Loar (LOAR) Q4 2025 earnings review
Topline Compounds, But the M&A Bill Crushes the Bottom Line
Loar delivered a pristine operating quarter with Q4 organic revenue up 16.9% and Adjusted EBITDA margins hitting 37.8%. The 'boring cash compounder' narrative remains intact above the operating line. However, below the line, the story shifts dramatically. Management closed the LMB Fans & Motors and Harper Engineering acquisitions by loading $685M of new debt onto the balance sheet. While this fueled a massive upward revision to 2026 Sales and EBITDA guidance, the resulting $55M in incremental interest expense completely reversed the EPS trajectory. 2026 Net Income guidance was slashed from $82.5M to $61M (midpoints), proving that Loar's aggressive inorganic growth strategy comes with a steep near-term cost to shareholders.
🐂 Bull Case
Commercial aftermarket continues to surge, growing nearly 38.5% YoY in Q4. Aging global fleets and supply chain constraints on new aircraft heavily favor Loar's proprietary, high-margin replacement parts.
Management's value pricing and productivity initiatives are working flawlessly. Adjusted EBITDA margins are guided to reach ~40% in FY26, showcasing immense operating leverage as the company scales.
🐻 Bear Case
The $685M in incremental debt drives projected 2026 interest expense to $80M (up from $25.7M in 2025). This debt burden caused management to cut FY26 Adjusted EPS guidance by over 20%.
After a massive run earlier in the year, Defense aftermarket sales actually reversed, falling 2.8% YoY in Q4. FY26 market assumptions explicitly forecast Defense decelerating to mid-single-digit growth.
⚖️ Verdict: ⚪
Neutral. The core operating engine is spectacular, boasting 17% organic growth and expanding margins. However, the aggressive M&A strategy has introduced massive interest rate friction, heavily diluting the bottom line for the foreseeable future.
Key Themes
Relentless Margin Expansion to 40%
Accelerating. Loar's Adjusted EBITDA margin trajectory is one of the most compelling parts of its story. Margins rose from 36.4% in 24Q4 to 37.8% in 25Q4. Crucially, despite historically warning about 'temporary dilution' from new acquisitions, management guided FY26 Adjusted EBITDA margins to ~40% (up from a prior estimate of 39%). This indicates that the LMB and Harper acquisitions are highly accretive to EBITDA, and Loar's pricing power over its proprietary parts easily offsets inflation.
Commercial Aftermarket Surge
Accelerating. Driven by the macro backdrop of older global fleets (average age 14+ years) and limited new aircraft production, Commercial Aerospace Aftermarket surged 38.5% YoY in Q4 to $39.1M. Business Jet & General Aviation Aftermarket grew an equally impressive 31.3% YoY. This high-margin segment remains the primary organic growth engine for the company.
The Heavy Cost of the M&A Machine
Reversing. While M&A is a core strategic pillar, the financial mechanics have drastically shifted. To acquire LMB Fans & Motors and Harper Engineering, Loar tapped its credit facility for $685M. Long-term debt ballooned from $277M in 24FY to $711M by 25FY. Interest expense, which management had successfully navigated down to $25.7M in FY25, is guided to spike to ~$80M in FY26. This wipes out the bottom-line benefits of the acquisitions in the near term.
Defense Aftermarket Cracks
Reversing. Earlier in 2025, management cited Defense as a major growth driver (Q1 was up 30%). In Q4, however, Defense Aftermarket sales fell 2.8% YoY to $17.4M. While Defense OEM grew strongly (+40.2%), the aftermarket weakness is a notable divergence from the Commercial segment. Management's FY26 macro assumption of 'mid-single digit' defense growth reflects this cooling reality.
Inorganic Growth Execution
Stable. The completion of the LMB Fans & Motors and Harper Engineering deals significantly expands Loar's footprint and IP. Management noted these additions 'further strengthen our portfolio and expand our growth platform.' The revised 2026 guidance implies these acquisitions add roughly $100M to the top line and $44M to Adjusted EBITDA annually, proving the company's ability to source and close meaningful scale.
Other KPIs
Accelerating. Up significantly from $55.0M in FY24. When subtracting $13.0M in capital expenditures, Free Cash Flow stands at $99.3M. This 137% free cash flow conversion relative to Net Income ($72.1M) validates management's claim of being a powerful 'cash compounder' before accounting for M&A outflows.
Decelerating efficiency. A/R grew 37.9% YoY against total sales growth of 23.2%. While not a glaring red flag given the aggressive Q4 sales jump, it slightly pressures working capital and requires monitoring to ensure collections pace matches revenue expansion.
Guidance
Accelerating. The midpoint of $645M represents a 30% YoY increase over FY25's $496.3M. This massive jump includes both double-digit organic aftermarket assumptions and the consolidation of the new acquisitions.
Accelerating. Upward revision from the previous $209-$214M range. The midpoint implies 35% YoY growth, outpacing top-line growth and cementing the ~40% margin profile.
Reversing. Down drastically from the prior guide of $0.98-$1.03, and representing a 25% YoY decline from the $1.04 achieved in FY25. This deceleration explicitly isolates the destructive near-term impact of the $55M incremental interest expense from M&A debt.
Key Questions
Deleveraging Timeline
With interest expense ballooning to $80M in FY26 and heavily diluting EPS, what is the specific timeline and capital allocation strategy for paying down the $685M in new debt?
Defense Aftermarket Weakness
Defense aftermarket sales declined roughly 3% YoY in Q4. Was this a timing issue regarding shipments, a specific platform sunsetting, or a broader change in military maintenance budgets?
M&A Integration Execution
Given the scale of LMB and Harper adding roughly $100M to the top line, what are the primary integration hurdles, and are there any anticipated one-time restructuring costs expected in H1 2026?