AAON's Q3 2025: Contradictions Emerge on Oklahoma Segment Margins, Backlog Growth, ERP Impact, and CapEx Reduction

Date of Call: November 6, 2025

Financials Results

• Revenue: $384.2M, up $57.0M or 17.4% YOY
• EPS: $0.37 diluted EPS, down 41.3% YOY, up 94.7% sequentially
• Gross Margin: 27.8%, down from 34.9% YOY, up 120 bps sequentially
• Operating Margin: 16.5% adjusted EBITDA margin, down from 25.3% YOY, up 160 bps sequentially

Guidance:

• Q4: expect double-digit revenue growth and sequential margin improvement (management referenced ~31% implied 4Q gross margin).
• Full-year 2025: sales growth expected mid-teens; gross margin 28.0%–28.5%; adjusted SG&A 16.5%–17% of sales.
• 2025 CapEx reduced to $180M (prior guide $220M); timing shifted into 2026.
• Cash flow from operations expected to turn significantly positive in Q4.
• Memphis large-scale production expected by year-end; Tulsa ERP rollout planned for H2 2026 with minimal disruption.

Business Commentary:

* Revenue Growth and BASX Brand Success: - AAON reported net sales of $384.2 million for Q3 2025, a 17.4% increase year-over-year. - The growth was driven by a 95.8% rise in BASX-branded sales due to high demand for data center solutions and the increasing production from the new Memphis facility.

• Operational Recovery and Production Increase:
• The company saw meaningful sequential sales growth from improved production throughput at Tulsa and Longview facilities.

• This was due to the implementation of the ERP system and the resolution of operational inefficiencies, allowing for increased production capacity.

• BASX Brand Backlog and Growth:

• The BASX-branded backlog grew to $896.8 million, up 119.5% year-over-year and 43.9% sequentially.

• The strong demand for both air-side and liquid cooling products, with a robust pipeline of data center opportunities, contributed to this growth.

• AAON Brand Sales and Market Dynamics:

• AAON-branded sales grew 28.1% sequentially, driven by improved production output and backlog conversion.
• Despite a soft commercial HVAC market, bookings remained strong, with national account wins up 96% in the third quarter, reflecting AAON's strategic focus on market differentiation and customer relationships.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted "substantial improvement in production throughput," "BASX brand continues to perform exceptionally well," backlog growth (BASX backlog $896.8M, up 119.5% YOY), and that they "expect sequential margin improvement to continue through the fourth quarter and into early 2026" while noting operational headwinds are temporary.

Q&A:

• Question from Ryan Merkel (William Blair & Company L.L.C., Research Division): Please speak to the drivers and your confidence in the outlook (40%–50% growth) for the BASX segment and whether you continue to expect strong orders/visibility.
  Response: BASX growth driven by liquid- and air-side demand across sites; improved ramp visibility enabled filling Memphis backlog; pipeline strong across hyperscalers, colocation and builders; expect continued strong orders and conversion into 2026.

• Question from Ryan Merkel (William Blair & Company L.L.C., Research Division): On Oklahoma gross margin — backing out Memphis unabsorbed costs and timing price/cost items, should normalized Oklahoma margins be in the mid-30s?
  Response: Yes — backing out Memphis impacts and near-term tariff/price timing puts Oklahoma in the mid-30s on a normalized basis, with some additional headroom possible.

• Question from Ryan Merkel (William Blair & Company L.L.C., Research Division): Can you respond to the short report claims that accounting changes inflated revenues and that large liquid cooling gross margins are in the 20% range?
  Response: Reaffirmed accounting fully complies with GAAP/ASC 606; the large liquid-cooling order is custom, priced appropriately, contract assets are converting to receivables and cash, and margins are not low-margin as alleged.

• Question from Noah Kaye (Oppenheimer & Co. Inc., Research Division): You lowered CapEx to $180M — should we infer any timing impact on planned capacity ramp (Memphis or elsewhere)?
  Response: No — the change is primarily timing (Q4 to Q1); Memphis build-out has most equipment in place and the CapEx reduction should not slow its ramp.

• Question from Noah Kaye (Oppenheimer & Co. Inc., Research Division): Can you give color on the discrete one-times at ACP and how you lap them into 4Q/2026?
  Response: Absent discrete operational items, ACP gross margin would be ~27%; discretes stem from ERP-related inefficiencies and manufacturing process items that should abate with optimization; backlog implies the segment can reach at least ~30% gross margin.

• Question from Noah Kaye (Oppenheimer & Co. Inc., Research Division): Is ACP the main driver of sequential gross-margin improvement into Q4 (toward ~31%)?
  Response: ACP is a significant driver of quarter-over-quarter margin improvement, with additional help from Oklahoma as tariff-related price/cost dynamics normalize.

• Question from Noah Kaye (Oppenheimer & Co. Inc., Research Division): Can you describe the customer mix/profile for BASX orders (liquid vs air-side, customer types)?
  Response: Order flow is broad-based across hyperscalers, contract builders, colocation and neocloud providers with a mix of liquid- and air-side solutions driving backlog and pipeline activity.

• Question from Christopher Moore (CJS Securities, Inc.): Please comment on pricing actions, AAON's premium today, and big-picture thoughts on rooftop in 2026.
  Response: YTD price increases roughly >9% (3% + 6% tariff); AAON retains a pricing premium (slight contraction vs. prior year); commercial HVAC remains soft with growing bid activity but slower conversions — recovery expected mid-2026.

• Question from Christopher Moore (CJS Securities, Inc.): Is BASX structurally limited to ~29%–32% gross margins or can it reach mid-30s once scale/efficiency improve?
  Response: Management views ~30% as a near-term execution target for BASX; with manufacturing/process stabilization and execution over time margins can improve, but mid-30s would require sustained process gains.

• Question from Timothy Wojs (Robert W. Baird & Co. Incorporated, Research Division): Where do Oklahoma lead times stand relative to normal, and how will you communicate/prepare for Tulsa's ERP conversion to avoid order pull-forward issues?
  Response: Oklahoma lead times are ~50% higher than desired; priority is to reduce backlog and lead times; company will proactively communicate and provide buffers ahead of Tulsa ERP go-live using lessons from Longview to minimize disruption.

• Question from Timothy Wojs (Robert W. Baird & Co. Incorporated, Research Division): What will the new COO's responsibilities be and what does he bring to AAON?
  Response: COO will standardize operations across facilities, drive lean/visible manufacturing, apply best practices and proactively address issues; brings experience operating many sites and lean manufacturing expertise.

• Question from Timothy Wojs (Robert W. Baird & Co. Incorporated, Research Division): Can you quantify Q4 free cash flow and any 2026 'DNA' number for AAON when Memphis comes online?
  Response: No precise Q4 FCF number provided — CFO said cash flow should be considerably higher and turn significantly positive in Q4; company expects free cash flow of $75M–$80M for 2025 and an incremental $20M–$25M in 2026.

• Question from Alex Hantman (Sidoti & Company, LLC): What specific lessons from Longview are being applied to Memphis and what milestones were considered before greenlighting Memphis rollout?
  Response: Key lessons: streamline ERP automation to reduce manual work and increase production velocity, expand hands-on system training (beyond classroom), and adjust configurations; Memphis went live Nov 1 and has been operating smoothly at lower volumes.

• Question from Alex Hantman (Sidoti & Company, LLC): Any work leveraging AI (e.g., ERP/automation, warranty analytics, predictive analytics)?
  Response: Exploring AI use cases across warranty trend analysis, predictive unit performance and operations; many initiatives are in sandbox/planning stages and will be phased into operations over time.

• Question from Brent Thielman (D.A. Davidson & Co., Research Division): Within rooftop, what is working for share capture and how is the national-account strategy performing?
  Response: Alpha Class air-source heat pump and national account focus are key differentiators driving bookings; product tiers enable portfolio-level decarbonization solutions that resonate with national account customers.

• Question from Brent Thielman (D.A. Davidson & Co., Research Division): On BASX productization — are standardized products emerging and how diversified are customers in recent orders?
  Response: Management is pursuing a software-driven semi-custom (not fully standardized) platform for efficiency; early quote activity exists but current backlog remains largely custom solution-based with a mix of a few large orders and several smaller customers.

• Question from Brent Thielman (D.A. Davidson & Co., Research Division): Do you have enough orders to fill Memphis now, or will you keep capturing more even as it ramps?
  Response: There is adequate backlog to ramp Memphis in a measured way but room to add orders; facility can support up to seven lines (three installed today) so additional bookings for back-half 2026 deliveries are acceptable.

Contradiction Point 1

AAON Oklahoma Segment Gross Margin Trends

It involves differing expectations and explanations for the gross margin trends in the AAON Oklahoma segment, which is crucial for financial forecasting and investor expectations.

Can you explain the gross margin trends and Oklahoma segment margin normalization? - Ryan Merkel (William Blair & Company L.L.C.)

2025Q3: The Oklahoma segment is expected to return to mid-30s gross margin levels after accounting for Memphis and pricing impacts. - Matthew Tobolski(CEO)

What explains the margin deviation for AAON Oklahoma and what are the prospects for margin improvement? - Timothy Ronald Wojs (Robert W. Baird & Co. Incorporated)

2025Q2: The margins in AAON Oklahoma are influenced by Memphis start-up costs and production of BasX branded products. Once Memphis is fully online, these factors should subside, with expectations for margins to return to the long-term target of 32% to 35%. - Matthew Tobolski(CEO)

Contradiction Point 2

Backlog Growth and Order Visibility

It involves differing statements about the growth of backlog and order visibility, which are key indicators for future sales and revenue expectations.

What are the key growth drivers for BASX, and how confident are you in sustaining strong order visibility? - Ryan Merkel(William Blair & Company L.L.C.)

2025Q3: There was a backlog growth in BASX due to strong order acquisition, driven by both air-side and liquid cooling solutions. - Matthew Tobolski(CEO)

Core rooftop bookings? Did Q4 pushouts recover as expected? Did the new surcharge significantly impact orders? - Ryan Merkel(William Blair)

2025Q1: There was volatility in Q4 bookings due to the refrigerant transition, but order cadence has normalized. - Matt Tobolski(COO)

Contradiction Point 3

Gross Margin Trends and Normalization

It pertains to differing statements about gross margin trends and expectations for normalization, which are crucial for financial forecasting and investor expectations.

Can you discuss gross margin trends and Oklahoma segment margin normalization? - Ryan Merkel(William Blair & Company L.L.C.)

2025Q3: The Oklahoma segment is expected to return to mid-30s gross margin levels after accounting for Memphis and pricing impacts. - Matthew Tobolski(CEO)

Will Blackwell's Q4 revenue be additive? What is the expected gross margin exit rate? - Stacy Rasgon(Bernstein Research)

2025Q1: Gross margins for Q3 are expected around 75%, with full-year guidance in the mid-70s. - Matt Tobolski(COO)

Contradiction Point 4

ERP Impact on Production and Recovery

This contradiction pertains to the impact of the ERP implementation on production and recovery, which directly affects operational efficiency and revenue expectations.

How are you preparing for the ERP rollout in Tulsa and managing lead times? - Timothy Wojs (Robert W. Baird & Co. Incorporated)

2025Q3: Lead times at the Oklahoma segment are 50% higher than desired, with efforts to reduce and manage them effectively. - Matthew Tobolski(CEO)

Can you explain the difference between the prior guidance and current guidance, particularly related to ERP implementation and lower volumes? - Timothy Ronald Wojs (Robert W. Baird & Co. Incorporated)

2025Q2: Despite these challenges, they are seeing recovery trends. - Matthew J. Tobolski(CEO)

Contradiction Point 5

Capacity Ramp Plans and CapEx Reduction

This contradiction involves the impact of CapEx reductions on capacity ramp plans, which are essential for future growth and production capabilities.

Can you clarify the CapEx reduction and its impact on capacity expansion plans? - Noah Kaye (Oppenheimer & Co. Inc.)

2025Q3: The CapEx reduction will not affect the Memphis facility ramp-up plans. - Rebecca Thompson(CFO)

What are your growth expectations for Q4 considering post-ERP challenges? - Brent Edward Thielman (D.A. Davidson & Co.)

2025Q2: Our CapEx guidance of $65 million to $70 million will reflect the expected increase in capacity in Tulsa as well as ongoing facility expansion in Memphis. - Matthew J. Tobolski(CEO)