Executive Summary / Key Takeaways

• AAON is strategically leveraging its differentiated HVAC and cooling technology, particularly in custom data center solutions and advanced heat pumps, to drive growth amidst mixed market conditions.
• Record total backlog of over $1 billion, significantly boosted by demand for BASX-branded data center equipment, positions the company for accelerated revenue growth in 2025, despite near-term softness in traditional markets.
• Significant capital investments in new manufacturing capacity in Longview and Memphis are underway to support the immense growth potential in the data center market, aiming for over $1 billion in data center revenue within a few years.
• While Q1 2025 saw gross margin contraction due to lower volumes in traditional HVAC and costs associated with new facility ramp-up, management anticipates margin recovery and sequential improvement throughout 2025 as production volumes increase and efficiencies improve.
• The company's full-year 2025 outlook projects mid-to-high teens sales growth and stable gross margins, underpinned by strong backlog conversion and strategic positioning in high-growth and high-efficiency markets, while managing risks from macroeconomic uncertainty and supply chain volatility.

Setting the Stage: A Legacy of Innovation Meets New Horizons

AAON, Inc., founded in 1987, has built its reputation as a provider of premium, highly configurable heating, ventilation, and air conditioning (HVAC) equipment for commercial and industrial indoor environments. Operating primarily within the non-residential construction and replacement markets, AAON's core strength lies in its engineering expertise and ability to deliver semi-custom and custom solutions, setting it apart from manufacturers focused on standardized, off-the-shelf products. This foundational principle of innovation and customization has been a cornerstone of the company's strategy, aiming to provide greater efficiency, performance, and long-term value to customers.

The strategic acquisition of BASX, Inc. in December 2021 marked a pivotal moment, propelling AAON into the rapidly expanding data center cooling and cleanroom markets. This move was not merely additive but transformative, integrating BASX's specialized capabilities in custom, high-performance cooling solutions, including liquid cooling, into AAON's portfolio. This integration is central to AAON's updated strategic pillars: leading in innovation and custom solutions, driving sustainable organic growth, and being a best-in-class operator. The company's recent organizational restructuring, including the planned CEO transition from Gary Fields to Matt Tobolski (co-founder of BASX), underscores a commitment to leveraging the combined strengths of both brands under a unified vision focused on executing this strategy.

The industry landscape in which AAON operates is dynamic, shaped by several powerful trends. The burgeoning demand for data centers, fueled by cloud computing and artificial intelligence, presents a significant growth opportunity, particularly for specialized cooling solutions. Concurrently, broader market trends towards decarbonization and electrification are driving demand for energy-efficient technologies like heat pumps. However, the industry also faces headwinds, including volatility in the non-residential construction market influenced by macroeconomic factors like interest rates, supply chain disruptions, and the complex, industry-wide transition to new refrigerants like R-454B, which has introduced temporary market uncertainty and component availability challenges.

Against this backdrop, AAON positions itself as a premium provider, emphasizing the superior quality, performance, and energy efficiency of its equipment. While this often entails a higher upfront cost, the company argues its solutions offer lower lifetime operating expenses and a better value proposition. Historically, AAON has managed a price premium relative to more standardized competitors, but recent commentary suggests this premium has narrowed, enhancing competitiveness. The company's go-to-market strategy, relying on independent manufacturer representatives, contrasts with many larger competitors who control their sales channels, a model AAON believes attracts top talent and fosters a solutions-based mindset.

Technological Edge: Efficiency, Customization, and the Future of Cooling

AAON's competitive moat is significantly underpinned by its technological differentiation, particularly its ability to engineer and manufacture highly configurable, energy-efficient HVAC systems. This is not merely about building units but designing solutions tailored to specific customer needs, a capability that provides tangible benefits over more standardized offerings. While specific, universally applicable quantitative metrics comparing the efficiency of every AAON product against every competitor's are not detailed, the company consistently highlights its equipment's superior energy performance and lower operating costs for the end-user. This efficiency advantage is a critical selling point, especially in an environment increasingly focused on sustainability and energy consumption.

A prime example of this technological leadership is the development of the Alpha Class heat pump series. These units are designed for enhanced performance and energy efficiency, directly addressing the growing market demand driven by electrification and decarbonization initiatives. AAON is pushing the boundaries of this technology, developing next-generation Alpha Class heat pumps capable of operating in extreme cold climates, down to negative 20 degrees Fahrenheit. This initiative aims to meet the U.S. Department of Energy's commercial heat pump challenge two years ahead of the 2027 target, demonstrating a commitment to innovation that anticipates future regulatory and market needs. By the end of 2025, the company expects its entire rooftop unit portfolio to be configurable with this low-temperature capability. The "so what" for investors is clear: this technological lead in a high-growth segment like heat pumps enhances AAON's market positioning, potentially commands a premium, and opens up new market opportunities, contributing to future revenue growth and potentially higher margins.

On the BASX side, the technological focus shifts to custom, high-performance cooling solutions for demanding environments like data centers and cleanrooms. The company's success here is rooted in its engineering prowess to design unique systems, including airside and liquid cooling solutions, for complex, high-density computing environments. The development and sale of the industry's first large-scale liquid cooling product is a testament to this capability. This technology is critical in addressing the immense heat loads generated by modern data centers, particularly those supporting AI and machine learning. The ability to provide tailored liquid cooling solutions, alongside advanced airside systems, positions AAON as a comprehensive provider in a market where standard solutions are often insufficient. This technological flexibility and customization capability in the data center space create a strong competitive advantage, fostering deep customer relationships and driving significant order volumes, as evidenced by the recent backlog growth.

AAON's R&D efforts, while not detailed with specific budget figures, are clearly focused on these key areas: enhancing the efficiency and capabilities of traditional HVAC (like heat pumps) and developing specialized solutions for high-growth markets (like data center cooling). The strategic intent is to maintain a technological edge that supports the company's premium positioning, justifies its value proposition, and drives sustainable organic growth by meeting evolving customer needs and regulatory requirements ahead of the curve. This ongoing investment in innovation is a critical component of AAON's long-term strategy and a key factor for investors to consider when evaluating the company's future growth potential and competitive resilience.

Performance and Expansion: Navigating Headwinds, Fueling Growth

AAON's recent financial performance reflects a company in transition, strategically investing for future growth while managing near-term market and operational challenges. In the first quarter of 2025, net sales grew by a robust 22.9% year-over-year to $322.1 million. This growth was overwhelmingly driven by the strength of the BASX brand, which saw sales of its equipment surge by an impressive 374.8%, primarily due to demand from the data center market. This highlights the significant impact the BASX acquisition and subsequent focus on this vertical are having on the top line.

However, this strong performance was partially offset by a 19.1% decline in sales of AAON-branded products, largely within the AAON Oklahoma segment. This segment, which represents the company's traditional rooftop unit business, faced headwinds from weak bookings in late 2024 (attributed to the market's adjustment to the new R454B refrigerant transition) and temporary supply chain issues with components for the new refrigerant equipment in early 2025.

The impact of these dynamics was evident in the company's profitability. Total gross profit decreased by 6.4% year-over-year in Q1 2025, leading to an 840 basis point contraction in gross margin, from 35.2% to 26.8%. This decline was primarily concentrated in the AAON Oklahoma segment, where lower production volumes resulted in reduced overhead absorption, causing segment gross margin to fall by 1,380 basis points to 23.5%. In contrast, the BASX and AAON Coil Products segments demonstrated resilience and operational improvement, with gross margins expanding by 350 basis points (to 24.0%) and 100 basis points (to 34.6%), respectively, driven by strong sales volume and efficiency gains, particularly as temporary inefficiencies from 2024 construction abated.

Selling, general, and administrative (SG&A) expenses increased by 13.3% to $51.3 million in Q1 2025, reflecting increased investments in back-office technology, automation, and costs associated with the Memphis facility acquisition ($2.7 million fee). However, SG&A decreased as a percentage of sales, from 17.3% to 15.9%, demonstrating some operating leverage despite the mixed revenue performance. The company's effective tax rate in Q1 2025 was notably low at 9.8%, benefiting from a significant excess tax benefit related to stock option exercises.

Liquidity and capital resources are being strategically deployed to support the company's growth ambitions, particularly in the data center space. Cash flow used in operations totaled $9.2 million in Q1 2025, a shift from the $92.4 million provided in the prior year period, primarily due to substantial investments in working capital, notably inventory for large data center orders. Capital expenditures also increased significantly, rising 30.2% to $50.4 million, reflecting ongoing investments in facility expansions and internal software development. To finance these investments and manage working capital needs, total debt increased to $252.4 million at March 31, 2025, with the company drawing on its revolving credit facility, which was further expanded in April 2025. Despite the increased debt, the leverage ratio remains manageable. The company also returned capital to shareholders through stock buybacks ($30 million in Q1 2025) and a 25% increase in its quarterly dividend, signaling confidence in its financial position and future prospects.

The most compelling indicator of AAON's future trajectory is its record backlog, which reached $1.03 billion at the end of Q1 2025, an impressive 83.9% increase year-over-year. The vast majority of this growth was driven by the BASX segment's backlog, which surged by 122.7%, fueled by demand for data center liquid cooling solutions. The AAON Products backlog also saw strong growth (44.9%), indicating a rebound in bookings for traditional equipment after the Q4 2024 lull. This substantial backlog provides significant revenue visibility and underpins management's confidence in accelerated growth, particularly in the data center segment, throughout 2025 and into 2026.

Competitive Landscape and Strategic Positioning

AAON operates within a competitive landscape dominated by larger, more diversified players like Carrier (CARR), Trane Technologies (TT), Johnson Controls (JCI), and Lennox International (LII), alongside smaller niche competitors. While these larger rivals possess greater scale, broader product portfolios, and extensive service networks, AAON differentiates itself through its focus on highly engineered, semi-custom, and custom solutions, particularly in specialized applications like data centers and high-efficiency HVAC.

AAON's technological advantages, such as its advanced heat pump technology and custom data center cooling solutions, provide a competitive edge. The company's ability to develop products like the Alpha Class heat pumps capable of operating in extreme cold climates positions it favorably in markets driven by electrification and decarbonization, potentially allowing it to capture market share from competitors whose standard offerings may not meet these evolving requirements. In the data center space, AAON's expertise in custom airside and liquid cooling solutions allows it to compete effectively for large, complex projects where standard equipment from larger competitors may not be suitable. The significant growth in BASX backlog, including large liquid cooling orders, suggests AAON is gaining traction and market share in this high-value segment, outpacing the overall growth rates seen in some competitors' broader portfolios.

Financially, AAON's growth trajectory, particularly the surge in data center revenue, is currently outpacing the overall revenue growth of many larger, more mature competitors. However, AAON's gross margins, while historically strong, faced temporary pressure in Q1 2025 due to the specific challenges in the AAON Oklahoma segment and costs associated with ramping up new facilities. Larger competitors like Trane Technologies and Lennox International have demonstrated higher gross margins (often in the 30-40% range), reflecting their scale, operational efficiencies, and potentially different product mix or market positioning. AAON's management is focused on improving operational efficiencies, particularly in the BASX segment and the new facilities, to drive margin recovery and align closer to historical levels and potentially compete more effectively on profitability.

AAON's strategic investments in capacity expansion, particularly the Longview and Memphis facilities, are critical responses to the competitive environment. By increasing production capabilities specifically for data center equipment, AAON aims to meet the surging demand in this market and solidify its position as a key provider. This expansion also allows for geographic diversification, potentially improving logistics and service capabilities relative to competitors. The company's reliance on independent representatives, while different from competitors' controlled channels, is viewed as a strength that provides broader market reach and a solutions-oriented sales approach.

Risks remain, including the potential for increased competition in the data center market as larger players invest more heavily, ongoing macroeconomic sensitivity impacting traditional HVAC demand, and the execution risk associated with successfully ramping up production at the new facilities while maintaining quality and efficiency. However, AAON's focused strategy on innovation, customization, and capacity expansion in high-growth areas, coupled with its efforts to improve operational efficiency and manage its price premium, positions it to compete effectively and capitalize on the significant opportunities ahead.

Outlook: Poised for Acceleration

AAON's outlook for 2025 is one of anticipated acceleration, driven by the conversion of its record backlog and strategic positioning in high-growth markets. The company maintains its full-year guidance, projecting sales growth in the mid-to-high teens. This forecast is underpinned by the expectation that the immense backlog, particularly from the BASX segment and data center orders, will translate into significantly higher revenue throughout the year.

Gross margin for the full year is expected to be similar to what was realized in 2024. While Q1 2025 saw a contraction, management anticipates sequential improvement throughout the year as production volumes increase, supply chain issues abate, and operational efficiencies improve, particularly in the BASX segment and as the new Longview facility ramps up production of high-demand data center equipment. The 6% tariff mitigation surcharge implemented in April 2025 is intended to neutralize the impact of tariffs on costs and margin, supporting the stability of gross profitability.

SG&A expenses as a percentage of sales are projected to decline by 25 to 50 basis points in 2025, indicating expected operating leverage as revenue grows faster than operating expenses, despite continued investments in technology and infrastructure. Capital expenditures are guided at approximately $220 million for the year, with a significant portion dedicated to bringing the Memphis facility online and ramping up production, a critical step in supporting the long-term growth trajectory, particularly in the data center market.

For the second quarter of 2025, management anticipates sales and earnings to be up modestly from Q1. They note that operating income is expected to see a more significant sequential increase, which will be partially offset at the net income level by a higher effective tax rate (returning closer to the estimated annual rate of 25.4% excluding discrete items) and increased interest expense due to higher debt levels financing working capital and investments.

Looking beyond the immediate quarters, the company sees 2025 as the beginning of another multiyear period of robust growth, potentially returning to annual growth rates similar to its trailing five-year CAGR. This optimism is fueled by the sustained demand in the data center market, the increasing adoption of high-efficiency heat pumps, and the operational leverage expected from the expanded manufacturing footprint. While macroeconomic uncertainty and potential supply chain volatility remain risks, AAON's strategic investments, technological leadership, and record backlog position it favorably to capitalize on the opportunities ahead.

Conclusion

AAON stands at a pivotal juncture, leveraging its historical strengths in innovation and customization to capitalize on transformative growth opportunities, most notably within the data center market. The strategic acquisition of BASX has proven highly synergistic, propelling the company into a high-growth vertical with significant demand for its specialized cooling solutions. The record backlog exceeding $1 billion is a powerful testament to the success of this strategy and provides a clear runway for accelerated revenue growth in 2025.

While the company is navigating near-term challenges in its traditional HVAC segment, including the disruptive refrigerant transition and a soft non-residential construction market, the strength of the data center business is more than compensating. Significant capital investments in expanding manufacturing capacity are strategically aligned to support the projected multiyear growth cycle in data centers and enhance overall operational efficiency. Although these investments may temporarily impact margins and cash flow, they are essential for scaling the business and realizing its long-term potential.

AAON's technological leadership, particularly in advanced heat pumps and custom data center cooling, provides a durable competitive advantage against larger, more standardized rivals. As the industry continues to prioritize energy efficiency, decarbonization, and specialized solutions for complex applications, AAON's differentiated offerings are well-positioned to capture market share. The company's outlook for mid-to-high teens growth in 2025, coupled with expectations for margin recovery and operational improvements, paints a picture of a company poised for a new phase of expansion. Investors should closely monitor the successful ramp-up of new production facilities, the continued conversion of the data center backlog, and the broader macroeconomic environment, as these factors will be key determinants of AAON's ability to execute on its compelling growth narrative and deliver enhanced shareholder value.