SARO Q3 2025: $400M Pass-Through Revenue Cut Resets Margin Profile for 2026
Standard Aero’s Q3 marked a pivotal margin reset as management executed structural contract changes that will eliminate $300 to $400 million in zero-margin pass-through revenue for 2026, clarifying the company’s true earnings power and cash flow profile. With commercial, business aviation, and military segments all delivering double-digit growth, the quarter also underscored SARO’s operational discipline amid persistent supply chain constraints. Management’s guidance raise, driven by visibility into Q4 cash flows and margin expansion, signals a step change in underlying profitability and working capital conversion for next year.
Summary
- Contract Restructuring Drives Margin Clarity: Pass-through revenue elimination will reveal higher underlying margins and improve free cash flow.
- Growth Platform Ramps Fuel Segment Outperformance: LEAP, HTF 7000, and military programs drove broad-based double-digit revenue gains.
- Supply Chain Headwinds Easing, Cash Flow Surge Expected: Improved parts availability sets up a strong Q4 cash generation inflection.
Performance Analysis
SARO delivered $1.5 billion in Q3 revenue, up 20% year-over-year, with adjusted EBITDA growing 16%. Double-digit growth was broad-based: commercial aerospace revenue rose 18%, business aviation surged 28%, and military and helicopter revenue climbed 21%. The company’s engine services segment (MRO and related work) represented the bulk of revenue, increasing 21% as LEAP and CFM56 program ramps offset margin dilution from early-stage work scopes. The component repair services (CRS) segment grew 14%, with record margins and a 32% jump in adjusted EBITDA, powered by demand from military and land/marine platforms as well as synergy capture from the ATI acquisition.
Free cash flow was a modest $4 million use in Q3, hampered by working capital tied up in engines awaiting constrained parts (notably forgings and castings). However, management expects a sharp reversal in Q4, as improved supply chain throughput will enable shipment and billing of delayed engines, unlocking a surge in cash conversion. Full-year 2025 guidance was raised across revenue, EBITDA, and free cash flow, reflecting confidence in both operational execution and the unwind of temporary working capital build.
- Broad-Based Growth: All major end markets posted double-digit revenue gains, underscoring SARO’s diversified demand base.
- Margin Dilution from Ramping Programs: LEAP and CFM56 DFW facilities remain at breakeven, but are expected to turn profitable in early 2026.
- Working Capital Drag Transitory: Contract asset build tied to supply chain delays will unwind in Q4, supporting a raised free cash flow outlook.
Underlying margin strength was masked by early-stage program ramps and temporary supply chain effects, but the business is set up for cleaner, higher-margin growth as contract and operating changes take hold in 2026.
Executive Commentary
"We have now made meaningful progress renegotiating several contracts that achieved structural changes to reduce or eliminate this pass-through activity, and we expect to see a clear positive impact in 2026. As a result of these contract amendments, we now expect approximately $300 to $400 million of material pass-through revenue to be eliminated next year. While that will appear to reduce our nominal topline growth rate at the outset, it will have minimal impact on EBITDA or earnings growth, resulting in higher reported margins that better reflect the true operating performance of these programs."
Dan Satterfield, Chief Financial Officer
"Our diversified business model across end markets, OEMs, and more than 40 platforms we serve continues to provide us with growth opportunities and resilience, enabling us to perform well through industry cycles... We are raising our four-year 2025 guidance across all key metrics, revenue, earnings, and free cash flow, reflecting our confidence in the fourth quarter and continued strength across both segments."
Russell Ford, Chairman and Chief Executive Officer
Strategic Positioning
1. Contract Structure Reset Will Improve Margin and Cash Flow Visibility
SARO’s renegotiation of long-term customer contracts to eliminate $300 to $400 million in zero-margin material pass-through revenue is a fundamental shift. This move will not only boost reported margins but also improve working capital efficiency and free cash flow conversion as inventory and contract assets tied to pass-through activity decline. The impact will be visible in 2026, with full cash flow benefits materializing in 2027 as legacy inventory runs off.
2. Growth Platforms Ramping with Margin Upside Ahead
The LEAP engine program, CFM56 expansion at DFW, and HTF 7000 business aviation platform are scaling rapidly. LEAP revenue nearly doubled sequentially, and the program is on track for $1 billion annual revenue in the next few years. However, both LEAP and CFM56 DFW remain margin-dilutive in early ramp, with profitability expected in 2026 as learning curves are traversed and full work scopes increase throughput and efficiency.
3. CRS Segment Delivers Record Margins, Expanding OEM Authorizations
Component repair services (CRS) posted record margins and 32% EBITDA growth, aided by expanded OEM-authorized repair capabilities, especially on LEAP and CF34 platforms. The segment’s portfolio now includes over 20,000 licensed repairs, with new authorizations driving third-party sales growth and cross-segment synergies.
4. Business Aviation Expansion Unlocks New Capacity
The Augusta, Georgia, facility expansion is operational, supporting strong demand for the HTF 7000 engine program. This positions SARO as the exclusive independent heavy overhaul provider, with new capacity already nearly full and further upside as the engine shop ramps into 2026.
5. Balance Sheet Flexibility for M&A and Organic Growth
Leverage declined to 2.9x net debt to EBITDA, providing ample capacity for further organic investments and accretive M&A. Management continues to scan a fragmented industry for bolt-on opportunities but remains disciplined on fit and valuation.
Key Considerations
This quarter’s results highlight SARO’s ability to drive operational outperformance while addressing structural inefficiencies that have historically masked true profitability. The company’s diversified exposure and disciplined capital allocation set up a cleaner, higher-quality earnings base for 2026 and beyond.
Key Considerations:
- Margin Expansion Catalyst: Elimination of pass-through revenue will lift reported margins and align earnings with underlying business economics.
- Supply Chain Still a Variable: While depth of delay is improving, persistent constraints on critical parts remain a watchpoint for engine throughput and cash timing.
- Program Ramp Execution: LEAP and CFM56 profitability depends on continued learning curve progress and work scope maturation in 2026.
- Free Cash Flow Inflection: Q4 is set for a sharp jump in cash generation as contract assets unwind, but sustainability will depend on ongoing supply chain normalization.
- M&A Optionality: Robust pipeline offers strategic upside, but management remains selective, preferring high-return bolt-ons that fit the portfolio.
Risks
Supply chain constraints on key engine parts (forgings, castings) remain a risk to timely engine shipments and working capital release. Although management has increasing visibility, further delays could impact cash flow and margin realization. Program ramp execution risk is elevated as LEAP and CFM56 transitions from breakeven to profitability. Additionally, the elimination of pass-through revenue will create a topline headwind, potentially obscuring true growth for less sophisticated observers.
Forward Outlook
For Q4, SARO guided to:
- Strong free cash flow as delayed engine shipments are completed and invoiced
- Improved margin mix in engine services, especially from business aviation and military programs
For full-year 2025, management raised guidance:
- Revenue: $5.97 billion to $6.03 billion
- Adjusted EBITDA: $795 million to $815 million
- Free cash flow: $170 million to $190 million
Management highlighted several factors that underpin the outlook:
- Visibility into Q4 cash flow, driven by engine shipments and contract asset unwind
- Ongoing demand strength across all major end markets, supporting continued double-digit growth
Takeaways
SARO’s Q3 marks a turning point, as contract restructuring and supply chain improvements set up a margin and cash flow reset for 2026. The company’s diversified growth engines and operational discipline position it well for compounding value creation, but execution on program ramps and supply chain normalization remain critical watchpoints.
- Margin Profile Reset: Structural contract changes will drive higher reported margins, improved cash flow, and clearer visibility into core earnings power.
- Growth Engine Execution: LEAP, CFM56, and HTF 7000 ramps are on track, but profitability hinges on learning curve progress and supply chain throughput.
- 2026 Watchlist: Investors should monitor the realization of cash flow benefits from contract changes and the transition of ramping programs into margin-accretive territory.
Conclusion
SARO’s Q3 2025 results clarify the company’s true profitability trajectory as contract and operational changes unlock higher margins and cash flow conversion. The foundation is set for cleaner, more sustainable growth, but supply chain and ramp execution will dictate the pace and quality of future results.
Industry Read-Through
SARO’s contract structure overhaul and margin reset signal a broader trend among aerospace MROs and OEMs to eliminate non-economic pass-through revenue and focus on true value-add activities. The persistent supply chain bottlenecks in forgings and castings remain an industry-wide constraint, but improving “depth of delay” metrics suggest incremental relief heading into 2026. Business aviation and military demand strength reinforce the resilience of aftermarket services, while the ramp of next-gen engine platforms like LEAP highlights the importance of learning curve management for margin expansion. Investors should expect similar margin and cash flow conversion resets across the sector as contract structures evolve and supply chain normalization takes hold.