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) (NASDAQ: VSEC) is a diversified provider of aftermarket distribution, logistics, maintenance, repair and overhaul, and engineering services. The company primarily serves the U.S. government, commercial aviation operators, aerospace manufacturers, and fleet customers through specialized operating businesses.

VSE’s Federal and Defense operations support the U.S. Department of Defense and other government agencies with supply-chain management, equipment sustainment, modernization, engineering, and logistics services. Its Aviation business distributes aircraft parts and provides related repair, overhaul, and technical services for commercial, regional, business, and military aviation markets. The company also serves transportation and fleet customers with vehicle parts, maintenance products, and related support services.

Founded in 1959, VSE has developed from a government services contractor into a multi-segment provider serving customers in the United States and international aviation markets. The company is headquartered in Alexandria, Virginia, and is led by President and Chief Executive Officer John Cuomo.

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 2025 results conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Michael Perlman. Please go ahead.

[Michael Perlman, VP of Investor Relations and Communications at VSE Corporation]

Thank you. Welcome to VSE Corporation's first quarter 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 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, VP of Investor Relations and Communications at VSE Corporation]

Beginning in the first quarter of 2025, 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 over to John.

[John Cuomo, President and CEO at VSE Corporation]

Good morning. Thank you for joining us today for VSE's first quarter 2025 conference call. This was truly an exceptional quarter for VSE. 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. 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 1st, 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 VSE as a focused, pure-play provider of aviation aftermarket parts and services.

[John Cuomo, President and CEO at VSE Corporation]

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 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. 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.

[John Cuomo, President and CEO at VSE Corporation]

Next, Turbine Weld strengthens VSE's collaboration with OEM partners by developing numerous proprietary repair specifications as the sole source provider for many flight-critical repairs. Finally, VSE plans to invest in Turbine Weld's operational capacity to address market demand and accelerated growth opportunities. Turbine Weld generated approximately $20 million in revenue over the last 12 months, and the purchase price was approximately $50 million. Third, we signed a new five-year authorized service center agreement with Eaton 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. This agreement reinforces VSE's OEM partner value proposition, supporting OEMs in servicing their end-user customers while also helping them monetize and protect their aftermarket business.

[John Cuomo, President and CEO at VSE Corporation]

Finally, last week, we entered into a new $700 million credit facility, including a five-year $300 million Term Loan A and $400 million 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 12 months, we've acquired two market-leading commercial aerospace engine-focused aftermarket businesses, both of which are performing ahead of plan. 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.

[John Cuomo, President and CEO at VSE Corporation]

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 Kellstrom. Integration efforts are well underway and progressing in line with our expectations. This reinforces our confidence in this transaction's strategic rationale and in our ability to create meaningful value as we integrate the businesses. We remain on track to achieve the $4 million in cost synergies we previously identified and are targeting near-term margins of 15% or greater as we optimize specific parts of the Kellstrom 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 12 months. We've made strong progress in building the necessary infrastructure, systems, and staffing to support this transition.

[John Cuomo, President and CEO at VSE Corporation]

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. Finally, the fleet segment divestiture. We are currently operating under a transition services agreement to ensure a seamless handoff. 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.

[John Cuomo, President and CEO at VSE Corporation]

This is supported by a 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. 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%-10%. Likewise, for our products and services supporting the business and general aviation customers, we maintain our projected growth rate of 5%-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. Here's how.

[John Cuomo, President and CEO at VSE Corporation]

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. Finally, where appropriate, we will pass through tariff-related surcharges. We believe our diversified market exposure, including a balanced presence in both commercial and business aviation, and our OEM-centric strategy, are key strengths that help us navigate in a dynamic and uncertain environment. To be clear, there's work to do, processes to implement and undertake, and uncertainty does exist for all of us until we understand the final trade agreements.

[John Cuomo, President and CEO at VSE Corporation]

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 2025, our consolidated revenues increased 58% to $256 million, driven by strong financial performance from our core aviation distribution and MRO businesses and contributions from both the TCI and Kellstrom acquisitions. Our consolidated adjusted EBITDA increased 60% to $40 million in the quarter, or 15.8% of revenue. These results were driven by strong end-market activity, solid execution on distribution program awards, an increase in MRO activity, solid performance from our OEM licensed manufacturing program, and contributions from recent acquisitions.

[John Cuomo, President and CEO at VSE Corporation]

Adjusted net income of $16 million and adjusted net income per diluted share of $0.78 increased 125% and 73%, respectively. Importantly, we ended the first quarter with a strong balance sheet, achieving pro forma adjusted net leverage ratio of 2.2x 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, CFO at VSE Corporation]

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. VSE generated $256 million of revenue in the quarter, an increase of 58% over the same period in the prior year. Adjusted EBITDA increased 60% to $40 million compared to the first quarter of 2024. Beginning in the first quarter of 2025 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.

[Adam Cohn, CFO at VSE Corporation]

Adjusted net income was $16 million, and adjusted diluted earnings per share was $0.78, an increase of 125% and 73%, respectively, over the prior year period. Now turning to slide seven, where I will review our aviation segment's record first quarter performance. VSE aviation generated $256 million of revenue in the quarter, an increase of 58% over the prior year period. 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 Kellstrom 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.

[Adam Cohn, CFO at VSE Corporation]

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 million, 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 licensed manufacturing program, and contributions from recent acquisitions. Now 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%-40%.

[Adam Cohn, CFO at VSE Corporation]

Supporting this growth are full-year revenue contributions of approximately 26%-28% from both the TCI and Kellstrom 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. We are also reaffirming our 2025 full-year aviation adjusted EBITDA margin guidance range of 15.5%-16.5% and increasing the range to 16%-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 Kellstrom 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 2025.

[Adam Cohn, CFO at VSE Corporation]

Synergy benefits will continue into 2026 until all integration activity is complete. 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 2025. Depreciation and amortization in total are projected to be approximately $38 million-$40 million 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 million per quarter for the remainder of the year, split relatively evenly between aviation and corporate. Finally, unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, are anticipated to total approximately $21 million for the full year, or about $14 million-$15 million, excluding stock-based compensation.

[Adam Cohn, CFO at VSE Corporation]

Let's move on to slide nine to discuss our recent debt refinancing. Last week, we entered into a new $700 million credit facility, including a $300 million Term Loan A and a $400 million 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, +175 basis points per annum, representing a 60 basis point improvement compared to the terms of the prior facilities. 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.

[Adam Cohn, CFO at VSE Corporation]

Following the recent debt refinancing, the sale of the fleet business, and the acquisition of Turbine Weld, we expect interest expense to be approximately $26 million-$28 million for the full year, or approximately $5 million 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 million, and cash and availability under our prior $350 million revolving credit facility was $158 million. During the first quarter, as planned, we used $49.5 million of free cash flow driven by strategic inventory investments to support current customer programs. This was an improvement of approximately $37 million over Q1 of last year. We are expecting to generate positive cash flow over the balance of the year.

[Adam Cohn, CFO at VSE Corporation]

Our adjusted net leverage ratio, pro forma for the sale of our fleet business, improved to 2.2x in the first quarter. Our long-term target for leverage remains in the 3-3.25x range. With that, I will turn it back over to John.

[John Cuomo, President and CEO at VSE Corporation]

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 Kellstrom to drive operational efficiencies and enhance customer value. 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.

[John Cuomo, President and CEO at VSE Corporation]

Next, we are advancing the full transition of our OEM licensed manufacturing capabilities from Honeywell to VSE. Finally, we continue to build our organic pipeline, strengthening OEM supplier partnerships and expanding our market reach. 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, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

[Ken Herbert, Aerospace and Defense Analyst at RBC Capital Markets]

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

[John Cuomo, President and CEO at VSE Corporation]

Morning, Ken.

[Adam Cohn, CFO at VSE Corporation]

Morning.

[Michael Perlman, VP of Investor Relations and Communications at VSE Corporation]

Morning.

[Ken Herbert, Aerospace and Defense Analyst 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 the 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? How do we think about the margin opportunity in the back half of the year in particular?

[Adam Cohn, CFO at VSE Corporation]

Yeah. No, thanks for the question, Ken. I would say that Q1 typically is our strongest margin period of the year. You can see that phenomenon if you look back at last year as well. A part of that is because we are selling lower-cost inventory that we are purchasing in the prior year period in Q4 and selling it through. You will see very strong margins in Q1. We also had a pretty positive mix in the quarter as well. We had some high-margin sales, particularly in distribution. It was a very strong period. The acquisitions, particularly Kellstrom and TCI, are performing well, as John mentioned. Q1, strong margins. We will continue to see benefits from integration synergies as we go through the course of the year, incremental benefits. It is early in the year, and we feel good about our guidance.

[Adam Cohn, CFO at VSE Corporation]

Obviously, a very strong margin performance, and we'll reassess as we go through the course of the year.

[Ken Herbert, Aerospace and Defense Analyst at RBC Capital Markets]

That's great. Thanks, Adam. 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? 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, President and CEO at VSE Corporation]

Yeah, 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. We believe that that backlog and a 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 avionics 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 kind of delay or extend something there. 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?

[John Cuomo, President and CEO at VSE Corporation]

Today, we feel good about our backlog. We built a little bit of conservatism compared to the market into our plan for the year. We feel that conservatism is now more realism. I think that we feel good about our guidance.

[Ken Herbert, Aerospace and Defense Analyst at RBC Capital Markets]

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

[Operator]

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

[Adam Cohn, CFO at VSE Corporation]

Good morning, Jeff.

[Jeff Van Sinderen, Senior Research Analyst at B. Riley Securities]

Yeah, good morning, everyone. Congratulations on the 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. Also, could the timing of completion of integration happen earlier than previously expected?

[John Cuomo, President and CEO at VSE Corporation]

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 we're enhancing some type of customer or supplier benefit. So we're accelerating those areas. I'd say still, when you look at TCI, the Kellstrom 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 18 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 Research Analyst at B. Riley Securities]

Okay. Fair enough. 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 time frame should we expect to see a little bit of impact on the P&L from those?

[John Cuomo, President and CEO at VSE Corporation]

Yeah. 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 kind of scaling of what we expect for 2025. Specifically, at the Eaton program, that'll scale this year, and we'll 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 2026 modeling. I'd say the 2025 guidance pretty much includes everything, and we've kind of scaled it for you in the guidance.

[Jeff Van Sinderen, Senior Research Analyst at B. Riley Securities]

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

[John Cuomo, President and CEO at VSE Corporation]

Thanks. Appreciate the time.

[Operator]

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

[Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist]

Hey, good morning, guys. Thanks for taking the question. Nice results.

[Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist]

John, just as you're looking at the business and trying to evaluate demand trends, what's the best metric to gauge the health? Obviously, you've got the business, general aviation side and transport. I mean, are you looking more—you referenced traffic, but is it more biz jet cycles? Is it more takeoffs and landings? What's the better proxy? If you do start, or I guess drawing 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, President and CEO at VSE Corporation]

Yeah, I'd say slower. Let's start with the second question first. I'd say we'll see it slower on the side, then you will on kind of the components. I think the complexity around the cycle, I think this is slightly different. What happened during COVID when everybody just paused and froze, it took longer to get the cycle back up and running. There is a lot of awareness in the market of that. I do not 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 spigot back on once we turn it off. I do expect to see some caution on some fronts, but a little bit more kind of crossing T's and dotting I's and watching the pen. I do not expect a wholesale kind of pullback.

[John Cuomo, President and CEO at VSE Corporation]

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 continuing 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? Are they seeing any kind of shifts or kind of pullback in demand on their front? Really, which is a near-term trend, it's looking at our booking and backlog trend.

[Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist]

Got it.

[John Cuomo, President and CEO at VSE Corporation]

We have seen a few blips here and there. As soon as we get nervous, they have kind of settled out a bit. You have seen a little bit of tariffs came out, a little quiet kind of weeks, and then it has come back. I would say we have not seen anything alarming yet, but we are keenly watching.

[Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist]

Okay. Okay. That's fair. And then just last one, maybe as it relates to cash, I heard 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 TCI. Any color there on those required investments?

[John Cuomo, President and CEO at VSE Corporation]

Yeah. So Adam has a couple of things to cash in the quarter and a little bit about CapEx.

[Adam Cohn, CFO at VSE Corporation]

Yeah. 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 million more than what we used this past quarter. 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. We talked about having the old headquarters lease buyout. That impacted us by around $6 million. Our cash flow was presented consolidated in Q1, and there was some usage related to the Wheeler fleet segment in that period. We're also talking about building inventory to transition the Honeywell program through the end of the year. You had a couple of those elements hitting in the first quarter.

[Adam Cohn, CFO at VSE Corporation]

We also made a couple of strategic inventory purchases ahead of the tariff noise as well. That had some impact. As we move through the year and we start lapsing the inventory bias, you'll start to see working capital benefit us through the course of the year. Getting to the second half of this year, we expect to see a strong free cash flow. You saw that in Q4 of last year as well. We are more CapEx heavy through the last three quarters versus Q1, but that's all embedded in the kind of gain that I'm talking about.

[Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist]

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

[Adam Cohn, CFO at VSE Corporation]

Thanks.

[Operator]

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

[Adam Cohn, CFO at VSE Corporation]

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 Louie DiPalma with William Blair. Please go ahead.

[Louie DiPalma, Research Analyst, Industrials at William Blair]

John, Adam, and Michael. Good morning.

[Adam Cohn, CFO at VSE Corporation]

Good morning.

[John Cuomo, President and CEO at VSE Corporation]

Good morning.

[Louie DiPalma, Research Analyst, Industrials at William Blair]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah. Thanks for the question, Louie. 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. Looking at kind of 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. We look at every OEM relationship as a beginning. We look at this as a beginning of our first kind of MRO relationship with them.

[John Cuomo, President and CEO at VSE Corporation]

We also have a legacy distribution relationship with them. It is a wonderful company with great products, and we look forward to accelerating to other opportunities after we get this launched.

[Louie DiPalma, Research Analyst, Industrials at William Blair]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I mean, every OEM is slightly different, but I'd say that if you look historically five years back at the business, 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, Industrials at William Blair]

Sounds good. Another one, what has been the general progress of the Honeywell Fuel Control OEM solutions acquisition? At what stage do you think VSE would be ready to do another deal of that ilk?

[John Cuomo, President and CEO at VSE Corporation]

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

[Louie DiPalma, Research Analyst, Industrials at William Blair]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I mean, I 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. I know we've done a number of deals, and it looks like the pace is real. Behind the scenes is a strong level of discipline and a number of transactions that we have exited because they're not right for the portfolio.

[John Cuomo, President and CEO at VSE Corporation]

Because of that, it's hard to predict the timing of M&A, of 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? I'd say it will remain part of the model, but with a very, very disciplined eye and approach.

[Louie DiPalma, Research Analyst, Industrials at William Blair]

Sounds good. Thanks, John. Thanks, everyone.

[Adam Cohn, CFO at VSE Corporation]

Thanks, Louie.

[John Cuomo, President and CEO at VSE Corporation]

Thanks.

[Operator]

Thank you. Again, if you have a question, please press star, then one. Our next question comes from Josh Sullivan with Benchmark. Please go ahead.

[Josh Sullivan, Managing Director and Senior Equity Research Analyst at Benchmark]

Good morning, guys.

[John Cuomo, President and CEO at VSE Corporation]

Good morning.

[Adam Cohn, CFO at VSE Corporation]

Good morning.

[Michael Perlman, VP of Investor Relations and Communications at VSE Corporation]

Morning.

[Josh Sullivan, Managing Director and Senior Equity Research Analyst at Benchmark]

Just on the component repair capacity with TCI you mentioned, what's the timeline to bringing that online, and then what's the potential incremental there?

[John Cuomo, President and CEO at VSE Corporation]

I'm sorry. The component repair? You missed the question.

[Josh Sullivan, Managing Director and Senior Equity Research Analyst at Benchmark]

The component repair capacity you mentioned in the prepared repair.

[John Cuomo, President and CEO at VSE Corporation]

Oh, the capacity for TCI. Yeah. I mean, I'd say it's in phases. What we're really doing with the business is going through the business together with the leaders to say, "Okay, these are all the capabilities we have. Where do we need to go deeper and expand and improve turntime so that we can increase capacity and support the market?" Some of it is equipment. Some of it is labor. Some of it is additional shifts. They're using the same equipment two or three times longer in a day than we're using today. I'd say we've already started. I mean, the business is up about 30% since we've owned it, and we've already started down that journey. 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 and Senior Equity Research Analyst at Benchmark]

Got it. You mentioned that key term, turntimes. 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? Clearly, a focal point for the industry is on improving turntime. How is VSE a part of that story?

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I mean, at the end of the day, everything, in our opinion, starts with the turntime first and then the cost second. You have got to be ahead of the market in terms of turntimes. It depends on the business, whether we are supporting the end user directly or we are supporting a major engine overhaul shop. For the engine overhaul shop, we are really doing back shop work, and we need to be in a position where we are faster and cheaper than they are. Turntime and cost of repair is a critical factor for us being awarded the business and us maintaining and growing that business. We feel we have done an outstanding job of that and continue to have turntime improvement, but feel like we are at or ahead of the industry in terms of turntimes.

[John Cuomo, President and CEO at VSE Corporation]

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 a very good portfolio of capabilities, but our turntimes 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. We've narrowed the scope of our MRO shops over the last five years to places where we know our turntimes 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. That's a huge part of the model. That's how we look at it all the time.

[Adam Cohn, CFO at VSE Corporation]

Great. Thank you for the time.

[John Cuomo, President and CEO at VSE Corporation]

Thanks.

[Operator]

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

[Ellen Page, Research Analyst at Jefferies]

Hi, 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 Kellstrom?

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I mean, I 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. From a growth perspective, expect that to be always on the lower end of growth for us. 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 the lower growth side. As we look at the two growth areas, I know we didn't have a share.

[Adam Cohn, CFO at VSE Corporation]

Yeah. It 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 it.

[John Cuomo, President and CEO at VSE Corporation]

Yeah. Because I mean, I can share a little color this quarter. I think MRO is a little ahead. Yeah, it's not materially different one way or another on the organic growth.

[Ellen Page, Research Analyst at Jefferies]

That's helpful. 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 done in the last 12 months?

[John Cuomo, President and CEO at VSE Corporation]

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. 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? That business, we've grown 30% throughout the year. As you can imagine, there's an amount of SG&A that stays flat during that period, and then there's some additional labor that comes in. SG&A is the percentage of sales that decline, which is going to drive some additional margin in that business.

[John Cuomo, President and CEO at VSE Corporation]

We'll look at price and product cost margins to assist that business as well. There's no kind of cost out in the business like that. In other businesses, like in the Kellstrom business, there were some leaders who left the business. Because we have a large organization, there's no need to replace those leaders. We had an ability to have some cost out in the first and into the second quarter to drive some synergies upfront. 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 and general aviation OEMs. Very similarly, it's a capacity-constrained market where all we need to do is help them and give them an aperture for growth. Each asset kind of looks different on our synergy plan.

[Ellen Page, Research Analyst at Jefferies]

Great. Thanks. I'll leave it there.

[John Cuomo, President and CEO at VSE Corporation]

Great. Thank you.

[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, President and CEO at VSE Corporation]

Yes. I just want to say thank you, everybody, for this has been a tremendous journey getting through our first kind of critical chapter at VSE, which is really transforming the business to a pure-play aviation aftermarket business. We are 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

• John Cuomo, President and CEO
• Adam Cohn, CFO
• Michael Perlman, VP of Investor Relations and Communications

Analysts

• Jeff Van Sinderen, Senior Research Analyst at B. Riley Securities
• Michael Ciarmoli, Managing Director of Aerospace and Defense Equity Research at Truist
• Josh Sullivan, Managing Director and Senior Equity Research Analyst at Benchmark
• Ellen Page, Research Analyst at Jefferies
• Ken Herbert, Aerospace and Defense Analyst at RBC Capital Markets
• Louie DiPalma, Research Analyst, Industrials at William Blair