AAON (AAON) Q3 2026 Earnings Call Transcript

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DATE

Monday, Nov. 9, 2026

CALL PARTICIPANTS

• Director of Investor Relations - Joseph Mondillo
• President and Chief Executive Officer - Matthew Tobolski
• Chief Financial Officer and Treasurer - Andy Cheung

TAKEAWAYS

• Net Sales -- $707.4 million, representing 84.1% year-over-year growth driven by demand for both AAON and BASX brands.
• AAON-Branded Revenue -- $310.2 million, growing 19.6% year over year due to healthy backlog and production throughput gains.
• BASX-Branded Revenue -- $397.2 million, increasing 218.3% year over year reflecting momentum in data center cooling demand.
• Non-GAAP Adjusted EPS -- $0.83, more than double the $0.37 reported in the prior-year period.
• Total Backlog -- $1.9 billion, a 40.5% year-over-year increase supported by customer investment in data center infrastructure.
• BASX-Branded Backlog -- $1.4 billion, rising 51.1% year over year with order activity increasing 116% sequentially during the third quarter.
• AAON-Branded Backlog -- $499.3 million, increasing 18.0% year over year despite softness in the broader commercial HVAC market.
• Gross Margin -- 26.7%, improving 60 basis points sequentially but down 110 basis points year over year due to brand mix.
• Operating Income -- $100.0 million, increasing 129.3% year over year through volume leverage and improved manufacturing efficiencies.
• Operating Cash Flow -- $146.9 million for the first nine months, compared to a use of $18.8 million in the prior-year period.
• 2026 Sales Guidance -- 72% to 75% growth, raised from the previous range of 55% to 60% based on strong production outlook.
• 2026 Gross Margin Guidance -- approximately 26%, reflecting higher utilization and the benefit of pricing actions.
• AAON Oklahoma Adjusted Gross Margin -- 32.8%, increasing 160 basis points sequentially due to improved price/cost dynamics.
• AAON Coil Products Gross Margin -- 25.8%, up from 11.0% last year reflecting repricing of backlog and higher production volume.
• BASX Segment Gross Margin -- 28.7%, compared to 27.0% in the prior-year period driven by volume growth.
• Leverage Ratio -- 1.0 at quarter end, decreasing from 1.8 at the beginning of the year.
• Capital Expenditures -- $147 million year to date, with management expecting spending to step down meaningfully next year.
• Restatement Impact -- $10.7 million, the amount by which first-half 2026 revenue was understated due to newly identified accounting errors.
• SG&A Expense -- 12.5% of sales, a 400 basis point reduction as a percentage of revenue versus the prior-year period.
• Memphis Facility Costs -- $20.7 million in overhead expenses within the AAON Oklahoma segment during the third quarter.

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RISKS

• Tobolski stated, "We self-identified errors that resulted in revenue being understated in the first half of 2026," noting that a material weakness existed in the company's internal control over financial reporting.
• Cheung stated, "The year-over-year decline in margin was driven by a 300-plus basis points brand mix headwind," referring to the impact of the lower-margin BASX brand growing faster than AAON-branded products.

SUMMARY

AAON, Inc. (NASDAQ:AAON) reported record net sales and a significant increase in earnings while identifying a material weakness in its internal control over financial reporting. Management reported that accounting errors resulted in an understatement of first-half revenue by $10.7 million, prompting a restatement of those periods. The company indicated that its growth in the data center sector and market share gains in the commercial HVAC market supported the top-line performance. Management stated that it raised its full-year revenue growth guidance to a range of 72% to 75% and anticipates reaching the end of a multiyear capital expenditure program.

• Management plans to provide a new reporting structure in the fourth quarter based on the distinct AAON and BASX brands.
• The Memphis facility is currently operating at approximately one-third utilization, with plans for an intentional ramp-up of production over coming quarters.
• Tobolski noted, "Less than 1/3 of our backlog is sitting in states with any level of pressure around data centers," regarding utility or regulatory constraints.
• The company reported its first free cash flow positive quarter in two years, driven by earnings growth and working capital management.
• Tobolski stated, "AAON-branded revenue increased 20% year-over-year," noting that the company is taking market share despite a soft commercial construction environment.
• Management reported that national account orders increased nearly 70% as the company focuses on direct relationships to solve customer thermal management problems.

INDUSTRY GLOSSARY

• HVAC: Heating, Ventilation, and Air Conditioning.
• BASX: A brand of AAON focusing on high-performance cooling and custom-engineered data center solutions.
• AAON Oklahoma: A reporting segment primarily containing the Tulsa manufacturing operations.
• AAON Coil Products: A reporting segment focused on coil manufacturing and liquid cooling products.
• Price/Cost: The relationship between the change in selling prices and the change in the cost of raw materials and manufacturing.

Full Conference Call Transcript

Operator: Thank you for standing by. At this time, I'd like to welcome everyone to the AAON Group's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations. Please go ahead.

Joseph Mondillo: Thank you, operator, and good afternoon, everyone. The press release announcing our Third Quarter 2026 Financial Results was issued earlier this afternoon and can be found on our corporate website, theaaongroup.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 with 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 The AAON Group's control that could cause The AAON Group'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 Forms 10-Q that we filed this afternoon 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, and Andy Cheung, our CFO. Matt will start off with some opening remarks. Andy will follow up with a walkthrough of the quarterly results, and Matt will then finish up with our updated outlook. With that, I will turn the call over to Matt.

Matthew Tobolski: Thanks, Joe, and good afternoon. Before getting into what was a great quarter, I want to address the accounting corrections and material weakness we disclosed today. During our third quarter reporting process, we self-identified errors that resulted in revenue being understated in the first half of 2026. We have restated those periods and concluded that a material weakness existed in our internal control over financial reporting. The company has grown tremendously in a relatively short period of time, and our financial processes and controls did not keep pace with that growth and complexity in some areas. We take responsibility for that. Over the past year, we have been strengthening the finance organization, systems, and review processes.

That work helped surface these issues, and we are moving with urgency to correct the underlying control gaps. The corrections increased previously reported first-half revenue by $10.7 million and diluted EPS by $0.09. That is important context, but it doesn't change the fact that our controls needed to be better. Andy will cover the details and remediation efforts shortly. Now, let's talk about the business, because this was an exceptional quarter. The AAON Group net sales reached a record $707 million, up 84% year-over-year and 10% sequentially. Operating income more than doubled to $100 million, and diluted EPS more than doubled to $0.83. We made meaningful progress in profitability. Gross margin improved sequentially to 26.7%.

Adjusted EBITDA increased 100% year-over-year to $127 million, and adjusted EBITDA margin improved 100 basis points sequentially to 18%. Through 9 months, operating cash flow reached $147 million compared with a use of $19 million over the same period last year. I'm proud of these results, but I'm even more encouraged by what's underneath them. For the past couple years, we've been deliberate about building the capabilities required to support a much larger company. We've invested in people, manufacturing capacity, supply chain, systems, and how we operate. That hasn't always been easy, and building ahead of growth brings cost and complexity with it. But we weren't just adding capacity, we were building capability, and we're seeing it work.

We're producing more, lead times are coming down, productivity is improving, margins are moving in the right direction, we're getting leverage from the investments we've already made, and significantly more earnings are converting into cash. There is still plenty of room to improve, which frankly excites me. This is starting to show what this company is capable of. As we look at our brands, I don't want the strength of AAON getting lost in all the attention around data centers. AAON had an outstanding quarter. AAON-branded revenue increased 20% year-over-year to a record $310 million. Orders grew 10%. Backlog was approximately 18% above last year at $499 million, and national account orders increased nearly 70%.

That's happening in a commercial construction market that remains soft. We are not being carried by the market. We are taking share. We have differentiated products, an incredibly strong sales channel, and deep customer relationships. We're continuing to innovate, and the manufacturing investments we've made are allowing us to improve speed and service. National accounts is a great example of what happens when those pieces come together. The closer we get to customers, the more we understand the problems they're actually trying to solve. That creates opportunities to bring our engineering, products, and operating capabilities to them in ways that are difficult to replicate. That's customer intimacy in practice. It's not a sales program. It's how we want to operate.

Then we have to execute. Backlog declined sequentially during the quarter because we are converting it faster and getting product to customers sooner. That's exactly what we wanted our operations initiatives to do. When I look at AAON today, I see a business growing 20% in a weak commercial market, with orders growing, national accounts accelerating, and service improving. That's a really strong business getting stronger, and I'm incredibly proud of what the team is accomplishing. BASX also had an exceptional quarter. BASX branded sales increased 218% year-over-year to a record $397 million. Order activity increased 116% sequentially and backlog end of the quarter at approximately $1.4 billion, up 51% year-over-year.

There has obviously been a lot of noise around data center investment recently, and we would be foolish not to pay attention to it. We are staying grounded in what we are actually seeing from our customers. Engagement remains strong, the opportunity pipeline remains healthy, and the level of activity we are seeing with customers gives good visibility into the near to medium-term opportunity. This would include the expectation of a strong seasonal demand in Q4, similar or better than what we saw in a year ago period. We have not seen a meaningful change in the demand environment or in the longer-term plans customers are sharing with us.

I think it is important to put that against the backlog already in hand. We ended the quarter with approximately $1.4 billion of BASX branded backlog, even as we substantially increased production and converting more of that backlog into revenue. The underlying problems our customers are trying to solve continue to get harder. Compute density is increasing, power availability remains constrained, efficiency matters more, and thermal management becomes increasingly more important as these systems become more power dense. That plays directly to where BASX is differentiated. We are at our best when we are working closely with customers to solve difficult thermal management problems where engineering, efficiency, speed, and execution matters.

We are focused on the opportunities where those capabilities create the greatest value for our customers. That is where we win, and what we are seeing from customers continues to give us confidence in the opportunity ahead. When I step back from the individual businesses, this is where I get particularly excited. AAON is taking share in the commercial HVAC market, BASX is scaling into a significant thermal management opportunity, and we are getting better at running the company. Total backlog finished the quarter at approximately $1.9 billion, up 40% year-over-year. Gross margin improved another 60 basis points sequentially. Underneath that, we are seeing tangible progress. AAON Coil Products gross margin improved from 19.1% in Q2 to 25.8% in Q3.

Adjusted gross margin at AAON Oklahoma reached 32.8%. In the BASX segment, more than tripled revenue and profits year-over-year. Higher utilization is helping, labor productivity is improving, price costs have moved in the right direction, and our supply chain work is producing real results. We are improving sourcing and resilience while supporting tremendous growth, but there is still work ahead, and we will continue actively managing this area as we scale. I am pleased with the progress our teams are making. I am also excited about the continuous improvement discipline taking hold across the company. We are getting more rigorous about finding problems, getting to the root cause, and making improvements stick.

We still have facilities with more utilization available, teams that will continue getting more productive, opportunities in sourcing, outsourcing, and working capital. I do not look at a quarter like this and think we are done. I see proof that the work is taking hold with a lot more still available to us. With that, I will turn the call over to Andy Cheung.

Chung Cheung: Thank you, Matt, and good afternoon, everyone. Let me provide some additional context around the accounting revisions for the first and second quarter. As disclosed in our amended 10-Q filings, the revisions primarily relate to revenue recognition and accounting for software subscriptions. In aggregate, these items increased first half 2026 revenue by $10.7 million, gross margin by 71 basis points, and diluted EPS by $0.09. Importantly, the errors were identified through enhanced review procedures and management's ongoing efforts to evaluate and strengthen our internal controls. Although management concluded that the aggregate impact on certain quarterly periods was material, the errors were largely timing-related in nature and did not affect the economics of the underlying contracts.

We have begun implementing remediation actions, including enhancing the design and operations of existing controls, implementing new control over the revenue process, and identifying opportunities to reduce reliance on manual controls. We remain committed to executing these actions while driving operational performance and shareholder value creation. For more information, please see disclosures in our press release, presentation, restated 10-Q filings for the first and second quarter, and in our 10-Q filing for the third quarter. Turning now to our third quarter financial results. Third quarter net sales increased 84% year-over-year to a record $707 million. Strong performance from both the BASX and AAON brands, combined with greater manufacturing efficiencies, delivered the outsized growth.

AAON-branded sales growth of 20% was driven by a strong backlog and increased production throughput as we continue to drive lead times lower at both our Tulsa and Longview facilities. BASX-branded sales increased 218% year-over-year, reflecting the combination of sustained momentum in data center cooling demand, increased production output, and greater utilization of recently added manufacturing capacity. Gross profit in the third quarter increased 76% to $189 million, driven primarily by strong revenue growth and improved operational execution. Gross margin was 26.7%, down 110 basis points from the year-ago period and up 60 basis points from Q2.

The year-over-year decline in margin was driven by a 300-plus basis points brand mix headwind, partially offset by improved price cost and volume leverage. Sequential expansion in consolidated gross margin was driven largely by the AAON Coil Products segment and our Tulsa operations, as both benefited from favorable price cost trends and higher capacity utilization. SG&A expenses as a percentage of sales declined 400 basis points to 12.5%, as strong top-line growth more than offset continued investments to support the company's strategic priorities. On a dollar basis, SG&A grew $25 million to $89 million, reflecting purposeful investments in people, systems, and processes that position the business for sustained growth and enhanced operational efficiency.

Non-GAAP adjusted EBITDA increased 100% from the prior year period to $127 million. Adjusted EBITDA margin was 18% compared to 16.5% a year ago. Adjusted diluted EPS grew 124% to $0.83. Turning now to the segment financials. Beginning with AAON Oklahoma, third quarter net sales increased 19% to $283 million, driven by strong operational execution and increased production throughput, which enabled accelerated conversion of a healthy beginning backlog. Higher pricing also contributed to growth. AAON Oklahoma adjusted gross profit increased 12% to $93 million. Adjusted gross margin of 32.8% declined 210 basis points from the prior year period, but increased 160 basis points sequentially, reflecting improved price cost dynamics and higher capacity utilization on increased production volumes.

AAON Coil Products segment sales increased 174% to $193 million. Growth was primarily driven by BASX-branded liquid cooling product sales of $166 million, an increase of 256%. It was further supported by a 14% increase in AAON-branded production within the segment. AAON Coil Products gross profit increased 542% to $50 million. Gross margin was 25.8% compared to 11% in the prior year period. The significant margin improvement was largely driven by improved price cost dynamics, along with higher production volume and better overhead absorptions. BASX segment sales grew 207% to $231 million. Results benefited from robust demand for data center solutions and a strong backlog.

Enhanced utilization of the Memphis facility drove higher production capacity and throughput, enabling faster backlog conversion and contributing to stronger sales performance. BASX segment sales gross profit increased 227% to $66.4 million, while gross margin expanded to 28.7% from 27% in the prior year period. Margin improvement was driven by strong volume growth, partially offset by incremental resources and investments to support future growth initiatives and share gains. Now turning to the balance sheet. Cash, cash equivalents, and restricted cash balances totaled $4 million on September 30, 2026. Debt at the end of the quarter was $387 million.

Our leverage ratio continued to improve as it has each quarter this year, declining to 1.0 at September 30 compared to 1.8 at the beginning of the year. Our cash flow performance improved significantly. For the first 9 months of 2026, cash flow from operations totaled $147 million compared to a use of cash of $19 million in the prior year period. The third quarter also marked our first free cash flow positive quarter in 2 years. The substantial improvement was driven by strong earnings growth and enhanced working capital management. Working capital as a percentage of trailing 12-month sales declined to 30% from 39% a year ago, extending a 4-quarter trend of sequential improvement.

While the trend is moving in the right direction, we are not yet satisfied with the current level and continue to see substantial room for improvement. Capital expenditures to date total $147 million in 2026, reflecting continued investments in strategic growth initiatives. Although CapEx remain elevated, we are approaching the end of our multi-year investment capacity expansion program and expect spending to step down meaningfully next year. We continue to see substantial opportunities to improve operational efficiency, optimize pricing and sourcing strategies, and enhance working capital and capital management. Looking ahead, we expect strong earnings growth, improved working capital turns, and lower capital expenditures to drive significantly stronger free cash flow generation for next year.

I will now hand the call back to Matt.

Matthew Tobolski: Thank you, Andy. The results Andy just walked through reinforce the operating progress I talked about earlier and give us increased confidence in the outlook. Based on our third quarter performance, production outlook, and backlog, we are raising our full-year outlook. We now expect 2026 sales growth of 72% to 75%, up from our previous expectation of 55% to 60%. We expect gross margin of approximately 26%, SG&A of approximately 13% of sales, and depreciation and amortization approximately $100 million. That's a significant move from where we were 3 months ago. We are producing more, converting backlog faster, and executing better.

We're also seeing the benefit of the pricing actions we've taken, both on new orders and through pricing improvements we've been able to secure within portions of our existing backlog. Combined with better utilization, productivity, and sourcing, that's contributing to the margin progress we're seeing. We built for this growth, we're now delivering it, and increasingly, we're seeing the operating leverage that should come with it. We're not providing formal 2027 guidance today, but I do want to share how we're thinking about what comes next. When I look forward, what excites me is how much opportunity remains in the capabilities we've built.

We have attractive opportunities to continue growing, capacity to produce more, teams that continue getting stronger, and significant opportunity to improve productivity and returns from the investments we've already made. That gives us multiple ways to drive value, through growth, margin expansion, and cash generation. At AAON, we're not assuming the commercial market suddenly gets easier. Our performance this year shows we don't need it to. We have a differentiated business that's taking share, and we see plenty of opportunity to continue doing that. At BASX, I'd like to come back to what we're actually seeing. We have approximately $1.4 billion of backlog. Order activity increased significantly during the quarter.

Customer engagement and the opportunity pipeline remain strong, and the activity we're seeing gives us good visibility into the near-to-medium-term opportunities. Our projects are geographically diverse, so we're not dependent on any single state or market, and the vast majority of our backlog is with well-capitalized customers with strong balance sheets. Beyond the backlog, the depth of our customer relationships gives us visibility into development plans that extend years into the future. More importantly, those relationships put us close to the problems our customers are working to solve and where their needs are going.

As compute density continues to increase, power and water remain constrained, and efficiency continues to matter, with thermal management becoming increasingly more important as these facilities become larger and more power-dense. These are exactly the problems BASX was built to solve. We're close to our customers. We understand their applications and engineer around their specific requirements. We move quickly, solve difficult problems, and execute at scale. That's where BASX is differentiated, and that differentiation is winning with customers today and is what gives us confidence in the long-term opportunity ahead. I'll finish here. I'm incredibly proud of this quarter.

We delivered record revenue, operating income and earnings per share more than doubled, margins improved sequentially, cash generation improved significantly, and we're raising our full-year outlook. Those results reflect years of investment and an incredible amount of work by our team. We're seeing that work translate into performance. We also self-identified a financial reporting issue this quarter that resulted in previously reported first-half revenue and earnings being understated. It exposed areas where our controls weren't good enough. We own it, and we're fixing it. I'm incredibly proud of what our team delivered, and when something isn't good enough, we're going to be equally direct about fixing it. That's how I want us to run this company.

What gives me confidence looking forward is pretty simple. We're closer to our customers, we're executing better, we're getting more productive, and both AAON and BASX have strong, differentiated positions in their markets. The strategy is working, and there's still a lot more performance available from what we've built. I'm incredibly proud of this team, and I'm excited about where we're going. With that, we'll open the call for questions.

Operator: [Operator Instructions] Your first question comes from Ryan Merkel with William Blair. Your line is open.

Ryan Merkel: Nice job this quarter. Wanted to start on the data center orders, if I could. It's nice to see BASX orders back above $300 million. Matt, can you talk about timing variability in BASX orders that you called out in the press release? Are you still waiting on some larger orders, or did you see those in the third quarter?

Matthew Tobolski: Well, certainly, there was great momentum in the third quarter compared to Q2, but that momentum continues to strengthen into Q4. As we look at Q4, and in the prepared remarks, made the comment that we expect the bookings in the BASX side to be at or above what we saw in the same quarter in 2025. So, there's been continued strength in bookings, and actually, as we've been on this call, I've been getting texts from our team as additional orders keep flowing through. So, we've had a lot of flow-through of orders, especially around our kind of annual program releases to some of our larger customers.

Ryan Merkel: Got it. That's great. Okay. Then, it was a big beat on revenue, and it came from both segments. Where did the surprise come from? Was it the increased throughput? Was it share gains? Was it price? Just unpack that a little bit.

Matthew Tobolski: Yes, no, it's been exciting to watch the strength in both sides of the business. Obviously, the BASX side has been growing tremendously strong over the last many quarters, but really, the AAON brand has just been as strong as it's ever been. So, you look at the differentiation in that product, it's allowing us to take share on the AAON brand, and all of that's being supported by continued strengthening of our operations and our execution, and that's really allowing us to capture that share on the AAON side. On the BASX side of it's continued operating rhythm and really driving performance in our existing investments.

We're seeing the coil product segment continuing to ramp up with good margin progression and really good operating performance, as well as seeing our Memphis investment continue to make great returns as we increase productivity. So, it's really been pretty broad-based. The market's been strong for us. The differentiation of the products has been strong. Our operations have been allowing us to execute well, and our supply chain team has been doing a tremendous job of ensuring the parts and pieces are showing up when our team needs them.

Ryan Merkel: That's great. Okay, and then one quick one on gross margins. Q4 is implied down slightly from Q3. Can you just talk about why that is? Are you seeing any cost inflation that might be causing a little bit of a squeeze?

Matthew Tobolski: That's a great question, and you're reading kind of what the guidance implies correctly. I think just to clarify, the big driver on the kind of sequential short downturn from quarter 3 to quarter 4 is really being driven not by inflation. It's really just calendar days working. When we look at holidays, traditional production schedules, as well as our traditional year-end wall-to-wall inventory counts, those just reduce the overall days of production. So, we're seeing increase in productivity and price cost through the quarter, but those are just being offset a little bit by the overall production days.

Operator: Your next question comes from Julio Romero with Sidoti & Company. Your line is open.

Justin Mechetti: This is Justin on for Julio. I wanted to start on the restatement. As you have previously signaled a move towards reporting AAON-branded and BASX-branded results as separate segments, does the restatement or the controls work tied to it change the timing? Would the new segments come with recasted historicals that match the corrected basis provided today?

Chung Cheung: Yes. I would say, first off, these correction and the control gaps that we find will not affect our plan from a resegmentation standpoint. Right now, we are still targeting in our Q4earnings call we will be providing a new look based on the 2-brand concept that we have been talking about. This quarter's discovery will not have any impact on it, and we are also anticipating that shortly prior to the resegmentation in Q4, we will be providing a recast of the historicals so that you can see what the historical trend is, and it will be reflecting the restated Q1 and Q2 financials.

Justin Mechetti: Got it. Turning to margins, you mentioned the year-over-year gross margin decline was mainly due to less mature, lower utilization facilities, which I assume is primarily Memphis. I am curious, where is Memphis utilization today, and when do you expect Memphis to reach the margins of your established plants?

Chung Cheung: Yes. Let me start with clarifying, yes, because of the growth of our BASX business, particularly in Memphis, but it is also reflecting, remember, I think we talked about in the past, there is a mix impact as we continue to outpace the growth between BASX and the AAON brand. That is roughly we estimated to be more than 300 basis points in brand mix headwind. These are really the driver. In terms of the utilization, I will say that the utilization we previously mentioned that we are approximately approaching about a third utilized in our Memphis location, and we still have lots of room to continue to grow that business.

Matthew Tobolski: I would just touch, I mean, it's a very intentional rate of growth in how we turn on more capacity inside that facility. This is a very substantial ramp-up investment for us, and it's a very intentional growth trajectory for us to ensure that we continue delivering not just the top-line dollars, but the quality growth and margin, as well as the quality and delivery expectation we have for our customers. While the other 2/3 of capacity sits there from an overall square footage standpoint, we'll be intentional about how we ramp that over time to ensure that quality growth is delivered not just to the street, but also to our customers.

We're talking about quarters and years of time to basically fully ramp that facility intentionally.

Operator: Your next question comes from Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye: I'm sure investors listening to this call are cheering right now around the resegmentation, so looking forward to that, and great to see you moving forward with it. Matt, you sound great about the health of the business, especially the BASX side, and your comments around the expectations for orders this quarter, 4Q, suggests to me at least that you've got a good amount of that already. Can you talk about the nature of these orders a little bit more? Give us a sense of composition. What's the same? What may be changing? Customers, any new customers? Just help us understand how the orders book is shifting here.

Matthew Tobolski: Yes. Good afternoon, and great question. When we look at the overall order trend in Q3 and in Q4 as well, certainly there's a broad-based kind of portfolio bookings growth in there. A lot of great success in liquid cooling orders with existing customers as well as with new customers. Continue to see growth in the airside products as well alongside that, and that continues to be with a diversifying customer base.

When we look high level at really where that growth is coming from, we have a really good base of existing customers that continue to not only kind of order existing products that we manufacture with them, but we continue to evolve the products with them going forward based on how their deployment's shifting over time. Kind of a continuous evolution in the overall products that we're manufacturing for existing customers. But really, also some great strength on new customer wins and diversified customer wins. It's really been a pretty broad-based success in the quarter, Q3, as well as quarter-to-date in Q4.

Noah Kaye: Okay. I'm sure you're getting these questions. We're getting them a lot from investors post-elections, because you touched on in your prepared remarks, your confidence in the backlog with respect to the counterparties and the geographic exposure of the projects. Can you just give us a little bit more Colin on that? I mean, when you look at what's in your backlog, I would imagine the vast majority of it is on projects that are already permitted and probably under construction, but just what gives you that confidence in the firmness of the backlog?

Matthew Tobolski: Yes, great question, and yes, to your point, certainly been a question that's been asked plenty of times post-election. When we look at the overall geographic diversity, we're talking about less than 1/3 of our backlog is sitting in states with any level of pressure around data centers. In those states, the majority of the conversation's more around regulation, around kind of who's there and who's footing the bill for a lot of the investments in utilities and other things like that. From a geographic perspective, good strength that we're seeing in where we're deploying projects. But we also continue seeing new orders come in within a geographically diverse set of states.

We continue to see strength with our customer base. A lot of our hyperscale customers have exposure all across the country, so they're not levered into one state substantially. Really seeing the geographic part be a non-issue at least in what we're seeing in our existing backlog. To your point, these are existing permitted projects. They're not speculative projects. Beyond that, just touching on the overall health of the business, well over 80% of what's in our backlog is with customers with incredibly strong balance sheets.

When we look at the kind of risk factor, there's a certain small amount of consideration in there, but by and large, there's very strong protections in the customers and the locations that we're providing product to.

Noah Kaye: That's helpful, Colin. Thank you. I want to ask one more about margins, if I may. That ACP margin improvement sequentially was pretty stark. Was there any one-time benefit? You mentioned some pricing improvement. Did revised contract prices generate any kind of catch-up revenue or margin benefit under percentage-of-completion accounting? Or is this the kind of margin that we should sort of expect for Q4?

Matthew Tobolski: Yes, no, fair question, and it does not include any catch-up revenue. That margin is for product that was manufactured and shipped during the quarter. That is reflective of kind of where we're building upon going forward. I would just touch on, we have spent a tremendous amount of energy in the Longview site beyond just a pricing perspective on really driving the operational efficiency of that factory. When I think about things that excite me, it's not just the top-line dollars we're getting, but it's the improvements we see in the shop floor every day, and we expect those to continue making meaningful impact in the margin as we drive forward.

Operator: Your next question comes from Tim Wojs with Baird. Your line is open.

Timothy Wojs: Nice job. Maybe just to start on the, Matt, just on the AAON Oklahoma business. I mean, the order activity there has been good year to date, but you are, I'd say, burning some backlog or catching up on some of the lead times. So, I know you're not giving '27 guidance, but as you think about AAON Oklahoma next year, is there any sort of dynamic where that catches up to you, or do you feel like AAON Oklahoma could see another growth year next year?

Matthew Tobolski: Yes, I think one thing to kind of keep in mind as we think about the booking cadence and kind of the backlog dynamic in Q3, and that is Q3 into Q4 tends to be the seasonally softest bookings quarters in our business, as basically we're filling the coffers for Q4 and Q1 and having delivery timeframes. When we look at the booking strength in Q3 from a seasonality perspective, we actually look at it as being a strong bookings quarter, all things considered.

So it's really giving us the opportunity to continue driving the backlog down, and therefore driving down the lead times in our product as we prepare for the end of Q4 into Q1, which tends to be the strongest bookings quarters. So, really from that vantage point, it was a very intentional decision to drive the production rates where we're at, with the goal of getting our lead times basically where we want them to be as we enter the strong booking season.

Timothy Wojs: Okay. I guess as you think about just the lead times within BASX, is there any way, probably varies by product and program and things, but is there any way to kind of give us a sense of where the lead times are in that business today versus maybe where they were 6 or 9 months ago? Just trying to think of kind of the order activity in Q4. You'll probably ship most of that backlog in 2027, but just if you can actually take orders and ship orders as you kind of get into next year, if that kind of falls into '28.

Matthew Tobolski: Yes, I think to start off, your statement at the beginning is very correct, which is very much varies by program and by product. There's been a lot of moving pieces that really go into it in terms of how we're driving throughput within existing programs and really balancing kind of line rates to meet demand. So, a little more complicated aspect with some of these longer duration programs.

But by and large, on the kind of, I'll say the more traditional type programs that are going through our production on the BASX side of the business, the simplest way to say it is yes, lead times have come down, but lead times have come down as we continue getting more maturity in our production operations across the entire fleet. Really the driver of lead times coming down is a balance of more production capacity coming online as a lot of the investments continue to mature, thereby allowing us to put in more demand into the system.

I would say, for us, and we've heard me say this for multiple quarters now, we are very intentional about when we turn on the capacity to the market, because one of our key prime focus areas for us is ensuring that when we commit to delivery dates with customers, we hit them. That means being very intentional about the level of confidence we have in that production coming online at the rate needed to meet the demand of the market. As the capacity matures more and more, it allows us to more confidently go to the market with accelerating lead times and more capacity to sell.

Really, I think on a broad-based perspective, the lead time movement is very much reflected around the operational maturity that continues to come into place within the existing investments that we've been making.

Timothy Wojs: Okay. That's helpful. I mean, is it fair to say that pace today is faster and ahead of schedule relative to what you thought at the beginning of the year?

Matthew Tobolski: Yes, I mean, I'll just say simply that our supply chain teams, our operating teams, they continue to impress me on a daily basis with the progression that they're making. They continue to drive performance across this business from an execution perspective. The evolution of our operating model within our production floors and our supply chain organization is incredibly impressive to see where it is today versus where it was a couple years ago. That discipline, that cadence for improvement, I mean, all of that is what's allowing us to deliver the improving production improvement, and ultimately allow us to drive more product through our factories.

Timothy Wojs: Okay. Then just the last one I had. I think this year, just to help kind of get some of the lead times worked out in Oklahoma, you guys did have some enhanced outsourcing arrangements. Is it still the plan as you go into 2027 that some of those outsourcing arrangements would come back in-house?

Matthew Tobolski: Yes, so we're being very intentional around the balance of the outsource/in-source conversation, but we are driving a lot of volumes through our insourcing, vertical integration production capabilities inside our plants. Today, we continue to see the amount of insourcing that we're doing increase, but we're also being very intentional to balance the outsourcing to ensure customer delivery. As we progress into 2027, we do expect there to be some outsourcing that is still sitting there to support our operations, but our goal is to continue bringing more and more of that capacity in-house, and obviously get the margin uplift that comes with it.

Operator: Your next question comes from David Tarantino with KeyBanc Capital Markets. Your line is open.

David Tarantino: Maybe just starting on the, putting a finer point on the margins and the coils business. You gave some Colin on it, but could you give some Colin on what drove the better margins between better throughput and better price cost? Maybe on the pricing front, can you give us an update on how those conversations with your customer has progressed this quarter?

Matthew Tobolski: Yes. From an overall kind of margin impact, the pricing certainly is the majority of the uplift that we saw in Q3. Definitely the productivity improvements are in there, but pricing would be the bigger driver in the quarter-over-quarter progression. When you think about the pricing conversations and how those are going with our customers, a lot of our large hyperscale customers or large customers that are sitting in our longer duration programs, sophisticated conversations around the drivers of the cost and really what we're doing to mitigate costs.

The conversations are being met openly, and really, the expectation that we hold ourselves to is that we can clearly articulate the drivers and everything we're doing to minimize the impacts, and in doing that, allowing us to have a very structured conversation to ensure that we're delivering the product at the appropriate value point. Really from a how it's going standpoint, there's an expectation obviously around discipline from our standpoint as well as doing everything we can to mitigate the overall cost increase.

At the end of the day, those conversations are being met with open arms, and really, obviously, as you can see in the price going through in backlog, it's sitting there in the books, and it continues to show up in future orders at higher levels as well.

David Tarantino: Okay, great. And maybe a similar line of questioning, but on Oklahoma, looks like the adjusted margins here are making some solid progress, but remain below the long-term target. Maybe could you just update us on the headwinds here and maybe give us your thoughts on if you think there's enough price in the backlog to return to that targeted mid to high 30s margin, and when should we expect that to show through?

Matthew Tobolski: Yes, so that's a great question. We look at the Oklahoma segment, and we've obviously talked about the price costs kind of mismatch in prior quarters. Really, a lot of action has been put in place to really get the price cost dynamic in check, to really ensure that we're staying ahead of the overall inflation and getting ourselves back towards our target margin level. All that to say that the progress you're seeing quarter-over-quarter throughout this year is very much reflective around that pricing discipline. Sitting in the backlog today is increased pricing relative to what we produced in Q3. So, there is continued price cost benefit that sits inside our backlog.

Really from a going forward basis, we continue to maintain a level of this, continue to have a level of discipline in our process, really where we're looking at inflation, not just that's showing up in our books today, but really within a supply chain perspective, getting much better visibility into forward-looking price expectations, or cost expectations, I should say, and ensuring that we're putting price into the market to counteract those and really drive the margin to our target levels. Are we able to flip a switch and get back to the overall target margin levels? No, it takes a little bit of time.

But as we get through next year, we expect to continue seeing movement in margins of the Oklahoma segment in the right direction.

David Tarantino: Okay, great. If I could sneak one more in here, and apologies if I missed it. Can you just update us on what the sales outlook now embeds between the AAON and BASX branded product growth?

Matthew Tobolski: Yes, we don't have explicit kind of definition for the quarter, the Q4. I just say thinking about it on a relative basis, it's going to be relatively in line from a ratio perspective to Q3, is what you would expect to see in Q4. So, that implies from a BASX side of the business growth of around 140% for the overall year.

Operator: Your next question comes from Chris Moore with CJS Securities. Your line is open.

Christopher Moore: Maybe we'll stick with the data center sales a little bit. So, the liquid cooling, $166 million within the coil segment. Can you kind of compare these sales to the data center sales within the BASX segment, for example? Are they more customized? The average size of these projects much different? The lead times much different?

Matthew Tobolski: I guess just the differentiating point that I would bring up regarding the coil segment liquid cooling products is really just, what's sitting in there is a long duration customer relationship and program. Kind of sitting inside there's some very bespoke products that have been designed and we're manufacturing specific to the customer's applications. Really kind of on that custom product side of things. We have similar products that are sitting in other facilities, whether Memphis or the BASX segment. I would just say the relative scale of the sort of relationship in the ACP segment is just a larger relationship and a longer duration relationship compared to some of the things in other plants.

Christopher Moore: Got it. My line's a little fuzzy, I might have missed it, but just in terms of the kind of data center capacity at the end of '26 versus, I know CapEx will step down in ''27, versus where you'll be at the end of '27. Can you talk to that?

Matthew Tobolski: Yes, certainly. A lot of capacity is still sitting kind of there to be able to bring out, brought online over time. We've messaged obviously that capacity of the overall BASX side of the business is in excess of $2 billion. We haven't put a fine-tooth comb in exactly where we see that ceiling. But certainly throughout 2027, as we continue bringing on more production capacity, it'll allow that to continue increasing throughout the year. Do we finish the year at that $2 billion capacity? Probably not, but certainly there's going to be more opportunity over time as we enter '27 into '28 as well.

Operator: Your next question comes from Matt Summerville with D.A. Davidson. Your line is open.

Paul Joseph Heilbronn: This is PJ Heilbronn on for Matt Summerville. Just one from me. Given the recent pullback in shares, can you talk about the potential to buy back shares at these levels and how you're thinking about that? Thank you.

Matthew Tobolski: Yes, good afternoon. And yes, very obvious question. I think when we look at the share pullback, certainly coming to mind is the fact that we still have $70 million of authorization for buybacks that are sitting inside of prior board approval. And so, as we look at the overall share values, we will certainly look at those opportunistically to really reduce the share count as appropriate. So, certainly is on the radar for us.

Operator: That concludes our question-and-answer session. I will now turn the conference back over to Joseph Mondillo, Director of Investor Relations, for any closing comments.

Joseph Mondillo: All right. Thank you, everyone, for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thank you.

Operator: This concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.

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