AAON, Inc. (AAON) Earnings

Management highlights

- Overall Quarterly Performance * Achieved the fourth consecutive quarterly revenue record, with Q2 2026 consolidated net sales of $627 million, up 101% YoY and 26% sequentially. Adjusted EBITDA more than doubled YoY to $94.2 million, with an adjusted EBITDA margin of 15.0% (flat YoY). Adjusted diluted EPS grew 213.6% YoY to 69 cents. * Consolidated gross margin of 24.3% was down 230 bps YoY, pressured by the ramp-up of new capacity at Memphis, mixed product mix, temporary price-cost timing, and elevated outsourcing costs. Gross margin improvement is expected as utilization and productivity increase. * SG&A as a percentage of sales declined 570 bps YoY to 13.3%, demonstrating strong operating leverage as revenue growth outpaced continued long-term investment. Total SG&A increased $24.5 million YoY to $83.6 million. * Brand Performance * Basics Brand (data center solutions): Record Q2 sales grew 216% YoY (501% on a two-year stack). H1 2026 sales are up 137% YoY (570% two-year stack). Q2 bookings were lower than the unusually elevated levels of recent quarters, but management attributes this to normal quarter-to-quarter variability from large-scale project timing, not a change in long-term demand. Total backlog remains nearly double prior year levels, with strong customer engagement and a healthy opportunity pipeline. * Aon Brand (commercial HVAC): Q2 sales grew 40% YoY (5% sequentially), with the company gaining market share despite a soft overall commercial HVAC market. Q2 bookings grew 16% YoY (45% two-year stack), driven by strength in traditional transactional business. AlphaClass (fully electric heat pump platform) orders grew 50% YoY in Q2, with growing customer adoption driven by sustainability and electrification trends. Aon-branded backlog increased 6% sequentially despite higher production rates. * Operational Updates * Higher throughput across all four major facilities enabled accelerated backlog conversion, resulting in a sequential decline in total backlog (the targeted outcome of capacity investments). The new Memphis facility is performing ahead of plan, with production and revenue outpacing internal forecasts, and margins expanding for two consecutive quarters. * The company has prioritized maintaining quality, delivery, and customer support standards while scaling at an unprecedented pace, with ongoing improvements as new processes and teams mature. * Balance sheet and cash flow: Cash, cash equivalents and restricted cash totaled $435 million at quarter-end, with a leverage ratio of 1.48 (down from 1.71 at the end of Q1). H1 2026 operating cash flow was a positive $55 million, a significant improvement from a $31 million cash use in H1 2025, driven by higher earnings and improved working capital efficiency. Year-to-date capital expenditures totaled $102.6 million, invested in expanded capacity to support future growth.

Guidance

- Management raised 2026 full-year sales guidance to 55-60% YoY growth, up from prior expectations, driven by stronger-than-expected production execution and backlog conversion. Gross margin guidance is 25-26%, SG&A as a percentage of sales is expected to be 13-14%, and depreciation and amortization is guided to $95-100 million. - Margin improvement is expected to be back-loaded through 2026: modest sequential improvement is projected for Q3 2026, with the most meaningful improvement coming in Q4 2026. Key drivers of back-half margin improvement include: more favorable price realization from recently implemented pricing actions embedded in the current backlog, higher facility utilization, productivity gains, and continued ramp-up of the Memphis facility. - For 2026, the guidance assumes approximately 20% YoY sales growth for the Aon brand, and the Basics brand will more than double YoY sales (after 140% growth in 2025), outperforming the ~30% overall growth of the data center market and continuing strong market share gains. Q3 and Q4 2026 sales are expected to be relatively balanced quarter-over-quarter, with Q4 holiday downtime implying higher productivity per working day. - Long-term, management expects continued margin expansion through 2027 driven by higher fixed cost absorption from capacity utilization, ongoing productivity gains, improved sourcing, and pricing actions already in backlog. Consolidated margins are expected to approach 30%+ on a full-year basis as the business scales.

Segment performance

Aon Oklahoma: Q2 2026 net sales grew 42% year-over-year (YoY) to $262.3 million, driven by strong backlog conversion and production improvements. Gross profit increased 18.9% YoY to $63.6 million, with a reported gross margin of 24.3% (down 460 bps from 28.9% YoY). Excluding $18.1 million in allocated Memphis facility overhead, gross margin expanded 60 bps YoY to 31.2%. Temporary headwinds from elevated outsourcing and inflation pressured margins, which management expects to moderate through 2026. This segment contributes approximately 41.8% of total consolidated net sales. Aon Coil Products: Q2 2026 net sales totaled $146.7 million, an increase of 151% YoY. 86.3% of segment sales ($126.6 million) came from Basics branded liquid cooling products, which grew 208% YoY, with Aon branded output growing 15.1% YoY. Gross profit increased 130% YoY to $23.5 million, with a gross margin of 16.0%. This segment contributes approximately 23.4% of total consolidated net sales. Basic Segment: Q2 2026 net sales grew 221% YoY to $218 million, driven by sustained high demand for data center solutions and expanded capacity at the new Memphis facility. Gross profit increased 244.2% YoY to $65.3 million, with gross margin expanding 210 bps YoY to 30.0%. Margin improvements came from strong volume growth, partially offset by investments to support future growth. This segment contributes approximately 34.8% of total consolidated net sales.

Risks & headwinds

- Rapid scaling of the new Memphis facility creates temporary margin pressures from ramp costs, onboarding of new staff, and elevated outsourcing levels as new production equipment comes online. - Persistent inflationary pressures on raw materials and freight have created temporary price-cost dislocations across multiple segments, as pricing actions take time to flow through existing backlog. - Broad supply chain constraints (including fan sourcing, a key input for HVAC and liquid cooling products) create ongoing operational risk, even with the company's proactive mitigation strategies including vertical integration and multi-sourcing. - The large-scale, project-based nature of Basics data center orders creates inherent quarter-to-quarter lumpiness in bookings that can lead to variability in quarterly performance.

Analyst Q&A

• Q: Q2 data center (Basics brand) bookings came in below expectations, with a healthy pipeline. Why was this quarter softer, and will orders improve in Q3? Is the softness due to a large delayed order? /

  A: Management explains that the prior four quarters had exceptionally strong bookings with a book-to-bill near 3, so Q2's lower level is just normal quarter-to-quarter lumpiness from large project order timing, not a slowdown in demand. There is no large pushed-out order; the overall pipeline is the strongest it has ever been, and continues to grow with more diversified customer base. Activity for 2027 and 2028 deliveries is already building, just not booked in Q2, so management expects that activity to convert to bookings as the year progresses.

• Q: What drove the 200 basis point reduction in full-year 2026 gross margin guidance, and what changed since the prior quarterly call? /

  A: The downward revision is primarily due to faster-than-expected ramp-up of the new Memphis facility, which is driving much of the top-line sales growth increase (full-year sales guidance was lifted ~20%, mostly from Memphis). The ramp of a new large facility from scratch creates temporary margin pressures from ramp costs, new staff onboarding, and elevated outsourcing as new equipment comes online. This is not a structural pricing issue; all core segments are showing operational margin improvement, and the faster ramp builds a stronger long-term growth foundation.

• Q: What are the key drivers of gross margin improvement in H2 2026, and will improvement be sequential through Q3 and Q4? /

  A: The largest driver of H2 margin improvement is better price-cost alignment, as pricing actions implemented at the end of 2025 have now been embedded into the current backlog, which has a much more favorable margin profile than the backlog executed in H1 2026. Additional improvement will come from productivity gains as Memphis matures. Management notes that improvement will be modest in Q3, with most meaningful improvement back-loaded to Q4 2026.

• Q: What changes has management made over the last 9 months to avoid future price-cost delays that pressured margins in the first half of 2026? /

  A: The company has made significant investments in operational and financial sophistication to improve forward visibility. A reorganized finance function now partners directly with business and supply chain leaders to provide faster, more detailed cost analytics, enabling earlier proactive pricing actions. These investments also improve working capital management and overall operational discipline, to catch cost pressures early rather than reacting after the fact.

• Q: Many data center HVAC peers face fan supply constraints. How has Aon's vertical integration of fan manufacturing impacted this risk? /

  A: Both Aon's legacy business and Basics brand manufacture their own plenum fans, which has been a long-term competitive advantage through past and current supply chain volatility. The company still sources some third-party fans, so it is aware of overall market capacity constraints, but proactively mitigates risk through multi-sourcing and early identification of potential constraints, and has had success minimizing impacts to production volumes to date.