Aaon, Inc. Q1 FY2026 Earnings Call

Hello, and welcome to the AAON, Inc. First Quarter 2026 Earnings Conference Call. I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations. You may begin.

Good morning, everyone. The press release announcing our first quarter 2026 financial results was issued earlier this morning and can be found on our corporate website, aaon.com. Today's call is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin our customary forward-looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matthew Tobolski, President and CEO; Chung Cheung, our new Chief Financial Officer, who joined the company in April; and Rebecca Thompson, our Chief Accounting Officer. Matt will start with some opening remarks, Chung will follow with a walk-through of the quarterly results and Matt will finish up with our updated outlook for 2026. With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. Q1 was a strong start to the year and an important execution quarter for AAON as the organizational, leadership and capacity investments that we have been deliberately building began to show up more clearly in our results. In addition to delivering record sales and 37% earnings growth, we recorded a book-to-bill well above 1, resulting in backlog of $2.1 billion, more than double from a year ago and marking the sixth consecutive quarter at record levels. Both brands continue to demonstrate the strength of their value propositions through highly engineered, configurable and custom solutions, consistent with the strategy we have executed against over multiple years. This led to strong customer demand and translated into solid growth in share gains during the quarter. Demand remained exceptionally strong in Basics, supported by the strength of the data center market and our differentiated solutions that deliver improved performance, greater efficiency and ease of maintenance. Basics branded sales grew 72% year-over-year, even against a lofty comparison and sales in the prior year period nearly quintupled. Increased production from our expanded facilities in Longview and Memphis supported higher throughput while we also continue to increase output from our Redmond site. Operationally, we executed well for our customers with all three facilities delivering record Basics branded sales during the quarter. This performance reflects not just strong demand but improving execution driven by deeper leadership benches, clear accountability and more disciplined operating processes as capacity scales with a more mature operating structure. In addition to higher throughput, we delivered another quarter of strong bookings. Basics posted a book-to-bill ratio over 2, driving a record backlog of Basics branded orders, up 160% from a year ago and 24% sequentially. Against the data center thermal management market growing at approximately 30%, our revenue and order growth supported continued market share gains at Basics. The AAON brand also performed well, gaining share even as market conditions remain soft and our extended lead times persisted. A key positive during the quarter was a notable improvement in production rates which drove AAON branded sales growth of 42% year-over-year and 11% sequentially. These improvements contributed to shorter lead times and a sequential reduction in backlog, though further progress is necessary. With volumes within the unitary HVAC market growing just modestly year-over-year, these first quarter results suggest meaningful share gains. Bookings of AAON branded equipment increased approximately 9% year-over-year and were up about 15% on a trailing 12-month basis. In the quarter, growth was driven by strength in our traditional transactional business while national account bookings were comparable with the prior year period. The improvement in transactional business reflects an acceleration in demand, which is encouraging considering this business was soft for much of last year. Orders of Alpha-class equipment, which comprise our AAON branded fully electric heat pump configurations, also contributed to growth, increasing 56% during the quarter. The same strength in AAON branded bookings limited the sequential decline in AAON branded backlog even with meaningful improvements in production. AAON branded backlog declined 3% sequentially and remained up 26% from a year ago. As a result, we remain focused on further ramping production to work down backlog to normalized lead times. In the midst of such strong growth, we have been intentionally investing in people, processes and tools to build a top-performing operating organization, one capable of sustaining higher growth rates while expanding margins over time. These investments are now moving from a build phase to an execution phase. Last quarter, we discussed the investments we've been making in supply chain management and lean manufacturing. We continue to leverage these investments and expect to see accelerating benefits as the year progresses. Margin expansion remains central to our long-term value creation model. In the near term, we are intentionally prioritizing growth, customer delivery and system maturity over near-term margin maximization. That decision is reflected in the temporary use of outsourcing and ramp-related inefficiencies as we scale capacity. These are conscious, disciplined trade-offs made from a position of strength and visibility, not demand-driven pressure or structural resets. We view them as economically positive decisions that accelerate market share gains and long-term returns on invested capital. Importantly, these decisions do not come at the expense of long-term growth. Longer term, as capacity builds out and internal capabilities mature, reliance on these temporary measures will decline driving margin improvement through better fixed cost absorption and productivity. As a result, we now expect higher growth for the year, albeit with more modest margins near term while continuing to see directional margin improvement as the year progresses. Before handing it off, I want to welcome Chung Cheung, our new Chief Financial Officer. Chung brings a strong financial background and a proven track record of leadership across strategy, financial planning and analysis and capital management. His experience and disciplined approach will be instrumental as we continue to scale the business, enhance execution and drive long-term value creation. Chung's insights and partnership will further strengthen our leadership team and support our focus on growth, margin improvement and operational excellence. I'd also like to thank Rebecca Thompson for her steadfast service as CFO. I look forward to her continued contributions and a return to the Chief Accounting Officer role. And with that, I will now turn it over to Chung, who will walk through the quarterly financials in more detail.

Good morning, everyone. I'll start this morning by first sharing how excited I am to join AAON and to have the opportunity to partner closely with Matt and the leadership team. I've held financial leadership roles across multiple industries in my nearly 30-year tenure, including an extensive amount of time in the industrial HVAC space with a consistent focus on driving operational efficiency. I'm pleased to bring that experience to AAON, and look forward to helping drive the next stage of profitable growth and value creation. The company's strong market position and the high growth opportunity is what initially attracted me to the role. And as I have become more familiar with the business over the past few weeks, I've been even more impressed by the strength of the underlying fundamentals and the sizable opportunity that lies ahead. I look forward to working with the team to support profitable execution, enhance returns and deliver long-term value for our shareholders. With that, let's turn to the first quarter financial results. First quarter net sales increased 54% year-over-year to a record $496.9 million. Growth was driven by strong performance across both Basics and AAON brands, supported by elevated backlog levels and recent capacity investments that enabled higher production rates during the period. Basics branded sales increased 72% year-over-year, reflecting continued strong demand for data center cooling solutions and capacity gains from higher utilization of our facilities in Memphis, Longview and Redmond. AAON branded sales grew 42% in the first quarter, driven by improved production throughput as we work to reduce lead times at both our Tulsa and Longview facilities. Gross margin was 25.1% in the first quarter, down 170 basis points from 26.8% in the prior year period. Gross margin was impacted by an increased amount of outsourced components to drive growth and share gains and absorb fixed costs at the new Memphis facility as well as tariff-related and general inflation pressures which are temporary. Despite these near-term margin impacts, earnings growth remained strong, reflecting our exceptional growth trajectory. As internal capacity scales, utilization and productivity increase, reducing reliance on outsourced components and resulting in better fixed cost absorption. Additionally, we have taken margin actions through pricing and mix and those actions are embedded in the backlog. SG&A expenses as a percentage of sales declined 220 basis points to 13.7%, up 32% to $67.9 million. This reflects strong operating leverage and disciplined cost management, and demonstrates how our organizational investments are scaling as revenue grows. Driven by the strong top line performance, non-GAAP adjusted EBITDA increased 44% from the prior year period to $78 million. Non-GAAP adjusted EBITDA margin was 15.7% compared to 17.6% a year ago. Diluted earnings per share in the first quarter of 2026 were $0.48, representing an increase of 37% from the first quarter of 2025. Turning now to the segment financials. Beginning with AAON Oklahoma. For the first quarter, net sales increased 51% year-over-year to $244 million. This outsized growth was driven by a strong beginning backlog and improved production throughput, which supported a higher backlog conversion despite a challenging industry backdrop. Results also benefited from a favorable comparison to the prior year period, which was disrupted by the industry's refrigerant transition, contributing to regained market share. AAON Oklahoma gross margin was 26.3%, an increase of 120 basis points from 25.1% in the first quarter of 2025. Overhead expenses associated with the Memphis facility impacted segment margin by $9.8 million. Excluding these costs, Oklahoma margins were 29.6%. The remaining gap to our historical highs in the upper 30s is explained by three items: outsourcing, tariff-related pressures and general inflation. None represent a structural change to Oklahoma's long-term earnings power or its role as a core margin engine for AAON. All three have already been addressed with actions embedded in backlog and new pricing actions. These temporary headwinds will moderate as the year progresses. AAON Coil Products sales were $117.6 million in the first quarter, an increase of $23.6 million or 25% compared to the prior year period. Growth was driven by $93.2 million in Basics branded liquid cooling product sales which increased 40% during the quarter. This strength was partially offset by a 12% decline in AAON branded output within the segment. AAON Coil Products gross margin was 24.1% in the first quarter compared to 31.8% in the prior year period, and up 280 basis points sequentially from 21.3% in the fourth quarter. The sequential margin expansion reflected improved operating leverage from higher throughput at the Longview facility along with a favorable mix of higher-margin Basics sales. Sales at the Basics segment grew 104% in the first quarter to $135.4 million. The robust growth was driven by sustained demand for data center solutions and new market share capture as Basics continued its trend of strong order intake and growing backlog. Increased utilization of our Memphis facility was also a significant factor, providing additional production capacity that was additive to segment results. Basics segment gross margin was 23.9%, essentially flat from the prior year period. The stable year-over-year margin reflected strong volume growth offset by incremental resources and investments to support the future growth and share gains. As utilization continues to improve, we expect Basics segment sales and margins to expand through the balance of the year, with the second half weighted more favorably as fixed cost absorption improves. Turning now to the balance sheet. Cash, cash equivalents and restricted cash balances totaled $1.1 million on March 31, 2026, and debt at the end of the quarter was $425.2 million. Our leverage ratio improved to 1.71x, down from 1.77x on December 31. During the first quarter, cash flow from operations was a positive $34 million, the highest level since the third quarter of 2024. This is compared favorably to a $9.2 million use of cash in the prior year period and was driven primarily by higher earnings and improved working capital efficiency. Capital expenditures totaled $52.9 million, reflecting continued investment in incremental capacity to support future growth. Looking ahead, we expect continued profitability and productivity improvements throughout 2026, which we believe will drive further cash flow improvement and strengthen the balance sheet in support of future growth. I will now hand the call back to Matt.

We entered the second quarter with significant production momentum and a strong backlog that gives us clear visibility for the rest of the year. Production throughput is ramping across all of our facilities, positioning the business to benefit from higher volumes and improved utilization. Given this operational momentum and backlog strength, our focus remains squarely on execution and delivering for our customers. In the near term, we expect temporary cost pressures from outsourcing as we support strong growth and continue to gain market share. These impacts are transitory; as internal capacity expands, these cost burdens will diminish and margins will improve. With demand remaining robust, production scaling, and capacity investments coming online, we expect margins to improve over the course of the year as operating leverage builds. We remain focused on scaling the business efficiently and strengthening margins over time while delivering for customers and driving long-term shareholder value. For the year, we now expect sales growth of 40% to 45% with a gross margin of 27% to 28%. SG&A as a percentage of sales is expected to be between 14% and 15%, and depreciation and amortization are expected to be in the $95 million to $100 million range. These expectations reflect our confidence in demand, improving execution, and the operating leverage embedded in our cost structure. Importantly, our full-year outlook reflects a net improvement in both the top and bottom line, with earnings up materially despite gross margins reflecting intentional timing and ramp decisions. The additional volume we are taking on this year carries strong incremental contribution and accelerates absorption, productivity, and capacity payback. This is a timing issue tied to how we are choosing to ramp and execute, not a reset of our long-term margin structure. As absorption improves, outsourcing declines, and pricing flows through, margin expansion will follow as these temporary factors unwind. In closing, I want to thank our employees, customers, sales channel partners, and shareholders for their continued support. We are seeing clear momentum in our operations as recent investments translate into stronger execution. Our visibility, execution priorities, and operating discipline position us well to continue improving performance and delivering long-term value. And with that, I will open the call for questions. Your first question comes from Ryan Merkel with William Blair.

Congrats on the quarter, very well done. So Matt, you're not going to be surprised about my first question, which is gross margin. There's a lot going on but I think it would be helpful if you could just talk about Oklahoma because the margins there, I think you said normalized for close to 30%, but the quarter was 26. So that 500 basis points, if I have that right, can you just unpack each of the temporary issues? And then the second part of the question is, how should we think about 2Q and why will 2Q improve sequentially? What are the drivers?

So touching on Oklahoma margins, just to clarify, the margin as reported includes the overhead impacts of the Memphis investments and so when we back that out, the Oklahoma margin for the quarter is sitting around 30%. And so when we think about that 30% compared to 2024 highs in the higher 30s, the three key drivers that are embedded in there are, first off, some intentional choices to outsource to help fuel the growth. And when we think about it from a system perspective, we've got demand coming across the entire platform for internal manufacturing resources. And so as we balance exactly where all those resources are driving throughput for the overall enterprise, some of that decision, especially in coil production in places like Longview, were centered on supporting some of the liquid cooling products we have. So because we tied up some of that capacity in the Longview site for Basics, we did some more outsourcing in the Oklahoma site, which shows up in the overall margin. But beyond that, there's a little bit of price-cost dynamic and a little bit of dilutive nature from the tariff surcharge and actual costs incurred. But I want to touch on the fact that the price-cost issues and the tariff impact were identified and actually pricing actions have been taken in the back half of last year. So embedded in backlog are intentional actions to increase price already, and we will continue to monitor input costs and really maintain discipline around pricing strategy.

Got it. Okay. That's helpful. And then 2Q, can you provide us any kind of color on where you think the margins will land?

Yes. I mean, for Q2, we're expecting sequential improvement quarter-over-quarter in the Oklahoma segment, and so that includes both with and without Memphis. The only thing I'd touch on is Oklahoma does traditionally have seasonality in Q4 and Q1. So we anticipate seeing sequential progression in the Oklahoma segment margin in Q2 and Q3 and there still is a little bit of potential pullback in Q4 with normalized seasonality. But all in all, we expect to see consistent improvement during the main peak months in the summer.

Got it. Okay. And then just quickly on Basics, I mean the revenues and orders were way above what I was thinking and maybe even what you were thinking, if I go back to what you told us in Q4. So why did Basics revenue in the quarter beat so much and then what is embedded in the guide for Basics growth at this point? Because I think prior, you had said 25% growth.

Yes. So it's a good question on what changed or what allowed us to accelerate the sales and the bookings guidance. And really, what I'd say is as we look within our customer base as well as new customer conversations, we continue to see incredibly strong demand in the data center market from an underlying perspective. And as we mapped out our execution plan to really capitalize on the opportunity, especially with our differentiated product, we made the choice to accelerate some of the productivity or production ramp, which is part of that additional cost structure that came in on the outsourcing. But when we saw the opportunity and we really mapped out how we can take advantage of that, we made it a point to really accelerate revenue, which allowed us to then also accelerate bookings. So as that demand really started to come online and show good legs and we gained more and more confidence in our ability to drive more volume through, it allowed us to continue adding more sales or bookings as well. So that's really the big driver of the acceleration on both the sales and the booking side. I would just say, high level, what's embedded in the overall guide for the year is when we zoom out and we look at the new 40% to 45% marker from a top line revenue perspective, that implies roughly $1 billion in Basics revenue for the year.

That's incredible. Okay. I'll get back in line.

Your next question comes from Chris Moore with CJS Securities.

Nice quarter. Maybe we'll start with on the rooftop side. So obviously, you're ramping production there, lowering the lead times sounds like you're taking some share. Just maybe you could talk a little bit about kind of what you're thinking about from the rooftop market for the balance of '26?

Yes. I mean the rooftop market as a whole, we talked through last year about making some great strides in our national account success throughout the calendar year. But as we came into 2026, we continue to see good strength in the national account structure. Beyond that, we saw solid movement in the more traditional transactional market. A lot of that growth in bookings that we saw in the quarter was actually driven by the more traditional market, which from our vantage point shows signs of recovery. We look at the data and it shows a low single digits recovery in volumes, which obviously we're outperforming on, so we're taking share. We're really capitalizing on the value proposition of the overall portfolio, seeing a lot of strength in the off-gas heat pumps and good strength out of our local markets. We continue to expect to see ramping production in the Oklahoma segment through Q2 and Q3, and again, a little bit of question mark in Q4 on normal seasonality, but we really see good strength from our value proposition and driving good revenue and share gains through the year.

Got it. In terms of the premium pricing? Is that still holding up?

Yes. One thing to point out, as I mentioned in my response to Ryan's question, embedded in the backlog have been intentional pricing actions that we've been taking through the back half of last year. So it's important to note that we are maintaining discipline on how we price our product and maintain that premium, and we continue to see strength in bookings. With that price, we continue to see the value proposition shine through with those share gains and outperformance on the overall bookings. So we definitely think the pricing strategy remains intact and we see the value proposition very much intact while continuing to focus on delivering innovative products to the marketplace.

Got it. And maybe just one on Basics. And it sounds like you're talking about $1 billion in revenue this year. Just from a capacity standpoint, where you'll be at the end of '26 and what's your longer-term target in terms of data center capacity?

Yes. We've talked in the past and again this is rough napkin math around about $1.5 billion of capacity. But last quarter, I indicated in a lot of the conversations that we truly see a lot of upside beyond that. Embedded inside the initial investments that we made in both Longview and Memphis is actually more revenue potential than that original $1.5 billion. We continue to work to really quantify that. Mix is obviously a huge component of that as we continue to capitalize on the market opportunity. But we definitely see the capacity embedded in there being above $2 billion of revenue potential.

Got it, I'll leave it there.

So we've got headroom. There are obviously sequential investments that come along with more equipment, but I'd say the big lifts have already been embedded in the investments we've been making.

Your next question comes from Noah Kaye with Oppenheimer.

Matt, yes, another really strong orders quarter for Basics. Can you talk a little bit about the nature of the orders you're seeing now, how that's evolving? Some of these wins are existing customers, new customers, mix—any color on that and how that's informing your ramp at Memphis would be helpful.

Yes, a great question. When we look at what is embedded inside not only the bookings but also the pipeline, which is equally important for longevity, there is a solid base of existing customers but we continue to engage with and secure orders from new customers as well. We see the delivery, execution and the value proposition of the product helping anchor continued orders from our current customers, and we see continued engagement and more opportunity with a broadening customer base. Diversification and reducing concentration risk across a broader customer base is one of our key focuses. Beyond the customer base, we are seeing broad-based demand across our entire product portfolio. We're not seeing demand isolated to one product. We see good strength in our traditional airside products that built the Basics brand initially, continued strength in the liquid cooling products with the CDUs, both liquid-air and liquid-conversion solutions, and good strength and interest in our AI-centric free cooling chillers—systems designed to operate optimally with higher fluid temps supporting AI workloads. So wins both from a sales and a bookings perspective are pretty broad-based around the customer set and the overall portfolio itself.

That's helpful. And then I think you mentioned the Basics segment had some outsourcing also helping to accelerate sales there. Was that also coils outsourcing? Can you give us any more color on what was being outsourced?

Yes. There's a variety of things that we look at operationally to see where constraints are. One thing I always say is manufacturing is a world of uncovering the constraints—no matter how much you solve one problem, you move to the next one. As we look at overall constraints and map out the rocks in the way of accelerating revenue growth, coils are a conversation where we continue to invest to expand capacity. So it's not a long-term outsourcing strategy on coils; it's essentially a short-term hedge to keep driving volumes while we ramp internal production. As Memphis comes online, we're adding a tremendous amount of internal manufacturing capacity at that site—coil production, sheet metal, weld and coating—so as we accelerate growth we balance those internal ramp rates with selected outsourcing to ensure continued volume while maturing internal processes. This is a temporary outsourcing strategy; more internal capacity coming online will drive margin improvement as that capacity matures.

Okay. That's helpful, Matt. One more question for Chung. First of all, welcome to the call. Maybe you could just talk for a minute about your priorities in the seat. It's nice to come in a quarter where operating cash flow is inflecting. But I know with your background, you probably see more opportunities to improve operating cash conversion. Can you talk about that and more broadly what you're focused on here in the near term?

Yes, absolutely, Noah. I'm super excited to be joining AAON here. As you can see, we have really strong fundamentals. In the last few weeks, I have learned a lot and started to formulate my priorities. Near term, I see three things as really important. One, margin discipline and the ability to grow our margin during this phase of rapid ramping growth. Second, we do see opportunity in cash generation, particularly in working capital management—there are opportunities there. And third, from an overall finance function standpoint, enhancing visibility and connection with the rest of the management and operating teams—I think there's a lot we can do to enhance the capability of the overall leadership team. I'm super excited and these are three priorities I'll focus on. I'll share more of my view on our next call in the coming months.

Your next question comes from Timothy Wojs with Baird.

I have a couple of questions. Just on gross margins, Matt, how much of the reduction relative to the prior guide is actually the investments you're making and any changes to kind of the Tulsa guide versus just higher mix of data center revenue now being in the sales line?

When we look at the prior guide expectation versus where we delivered in Q1, the biggest driver of that variance is the intentional actions and decisions we made to accelerate volumes. The incremental cost that resulted affected multiple segments, but by and large, relying on more outsourcing activities to drive volume was a big driver. Beyond that, we made additional investments internally in people and processes to support that level of growth throughout the year; there's a bit of front-loading in Q1 to fuel growth for the remainder of the year. Data center (Basics) margin is lower than Oklahoma's structural margin in the high 30s, but that was not the prime driver of the disconnect to guide.

Okay. If $1 billion or so of Basics branded is the target for 2026 now, I think it implies there's no real change in the AAON branded sales— is that math right?

Yes. They're roughly in line. There's a little bit of upside but not a marked difference on the AAON side.

Okay. And then just the last one. Usually, you see a several hundred basis point step up in Oklahoma margins from Q1 to Q2 due to seasonality and revenue mix. I know you're chewing through some backlog. How would you specifically expect the Oklahoma business to perform Q1 to Q2 relative to normal seasonality?

We anticipate being relatively in line with normal seasonality and expect an uptick from Q1 to Q2. We also anticipate additional acceleration in growth and margin profile into Q3 before some seasonality in Q4. So Q1 to Q2 should be in the ballpark of our normal seasonality expectations.

Your next question comes from Julio Romero with Sidoti & Company.

This is Justin on for Julio. Can you give us an update on Memphis revenue contribution in Q1 specifically and help us frame the trajectory from roughly $25 million to $30 million into where you expect Memphis to be exiting 2026 on a quarterly revenue run rate basis?

We don't have Memphis explicitly called out as a revenue breakout, but we did see a good contribution step-up from Q4 to Q1 which was a big driver of revenue gain for the quarter. We anticipate continuing to see growth from Memphis throughout the year as that facility matures and stabilizes its internal manufacturing processes, allowing sequential ramp. The current focus in Memphis is maturing operations and driving consistent performance before accelerating further, but we do see the opportunity to continue driving sequential growth there.

Very helpful. And then with capital expenditures being deployed towards investments in capacity, can you give us a sense of where the capacity investment is being directed and whether the $190 million full year CapEx plan is still intact or whether the demand environment is causing you to revisit that number?

When we think about where the $190 million is spread out, there's a large concentration on continued buildout in Memphis throughout the year. Last year we invested heavily to put more equipment into that facility and that continues. That initial investment in Memphis provides a strong amount of revenue potential, so we're not facing an immediate massive follow-up CapEx to support continued growth. We've made investments over the last couple of years across Longview, Memphis, Tulsa, Redmond and Kansas City, and those investments are framed around the forward-looking growth potential. The investments we're making this year are centered in Memphis, but the prior investments support a lot of this growth and do not trigger a massive additional investment required to support this rate of growth.

And just to add on your question, we are still seeing $119 million is our current expectation for the year. Very helpful and congrats on a nice quarter. Thanks so much.

This concludes the question-and-answer session. I'll turn the call to Joseph for closing remarks.

Okay. We thank everyone for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks.

This concludes today's conference call. Thank you for joining. You may now disconnect.