VSE Corporation

Good day and thank you for standing by. Welcome to the VSE Corporation first quarter 2026 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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 Pearlman. Please go ahead.

Thank you. Welcome to VSC 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 Cohen, 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 remained the 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 three, where I will highlight our recent developments. Let me start with the acquisition of PAG, which we closed this week on Tuesday, May 5th. Together, VSE and PAG now form a scaled independent aviation aftermarket platform with 61 locations across eight 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 and sourcing, and procurement efficiencies, and we are confident in our ability to deliver on those objectives. Let's move to slide four and continue with our recent developments. On April 1st, 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 tear down and retirement activity. let's now turn to slide five, where I will highlight a few business developments from the quarter first. We've 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 lifecycle. We completed the integration of turbine weld into the VSC 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 six 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 remained the 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 seven 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 Arrow 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 Arrow 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 licensed manufacturing sales, and continued synergy realizations 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 eight in 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 5th. 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 three times with a clear path to below 2.5 times by year end, driven by EBITDA growth and free cash flow generation. Let's turn to slide nine 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 5th, 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 to $40 million. Depreciation and amortization is expected to be approximately 98 to $103 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be approximately 18 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 5th, 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 Turban 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 and 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 and 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 continued support and confidence in VSE. Operator, we are now ready to take questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We compile our Q&A roster. And our first question will come from Ken Herbert from RBC Capital Markets. Your line is open.

Morning, Ken.

Yeah, hi. Good morning. Yeah, hey, John and 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 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?

Yeah, I think I appreciate the question. And what I would add to kind of the remarks I made a minute ago is You know, April has also started out quite strong. And, you know, 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, you know, 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. You know, we typically lag a bit on newer generation engines. and have a mix of more legacy engines. So whether, you know, if you want to play kind of downside scenarios and think through, you know, if retirements accelerate a bit, that does cause an element of teardowns, you know, and such as acceleration happens, which creates additional demand inside of our shops. The second thing I would note is, you know, our business is about 50% business in general aviation. And, you know, 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, you know, we tend to see that market slightly more resilient and, you know, in near term, you know, where you see a little blip, you know, from a macro perspective, you don't usually see an impact there. So, at this point, you know, we're holding to our guidance. If, you know, if things change, we may even, you know, look at some upside potential towards the back end of the year.

That's great. Thanks. And if I could, just to follow up on PAG, congratulations on getting that done. Thank you. How do we think about the pace of the synergy captor? 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?

Yeah, think about 26 as more insourcing and cross-selling and 27 as 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, you know, 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.

Great. Thanks, John. I'll pass it back there.

Thanks, Ken.

Thank you. Our next question will come from Sheila Kyoglu from Jefferies. Your line is open.

Morning, Sheila. Morning, guys. Morning. Thank you. I wanted to ask, you know, 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 know, 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?

Yeah, 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. 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 are 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 numbers? And how are you thinking about the business aviation side of both repair and distribution growing in that channel?

Yeah, I mean, we see it, we see it more resilient than the commercial side of the business. And again, as I mentioned a moment ago, the workhorse aircraft, you know, your PT6 engines, your, you know, your citations, your Learjets, your King Airs and Pilatus, that is the core of what we focus on, both from an airframe and from a, you know, 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, you know, 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.

Perfect. Thank you.

Thanks, Sheila.

Thank you. Our next question will come from Louis de Palma from William Blair. Your line is open.

John, Adam, and Michael, good morning.

Morning, Louis.

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 CFM 56 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?

Oh, yeah. I think the Prime Windy Canada, you're correct. It'll scale throughout the year. And I'd say on the engine side, the CFM 56 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?

Yeah, I would say it's already embedded into our guidance. And as you know, we had a program that's ending this year, Louis, so the Pratt APU program 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 commercials 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.

Yeah, I mean, the 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, you know, it's just, it's four, it's really four separate companies or five separate companies with a number of contracting arms, even within them. You know, 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, you know, 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, you know, I don't want to give an exact percentage around that, but I would just say, you know, 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 know, 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?

Yeah, it's a good question. This is an opinion. I tend to still think that PMAs 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 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 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, you know, assuming OEMs want to kind of reallocate capital during any type of, you know, period of disruption, you know, we have our OEM solutions business where we're buying the IP as well. So we've got kind of three avenues and three levers to pull there, you know, and, you know, I would say we're more responsive to what customers want than force them, you know, down one path or another.

Great.

Thanks, John. Thanks, everyone. Absolutely. Thanks, guys. Thank you. Our next question will come from Scott Deutchel from Deutsche Bank. Your line is open.

Morning, Scott. Hi, good morning. John, can you clarify what exactly the CSN 56 asset management program is and what the scope is for BSE?

Yeah, it's a good question. So we typically are not, I wouldn't call us a traditional use serviceable material player. You know, everybody has USM product that, you know, 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, you know, 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, you know, 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've got a hold of some really great engines that, you know, 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 two reasons, Scott. It was partially the engine purchases and then also the inventory build on the new APU program. That was most of the cast usage in the quarter in the inventory build.

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

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 or the accretion from PAG and the PAG cost synergies. But just curious for your perspective there.

Yeah, ask me that next quarter. And I say that because, you know, it's funny. You buy these businesses, you do all this work and all this diligence, and then you have to see it play in reality. And really the devil's in the detail as you start to operate the business. So, you know, we have we never put a timeline 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. You know, we've owned the business for, I think, 25 hours now.

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. Thank you.

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

Yeah, 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 support. 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. Thank you.

Thank you. Our next question will come from John Godden from Citi. Your line is open.

Hey, guys. Thanks for taking my question. You know, there were a few earlier questions about aftermarket resiliency, you know, and sometimes you're referring to kind of the trends in OneQ and other times that, you know, 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, you know, negative impact on aftermarket, but you see nothing in any of the leading indicators that you have access to? that suggest their softness. Is that the message?

Yeah, 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, you know, a strong month. You know, 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 you know, 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. Correct. 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 you know, the likelihood of hitting the earn out, what it takes to get there, and maybe this idea that you kind of described as priority number one, which was accelerating the integration, you know, what can be done and are we on track at the end of this year, do you think, you know, to be hitting those kind of above normal targets for that earn out?

Yeah, it's a good question. You know, I mean, essentially to oversimplify it, you know, 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 insourcing and sales synergies. So as soon as we got antitrust clearance about three or four weeks ago, So we're waiting on a few foreign investment things to close. But in that last three weeks, we've 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 those growth opportunities. I think that the answer is probably somewhere in the middle. meaning that, you know, 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, you know, so hopefully there'll be some upside on, you know, 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 one or two 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, you know, internal slides at this point.

Got it. Excellent. Appreciate the color.

Thanks, John.

Thanks.

Thank you. Our next question will come from Louis Raffetto from Wolf Research. Your line is open.

Hey, good morning, gentlemen.

Good morning.

John, can you provide an update on the fuel control systems manufacturer? 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?

Yeah, I mean, essentially, you know, all the revenue and earnings are embedded, you know, are in the business at this point. We have a few, you know, transition items to get done to make us officially the manufacturer record of that manufacturer. of that product line, but essentially from a modeling perspective, I'd say everything's 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, you know, 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 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. Thank you, John. 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?

Yeah. On the term loan B, we're SOFR plus 200. with scale-downs depending on leverage. So the term loan A, we were at 175. That's only because we were 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 easy, you know, borrowing requirements that are easier going forward from a flexibility standpoint. So we feel all in all is a very good outcome for us.

Appreciate it. Thank you. Thank you. And as a reminder, to ask a question, please press star 1-1. And our next question will come from Jeff Van Cenderen from B. Reilly Securities. Your line is open.

Morning, Jeff.

Hi, good morning. Good morning, everyone. And let me add my congratulations on closing PAG. I feel like that was pretty fast.

Yeah, 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, we're not going 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?

Yeah, 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. The first elements 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 insourcing 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 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, meaning 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, you know, 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 till 2027 there. So again, picture all the synergy capture really around insourcing, and sales synergies at this point in time, and all the actions around it will be focused there. Obviously, Adam's 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, uh, I want to see you at the end of the month at your conference on that topic.

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

Yeah, 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. then 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 say is we're trying to build as much in-house as we possibly can. I'm concerned about having somebody else get embedded 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, you know, a part comes in the door, we tear it apart, quote it, and then, you know, repair it. Wherever we can improve a process, you know, 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, you know, I would say we're at the very infant phases right now and, you know, look forward to having real productivity gains really 2027 and beyond.

Okay, great. Thanks for taking my questions.

Thank you. And our next question will come from Jonathan Siegman from Stiefel. Your line is open.

Good morning, Jonathan.

Good morning. Thanks for taking my question. So on the Martin-Whitney Canada Agreement, congratulations on that. I think by our account, there were five or six other agreements and expansions and geographies without particular customers. I know you said you didn't want to quantify how much opportunity there was of specific customers, 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 a further opportunity here at Pratt? Thank you.

Yeah, 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, you know, 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, quote, unquote, 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 with North Star, appreciate that small, but glad to see the acquisition flywheel is not going into hibernation mode. after precision aviation and just wondering if we should consider this just a one-off or if there's other potential small bite-sized opportunities for you. Thank you.

Yeah, it's a good question. Two things. Number one, 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 been able to. With regard to our M&A pipeline, which remains very robust, the smaller deals that are kind of self-sourced, I don't think it's complex on those because you never know what 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. you know, in the back end of the year. With regard to anything more material, I look more at the end of the year to 2027 before we'd be open to doing anything.

Thank you. Thank you. 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.

Yeah, I just want a quick thank you to everybody for continued support. Thanks for the time this morning and, uh, 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.