Executive Summary / Key Takeaways

• Loar Holdings is a niche aerospace and defense component supplier focused on mission-critical, proprietary products with significant aftermarket exposure, executing a disciplined growth strategy combining strategic acquisitions and organic initiatives.
• The company delivered robust Q1 2025 results, with net sales up 24.8% year-over-year and Adjusted EBITDA margin expanding to 37.6%, driven by strong organic growth (11.1%) and contributions from recent acquisitions like Applied Avionics.
• Management raised its full-year 2025 guidance, projecting net sales between $482M-$490M and Adjusted EBITDA between $182M-$185M, implying a 120 basis point margin improvement, citing strong demand across all end markets and ahead-of-plan execution on pricing and productivity.
• LOAR's competitive moat is built on its proprietary technology, high barriers to entry (qualification processes), diverse product portfolio (~20,000 unique parts), and focus on higher-margin aftermarket content (now ~55% of sales), enabling it to pass through cost inflation, including potential tariffs.
• The pending acquisition of LMB Fans & Motors, expected to close in Q3 2025 and financed by an incremental term loan, underscores the continuation of LOAR's M&A-driven growth strategy, which has historically delivered above-market expansion.

Setting the Scene: LOAR's Niche in Aerospace & Defense

In the vast and complex ecosystem of aerospace and defense manufacturing, Loar Holdings Inc. (NYSE:LOAR) has carved out a distinct and profitable niche. Founded in 2012, the company has grown rapidly by focusing on the design, manufacture, and sale of highly engineered, mission-critical components. These aren't the headline-grabbing airframes or engines, but rather the essential, often overlooked parts – from auto throttles and lap-belt airbags to sensors, switches, and braking system components – that are vital for the safety, performance, and longevity of aircraft and defense systems.

LOAR's strategic approach is straightforward yet effective: identify pain points in the industry, solve them with proprietary, high-intellectual property solutions, and build a diversified portfolio through disciplined acquisitions. This model has historically fueled impressive growth, with sales and Adjusted EBITDA compounding annually at 37% and 45%, respectively, from inception through 2024. The company's conversion to a corporation and subsequent IPO in April 2024, followed by a follow-on offering in December 2024, marked a significant step, providing capital flexibility to accelerate its strategy.

Operating across commercial aerospace, business jet and general aviation, and defense markets, LOAR positions itself as a specialized supplier. While it interacts with industry giants like Boeing (BA), Airbus, and Lockheed Martin (LMT), its focus remains on providing essential components where its expertise and proprietary designs offer a competitive edge. This niche focus, coupled with a significant portion of revenue derived from the higher-margin aftermarket – now approximately 55% of total sales, up from 52% a year ago – provides a degree of resilience and predictability often sought by investors in the cyclical aerospace sector.

The Engine of Growth: Disciplined M&A and Organic Initiatives

LOAR's growth story is a dual narrative of strategic inorganic expansion and consistent organic execution. The company's acquisition strategy is highly disciplined, targeting businesses that fit specific criteria: proprietary content, high barriers to entry, meaningful aftermarket exposure, and strong market positions in niche segments. This approach is designed to be accretive and enhance the overall portfolio's characteristics.

A prime example is the acquisition of Applied Avionics, LLC (AAI) on August 26, 2024, for $383.5 million. AAI specializes in highly engineered avionics interface solutions, a clear fit with LOAR's focus on mission-critical, IP-driven products. This acquisition immediately contributed to revenue, accounting for $12.6 million in net acquisition sales in Q1 2025. Management noted that the goodwill recognized in the AAI deal was primarily attributable to the assembled workforce, expected synergies, and industry operating expertise, highlighting the strategic value beyond just the product portfolio.

Looking ahead, LOAR continues to pursue this strategy, as evidenced by the pending acquisition of LMB Fans Motors (LMB) for €365 million plus assumed net debt, announced on March 7, 2025. LMB is described as a global specialty player in customized high-performance fans and motors, with a business primarily serving the European defense market. Expected to close in Q3 2025, this acquisition aligns with LOAR's focus on proprietary, A&D-centric businesses with aftermarket potential. The acquisition is planned to be financed through additional borrowings under LOAR's existing Credit Agreement, with Blackstone Credit committing $400.0 million in incremental term loan facilities, demonstrating access to capital for strategic growth.

Complementing its M&A engine, LOAR drives organic growth through four key value streams: launching new products, optimizing operations for productivity, achieving price increases above inflation, and developing talent. New product introductions are a consistent contributor, targeted to add 1% to 3% to the top line annually over the long term. A notable recent development is the secondary cockpit barrier, developed in partnership with Airbus to meet new FAA safety requirements. Production units have already shipped, with entry into service scheduled for later in 2025, showcasing LOAR's ability to innovate and respond to evolving industry needs. The company is also making progress on PMA (Parts Manufacturer Approval) initiatives, including dynamometer testing for brake components and securing a customer agreement to market and sell certain products, with benefits expected in the latter half of 2025 and early 2026.

Technological Edge and Proprietary Moat

LOAR's competitive strength is fundamentally rooted in its technology and the proprietary nature of its products. The company emphasizes "mission-critical, highly engineered solutions with high intellectual property content." This isn't a single breakthrough technology, but rather a portfolio of specialized engineering capabilities applied across a diverse range of components. With an average of over 20,000 unique products annually, no single product accounts for more than approximately 3% of net sales, illustrating the breadth of their expertise and the depth of their customer integration.

The tangible benefits of this technological focus and proprietary design manifest in several ways. The demanding, extensive, and costly qualification processes required for new entrants in the aerospace and defense industry act as a significant barrier, protecting LOAR's market positions. The company's history of consistently delivering solutions that meet stringent specifications builds deep customer relationships and reinforces this moat. While specific quantitative performance metrics comparing LOAR's technology directly against alternatives from larger competitors aren't detailed, the emphasis on "quality, on-time performance and engineering capabilities" suggests that LOAR's products meet or exceed the necessary standards to be deemed "essential" by its customers. The successful development and rapid progression of the secondary cockpit barrier from concept to production within approximately 12 months, in partnership with a major OEM like Airbus, highlights a capability for responsive, specialized engineering that is a key differentiator.

LOAR's R&D efforts, while not quantified as a percentage of revenue in the same way as some larger primes, are focused on new product launches and PMA initiatives. The stated goal of these efforts is to drive 1-3% organic growth annually. The progress on PMA, including passing dynamometer testing for brake components, indicates a focus on expanding their certified aftermarket offerings, which typically command higher margins and face less direct competition from OEMs.

For investors, the "so what" of this technological edge is clear: it underpins LOAR's pricing power, supports its ability to achieve margins that are competitive with, and in some cases potentially higher than, segments of larger, more diversified players, and provides a sustainable basis for organic growth. The proprietary nature allows LOAR to pass through cost increases, including potential impacts from tariffs, without significant pushback, as highlighted by management. This moat is crucial in maintaining profitability and driving value creation.

Financial Performance: A Story of Growth and Margin Expansion

LOAR's recent financial performance underscores the effectiveness of its strategy and the favorable market environment. For the three months ended March 31, 2025, the company reported net sales of $114.66 million, a significant 24.8% increase from $91.84 million in the prior-year period. This growth was fueled by both strong organic performance (up 11.1% to $102.0 million) and contributions from the Applied Avionics acquisition.

Profitability saw notable improvement. Gross profit increased by 34.4% to $59.71 million, with the gross profit margin expanding by 370 basis points to 52.1% from 48.4% in Q1 2024. This margin expansion was attributed primarily to operating leverage and the execution of strategic value drivers, partially offset by higher amortization of intangible assets. Selling, general, and administrative expenses increased by 44.6% to $33.10 million, or 28.9% of net sales, up from 24.9%. This increase was driven by stock-based compensation, R&D, amortization, and costs associated with being a public company. Despite the rise in SG&A, operating income grew by 22.4% to $26.14 million.

A significant factor in the bottom-line improvement was the dramatic reduction in interest expense, which fell by 63.6% to $6.46 million in Q1 2025 from $17.73 million in Q1 2024. This was a direct result of substantial debt repayments made using proceeds from the IPO and Follow-on Offering in 2024. Consequently, net income surged to $15.32 million, or 13.4% of net sales, a substantial increase from $2.25 million, or 2.4% of net sales, in the prior-year quarter.

Adjusted EBITDA, a key metric for LOAR, increased by 37.8% to $43.13 million in Q1 2025 from $31.30 million in Q1 2024. The Adjusted EBITDA margin improved to 37.6% from 36.0%, reflecting the benefits of operating leverage and strategic initiatives, partially offset by the higher mix of defense sales and public company costs.

Looking at the full year 2024, LOAR achieved record sales of $402.82 million, up 27% from $317.48 million in 2023. Adjusted EBITDA reached $146 million, up significantly from prior periods. The company also highlighted strong free cash flow conversion, exceeding 200% for calendar year 2024, demonstrating its ability to translate earnings into cash.

Liquidity and Capital Allocation

LOAR's liquidity position has been significantly enhanced by its public offerings. As of March 31, 2025, the company held $80.50 million in cash and cash equivalents, up from $54.07 million at the end of 2024. Total debt stood at $281.37 million (gross), with net debt considerably lower due to the cash balance. The voluntary debt prepayments totaling $614.6 million in 2024, funded by IPO and Follow-on proceeds and cash from operations, have pushed the next term loan principal payment out to May 10, 2030. This extended debt maturity profile provides substantial financial flexibility.

The company also maintains access to capital through its Credit Agreement, with $100.0 million available under a delayed draw term loan commitment (expiring May 10, 2026) and a $50.0 million revolving line of credit (maturing May 10, 2029). Management believes that cash from operations and available borrowings are sufficient to fund cash requirements for at least the next twelve months, including planned capital expenditures (guided at approximately $14 million for 2025). The commitment for the $400.0 million incremental term loan facility for the pending LMB acquisition further underscores the company's ability to secure financing for its M&A strategy.

Competitive Landscape: Positioning Against Giants and Specialists

LOAR operates within the highly competitive aerospace and defense component market, competing with a mix of large, diversified primes and smaller, specialized suppliers. Its direct competitors include segments of giants like Lockheed Martin, Boeing, Northrop Grumman (NOC), and GE Aerospace (GE), as well as other niche players.

Compared to the large primes, LOAR's competitive positioning is based on its specialized focus, operational agility, and cost efficiency in its specific product areas. While companies like LMT and NOC focus on complex, large-scale defense systems and BA and GE Aerospace on major aircraft platforms and engines, LOAR excels in providing essential, often lower-cost, proprietary components. Its gross profit margin of 52.1% in Q1 2025 and Adjusted EBITDA margin of 37.6% demonstrate strong profitability, which compares favorably to the gross margins of LMT (~12%), BA (~-3%), NOC (~20%), and GE Aerospace (~37%) in their latest reported annual periods, although direct segment-level comparisons are challenging. LOAR's focus on aftermarket content (55% of sales) provides a higher-margin revenue stream compared to OEM-heavy businesses.

LOAR's key competitive advantages, or moats, include:

• Proprietary Technology & IP: The high intellectual property content and specialized engineering create barriers to entry and support pricing power.
• Niche Market Leadership: Strong positions in specific component markets make LOAR an essential supplier.
• Aftermarket Focus: Recurring, higher-margin revenue stream provides stability and profitability.
• Customer Relationships: Long-standing relationships with a diversified customer base across OEMs and the aftermarket.
• Operational Efficiency: Lean, entrepreneurial structure and focus on productivity initiatives contribute to strong margins.

However, LOAR also faces competitive disadvantages and vulnerabilities. Its smaller scale compared to primes means it may have less leverage with certain suppliers and potentially slower R&D cycles for entirely new, groundbreaking technologies compared to the significant R&D investments made by larger players. Reliance on certain key customers is also a noted risk. The company mitigates these by maintaining a diversified customer base, focusing R&D on product extensions and PMA opportunities, and strategically managing its supply chain (e.g., seeking second sources).

The demanding qualification process in the industry acts as a significant barrier to entry, benefiting established players like LOAR. While indirect competitors like emerging technology providers (e.g., in electric propulsion) could impact the market long-term, LOAR's focus on essential components for existing and near-term aircraft platforms provides a degree of insulation in the near to medium term.

Outlook and Guidance: Confidence in Continued Momentum

Management is highly optimistic about the remainder of 2025, citing strong market tailwinds and continued execution on strategic initiatives. Following the robust Q1 performance, LOAR raised its full-year 2025 guidance (on a pro forma basis, assuming ownership of all business units since the start of 2024):

• Net Sales: $482 million to $490 million (up from $480M-$488M)
• Adjusted EBITDA: $182 million to $185 million (up from $180M-$184M)
• Adjusted EBITDA Margin: Approximately 37.5% (implying a 120 basis point improvement over 2024)
• Net Income: $59 million to $64 million
• Adjusted EPS: $0.71 to $0.76 per share

This guidance is underpinned by specific market assumptions: Commercial OEM sales are expected to be up high single-digits, Commercial Aftermarket sales are projected to be up double-digits (an increase from the previous high single-digit forecast due to strong early-year bookings), and Defense sales are anticipated to be up high double-digits (17%-20%).

Management's confidence stems from being ahead of plan on value pricing and productivity initiatives, coupled with record bookings and backlog across all end markets. They noted no degradation in demand and highlighted that the primary challenge is keeping up with the pace of orders. Key industry tailwinds supporting this outlook include airlines extending the life of older aircraft, increased global defense spending driven by geopolitical uncertainty, and ongoing capacity constraints in the broader supply base.

Other guidance details for 2025 include capital expenditures of approximately $14 million, interest expense of approximately $28 million, an effective tax rate of approximately 30%, depreciation and amortization of approximately $51 million, noncash stock-based compensation of approximately $50 million (significantly higher than previously guided, reflecting public company compensation structures), and a fully diluted share count of approximately 97 million shares. It is important to note that this guidance explicitly excludes any benefit from the pending LMB acquisition.

Key Risks and Mitigation

While the outlook is positive, several risks could impact LOAR's performance. The company's almost exclusive focus on the aerospace and defense industry makes it sensitive to downturns in air travel, changes in defense budgets, and geopolitical events. Reliance on certain key customers and the ability to successfully integrate future acquisitions are also pertinent risks.

Operational risks include potential increases in raw material costs, taxes, and labor costs that cannot be fully passed through, as well as ongoing supply chain disruptions and labor availability challenges within the industry. Risks associated with being a government supplier, such as audits and investigations, are relevant to the defense segment. Furthermore, potential changes to U.S. tariff and import/export regulations could impact costs.

LOAR employs several mitigation strategies. Its diversified product portfolio and customer base across different platforms and end markets help reduce reliance on any single program or customer. The proprietary nature of its products and focus on value-based pricing are intended to allow the company to pass through cost inflation, including potential tariff impacts, although the effectiveness of this could vary depending on market conditions and customer agreements. Management's focus on operational efficiency and talent development aims to address productivity and labor challenges. For tariffs specifically, the company has taken steps like requiring vendors to prove cost increases and seeking second sources, and noted that strategic inventory levels provided some buffer.

Conclusion

Loar Holdings has established itself as a high-growth, high-margin player in the specialized aerospace and defense component market. Its core investment thesis is built on a proven strategy of acquiring proprietary, mission-critical businesses with strong aftermarket exposure and driving organic growth through focused execution on pricing, productivity, and new product development. The recent IPO and follow-on offering have significantly strengthened the balance sheet, providing the financial firepower to continue its accretive M&A strategy, as demonstrated by the pending LMB acquisition.

The company's Q1 2025 performance and raised full-year guidance underscore the momentum driven by robust demand across commercial aftermarket, defense, and improving OEM channels, coupled with effective operational execution and the benefits of a de-levered balance sheet. While risks inherent to the aerospace and defense sector and the integration of acquisitions remain, LOAR's proprietary technology, diversified niche portfolio, and disciplined approach provide a compelling foundation. The company's ability to consistently deliver above-market organic growth and expand margins, even while integrating acquisitions and building public company infrastructure, suggests that its "boring" execution is precisely what makes it a potentially attractive cash compounder for investors in the sector.