity.

Please turn to Slide 14. Demand continues to be a fairly broad-based -- demand continues to be fairly broad-based as far as our end markets. Lodging and office buildings remain soft, but outside of that, most sectors in which we participate are still quite strong. Data centers and semiconductor markets are very strong, as I mentioned already. K-12 education vertical is also solid. I think that actually strengthens in 2023 with the majority of the stimulus money in the CARES Act having still not been spent. Health care and manufacturing are also still very good. We continue to see robust demand in growth facility markets. And while new construction of warehouses seems to be slowing, the end market remains good for us due to retrofit work. Overall, demand is solid across the board.

While we continue to monitor for the slowdown that everyone is anticipating, we still do not see it. Sentiment among our channel power group remains very positive and the macro data we track is still encouraging. Construction spending is back to pre-pandemic levels and construction starts are at the strongest level in years. The ABI and the Dodge Momentum Index, which tracks the pipeline of non-residential projects early in the planning stages, have recently peaked, but it still imply the pipeline is still at historically high levels. Turning now to slide 15. Our biggest challenge right now continues to be ramping up production fast enough. While we are happy to see backlog growing, you'd like to see it start to come down, led by improving lead-times.

I think we'll start to see this happen in 2023, but it won't be until the second half of the year. The team is doing a great job with adding headcount, while improving productivity. That said, our orders continue to outpace production. We want to continue to provide our channel partners and customers with the best lead-times in the industry. To do this, we're going to continue to invest in the business. We will continue to add headcount and invest in capacity for long-term growth. Our CapEx in 2023, as Rebecca mentioned, is estimated to be to be a $135 million, which would be a 150% increase from last year. We feel strongly that we have the best product offering for the best value, which is allowing us to accommodate the increasing demand caused by secular trends within to decarbonization, energy efficiency, higher energy prices into our air quality and government regulations.

We must continue to deliver at the very competitive lead-times growth, so we will continue to invest in capacity. Moving to slide 16. I want to touch briefly on our parts business. At 6% of total sales, parts still made up the small percentage in 2022. However, as we discussed in the past, this is an area of the company that we have been focusing on a lot, both internally and with our sales channel partners. In the fourth quarter, part sales were up 23.1% and in 2022, they were up 30.3%. Compared to 2020, parts sales were up 64.6% in 2022. While parts became a smaller part of the company last year, it was due to the robust growth of equipment sales as well as the acquisition of BasX. Overall though, it was a record year for parts. It could not have been even better.

In 2022, the Parts business arguably was the most effective part of the company on supply chain issues. While parts was not as affected on a profit margin basis, it was on a sales volume basis. Our parts business leverages the company's buying power of components and parts that go into the equipment we manufacture. Supply chain shortages limited this buying power in 2022, which, in the end, adversely affected parts sales the most because deliverability of the equipment takes precedence over part sales. Thus, despite the success we had, it could have been even better. As our supply chain normalizes, however, our parts business will reaccelerate. We'd expect to see this occur over the course of 2023. Longer term, with what we're doing to structurally build out this part of the company, the fundamentals are very strong.

Furthermore, the parts business is somewhat like a razor, razor blade type of business. With all the new AAON equipment entering the field last year and this year, parts will start to benefit from maintenance demand in just a couple of years. I'll remind you that Parts gross profit margin is significantly higher than the company's average gross profit margin. We anticipate this business will become a larger part of the company, both on a sales and profitability basis. As such, we are happy to see where this business is positioned, and we expect it will continue to be a big priority within our growth strategy. Please turn to slide 17. Before finishing up and handing off the call for Q&A, I want to provide some information on our outlook for 2023.

Based on the size of our backlog, the margin profile of the backlog, which continues to improve, increasing production capacity and productivity, and strong order trends, we anticipate another record year of sales and earnings. For your modeling purposes, here's some additional information that should help. Pricing will be a low double-digit contributor to sales growth. For gross profit margin, we will build off where we finished in the fourth quarter. It may not be a straight line, especially given some temporary expenses that we would see in the first quarter, but gross profit margins will continue to improve in 2023. For SG&A, you should be aware that we're making several investments that will help position the company better for long-term growth.

This will limit the operating leverage you will normally see within SG&A. We think SG&A as a percent of sales will be slightly higher than we realized in 2022. And finally, CapEx will be approximately $135 million. In closing, I want to finish by thanking all of our employees, sales channel partners and customers. I also want to announce that we'll be hosting an Investor Day on May 17 and 18 at our headquarters in Tulsa, Oklahoma. You can find more details on this event on our website. We will also be attending Sidoti & Company's small cap conference on March 22, and Wells Fargo's Industrial Conference on June 13. I hope to see some of you at these events. Thank you. And I will now open the call for Q&A.

See also 16 Largest Indian Banks by Assets and Top 20 Oil Exporting Countries in 2023.

To continue reading the Q&A session, please click here.