8-K: AAON Navigates ERP Impact, Targets Data Center Growth

AAON, Inc. presented at D.A. Davidson's conference, highlighting strategic growth in data centers despite Q2 2025 sales and earnings impact from ERP implementation.

Summary

• Participated in D.A. Davidson's Diversified Industrials & Services Conference on September 18, 2025, presenting an investor relations presentation.
• Reported Q2 2025 sales of $311.6 million, a -0.6% year-over-year decrease.
• Q2 2025 gross profit margin was 26.6%, down 950 basis points year-over-year.
• Q2 2025 Non-GAAP Adjusted EBITDA was $46.6 million, a -43.1% year-over-year decrease.
• Q2 2025 Non-GAAP Adjusted Diluted EPS was $0.22, a -64.5% year-over-year decrease.
• Adjusted backlog ended Q2 2025 at a record $1.1 billion, up 71.9% year-over-year.
• The Q2 2025 results were impacted by the implementation of a new SAP ERP system at the Longview facility, causing slower production.
• Reaffirmed 2025 outlook: low-teens sales growth, 28%-29% gross margin, 16.5%-17.0% Non-GAAP Adj. SG&A as a % of sales, and approximately $220.0 million in CapEx.
• Reaffirmed 2027 targets: 12.5%+ 3-year organic sales CAGR, 32%-35% gross margin, and 13%-14% SG&A as a percent of sales.
• Emphasized strategic growth in the data center market, with BASX providing fully customized solutions for air handling, liquid cooling, and cleanroom environments.
• BASX air-side cooling sales (~$167 million in 2024) are expected to grow >20% for the next three years.
• Secured substantial orders for liquid cooling solutions since October (previous year), targeting the rapidly evolving AI data center market.
• The new Memphis facility (787,000 sq ft) is expected to double BASX's production capacity, with production starting in Q4 2025.
• AAON brand focuses on semi-custom engineering, innovation (Alpha Class heat pumps), and a solutions-based sales channel, with Alpha Class sales up 39% in 2024.

Sentiment

Score: 6

Explanation: While Q2 2025 results were significantly negative due to ERP implementation, the company maintains a strong backlog, reaffirms its full-year 2025 guidance, and outlines compelling long-term growth strategies, particularly in the data center market and with innovative products like Alpha Class heat pumps. The negative short-term impact is acknowledged and attributed to a strategic, albeit disruptive, operational upgrade, suggesting a temporary setback rather than fundamental weakness.

Positives

• Record adjusted backlog of $1.1 billion at the end of Q2 2025, representing a 71.9% year-over-year increase, indicating strong future demand.
• Strategic positioning for significant growth in the data center market, with BASX offering specialized, fully customized thermal management solutions.
• BASX air-side cooling sales (~$167 million in 2024) are projected to grow over 20% for the next three years.
• Secured substantial orders for liquid cooling solutions since October (previous year), indicating successful penetration into the rapidly evolving AI data center market.
• New Memphis facility (787,000 sq ft) will double BASX's production capacity, with 490,000 sq ft dedicated to data center equipment, supporting future growth.
• AAON's Alpha Class heat pump category grew 39% in 2024, demonstrating innovation and alignment with decarbonization trends, despite a 5% decline in total rooftop sales.
• Successful development of a national account pipeline worth several hundred million dollars in annualized sales over the last 18 months.
• Reaffirmed strong 2027 targets: 12.5%+ 3-year organic sales CAGR, 32%-35% gross margin, and 13%-14% SG&A as a percent of sales.
• Improved AAON Oklahoma gross margin from 30.5% in 2020 to 35.2% in 2024, indicating operational efficiency gains.
• The company's unique integrated process and semi-custom engineering create high barriers to entry and a competitive advantage.

Negatives

• Q2 2025 sales decreased by 0.6% year-over-year to $311.6 million.
• Gross profit margin in Q2 2025 significantly declined by 950 basis points year-over-year to 26.6%.
• Non-GAAP Adjusted EBITDA for Q2 2025 fell by 43.1% year-over-year to $46.6 million.
• Non-GAAP Adjusted Diluted EPS for Q2 2025 decreased by 64.5% year-over-year to $0.22.
• The new ERP system implementation at the Longview facility caused slower production rates and limited Tulsa production ramp, directly impacting Q2 2025 results.
• Reliance on two additional coil suppliers faced challenges, further affecting production.
• Total rooftop sales were down 5% in 2024, indicating weakness in a core segment despite Alpha Class growth.

Risks

• Timing and extent of changes in raw material and component prices.
• Effects of fluctuations in the commercial/industrial new construction market.
• Timing and extent of changes in interest rates.
• Other competitive factors during the year.
• General economic, market, or business conditions.
• Potential for actual outcomes and results to differ materially from forward-looking statements due to difficult-to-predict assumptions.
• Challenges and potential impacts from the ongoing ERP system implementation across various sites.

Future Outlook

The company reaffirms its 2025 outlook for low-teens sales growth, 28%-29% gross margin, 16.5%-17.0% Non-GAAP Adjusted SG&A as a percentage of sales, and approximately $220.0 million in CapEx, incorporating a cushion for potential ERP impact in the second half. For 2027, it targets a 12.5%+ 3-year organic sales CAGR, 32%-35% gross margin, and 13%-14% SG&A as a percent of sales, driven by strategic growth in the data center market and operational efficiencies. The data center market is expected to see annualized put-in-place construction grow to ~8-12 GWs, with a significant shift towards liquid cooling by 2028 (60% liquid, 40% air-cooled).

Management Comments

• All statements at the conference (including Exhibit 99.1), other than historical financial information, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
• We undertake no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
• While the Company's management believes that these forward-looking statements are reasonable as and when made, these statements are not guarantees of future performance and undue reliance should not be placed on them.
• In our view, the data center HVAC supply chain will remain tight for years.

Industry Context

The company is strategically capitalizing on the rapidly expanding data center market, which is experiencing a significant shift towards liquid cooling, especially for AI data centers. This trend, coupled with broader secular trends in decarbonization, energy efficiency, and government regulations, is driving demand for highly engineered, customized HVAC solutions. The company believes the data center HVAC supply chain will remain tight for years, indicating strong demand and potential for sustained pricing power. Its focus on Alpha Class heat pumps aligns with the industry's move towards electrification and energy-efficient solutions.

Comparison to Industry Standards

• BASX is highlighted as the only player in the industry specializing in providing solutions, not just standard products, for data centers, offering full customization, high-quality manufacturing, and premier customer care.
• AAON's Alpha Class heat pumps were the only ones operable below 30°F in 2023, down to 0°F, and in 2025, they are introducing operability down to -20°F, meeting the Department of Energy's challenge two years ahead of requirement, positioning them as an industry leader in heat pump technology.
• The company claims its competitive advantage lies in a unique integrated process with sophisticated engineering, efficient manufacturing through automation, and the most capable R&D lab in the industry, creating high barriers to entry.
• AAON products are presented as having lower Total Cost of Ownership (TCO) through higher efficiency, longer lifespan (up to 2x the competition), and greater reliability compared to low-quality alternatives.
• The company's solutions-based sales channel model is described as superior to most factory products-based sales channels in the industry.

Stakeholder Impact

• Shareholders: Short-term negative impact on earnings and margins due to ERP, but strong backlog and long-term growth strategy in data centers and innovation could drive future value. Reaffirmed 2025 and 2027 targets provide a positive outlook.
• Customers: Potential for temporary delays in product delivery due to ERP-related production slowdowns, but long-term benefit from enhanced operational efficiency, customized solutions, and advanced products (e.g., Alpha Class, BASX data center solutions).
• Employees: Undergoing significant operational changes with ERP implementation, requiring adaptation and training, but potentially leading to more efficient workflows and growth opportunities.
• Suppliers: Challenges with coil suppliers noted, indicating potential for supply chain pressure.

Next Steps

• Continue ERP system roll-out to Memphis (Q4 2025), Redmond, and Tulsa (sometime in 2026).
• Start production at the new Memphis facility in Q4 2025, with a ramp-up in 2026.
• Capitalize on the expansion in the data center market, including continued growth in air-side cooling and further penetration into liquid cooling solutions.
• Continue to innovate with Alpha Class heat pumps, aiming for operability down to -20°F.
• Further narrow the price premium to less than 10% in 2025 to drive market share gains.
• Focus on parts and service to support the solutions-based offering.
• Leverage marketing function and invest in sales (e.g., Customer Exploration Center, training, national account director).

Key Dates

Recommendation

The Q2 2025 financial results were significantly worse than expected, primarily due to the disruptive but necessary ERP system implementation. This short-term operational challenge has impacted sales, margins, and EPS. However, the company maintains a robust, record-high backlog, reaffirms its full-year 2025 guidance (albeit with an ERP cushion), and outlines a compelling long-term growth strategy focused on the high-growth data center market and continued innovation in energy-efficient HVAC solutions (Alpha Class). The strategic investments in capacity (Memphis facility) and operational upgrades (ERP) are expected to drive future performance. Given the temporary nature of the Q2 headwinds and the strong underlying fundamentals and growth prospects, a 'hold' recommendation is appropriate. Investors should monitor the successful execution of the ERP rollout and the ramp-up of new production capacity.

Keywords

HVAC, Data Centers, Commercial HVAC, Industrial HVAC, Rooftop Units, Air Handling Units, Liquid Cooling, Thermal Management, ERP Implementation, AAON, BASX, Heat Pumps, Energy Efficiency, Decarbonization, Manufacturing, Backlog, Investor Presentation