AAON, Inc. (AAON) NEUTRAL Price Target: $35 Price: $ Sidoti & Company, LLC

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1 September 15, 2017 Morning Meeting Note Company Update AAON, Inc. (AAON) Equity Research We Maintain Our Outlook For Robust Growth For AAON, Following A Peer s Positive Commentary Earlier This Week; Maintain $35 Target And NEUTRAL Rating On Valuation E 2018E OLD NEW OLD NEW OLD NEW Mar. $0.15 $0.20 $0.19A $0.26 June A 0.36 Sep Dec EPS $0.84 $0.96 $1.01 $0.99 $1.40 P/E 33.0x 23.3x EBITDA (mil) $83.0 $92.6 $95.2 $93.4 $130.1 EV / EBITDA 18.0x 12.9x Note: *FCF includes include stock-based compensation expense E 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 2018E Rev.(Mil.) $245.3 $244.6 $266.2 $303.1 $321.1 $356.3 $358.6 $384.0 $408.1 $500.8 GAAP EPS $0.49 $0.38 $0.25 $0.49 $0.68 $0.80 $0.84 $0.96 $0.99 $1.40 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. On Wednesday, peer Lennox International (NYSE: LII, NC) stated in a conference presentation that, although new construction business at the commercial segment remains soft, replacement orders are accelerating. Lennox s management reiterated previous guidance that commercial revenue would accelerate in 2H:17. This peer commentary supports our forecast that AAON s year-over-year revenue growth rate will accelerate to 12% in 2H:17 (7% related to the core business, 5% related to the new WHP business) after a flat showing in 1H:17. We find the peer commentary encouraging, as new construction (about half of AAON s revenue) data as of late has indicated the industry has been slowing to almost a halt. We lower our 3Q:17 estimate to $0.28 (from $0.30) due to rising raw material costs. Moreover, we think there is execution risk related to the new WHP business relative to expectations. With AAON shares trading at forward P/E and EV/EBITDA multiples of 27x and 15x, respectively, compared to the Lennox International at 19x and 13x and the S&P 600 at 19x and 9.5x, we see limited upside for the stock price. Our $35 target is derived at 25x our 2018 EPS estimate of $1.40, which equates to 14x our 2018 EBITDA estimate of $130 million. We maintain a NEUTRAL rating on AAON shares primarily due to valuation. NEUTRAL Price Target: $35 Price: $32.65 Joseph Mondillo, CFA (212) (jmondillo@sidoti.com) Key Statistics Analysts Covering 3 Market Cap (Mil) $1,720 Enterprise Value $1, Week Range (NASDAQ) Year EPS CAGR 20% Avg. Daily Trading Volume 134,000 Shares Out (Mil) Float Shares (Mil) Insider Ownership 25% Institutional Holdings 60% Annualized Dividend $0.26 Dividend Yield 0.8% FCF Per Share (2018E)* $0.61 FCF Yield (2018E) 1.9% Net Cash Per Share (2018E) $0.69 Price to Book Value 7.9x Return on Equity (2018E) 17.3% Total Debt to Capital Nil Interest Coverage Ratio N/A Short Interest % 7.5% Short Interest Days To Cover 26.8 Russell ,425 Russell 2000 Last 12 Months 15.1% AAON Last 12 Months 15.2% We thought Lennox International s commentary earlier this week was encouraging. The two comments that caught our attention were related to cooler-than-average temperatures and a reiteration of 2H:17 guidance for the commercial segment. Regarding the former, Lennox CEO Todd Bluedorn stated that degree cooling days data were down year over year 6% in July, 25% in August and 40% in the first week of September. While this is interesting, and not surprising, we do not think this is a big concern for AAON s business. AAON carries very little inventory for unplanned replacement demand, so unexpected extreme heat or cold temperatures should not affect AAON s business significantly. However, the second comment reiterating guidance (originally issued in late July) with the Required disclosures appear in the Appendix Member FINRA & SIPC 1212 Avenue of the Americas 15 th Floor New York, NY Phone:

2 AAON, INC. note that commercial revenue is expected to accelerate in 2H:17 was encouraging. Much of the new construction data lately, as well as industry shipment data, has indicated construction slowing to almost a halt. Even though a lot of this data lags by about two to three months, investors have been concerned as both shares of AAON and LII are off substantially since peaking in mid- June. Having said this, Lennox management stated that while their commercial new construction business has been soft, they continue to expect strength in their replacement business to fully offset the softness and fuel an acceleration in revenue in 2H:17. We maintain a NEUTRAL rating on AAON stock primarily due to valuation... Although the shares have recently pulled back, the stock still trades at forward P/E and EV/EBITDA multiples of 27x and 15x. While AAON justifiably trades at a premium to peer Lennox International, which trades at 19x and 13x, we think the shares still trade close to fair valuation. Thus, we maintain a NEUTRAL rating. Our $37 target is based on 25x our 2018 EPS estimate $1.40, which equates to 14x our 2018 EBITDA estimate of $130 million. however, we note we do have concerns related to raw material costs and execution with the new WHP business. We lower our 3Q:17 EPS estimate to $0.28 (from $0.30) and trim our 2017 EPS estimate to $0.99 from $1.01 due to rising raw material costs. The cost of copper and aluminum, which probably make up about 10% of COGS are up about 35%-40% over the last year, about a third of the appreciation occurred since the end of June. Therefore, while we expect higher volumes will help leverage margin expansion, we expect this expansion will be less than we originally expected in the near-term. Secondly, we think the expectations for AAON s water-source heat pump (WHP) business are very high; and we think the recently belowaverage temperatures could push back the volume ramp up that the Street is expecting. In our view, even though backlog was up 20% year over year at the end of June (which we model will fuel revenue growth of 12% in 2H:17 after a flat showing in 1H:17), we are cautious in the near-term of expectations relative to the current lofty share valuation. Key Risks Construction does not improve Steel and copper prices rise U.S. recession 2

3 AAON, INC. Table 1. AAON, Inc. Income Statement (in thousands, except where noted) 2015 Mar Jun Sep Dec 2016 MarA JunA SepE DecE 2017E MarE JunE SepE DecE 2018E Sales, net $358,632 $85,422 $102,319 $104,568 $91,668 $383,977 $86,078 $101,326 $112,796 $105,918 $406,119 $104,686 $128,512 $136,678 $130,912 $500,787 Cost of sales 249,951 59,691 69,572 71,476 65, ,897 61,092 69,648 77,541 75, ,323 72,928 86,522 91,606 89, ,723 Gross profit 108,681 25,731 32,747 33,092 26, ,080 24,986 31,678 35,255 30, ,795 31,758 41,990 45,072 41, ,064 SG&A 37,438 8,913 10,561 10,400 8,632 38,506 10,530 11,971 11,730 9,792 44,023 9,979 12,331 12,424 10,754 45,489 Other (59) (8) (12) (20) (1) Operating income 71,302 16,826 22,198 22,692 17,878 79,594 14,457 19,659 23,526 21,083 78,725 21,779 29,659 32,648 30, ,576 Operating income (ex. one-time items) 71,302 16,826 22,198 22,692 17,878 79,594 14,457 19,659 23,526 21,083 78,725 21,779 29,659 32,648 30, ,576 Interest expense (161) (74) (67) (82) (69) (292) (60) (71) (21) (50) (202) (45) (48) (21) (50) (164) Other (income) expense 124 (117) (10) (105) (11) (34) (25) Income before income taxes 71,339 17,017 22,275 22,762 17,937 79,991 14,528 19,764 23,537 21,123 78,952 21,814 29,697 32,659 30, ,700 Income tax provision 25,611 6,211 7,934 8,180 6,517 28,842 4,311 5,970 8,473 7,604 26,359 7,853 10,691 11,757 10,991 41,292 Net Income $45,728 $10,806 $14,341 $14,582 $11,420 $51,149 $10,217 $13,794 $15,064 $13,519 $52,593 $13,961 $19,006 $20,902 $19,539 $73,408 Net Income (ex. one-time items) $45,728 $10,806 $14,341 $14,082 $11,420 $51,149 $10,217 $13,794 $15,064 $13,519 $52,593 $13,961 $19,006 $20,902 $19,539 $73,408 GAAP Diluted EPS $0.84 $0.20 $0.27 $0.27 $0.21 $0.96 $0.19 $0.26 $0.28 $0.26 $0.99 $0.26 $0.36 $0.40 $0.37 $1.40 Diluted EPS $0.84 $0.20 $0.27 $0.26 $0.21 $0.96 $0.19 $0.26 $0.28 $0.26 $0.99 $0.26 $0.36 $0.40 $0.37 $1.40 Diluted shares outstanding 54,481 53,430 53,401 53,394 53,420 53,411 53,190 53,151 53,031 52,911 53,071 52,791 52,671 52,551 52,431 52, % -1.96% -0.64% -0.87% YOY Growth: Revenue 0.6% 11.3% 13.3% 10.8% -5.7% 7.1% 0.8% -1.0% 7.9% 15.5% 5.8% 21.6% 26.8% 21.2% 23.6% 23.3% Cost of sales 0.8% 8.6% 10.2% 11.4% -3.7% 6.4% 2.3% 0.1% 8.5% 15.2% 6.6% 19.4% 24.2% 18.1% 19.5% 20.3% SG&A -7.7% 7.2% 14.8% 3.4% -12.4% 2.9% 18.1% 13.4% 12.8% 13.4% 14.3% -5.2% 3.0% 5.9% 9.8% 3.3% Gross profit 0.4% 18.0% 20.8% 9.6% -10.4% 8.6% -2.9% -3.3% 6.5% 16.5% 4.0% 27.1% 32.6% 27.8% 33.6% 30.4% Operating income 4.8% 24.9% 23.7% 12.6% -9.3% 11.6% -14.1% -11.4% 3.7% 17.9% -1.1% 50.6% 50.9% 38.8% 44.6% 45.5% Net income -0.3% 28.7% 28.8% 10.0% -11.8% 11.9% -5.5% -3.8% 3.3% 18.4% 2.8% 36.6% 37.8% 38.8% 44.5% 39.6% Diluted EPS 0.9% 31.6% 31.9% 8.6% -10.8% 14.1% -5.0% -3.4% 7.7% 19.5% 3.5% 37.7% 39.0% 40.0% 45.9% 40.8% Margin Analysis: COGS/sales 69.7% 69.9% 68.0% 68.4% 71.1% 69.2% 71.0% 68.7% 68.7% 70.8% 69.8% 69.7% 67.3% 67.0% 68.5% 68.0% SG&A/sales 10.4% 10.4% 10.3% 9.9% 9.4% 10.0% 12.2% 11.8% 10.4% 9.2% 10.8% 9.5% 9.6% 9.1% 8.2% 9.1% Gross profit margin 30.3% 30.1% 32.0% 31.6% 28.9% 30.8% 29.0% 31.3% 31.3% 29.2% 30.2% 30.3% 32.7% 33.0% 31.5% 32.0% Operating margin (ex. one-time items) 19.9% 19.7% 21.7% 21.7% 19.5% 20.7% 16.8% 19.4% 20.9% 19.9% 19.4% 20.8% 23.1% 23.9% 23.3% 22.9% Pretax margin 19.9% 19.9% 21.8% 21.8% 19.6% 20.8% 16.9% 19.5% 20.9% 19.9% 19.4% 20.8% 23.1% 23.9% 23.3% 22.9% Net margin 12.8% 12.7% 14.0% 13.9% 12.5% 13.3% 11.9% 13.6% 13.4% 12.8% 13.0% 13.3% 14.8% 15.3% 14.9% 14.7% Tax rate 35.9% 36.5% 35.6% 35.9% 36.3% 36.1% 29.7% 30.2% 36.0% 36.0% 33.4% 36.0% 36.0% 36.0% 36.0% 36.0% Source: and company reports 3

4 Table 2. AAON, Inc. Cash Flow Statement (in thousands, except where noted) AAON, INC MarA JunA SepE DecE 2017E 2018E Cash flows from operating activities Net income $45,728 $53,376 $10,217 $13,794 $15,256 $13,135 $52,401 $63,786 Depreciation 11,741 13,035 3,638 3,643 3,670 3,750 14,701 15,550 Amortization of bond premiums Provision for losses on account receivable (48) (25) 184 (43) 141 Provision for excess and obsolete inventories (Gain)/loss on disposition of assets (59) (20) (1) Share-based compensation 2,891 4,357 1,645 1,884 1,200 1,200 5,929 5,000 Excess tax benefits from stock options exercised (2,445) Deferred income taxes 1, (356) 364 Other 375 (218) (74) 66 (8) Change in assets and liabilities (6,623) (8,032) (6,223) 4,358 3,039 (6,411) (5,237) (10,168) Net cash provided by operating activities 52,910 63,923 10,166 23,594 23,164 11,674 68,598 74,168 Cash flows from investing activities Other Investment in certificates of deposit and other (2,546) 9,332 9,340 (7,993) 1,347 Capital expenditures (20,967) (26,604) (6,071) (10,776) (15,000) (17,000) (48,847) (42,000) Net cash provided by investing activities (23,194) (16,925) 3,269 (18,769) (15,000) (17,000) (47,500) (42,000) Cash flows from financing activites Exercise of stock options 2,795 2, ,573 Other 2,445 (823) (560) (506) (1,066) Repurchase of common stock (37,143) (19,317) (6,303) (3,065) (3,000) (3,000) (15,368) (12,000) Cash dividends paid to stockholders (11,857) (12,676) (6,894) (6,878) (13,772) (15,747) Net cash provided by (used in) financing activities (43,760) (30,753) (5,965) (2,896) (9,894) (9,878) (28,633) (27,747) Net change in cash (14,044) 16,245 7,470 1,929 (1,730) (15,205) (7,535) 4,421 Cash, beginning of period 21,952 7,908 24,153 31,623 33,552 31,822 24,153 16,618 Cash, ending of period $7,908 $24,153 $31,623 $33,552 $31,822 $16,618 $16,618 $21,038 Free cash flow 31,943 37,319 $4,095 $12,818 $8,164 ($5,326) 19,751 32,168 FCF per share $0.59 $0.70 $0.08 $0.24 $0.15 ($0.10) $0.37 $0.61 Source: and company reports 4

5 AAON, INC. Table 3. AAON, Inc. Balance Sheet (in thousands, except where noted) MarA JunA 2017E 2018E Assets Current assets: Cash 7,908 24,153 31,623 33,552 16,618 16,974 Short-term securities 22,524 19,595 10,259 18,252 18,252 18,252 Accounts receivable 50,024 43,001 44,377 43,114 57,153 64,747 Income tax receivable 4,702 6,239 3, Note receivable Inventories 38,499 47,352 55,988 63,075 56,194 63,002 Prepaid expenses and other Total current assets 124, , , , , ,242 Property, plant and equipment, net 101, , , , , ,204 Long-term securities 7, Total assets 232, , , , , ,113 Liabilities and stockholders' equity Current liabilities: Accounts payable 6,178 7,102 9,936 14,108 14,048 16,286 Dividend payable 6,849 Accrued liabilities 37,235 31,940 31,186 34,293 37,650 39,679 Total current liabilities 43,413 39,042 41,122 55,250 51,698 55,965 Deferred tax liabilities 8,706 9,531 10,251 9,895 9,895 9,895 Other long-term liabilities 1,817 2,059 2,115 2,119 2,119 2,119 Total stockholders' equity 178, , , , , ,134 Total liabilities and stockholders' equity 232, , , , , ,113 Key Financial Ratios: Long-term debt/total capital 1.0% 1.0% 1.0% 1.0% 0.9% 0.7% Book value/share $3.26 $3.77 $3.92 $4.00 $4.41 $5.70 Profit Margin 12.3% 12.7% 14.0% 13.9% 13.3% 13.1% Asset Turnover Leverage Net cash $30,455 $43,773 $41,907 $51,830 $34,896 $35,252 Net cash per share $0.70 $0.83 $0.80 $0.98 $0.67 $0.68 Inventory turnover Return on equity (ROE) 26.8% 22.5% 22.8% 26.0% 22.6% 20.8% Return on assets (ROA) 22.2% 18.7% 16.3% 20.3% 18.9% 21.8% Return on total capital (ROTC) 36.3% 27.9% 23.8% 33.0% 26.0% 27.1% Source: and company reports 5

6 Appendix Required Disclosures Required Disclosures AAON, Inc. (AAON-$32.65) NEUTRAL Price Target: $35 September 15, 2017 Rating and Price Target History Table Action Date Px Rating PT Rating 2/6/ Neutral 25 PT 8/6/ PT 10/19/ PT 12/17/ PT 2/25/ PT 9/16/ PT 12/16/ PT 5/4/ PT 8/3/ Key Risks Construction does not improve Steel and copper prices rise U.S. recession Valuation: We maintain a NEUTRAL rating on AAON stock primarily due to valuation... Although the shares have recently pulled back, the stock still trades at forward P/E and EV/EBITDA multiples of 27x and 15x. While AAON justifiably trades at a premium to peer Lennox International, which trades at 19x and 13x, we think the shares still trade close to fair valuation. Thus, we maintain a NEUTRAL rating. Our $37 target is based on 25x our 2018 EPS estimate $1.40, which equates to 14x our 2018 EBITDA estimate of $130 million. 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 09/15/17, Sidoti provides research on 275 companies, of which 181 (65%) are rated BUY and 86 (35%) are rated NEUTRAL. Of the BUYS, Sidoti has received investment banking income from 5 companies (2.76%). Of the NEUTRALS, Sidoti has received investment banking income from 1 company (1.16%). Of the NEUTRALS, 0 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 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 6

7 APPENDIX CONTINUED 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. 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