Aaon: When Cool Heads Prevail

Aaon, an air-conditioning and heating-systems maker, has a plum niche and a list of prestigious clients

When a corporate giant that accounts for 25% of sales leans on a tiny supplier for better prices, the only solution is for the supplier to knuckle under, right? Not if you're Norman H. Asbjornson, CEO of Aaon Inc. (AAON ) Indeed, in 1991, Asbjornson, a 65-year-old former tank mechanic for the U.S. Army who's tough as nails, turned down a request from McDonald's Corp. (MCD ) to slash prices on Aaon's rooftop air-conditioning and heating systems. The upshot, he says: "They did just what they said they would do, and we lost all of the McDonald's business."

It took Asbjornson a year to replace that revenue, as he laboriously lined up independent manufacturers' reps to hawk his commercial-heating, ventilation, and air-conditioning equipment to new customers. But Asbjornson has no regrets about turning down Mickey D's. "I knew I was taking a chance, but what was the point [of cutting prices] if I couldn't make any money?"

Making money certainly hasn't been an issue recently. Over the past three years, profits climbed an annual average 64%, while sales rose 23% on average. And the hot streak has continued at Aaon, No. 34 on the Hot Growth list. First-quarter earnings in 2001 were up 17%, to $3.6 million, while sales jumped 11%, to $39.4 million. And Aaon is sitting on a $33.4 million backlog of orders, including projects for Wal-Mart Stores (WMT ), Target (TGT ), and Home Depot (HD ).

ROOFTOP MARKET. Nabbing such prestigious clients is no small feat for Aaon, which is a fraction of the size of industry giants Trane, Carrier (CONE ), Lennox (LII ), and York. But Aaon has grabbed a 12% share of the $1.4 billion rooftop air-conditioning market by carving out a niche of semi-customized cooling systems, positioned between low-priced commodity equipment and high-end customized systems. Aaon, for instance, can tailor one of its regular production lines to make units with special heat-recovery options unavailable on low-end systems. By combining custom features with assembly-line production, it can offer customers big savings, says analyst Kent A. Newcomb of A.G. Edwards & Sons Inc. Aaon's prices are about 5% higher than low-end products but only one-third that of a customized system. "Aaon is an innovative company that has really turned the industry on its head," adds Jim Laird, director of energy for Home Depot, which has given 70% of its business to Aaon.

That's what Asbjornson, previously vice-president at the air-conditioning division of John Zink Co. in Tulsa, had in mind when he began designing new cooling equipment in July, 1987. As he did so, he also put up his $70,000 life savings and raised $8 million from banks and private investors to buy the Zink unit where he worked. In November, 1988, the first equipment rolled off the line of the new company, Aaon. The made-up name was chosen to ensure that Aaon was near the top of the telephone-book listings. In 1989 he took it public at 20 cents a share. The stock, of which he owns 20%, recently traded at $23.

Wal-Mart, Target, and Home Depot accounted for 38% of the 18,000 units Aaon sold last year. But with a slow economy--65% of Aaon sales go into new construction--and emerging competition in the semi-custom market, Asbjornson is expanding his product lines. He's also stretching his customer base to include schools and hospitals. "The past five years leave little doubt that we have gained a significant level of momentum," says Asbjornson. The challenge now is to maintain it.

By Stephanie Anderson Forest in Tulsa

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