AAON (AAON) Q3 2024: Data Center Backlog Surges 32%, Doubling Segment Capacity for 2025

November 7, 2024 | By EarningsIQ Research

AAON’s Q3 results highlight a decisive pivot toward data center cooling, with backlog up 32% and a record $174.5 million liquid cooling order signaling a multi-year growth runway. While traditional rooftop HVAC faces near-term headwinds, expanding production capacity and geographic diversification position AAON for outsized growth and margin leverage as demand shifts. Investors should focus on execution risk as the company ramps new facilities and integrates large-scale orders into its manufacturing base.

Summary

  • Data Center Momentum Accelerates: Record backlog and major liquid cooling wins shift AAON’s growth profile.
  • Capacity Expansion Underpins Outlook: New facilities and geographic reach mitigate operational constraints and support scale.
  • Traditional HVAC Faces Transition: Refrigerant change and construction softness weigh on legacy segment, with recovery expected mid-2025.

Business Overview

AAON designs, manufactures, and sells advanced HVAC (Heating, Ventilation, and Air Conditioning) equipment, with core segments in custom rooftop units, data center cooling, and coil products. The company generates revenue through sales of semi-custom, built-to-order systems for commercial and industrial applications. Its three major segments—AAON Oklahoma (traditional HVAC), AAON Coil Products, and BASX (data center and specialty)—are increasingly weighted toward data center solutions, now representing a growing share of bookings and backlog.

Performance Analysis

AAON delivered Q3 revenue growth of 4.9% year-over-year, driven primarily by surging demand in the BASX and AAON Coil segments, which grew 58.8% and 36.7%, respectively. This expansion is directly tied to the company’s penetration into the data center cooling market, now accounting for nearly 30% of company bookings, up from 13% a year ago. The Oklahoma segment, which serves more traditional commercial HVAC markets, posted a 7.1% revenue decline, reflecting tough comps and ongoing refrigerant transition headwinds.

Gross margin contracted 230 basis points versus the prior year, settling at 34.9%, but remains at historically strong levels. Margin pressure stemmed from lower Oklahoma volumes and temporary inefficiencies in BASX, partially offset by favorable mix and improved efficiency in the coil segment. SG&A as a percent of sales improved, aided by lower professional fees and ongoing investment in technology and automation, even as back office spend remains elevated. Operating cash flow nearly doubled year-to-date, supported by disciplined inventory management and robust demand conversion.

  • Data Center Bookings Drive Growth: Year-to-date bookings in data center equipment nearly doubled, with a $174.5 million liquid cooling order in October and a robust pipeline signaling sustained demand.
  • Backlog Reaches Record Levels: Company-wide backlog rose 32% year-over-year to $647.7 million, with the majority attributed to data center projects scheduled for 2025 production.
  • CapEx Ramps for Expansion: Capital expenditures guidance increased to $215 million, reflecting major investments in new facilities in Texas and Tennessee to support future growth.

AAON’s financial health remains strong, with low leverage and ample liquidity, positioning the company to fund capacity expansion and absorb short-term margin fluctuations as it transitions to a data center-centric revenue base.

Executive Commentary

"A significant portion of the total backlog at the end of the quarter consisted of orders of data center equipment. Furthermore, subsequent to the end of the quarter, we received approximately $174.5 million of orders that by and large will be produced in the first half of 2025... Aon is becoming a leading player in the data center cooling market as a fully capable provider of highly engineered, energy efficient solutions for its customers."

Gary Field, Chief Executive Officer

"The orders we received in October were related to a highly custom-designed liquid cooling solution. The bidding process of these orders were competitive and really challenged our engineering team. At the end of the day, it came down to who was able to design and manufacture the most ideal solution for this customer. Aon's customer-centric, solutions-based approach is unique to the industry and have been critical to our success."

Matt Tobolsky, President and Chief Operating Officer

Strategic Positioning

1. Data Center Pivot Accelerates

AAON’s transformation into a data center cooling leader is now tangible, with data center bookings nearly doubling year-to-date and comprising almost 30% of total bookings. The $174.5 million liquid cooling order and subsequent $34 million in follow-on orders exemplify both the scale and the recurring nature of demand, positioning AAON as a preferred supplier for advanced, energy-efficient cooling solutions in AI-driven infrastructure.

2. Capacity and Geographic Diversification

Facility investments in Longview, Texas and Memphis, Tennessee will double AAON’s data center manufacturing footprint, enabling the company to fulfill large-scale orders and diversify operational risk. The Memphis facility, set to go live by end-2025, will also free up Tulsa capacity, supporting both growth and resilience as order visibility extends further into the future.

3. Legacy HVAC Navigates Transition

The Oklahoma segment faces a near-term demand lull, pressured by the refrigerant transition, soft non-residential construction, and macro uncertainty. Unlike competitors, AAON’s semi-custom, built-to-order model bypasses channel inventory build, limiting pre-buy effects but also reducing near-term visibility. Management expects a rebound as the refrigerant transition completes and macro headwinds abate in mid-2025.

4. Margin and Pricing Dynamics

Gross margins remain robust despite temporary contraction, with management signaling discipline on pricing and a willingness to accept lower premiums to regain share and maintain volume. The company’s value proposition—energy efficiency and customization—remains intact, with margin leverage expected as new facilities ramp and outsourcing declines.

5. Organizational Structure and Risk Management

Leadership is proactively restructuring the business to ensure operational scalability and risk mitigation as growth accelerates. This includes leadership realignment, process modification, and technology investment to support high returns on invested capital and sustain performance through rapid expansion.

Key Considerations

AAON’s strategic context is defined by a decisive shift to data center cooling, supported by record backlog and aggressive capacity expansion, but tempered by execution risk and legacy segment volatility.

Key Considerations:

  • Execution Complexity Increases: Successfully ramping new facilities and integrating large, custom orders requires operational discipline and cross-segment coordination.
  • Data Center Pipeline Visibility: Management reports the $174.5 million order is just a fraction of a robust pipeline, with additional multi-million-dollar orders in play, suggesting above-trend revenue potential into 2025 and beyond.
  • Legacy Segment Margin Management: Oklahoma segment faces a demand trough and competitive pricing, but AAON’s differentiated product and efficiency focus may enable faster recovery as macro trends improve.
  • CapEx and Cash Flow Balance: Elevated CapEx is a lever for long-term growth, but will require continued cash flow discipline and monitoring of returns as new capacity comes online.

Risks

AAON faces material execution risk as it scales manufacturing to meet large, custom data center orders, with potential for margin volatility during ramp-up. The legacy HVAC segment is exposed to macro uncertainty, construction cycle softness, and regulatory transitions. Any delays in facility startup, supply chain disruptions, or slower-than-expected demand conversion could impact growth and profitability. Management’s ability to maintain pricing power and operational efficiency during rapid expansion will be critical to sustaining returns.

Forward Outlook

For Q4, AAON guided to:

  • Seasonal softness in legacy HVAC demand and gross margin, with Oklahoma segment revenue expected to decline sequentially.
  • Data center backlog conversion ramping, with production at Longview commencing early 2025 and Memphis facility online by late 2025.

For full-year 2024, management maintained guidance:

  • Flat volumes, mid-single-digit pricing contribution, and gross margin up year-over-year.
  • CapEx increased to $215 million, reflecting Memphis investment.

Management highlighted several factors that will shape 2025:

  • Quarter-over-quarter earnings dip in Q1 as new capacity ramps, followed by accelerating sales and margin leverage as data center orders convert.
  • Legacy HVAC recovery expected as refrigerant transition and macro headwinds subside, supported by improved interest rate environment and post-election clarity.

Takeaways

AAON’s Q3 marks a structural inflection, with data center cooling now driving backlog, growth, and capital allocation. Investors should monitor the pace of facility ramp, margin realization on large orders, and the timing of legacy HVAC recovery.

  • Data Center Scale-Up: Record data center backlog and new facility investments position AAON for step-change growth, but require flawless execution to convert pipeline into profitable revenue.
  • Margin and Pricing Discipline: Management’s willingness to adjust pricing in legacy segments signals a focus on volume and share, with margin preservation dependent on operational efficiency gains in new facilities.
  • Watch Facility Ramp and Order Conversion: The Memphis and Longview expansions are critical swing factors for 2025 revenue and margin realization; delays or inefficiencies could temper the growth narrative.

Conclusion

AAON’s strategic pivot to data center cooling is now the dominant driver of its outlook, with record backlog, robust pipeline, and aggressive capacity expansion underpinning a multi-year growth thesis. Near-term volatility in legacy HVAC is a watchpoint, but the company’s operational and financial positioning supports a constructive long-term view—provided execution risks are managed as new facilities and orders ramp through 2025.

Industry Read-Through

AAON’s results offer a clear read-through for the HVAC and data center infrastructure sectors: the AI and cloud-driven data center buildout is creating a secular tailwind for specialized cooling providers, with custom, energy-efficient solutions increasingly favored over commoditized products. The refrigerant transition and macro softness in traditional HVAC remain industry-wide headwinds, but players with engineering depth and flexible manufacturing are best positioned to capture share. Investors should expect continued capital reallocation toward data center capacity across the sector, with margin pressure and execution risk rising for those scaling into large, custom projects. The shift toward geographic diversification and supply chain resilience is likely to become a broader theme as demand visibility and order sizes increase.

AAON Industrials HVAC Data Centers Backlog Capacity Refrigerant Margin