AAON (NASDAQ:AAON) Q1 2026 Earnings Call

0:00 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 the absorbed fixed costs at the new Memphis facility, as well as tariff related and general inflation pressures, all of which are temporary. Despite these near term margin impacts, earnings growth remains 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.

0:47 Additionally, we have taken margin actions through pricing and mix, and those actions are embedded in the backlog. SG and A expenses as a percentage of sales declined two twenty basis points to 13.7%, up 32% to 67,900,000 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 $78,000,000 Non GAAP adjusted EBITDA margin was 15.7% compared to 17.6% a year ago.

1:38 Diluted earnings per share in the first quarter of twenty twenty six were $0.48 representing an increase of 37% from the first quarter of twenty twenty five. Turning now to the segment financials, beginning with AAON, Oklahoma. For the first quarter, net sales increased 51% year over year to $244,000,000 This outsized growth was driven by a strong beginning backlog and improved production throughput, which supported by higher backlog conversion despite a challenging industry backdrop. Results also benefited from a favorable comparison to the prior year period, which had been disrupted by the industry's refrigerant transition, contributing to regain market share.

2:30 AAON, Oklahoma gross margin was 26.3%, an increase of 120 basis points from 25.1 in the first quarter of twenty twenty five. Overhead expenses associated with the Memphis facility impacted segment margin by $9,800,000 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.

3:16 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 $117,600,000 in the first quarter, an increase of $23,600,000 or 25% compared to the prior year period. Growth was driven by 93,200,000 in basic 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.

4:02 AAON coil products gross margin was 24.1% in the first quarter compared to 31.8% in the prior year period and up two eighty 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 basic sales. Sales at the basic segments grew 104% in the first quarter to $135,400,000 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.

4:53 Increased utilization of our Memphis facility was also a significant factor, providing additional production capacity that was additive to segment results. ASX segment's 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 needed to support the future growth and share gains. As utilization continues to improve, we expect basic 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 equivalents and restricted cash balances totaled $1,100,000 on 03/31/2026 and debt at the end of the quarter was $425,200,000 Our leverage ratio improved to 1.71 times down from 1.77 times on December 31.

6:05 During the first quarter, cash flow from operations was a positive $34,000,000 the highest level since the third quarter of twenty twenty four. This is compared favorably to a 9,200,000 use of KS in the prior year period and was driven primarily by higher earnings and improved working capital efficiency. Capital expenditures totaled $52,900,000 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.

6:56 I will now hand the call back to Matt. Thank you, Andy. We entered the second quarter with significant production momentum and a strong backlog that provides excellent visibility through the remainder of the year. Production throughput continues to ramp across all of our facilities, positioning the business to benefit from higher volumes and improved utilization. With 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 continued market share gains. However, these impacts are transitory, and as internal capacity expands, these cost burdens will diminish, allowing margins to improve.

7:44 With demand remaining robust, production continuing to scale, and capacity investments coming online, we expect improving margins 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 our customers and driving long term value for our shareholders. For the year, we now anticipate sales growth of 40 to 45% at a gross margin of 27% to 28%. SG and A as a percentage of sales is expected to be between 1415%, and depreciation and amortization expenses are expected to be in the 95,000,000 to $100,000,000 range. These expectations reflect our confidence in demand, improving execution and the operating leverage embedded in our cost structure.

8:36 Importantly, our full year outlook reflects a net improvement in both 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 in long term margin structure. As absorption improves, outsourcing declines, and pricing flows through, margin expansion follows as these temporary factors unwind. In closing, I want to thank our employees, our customers, sales channel partners, and shareholders for their continued support.

9:22 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. Thank you. If you would like to ask a question, please press Your first question comes from Ryan Merkel with William Blair. Your line is open. Hey, everyone. Good morning and congrats on the quarter. Very well done. So Matt, you're not going to be surprised about my first question, which is gross margin.

10:10 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 were 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? Yes, good morning, Ryan, and thanks for the question. 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%.

10:59 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 is 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 kind of throughput for the overall enterprise, some of that decision, especially in coil production in places like Longview, we're centered on supporting some of the liquid cooling products we have. 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.

11:48 But beyond that, there's a little bit of price cost dynamic and a little bit of diluted 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 at the back half of last year or so embedded in backlog is actually intentional action as to increase that price already. And we will continue to monitor the 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, Q2, we're expecting sequential improvement quarter over quarter in the Oklahoma segment.

12:35 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 the normalized seasonality. But all in all, we expect to see consistent improvement kind of 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 4Q. 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?

13:24 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 cadence. And really what I'd say is, we look kind of within our customer base, as well as new customer conversations, we continue to see incredibly strong strength in the data center market from an underlying perspective. And as we mapped out kind of our execution plan to really capitalize on the opportunity, especially with our differentiated product, we made a 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.

14:17 So as that demand really started to come online and show good legs and we gain 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 really the acceleration both on 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 kind of the new 40% to 45% kind of marker from a top line revenue perspective, that implies roughly a $1,000,000,000 in basics revenue for the year. That's incredible. Okay, I'll get back in line. Thank you. Thanks, Ryan.

15:05 Your next question comes from Chris Moore with CJS Securities. Your line is open. Hey, good morning guys. 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 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 of obviously 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.

15:53 But beyond that, what we saw was some really solid movement in the more traditional transactional market. And so a lot of that growth in bookings that we saw in the quarter actually was driven by the more traditional market, which from our vantage point, it shows signs of recovery. We look at the age or I data kind of through second quarter and it shows a low single digits recovery in volumes going through, 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 class heat pumps. We're seeing good strength out of our local markets. And so, we continue to expect to see ramping production in the Oklahoma segment through Q2 and Q3.

16:38 Again, a little bit of question mark in Q4 on normal seasonality, but 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 it that's still holding up? Yes, I think one thing to point out and kind of mentioned in my response to Ryan's question, but embedded in the backlog has been intentional pricing actions that we've been taking through the back half of last year. So it's important to note, implied in there obviously is we're maintaining discipline on how we price our product and maintain that premium and we continue to see strength in bookings. So 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 that the pricing strategy remains intact.

17:31 We see the value proposition very much intact. They continue focusing on delivering innovative products to the marketplace. Got it. And maybe just one on basics. And it sounds like you're talking about $1,000,000,000 in revenue this year. Just from a capacity standpoint, kind of where you'll be at the end of twenty twenty six? And kind of what's your longer term target in terms of data center capacity? Yeah, mean, we've talked in the past and again, this is sort of was rough napkin map in the past around about 1,000,000,000 and a half of capacity. But last quarter I indicated a lot of the conversations and really response to questions, which was we truly see a lot of upside actually beyond that. So embedded inside the initial investments that we've made in both Longview and Memphis is actually more revenue potential than that original $1,500,000,000 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.

18:33 But we definitely see the capacity embedded in there being above $2,000,000,000 for sure. Got it. I'll leave it there. So we've got headroom. I would just touch too. I mean, there's 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. Perfect. I appreciate it, Matt. Thank you very much. Thanks, Chris. Your next question comes from Noah Kaye with Oppenheimer. Your line is open. Thanks. Hey, 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, existing customers, new customers, mix, any color on that and how that's informing your ramp at Memphis would be helpful.

19:30 Yes, good morning, Owen. Great question. So when we look at the overall kind of what is embedded inside, not only the bookings, but also I'd say the pipeline, which I think is also equally as important about longevity. There was a solid base obviously of existing customers, but we continue to engage with and secure orders with new customer base as well. And so, we see that the delivery and the execution and the value proposition of the product helping anchor continued orders from our current customers, but also we see continued engagement and a lot more opportunity with broadening that customer base, which as we've talked about in the past is actually one of the key focuses that we have as a business. We love the customer base that we have. We also want to be very intentional about diversification and ensuring we spread out the overall kind of concentration risk within a broader customer base. And so we continue to focus on that. We continue to see it driving success in the overall results.

20:30 And just kind of maybe moving one step further beyond just the customer base. I also want to just talk about the kind of overall product portfolio embedded in the conversation. One thing we're seeing in the midst of all this is really a broad based demand for our entire portfolio. So it's not isolated on one product or another, we're seeing good strength and consistent strength in our traditional airside products that built the braces brand from the beginning days. So we see the good strength in airside. We continue to see that market actually growing in demand for us, but also continued strength in the liquid cooling products with the CDUs both liquid to air and liquid to liquid conversations. But beyond that, we're also seeing really good strength and interest in our kind of AI centric free cooling chillers. So systems that are intentionally designed to operate at optimized levels within higher fluid temps supporting AI workloads.

21:25 We continue to see increasing demand and increasing success there. So really the 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. Thanks, Matt. And then I think you mentioned around the basic segment there was some outsourcing also helping to accelerate sales there. Was that also COIL's outsourcing? Can you give us any more color what was being outsourced? Yeah, there's a variety of things that we look at from an operational perspective to see where the 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 it to the next one. And so as we look at overall constraints and really map out the sort of rocks that are in the way from accelerating revenue growth, coils obviously are a conversation that we continue to invest to expand our capacity.

22:25 So it's not a long term outsourcing strategy on coils, it's just essentially as we continue ramping internal production, we're basically using that as a little bit of a short term kind of hedge to be able to keep driving the volumes. But same thing as we think about a Memphis coming online, we're adding a tremendous amount of internal manufacturing capacity in the Memphis site, whether coil production, whether sheet metal, whether welding coating, all these things that are part of the puzzle. And as we push to really accelerate growth, we understand kind of the ramp rates of some of those internal investments. And we balance that with outsourcing to ensure that we can drive volumes while continuing to mature the internal operating processes.

23:10 So that's where we talk about this as a temporary conversation in outsourcing. We continue to have more and more capacity internally coming online, which is what's going to help drive margin improvement as we keep getting that capacity to mature. Okay. That's helpful Matt. One more is just for Andy. First of all, 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 an operating cash flow is inflecting. But I know with your background, you probably see some more opportunities to improve operating cash conversion. Can you talk a little bit about that and just more broadly what you're focused on here in the near term? Yes, absolutely, Laura. I'm super excited to be joining AAON here. And as you can see, we have really strong fundamentals in the last few weeks. I really learned a lot and starting to formulate my priorities.

24:06 I would say near term, I see three things as really important. One definitely is the margin discipline, the ability to grow our margin during this phase of ramping rapid growth. Second, as you mentioned, we do see opportunity in cash generation, particularly on working capital management. I think there are opportunities there. And then lastly, I think just from an overall finance function standpoint, the visibility, the connection with the rest of the management team, with our operating team. I think there's a lot that we can do to enhance the capability of the overall leadership team. So yes, I'm super excited. These are three things I'm definitely going to share more of my view in the next call in the next couple of months. We look forward to that. Thank you all.

24:54 Thank you. Thanks, Della. Your next question comes from Tim Weiss with Baird. Your line is open. Hey, guys. Good morning. Nice job. I guess a couple of questions for me. Just on the gross margins, Matt, how much of the kind of reduction relative to the prior guide is actually the investments you're making and any changes to kind of the Tulsa guide versus just a higher mix of data center revenue now being in the sales line? Yeah, when we look at well, first off, good morning, Tim. When we look at the sort of kind of prior guide expectation to really where we delivered in Q1, I would say the biggest driver of that sort of a miss or dislocation is really driven by the intentional actions and decisions we made to accelerate volumes. And so the incremental costs that put on obviously affected multiple segments, but by and large that decision to drive more volume and in doing so relying on some more outsourcing activities certainly was a big driver in that. And so that plus the Oklahoma margin conversation around a little bit of that price cost that also had some near term pressures.

26:24 But beyond that, the additional pieces that are embedded in there is, as we look at the opportunity ahead, we look at that growth rate and we map out what it's going to take. We've additionally made some more investments internally within our people and our process and some other investments to support that level of growth throughout the year. So there's a little bit of front load as well that kind of midway through the quarter we undertook to really help fuel that growth throughout the year. So, I mean, there's certainly a variety of factors in there. The data center margin is lower that we talked about than the structural AAON, Oklahoma margin in the high 30s. But again, we knew that going into the quarter, but that really wasn't the prime driver of that disconnect. Okay.

27:10 Okay. That's helpful. And I guess if $1,000,000,000 or so of Basics branded is kind of the target for '26 now, I think it implies that there's no real change in the AAON branded sales, I guess. Is that math right? Yes, mean, it's very in line. I mean, there's a little bit upside, but it's not markedly different on the AAON side. Okay. Okay. And then just the last one, you know, you see kind of a several 100 basis points step up if you just look at also margins from Q1 to Q2, just from a seasonality and a revenue perspective. And I know you're kind of chewing through some backlog. So how would you kind of specifically expect the Tulsa business to perform Q1 to Q2 relative to normal seasonality? Thanks.

28:06 Yes, I mean, I would say you're going to be we anticipate being relatively in line with that normal seasonality. And so I would say you're going to see uptick or we anticipate seeing uptick Q1 to Q2, but I would say additionally acceleration in that growth or in margin profile really into Q3 before we expect some seasonality. So Q1 to Q2, I'd say rough order of magnitude, you're in the ballpark of what we expect. Okay. That's helpful. Thanks. Thanks, Tim. Your next question comes from Julio Romero with Sidoti and Company. Your line is open.

28:54 Good morning, Matt, and welcome, Andy. This is Justin on for Julio. Good morning, Justin. Can you give us an update on Memphis revenue contribution in Q1 specifically and help us frame the trajectory from roughly 25,000,000 to $30,000,000 in Q4 to where you expect Memphis to be exiting 2026 on a quarterly revenue run rate basis? Yeah, we don't have Memphis explicitly called out in terms of that breakout of revenue. But what I would say is we anticipated, we saw a good contribution step up from Q4 to Q1. That's obviously the big driver in some of that revenue gain for the quarter. We anticipate continuing to see growth in Memphis throughout the year. So as that facility continues to mature, and really more and more stability in the internal manufacturing process, it allows us to continue ramping that throughout the year. So we anticipate seeing strength and growth throughout the year.

29:57 Really the focus right now in Memphis is ensuring that we've ensured that operation and really drive consistent performance before we push the accelerator too hard. But we do see the opportunity throughout the year to keep driving sequential growth in that side of the business. Very helpful. And then with capital expenditures being deployed towards investments and capacity, can you give us a sense of where the capacity investment is being directed and whether the $190,000,000 full year CapEx plan is still intact or whether the demand environment is causing you to revisit that number? Yes, that's a great question. So really when we think about where that $190,000,000 is spread out, obviously there's a huge concentration in terms of facility perspective on Memphis and continuing to build out Memphis throughout the year. So last year, obviously we had a huge year of investment in putting more and more equipment into that facility.

31:00 But obviously that continues in this calendar year as we continue to mature that operation and build a backup house to sustain that continued growth. So I want to just anchor there for one second and say that initial investment in Memphis does provide a tremendous amount of revenue potential. So it's not like there's an immediate massive follow-up of additional CapEx to support the continued growth. We have made a lot of investments over the last couple of years fleet wide, whether Longview, Memphis, and really Tulsa, Redmond, Kansas City site as well. So we've been making investments over the last couple of years to obviously show up in our financials, but those investments we've been making in the last couple of years have been very much framed around that forward looking growth potential.

31:45 So the investments we're making this year, obviously centered in Memphis, but the investments we've been making are gonna support a lot of this growth is not triggering some massive investment that we have to make to be able to support this rate of growth in that $2,000,000,000 marker kind of from a revenue perspective. And Justin, just to add on your question, we are still seeing $190,000,000 is our current expectation for the year. Very helpful. Thank you 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. I'd like to 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.

32:41 This concludes today's conference call. Thank you for joining. You may now disconnect.