AAON (AAON) Q3 2025: Basics Backlog Surges 120% as Memphis Capacity Ramps for Data Center Growth
AAON’s third quarter marked a turning point, with operational recovery and capacity expansion fueling a 120% surge in Basics backlog, positioning the company for robust data center-driven growth in 2026. Margin pressure from ERP and new facility ramp-up persisted, but sequential improvements and strong bookings signal a favorable trajectory. Management’s guidance and order visibility reinforce confidence in sustained production gains and margin normalization next year.
Summary
- Data Center Demand Drives Backlog: Basics backlog more than doubled, anchored by Memphis and liquid cooling orders.
- Operational Recovery Gains Traction: Sequential margin and throughput improvements at Tulsa and Longview signal execution progress.
- 2026 Growth Visibility Improves: High backlog and capacity expansion underpin confidence in next year’s ramp.
Performance Analysis
AAON delivered a quarter defined by operational inflection and accelerating demand in its Basics segment, which now serves as the company’s primary growth engine. Net sales grew double digits year-over-year, led by a near doubling of Basics-related sales, reflecting the company’s expanding presence in the data center cooling market. The Memphis facility, a new 800,000 square foot manufacturing site, began ramping production, directly supporting the surge in orders and backlog.
Gross margin remained under pressure from ERP implementation and unabsorbed fixed costs tied to Memphis, but sequential improvement (up 120 basis points) demonstrates that cost headwinds are abating as production throughput increases. The Oklahoma segment’s gross margin, while down year-over-year, improved sequentially, with management targeting a return to 30%+ as pricing and operational efficiency normalize. Adjusted EBITDA margin and EPS both rebounded sharply from Q2 lows, though they remain below prior-year levels due to ongoing ramp costs and technology investments.
- Basics Segment Momentum: Sales and backlog surged, with liquid cooling and airside solutions both contributing, fueled by robust data center demand.
- ERP Implementation Impact: Operational inefficiencies in Longview and Memphis weighed on margins, but lessons learned are improving future rollouts.
- Working Capital Dynamics: Cash flow from operations is set to turn positive in Q4 as large contract deliveries convert to cash, providing greater financial flexibility.
Despite margin compression, the combination of strong bookings, backlog growth, and production recovery positions AAON for accelerating growth and profitability as capacity and systems stabilize.
Executive Commentary
"The third quarter marked a decisive inflection point in our operational recovery and capacity expansion. We saw substantial improvement in production throughput at both the Tulsa and Longview facilities, which drove meaningful sequential sales growth, while continued strength in bookings contributed to further backlog growth."
Matt Tobolsky, CEO and President
"Net sales in the quarter increased year over year...driven by a 95.8% rise in basics rated sales due to continued demand for data center solutions and increasing production out of our Memphis facility. Gross margin was 27.8%, down from 34.9% in the prior year, but up 120 basis points sequentially."
Rebecca Thompson, CFO and Treasurer
Strategic Positioning
1. Data Center-Driven Growth via Basics Brand
The Basics brand, AAON’s custom data center cooling solutions business, is now the company’s primary growth lever. Backlog soared to $897 million, up 120% year-over-year and nearly 44% sequentially, as the Memphis facility’s capacity came online. Liquid cooling, a technology critical for high-density data centers, and airside solutions both saw strong order flow, with management citing robust pipeline visibility and a diversified customer base across hyperscalers, co-location providers, and developers.
2. Operational Execution and ERP Rollout
ERP (Enterprise Resource Planning) implementation, a system upgrade to streamline manufacturing and supply chain processes, remains a double-edged sword. While it caused inefficiencies and margin drag at Longview and Memphis, management has applied lessons learned to accelerate recovery and minimize disruption for future rollouts, including Tulsa and Redmond in 2026. Enhanced training, process automation, and proactive communication are now central to the transition strategy.
3. Oklahoma/AON Brand Normalization
The legacy AON brand, focused on commercial HVAC rooftop units, is recovering production after ERP-related slowdowns. Sequential sales rose over 28%, with production at Tulsa running ahead of target and Longview nearing full recovery. National account bookings nearly doubled year-to-date, and the alpha class air source heat pump, a differentiated product for decarbonization, continues to drive outperformance in bookings despite sector softness.
4. Capital Allocation and Cash Flow Discipline
AAON reduced its 2025 CapEx guidance by $40 million due to project timing, with most spending deferred into 2026. The company expects a significant cash flow inflection in Q4 as large contract assets convert to cash, supporting ongoing investments in capacity and technology. The balance sheet remains healthy, with leverage at 1.73x and flexibility for future growth initiatives.
5. Margin Recovery Roadmap
Management reaffirmed a path to margin normalization, targeting 28-28.5% gross margin for the full year and at least 30% for the Oklahoma segment as ramp costs and ERP inefficiencies abate. Basics segment margin is expected to reach 30% as production stabilizes, with upside potential over time through process optimization and scale.
Key Considerations
AAON’s Q3 was about more than headline growth; the company is actively navigating operational complexity, scaling for next-gen demand, and sharpening its execution playbook for future expansion.
Key Considerations:
- Data Center Tailwind: Basics’ backlog and pipeline signal multi-year growth, with Memphis capacity positioned to capture rising AI and cloud cooling demand.
- ERP System Maturity: Ongoing ERP rollout is a risk, but process improvements and training investments are reducing disruption risk for future sites.
- Commercial HVAC Market Softness: AON brand bookings outperform the sector, but underlying market demand remains muted, requiring continued differentiation and pricing discipline.
- Margin Expansion Levers: Gross margin recovery depends on operational efficiency, cost absorption, and continued pricing power, especially as new facilities ramp.
- Capital Flexibility: Cash flow inflection and deferred CapEx bolster AAON’s ability to invest in growth and weather short-term volatility.
Risks
ERP implementation remains the most acute operational risk, as future rollouts at Tulsa and Redmond could temporarily disrupt production and margin recovery if not managed carefully. Macroeconomic softness in commercial HVAC and potential delays in data center project starts could dampen near-term order conversion. Ongoing margin pressure from ramp costs and supply chain constraints, especially in coils, require close monitoring as the company scales.
Forward Outlook
For Q4, AAON guided to:
- Double-digit revenue growth, driven by continued production recovery and pricing actions.
- Sequential gross margin improvement, targeting 31% for the quarter.
For full-year 2025, management raised guidance:
- Mid-teens sales growth
- Gross margin of 28-28.5%
- Adjusted SG&A at 16.5-17% of sales
Management emphasized the strong backlog and data center demand as key drivers for 2026, with Memphis ramp-up and ERP lessons learned supporting execution. Cash flow is expected to turn significantly positive in Q4 as large contract deliveries convert to cash.
- Capacity expansion and backlog conversion underpin confidence in next year’s growth.
- ERP rollouts will be closely managed to minimize disruption.
Takeaways
AAON’s quarter signals a successful pivot to data center-driven growth, with operational recovery and capacity expansion setting the stage for 2026. Margin normalization and ERP execution are critical watchpoints as the company transitions from ramp to scale.
- Backlog-Driven Growth: Basics’ $897 million backlog and Memphis ramp provide high visibility into next year’s sales trajectory, especially in liquid cooling.
- Operational Playbook Matures: ERP lessons and process improvements are reducing risk for future transitions, but execution discipline remains paramount.
- Margin and Cash Flow Recovery: Investors should monitor gross margin trends, cash conversion, and the pace of operational normalization as key valuation drivers.
Conclusion
AAON’s Q3 marked a clear inflection in both operational execution and strategic positioning, with the Basics segment and Memphis facility anchoring a multi-year growth story. Margin recovery and ERP rollout remain the critical variables, but the company’s backlog and capacity investments provide a solid foundation for sustained outperformance in 2026 and beyond.
Industry Read-Through
AAON’s surge in data center cooling orders and capacity expansion reflect a broader industry trend toward infrastructure investment for AI and cloud workloads, benefiting custom HVAC and liquid cooling suppliers. The operational challenges of ERP rollouts and new facility ramps are common across manufacturing sectors, highlighting the importance of process discipline and change management. Commercial HVAC market softness continues to weigh on legacy players, but differentiated product portfolios and national account strategies can drive outperformance for those able to execute. Investors in industrials and building products should watch for similar backlog-driven growth stories and margin normalization paths as end-market demand shifts toward next-gen technology infrastructure.