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Date

Wednesday, May 6, 2026 at 8:30 a.m. ET

Call participants

  • Chief Executive Officer — John Cuomo
  • Chief Financial Officer — Adam Cohn

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Risks

  • During the quarter, $69 million of free cash flow was used for inventory build related to engine purchases and new APU program procurement, described by management as "kind of one-offs nonrepeatable," suggesting near-term cash flow pressure but anticipated recovery later in the year.
  • Management acknowledged that full realization of cost synergies from the PAG acquisition will extend into 2027, with John Cuomo stating, "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." This signals a delayed timeline for full synergy capture.

Takeaways

  • Revenue -- $325 million, a 27% increase year over year, with growth driven by both distribution and MRO channels.
  • Distribution revenue -- Up 26% compared to the prior year, led by new and existing programs, product expansion, market share gains, and benefits from the Aero 3 acquisition.
  • MRO revenue -- Increased by 28% year over year, attributed to expanded repair capacity, new capabilities, strong end market demand, and contributions from Aero 3 and Turbine Weld acquisitions.
  • Organic revenue growth -- Approximately 15% year over year, excluding acquisitions, reflecting ongoing strong underlying demand.
  • Engine aftermarket revenue share -- Now more than 50% of total company revenue, driven by ongoing fleet utilization and supply constraints.
  • Adjusted EBITDA -- $55 million, up 37% year over year, with an adjusted EBITDA margin of 17.1%, which improved by approximately 1.3 percentage points from a higher mix of margin-rich business activities and realized synergies from acquisitions.
  • Adjusted net income -- $33 million.
  • Adjusted diluted EPS -- $1.17.
  • Free cash flow -- Company used $69 million during the quarter, attributed to procurement seasonality and strategic investments for recently awarded APU and airline asset management programs.
  • Total debt outstanding -- $366 million at quarter end, with $1.24 billion in cash and equivalents used principally to fund the PAG acquisition on May 5.
  • Credit facility -- Revolving credit facility upsized to $500 million and remains undrawn.
  • Pro forma net leverage -- Estimated to be below 3x following the PAG acquisition, with a stated plan to reach below 2.5x by year-end through EBITDA and cash flow improvement.
  • PAG acquisition -- Closed May 5 and adds a total of 61 locations in eight countries, including 48 repair shops and 11 distribution centers, creating a scaled, independent aviation aftermarket platform with immediate margin accretion and improved free cash flow potential.
  • NorthStar Technologies acquisition -- Completed April 1, expands engine services in business and general aviation; management described its financial impact as "a few million of revenue contribution for the year."
  • Life-of-program agreement with Pratt & Whitney Canada -- Globally exclusive APU aftermarket distribution for over 2,500 SKUs covering more than 15 platforms, deepening OEM program alignment and broadening parts coverage.
  • CFM56 engine asset management program -- Acquisition for a major U.S. airline partner, provides more integrated aftermarket solutions, and supports organic growth; described as a traditional USM transaction.
  • Updated 2026 guidance -- Full-year revenue growth guidance raised to 57%-61% and adjusted EBITDA margin outlook lifted to 18.1%-18.5%, both now inclusive of PAG.
  • Full-year modeling assumptions -- Interest expense projected at $37 million-$40 million, depreciation and amortization at $98 million-$103 million, effective tax rate at 25%, stock-based compensation at $18 million-$19 million, and capital expenditures at 2%-2.5% of revenue.
  • Term Loan B financing -- $900 million new Term Loan B closed on May 5, upsizing borrowing capacity, extending maturities, and increasing day-to-day flexibility; priced at SOFR plus 200, with potential step-downs based on leverage.
  • Turbine Weld integration -- Integration completed, expanding engine-focused MRO offerings and supporting segment scaling.
  • AI and process initiatives -- Targeted use of AI and data-driven tools to improve productivity in MRO, supply chain, and customer service functions with measurable ROI, though benefits expected to build through 2027 and beyond.

Summary

VSE Corporation (VSEC 3.86%) presented first-time disclosure of record quarterly results highlighted by sharp revenue and margin expansion, with engine-related aftermarket revenue now exceeding half of total company revenue and cited as a durable driver. Management detailed the immediate closing of the PAG acquisition, which substantially increases global presence and technical scope, with accompanying margin accretion modeled into updated financial targets and full-year guidance. The company’s expanded exclusive agreement with Pratt & Whitney Canada was formally quantified as spanning more than 2,500 SKUs and 15+ aviation platforms, reinforcing depth in OEM-aligned programs. Balance sheet flexibility was underscored with the simultaneous upsizing of credit lines and closing of a $900 million Term Loan B, timed to coincide with the PAG transaction and supporting future M&A and organic initiatives. Management directly addressed macro headwinds, reporting "not seeing any outward impact on our engine bookings at this point in time," and described April and early Q2 activity as robust, while confirming that guidance embeds recent customer and program wins.

  • Cuomo said, "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."
  • Cuomo highlighted, "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," distinguishing portfolio composition versus commercial exposure.
  • Cohn clarified that the NorthStar acquisition is financially "immaterial," intended primarily to serve OEM client needs and logistics support rather than material revenue accretion.
  • On margin expansion, Cuomo stated, "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."
  • An updated revenue guidance range of 57%-61% growth and adjusted EBITDA margin of 18.1%-18.5% for 2026 are each explicitly "driven by the inclusion of PAG and does not reflect any change in our expectations for the underlying business."

Industry glossary

  • APU: Auxiliary Power Unit; a small engine installed on aircraft mainly to provide energy for functions other than propulsion, often critical in aftermarket support agreements.
  • CFM56: A widely-used family of turbofan aircraft engines, common in asset management and teardown activity within aviation MRO.
  • PAG: Precision Aviation Group; acquired by VSE to expand global aviation aftermarket reach and margin profile.
  • DER repairs: Designated Engineering Representative repairs; FAA-approved engineering alternatives to OEM parts or repairs, often cited for flexibility and supply solutions.
  • USM: Used Serviceable Material; refers to recycled aircraft parts salvaged from retired or dismantled aircraft, a major segment in the engine aftermarket.
  • SKUs: Stock Keeping Units; unique identifiers for individual products or parts, critical in large-scale distribution agreements such as with Pratt & Whitney Canada.

Full Conference Call Transcript

John Cuomo: 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.

Adam Cohn: 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.

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

Kenneth Herbert: 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?

John Cuomo: 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.

Kenneth Herbert: 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?

John Cuomo: 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.

Operator: Our next question will come from Sheila Kahyaoglu from Jefferies.

Sheila Kahyaoglu: 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?

John Cuomo: 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.

Sheila Kahyaoglu: 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?

John Cuomo: 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.

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

Louie Dipalma: 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?

John Cuomo: 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...

Adam Cohn: 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.

Louie Dipalma: 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?

John Cuomo: 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.

Louie Dipalma: 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?

John Cuomo: 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.

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

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

John Cuomo: 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.

Scott Deuschle: 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?

Adam Cohn: 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.

John Cuomo: 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.

Scott Deuschle: 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.

John Cuomo: 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.

Scott Deuschle: 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.

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

John Cuomo: 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.

Operator: Our next question will come from John Godyn from Citi.

John Godyn: 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?

John Cuomo: 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.

John Godyn: 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?

John Cuomo: 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.

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

Louis Raffetto: 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?

John Cuomo: 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.

Louis Raffetto: 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?

Adam Cohn: 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.

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

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

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

Jeff Van Sinderen: 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?

John Cuomo: 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.

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

John Cuomo: 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.

Jeff Van Sinderen: 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?

John Cuomo: 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.

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

Jonathan Siegmann: 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?

John Cuomo: 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.

Jonathan Siegmann: 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?

John Cuomo: 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.

Operator: 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.

John Cuomo: 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.

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