8-K: AAON Q3 2025: Record Backlog, Strong Data Center Growth

AAON, Inc. reported strong third-quarter 2025 results with record backlog and significant growth in BASX-branded data center equipment sales, despite a year-over-year decline in GAAP diluted EPS.

Summary

• Net sales increased 17.4% year-over-year to $384.2 million.
• GAAP diluted EPS was $0.37, down 41.3% year-over-year but up 94.7% sequentially.
• Total backlog reached a record $1.32 billion, up 103.8% year-over-year and 18.1% sequentially.
• BASX-branded sales surged 95.8% to $124.8 million, driven primarily by increased demand for liquid cooling equipment for data center applications.
• AAON-branded sales decreased 1.5% year-over-year to $259.5 million but rose 28.1% sequentially.
• Gross profit margin was 27.8%, down from 34.9% in the prior-year period but up sequentially from 26.6%.
• National account bookings increased 96% in the quarter and 92% year-to-date.
• Capital expenditure plans for 2025 are $180.0 million.

Sentiment

Score: 6

Explanation: While diluted EPS and gross margin were down year-over-year, there was strong sequential improvement, record backlog, significant growth in the high-demand data center segment (BASX), and positive outlook revisions for sales growth. Operational challenges related to ERP and new facilities are being addressed, and cash flow is expected to improve significantly in Q4. The overall sentiment is cautiously positive, acknowledging current headwinds but emphasizing strong underlying demand and strategic progress.

Positives

• Net sales increased 17.4% year-over-year to $384.2 million.
• Record total backlog of $1.32 billion, up 103.8% year-over-year and 18.1% sequentially.
• BASX-branded sales grew 95.8% to $124.8 million, driven by data center liquid cooling equipment.
• National account bookings increased 96% in the quarter and 92% year-to-date, indicating market share gains despite broader market softness.
• AAON-branded sales rose 28.1% sequentially, reflecting steady production momentum at the Tulsa, Oklahoma, facility.
• Sequential improvement in gross profit margin from 26.6% to 27.8%.
• Significant gains in production throughput at the Longview, Texas, facility, reaching 90% of target in September and exceeding that level in October.
• Anticipate cash flow from operations to turn significantly positive in the fourth quarter as working capital becomes a source of cash.
• Strong underlying demand across both AAON and BASX brands, particularly in data center applications.

Negatives

• GAAP diluted EPS of $0.37 was down 41.3% year-over-year.
• Gross profit margin of 27.8% was down from 34.9% in the prior-year period.
• Year-over-year gross margin contraction primarily reflected operational inefficiencies associated with the Enterprise Resource Planning ("ERP") system implementation and unabsorbed fixed costs at the new Memphis facility.
• AAON-branded sales decreased 1.5% year-over-year.
• AAON Coil Products segment gross margin declined year-over-year from 35.3% to 16.1% and sequentially from 22.0% to 16.1%, reflecting several discrete items that collectively impacted gross margin by approximately 1,050 basis points.
• AAON Oklahoma segment gross margin was down from 36.8% to 31.5% year-over-year, primarily driven by incremental overhead expenses of $4.5 million related to the new Memphis plant and a temporary mismatch in timing between higher material costs associated with tariffs and the benefit from the 6% tariff surcharge.
• BASX segment gross margin slightly down from 27.9% to 27.0% year-over-year, reflecting higher indirect warehouse personnel costs associated with operating the Redmond, Oregon, facility near full capacity.
• Cash and cash equivalents decreased to $1.041 million as of September 30, 2025, from $14 million as of December 31, 2024.
• Net cash used in operating activities was $(18.784) million for the nine months ended September 30, 2025, compared to $191.687 million provided in the prior year period.
• Long-term debt increased to $360.142 million as of September 30, 2025, from $138.891 million as of December 31, 2024.

Risks

• The timing and extent of changes in raw material and component prices.
• The effects of fluctuations in the commercial/industrial new construction market.
• The timing and extent of changes in interest rates.
• Other competitive factors during the year.
• General economic, market, or business conditions.
• Operational inefficiencies associated with the Enterprise Resource Planning ("ERP") system implementation.
• Unabsorbed fixed costs at the new Memphis facility.
• Temporary mismatch in timing between higher material costs associated with tariffs and the benefit from the 6% tariff surcharge.
• Higher indirect warehouse personnel costs associated with operating the Redmond, Oregon, facility near full capacity.

Future Outlook

The company expects full-year 2025 year-over-year sales growth in the mid-teens (an upward revision from low teens) and a gross profit margin of 28.0%-28.5% (a slight downward revision from 28.0%-29.0%). Non-GAAP adjusted SG&A as a percentage of sales is expected to remain at 16.5%-17.0%. Management is confident in continued progress, positive booking trends, expanding production capacity, and further ERP system integration, aiming for operational excellence and growth. Cash flow from operations is anticipated to turn significantly positive in the fourth quarter.

Management Comments

• "Our third quarter results demonstrate the enduring demand for our products and reflect continued share gains, margin improvement and steady progress toward our operational goals, with notable sequential improvement in several key areas." Matt Tobolski, President and CEO.
• "Most notably, we achieved significant gains in production throughput at our Longview, Texas, facility, reflecting continued progress implementing our new ERP system." Matt Tobolski.
• "We are also making tremendous progress with our BASX brand as we broaden our reach in the data center market and continue to deliver industry-leading air-side and liquid cooling solutions." Matt Tobolski.
• "We remain on track to add substantial production capacity by year-end, ensuring we can meet growing customer demand and continue driving operational excellence." Matt Tobolski.
• "Overall, our financial position remains strong. We anticipate cash flow from operations will turn significantly positive in the fourth quarter as working capital becomes a source of cash, reflecting payments received on a large order that was recently delivered." Rebecca Thompson, CFO and Treasurer.

Industry Context

The company is demonstrating strong market share gains in the HVAC solutions sector, particularly within the high-growth data center market through its BASX brand, despite a noted softness in the broader nonresidential construction market. The significant demand for liquid cooling equipment for data centers highlights a key industry trend and growth opportunity that AAON is actively capitalizing on.

Stakeholder Impact

• Shareholders: Potential for long-term value creation through market share gains, capacity expansion, and operational improvements, but short-term earnings per share were negatively impacted. The increase in long-term debt may also be a consideration.
• Customers: Benefit from increased production capacity and continued delivery of high-performance, energy-efficient HVAC and liquid cooling solutions, especially in the data center market.
• Employees: Focus on hiring and training at the AAON Oklahoma segment indicates potential job opportunities and skill development, particularly with new facility ramp-ups.

Next Steps

• Continue optimizing operations in Redmond, Oregon.
• Continue investing in expanding production at the new Memphis, Tennessee, facility to support growth and margin expansion.
• Add substantial production capacity by year-end 2025.
• Further scale production and complete future ERP rollouts.
• Realize the benefit from the 6% tariff surcharge to offset higher material costs.
• Focus on hiring, training, and increasing production output at the AAON Oklahoma segment.

Key Dates

Recommendation

The company demonstrates strong underlying demand, record backlog, and significant growth in the critical data center segment, indicating robust long-term potential. However, current profitability is impacted by operational inefficiencies, ERP implementation costs, and unabsorbed fixed costs, leading to a year-over-year decline in EPS and gross margin. While sequential improvements are positive, and management expects Q4 cash flow to turn positive, the short-term financial performance and ongoing operational challenges warrant a 'hold' until there is clearer evidence of sustained margin recovery and full realization of efficiency gains from the new facilities and ERP system. The revised outlook for gross profit margin is also slightly lower than previous guidance.

Keywords

HVAC solutions, data center cooling, BASX, AAON, commercial HVAC, industrial HVAC, energy-efficient HVAC, backlog, net sales, EPS, gross margin, ERP system, market share, capital expenditures, liquid cooling