AAON(AAON -11.47%) reported second-quarter 2025 results on Aug. 11, 2025, with net sales down 0.6% year over year to $311.6 million and gross margin contracting 950 basis points to 26.6%. Management lowered full-year 2025 guidance, citing ERP (enterprise resource planning) implementation disruptions, but highlighted strong backlog growth and momentum in the Basics data center segment. The following insights detail the operational challenges, strategic opportunities, and long-term margin outlook discussed on the call.
ERP transition disrupts AAON production
Production rates for branded equipment at the Longview facility declined 50% in April 2025 compared to the average rate over the first nine months of 2024, and by July, were still 37% below that benchmark. These disruptions also affected the Tulsa facility, which relies on Longview-supplied coils, compounding operational inefficiencies and reducing overall gross margin in the AAON Oklahoma and AAON Coil Products segments.
“At Longview, production of AAON branded equipment was significantly impacted early in the quarter as teams adapted to the new system. However, as production and supporting functions gained experience and familiarity, we saw steady improvement throughout the remainder of the quarter. … After bottoming out in April, the total production consistently improved month to month throughout the quarter. And while it’s not shown here, we continue to see improvement through July. Also, it was 6% below that benchmark pace in July, and while Longview still has some ground to make up, improvements began to accelerate starting in June.”
— Matt Tobolski, CEO and President
The ERP rollout is expected to remain a near-term risk, but management anticipates operational normalization and margin recovery in 2026 as further site transitions are completed and lessons from Longview are applied to future implementations.
Data center sales drive AAON backlog growth
Basics branded data center sales grew 127% year over year in the second quarter and 269% year to date, while national account orders for branded equipment rose 90% in the first half of 2025. Liquid cooling represented approximately 40% of year-to-date Basics branded data center sales, and a strategic partnership with Applied Digital resulted in significant orders for advanced cooling solutions in AI-oriented data centers.
“The Basics brand continued to demonstrate strength within the data center market in Q2. Basics branded data center sales were up 127% in Q2, and 269% year to date. … Year to date, liquid cooling equipment accounted for approximately 40% of total Basics branded data center sales. … National accounts orders grew year over year by 163% in Q2, and they’re up 90% year to date. … In the first half of the year, national accounts made up approximately 35% of total AAON branded orders, up from approximately 20% a year ago.”
— Matt Tobolski, CEO and President
Strong backlog growth, up 72% year over year, is underpinned by robust demand in the data center vertical and national accounts, positioning AAON to capture market share and enhance pricing power despite broader industry softness.
AAON targets higher margins as Memphis ramps
The Memphis facility, acquired eight months ago, is currently a cost drag but is expected to double Basics manufacturing capacity and become accretive as volume ramps for major orders like Applied Digital in 2026. Management reiterated a long-term company margin target of 32%-35% and expects full ERP implementation by year-end 2026.
“By year-end, this facility will significantly expand the capacity of Basics branded manufacturing by nearly doubling its square footage. At that point, we’ll be well-positioned operationally to fully capitalize on the robust demand for the data center market. … We anticipate full implementation will be complete by year-end 2026 … factoring in subsequent ERP rollouts, particularly in the quarter when we go live in Tulsa, we expect to achieve double-digit year-over-year growth in margin improvement for the year, trending towards our long-term target of 32% to 35%.”
— Matt Tobolski, CEO and President
Assuming successful ERP stabilization and Memphis scaling, AAON is positioned to convert strong backlog and order flow into structurally higher margins and accelerated profit growth beyond 2025, mitigating the current year’s transitory production and efficiency headwinds.
Looking Ahead
Management now guides for full-year sales growth in the low teens, gross margin of 28%-29% for the full year, adjusted SG&A (selling, general, and administrative expenses) ratio of 16.5%-17%, and capital expenditures of $220 million. Sequential growth in sales and margins is expected in the third and fourth quarters, with price increases (3%) and a 6% tariff surcharge set to lift gross margin more meaningfully by the fourth quarter. ERP impacts are expected to moderate but not fully normalize until the end of 2026, with the long-term consolidated gross margin target remaining 32%-35% upon completion of ERP rollout and Memphis ramp.
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