VSE Corporation Aktie

Good day, and thank you for standing by. Welcome to the VSE Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.

Thank you. Welcome to VSE Corporation's First Quarter 2026 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly.

Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements.

We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions.

With that, I'd like to turn the call over to John.

Good morning, everyone, and thank you for joining us today. We delivered a strong start to 2026 with record results in the first quarter and continued momentum across our business. Our performance was driven by balanced contributions from both our distribution and MRO channels, supported by strong execution, new program activity and continued market share gains. Engine-related aftermarket activity remains a key driver of our business and now represents more than half of our total revenue with continued strength across our core platforms.

During the quarter, we advanced our OEM-aligned distribution programs, expanded our MRO capabilities, invested in targeted growth opportunities and made meaningful progress on our acquisition integrations. We remain focused on executing our strategy, scaling our platform and driving continued growth, margin expansion and long-term value creation. Let's begin on Slide 3, where I will highlight our recent developments.

Let me start with the acquisition of PAG, which we closed this week on Tuesday, May 5. Together, VSE and PAG now form a scaled independent aviation aftermarket platform with 61 locations across 8 countries, including 48 repair facilities and 11 distribution centers of excellence. The combination significantly expands our capabilities across both distribution and MRO, enhances our technical depth and strengthens our ability to deliver more integrated end-to-end solutions with increased proprietary content to a broad and diversified customer base. The business will now serve a diverse customer base across commercial, business and general aviation, rotorcraft, OEM and defense markets.

Strategically, this transaction accelerates our transition towards a more integrated, higher-margin aftermarket model with greater exposure to repair and engine-related activity. PAG's margin profile is immediately accretive and supports a clear path to exceeding 20% consolidated adjusted EBITDA margins over time, along with improved free cash flow generation. We funded the transaction through a combination of equity and new debt financing, which Adam will cover in more detail shortly. With the transaction now closed, our focus shifts to integration and execution. We see clear opportunities to drive synergies through cross-selling, repair in-sourcing and procurement efficiencies, and we are confident in our ability to deliver on those objectives.

Let's move to Slide 4 and continue with our recent developments. On April 1, we acquired NorthStar Technologies, a provider of MRO and third-party logistics services supporting the engine aftermarket. This acquisition expands our engine service capabilities in the business and general aviation market, deepens our integration with OEM aftermarket supply chains and enhances our ability to capture growing demand for teardown and other labor-intensive services. The business operates under a capital-light model with strong demand visibility and a demonstrated resilience across market cycles, supporting both active fleet and increasing teardown and retirement activity.

Let's now turn to Slide 5, where I will highlight a few business developments from the quarter. First, we previously announced a new globally exclusive life of program distribution agreement with Pratt & Whitney Canada for APU aftermarket components. This agreement spans more than 2,500 SKUs across more than 15 commercial, regional and business aviation platforms and meaningfully expands our OEM aligned portfolio while deepening our role in supporting these assets across their full life cycle.

Second, we expanded our airline-focused asset management program through the acquisition of CFM56 engines for a major U.S. airline partner. By leveraging our in-house capabilities across asset management, teardown and component level repair, we're able to deliver a more integrated engine aftermarket solution. This program supports our organic growth and further strengthens our position across the engine life cycle.

Third, we completed the integration of Turbine Weld into the VSE platform. With that integration now in place, the business is well positioned to continue to scale and contribute to our expanding engine-focused MRO capabilities. And finally, in connection with the PAG acquisition, we strengthened our capital structure through a combination of equity and debt financing, enhancing our financial flexibility to support future growth. Adam will cover this in more detail shortly.

Let me briefly update you on the current aviation aftermarket environment. Despite near-term macroeconomic uncertainty, including elevated fuel prices driven by recent geopolitical developments, we have not seen a pullback in airline capacity, OEM production plans or operator behavior to date. Demand for engine maintenance and repair activity remains strong, supported by continued fleet utilization, aging assets and ongoing supply constraints. This continues to be a key driver of activity across our commercial and business aviation businesses. Specifically in the business and aviation sector, demand also remains resilient. This segment has historically demonstrated lower sensitivity to fuel price volatility and continues to provide a stable and diversified source of revenue within our portfolio.

Let's now move to Slide 6 and discuss our consolidated first quarter 2026 financial performance. In the first quarter of 2026, we delivered record revenue and profitability. Revenue growth was driven by balanced contributions from both our distribution and MRO businesses, along with contributions from recent acquisitions. Engine aftermarket activity remains a key driver of our performance and now represents more than 50% of our total revenue. We continue to see strong demand across this segment, supported by high fleet utilization and ongoing supply constraints. Our business also delivered record profitability in the quarter. Profitability in the quarter reflects disciplined execution across both new and existing programs, expanded product offerings and MRO capabilities, strong performance in our OEM licensing and manufacturing programs and early synergy realization from recent acquisitions.

With that, I will now turn the call over to Adam to walk through our financial details.

Thank you, John. Let's turn to Slide 7 of the conference call materials, where I will provide a detailed overview of our first quarter consolidated financial results. For the first quarter of 2026, we generated $325 million of revenue, an increase of 27% year-over-year. Both distribution and MRO delivered strong results with distribution revenue increasing 26% and MRO revenue increasing 28% year-over-year. The 26% increase in distribution revenue was driven by strong performance across new and existing programs, product line expansion, market share gains and contributions from the Aero 3 acquisition. The 28% increase in MRO revenue was driven by expanded repair capacity, new repair capabilities, sustained end market demand and contributions from the Aero 3 and Turbine Weld acquisitions. Growth across both segments continues to be supported by strong demand, specifically in the engine aftermarket.

Excluding recent acquisitions, organic revenue increased about 15% year-over-year, reflecting strong underlying demand across the business. Consolidated adjusted EBITDA increased 37% to $55 million compared to the first quarter of 2025. Adjusted EBITDA margin was 17.1%, an increase of approximately 130 basis points versus the prior year period, driven primarily by greater mix of higher-margin product and repair activity, higher-margin OEM license manufacturing sales and continued synergy realization from recent acquisitions. Adjusted net income was $33 million and adjusted diluted earnings per share was $1.17 per share.

Let's turn to Slide 8 and our balance sheet. At the end of the first quarter, total debt outstanding was $366 million. The company had approximately $1.24 billion of cash and cash equivalents on hand, of which a majority was used to fund the PAG acquisition at closing, which occurred on May 5. We had no borrowings under our $400 million revolving credit facility, which was recently upsized to $500 million. The upsized credit facility remains undrawn.

During the first quarter, we used approximately $69 million of free cash flow, driven by part procurement seasonality and targeted strategic investments to support both the recently awarded APU program and the expanded airline-focused asset management program. We remain confident in our ability to generate strong free cash flow as these investments scale through the balance of the year. Pro forma for the acquisition, adjusted net leverage is estimated to be below 3x with a clear path to below 2.5x by year-end, driven by EBITDA growth and free cash flow generation.

Let's turn to Slide 9 to review our updated consolidated company guidance for full year 2026, inclusive of the PAG acquisition. Starting with revenue. With the PAG acquisition now closed as of May 5, we are updating our full year 2026 revenue growth guidance to reflect the contribution of that business. Our new range, inclusive of PAG is 57% to 61% for the full year. Importantly, this update reflects the inclusion of PAG and no change in our expectations for the underlying business. The updated revenue guidance is presented net of intercompany eliminations.

We are also updating our full year 2026 adjusted EBITDA margin outlook to reflect the addition of PAG, raising our range to 18.1% to 18.5%. As with our revenue guidance, this update is driven by the inclusion of PAG and does not reflect any change in our expectations for the underlying business. On a free cash flow basis, inclusive of our strategic investments executed in the first quarter and inclusive of the PAG acquisition, we expect to see improvement over the course of the year and on a year-over-year basis, driven by earnings growth and a reduction in working capital intensity.

I would now like to provide an update on several additional modeling assumptions post PAG acquisition, which are also detailed in the appendix of the presentation. For the full year 2026, interest expense net of interest income is projected at approximately $37 million to $40 million. Depreciation and amortization is expected to be approximately $98 million to $103 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be approximately $18 million to $19 million, and capital expenditures are expected to be approximately 2% to 2.5% of revenue.

Let's now move to Slide 10 and review our new capital structure. On May 5, we closed on a $900 million Term Loan B and upsized our revolving credit facility to $500 million. These new facilities replace our prior Term Loan A and the revolver structure. And together, they strengthen our balance sheet and give us flexibility to execute on our strategic priorities. With this refinancing, we extended our term loan maturity, expanded our borrowing capacity and improved our day-to-day operating flexibility. We were pleased with the level of institutional support and the pricing achieved. This refinancing positions us with significant available liquidity to support our strategic priorities and future growth initiatives.

With that, I'll turn the call back over to John.

Thanks, Adam. I'd like to conclude by briefly reviewing our 2026 priorities on Slide 11. First, we are focused on executing our recent acquisitions, accelerating integration and realizing synergies. We've made meaningful progress in the first quarter, including completing the integration of Turbine Weld. Second, we are implementing newly awarded OEM and distribution programs across our core platforms, including the Pratt & Whitney Canada APU agreement and our CFM engine initiatives, which we expect to contribute more meaningfully in the second half of the year.

Third, we are expanding our MRO capacity and technical capabilities to capture continued demand across the engine aftermarket. Fourth, we are advancing and converting our organic growth pipeline into revenue and margin contribution. Fifth, we are continuing to enhance our systems and processes to support scale, integration and efficient growth, including the targeted use of AI and data-driven tools to improve operational efficiency and optimize workflows across the platform.

And finally, with the PAG acquisition now closed, our focus moves to execution. We see clear opportunities to realize synergies through cross-selling, repair in-sourcing, procurement efficiencies and network optimization, and we are confident in our ability to deliver on those objectives.

In closing, we delivered a strong start to 2026 with record results in the first quarter and continued momentum across our business as we begin the second quarter. During the first quarter, we advanced our OEM aligned distribution programs, expanded our MRO capabilities, invested in targeted growth opportunities and made meaningful progress on our acquisition integrations. While we are mindful of the current macro environment, including geopolitical developments and fuel price volatility, demand across our core end markets has remained resilient, and we have not seen a change in customer behavior to date.

Overall, we believe the strength of our engine-focused aftermarket exposure, combined with our growing presence in business and general aviation, positions us well to navigate near-term uncertainty while continuing to execute on our long-term growth strategies. Thank you for your continued support and confidence in VSE.

Operator, we are now ready to take questions.

[Operator Instructions] And our first question will come from Ken Herbert from RBC Capital Markets.

John, Adam, and Michael, really nice results for the quarter. Maybe just to start the discussion, John. I can appreciate you've maintained the full year guide and not seeing any impact yet from the higher crude prices on airline or purchasing behavior. But some other engine companies like GE, in particular, have talked about a lag effect and have sort of lowered their expectations of cycles and utilization this year somewhat. Are you concerned at all that we see any sort of lag impact on your business, especially now with a greater focus on engine? Or maybe how can you talk about in your prior experiences, how this could potentially play out as you think about the portfolio today?

Yes. I think -- I appreciate the question. And what I would add to kind of the remarks I made a minute ago is April has also started out quite strong. And our bookings don't go out years, but they do, in many instances, go out months, specifically on our engine-related business. And again, not seeing any outward impact on our engine bookings at this point in time. I'd also kind of highlight the mix of the work that we have. We typically lag a bit on newer generation engines and have a mix of more legacy engines. So whether if you want to play kind of downside scenarios and think through retirements accelerate a bit, that does cause an element of teardowns and such as acceleration happens, which creates additional demand inside of our shops.

The second thing I would note is our business is about 50% business and general aviation. And we're -- we do more work on the workhorse aircraft than we do on kind of the more expensive airplanes that don't fly as much. And we tend to see that market slightly more resilient in the near term where you see a little blip from a macro perspective, you don't usually see an impact there. So at this point, we're holding to our guidance. If things change, we may even look at some upside potential towards the back end of the year.

That's great. And if I could, just a follow up. On PAG, congratulations on getting that done. How do we think about the pace of the synergy capture? Typically, you're going to take some time to get to know the business well, but you tend to move fairly quickly as you identify opportunities. How should we think about that as it impacts '26 and '27 on the synergy side?

Yes. Think about '26 is more in-sourcing and cross-selling and '27 is more kind of cost synergies. We have already -- during diligence and then in our work pre-closing, we've highlighted a number of synergies. And if you look at kind of the embedded organic growth for that business, it's -- the business will grow naturally high single digits. We've conservatized it slightly because some of that will move towards intercompany as we drive some synergies, which is where we'll get some near-term margin improvement. And then the second phase of synergies will roll out through 2027 as we execute on our cost initiatives.

Our next question will come from Sheila Kahyaoglu from Jefferies.

I wanted to ask just the organic growth in Q1 of 15% is ahead of schedule. Maybe, John, on your comments, specifically honing in on that 28% MRO expansion. How much of that was organic? And you mentioned it was increase in repair capability, increase in parts, I guess. Can you maybe expand on how you're doing that and how you think about the MRO business growing?

Yes. Actually, Sheila, for the first quarter, distribution outpaced MRO in terms of growth. We saw our distribution businesses, both on the commercial and on the business and general aviation side, quite strong. More of our engine-focused product, I would say, led that growth with kind of MRO slightly lower organic growth in comparison. And I'd say it's a -- it really is -- what I like about the quarterly results is there's a lot of balance to it. You saw contributions from new programs that we've implemented or in the process of implementing. You saw contributions from businesses we've acquired in the past that are now organic, and we have them growing at above market. And then we have some of the internal investments that we've made to support some expanded repair capabilities. We saw some contributions from those as well. And again, April, I'd say, has started off quite strong on both sides of the business, both MRO and distribution.

Great. And then maybe if I could ask another one, just given your relatively high business aviation exposure, how are you thinking about -- or what are you seeing in terms of the fleet activity given higher jet fuel, and how are you thinking about the business aviation side of both repair and distribution growing in that channel?

Yes. I mean we see it more resilient than the commercial side of the business. And again, as I mentioned a moment ago, the workhorse aircraft, your PT6 engines, your Citations, your Learjets, your King Airs and Pilatus, that is the core of what we focus on, both from an airframe and from -- I mean, from a component and from an engine perspective. And you tend to see sometimes people downgrade slightly to those aircraft when they're flying kind of higher, more expensive jets. And we tend to see that side of the business to be more resilient. So we haven't seen any concern. And I think the data has been quite strong for the first quarter and leading into the second quarter as well.

Our next question will come from Louie DiPalma from William Blair.

Your organic growth in the first quarter of 15% was -- it appears that it will be faster than the industry growth that you estimated was going to be in the high singles for this year. Should your new Pratt & Whitney Canada APU global distribution deal and the other deal that you announced, the CFM56 deal, should that lead to an acceleration in the organic growth in the second half because that likely wasn't a contributor in the first quarter, right? And what are some of the other moving parts in terms of the organic growth for this year?

Yes. I think the Pratt & Whitney Canada, you're correct. It will scale throughout the year. And I'd say on the engine side, the CFM56 announcement that we made, that could be some late '26 or even sometimes 2027 revenue. So Adam, I think from a modeling perspective, how would you...

Yes. I would say it's already embedded into our guidance. And as you know, we had a program that's ending this year, Louie. So the Pratt APU program will -- is replacing that revenue.

Great. That makes sense. And secondly, in the prior question, you were just discussing the dynamic between business aviation and commercial. In your recent 10-K disclosure, you revealed that a group of affiliated customers now represents 20% of revenue, and it would seem that affiliated group is RTX, since you have such a strong relationship with Pratt & Whitney Canada. But I was wondering how has business grown with Pratt & Whitney Commercial since you've acquired TCI? And how is the TCI business done? And is there more room for growth on the commercial side there, not only for Pratt & Whitney, but for your other partners?

Yes. I mean RTX is an important partner to us. You also have the Collins business, which is a number of businesses within that business as well. So there's -- it's just -- it's really 4 separate companies or 5 separate companies with a number of contracting arms even within them. We see all of our OEM partners as continued opportunities for share of wallet expansion. And if you look back from all of our acquisitions, and we'll do a little bit more deep dive at the back end of the year as we have our Investor Day, but the organic growth that we've been able to experience inside all of our core acquisitions and those programs or tangential programs they support is well above market. So I don't want to give an exact percentage around that, but I would just say we've grown the business north of 20% since we've owned it.

Great. And one final one. If the price of oil were to stay elevated, and that might not happen, but if it were -- would you expect that like PMA and USM would start to become more competitive to OEM parts? And I know in the past, you've described how you work with the OEMs on pricing strategies to help protect their businesses from competition related to PMA and USM. And so would you expect to play a significant role there? And would that help offset any weakness?

Yes, it's a good question. I tend -- this is an opinion. I tend to still think that PMA and DER repairs and our proprietary solutions, it's driven more by supply chain than by cost to start. You're solving problems for customers when they can't -- they don't have access to the products or the services in the market. So I tend to believe that, that's really the biggest driver. I think that in some instances, when you look at the economics around a repair or the economics around a certain type of aircraft, I do think that you'll look at can you do something different in terms of parts and repair to drive a better economic situation for that carrier or for that operator.

I think when you're looking at the commercial airlines, one part here and there is not going to change the overall dynamics that dramatically that I still think engineering and supply chain will be the biggest drivers of kind of that PMA/DER transition over cost first, even with fuel prices being up. But that's an opinion. It may be different. We're prepared. We're working with our OEM partners. We work with our supplier partners. We have our reverse engineering team and then our engineering team that can support PMA parts as needed. We have DERs on staff, and we have the ability to support proprietary solutions around that as well. And then assuming OEMs want to kind of reallocate capital during any type of period of disruption, we have our OEM solutions business where we're buying the IP as well. So we've got kind of 3 avenues and 3 levers to pull there. And I would say we're more responsive to what customers want and force them down one path or another.

Our next question will come from Scott Deuschle from Deutsche Bank.

John, can you clarify what exactly the CFM56 asset management program is and then what work scope is for VSE?

Yes, it's a good question. So we typically are not -- I wouldn't call us a traditional used serviceable material player. Everybody has USM product that's part of their portfolio. We tend to tie new parts, rotables, and exchanges, and repair together as much as possible. And then we look at our USM business more as an asset management business where we're supporting our major airline customers. And hopefully, in many instances, it's asset-light, where we're not buying the asset. We're just helping them monetize a used asset, and that could be us selling it on behalf of them. It could be us tearing it down and repairing pieces of it. And then we can drive some revenue in our MRO shops and then, again, maybe some type of profit sharing.

In this instance, we have a major airline who did want to exit some engines because they don't have a program set up today, and we did buy the engines. We'll be tearing them down. We'll be utilizing our existing capabilities inside of our MRO shops. And this is more of a traditional USM model than we typically deploy. And that's what this airline needs at this point in time. And we wanted to show our nimbleness and agility, and we got a hold of some really great engines that in a time where the market needs them at a pretty good valuation.

Okay. And was this the main driver of the inventory build we saw in the quarter? Or was that more related to the new distribution agreement?

It's really 2 reasons, Scott. It was partially the engine purchases and then also the inventory build on the new APU program. That was most of the cash usage in the quarter and the inventory build.

And that's why we felt very confident saying expect guidance to -- I mean, expect the cash to change dramatically throughout the year because you had 2 kind of one-offs nonrepeatable.

Okay. And then, John, can you share your latest thinking as to when you think the business can get to 20% EBITDA margins? It seems like it could be relatively soon given the outperformance in the quarter, the accretion from PAG and the PAG cost synergies, but just curious for your perspective there.

Yes, ask me that next quarter, and I say that because it's funny you buy these businesses, you do all this work and all the diligence and then you have to see it play in reality and really the devil is in the detail as you start to operate the business. So we have -- we never put a time line on it, candidly, because of a lot of the financing that we were going through. But we were hoping that we would be in that 20% range more like the end of '27. That's really kind of how we modeled things initially in our plans. The question is, can I accelerate that and bring that forward? I'm not 100% ready to commit to that at this point. I would tell you, we are doing everything in our power to try to accelerate that. We think it's an important milestone for the business. And I'll keep you updated as I kind of get my arms around both the synergies and just really my arms around each of the business units in a different way as we're operating it. We've owned the business for, I think, 25 hours.

Right. Okay. And then last question, Adam, can you just offer any detail on NorthStar's revenue and margins? Just trying to think through the modeling implications of that acquisition.

Yes. Scott, I would say it's immaterial. It's a few million of revenue contribution for the year.

Yes. And Scott, from a strategic perspective, this acquisition was really done to support one of our OEM partners. They need some support in their aftermarket programs on logistics. They need support with some repairs that they may be doing in-house today that there's an opportunity where they don't have capacity for us to support. And then they have some leases that are coming -- engines coming off of lease that they need to tear down and again, repair and other types of support around it. So this was a fast way to build the business plan around kind of an OEM partner's need.

Our next question will come from John Godyn from Citi.

There were a few earlier questions about aftermarket resiliency. And sometimes you're referring to kind of the trends in 1Q and other times that you were talking about forward bookings and having multi-month visibility. I just want to be like crystal clear. Is it fair to say that not only did you not see anything this quarter impact -- negative impact on aftermarket, but you see nothing in any of the leading indicators that you have access to that suggests there's softness. Is that the message?

Yes. I think it's a good question, John. At this point, we have not seen any softness in our business. And like I said, April was a strong month. I don't have the closed final numbers yet, but just looking at the flash for the month, it was another strong month, and we look at outward bookings being quite strong at this point in time as well. So I'd say from our indicators and the data that we have on hand today, we are not seeing any demand degradation at this point.

Okay. Appreciate that. And then just focusing on PAG, congrats again on closing the deal. I remember earlier in the year, there was a little bit of a sort of sidebar discussion about an earn-out that you had on PAG. And you had made the comment at different times that you'd be more than happy to pay that earn-out because it means that the integration synergies, everything went phenomenally. It feels like we're on the first step of hitting that earn-out because the deal closed early. Can you elaborate on the likelihood of hitting the earn-out, what it takes to get there? And maybe this idea that you kind of described as priority #1, which was accelerating the integration. What can be done? And are we on track at the end of this year, do you think, to be hitting those kind of above normal targets for that earn-out?

Yes. I mean it's a good question. I mean, essentially, to oversimplify it, our model showed one EBITDA number, their model had a higher one. So the question is, how do you bridge that gap and get there? And that was not just dollars, but their margin percentage was higher in their model. So it's a combination of the right mix and of accelerating some of the in-sourcing and sales synergies. So as soon as we got antitrust clearance about 3 or 4 weeks ago. So we're waiting on a few foreign investment things to close. But in that last 3 weeks, we started to put together the synergy plan. And we're actually having dinner with the team tonight, and we'll spend a little bit of time this week diving into it a little bit further to try to accelerate some of that -- those growth opportunities.

I think that the answer is probably somewhere in the middle, meaning that their model, I still think was a bit on the robust side. But I do think ours probably had some level of conservatism on the ability to achieve some of those near-term synergies. So hopefully, there'll be some upside on margin as we get into the back end of the year. Again, like I mentioned earlier, I just got to get my arms around it, and I want to get 1 or 2 wins in there quickly, right, to say, okay, this is exactly what we thought it is, and I can validate all the things that we have on our internal slides at this point.

Our next question will come from Louis Raffetto from Wolfe Research.

John, maybe can you provide an update on the fuel control systems manufacturing? I think you kind of referenced it a few times in the release and this morning. So just curious how that is going? Are we fully up to speed now?

Yes. I mean, essentially, all the revenue and earnings are in the business at this point. We have a few transition items to get done to make us officially the manufacturer of record of that product line. But essentially, from a modeling perspective, I'd say everything is embedded. What we've learned over time is we're building a really deep -- I'm trying to think of the right phrasing to use. But with the fuel control program, what we've learned is we're building a very deep portfolio on the engines that, that supports.

So I would say that the share of wallet opportunity around the fuel control has been what's been exciting as well. So we've got some fuel pumps that we're supporting. We've got other repair capabilities that we're supporting. So it's turned out to be not just a very strong revenue and margin driver for us, but it's created organic opportunities for us to grow around it as well, and that's been pretty exciting. So it's been a big contributor to both the margin improvement in the business as well as the organic growth.

Great. And then Adam, I know the slide deck mentioned attractive pricing on the refinancing. I think on the old stuff, you were like SOFR plus 175. Do you have an idea what the new items are?

Yes. On the Term Loan B, we're SOFR plus 200 with scale downs depending on leverage. So the term loan A, we are at 175. That's only because we are at a low leverage level with the cash that we generated from some of the equity raises. So it's a similar kind of grid where you're in that at this leverage level, you'll be in that S plus 200-ish range. And obviously, there's more flexibility there, less covenants and borrowing requirements that are easier going forward from a flexibility standpoint. So we feel, all in all, it is a very good outcome for us.

And our next question will come from Jeffrey Van Sinderen from B. Riley Securities.

And let me add my congratulations on closing PAG. I feel like that was pretty fast.

Yes. I mean for the size of the transaction, we feel good about the pace and getting that over the finish line.

Yes. So now that you're 25 whole hours in, I won't ask you to jump too far ahead, but maybe any more color you can share on what the first 90 days focus on integration looks like for PAG? And then also, maybe you can touch on how you're thinking about PAG's ability to reverse engineer and do you further develop that?

Yes. I mean, candidly, the first 30 to 45 days is actually just physically visiting the sites, getting to meet the people, spending time with them. What we will -- the first element of integration will be by capability set and by market segment and customer base, getting those teams together to work on cross-selling opportunities and in-sourcing opportunities. And whether that means just bringing things in-house, whether that means how we go to customers with a greater offering, whether that means utilizing the proprietary solutions that we have in our business and they have in theirs and embed them inside of our capability sets.

So I'd say that, that's really all the focus. We'll have probably five or six key people who will come up with a number of actions. And we've got a synergy capture leader that will be very much focused on how do we drive those benefits in the market, which -- meeting to our end user customers. So we're bringing better service to customers, which will drive the near-term integration. As far as kind of organization and systems and all of that, we have a framework of what we think the business is going to do and how it should come together. And the CEO, David Mast and I kind of worked on it a lot as we went through kind of diligence and just time together.

Now again, we got to go validate that, and that's why we won't make any changes of any substance until 2027 there. So again, picture all the synergy capture really around in-sourcing and sales synergies at this point in time and all the actions around it will be focused there. Obviously, Adam has got his things in terms of internal controls and treasury and the like, but that's not stuff that you're going to see in the P&L.

Okay. That's helpful. And then any thoughts on kind of the reverse engineering capabilities there?

I'd say their stronger capabilities are actually more on the DER repairs than actually on reverse engineering capabilities. I think we bring more opportunity on the reverse engineering to them. So I think bringing our engineering team into their shops, they did acquire a couple of businesses in the last like 18 months that do have a little bit more kind of reverse engineering capability. And candidly, I did not spend a lot of time with those businesses during diligence, and I look forward to the site visits next week actually to dive into that. So I'll have a better answer for you when I see you at the end of the month at your conference on that topic.

Fair enough. And then it may seem like a small detail at this moment, but how are you planning to apply AI to your businesses?

Yes. I mean, we've got a number of initiatives. How we're starting with AI is a couple of things. Number one, it's more bottoms-up than top-down led, meaning I want the businesses to find problems that they have inside of their business units and then working with our IT leader and the AI initiatives that we can deploy to really support solving those problems. So some of our MRO leaders have launched a number of programs already. And we're measuring both productivity improvements and ROI on those initiatives.

The second thing I'd say is we're trying to build as much in-house as we possibly can. I'm concerned about having somebody else get embedded from a process perspective inside of our processes and then I've got kind of this annuity-based fee that I have to pay forever to somebody because we like what's happened and what's been done. But I would say it's anything from improving kind of work on the shop floor where from an end-to-end, a part comes in the door, we tear it apart, quote it and then repair it wherever we can improve a process in that kind of chain. The second piece is aggregating data to support both supply chain demand planning and pricing. And then I'd say on the third side, anything on the customer service side. We get a lot of quotes, aggregating quotes, the quality of those quotes and data around that, I think, is really critical. So I would say we're at the very infant phases right now and look forward to having real productivity gains really 2027 and beyond.

And our next question will come from Jonathan Siegmann from Stifel.

So on the Pratt & Whitney Canada agreement, congratulations on that. I think by our count, there were 5 or 6 other agreements and expansions and geographies of that particular customer. So just -- I know you said you didn't want to quantify how much opportunity there was at specific customers. But given the great success here with this one, is it fair to say that you're in the late innings of expansion? Or is there further opportunity here in Pratt?

Yes. I mean I think when you look at any of the Tier 1 OEMs as partners, I'd say there's no late innings because they're still managing somewhere between 75% and 80% of the aftermarket on their own. So number one, there's share gain to just happen there. The second is they touch so many different aircraft types and so many different product categories that even though it's "the same OEM partner", so many of these programs, an APU program on a regional jet is very different than an engine program on a light business jet, which is very different than a gearbox program on a Gulfstream.

So I'd say it's really kind of early to mid-innings with all of these partners because there's just so many different opportunities that don't look like each other. So for us, it's almost like separate programs than it is the same account that it may look like to you from the outside.

Great. And then with NorthStar, I appreciate that small, but glad to see the acquisition flywheel going into hibernation mode after Precision Aviation. I'm just wondering if -- if we should consider this just a one-off or if there's other potential small bite-size opportunities for you?

Yes, it's a good question. Two things. Number one, the NorthStar deal was intended to support one of our OEM partners, and I want to continue to show my OEM partner regardless of me doing a large deal that I can still be nimble and agile and support them as quickly as I've always been for this time.

With regard to our M&A pipeline, which remains very robust, the smaller deals that are kind of self-sourced, timing is complex on those because you never know when an individual owner wants to sell. So if they accelerate their own kind of mental process, I would tell you we've been part of it. And you'll absolutely see us play in that space in the back end of the year. With regard to anything more material, I look more at end of the year to 2027 before we'd be open to doing anything.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Cuomo for any closing remarks.

Yes. I just want to -- a quick thank you to everybody for your continued support. Thanks for the time this morning, and have a great rest of your week. Take care.

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Good day, and thank you for standing by. Welcome to the VSE Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.

Thank you. Welcome to VSE Corporation's Fourth Quarter and Full Year 2025 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly.

Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements.

We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open up the line for questions.

With that, I'd like to turn the call over to John.

Good morning. Thank you for joining us today for VSE's Fourth Quarter and Full Year 2025 Conference Call. 2025 was an exceptional and transformational year for VSE. We completed our multiyear transformation and transition to a pure-play aviation aftermarket company, delivered record aviation revenue and profitability, surpassed $1 billion in annual revenue for the first time in our history and strengthened our balance sheet.

These results reflect disciplined execution and validate the strategy we have been advancing over the past several years. During the year, we expanded our engine and component capabilities through highly complementary acquisitions, advanced key OEM programs, increased MRO capacity and accelerated integration and synergy capture activities across the platform.

Each of these actions enhances our operating leverage, deepens our proprietary capabilities and strengthens our competitive positioning in the global aviation aftermarket. We entered 2026 with strong momentum. Our aviation-only platform is scaled and positioned to drive sustained organic growth and continued margin expansion and improved free cash flow generation.

Let's move to Slide 3, where I would like to highlight our recent developments. Let me start with our announced transformational acquisition of Precision Aviation Group, or PAG. On January 29, we entered into a definitive agreement to acquire PAG, a leading provider of MRO and supply chain solutions across commercial, business and general aviation, rotorcraft and defense markets.

This is a highly strategic transaction that meaningfully expands our scale and strengthens our engine and component service capabilities across the aviation aftermarket. Importantly, PAG aligns directly with our strategy of adding high-value, high-margin, mission-critical proprietary and differentiated services to our portfolio.

From a financial perspective, PAG expects to generate approximately $615 million in adjusted revenue for the full year 2025 with adjusted EBITDA margins above 20%. Following the anticipated close in the late second quarter, our combined leadership teams will immediately focus on integration and executing identified synergy initiatives. Phase 1 cost and in-sourcing synergies are expected to exceed $15 million on an annualized basis.

This provides a clear path for the combined company to achieve adjusted EBITDA margins above 20% over the next several years as integration progresses. The total upfront consideration for the acquisition is approximately $2.025 billion, subject to customary working capital adjustments. This consists of $1.75 billion in cash and approximately $275 million of equity issued to GenNx360, subject to a customary lockup.

The agreement also includes up to $125 million in contingent earn-out consideration payable in cash or equity at VSE's discretion based on PAG's 2026 adjusted EBITDA performance. We expect to fund the transaction with approximately $1.28 billion in net proceeds from our recently completed common stock and tangible equity unit offerings, together with permanent debt financing that we are finalizing in the coming weeks.

Let's turn to Slide 4. I'm very pleased to announce 2 new organic growth awards that expand our exclusive product portfolio, increase annuity-like revenue and further our strategy of adding proprietary content to the business. First, we entered into an asset purchase agreement with an OEM to exclusively manufacture, distribute and repair certain fuel pumps for the Pratt & Whitney Canada PT6 engine series.

This expands our proprietary OEM solutions portfolio and strengthens our position in high-value, high-margin, mission-critical engine accessory programs. We also announced a new globally exclusive life of program APU components distribution agreement. This meaningfully expands our role in supporting APU platforms across a broad range of commercial and mission-critical aircraft.

Under this agreement, VSE will serve as the exclusive life of program license distributor for more than 2,500 unique aftermarket parts supporting 4 OEM APU platforms. This program will require approximately $45 million of initial inventory and working capital, which is expected to impact free cash flow in the first quarter and for the full year 2026.

With that, let me briefly update you on the current aviation aftermarket environment and how we're thinking about 2026. The aviation aftermarket is positioned for another year of growth in 2026, supported by many of the same fundamentals that drove performance in 2025 across both commercial and business aviation. In Commercial Aviation, we continue to see healthy air travel demand with industry forecast calling for mid-single-digit revenue passenger kilometer growth in 2026.

Early commentary from the airlines we serve as we enter the year has also been constructive. Aircraft retirements remain an important watch item, but they are anticipated to stay below historical averages for the next several years. That dynamic continues to reflect the undersupply of new aircraft, sustained utilization of legacy fleets, strong durability of existing engine platforms, MRO capacity constraints, extended material lead times and oil prices that support the economics of keeping older aircraft in service.

And business in general aviation, demand remains strong with aircraft utilization at or near record levels. Ongoing wealth creation and the increasing preference for point-to-point travel supported by fractional and charter models continue to underpin activity. While North America remains the largest market, we expect relatively stronger markets in the Asia Pacific, Middle East and Africa regions, contributing to an expanded global installed base.

Taking all that into account and considering our portfolio mix across commercial and business aviation as well as engine and non-engine programs, we expect our core markets that we support to grow in the mid- to high single-digit range. Based on our planned organic growth initiatives, we expect to outperform those market assumptions, and Adam will shortly outline organic growth guidance in the high single-digit to low double-digit range.

Let's now turn to Slide 5, where I'll walk through our full year 2025 highlights. We delivered record aviation revenue and profitability, surpassing $1 billion in aviation revenue for the first time in company history, while expanding margins and generating positive free cash flow. We secured multiple new distribution and MRO program awards and strengthened key OEM partnerships, reinforcing future organic growth and expanding proprietary content.

In April, we completed the sale of our Fleet segment, repositioning VSE as a pure-play aviation aftermarket company and sharpening our strategic focus. In May, we acquired Turbine Weld, a specialized MRO provider focused on complex engine components in business and general aviation. This enhances our proprietary repair capabilities across key engine platforms and strengthens our engine MRO value proposition.

And in December, we completed the acquisition of Aero 3, a global MRO provider and distributor in the wheel and brake aftermarket. Aero 3 builds upon our 2023 acquisition of Desser Aerospace and further expands our global wheel and brake MRO and distribution capabilities while enhancing our diversified component services portfolio. We also made substantial progress advancing Kellstrom integration activities, exceeding our synergy capture targets and driving alignment across branding, organizational structure, IT systems and operational processes.

We invested strategically to increase MRO capacity and broaden technical capabilities across both engine and component programs to support future organic growth. We launched new program and product introductions in Europe and continue to expand our presence across both Europe and Asia Pacific. We advanced our OEM solutions organization and fuel control transition program, positioning 2026 as a key execution year.

And finally, we launched initial AI-enabled tools and process improvement initiatives to drive greater efficiency across the platform. Let's now turn to Slide 6 for a closer look at our full 2025 financial performance. For the full year, we delivered record revenue and record profitability. Revenue growth was driven by strong performance across both our Aviation distribution and MRO business units, along with contributions from recent acquisitions.

The Aviation segment also generated record profitability, supported by disciplined execution and distribution programs, increased MRO activity, strong performance in our OEM license manufacturing programs and acquisition contributions. I'm also pleased to report that we generated positive free cash flow for the full year and reduced adjusted net leverage to 1.1x.

I'll now turn the call over to Adam to walk through the financial details.

Thank you, John. Let's turn to Slide 7 of the conference call materials, where I will provide an overview of our fourth quarter consolidated financial performance. For the fourth quarter of 2025, we generated $301 million of revenue or an increase of 32%. Consolidated adjusted EBITDA increased 55% to $52 million compared to the fourth quarter of 2024.

Adjusted EBITDA margin was 17.2% in the quarter, an approximate 260 basis point improvement over the prior year period. Adjusted net income was $26 million and adjusted diluted earnings per share was $1.16. Moving now to the full year 2025. Revenue was approximately $1.1 billion in 2025, up 41% versus 2024. Adjusted EBITDA for the full year was $183 million, representing an increase of 56% as compared to 2024.

Adjusted net income increased 121% to $83 million, and adjusted net income per diluted share increased 87% to $3.92 per diluted share. Turning to Slide 8. I'll review the Aviation segment's fourth quarter performance. Aviation revenue increased 32% year-over-year to a record $301 million in the fourth quarter. Both distribution and MRO delivered strong results, increasing 37% and 24%, respectively.

The 37% increase in distribution revenue was driven by strong performance across new and existing programs, product line expansion, market share gains and a partial quarter contribution from Kellstrom in the prior year period. The 24% increase in MRO revenue was driven by expanded repair capacity, new repair capabilities, sustained end market demand and contributions from the Turbine Weld acquisition.

Excluding the impact of all recent acquisitions and including Kellstrom beginning in December, organic Aviation segment revenue increased approximately 12% year-over-year in the fourth quarter. Aviation adjusted EBITDA increased 43% to a record $55 million, representing 18.3% of revenue. The year-over-year improvement reflects a greater mix of higher-margin product and repair activity, increased in-sourcing, favorable program mix, higher-margin OEM license manufacturing sales and continued synergy realization.

For the full year 2025, Aviation segment revenue increased 41% to a record $1.1 billion. Adjusted EBITDA increased 48% to $195 million and adjusted EBITDA margin expanded 80 basis points to 17.6%. Turning to Slide 9 and our balance sheet. At the end of the fourth quarter, total debt outstanding was $296 million with approximately $69 million of cash on hand. We had no borrowings under our $400 million revolving credit facility.

During the fourth quarter, we generated approximately $31 million of free cash flow, driven by strong profitability and disciplined working capital management. For the full year 2025, free cash flow totaled $6 million, an improvement of approximately $57 million versus the prior year period. At year-end, our adjusted net leverage ratio improved to 1.1x compared to 2x at the end of the third quarter.

Following the anticipated close of the PAG acquisition, we expect adjusted net leverage to be below 3x. Let's now turn to Slide 10 to review our consolidated company guidance for the full year 2026. Beginning this year, we will no longer provide segment level guidance since we are now one segment aviation-focused business. In addition, the recently announced PAG acquisition is not included in our 2026 outlook.

We plan to update our consolidated guidance following the close of that transaction. Starting with revenue. We expect full year 2026 revenue to increase between 19% and 23% year-over-year. Full year contributions from the Aero 3 and Turbine Weld acquisitions are expected to account for approximately 11% to 13% of that growth.

We expect organic growth in the high single to low double-digit range, above the broader market growth outlook John referenced earlier, driven by new program awards, distribution expansion, increased MRO capacity and capabilities and continued market share gains. From a quarterly cadence standpoint, revenue is expected to increase sequentially throughout the year.

This reflects Aero 3 seasonality and the ramp of new program awards with heavier revenue contribution in the second half of the year. For the full year 2026, we expect adjusted EBITDA margins between 16.8% and 17.3%. The Aero 3 and Turbine Weld acquisitions are expected to be accretive by approximately 40 basis points. Within the core aviation business, operating leverage, program optimization and improved MRO utilization are expected to contribute between up to 50 basis points of incremental margin expansion.

On a quarterly basis, first quarter margins are expected to decline sequentially from the fourth quarter of 2025. This reflects Aero 3 seasonality, the revenue ramp of new program awards and product mix. Importantly, first quarter margins are expected to improve on a year-over-year basis. As John mentioned earlier, the new OEM APU program will require approximately $45 million of initial inventory and related working capital management.

This will impact free cash flow in the first quarter and for the full year 2026 and is incremental to our typical first quarter working capital usage. Excluding this initial inventory investment, we expect stronger free cash flow in 2026 compared to 2025. Let me briefly review some additional modeling assumptions, which are also detailed in the appendix. For the full year 2026, interest expense is projected at approximately $20 million.

Depreciation and amortization is expected to be between $52 million and $54 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be between $15 million and $16 million. And capital expenditures are expected to be approximately 2% of revenue.

With that, I'll turn the call back over to John.

Thanks, Adam. I'd like to conclude our prepared remarks by looking ahead and reviewing our 2026 priorities on Slide 11. First, we are focused on executing our recent acquisitions and accelerating integrations and synergy realization. Second, we are implementing newly awarded distribution and OEM solutions programs, including those I mentioned earlier, across our core platforms.

Third, we are expanding MRO capacity and technical capabilities to capture incremental growth opportunities. Fourth, we are advancing and converting our organic growth pipeline. Fifth, we are continuing to enhance our processes and systems to enable scale and support future integrations. And finally, we expect to close the PAG acquisition in the second quarter and initiate a disciplined structured integration and synergy capture process immediately thereafter. In closing, 2025 was a defining year for VSE.

We delivered record financial performance, completed our transformation to a pure-play aviation aftermarket company, expanded our proprietary and exclusive content portfolio and strengthened our balance sheet. At the same time, we positioned the company for its next phase of growth, both organically and through the announced acquisitions of Aero 3 and PAG.

As we look ahead to 2026, we see a supportive market environment, accelerating organic momentum, expanding margins and a clear path to greater scale and capability. Our strategy remains consistent and disciplined, focus on high-value, high-margin, mission-critical aftermarket services, expand proprietary content, drive operational execution and allocate capital thoughtfully.

We believe the actions we've taken over the past several years have built a stronger, more resilient and more scalable aviation platform, and we are confident in our ability to continue delivering long-term value for our shareholders. I want to thank our shareholders for their continued support and confidence in our strategy and most importantly, to thank our global VSE team for their dedication and execution.

Your commitment is what drives our performance and positions us for an even stronger future. Operator, we are now ready to take questions.

[Operator Instructions] And our first question will come from Ken Herbert from RBC.

John, maybe I just wanted to -- I appreciate the detail you provided on the sort of the margin walk through '26. But can you just maybe dig a little bit deeper into how we should think about the run rate synergy captures on Kellstrom, Aero 3, TCI, the recent acquisitions?

And where are you relative to initial expectations there? And as we think about sort of opportunity in '26 and beyond on those?

Yes, it's a great question. I'd say that we'll give an update with the first quarter with regard to Aero 3. I'd like to let the business run for a solid quarter, see exactly how it performs, where I can kind of micro manage the financials before we kind of lay out what we think we can do with the business.

But with regard to Kellstrom, the business on an individual basis is at or above our company-wide margins today. So we're extremely ahead of the totality of where we thought the business would be. We've owned it for 14 months, and we've taken it from 11% margins to about 17% -- this year, I would tell you that we still have some margin opportunity as we continue -- on the cost side as we continue to finish the integration.

The area -- and this goes for Turbine Weld and for TCI, our opportunity to have solid kind of double-digit growth in '26, '27 on those 3 sites is there's a strong line of sight. And I just want to make sure we're investing in the headcount and the capability sets. So we've been, I'd say, slightly conservative on our modeling on synergies. But essentially, it's 100 to 200 basis points is kind of what we've got baked into our plan.

But I've been more conservative because if I can bring on the labor and get our business to grow 12%, 13%, 14% over the next 24 months, I'd rather be in that position.

That's great. And I just wanted to follow up. You made a comment in terms of your priorities on advancing the organic growth pipeline. And you've announced some deals with Pratt Canada recently.

Can you give any more examples of where we might see that organic pipeline growing and how we think about maybe the opportunity there to push sort of better than, call it, the 10% growth we're seeing this year?

Yes. I mean, I think it's a great question. I'd say there's a couple of things. Number one is we've got a really strong pipeline. The question just is when do you close the deal and when do you receive the revenue. We've got a number of really kind of strategic MRO contracts that we're working on, on the commercial side with major airline customers.

The question just is not an if, but when do you start really seeing the value of those awards. I would say the greater opportunity, though, is probably about 60% of our business is engine focused. And that's both on business and general aviation and commercial. That market is there. It's just building out the capacity for it and potentially working with our OEM partners where they're focusing on, for example, LEAP or GTF where they want to outsource a more legacy engine to us and that work we can move pretty quickly.

So I'd say expect to see us really talk more about the commercial MRO side of the business, whether it's avionics, hydraulics, pneumatics or anything touching the engine. those are the biggest areas of organic growth opportunities where we can realize revenue and earnings, I'd say, quickly in the next 12 to 18 months.

Our next question will come from Sheila Kahyaoglu from Jefferies.

John, I always appreciate that you provide color out there. So maybe how do we think about on Slide 10, when you talk about your revenue growth profile versus the market of high single-digit, low double-digit growth, how much of that is coming from your outperformance is coming from share gains versus pricing?

And how do you think about the growth within your different markets, whether it's engines, wheels and brakes or general aviation versus commercial?

Yes. I mean I appreciate the question because I do think that we get comped many times with just the generic commercial aftermarket. And we do have a strong business in general aviation and rotorcraft content, which is on an organic basis, growing slightly slower, maybe 200 basis points, 300 basis points slower in terms of growth.

So you're thinking more kind of mid-plus single digits rather than high single digits. Where we love those markets is we have the ability to kind of build a bigger competitive moat because we're -- we look at it on a platform-by-platform or engine-by-engine basis, and we can drive higher content. So we love those markets, but organically, they tend to grow slightly a little slower.

So we look at the business in 4 buckets. We think our commercial engine business will grow low double digits. We think our business and general aviation engine business will grow kind of high single digits. right below that is more the component side of the commercial business and that mid-single-digit growth rate would be business and general aviation components.

And I would tell you on the pricing side, we're seeing a little bit of moderation in pricing. I mean we've had very aggressive pricing over the last 5 years, plus tariff impact, which does get pushed down to the end user. So in those market growth rates, I would tell you, think of it more as 50-50 price and volume.

Got it. And then maybe if I could ask another one. It's -- I don't think it's necessarily on your slides for your '26 priorities in terms of free cash flow improvement.

And maybe that's because you're investing in new awards and to ensure you have the labor there and potential. But can you think about -- can you talk to us about free cash flow potential in 2026?

Yes, sure. I mean, by the way, it should be. So that was on my part. Thanks for highlighting it. But because it should be. It is definitely a conversation we're having.

No, I looked at it as a positive that you're investing in organic growth.

But it's a combination. We've hit the scale now. First quarter is always going to relatively be free cash flow negative. We just -- we have so many end of year opportunities, and we're putting cash to work. But as you look at the back end of the year, you should see a stronger free cash flow conversion.

Adam, do you want to speak in a little bit more detail to it?

Yes. Thanks for the question, Sheila. So yes, I mean we made significant improvement in 2025, as you mentioned, improving, call it, around $57 million year-on-year. We are expecting to continue to improve, specifically excluding this APU program investment that we talked about.

But I think you're seeing the benefit of the portfolio shift to more MRO, less working capital-intensive revenue, and we are continuing to optimize our distribution program, resulting in improved terms as well. And I think you'll continue to see that shift, especially through the PAG acquisition as well. So we'll provide more specific guidance after the close of the PAG acquisition and the permanent debt financing and some of the deal-related items.

But as John said, we are expecting improvement into 2026. We will see more cash use in the first half of the year driven by the APU investment, but you should expect very strong free cash flow generation in the second half of the year.

Our next question will come from Louie DiPalma from William Blair.

Congrats on the flurry of activity on the business development front over the past 12 months.

Adam, are you able to hear Louie?

Yes.

Can you hear me?

John, can you confirm that you can hear or you still can't hear Louie?

I cannot. I hear you and I hear Adam. I do not hear Louie.

And Louie, I brought you back up to the stage. Can you say a couple of words to make sure John can hear you, please?

Fantastic. I was wondering what was the origin of the OEM licensing fuel pump deal and the APU distribution agreement. John, were these competitive situations or deals that arose from your existing partnerships without a formal process?

It's a great question. I'd say that both of the agreements were definitely a result of the focus as we build these relationships that we're getting ahead of potential future opportunities, and we're highlighting to our OEM partners where we think we can add value. I would say that one of them was more competitive of a process and the other one was more of us working out a partnership agreement.

And the next question perhaps for Adam. Adam, if you abstained from M&A for a couple of years, would you still expect to expand the EBITDA margin by roughly that 50 basis points level that you set out for this year just based on your operating leverage, cross-selling, increased utilization and just expansion into higher-margin solutions. And so are you -- do you need M&A to expand margins? Or do you have a long runway for organic margin expansion?

Yes. We definitely don't need M&A to expand margins. And I think if you go back historically, you can look at the year-over-year margin improvement and exclude M&A, we've been pretty clear on buying some of these businesses at lower than segment or consolidated margin, and you've seen the organic margin expansion. I think there's a number of opportunities.

One is obviously integrating the businesses and synergies. You can say some of that is inorganic, but we continue to in-source some of our repairs internally that continues to drive margins. You hit on the operating leverage. And as we grow organically at very strong growth rates, you continue to see that operating leverage improve over time.

And then there's just further optimization efforts in our existing business around supply chain and other indirect spend. So I think 50 basis points is a decent barometer, but there's significant organic expansion opportunities in the business without M&A.

And tying the 2 questions together, would that OEM licensing fuel pump deal, would that typically be higher margin like in the 20% range or even above that? And would that be similar to what you did with the Honeywell deal?

Yes. Those type of opportunities would typically be higher than our consolidated margin, similar to the Honeywell program on the higher end of the margin range.

Our next question comes from Michael Ciarmoli from Truist.

John, just back on to this APU opportunity. Can we assume -- I don't think you said the OEM, is this Honeywell? If it's not Honeywell, are you then basically selling all the components into the licensed repair network?

I mean, do you have an expectation of what this revenue ramp looks like once you -- or even once you get to full kind of run rate, how this would be additive to organic growth?

It is -- I don't -- I'd rather not say the OEM at this point, but we are selling to the operators and into the networks. But it's -- we are just in the finalization of it. The reason we really shared it with the quarter is because we're going to -- we want to accelerate the transition. So there will be an inventory purchase.

So I wanted to make sure you were able to model the inventory purchase in the first quarter. Our first quarter earnings will be in early May. We'll have a better feel then of how fast we can transition, which is how fast we can be additive in terms of revenue and earnings. I'd say we're a little premature there.

I just wanted to make sure that you all weren't surprised by the inventory build that we were going to do in the first quarter to support this. But I just need to see how fast we can actually transition the program before I can commit to the revenue.

Got it. Got it. Did this have anything -- I know when you made the PAG acquisition, they had some APU exposure. Was this related to PA broaden that...

I think there's more...

Repair, but, yes.

Yes, this is something we were working on prior to that.

Okay. Got it. And then maybe just back to Sheila's kind of revenue question. I feel like all of our models here are pro formas built on top of pro formas and so on.

I know, kind of complicated.

Can you give us a sense -- I don't know if you answered kind of distribution versus MRO growth in terms of parsing that out. And obviously, you've got some of these new programs ramping distribution. But can you even talk to it, I guess, the breakdown or growth rates among the 2 lines?

And then are you -- is this market share wins that you're seeing driving kind of same stores? Just to give us a little bit more confidence in our modeling.

Yes. I think where you're seeing us outpace the way we look at our markets in those 4 buckets that I shared during Sheila's question, we are -- the outpacing of that is from share gain. And the share gain across the board. This year, the organic growth rate in our distribution business will be lower than the MRO business.

We do have that one actuation program headwind to that program that ended last year that -- so we do have a little bit of a headwind in that business today. It's still going to be strong high single-digit organic growth rate, but expect that to couple with the MRO growth rate, which will be probably more in the low double-digit side, if I was looking at it by capability set.

But traditionally, in our business, they've been pretty similar. This year, we just have that little bit of a headwind, which is bringing the organic growth in distribution a little lower.

Our next question comes from John Godyn from Citi.

I just wanted to follow up on margins. You guys had a tremendous performance in the fourth quarter. I appreciate some of the commentary for 2026, but maybe we can talk about what would drive the low end versus the high end of margin guide for '26 and if there's room to perhaps exceed expectations in '26.

Yes, John, thanks for the question. I'd say it's on the low end, the 2 things that would drive it is just natural mix. So the mix on the lower end of the margin profile. And then labor, if we're able to bring on labor to support back end of the year kind of engine growth and new program growth that our SG&A is kind of a little tighter than what our plan is.

That would probably drive the low-end opportunity. I think at the high end, there's a couple of levers that we'll focus on pulling this year to drive margin. On the number one, Ken mentioned it is additional synergy opportunity that we've got with the acquired businesses and how we integrate them. Number two is, as we look at accelerating organic growth more on the proprietary side of the business, which tends to be higher margin.

So we're moving mix on the higher margin side. And then as far as kind of some of our process and efficiency opportunities, if we can accelerate those kind of faster than planned, those will drive kind of from an SG&A as a percentage of sales, a slight improvement, which will impact margins on the positive side.

So we've got some levers to pull. I just -- it's just about a matter of timing, right? So I just want to be conscious of the timing and make sure that we can -- we've got a lot on our plate in terms of execution that we can execute it the right way.

That's fantastic. And sort of similar question but bigger picture, as we look at that 20% margin target, maybe you can just elaborate on what the shape of that looks like? And if there are any big milestones that kind of unlock a step change in margins or if you expect it to just be kind of ratable and linear over the next few years?

Yes. I mean it's -- we had a path to 20% prePAG announcement. The announcement of PAG will accelerate that path in a faster way. I'd say that once we close the deal and we kind of recast our guidance for the back end of the year, I'll have a better feel. It's -- I'd say the gating factor on timing is how fast we can get through some of the synergies that we publicly shared.

That first phase of $15 million of synergies really gets us there. So the question just is how fast can I execute on it? I traditionally like to let a business kind of run itself on its own for 3 to 6 months before we start integration. Here, if there's some kind of low-hanging fruit for lack of a better phrase, like that we would focus on that near term to help us accelerate that. But I would say don't expect the 20% number in 2026. Our goal would be back end of the year '27.

Our next question will come from Jonathan Siegmann from Stifel.

Maybe just back to that inventory build in Q1. I appreciate the quantification of that. Is it -- granted, it's got -- the business has got to ramp up, but is it too aggressive to think you'll eventually be turning that inventory 1 to 2 times a year? Is that the right way to think about it? Or is there a reason it would be substantially less?

I think you're looking at it the right way. I would say year 1 of a program will never turn it twice. That's more of as we optimize the program. So we tend to be conservative in the first year because we want delivery performance to the end users to be at the highest level and having that inventory always drives our ability to do that. So it's a -- I would tell you, as we get into '27 and definitely into '28, you'll see that inventory optimize a little better.

That's great. And then you also highlighted additional opportunities like this. So I just -- the sales process, how long does it take to close?

Good question. It could be 3 months to 3 years. I mean it depends because we're working on these kind of programs with a lot of our business that we're working on where as the OEM is working on next-generation products and they want to reallocate resources or something in their definition of end of life becomes something that they want to have a discussion on.

So it really sometimes the conversation starts and it's until they realize that they need to allocate resources to a different part of the business that starts to accelerate that kind of opportunity set. So really, unfortunately, it's a complicated part of our -- the nature of our business, which is why you have to have a deep pipeline because timing of the acquisition -- the organic programs is difficult. Likewise, it's also difficult to time the transition.

So the reason we shared the inventory, it's the fastest way to transition, it's painful from a working capital perspective. But buying all the inventory and transitioning quickly will allow us to move faster on the transition versus kind of a trickle in transition. So this one, hopefully, we can transition in the first to second quarter. But it's -- the timing of these deals is all over the place.

But the returns are great. So congratulations again.

Thank you, appreciate it.

Our next question will come from Jeff Van Sinderen from B. Riley Securities.

Just wondering if we could delve a bit deeper into the Pratt PT6 agreement. Is there more you can tell us about that, maybe order of magnitude, how significant is it? Maybe what it can contribute to the business?

Yes. I mean, I'd say it's premature to give you a little bit more detail there because we -- what we like to do is similar to like an M&A deal is that we like to test the markets to make sure that and validate kind of the assumptions that we put into our model, which we believe is conservative. But I mean, Adam, we -- or Michael, have we -- are we comfortable sharing any details around that? Or at this point, we...

Yes, I would say that the purchase was around $10 million or so. And you're not going to really see a significant earnings contribution from that program. Similar to Honeywell, we are the current distributor on the program.

So we need to burn through all of our higher cost of inventory before we could start selling through the lower cost inventory. So we'll see some margin pickup in the back half of the year, which is reflected in our guidance, but you're not going to see a material impact in the first half of the year.

Okay. That's helpful. And then I think we're all aware you guys have a large acquisition pending. But where do you stand on organically increasing MRO capacity as you think about this year? And then maybe what are you experiencing on the employee hiring front for MRO?

Yes. I mean we've been having a bunch of strategy sessions this week. We are seeing both turnover improvements as well as retention improvements. And I think the brand is becoming more well recognized in the market where we're attracting more talent. So I'd say the bigger opportunities we still have to focus on are our engine-related MRO shops where, a, the market is very receptive. And if we can bring the labor in, we can utilize that labor pretty much immediately.

But it's still a tight labor market. So that's really, I'd say, the biggest concern area from a labor perspective. We are investing organically in probably about 4 specific facilities this year that we're working on building capacity to support kind of future for those sites, hopefully, double-digit organic growth as we look at the next kind of chapter for those businesses.

Our next question will come from Scott Deutsche from Deutsche Bank.

John, I'm not sure how familiar you are with Woodward, but they have now spoken publicly about working to license third parties to help support their aftermarket growth on programs like the LEAP engine. So can you say whether that's an opportunity which you are actively pursuing and which would fit in your wheelhouse?

Yes. I mean I'd say that as they start to look at those opportunities, that's right in our wheelhouse. When we look at kind of engine accessories or -- we do some authorized work with Woodward on some of our fuel engine accessory shops.

So taking the MRO work we already do for somebody like them just as an example, and then converting that into a license opportunity, that's like exactly when you talk about kind of what is the sweet spot look like, where we're going to support that OEM, help them extend the life of aging aircraft and -- but really do so in a value-added way to the end user as well. Those are the sweet spots of the deals that make the most sense to us.

Do you think you could help them with some of their more complex parts like fuel metering unit?

Yes. I would tell you that our fuel control program now that I've looked back on it was a very complicated first product for our team to go through. The quality of our engineering and supply chain organization that we've stood up that is basically an OEM-driven organization is, I believe, second to none and will really put us in a competitive position for future opportunities.

We don't want to -- nor do we have the capacity or capabilities to actually be the manufacturer of those complex products. So as long as one of our gating factors is to make sure that we can manage a complex supply chain that we don't need to be the actual manufacturer. So that's kind of one of those gating things that product line by product line that I have to look at to make sure that, that's really where we can add value.

And the second thing is we don't mind supporting in production aircraft but we don't want the majority of the revenue to be supporting kind of new build. We are -- our organization and our design is obviously built around aftermarket. So I want to make sure that the majority of the use, whether it's parts or MRO capabilities in addition to the manufacturing is all aftermarket focused. So those are kind of the gating things we look at to see if we can really add value and if we're going to -- it's going to be the right fit for us.

Okay. And then do you see any opportunities for BSDC to do any distribution or repair work for aero derivative engines?

We looked at an M&A opportunity earlier this year and do I think it's an interesting market and one that a few of kind of our industry peers have focused on? Absolutely. I think for us, we just hit $1 billion of revenue for the first time. Hopefully, we'll be driving closer to $2 billion this year.

We have so much just core organic opportunities within our core space and the resources are so limited on the engine side to begin with that for right now, we're going to keep our focus there. It doesn't mean we can't add it as a capability set at a later date. But right now, I'd say it's -- we're going to keep it out of scope.

[Operator Instructions] And our next question will come from Louis Raffetto from Wolfe Research.

You covered pretty much everything. So maybe just a couple of cleanup questions. Adam, do you have the organic growth for MRO and distribution in the fourth quarter? Are they both pretty much around that 12%?

Yes. It was a little bit more skewed towards distribution than MRO, fairly balanced, but more -- a little higher in distribution.

All right. And then I just want to make sure I understand the $20 million of interest expense. Is that including the sort of modest additional expense related to the TEUs?

No. It's going to be roughly in that range. It just -- it doesn't include any interest income though. So it's only interest expense. And as you know, we did the equity raise. So there's some cash on the balance sheet. We'll earn some interest income ahead of the PAG closing. But it does include it.

All right. And then just on the stock comp, would that continue to be split sort of between the aviation segment and corporate? Or will that...

That's a fair way to think about it.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Cuomo for any concluding remarks.

Yes. I just want to thank everybody for making the time for us today. I know it's a long and detailed call, a lot of moving pieces in the business right now.

We couldn't be more excited about how we finished 2025 and equally excited about all of the opportunities, both organically with our new program wins and execution on those as well as bringing our recently acquired and soon-to-be acquired businesses into the VSE family and the opportunities that lie ahead for those businesses as well. Thank you again, and have a great Thursday.

Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

We're very pleased to have the CEO of VSE Corporation. John, thank you for being with us today.

Thanks for having us.

For us, we've described VSE as an aerospace compounder with a long M&A runway. And I feel like you've been delivering on that thesis faster than we ever expected. We've got this recent PAG deal, should expand revenue quite significantly. I wanted to dig into that a bit more, but I think a great place to start is maybe just giving an overview, anybody that's new to the story, how did you find PAG? What is the asset and what's so compelling about it?

Sure. Yes. I mean I appreciate the way you described the business. I hope that we can live up to that standard for you. I've been with this business for about 6 years, came in here with a very kind of strong belief in where there are gaps in the aviation aftermarket. And you think about when something breaks, you have a new part, a used part or a repair, and you need that some level of service to support any of those 3. And where I think one of the bigger gaps is that they don't really come together in many -- for many of our peers and competitors out there.

There's new parts suppliers, use part suppliers and repair suppliers. So what we've built over the last 5, 6 years is a platform that we believe supports large OEMs, helps them monetize their aftermarket and support the large group of end users. And where we saw PAG add a lot of value is that when you look at the repair capabilities, and the number of different types of aircraft and engine type. They had just a really unique group of bespoke capabilities and how they bring parts and services together very much aligns with the model that we've been driving.

So when I thought about what is the right scalable asset for us, this was the asset. And we've been working on this asset longer than other deals that we actually closed well prior because we were trying to get ahead of a process knowing how transformational this deal could be.

Yes. And we're definitely going to dig into that a bit more. But I think that one of the important points that in my conversations with investors, sometimes goes underappreciated, is that, this isn't the first time you're doing this, right?

No.

You help build KLX into one of the largest MROs of the time, before it was ultimately sold to BA when it was part of B/E Aerospace, I think just because it was part of a larger company, maybe people don't recall the details of that journey. Can you just walk us through that and how important that experience is in setting up VSEC today?

Sure. I mean that business was a consumables and expendables business. So you don't have a lot of intellectual property. You had a lot of competition and you're trying to build the roll-up to support a global aftermarket and we supported OEMs as well. And -- but it was really -- that was an M&A compounder and a roll-up strategy. Almost solely, the organic growth kind of came second to M&A. But what we did when we sold that to Boeing, it was sold on 1 ERP system still had strongest margins in the industry and our strongest level of end-user service.

So when you think about what we're building here at VSE, it's very different in terms of the products and services, but some of the core capabilities of culture, half of my executive team are people that have worked with in the past and I knew that can deliver on the strength of what we were going to build here. But the model in which, and we think it's a huge differentiator when we look at acquisition assets and what we can do with them, we don't just need to buy an A asset or make it an A+ asset or raise prices or do something like that.

We can take a part of business, put it back in a different way where we can really find those kind of diamonds in the rough in those gems as we integrate. And it supports the end user customers, it's supporting employees with greater opportunities. And from a shareholder perspective, we're able to really drive once these synergies come to play. I mean, most of the deals we've done are actually single-digit multiple deals compared to how the shares are trading today.

And maybe you could just elaborate a little bit on, VSEC is not just purely a repeat of KLX.

Correct, correct.

That's really great background that you had that experience with KLX, but it is different. There is more of a focus on higher IP, other avenues of growth. Maybe you could just expand on that.

Yes. I mean the KLX business was about 60% OEM direct, about 40% aftermarket. This business is 100% aftermarket focused. There are more services, and there's a lot more complexity. And I'd say, from a technological perspective, the parts are a lot more complex. And then from an intellectual property perspective, there's IP that we don't own, where we're supporting the IP of our OEMs. But really, about 2 years ago, we started our journey of where intellectual property is now part of our model and a huge part of our growth pillar. So we've got our distribution businesses in new parts and used parts.

Post PAG, we'll have kind of 6 MRO segments kind of centers of excellence and capability sets under those. And we'll have 3 groups of IP-related revenue streams. One of them is what we call OEM solutions. We're buying the IP from our large OEMs when this end-of-life products or something that they've just done making and we'll actually contract manufacture and manage the totality of the aftermarket and own the IP. The second is where we're doing some reverse engineering and alternative sourcing of products, and we own the IP for the product.

And the third is what's called DER repair, where we're using either a different type of process or used parts or PMA parts inside of the repair capability. And again, we own the IP on the repair. So we're just, I'd say, at the forefront of where IP will be a larger focus of the business as we move forward.

Great. I think it's a fantastic overview. Obviously, unusual to have an executive have so much breadth and depth of experience and doing it again. Can we just go back to VSE core, let's say, and dig into the basic organic growth algorithm that you see. Revenue growth, margin expansion on top of it. How do you think of the core business before M&A?

Sure. I mean if you look at our business today, I kind of break it into 4 buckets. I look at commercial Engines, commercial non Engines, business and general Aviation engines, business and general Aviation non-engine. At the highest end, you're seeing the commercial engine market growing low double digits to mid-double digits. I think followed by the business in general Aviation engine market, high single digits to about 10%. And then the component markets just slightly less than that. And probably the slowest growth is your rotorcraft business in general Aviation non engine, more in that 5%, 6% range.

So -- and ironically, our business that you can almost say it's a 1/4 of each, just round numbers. I start there kind of where the macro trends are for us, we build the strategy internally that M&A in that compounder is really critical to the strategy. But 99% of my team is not focused on that. They're incentivized only off of organic growth, they are focused only on organic growth and margin expansion. And it's really how do you build the model regardless of where growth is or isn't that you're going to continue to outpace your peers.

So we're building things out 3 years out in terms of kind of market share opportunities. And I think what's unique about our model is the rough numbers, the total aftermarket, let's say, $150 billion. $50 billion is people like myself and my competitors in the services market supporting kind of that 1/3 of the market. The other $100 billion is the large OEMs or mid-tier OEMs going direct to the end users. Where our model is different is we're attacking both sides of the table. Most of my wins are actually coming from that $100 billion OEM-direct model because our model is unique. We're supporting these OEMs on protecting their IP, managing their aftermarket and their end users stronger than they can do and helping them monetize it, that they're coming to us when they're struggling with problems.

And rather than something going through a competitive bid, we're winning more market share kind of direct from those OEMs. And it's allowed us over the 5 years, to be in a position where we've had greater than an organic -- greater than market growth organically. I think on the organic side, I look back at the 3 years, roughly around 15%?

Yes.

We go in the business about 30% CAGR in the last 3 years, about half organic, half inorganic.

Yes. And it does seem like some of the tailwinds that you're describing that have lifted organic growth to above normal rates continue into 2026.

Correct. Yes, I look at '26 and '27 right now about the same. I don't look that much further out. The data starts, I hate assumptions, data starts to have too many assumptions in it and not as much like real shop visit data that I can kind of tie to a real model.

Yes. And is B/GA always going to be a bit of a discount to commercial aftermarket? Or is there a world where they converge?

I think today, it's a discount. I think you're -- but for us, what we like about it is it gives us an opportunity to build something different. We don't look at the markets the same. We look at the commercial markets as higher growth and -- but yet there's a bigger competitive landscape. And we look at the business in general aviation market Think about the number of aircraft in that market from a piper to a King Air to a Lear 45 to Robinson helicopter, I mean things that fit in those markets to Gulfstream. And we really look at an engine type by engine and platform by platform strategy there. And we think it allows us to build a greater moat around our competition. Again, that IP play comes in a little bit stronger there.

So even though the market growth is slightly lower, we think the margin opportunities and to create more annuity-like revenue streams that we think can happen more in the business and general Aviation space. But I would look at the next 2 to 3 years, I don't -- I still see it as a discount slightly to a commercial work.

So more of the same of what we've seen.

Yes.

Got it. And then on the margin side of the algorithm, you've talked about getting to 20% adjusted EBITDA margins. Can you just elaborate on the bridge there, what it takes?

Yes. I mean if I look back 6 years ago, we were at about 11.5% segment margins, a single-digit company-wide margin. Our earnings are next week, but we've given preliminary guidance range when we announced our acquisition, so we have company-wide margins well north of 15% now, which is something that was our first target. How do we get consolidated margins there. We feel very comfortable with our models, both in terms of our organic growth and our synergy model with PAG to put us in a position of about 20% margins. We haven't given a perfect time line, but I'd say end of '27 going into '28.

And when you think about what the business could attain in the fullness of time, could we even get above 20% margins? Or is that a cap?

No, absolutely. I mean we'll do an Investor Day, Michael and I are working on dates probably in third quarter, and we'll talk. I know that it's going to be the first question. So we'll be ready -- it's not going to be a grow and plateau at some point. I joke with my team, you get a month to plateau and then you got to focus on the next area of growth. I look at that thing is as a milestone, almost kind of like a marathon, and I think that 20% is a great milestone.

And I think through how do then you build a path, let's say, to 25%. But we haven't the model around it. What I would tell you is for us to get from 20% to 22%, 23%, it's all about how fast I could grow that intellectual those intellectual property revenue streams. That's really what's going to drive the pace of, I'd say, the margin expansion above 20%.

Yes. I had a question about the preliminary numbers, but with earnings around the corner, we'll pass on that. Can we just talk about the financial picture from a free cash flow and balance sheet perspective. What are the normalized ways to think about that? If we're in a world where we're hitting the organic growth that you're talking about, margins are expanding to 20% in the fullness of time, maybe even beyond that, how cash generative is this business? And what is the right leverage ratio for the business?

Yes. I mean I think I'll talk about leverage ratios first. We've given pretty much a wide range with earnings next week, we'll announce like leverage year-end finished with the 1x to it. We obviously did a very material acquisition. And by the time that closes and we've got first quarter is our heaviest cash usage quarter I don't ever see us having a positive free cash flow in the first quarter. It's just a tough 1x the way our markets work. but leverage will be somewhere between 2.5x and 3x post deal closing. And then you'll see leverage improve from there. But we've given a pretty wide range on leverage from 2x to 3.5x because we're very comfortable going up to 3.5x to do a deal, and then we think we can delever pretty quickly. I think when you look at the free cash flow profile of the business, your question was well stated because I think when you think about growing and scaling a business, that was essentially very distribution heavy initially.

It was hard to get free cash flow positive, period. And when you're growing at -- I've talked about the last 3 years a growth first couple of years of growth were 40% CAGR, and it's all distribution and inventory focus. It was very hard to get that free cash flow generation positive. You can expect positive free cash flow in the targets we've given as a...

Yes.

So I don't want to...

So when you're taking a look at 2024, we used about $52 million of free cash flow. As John just mentioned, we expect to be cash flow positive for 2025. We're targeting about 30% to 35% EBITDA conversion from a free cash flow perspective on a go-forward basis.

And I'd say expect on a quarterly basis, we expect the first quarter to never look pretty and then to improve from there. It's just the mechanics of the way our markets work.

Yes. And that free cash flow ramp that you're describing, I mean that's just the normal working capital that a distribution business needs as it grows. So that's...

It does. And I think that we'll always focus on optimizing inventories. But at the end of the day, these are chains that are never going to get fully corrected, I don't think in my career, and you want to be in a position where service levels are strong. The PAG acquisition just has a natural benefit to it because what it does is today, our business is 60% distribution, 40% MRO. Post-PAG, it flips and we're 60% MRO, 40% distribution. The free cash flow conversion is far stronger on the MRO side of the business. So you're going to see a 2027 clean year free cash flow model looking much stronger on a percentage of sales than you do with our legacy numbers.

Yes. I think we've waited long enough. I want to dig into PAG. You mentioned how the business mix flips. Can you just talk for the audience kind of the strengths of an MRO business versus the strength of distribution. And more importantly, when you put them together, what new advantages are created.

Sure. Yes. I think that -- what I love what PAG did is they built many centers of excellence. So whether you're talking about a Rolls-Royce 250 engine, where they do the full engine repair, you're talking about avionics, their avionics capabilities can touch the oldest of cargo carriers to 787, A350, cockpit displays to Gulfstream navigation systems that are next gen. So the scope of work that they do across their different sectors, they've looked at it much more in this bespoke MRO category.

And then what they have done that I think is really unique is the only parts they carry are parts where they're doing repairs. So their distribution and their exchanges and their used material, it's very much tied to repair. So it's not -- again, driving a really tight strategy with these disparate businesses. I actually love how they did that. And by the way, it drives higher margin. It drives stronger free cash flow.

So the fundamentals of the business when you dive underneath look better than some of these legacy disparate kind of MRO shops that I've seen in the past. What I also think is valuable about bringing parts and services together is they're driving the MRO activity because they have the product.

So example, if you know the Apple store around the corner, has a used phone that they can swap out and it's going to take 2 weeks to fix your phone, you're going to go there over somebody else who might be $10 cheaper, but you have no phone for a couple of weeks. So the way they've connected the exchanges to the MRO shops, I think, is second to none in the industry. And I think it's driving superior margins.

But -- and equally or more important, it depends they're driving this customer connectivity and this kind of annuity relationship with these customers because these customers are no longer holding inventory, and they're coming to them directly to get the exchange and then to get the repair.

Yes.

And I think there's a lot of synergies we can bring together when we bring the businesses together.

Do you generally think of an MRO business as better or distribution business is better?

It's funny because we have investors that we have 3 today who just like trying -- everyone's trying to figure out my margin profile in each. I wouldn't say in totality, I think of one is better than the other. Obviously, when you peel the onion, I have some very high-margin distribution. I have some very high-margin MRO businesses. And sometimes we have no loss leaders in our business. It's not the way that we operate. All of our businesses are driven. We drive granular, very detailed mini P&Ls and everything has a profit to them. So I would tell you that the more competitive areas where there's a lot of OEM influence tend to be lower margin, both on distribution and on MRO, and you see it on heavy engine work or on full aircraft work as well.

but I don't necessarily think one fundamentally is better than the other. I think the only fundamental improvement you get from MRO is on the free cash flow.

Yes. And in terms of volatility through the cycle, maybe as somebody who's lived through these businesses, lived through multiple cycles. Maybe you can talk about the typical how they behave through a cycle, but also what you're doing to perhaps protect the businesses and make them even more stable.

Yes. I tend to be more like cynical or concerned than most on the cycles. And I'm concerned about the cycles because I'm a believer that all the data that you see is built off of too many assumptions. We were talking earlier about that and I get concerned that what could happen if retirements pick up. And so I build a plan every year organically as if the market is not going to grow. That's the way we build it. And what's going to happen if there's no growth, and I tell you, you still have to grow somewhere between 5% and 10%. Where are you gaining market share? Where can you find ways to support your OEM partners?

Remember, you've got $100 billion of work that they're doing today that maybe it's not necessarily -- it's share gain, it's outsourcing to you. Where in these different cycles, can you find opportunities to grow through those cycles. Most of the time, you hear and there was some chatter last week about destocking and distribution. We tend to have a very different philosophy on that because we hold inventory very tight. Because our delivery performance is so strong and our customers know to rely on us, and we're selling highly technical, very expensive products. We try not to like let people build stock in the market.

We tell them, look, we'll always have it. We'll manage through it. Inventory, supply chain issues are happening, and we're going to share across the industry, but we do that also so that we can manage through downturns and not have a destocking model. It also gives us a little bit more pricing power when we can utilize it, people aren't sitting on legacy inventory at lower margins and those types of things. So that's another benefit to our stocking model that it makes it -- it gives us a little bit of protection.

I think that with regard to MRO, there's 2 or 3 kind of groups of products. There's break fix, something that breaks that it needs to be fixed. There's things that time out, regardless of they're being used. So during COVID, there's still things coming into our shop because of time. And then there's things that are takeoff and landing based. And very candidly, you do see different cycles through -- depends on use. We try to drive a balance within our shops to drive somewhat of consistency through cycles.

I look at the cycle is more of I can't control that. What I can control is what new work can I bring in during a downturn? How do I sit with an OEM partner and say, "Hey, if a downturn is happening, you have to reduce cost. So maybe some of this end-of-life product, I can take on for you. I can find ways to create a financial opportunity for you and build a different platform for me." That's -- so we look at it more that way than trying to just control the end user demand.

Yes. That makes sense. I wanted to just spend an extra second on supply chain.

Sure.

Obviously, the business that you're building is embedded in the supply chain. Throughout the day, we've heard different data points about supply chain. In the morning, for example, we had Textron talking about challenges in managing the biz jet supply chain and some hiccups there. I wanted to just take the temperature. How does the supply chain broadly look from your perspective? What are you doing to kind of facilitate things? And when we hear some of the larger players talk about hiccups in the supply chain, are you seeing something similar? How would you assess it?

Yes. I mean, I've been in the industry since '99. The supply chain never really works? Like it's like this -- so it just never has been that efficient in that and actually really worked. So do I see it working today? No. But I don't think -- I do think it's improved. I mean I was sharing earlier today with someone. I mean there is the head of after-mar -- I mean aftermarket and then the head of supply chain, 1 of the Tier 1 OEM that last year, the 3 of us would get on a call every Friday and allocate bearings because they're -- I'm supporting their end users.

So we're in it together. It's like who should get them. Someone is going to get stuck. Either a part is not going to get made out of production or some end user is not going to get their engine or whatever else out of the repair shop. That's how tight we were on some of the supply chain. I think a lot of that is better that we're not seeing shutdowns on the repair side or on the production side. At the end of the day, though, you're dealing with everyone uses the same supply chain. You've got commercial business aviation, defense, space, rotorcraft, aftermarket OE.

And as one is coming up and the other ones -- no one's declining, right? People may be flattening out a bit. That supply chain just feels a different level of constraint. And it's like a whack-a-mole, 1 thing goes up and goes down. Our job is how do we proactively predict where we think because this market is going to grow faster than that market, what supply chain is going to be impacted? How do I get in early and procure -- or how do I find alternative sourcing opportunities.

So we've been using -- that's where the DER repair comes in. We're using some used serviceable material and repairs. We're looking at PMA parts for more noncritical parts where our OEMs are not upset about it because we're solving supply chain issues for them. But I'd say it's better, but I don't ever see where the Nirvana -- I look at the bright light. I don't see the bright light at the end of the tunnel there.

I wanted to follow up on PMA a bit. Sometimes I'm asked the question by an investor looking at the stock and they're always looking kind of -- trying to compare what you might become. Is this going to be the next TransDigm? Is this going to be in the next Heico. You've used the phrase PMA a few times. Maybe you could explain to the audience what that is to the extent that people are still playing catch up a little bit and talk about the long-term vision for PMA.

Yes. I mean I think with regards to who we're going to be when we grow up, I think the one big difference compared to the companies you mentioned is they are outstanding businesses that are groups of 30, 40, 50 different individual businesses. We will be -- we've got a logo internally, our on VSE logo. Our goal is to support the market caps first. And what that means is simplification and us being a 1 branded company and trying to have a single invoice and single system and single focus is going to drive what we believe is the strongest differentiation.

And then it's talking about the quality of the services, how fast we can get those services done and then where we see gaps in those services. And it's not just an economic model. It's really the economics do work, but they come second because we're driving of what's going to support our end users and our OEMs the right way. We started this business all about supporting OEMs and when you think about supporting OEMs and think it through your Tier 1 OEMs, a Honeywell, a Pratt, Collins, they spend a lot of R&D to get their proprietary parts and proprietary content and they don't want someone knocking it off.

So PMA was never, which is a reverse engineered product, that's a generic version of one of those parts. It was never really a part of our initial design. What's happening over time is, because no one sees the light at the end of the tunnel for supply chain, how do we support end users for our OEMs when -- if an OEM needs 1,000 parts for production and I need 100 for the aftermarket, and they're only going to get 1,000 from the manufacturer. We're 100 short no matter what. So where I'm trying to come up with alternative solutions is, is there a different repair module I can use? Can I use used parts as engines or another part expires and test them and get them up and running. Or can I use a reverse engineered or a PMA part?

And that's really the impetus of it. So I'm doing it in a much more, for lack of a better word, OEM-friendly way and aligned with those OEMs to solve back to your supply chain comment, to solve supply chain issues rather than just to go head to head and compete with them. So it's a slightly different model, but the return is I'm solving issues and then for me and the business on a beneficial level, there's more intellectual property, which obviously drives higher margins over time.

Yes, that makes sense. So it's really a result of how tight the backdrop is, a lot of these products in that way, you're helping OEMs while pursuing...

Exactly.

Which isn't always the case. No, that's fantastic. If we could just circle back to PAG. I get asked the question about the TAM for the company. And when you're doing M&A, when you're involved in distribution when you're involved in MRO and incrementally kind of building out some PMA lines of business as well, the TAM could be enormous, right? How do you help people think about the overall growth opportunity over years?

Yes. I mean I look at back to like the experiences I've had, my last business was very, very tight in what we did. So we were buying a lot of -- buying up our competition. We were consolidating a market. Creating the global leader in what we did. But it was a tight niche market in what we did. And I didn't want to have that stress when I got here. So I tried to build a little bit more of a broader platform.

On the flip side, A few people have tried to build the aerospace aftermarket one-stop shop, and it has failed in my opinion, miserably. I'm certain that those people who have it in their model will tell you otherwise. But delivery performance doesn't work. These -- every part in this industry has a story and those stories and the complexity around them are important. And you start to lose that, it just becomes a part number in a system. And I think that, that is not what's in the best interest of our OEM partners or our end users.

So here, the way I look at it is, it's a collection of quality repair capabilities and a collection of quality OEM-centric product that have -- where we can add value in the market. And that's supporting commercial, business and general aviation rotorcraft. And we barely started on defense. Our -- my business today is 1% defense. With our PAG acquisition will be just about 5% defense. So we see the opportunity geographically, still very domestic in nature. I think we'll have about 60-plus locations in terms of MRO facilities and probably 55 of them are in the U.S.

So a great opportunity to grow geographically. The second is we think there's a really strong opportunity in the defense sector over time for us to grow. But on the commercial and the business in general aviation, you'll see us focus more platform by platform because specifically, you look at business and general aviation. You look at PT6, you look at a King Air. You look at Lear 45, how do you dive into that platform? And again, aligned with your OEM partner where they want the help and they need the help to support, and if you start thinking about the number of platforms out there, it just starts to keep this strategy tight but create this extremely large addressable market.

When I look at our near-term pipeline and not everything is actionable, but I've got 35 to 40 M&A targets in my secret phone list that I won't share with my team. But like on deals that I'm courting and deals that I'm working, which are capability adds. And as you build up this platform strategy, I think all that's going to come out is more and more opportunity. This capability set, we can grow organically. This one might be faster inorganically, and I think you're going to continue to see that growth. So I've never publicly said you can expect, let's say, the market is going to grow 8%, I'm going to grow 10%, and I'm going to grow 10% in organic and do you expect a 20% CAGR over 3 years.

But I've also, on the flip side, said with shareholders you're trying to build out a 3-year plan. That's -- in my mind, that's kind of how I think about it is we're going to outpace organic growth, and there's plenty of inorganic opportunities for us to keep layering in of all shapes and sizes.

Yes. I want to follow up on the pipeline. But before we do, just finishing up with -- you do have this $15 million synergy number out there. You've talked about at Investor Day. Obviously, you don't want to steal the thunder and it might be too early to really kind of like think about all of the layers of upside. But it does seem like that $15 million number in light of everything we've discussed maybe a bit conservative.

I'm laughing because this is -- we've had a great day, outstanding group of meetings with very knowledgeable investors and every single one of them said my number's too low on synergies. So yes, so I think you're aligned with kind of investor feedback. In all transparency, we shared mostly cost synergies and a few of the products that we know they're buying from us today where there's some margin opportunity. I like to -- what I say, I like to make sure I can do.

We have delivered -- we have done 3 acquisitions in the last 18 months. We have taken an 11% EBITDA margin business to north of 16%. We have taken a 13% EBITDA margin business to north of 16%. That business, we also grew almost 30% in the first year that we own the asset. And I want to make sure that I continue that trajectory of really sharing tangible synergies. So what's not included in all the sales synergies and some of the supply chain opportunities above and beyond. Now could they be double what I shared? Absolutely.

I want to get a little bit more meat on the bones and just make sure that I feel confident in the data that I share and then how fast we can execute on it.

Yes, that makes sense. It is a very large deal and just to explore the risk or get people comfortable with the risk of integration. Maybe you can just talk about your integration playbook.

Sure. Yes. I mean I'd say it's probably one of the core differentiators in what we do compared to our peers. We actually integrate assets. I was e-mailing with the CEO at PAG this morning. We're going through site by site, like our like sites and what systems we're on. MRO systems, it's like 5 of them that are out there. We've bought businesses with everyone, so we know how to integrate them and know where the system complexities lie.

Some of them we choose not to integrate because the risks may not outweigh the benefits. As I did a lot of this diligence myself early on because this was a deal that we went to market on before it hit market. We tried to get ahead of a process. So we had a lot of early access, and I was working it kind of personally. And because of that, I kind of built out the integration strategy.

So we will integrate in like 6, like 7 different business units. So expect us to integrate 1 business unit at a time. So really, it's like derisking the integration because you can take 20 MRO facilities and integrate 1 at a time, you're not turning a light switch with a big SAP conversion that you hear about from large companies and then everything goes down. We can integrate a $20 million business to start then the $50 million business and so on and so forth. So what we typically do in the first 90 days is watch how they operate, see how things run, see if there's areas from a controls or whatever risk perspective that we want to integrate faster for those, figure out where we think the biggest synergies are and we usually expedite those integrations.

But you'll see us integrate more in smaller chunks over time to derisk the integration. Of all the things I'm worried about, I would tell you that's not where my biggest thing that keeps me up at night. I want to understand the market and the market growth opportunities, but I feel really good about the strategy and our ability to execute on the integration.

Yes. And another part of integration is deal structure at the outset. Sometimes there are earn-outs or other incentives. Do you -- can you talk a little bit about the structure and how maybe that just drives success here?

Sure. I mean the earn-out -- I'm not a big earn-out fan. I must never do them. In a deal, we do have an earn-out with this deal for 2026. I would tell you that we're not at 99% aligned, we're 100% aligned. I would love to pay the earn-out. The earn-out is they're going to drive the earnings greater than I modeled 26 individual P&Ls for 2024, 2025 and '26, -- our 20 -- my numbers and their numbers thankfully for '24 and '25 are very close. '26 they think they're going to do a little better than I think they're going to do, great. I'm happy to pay them for it. We talk about that 20% margin opportunity. It will drive all of the positive opportunities faster for us. if they can achieve that.

So the CEO will stay on board at least through year-end running the business, which is essentially we would do even if there's not an earn-out. We like to make sure and validate everything we saw in diligence. Get every ducks in a row in January 1 will kick off real integration. It doesn't mean synergies won't come sooner. We'll work on synergy plans very quickly. But the actual tactical integration work will start in early '27.

So if those incentives work as intended. It seems like we may even be at a point later this year where we're already exceeding expectations deal just because the core operations of PAG were strong.

Yes. I would love to sit at an Investor Day and tell you I'm going to hit 20% margins as a consolidated basis whenever Michael, let me say. I mean in a faster pace. And that -- if they earn that earn out, I will tell you that will happen because that earn-out is not happening in a low margin. It's happening at a margin that's accretive to our existing margin profile.

Okay. I wanted to talk about the pipeline. This is actually just one of a string of deals that you're executing. It's I believe it's the largest one so far. It seems like there is a deep pipeline behind this. Plug us into how you're thinking about the M&A engine over multiple years. And I don't know, is there a way to think about what the business could be a few years down the line?

Yes. I mean I think when I look at the pipeline of assets out there, of quality assets and ones that I think that we can be additive to, it's really exciting because I looked at this business is like chapters. The first chapter when I got here, it was a little messy or a lot messy. It was cleaning things up. It was validating as like a value proposition ahead of my head that's slightly different than what my peers have in the market and making sure that these OEMs really kind of connected to it.

And then it was divesting of non-core stuff. The second chapter was all about, okay, how do we now take what we've done and go outpace the market organically, do these smaller deals, $100 million, $200 million deals and drive margins up and synergies up. And the results speak for themselves. It's not just the words, right? And now it's -- let's put some scale on this. And I think that, as I'm starting to do it already, and I'm like not even a month in, you're already seeing kind of what the future framework could be and where the gaps are. And the gaps are good because it creates both organic and inorganic pipeline opportunities. Combined, the PAG and VSE asset will provide a greater organic and inorganic total addressable market than we would individually. I'm looking at things differently than I would have in the past in terms of MRO capabilities.

They will look at things differently in terms of distribution capabilities. The pipeline of intellectual property-focused deals is different than what I would have done in the past. And then on the organic side, again, we haven't shared the sales synergy data. But as I get my arms around it, I think there's some really big and interesting and unique opportunity of what we can do together. We're already talking about kind of our first joint things we want to do and hopefully, May or June when the deal closes. And they're really exciting. And again, things we couldn't do individually. So I would say expect this next chapter to be, yes, it will be a little "quiet" as we integrate. But I don't need the 3 years to integrate the business to get the M&A pipeline flowing.

And we look at $10 million and $20 million deals as well. They're not always these transformational deals on paper, but sometimes these bespoke little deals can help, again, think of that moat that we're trying to create in some of those areas. You fill in a gap where that -- and you're creating even really solidifying that moat. So there's a couple of little ones I've got in my pipeline that are more family-owned businesses, whenever they're ready, I'm ready, no matter what's happening because they'll be so much more additive and accretive than even a larger deal.

Yes. We're knocking on the end here. I want to give you the floor and just any concluding thoughts, any points you want to really leave investors with?

Yes. I mean I think -- I appreciate that. I think that what I would like to leave investors with is, we have built something that's different. When you look at websites and you hear people's pitches, when you think of parts and repair, they all tend to look and feel the same. We have built something that's really unique because we're attacking the entire addressable market that a lot of our peers can't address because we're supporting these Tier 1, 2 and 3 OEMs in a very different and unique way, while we're also servicing the end market.

The second thing is that the first couple of years I was pitching here, it's all about like we're going to do this, we're going to do this. We have validated the value proposition and validated our ability to acquire, integrate and drive margins. and just expect that to continue to happen and don't think that the story is by any means ending. It's, in fact, a more exciting part of it.

The third thing I would say is, yes, the market has been healthy, and I expect it to remain healthy. But for us, a moderated market still creates a tremendous amount of opportunity and we look at the total addressable organic and inorganic markets as things that are really exciting to -- I don't -- I didn't give you a number when you asked what the future could look like. But there's no reason the business can't keep compounding and doubling. I mean the revenue number is not what excites me. It's more the quality of the revenue and the margin expansion in totality of it.

But there's no reason that the revenue can't keep scaling. It's not time to have a little pull with the asset.

Great. And on that point, thank you very much.

Thanks for having us.

That was fantastic. Thank you, everybody, for joining us.

Thank you.

Good day, and thank you for standing by. Welcome to the VSE Corporation's Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.

Thank you. Joining me today are John Cuomo, President and CEO; and Adam Cohn, our Chief Financial Officer. Today's call will address the press release issued this morning announcing VSE Corporation has entered into a definitive agreement to acquire Precision Aviation Group. As part of the announcement, the company provided preliminary fourth quarter and full year 2025 results, which will be reviewed on this call. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly.

Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are included in our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted.

With that, I'll turn the call over to John.

Thank you, Michael. Good morning, and thank you, everyone, for participating in today's call. We appreciate your flexibility in joining us on short notice. Today is a very exciting day as we announced a transformational step forward for VSE. We have signed a definitive agreement to acquire Precision Aviation Group, or PAG. This transaction represents a major milestone in accelerating VSE's strategy to build a scaled, differentiated and higher-margin aviation aftermarket platform. This transaction is expected to meaningfully increase our revenue by about 50% on a pro forma basis, support a path to over 20% consolidated adjusted EBITDA margins over the next few years and strengthen our market positions.

In addition, this will create long-term value creation opportunities for customers, suppliers, employees and shareholders. Let's get started and move to Slide 2 of our presentation materials. We have long admired PAG, their leadership, their team, their MRO capabilities, their product solutions, their sales and service-driven culture and the platforms and end markets they support.

Let's begin with a summary of the strategic rationale for this deal. First, the acquisition of PAG broadens our global footprint, improving customer proximity, turnaround times, AOG support and supply chain responsiveness. The combined company will operate a network of 60 locations, including 47 repair facilities and 11 distribution centers of excellence worldwide. Second, this transaction expands our parts, repair and proprietary capabilities portfolio, creating one of the broadest and most diverse aftermarket capability sets in the market.

Third, PAG supports continued diversification with end market customers across over 10,000 commercial, cargo, business and general aviation, rotorcraft, lessors and defense customers improving resilience through market cycles. Next, the business meaningfully scales VSE, including an approximate 50% increase in estimated fiscal year 2025 revenue on a pro forma basis and the opportunity for the combined and consolidated EBITDA margin to exceed 20% over the next few years as integration and synergy initiatives progress.

And finally, we will have the opportunity to drive approximately $15 million in annualized synergies over the next few years as our integration and synergy actions progress. Let's now move to Slide 3. Over the last 6 years, VSE has undergone a multiyear transformation to focus our business on the aviation aftermarket. Highlighting this transformation were the divestitures of noncore business segments, the acquisitions of 8 aviation aftermarket businesses and the restructuring of the VSE platform to support an aviation aftermarket distribution, repair and recently launched Proprietary Solutions business.

During this period, we have been a disciplined acquirer of high-quality aviation assets, demonstrating synergy realization through tangible cost savings, operating and integration efficiencies and accelerating growth through new investment. The realization of acquisition synergies in combination with our improved operational performance has led to accelerated growth, margin expansion and increased market share post integrations. Over the past 6 years, VSE has delivered strong financial performance supported by these actions. Our Aviation segment revenue has grown approximately 30% on a compounded annual growth rate from $225 million in 2019 to approximately $1.1 billion in 2025. Over the same time, VSE consolidated adjusted EBITDA margins expanded over 400 basis points to approximately 16.3% in 2025.

Let's now move to Slide 4, where I'll provide a brief update on who VSE is today. As you're aware, VSE is now 100% focused on aviation aftermarket providing distribution and repair services for commercial and business and general aviation markets. We serve our end markets through parts distribution, MRO and Proprietary Solutions. We employ approximately 1,600 people across 31 locations in 7 countries, offering a broad range of services to a diversified global client base of commercial airlines, regional airlines, air cargo transporters, MRO providers, aviation manufacturers, private aircraft owners and fixed-based operators. Our end market exposure pro forma for the Aero 3 acquisition, which closed in late December 2025 is approximately 54% commercial and 46% business and general aviation based on our preliminary estimates. Distribution and MRO account for approximately 59% and 41% of revenue, respectively, and our engine-related content now represents approximately 59% of revenue.

Let's move to Slide 5 and talk more about PAG. PAG is a best-in-class global provider of aviation aftermarket MRO services, distribution and supply chain solutions supporting commercial, business and general aviation, rotorcraft and defense end markets through a broad portfolio of technical capabilities. PAG operates 29 locations worldwide across 6 countries, employs approximately 1,000 people and completes more than 175,000 repairs annually. Pro forma for acquisitions completed in 2025 by PAG, the company generated approximately $615 million in adjusted revenue for the full period ended December 31, 2025.

PAG supports over 10,000 active customers, supporting a diverse set of aircraft platforms across commercial, business and general aviation and military end markets. More specifically, PAG's end market exposure is approximately 58% business and general aviation, 29% commercial and 13% military, with approximately 1/3 of the business focused on engine content. PAG's primary capabilities include the following: repair services across components, engines and APUs and avionics, parts and services, including exchanges and Used Serviceable Material and Proprietary Solutions, which include DER repair, reverse engineering and in-house manufacturing.

Let's now move to Slide 6, where I will highlight what VSE and PAG will look like together. This is an exciting slide and the combination of our 2 businesses creates a more diversified, globally scaled, higher-margin aviation aftermarket platform with broader technical capabilities and an expanded portfolio of proprietary repair solutions designed to strengthen customer support, extend asset life and reduce total cost of ownership. The combined company will employ approximately 2,600 people in 60 locations across 8 countries with an industry-leading MRO network and centers of excellence that enhance customer proximity, turnaround times, AOG support and supply chain responsiveness.

PAG's margin profile, combined with VSE's growing proprietary parts and repair solutions business, is expected to drive the combined company's operating leverage and support a path to exceed 20% consolidated adjusted EBITDA margins over the next few years as integration and synergy initiatives progress. The combined company's end market exposure is expected to be approximately 50% business and general aviation, 45% commercial and 5% military. MRO will now account for approximately 60% of total revenue, and engine-related content is expected to be approximately 50% of total revenue.

Let's walk through more detail on PAG and more detail on the strategic rationale behind the acquisition as we move to Slide 7. PAG is a highly diversified aviation aftermarket platform, operating 4 complementary business units. The first is component services, where PAG offers a broad range of system and component repair and overhaul capabilities across hydraulics, pneumatics, starter generators, wheel and brakes, instruments and landing gear. Second is engine services, where PAG delivers component, accessory, engine and APU repair and testing for turbine-powered platforms. A few key engine and APU platforms include the Rolls-Royce 250, the PT6, the GTCP131-9 and the GTCP331.

Third, our avionics services. PAG offers industry-leading repair solutions for flight critical electronic and electromechanical systems, including displays, sensors, engine and flight control systems, navigations, communications and radars. And lastly, Proprietary Solutions, where PAG provides DER repairs, reverse engineering alternatives and low-rate in-house manufacturing of structural parts, circuit boards and subassemblies. PAG operates a differentiated high-margin 100% aftermarket-focused business with adjusted EBITDA margins greater than 20%. PAG offers integrated solutions and proprietary content, including over 2,000 unique DER repair capabilities and inventory to support their maintenance service model. Additionally, PAG has multiple margin expansion levers, including cross-selling, in-sourcing and the expansion of DER and proprietary repairs for increased value capture.

Let's now move to Slide 8. And this slide really highlights the capability set for the combined business. The combination of VSE and PAG's capabilities create an integrated aviation aftermarket platform with highly diversified capabilities and Proprietary Solutions. Our business will kind of be organized in 3 channels: parts, MRO and exchange services and Proprietary Solutions. The parts channel will include our new parts distribution and new serviceable material business units.

The MRO and exchange services will include 6 areas of focus: commercial engine component and accessory, business in general aviation and rotorcraft engine accessory, wheel and brake, avionics, traditional component repair and engine and APU MRO. And our Proprietary Solutions channel will include our OEM solutions business, which is anchored by our fuel control program, our DER and proprietary repair business and our alternative sourcing and reverse engineering business. This combined capacity set and capability set will be one of the broadest and most diverse in the industry.

Let's now shift our focus to integration and synergy capture opportunities on Slide 9. Together, VSE and PAG are expected to realize over $15 million in annualized synergies by a phased integration of our operational and corporate support functions. Over the next few years, we expect to fully optimize our consolidated offerings, including cross-selling and in-sourcing product support and repairs and driving operational efficiencies across our 60 shared locations. We expect to drive further operational efficiencies through procurement savings, network optimization and supply chain improvements, which are also expected to improve working capital and drive improved cash flow.

Let's move to Slide 10, where I will highlight VSE's successful track record of acquisitions and integrations. Since 2021, we have completed 8 aviation aftermarket-focused acquisitions, deployed approximately $1 billion in capital and delivered strong organic growth and margin expansion post acquisition. We have a proven and repeatable integration playbook, allowing us to successfully integrate systems, processes and organizations. We have a strong track record of delivering on synergy targets on or ahead of schedule.

I want to emphasize something more important. This is not a deal solely about size and scale. It's a deal where the strategic logic is clear on day 1, more capabilities, more customer relevance, more geographic reach, more repair content, more Proprietary Solutions and ultimately, an anticipated stronger margin and cash flow profile.

I will now turn the call over to Adam to review the transaction details and our preliminary fourth quarter and full year 2025 results.

Thank you, John. Let's turn to Slide 11 to review the transaction details. Under the terms of the agreement, VSE will acquire PAG for total upfront consideration of approximately $2.025 billion, subject to customary working capital adjustments, consisting of $1.75 billion in cash and approximately $275 million of equity consideration issued to GenNx, a repeat partner to VSE, subject to a customary lockup period that will expire in 3 equal parts, 6, 12 and 18 months from closing.

Further, the agreement includes up to $125 million in additional contingent earn-out consideration payable in cash or equity consideration at VSE's sole discretion based on PAG's 2026 adjusted EBITDA performance. Inclusive of full run rate synergies, the total upfront consideration represents approximately 13.5x PAG's expected adjusted EBITDA for the full year period ended December 31, 2025. The transaction is expected to be immediately accretive to VSE's adjusted EBITDA margin with consolidated margin expected to exceed 20% over the next few years as integration and synergy initiatives progress. The cash portion of the upfront consideration is supported by a full commitment to enter a bridge facility. The transaction is expected to close in the second quarter of 2026, subject to regulatory approvals and customary closing conditions.

Let's now turn to Slide 12 of the conference call materials, where I will review our preliminary fourth quarter and full year 2025 consolidated financial results. We announced today that the company expects fourth quarter and full year 2025 revenue in the range of approximately $290 million to $304 million and approximately $1.101 billion to $1.115 billion, respectively. Our fourth quarter and full year 2025 results include approximately 1 week of Aero 3 results.

Our fourth quarter and full year 2025 operating income is expected to be in the range of approximately $27 million to $34 million and approximately $84 million to $91 million, respectively. And fourth quarter and full year 2025 consolidated adjusted EBITDA in the range of $45 million to $53 million and $176 million to $184 million, respectively. The company also expects to report a sequential quarterly improvement in free cash flow in the fourth quarter, resulting in positive free cash flow for the full year 2025.

With that, I will turn it back over to John.

Thank you, Adam. In conclusion, the acquisition of PAG is transformational, is expected to significantly expand our scale, diversify our capability set, increase our Proprietary Solutions content and strengthen our market position as a mission-critical partner to aviation operators worldwide. The combined company is expected to deliver compelling value for our customers, suppliers, employees and shareholders as we execute a clear path to enhance growth, diversification and near-term margin expansion. PAG expands our scale, it strengthens our capabilities and it meaningfully upgrades the long-term earnings power of VSE. I cannot be more excited to welcome PAG President, David Mast and his outstanding PAG Global team to the VSE family.

With that, I'd like to turn the call back to the operator as we are now ready to open the line for questions.

[Operator Instructions] And our first question will come from Sheila Kahyaoglu from Jefferies.

John, congrats on yet another deal. It seems like you've been working on this one for a while. So PAG seems to have a broad set of capabilities, whether it's component repair, DER engines. Can you maybe expand on a few of the slides you nicely laid out and how it overlaps with the VSEC portfolio and the potential for revenue synergies?

Yes. I mean it's something we have been working on it for a long time, and this is the deal for us that was going to really transform the business. What I love about the business before I talk about the capabilities is as you look at -- like our culture and our business was really built off of execution. We have so many exclusive contracts, and we have a new parts distribution business and our repair business really began off of our OEM exclusivity and we became an execution business. They have much more of a hustle culture. They built a very similar model where parts are integrated into MRO. So bringing the cultures together is really going to take 1 plus 1 greater than 2.

With regard to the capability set, it's highly complementary. There's very, very little overlap. We have some fuel controls and a little bit of wheel and brake that's an overlap, new customers, but not same capabilities. But when you look and dive deeper into what they do, what I love is, let's talk about avionics. Avionics, they've got a tremendous, tremendous capability set on the commercial avionics platform. We have a great business. Combined, that business, I think, will be second to none in the markets. This gets us into both full engine and full APU MRO. They're doing that the engine work more on the rotorcraft and business and general aviation side. And on the APU side, it's mostly Honeywell commercial APUs.

So it expands that portfolio as well. So think of things like potentially our Southwest teardown program, where we have the entire Used Serviceable Material for 737NG. Now we've got a capability set to bring that work in-house that's far more expansive than what VSE had today. I think that the other thing I really love about the capability set is they're on new platforms and growth platforms, but there's also some legacy "End-of-life" platforms.

And that's where you can have more intellectual property, you can own more of your repair capabilities and you can kind of own like we do with that fuel control program that we bought from Honeywell, we can kind of own the end-to-end solution, which is great for the end user customer, but also great for our margin profile. So I don't know if that answered the question, but there's a little bit of a mix there. I'd say on the left side of that chart, where it's new parts and our commercial USM business, that's pretty much exclusively VSE. And within that gray part on Slide 8, that's where you'll see a lot of the overlap with -- and kind of capability expansion with PAG.

Got it. No, that's super helpful. And then maybe another one on PAG's organic growth focus. It seems like the company was quite acquisitive with 7 add-on deals throughout the last few years. How do we think about the core organic growth of the business and how you see that going forward?

Yes. I mean if you look -- it's hard to clean up, you'll see as you look through all the pro formas, the legacy data is complicated. But the business grew kind of high single digits, low double digits through the last few years. But I would say, looking forward in our forecast, we'll look more in that kind of high single-digit category. Similar to what we did with Kellstrom, we want to make sure we're growing the right revenue together. So I'd say we'll be a little bit more conservative in that mid- to upper single digits as we look at optimizing the right margin profile for the future and the right capability set for the future. So there may be some things that we say we don't want to grow together and other areas that will kind of double down. So I'd say think of it more in this -- in the high single -- mid- to upper single-digit category.

Our next question will come from Ken Herbert from RBC Capital Markets.

On the PAG business, it's obviously grown quite a lot as well, as you just called out through acquisitions. How integrated is the business today? And how much of a sort of integration of the PAG business do you need to sort of undertake here now as part of this moving forward?

Yes. I think what David Mast, CEO, has done really, really well. It's less of an integration strategy than we have. It's a little different, but the investments he's made in his facilities are second to none. I look forward to hosting you and some investors at some of the sites and you get a feel for the amount of investment that they put into these centers of excellence. So I'd say from a like how the facilities look and operate and from a Six Sigma and a lean perspective, really outstanding. They're on similar groups of systems that we're on. The question is when you look at these capability sets, I think that what we'll want to do is kind of do some more system integration inside of these capability sets and think through the go-to-market strategy. But I'd say they're further along than most of the other deals we've done in terms of acquisitions, but -- and integrations, but there definitely is part of the integration playbook that we'll put together through the end of this year and really kick off integration in 2027.

Okay. That's great. And just looking at the pro forma business combined, you'll be still approximately sort of 50% business jet, general aviation. Can you just talk strategically the justification for the continued focus in this market and why you think it presents maybe opportunities, maybe not better than commercial transport, but how it compares to commercial transport? I tend to think of it as maybe more fragmented, less volume, but maybe a little better opportunities on price and return. So any comment on that would be great.

Well, we look at it very similar, Ken. I think you're talking about a couple of things. Number one is you have a huge tail of end-user customers. So when you think of kind of rotorcraft, business aviation and general aviation, the 3 combined, in many instances, you're looking at north of 10,000 end users, which is -- creates a level of complexity for our OEM partners, and it really puts us in a strong and leading position to support the aftermarket. The second thing is you're also looking at a tremendous amount of platforms. You've got from a PC-12 to a Gulfstream to Robinson helicopter, I mean you look at that totality of that market, the number of kind of legacy aircraft that will fly for another 20, 30 years and then the number of new aircraft that are flying. We see that market as one that we can look platform by platform together. Actually, I was with David, the CEO, this week, and we were talking about if you look at our capabilities set together, when you look at a platform and you pick out the Pilatus like the PC-12, you can go through that platform and you can say, here's where we support wheel and brake, here's where we can support the engine. Here's where we can support the airframe. Here's where we can support the avionics. And we can start to put together platform strategies in terms of totality of aftermarket that we think will be second to none in the market. So we're really, really excited about that market and really becoming a unique market leader in that space.

Our next question comes from Scott Deuschle from Deutsche Bank.

Sorry if I missed this. John, can you give us a sense, though, as to how large the DER repair business is at PAG? I mean 2,000 repair seems like a lot, but I was curious if you could put that in the context of their revenue.

Yes. It's not in the deck, but let me pull out so I get you the right information. I mean it's on the smaller end of the business. I'd say think of it more on just sub-10%.

Okay. And then when you talk about their reverse engineering capability, is that just code for PMA? Or are you referring to something else?

It's somewhat code for PMA, but more than the PMA, it's thinking through how they're managing their own shops and where they can build engineering and manufacturing capabilities, so they're not using third-party shops, and they're bringing things in-house. I think one of the other strong things Ken's question a moment ago on integration. I think one of the things that David, the CEO, has done really, really well is as he's bought businesses, leaving the systems and the other pieces aside, he's really brought capabilities in-house, and they really look at that cross-selling and how to use the shops together quite well. And when you look at that manufacturing and product side of the business, that's really what it's supporting the MRO shops.

Okay. Great. And then, Adam, there's a pretty wide range on preliminary EBITDA for the fourth quarter, particularly given that it's late January here. I guess what drives that range? And can you give us some sense as to whether it's biased toward the low end or high end?

Yes. I mean, Scott, it's really just about completing our year-end audit work and just providing an appropriate range around the numbers. So we feel good about the quarter, and we'll give you an update on the earnings call next month.

Scott, you just got me in trouble because Adam had a narrower range, and I...

All good. I guess last question here, John. Can you characterize PAG's free cash flow conversion rate in 2025 and then what that expectation is for that business in 2026?

Yes. I mean, Adam, you can answer this. It's stronger than ours. And I think [indiscernible] to go ahead.

Yes, Scott, I would just say I would think of the conversion more similar to our existing MRO business. It is an inventory supported MRO model, but it's still much less working capital intensive than our distribution business. So you should see the mix improve and our cash flow profile to improve over time.

Our next question will come from Louie DiPalma from William Blair.

Congrats on this transaction and the strong fourth quarter results. How significant is the international presence for PAG? And how does that -- as you integrate the company, how does that further develop your view for the centers of excellence across avionics, engines and the other areas?

Yes. I mean the market in general, when you look at independent maintenance repair and overhaul shops, still remains very U.S. dominant, but we still see a tremendous opportunity for future growth organically and inorganically with smaller opportunities outside of the U.S. I think that their Australia presence is very exciting to us. It's a really strong rotorcraft and business and general aviation market. And we have opposite capabilities, very complementary capabilities, I should say. So bringing those together will really position us well in that market. I also think that they've got a great opportunity for us to utilize our existing capabilities to support their facility in Brazil. And then they have a recent acquisition in Europe that is a really strong center of excellence as well. So I'd say it's a great start, and it's a great continued expansion. I think as we look 5 years down the road for us, there's still a tremendous opportunity for us outside the U.S. to keep expanding.

Great. And in terms of the component repair business, you have established key distributor arrangements with Pratt & Whitney Canada, with Honeywell, Eaton and many other Tier 1s. How do the MRO capabilities of PAG allow you to provide component repair for some of those same components that you are the exclusive distributor for? And how does that contribute to positive margin generation?

Yes. I think -- I mean, we shared an initial synergy target, but I'll tell you, we'll share more as we start to get our arms around the businesses together. David and I both very much agree that the bigger opportunities out there is as we get our teams together and start sharing more data across the board of how we can work together and in-source and do things exactly like you say, we have a few target large OEMs that we believe our combined capability set can bring more offerings to the table. I look at when we acquired the 1st Choice business in South Florida, which is an independent MRO shop on the commercial side. We now have Eaton programs that are approved and authorized. We have Collins programs, and we have Honeywell programs in there, where before they had no direct OEM programs. So I'd say more than taking our existing work, I think that it's more about future organic growth opportunities where we can take their existing capabilities, partner with our large OEMs and bring in authorized work into their shops. I'd say that's the bigger opportunity. That is in-sourcing our own work that we potentially are outsourcing today.

Right. And one final one. You launched the Honeywell Fuel Control product line successfully, and that seems to be one of your higher-margin products as you are the OEM. And I think you previously disclosed in an answer that the Proprietary Solutions for PAG is roughly 10% of revenue. But do you envision Proprietary Solutions growing as a percentage of overall...

We do. Yes. If you look at that, I think it's Slide 8, which kind of lays out what the capability set looks like for the future. When you look at that Proprietary Solutions side of the business, expect it to continue to grow, expect us to continue to partner with our OEMs as they have end-of-life programs, as they have intellectual property that we can focus on to support them. And as we deal with continued supply chain issues, as the OEM, specifically on the commercial side, market continues to grow, you're going to see other supply chain constraints that we may not even know about today and utilizing proprietary repairs and alternative sourcing and reverse engineering to support kind of those supply chain gaps, we see that as tremendous growth opportunities for the business going forward as well as margin expansion opportunity.

And our next question will come from Louis Raffetto from Wolfe Research.

Obviously, you guys have been busy. Curious as to why debt versus equity for this deal versus the last deal?

Yes. I mean, at the end of the day, what we wanted to bring to the table here is deal certainty. We put our balance sheet in a position as we focused on the Aero 3 acquisition to really have a strong balance sheet to support this acquisition because we've been working on this longer than we worked on the last one and wanted to have the ability to bring deal certainty. And we'll work on permanent financing and share more details as we get through that work.

All right. Great. And then I guess Slide 8 is interesting. Is that something we should think of as potential future reporting lines? Or just end market breakdown? Just curious as to how to think about that slide.

Yes. I think it's too much for a reporting line perspective. Adam and I had this discussion last week in the middle of the kind of deal work is what does 2027 kind of reporting look like. So we'll -- we have some work to do on that. It's -- I think -- but I'd say this is how we'll probably organize the business, and then we'll think through how to bucketize that and how to think about reporting going forward. We expect the transaction to close sometime in the second quarter. The business will run relatively independent through the end of the calendar year. And Michael will share details shortly. We'll set up our Investor Day. We have a date already for early January, and we'll launch and share kind of how we will publicly report as well as what to expect from an integration perspective. We feel really confident we've done more diligence on this transaction, obviously, with the size of scale than we've ever done before. But now we want to really understand together how we're going to work together before we kind of finalize everything. So we've got the framework. And now it's just as we've always done with our integration playbook. Let the businesses run, let us learn from each other and work together and then we fine-tune that integration model, and then we'll share publicly towards the end of the year, and we'll walk you through how to look at the markets as well. I'd say for today, we'll continue to report distribution versus repair, and we'll continue to share details on our market segments. And because the engine markets are growing so fast, we'll continue to share kind of engine versus non-engine data. But as we get into 2027 and we can get our arms around the data together, we'll share additional information above and beyond that.

Our next question will come from Jeff Van Sinderen from B. Riley Securities.

Let me add my congratulations. It looks like an amazing deal. A couple of multipart questions here. Circling back to the combined organic growth profile for a moment, what are the fastest-growing areas at PAG? And as an entity, where do you see the most substantial opportunities for growth as you contemplate putting the 2 companies together? And then also, are there any parts of the combined business that you might rationalize?

Yes. I mean both great questions, Jeff. Thank you. I think let's start with the organic growth. I think I mentioned earlier, we look at kind of mid- to high single-digit growth rates because we do look at, I'd say, potential rationalization. I think we have to go through the capability sets together post close and really dive deep and see if everything makes sense for the long term. So I'm not ready to answer that question yet because I'd like to just cross all my T's and dot my I's before I answer that question. With regard to growth rates, it's very similar to us. So you're going to see their commercial business on the avionics and more on the engine APU side be on the higher end of the growth profile. Anything on the business and general aviation side, engines will grow faster than non-engine work. So it kind of is in those 3 tiers, those 3 buckets.

Okay. That's helpful. And then as you -- maybe you can touch on PAG's pipeline of acquisition targets because they've been acquisitive as well. And how does that expand the scope of what the combined entity might look to acquire in the future?

Well, I mean, you know I'm fast, but I will tell you that we're going to swallow this deal together and bring these businesses together the right way. But I would tell you, I ironically think of more small rather than large. I think what we will do together as we build out the strategic profile, we share that Slide 8 with the capability set. The more we dive deep like into the granular areas of capabilities, what we're going to learn is what we need to round out the portfolio and whether it's geographic, whether it's a customer base, whether it's a platform or whether it's just a capability within an existing kind of grouping. And I think expect to see in the future more smaller tuck-ins to support those areas than something large and transformational again. I'd say that's kind of where we would focus near term. But the bigger near term is how do we bring these businesses together the right way and really extract the value that we know is there with the combined businesses.

Okay. Great. And if I could squeeze one more in really quick. Just anything on integration time line or milestones we should anticipate?

Yes. I mean because of -- we don't see any antitrust risk. I mean, like I said, there's really not -- there's really no -- almost no overlap in terms of capability sets. So -- but we do want -- we have to get through that work and get through closing. The second thing is a deal of this size and scale and the quality of the team that they have, this is more of a joint integration team where we want to make sure that we're aligned together. So we will spend the back end of the year with the integration team working. And I would say don't expect the integration really to begin until 2027. They have a really strong operating plan this year, and that's why we supported an earn-out on the transaction. So we want to allow them to continue to excel. I'm the first one who says I want them to achieve 100% of that earn-out. We want to give them the capacity to do that. And we want the integration planning to really be done perfectly well, and we'll kick off integration in January of '27. But we will share with you a very detailed integration plan and what to expect.

Our next question will come from John Godyn from Citi.

Congratulations on the deal. It sounds like there's a lot more information coming, so I can appreciate that. But I wanted to just look at Slide 9 with the synergy numbers and some of the detail there and just double-click on that to the extent possible. I was curious kind of revenue synergies versus cost synergies, maybe expanding on some of the bullet points here that you guys have for the integration playbook. And I guess the last piece is just the greater than sign on the $15 million, of course, is curious, anything to elaborate on the upside beyond $15 million?

Yes. It's a great question, John. And you're kind of newer to working with us, so you'll get a feel of how we manage the integration playbook. When we share on a deal, the initial synergy targets, those are all things that we can literally tick and tie with detailed actions. So the reason there's the plus sign is I think that we see a lot of -- I'll talk about the plus sign first. We see a lot of opportunities in how we bring this business together from a go-to-market perspective where there's really sales synergies, and we can now kind of tackle a new market or a new capability set or a new growth area that we wouldn't have been able to do on our own, either one of us. And that's the plus area. But I'd say because I can't actually put a detailed action and a check box next to it, that's not what I'm sharing today. So we have a very confident line of sight to cost synergies, to margin synergies that are built into the $15 million, and that's the playbook work. And then the above and beyond, we'll share more details as we can kind of get our arms around kind of the customer-facing and the sales side as we bring the businesses together, and that's where we believe there's upside. So what we presented here, we feel really confident in the plan. And the thing -- obviously, the synergies are important of a deal of size and scale. But what it also does is taking their margin profile, how we've been able to scale our margins and with the synergies, it puts us in a position to really -- I look at the best-in-class aftermarket businesses and their consolidated EBITDA starts with a 2 rather than a 1 and puts us in a position of line of sight to a 20-plus percent EBITDA margin, which is also really exciting for the platform we're building.

That's great. So it sounds like as you roll out more details on integration, et cetera, that 15% is likely to get pressed higher, and we'll get those details over time.

Yes. And I would say very transparently, you won't get those details until probably maybe with our third quarter. And if not, definitely, as we launch, we'll do an integration kind of Investor Day like real -- to walk you through it in detail. So I'd say sometime between October and January, we'll be able to give you the granular details. We'll get through closing. I don't know when it will close, like May, June at the latest, and then get our arms around and again, validate the next level of synergies and put that detailed plan together with the actions, and then we'll walk all of you through that detailed plan. And we'll see we're very transparent about it.

Okay. Perfect. And can I ask [indiscernible], and I apologize if I missed it, but the interest rate on the fully committed bridge facility, do we know that or approximately? Any color there?

Yes. We didn't give a specific interest rate. I would just say somewhat consistent with our current debt facility is the way to think about it.

And our next question will come from Jonathan Siegmann from Stifel.

John, Adam and Michael, congratulations on the great deal. So this is the second one from the same seller, which the first one was a good deal. Just real quick. Just was there any reason why the former owner didn't put those 2 pieces together on their own? And is there a reason why they -- together at VSE is a better combination?

I mean I can't answer the first question. I think I don't -- I've always been in a public company, so I don't know the ins and outs of how all the private equity funds work and the rationalization around it. But I do have a tremendous amount of confidence that when you look at the capability set that both assets really, really fit well with us. I think GenNx360, I'm thrilled that they have some rollover equity and they're a great partner, and they've been outstanding to do true transactions with. And the way that they've invested in their businesses, the way they've invested in their management teams and the quality of the capabilities and the assets that they have, I don't think there's any more in their portfolio, but they've been 2 great transactions for us. So not certain on their end. I can't answer that. But for us, we see a tremendous opportunity in these real centers of excellence in terms of MRO and parts capability sets.

Okay. And then all right, maybe I'll just ask on the Proprietary Solutions. You've highlighted your enthusiasm for that growing nicely and being accretive to margins. Just can you maybe expand on the relative size of PAG's Proprietary Solutions? You mentioned to Scott's question on DER specifically, but how does that grow?

Yes. Just to be clear, so I'd say that whole bucket is under 10 -- it's under 10% of their business. So that includes the whole Proprietary Solutions business.

Okay. And that should be margin accretive as well, same kind of...

Absolutely. Yes. Absolutely.

[Operator Instructions] And our next question will come from Sam Struhsaker from Truist Securities.

On for Mike Ciarmoli. Congratulations on this deal. I was just curious you kind of building off of the Proprietary Solutions question there. You mentioned reverse engineering alternatives. Does that mean that they're doing PMA work? Or is that something else?

Yes. I mean there's some PMA in there. I'd say that Proprietary Solutions business is far more focused on DER repair than anything else. So as you look at that business, they are a repair business with maintenance repair and overhaul sites that they bring their inventory-centric model to. So where they're looking at their proprietary solutions business, it leads with kind of DER repair, which in many instances is bringing either a Used Serviceable Material part or a PMA part into the repair capability where there are supply chain constraints in the market.

Got it. And I apologize if I missed this earlier, I was having some technical difficulties. But -- so is it fair to assume that then all of those kind of subsegments within PAG are margin accretive to you guys?

I don't think we -- I actually don't really look at that on an individual basis. Adam, how would you look at that? I'd just say the total business is accretive. Obviously, the higher-margin work is accretive. I didn't go...

Yes. I mean the businesses are relatively consistent. But overall, it's accretive consolidated.

And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Cuomo for any closing remarks.

Thanks, Crystal, and thanks, everybody, for joining today. I appreciate the tremendous flexibility in spending an hour with us this morning. We've been working for 6 years on transforming this business and building a platform to be able to find the right kind of merger partner, and I use that word in a literal sense that we can bring together to start scaling this business in the right direction and excited for the PAG team to join our family and look forward to the closing and all that's ahead. Thanks again, and have a wonderful rest of your day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.

Good day, and thank you for standing by. Welcome to the VSE Corporation's Third Quarter 2025 Results Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you. Welcome to VSE Corporation's Third Quarter 2025 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO; followed by a financial update from Adam Cohn, our Chief Financial Officer.

The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements.

We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted.

With that, I'd like to turn the call over to John.

Thank you, Michael, and thank you for joining us today for VSE's Third Quarter 2025 Conference Call. We appreciate your flexibility in joining us on short notice. We advanced our earnings call to provide timely and detailed information about today's announced acquisition of Aero 3.

Before we begin the presentation, I want to share a brief update on the third quarter of 2025. I'm proud to report that VSE delivered another exceptional quarter, achieving record revenue and record profitability, while continuing to improve free cash flow generation. The financial results we are sharing today highlight the strength of our markets, the resilience of our aviation aftermarket platform and the disciplined execution of our 2025 operating plan.

At the same time, our team continues to execute on our strategic objectives, integrating recent acquisitions, capturing synergies, advancing OEM license manufacturing, expanding MRO capabilities and growing our organic pipeline.

Let's now begin on Slide 3 of our presentation. We are pleased to announce that VSE has signed a definitive agreement to acquire Aero 3, a diversified global Maintenance Repair and Overhaul service provider and parts distributor, offering a comprehensive suite of wheel and brake aftermarket solutions to support commercial, business and general aviation operators.

Aero 3 is a global market leader built around 3 complementary business units. The first and largest is Wheel & Brake MRO services, which represents approximately 75% of Aero 3's revenue. This business operates 9 strategically located repair and overhaul facilities across the U.S., Canada and the U.K., providing proximity to key customer operations, reduced logistics costs and industry-leading turnaround times and performance.

The second business unit is Distribution, accounting for roughly 20% of revenue. This segment provides OEM authorized distribution of wheel and brake components, further expanding VSE's position as a trusted OEM partner.

And third is Proprietary Solutions, which represents approximately 5% of revenue. This unit focuses on engineering and production of proprietary custom-designed aircraft components, enhancing VSE's exposure to higher-margin, differentiated proprietary products.

Total cash consideration for the business is $350 million, subject to working capital adjustments. This transaction is expected to close in the fourth quarter of 2025, subject to regulatory approvals and customary closing conditions. Aero 3 generated approximately $120 million of revenue during the trailing 12-month period ending August 2025 with strong adjusted EBITDA margins in excess of 20%.

And year-to-date, on a pro forma basis, the acquisition of Aero 3 enhances VSE's consolidated adjusted EBITDA margin by more than 50 basis points. The acquisition is expected to be funded through anticipated proceeds from an equity financing and, if appropriate, borrowings under our existing credit facility.

Our intent is to maintain leverage consistent with or below current levels, ensuring we maintain the balance sheet flexibility to execute on potential future M&A opportunities and to support organic growth investments. As we look ahead, our 2026 M&A and organic pipelines remain robust, and we remain confident in our ability to continue to capitalize on both to drive long-term growth and margin expansion.

Let's now move to Slide 4. Aero 3 operates a highly attractive and well-diversified business mix, characterized by minimal customer concentration and a deep network of blue-chip aircraft operators with most top customers supported by long-term agreements. They support a broad and deep range of aircraft coverage with an intentional focus on regional and narrow-body platforms, the fastest-growing and most utilized aircraft globally. And they support a global customer base that includes a leading presence in the U.S., Canada and Europe.

Aero 3 is a strong strategic fit with VSE's core focus areas, increasing our exposure and market leadership in the global wheel and brake aftermarket. First, Aero 3 builds on our 2023 acquisition of Desser Aerospace, a leading tire, tube and battery distributor with 2 wheel and brake MRO facilities. By combining Desser Tire's expertise with Aero 3's wheel and brake MRO capabilities, the combined business creates a unified solution for fleet operators.

The integrated facility footprint enables stronger support through national programs while seamlessly incorporating tire repair and replacement into wheel and brake aftermarket services. This will drive strong sales synergies as we bring our businesses together.

Second, Aero 3 expands VSE's global MRO footprint and capabilities with the addition of 9 wheel and brake repair and overhaul facilities located across the United States, Canada and the United Kingdom, supporting both current and new customers for VSE.

Third, Aero 3 deepens VSE's OEM alignment. The company supports all major wheel and brake OEMs and strengthens VSE's strategy as a trusted OEM aligned partner across aviation services.

Fourth, Aero 3 enhances VSE distribution capabilities with the addition of new authorized OEM product lines, enabling VSE to offer global customers expanded, fully integrated aftermarket repair and parts solutions.

Fifth, Aero 3's Proprietary Solutions business accelerates the growth of differentiated, high-margin products, enhancing our engineering and manufacturing capabilities and expanding our intellectual property-driven portfolio.

And finally, and most importantly, Aero 3 has experienced leadership and expertise in this market. The Aero 3 leadership team led by Daniel Bell will remain with the business and continue driving growth and operational excellence across VSE's entire global Wheel and Brake Group.

As you can see, we're incredibly excited to welcome Aero 3 to the VSE family. With this acquisition, we're taking another major step forward, creating a business built around 3 powerful complementary capabilities: engine accessories and components; component repair, including hydraulics, pneumatics and avionics; and now expanding wheel and brake services.

Across each of these areas, we'll bring together MRO, new and used part distribution and proprietary solutions to deliver a differentiated high-value experience for our global aviation aftermarket customers. It's a combination that truly positions VSE for the next phase of growth.

With each VSE acquisition, we strengthened our market position and continue to differentiate ourselves through how we integrate businesses and drive synergies in revenue and margin. We've been successful not only in acquiring high-quality businesses, but in bringing them together to deliver above-market growth and meaningful synergies.

You can see that success evidenced in our recent and ongoing integrations of TCI and Kellstrom. We are successfully integrating systems and organizations, sharing best practices and creating cross-selling and new business opportunities, all of which are reflected in our 2025 organic revenue growth and EBITDA expansion. We look forward to continuing that momentum and capturing the synergy and growth opportunities as Aero 3 becomes part of the VSE family.

Let's now continue on to Slide 5 and review our recently announced organic growth initiatives, program awards and operating plan updates. First, Kellstrom Aerospace, led by Executive Vice President, Daniel Adamski, extended its exclusive global distribution agreement for both AMETEK Sensors and Fluid Management Systems and Hughes Treitler product lines, including sensors and control line replaceable unit and piece parts, oil coolers and heat exchangers supporting a broad range of engine platforms.

Second, we expanded our strategic collaboration with Eaton and launched a used serviceable material distribution program. Through this program, we will acquire and manage as removed material and finished overhaul components, improving the availability of rotable and exchange assets available to the market, while building upon our previously announced hydraulic systems repair agreement.

Third, we were awarded a global distribution agreement with Bridgestone Aircraft Tire. This partnership expands market access to Bridgestone Aircraft Tires portfolio of new and retread tires supporting commercial aviation operators across Boeing, Airbus and regional aircraft platforms.

Fourth, we signed a new long-term agreement to provide repair and overhaul services for engine fuel units powering the Navy's TH-73 Thrasher helicopter. This agreement expands VSE Aviation's MRO offering into direct defense sustainment support.

Finally, we partnered with LuminUltra to distribute BugCount Fuel, an innovative microbial contamination fuel test servicing the aerospace market.

In addition to our new business wins and contract renewals, the third quarter represented a strong execution quarter for our operating plan. We continue to make meaningful progress on our acquisition integrations and our OEM license program implementation is advancing towards completion. Our successful integration and program implementation efforts, combined with ongoing investments in new capabilities and capacity have driven a notable improvement in margins across the business.

I will now provide a brief update on the current market environment, which continues to benefit from strong aftermarket fundamentals. The aviation aftermarket remains robust, supported by strong passenger demand, high fleet utilization and a slow pace of retirements, factors that continue to drive demand for maintenance services.

Within Commercial aviation, demand remains specifically strong in the Engine segment, driven by an aging global fleet, ongoing supply chain constraints and limited new aircraft availability. The business in general aviation aftermarket also remains healthy, supported by steady activity in North America and Europe, growth in emerging markets and solid customer demand.

Looking ahead, we expect continued strength across the aviation aftermarket through 2026. Organic growth rates, however, are likely to moderate slightly as we cycle through several years of exceptional organic growth performance, reflecting a healthy and sustainable stabilization in the aftermarket.

Let's now move to Slide 6 to discuss our financial performance. Once again, the VSE team delivered an outstanding quarter, generating record aviation revenue and record aviation margins, all while driving stronger and improved free cash flow.

In the third quarter of 2025, our consolidated revenues increased 39% to $283 million, driven by execution of new and existing distribution programs, expanded MRO capacity, the addition of new product lines and repair capabilities and contributions from recent acquisitions, all supported by solid end market demand.

Consolidated adjusted EBITDA increased 58% to $47 million or 16.7% of revenue, while Aviation adjusted EBITDA increased by 51% in the quarter to a record $50 million or 17.8% of revenue. Our record adjusted EBITDA was driven by a higher mix of proprietary and higher-value aftermarket products and repair work, increased in-sourcing synergies, sales from the OEM license manufacturing program and the earlier-than-planned realization of cost and margin synergies from recent acquisitions.

And finally, we ended the third quarter with a stronger balance sheet, improving our adjusted net leverage ratio to 2x, driven by solid free cash flow generation and improved working capital management.

I will now turn the call over to Adam to discuss the details of our financial performance.

Thank you, John. Let's turn to Slide 7 of the conference call materials, where I will provide an overview of our third quarter consolidated financial performance. VSE generated $283 million of revenue in the quarter, an increase of 39% over the same period in the prior year.

In the third quarter, we recorded a noncash fair value adjustment of $23 million related to the earn-out receivable from the divestiture of our noncore fleet business based on updated results and forecast provided by the buyer. This charge only impacted consolidated operating income and had no effect on our Aviation segment results.

Consolidated adjusted EBITDA increased 58% to $47 million compared to the third quarter of 2024. Adjusted EBITDA margin was 16.7% in the quarter, an approximate 200 basis point improvement over the prior year period.

Adjusted net income was $20 million and adjusted diluted earnings per share was $0.99, an increase of 111% and 87%, respectively, over the prior year period.

Now turning to Slide 8, where I will review our Aviation segment's record third quarter performance. VSE Aviation generated $283 million of revenue in the quarter, an increase of 39% over the prior year period. Distribution revenue increased 49% in the period, driven by balanced operational execution of new and existing programs, product line expansion, market share gains and strong contributions from the Kellstrom acquisition.

MRO revenue increased 25% in the quarter, driven by higher-margin product mix, the addition of new repair capabilities, an increase from in-sourcing repair activity, strong end market demand and contributions from the Turbine Weld acquisition. Excluding the impact of recent acquisitions, organic Aviation segment revenue increased by approximately 10% in the third quarter as compared to the prior year period.

Aviation adjusted EBITDA increased by 51% in the quarter to a record $50 million or 17.8% of revenue. Adjusted EBITDA margin improved 140 basis points year-over-year, driven by an increased focus on higher-margin product and repair activity, including a refinement of our USM strategy, an increase from in-sourcing activity, favorable mix, higher-margin aftermarket sales from our OEM license manufacturing program and the continued realization of synergies from recent acquisitions.

Let's now turn to Slide 9 of our presentation materials to review our Aviation segment guidance for the full year 2025. Our guidance assumes current market conditions and no significant changes in tariff or macroeconomic environment. We are increasing full year 2025 Aviation segment revenue growth guidance to 38% to 40% from prior guidance of 35% to 40%.

We expect fourth quarter revenue to be flat to slightly down sequentially compared to the third quarter, reflecting normal seasonality in our business. We are raising our 2025 full year Aviation adjusted EBITDA margin guidance to 17% to 17.25% from our prior guidance of 16.5% to 17%, driven by strong year-to-date margin performance. The updated guidance assumes lower margin in the fourth quarter, which reflects normal seasonal trending for our business. The earlier quarters benefit from selling lower cost inventory purchased in the prior year.

In addition to our formal guidance commentary, I want to provide some additional modeling details for the fourth quarter. Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture are anticipated to be approximately $4 million in the fourth quarter. Stock-based compensation, which beginning in Q1 is excluded from adjusted EBITDA is expected to be approximately $3 million, split relatively evenly between aviation and corporate.

Depreciation and amortization in total are projected to be approximately $11 million for the fourth quarter. Interest expense is expected to be approximately $5 million for the fourth quarter. And finally, our effective tax rate is expected to be approximately 25% in the fourth quarter.

Turning to Slide 10 to review our balance sheet. At the end of the third quarter, our total net debt outstanding was $347 million, and cash and availability under our $400 million revolving credit facility was $347 million.

During the third quarter, we generated approximately $18 million of free cash flow driven by record operating results and disciplined working capital management. This was an improvement of approximately $14 million versus Q3 of last year and a nearly $80 million improvement year-to-date. We are expecting to once again generate strong free cash flow in the fourth quarter.

And finally, our adjusted net leverage ratio improved to 2x at the end of the third quarter from 2.2x in the second quarter.

With that, I will turn it back over to John.

Thanks, Adam. I'd like to conclude our prepared remarks by providing a brief update on our fourth quarter 2025 priorities. Integration. All projects remain on or ahead of schedule, and our synergy capture plans are significantly ahead of expectations. Our focus is to maintain a disciplined integration approach and complete all open projects in 2026.

Focus on 2026. We are accelerating capability expansion, operational capacity increases and new program wins to drive another strong year of performance. We're also advancing our OEM license manufacturing transition, which remains on track for 2026 completion.

In addition, we remain focused on building our organic growth pipeline, deepening OEM partnerships and expanding our market presence to support growth in 2026 and beyond.

And finally, we're preparing to welcome Daniel Bell and the entire Aero 3 team to VSE as we continue to strengthen our global wheel and brake platform.

I'll close by thanking our shareholders, customers and suppliers for their continued trust and support and most importantly, to our exceptional VSE team, congratulations, and thank you for another outstanding quarter.

Thank you, John and Adam. Due to the acceleration of today's earnings announcement, we will not be conducting a question-and-answer session following today's prepared remarks. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Hello and welcome to the VSE Corporation's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations and Treasury, Michael Perlman.

Thank you. Welcome to VSE Corporation's Second Quarter 2025 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO; followed by a financial update from Adam Cohn, Chief Financial Officer.

The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions.

With that, I would now like to turn the call over to John.

Good morning. Thank you for joining us today for VSE's Second Quarter 2025 Conference Call. We are pleased to report another outstanding and record quarter. In the second quarter of 2025, we achieved record revenue, record profitability, record margins and significantly improved free cash flow generation. Today's results highlight the strength of our business, the resilience of our markets, the strong contributions from recent acquisitions and the impact that our integration efforts are having on accelerating growth and margin opportunities.

Let's begin with Slide 3 and a review of our second quarter highlights. First, on April 1, we completed the sale of our Fleet segment. This marks the final step in our multiyear transformation into a pure-play aviation aftermarket company. With this divestiture behind us, we are now fully focused on higher growth, higher-margin distribution and MRO services within the aviation aftermarket. Second, we acquired Turbine Weld Industries, specialized MRO provider of complex engine components supporting the business and general aviation aftermarket. This acquisition expands our engine service capabilities, adds several proprietary repair offerings to our MRO portfolio, deepens our OEM relationships and opens the door to future growth through targeted investments.

Third, we signed a new 5-year authorized service center agreement with Eaton for hydraulic pump MRO support. This is Eaton's first authorized aftermarket repair partnership and endorsement of VSE as a trusted and capable OEM partner. Fourth, we secured a new $700 million credit facility, comprising a $300 million Term Loan A and a $400 million revolver. This refinancing places our prior facilities and gives us more flexibility along with a lower total cost of capital to support growth. And finally, we made solid progress executing on our operating plans, integrating recent acquisitions, launching new programs and expanding margins through synergy capture and operational improvements.

Let's now move to Slide 4, where I will provide updates on our acquisition and integration efforts. Let's begin with TCI. We acquired TCI in April 2024, and it's quickly become one of our fastest-growing business units. Growth has been driven by a strong backlog from OEM engine partners and new business wins. To support this momentum, investing in new repair capabilities, expanding our capacity and executing cross-selling synergies, including in-sourcing work from our Kellstrom business. In December 2024, we acquired Kellstrom. We're very pleased with Kellstrom's performance and integration progress over our first 6 months of ownership. The team is executing well with a clear focus on driving profitable growth and improving margins.

We're doing that in 3 ways: first, emphasizing higher value, higher-margin engine and engine-related components, specifically those supporting next-generation platforms like the LEAP engine. Second, we've refined our USM used serviceable material strategy to focus on higher-margin product lines and align with our in-house repair capabilities and new part distribution product lines. This more disciplined and strategic approach has reduced top line USM revenue but is driving significantly stronger margins. In the first half of 2025, we have reduced Kellstrom's USM revenue by approximately 20% on a run rate basis versus the prior year, and we expect a similar year-over-year trend in the second half. Importantly, we've repositioned USM as a strategic enabler of new part distribution and repair services and no longer a stand-alone speculative parts trading business.

Third, we've already begun capturing a significant portion of the $4 million in cost synergies we identified at the time of acquisition. In addition to TCI and Kellstrom, we are very excited about our recent acquisition of Turbine Weld, an outstanding business with an outstanding team. At Turbine Weld, we are expanding operational capacity to meet strong customer demand and investing in new equipment and technical talent to support this accelerated growth. In addition, we're implementing standardized processes and upgrading systems to ensure the business scales efficiently and sustainably.

Now moving on to program implementations. The OEM licensed fuel control program made strong progress in the second quarter with the successful production of our first approved units. We remain on track for full production by early 2026. Margin contribution is now fully reflected in our financials. As mentioned, we launched Eaton's first authorized repair station in the Americas. Early results are strong, and we're helping Eaton expand into new markets, increase repair capacity and improve the customer experience. This sets the stage for future partnership opportunities.

Finally, following the fleet divestiture, we completed a full cost review to align with our single segment aviation model. We're now operating from a leaner base and are in the final stages of transition work, which will be completed before year-end.

I will now provide an update on the current market environment for our business. The second quarter began with some softness in the aftermarket, driven by uncertainty around tariffs. However, activity rebounded quickly in May and June as OEMs and customers regained confidence and swiftly adjusted to the new environment. Looking ahead to the second half of 2025 and 2026, we anticipate continued strength in the aviation aftermarket, specifically in the Engine segment. To capitalize on this growth, we made targeted investments, both organically and through acquisitions, engine part distribution and repair services. The engine aftermarket remains one of the fastest-growing and most supply-constrained parts of the market. As of the second quarter, engine-related MRO and distribution revenue represents greater than 50% of total VSE aviation revenue.

Let's now move to Slide 5 to discuss our financial performance. VSE delivered another outstanding quarter, generating record revenue, record profitability and positive free cash flow, supported by solid execution and continued robust end market activity. In the second quarter of 2025, consolidated revenues increased 41% to $272 million, driven by strong financial performance from our core aviation distribution and MRO businesses and contributions from recent acquisitions.

Aviation adjusted EBITDA increased by 48% in the quarter to a record $47 million or 17.1% of revenue and consolidated adjusted EBITDA increased 52% to $43 million or 16% of revenue. These record results driven by a balanced mix, strong pricing, solid execution on distribution program awards, a focus on higher-margin product lines continued success in our OEM license manufacturing program and contributions from recent acquisitions, including earlier-than-planned synergy capture. Adjusted net income of $20 million and adjusted net income per diluted share of $0.97 increased 149% and 106%, respectively.

And finally, we completed the second quarter with a strong balance sheet, achieving an adjusted net leverage ratio of 2.2x following the sale of the fleet business and the acquisition of Turbine Weld, providing us with significant financial flexibility to support our strategic growth initiatives.

I will now turn the call over to Adam to discuss the details of our financial performance.

Let's turn to Slide 6 of the conference call materials, where I will provide an overview of our second quarter consolidated financial performance.

VSE generated $272 million of revenue in the quarter, an increase of 41% over the same period in the prior year. Adjusted EBITDA increased 52% to $43 million compared to the second quarter of 2024. Adjusted EBITDA margin was 16% in the quarter, an approximate 110 basis point improvement over the prior year period. Adjusted net income was $20 million and adjusted diluted earnings per share was $0.97, an increase of 149% and 106%, respectively, over the prior year period.

Now turning to Slide 7. I will review our Aviation segment's record second quarter performance. VSE Aviation generated $272 million of revenue in the quarter, an increase of 41% over the prior year period. More specifically, distribution revenue increased 50% in the period, driven by strong operational execution of new and existing programs, product line expansion, specifically parts supporting our OEM license manufacturing program, market share gains and contributions from the Kellstrom acquisition.

MRO revenue increased 27% in the quarter, driven by increased repair activity on higher-value technical repair capabilities from our avionics, fuel, pneumatics and hydraulics MRO centers of excellence, the addition of new repair capabilities, strong end market demand and contributions from the Turbine Weld acquisition. Excluding the impact of recent acquisitions and including TCI results in the quarter, organic Aviation segment revenue increased by approximately 13% in the second quarter as compared to the prior year.

Aviation adjusted EBITDA increased by 48% in the quarter to a record $47 million or 17.1% of revenue. Adjusted EBITDA margin improved 80 basis points year-over-year, driven by favorable pricing and product mix, higher-margin aftermarket sales from our OEM license manufacturing program, lower contributions from our less profitable USM business and increased in-sourcing of repair work. We're also beginning to realize cost synergies from recent acquisitions.

Now let's turn to Slide 8 of our presentation materials to review our Aviation segment guidance for the full year 2025. It is important to note that our guidance does not assume further tariff escalation or global recession. We are reaffirming our full year 2025 Aviation segment revenue growth guidance range of 35% to 40%. This growth is supported by full year contributions from recent acquisitions, partially offset by our strategic decision to narrow our USM focus to higher-margin product lines aligned with our in-house repair capabilities and new part distribution portfolio. We are raising our 2025 full year Aviation adjusted EBITDA margin guidance to the high end of the previously provided range to 16.5% to 17%. This increase reflects a higher-margin product mix and lower contributions from our less profitable USM business.

In addition to our formal guidance commentary, I will now provide some additional modeling items. Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, are anticipated to be between $14 million and $15 million, excluding stock-based compensation for the full year. Stock-based compensation, which beginning in Q1 is excluded from adjusted EBITDA, is expected to be $3 million per quarter for the remainder of the year, split relatively evenly between aviation and corporate. Depreciation and amortization in total are projected to be approximately $38 million to $40 million for the full year 2025. Interest expense is expected to be approximately $26 million to $28 million for the full year. And finally, our effective tax rate is expected to be approximately 25% for the remaining 2 quarters or a full year blended rate of 22% ...

Turning to Slide 10 to review our balance sheet. At the end of the second quarter, our total net debt outstanding was $362 million, cash and availability under our $400 million credit facility was $333 million. During the second quarter, we generated approximately $6 million of free cash flow, driven by disciplined working capital management and record operating results. This was an improvement of approximately $28 million versus Q2 of 2024. We are expecting to generate improved free cash flow in the second half of the year. Our adjusted net leverage ratio was 2.2x in the second quarter, which includes the impact of the fleet business sale and the acquisition of Turbine Weld.

With that, I will turn it back over to John.

I'd like to conclude our prepared remarks by revisiting our 2025 priorities on Slide 11.

First, following the sale of our fleet business, we completed a full review of our corporate structure and cost base. We're now aligned with our aviation focused strategy and well positioned to scale. Final transition work is underway and on track to be completed by year-end. Second, we're expanding repair capabilities and increasing capacity across both legacy operations and recent acquisitions to meet strong demand and drive growth at our MRO centers of excellence. Third, we're prioritizing the integration of TCI and Kellstrom to unlock efficiencies and enhance customer value. We've also launched integration planning for Turbine Weld and are investing to meet growing demand.

Fourth, we've begun capturing synergies from recent acquisitions to support margin expansion. Phase 1 of the Kellstrom integration is already delivering a significant portion of the $4 million in identified cost savings as evidenced by our strong second quarter margin performance. Next, we continue to make steady progress on implementing our OEM license fuel control manufacturing capabilities. And finally, we remain focused on building the organic growth pipeline, deepening OEM partnerships and expanding our market presence to support 2026 and beyond. I'll close by thanking our shareholders, customers and supplier partners for their continued trust and support. And most importantly, thanks to the VSE team for their outstanding record second quarter performance.

Operator, we're now ready to open the line for questions.

[Operator Instructions].

Our first question comes from the line of Ken Herbert with RBC Capital Markets.

John, maybe just to follow up on your comments on the organic growth. It looks like the guidance implies, call it, low to mid-teens organic growth in the back half of the year, and you seem to have done a really nice job here of offsetting some of the USM growth headwinds. Can you just talk about what you're seeing on the commercial transport versus business jet side or specifically how we think about second half and what you're seeing by some of your end markets?

Sure. I appreciate the question. Yes, I mean, I think I wanted to be a little clear because I didn't want anyone to get a concern that organic growth was slowing. But we're really in a position as we have done in the first half of the year to continue to reposition that new serviceable material business to something different, which is a bit of a decline in top line. But when we look at the markets, I'd say, let me break it down first engine and non-engine. Both B&GA and commercial, the engine markets continue to be the most robust parts of the market for us specifically, and they continue to outperform kind of the component side of our business. That's both in distribution and MRO. Then when you look at it by end markets, the commercial end markets are stronger than the business in general aviation market. That market has settled nicely. The B&GA market is nicely in that kind of 4% to 6% range, where we're seeing the commercial end markets probably naturally without organic growth in that high single digit to low double digits and then a little bit of organic growth pushing us into double digits on the commercial side. So you kind of balance it out and you get to a place where our natural organic growth for our business being 50% commercial, 50% B&GA, about just over 50% engine type products versus component products, putting it in a position where it's about kind of mid- to high single digits before any share gain.

And can you provide any more detail on the sort of the one VSE. And I guess, specifically, what the impact could be maybe this year, but more importantly, '26, '27 as we think about the adjusted EBITDA margins. Is there a significant cost opportunity here? Or how are you thinking about the potential there?

Yes. I mean I'd say that we're ... as you could see by the margins that we posted in the quarter, the progress on the acquisitions and the integrations is ahead of schedule. So we built into our plans margin opportunity and definitely felt that there was opportunity to continue to scale margins. I would say that we continue to be ahead of our plans. So I wouldn't get too far ahead in terms of margin opportunity, but there's definitely ... we do see continued opportunity out in the market as we integrate, but we've already captured a number of synergies, both on our fuel control program, our initial $4 million that we announced with Kellstrom, a significant portion of that has been realized in the first half of the year as well.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe just on that last point, Ken just made on cash, great cash generation. And I think you called out improved free cash flow in the second half. So given $57 million of generation, just given the generation in the first half, how do we think about the sustainability of free cash flow and any puts and takes on working capital we should consider?

Yes, sure. So yes, it was a good ... a solid cash quarter, as you mentioned, Sheila, we generated about $6 million in the quarter. We have seen significant improvement year-over-year. So if you look over the first 6 months versus last year, I think we've improved by about $65 million, so pretty significant. And as you know, there's some working capital seasonality in the business. So we generally see a larger use in the first half of the year, and that sort of neutralizes in the back half of the year as we lap our inventory purchases. So we are expecting to see strong improvement through the back half of the year. I would say that we are seeing improvement in our working capital profile, especially just given the last few acquisitions, including KelLstrom, they're less working capital-intensive businesses. So we're just seeing some natural improvement. But there's definitely a focus on continuing to generate strong free cash flow.

Great. And maybe if we could talk about [ KeLlston ] for a little bit. It's been a part of VSE for now over 6 months. What are the biggest positives? And John, you mentioned potentially shifting around the USM business, which you've always called out to something different. What does that something different mean?

Yes, I appreciate the question. I mean, first, it makes me feel great about the diligence. Everything is relatively as we had thought the business would be. The distribution business is as strong or stronger than we had anticipated. The team that manages that is quite strong as well, and we're really pleased to see what they have done in the first half of the year and the opportunities as we move forward as well. The Vortex business, which is their MRO business services business, it continues to perform outstandingly well, and we plan to get that integrated onto our systems, hopefully before year-end.

And then I'd say for the USM business, we wanted to let it run for about 6 months and just watch how the business played. It was a little bit too opportunistic in terms of parts trading for me. So where we're moving the business and shifting the business is we look at our business as bringing together our capabilities and in-sourcing as much work as we possibly can. So think of it more of a new used and repair model where we're supporting our new part distribution with a USM option or we're supporting our repair capabilities with a used option or we're working directly with large airlines on some type of asset management program. So that's what our USM kind of strategy, which we've just launched and put a new leader in place, and that's what that will look like, and we'll share more details as we get into the back end of the year. But expect to see a little bit of pruning on the revenue side there because we want to get away from the transactional parts trading, and we also want to focus on the right margin profile for our business.

. And our next question comes from the line of Noah Levitz with William Blair.

To start off on margins, you touched a little bit on it earlier, but we were under the impression that Q1 margins were typically the greatest and then Q2 and Q3 were a bit lower before improving back in the fourth quarter. Obviously, this quarter's aviation EBITDA margins were exceptional at 17.1%. So given fuel control program receiving the full margin contribution, Kellstrom cost synergies moving faster than expected and then also driving down some of that lower-margin USM work, what's kind of ... what's preventing you from the back half of the year maintaining, if not beating that 17.1%.

Adam, do you want to kick off or you want me to start?

Go ahead.

Yes, I'll take it. It's a good question. So I would say that the second quarter margins were very strong. I think the Kellstrom synergy capture had a large part sort of capturing those maybe earlier than we initially anticipated. So that really drove some of the strong margins in the second quarter. If you look back historically, there is definitely seasonality in our margins, and it really goes back to the seasonality in the distribution business. We tend to see higher margins in the first half of the year from basically lower cost of inventory. And so that's really what's driving sort of that first half to second half. And maybe initially, we expected to capture more of the synergies in the second half of the year from Kellstrom, but that sort of accelerated up a quarter. So that's driving some of the differences from what we initially anticipated.

And then with leverage down to 2.2x, can you talk a little bit about the M&A pipeline going forward? And then in particular, you've had the Honeywell Fuel Control deal for a while now and it seems like those style of programs are very, very strong on the margin side. So are there other versions of that in the pipeline as well?

Yes, I appreciate the question. I'd say that the M&A pipeline is very, very healthy. As we look at the back half of '25 and into '26. We have a number of kind of active or soon to be active things in the market. It's always difficult to forecast something like that because as you dive in, it's either you're all in or you're all out. So we'll see how that plays out. But we do have a pretty robust and healthy pipeline. And obviously, it's a place we plan to use our balance sheet to support that inorganic growth.

With regard to kind of our licensed manufacturing program, we really need until the first quarter of next year to be perfect on our fuel control execution. So we are ... although we're excited about the program and the growth opportunities it offers because it's our first program and it's something very unique that we haven't done before, we're more ... we're kind of looking at it with more of a longer game of focus. So I'd say don't expect anything there, at least in the next 12 months. So maybe back end of next year as we move into 2027, we'll look at growth opportunities and what the market looks like there for us.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities.

Let me add my congratulations. I wanted to follow up just on the Kellstrom synergies. It sounds like you're realizing those a little bit ahead of expectations. And wondering where are you seeing the remaining opportunities for efficiencies, synergies, leveraging scale as you fully integrate recent acquisitions. Just wondering what the focus is there for second half.

Yes. I mean I appreciate the question. Synergy capture is easy and complicated at the same time. There's 4 real levers, right? There's growing revenue while keeping your SG&A relatively flat. There's an element of price. There's an element of product cost and then there's an element of operating expenses. So each deal that we do, when we're going through our deal modeling and our diligence, kind of we try to capture where we think the synergy opportunities are and what the very specific actions are that are going to be tied to each. I would say that a lot of the cost synergies have been captured already on this deal. So really what we look at is more in-sourcing, more on the product margin side or opportunities to grow top line while kind of leveraging that operating expense base. So the SG&A as a percentage of sales will start to decline and generate stronger returns for the business. So I'd say it's more on the top side of the income statement and the bottom side as we continue to integrate.

Okay. Fair enough. And then just kind of a follow-up. I'm wondering what your latest thinking is on opportunities for the Honeywell business.

Yes. I mean, like I just said to Noah, it's ... of anything we're doing, that is probably the most precise program. It's our first manufacturing program. It's a fuel control that's on the PT6 engine for Pratt Canada and the Rolls-Royce 250 ... and we want it to be absolutely perfect. We have work to do through the first quarter to continue to get kind of final approvals and it to be our control without any interference from the original OEM. So we do not plan to work on new programs until that's complete. So I would tell you, probably the first quarter, I can give you a better strategy update once we get the full implementation done on this program. But it's really ... it's performing very, very well. We've got to clean up some supply chain issues that existed when we acquired the program, and that's in process. Full financials are embedded in everything that we're doing today. So very, very pleased with the performance of the program. We just need a little bit of time.

And our next question comes from the line of Josh Sullivan with ... the Benchmark Company.

John, can you just expand on the hydraulics opportunity? Maybe how large is that market? Why are you maybe the right partner to leverage capabilities there?

Yes. I think ... I mean, it's a good question to say how large it is because ... and I laugh because it's data that I'm trying to get my arms around myself because you look at ... when you have kind of an unapproved market, you don't have data. So I would guess it's somewhere between $50 million and $100 million, but I'm giving you a very, very wide range because it's really difficult to capture kind of what the unauthorized shops are doing. For us, I think there's a few things. Number one is we're really able to drive kind of faster turnaround times and our level of quality in supporting OEM authorized work is very, very core to our strategy. So the second thing is we partner in unique ways. It's not a one-size fits all for an OEM. so we can kind of customize and really listen to where the OEM needs us and where they don't. So starting to understand how this product is performing, where there's new parts, where there's used parts and again, where the MRO piece plays in and how can we bring all that together to support this OEM. So relationship is strong. We've been able to capture business back that was in an unauthorized shop prior and listen to the OEM of some core customers that they wanted us to focus on and bring that work in to drive some near-term success. So we're really pleased with the work so far.

And then maybe this ties into your USM strategy, but you noted engine side continues to be stronger than the component side. We've obviously heard that in other areas of the industry as well. But just curious on your thoughts on the cycle from when that might flip where component demand would outpace the engine side. And I know your recent M&A has really been focused on the engine side, but just trying to get some perspective on that long-term industry cycle.

Yes, it's a great question. And so my answer is more opinion than I would say fact and database. But where we don't see kind of an inflection point where that shifts. We see at least for the near term and the midterm, the engine aftermarket, again, both for business and general aviation and commercial continuing to outpace kind of the component side. The majority of that is ... really comes down to supply chain and MRO capacity. So if I ... if you go visit my engine-related MRO shops and I can add capacity, I can fill that with work very, very quickly. We're still seeing more supply ... more demand out there than there is supply in terms of shop floor space to do work. So I don't see that slowing down in kind of the next 3 years or so, and that's probably as far as we look out.

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

Nice results. John, just maybe back to Sheila's question on the USM, moving away from that maybe transactional speculative. Should we think about some of this new focus being accretive to your repair margins, especially as we think about sort of overall engine repairs? Are you going to be out there looking for certain USM parts to drive down repair costs?

Yes. I mean I'd love to answer the question next quarter or the quarter after because we're just in the beginning of launching the strategy. But it's a great question, and it's exactly how we're looking at it. So I don't want to say unequivocally, yes. until I know that we can execute on the strategy. But I would say it's a couple of things. Number one, it's how do you ... if you think about when something is broken, the question is, do you need a new part? Do you need a used part or do you need a repair? And bringing those 3 together so that, again, looking at it through the customers' lens rather than them shipping a part to us into one of our MRO shops, we come back with a quote on price and lead time, turnaround time and they basically say it's a beyond economical repair and the numbers don't work. And if we don't have a rotable pool or a used USM pool, we're not in a position to offer them an alternative at that point in time. So tying those 2 together, number one, is extremely customer-friendly, and we think that's a very good strategy for us.

The second piece is exactly where your initial comments are is how do we continue to look at, for lack of a better word, in-sourcing our own work so that we can continue to focus on margin expansion. We've already taken some of the Vortex work, which is the calcium services business, and we're in-sourcing that into our TCI component shop up in Connecticut. So looking at those types of opportunities within the business continues to be a priority in terms of margin expansion.

And then I think on ... maybe if you could just parse out a little bit. I think I heard 50% revenue exposure to engines, maybe how that breaks out between commercial, BGA. And should we think about ... you talked about more alignment with some of the newer engines like LEAP. Should we look at kind of the LEAP shop visit forecast as a good proxy for your engine growth in commercial going forward?

Yes. I mean I think first, Michael, did we ... did we break out the data on the market segments when you did the engine work?

No, we didn't give that level of granularity.

Okay. Yes. But Mike, we'll try to get you some of that data and I'll ... for another quarter to get you the data around that question. But it's north of 50% in terms of engine work, and that's both on the MRO side and on the distribution side of the business compared ... and it's ... I would say it's probably not very different in our 2 market segments, but we'll get some data around it. The second question with regard to LEAP. I would say it was a little early to use that data for trends for us. We are still more on legacy engines. We are focused on kind of continuing to evolve that. But if you look at our core Pratt & Whitney Canada, Prat & Whitney U.S., GE, Safran type engines, we're probably heavier on kind of legacy engines today and continuing to focus on evolution to newer type engines.

And then just last one, Adam, do you have a target leverage ratio for year-end?

I mean given where we are right now, Mike, at 2.2x with the EBITDA growth and free cash flow generation, we should be south of 2x by the end of the year. We didn't give a specific target, but we should be more than 2x. Number ...

[Operator Instructions]

And our next question comes from the line of Ken Herbert with RBC Capital Markets.

John, I appreciate the follow-up. I just wanted to ask the engine question maybe a slightly different way. Do you see better opportunity today as you look to build out that exposure on maybe the MRO side, it sounds like it may be relative to distribution as you think about engine and specifically sort of the organic pipeline. And then as part of that, does your existing relationship on the engine side, in particular, with Pratt, does that preclude you at all from working with other engine OEMs on the distribution side?

No. I mean, so first, more of our direct engine OEM distribution business is on business and general aviation engines than it is on the commercial side. Our commercial distribution work that we do that's supporting engines is less engine OEM work, and it's more other OEMs that are supporting that engine. So I think we have opportunity to support far more commercial distribution opportunities. And then with regard to OEMs, I mean, we're very, very OEM-centric and in our MRO shops. So we have centers of excellence that support different OEMs, and we don't see working with one precluding us from an opportunity to work with another.

And I'm showing no further questions.

So with that, I'll now turn the call back over to President and CEO, John Cuomo, for any closing remarks.

Thanks, everybody, for joining our call today. We appreciate the continued support of the story. Have a great Thursday.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.