VSE Q2 2026 Earnings Report

VSE EPS Results

• Actual EPS: $1.75
• Consensus EPS: $0.93
• Beat/Miss: Beat by +$0.82
• One Year Ago EPS: $0.97

VSE Revenue Results

• Actual Revenue: $449.14 million
• Expected Revenue: $425.03 million
• Beat/Miss: Beat by +$24.11 million
• YoY Revenue Growth: +65.00%

VSE Announcement Details

• Quarter: Q2 2026
• Date: 8/5/2026
• Time: After Market Closes
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 8:30AM ET

VSE (NASDAQ:VSEC) (NASDAQ: VSEC) is a provider of aftermarket distribution and supply chain management services serving both government and commercial markets. The company’s solutions span a wide range of industries, with particular emphasis on defense, aerospace and transportation. VSE’s core mission is to ensure mission readiness by delivering critical parts, maintenance and technical support for equipment throughout its lifecycle.

Through its Distribution Services segment, VSE sources, markets and distributes replacement parts and components for commercial truck, bus, rail and specialty vehicle applications. Its Supply Chain Management and Maintenance, Repair and Overhaul (MRO) businesses provide contract logistics, asset management, turnkey repair solutions and technical assistance for complex systems. These services include engine and component repair, overhaul of air and ground systems, certification testing and packaging for secure shipments.

VSE’s customer base includes the U.S. Department of Defense, federal agencies such as the U.S. Navy and NASA, as well as commercial fleets and industrial operators in North America. The company operates a network of service centers, warehouses and repair facilities to deliver rapid-response support. Backed by a leadership team with deep experience in government contracting, logistics and manufacturing, VSE prioritizes compliance, quality assurance and on-time delivery to meet critical operational requirements.

VSE Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Record second-quarter results: Revenue rose 65% year over year to $449 million, while adjusted EBITDA nearly doubled to $86 million and margin expanded 320 basis points to a record 19.2%. Organic revenue growth was approximately 14%, supported by strength in both MRO and distribution.
• Positive Sentiment: VSE raised its full-year 2026 outlook, now projecting revenue growth of 61%–64% versus 57%–61% previously, and adjusted EBITDA margins of 18.7%–19% versus 18.1%–18.5%. Management attributed the higher outlook primarily to stronger execution in the core business, with acquisitions performing generally in line with expectations.
• Positive Sentiment: Integration of the PAG and NorthStar acquisitions is underway, with opportunities identified in insourcing, sales-channel coordination, proprietary repair content, logistics, and operating efficiencies. Management expects most PAG synergies—previously estimated at $15 million in run-rate savings—to be realized in 2027 and beyond.
• Positive Sentiment: Management expects stronger second-half free cash flow as earnings increase, transaction costs decline, and working-capital intensity moderates. Net leverage ended the quarter at 2.4x and is expected to improve further, while planned engine-facility expansions could increase MRO capacity by roughly 50% at one location.
• Neutral Sentiment: VSE acknowledged ongoing supply-chain volatility, energy-price and geopolitical uncertainty, and elevated acquisition valuations, although it reported no meaningful deterioration in customer demand or operator behavior. The company also noted that quarterly mix and timing may cause profitability to vary from period to period.

Presentation

[Operator]

Day. Thank you for standing by. Welcome to the VSE Corporation's second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Perlman. Please go ahead.

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

Thank you. Welcome to VSE Corporation's second quarter 2026 results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations.

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

Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We're 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]

Before we begin, I'd like to highlight that VSE will host an investor day on Wednesday, December 9th at Current Pier 59 in New York City. We look forward to sharing more on our strategy and long-term outlook there. Save-the-date invitations will be sent out later this month, with full details to follow in September. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.

[John Cuomo, President and CEO at VSE Corporation]

Good morning, everyone, and thank you for joining us today. Let's begin on slide three, where I will review our second quarter highlights. This second quarter marked a defining step forward for VSE. We closed two strategic acquisitions, delivered record revenue and profitability, including a record consolidated adjusted EBITDA margin, and launched integration and synergy capture workstreams across the combined platform. Importantly, the quarter demonstrated the underlying strength of our core business and the earnings power of the platform we're building.

[John Cuomo, President and CEO at VSE Corporation]

Let me now walk through our second quarter highlights. First, we completed the acquisition of PAG, the largest transaction in VSE's history and a major milestone in our transformation. Together, PAG, NorthStar, and our legacy VSE Aviation businesses create a differentiated global aviation aftermarket platform with greater scale, broader capabilities, and deeper customer relevance.

[John Cuomo, President and CEO at VSE Corporation]

We are advancing our strategy to become the world's leading independent provider of aviation aftermarket distribution and repair services while remaining firmly grounded in the OEM-centric strategy that has guided our transformation. Second, the strength of the platform is already evident in our financial performance and progress. We delivered record revenue and profitability in the second quarter, with results above prior expectations. Organic revenue grew approximately 14%, with strength across both repair and distribution, supported by strength in the commercial engine aftermarket, new business wins, expanded capabilities, market share gains, and increased share of wallet.

[John Cuomo, President and CEO at VSE Corporation]

Adjusted EBITDA nearly doubled year-over-year, significantly outpacing revenue growth, and adjusted EBITDA margins reached a record 19.2% in the quarter. This performance represents meaningful progress towards our long-term objective of consolidated adjusted EBITDA margins above 20% and supports our decision to raise both revenue and margin guidance for the full year.

[John Cuomo, President and CEO at VSE Corporation]

Integration, execution, and synergy capture are underway. We've established clear business plans, integration governance, and executive-owned workstreams across the combined platform. Integration is a core VSE capability and an important competitive differentiator. In the short time since closing, our teams have already begun advancing tangible opportunities in insourcing, joint sales channel alignment, and operating efficiency.

[John Cuomo, President and CEO at VSE Corporation]

It remains early, but the pace of execution and the quality of the opportunities identified reinforced our confidence in the revenue synergy and margin expansion potential of the combined platform. Let's now move to slide four, where I will highlight our recent acquisitions in greater detail. Let me start with the acquisition of PAG, which we closed on May 5th. We completed the acquisition from GenNx360 Capital Partners in a transaction valued at approximately $2 billion in cash and equity.

[John Cuomo, President and CEO at VSE Corporation]

The acquisition materially expands VSE scale, global reach, proprietary content, and repair capabilities across commercial business, general aviation, rotorcraft, OEM, and defense end markets. We recently hosted our first employee connection summit, bringing together leaders from VSE and PAG to accelerate integration planning and commercial collaboration. The teams aligned on sales channel strategy, systems priorities, insourcing, and joint commercial opportunities.

[John Cuomo, President and CEO at VSE Corporation]

Execution is now underway across these workstreams. While we are still early in the integration, we are encouraged by both the breadth of the opportunities identified and the engagement of the combined teams. Just as important, PAG brings an exceptional team, highly complementary capabilities, and a strong customer-focused culture. This combination is strengthening VSE strategically, operationally, and commercially. Moving now to our NorthStar acquisition, which closed on April 1st. This acquisition adds engine-related MRO, third-party logistics, and component support capabilities to our aftermarket offering.

[John Cuomo, President and CEO at VSE Corporation]

NorthStar's teardown, kitting, and component-level capabilities span multiple engine platforms and deepen our role within the OEM aftermarket supply chains. Since completing the acquisition, we have already rebranded the business as VSE Aviation Services, aligned its leadership structure, and launched key integration initiatives to expand logistics, repair capacity, and engine component support. Let me provide an update on the current aviation aftermarket environment.

[John Cuomo, President and CEO at VSE Corporation]

The fundamentals supporting our business remain healthy and continue to reinforce our confidence in the long-term demand environment. The broader macroeconomic and geopolitical environment remains dynamic, including volatility in energy prices. We continue to monitor these conditions closely and remain disciplined in our planning. Our updated guidance reflects what we are seeing in the business today: strong first half execution, healthy customer demand, and solid program visibility.

[John Cuomo, President and CEO at VSE Corporation]

To date, we have not seen any recent uncertainty translate into any meaningful change in a customer demand or operator behavior. Customer activity remains healthy across our platforms, and the demand signals we see support confidence in the durability of our business. At the same time, we will continue to stay close to our customers and respond quickly if market conditions should change. Global air traffic and fleet utilization remain resilient.

[John Cuomo, President and CEO at VSE Corporation]

An aging installed base, continued constraints on new aircraft and engine availability, and the need to keep existing assets operating are sustaining demand for aftermarket parts and repair services. These are durable demand drivers across our platform. In business and general aviation, conditions also remain unchanged. The diversity of this customer base and the mission-critical nature support the aftermarket demand.

[John Cuomo, President and CEO at VSE Corporation]

This market provides an important and complementary source of revenue alongside the strength we continue to see in commercial aviation. Taken together, the breadth of our markets, customers, capabilities, and revenue streams give us confidence in the resilience of our business as we enter the second half, remain optimistic about the opportunity ahead, while maintaining discipline around execution and external risk. Let's now turn to slide five, where I'll briefly walk through our second quarter 2026 financial highlights.

[John Cuomo, President and CEO at VSE Corporation]

We delivered an outstanding quarter, headlined by record revenue and profitability. The results reflect strong execution in our core aviation businesses, continued organic momentum, and contributions from our recent acquisitions. Our revenue of $449 million increased 65% year-over-year, including 14% organic growth. Revenue growth was driven by new business wins, expanded product and repair capabilities, market share gains, increased share of wallet, and contributions from recent acquisitions.

[John Cuomo, President and CEO at VSE Corporation]

Adjusted EBITDA reached a record $86 million in the quarter, increasing 98% year-over-year and significantly outpacing revenue growth. Adjusted EBITDA margin expanded approximately 320 basis points to a record 19.2% in the quarter. The result reflects favorable product and repair mix, strong operating execution, synergies from prior acquisitions, and contributions from PAG.

[John Cuomo, President and CEO at VSE Corporation]

The level of profitability exceeded our expectations for the quarter and demonstrates the earning power of the platform, although quarterly mix and timing can create variability from period to period. Adjusted net income of $55 million increased 101%, while adjusted diluted earnings per share of $1.75 increased 33% year-over-year. Our record profitability reinforces our confidence in the long-term earnings potential of VSE and our path toward consolidated Adjusted EBITDA margins above 20% over time. I'll now turn the call over to Adam to walk through the financial details.

[Adam Cohn, CFO at VSE Corporation]

Thank you, John. Let's turn to slide six of the conference call materials, where I will provide a detailed overview of our second quarter consolidated financial results. For the second quarter of 2026, we generated $449 million of revenue, an increase of 65% year-over-year. Both MRO and distribution delivered strong results, with MRO revenue increasing 149% and distribution revenue increasing 17% year-over-year.

[Adam Cohn, CFO at VSE Corporation]

The 149% increase in MRO revenue was driven by expanded repair capabilities and capacity, strong growth in engine content, market share gains, increased share of wallet with existing OEM partners, and contributions from recent acquisitions, primarily PAG and Aero-3. The 17% increase in distribution revenue was driven by solid execution on new business wins, product line expansion, market share gains Strong commercial engine end market demand and contributions from the Aero-3 acquisition.

[Adam Cohn, CFO at VSE Corporation]

Excluding recent acquisitions, organic revenue increased approximately 14% year-over-year, reflecting strong underlying demand and execution across the business. This growth rate is net of intercompany eliminations between VSE and PAG since the May 5th closing. Consolidated adjusted EBITDA increased 98% to $86 million. Adjusted EBITDA margin was 19.2%, an increase of approximately 320 basis points from the prior year period.

[Adam Cohn, CFO at VSE Corporation]

The expansion was driven primarily by a greater mix of higher margin product and repair activity, synergies from previously completed acquisitions and contributions from PAG. Adjusted net income was $55 million and adjusted diluted earnings per share was $1.75 per share. For the current and prior year periods, adjusted net income and adjusted diluted earnings per share have been updated to exclude amortization of intangible assets and stock-based compensation. Turning to slide seven and our balance sheet.

[Adam Cohn, CFO at VSE Corporation]

During the quarter, we closed on a $900 million Term Loan B and upsized our revolving credit facility to $500 million. These new facilities replace our prior Term Loan A and revolver structure. Together they strengthen our balance sheet and give us the flexibility to execute against our strategic priorities.

[Adam Cohn, CFO at VSE Corporation]

At the end of the second quarter, total debt outstanding was $967 million, including our new Term Loan B and the debt portion of the tangible equity units. Debt issuance costs were approximately $20 million, and we had approximately $75 million of cash and cash equivalents on hand, resulting in a net debt of approximately $872 million. We had no borrowings under our recently upsized $500 million revolving credit facility. During the second quarter, we generated approximately $19 million of free cash flow, a significant improvement from the first quarter and from the second quarter of last year.

[Adam Cohn, CFO at VSE Corporation]

The improvements were driven by strong profitability, better working capital performance, and a continued shift in portfolio mix towards MRO. Second quarter free cash flow was also absorbed by approximately $10 million of PAG-related cash transaction expenses. Excluding those expenses, free cash flow conversion was approximately 34% of adjusted EBITDA. We expect cash generation to strengthen in the second half as earnings grow, integration progresses and working capital investments begin to scale.

[Adam Cohn, CFO at VSE Corporation]

At quarter end, our adjusted net leverage ratio was 2.4x, stronger than the pro forma guidance we outlined at the time of the PAG closing. We expect leverage to continue to improve in the second half of the year, supported by stronger free cash flow generation. This will increase our financial flexibility as we execute integration priorities and maintain a disciplined approach to capital allocation.

[Adam Cohn, CFO at VSE Corporation]

Let's now turn to slide eight to review our updated consolidated company guidance for full year 2026, starting with revenue. Based on the strength of our first half execution, continued double-digit organic growth and increasing visibility into customer demand and program activity, we are raising our full year 2026 revenue guidance. We now expect full year revenue growth of 61%-64%, up from our prior outlook of 57%-61%. We are also increasing our full year 2026 adjusted EBITDA margin outlook, reflecting record first half profitability, continued operating execution, and the early benefits from our recent acquisitions. We now expect full year adjusted EBITDA margin of 18.7%-19%, compared with prior outlook of 18.1%-18.5%.

[Adam Cohn, CFO at VSE Corporation]

On free cash flow inclusive of PAG, we expect meaningful improvement in the second half, driven by earnings growth, lower transaction-related cash costs, and improved working capital efficiency as investments and programs scale. Stronger cash generation remains an important priority and is expected to support continued deleveraging. I would now like to provide an update on several additional modeling assumptions post PAG acquisition, which are also detailed in the appendix of the presentation.

[Adam Cohn, CFO at VSE Corporation]

For full year 2026, interest expense net of interest income is projected at approximately $36 million-$39 million. Depreciation and amortization is expected to be approximately $96 million-$100 million in aggregate. The effective tax rate is projected at approximately 25%. Stock-based compensation is expected to be approximately $18 million-$19 million, and capital expenditures are expected to be approximately 2%-2.5% of revenue. With that, I'll turn the call back over to John.

[John Cuomo, President and CEO at VSE Corporation]

Thanks, Adam. I'd like to conclude by briefly reviewing our 2026 priorities on slide nine. First, we are focused on executing acquisition integrations and accelerating the realization of synergies. Second, we are implementing newly awarded distribution programs across our core platforms. The recently launched Pratt & Whitney Canada APU agreement ramped ahead of our expectations in the second quarter. We are also advancing our CFM engine initiatives.

[John Cuomo, President and CEO at VSE Corporation]

We took delivery of seven CFM56 engines during the quarter and began processing those assets through our in-house repair and tear down operations. Third, we are expanding our MRO capacity and technical capabilities to capture incremental demand, specifically across the engine aftermarket. Fourth, we are advancing and converting our organic pipeline into revenue and margin contribution.

[John Cuomo, President and CEO at VSE Corporation]

Fifth, we are continuing to enhance our systems and our processes to support scale, integration, and efficient growth, including the targeted use of AI and data-driven tools to improve operational efficiency, optimize workflows, and support decision-making across the platform. Finally, with the PAG acquisition now closed, we are advancing integration across sales channels, insourcing, systems, organizational alignment, and joint commercial opportunities.

[John Cuomo, President and CEO at VSE Corporation]

We are confident in the combined strength of the platform and see meaningful revenue synergy and margin expansion potential as the integration progresses. We remain disciplined, measure progress against clear milestones, and prioritize actions that create durable value for customers and shareholders. In closing, this was an exceptional quarter for VSE. We delivered record revenue, record profitability, including record adjusted EBITDA margins, generated approximately 14% organic growth, improved free cash flow, advanced integrations, and raised both revenue and adjusted EBITDA margin guidance.

[John Cuomo, President and CEO at VSE Corporation]

More importantly than any single quarter, these results demonstrate that our strategy continues to work. Our core businesses are performing exceptionally well, our market position continues to strengthen, and our expanded platform is creating new opportunities for growth, efficiency, and long-term value creation. While we remain disciplined in managing the business through an evolving external environment, I have never been more confident in VSE's long-term competitive position, the quality of our team, and the long-term opportunity to create value for our shareholders. Thank you for your continued support and confidence in VSE. Operator, we are now ready to take questions.

[Operator]

Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by, we compile the Q&A roster. Our first question will come from Ken Herbert from RBC Capital Markets. Your line is open.

[Ken Herbert, Analyst at RBC Capital Markets]

Yeah. Hi, good morning, John and Adam and Michael. Nice results.

[John Cuomo, President and CEO at VSE Corporation]

Thanks, Ken.

[Ken Herbert, Analyst at RBC Capital Markets]

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

[John Cuomo, President and CEO at VSE Corporation]

It's honestly, Ken, a little bit of everything. If you look at our first quarter, we had really our stronger phase of our organic growth is actually on the distribution side in the legacy business. Second quarter, it kind of flipped a little bit and our MRO businesses were slightly stronger. Our acquisitions are all performing well.

[John Cuomo, President and CEO at VSE Corporation]

The teams continue to perform. We had a few business wins in late last year that are kind of ramping slightly ahead of schedule. I'd say, it's a little puts and takes from across the board rather than kind of one strong initiative. But I'd say on the revenue side, it's more the core business confidence than anything. Our modeling on our acquisitions is pretty firm, but I'd say our confidence on the core business is driving the revenue guidance.

[Ken Herbert, Analyst at RBC Capital Markets]

Okay. Very helpful. Maybe really nice gross margins in the second quarter. Maybe Adam, as we think about sort of moving forward, how do we think about incremental gross margin opportunities, both within PAG and across the organization as we think about that underpinning what should be continued margin expansion? What are you looking at today as you look at some of the opportunities on gross margins, and how do we think about the right run rate there for the margins in the second half of this year, but more importantly, exiting 2026?

[Adam Cohn, CFO at VSE Corporation]

Yeah. No, thanks for the question, Ken. The margin performance was exceptionally strong in the quarter, really driven by the strong organic growth that John alluded to, especially in some of our higher-margin engine-focused businesses. We saw very strong incrementals in the second quarter. I think right now, just given the organic growth visibility, we feel strongly about the margins heading into the second half of the year, and you see that embedded into our updated guidance for 18.7%-19% for full year. We continue to see very strong margins, especially in the engine-focused businesses.

[Ken Herbert, Analyst at RBC Capital Markets]

Great. Thanks. I'll pass it back there.

[Adam Cohn, CFO at VSE Corporation]

Thanks, Ken.

[Operator]

Thank you. Our next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

[Sheila Kahyaoglu, Analyst at Jefferies]

Good morning, John and Adam. How are you guys? John, you're now 90 days into owning PAG, maybe can you update us on how that integration is going? I know you're very thorough with those. How much of the synergy realization is contributing to the full year margin raise versus organic improvements?

[John Cuomo, President and CEO at VSE Corporation]

Yeah, Sheila, it's funny because I read some of the pre-notes out last night about kind of acceleration of synergies, that's really not what drove the margin. We really let businesses run for a solid 90, 100 days. I kind of call it the 100-day plan. You watch the business that you acquire, then you validate some of your initial integration assumptions.

[John Cuomo, President and CEO at VSE Corporation]

We really haven't kicked off. We've got things in action, you'll see the synergy realization more in 2027 than you are going to see in 2026. This is mostly our core business. Obviously, we're trying to start some insourcing earlier, which will drive some margin improvement. I'd say the majority of the confidence in our raise is really based on the core business at this point. I feel very good about the business that we've acquired. I'm not finding anything that's concerning at all that's going to deviate from our plans, that's not what's driving the back end of the year guidance increase.

[Sheila Kahyaoglu, Analyst at Jefferies]

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

[John Cuomo, President and CEO at VSE Corporation]

I think the part that's better is, it's interesting, the CEO of PAG was very excited during the diligence of how the businesses can come together and where all of the insourcing and other opportunities can come. I think we'll be able to accelerate that to a faster and greater pace than I had initially thought. I think some of the core technical capabilities of where we can drive proprietary content over time, I think some of those areas are greater than probably I had anticipated.

[John Cuomo, President and CEO at VSE Corporation]

All in all, it's an outstanding team. I love the culture, extremely customer-centric. The nimbleness and the agility of what they bring to the table is absolutely just second to none. Very excited about what's ahead, excited about accelerating some of our kind of themes around integration on some of those proprietary content concepts sooner than later.

[Sheila Kahyaoglu, Analyst at Jefferies]

Great. Thank you.

[Operator]

Thank you. Our next question comes from Louie DiPalma from William Blair. Your line is open.

[Louie DiPalma, Analyst at William Blair]

John, Adam, and Michael, good morning.

[John Cuomo, President and CEO at VSE Corporation]

Morning, Louie.

[Louie DiPalma, Analyst at William Blair]

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

[Adam Cohn, CFO at VSE Corporation]

Yeah, it's really from a multitude of factors, Louie. Obviously, it was very strong margins in the second quarter. We feel good about the organic growth in the second half of the year. I think we continue to see more insourcing opportunities, especially on the repair side, and that's really having an impact on our margins. We feel good about the PAG acquisition as well. It's just performing in line with our expectations, but obviously, you're going to get a margin uplift in the third quarter as you have full quarter contributions from PAG.

[Louie DiPalma, Analyst at William Blair]

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

[Adam Cohn, CFO at VSE Corporation]

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

[Louie DiPalma, Analyst at William Blair]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah, I appreciate the question. Louie, the one thing I'd add on top of it is we had a contract that expired, we had holes to fill on top of the growth. If you actually carve that out.

[Louie DiPalma, Analyst at William Blair]

Like the Triumph, yeah.

[John Cuomo, President and CEO at VSE Corporation]

The core organic growth is actually even stronger. When you look at it's really what drives the growth, right? It's price and volume. Remember, our business mix is slightly different than a lot of our competitors that are out there. Everyone talks about the commercial markets. Half of our business is business and general aviation as well, and 50% of our business is engine-related in totality.

[John Cuomo, President and CEO at VSE Corporation]

First of all, the commercial markets are still very healthy. Are they growing at as fast of a rate as last year? No, they're still quite healthy and robust. It's not a zero-growth game. The second is our business and general aviation markets are continuing to grow at a nice pace. The third is the engine side of both markets is growing faster than the component side, and that's 50% of our business.

[John Cuomo, President and CEO at VSE Corporation]

We have new business wins, there's a little bit of a price element in there as well. You kind of break it down into all those individual buckets, it's a little part from each. It's just so nice to see the core business starting to come together and perform as we had planned.

[Louie DiPalma, Analyst at William Blair]

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

[John Cuomo, President and CEO at VSE Corporation]

No, not at this time.

[Louie DiPalma, Analyst at William Blair]

Great. Thanks, John. Thanks, Adam.

[Operator]

Thank you. Our next question will come from John Godyn from Citi. Your line is open.

[John Godyn, Analyst at Citi]

Hey, guys. Thanks for taking my question. John, in the prepared remarks, you described the long-term vision as being the world's leading provider of aftermarket distribution and aftermarket services. I know this isn't the first quarter you've had that sentence in there. When I just take a step back and I think about what that means, it doesn't feel like that's a $7 billion enterprise value company.

[John Godyn, Analyst at Citi]

When I think of what that means across the coverage of A and B, I can easily brainstorm companies that are 10 times larger that might fit that category and are still growing. Maybe you can just kind of reflect on that vision for a moment and where this all goes from here in the fullness of time. It does kind of feel like we're at the beginning of the beginning.

[John Cuomo, President and CEO at VSE Corporation]

Yeah, I appreciate the question. I'll answer half of it because I got to leave a little bit for my investor day in December. I look at life in terms of chapters. As you start a new chapter, you're continuing the story from the chapter before, the reason you start a new chapter is there is kind of an impetus for some change and for what's next.

[John Cuomo, President and CEO at VSE Corporation]

When we look at our market, which is centered in OEM centricity, you look at a $200 billion aftermarket that's still 75% or so OEM direct to end user. That's where we're gaining most of our share. We still see a tremendous amount of upside in the opportunity sets in our distribution business, our maintenance repair and overhaul business, equally or more important is our newer and more growing proprietary solutions business where we own IP in kind of a few different ways.

[John Cuomo, President and CEO at VSE Corporation]

I think you're looking at it the right way. I look at things in terms of three-year buckets. I like how you look even bigger than that. We just see the enormous kind of firepower in the market, the opportunities, regardless of little blips and ups and downs. Markets take those. That's not overly concerning to us.

[John Cuomo, President and CEO at VSE Corporation]

We're looking long term of where there are gaps in markets that need to be filled and how we at VSE have something unique to go and fill those markets. Appreciate the question. You'll see a lot more clarity around the puts and takes and what will financially and from a forecast perspective over the next three-plus years help kind of solidify the confidence in that story as we get into December.

[John Godyn, Analyst at Citi]

We'll look out for that. If I could ask one more on PAG.

[John Cuomo, President and CEO at VSE Corporation]

Sure.

[John Godyn, Analyst at Citi]

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

[John Cuomo, President and CEO at VSE Corporation]

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

[Adam Cohn, CFO at VSE Corporation]

Yeah. If you look in the balance sheet within the earnings release, you could see there's about $34 million of fair value on the earn-out in terms of total opportunity of about $125 million. I think we're well aligned. It's based on 2026 adjusted EBITDA, and that's kind of where our expectations are right now.

[John Godyn, Analyst at Citi]

Yeah. The bottom line is it sounds like you're on track to achieve it.

[John Cuomo, President and CEO at VSE Corporation]

A portion of it at this point.

[Adam Cohn, CFO at VSE Corporation]

A portion of it at this point, yeah.

[John Godyn, Analyst at Citi]

Yeah. All right. Thanks, guys.

[John Cuomo, President and CEO at VSE Corporation]

Thanks, John.

[Operator]

Thank you. Our next question will come from Kristine Liwag from Morgan Stanley. Your line is open.

[Kristine Liwag, Analyst at Morgan Stanley]

Hey. Good morning, everyone.

[John Cuomo, President and CEO at VSE Corporation]

Kristine.

[Kristine Liwag, Analyst at Morgan Stanley]

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

[John Cuomo, President and CEO at VSE Corporation]

Oh, big target there. I'll just talk anecdotally, then I'll let Adam kind of walk through the math for you. We'll work on, again, some three-year guidance towards the back end of the year. As you know, we've owned the business for 100 days, so I don't always like to overstate my expectations until I just continue to watch it perform.

[John Cuomo, President and CEO at VSE Corporation]

Our businesses from a CapEx perspective are quite light. Our distribution business, which is about $700 million-$800 million of the business, is only about 1% of sales at the top end. Our MRO businesses tend to be 2%-3%, depending on how much investment we're making in the capacity expansion on the organic side. The inventory and the working capital is really what drives the free cash flow generation. Because of all the supply chain constraints in the market, we have been pretty prudent.

[John Cuomo, President and CEO at VSE Corporation]

You see some others talk about kind of missing a quarter because of inventory. We're trying to hedge ourselves on core parts and make sure we're ahead of the curve. That said, as the business continues to grow, as those markets start to stabilize and the business mix continues to shift more towards our proprietary solutions and our MRO businesses, what that does is just naturally drive a stronger free cash flow generation. Do you want to talk a little bit about the back end of the year, Adam?

[Adam Cohn, CFO at VSE Corporation]

Yeah. No, you answered it really well. There's going to be less working capital intensity in the back half of the year, and that's just in line with the seasonality of our business, especially this year where we had a couple of new programs

[Adam Cohn, CFO at VSE Corporation]

Occur in the first quarter, and you saw heavy inventory use. You saw less use in the second quarter, and we talked about a conversion in the low 30s, particularly if you exclude some of the PAG-related cash transaction costs. We're even expecting stronger free cash flow in the second half of the year as the working capital intensity continues to reduce.

[Adam Cohn, CFO at VSE Corporation]

We have full quarter contributions from PAG. There's obviously going to be some offset with interest expense as we have the full run rate from the Term Loan B that we issued in the second quarter. Overall, we feel good about the conversion in the back half of the year. Then as John said during the Investor Day, we'll share some more about longer-term free cash flow conversion targets. We feel really good about the outlook.

[Kristine Liwag, Analyst at Morgan Stanley]

Great. Super helpful. Following up on that inventory comment, how much of that inventory increase is driven by part availability to support your MRO business versus filling up the distribution channels? Also, following up on that distribution, sorry, I guess it's a three-part question. Yesterday we saw Honeywell take an inventory obsolescence charge. Is there a risk in your distribution side of potential obsolescence risk?

[John Cuomo, President and CEO at VSE Corporation]

Good questions.

[Adam Cohn, CFO at VSE Corporation]

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

[John Cuomo, President and CEO at VSE Corporation]

I know, I kind of joke, Kristine, that we talk fast, we kind of move fast, there's a tremendous amount of discipline in our business. Some of our sales teams struggle where we don't take a distribution opportunity, exactly to your point, we feel like it has some obsolescence risk. When you look at our core distribution business, we are on real, modern, solid platforms that have a lot of longevity in them, we are not doing one-off programs.

[John Cuomo, President and CEO at VSE Corporation]

That's where I think people get into inventory obsolescence risk. When you're supporting, whether it's LEAP or Geared Turbofan or CFM56 or PT6 engine, or you're on the airframes of 737 MAX, A350, you're on core product lines, you have a lot of confidence in your inventory that's on the balance sheet.

[Kristine Liwag, Analyst at Morgan Stanley]

Great. Thank you very much.

[John Cuomo, President and CEO at VSE Corporation]

Thank you.

[Operator]

Thank you. Our next question will come from Louis Raffetto from Wolfe Research. Your line is open.

[Louis Raffetto, Analyst at Wolfe Research]

Hey, good morning, gentlemen.

[John Cuomo, President and CEO at VSE Corporation]

Good morning.

[Adam Cohn, CFO at VSE Corporation]

Good morning.

[Louis Raffetto, Analyst at Wolfe Research]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I think what they do very well is how they tie inside of their MRO shops, their exchange pool. Yes, there are a number of the larger customers who have inventory on the shelf. This has been a period post-COVID where holding inventory has not been a bad thing. For 90% of the cycles I've been through, your end users don't want to hold inventory. Having those exchanges very closely tied with the MRO shop is helping them get the order, and I think that there is just a tremendous opportunity in how we tie the exchange pool to the MRO shops.

[John Cuomo, President and CEO at VSE Corporation]

The second thing is, I think that as we continue to expand our DER repair capabilities, is how do we utilize our in-house alternative sourcing models, whether it's creating our own products or using USM to create repairs where we have gaps in supply chain. I think they do both of those really well and look forward to expanding on that inside of our core business.

[Louis Raffetto, Analyst at Wolfe Research]

Great. Thank you. Maybe just your latest thoughts on M&A. Not trying to rush anything, obviously, but you've done several deals now, but you're certainly on track to be below, I think, two times leverage by the end of the year. I know you've got a list of other things you'd still like to do.

[John Cuomo, President and CEO at VSE Corporation]

Yeah. It is a very active market. The back end of the year has a tremendous amount of opportunities, so it'll be an interesting back end of the year to see how those opportunities fall out. There are a number that are interesting to us. The bid and ask is an interesting model as well. I think valuations are very high. There are actually multiples that are expanding and not contracting.

[John Cuomo, President and CEO at VSE Corporation]

The competitive landscape has increased as well. There's a lot of factors to look into. Does the capability fit? How confident do we feel about 2027 and 2028? Can evaluation work? There are certain deals that I think we're able to absorb in our organization today while we're integrating PAG, and there might be a few others that might be a little bit too complex for us right now.

[John Cuomo, President and CEO at VSE Corporation]

We'll stay with things that we feel like we can absorb and definitely not risk anything in the franchise or anything in our integration plan. It doesn't preclude us from doing another deal.

[Louis Raffetto, Analyst at Wolfe Research]

Thank you very much.

[John Cuomo, President and CEO at VSE Corporation]

Thanks.

[Operator]

Thank you. Our next question comes from Jeff Van Sinderen from B. Riley Securities. Your line is open.

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

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

[John Cuomo, President and CEO at VSE Corporation]

From an organic perspective, we have three facilities that we're building. We're building a new facility for one of our engine shops, and we'll move that shop, and that will give us probably a 50% increase in capacity. For our other two stronger engine-focused shops, we're working on expanding existing facilities.

[John Cuomo, President and CEO at VSE Corporation]

The other thing, as we get into 2027, we'll talk more about that new capability add at those shops when we both have the labor, the space, and the equipment to support those. As we look at the next generation of engines, specifically on the commercial side, and we want to support our OEM partners with back shop work, we need to make sure we've got both the capacity and the labor to be able to step in and support that.

[John Cuomo, President and CEO at VSE Corporation]

There are some strong organic initiatives in front of us right now.

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

Maybe if we can just touch on supply chain for a moment, just wondering the latest you're seeing there, how you feel like it's evolving. Any impact you expect on inventory management around supply chain?

[John Cuomo, President and CEO at VSE Corporation]

Let's start with the VSE side of things. Adam spoke about stronger free cash flow generation at the back end of the year. Nothing really different on our side. I think from the actual what's happening in the market, it continues to be a whack-a-mole. One area gets fixed, and another area has an element of concern.

[John Cuomo, President and CEO at VSE Corporation]

As OEM production continues to ramp, which is a good thing for the market in general, it also creates the same supply but it creates a little bit more constraints as well. I'd say in total, the puts and takes, I'd say there's not much of a difference from my perspective over the last 12 months. There's improvements in some areas and weakness in others, so you just have to be ahead of the curve.

[John Cuomo, President and CEO at VSE Corporation]

Nothing that's materially changing any of our kind of forecasting at this point.

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

Okay, great. Thanks for taking my questions.

[John Cuomo, President and CEO at VSE Corporation]

Thanks, Jeff.

[Operator]

Thank you. As a reminder, to ask a question, please press star one one. Our next question will come from Scott Deuschle from Deutsche Bank. Your line is open.

[Scott Deuschle, Analyst at Deutsche Bank]

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

[John Cuomo, President and CEO at VSE Corporation]

I'm trying to do the math on your inorganic, organic. I think that organic growth is about 14%. We had contribution from the acquisitions. I'd say the acquisitions performed relatively in line with our expectations. Did they slightly beat? Yes. The core business was the bigger beat than the M&A side of the beat on the top line. I don't know if that actually answers your question.

[Scott Deuschle, Analyst at Deutsche Bank]

No, that's helpful. Yeah. John, Honeywell is having some challenges with its supply chain now, it looks like they're needing to make some sacrifices on meeting their aftermarket demand in order to support their OE customers. I guess the question I have for you is whether that might create an inroad for you to be able to do more for them, given their constraints in serving the aftermarket and given your existing relationship. Can you say whether you've had any recent discussions to that effect?

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I think that we have certain platforms that have a lot of Honeywell content. 737, the NGs. We are one of the largest providers of kind of parts and services on that airframe. I do hope that there's opportunities. We look at our supplier partners as customers, and I hope there's ways that we can help them solve some of those issues. As far as kind of detailed discussions, I'd rather not kind of speak about how we have those conversations.

[John Cuomo, President and CEO at VSE Corporation]

We've read their releases as well, and we'll see anything we can do to support them. There are ways to take some of the kind of used serviceable material parts from some of the part-outs of some of the 737s and hopefully put them through our repair facilities, and maybe we can provide some opportunities to Honeywell with that product.

[John Cuomo, President and CEO at VSE Corporation]

I don't know the details specifically of where their gaps are at this point.

[Scott Deuschle, Analyst at Deutsche Bank]

Okay. Thank you.

[Operator]

Thank you. Our next question will come from Jonathan Siegmann from Stifel. Your line is open.

[Jonathan Siegmann, Analyst at Stifel]

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

[John Cuomo, President and CEO at VSE Corporation]

Yeah. I appreciate the question. We hear that sometimes, too, and I think that the commercial market has a lot of the sexiness around the big engines. There are more PT6s flying than there are CFM56s, but everyone likes to talk about the CFM56 opportunities. We find the GA business in general aviation market, you have a few fractionals that have a large fleet, but other than that, you have 15,000-plus end users, and it goes everything from a true large business, large-cabin business aircraft to a small GA aircraft to a rotorcraft.

[John Cuomo, President and CEO at VSE Corporation]

Those end users tend to have very few aircraft. They tend to stock less inventory. There's a long tail of end users that don't have exchanges or inventory on their shelves, and they tend to have a stronger need for a stronger platform of maintenance repair and overhaul and inventory-centric aftermarket support.

[John Cuomo, President and CEO at VSE Corporation]

There's so many different variants to those aircraft and engine types that, again, we find it a great opportunity for someone like ourselves to support our OEM partners in managing that tail. With regard to the market trends, where the volume comes from is less on the large cabin and more on the mid and light-cabin aircraft, because those are the ones that are chartering the most, takeoffs and landings the most.

[John Cuomo, President and CEO at VSE Corporation]

You tend to see a lot of consistency, even a little bit of ups and downs in the markets in that sector. We've been talking about this market for the last six years, and we'll continue to talk about it for at least the next six, and it will continue to be a really strong part of our business. Appreciate the question, and we see it as a tremendous opportunity for our business.

[Jonathan Siegmann, Analyst at Stifel]

Thank you, John.

[Operator]

Thank you. I'm showing no further questions from our phone lines. I'd now like to pass the conference back to John Cuomo for any closing remarks.

[John Cuomo, President and CEO at VSE Corporation]

Well, thanks, everybody, for the support this morning. For the analysts, I know it's a very busy earnings day, so I appreciate you all making time for us. To our shareholders, thanks again for the confidence, and speak to you all early November. Thanks, and have a great day.

[Operator]

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

Participants

Executives

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

Analysts

• Ken Herbert, Analyst at RBC Capital Markets
• Sheila Kahyaoglu, Analyst at Jefferies
• Louie DiPalma, Analyst at William Blair
• John Godyn, Analyst at Citi
• Kristine Liwag, Analyst at Morgan Stanley
• Louis Raffetto, Analyst at Wolfe Research
• Jeff Van Sinderen, Analyst at B. Riley Securities
• Scott Deuschle, Analyst at Deutsche Bank
• Jonathan Siegmann, Analyst at Stifel