AAON, Inc. (AAON) NEUTRAL Price Target: $34 Price: $ Sidoti & Company, LLC

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1 December 16, 2016 Morning Meeting Note Raise Price Target AAON, Inc. (AAON) Equity Research Raise Target To $34 (From $28) On Anticipation Of A Lower Tax Rate; Continue To Forecast Strong Growth In ; However, View Shares As Fairly Valued; Maintain NEUTRAL Rating E 2017E 2018E OLD NEW OLD NEW OLD NEW Mar. $0.15 $0.20A $0.22 $0.27 June A Sep A Dec EPS $0.84 $1.01 $1.11 $1.35 P/E 32.3x 29.4x 24.2x EBITDA (mil) $83.0 $95.4 $106.6 $126.3 EV / EBITDA 17.9x 15.8x 13.4x Note: *FCF includes include stock-based compensation expense. 2015, 2016E, 2017E and 2018E include stock-based compensation expense of $0.05, $0.08, $0.08, and $0.09, respectively. Sum of quarterly EPS may not equal full-year total due to rounding and/or change in share count. The Russell 2000 Index includes AAON. NC=Not covered by. Year E 2017E 2018E Rev.(Mil.) $245.3 $244.6 $266.2 $303.1 $321.1 $356.3 $352.1 $392.5 $420.3 $474.9 GAAP EPS $0.49 $0.38 $0.25 $0.49 $0.68 $0.80 $0.84 $1.00 $1.11 $1.35 Description: AAON, Inc. ( is a leading domestic manufacturer of standard and custom heating, ventilating and air conditioning (HVAC) units, including unitary rooftops, chillers, air-handling units, make-up air units, heat recovery units, condensing units, coils and boilers. Products target the nonresidential market, specifically planned replacement (55%) and new construction (45%). AAON generates almost all of its revenue from the U.S. Headquarters are in Tulsa, OK. We raise our target to $34 (from $28) as we shift our valuation horizon to 2018; we apply a 25x multiple to our 2018 EPS estimate of $1.35, which equates to 14x our 2018 EBITDA estimate of $126 million. Previously, we applied a multiple of 25x our 2017 EPS estimate of $1.11. Our new target implies an increase to our prior multiple on 2017 earnings (from 25x to 31x), which reflects our expectation that the company s tax rate will be lower than our current estimates reflect. In , the company realized an average cash tax rate of about 36%. (see Exhibit 1 for a tax rate scenario analysis) As for AAON s business trends, we think the nonresidential HVAC market will continue to grow in the low-to-mid-single digits range in We forecast revenue growth for AAON of 8% in 2017 and 12% in 2018 (from an estimated 9% in 2016), so we continue to expect the company will take share as it leverages its high quality products and new water source heat pump business. Trading at forward P/E and EV/EBITDA multiples of 30x and 17x, compared to peer Lennox International (NYSE: LII, NC) at 21x and 13.5x, we think shares are fairly valued. We think premium multiples are justified given AAON s stronger growth outlook and margin profile. We maintain our NEUTRAL rating. We raise our target to $34 (from $28) primarily on the anticipation of lower tax rates. We estimate over 95% of AAON s revenue is derived from the U.S. With a Trump presidency and Republican led Congress, we think it is likely U.S. corporate tax rates will be lowered in Although it is still unclear on what the overall tax rate will be, we think it is highly likely it will be significantly lower than the average cash tax rate of 36% that AAON saw in In Exhibit 1, we illustrate how AAON s earnings and our valuation will change based on several tax rate scenarios. As shown, every 5% reduction to its rate would add about $0.11 of EPS and about $2 to our share valuation. Our new target reflects AAON s cash tax rate being lowered close to 20%. Joseph Mondillo (212) (jmondillo@sidoti.com) Key Statistics NEUTRAL Price Target: $34 Price: $32.65 Analysts Covering 3 Market Cap (Mil) $1,720 Enterprise Value $1, Week Range (NASDAQ) Year EPS CAGR 20% Avg. Daily Trading Volume 139,000 Shares Out (Mil) Float Shares (Mil) Insider Ownership 25% Institutional Holdings 60% Annualized Dividend $0.26 Dividend Yield 0.8% FCF Per Share (2018E) $0.99 FCF Yield (2018E) 3.0% Net Cash Per Share (2018E) $1.75 Price to Book Value 8.4x Return on Equity (2018E) 17.3% Total Debt to Capital Interest Coverage Ratio Nil NM Short Interest % 4.2% Short Interest Days To Cover 13.1 Russell ,366 Russell 2000 Last 12 Months 13.2% AAON Last 12 Months 31.9% Required disclosures appear in the Appendix Member FINRA & SIPC 122 East 42 nd Street 4 th Floor New York, NY Phone:

2 Exhibit 1: Tax Rate Sensitivity Rate 2018 EPS Target 1 15% $1.83 $37 20% $1.72 $35 25% $1.61 $33 30% $1.50 $31 Current $1.35 $28 1 Target would be calculated at 20x 2018 EPS, in line with our prior valuation. Source: estimates We expect AAON will gain share in the nonresidential HVAC market, which we expect will continue to grow in the 3%-4% range. On Wednesday, peer Lennox International held an investor day in which it presented its outlook for For its commercial segment, the company expects the market to grow about 3%-4% and its business segment to grow 3%-7% (accounting for neutral currency effects). We expect the driver of the growth will come from the replacement market. We also think new construction will slowly accelerate in 2017 on the assumption that the U.S. economy picks up. As shown in Exhibit 2, Lennox s outlook implies stable growth to a slight acceleration. Also, shown in this Exhibit, AAON has for the most part been outperforming both Lennox and the industry since We expect AAON will continue to outperform again in 2017, due to the company s focus on larger tonnage and more customizable rooftop units, as well as it recent entrance to the water source heat pump market, which will be a new stream of revenue. We forecast revenue growth of 8% in 2017 and 12% in The acceleration in 2018 is largely due to the traction we expect the company will attain with its new water source heat pump business; we forecast about $50 million of revenue and $0.14 of EPS from this business in Lastly, as shown in Exhibit 3, we note that industry shipments of large tonnage units (AAON s high margin units) remained strong through October. Exhibit 2: AAON's Sales Growth Versus Peer Group 1Q:12 2Q:12 3Q:12 4Q:12 1Q:13 2Q:13 3Q:13 4Q:13 1Q:14 2Q:14 3Q:14 4Q:14 1Q:15 2Q:15 3Q:15 4Q:15 1Q:16 2Q:16 3Q:16 AAON 8.4% 20.6% 4.0% 23.0% 2.9% 9.5% 16.8% -5.9% 14.3% 1.2% 14.7% 15.5% 0.5% -2.2% -8.3% 14.8% 11.3% 13.3% 10.8% Lennox International 1.8% 1.2% -1.8% 4.3% 4.0% 3.7% 8.8% 13.4% 6.1% 5.0% 1.0% 4.9% -7.6% 5.2% 2.2% 1.8% 6.5% -0.3% 1.9% Industry 5.5% 9.1% 6.2% 6.2% -0.6% -0.9% 3.3% 9.1% 10.8% 6.2% 7.8% -1.1% -1.7% 14.7% 1.1% 12.2% 7.5% -0.3% 9.8% *3Q:15 industry data includes just July and August. Source: AHRI, and company reports We maintain a NEUTRAL rating. We raise our target to $34 (from $28) mainly on the likelihood AAON will benefit from lower tax rates in the future. However, with the stock trading at forward P/E and EV/EBITDA multiples of 30x and 17x, we think shares are already fairly valued. While AAON trades at a premium to peer Lennox International, which trades at 21x and 13.5x, we think this is justified by AAON s stronger growth outlook and margin realization. Our new $34 target is now derived at 25x our 2017 EPS estimate of $1.35, which equates to 14x our 2018 EBITDA estimate of $126 million. Previously, we applied a 25x multiple to our prior 2017 EPS estimate of $1.11. Our new target implies an increase to our prior multiple on 2017 earnings (from 25x to 31x), which is due to our expectation that the company s tax rate will be lower than what our current estimates reflect. Key Risks Construction does not improve Steel and copper prices rise U.S. recession 2

3 Table 1. AAON, Inc. Income Statement (in thousands, except where noted) MarA JunA SepA DecA 2015 MarA JunA SepA DecE 2016E MarE JunE SepE DecE 2017E 2018E Sales, net $76,768 $90,275 $94,360 $97,229 $358,632 $85,422 $102,319 $104,568 $99,174 $391,483 $92,256 $110,505 $112,933 $107,107 $422,801 $474,998 Cost of sales 54,970 63,158 64,175 67, ,951 59,691 69,572 71,476 68, ,268 64,025 74,591 75,665 73, , ,631 Gross profit 21,798 27,117 30,185 29, ,681 25,731 32,747 33,092 30, ,215 28,230 35,914 37,268 33, , ,367 SG&A 8,317 9,200 10,062 9,859 37,438 8,913 10,561 10,400 9,917 39,791 8,949 10,498 11,180 9,854 40,481 42,727 Other 5 (30) (34) (59) (8) (12) (20) 0 0 Operating income 13,476 17,947 20,157 19,722 71,302 16,826 22,198 22,692 20,727 82,443 19,281 25,416 26,088 23,671 94, ,640 Operating income (ex. one-time items) 13,476 17,947 20,157 19,722 71,302 16,826 22,198 22,692 20,727 82,443 19,281 25,416 26,088 23,671 94, ,640 Interest expense (44) (29) (14) (74) (161) (74) (67) (82) (55) (278) (45) (48) (21) (50) (164) (164) Other (income) expense 75 (27) (117) (10) (105) Income before income taxes 13,445 18,003 20,113 19,778 71,339 17,017 22,275 22,762 20,772 82,826 19,316 25,454 26,099 23,711 94, ,764 Income tax provision 5,046 6,873 6,862 6,830 25,611 6,211 7,934 8,180 7,686 30,011 7,147 9,418 9,656 8,773 34,995 41,723 Net Income $8,399 $11,130 $13,251 $12,948 $45,728 $10,806 $14,341 $14,582 $13,087 $52,816 $12,169 $16,036 $16,442 $14,938 $59,585 $71,041 Net Income (ex. one-time items) $8,399 $11,130 $13,251 $12,948 $45,728 $10,806 $14,341 $14,082 $13,087 $52,816 $12,169 $16,036 $16,442 $14,938 $59,585 $71,041 GAAP Diluted EPS $0.15 $0.20 $0.24 $0.24 $0.84 $0.20 $0.27 $0.27 $0.25 $0.99 $0.23 $0.30 $0.31 $0.28 $1.12 $1.35 Diluted EPS $0.15 $0.20 $0.24 $0.24 $0.84 $0.20 $0.27 $0.26 $0.25 $0.99 $0.23 $0.30 $0.31 $0.28 $1.12 $1.35 Diluted shares outstanding 54,640 54,670 54,580 54,036 54,481 53,430 53,401 53,394 53,294 53,380 53,174 53,054 52,934 52,814 52,994 52, % -2.02% -0.72% -0.91% YOY Growth: Revenue 0.5% -2.2% -8.3% 14.8% 0.6% 11.3% 13.3% 10.8% 2.0% 9.2% 8.0% 8.0% 8.0% 8.0% 8.0% 12.3% Cost of sales 0.8% -2.0% -7.8% 13.6% 0.8% 8.6% 10.2% 11.4% 1.3% 7.7% 7.3% 7.2% 5.9% 7.4% 6.9% 11.0% SG&A 9.0% -13.1% -27.2% 15.7% -7.7% 7.2% 14.8% 3.4% 0.6% 6.3% 0.4% -0.6% 7.5% -0.6% 1.7% 5.5% Gross profit -0.2% -2.7% -9.5% 17.4% 0.4% 18.0% 20.8% 9.6% 3.6% 12.5% 9.7% 9.7% 12.6% 9.4% 10.4% 15.1% Operating income -5.4% 3.8% 3.3% 16.3% 4.8% 24.9% 23.7% 12.6% 5.1% 15.6% 14.6% 14.5% 15.0% 14.2% 14.6% 19.3% Net income -14.5% -2.1% 6.5% 22.9% -0.3% 28.7% 28.8% 10.0% 1.1% 15.5% 12.6% 11.8% 12.8% 14.1% 12.8% 19.2% Diluted EPS -6.5% -5.9% -6.2% 24.7% 0.9% 31.6% 31.9% 8.6% 2.5% 17.9% 13.2% 12.6% 17.8% 15.2% 13.6% 20.3% Margin Analysis: COGS/sales 71.6% 70.0% 68.0% 69.6% 69.7% 69.9% 68.0% 68.4% 69.1% 68.8% 69.4% 67.5% 67.0% 68.7% 68.1% 67.3% SG&A/sales 10.8% 10.2% 10.7% 10.1% 10.4% 10.4% 10.3% 10.4% 10.0% 10.2% 9.7% 9.5% 9.9% 9.2% 9.6% 9.0% Gross profit margin 28.4% 30.0% 32.0% 30.4% 30.3% 30.1% 32.0% 32.6% 30.9% 31.2% 30.6% 32.5% 33.0% 31.3% 31.9% 32.7% Operating margin (ex. one-time items) 17.6% 19.9% 21.4% 20.3% 19.9% 19.7% 21.7% 21.7% 20.9% 21.1% 20.9% 23.0% 23.1% 22.1% 22.3% 23.7% Pretax margin 17.5% 19.9% 21.3% 20.3% 19.9% 19.9% 21.8% 21.8% 20.9% 21.2% 20.9% 23.0% 23.1% 22.1% 22.4% 23.7% Net margin 10.9% 12.3% 14.0% 13.3% 12.8% 12.7% 14.0% 13.9% 13.2% 13.5% 13.2% 14.5% 14.6% 13.9% 14.1% 15.0% Tax rate 37.5% 38.2% 34.1% 34.5% 35.9% 36.5% 35.6% 35.9% 37.0% 36.2% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% Source: and company reports 3

4 Table 2. AAON, Inc. Cash Flow S tatement (in thousands, except where noted) MarA JunA SepA DecE 2016E 2017E 2018E Cash flows from operating activities Net income $44,158 $45,728 $10,806 $14,341 $16,809 $13,087 $55,043 $59,585 $71,041 Depreciation 11,553 11,741 3,171 3,175 3,201 3,150 12,697 13,200 13,650 Amortization of bond premiums Provision for losses on account receivable (22) (48) 123 (165) Provision for excess and obsolete inventories (Gain)/loss on disposition of assets (305) (59) (8) (12) - (20) Share-based compensation 2,178 2, ,095 1, ,072 4,600 5,000 Excess tax benefits from stock options exercised (1,239) (2,445) (745) (384) 1,129 - Deferred income taxes (2,111) 1,172 (1,030) (821) 332 (1,519) Other Change in assets and liabilities (2,794) (6,623) 1,818 (4,237) (4,317) 789 (5,947) (5,327) (7,686) Net cash provided by operating activities 52,279 52,910 15,248 13,224 18,535 17,926 64,933 72,058 82,005 Cash flows from investing activities Other (7) Investment in certificates of deposit and other 9,779 (2,546) 3,418 (6,475) 5,573 2,516 Capital expenditures (16,127) (20,967) (7,332) (8,493) (7,802) (8,000) (31,627) (28,000) (30,000) Net cash provided by investing activities (6,029) (23,194) (3,906) (14,975) (2,202) (8,000) (29,083) (28,000) (30,000) Cash flows from financing activites Exercise of stock options 1,318 2, ,681 Other 1,239 2, (1,688) (559) Repurchase of common stock (29,284) (37,143) (3,456) (4,218) (6,898) (2,500) (17,072) (12,000) (12,000) Cash dividends paid to stockholders (9,656) (11,857) (5,820) (6,928) (12,748) (15,862) (15,718) Net cash provided by (used in) financing activities (36,383) (43,760) (2,002) (3,288) (13,980) (9,428) (28,698) (27,862) (27,718) Net change in cash 9,867 (14,044) 9,340 (5,039) 2, ,152 16,196 24,287 Cash, beginning of period 12,085 21,952 7,908 17,248 12,209 14,562 7,908 15,060 31,255 Cash, ending of period $21,952 $7,908 $17,248 $12,209 $14,562 $15,060 $15,060 $31,255 $55,542 Free cash flow 36,152 31,943 $7,916 $4,731 $10,733 $9,926 33,306 44,058 52,005 FCF per share $0.65 $0.59 $0.15 $0.09 $0.20 $0.19 $0.62 $0.83 $0.99 Source: and company reports 4

5 Table 3. AAON, Inc. Balance Sheet (in thousands, except where noted) MarA JunA SepA 2016E 2017E 2018E Assets Current assets: Cash 21,952 7,908 17,248 12,209 14,562 15,060 31,255 64,545 Short-term securities 18,070 22,524 25,955 32,135 26,750 26,750 26,750 26,750 Accounts receivable 44,092 50,024 42,001 58,483 53,334 56,727 61,265 69,230 Income tax receivable 2,569 4, ,472 2,472 2,472 2,472 Note receivable Inventories 37,618 38,499 42,479 40,125 43,401 41,533 44,596 49,660 Prepaid expenses ,483 1, Total current assets 131, , , , , , , ,165 Property, plant and equipment, net 91, , , , , , , ,984 Long-term securities 10,112 7, Total assets 233, , , , , , , ,828 Liabilities and stockholders' equity Current liabilities: Accounts payable 11,370 6,178 3,604 9,367 7,228 6,853 8,094 9,013 Dividend payable 5,797 Accrued liabilities 31,343 37,235 34,435 38,087 36,110 38,376 39,440 43,919 Total current liabilities 42,713 43,413 38,039 53,251 43,338 45,229 47,535 52,932 Deferred tax liabilities 13,677 8,706 7,676 6,855 7,187 7,187 7,187 7,187 Other long-term liabilities 2,668 1,817 2,284 2,437 1,976 1,976 1,976 1,976 Total stockholders' equity 174, , , , , , , ,733 Total liabilities and stockholders' equity 233, , , , , , , ,828 Key Financial Ratios: Long-term debt/total capital 1.5% 1.0% 1.2% 1.2% 1.0% 0.9% 0.8% 0.6% Book value/share $3.14 $3.26 $3.41 $3.57 $3.75 $3.84 $4.60 $5.90 Profit Margin 12.1% 12.3% 14.0% 13.3% 12.8% 12.7% 13.5% 13.9% Asset Turnover Leverage Net cash/share $0.91 $0.70 $0.81 $0.85 $0.79 $0.80 $1.11 $1.75 Days' sales outstanding Inventory turnover Sidoti 5.5 & Company, 6.4LLC Return on equity (ROE) 28.6% 26.8% 25.4% % 26.0% 24.0% 23.5% 22.7% Return on assets (ROA) 18.8% 22.2% 18.3% 22.6% 22.8% 21.1% 21.1% 23.1% Return on total capital (ROTC) 33 3% 36 3% 29 4% 37 7% 35 4% 31 0% 31 6% 35 1%

6 Appendix Required Disclosures Required Disclosures AAON, Inc. (AAON-$32.65) NEUTRAL Price Target: $34 December 16, 2016 Rating and Price Target History Table Action Date Px Rating PT PT 1/3/ Rating 4/24/ Buy 23 PT 4/24/ PT 5/5/ Rating 2/6/ Neutral 25 PT 8/6/ PT 10/19/ PT 12/17/ PT 2/25/ PT 9/16/ Key Risks Construction does not improve Steel and copper prices rise U.S. recession Valuation: We maintain a NEUTRAL rating. We raise our target to $34 (from $28) mainly on the likelihood AAON will benefit from lower tax rates in the future. However, with the stock trading at forward P/E and EV/EBITDA multiples of 30x and 17x, we think shares are already fairly valued. While AAON trades at a premium to peer Lennox International, which trades at 21x and 13.5x, we think this is justified by AAON s stronger growth outlook and margin realization. Our new $34 target is now derived at 25x our 2017 EPS estimate of $1.35, which equates to 14x our 2018 EBITDA estimate of $126 million. Previously, we applied a 25x multiple to our prior 2017 EPS estimate of $1.11. Our new target implies an increase to our prior multiple on 2017 earnings (from 25x to 31x), which is due to our expectation that the company s tax rate will be lower than what our current estimates reflect. Required Disclosures The (Sidoti) Equity Research rating system consists of BUY and NEUTRAL recommendations. BUY suggests capital appreciation of at least 25% from initiation of coverage over the next 12 months, while NEUTRAL denotes that a stock is not likely to provide similar gains over a 12-month period. As of 12/16/16, Sidoti provides research on 237 companies, of which 150 (63%) are rated BUY and 84 (37%) are rated NEUTRAL. Of the BUYS, Sidoti has received investment banking income from 2 companies (1.33%). Of the NEUTRALS, Sidoti has received investment banking income from 1 company (1.19%). Of the NEUTRALS, 51 trade above our price targets. A risk to our price target is that the analyst s estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in the Risk Factors section in the SEC filings available in electronic format through SEC Edgar filings at The research analyst certifies that this report accurately reflects his/her personal views about the subject securities and issuers and that none of the research analyst's compensation was, is or will be directly or indirectly related to the analyst's specific recommendations or views contained in this research report. Sidoti research analysts seek to have management of their covered companies meet with investors during non-deal road shows. Analysts compensation may be related to their success in scheduling non-deal road shows. Sidoti research analysts generally do not cover (or continue to cover) those companies that limit access to their senior executives by not participating in Sidoti-sponsored conferences and non-deal roadshows. A possible effect of this view may be that continued coverage decisions are made, in part, based on the willingness of management of covered companies to participate in such meetings. This approach could be viewed as presenting potential conflicts of interest. Sidoti does NOT own securities of the issues described herein. Sidoti policy does not allow an analyst or a member of their household to own shares in any company that he/she covers. Sidoti policy does not allow employees or household members to serve as an officer or director of a covered company. Sidoti does not make a market in any securities. Sidoti has non-research employees that will seek compensation for investment banking services from this company and trading revenue in connection with trading 6

7 APPENDIX CONTINUED the securities of this company. Investment banking services, as defined under FINRA Rule 2241, includes, among other things, acting as an underwriter in or as a member of the selling group in a securities underwriting. Sidoti s role in any investment banking transaction can be viewed on this company s filings at Sidoti employees, including research analysts, receive compensation that is based in part upon the overall performance of the firm, including revenues generated by Sidoti s investment banking and brokerage activities, but compensation is not directly related to investment banking or brokerage revenues. Sidoti also provides an additional research product called Company Sponsored Research. The analysts providing Company Sponsored Research will be the same Sidoti analysts covering the relevant sector and some or all analysts will work on both products. Sidoti acted as an agent and received non-investment banking securities-related income from AAON. Other Disclosures This report is for information purposes only and is not intended as an offer to sell or a solicitation to buy securities. Sidoti does not maintain a predetermined schedule for publication of research and will not necessarily update this report. The stock rating on this report reflects the analyst s recommendation based on a 12 month period. Information contained herein is based on sources we believe to be reliable but we do not guarantee their accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments as of this date and are subject to change without notice. It should be presumed that the analyst who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication. This report was prepared for market professionals and institutional investor customers. Market professionals and institutional investors should consider this report as only a single factor in making their investment decisions. This research report is not a substitute for the exercise of your independent judgment. At times, Sidoti may be in possession of material non-public information, none of which is used in the preparation of our research. Sidoti maintains and enforces written policies and procedures reasonably designed to prevent any controlling persons, officers (or persons performing similar functions), or employees of Sidoti from influencing the activities of research analysts and the content of research reports prepared by the research analyst. Reprints of reports are prohibited without permission. Additional information is available upon request. Source Key Statistics data is sourced from FactSet Research Systems 7