AAON (AAON) Q2 2025: Basics Data Center Sales Up 127%, ERP Drag Slows Margin Recovery
AAON’s Q2 exposed operational fragility as ERP rollout and supply chain overlap triggered a sharp margin contraction, even as data center demand and backlog surged. The business is now navigating a recovery phase, with visibility into margin lift as production stabilizes and price actions flow through. Investors should monitor execution on ERP remediation and Memphis ramp as levers for regaining earnings momentum into 2026.
Summary
- ERP Implementation Strain: Operational disruption from Longview’s ERP go-live significantly hampered Aon-branded production and gross margin.
- Data Center Demand Surges: Basics brand data center sales and backlog strength reinforce secular tailwinds despite segment margin pressure.
- Margin Recovery Hinges on Execution: Memphis ramp, ERP stabilization, and price-cost tailwinds are critical for restoring profitability trajectory.
Performance Analysis
AAON’s Q2 results reflected acute operational headwinds, with reported revenue down slightly year-over-year as a 21% decline in Aon-branded sales was almost fully offset by a 90% Basics-branded sales surge. The core issue was a disruptive ERP (Enterprise Resource Planning) rollout at Longview, which compounded with external coil supplier ERP issues, sharply constraining production and delivery of Aon-branded products. This bottleneck rippled into Tulsa operations, amplifying under-absorption and inefficiency across the supply chain.
Gross margin contracted by 950 basis points, driven by lower volumes, Memphis startup drag, and elevated SG&A from ERP-related consulting and depreciation. The Basics segment, propelled by data center liquid cooling projects, posted 20% sales growth but also saw margin pressure from indirect cost inflation. Working capital and capex investment remained elevated, with year-to-date cash flow from operations turning negative as the company prioritized capacity expansion and inventory build for new projects.
- ERP Disruption: Implementation at Longview slashed Aon-branded production by up to 50% in April, with only gradual recovery by July.
- Segment Divergence: Basics segment growth offset Aon-branded shortfall, but margin headwinds persisted across both.
- Cash Flow Strain: Operating cash flow turned negative due to working capital build, Memphis ramp, and $30 million in buybacks.
Despite near-term setbacks, strong backlog growth and incremental price realization provide a foundation for sequential improvement in the second half, contingent on operational normalization.
Executive Commentary
"Our second quarter results that we reported this morning fall short of our expectations and do not reflect the high standard we set for ourselves as an organization. While we're navigating some near-term challenges, we firmly believe that the actions we're taking today will significantly strengthen the company for the long term."
Matt Tobolsky, CEO and President
"The gross margin was 26.6%, down 950 basis points. The contraction of margin was largely due to lower production volume of Aon branded equipment sales at the Aon Oklahoma and Aon coil product segments. Our new Memphis facility incurred $3 million in costs during the quarter, with minimal sales to offset this cost."
Rebecca Thompson, CFO and Treasurer
Strategic Positioning
1. ERP Transformation as Double-Edged Sword
The phased ERP upgrade, designed to future-proof AAON’s operations, revealed process fragility as the Longview go-live disrupted both local and dependent Tulsa production. The company’s strategy of starting with the most complex site provided valuable learnings but at a steep near-term cost. Full rollout is expected by year-end 2026, with management emphasizing that future implementations should be less disruptive due to lessons learned and enhanced shared services proficiency.
2. Data Center and Liquid Cooling as Growth Engine
Basics-branded data center sales soared 127% in Q2, with liquid cooling solutions now comprising 40% of segment sales. The Applied Digital partnership, supplying thermal management for AI factories, positions AAON as a key player in next-generation infrastructure. However, capacity constraints at Memphis and the need to invest ahead of revenue continue to pressure margins, even as the order pipeline remains robust.
3. National Accounts and Pricing Power in Aon Brand
National accounts orders for Aon-branded products grew 163% in Q2, now representing 35% of total Aon orders. This reflects success in targeted customer engagement and differentiation via high-performance offerings like the AlphaClass heat pump. The pricing environment is improving, with Q3 and Q4 expected to benefit from the 3% price increase and 6% tariff surcharge that have only just begun to flow through the P&L.
4. Capacity Expansion and Memphis Ramp
Memphis facility ramp is a top operational priority, set to double Basics manufacturing capacity by year-end. This is critical for unlocking the full backlog and mitigating current constraints in the data center segment. The transition from cost drag in 2025 to positive contribution in 2026 is a key inflection point for the business model.
5. Margin Recovery Roadmap
Management reiterated a long-term gross margin target of 32% to 35%, with Q4 2025 margins expected to recover to low 30s as production normalizes and price/cost dynamics turn favorable. The company expects double-digit margin improvement in 2026 as ERP headwinds fade and Memphis reaches scale, but execution risk remains until operational stability is proven.
Key Considerations
AAON’s Q2 signals both the risks of digital transformation and the secular strength of its end markets. The company’s ability to restore operational cadence and capitalize on robust demand will determine the pace of earnings normalization.
Key Considerations:
- ERP Rollout Lessons: Longview’s go-live was intentionally complex to “stress test” the system, but the resulting disruption was deeper than anticipated, underscoring the need for rigorous change management as the program extends to other sites.
- Backlog Quality and Pricing: Aon-branded backlog is now favorably priced, with Q3 and Q4 to benefit from recent price hikes and tariff surcharges, supporting margin accretion if production stabilizes.
- Memphis Facility as Leverage Point: The Memphis ramp is pivotal for Basics segment growth and margin improvement, with 2026 expected to mark the shift from cost drag to profit contributor.
- Working Capital and Cash Flow: Elevated inventory and capex for growth projects have pressured cash flow, but normalization is expected as Memphis and working capital investments begin to yield returns in the back half.
Risks
Execution risk remains high as further ERP rollouts approach and production ramps at multiple sites. Persistent supply chain volatility, margin headwinds from indirect costs, and macro uncertainty in non-residential construction could further delay recovery. The company’s ability to translate backlog into profitable sales will be closely watched, especially as Memphis capacity comes online.
Forward Outlook
For Q3 and Q4, AAON guided to:
- Sequential revenue and margin improvement as production ramps and price realization accelerates
- Gross margin in the low 30% range by Q4, up from Q2 trough
For full-year 2025, management lowered guidance:
- Sales growth in the low teens
- Gross margin of 28% to 29%
- CapEx maintained at $220 million
Management highlighted:
- ERP-related headwinds will persist in H2 but are expected to diminish with operational recovery
- Backlog visibility and positive price/cost dynamics provide confidence in sequential improvement
Takeaways
The quarter underscores that digital transformation risk is real, but secular demand in data centers and national accounts remains robust. Margin and cash flow normalization are possible by 2026 if execution on ERP and Memphis ramp holds.
- ERP Headwind Is Temporary but Material: The operational disruption is acute but should fade as lessons are applied to future rollouts and production ramps up.
- Backlog and Pricing Offer Recovery Path: Strong backlog, improved pricing, and tariff pass-through set up margin recovery if execution stabilizes.
- Memphis and Data Center Opportunity: Memphis is the key lever for unlocking Basics segment upside and margin expansion in 2026 and beyond.
Conclusion
AAON’s Q2 was defined by ERP-related execution risk, but the core business remains positioned for strong recovery as operational bottlenecks ease. The next two quarters are critical for proving that backlog conversion and margin normalization are on track.
Industry Read-Through
AAON’s experience highlights the operational risk of ERP transitions in complex manufacturing environments, a cautionary signal for peers contemplating similar upgrades. Data center demand and liquid cooling adoption remain strong secular tailwinds across HVAC and thermal management suppliers. Capacity investment ahead of demand can pressure margins, but those able to ramp efficiently stand to benefit as AI infrastructure spending accelerates. The ability to pass through tariffs and price increases is a key competitive differentiator as supply chains remain volatile.