Prepared remarks
Good day, and thank you for standing by. Welcome to the VSE Corporation Fourth Quarter 2025 Earnings Conference Call. Operator provides instructions. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.
Thank you. Welcome to VSE Corporation's Fourth Quarter and Full Year 2025 Results Conference Call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open up the line for questions. With that, I'd like to turn the call over to John.
Good morning. Thank you for joining us today for VSE's Fourth Quarter and Full Year 2025 Conference Call. 2025 was an exceptional and transformational year for VSE. We completed our multiyear transformation and transition to a pure-play aviation aftermarket company, delivered record aviation revenue and profitability, surpassed $1 billion in annual revenue for the first time in our history and strengthened our balance sheet. These results reflect disciplined execution and validate the strategy we have been advancing over the past several years. During the year, we expanded our engine and component capabilities through highly complementary acquisitions, advanced key OEM programs, increased MRO capacity and accelerated integration and synergy capture activities across the platform. Each of these actions enhances our operating leverage, deepens our proprietary capabilities and strengthens our competitive positioning in the global aviation aftermarket.
We entered 2026 with strong momentum. Our aviation-only platform is scaled and positioned to drive sustained organic growth and continued margin expansion and improved free cash flow generation. Let's move to Slide 3, where I would like to highlight our recent developments. Let me start with our announced transformational acquisition of Precision Aviation Group, or PAG. On January 29, we entered into a definitive agreement to acquire PAG, a leading provider of MRO and supply chain solutions across commercial, business and general aviation, rotorcraft and defense markets. This is a highly strategic transaction that meaningfully expands our scale and strengthens our engine and component service capabilities across the aviation aftermarket. Importantly, PAG aligns directly with our strategy of adding high-value, high-margin, mission-critical proprietary and differentiated services to our portfolio.
From a financial perspective, PAG expects to generate approximately $615 million in adjusted revenue for the full year 2025 with adjusted EBITDA margins above 20%. Following the anticipated close in the late second quarter, our combined leadership teams will immediately focus on integration and executing identified synergy initiatives. Phase 1 cost and in-sourcing synergies are expected to exceed $15 million on an annualized basis. This provides a clear path for the combined company to achieve adjusted EBITDA margins above 20% over the next several years as integration progresses. The total upfront consideration for the acquisition is approximately $2.025 billion, subject to customary working capital adjustments. This consists of $1.75 billion in cash and approximately $275 million of equity issued to GenNx360, subject to a customary lockup. The agreement also includes up to $125 million in contingent earn-out consideration payable in cash or equity at VSE's discretion based on PAG's 2026 adjusted EBITDA performance.
We expect to fund the transaction with approximately $1.28 billion in net proceeds from our recently completed common stock and tangible equity unit offerings, together with permanent debt financing that we are finalizing in the coming weeks. Let's turn to Slide 4. I'm very pleased to announce 2 new organic growth awards that expand our exclusive product portfolio, increase annuity-like revenue and further our strategy of adding proprietary content to the business. First, we entered into an asset purchase agreement with an OEM to exclusively manufacture, distribute and repair certain fuel pumps for the Pratt & Whitney Canada PT6 engine series. This expands our proprietary OEM solutions portfolio and strengthens our position in high-value, high-margin, mission-critical engine accessory programs. We also announced a new globally exclusive life of program APU components distribution agreement.
This meaningfully expands our role in supporting APU platforms across a broad range of commercial and mission-critical aircraft. Under this agreement, VSE will serve as the exclusive life of program license distributor for more than 2,500 unique aftermarket parts supporting 4 OEM APU platforms. This program will require approximately $45 million of initial inventory and working capital, which is expected to impact free cash flow in the first quarter and for the full year 2026. With that, let me briefly update you on the current aviation aftermarket environment and how we're thinking about 2026. The aviation aftermarket is positioned for another year of growth in 2026, supported by many of the same fundamentals that drove performance in 2025 across both commercial and business aviation. In Commercial Aviation, we continue to see healthy air travel demand with industry forecasts calling for mid-single-digit revenue passenger kilometer growth in 2026.
Early commentary from the airlines we serve as we enter the year has also been constructive. Aircraft retirements remain an important watch item, but they are anticipated to stay below historical averages for the next several years. That dynamic continues to reflect the undersupply of new aircraft, sustained utilization of legacy fleets, strong durability of existing engine platforms, MRO capacity constraints, extended material lead times and oil prices that support the economics of keeping older aircraft in service. And in business and general aviation, demand remains strong with aircraft utilization at or near record levels. Ongoing wealth creation and the increasing preference for point-to-point travel supported by fractional and charter models continue to underpin activity. While North America remains the largest market, we expect relatively stronger markets in the Asia Pacific, Middle East and Africa regions, contributing to an expanded global installed base.
Taking all that into account and considering our portfolio mix across commercial and business aviation as well as engine and non-engine programs, we expect our core markets that we support to grow in the mid- to high single-digit range. Based on our planned organic growth initiatives, we expect to outperform those market assumptions, and Adam will shortly outline organic growth guidance in the high single-digit to low double-digit range. Let's now turn to Slide 5, where I'll walk through our full year 2025 highlights. We delivered record aviation revenue and profitability, surpassing $1 billion in aviation revenue for the first time in company history, while expanding margins and generating positive free cash flow. We secured multiple new distribution and MRO program awards and strengthened key OEM partnerships, reinforcing future organic growth and expanding proprietary content. In April, we completed the sale of our Fleet segment, repositioning VSE as a pure-play aviation aftermarket company and sharpening our strategic focus.
In May, we acquired Turbine Weld, a specialized MRO provider focused on complex engine components in business and general aviation. This enhances our proprietary repair capabilities across key engine platforms and strengthens our engine MRO value proposition. And in December, we completed the acquisition of Aero 3, a global MRO provider and distributor in the wheel and brake aftermarket. Aero 3 builds upon our 2023 acquisition of Desser Aerospace and further expands our global wheel and brake MRO and distribution capabilities while enhancing our diversified component services portfolio. We also made substantial progress advancing Kellstrom integration activities, exceeding our synergy capture targets and driving alignment across branding, organizational structure, IT systems and operational processes. We invested strategically to increase MRO capacity and broaden technical capabilities across both engine and component programs to support future organic growth.
We launched new program and product introductions in Europe and continue to expand our presence across both Europe and Asia Pacific. We advanced our OEM solutions organization and fuel control transition program, positioning 2026 as a key execution year. And finally, we launched initial AI-enabled tools and process improvement initiatives to drive greater efficiency across the platform. Let's now turn to Slide 6 for a closer look at our full 2025 financial performance. For the full year, we delivered record revenue and record profitability. Revenue growth was driven by strong performance across both our Aviation distribution and MRO business units, along with contributions from recent acquisitions. The Aviation segment also generated record profitability, supported by disciplined execution and distribution programs, increased MRO activity, strong performance in our OEM license manufacturing programs and acquisition contributions.
I'm also pleased to report that we generated positive free cash flow for the full year and reduced adjusted net leverage to 1.1x. I'll now turn the call over to Adam to walk through the financial details.
Thank you, John. Let's turn to Slide 7 of the conference call materials, where I will provide an overview of our fourth quarter consolidated financial performance. For the fourth quarter of 2025, we generated $301 million of revenue or an increase of 32%. Consolidated adjusted EBITDA increased 55% to $52 million compared to the fourth quarter of 2024. Adjusted EBITDA margin was 17.2% in the quarter, an approximate 260 basis point improvement over the prior year period. Adjusted net income was $26 million and adjusted diluted earnings per share was $1.16. Moving now to the full year 2025. Revenue was approximately $1.1 billion in 2025, up 41% versus 2024. Adjusted EBITDA for the full year was $183 million, representing an increase of 56% as compared to 2024. Adjusted net income increased 121% to $83 million, and adjusted net income per diluted share increased 87% to $3.92 per diluted share.
Turning to Slide 8. I'll review the Aviation segment's fourth quarter performance. Aviation revenue increased 32% year-over-year to a record $301 million in the fourth quarter. Both distribution and MRO delivered strong results, increasing 37% and 24%, respectively. The 37% increase in distribution revenue was driven by strong performance across new and existing programs, product line expansion, market share gains and a partial quarter contribution from Kellstrom in the prior year period. The 24% increase in MRO revenue was driven by expanded repair capacity, new repair capabilities, sustained end market demand and contributions from the Turbine Weld acquisition. Excluding the impact of all recent acquisitions and including Kellstrom beginning in December, organic Aviation segment revenue increased approximately 12% year-over-year in the fourth quarter. Aviation adjusted EBITDA increased 43% to a record $55 million, representing 18.3% of revenue.
The year-over-year improvement reflects a greater mix of higher-margin product and repair activity, increased in-sourcing, favorable program mix, higher-margin OEM license manufacturing sales and continued synergy realization. For the full year 2025, Aviation segment revenue increased 41% to a record $1.1 billion. Adjusted EBITDA increased 48% to $195 million and adjusted EBITDA margin expanded 80 basis points to 17.6%. Turning to Slide 9 and our balance sheet. At the end of the fourth quarter, total debt outstanding was $296 million with approximately $69 million of cash on hand. We had no borrowings under our $400 million revolving credit facility. During the fourth quarter, we generated approximately $31 million of free cash flow, driven by strong profitability and disciplined working capital management. For the full year 2025, free cash flow totaled $6 million, an improvement of approximately $57 million versus the prior year period.
At year-end, our adjusted net leverage ratio improved to 1.1x compared to 2x at the end of the third quarter. Following the anticipated close of the PAG acquisition, we expect adjusted net leverage to be below 3x. Let's now turn to Slide 10 to review our consolidated company guidance for the full year 2026. Beginning this year, we will no longer provide segment level guidance since we are now one segment aviation-focused business. In addition, the recently announced PAG acquisition is not included in our 2026 outlook. We plan to update our consolidated guidance following the close of that transaction. Starting with revenue. We expect full year 2026 revenue to increase between 19% and 23% year-over-year. Full year contributions from the Aero 3 and Turbine Weld acquisitions are expected to account for approximately 11% to 13% of that growth. We expect organic growth in the high single to low double-digit range, above the broader market growth outlook John referenced earlier, driven by new program awards, distribution expansion, increased MRO capacity and capabilities and continued market share gains.
From a quarterly cadence standpoint, revenue is expected to increase sequentially throughout the year. This reflects Aero 3 seasonality and the ramp of new program awards with heavier revenue contribution in the second half of the year. For the full year 2026, we expect adjusted EBITDA margins between 16.8% and 17.3%. The Aero 3 and Turbine Weld acquisitions are expected to be accretive by approximately 40 basis points. Within the core aviation business, operating leverage, program optimization and improved MRO utilization are expected to contribute up to 50 basis points of incremental margin expansion. On a quarterly basis, first quarter margins are expected to decline sequentially from the fourth quarter of 2025. This reflects Aero 3 seasonality, the revenue ramp of new program awards and product mix. Importantly, first quarter margins are expected to improve on a year-over-year basis.
As John mentioned earlier, the new OEM APU program will require approximately $45 million of initial inventory and related working capital management. This will impact free cash flow in the first quarter and for the full year 2026 and is incremental to our typical first quarter working capital usage. Excluding this initial inventory investment, we expect stronger free cash flow in 2026 compared to 2025. Let me briefly review some additional modeling assumptions, which are also detailed in the appendix. For the full year 2026, interest expense is projected at approximately $20 million. Depreciation and amortization is expected to be between $52 million and $54 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be between $15 million and $16 million. And capital expenditures are expected to be approximately 2% of revenue. With that, I'll turn the call back over to John.
Thanks, Adam. I'd like to conclude our prepared remarks by looking ahead and reviewing our 2026 priorities on Slide 11. First, we are focused on executing our recent acquisitions and accelerating integrations and synergy realization. Second, we are implementing newly awarded distribution and OEM solutions programs, including those I mentioned earlier, across our core platforms. Third, we are expanding MRO capacity and technical capabilities to capture incremental growth opportunities. Fourth, we are advancing and converting our organic growth pipeline. Fifth, we are continuing to enhance our processes and systems to enable scale and support future integrations. And finally, we expect to close the PAG acquisition in the second quarter and initiate a disciplined structured integration and synergy capture process immediately thereafter. In closing, 2025 was a defining year for VSE. We delivered record financial performance, completed our transformation to a pure-play aviation aftermarket company, expanded our proprietary and exclusive content portfolio and strengthened our balance sheet.
At the same time, we positioned the company for its next phase of growth, both organically and through the announced acquisitions of Aero 3 and PAG. As we look ahead to 2026, we see a supportive market environment, accelerating organic momentum, expanding margins and a clear path to greater scale and capability. Our strategy remains consistent and disciplined, focused on high-value, high-margin, mission-critical aftermarket services, expanding proprietary content, driving operational execution and allocating capital thoughtfully. We believe the actions we've taken over the past several years have built a stronger, more resilient and more scalable aviation platform, and we are confident in our ability to continue delivering long-term value for our shareholders. I want to thank our shareholders for their continued support and confidence in our strategy and most importantly, to thank our global VSE team for their dedication and execution. Your commitment is what drives our performance and positions us for an even stronger future. Operator, we are now ready to take questions.
Questions and answers
Operator provides instructions. And our first question will come from Ken Herbert from RBC.
John, maybe I just wanted to say I appreciate the detail you provided on the margin walk through for '26. Can you dig a little deeper into how we should think about the run-rate synergy captures on Kellstrom, Aero 3, TCI and the recent acquisitions? Where are you relative to initial expectations there, and how should we think about the opportunity in '26 and beyond for those?
Yes, it's a great question. I'd say that we'll give an update with the first quarter with regard to Aero 3. I'd like to let the business run for a solid quarter, see exactly how it performs, where I can manage the financials before we lay out what we think we can do with the business. But with regard to Kellstrom, the business on an individual basis is at or above our company-wide margins today. So we're extremely ahead of the totality of where we thought the business would be. We've owned it for 14 months, and we've taken it from 11% margins to about 17% this year. I would tell you that we still have some margin opportunity as we continue to finish the integration. The area—and this goes for Turbine Weld and for TCI—our opportunity to have solid double-digit growth in 2026 and 2027 on those three sites is strong and we have a clear line of sight. I just want to make sure we're investing in headcount and capability sets. So we've been slightly conservative in our modeling on synergies. Essentially, it's 100 to 200 basis points is what we've got baked into our plan. But I've been more conservative because if I can bring on the labor and get our business to grow 12%, 13%, 14% over the next 24 months, I'd rather be in that position.
That's great. And I just wanted to follow up. You made a comment in terms of your priorities on advancing the organic growth pipeline. And you've announced some deals with Pratt Canada recently. Can you give any more examples of where we might see that organic pipeline growing and how we think about maybe the opportunity there to push sort of better than, call it, the 10% growth we're seeing this year?
Yes. I think there's a couple of things. Number one is we've got a really strong pipeline. The question is when do you close the deal and when do you receive the revenue. We've got a number of strategic MRO contracts that we're working on in the commercial side with major airline customers. The question is not an if, but when you start really seeing the value of those awards. I would say the greater opportunity is that about 60% of our business is engine focused. That includes business and general aviation and commercial. That market is there. It's about building out capacity for it and potentially working with our OEM partners where they want to outsource a legacy engine to us and that work we can move quickly. Expect to see us talk more about the commercial MRO side of the business—whether it's avionics, hydraulics, pneumatics or anything touching the engine. Those are the biggest areas of organic growth opportunities where we can realize revenue and earnings quickly in the next 12 to 18 months.
Our next question will come from Sheila Kahyaoglu from Jefferies.
John, I always appreciate that you provide color out there. So maybe how do we think about on Slide 10, when you talk about your revenue growth profile versus the market of high single-digit, low double-digit growth, how much of that outperformance is coming from share gains versus pricing? And how do you think about the growth within your different markets, whether it's engines, wheels and brakes or general aviation versus commercial?
I appreciate the question. We often get compared with the generic commercial aftermarket. We have a strong business in general aviation and rotorcraft content, which is growing slightly slower—maybe 200 to 300 basis points slower—in terms of growth. So think more mid-plus single digits rather than high single digits for that vertical. Where we like those markets is the ability to build a bigger competitive moat because we can drive higher content platform by platform. We look at the business in four buckets. We think our commercial engine business will grow low double digits. Our business and general aviation engine business will grow high single digits. Just below that is the component side of the commercial business at mid-single-digit growth, and business and general aviation components also mid-single-digit. On the pricing side, we're seeing some moderation. We had aggressive pricing over the last five-plus years, and tariff impacts have fed through to end users. In those market growth rates, consider it roughly 50-50 price and volume.
Got it. And then maybe if I could ask another one. It's — I don't think it's necessarily on your slides for your 2026 priorities in terms of free cash flow improvement. And maybe that's because you're investing in new awards and to ensure you have the labor there and potentially. But can you talk to us about free cash flow potential in 2026?
Yes, sure. It should be on the slide; thanks for highlighting it. It is a conversation we're having. It's a combination. We've hit scale now. The first quarter is always relatively free cash flow negative; we have many end-of-year opportunities and we're putting cash to work. But as you look at the back end of the year, you should see a stronger free cash flow conversion. Adam, do you want to speak in a little more detail?
Yes, thanks for the question, Sheila. We made significant improvement in 2025, improving around $57 million year on year. We expect to continue to improve, specifically excluding the APU program investment we've discussed. You're seeing the benefit of the portfolio shift to more MRO, which is less working capital intensive, and we are continuing to optimize our distribution programs, resulting in improved terms. I think you'll continue to see that shift, especially through the PAG acquisition as well. We'll provide more specific guidance after the close of the PAG acquisition and the permanent debt financing and some of the deal-related items. But as John said, we are expecting improvement into 2026. We will see more cash use in the first half of the year driven by the APU investment, but expect very strong free cash flow generation in the second half of the year.
Our next question will come from Louie DiPalma from William Blair.
Congrats on the flurry of activity on the business development front over the past 12 months. Adam, are you able to hear Louie? Can you hear me? John, can you confirm that you can hear or you still can't hear Louie?
Yes.
I cannot hear Louie at the moment.
And Louie, I brought you back up to the stage. Can you say a couple of words to make sure John can hear you, please?
Fantastic. I was wondering what was the origin of the OEM licensing fuel pump deal and the APU distribution agreement. John, were these competitive situations or deals that arose from your existing partnerships without a formal process?
It's a great question. Both agreements were a result of the focus in building these relationships and getting ahead of potential future opportunities, highlighting to our OEM partners where we can add value. I would say one of them was more competitive in process and the other was more of us working out a partnership agreement.
And the next question perhaps for Adam. Adam, if you abstained from M&A for a couple of years, would you still expect to expand the EBITDA margin by roughly that 50 basis point level that you set out for this year just based on your operating leverage, cross-selling, increased utilization and expansion into higher-margin solutions? Do you need M&A to expand margins? Or do you have a long runway for organic margin expansion?
Yes. We definitely don't need M&A to expand margins. Historically, you can look at year-over-year margin improvement and, excluding M&A, we've had organic margin expansion. We've purchased some businesses at lower than consolidated margin and improved those margins. There are a number of opportunities: integrating businesses and synergies, in-sourcing repairs internally, operating leverage through strong organic growth rates, and further optimization efforts around supply chain and indirect spend. So 50 basis points is a decent barometer, but there's significant organic expansion opportunities without M&A.
And tying the two questions together, would that OEM licensing fuel pump deal typically be higher margin like in the 20% range or even above that? And would that be similar to what you did with the Honeywell deal?
Yes. Those types of opportunities would typically be higher than our consolidated margin, similar to the Honeywell program on the higher end of the margin range.
Our next question comes from Michael Ciarmoli from Truist.
John, just back on to this APU opportunity. Can we assume — I don't think you said the OEM, is this Honeywell? If it's not Honeywell, are you then basically selling all the components into the licensed repair network? I mean, do you have an expectation of what this revenue ramp looks like once you — or even once you get to full run rate, how this would be additive to organic growth?
I would prefer not to name the OEM at this point. We are selling to operators and into the networks. We are finalizing it, and we shared it to accelerate the transition. There will be an inventory purchase, and I wanted to make sure you could model the inventory purchase in the first quarter. Our first quarter earnings will be in early May. We'll have a better feel then of how fast we can transition, which is how fast we can be additive in revenue and earnings. We're a little premature to quantify it now, but I wanted to ensure you were not surprised by the inventory build we will do in the first quarter to support this.
Got it. Did this have anything — I know when you made the PAG acquisition, they had some APU exposure. Was this related to that?
I think there's more to it; this is something we were working on prior to that.
Okay. Got it. And then maybe just back to Sheila's revenue question. I feel like all of our models here are pro formas built on top of pro formas and so on. Can you give us a sense — I don't know if you answered distribution versus MRO growth in terms of parsing that out. And obviously, you've got some of these new programs ramping distribution. But can you even talk to the breakdown or growth rates among the two lines? And then are these market share wins that you're seeing driving same-store growth? Just to give us a little more confidence in our modeling.
You're seeing us outpace markets primarily from share gain. The share gain occurs across the board. This year, organic growth in our distribution business will be lower than MRO, due to one actuation program headwind that ended last year. Distribution organic growth is still expected to be strong high single digits, while MRO growth will be more in the low double-digit side by capability set. Historically the businesses have been similar, but this year distribution has a small headwind.
Our next question comes from John Godyn from Citi.
I just wanted to follow up on margins. You guys had a tremendous performance in the fourth quarter. I appreciate some of the commentary for 2026, but maybe we can talk about what would drive the low end versus the high end of margin guide for 2026 and if there's room to perhaps exceed expectations in 2026.
Good question. On the low end, drivers would be natural mix and labor if we bring on labor to support back-end-of-year engine growth and new program growth, which would tighten SG&A relative to plan. At the high end, levers include additional synergy opportunities from acquired businesses and integration, accelerating organic growth on the proprietary side which is higher margin, and accelerating process and efficiency improvements that reduce SG&A as a percentage of sales. Timing is the gating factor, as we have a lot of execution on our plate.
That's fantastic. And sort of similar question but bigger picture, as we look at that 20% margin target, maybe you can just elaborate on what the shape of that looks like? And if there are any big milestones that kind of unlock a step change in margins or if you expect it to just be kind of ratable and linear over the next few years?
We had a path to 20% before the PAG announcement. The PAG announcement will accelerate that path. Once we close the deal and recast guidance, I'll have a better feel. The gating factor is how fast we can capture synergies we publicly shared. That first phase of $15 million of synergies really helps get us there. Traditionally I let a business run on its own for three to six months before major integration, but we will focus on low-hanging fruit near term to accelerate progress. Don't expect the 20% in 2026; our goal would be the back end of 2027.
Our next question will come from Jonathan Siegmann from Stifel.
Maybe just back to that inventory build in Q1. I appreciate the quantification of that. Is it — granted, it's got to ramp up, but is it too aggressive to think you'll eventually be turning that inventory one to two times a year? Is that the right way to think about it? Or is there a reason it would be substantially less?
You're thinking about it correctly. Year one of a program will not typically turn twice; that optimization comes later. We tend to be conservative in the first year to ensure delivery performance to end users, and carrying inventory supports that. I would say as we get into 2027 and definitely into 2028, you'll see that inventory optimize better.
That's great. And then you also highlighted additional opportunities like this. So I just — the sales process, how long does it take to close?
It can range from three months to three years. It depends. Many conversations start and timing accelerates when the OEM reallocates resources or decides to outsource legacy platforms. Timing for acquisition-like or organic program transitions varies, which is why having a deep pipeline is important. The inventory purchase accelerates transition but is painful from a working capital perspective. Buying all the inventory and transitioning quickly allows faster revenue recognition compared to a trickle approach. For this program, we hope to transition in the first to second quarter, but timing is variable.
But the returns are great. So congratulations again.
Our next question will come from Jeff Van Sinderen from B. Riley Securities.
Just wondering if we could delve a bit deeper into the Pratt PT6 agreement. Is there more you can tell us about that, maybe order of magnitude, how significant is it? Maybe what it can contribute to the business?
It's premature to give more detail because we like to test the market and validate assumptions we put into our model, which we believe is conservative. Adam, are we comfortable sharing any details around that, or at this point?
Yes. The purchase was around $10 million or so. You're not going to see a significant earnings contribution from that program initially. Similar to Honeywell, we are the current distributor on the program, so we need to burn through our higher-cost inventory before we can start selling through lower-cost inventory. We'll see some margin pickup in the back half of the year, which is reflected in our guidance, but you shouldn't expect a material impact in the first half.
Okay. That's helpful. And then I think we're all aware you guys have a large acquisition pending. But where do you stand on organically increasing MRO capacity as you think about this year? And then maybe what are you experiencing on the employee hiring front for MRO?
We've had a number of strategy sessions this week. We are seeing both turnover improvements and better retention, and the brand is becoming more recognized, which helps attract talent. The bigger opportunities are engine-related MRO shops where the market is receptive and if we can bring in labor we can utilize it quickly. It remains a tight labor market, which is our primary concern. We are investing organically in about four specific facilities this year to build capacity and support future double-digit organic growth at those sites as we move into the next chapter.
Our next question will come from Scott Deuschle from Deutsche Bank.
John, I'm not sure how familiar you are with Woodward, but they have now spoken publicly about working to license third parties to help support their aftermarket growth on programs like the LEAP engine. So can you say whether that's an opportunity which you are actively pursuing and which would fit in your wheelhouse?
Yes. As they consider those opportunities, that's right in our wheelhouse. When they look at engine accessories, we already do some authorized work with companies like Woodward on fuel engine accessory shops. Converting MRO work into license opportunities fits our sweet spot. We can support OEMs, help extend life of aging aircraft and add value to end users. Those opportunities make sense for us.
Do you think you could help them with some of their more complex parts like fuel metering units?
Our fuel control program was a complicated first product for our team. The quality of our engineering and supply chain organization that we've stood up as an OEM-driven organization is strong and will position us well for future opportunities. We do not have capacity or desire to be the manufacturer of those complex products in many cases. One gating factor is our ability to manage a complex supply chain without being the manufacturer. Another gating factor is that we prefer the majority of revenue to be aftermarket-focused rather than new build. Those are the product line considerations I evaluate to ensure we add value and that it's the right fit for us.
Okay. And then do you see any opportunities for BSDC to do any distribution or repair work for aero derivative engines?
We looked at an M&A opportunity earlier this year. I think it's an interesting market that some peers have focused on. For now, we hit $1 billion in revenue and hope to be closer to $2 billion this year. We have many core organic opportunities and limited engine resources, so for the near term we're keeping focus on our core space. That doesn't mean we can't add it later, but for now it's out of scope.
And our next question will come from Louis Raffetto from Wolfe Research.
You covered pretty much everything. So maybe just a couple of cleanup questions. Adam, do you have the organic growth for MRO and distribution in the fourth quarter? Are they both pretty much around that 12%?
Yes. It was a little bit more skewed towards distribution than MRO, fairly balanced, but a little higher in distribution.
All right. And then I just want to make sure I understand the $20 million of interest expense. Is that including the modest additional expense related to the TEUs?
No. It's going to be roughly in that range. It doesn't include any interest income though. So it's only interest expense. As you know, we did the equity raise, so there's some cash on the balance sheet and we'll earn some interest income ahead of the PAG closing, but the $20 million reference is interest expense.
All right. And then just on the stock comp, would that continue to be split sort of between the aviation segment and corporate?
That's a fair way to think about it.
And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to John Cuomo for any concluding remarks.
Yes. I just want to thank everybody for making the time for us today. I know it's a long and detailed call, a lot of moving pieces in the business right now. We couldn't be more excited about how we finished 2025 and equally excited about all of the opportunities, both organically with our new program wins and execution on those as well as bringing our recently acquired and soon-to-be acquired businesses into the VSE family and the opportunities that lie ahead for those businesses as well. Thank you again, and have a great Thursday.
Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.