Loar Holdings Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited results compared with Q1 2023. Loar designs and manufactures specialized aerospace and defense components, with commercial aerospace, business jet/general aviation, and defense as its principal end markets. The company converted from an LLC to a corporation on April 16, 2024, and completed its IPO after quarter-end.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $91.8 million | $74.2 million |
| Gross profit / gross margin | $44.4 million / 48.4% | $36.0 million / 48.5% |
| Operating income / operating margin | $21.4 million / 23.3% | $17.1 million / 23.0% |
| Net income (loss) | $2.2 million | $(7.5) million |
| Net cash from operating activities | $10.8 million | $3.1 million |
| Capital expenditures | $2.4 million | $1.9 million |
- Sales increased 23.7%. Organic sales rose 11.1% to $82.5 million; the company attributed the remaining increase principally to $9.3 million of sales from 2023 acquisitions DAC and CAV.
- Commercial end-market sales were $67.0 million, defense sales $16.6 million, and other sales $8.3 million. Growth was led by commercial OEM sales, supported by higher aircraft production and improved supply-chain deliveries.
- Adjusted EBITDA, a non-GAAP measure, was $33.0 million versus $26.8 million; adjusted EBITDA margin was 36.0% versus 36.2%. The company cautions that this measure excludes, among other items, interest, taxes, capital replacement needs, and acquisition integration costs.
- Interest expense increased to $17.7 million from $15.4 million, reflecting acquisition-related borrowings and higher rates. The effective tax rate was 37.9%, compared with 554.9% in Q1 2023; the prior-year tax expense included a valuation allowance against a deferred tax asset for disallowed interest carryforwards.
- Cash and cash equivalents were $28.2 million at March 31, 2024. Current assets were $181.6 million and current liabilities $58.8 million. Operating cash flow benefited from collection of large receivables; inventory growth used $4.8 million of cash.
- At quarter-end, credit-agreement debt was $537.5 million gross and $534.2 million net of issuance costs. Including finance leases, reported total debt was $537.7 million. The company had $47 million of delayed-draw term-loan availability and a $20 million revolver; it reported compliance with all debt covenants.
Material changes and subsequent events
- Compared with Q1 2023, sales and operating income rose, while gross margin was essentially flat. SG&A increased 21.5% to $22.9 million, but declined as a share of sales to 24.9% from 25.4%. Acquisition integration costs were $1.5 million across cost of sales and SG&A, versus $0.2 million in the prior-year quarter.
- Net income improvement also reflected the unusually high prior-year tax provision; it should not be attributed solely to operating growth.
- On April 29, 2024, Loar sold 12.65 million IPO shares at $28 per share. The notes report net proceeds of approximately $330.1 million after underwriting discounts and commissions, while MD&A reports $326.1 million after discounts and offering costs.
- On May 3, 2024, the company used IPO proceeds to repay $284.6 million of term-loan principal plus $0.3 million of accrued interest. On May 10, the credit agreement was restated, extending term-loan maturity to May 10, 2030, reducing applicable interest margins, increasing delayed-draw availability to $100 million, and replacing the revolver with a $50 million commitment.
Outlook, risks, and unusual items
- No numerical full-year sales or earnings guidance is provided. Management expects 2024 sales growth from organic growth, conversion of backlog, and strategic acquisitions, and plans to continue product development and pursue acquisitions.
- Management says inflation and supply-chain disruptions may increase material and labor costs, but had not materially affected results or capital resources and were not expected to materially alter its outlook. It also cites distributor and customer destocking as a partial offset to aftermarket growth.
- Key risks include dependence on aerospace and defense markets and certain customers, aircraft production and flight-hour cycles, supply availability and cost, fixed-price contracts, acquisition integration, variable-rate and substantial indebtedness, and government budget and contracting risks. Management believes operating cash flow and available borrowings should fund requirements for at least 12 months.
- Management states that ordinary-course lawsuits and claims are not expected to have a material financial impact. The company reported no legal proceedings under Part II, Item 1. Environmental liabilities were $1.1 million at quarter-end.
Important facts for investors to verify
- Reconcile the IPO net-proceeds figures of $330.1 million and $326.1 million, and confirm the final debt balance after the $284.6 million repayment and May 10 refinancing.
- Assess interest expense, variable-rate exposure, leverage, covenant headroom, and the availability and terms of the amended credit facilities.
- Track organic growth, backlog conversion, aircraft production and aftermarket demand, including whether destocking or supply constraints worsen.
- Monitor gross margin and integration costs as DAC and CAV are integrated, and distinguish operating improvement from prior-year tax effects.
- Review customer concentration, acquisition-related contingent payments, and the implications of the controlled-company structure and potential future share sales.