10-Q: AAON Q3 2025 Earnings: BASX Drives Sales Amidst AAON Headwinds

AAON, Inc. reported increased net sales driven by strong BASX demand, despite lower gross profit and net income due to tariff impacts, ERP disruptions, and a softer AAON rooftop market.

Summary

• Net sales for the three months ended September 30, 2025, increased 17.4% to $384.2 million, and for the nine months increased 12.7% to $1,017.9 million, compared to the prior year periods.
• Gross profit decreased 6.4% to $106.9 million for Q3 2025 and 13.6% to $276.0 million for the nine months, with gross profit margin declining from 34.9% to 27.8% in Q3 and 35.4% to 27.1% for the nine months.
• Net income for Q3 2025 was $30.8 million ($0.37 diluted EPS), down from $52.6 million ($0.63 diluted EPS) in Q3 2024. For the nine months, net income was $75.6 million ($0.91 diluted EPS), down from $143.9 million ($1.72 diluted EPS) in the prior year.
• BASX branded products experienced significant growth, with net sales up $61.1 million in Q3 and $217.3 million for the nine months, primarily driven by data center liquid cooling solutions.
• AAON branded products faced challenges, with net sales down $4.1 million in Q3 and $102.4 million for the nine months, due to a softer rooftop market and supply chain constraints from a refrigerant transition.
• The implementation of a new ERP system at the Longview, Texas facility on April 1, 2025, caused production disruptions, particularly impacting AAON Coil Products' gross profit margins.
• Operating activities resulted in a net cash outflow of $18.8 million for the nine months ended September 30, 2025, compared to an inflow of $191.7 million in the prior year.
• Total backlog reached $1,320.1 million at September 30, 2025, a 103.8% increase year-over-year, with BASX Products backlog increasing 119.5%.

Sentiment

Score: 4

Explanation: While sales growth and backlog are strong, significant declines in gross profit, net income, and EPS, coupled with negative cash flow from operations and ERP implementation issues, indicate substantial operational and profitability challenges. The positive outlook for BASX and tax law changes are offset by these immediate financial headwinds.

Positives

• Total net sales increased by 17.4% for the three months and 12.7% for the nine months ended September 30, 2025, driven by strong demand for BASX products.
• BASX branded products net sales grew by 19.2% in Q3 2025 and 42.2% for the nine months, primarily from data center liquid cooling solutions.
• Consolidated backlog significantly increased by 103.8% to $1,320.1 million at September 30, 2025, indicating strong future revenue potential.
• The company maintains a favorable liquidity position, enabling strategic material purchases and mitigating supply chain disruptions.
• Cash dividends declared per common share increased to $0.10 in Q3 2025 from $0.08 in Q3 2024.
• The company is in compliance with its debt covenants, with a leverage ratio of 1.73 to 1.0, well below the 3 to 1 requirement.
• The One Big Beautiful Bill Act (OBBBA) enacted July 4, 2025, introduced favorable tax law changes, including 100% bonus depreciation and permanent expensing of domestic R&E costs, leading to a $30.9 million increase in DTLs and a $30.6 million decrease in current income tax payable.

Negatives

• Gross profit decreased by 6.4% in Q3 2025 and 13.6% for the nine months, with gross profit margins declining significantly across segments.
• Net income decreased by 41.5% in Q3 2025 to $30.8 million and by 47.5% for the nine months to $75.6 million.
• Diluted EPS decreased to $0.37 in Q3 2025 from $0.63 in Q3 2024, and to $0.91 for the nine months from $1.72 in the prior year.
• Operating activities resulted in a net cash outflow of $18.8 million for the nine months ended September 30, 2025, a significant reversal from the $191.7 million inflow in the prior year.
• AAON branded products experienced a decline in net sales due to a softer rooftop market, higher interest rates, slowing construction starts, and supply chain constraints from a refrigerant transition.
• The ERP system implementation caused production disruptions and negatively impacted gross profit margins, particularly for AAON Coil Products.
• Interest expense, net, significantly increased to $5.2 million in Q3 2025 from $1.1 million in Q3 2024, and to $12.0 million for the nine months from $1.7 million in the prior year, due to increased borrowings.
• Selling, general and administrative expenses increased by $14.6 million in Q3 2025 and $33.9 million for the nine months, driven by higher warranty costs, salaries, benefits, and technology consulting fees.
• The tariff surcharge implemented on April 1, 2025, has not yet fully covered the additional costs from tariffs, impacting profitability.

Risks

• Continuous changes and uncertainty in tariff policy could impact the cost of materials, parts, or components imported into the U.S. and the availability of supply from vendors.
• Increased prices of products due to tariffs and other cost increases could adversely affect demand.
• Supply chain challenges related to specific manufacturing parts, potentially exacerbated by trade conflict.
• Tight labor market, especially for skilled and unskilled production labor, could hinder production capacity.
• Future increases in the cost of materials, parts, components, or labor, in addition to supply chain disruptions, while temporary, could negatively impact consolidated financial position, results of operations, and cash flows.
• The business can be affected by economic factors, including the level of economic activity, and the cyclical nature of new construction and replacement markets.
• Fluctuations in raw material prices (steel, copper, aluminum) due to market volatility.
• Noncompliance with various regulations and contractual provisions related to New Markets Tax Credit (NMTC) arrangements could result in indemnification obligations for lost tax benefits.
• Exposure to changes in interest rates related to outstanding debt, with a one percentage point increase potentially decreasing annual income before taxes by approximately $3.6 million.
• Potential for litigation and regulatory matters incidental to business, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, and tax laws.

Future Outlook

The company expects the 6.0% tariff surcharge on AAON branded orders to fully cover additional tariff costs by the end of the year. Management believes its favorable liquidity position, projected cash flows, and existing credit facility will satisfy working capital, capital expenditures, and other liquidity requirements for 2025 and the foreseeable future. The estimated annual 2025 effective tax rate, excluding discrete events, is approximately 24.1%, with discrete events expected to keep the actual rate lower. The capital expenditure program for 2025 is estimated to be approximately $180.0 million.

Management Comments

• We continue to see strong demand and growth of the BASX brand with increases in net sales of $61.1 million and $217.3 million for the three and nine months ended September 30, 2025, respectively. This growth is primarily driven by data center demand for our liquid cooling solutions.
• The AAON brand has experienced challenges with a softer rooftop market due to macroeconomic factors like higher interest rates and slowing construction starts.
• The refrigerant change that went into effect on January 1, 2025 created supply chain constraints for components with the new refrigerant that challenged the first quarter and lingered into the second quarter.
• The Company went live with its new Enterprise Resource Planning (ERP) system on April 1, 2025 at its Longview, Texas facility. The adoption of this new system has caused some disruptions due to changes in processes.
• All of our segments saw sequential increases in net sales in the third quarter as we overcame the challenges associated with our ERP implementation.
• We continue to invest in the future growth of the Company as evidenced by our $138.9 million in capital expenditures in 2025, an increase of $25.1 million or 22.1% when compared to 2024.
• To date, we estimate that the amount of surcharge realized has not covered the additional costs from the tariffs, but expect this to change by the end of the year as we fully realize our surcharge.
• Due to our favorable liquidity position, we are well positioned to make strategic purchases of materials when we see opportunities or potential disruptions in our supply chain.
• We continue to implement human resource initiatives to retain and attract labor to further increase production capacity.
• Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing) and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures, and other liquidity requirements associated with our operations in 2025 and the foreseeable future.

Industry Context

The company operates in the commercial and industrial HVAC market, which is influenced by cyclical factors such as interest rates, inflation, consumer spending, and employment rates. The strong performance of the BASX segment, particularly in data center cooling solutions, aligns with the rapidly growing hyperscale data center market trend. Conversely, the AAON brand's challenges reflect a broader softening in the rooftop HVAC market, likely impacted by higher interest rates and slower construction starts. The industry is also navigating new refrigerant regulations, which have created supply chain constraints. The company's independent manufacturer representative sales channel strategy is noted as unique compared to larger competitors who often control their sales channels, aiming to attract top talent and offer solutions-based selling.

Comparison to Industry Standards

• The company's independent sales channel strategy is unique compared to most larger competitors who control their sales channels, aiming to attract top talent and provide solutions-based selling.
• The company's total shareholder return (TSR) for Performance Restricted Stock Units (PSUs) is benchmarked against similar companies in the capital goods sector of the S&P SmallCap 600 Index (S&P 400 and S&P 600 within the building products industry group for awards granted after March 1, 2025).

Legal Proceedings

• The company is involved from time to time in claims and lawsuits incidental to its business, including alleged violations of contract, product liability, warranty, environmental, regulatory, personal injury, intellectual property, employment, and tax laws.
• Management does not believe these matters will have a material adverse effect on the business, financial position, results of operations, or cash flows.

Related Party Transactions

• Sales of units to an entity operated by a board member's immediate family, which also acts as a company representative, leading to payments for third-party products.
• Purchases of supplies from entities controlled by two board members and a member of the executive management team.
• Periodic part sales and payments to a board member related to a consulting agreement that expired in May 2024.
• Periodic rental of space partially owned by a board member for company meetings.
• Leasing of flight time of an aircraft partially owned by the President and CEO and another senior leadership member.

Stakeholder Impact

• Shareholders are impacted by decreased net income and EPS, but also by increased dividends and share repurchase programs. The significant backlog suggests potential for future revenue growth.
• Employees benefited from annual merit raises (3.3% in March 2024, 4.0% in March 2025) and a defined contribution plan with a 175.0% company match. Profit sharing bonuses were lower due to reduced earnings.
• Customers may experience increased product prices due to tariff surcharges and other cost pass-throughs. Supply chain challenges and ERP disruptions could affect product availability and lead times, though Q3 saw sequential improvements.
• Suppliers: The company maintains strong vendor relationships and is expanding its list of available vendors to manage supply chain challenges. Long-term purchase commitments for raw materials like refrigerants are in place.
• Creditors: The company's leverage ratio of 1.73 to 1.0 indicates compliance with debt covenants, providing comfort to creditors despite increased borrowings.

Next Steps

• Fully realize the 6.0% tariff surcharge to cover additional costs by the end of the year.
• Continue human resource initiatives to retain and attract labor to increase production capacity.
• Manage supply chain challenges through strong vendor relationships and expanding vendor lists.
• Continue capital expenditure program for 2025, estimated at $180.0 million, for infrastructure, machinery, and production space.
• Evaluate the need for a valuation allowance for Federal and State NOL carryforwards, expecting DTA reversals in tax year 2026 or Q4 2025.

Key Dates

Recommendation

While AAON, Inc. demonstrates strong top-line growth driven by its BASX segment and a record backlog, significant declines in profitability metrics (gross profit, net income, EPS) and negative cash flow from operations are concerning. Operational challenges from the ERP implementation and a softer AAON rooftop market, coupled with increased interest expenses and tariffs, weigh heavily on current performance. The long-term potential from data center demand and strategic investments is positive, but the immediate financial headwinds and execution risks warrant a 'hold' position until there is clear evidence of improved profitability and operational efficiency.

Keywords

HVAC, Data Center Cooling, Cleanroom Systems, Air Handling Units, Energy Recovery Units, Geothermal Heat Pumps, Commercial HVAC, Industrial HVAC, SEC Filing, Earnings Report, Manufacturing, Supply Chain, Tariffs, Labor Market, Backlog, Capital Expenditures, ERP System, New Markets Tax Credit, AAON, BASX