VSE Corporation Q2 FY2025 earnings call

• Completed the sale of the Fleet segment on April 1, 2025, transitioning to a pure-play aviation aftermarket company.
• Acquired Turbine Weld, a specialized MRO provider of complex engine components, expanding engine service capabilities and OEM relationships.
• Signed a new 5-year authorized service center agreement with Eaton for hydraulic pump MRO support.
• Secured a new $700 million credit facility for flexibility and lower cost of capital.
• Acquired TCI in April 2024, which has become a fast-growing business unit; acquired Kellstrom in December 2024, with progress in integrating it, focusing on higher-margin engine components, refining USM strategy, and capturing cost synergies.
• Made progress on the OEM licensed fuel control program, with first approved units produced and on track for full production by early 2026.
• Completed a full cost review post-Fleet divestiture, aligning with the aviation-focused strategy and on track to complete transition work by year-end.

In the second quarter of 2025, VSE Aviation generated $272 million in revenue, a 41% increase from the prior year. Distribution revenue rose 50% due to strong execution of new and existing programs, product line expansion, market share gains, and contributions from the Kellstrom acquisition. MRO revenue increased 27% from higher-value technical repair activity, new repair capabilities, strong end market demand, and contributions from the Turbine Weld acquisition. Excluding recent acquisitions, organic Aviation segment revenue grew ~13% y-o-y. Engine-related MRO and distribution revenue represents greater than 50% of total VSE aviation revenue.

• Reaffirmed 2025 Aviation segment revenue growth guidance range of 35% to 40%, supported by full year contributions from recent acquisitions and narrowing USM focus to higher-margin product lines.
• Raised 2025 full year Aviation adjusted EBITDA margin guidance to the high end of the previously provided range, 16.5% to 17%, due to higher-margin product mix and lower contributions from less profitable USM business.
• Adjusted unallocated corporate costs are anticipated to be between $14 million and $15 million, excluding stock-based compensation for the full year.
• Stock-based compensation is expected to be $3 million per quarter for the remainder of the year.
• Depreciation and amortization projected to be approximately $38 million to $40 million for full year 2025.
• Interest expense expected to be approximately $26 million to $28 million for full year.
• Effective tax rate expected to be approximately 25% for the remaining 2 quarters or a full year blended rate of 22%.

Q: Ken Herbert with RBC Capital Markets asked about organic growth and end markets, specifically commercial vs business jet.

A: John Cuomo said engine markets are most robust, commercial end markets are stronger than business general aviation, with commercial in high single digits to low double digits and business general aviation in 4%-6% range.

Q: Sheila Kahyaoglu with Jefferies asked about sustainability of free cash flow and working capital.

A: John Cuomo said they generated ~$6 million in the quarter, saw improvement year-over-year, and expect strong free cash flow in the second half, noting working capital seasonality with larger use in first half and neutralization in back half.

Q: Sheila Kahyaoglu also asked about Kellstrom's USM business shift.

A: John Cuomo said they're repositioning USM to support new part distribution and repair services, moving away from transactional parts trading to focus on higher-margin product lines and right margin profile.

Q: Noah Levitz with William Blair asked about margins and preventing back half from maintaining 17.1% EBITDA.

A: John Cuomo said second quarter margins were strong due to Kellstrom synergy capture earlier than anticipated, and historically margins have seasonality with first half higher due to lower cost of inventory.

Q: Adam Cohn with Jefferies asked about M&A pipeline and Honeywell fuel control program.

A: John Cuomo said M&A pipeline is healthy, but the Honeywell fuel control program needs until first quarter of next year to be perfect, so no new programs expected in next 12 months.

Q: Jeff Van Sinderen with B. Riley Securities asked about Kellstrom synergies and remaining opportunities.

A: John Cuomo said synergy capture involves growing revenue, price, product cost, and operating expenses, with most cost synergies already captured on Kellstrom deal, focusing on in-sourcing and leveraging operating expense base.

Q: Joshua Sullivan with Benchmark Company asked about hydraulics opportunity and engine vs component demand cycle.

A: John Cuomo said hydraulics market is ~$50M-$100M, VSE is good partner due to faster turnaround and customized partnerships; expects engine aftermarket to outpace component side for near to midterm due to supply chain and MRO capacity issues.

Q: Michael Ciarmoli with Truist Securities asked about USM strategy and impact on repair margins.

A: John Cuomo said they're in early stages of launching the USM strategy, which aims to bring new, used, and repair together for customer-friendly approach and margin expansion, with initial steps like in-sourcing Vortex work into TCI component shop.

Q: Ken Herbert with RBC Capital Markets asked again about engine exposure and working with other OEMs.

A: John Cuomo said more direct engine OEM distribution business is on business and general aviation engines, commercial distribution supports engines via other OEMs, and working with one OEM doesn't preclude working with another.