AAON (AAON) Q2 2026 earnings review
Triple-Digit Revenue Growth Masks Margin Growing Pains
AAON delivered a staggering 101% YoY revenue growth in Q2, driven by insatiable demand for data center solutions and rapidly accelerating manufacturing throughput. However, the cost of this hyper-growth is evident in the gross margin, which contracted to 24.3% from 26.6% a year ago. Management is deliberately sacrificing near-term profitability by aggressively utilizing outsourced components and absorbing ramp-up costs at the Memphis facility to capture market share. Consequently, FY26 sales guidance was raised significantly to 55-60%, while gross margin guidance was lowered to 25-26%. The volume surge drove a massive 570 bps improvement in SG&A leverage, allowing EPS to skyrocket 258% despite the gross margin pressure.
🐂 Bull Case
Net sales doubled YoY, completely outperforming historical industrial manufacturing trajectories. Operating income surged 192% as the company achieved massive overhead leverage (SG&A fell to 13.3% of sales).
The BASX segment is capturing incredible market share. Sales grew 220% YoY, proving the company's highly engineered liquid and airside cooling solutions are winning in the AI data center boom.
🐻 Bear Case
Gross margin guidance was cut to 25-26% for FY26. Heavy reliance on outsourced components and Memphis facility ramp costs are punishing unit economics, making the company highly dependent on volume to drive profit.
AAON Coil Products saw gross margins collapse to 16.0% despite a 150% jump in sales, reflecting severe inflationary cost pressures, high freight, and poor price-cost timing in the segment.
⚖️ Verdict: 🟢
Bullish. While margin degradation is a valid concern, it is a deliberate, strategic trade-off. Generating 101% revenue growth and 258% EPS growth while capturing massive data center market share heavily outweighs near-term unit cost inefficiencies.
Key Themes
BASX Segment and Data Center Demand Explosion
The BASX brand continues to be AAON's primary growth engine. Segment net sales reached a record $218.0 million, an Accelerating growth rate of 220.7% YoY. BASX backlog remains astronomical at $1.43 billion, up 185.4% YoY. This confirms AAON is successfully capitalizing on the AI data center build-out, rapidly expanding beyond its historical commercial HVAC roots.
Outsourcing and Inflation Crushing Coil Margins
AAON Coil Products segment sales grew 150.9% (driven by $126.6M in BASX liquid cooling sales), but segment gross profit margin dropped to 16.0% from 17.5% YoY, and is Decelerating sharply from 24.1% in 26Q1. Management cited outsourcing-related costs, freight pressure, and price-cost timing as the culprits. The company must prove it can fulfill liquid cooling demand profitably, not just at high volumes.
Massive SG&A Leverage
Because AAON is pushing triple-digit top-line growth through its system, it is achieving incredible operating leverage. SG&A expenses as a percent of sales plunged 570 basis points YoY to 13.3%. This is the core mechanism allowing AAON to deliver 192% operating income growth despite contracting gross margins.
Backlog Conversion Turning the Corner
For the first time in several quarters, total backlog saw a Reversing trend sequentially, dropping 7.4% from 26Q1 to $1.97 billion. Rather than signaling weak demand, management correctly framed this as accelerated backlog conversion. Throughput is finally catching up to order intake, enabled by the Memphis and Longview capacity expansions.
Memphis Facility Overhead Burden
The AAON Oklahoma segment absorbed $18.1 million of overhead expenses associated with the Memphis facility during Q2, up from just $3.0 million a year ago. Without these costs, the segment's margin would have expanded to 31.2% instead of the reported 24.3%. Getting Memphis to full utilization is critical to repairing the consolidated gross margin profile.
Other KPIs
Reversing. Year-to-date operating cash flow improved significantly to $55.0 million, compared to a cash burn of $31.0 million in the first half of 2025. This marks a critical inflection point as the heavy working capital investments required to launch the Memphis facility and support the initial data center ramp begin to normalize and convert into cash.
Stable YoY (up 98.0%), but Decelerating sequentially (down 7.4% from Q1). The slight sequential decline is a positive indicator of improved factory execution, reflecting the company's ability to ship product faster than the inherent timing variability of large BASX project awards.
Guidance
Accelerating significantly. Management raised the full-year outlook from the prior expectation of 40%-45%. Given the 101% growth in Q2, achieving a 57.5% midpoint implies continued robust throughput in the second half of the year, driven by the massive $2.0B backlog.
Decelerating. Lowered from the previous target of 27%-28%. This formalizes the margin sacrifice strategy. The midpoint of 25.5% suggests modest sequential margin improvement in H2 2026 (relative to Q2's 24.3%) as internal capacity replaces temporary outsourcing.
Accelerating efficiency. Improved (lowered) from the prior outlook of 14%-15%. This reflects strong confidence in overhead cost control and operating leverage as revenue scales.
Key Questions
Timeline for Outsourcing Reduction
With gross margin guidance lowered to 25-26% due to strategic outsourcing, what is the exact timeline and capacity utilization threshold at Memphis required to bring this manufacturing back in-house and return to historical 28-30% gross margins?
AAON Coil Products Profitability
The AAON Coil Products segment saw margins drop to 16.0% despite massive liquid cooling volume. Are liquid cooling contracts inherently lower margin than traditional airside equipment, or is this purely a temporary price-cost and freight anomaly?
BASX Backlog Concentration
BASX backlog is up 185% year-over-year. How concentrated is this backlog among top hyperscale or colocation customers, and what cancellation or pushout protections are embedded in these contracts if AI data center build-outs slow?