VSE Q1 2025 Earnings Report

VSE EPS Results

• Actual EPS: $0.78
• Consensus EPS: $0.55
• Beat/Miss: Beat by +$0.23
• One Year Ago EPS: $0.45

VSE Revenue Results

• Actual Revenue: $256.05 million
• Expected Revenue: $248.20 million
• Beat/Miss: Beat by +$7.85 million
• YoY Revenue Growth: +57.60%

VSE Announcement Details

• Quarter: Q1 2025
• Date: 5/6/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, May 7, 2025
• Conference Call Time: 8:30AM ET

VSE (NASDAQ:VSEC) operates as a diversified aftermarket products and services company in the United States. The company operates through two segments, Aviation and Fleet. The Aviation segment provides aftermarket parts supply and distribution; maintenance, repair, and overhaul services for components and engine accessories supporting commercial, business, and general aviation operators. This segment serves commercial airlines, regional airlines, cargo transporters, MRO integrators and providers, aviation manufacturers, corporate and private aircraft owners, and fixed-base operators. The Fleet segment offers parts supply, inventory management, e-commerce fulfillment, logistics, supply chain support, and other services to support the commercial aftermarket medium- and heavy-duty truck market. This segment also provides sale of vehicle parts and supply chain services to support client truck fleets, as well as sustainment solutions and managed inventory services to government and commercial truck fleets. VSE Corporation was incorporated in 1959 and is headquartered in Alexandria, Virginia.

VSE Q1 2025 Earnings Call Transcript

Key Takeaways

• Sale of Fleet segment: Completed on April 1, officially closing a multi-year strategic transformation and repositioning VSE as a pure-play aviation aftermarket provider.
• Acquisition of Turbine Weld Industries: Bolsters MRO services for PW100 and PT6 engine platforms with $20 million in trailing revenue and plans to invest in operational capacity to address accelerated market demand.
• New Eaton authorized service center agreement: Marks Eaton’s first-ever MRO collaboration on hydraulic pump repairs, enhancing VSE’s OEM partner value proposition and expanding aftermarket capabilities.
• $700 million credit facility: Secured a five-year $300 million term loan and $400 million revolver at SOFR + 175 bps, reducing cost of capital by 60 bps and providing funding flexibility for growth strategies.
• Record Q1 financial performance: Delivered 58 % revenue growth to $256 million, 60 % adjusted EBITDA increase to $40 million, $0.78 EPS, achieved 2.2× leverage and reaffirmed 2025 guidance while monitoring tariff and macro uncertainties.

Presentation

[Operator]

Good day, and welcome to the VSE Corporation First Quarter twenty twenty five Results Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press then 2.

[Operator]

Please note this event is being recorded. I would now like to turn the conference over to Michael Perlman. Please go ahead.

[Michael Perlman, Vice President of Investor Relations & Communications at VSE]

Thank you. Welcome to VSE Corporation's first quarter twenty twenty five 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.

[Michael Perlman, Vice President of Investor Relations & Communications at VSE]

Actual results may differ significantly from those projected in today's forward looking statements due to the 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.

[Michael Perlman, Vice President of Investor Relations & Communications at VSE]

Beginning in the first quarter of twenty twenty five, our results exclude the Fleet segment, which was moved to discontinued operations following the announced sale of that business. At the conclusion of our prepared remarks, we will open up the line for questions. With that, I'd like to turn the call

[Operator]

over to John.

[John Cuomo, CEO, President & Director at VSE]

Good morning. Thank you for joining us today for VSE's first quarter twenty twenty five conference call. This was truly an exceptional quarter for VSC. We delivered record revenue and record profitability, a clear testament to the strength of our businesses, the resilience of our markets, the dedication of our teams and the effectiveness of our ongoing transformation strategy.

[John Cuomo, CEO, President & Director at VSE]

At the same time, we made significant strides in advancing our multi year strategic transformation. All positioning VSE as a more focused, integrated and margin and growth oriented platform. Let's begin on Slide three and discuss recent business updates and developments. First, on April 1, we completed the sale of our fleet segment. This divestiture marks the official close of a significant chapter in our multi year strategic transformation, one that positions BSE as a focused pure play provider of aviation aftermarket parts and services.

[John Cuomo, CEO, President & Director at VSE]

The divestiture represents the culmination of deliberate strategic actions, including multiple business exits, all aimed at repositioning the company for the future. With this chapter complete, we are now fully focused on pursuing higher growth, higher margin opportunities in the aviation aftermarket, creating a long term value for our customers, supplier partners, employees and shareholders. Second, we announced the acquisition of Turbine Weld Industries, a specialized MRO service provider of complex engine components for business and general aviation platforms. This acquisition marks another important step in the strategic expansion of our aviation services business, further positioning VSE as a comprehensive solution provider to our OEM and aftermarket partners. Turbine Weld is an outstanding business and well aligned with VSE's core strategy in the following areas.

[John Cuomo, CEO, President & Director at VSE]

Turbine Weld enhances VSE's position in the business and general aviation engine aftermarket on two of the most widely used engine platforms, the PW100 and the PT6. Next, Turbine Weld strengthens BSE's collaboration with OEM partners by developing numerous proprietary repair specifications as the sole source provider for many flight critical repairs. And finally, CSE plans to invest in Turbinewell's operational capacity to address market demand and accelerated growth opportunities. Turbine Wealth generated approximately $20,000,000 in revenue over the last twelve months and the purchase price was approximately $50,000,000 Third, we signed a new five year authorized service center agreement with Ethan to perform MRO services on hydraulic pump products. This marks Eaton's first ever authorized service center collaboration and represents a significant enhancement to their aftermarket repair capabilities and customer support for these products.

[John Cuomo, CEO, President & Director at VSE]

This agreement reinforces BSE's OEM partner value proposition, supporting OEMs in servicing their end user customers while also helping them monetize and protect their aftermarket business. And finally, last week we entered into a new $700,000,000 credit facility, including a five year three hundred million dollars term loan A and $400,000,000 revolving credit facility to replace all existing credit facilities. Adam will discuss this in more detail, but this refinancing positions VSE to execute on our growth strategies with increased flexibility at a lower cost of capital. Let's now move to slide four, where I'll provide a business update beginning with our integration activities. Over the past twelve months, we've acquired two market leading commercial aerospace engine focused aftermarket businesses, both of which are performing ahead of plan.

[John Cuomo, CEO, President & Director at VSE]

Let's start with TCI. April marked the one year anniversary of TCI joining the VSE family. The business continues to exceed expectations driven by strong input volumes and a robust backlog of work from our OEM engine partners. To support this growing demand and to position TCI for future expansion, we're investing in additional component repair capacity aligned with OEM requirements. Turning now to Kelspr, integration efforts are well underway and progressing in line with our expectations.

[John Cuomo, CEO, President & Director at VSE]

This reinforces our confidence in this transaction strategic rationale and in our ability to create meaningful value as we integrate the businesses. We remain on track to achieve the $4,000,000 in cost synergies we previously identified and are targeting near term margins of 15% or greater as we optimize specific parts of the Kaelstrom portfolio. Now moving on to program implementations. The transition of the Honeywell fuel control program is progressing, with full operational capability and production expected within the next twelve months. We made strong progress in building the necessary infrastructure, systems and staffing to support this transition.

[John Cuomo, CEO, President & Director at VSE]

The expected financial contribution from this program is fully reflected in our 2025 guidance. Additionally, as noted earlier, we recently launched the first ever authorized repair station for Eaton in The Americas. This is a natural extension of our long standing distribution partnership supporting Eaton's fuel pumps for business and general aviation. This new agreement expands our capabilities into hydraulic repairs and overhaul for commercial aviation customers. And finally, the fleet segment divestiture, we are currently operating under a transition services agreement to ensure a seamless handoff.

[John Cuomo, CEO, President & Director at VSE]

In parallel, we are conducting a comprehensive review of our corporate and business unit cost structure, ensuring we remain lean and efficient to support our go forward single segment aviation strategy. I will now transition and provide an update on the current market environment for our business. Despite broader global market uncertainties, particularly those stemming from evolving tariff policies, demand remains solid. This is supported by continued strength in global passenger traffic trends. We remain cautiously optimistic that aircraft utilization will hold strong throughout the remainder of the year, which should continue to support robust aftermarket demand outlook.

[John Cuomo, CEO, President & Director at VSE]

That said, our team is monitoring the situation closely and remains prepared to act as needed. Based on current market trends, customer feedback and our backlog and bookings, we are reaffirming our full year revenue guidance. For 2025, we continue to expect commercial aftermarket growth in the range of 8% to 10%. Likewise, for our products and services supporting the business and general aviation customers, we maintain our projected growth rate of 5% to 6%. Now turning specifically to tariffs, We've been proactive in working closely with our OEM partners to mitigate potential impacts, both for our business and our end user customers.

[John Cuomo, CEO, President & Director at VSE]

Here's how. First, our strong inventory position provides us flexibility in how and when we make purchases. Second, our global distribution footprint enables us to optimize and adjust logistic flows where needed and we're actively coordinating with supplier partners on this front. Third, we're leveraging the USMCA exemptions to support trade flows for Mexico and Canada based products and customers. And finally, where appropriate, we will pass through tariff related surcharges.

[John Cuomo, CEO, President & Director at VSE]

We believe our diversified market exposure, including a balanced presence in both commercial and business aviation, our OEM centric strategy, our key strengths that help us navigate in a dynamic and uncertain environment. To be clear, there is work to do, processes to implement and undertake and uncertainty does exist for all of us until we understand the final trade agreements. However, at this time, we do not expect any tariff related impacts that would require us to revise our previously issued 2025 revenue or margin guidance, nor our organic growth expectations for either of our end user markets. Let's now move to Slide five to discuss our financial performance. In the first quarter of twenty twenty five, our consolidated revenues increased 58% to $256,000,000 driven by strong financial performance from our core aviation distribution and MRO businesses and contributions from both the TCI and Kaelstrom acquisitions.

[John Cuomo, CEO, President & Director at VSE]

Our consolidated adjusted EBITDA increased 60% to $40,000,000 in the quarter or 15.8 of revenue. These results were driven by strong end market activity, solid execution on distribution program awards and an increase in MRO activity, solid performance from our OEM license manufacturing program and contributions from recent acquisitions. Adjusted net income of $16,000,000 and adjusted net income per diluted share of $0.78 increased 12573% respectively. And importantly, we ended the first quarter with a strong balance sheet, achieving pro form a adjusted net leverage ratio of 2.2 times following the sale of the fleet business, which provides us with significant financial flexibility. I will now turn the call over to Adam to discuss the details of our financial performance.

[Adam Cohn, Chief Financial Officer at VSE]

Thank you, John. Let's turn to Slide six of the conference call materials, where I will provide an overview of our first quarter consolidated financial performance. As a reminder, our consolidated results exclude the Fleet segment, which was moved to discontinued operations following the announced sale of the business. VLC generated $256,000,000 of revenue in the quarter, an increase of 58% over the same period in the prior year. Adjusted EBITDA increased 60% to $40,000,000 compared to the first quarter of twenty twenty four.

[Adam Cohn, Chief Financial Officer at VSE]

Beginning in the first quarter of twenty twenty five and for future and comparative prior year periods, consolidated and segment level adjusted EBITDA will exclude stock based compensation. Adjusted EBITDA margin was 15.8 in the quarter, an approximate 30 basis point improvement over the prior year period. Adjusted net income was $16,000,000 And adjusted diluted earnings per share was $0.78 an increase of 12573% respectively over the prior year period. Now turning to slide seven, where I will review our aviation segment's record first quarter performance. DSE Aviation generated $256,000,000 of revenue in the quarter, an increase of 58% over the prior year period.

[Adam Cohn, Chief Financial Officer at VSE]

More specifically, distribution revenue increased 49 in the period, driven by the ramp of new OEM program awards, strong operational execution and market share growth, product line expansion and contributions from the KELstrom acquisition. MRO revenue increased 76% in the quarter, driven by the expansion of new repair capabilities, share gains in the commercial and business and general aviation markets, strong end market demand, support from our new OEM authorized avionics program, and contributions from the TCI acquisition. Excluding the impact of all recent acquisitions, organic aviation segment revenue increased by approximately 12% in the first quarter as compared to the prior year period. Aviation adjusted EBITDA increased by 52% in the quarter to a record $43,000,000 or 16.9% of revenue. This increase in adjusted EBITDA was driven by strong execution on distribution programs, increased throughput at MRO facilities, improved pricing and product mix, solid performance from our OEM license manufacturing program and contributions from recent acquisitions.

[Adam Cohn, Chief Financial Officer at VSE]

Now let's let's turn to slide eight of our presentation materials to review our aviation segment guidance for the full year 2025. It is important to note that our guidance does not assume further tariff escalation or a global recession. We are reaffirming our full year 2025 Aviation segment revenue growth guidance range of 35% to 40%. Supporting this growth are full year revenue contributions of approximately percent to 28% from both the TCI and Telstrom acquisitions. In addition, we are expecting to outperform the market growth assumptions John discussed earlier with high single to low double digit organic growth for the full year supported by market share gains, distribution program growth and repair capability expansion.

[Adam Cohn, Chief Financial Officer at VSE]

We are also reaffirming our 2025 full year aviation adjusted EBITDA margin guidance range of 15.5% to 16.5%. And increasing the range to 16% to 17% to include an approximate 50 basis point positive adjustment associated with the stock based compensation add back that I referenced earlier. We continue to expect TCI and Telstrom to have a near term margin dilutive impact on aviation's margins, offset by an improvement in core legacy aviation margins driven by operating leverage, program optimization and MRO utilization. In addition, we expect to begin realizing integration synergies in the second half of twenty twenty five. Synergy benefits will continue into 2026 until all integration activity is complete.

[Adam Cohn, Chief Financial Officer at VSE]

In addition to our formal guidance commentary, I want to provide several clarifying financial updates related to the recent divestiture of our Fleet segment. Our effective tax rate is expected to be approximately 25% for the remaining three quarters of twenty twenty five. Depreciation and amortization in total are projected to be approximately 38,000,000 to $40,000,000 for the full year, inclusive of the Turbine Weld acquisition. Stock based compensation, which beginning in Q1 is excluded from adjusted EBITDA, is expected to be approximately $3,000,000 per quarter for the remainder of the year. Split relatively evenly between aviation and corporate.

[Adam Cohn, Chief Financial Officer at VSE]

And finally, unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, are anticipated to total approximately $21,000,000 for the full year or about $14,000,000 to $15,000,000 excluding stock based compensation. Let's move on to slide nine to discuss our recent debt refinancing. Last week, we entered into a new $700,000,000 credit facility, including a $300,000,000 term loan A and a $400,000,000 revolving credit facility, both maturing in May 2030. These facilities replaced the company's previous debt facilities, which were scheduled to mature in October 2026. Borrowing under each of the new facilities will bear interest at the secured overnight financing rate plus 175 basis points per annum, representing a 60 basis point improvement compared to the terms of the prior facilities.

[Adam Cohn, Chief Financial Officer at VSE]

We are very pleased to have secured more favorable terms, including a lower interest rate and expanded borrowing capacity, which will reduce our cost of capital and enhance our liquidity. Following the recent debt refinancing, the sale of the Fleet business and the acquisition of Turbine Wealth, we expect interest expense to be approximately $26,000,000 to $28,000,000 for the full year or approximately $5,000,000 lower than our previous guidance. Turning to slide 10 to review our balance sheet. At the end of the first quarter, our total net debt outstanding was $459,000,000 And cash and availability under our prior $350,000,000 revolving credit facility was $158,000,000 During the first quarter, as planned, we used $49,500,000 of free cash flow driven by strategic inventory investments to support current customer programs. This was an improvement of approximately $37,000,000 over Q1 of last year.

[Adam Cohn, Chief Financial Officer at VSE]

We're expecting to generate positive cash flow over the balance of the year. Our adjusted net leverage ratio pro form a for the sale of our fleet business improved to 2.2 times in the first quarter. Our long term target for leverage remains in the three to 3.25 times range. With that, I will turn it back over to John.

[John Cuomo, CEO, President & Director at VSE]

Thank you, Adam. I'd like to conclude our prepared remarks by summarizing our 2025 priorities. First, following the sale of our fleet business, we have initiated a comprehensive review of our corporate structure and cost base to better align with our aviation focused strategy. Second, we are expanding repair capabilities and increasing operational capacity to meet growing demand and accelerate organic growth across our MRO centers of excellence. Third, we are prioritizing the integrations of TCI and Kaelstrom to drive operational efficiencies and enhance customer value.

[John Cuomo, CEO, President & Director at VSE]

Integration planning for Turbine Weld is already underway. To lead these efforts, we've appointed a senior internal leader to oversee all integration activities and synergy capture activities across the organization. Fourth, we remain committed to capturing synergies from recent acquisitions to support margin expansion throughout this year and into 2026. Next, we are advancing the full transition of our OEM license manufacturing capabilities from Honeywell to VSE. And finally, we continue to build our organic pipeline, strengthening OEM supplier partnerships and expanding our market reach.

[John Cuomo, CEO, President & Director at VSE]

Thank you to our shareholders, customers and employees for your continued support and confidence in our team. We remain focused on delivering long term value and are excited about the road ahead. Operator, we are now ready for the question and answer portion of our call.

[Operator]

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, The first question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

[Ken Herbert, Managing Director at RBC Capital Markets]

Yes. Hi. Good morning, John, Adam and Michael.

[John Cuomo, CEO, President & Director at VSE]

Good morning, Ken.

[Adam Cohn, Chief Financial Officer at VSE]

Good morning.

[Michael Perlman, Vice President of Investor Relations & Communications at VSE]

Good morning.

[Ken Herbert, Managing Director at RBC Capital Markets]

I just wanted to first ask on the margins in the first quarter. Good performance. It looks like you're calling out more of the synergy capture in second half of the year. How should we think about the conservatism in the margin outlook and maybe opportunities there as volume growth sort of holds steady around this, give or take low double digit, high single range through the year.

[Ken Herbert, Managing Director at RBC Capital Markets]

How do we think about the margin opportunity in the back half of the year in particular?

[Adam Cohn, Chief Financial Officer at VSE]

Yes. No, thanks for the question, Ken. I would say that Q1 typically is our strongest margin period of the year. You can see that phenomena if you look back at last year as well. And a part of that is because we're selling lower cost inventory that we're purchasing in the prior year period in Q4 and selling it through.

[Adam Cohn, Chief Financial Officer at VSE]

So you will see very strong margins in Q1. And we also had pretty positive mix in the quarter as well. We had some high margin sales, particularly in distribution. So it was a very strong period. And the acquisitions, particularly Kaelstrom and TCI, are performing well, as John mentioned.

[Adam Cohn, Chief Financial Officer at VSE]

So Q1, strong margins. And we will continue to see benefits from integration synergies as we go through the course of the year, incremental benefits. And but it's early in the year, and we feel good about our guidance. Obviously, a very strong margin performance, and we'll reassess as we go through the course of the year.

[Ken Herbert, Managing Director at RBC Capital Markets]

That's great. Thanks, Adam. And just as I think about the end market growth you outlined for business jets and commercial transport, If there is theoretically a slowdown or we see more of a pronounced slowdown in airline capacity or a broader economic slowdown macro pressure, where do you see sensitivity in business jets relative to commercial transport? And do you feel like one market might be better positioned relative to the other as you think about sensitivity through this year to some of the macro pressures?

[John Cuomo, CEO, President & Director at VSE]

Yes, Ken, it's a great question. As we dive in inside of each of those markets, I think that we're obviously very engine heavy on both businesses, both markets. We see less pressure there because of the backlog. And we believe that, that backlog and the number of engine overhauls will continue regardless of what happens in the market because of the backlog there. I think that you're looking more on the maybe avionic side of the house or some of the interiors or other types of repairs that you may see them either where an airline can make a decision to delay or extend something there.

[John Cuomo, CEO, President & Director at VSE]

So I think that from a true repair perspective, probably a little bit more on those commercial non engine related work. I think the question just is, does flight hours hold up on both sides of the business? Today, we feel good about our backlog. We built a little bit of conservatism compared to the market into our plan for the year. And we feel that conservatism is now more realism.

[John Cuomo, CEO, President & Director at VSE]

So I think that we feel good about our guidance.

[Ken Herbert, Managing Director at RBC Capital Markets]

Great. Thanks, John. Congratulations on the quarter and obviously the massive restructuring. I'll pass it back Our

[Operator]

next question comes from Jeff Van Sinderen with B. Riley Securities. Please go ahead.

[John Cuomo, CEO, President & Director at VSE]

Good morning, Jeff.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

Hi. Good morning, everyone, and congratulations on strong metrics. Just wanted to touch a little bit more on the acceleration of integration of your recent acquisitions. Just wondering if there's any more color you can give us on some of the things you're doing there.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

And also, could the timing of completion of integration happen earlier than previously expected?

[John Cuomo, CEO, President & Director at VSE]

Yeah, I think it's a good question. I'd say that there's a couple of things that we're learning. We're learning where there's value in shifting some of the integrations and where we can drive synergies faster, organic growth on a combined basis faster, or enhancing some type of customer or supplier benefit. So we're accelerating those areas.

[John Cuomo, CEO, President & Director at VSE]

I'd say still, when you look at TCI, the Kaelstrom totality of the business and now the new acquisition, you're still looking at, I'd say, the earliest kind of bid next year to get all of them done, which is about eighteen months or so, which is about what we've shared. I don't see our ability to accelerate that further. I think it's just shifting it, which can help drive better benefits, like shifting priorities.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

Okay. Fair enough.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

And then I know you've gotten onto some new programs, some new business one. Just wondering which one of those or I guess how you would rank those or which are the most meaningful in terms of contribution? And then kind of over what timeframe should we expect to see a little bit of impact on the P and L from those?

[John Cuomo, CEO, President & Director at VSE]

Yes. I'd say that if you look at the guidance that we've put out for the year, that pretty much contains the organic growth scaling of what we expect for 2025.

[John Cuomo, CEO, President & Director at VSE]

Specifically, the Eaton program, that will scale this year and will give a little bit more color into 2026. And expect us to talk more about organic growth opportunities in the back end of the year and how that could impact 'twenty six modeling. But I'd say the 'twenty five guidance pretty much includes everything. And we've kind of scaled it for you in the guidance.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

Okay.

[Jeff Van Sinderen, Senior Analyst at B. Riley & Co]

Fair enough. Thanks very much. I'll take the rest offline.

[John Cuomo, CEO, President & Director at VSE]

Thanks. Appreciate the time.

[Operator]

Our next question comes from Michael Ciarmoli with Truist. Please go ahead.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Hey, good morning, guys. Thanks for taking the questions. Results. John, just as you're looking at the business and trying to evaluate demand trends, what's the best metric to gauge the health? And obviously, you've got the business general aviation side and transport.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

I mean, you looking more you referenced traffic, but is it more biz jet cycles? Is it more takeoffs and landings? What's the better proxy? And if you do start or I guess, drawn on your experience historically, from the time we start to see capacity cuts, how long does that typically take to flow through to impact demand?

[John Cuomo, CEO, President & Director at VSE]

Yes, I'd say slower let's start with the second question first.

[John Cuomo, CEO, President & Director at VSE]

I'd say we'll see it slower on the side than you will on kind of the component. Think the complexity around the cycle, I think this is slightly different. What happened during COVID when everybody just paused, froze, took longer to get the cycle up and running. And there's a lot of awareness in the market of that. So I don't expect to see kind of a holistic pullback in terms of retraction of work because people know it's not that easy to turn this picket back on once we turn it off.

[John Cuomo, CEO, President & Director at VSE]

So so I do expect to see some caution on some fronts, but a little bit more crossing t's and dotting i's and watching the but I don't expect a wholesale pullback. I think with regard to data, it's a great question. I think the traffic data is the strongest data. I think on the engine side, it's continued to talk to the overall shops, whether it's third parties or the OEM, and understand on literally a granular level how full their shops are. Do they plan to stay full?

[John Cuomo, CEO, President & Director at VSE]

And do they are they seeing any kind of shifts or kind of pullback in demand on their front? And then really, which is a near term trend, is booking or booking a backlog.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

So Got it.

[John Cuomo, CEO, President & Director at VSE]

So and we've seen a few blips here and there. And then as soon as we get nervous, they've cut settled out a bit.

[John Cuomo, CEO, President & Director at VSE]

But you have seen a little bit tariffs came out a little quiet cut, kinda tweaks, and then then it's come back. So I'd say we haven't seen anything alarming yet, but we are keenly watching.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Okay. Okay. That's fair.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

And then just last one, maybe as it relates to cash, I expect positive for the rest of the year, but then you also talked about, I guess, making some investments specifically at recently acquired turbine weld and then just adding more capacity, including PCI. Maybe any color there on those required Yes.

[John Cuomo, CEO, President & Director at VSE]

That's the cash in the quarter and a little bit about CapEx.

[Adam Cohn, Chief Financial Officer at VSE]

Yes. So Mike, in terms of the quarter, Q1 usually is our larger cash usage period. If you look back at Q1 last year, I think we used about $37,000,000 more than what we used this past quarter. And a big part of that is just the inventory purchases that we're making at the end of the year and associated payables in Q1. I think there were a few other aspects in Q1 of this year.

[Adam Cohn, Chief Financial Officer at VSE]

We talked about having the old headquarters lease buyout, so that impacted us by around $6,000,000 Our cash flow was presented consolidated in Q1, and there is usage related to the Wheeler fleet segment in that period. And we're also talked about building inventory to transition the Honeywell program through the end of the year. So you had a couple of those elements hitting in the first quarter. We also made a couple of strategic inventory purchases ahead of the tariff noise as well. So that adds some impact. But as we move through the year and we start lapsing the inventory buys, you'll start to see working capital benefit us through the course of the year. And so getting to the second half of this year, we expect to see strong free cash flow. You saw that in Q4 of last year as well. And we are we do have we're more CapEx heavy through the last three quarters versus Q1, but that's all embedded in the kind of that I'm talking about.

[Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities]

Got it. Perfect. Thanks, guys. I'll jump back in the queue.

[John Cuomo, CEO, President & Director at VSE]

Thanks, Zai.

[Operator]

Our next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead. Sheila, sorry to interrupt, but you are not audible at the moment.

[Michael Perlman, Vice President of Investor Relations & Communications at VSE]

Operator, let's move to the next analyst, and we'll see if Sheila can get back into the queue.

[Operator]

Certainly. Our next question comes from Louis De Palma with William Blair. Please go ahead.

[Louie Dipalma, Research Analyst at William Blair]

John, Adam, and and Michael, good morning.

[John Cuomo, CEO, President & Director at VSE]

Morning.

[Adam Cohn, Chief Financial Officer at VSE]

Morning.

[Louie Dipalma, Research Analyst at William Blair]

John, can you discuss the origin of the Eaton Hydraulics deal? How did it come about? And is there opportunity to do more with Eaton? Is this just potentially a phase one?

[John Cuomo, CEO, President & Director at VSE]

Yeah. Thanks for the question, Louis. This is exactly aligned with what we've discussed on this OEM centric value proposition, where rather than bidding on competitive deals that are in the market against most of our competitors and being in a race to the bottom, it's sitting with OEMs talking about where they have problems in the market and coming up with solutions. So looking at legacy platforms where you have an OEM who maybe has lost a significant amount of share to unauthorized shops, MRO shops in the market, and then how do we help them capture some of that share back. Having that dialogue really was the impetus for the program and then the award that was eventually given to us.

[John Cuomo, CEO, President & Director at VSE]

We look at every OEM relationship as a beginning. So we look at this as the beginning of our first MRO relationship with them. We also have a legacy distribution relationship with them. So it's a wonderful company with great products. And we look forward you know, accelerating to other opportunities after we get this launched.

[Louie Dipalma, Research Analyst at William Blair]

Right. Because haven't you been able to significantly expand with Honeywell and Pratt and Whitney Canada after, like, your original deals with those companies?

[John Cuomo, CEO, President & Director at VSE]

Yeah. I mean, every every OEM is slightly different, but I'd say that if you look historically five years back at the business, you know, we've been able to grow share with each of the OEMs once we get embedded with one program, and they can actually see the performance of our business and the differentiation of what we can do that's different from others out there in the market. Absolutely.

[Louie Dipalma, Research Analyst at William Blair]

Sounds good. And another one, what has been the general progress of the Honeywell fuel control OEM solutions acquisition? And, at what stage do you think VSE would be ready to do another deal of that ilk?

[John Cuomo, CEO, President & Director at VSE]

Yeah. I mean, I've said repeatedly, and I will stick to it, is 2026 we'll start looking at other opportunities. So there'll be nothing in 2025. And we are accelerating very much on literally a week by week basis of getting engineering approvals. And the big goal is to get the design authority shifted to us where we're officially the manufacturer of record. Hope that's well before the end of the year.

[Louie Dipalma, Research Analyst at William Blair]

Sounds good. And one final one. Over the past two years, and I guess this is for you, John, and Adam as well, VSC has done approximately $600,000,000 of M and A volume across your different deals. And should investors generally expect VSE to make like $300,000,000 in acquisitions per year going forward as a benchmark? Or like because you're larger now, do you think that your M and A volume could be larger than that?

[John Cuomo, CEO, President & Director at VSE]

Yeah. I mean, love the question, and I would love to tell you I've got this great model that will execute perfectly according to the model. I've got a great pipeline of smaller deals, similar to the one that we just closed last week, of kind of medium sized deals, and then a few kind of transformational deals that are out there in the market. The question is, what does that mean in terms of timing and reality? We are very, very, very disciplined.

[John Cuomo, CEO, President & Director at VSE]

I know we've a number of deals, and the pace is real. But behind the scenes is a strong level of discipline in a number of transactions that we have exited because they're not right for the portfolio. So it's hard because of that, it's hard to predict the timing of M and A when deals are actually actionable. And then once they're actionable, is it the right fit for us once we get under the hood of the business? So I'd say it will remain part of the model, but with a very, very disciplined eye and approach.

[Louie Dipalma, Research Analyst at William Blair]

Sounds good. Thanks. Thanks, Tom. Thanks, everyone.

[John Cuomo, CEO, President & Director at VSE]

Thanks, Louis.

[Adam Cohn, Chief Financial Officer at VSE]

Thanks.

[Operator]

Thank you. Our next question comes from Josh Sullivan with Benchmark. Please go ahead.

[John Cuomo, CEO, President & Director at VSE]

Good morning, Josh.

[Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC]

Good morning.

[Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC]

Good morning. Just on the component repair capacity with TCI you mentioned, what's the time line to bringing that online? And then what's the potential incremental there?

[John Cuomo, CEO, President & Director at VSE]

I'm sorry, the component repair I missed the question.

[Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC]

Component repair capacity you mentioned in the prepared remarks.

[John Cuomo, CEO, President & Director at VSE]

Oh, the capacity yeah. I I'd say it's in phases. So we're really dealing with the businesses, going through the business together with the leaders to say, okay. Well, these are all the capabilities we have. Where do we need to go deeper and expand, and improve turn times so that we can increase capacity and support the market?

[John Cuomo, CEO, President & Director at VSE]

So some of it is equipment. Some of it is labor. Some of it is additional shifts using the same equipment two or three times longer in a day than we're using today. So I'd say we've already started. I mean, the business is up about 30% since we've owned it.

[John Cuomo, CEO, President & Director at VSE]

And we've already started down that journey. So I'd say it's evolutionary, not kind of revolutionary. It won't just happen all at once. It'll just happen in phases.

[Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC]

Got it. And then you mentioned that key term, turn times. And as you guys get deeper into the commercial engine market, how do you play into that conversation, given all these capabilities you're bringing in? And clearly, a focal point for the industry is on improving turn time. How is VSCC a part of that story?

[John Cuomo, CEO, President & Director at VSE]

Yeah. I mean, at the end of the day, everything, in our opinion, starts with turn time first and then the cost second. And you've got to be ahead of the market in terms of turn times. So it depends on the business, whether we're supporting the end user directly or we're supporting a major engine overhaul shop. For the engine overhaul shop, we're really doing back shop work.

[John Cuomo, CEO, President & Director at VSE]

And we need to be in a position where we're faster and cheaper than they are. And so turn time and cost of repair is a critical factor for us being awarded the business and us maintaining and growing that business. And we feel we've done an outstanding job of that and continue to have turn time improvement, but feel like we're at or ahead of the industry in terms of turn times. And I'd say it's not that different with regard to the end user work. Being very candid since I've been at the business, we've shifted the portfolio a bit to where we were maybe servicing very good portfolio of capabilities.

[John Cuomo, CEO, President & Director at VSE]

But our turn times weren't good and our costs weren't good because we didn't have good cost basis on product, that we just weren't competitive. So we've narrowed the scope of our MRO shops over the last five years to places where we know our turn times are market leading. And we know that because of other efficiencies and other supply chain avenues that we pursue, we're able to offer competitive pricing as well. So that's a huge part of the model. That's how we look at it all the time.

[Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC]

Great, thank you for the time.

[John Cuomo, CEO, President & Director at VSE]

Thanks.

[Operator]

The next question comes from Ellen Page with Jefferies. Please go ahead.

[Ellen Page, Equity Associate at Jefferies]

Guys. Thanks for the question. Maybe just to start, you called out 12% organic growth for the overall aviation business, but can you help us understand the trends in MRO versus distribution and if there is any impact from timing at the USM business within KELSTROM.

[John Cuomo, CEO, President & Director at VSE]

Yeah. Mean, think we've let me just answer the USM question first. We've been pretty clear that USM is part of everyone's model, and there's a place for it inside of our business. But it's a much more strategic place. So from a growth perspective, expect that to be always on the lower end of growth for us.

[John Cuomo, CEO, President & Director at VSE]

And that's pretty much where we are today. We're finding the right place for that business as we integrate it, and there will be a place for it. It's just definitely on a lower growth side. As we look at the two growth areas, I know we didn't

[Adam Cohn, Chief Financial Officer at VSE]

Was a little bit skewed towards distribution this quarter, but it's normal ebbs and flows in the quarter, so nothing to really take away from Yes.

[John Cuomo, CEO, President & Director at VSE]

I mean, this I mean, I could share a little color this quarter.

[John Cuomo, CEO, President & Director at VSE]

I think Amaru is a little ahead. But yes, it's not materially different one way or another on the organic growth.

[Ellen Page, Equity Associate at Jefferies]

That's helpful. And, within your integration process for year one and two, how do you think about cost versus revenue synergies, for the three deals that you've

[John Cuomo, CEO, President & Director at VSE]

done in the last twelve months? Yeah. The answer is just yes. I mean, meaning that synergies, encompass a little bit of everything. But I'd say, in all sincerity, each acquisition brings something different with how we look at synergies.

[John Cuomo, CEO, President & Director at VSE]

So let's talk about TCI first. That business is not a cost takeout business. That business is all about how can we help a business that's an A plus asset with an A plus team, and how do we help them expand capacity and take advantage of a growing market. So that business, we've grown 30% throughout the year. As you can imagine, there's an amount of SG and A that stays flat during that period.

[John Cuomo, CEO, President & Director at VSE]

And then there's some additional labor that comes in. So SG and A as a percentage of sales does decline, which is going to drive some additional margin in that business. And then we'll look at price and product cost margins to assist that business as well. So there's no cost out in the business like that. In other businesses, like in the Kaelstrom business, there were some leaders who have left the business.

[John Cuomo, CEO, President & Director at VSE]

And because we have a large organization, there's no need to replace those leaders. And we had an ability to have some cost out in the first and into the second quarter to drive some synergies up front. So each deal will kind of look different. I'd say Turbine Weld will look more like TCI. It's a very similar business, just supporting business in general aviation, OEMs.

[John Cuomo, CEO, President & Director at VSE]

And very similarly, it's a capacity constrained market where, all we need to do is help them, give them an aperture for growth. So each asset kind of looks different on our synergy plan.

[Ellen Page, Equity Associate at Jefferies]

Great. Thanks. I'll leave it there.

[John Cuomo, CEO, President & Director at VSE]

Great. Thanks, Al.

[Operator]

Thank you. This concludes our question and answer session. I would like to turn the conference back over to John Cuomo for any closing remarks.

[John Cuomo, CEO, President & Director at VSE]

Yes. I just wanna say thank you, everybody, for this has been a tremendous journey getting through our first critical chapter at VSE, which is really transforming the business to a pure play aviation aftermarket business. And we're excited for the next chapter ahead and for all of you to be part of it. Have a great day. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Michael Perlman, Vice President of Investor Relations & Communications
• John Cuomo, CEO, President & Director
• Adam Cohn, Chief Financial Officer

Analysts

• Ken Herbert, Managing Director at RBC Capital Markets
• Jeff Van Sinderen, Senior Analyst at B. Riley & Co
• Michael Ciarmoli, Managing Director - Aerospace & Defense Equity Research at Truist Securities
• Louie Dipalma, Research Analyst at William Blair
• Josh Sullivan, Managing Director & Equity Research Analyst at The Benchmark Company LLC
• Ellen Page, Equity Associate at Jefferies