AAON Stock

AAON, Inc. is a lead producer in heating, ventilation, and air conditioning (HVAC) systems for commercial and industrial indoor environments. The company engages in the engineering, manufacturing, and selling of premium heating, ventilation, and air conditioning equipment consisting primarily of semi-custom and custom rooftop units, data center cooling solutions, cleanroom systems, packaged outdoor mechanical rooms, air handling units, makeup air units, energy recovery units, condensing units, geothermal/water-source heat pumps, coils, and controls. The company’s operating subsidiaries include AAON, Inc. (AAON Oklahoma), AAON Coil Products, Inc. (AAON Coil Products), and BASX, Inc. (BASX).

Segments

The company conducts its business through three business segments: AAON Oklahoma, AAON Coil Products, and BASX.

AAON Oklahoma: AAON Oklahoma engineers, manufactures, and sells, semi-custom, and custom HVAC systems, designs and manufactures controls solutions, and sells retail parts to customers through retail part stores and online. AAON Oklahoma includes the operations of its Tulsa, OK and Parkville, Missouri (MO) manufacturing facilities, two retail locations, and the Norman Asbjornson Innovation Center (NAIC) research and development laboratory accredited by the Air Movement and Control Association International, Inc. (AMCA).

With the NAIC, a world-class research and development (R&D) laboratory in Tulsa, Oklahoma (OK), the company’s products are continuously tested under a variety of extreme environmental conditions to ensure they deliver the ultimate performance, efficiency, and value.

Also located in Tulsa, OK, the company’s cutting-edge Customer Exploration Center showcases the engineering, design attributes and premium build quality of its equipment side-by-side the market alternatives.

AAON Coil Products: AAON Coil Products engineers and manufactures a selection of the company’s semi-custom, and custom HVAC systems, as well as a variety of heating and cooling coils to be used in HVAC systems, mostly for the benefit of AAON Oklahoma, AAON Coil Products, and BASX. AAON Coil Products consists of operations at its Longview, Texas (TX) manufacturing facilities.

BASX: BASX engineers, manufactures, and sells an array of custom, high-performance cooling solutions for the rapidly growing hyperscale data center market, ventilation solutions for cleanroom environments in the bio-pharmaceutical, semiconductor, medical and agriculture markets, and highly custom, air handlers and modular solutions for a vast array of markets. BASX consists of operations at the company’s Redmond, Oregon (OR) manufacturing facilities.

Business and Marketing Strategy

The company’s products serve the commercial, industrial, data center, and cleanroom markets within the HVAC equipment industry. The company’s business strategy involves mass semi-customization leveraging flexible computer-aided manufacturing systems to produce highly configurable equipment. The company differentiates from other HVAC manufacturers by combining the low unit costs of mass production processes with the flexibility of individual customization.

Through a collaborative effort with the company’s network of independent sales representatives, it engineers and manufactures products and systems that best serve the buyer's unique needs and applications.

The company’s go-to-market strategy is centered around customers and markets that demand HVAC equipment with extraordinary performance and durability, greater energy efficiency, and best overall value. The company manufactures equipment with more configurability than other standard offerings found in the HVAC equipment industry.

AAON has been dedicated to manufacturing and product leadership with innovation through research and development with a specific emphasis on energy performance, durability, efficiency, and indoor air quality.

As a result of its strategy to engineer and manufacture innovative HVAC products of the highest performance, efficiency, and value, the company is naturally committed to meeting regulatory and certification standards of the relevant standard setting bodies, including the Air-Conditioning, Heating, and Refrigeration Institute (AHRI); the American National Standards Institute (ANSI); American Society of Heating, Refrigeration and Air-Conditioning Engineers (ASHRAE); the AMCA and the International Organization for Standardization (ISO).

Products - AAON Oklahoma and AAON Coil Products

The company’s rooftop and condensing units are primarily installed on commercial or industrial structures. The company’s air handling units, self-contained units, geothermal/water-source heat pumps, and coils are suitable for all sizes of commercial and industrial buildings.

The size of these markets is determined primarily by the number of commercial and industrial building completions and replacement demand from existing buildings. The replacement market consists of products installed to replace existing units/components that are worn or damaged and products to upgrade certain components, such as low leakage dampers, high efficiency heat exchangers and modern controls components.

The commercial and industrial new construction markets are subject to cyclical fluctuations in that they generally lag behind the housing market. The housing market, in turn, is influenced by cyclical factors such as interest rates, inflation, consumer spending habits, employment rates, the state of the economy and other macroeconomic factors. When new construction is down, the company emphasizes the replacement market.

The company purchases certain components, fabricate sheet metal and tubing and then assemble and test the finished products. The company’s primary finished product consists of a single unit system that generates heating and cooling in a self-contained cabinet, referred to in the industry as unitary product. The company’s other finished products are coils, air handling units, condensing units, makeup air units, energy recovery units, rooftop units, geothermal/water-source heat pumps, and controls.

The company offers three groups of rooftop units: the RQ Series, consisting of five cooling sizes ranging from two to six tons; the RN Series, offered in 28 cooling sizes ranging from six to 140 tons; and the RZ Series, which is offered in 15 cooling sizes ranging from 45 to 261 tons.

When configured as Air-Source Heat Pumps (ASHP), the RQ and RN Series (2 to 50 tons), are capable of operating in ambient outside temperatures as low as zero degrees Fahrenheit. Known as the AAON Alpha Class, the company’s omni-climate ASHPs are a critical solution that meet the increasing demand for building decarbonization. Utilizing variable speed technology, these innovative ASHPs provide energy-efficient heating and cooling throughout the year in virtually any climate.

In addition to its legendary RTUs, the company offers the SA, SB and M2 Series as indoor packaged, water-cooled or geothermal/water-source heat pump self-contained units with cooling capacities of three to 70 tons.

The company’s condensing unit, the CF Series, is available from two to 70 tons and can be configured as an Alpha Class ASHP.

The company’s air handling units consist of the indoor H3 and V3 Series and the modular M2 Series, as well as air handling unit configurations of the RQ, RN, RZ, and SA Series units.

The company’s energy recovery option applicable to its RQ, RN, RZ, and SB units, as well as its H3, V3, and M2 Series air handling units, responds to the U.S. Clean Air Act mandate to increase fresh air in commercial structures. The company’s products are designed to compete on the higher quality end of standardized products.

The company’s RN, RQ, M2, and SB Series, are AHRI certified in accordance with ANSI/AHRI/ASHRAE/ISO 13256.

The company’s unitary products (RQ and RN Series) are certified with AHRI and the US Department of Energy to ANSI/AHRI 210/240 up to five tons capacity and ANSI/AHRI 340/360 up to 63 tons capacity.

Performance characteristics of the company’s products range in cooling capacity from two to 261 tons and in heating capacity from 7,200 to 4,500,000 British Thermal Units (BTUs). Many of the company’s products far exceed these minimum standards and are among the highest efficiency products currently available in the market.

A typical commercial building installation requires one ton of air conditioning for every 300-400 square feet or, for a 100,000 square foot building, 250 tons of air conditioning, which can involve multiple units.

The company’s packaged RTUs with two stage or variable speed compressors are optimized with high efficiency evaporator and condenser coils and variable speed fans, leading to an AHRI Certified performance up to 20.3 seasonal energy efficiency ratio (SEER) and 22.5 integrated energy efficiency ratio (IEER). AAON H3/V3 Series energy recovery wheel air handling units provide energy efficient 100% outside air ventilation by recovering energy that would otherwise be exhausted from a building.

In addition to the equipment it manufactures, the company designs and produces high-performance controls solutions that enhances its equipment’s unique features and capabilities. The company’s controls division provides factory-developed and tested control options for Variable Air Volume, Make-Up Air, Single Zone VAV, Constant Volume, and Zoning systems associated with its products and other HVAC related equipment.

The company offers several controls options: the Orion Controller, factory installed customer provided controls, and terminal block for field installed controls. Most of its controls are Underwriters Laboratories category ZPVI2 compliant and BACnet Testing Laboratories certified which ensures its products meet internationally recognized standards for safety, traceability, conformance, and production quality. The company’s economizer function is California Title 24 certified to minimize energy consumption. The company’s proven sequences of operation optimize the performance of its HVAC units.

Out of the box, the company’s controls are user-friendly and configurable to provide a variety of HVAC unit application options, in addition, the company is able to customize its controls to meet customers’ unique requirements.

Products – BASX

The products BASX manufactures are highly engineered and customized products, fully complementing its legacy business. BASX data center cooling solutions are focused on providing highly configurable, purpose-built equipment with a focus on efficiency, speed of deployment, and quality. High-performance air-cooled chiller solutions are provided with indirect airside economization and optional adiabatic assisted cooling, and is designed to integrate with high performance computing systems requiring direct to chip cooling. White space process cooling solutions include fan coil walls, computer room air handling (CRAH) units, overhead fan coils, in-row coolers, and chilled water air handlers. Packaged solutions include coupled economizing chillers with integrated air handling units, direct evaporative coolers, and packaged direct expansion (DX) solutions with airside economizers.

BASX cleanroom products are built to provide environmental control serving critical processes and high-fidelity control for precise industry requirements. Process cooling solutions include recirculation air handling units and make up air handling units, including integration of piping systems and controls. Environmental control solutions include modular cleanroom environments, fan filter units, filtered ceiling grids with integral flush mount lighting, pressurized plenums with integral ceiling grids, and hospital surgical suites.

BASX custom air handling products are primarily used in commercial, industrial, healthcare, and institutional facilities employing chilled water cooling, packaged direct expansion, heating hot water, indirect gas direct heat, humidification, dehumidification, filtration, and integrated controls. BASX manufactures plenum fans for integration into air handling units, as well as for replacement applications. BASX also offers integrated sound performance solutions.

Air Quality Products

The ASHRAE, a professional association with a goal of advancing HVAC systems designs and construction, established an Epidemic Task Force in 2020 and determined several recommendations to mitigate the spread of the virus, including humidity control, air filtration, increased outdoor air ventilation, and air disinfection.

Humidity control - The company continues to lead the market in developing energy efficient humidity control with the use of variable capacity compressors and modulating hot gas reheat. Designing HVAC systems with superior humidity control allows building management to maintain ASHRAE’s recommended ambient relative humidity levels of 40%-60%, the ideal level to inactivate viruses in the air and on surfaces.

Air Filtration - The company standardized a design that uses a backward curved fan wheel, which can accommodate higher airflow and static pressure required for the ASHRAE recommended MERV 13 filtration, the minimum filter level for virus mitigation, with very little reconfiguration. Prior to 2020, a vast majority of commercial buildings used filtration levels of MERV 4 to MERV 8, which has always been acceptable for filtering out typical particulates in the air stream.

Outdoor Air Ventilation - The company’s innovative use of energy recovery wheels and energy recovery plates combined with its superior humidity control design can help building management follow outdoor ventilation air recommendations while limiting an increase of energy usage and maintaining recommended humidity levels. AAON has been the leader in Dedicated Outdoor Air Systems (DOAS) for many years.

On October 31st, 2022, the US Department of Energy (DOE) released their final ruling concerning DX-DOAS. These are systems that condition primarily fresh outside air streams to maintain space comfort and air quality.

Starting May 1, 2024, the DOE will begin regulating the efficiency of dedicated outdoor air units separately from other comfort cooling systems.

Air Disinfection - The company’s basic design characteristics allow for an easy installation of ultraviolet lighting equipment. In addition to this equipment offered as options in new units sold, its basic design characteristics allow for easy installation in units already used in the field.

Overall, the company is well positioned to accommodate the heightened demand for features that can help mitigate virus transmission and improve indoor air quality. The features that ASHRAE recommends require premium designs and configurations that are standard in its units. As a result, the company is able to incorporate air quality features into its units at a minimal price premium and with no delivery delay.

Representatives

To support and service its customers and the ultimate consumer, the company provides parts availability through its Representatives' sales offices, as well as its two Tulsa, Oklahoma operated retail parts stores, to serve the local markets.

Warranties

The company’s product warranty policy is the earlier of one year from the date of first use or 18 months from date of shipment for parts only, including controls; 18 months for data center cooling solutions and cleanroom systems; five years for compressors (if applicable); 15 years on aluminized steel gas-fired heat exchangers (if applicable); 25 years on stainless steel heat exchangers (if applicable); and ten years on gas-fired heat exchangers in its historical RL products (if applicable). The company’s warranty policy for the RQ series covers parts for two years from date of unit shipment. The company’s warranty policy for the WH and WV Series geothermal/water-source heat pumps covers parts for five years from the date of installation.

The company also sells extended warranties on parts for various lengths of time ranging from six months to ten years. Revenue for these separately priced warranties is deferred and recognized on a straight-line basis over the separately priced warranty period.

Major Customers

For the year ended December 31, 2023, Texas AirSystems accounted for approximately 13.8% of the company’s sales. Through portfolio groups, Meriton has an ownership interest in Texas AirSystems and certain other of the company’s sales representatives. The aggregate sales percentages through Meriton-affiliated groups that are in addition to Texas AirSystems’ sales for the year-ended December 31, 2023, accounted for an additional 2.3%. Two other similar groups, Ambient and Hobbs/Insight, share common ownership of some of the company’s other sales representatives through portfolio groups and for the year-ended December 31, 2023, aggregate sales through their portfolio groups accounted for approximately 11.5% of its sales. Sales through the portfolio groups of either Ambient or Hobbs/Insight did not account for 10% or more of the company’s sales for any year-ended prior to December 31, 2023.

Competition

The company’s AAON Oklahoma and AAON Coil Products product offerings primarily compete with Lennox (Lennox International, Inc.), Trane (Trane Technologies plc), York International (Johnson Controls International PLC), Carrier (Carrier Global Corporation), and Daikin (Daikin Industries). Our BASX product offerings primarily compete with Vertiv (Vertiv Holdings Co.), STULZ (STULZ Air Technology Systems, Inc.), Munters, Silent Aire (Johnson Controls International PLC), Nortek (Nortek Air Solutions), and Engineered Air.

Research and Development

The company’s R&D expenses incurred were approximately $43.7 million in 2023.

Patents, Trademarks, Licenses, and Concessions

The company holds several patents that relate to the design and use of its product. The company owns certain trademarks it considers important in the marketing of its products and services, and it protects its marks through national registrations and common law rights. The company’s patents have legal terms of 20 years with expiration dates ranging from 2023 to 2039. The company’s trademarks, certain of which are material to its business, are registered or otherwise legally protected in the U.S.

Seasonality

Historically, sales of the company’s products were moderately seasonal with the peak period being May-October of each year due to timing of construction projects being directly related to warmer weather. However, in recent years, given the increase in demand of its products and increase in its backlog, sales have become more constant throughout the year (year ended December 31, 2023).

Environmental & Regulatory Matters

Laws concerning the environment that affect or could affect the company’s operations include, among others, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, regulations promulgated under these Acts and any other federal, state or local laws or regulations governing environmental matters

History

AAON, Inc. was founded in 1987. The company, a Nevada corporation, was incorporated in 1987.