StandardAero, Inc.(SARO) - 2024 Q4 - Annual Report

Introductory Note Basis of Presentation The company operates through Engine Services and Component Repair segments and is majority-owned by Carlyle and GIC post-IPO - The company's business is organized into two primary reportable segments: Engine Services, which provides comprehensive aftermarket services for gas turbine engines, and Component Repair Services, which focuses on engine piece part and accessory repair[9] - Following its IPO and restructuring in October 2024, the company's major shareholders are Carlyle (62.8%) and GIC (14.2%)[10] Summary Risk Factors The company faces risks from industry cyclicality, supply chain issues, its controlled status, and material weaknesses in internal controls - Key operational risks include dependency on the commercial and business aviation industries, fluctuations in military spending, supply chain disruptions, inflation, and intense market competition[18] - Significant financial and corporate governance risks include the company's ability to remediate identified material weaknesses in internal controls, manage substantial indebtedness, and navigate its status as a "controlled company"[18] Forward-Looking Statements Forward-Looking Statements This report contains forward-looking statements subject to risks and uncertainties, covered by safe harbor provisions - The report includes forward-looking statements concerning future financial performance, business strategy, and operational plans, intended to be covered by safe harbor provisions[20] - These predictions are based on current expectations and are subject to significant risks and uncertainties, meaning actual results could differ materially; the company does not plan to publicly update these statements unless required by law[21][23] PART I Business StandardAero is a leading independent provider of aerospace engine aftermarket services with significant revenue from long-term agreements - The company is a leading independent provider of aerospace engine aftermarket services, with a comprehensive suite of solutions including maintenance, repair, and overhaul (MRO) for fixed and rotary wing aircraft[26] - The company holds exclusive or semi-exclusive licenses from OEMs for several key engine platforms, including certain Rolls-Royce, Honeywell, and Safran engines, and is the first independent provider in the Americas with a license for CFM International's LEAP engines[28] Customer Concentration (FY 2022-2024) | Year | Revenue from Top 4 OEM Customers | | :--- | :--- | | 2024 | 41% | | 2023 | 43% | | 2022 | 45% | - As of December 31, 2024, the company had approximately 7,700 employees, an increase from 7,300 in the prior year; the workforce is predominantly non-unionized[35] - The aerospace and defense industries are highly regulated by agencies such as the FAA, requiring stringent compliance for all maintenance, repair, and overhaul activities[42] Risk Factors The company faces extensive risks across its business, finances, and operations, including industry cyclicality and material weaknesses in internal controls Risks Related to Our Business and Industry Performance is tied to cyclical aviation markets, military spending, supply chain stability, and a concentrated customer base - The business is highly susceptible to factors impacting the commercial and business aviation industries, such as economic downturns, geopolitical events, and reduced flight activity, which can decrease demand for aftermarket services[52][53] - Revenue from military end-users accounted for $993.4 million (19.0%) in 2024, making the company vulnerable to decreases in government defense budgets, spending priorities, or outsourcing[56] - The company depends on a sufficient supply of parts from OEMs and other suppliers; global supply chain disruptions have caused and could continue to cause material shortages, delivery delays, and increased costs[60][61][63] - The market is highly competitive, with rivals including service divisions of major OEMs (GE, Pratt & Whitney, Rolls Royce), other independent providers, and in-house airline maintenance divisions[70][71][72] - A significant portion of revenue is derived from a small number of customers; in 2024, the top four OEM customers accounted for approximately 41% of revenue, creating risk if any of these customers reduce their business[81] Risks Related to Financial and Accounting Matters The company has identified material weaknesses in its internal controls, creating a risk of material misstatement in financial reports - The company identified material weaknesses in its internal control over financial reporting, specifically in the areas of control environment, risk assessment, monitoring, information and communication, written policies, and IT general controls[101][103] - A remediation plan is being implemented to address these weaknesses, which includes hiring additional accounting and IT personnel, developing monitoring controls, and improving IT control design and testing[102] - Failure to effectively remediate these material weaknesses could impair the ability to accurately report financial results, diminish investor confidence, and potentially lead to litigation or regulatory penalties[100][104] Risks Related to Information Technology, Intellectual Property and Cybersecurity The company faces significant cybersecurity threats and must comply with stringent, evolving government and data privacy regulations - The company regularly experiences evolving cyber-based attacks from various threat actors, which could lead to data breaches, production downtimes, and financial losses[113][114] - As a DoD contractor, the company must comply with DFARS and will be subject to the upcoming Cybersecurity Maturity Model Certification (CMMC) program; failure to achieve certification could restrict the ability to win or perform on DoD contracts[117][118] - The company is subject to a variety of evolving federal, state, and foreign data privacy laws, such as the California Consumer Privacy Act (CCPA) and Europe's General Data Protection Regulation (GDPR), which impose significant compliance costs and potential liabilities[120][121][124] - Disruptions to critical IT systems, whether from cyberattacks, equipment failures, or other events, could impair the ability to provide services and harm the company's reputation and financial condition[130] Risks Related to Government Regulation and Litigation Operations are subject to extensive regulation, including import/export controls, FAA approvals, and international compliance risks - Changes to U.S. tariff and import/export regulations could increase costs and negatively affect business, as the company has significant operations, customers, and suppliers in the U.S., Canada, and other countries[140] - The business operates in a highly regulated industry and must maintain numerous regulatory approvals from authorities like the FAA, EASA, and Transport Canada to perform its services[141][143] - Revenue from customers outside the U.S. and Canada represented approximately 30% of total revenue in 2024, exposing the company to risks associated with international operations, including political instability and compliance with foreign laws like the FCPA[146][147] - The company is subject to increasingly stringent environmental, health, and safety laws, as well as growing expectations and disclosure requirements related to ESG matters, which could result in substantial costs and reputational risk[150][157][158] Risks Related to Management and Employees Success depends on retaining key personnel, managing pension liabilities, and adapting to the increased costs of being a public company - The company's success depends on retaining its senior management team and attracting highly trained technical personnel in a competitive aerospace labor market[168][169] - The company maintains two U.K. defined benefit pension plans that were underfunded as of December 31, 2023, which may require future operating cash flow to cover shortfalls[174] - The requirements of being a public company, including compliance with the Exchange Act and Sarbanes-Oxley, have increased legal, accounting, and financial compliance costs and may strain management resources[175] Risks Related to Our Indebtedness The company's substantial indebtedness requires significant cash for debt service and includes restrictive covenants limiting financial flexibility Total Indebtedness | Date | Total Indebtedness Outstanding | | :--- | :--- | | Dec 31, 2024 | $2,269.6 million | - The company's high level of debt could make it difficult to satisfy obligations, limit the ability to obtain additional financing, and increase vulnerability to adverse economic conditions and rising interest rates[179] - The New Credit Agreement imposes restrictive covenants that limit the company's ability to, among other things, incur more debt, make acquisitions, sell assets, and pay dividends[186] - A significant portion of the company's debt is at variable interest rates, exposing it to interest rate risk; a 1 percentage point change in interest rates would result in an approximate $30.0 million change in annual interest expense on the New Senior Credit Facilities[191] Risks Related to Ownership of Our Common Stock Stock ownership risks include price volatility and significant control by Carlyle, which makes the company a "controlled company" - Carlyle owns approximately 62.8% of the common stock, giving it control over management appointments, major transactions, and director elections; this concentration may create conflicts of interest with other stockholders[197] - The company is a "controlled company" under NYSE rules, allowing it to be exempt from certain corporate governance requirements, including the need for a majority-independent board and fully independent compensation and nominating committees[199] - Anti-takeover provisions in the company's charter and bylaws, along with Delaware law, could make it more difficult for a third party to acquire the company, even if it would be beneficial to stockholders[207] - The company does not currently intend to pay dividends, meaning a return on investment is solely dependent on the appreciation of the stock price[213] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[221] Cybersecurity The company's cybersecurity program is guided by industry standards, with oversight from the Board's Audit Committee - The company's cybersecurity program is informed by recognized industry standards like the NIST Cybersecurity Framework, ISO 27001, and CIS Controls[223] - The Board of Directors has delegated oversight of cybersecurity risk to its Audit Committee, which oversees management's implementation of the program[226] - Primary responsibility for managing cybersecurity threats lies with the management team, led by the VP of Information Security and the SVP of Information Technology, both of whom have over 20 years of relevant experience[228][230] Properties The company's primary operational facilities are located in the United States, Canada, and the United Kingdom - The company's main facilities are in the U.S. (Texas, Ohio, Illinois), Canada (Winnipeg, Summerside), and the U.K. (Fleetlands, Almondbank), with a global presence in 11 countries[233] Top 5 Material Facilities by Production Area | Location | Production Area (Square Feet) | Use | Owned or Leased | | :--- | :--- | :--- | :--- | | Fleetlands, U.K. | 731,000 | Engine and airframe repair and overhaul | Owned | | San Antonio, Texas, U.S. | 716,000 | Engine repair and overhaul | Leased | | Winnipeg, Canada | 637,000 | Engine and component repair and overhaul | Owned/Leased | | Cincinnati, Ohio, U.S. | 460,000 | Component repair and overhaul | Leased | | Dallas, Texas, U.S. | 384,000 | Engine and component repair and overhaul | Leased | Legal Proceedings The company is involved in various legal proceedings that are not expected to have a material adverse effect - The company is subject to legal proceedings in the ordinary course of business but does not anticipate any material adverse impact from them[237] Mine Safety Disclosures This item is not applicable to the company - Not applicable[238] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock began trading on the NYSE in October 2024, with IPO proceeds used for significant debt reduction - The company's common stock commenced trading on the NYSE under the symbol "SARO" on October 2, 2024; prior to this, there was no public market for the stock[241] - The company does not currently anticipate paying any cash dividends, planning instead to use earnings to support operations and finance growth[243] - The IPO on October 1, 2024, generated net proceeds of approximately $1,202.8 million, which were used to redeem all $475.5 million of Prior Senior Notes and prepay a total of $725.6 million of outstanding term loans[249][250] [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 14.8% to $5.24 billion in FY2024, driving a return to profitability with $11.0 million in net income Results of Operations Revenue grew 14.8% in 2024, leading to a net income of $11.0 million compared to a $35.1 million loss in 2023 Consolidated Results of Operations (2024 vs. 2023) | Metric | 2024 (in millions) | 2023 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $5,237.2 | $4,563.3 | 14.8% | | Operating Income | $403.3 | $337.3 | 19.6% | | Net Income (Loss) | $11.0 | $(35.1) | -131.4% | - Revenue growth was primarily driven by a $605.9 million (24.6%) increase in the commercial aerospace end market, reflecting higher engine usage and maintenance demand[288] - SG&A expense increased by $51.3 million, largely due to $26.9 million in IPO-related costs and a $17.4 million one-time charge for stock compensation expense recognized upon the IPO[291] - Interest expense decreased to $282.5 million from $309.6 million due to debt repayments using IPO proceeds and refinancing at more favorable rates[294] Segment Results Both the Engine Services and Component Repair Services segments experienced double-digit revenue and Adjusted EBITDA growth in 2024 Segment Performance (FY 2024 vs. FY 2023) | Segment | Metric | 2024 (in millions) | 2023 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Engine Services | Segment Revenue | $4,644.8 | $4,049.9 | 14.7% | | | Segment Adj. EBITDA | $610.9 | $519.1 | 17.7% | | Component Repair | Segment Revenue | $592.4 | $513.4 | 15.4% | | | Segment Adj. EBITDA | $154.7 | $125.3 | 23.5% | - Engine Services growth was driven by increased demand in commercial aerospace and business aviation, though partially offset by supply chain delays[301] - Component Repair Services growth was supported by strong commercial aerospace demand and the acquisition of Aero Turbine[303] Liquidity and Capital Resources The company had $837.7 million in available liquidity at year-end, with total debt significantly reduced following the IPO Key Liquidity and Capital Metrics | Metric (in millions) | As of Dec 31, 2024 | As of Dec 31, 2023 | | :--- | :--- | :--- | | Cash | $102.6 | $58.0 | | Net Working Capital | $1,211.6 | $1,066.3 | | Total Debt | $2,231.4 | $3,198.8 | | Total Stockholders' Equity | $2,373.4 | $1,146.7 | Consolidated Cash Flow Summary (FY 2024) | Cash Flow Activity (in millions) | Amount | | :--- | :--- | | Net cash provided by operating activities | $76.3 | | Net cash used in investing activities | $(235.5) | | Net cash provided by financing activities | $203.8 | - Net cash from financing activities was primarily driven by $1,202.8 million in IPO proceeds and $3,247.0 million in new debt issuance, offset by $4,235.5 million in debt repayments[314] Critical Accounting Estimates Key estimates include revenue recognition, business combinations, and goodwill, with revenue recognition being highly sensitive to margin assumptions - Revenue for fixed price and time & material contracts is recognized over time using a portfolio approach based on an estimated margin by engine platform; this is a critical estimate, as a 1% change in the margin for open work orders would have changed 2024 revenue by $13.2 million[321][323] - The valuation of assets acquired and liabilities assumed in business combinations requires significant judgment, particularly for intangible assets like customer relationships, which are valued using income-based approaches[326][327][328] - Goodwill is tested for impairment annually on October 1; qualitative analyses performed for 2024 and 2023 indicated no impairment had occurred[329] - The company maintains a valuation allowance against deferred tax assets, which stood at $117.7 million as of December 31, 2024, primarily related to the realizability of interest expense carryforwards under Section 163(j)[331] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from interest rates, inflation, and foreign currency fluctuations - The company is exposed to interest rate risk from its variable-rate New Senior Secured Credit Facilities; it uses interest rate swaps and caps to manage this volatility, including a swap fixing the SOFR rate on a $400.0 million notional amount and caps on a $1,500.0 million notional amount[334][335] - Inflation poses a risk by increasing costs of labor, equipment, and raw materials; the company attempts to offset this through price increases and operational improvements[336] - Foreign currency risk exists due to international operations; for the year ended December 31, 2024, approximately 2.9% of revenue was attributable to non-U.S. Dollar currencies, and a hypothetical 10% change in the U.S. dollar's value would not have had a material effect[338] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and accompanying notes for the past three fiscal years Consolidated Financial Statements The financial statements show total assets of $6.21 billion and net income of $11.0 million for fiscal year 2024 Key Financial Statement Data (FY 2024) | Metric (in thousands) | Amount | | :--- | :--- | | Balance Sheet (as of Dec 31, 2024): | | | Total Assets | $6,213,601 | | Total Liabilities | $3,840,197 | | Total Stockholders' Equity | $2,373,404 | | Statement of Operations (Year ended Dec 31, 2024): | | | Revenue | $5,237,161 | | Operating Income | $403,219 | | Net Income | $10,974 | | Cash Flow Statement (Year ended Dec 31, 2024): | | | Net Cash from Operating Activities | $76,330 | Notes to Consolidated Financial Statements The notes detail revenue disaggregation, recent acquisitions, new debt structure, and the impact of the IPO on stock compensation Revenue by End Market (in thousands) | End Market | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Commercial Aerospace | $3,066,463 | $2,460,624 | $2,250,074 | | Military & Helicopter | $973,813 | $968,136 | $884,492 | | Business Aviation | $1,046,914 | $968,965 | $887,008 | | Other | $149,971 | $165,559 | $128,904 | - The company acquired Aero Turbine on August 23, 2024, for approximately $132.0 million, including contingent consideration; the acquisition is reported within the Component Repair Services segment[449] - On October 31, 2024, the company entered into a new credit agreement for $2.25 billion in term loans and a $750 million revolving credit facility, using the proceeds to repay and terminate prior debt facilities[480][481] - Upon its IPO on October 2, 2024, the company began recognizing stock compensation expense for awards under its 2019 Long-Term Incentive Plan, recording $17.4 million in 2024; a new 2024 Incentive Award Plan was also adopted[538][543][549] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[597] Controls and Procedures Disclosure controls were deemed ineffective as of year-end due to previously identified material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024, due to material weaknesses in internal control over financial reporting[599] - The identified material weaknesses include deficiencies in the control environment, risk assessment processes, accounting policies and procedures, and IT general controls[601] - A remediation plan is in process to address these weaknesses, involving hiring, developing monitoring controls, and improving IT controls[603] Other Information The company reports no other information required to be disclosed - None[606] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[606] PART III Directors, Executive Officers and Corporate Governance This section lists the company's leadership, with further governance details incorporated by reference from the 2025 Proxy Statement Key Executive Officers | Name | Position | | :--- | :--- | | Russell Ford | Chief Executive Officer and Director | | Daniel Satterfield | Chief Financial Officer and Treasurer | | Kimberly Ernzen | Chief Operating Officer | - The company has a code of ethics applicable to all directors, officers, and employees, which is available on its website[629] - Further information required by this item is incorporated by reference from the company's Definitive Proxy Statement for the 2025 Annual Meeting of Stockholders[630] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[631] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[632] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[633] Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the company's 2025 Proxy Statement - Information is incorporated by reference from the 2025 Proxy Statement[634] PART IV Exhibits, Financial Statement Schedules This section provides an index of all exhibits filed with the report, with financial statements located in Part II, Item 8 - The consolidated financial statements are located in Part II, Item 8 of the report[637] - An index of exhibits filed with the report is provided, referencing key documents such as the Amended and Restated Certificate of Incorporation, the New Credit Agreement, the Stockholders Agreement, and various incentive and compensation plans[639][642] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[644]