AAON, INC. Q1 2026 earnings call

Thank you, operator, and good morning, everyone. The press release announcing our first quarter 2026 financial results was issued earlier this morning and can be found on our corporate website, aaon.com. The call today is accompanied by a presentation that you can also find on our website, as well as on the listen-only webcast. We begin our customary forward-looking statement policy. During the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933, and the Securities Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AAON's control that could cause AAON's results to differ materially from those anticipated.

You are all aware of the inherent difficulties, risks, and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matt Tobolski, President and CEO; Andy Cheung, our new Chief Financial Officer, who joined the company in April; and Rebecca Thompson, our Chief Accounting Officer.

Matt will start with some opening remarks, Andy will follow with a walkthrough of the quarterly results, and Matt will finish up with our updated outlook for 2026. With that, I will turn the call over to Matt.

Thanks, Joe, and good morning. Q1 was a strong start to the year and an important execution quarter for AAON as the organizational leadership and capacity investments that we have been deliberately building began to show up more clearly in our results. In addition to delivering record sales and 37% earnings growth, we recorded a book-to-bill well above one, resulting in backlog of $2.1 billion, more than double from a year ago and marking the sixth consecutive quarter at record levels. Both brands continue to demonstrate the strength of their value propositions through highly engineered, configurable, and custom solutions consistent with the strategy we have executed against over multiple years. This led to strong customer demand and translated into solid growth and share gains during the quarter.

Demand remained exceptionally strong at BASX, supported by the strength of the data center market and our differentiated solutions that deliver improved performance, greater efficiency, and ease of maintenance. BASX-branded sales grew 72% year-over-year, even against a lofty comparison, and sales in the prior year period nearly 5x. Increased production from our expanded facilities in Longview and Memphis supported a higher throughput, while we also continued to increase output from our Redmond site. Operationally, we executed well for our customers with all three facilities delivering record BASX-branded sales during the quarter. This performance reflects not just strong demand, but improving execution driven by deeper leadership benches, clear accountability, and more disciplined operating processes as capacity scales with a more mature operating structure. In addition to higher throughput, we delivered another quarter of strong bookings.

BASX posted a book-to-bill ratio over two, driving a record backlog of BASX-branded orders up 160% from a year ago and 24% sequentially. Against the data center thermal management market growing at approximately 30%, our revenue and order growth rates supported continued market share gains at BASX. The AAON brand also performed well, gaining share even as market conditions remained soft and our extended lead times persisted. A key positive during the quarter was a notable improvement in production rates, which drove AAON-branded sales growth of 42% year-over-year and 11% sequentially. These improvements contributed to shorter lead times and a sequential reduction in backlog, though further progress is necessary. With volumes within the unitary HVAC market growing just modestly year-over-year, these first quarter results suggest meaningful share gains.

Bookings of AAON-branded equipment increased approximately 9% year-over-year and were up about 15% on a trailing 12-month basis. In the quarter, growth was driven by strength in our traditional transactional business, while national account bookings were comparable with the prior year period. The improvement in transactional business reflects an acceleration in demand, which is encouraging considering this business was soft for much of last year. Orders of Alpha Class equipment, which comprise our AAON-branded fully electric heat pump configurations, also contributed to growth, increasing 56% during the quarter. The same strength in AAON-branded bookings limited the sequential decline in AAON-branded backlog, even with meaningful improvements in production. AAON-branded backlog declined 3% sequentially and remained up 26% from a year ago. As a result, we remain focused on further ramping production to work down backlog and normalize lead times.

In the midst of such strong growth, we have been intentionally investing in people, processes, and tools to build a top-performing operating organization, one capable of sustaining higher growth rates while expanding margins over time. These investments are now moving from build phase to execution phase. Last quarter, we discussed the investments we've been making in supply chain management and lean manufacturing. We continue to leverage these investments and expect to see accelerating benefits as the year progresses. Margin expansion remains central to our long-term value creation model. In the near term, we are intentionally prioritizing growth, customer delivery, and system maturity over near-term margin maximization. That decision is reflected in the temporary use of outsourcing and ramp-related inefficiencies as we scale capacity. These are conscious, disciplined trade-offs made from a position of strength and visibility, not demand-driven pressure or structural resets.

We view them as economically positive decisions that accelerate market share gains and long-term returns on invested capital. Importantly, these decisions do not come at the expense of AAON's growth. Longer term, as capacity builds out and internal capabilities mature, reliance on these temporary measures will decline, driving margin improvement through better fixed cost absorption and productivity. As a result, we now expect higher growth for the year, albeit with more modest margins near term, while continuing to see directional margin improvement as the year progresses. Before handing it off, I want to welcome Andy Cheung, our new Chief Financial Officer. Andy brings a strong financial background and a proven track record of leadership across strategy, financial planning and analysis, and capital management. His experience and disciplined approach will be instrumental as we continue to scale the business, enhance execution, and drive long-term value creation.

Andy's insights and partnership will further strengthen our leadership team and support our focus on growth, margin improvement, and operational excellence. I'd also like to thank Rebecca Thompson for her steadfast service as CFO. I look forward to her continued contributions and her return to the Chief Accounting Officer role. With that, I will now turn it over to Andy, who will walk through the quarterly financials in more detail.

Thank you, Matt, and good morning, everyone. I'll start this morning by first sharing how excited I am to join AAON and to have the opportunity to partner closely with Matt and the leadership team. I've held financial leadership roles across multiple industries in my nearly 30 years tenure, including an extensive amount of time in the industrial HVAC space with a consistent focus on driving operational efficiency. I'm pleased to bring that experience to AAON and look forward to helping drive the next stage of profitable growth and value creation. The company's strong market position and the high growth opportunity is what initially attracted me to the role. As I have become more familiar with the business over the past few weeks, I've been even more impressed by the strength of the underlying fundamentals and the sizable opportunity that lies ahead.

I look forward to working with the team to support profitable execution, enhance returns, and deliver long-term value for our shareholders. With that, let's turn to the first quarter financial results. First quarter net sales increased 54% year-over-year to a record $496.9 million. Growth was driven by strong performance across both BASX and AAON brands, supported by elevated backlog levels and recent capacity investments that enabled higher production rates during the period. BASX brand of sales increased 72% year-over-year, reflecting continued strong demand for data center cooling solutions and capacity gains from higher utilization of our facilities in Memphis, Longview, and Redmond. AAON brand of sales grew 42% in the first quarter, driven by improved production throughput as we work to reduce lead times at both our Tulsa and Longview facilities.

Gross margin was 25.1% in the first quarter, down 170 basis points from 26.8% in the prior year period. Gross margin was impacted by an increased amount of outsourced components to drive growth and share gains, unabsorbed fixed costs at the new Memphis facility, as well as tariff-related and general inflation pressures, all of which are temporary. Despite these near-term margin impacts, earnings growth remains strong, reflecting our exceptional growth trajectory. As internal capacity scales, utilization and productivity increase, reducing reliance on outsourced components and resulting in better fixed cost absorption. Additionally, we have taken margin actions through pricing and mix, and those actions are embedded in the backlog. SG&A expenses as a percentage of sales declined 220 basis points to 13.7%, up 32% to $67.9 million.

This reflects strong operating leverage and disciplined cost management and demonstrates how our organizational investments are scaling as revenue grows. Driven by the strong top-line performance, non-GAAP adjusted EBITDA increased 44% from the prior year period to $78 million. Non-GAAP adjusted EBITDA margin was 15.7% compared to 17.6% a year ago. Diluted earnings per share in the first quarter of 2026 were $0.48, representing an increase of 37% from the first quarter of 2025. Turning now to the segment financials, beginning with AAON Oklahoma. For the first quarter, net sales increased 51% year-over-year to $244 million. This outsized growth was driven by a strong beginning backlog and improved production throughput, which supported by higher backlog conversion despite a challenging industry backdrop.

Results also benefited from a favorable comparison to the prior year period, which had been disrupted by the industry's refrigerant transition, contributing to regained market share. AAON Oklahoma gross margin was 26.3%, an increase of 120 basis points from 25.1% in the first quarter of 2025. Overhead expenses associated with the Memphis facility impacted segment margin by $9.8 million. Excluding these costs, Oklahoma margins were 29.6%. The remaining gap to our historical highs in the upper 30 is explained by three items: outsourcing, tariff-related pressures, and general inflation. None represent a structural change to Oklahoma's long-term earnings power or its role as a core margin engine for AAON. All three have already been addressed with actions embedded in backlog and new pricing actions. These temporary headwinds will moderate as the year progresses.

AAON Coil Products sales were $117.6 million in the first quarter, an increase of $23.6 million or 25% compared to the prior year period. Growth was driven by $93.2 million in BASX branded liquid cooling product sales, which increased 40% during the quarter. This strength was partially offset by a 12% decline in AAON branded output within the segment. AAON Coil Products gross margin was 24.1% in the first quarter compared to 31.8% in the prior year period, up 280 basis points sequentially from 21.3% in the fourth quarter. The sequential margin expansion reflected improved operating leverage from higher throughput at the Longview facility, along with a favorable mix of higher margin BASX sales.

Sales at the BASX segment grew 104% in the first quarter to $135.4 million. The robust growth was driven by sustained demand for data center solutions and new market share capture as BASX continued its trend of strong order intake and growing backlog. Increased utilization of our Memphis facility was also a significant factor, providing additional production capacity that was additive to segment results. BASX segment gross margin was 23.9%, essentially flat from the prior year period. The stable year-over-year margin reflected strong volume growth, offset by incremental resources and investments needed to support the future growth and share gains. As utilization continues to improve, we expect BASX segment sales and margins to expand through the balance of the year, with the second half weighted more favorably as fixed cost absorption improves.

Turning now to the balance sheet. Cash, cash equivalents, and restricted cash balances totaled $1.1 million on March 31, 2026, and debt at the end of the quarter was $425.2 million. Our leverage ratio improved to 1.71x, down from 1.77x on December 31. During the first quarter, cash flow from operations was a +$34 million, the highest level since the third quarter of 2024. This is compared favorably to a $9.2 million use of cash in the prior year period and was driven primarily by higher earnings and improved working capital efficiency. Capital expenditures totaled $52.9 million, reflecting continued investment in incremental capacity to support future growth.

Looking ahead, we expect continued profitability and productivity improvements throughout 2026, which we believe will drive further cash flow improvement and strengthen the balance sheet in support of future growth. I will now hand the call back to Matt.

Thank you, Andy. We entered the second quarter with significant production momentum and a strong backlog that provides excellent visibility through the remainder of the year. Production throughput continues to ramp across all of our facilities, positioning the business to benefit from higher volumes and improved utilization. With this operational momentum and backlog strength, our focus remains squarely on execution and delivering for our customers. In the near term, we expect temporary cost pressures from outsourcing as we support strong growth and continued market share gains. These impacts are transitory, and as internal capacity expands, these cost burdens will diminish, allowing margins to improve. With demand remaining robust, production continuing to scale, and capacity investments coming online, we expect improving margins over the course of the year as operating leverage builds.

We remain focused on scaling the business efficiently and strengthening margins over time while delivering for our customers and driving long-term value for our shareholders. For the year, we now anticipate sales growth of 40%-45% at a gross margin of 27%-28%. SG&A as a percentage of sales is expected to be between 14% and 15%, and depreciation and amortization expenses are expected to be in the $95 million-$100 million range. These expectations reflect our confidence in demand, improving execution, and the operating leverage embedded in our cost structure. Importantly, our full year outlook reflects a net improvement in both top and bottom line, with earnings up materially despite gross margins reflecting intentional timing and ramp decisions. The additional volume we are taking on this year carries strong incremental contribution and accelerates absorption, productivity, and capacity payback.

This is a timing issue tied to how we are choosing to ramp and execute, not a reset in long-term margin structure. As absorption improves, outsourcing declines, and pricing flows through, margin expansion follows as these temporary factors unwind. In closing, I want to thank our employees, our customers, sales channel partners, and shareholders for their continued support. We are seeing clear momentum in our operations as recent investments translate into stronger execution. Our visibility, execution priorities, and operating discipline position us well to continue improving performance in delivering long-term value. With that, I will open the call for questions.