AAON, INC.

AAON, Inc. operates in the heating, ventilation, air conditioning, and liquid cooling solutions industry for commercial and industrial indoor environments, serving markets such as retail, manufacturing, educational, lodging, supermarket, data centers, medical and pharmaceutical, and industrial ¹. The company's business strategy is centered on mass semi-customization, utilizing flexible, computer-aided manufacturing systems to produce highly configurable equipment that balances cost efficiency with individual customization ². The company competes on technical excellence and customer outcomes, emphasizing product quality, performance, efficiency, serviceability, reliability, and lifecycle cost of ownership, rather than initial price ³. In the replacement markets and owner-controlled purchases, AAON has gained market share by demonstrating superior total cost of ownership, while in the new construction market, improved operational efficiency has narrowed the price gap with competitors' standardized offerings ⁴.

AAON generates revenue by engineering, manufacturing, and selling premium HVAC equipment, including semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls ⁵. The company's business model involves a build-to-order approach, where every system is pre-specified before production begins, and sales are primarily conducted through a network of independent sales representatives ⁶. Revenue recognition for highly customized products is over time as progress is made toward satisfying performance obligations, while for certain manufactured equipment and parts sales, revenue is recognized at the time of shipment when control passes to the customer ⁷. The company also sells extended warranties, with revenue deferred and recognized on a straight-line basis over the warranty period ⁸.

The Company operates through three reportable business segments: AAON Oklahoma, AAON Coil Products, and BASX ⁹. The AAON Oklahoma segment engineers, manufactures, and sells highly configurable HVAC systems, designs and manufactures controls solutions, and sells aftermarket parts through retail stores and online ¹⁰. This segment includes operations in Tulsa, Oklahoma; Memphis, Tennessee; and Parkville, Missouri, along with the Norman Asbjornson Innovation Center (NAIC) and the Gary D. Fields Customer Exploration Center ¹¹. The NAON Coil Products segment engineers and manufactures semi-custom and custom HVAC systems, as well as heating and cooling coils, primarily for AAON Oklahoma, AAON Coil Products, and BASX, operating from Longview, Texas facilities ¹². The BASX segment engineers, manufactures, and sells custom, high-performance cooling solutions for the hyperscale data center market, ventilation solutions for cleanroom environments, and highly customized air handlers and modular solutions, operating from Redmond, Oregon, with support from Memphis, Tennessee, and Longview, Texas ¹³.

AAON-branded products serve commercial and industrial buildings, with core offerings including rooftop units (RTUs) across RQ Series (two-five ton cooling capacity), RN Series (six-140 ton cooling capacity), and RZ Series (45-261 ton cooling capacity) ¹⁴. The product portfolio also encompasses air handling units, condensing units, makeup air units, energy recovery units, geothermal and water-source heat pumps, coils, and factory controls ¹⁵. The AAON Alpha Class™ Technology enables air-source heat pumps (ASHP) to operate in ambient temperatures as low as negative twenty degrees Fahrenheit, addressing commercial building decarbonization ¹⁶. BASX-branded products are highly customized for mission-critical environments, focusing on thermal management and air handling solutions for data centers, healthcare, cleanroom, and industrial applications ¹⁷. In 2025, BASX introduced its proprietary Coolant Distribution Unit (CDU) for liquid cooling, supporting rack densities exceeding 100 kilowatts, and a water-free Free Cooling Chiller platform for large-scale data center heat rejection ¹⁸.

For the fiscal year ended December 31, 2025, AAON reported net sales of $1,442,076 thousand ¹⁹, an increase of 20.1% from the prior year ²⁰. Gross profit was $385,724 thousand ²¹, representing a gross margin of 26.7% ²², down from 33.1% in 2024 ²³. Operating income was $146,248 thousand ²⁴, resulting in an operating margin of 10.1% ²⁵. Net income for the period was $107,593 thousand ²⁶, with basic EPS of $1.32 ²⁷ and diluted EPS of $1.29 ²⁸. Cash and cash equivalents stood at $13 thousand ²⁹ as of December 31, 2025, while total debt (short-term and long-term) was $405,855 thousand ³⁰. The company's leverage ratio was 1.77 to 1.0 ³¹.

Net sales for 2025 increased by $241.4 million, or 20.1%, driven by a 143.5% increase in BASX-branded products, or $322.8 million, compared to 2024 ³². Conversely, net sales of AAON-branded products decreased by 8.3%, or $81.4 million, due to a softer market influenced by macroeconomic factors and supply chain issues related to a refrigerant change and coil shortages ³³. Gross profit decreased by $11.4 million, or 2.9%, with the gross profit margin declining from 33.1% in 2024 to 26.7% in 2025 ³⁴. AAON Oklahoma's gross profit decreased by 27.6% ³⁵, primarily due to lower volumes and suboptimal overhead absorption, with the Memphis plant contributing $16.1 million in cost to the segment ³⁶. AAON Coil Products' gross profit margin increased slightly from 19.2% in 2024 to 21.4% in 2025 ³⁷, while BASX's gross profit increased by 71.6% due to better overhead absorption from increased sales volumes from the Memphis facility ³⁸.

During 2025, the Company went live with its new Enterprise Resource Planning (ERP) system on April 1, 2025, at its Longview, Texas facility, which caused some disruptions to the AAON Coil Products segment and, to a lesser extent, impacted AAON Oklahoma's production ramp-up ³⁹. The ERP system was also implemented at the Memphis, Tennessee facility on November 1, 2025, with minimal disruption ⁴⁰. The company invested $204.9 million in capital expenditures, including the acquisition of intangible assets, in 2025 ⁴¹. A new 36,000 square foot weld-shop opened in September 2024 at the Redmond, Oregon facility ⁴². In December 2024, a facility in Memphis, Tennessee, was purchased to facilitate growing demand for BASX products and add geographic diversification ⁴³. The Longview, Texas West Plant expansion, adding 225,500 square feet of manufacturing/warehouse space and 12,000 square feet of office space, was completed in January 2025 ⁴⁴. The company also fully transitioned to a new refrigerant with lower global warming potential for HVAC systems, as required by the US EPA for equipment manufactured beginning January 1, 2025 ⁴⁵.

The data center market, which is a significant driver for the BASX brand, is expected to continue its strong growth trajectory, with present indicators suggesting no meaningful signs of slowing in the foreseeable future ⁴⁶. The growing maturity and adoption of Artificial Intelligence and high-performance compute are driving profound innovation across this market, leading to increased demand for AAON's products and solutions ⁴⁷. In response to this accelerating growth, the company has made substantial capital investments to expand its capacity ⁴⁸.

AAON's capital expenditure program for 2026 is estimated to be approximately $190.0 million ⁴⁹, with many projects subject to review and cancellation at the discretion of the CEO and Board of Directors without incurring substantial charges ⁵⁰. These investments are aimed at additional infrastructure and machinery for both replacement and production growth, finalizing new production space in Redmond, Oregon and Longview, Texas, and adding equipment and production capacity in Parkville, Missouri and Memphis, Tennessee ⁵¹. The company also plans to continue investments in purchasing or developing software for internal use to support future growth ⁵².

The company's approach toward emissions reduction and climate change includes product solutions for customers and improvements to its own facilities ⁵³. Approximately 36% of the energy portfolio is currently derived from renewable sources, and the company opted into additional renewable energy at its Tulsa, Oklahoma, Memphis, Tennessee, and Redmond, Oregon facilities in 2025 ⁵⁴. AAON has transitioned to the lower global warming potential R-454B refrigerant and continues to develop and manufacture non-fossil fuel-consuming units ⁵⁵. The company is also investing in advanced controls manufacturing capabilities to improve speed, precision, and consistency across production and testing processes, enhancing efficiency, quality assurance, and supporting increased production capacity through automation ⁵⁶.

AAON's planned capital allocation includes an estimated $190.0 million in capital expenditures for 2026 ⁵⁷. The company has an active stock repurchase program, with approximately $70.0 million remaining under the current board authorization as of December 31, 2025 ⁵⁸. For the year ended December 31, 2025, the company repurchased $30.0 million of shares under its open market program ⁵⁹. The Board of Directors pays cash dividends, with the annualized dividend per share increasing to $0.40 in 2025 from $0.32 in 2024 and 2023 ⁶⁰. R&D expenses were approximately $58.2 million in 2025 ⁶¹, and the company continues to invest in research and new product development to compete effectively and meet evolving regulatory standards ⁶².

Management has flagged several structural headwinds and execution risks. The commercial and industrial new construction markets began to contract in late 2024 and continued through 2025, with no clear indications of significant reacceleration ⁶³. Mixed signals from general economic indicators regarding the health of the general economy could further impact new construction and replacement markets, potentially reducing sales volumes and profitability ⁶⁴. Supply chain issues, particularly related to the refrigerant change and coil supply shortages, constrained AAON brand sales in 2025 ⁶⁵. The implementation of the new ERP system at the Longview, Texas facility caused some disruptions to the AAON Coil Products segment, impacting production and gross profit margins ⁶⁶.

Geographic, regulatory, and macro factors also pose constraints. Beginning in January 2025, the U.S. Administration enacted tariffs on imported goods, leading to reciprocal tariffs from foreign countries ⁶⁷. These continuous changes and uncertainty in tariff policy could impact the cost and availability of raw materials and components, and while the company expects to pass some costs to customers, increased product prices could adversely affect demand ⁶⁸. New York State's final rule, effective January 1, 2034, requiring refrigerants with a 20-year global warming potential less than 10, will necessitate significant research and development and potentially increase equipment costs ⁶⁹. The company anticipates similar rules from California and Washington state, as well as several other states, which could lead to a patchwork of different timing and requirements, increasing the options needed and potentially costs ⁷⁰. Regulations reducing or eliminating fossil fuels may shift demand to air- and water-cooled heat pump-type units, affecting production productivity, material costs, and aftermarket warranty costs ⁷¹.

The company faces several material risks, including disruptions from public health pandemics affecting employees, suppliers, and business partners ⁷². Economic conditions, such as interest rates, inflation, consumer spending, and employment rates, can negatively impact sales in new construction and replacement markets ⁷³. A significant portion of sales is derived from a limited number of customers, and the loss or reduction in sales to these customers could materially adversely affect results ⁷⁴. The company may not realize all expected sales from its backlog, which was approximately $1,828.5 million as of December 31, 2025 ⁷⁵, due to customer cancellations or deferrals ⁷⁶. Dependence on third-party representatives for sales and marketing poses a risk if these relationships are terminated or impaired ⁷⁷. Warranty and product liability claims could result in material costs not covered by insurance ⁷⁸. The loss of key officers or senior leadership, or an inability to attract and retain skilled employees, could adversely affect the business ⁷⁹. Natural disasters, particularly affecting the concentrated operations in Tulsa, Oklahoma, and areas prone to wildfires in Oregon, could damage facilities and halt operations ⁸⁰. Variability in self-insurance liability estimates for employee health and workers' compensation could impact results ⁸¹. Intense competition in the HVAC business could lead to price reductions or market share loss ⁸². Failure to successfully develop and market new products or keep pace with technological advances could materially adversely affect the business ⁸³. The lengthy sales cycle and unpredictable order patterns for certain BASX-branded products, especially large orders, can cause significant period-to-period revenue and operating result variations ⁸⁴. Problems with the availability or increases in prices of raw materials like steel, copper, and aluminum, or components, could depress sales or increase costs ⁸⁵. Non-cancellable contracts for raw materials, ranging from six to 18 months, could lead to foregone economic benefits if prices change favorably or excess inventory costs if demand declines ⁸⁶. Cybersecurity attacks and reliance on information technology pose risks of disruptions, data breaches, and competitive disadvantage if investments are insufficient ⁸⁷. The growing use of AI tools introduces potential risks related to data privacy, cybersecurity, intellectual property, and regulatory compliance ⁸⁸. Complications with the design or implementation of the new ERP system could adversely impact financial positions, results of operations, and cash flows ⁸⁹. Exposure to environmental liabilities and rapidly changing federal, state, and local environmental laws could increase costs ⁹⁰. New or evolving governmental regulations and policies, including those related to refrigerants and fossil fuels, could substantially affect operations and profitability, potentially creating a patchwork of differing state requirements ⁹¹. Changes in U.S. or foreign trade policies, including tariffs, could increase product costs and adversely impact competitiveness ⁹². Adverse changes in tax laws, such as the One Big Beautiful Bill Act (OBBBA) enacted on July 4, 2025, which impacted bonus depreciation and R&E costs, can affect tax expense or benefits ⁹³. International regulations, such as the Foreign Corrupt Practices Act, also pose compliance risks ⁹⁴.

Management's message to shareholders emphasizes the company's position as a leader in HVAC and liquid cooling solutions, driven by a commitment to research and development, advanced engineering, and decades of industry experience to deliver highly configurable equipment with reliable performance, efficiency, and long-term value. The company's core priorities include "Customers First," focusing on tailored solutions and technical excellence over price, and "Product Leadership," through continuous R&D to advance energy performance, durability, system efficiency, and indoor air quality ⁹⁵. Management also highlights strategic investment in its independent sales representative network for support throughout equipment lifecycles and fostering a culture focused on innovation and operational excellence to attract and retain talent ⁹⁶. The company has made substantial capital investments to expand capacity, particularly for its BASX brand, in response to the accelerating growth in the data center market ⁹⁷. For 2026, the capital expenditure program is estimated to be approximately $190.0 million ⁹⁸. The company has increased its annualized dividend per share to $0.40 ⁹⁹ and has an active stock repurchase program with approximately $70.0 million remaining under authorization ¹⁰⁰. Management acknowledges macroeconomic headwinds, such as a softer market for AAON-branded products due to higher interest rates and slowing construction, and supply chain challenges, including those related to the refrigerant change and coil shortages ¹⁰¹. The company also notes the impact of tariffs and the uncertainty of international trade policy, which could increase material costs and affect demand, and the challenges of a tight labor market ¹⁰². Despite these challenges, management expresses confidence in its ability to meet working capital needs, capital expenditures, and other liquidity requirements for 2026 and the foreseeable future through cash flow from operations and its revolving credit facility ¹⁰³.