AAON (AAON) Q1 2025: Backlog Soars 84% as Data Center Demand and Refrigerant Transition Reshape Growth
AAON’s record $1 billion backlog and 374% surge in Basics-branded sales signal a structural shift toward data center cooling and heat pump solutions, even as legacy rooftop volumes lag. Margin headwinds and supply chain friction are giving way to operational normalization, with management emphasizing backlog conversion and national account wins as the next growth lever. Investors should watch for continued execution on production ramp and customer diversification as AAON navigates macro uncertainty and tariff impacts into year-end.
Summary
- Data Center Demand Drives Backlog: Robust bookings and a record $1 billion backlog highlight durable demand in both airside and liquid cooling segments.
- Legacy Rooftop Weakness Offsets Growth: Refrigerant transition and supply chain issues pressured Aon-branded rooftop unit production and gross margin.
- Margin Recovery Hinges on Execution: Margin normalization depends on supply chain stability, backlog conversion, and ramp-up of new Memphis capacity.
Performance Analysis
AAON’s Q1 results underscore a business model in transition, with BASICS-branded equipment (data center cooling solutions) driving triple-digit growth and offsetting a sharp decline in legacy Aon-branded rooftop units. The 22.9% revenue increase was almost entirely attributable to data center demand, as Basics segment sales rose 138.9% and Aon Coil Products surged 287.8%. In contrast, Aon Oklahoma (rooftop units) sales fell 23% as the refrigerant transition and component shortages constrained output.
Gross margin contracted sharply, falling 840 basis points to 26.8%, reflecting operating deleverage from lower rooftop volumes and supply chain friction in the Oklahoma segment. However, Basics and Coil Products segments posted margin gains of 350 and 100 basis points respectively, benefiting from operational improvements and higher throughput. SG&A leverage improved as a percent of sales, but one-time items (notably a $2.7 million broker fee) and higher CapEx weighed on near-term earnings and cash flow. The company’s leverage ratio remains conservative at 0.95, supporting continued investment in capacity and working capital.
- Data Center Pull-Through: Liquid and airside cooling for data centers drove the bulk of new sales and backlog growth, with $80 million of a $200 million order already recognized.
- Rooftop Unit Headwinds: Aon-branded rooftop production lagged due to weak Q4 bookings and supply chain constraints tied to the R454B refrigerant transition.
- Margin Dynamics: Gross margin pressure concentrated in Oklahoma, while Basics and Coil Products margins expanded on higher volumes and efficiency gains.
Backlog visibility and customer diversification remain central themes for forward growth, as management eyes greater production normalization and margin recovery in the second half of 2025.
Executive Commentary
"What we're doing with the development of heat pumps on the Aon side of the business and custom air side and liquid cooling data center solutions on the basics side is very exciting. The strategies we're taking regarding the other two pillars ensures that we will fully leverage these innovations along with the already premier solutions we provide to drive market share gains at highly profitable levels."
Gary Field, CEO
"Production of rooftop units were impacted by weak bookings throughout most of the fourth quarter. This was related to a temporary lull in demand as the market shifted from the legacy R410A refrigerant to the new R454B refrigerant equipment. Bookings have since rebounded in a strong manner, suggesting that we're becoming more competitive with the new refrigerant equipment."
Rebecca Thompson, CFO and Treasurer
Strategic Positioning
1. Data Center Cooling as a Growth Engine
The Basics and Aon Coil Products segments are now the primary growth drivers, propelled by AI and cloud data center buildout. With airside and liquid cooling solutions in high demand, these segments delivered the majority of Q1’s revenue and margin expansion. The $1 billion backlog reflects strong multi-year project visibility, with management citing three to seven-year customer outlooks and ongoing pipeline strength despite industry “noise.”
2. Rooftop Unit Transition and Heat Pump Leadership
Aon-branded rooftop units are in a cyclical trough, but management is positioning for a rebound by leveraging the AlphaClass heat pump platform, which now operates down to negative 20 degrees Fahrenheit. This next-generation offering targets both cold and warm climates, positioning AAON to win national account business and lead the DOE’s commercial heat pump challenge ahead of schedule. The price premium for Aon-branded units has narrowed, supporting market share gains as supply chain headwinds fade.
3. Operational Flexibility and Capacity Expansion
AAON’s vertically integrated manufacturing and ongoing Memphis facility buildout provide operational flexibility and insulation from tariff and supply chain shocks. While Memphis will be a cost center until late 2025, the ramp-up is expected to enhance on-time delivery, production efficiency, and future margin leverage. Management’s focus on right-sizing Oregon capacity and improving productivity is already yielding margin benefits in the Basics segment.
4. Customer Diversification and National Accounts
While recent growth is concentrated in a few large data center customers, AAON is targeting broader customer diversification through new bids and national account penetration. The company’s sales and engineering teams are actively engaging with both liquid cooling and traditional data center clients, aiming to reduce single-customer exposure and build a more resilient backlog.
Key Considerations
AAON’s Q1 showcased both structural opportunity and near-term friction, with the business model tilting further toward data center and heat pump solutions amid legacy rooftop volatility and operational normalization.
Key Considerations:
- Backlog Visibility and Conversion: Record backlog offers multi-quarter revenue visibility, but timely production ramp and supply chain normalization are critical for margin recovery.
- Margin Sensitivity to Mix: Higher-margin rooftop units remain subdued, placing greater emphasis on data center volumes and segment mix for overall profitability.
- CapEx and Cash Flow Discipline: Elevated CapEx ($220 million guided for 2025) and working capital needs will pressure near-term free cash flow, but leverage remains manageable.
- Tariff Surcharge Implementation: The 6% tariff mitigation surcharge is expected to neutralize cost impact, but trade policy fluidity and customer acceptance require monitoring.
- Customer Concentration Risk: Recent wins are skewed toward a few large data center projects; ongoing diversification is necessary to sustain growth and mitigate order lumpiness.
Risks
Macro uncertainty in non-residential construction, ongoing supply chain normalization, and the pace of data center project execution represent key risks for the remainder of 2025. Customer concentration in data center cooling heightens exposure to project delays or cancellations, while tariff and trade policy changes could disrupt cost structures. Execution on Memphis ramp-up and backlog conversion will be pivotal for margin normalization and earnings trajectory.
Forward Outlook
For Q2 2025, AAON guided to:
- Modest sequential sales and earnings growth, with operating income expected to rise more than earnings per share due to a normalized tax rate and higher interest expense.
- Improving production and margin recovery in Aon Oklahoma as supply chain issues abate.
For full-year 2025, management maintained guidance:
- Mid to high teens sales growth with gross margin similar to 2024.
- SG&A as a percent of sales down 25 to 50 basis points; CapEx at $220 million.
Management emphasized backlog conversion, margin recovery in Oklahoma, and further operational improvement in Basics as key drivers for the rest of the year.
- Tariff surcharge expected to fully offset cost impact for the remainder of 2025.
- Memphis facility to remain a cost center until late 2025, with volume ramp in 2026.
Takeaways
AAON’s Q1 marks a structural pivot toward data center and heat pump-driven growth, with backlog and bookings providing visibility but execution on production ramp and customer diversification still critical for valuation.
- Data Center Leverage: Multi-year pipeline strength and large orders anchor growth, but require ongoing execution and customer diversification to mitigate risk.
- Margin Recovery Path: Rooftop volume normalization and Memphis ramp-up are necessary to restore profitability and offset CapEx drag.
- Future Watchpoint: Investors should track backlog conversion rates, margin mix, and the impact of tariff surcharges as the year progresses.
Conclusion
AAON is capitalizing on secular data center and electrification trends, but must deliver on backlog conversion, margin recovery, and customer diversification to sustain its valuation and growth narrative. Execution in the second half of 2025 will determine whether the company can fully leverage its operational investments and market positioning.
Industry Read-Through
AAON’s results reinforce the structural demand for data center cooling solutions and the accelerating shift to advanced heat pump technologies, with implications for HVAC peers and industrial suppliers exposed to AI and cloud infrastructure buildout. The refrigerant transition’s impact on legacy product lines is a cautionary signal for others navigating regulatory-driven product shifts. Tariff mitigation strategies and vertical integration provide a template for managing supply chain and cost volatility in a fluid trade environment. Customer concentration risk and the need for backlog diversification are broader themes for suppliers tied to large project cycles.