What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-06 compared with 2025-08-11 · 84 added, 68 removed, 362 unchanged (30% of the section changed)

11 unchanged sentences

We sell our products to all 50 states in the United States and certain provinces in Canada.

Foreign sales were approximately $7.5 million and $18.8 million the three and six months ended June 30, 2025, respectively, as compared to $7.1 million and $14.5 million for the three and six months ended June 30, 2024, respectively.

Foreign sales were approximately $9.1 million and $27.9 million the three and nine months ended September 30, 2025, respectively, as compared to $10.1 million and $24.6 million for the three and nine months ended September 30, 2024, respectively.

Our business can be affected by a number of economic factors, including the level of economic activity in the markets in which we operate.

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economy and global economy.

At June 30, 2025, the price (year to date average) for copper increased 10.3% while stainless steel decreased 27.5%, respectively.

The price (year to date average) for galvanized steel and aluminum remained relatively flat, as compared to the price (year to date average) at June 30, 2024.

At September 30, 2025, the price (year to date average) for copper increased 14.3% while stainless steel decreased 26.8%, respectively.

The price (year to date average) for galvanized steel and aluminum remained relatively flat, as compared to the price (year to date average) at September 30, 2024.

We attempt to limit the impact of price fluctuations on these materials by entering into cancellable and non-cancellable contracts with our major suppliers for periods of six to 18 months.

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We expect to continue to pass along some of these costs to our customers, but the increased price of our products could adversely affect the demand, which could have an adverse effect on our business and our earnings.

The third quarter of 2025 is the first period for us to see any significant financial impact from tariffs.

On April 1, 2025 we instituted a 6.0% tariff surcharge on AAON branded orders which we began to see realization of in the third quarter of 2025.

To date, we estimate that the amount of surcharge realized has not covered the additional costs from the tariffs, but expect this to change by the end of the year as we fully realize our surcharge.

Due to our favorable liquidity position, we are well positioned to make strategic purchases of materials when we see opportunities or potential disruptions in our supply chain.

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The following table shows our historical backlog levels:

September 30,

2025 December 31,

2024 June 30,

2024 September 30,

(in thousands)

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Total Backlog $ 1,320,140 $ 867,090 $ 647,694

At June 30, 2025, our consolidated backlog is $995.3 million, an increase of 53.1%, or $345.3 million, as compared to June 30, 2024.

Backlog was up from a year ago for both AAON Products and BASX Products with BASX Products increasing 27.0%, or $106.6 million, when compared to June 30, 2024.

At September 30, 2025, our consolidated backlog is $1,320.1 million, an increase of 103.8%, or $672.4 million, as compared to September 30, 2024.

Backlog was up from a year ago for both AAON Products and BASX Products with BASX Products increasing 119.5%, or $488.2 million, when compared to September 30, 2024.

Most of these orders were associated with the BASX branded data center liquid cooling solutions.

Consolidated Results of Operations

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2025 2024 2025 2024

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The following are recent highlights and items that impacted our results of operations, cash flows and financial condition:

• We continue to see strong demand and growth of the BASX brand with increases in net sales of $51.7 million and $156.3 million for the three and six months ended June 30, 2025, respectively.

• We continue to see strong demand and growth of the BASX brand with increases in net sales of $61.1 million and $217.3 million for the three and nine months ended September 30, 2025, respectively.

This growth is primarily driven by data center demand for our liquid cooling solutions.

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Additionally, the refrigerant change that went into effect on January 1, 2025 created supply chain constraints for components with the new refrigerant that challenged the first quarter and lingered into the second quarter.

As a result, net sales for the AAON brand were down $53.6 million and $98.3 million for the three and six months ended June 30, 2025, respectively.

As a result, net sales for the AAON brand were down $4.1 million and $102.4 million for the three and nine months ended September 30, 2025, respectively.

• The Company went live with its new Enterprise Resource Planning (“ERP”) system on April 1, 2025 at its Longview, Texas facility.

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These disruptions primarily impacted the AAON Coil Products segment with decreased net sales and gross profit margins during the three months ended, June 30, 2025.

To a lesser extent, the impact to the coil production at AAON Coil Products also impacted AAON Oklahoma’s ability to ramp up production, which contributed to the lower net sales and gross profit margins for that segment during the quarter.

All of our segments saw sequential increases in net sales in the third quarter as we overcame the challenges associated with our ERP implementation.

• We continue to invest in the future growth of the Company as evidenced by our $138.9 million in capital expenditures in 2025, an increase of $25.1 million or 22.1% when compared to 2024.

• We completed the repurchase of 0.4 million shares for $30.0 million during the six months ended June 30, 2025.

• We completed the repurchase of 0.4 million shares for $30.0 million during the nine months ended September 30, 2025.

We report our financial results based on three reportable segments:

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The CODM does not evaluate operating segments using asset or liability information.

Segment Operating Results for Three Months Ended June 30, 2025 and Three Months Ended June 30, 2024

Segment Operating Results for Three Months Ended September 30, 2025 and Three Months Ended September 30, 2024

Three Months Ended

September 30,

2025 Percent of Sales 1

September 30,

2024 Percent of Sales 1

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2 Presented after intercompany eliminations.

Total net sales decreased $2.0 million, or 0.6%.

AAON Oklahoma had net sales of $185.1 million, a decrease of 18.0% compared to the same period in the prior year.

This decrease was driven by lingering supply chain issues from the refrigerant transition at the beginning of the quarter and coil supply shortages in the end of the quarter due to our ERP implementation at our Longview, Texas facility which slowed production of coils made for our Tulsa plant.

Total net sales increased $57.0 million, or 17.4%.

AAON Oklahoma had net sales of $238.7 million, an increase of 4.3% compared to the same period in the prior year.

This increase was driven by the strong backlog entering the quarter and a successful ramp up of production.

Sales were up 99.4%, at AAON Coil Products primarily driven by growth in BASX branded products of $45.9 million for a large liquid cooling data center.

AAON branded products declined $10.9 million due to disruptions caused by the change in ERP systems.

BASX net sales were up 20.4% to $68.0 million due to the continued demand for data center solutions.

BASX net sales were up 19.2% to $75.2 million due to the continued demand for data center solutions and increasing production out of our Memphis facility.

Gross profit decreased $7.3 million or 6.4% and from 34.9% of sales to 27.8% of sales.

AAON Oklahoma’s decrease in gross profit is primarily driven by the lower volumes discussed above that resulted in sub optimal overhead absorption.

Additionally, our new plant in Memphis contributed $3.0 million in cost of sales with minimal net sales to offset this cost to the AAON Oklahoma segment.

AAON Coil Products decreased 1,990 basis points in gross profit margin is a result of slower production from implementing our ERP system at the beginning of the quarter.

BASX gross profit margin of 27.9% is slightly down year over year due to higher indirect costs for warehouse personnel offset by slightly lower cost of materials.

AAON Oklahoma’s decrease in gross profit is driven by the impact of tariffs and the additional overhead from our Memphis plant.

Memphis is part of AAON Oklahoma, building intercompany sales for the BASX segment at cost.

As such, the sales and gross profit from orders completed in Memphis are reflected in the BASX segment, but the additional overhead cost of running the plant is reflected in the AAON Oklahoma segment.

Memphis contributed $4.5 million in cost of sales to the AAON Oklahoma segment.

AAON Coil Products gross profit margin decreased from 35.3% to 16.1% as a result of slower production from implementing our ERP system at the beginning of the second quarter.

As shown in the table below, we have experienced fluctuations in the cost of several raw materials.

Raw Material Costs

Three-month average raw material cost per pound as of June 30:

Three-month average raw material cost per pound as of September 30:

2025 2024 % Change

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Three Months Ended Percent of Sales

2025 June 30,

September 30,

2025 September 30,

(in thousands)

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Total SG&A $ 63,230 $ 48,637 16.5 % 14.9 %

Selling, general and administrative expenses increased $13.3 million for the three months ended June 30, 2025, from the prior year period.

Selling, general and administrative expenses increased $14.6 million for the three months ended September 30, 2025, from the prior year period.

Warranty is up $4.2 million due to an increase in our historical claims.

Profit sharing is down as a result of our lower earnings in the quarter.

Salaries and benefits have increased as we add additional headcount to help build out our organizational capacity for future growth.

Depreciation and amortization increased $3.1 million during the three months ended June 30, 2025, due to increased investments from our ERP implementation.

We incurred approximately $3.4 million in incentive fees due to our real estate broker associated with the acquisition of our Memphis, Tennessee plant for a percentage of the incentives awarded to us by various entities.

Other includes an increase in expense of $3.2 million for technology related consulting fees along with increased expenses related to travel and other consulting expenses.

Three Months Ended Effective Tax Rate

2025 June 30,

September 30,

2025 September 30,

(in thousands)

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The Company’s estimated annual 2025 effective tax rate, excluding discrete events, is expected to be approximately 24.1%.

During the three months ended June 30, 2025, the Company recorded an excess tax benefit of $4.1 million as compared to $1.3 million during the same period in 2024.

The excess tax benefit is related to the timing of stock option exercises as a result of our high stock price during the three months ended June 30, 2025 and 2024, respectively.

Segment Operating Results for Six Months Ended June 30, 2025 and Six Months Ended June 30, 2024

Six Months Ended

Discrete events such as excess tax benefits related to stock compensation and various tax credits consistently provide a benefit, keeping our actual effective rate lower than the stated 24.1%.

Segment Operating Results for Nine Months Ended September 30, 2025 and Nine Months Ended September 30, 2024

Nine Months Ended

September 30,

2025 Percent of Sales 1

September 30,

2024 Percent of Sales 1

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This decrease was driven by supply chain issues from the refrigerant transition at the beginning of the year and coil supply shortages in the second quarter due to our ERP implementation at our Longview, Texas facility which slowed production of coils made for our Tulsa plant.

Sales were up 174.2% for AAON Coil Products primarily driven by growth in BASX branded products of $106.3 million for a large liquid cooling data center.

Sales were up 145.2% for AAON Coil Products primarily driven by growth in BASX branded products of $152.2 million for liquid cooling data centers.

AAON branded products declined $20.4 million due to disruptions caused by our ERP implementation.

BASX net sales were up 59.4% to $134.2 million due to the continued demand for data center solutions.

BASX net sales were up 42.2% to $209.4 million due to the continued demand for data center solutions and increasing production out of our Memphis facility.

Gross profit decreased $43.5 million or 13.6% and from 35.4% of sales to 27.1% of sales.

AAON Oklahoma’s decrease in gross profit is primarily driven by the lower volumes discussed above that resulted in sub optimal overhead absorption.

Additionally, our new plant in Memphis contributed $5.3 million in cost of sales with minimal net sales to offset this cost for the AAON Oklahoma segment.

AAON Coil Products 860 basis point drop in gross profit margin is a result of slower production from implementing our ERP system at the beginning of the second quarter.

Additionally, our new plant in Memphis is part of AAON Oklahoma, building intercompany sales for the BASX segment at cost.

Memphis contributed $9.3 million in cost to the AAON Oklahoma segment.

AAON Coil Products gross profit margin decreased from 37.1% to 25.4% and is a result of slower production from implementing our ERP system at the beginning of the second quarter.

Raw Material Costs

Six-month average raw material cost per pound as of June 30:

Nine-month average raw material cost per pound as of September 30:

2025 2024 % Change

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Selling, General and Administrative Expenses

Six Months Ended Percent of Sales

2025 June 30,

Nine Months Ended Percent of Sales

September 30,

2025 September 30,

(in thousands)

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Total SG&A $ 173,670 $ 139,820 17.1 % 15.5 %

Selling, general and administrative expenses increased $19.3 million for the six months ended June 30, 2025, from the prior year period.

Selling, general and administrative expenses increased $33.9 million for the nine months ended September 30, 2025, from the prior year period.

Profit sharing is down as a result of our lower earnings in the period.

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Other includes an increase in expense of $8.9 million for technology related consulting fees along with increased expenses related to travel and other consulting expenses.

Six Months Ended Effective Tax Rate

2025 June 30,

Nine Months Ended Effective Tax Rate

September 30,

2025 September 30,

(in thousands)

Income tax provision $ 14,869 $ 34,456 16.4 % 19.3 %

During the six months ended June 30, 2025, the Company recorded an excess tax benefit of $9.0 million as compared to $6.7 million during the same period in 2024.

The excess tax benefit is related to the timing of stock option exercises as a result of our high stock price during the six months ended June 30, 2025 and 2024, respectively.

The Company’s estimated annual 2025 effective tax rate, excluding discrete events, is expected to be approximately 24.1%.

Discrete events such as excess tax benefits related to stock compensation and various tax credits consistently provide a benefit, keeping our actual effective rate lower than the stated 24.1%.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through net cash provided by operations and the use of the revolving bank line of credit based on our current liquidity at the time.

Working Capital - Our unrestricted cash remained stable at a nominal amount from December 31, 2024 to June 30, 2025.

Working Capital - Our unrestricted cash increased $1.0 million from December 31, 2024 to September 30, 2025.

Our restricted cash decreased $5.3 million due to funding requirements related to our Longview, Texas expansion.

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The Amended Revolver is prepayable without penalty.

As of June 30, 2025 and December 31, 2024, we had $317.3 million and $76.5 million outstanding under the Amended Revolver, respectively.

We have one standby letter of credit totaling $0.7 million as of June 30, 2025 and one standby letter of credit totaling $0.3 million as of December 31, 2024.

At June 30, 2025, we have $182.1 million of borrowings available under the Amended Revolver.

As of September 30, 2025 and December 31, 2024, we had $360.1 million and $76.5 million outstanding under the Amended Revolver, respectively.

We have one standby letter of credit totaling $0.7 million as of September 30, 2025 and one standby letter of credit totaling $0.3 million as of December 31, 2024.

At September 30, 2025, we have $139.2 million of borrowings available under the Amended Revolver.

The Amended Revolver expires May 27, 2030.

The Term Loan had no outstanding balance as of June 30, 2025 and a balance of $78.4 million as of December 31, 2024 respectively.

The Term Loan had no outstanding balance as of September 30, 2025 and a balance of $78.4 million as of December 31, 2024 respectively.

Any outstanding loans under the Revolver bear interest at the daily compounded secured overnight financing rate (“SOFR”) plus the applicable margin.

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The applicable fee percentage is determined quarterly based on the Company's leverage ratio.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and six months ended June 30, 2025 and 2024.

Fees associated with the unused portion of the committed amount are included in interest expense on our consolidated statements of income for the three and nine months ended September 30, 2025 and 2024.

Weighted average interest rate of our borrowings outstanding are as follows:

Three months ended Six months ended

2025 June 30,

2024 June 30,

2025 June 30,

Three months ended Nine months ended

September 30,

2025 September 30,

2024 September 30,

2025 September 30,

Revolver 5.8% 6.6% 5.7% 6.6%

1 unchanged sentence

1 Funds were borrowed on December 16, 2024.

No borrowings outstanding during the six months ended June 30, 2024.

No borrowings outstanding during the nine months ended September 30, 2024.

If SOFR cannot be determined pursuant to the definition, as defined by the Amended Loan Agreement, any outstanding effected loans will be deemed to have been converted into alternative base rate (“ABR”) loans.

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As of December 16, 2024, as defined by the Amended Loan Agreement, if the SOFR cannot be determined any outstanding balance will bear interest at the Prime Rate in effect on such day.

At June 30, 2025, we were in compliance with our financial covenants, as defined by the Amended Loan Agreement.

At September 30, 2025, we were in compliance with our financial covenants, as defined by the Amended Loan Agreement.

These covenants require that we meet certain parameters related to our leverage ratio.

At June 30, 2025, our leverage ratio was 1.4 to 1.0, which meets the requirement of not being above 3 to 1.

At September 30, 2025, our leverage ratio was 1.73 to 1.0, which meets the requirement of not being above 3 to 1.

2019 New Markets Tax Credit - On October 24, 2019, the Company entered into a transaction with a subsidiary of an unrelated third-party financial institution (the “2019 Investor”) and a certified Community Development Entity under a qualified New Markets Tax Credit (“2019 NMTC”) program pursuant to Section 45D of the Internal Revenue Code of 1986, as amended, related to an investment in plant and equipment to facilitate the expansion of our Longview, Texas manufacturing operations (the “2019 Project”).

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The Company is authorized to effectuate repurchases of the Company’s common stock on terms and conditions approved in advance by the Board.

As of June 30, 2025, approximately $70.0 million remains under the current board authorization.

4 As of June 30, 2025, approximately $30.0 million of shares have been repurchased in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

As of September 30, 2025, approximately $30.0 million of shares have been repurchased, and approximately $70.0 million remains under the current board authorization.

The Company also repurchases shares of AAON, Inc.

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Our repurchase activity is as follows:

Six Months Ended

June 30, 2025 June 30, 2024

Nine Months Ended

September 30, 2025 September 30, 2024

(in thousands, except share and per share data)

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May 13, 2025 June 6, 2025 June 27, 2025 $0.10 $0.40

August 14, 2025 September 5, 2025 September 26, 2025 $0.10 $0.40

Based on historical performance and current expectations, we believe our cash and cash equivalents balance, the projected cash flows generated from our operations, our existing committed revolving credit facility (or comparable financing) and our expected ability to access capital markets will satisfy our working capital needs, capital expenditures, and other liquidity requirements associated with our operations in 2025 and the foreseeable future.

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Statement of Cash Flows

The following table reflects the major categories of cash flows for the six months ended June 30, 2025 and 2024.

The following table reflects the major categories of cash flows for the nine months ended September 30, 2025 and 2024.

For additional details, see the consolidated financial statements.

Six Months Ended

2025 June 30,

Nine Months Ended

September 30,

2025 September 30,

(in thousands)

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These purchases are allocated to customer jobs and show as increases to our contract assets.

Current payment terms for BASX jobs primarily require the Company to fund the upfront working capital resulting in cash outflows related to our contract assets.

Current payment terms for BASX-branded jobs primarily require the Company to fund the upfront working capital resulting in cash outflows related to our contract assets.

Cash Flows Used in Investing Activities

Capital expenditures during the six months ended June 30, 2025, relate to additional infrastructure and machinery for both replacement and production growth, finalizing our new production space in our Redmond, Oregon and Longview, Texas locations, additional equipment and production capacity in Parkville, Missouri, and new equipment for our Memphis,

Capital expenditures during the nine months ended September 30, 2025, relate to additional infrastructure and machinery for both replacement and production growth, finalizing our new production space in our Redmond, Oregon and Longview, Texas locations, additional equipment and production capacity in Parkville, Missouri, and new equipment for our Memphis,

Tennessee facility.

4 unchanged sentences

The change in cash from financing activities in 2025 is primarily related to borrowings under our revolving credit facility to manage our working capital needs, especially strategic purchases of inventory to avoid supply chain delays and the funding of certain capital expenditures, offset by repayments we were able to make due to our operating results and financial condition.

During the six months ended June 30, 2025, we repurchased $30.0 million under our open market share repurchase programs.

During the nine months ended September 30, 2025, we repurchased $30.0 million under our open market share repurchase programs.

Furthermore, cash flows from financing activities is historically affected by the timing of stock options exercised by our employees.

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These contracts are not accounted for as derivative instruments because they meet the normal purchase and normal sales exemption.

We had no material contractual purchase obligations as of June 30, 2025, except as described below.

We had no material contractual purchase obligations as of September 30, 2025, except as described below.

In 2023, the Company executed a five-year purchase commitment for refrigerants.

Payments made in satisfaction of the purchase commitment were approximately $1.5 million and $2.1 million the three and six months ended June 30, 2025, respectively, as compared to $3.0 million and $6.6 million for the three and six months ended June 30, 2024, respectively.

Payments made in satisfaction of the purchase commitment were approximately $1.6 million and $3.8 million the three and nine months ended September 30, 2025, respectively, as compared to $3.1 million and $9.7 million for the three and nine months ended September 30, 2024, respectively.

Estimated minimum future payments are $5.3 million, $10.5 million, and $11.2 million for 2025, 2026, and 2027, respectively.

Critical Accounting Policies

There have been no material changes in the Company’s critical accounting policies during the six months ended June 30, 2025.

There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2025.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis