AAON's Q3 Profit Plunges 41% Amid Soaring Costs, Tariffs

TL;DR

**AAON's revenue growth is a mirage; costs are eating profits alive, making it a sell until they fix their margins.**

AI Summary

AAON, Inc. reported a significant decline in net income for both the three and nine months ended September 30, 2025, despite an increase in net sales. For the three months, net income decreased by 41.5% to $30.78 million from $52.63 million in the prior year, while net sales rose 17.4% to $384.24 million from $327.25 million. Over the nine-month period, net income plummeted 47.5% to $75.56 million from $143.87 million, even as net sales increased 12.7% to $1.02 billion from $902.92 million. This profit erosion was primarily driven by a substantial increase in cost of sales, which grew 30.2% for the quarter and 27.2% for the nine months, and a sharp rise in selling, general and administrative expenses, up 30.0% for the quarter and 24.2% for the nine months. Interest expense also surged, increasing over 370% for both periods. The company implemented a 6.0% tariff surcharge on AAON branded orders starting April 1, 2025, to mitigate rising material costs due to new U.S. tariffs, but noted the surcharge had not yet fully covered these additional costs by Q3 2025. Capital expenditures increased to $128.07 million for the nine months, up from $99.37 million in the prior year, indicating continued investment in property, plant, and equipment.

Why It Matters

This filing reveals AAON is struggling to translate increased sales into profit, a critical concern for investors. The significant drop in net income, despite higher revenue, suggests severe margin compression driven by rising costs of sales, SG&A, and interest expenses. The company's inability to fully offset tariff impacts with a 6.0% surcharge indicates pricing power challenges or rapidly escalating input costs, potentially impacting future profitability and competitive positioning against peers who might manage these pressures more effectively. For employees, sustained profit declines could eventually impact wage growth or job security, while customers might face continued price increases. The broader market will watch if these cost pressures are industry-wide or specific to AAON's operational inefficiencies.

Risk Assessment

Risk Level: high — The risk level is high due to a 41.5% decrease in net income for the three months ended September 30, 2025, and a 47.5% decrease for the nine months, despite increased net sales. This significant profit erosion is driven by a 30.2% increase in cost of sales for the quarter and a 373% increase in interest expense, net, for the same period, indicating severe margin pressure and rising debt costs.

Analyst Insight

Investors should consider reducing their exposure to AAON given the sharp decline in net income and significant cost pressures. Monitor future filings closely for signs that the 6.0% tariff surcharge is effectively covering increased costs and if operational efficiencies are improving gross and operating margins. Await evidence of sustained profit recovery before considering new positions.

Financial Highlights

debt To Equity

0.42

revenue

$1.02B

operating Margin

10.05%

total Assets

$1.53B

total Debt

$360.14M

net Income

$75.56M

eps

$0.91

gross Margin

27.11%

cash Position

$1.04M

revenue Growth

+12.7%

Key Numbers

• $384.24M — Net sales (Q3 2025) (Increased 17.4% from $327.25 million in Q3 2024)
• $30.78M — Net income (Q3 2025) (Decreased 41.5% from $52.63 million in Q3 2024)
• $1.02B — Net sales (9 months 2025) (Increased 12.7% from $902.92 million in 9 months 2024)
• $75.56M — Net income (9 months 2025) (Decreased 47.5% from $143.87 million in 9 months 2024)
• $277.38M — Cost of sales (Q3 2025) (Increased 30.2% from $213.09 million in Q3 2024)
• $63.23M — SG&A expenses (Q3 2025) (Increased 30.0% from $48.64 million in Q3 2024)
• $5.15M — Interest expense, net (Q3 2025) (Increased 372.3% from $1.09 million in Q3 2024)
• 6.0% — Tariff surcharge (Instituted on AAON branded orders starting April 1, 2025)
• $128.07M — Capital expenditures (9 months 2025) (Increased from $99.37 million in 9 months 2024)
• $360.14M — Long-term debt (Sept 30, 2025) (Increased from $138.89 million at Dec 31, 2024)

Key Players & Entities

• AAON, Inc. (company) — Registrant and parent company
• AAON Oklahoma (company) — Operating subsidiary of AAON, Inc.
• AAON Coil Products, Inc. (company) — Operating subsidiary of AAON, Inc.
• BASX, Inc. (company) — Operating subsidiary of AAON, Inc.
• U.S. Administration (regulator) — Enacting tariffs affecting imported goods
• NASDAQ (regulator) — Exchange where AAON Common Stock is registered
• SEC (regulator) — Securities and Exchange Commission
• FASB (regulator) — Financial Accounting Standards Board

FAQ

Risk Factors

• Rising Costs Eroding Profitability [high — financial]: Net income declined significantly by 41.5% in Q3 2025 and 47.5% for the nine months ended September 30, 2025, despite increased net sales. This was driven by a substantial 30.2% increase in cost of sales for the quarter and a 27.2% increase for the nine months, alongside a 30.0% rise in SG&A expenses for the quarter and 24.2% for the nine months. The company's implemented 6.0% tariff surcharge has not yet fully offset these rising material costs.
• Surging Interest Expense [high — financial]: Interest expense, net, increased by over 370% for both the three and nine months ended September 30, 2025. This dramatic rise, from $1.09 million to $5.15 million in Q3 and from $1.697 million to $11.964 million for the nine months, significantly impacted net income.
• Increased Leverage [medium — financial]: Long-term debt has more than doubled, increasing from $138.89 million at December 31, 2024, to $360.14 million as of September 30, 2025. This substantial increase in debt raises financial risk and could impact future profitability due to higher interest payments.
• Supply Chain and Tariff Impacts [medium — operational]: The company implemented a 6.0% tariff surcharge on AAON branded orders starting April 1, 2025, to mitigate rising material costs due to new U.S. tariffs. However, the surcharge had not yet fully covered these additional costs by Q3 2025, indicating ongoing pressure on margins from supply chain and trade policy changes.
• Significant Capital Expenditures [medium — operational]: Capital expenditures for the nine months ended September 30, 2025, increased to $128.07 million from $99.37 million in the prior year. While this indicates investment in property, plant, and equipment, it also represents a significant outflow of cash that could affect liquidity.

Industry Context

The HVAC equipment manufacturing industry is characterized by cyclical demand tied to new construction and renovation, as well as increasing regulatory focus on energy efficiency and emissions. Companies like AAON face competition from both large, diversified players and smaller, specialized manufacturers. Recent trends include a push towards smart and connected systems, and the impact of global supply chain disruptions and tariffs on material costs.

Regulatory Implications

The company is subject to U.S. tariffs, which have directly impacted material costs and necessitated the implementation of a surcharge. Changes in environmental regulations regarding energy efficiency and refrigerants could require significant R&D investment and product redesigns, potentially affecting future costs and competitiveness.

What Investors Should Do

1. Monitor margin trends closely
2. Analyze debt levels and interest coverage
3. Evaluate the effectiveness of the tariff surcharge
4. Assess capital expenditure returns

Key Dates

• 2025-04-01: Implementation of 6.0% tariff surcharge — Attempt to mitigate rising material costs due to new U.S. tariffs, but has not yet fully covered these costs.

Glossary

Cost of sales

The direct costs attributable to the production or purchase of the goods sold by a company. (A significant increase in cost of sales is the primary driver of the decline in net income, despite rising sales.)

Selling, general and administrative expenses (SG&A)

Expenses a business incurs that are not directly related to the production or acquisition of goods and services. (A sharp rise in SG&A expenses also contributed to the erosion of profit margins.)

Interest expense, net

The cost incurred by an entity for borrowed funds, net of any interest income. (A substantial increase in net interest expense significantly impacted the company's bottom line.)

Contract assets

Represents the entity's right to consideration in exchange for performance obligations that have been transferred to a customer. (An increase in contract assets suggests growing revenue or unbilled work, but also ties up capital.)

Contract liabilities

Represents the entity's obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. (An increase in contract liabilities indicates deferred revenue, meaning customers have paid in advance for future goods or services.)

Debt, long-term

Financial obligations that are due more than one year from the balance sheet date. (A significant increase in long-term debt raises financial risk and increases future interest obligations.)

Year-Over-Year Comparison

Compared to the prior year, AAON, Inc. has seen robust revenue growth, with net sales increasing by 17.4% in Q3 and 12.7% over the nine months. However, this top-line growth has been overshadowed by a severe decline in profitability, with net income dropping by 41.5% and 47.5% respectively. Key drivers for this margin compression include a significant surge in cost of sales and SG&A expenses, as well as a dramatic increase in interest expense. New risks related to tariffs and supply chain costs have emerged, impacting the company's ability to translate sales into profit.

Filing Documents

• aaon-20250930.htm (10-Q) — 1656KB
• aaon_10q09302025ex311.htm (EX-31.1) — 11KB
• aaon_10q09302025ex312.htm (EX-31.2) — 11KB
• aaon_10q09302025ex321.htm (EX-32.1) — 6KB
• aaon_10q09302025ex322.htm (EX-32.2) — 6KB
• 0000824142-25-000199.txt ( ) — 9816KB
• aaon-20250930.xsd (EX-101.SCH) — 72KB
• aaon-20250930_cal.xml (EX-101.CAL) — 105KB
• aaon-20250930_def.xml (EX-101.DEF) — 283KB
• aaon-20250930_lab.xml (EX-101.LAB) — 773KB
• aaon-20250930_pre.xml (EX-101.PRE) — 575KB
• aaon-20250930_htm.xml (XML) — 1735KB

– FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements. AAON, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) September 30, 2025 December 31, 2024 Assets (in thousands, except share and per share data) Current assets: Cash and cash equivalents $ 1,041 $ 14 Restricted cash 1,226 6,500 Accounts receivable, net 266,238 147,434 Income tax receivable 25,508 4,115 Inventories, net 250,511 187,420 Contract assets, net 207,140 135,421 Prepaid expenses and other 7,668 7,308 Total current assets 759,332 488,212 Property, plant and equipment, net 591,652 510,356 Intangible assets, net and goodwill 163,886 160,152 Right of use assets 17,050 15,436 Deferred tax assets — 836 Other long-term assets 2,151 242 Total assets $ 1,534,071 $ 1,175,234 Liabilities and Stockholders' Equity Current liabilities: Debt, short-term $ — $ 16,000 Accounts payable 109,740 44,645 Accrued liabilities 120,468 99,347 Contract liabilities 19,974 14,913 Total current liabilities 250,182 174,905 Debt, long-term 360,142 138,891 Deferred tax liabilities 22,199 — Other long-term liabilities 22,205 20,743 New markets tax credit obligations 1 16,233 16,113 Commitments and contingencies (Note 19 ) Stockholders' equity: Preferred stock, $ .001 par value, 5,000,000 shares authorized, no shares issued — — Common stock, $ .004 par value, 200,000,000 shares authorized, 81,593,092 and 81,436,594 issued and outstanding at September 30, 2025 and December 31, 2024, respectively 326 326 Additional paid-in capital 56,350 68,946 Retained earnings 806,434 755,310 Total stockholders' equity 863,110 824,582 Total liabilities and stockholders' equity $ 1,534,071 $ 1,175,234 1 Held by variable interest entities (Note 18) The accompanying notes are an integral part of these consolidated financial statements. - 1 - AAON, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2025 2024 2025 2024 (in th

View Full Filing

View this 10-Q filing on SEC EDGAR