VSE Corporation (VSEC) Q2 2026 Earnings Report, Transcript and Summary

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

Thank you. Welcome to VSE Corporation's Second Quarter 2026 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO; followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. Before we begin, I'd like to highlight that VSE will host an Investor Day on Wednesday, December 9, at current Tier 59 in New York City. We look forward to sharing more on our strategy and long-term outlook there. State and the date invitations will be sent out later this month with full details follow in September. 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. Let's begin on Slide 3, where I will review our second quarter highlights. The second quarter marked a defining step forward for VSE. We closed 2 strategic acquisitions, delivered record revenue and profitability, including a record consolidated adjusted EBITDA margin and launched integration and synergy capture work streams across the combined platform. Importantly, the quarter demonstrated the underlying strength of our core business and the earnings power of the platform we're building. Let me now walk through our second quarter highlights. First, we completed the acquisition of PAG, the largest transaction of VSE's history and a major milestone in our transformation. Together, PAG, NorthStar and our legacy VSE Aviation businesses create a differentiated global aviation aftermarket platform with greater scale, broader capabilities and deeper customer relevance. We are advancing our strategy to become the world's leading independent provider of aviation aftermarket distribution and repair services while remaining firmly grounded in the OEM-centric strategy that has guided our transformation. Second, the strength of the platform is already evident in our financial performance and progress. We delivered record revenue and profitability in the second quarter, which results above prior expectations. Organic revenue grew approximately 14%, with strength across both repair and distribution, supported by strength in the commercial engine aftermarket, new business wins, expanded capabilities, market share gain and increased share of wallet. Adjusted EBITDA nearly doubled year-over-year, significantly outpacing revenue growth and adjusted EBITDA margins reached a record 19.2% in the quarter. This performance represents a meaningful progress towards our long-term objective of consolidated adjusted EBITDA margins above 20% and supports our decision to raise both revenue and margin guidance for the full year. Finally, integration, execution and synergy capture are underway. We have established clear business plans, integration governance and executive owned work streams across the combined platform. Integration is a core VSE capability and an important competitive differentiator. In the short time since closing, our teams have already begun advancing tangible opportunities in in-sourcing joint sales, sales channel alignment and operating efficiency. It remains early but the pace of execution and the quality of the opportunities identified reinforced our confidence in the revenue synergy and margin expansion potential of the combined platform. Let's now move to Slide 4, where I will highlight our recent acquisitions in greater detail. Let me start with the acquisition of PAG, which we closed on May 5. We completed the acquisition from GenX 360 Capital Partners in a transaction valued at approximately $2 billion in cash and equity. The acquisition materially expands VSE scale, global reach, proprietary content and repair capabilities across commercial, business, general aviation, rotorcraft, OEM and defense end markets. We recently hosted our first employee Connection Summit, bringing together leaders from VSE and PAG to accelerate integration planning and commercial collaboration. The team is aligned on sales channel strategy, systems priorities, insourcing and joint commercial opportunities. Execution is now underway across these work streams. While we are still early in the integration, we are encouraged by both the breadth of the opportunities identified and the engagement of the combined teams. Just as important, PAG brings an exceptional team, highly complementary capabilities and a strong customer-focused culture. This combination is strengthening VSE strategically, operationally and commercially. Moving now to our NorthStar acquisition, which closed on April 1. This acquisition adds engine-related MRO, third-party logistics and component support capabilities to our aftermarket offering. NorthStar's teardown kitting and component level capabilities span multiple engine platforms and deepen our role within the OEM aftermarket supply chains. Since completing the acquisition, we have already rebranded the businesses via Aviation Services, aligned its leadership structure and launched key integration initiatives to expand logistics, repair capacity and engine component support. With that, let me provide an update on the current aviation aftermarket environment. Overall, the fundamentals supporting our business remain healthy and continue to reinforce our confidence in the long-term demand environment. The broader macroeconomic and geopolitical environment remains dynamic including volatility in energy prices. We continue to monitor these conditions closely and remain disciplined in our planning. Our updated guidance reflects what we are seeing in the business today, strong first step execution, healthy customer demand and solid program visibility. To date, we have not seen any recent uncertainty translates into any meaningful change in customer demand or operator behavior. Customer activity remains healthy across our platform and the demand signals we see support confidence in the durability of our business. At the same time, we will continue to stay close to our customers and respond quickly if market conditions should change. Global air traffic and fleet utilization remained resilient, an aging installed base, continued constraints on new aircraft and engine availability and the need to keep existing assets operating or sustaining demand for aftermarket parts and repair services. These are durable demand drivers across our platform. In Business and General Aviation, conditions also remain unchanged. The diversity of this customer base and the mission-critical nature support the aftermarket demand. This market provides an important and complementary source of revenue alongside the strength we continue to see in commercial aviation. Taken together, the breadth of our markets, customers, capabilities and revenue streams give us confidence in the resilience of our business as we enter the second half. We remain optimistic about the opportunity ahead while maintaining discipline around execution and external risk. Let's now turn to Slide 5, where I'll briefly walk through our second quarter 2026 financial highlights. We delivered an outstanding quarter headlined by record revenue and profitability. The results reflect strong execution in our core aviation businesses, continued organic momentum and contributions from our recent acquisitions. Our revenue of $449 million increased 65% year-over-year, including 14% organic growth. Revenue growth was driven by new business wins, expanded product and repair capabilities, market share gains, increased share of wallet and contributions from recent acquisitions. Adjusted EBITDA reached a record $86 million in the quarter, increasing 98% year-over-year and significantly outpacing revenue growth. Adjusted EBITDA margin expanded approximately 320 basis points to a record 19.2% in the quarter. The result reflects favorable product and repair mix, strong operating execution, synergies from prior acquisitions and contributions from PAG. The level of profitability exceeded our expectations for the quarter and demonstrates the earning power of the platform, although quarterly mix and timing can create variability from period to period. Adjusted net income of $55 million increased 101% while adjusted diluted earnings per share of $1.75 increased 33% year-over-year. Our record profitability reinforces our confidence in the long-term earnings potential of VSE and our path toward consolidated adjusted EBITDA margins above 20% over time. I'll now turn the call over to Adam to walk through the financial details.

Thank you, John. Let's turn to Slide 6 of the conference call materials where I will provide a detailed overview of our second quarter consolidated financial results. For the second quarter of 2026, we generated $449 million of revenue, an increase of 65% year-over-year. Both MRO and distribution delivered strong results with MRO revenue increasing 149% and distribution revenue increasing 17% year-over-year. The 149% increase in MRO revenue was driven by expanded repair capabilities and capacity, strong growth in engine content, market share gains, increased share of wallet with existing OEM partners and contributions from recent acquisitions, primarily PAG and Aero 3. The 17% increase in distribution revenue was driven by solid execution on new business wins, product line expansion, market share gains, strong commercial engine end market demand and contributions from the Aero 3 acquisition. Excluding recent acquisitions, organic revenue increased approximately 14% year-over-year, reflecting strong underlying demand and execution across the business. This growth rate is net of intercompany eliminations between VSE and PAG since the May 5 closing. Consolidated adjusted EBITDA increased 98% to $86 million. Adjusted EBITDA margin was 19.2%, an increase of approximately 320 basis points from the prior year period. The expansion was driven primarily by a greater mix of higher-margin products and repair activity, synergies from previously completed acquisitions and contributions from PAG. Adjusted net income was $55 million and adjusted diluted earnings per share was $1.75 per share. For the current and prior year periods, adjusted net income and adjusted diluted earnings per share have been updated to exclude amortization of intangible assets and stock-based compensation. Turning to Slide 7 and our balance sheet. During the quarter, we closed on a $900 million term loan B and upsized our revolving credit facility to $500 million. These new facilities replaced our prior term loan A and revolver structure. And together, they strengthen our balance sheet and give us the flexibility to execute against our strategic priorities. At the end of the second quarter, total debt outstanding was $967 million, including our new term loan B and the debt portion of the tangible equity units. Debt issuance costs were approximately $20 million, and we had approximately $75 million of cash and cash equivalents on hand, resulting in a net debt of approximately $872 million. We had no borrowings under our recently upside $500 million revolving credit facility. During the second quarter, we generated approximately $19 million of free cash flow, a significant improvement from the first quarter and from the second quarter of last year. The improvements were driven by strong profitability, better working capital performance and a continued shift in portfolio mix towards MRO. Second quarter free cash flow was also absorbed by approximately $10 million of PAG related cash transaction expenses. Excluding those expenses, free cash flow conversion was approximately 34% of adjusted EBITDA. We expect cash generation to strengthen in the second half as earnings grow integration progresses and working capital investments begin to scale. At quarter end, our adjusted net leverage ratio was 2.4x, stronger than the pro forma guidance we outlined at the time of the PAG closing. We expect leverage to continue to improve in the second half of the year, supported by stronger free cash flow generation. This will increase our financial flexibility as we execute integration priorities and maintain a disciplined approach to capital allocation. Let's now turn to Slide 8 to review our updated consolidated company guidance for full year 2026, starting with revenue. Based on the strength of our first half execution, continued double-digit organic growth and increasing visibility into customer demand and program activity, we are raising our full year 2026 revenue guidance. We now expect full year revenue growth of 61% to 64%, up from our prior outlook of 57% to 61%. We are also increasing our full year 2026 adjusted EBITDA margin outlook, reflecting record first half profitability, continued operating execution and the early benefits from our recent acquisitions. We now expect full year adjusted EBITDA margin of 18.7% to 19% compared with prior outlook of 18.1% to 18.5%. On free cash flow, inclusive of PAG, we expect meaningful improvement in the second half driven by earnings growth, lower transaction-related cash costs and improved working capital efficiency as investments in programs scale. Stronger cash generation remains an important priority and is expected to support continued deleveraging. 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 full year 2026, interest expense net of interest income is projected at approximately $36 million to $39 million. Depreciation and amortization is expected to be approximately $96 million to $100 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. 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 9. First, we are focused on executing acquisition integration and accelerating the realization of synergies. . Second, we are implementing newly awarded distribution programs across our core platforms. The recently launched Pratt & Whitney Canada APU agreement ramped ahead of our expectations in the second quarter. We are also advancing our CFM engine initiatives. We took delivery of 7 CFM 56 engines during the quarter and began processing those assets through our in-house repair and tear down operations. Third, we are expanding our MRO capacity and technical capabilities to capture incremental demand specifically across the engine aftermarket. Fourth, we are advancing and converting our organic pipeline into revenue and margin contribution. Fifth, we are continuing to enhance our systems and our processes to support scale, integration and efficient growth including the targeted use of AI and data dripping tools to improve operational efficiency, optimize workflows and support decision-making across the platform. And finally, with the PAG acquisition now closed, we are advancing integration across sales channels, in-sourcing, systems, organizational alignment and joint commercial opportunities. We are confident in the combined strength of the platform and see meaningful revenue synergy and margin expansion potential as the integration progresses. We remain disciplined measure progress against clear milestones and prioritize actions that create durable value for customers and shareholders. In closing, this was an exceptional quarter for VSE. We delivered record revenue record profitability, including record adjusted EBITDA margins, generated approximately 14% organic growth, improved free cash flow, advanced integration and raise both revenue and adjusted EBITDA margin guidance. More importantly than any single quarter, these results demonstrate that our strategy continues to work. Our core businesses are performing exceptionally well. Our market position continues to strengthen and our expanded platform is creating new opportunities for growth, efficiency and long-term value creation. While we remain disciplined in managing the business through an evolving external environment, I have never been more confident in VSE's long-term competitive position, the quality of our team and the long-term opportunity to create value for our shareholders. Thank you for your continued support and confidence in VSE. Operator, we are now ready to take questions.

Nice results. Maybe, John, just to kick off, the guidance raise in terms of the revenues, can you provide any more specifics around was that maybe better execution on recent acquisitions that you're expecting? Is it legacy business, distribution MRO. What should we think about underlying sort of the increased confidence in the second half and full year revenue outlook? .

Yes. I mean, it's honestly a little bit of everything. So if you look at our first quarter, we had really -- our stronger phase of our organic growth is actually on the distribution side in the legacy business. Second quarter, it kind of flipped a little bit in our MRO businesses were slightly stronger. Our acquisitions are all performing well. Just the teams continued to perform. We had a [indiscernible] year that are kind of ramping slightly ahead of schedule. So I'd say it's a little puts and takes from across the board rather than kind of one strong initiative. But I would say on the revenue side, it's more the core business confidence than anything our modeling on our acquisitions is pretty firm. But I'd say our confidence on the core business is driving the revenue guidance.

Okay. Very helpful. And maybe really nice gross margins in the second quarter. And maybe, Adam, as we think about sort of moving forward, how do we think about incremental gross margin opportunities, both within PAG and across the organization as we think about that underpinning what should be continued margin expansion. But what are you looking at today as you look at some of the opportunities on gross margins? And how do we think about the right run rate there for the margins in the second half of this year, but more importantly, exiting '26?

Yes. Thanks for the question, Ken. Yes, the margin performance was exceptionally strong in the quarter, really driven by the strong organic growth that John alluded to, especially in some of our higher-margin hedging focused businesses. So we saw very strong incrementals in the second quarter. I think right now, just given the organic growth visibility, we feel strong about the margins heading into the second half of the year, and you see that embedded into our updated guidance for 18.7% to 19% for full year. But we continue to see very strong margins, especially in the engine focused businesses.

John, you're now 90 days into owning PAG. So maybe can you update us on how that integration is going? I know you're very thorough with those. How much of the synergy realization is contributing to the full year margin rate versus organic improvement?

Yes. I mean Sheila, it's funny because I've read some of the pre-notes last night about kind of acceleration of synergies. And that's really not what drove the margin. We really let businesses run for a solid 90-100 days, I kind of call it a 100-day plan, you watched the business that you acquire, and then you validate some of your initial integration assumptions. So we really haven't kicked off. We've got things in action. But you'll see the synergy realization more in '27 than you are going to see in '26. We had -- this is mostly our core business. Obviously, we're trying to start some in-sourcing earlier, which will drive some margin improvement. But I'd say the majority of confidence in our raise is really based on the core business at this point. I mean, I feel very good about the business we've acquired. I'm not finding anything that's concerning at all. It's going to deviate from our plans, but that's not what's driving the back end of the year guidance increase.

Okay. Great. Maybe I'll stick with a follow-up on PAG. In that case, can you talk about what part of the business has been better than you expected versus when you first bought it? And how do you think about the opportunities within the business?

Yes. I think the part that better is -- and it's interesting, the CEO of PAG was very excited during the diligence of how the businesses can come together and where all of the in-sourcing and other opportunities can come. I think that is, I think, more -- we'll be able to accelerate that to a faster and greater pace than I had initially thought. I think some of the core technical capabilities of where we can drive proprietary content over time, I think some of those areas are greater than probably I had anticipated. But all in all, it's an outstanding team, love the culture of extremely customer-centric, the nimbleness and the agility of what they bring to the table is absolutely just second to month. So very excited about what's ahead and excited about accelerating some of our kind of themes around the integration some of those proprietary content concepts sooner than later.

To clarify the previous answer, is the updated margin expansion outlook mostly related to operating leverage and the upside on the revenue line? .

Yes. Yes, it's really some multi of factors, [indiscernible] very strong margins in the second quarter, and we feel good about the organic growth in the second half of the year. I think we continue to see more in-sourcing opportunities, especially on the repair side, and that's really having an impact on our margins. And then we feel good about the PAG acquisition as well. It's performing in line with our expectations. But obviously, you're going to get a margin uplift in the third quarter as you have full quarter contributions from PAG.

Can you remind investors what were the original synergy expectations for the PAG acquisition if none of them have been realized yet?

We had about $15 million of run rate synergies was our initial expectation.

Okay. And one other question in terms of the strong organic growth, organic growth actually accelerated from last year, even though industry travel volumes and aircraft retirements have been pretty flattish versus 2025. How do you explain that outperformance in terms of the organic growth acceleration. Would most of it be attributed to the new business wins, such as the Pratt & Whitney Canada APU win and the CFM56 or I guess how, in general, do you explain the acceleration versus last year?

Yes, I appreciate the question. And Louie, the one thing I'd add on top of it is we had a contract that expires. So we have hold to sell on top of the growth. So if you actually [indiscernible] core organic growth is actually even stronger. When you look at it, it's really what drives the growth, right? It's price and volume. We are still seeing -- remember, our business mix is slightly different than a lot of our competitors that are out there. Everyone talks about the commercial market. Half of our business is in general in Asia as well. And 50% of our business is engine related in totality. So first of all, the commercial markets are still very healthy. Are they growing at a staff of the rate of last year? No, but they're still quite healthy and robust. It's not a 0 growth game. The second is our business in general aviation markets are continuing to grow at a nice pace. The third is the engine side of both markets is growing faster than in the component side, and that's 50% of our business. And then we have new business wins. And then there's a little bit of a price element in there as well. So it's -- you kind of break it down into those -- all those individual buckets and is a little hard for each, but it's just a nice to see the core business starting to come together in performance we had planned.

Great. And are there expected to be any changes to that trend in the second half of the year?

No, not at this time.

John, in your prepared remarks, you described the long-term vision as being the world's leading provider of aftermarket distribution and aftermarket services. And I know this isn't the first quarter you've had that sentence in there. But when I just take a step back and I think about what that means, it doesn't feel like that's a $7 billion enterprise value company. When I think of what that means across the coverage of AV, I can easily bring store companies that are 10x larger that might kind of fit that category and are still growing. So maybe you can just kind of reflect on that vision for a moment. and where this all goes from here in the fullness of time, it does kind of feel like we're at the beginning of the beginning.

Yes, I appreciate the question, John, and I'll answer half of it because I got to leave a little bit from my Investor Day in December. But the -- look at life in terms of chapters. And as you start a new chapter, you're continuing the story from the chapter before, but the reason you start a new chapter is there is kind of an impetus for some change in for what's next. When we look at our market, which is centered in OEM centricity, and you look at a $200 million aftermarket that's still 75% or so an OEM direct to end user. And that's where we're gaining most of our share. We still see a tremendous amount of upside in the opportunity set in our distribution business, our [indiscernible] overhaul business and equally or more important is our newer and more growing proprietary solutions business, where we own IP in kind of a few different ways. So I think you're looking at it the right way. I look at things in terms of kind of 3-year bucket, but I like to look even bigger than that. And we just see the enormous kind of firepower in the market, the opportunities regardless of little blips and ups and downs, when market takes, that's not overly concerning to us. We were looking long term of where there are gaps in markets that need to be filled and how we at VSE have something unique go and build those markets. So I appreciate the question and you'll see a lot more clarity around the puts and takes and what will financially and kind of from a forecast perspective over the next 3-plus years, help kind of solidify the confidence in that story as we get into December.

We'll look out for that. If I could ask one more on PAG. After the deal was announced, one of the things that we chatted a bit about but I felt like it was underappreciated was the value of the earn-out in motivating the team. I recall you describing as the earn-out objectives being kind of a very high bar. It does seem like we're executing quite well toward that. Any thoughts on the achievability of the earnout this year and if that view has changed?

Yes. I think the top end is the high bar. We expect -- I mean I have high expectations and want them to achieve some element of the earn-out because it means the business is performing at or better than we had forecast. Adam, you want to kind of share how you modeled it in [indiscernible]?

Yes. I mean if you look at the balance sheet, within the earnings release, you could see there's about $34 million of fair value on the earnout in terms of total expectation -- total opportunity about $25 million. So I think we're well aligned is based on 2026 adjusted EBITDA, and that's kind of where our expectations are right now.

Yes. So the bottom line is it sounds like you're on track to achieve it?

[indiscernible].

John, there's clear momentum in revenue growth and margin expansion from the core and you've got the incrementals from acquisition. Anything those questions are fairly well asked. I was wondering if you could talk about how you think about the free cash flow generation, strength of the company and that free cash flow conversion to EBITDA. What are the puts and takes in working capital with this combined entity. And when you compare your business to other aerospace defense, kind of suppliers in that ecosystem. Is there a path for you to get to a free cash flow to EBITDA conversion north of 70% over time?

[indiscernible] there. I mean yes, I'll just talk anecdotally and then I'll let Adam kind of walk through the math for you. And we'll work on against the 3-year guidance towards the back end of the year. As we've owned the business for 100 days. So I don't always like to overstate kind of my expectations until I just kind of continue to watch it perform. Our businesses from a CapEx perspective are quite light, our MRO distribution business, which is about $700 million, $800 million the business is only about 1% of sales at the top end. Our MRO businesses tend to be 2% to 3%, depending on how much investment we're making in the capacity expansion on the organic side. And the inventory on the working capital is really what drives this free cash flow generation. Because of all of the supply chain constraints in the market, we have been pretty prudent. You see some others talk about kind of missing a quarter because of inventory. So we're trying to be hedge ourselves on floor parts and make sure we're ahead of the curve. That said, as the business continues to grow, as those markets type to stabilize, and the business mix continues to shift more towards our proprietary solution and MRO businesses, what that does is just naturally drive a stronger free cash flow generation. So you want to talk a little bit about the back end of the year, Adam?

Yes. No. I mean you mentioned it really well. There's going to be less working capital intensity in the back half of the year, and that's just in line with the seasonality of our business, especially this year where we had a couple of new programs that occurred in the first quarter, and you saw a heavy inventory use. You saw less use in the second quarter, we talked about a conversion particularly if you exclude some of the PAG related cash transaction costs, we're even expecting stronger free cash flow in the second half of the year as the working capital intensity continues to reduce, we have full quarter contributions from PAG. There's obviously going to be some offset with interest expense as we have the full run rate from the term loan B that we issued in the second quarter. But overall, we feel good about the conversion in the back half of the year. And then as John said, during the Investor Day, we'll share some more about longer-term free cash flow conversion targets. So we feel really good about the outlook.

Great. Super helpful. And following up on that inventory comment. So how much of that inventory increase is driven by part availability to support your MRO business versus filling up the distribution channels? And also following up on that distribution, sorry, I guess, a 3-part question. Yesterday, we saw Honeywell taken inventory obsolescence charge. Is there a risk in your distribution side of potential obsolescence risk?

Yes. Yes. Good question. I would say in terms of inventory intensity, it's probably double in distribution than it is from an MRO perspective. So more of the organic growth in distribution is driving the inventory build, especially in the first half of the year. And then I would say in terms of outlook, no, we feel really good about it. We have very rigid strict policies around our health of our inventory. We're constantly assessing our programs and demand. So we feel very good. We don't feel like there's any risk.

And I know, like I kind of joke or [indiscernible] that we talk fast, so we kind of move fast, but there's a tremendous amount of discipline in our business. And some of our sales teams struggle where we don't take a distribution opportunity because it's exactly to your point, we feel like it has some obsolescence risk. When you look at our core distribution business, we are on looking at real, modern, solid platforms that have a lot of longevity in them, and we are not doing kind of one-off programs. And that's where I think people get into inventory obsolescence risk. When you're supporting whether it's lead or [indiscernible] engine where you're on the airframes of 737 MAX, A350, you're on core product lines, you have a lot of confidence in your inventory on the balance sheet.

John, I think when you talk about PAG initially, one of the things that you like most about it was kind of how they leverage the repair distribution model. I think you said maybe they even do it better than you guys. Can you just sort of expand on what you see them do and sort of maybe the difference between what you do and they do and how you can leverage what you're learning from them?

Yes. I think what they do very, very well is how they tie inside of their MRO shops, their exchange pool. So yes, there are a number of the larger customers who have inventory on the shelf. But -- and this has been a period of COVID where kind of holding inventory has not been a mapping. But for 90% of the cycles I've been through your end users don't want to hold inventory. So having those exchanges very closely tied with the MRO shop is helping them get the order. And I think that there is just a tremendous opportunity in how we tie the exchange pool to the MRO shops. The second thing is, I think as we continue to expand our [ DER ] repair capabilities is how do we utilize kind of our in-house kind of alternative sourcing models, whether it's creating our own products or using USM to create repair where we have gaps in supply chain. I think [indiscernible] those really, really well, and we look forward to kind of expanding on that in part of our focus.

And maybe just your latest thoughts on M&A, not trying to rush anything, obviously, but you've done several deals now, but you're certainly on track to be below, I think, 2x leverage by the end of the year. And I know you've got a list of other patients still like to do?

Yes, it is a very, very active market at the back end of the year has a tremendous amount of opportunities. So be an interesting kind of back end of the year to see how those opportunities kind of fall out. There are numbers that are interesting to us. They didn't ask [indiscernible] is an interesting model as well. I think valuations are very, very high. And they're actually multiples are expanding and not contracting. The competitive landscape has kind of increased as well. So there's a lot of factors to look into -- does the capability fit, do -- how confident do we feel about '27 and '28 and then kind of the valuation work. There are certain deals that I think we're able to absorb in our organization today while we're integrating PAG. And there might be a few others that might be a little bit too complex for us right now. So we'll stay with things that we feel like we can absorb and definitely not risk anything in the franchise or anything in our integration plan. But it doesn't preclude us from doing another one.

In your prepared comments, John, I think you mentioned expanding MRO capacity capabilities for the engine aftermarket, which obviously is a really strong market right now. Can you speak more about some of the initiatives you're planning and working on towards that end?

Yes. I mean, from an organic perspective, I mean, we have 3 facilities that we're building a new facility for 1 of our engine shops, and we'll move that shop, and that will give us probably a 50% increase in capacity. And then for our other 2 stronger and poker shops, we're working on kind of expanding existing facilities. The other thing as we get into 2027, we'll talk more about kind of that new capability as the shops when we will have the labor, the space and the equipment to support those. So as we look at kind of the next generation of engines, specifically on the commercial side, and we want to support our OEM partners with backshop work, we need to make sure we've got both the capacity and the labor to be able to step in and support that. So there are some strong organic initiatives in front of us right now.

Okay. Great. And then maybe if we can just touch on supply chain for a moment. Just wondering sort of the latest you're seeing there, how you feel like it's evolving? Any impact do you expect on inventory management around supply chain? .

Let's start with the [indiscernible] side of things. I don't expect any -- a spoke about kind of stronger free cash flow generation at the back end of the year. So nothing really different on our side. I think from the actual -- like what's happening in the market, it continues to be kind of a lockable -- 1 area gets fixed and another area kind of has an element of concern. As OEM production continues to ramp, which is a good thing for the market in general, it also creates the same supply that it's a little bit more constraints as well. I'd say, in total, the puts and takes, I'd say there had there's not much of a difference from my perspective. Over the last 12 months, there's improvements in some areas and weakness in others. So you just have to be ahead of the curve, but not making that materially changing any of our kind of forecasting at this point.

I joined a bit late, so I apologize if any of these were already addressed. But John, the sales beat on my math was about half organic and half inorganic. So I was wondering if you could talk a bit about where that inorganic outperformance came from, but then maybe what's most surprising you on the upside on some of these recent deals?

I'm sorry, there's a math on your inorganic and organic. I think that -- yes, organic growth is about 14%. We had contributions from the acquisitions. I'd say the acquisitions performed relatively in line with our expectations. Do they slightly be, yes, the core business was the bigger beat than the acquisition on the M&A side of the beat on the top line. I don't know that question [indiscernible].

No, that's helpful. Yes. And then, John, the Honeywell is having some challenges with its supply chain now kind of looks like they're needing to make some [indiscernible] by meeting their aftermarket demand in order to support their OE customers. And so I guess the question I have for you is whether that might create an inroad for you to be able to do more for them given their constraints in serving market and given your existing relationship? And then can you say whether you've had any recent discussions to that effect?

Yes. I mean I think that we have certain platforms that have a lot of Honeywell content. 737, the NGs, we are one of the largest providers of kind of parts and services on that airplane. So I do hope that there's opportunities. We look at our supplier partners as customers, and I hope this way that we can help them solve some of those issues. As far as kind of detailed discussions, I'd rather not to kind of speak about how we have those conversations. But we've read the releases as well. And we'll see having anything we can do to support them. There are ways to take some of the kind of service material parts from some of the part out of some of the 737s and hopefully, put it through our repair facilities and maybe we can provide some opportunities [indiscernible] with that product. But I haven't had -- I don't know the details specifically of where their gaps are at this point.

Good quarter. Just a lot of questions have been answered already. So forgive maybe a more general one, but we have conversations with investors that have a perception that business jet services may be a relatively less attractive part of the aerospace market. Just would really appreciate hearing your comments, John, countering why this vertical is attractive and why it's a good fit for your company's capabilities? .

Yes. I mean, I appreciate the question. We hear that sometimes, too. And I think that the commercial market has a lot of the effectiveness around the big engines. There are more [indiscernible] flying than there are CFM56, but everyone likes to talk about the [indiscernible] opportunities. The -- we find the business in general aviation market. You have a few fractions that have a large fleet. But other than that, you have 15,000-plus end users. And it goes everything from a true large business, large cabin business aircraft to a small GA aircraft to [indiscernible]. And those end users tend to have very few aircraft, they tend to do some stock less inventory. So there's a long tail of end users, that don't have exchanges or inventory on their shelves, and they tend to have a stronger need for a stronger platform of management overall and inventory-centric aftermarket support. There's a lot of so many different variants to those aircraft and engine types that again, we find a great opportunity for someone like ourselves to support our OEM partners in managing that tail. And then with regards to the kind of market trends, where the volume comes from is less of the large cabin and more on the mid- and light cabin aircraft because those are the ones that are charging the most take off the landing the most. And you tend to see a lot of consistency, even a little bit of ups and downs in the market on those kind of in that sector. So we've been talking about this market for the last 6 years. And we'll continue to talk about it for at least the next 6 and will continue to be a really strong part of our business. So I appreciate the question, and we see a tremendous opportunity for our business.

Thanks, everybody, for the support this morning for the analysts. I know it's a very busy year these days. So I appreciate you all making time for us and to our shareholders. Thanks again for the conference and speak to you all early November. Thanks and have a great day.

Thank you. And this does conclude today's conference call. Thank you for your participation. You may now disconnect.