The Aaon Group (AAON) Q3 2026 earnings review
Aaon raises its sales outlook, but restates first-half results
The Aaon Group, which makes commercial rooftop and data-center cooling equipment, shipped record volume while restating its first-half books. Third-quarter revenue rose 84% to $707 million and profit per share more than doubled as liquid-cooling factories ramped up. Chief executive Matt Tobolski raised the full-year sales outlook again, though by our math the plan points to revenue dipping 7% in the fourth quarter from the third.
| Revenue | $707.4M +84.1% from a year ago |
|---|---|
| Gross margin | 26.7% +0.6 points from restated Q2 |
| Total order backlog | $1.85B -5.4% from restated Q2 |
| Full-year sales growth outlook | Raised to 72%–75% prior 55%–60% |
⚖️ Verdict: 🟢 Bullish
The story got better because factory output and coil repricing cleared what the old full-year plan pointed to, lifting operating cash flow and paying down debt. Two cautions temper that progress: management identified a material weakness in internal controls that forced a first-half restatement, and data-center backlog shrank for a second straight quarter.
The question now is whether data-center orders will refill the backlog fast enough to keep factories growing in 2027, and whether the accounting errors are contained. Either the recent backlog drop is normal timing between giant data-center awards, or customers are digesting past orders as upfront down payments drain. Fourth-quarter backlog and the year-end audit will settle both.
🐂 Bull Case
Data-Center Output Drove Another Outlook Raise
The Aaon Group makes heating and cooling equipment through two brands: AAON for commercial buildings and BASX for data centers and cleanrooms. Chief executive Matt Tobolski has spent the past two years expanding factory space to work through a $1.9 billion order backlog.
Those factories turned out far more equipment than the prior full-year outlook implied. By our math, the old plan pointed to $246–282 million of BASX sales per quarter in the second half, but BASX shipped $397.2 million in the third quarter alone.
- BASX-branded sales: $397.2 million, up 218.3% from a year ago and 56.1% of total company revenue
- Liquid cooling sales (equipment that cools servers with fluid inside the AAON Coil Products division): $165.5 million, up 255.6%
- AAON-branded rooftop unit sales: $310.2 million, up 19.6% despite "softer conditions in the broader commercial HVAC market"
Because factory output cleared the old target by so much, management raised its full-year sales growth plan by 16 percentage points at the middle of the range, to 72%–75%. Even so, by our math the new outlook implies fourth-quarter revenue of about $660 million, down 7% from the third quarter.
What to watch: fourth-quarter BASX shipments against that implied $660 million company total. Another quarter near $400 million would show management's fourth-quarter plan is cautious again.
Coil Repricing and Overhead Discipline Lifted Margins
For four quarters, management had cut or held down its full-year gross margin target while waiting for higher-priced orders to reach the factory floor. In the third quarter, those repriced orders arrived and operating margin rose 2.8 percentage points from a year ago to 14.1%.
Gross margin in the AAON Coil Products segment — the Texas division that builds cooling coils and liquid-cooling units — jumped to 25.8%, up from 19.1% in the restated second quarter and 11.0% a year ago. The company credited "repricing of existing backlog to mitigate inflationary and other price/cost headwinds" along with higher factory volume. At the same time, selling and administrative overhead fell 4.0 percentage points of revenue from a year ago to 12.5%, because sales grew much faster than office costs.
What to watch: consolidated gross margin in the fourth quarter, which by our math needs to reach 26.3% to hit the full-year outlook of about 26%. Holding above 26.7% would confirm that higher-priced backlog is outrunning new-factory startup costs.
🐻 Bear Case
Accounting Errors Forced a First-Half Restatement
A standing pillar of the bull case was that new finance chief Andy Cheung, who joined earlier this year, was upgrading financial discipline. Instead, during the third-quarter close, management found a material weakness in internal control over financial reporting and restated both the first and second quarters of 2026.
The company said it found "certain errors related to revenue recognition and accounting for software subscriptions" across its AAON Coil Products and BASX divisions. The restatement lowered first-quarter revenue by $4.4 million and raised second-quarter revenue by $15.2 million. Because every dollar of those revenue adjustments flowed straight to gross profit without any change to cost of sales, first-half gross margin moved up by 0.71 percentage points — shifting second-quarter gross margin from 24.3% to 26.1%.
That accounting revision, rather than factory improvements alone, did most of the work in lifting first-half margins toward the full-year target. It also shows that internal controls did not keep pace with custom data-center contracts that recognize revenue over time.
What to watch: Item 4 of the third-quarter 10-Q and the year-end 10-K audit opinion. Until the material weakness is remediated, reported quarterly margins in custom data-center divisions carry revision risk.
Data-Center Backlog Shrank as Down Payments Drained
Management said booking activity remained solid and attributed a sequential dip in total backlog to "accelerated backlog conversion into record revenue and the inherent timing variability of large BASX project awards". Backlog is the total value of unshipped customer orders.
Yet BASX-branded backlog fell for a second straight quarter, dropping $64.7 million from the restated June figure to $1,355.2 million. By our math, adding that change to the $397.2 million of BASX shipments yields about $332.5 million of new BASX orders in the quarter — a book-to-bill ratio (new orders divided by shipments) of 0.84, up from about 0.45 in the second quarter but still below 1.0.
- BASX-branded backlog: $1,355.2 million, down 4.6% from last quarter (up 51.1% from a year ago)
- AAON-branded backlog: $499.3 million, down 7.6% from last quarter (implied orders of $269.1 million, or 0.87 times shipments)
- Customer contract liabilities (upfront down payments on orders): $5.7 million, down from $12.8 million in June and $80.7 million at year-end
Two straight quarters of shrinking data-center backlog and a 93% year-to-date drop in customer down payments show that factories are shipping existing projects faster than customers are placing deposit-backed new ones.
What to watch: fourth-quarter BASX-branded backlog and contract liabilities at year-end. A third sequential drop in BASX backlog would mean 2027 data-center growth must slow toward the pace of new orders.
Memphis Factory Costs Still Weigh on Oklahoma
While soft commercial construction conditions weighed on the broader HVAC industry, The Aaon Group's biggest cost drag remained its own new 787,000-square-foot factory in Memphis, Tennessee. The company records Memphis facility overhead inside its AAON Oklahoma division while shipping BASX data-center equipment from the plant.
In the third quarter, Memphis overhead charged to AAON Oklahoma rose to $20.7 million, up from $18.1 million in the second quarter and $4.5 million a year ago. Because that charge reached 7.3% of segment sales, AAON Oklahoma's reported gross margin fell 7.5 percentage points from a year ago to 25.5% (32.8% excluding Memphis overhead).
What to watch: Memphis overhead dollars in the fourth quarter. Until that cost stops rising faster than Oklahoma sales, reported profitability in the core rooftop business will stay depressed.
Risks this quarter didn't answer
Four standing concerns from prior quarters could not be read from the earnings release because their disclosures live in the quarterly filing or conference call.
- Standalone Memphis revenue and margin: management previously promised clearer disclosure of Memphis plant economics, which was not in the release.
- Warranty expense and claims: cash flow shows extended-warranty liabilities up $10.7 million year-to-date versus $0.4 million a year ago, and the 10-Q warranty footnote will show quarterly claims.
- ERP software rollouts at Redmond and Tulsa: no schedule update appeared in the release.
- Customer concentration and air-side cooling mix: require the 10-Q concentration footnote and call commentary.
💲 Other KPIs
Cash generated from operations reached $146.9 million in the first nine months, compared with an $18.8 million cash drain a year ago. By our math, third-quarter operating cash flow was $91.9 million, which funded $40.8 million of factory spending and paid down the revolving credit line by $48.3 million to $386.7 million.
Goods and raw materials in stock rose to $376.0 million at the end of September, up 13.5% from June's $331.3 million and up 44.0% from $261.2 million at year-end. That build absorbed $116.6 million of cash over the first nine months, though inventory grew slower than the 84.1% rise in third-quarter sales.
The average number of diluted shares rose 0.7% from a year ago to 83.6 million, and held roughly steady against the second quarter's 83.7 million. The HVAC maker spent nothing on open-market share buybacks in the first nine months as it directed cash toward factory construction and debt paydown.
🔮 Guidance
Raised. Management lifted its full-year sales growth plan by 16 percentage points at the middle of the range, to about $2.50 billion. By our math, that leaves about $660 million of sales for the fourth quarter — up 55.6% from a year ago, but down 6.7% from the third quarter. It is the third straight raise this year: +23.5 points, +15.0 points, +16.0 points.
Raised to the top of the prior range. After three consecutive cuts earlier in the cycle (from 30.0% at the middle of the range to 27.5% to 25.5%), the company nudged the full-year target to about 26%. With the first nine months restated to 25.9%, by our math the plan implies a fourth-quarter gross margin of about 26.3%, down slightly from 26.7% in the third quarter.
Improved to the favorable end of the prior range. Overhead costs are now planned at about 13% of revenue for the full year, down from the 13.5% middle of the old range and 16.0% at the start of the year. By our math, that implies fourth-quarter overhead of about 12.5% of sales, matching the third quarter.
Tightened to the top of the prior range. Non-cash factory wear-and-tear is set at about $100 million for the year, in line with the $95–100 million range held since the start of the year. With $73.9 million recorded through nine months, by our math the fourth quarter will carry about $26.1 million, compared with $27.1 million in the third quarter.
❓ Key Questions
What caused the revenue recognition errors in Q1 and Q2?
The restatement shifted millions of dollars of revenue and gross profit between quarters in AAON Coil Products and BASX without changing cost of sales. Investors need to know what contract rules were misapplied and when the material weakness will be fixed.
Why have customer down payments fallen 93% this year?
Contract liabilities dropped from $80.7 million at year-end to $5.7 million in September while BASX backlog shrank for a second quarter. Management has not explained whether newer data-center orders carry smaller upfront deposits or if large upfront-payment awards have paused.
When will management disclose standalone Memphis plant margins?
Charging $20.7 million of Memphis overhead to AAON Oklahoma while booking the plant's data-center revenue in BASX distorts both segments. Finance chief Andy Cheung previously promised clearer disclosure of Memphis economics, which did not appear in the release.
Is the 32%–35% gross margin target for 2027 still active?
Even after the first-half restatement and third-quarter coil repricing, consolidated gross margin sits at 26.7% and the fourth quarter is implied at 26.3% by our math. Management has not said whether its old 2027 Investor Day margin target still holds.