VSE Q2 2025 Earnings Report

VSE EPS Results

• Actual EPS: $0.97
• Consensus EPS: $0.69
• Beat/Miss: Beat by +$0.28
• One Year Ago EPS: $0.47

VSE Revenue Results

• Actual Revenue: $272.14 million
• Expected Revenue: $267.39 million
• Beat/Miss: Beat by +$4.75 million
• YoY Revenue Growth: +41.10%

VSE Announcement Details

• Quarter: Q2 2025
• Date: 7/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 31, 2025
• Conference Call Time: 8:30AM ET

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

VSE Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Divestiture of fleet segment on April 1 completed VSE’s transformation into a pure-play aviation aftermarket company focused on higher-growth, higher-margin distribution and MRO services.
• Positive Sentiment: Acquisition of Turbine Weld Industries expands proprietary engine component MRO capabilities and deepens OEM relationships in the business and general aviation aftermarket.
• Positive Sentiment: Record Q2 performance with 41% year-over-year revenue growth to $272 million, adjusted EBITDA up 52% to $43 million, and adjusted EPS increasing 106% to $0.97.
• Positive Sentiment: Secured a new $700 million credit facility (a $300 million term loan A and $400 million revolver), replacing prior debt with greater flexibility and a lower cost of capital.
• Neutral Sentiment: Reaffirmed full-year 2025 guidance with aviation revenue growth of 35%–40% and raised adjusted EBITDA margin outlook to 16.5%–17%, assuming no further tariff escalations or a global recession.

Presentation

[Operator]

Hello, and welcome to the VSE Corporation's Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations and Treasury, Michael Perman.

[Michael Perlman, VP - IR & Treasury at VSE]

Thank you. Welcome to VFC Corporation's second quarter twenty twenty five results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, Chief Financial Officer. The presentation we are sharing today is on our website. We encourage you to follow along accordingly.

[Michael Perlman, VP - IR & Treasury at VSE]

Today's discussion contains forward looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward looking statements. We are using non GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website.

[Michael Perlman, VP - IR & Treasury at VSE]

All percentages in today's discussion refer to year over year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. With that, I would now like to turn the call over to John.

[John Cuomo, President & CEO at VSE]

Good morning. Thank you for joining us today for VSE's second quarter twenty twenty five conference call. We are pleased to report another outstanding and record quarter. In the 2025, we achieved record revenue, record profitability, record margins, and significantly improved free cash flow generation. Today's results highlight the strength of our business, the resilience of our markets, the strong contributions from recent acquisitions, and the impact that our integration efforts were having on accelerating growth and margin opportunities.

[John Cuomo, President & CEO at VSE]

Let's begin with slide three and a review of our second quarter highlights. First, on April 1, we completed the sale of our fleet segment. This marked the final step in our multiyear transformation into a pure play aviation aftermarket company. With this divestiture behind us, we are now fully focused higher growth, higher margin, distribution, and MRO services within the aviation aftermarket. Second, we acquired Turbine Weld Industries, specialized MRO provider of complex engine components supporting the business and general aviation aftermarket.

[John Cuomo, President & CEO at VSE]

This acquisition expands our engine service capabilities, adds several proprietary repair offerings to our MRO portfolio, deepens our OEM relationships, and opens the door to future growth through targeted investment. Third, we signed a new five year authorized service center agreement with Eaton for hydraulic pump MRO support. This is Eaton's first authorized aftermarket repair partnership, an endorsement of VSE as a trusted and capable OEM partner. Fourth, we secured a new $700,000,000 credit facility comprising a $300,000,000 term loan a and a $400,000,000 revolver. This refinancing replaces our prior facilities and gives us more flexibility along with a lower total cost of capital to support growth.

[John Cuomo, President & CEO at VSE]

And finally, we made solid progress executing on our operating plans, integrating recent acquisitions, launching new programs, and expanding margins through synergy capture and operational improvement. Let's now move to slide four, where I will provide updates on our acquisition and integration efforts. Let's begin with TCI. We acquired TCI in April 2024, and it's quickly become one of our fastest growing business units. Growth has been driven by a strong backlog from OEM engine partners and new business wins.

[John Cuomo, President & CEO at VSE]

To support this momentum, investing in new repair capabilities, expanding our capacity, and executing cross selling synergies, including in sourcing work from our Kaelstrom business. In December 2024, we acquired Kaelstrom. We're very pleased with Kaelstrom's performance and integration progress over our first six months of ownership. The team is executing well with a clear focus on driving profitable growth and improving margins. We're doing that in three ways.

[John Cuomo, President & CEO at VSE]

First, emphasizing higher value, higher margin engine and engine related components, specifically those supporting next generation platforms like a Leap Engine. Second, we've refined our USM, used serviceable material strategy to focus on higher margin product lines that align with our in house repair capabilities and new part distribution product lines. This more disciplined and strategic approach has reduced top line USM revenue, but is driving significantly stronger margins. In the 2025, we have reduced KELstrom's USM revenue by approximately 20% on a run rate basis versus the prior year, and we expect a similar year over year trend in the second half. Importantly, we repositioned USM as a strategic enabler of new part distribution and repair services and no longer a stand alone speculative parts trading business.

[John Cuomo, President & CEO at VSE]

Third, we've already begun capturing a significant portion of the $4,000,000 in cost synergies we identified at the time of acquisition. In addition to DCI and Kaelstrom, we're very excited about our recent acquisition of Turbine Weld, an outstanding business with an outstanding team. At Turbine Weld, we're expanding operational capacity to meet strong customer demand and investing in new equipment and technical talent to support this accelerated growth. In addition, implementing standardized processes and upgrading systems to ensure the business scales efficiently and sustainably. Now, moving on to program implementations.

[John Cuomo, President & CEO at VSE]

The OEM licensed fuel control program made strong progress in the second quarter, with the successful production of our first approved units. We remain on track for full production by early twenty twenty six. Margin contribution is now fully reflected in our financials. As mentioned, we launched Eaton's first authorized repair station in The Americas. Early results are strong, and we're helping Eaton expand into new markets, increase repair capacity, and improve the customer experience.

[John Cuomo, President & CEO at VSE]

This sets the stage for future partnership opportunities. Finally, following the fleet divestiture, we completed a full cost review to align with our single segment aviation model. We're now operating from a leaner base and are in the final stages of transition work, which will be completed before year end. I will now provide an update on the current market environment for our business. The second quarter began with some softness in the aftermarket, driven by uncertainty around tariffs.

[John Cuomo, President & CEO at VSE]

However, activity rebounded quickly in May and June, as OEMs and customers regained confidence and swiftly adjusted to the new environment. Looking ahead to the 2025 and 2026, we anticipate continued strength in the aviation aftermarket, specifically in the engine segment. To capitalize on this growth, we made targeted investments, both organically and through acquisitions, engine part distribution and repair services. The engine aftermarket remains one of the fastest growing and most supply constrained parts of the market. As of the second quarter, engine related MRO and distribution revenue represents greater than 50% of total VSE aviation revenue.

[John Cuomo, President & CEO at VSE]

Let's now move to slide five to discuss our financial performance. BSE delivered another outstanding quarter, generating record revenue, record profitability, and positive free cash flow, supported by solid execution and continued robust end market activity. In the 2025, consolidated revenues increased 41% to $272,000,000, driven by strong financial performance from our core aviation distribution and MRO businesses and contributions from recent acquisitions. Aviation adjusted EBITDA increased by 48% in the quarter to a record $47,000,000, 17.1% of revenue, and consolidated adjusted EBITDA increased 52% to $43,000,000 16% of revenue. These record results, driven by a balanced mix, strong pricing, solid execution on distribution program awards, a focus on higher margin product lines, continued success in our OEM license manufacturing program, and contributions from recent acquisitions, including earlier than planned synergy capture.

[John Cuomo, President & CEO at VSE]

Adjusted net income of $20,000,000 and adjusted net income per diluted share of 97¢ increased one hundred and forty nine percent and one hundred and six percent, respectively. And finally, we completed the second quarter with a strong balance sheet, achieving an adjusted net leverage ratio of 2.2 times following the sale of the fleet business and the acquisition of Turbine Weld, providing us with significant financial flexibility to support our strategic growth initiatives. I will now turn the call over to Adam to discuss the details of our financial performance.

[Adam Cohn, CFO at VSE]

Thank you, John. Let's turn to slide six of the conference call materials.

[Adam Cohn, CFO at VSE]

I will provide an overview of our second quarter consolidated financial performance. VSE generated $272,000,000 of revenue in the quarter, an increase of 41% over the same period in the prior year. Adjusted EBITDA increased 52% to $43,000,000 compared to the 2024. Adjusted EBITDA margin was 16% in the quarter, an approximate 110 basis point improvement over the prior year period. Adjusted net income was $20,000,000 and adjusted diluted earnings per share was $0.97 an increase of 149106% respectively over the prior year period.

[Adam Cohn, CFO at VSE]

Now turning to slide seven, I will review our Aviation segment's record second quarter performance. VSE Aviation generated $272,000,000 of revenue in the quarter, an increase of 41% over the prior year period. More specifically, distribution revenue increased 50% in the period driven by strong operational execution of new and existing programs, product line expansion, specifically parts supporting our OEM license manufacturing program, market share gains and contributions from the KELLSTRUM acquisition. MRO revenue increased 27% in the quarter, driven by increased repair activity on higher value technical repair capabilities from our avionics, fuel, pneumatics and hydraulics MRO centers of excellence, the addition of new repair capabilities, strong end market demand and contributions from the Turbine Weld acquisition. Excluding the impact of recent acquisitions and including TCI results in the quarter, organic Aviation segment revenue increased by approximately 13% in the second quarter as compared to the prior year.

[Adam Cohn, CFO at VSE]

Aviation adjusted EBITDA increased by 48% in the quarter to a record $47,000,000 or 17.1% of revenue. Adjusted EBITDA margin improved 80 basis points year over year, driven by favorable pricing and product mix, higher margin aftermarket sales from our OEM license manufacturing program, lower contributions from our less profitable USM business, and increased in sourcing of repair work. We're also beginning to realize cost synergies 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 global recession.

[Adam Cohn, CFO at VSE]

We are reaffirming our full year 2025 Aviation segment revenue growth guidance range of 35% to 40. This growth is supported by full year contributions from recent acquisitions, partially offset by our strategic decision to narrow our USM focus to higher margin product lines, aligned with our in house repair capabilities and new part distribution portfolio. We are raising our 2025 full year Aviation adjusted EBITDA margin guidance to the high end of the previously provided range to 16.5% to 17%. This increase reflects a higher margin product mix and lower contributions from our less profitable USM business. In addition to our formal guidance commentary, I will now provide some additional modeling items.

[Adam Cohn, CFO at VSE]

Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, are anticipated to be between 14,000,000 and $15,000,000 excluding stock based compensation for the full year. Stock based compensation, which beginning in Q1 excluded from adjusted EBITDA, is expected to be $3,000,000 per quarter for the remainder of the year, split relatively evenly between aviation and corporate. Depreciation and amortization in total are projected to be approximately $38,000,000 to $40,000,000 for the full year 2025. Interest expense is expected to be approximately 26,000,000 to $28,000,000 for the full year. And finally, effective tax rate is expected to be approximately 25% for the remaining two quarters or a full year blended rate of 22%.

[Adam Cohn, CFO at VSE]

Turning to slide 10 to review our balance sheet. At the end of the second quarter, our total net debt outstanding was $362,000,000 Cash and availability under our $400,000,000 credit facility was $333,000,000 During the second quarter, we generated approximately $6,000,000 of free cash flow, driven by disciplined working capital management and record operating results. This was an improvement of approximately $28,000,000 versus 2024. We are expecting to generate improved free cash flow in the second half of the year. Our adjusted net leverage ratio was 2.2 times in the second quarter, which includes the impact of the Fleet business sale and the acquisition of Turbine Weld.

[Adam Cohn, CFO at VSE]

With that, I will turn it back over to John.

[John Cuomo, President & CEO at VSE]

Thanks, Adam. I'd like to conclude our prepared remarks by revisiting our 2025 priorities on Slide 11. First, following the sale of our fleet business, we completed a full review of our corporate structure and cost base. We're now aligned with our aviation focused strategy and well positioned to scale.

[John Cuomo, President & CEO at VSE]

Cynote's transition work is underway and on track to be completed by year end. Second, we're expanding repair capabilities and increasing capacity across both legacy operations and recent acquisitions to meet strong demand and drive growth at our MRO centers of excellence. Third, we're prioritizing the integration of CCI and Kaelstrom to unlock efficiencies and enhance customer value. We've also launched integration planning for Turbine Weld and are investing to meet growing demand. Fourth, we've begun capturing synergies from recent acquisitions to support margin expansion.

[John Cuomo, President & CEO at VSE]

Phase one of the Kaelstrom integration is already delivering a significant portion of the $4,000,000 in identified cost savings, as evidenced by our strong second quarter margin performance. Next, we continue to make steady progress on implementing our OEM licensed fuel control manufacturing capabilities. And finally, we remain focused on building the organic growth pipeline, deepening OEM partnerships, and expanding our market presence to support 2026 and beyond. I'll close by thanking our shareholders, customers, and supplier partners for their continued trust and support. And most importantly, thanks to the BSE team for their outstanding record second quarter performance.

[John Cuomo, President & CEO at VSE]

Operator, we're now ready to open the line for questions.

[Operator]

Certainly. Our first question comes from the line of Ken Herbert with RBC Capital Markets.

[Ken Herbert, Managing Director at RBC Capital Markets]

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

[John Cuomo, President & CEO at VSE]

Good morning, Ken.

[Ken Herbert, Managing Director at RBC Capital Markets]

Hey, John, maybe just to follow-up on your comments on the organic growth. Looks like the guidance implies, call it, low to mid teens organic growth in the back half of the year, and you seem to have done a really nice job here of offsetting some of the USM growth headwinds. Can you just talk about what you're seeing on the commercial transport versus business jet side or specifically how we think about second half and what you're seeing by some of your end markets?

[John Cuomo, President & CEO at VSE]

Sure. Appreciate the question. Yeah, I mean, think I wanted to be a little clear because I didn't want anyone to get a concern that organic growth was slowing. But we're really in a position as we have done in the first half of the year to continue to reposition that used serviceable material business to something different, which is a bit of a decline in top line. But when we look at the markets, I'd say, let me break it down first, engine and non engine.

[John Cuomo, President & CEO at VSE]

Both B and GA and commercial, the engine markets continue to be the most robust parts of the market for us specifically. And they continue to outperform the component side of our business. That's both in distribution and MRO. Then when you look at it by end markets, the commercial end markets are stronger than the business and general aviation market. That market has settled nicely.

[John Cuomo, President & CEO at VSE]

The B and G market is nicely in that kind of 4% to 6% range, where we're seeing the commercial end markets probably naturally without organic growth in that high single digits to low double digits, and then a little bit of organic growth pushing us into double digits on the commercial side. So you kinda balance it out, and, know, you get to a place where our natural organic growth for our business being 50% commercial, 50% b and g a, about just over 50% engine type products versus com component products, putting it in a position where it's about kind of mid to high single digits before any share gain.

[Ken Herbert, Managing Director at RBC Capital Markets]

Very helpful. And can you provide any more detail on the sort of the one VSE? And I guess specifically, what the impact could be maybe this year, but more importantly, 2627 as we think about the adjusted EBITDA margins. Is there a significant cost opportunity here or how are you thinking about the potential there?

[John Cuomo, President & CEO at VSE]

Yeah. I I mean, I I'd say that we're you know, as you could see by the margins that we posted in the quarter, the the progress on the acquisitions and the integrations is is, you know, ahead of ahead of schedule. So we built into our plans, margin opportunity and definitely felt that there was opportunity to continue to scale margins. I would say that we continue to be ahead of our plans. So I wouldn't get too far ahead in terms of margin opportunity, But we do see continued opportunity out in the market as we integrate.

[John Cuomo, President & CEO at VSE]

But we've already captured a number of synergies, both on our fuel control program, our initial $4,000,000 that we announced with Kaelstrom. A significant portion of that has been realized in the first half of the year as well.

[Ken Herbert, Managing Director at RBC Capital Markets]

Thanks, John. Nice cash generation in the quarter as well. I'll pass it back there.

[John Cuomo, President & CEO at VSE]

Thanks, Ken. Appreciate it.

[Operator]

Thank you. And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

[Sheila Kahyaoglu, Aerospace, Defense & Airlines Equity Research at Jefferies]

Good morning, John and Adam, and thank you for the time. Maybe just on that last point Ken just made on cash, great cash generation. I think you called out improved free cash flow in the second half. So given $57,000,000 of generation, just given the generation in the first half, how do we think about the sustainability of free cash flow and any puts and takes on working capital we should consider?

[Adam Cohn, CFO at VSE]

Yes, sure. So yes, it was a good solid cash quarter, as you mentioned, Sheila, generated about $6,000,000 in the quarter. We have seen significant improvement year over year. So if you look over the first six months versus last year, I think we've improved by about $65,000,000 so pretty significant. And as you know, there's some working capital seasonality in the business.

[Adam Cohn, CFO at VSE]

So we generally see a larger use in the first half of the year, and that sort of neutralizes in the back half of the year as we lap our inventory purchases. So we are expecting to see strong improvement through the back half of the year. I would say that we are seeing improvement in our working capital profile, especially just given the last few acquisitions, including Kaelstrom, they're less working capital intensive businesses. So we're just seeing some natural improvement. But there's definitely a focus on continuing to generate strong free cash flow.

[Sheila Kahyaoglu, Aerospace, Defense & Airlines Equity Research at Jefferies]

Great. And maybe if we could talk about Telstra for a little bit, it's been a part of DSE for now, over six months, what are the biggest positives? And, John, you mentioned, you know, potentially shifting around the USM business, which you've always called out to something different. What does that something different mean?

[John Cuomo, President & CEO at VSE]

Yeah. I appreciate the question. I mean, first, it makes me feel great about the diligence. Everything is relatively as we had thought the business would be. The distribution business is as strong or stronger than we had anticipated.

[John Cuomo, President & CEO at VSE]

The team that manages that is quite strong as well. And we're really pleased to see what they have done in the first half of the year and the opportunities as we move forward as well. The Vortex business, which is their MRO business, services business, continues to perform outstanding ly well. And we plan to get that integrated onto our systems, hopefully before year end. And then I'd say for the USM business, we wanted to let it run for about six months and just watch how the business played.

[John Cuomo, President & CEO at VSE]

It was a little bit too opportunistic in terms of parts trading for me. So where we're moving the business and shifting the business is we look at our businesses bringing together our capabilities and insourcing as much work as we possibly can. So think of it more of a new used and repair model, where we're supporting our new part distribution with a used USM option, or we're supporting our repair capabilities with a used option, or we're working directly with large airlines on some type of asset management program. So that's what our USM kind of strategy, which we've just launched and put a new leader in place, and that's what that'll look like. And we'll share more details as we get into the back end of the year.

[John Cuomo, President & CEO at VSE]

But expect to see a little bit of pruning on the revenue side there because we want to get away from the transactional parts trading, and we also want to focus on the right margin profile for our business.

[Sheila Kahyaoglu, Aerospace, Defense & Airlines Equity Research at Jefferies]

Great. Thank you so much for that color.

[John Cuomo, President & CEO at VSE]

Thank you.

[Operator]

Thank you. And our next question comes from the line of Noah Levitz with William Blair.

[Noah Levitz, Equity Research Associate at William Blair]

Awesome. John, Adam, Michael, good morning. Thanks for taking my question.

[John Cuomo, President & CEO at VSE]

Good morning, Noah.

[Noah Levitz, Equity Research Associate at William Blair]

To start off on margins, you touched a little bit on it earlier, but we were under the impression that Q1 margins were typically the greatest and then Q2 and Q3 were a bit lower before improving back in the fourth quarter.

[Noah Levitz, Equity Research Associate at William Blair]

Obviously, this quarter's aviation EBITDA margins were exceptional at 17.1%. So given fuel control program receiving the full margin contribution, KELstrom cost synergies moving faster than expected, and then also driving down some of that lower margin USM work, what's preventing you from the back half of the year maintaining if not beating that seventeen months?

[John Cuomo, President & CEO at VSE]

Adam, you want kick off or you want me to start? Go ahead.

[Adam Cohn, CFO at VSE]

Yeah, I'll take it. It's a good question. So I would say that the second quarter margins were very strong.

[Adam Cohn, CFO at VSE]

I think Kaelstrom synergy capture had a large part, sort of capturing those maybe earlier than we initially anticipated. So that really drove some of the strong margins in the second quarter. If you look back historically, there is definitely seasonality in our margins and it really goes back to the seasonality in the distribution business. We tend to see higher margins in the first half of the year from basically lower cost of inventory. And so that's really what's driving sort of that first half to second half.

[Adam Cohn, CFO at VSE]

And maybe initially, expected to capture more of the synergies in the second half of the year from KELLstrom, but that sort of accelerated up a quarter. So that's driving some of the differences from what we initially anticipated.

[Noah Levitz, Equity Research Associate at William Blair]

Great. And then with leverage down to 2.2 times, can you talk a little bit about the M and A pipeline going forward? And then in particular, you've had a Honeywell fuel control deal for a while now, and it seems like those style of programs are very, very strong on the margin side. So are there other versions of that in the pipeline as well? Thanks.

[John Cuomo, President & CEO at VSE]

Yes, I appreciate the question. I'd say that the M and A pipeline is very, very healthy. As we look at the back half of 2025 and into 2026, we have a number of kind of active or soon to be active things in the market. It's always difficult to forecast something like that because as you dive in, it's either you're all in or you're all out. So we'll see how that plays out, but we do have a pretty robust and healthy pipeline.

[John Cuomo, President & CEO at VSE]

And obviously it's a place we plan to use our balance sheet to support that inorganic growth. With regard to kind of our licensed manufacturing program, we really need until the first quarter of next year to be perfect on our fuel control execution. So we are although we're excited about the program and the growth opportunities it offers, because it's our first program and it's something very unique that we haven't done before, we're kind of looking at it with more of a longer game focus. So I'd say don't expect anything there, at least in the next twelve months. So hope maybe back end of next year as we move into 2027, we'll look at growth opportunities and what the market looks like there for us.

[Noah Levitz, Equity Research Associate at William Blair]

Great. Thanks and congrats on the quarter.

[John Cuomo, President & CEO at VSE]

Thank you, Noah. Appreciate it.

[Operator]

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities.

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

Hey, everyone. Let me add my congratulations. Wanted to follow-up just on the Kaelstrom synergies. It sounds like you're realizing those a little bit ahead of expectations. And wondering where are you seeing the remaining opportunities for efficiencies, synergies, leveraging scale as you fully integrate recent acquisitions?

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

Just wondering what the focus is there for second half.

[John Cuomo, President & CEO at VSE]

Yes, I mean, I appreciate the question. Synergy capture is easy and complicated at the same time. There's four real levers, right? There's growing revenue while keeping your SG and A relatively flat. There's an element of price.

[John Cuomo, President & CEO at VSE]

There's an element of product cost. And then there's an element of operating expenses. So each deal that we do, when we're going through our deal modeling and our diligence, kind of we try to capture where we think the synergy opportunities are and what the very specific actions are that are going to be tied to each. I would say that a lot of the cost synergies have been captured already on this deal. So really what we look at is more in sourcing, more on the product margin side or opportunities to grow top line while kind of leveraging that operating expense base.

[John Cuomo, President & CEO at VSE]

So the SG and A as a percentage of sales will start to decline and generate stronger returns for the business. So I'd say it's more on the top side of the income statement than the bottom side as we continue to integrate.

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

Okay, fair enough. And then just kind of a follow-up, wondering what your latest thinking is on opportunities for the Honeywell business?

[John Cuomo, President & CEO at VSE]

Yeah, I mean, like I just said to Noah, of anything we're doing, that is probably the most precise program. It's our first manufacturing program. It's a fuel control that's the PT6 engine for Pratt Canada and the Rolls Royce two fifty. But we want it to be absolutely perfect. We have work to do through the first quarter to continue to get kind of final approvals and it to be our control without any interference from the original OEM.

[John Cuomo, President & CEO at VSE]

So we do not plan to work on new programs until that's complete. So, I would tell you, probably the first quarter, I can give you a better strategy update once we get the full implementation done on this program. It's performing very, very well. We've got to clean up some supply chain issues that existed when we acquired the program, and that's in process. Full financials are embedded in everything that we're doing today.

[John Cuomo, President & CEO at VSE]

So very, very pleased with the performance of the program. We just need a little bit of time.

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

Okay. Fair enough. Thanks for taking my questions.

[John Cuomo, President & CEO at VSE]

Thank you.

[Operator]

Thank you. And our next question comes from the line of Josh Sullivan with The Benchmark Company.

[Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC]

Hey, good morning.

[John Cuomo, President & CEO at VSE]

Hey, Josh.

[Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC]

John, can you just expand on the hydraulics opportunity? Maybe how large is that market? Why are you maybe the right partner to leverage capabilities there?

[John Cuomo, President & CEO at VSE]

Yeah, I think, I mean, it's a good question to say how large it is because I laugh because it's the data that I'm trying to get my arms around myself because you look at when you have kind of an unapproved market, you don't have data. So I would guess it's somewhere between 50 and 100,000,000, but I'm giving you a very, very wide range because it's really difficult to capture kind of what the unauthorized shops are doing. For us, I think there's a few things. Number one is we're really able to drive kind of faster turnaround times and our level of quality in supporting OEM authorized work is very, very core to our strategy. So the second thing is we partner in unique ways.

[John Cuomo, President & CEO at VSE]

It's not a one size fits all for an OEM. So we can kind of customize and really listen to where the OEM needs us and where they don't. So starting to understand how this product is performing, where there's new parts, where there's used parts, and again, the MRO piece plays in, and how can we bring all of that together to support this OEM. So relationship is strong. We've been able to capture business back that, was in an unauthorized shop prior and, listened to the OEM of some core customers that they wanted us to focus on and bring that work in to drive some near term success. So we're really pleased with the work so far.

[Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC]

Got it. And then maybe this ties into your USM strategy, but you noted engine side continues to be stronger than the component side. We've obviously heard that in other areas of the industry as well. But just curious on thoughts on the cycle for when that might slip where component demand would outpace the engine side. And I know your recent M and

[Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC]

A has really been focused on the engine side, but just trying to get some perspective on that long term industry cycle.

[John Cuomo, President & CEO at VSE]

Yeah, it's a great question. And so, my answer is more opinion than I would say fact and database. But where we don't see kind of an inflection point where that shifts. We see, at least for the near term and the midterm, the engine aftermarket, again, both for business and general aviation and commercial continuing to outpace kind of the component side. The majority of that is really comes down to supply chain and MRO capacity.

[John Cuomo, President & CEO at VSE]

So, you know, if I, and if you go visit my engine related MRO shops and I can add capacity, I can fill that with work very, very quickly. We're still seeing more supply, more demand out there than there is supply in terms of shop floor space to do work. So I don't see that slowing down in kind of the next three years or so. And that's probably as far as we look out.

[Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC]

Got it. Thank you for the time.

[John Cuomo, President & CEO at VSE]

Thanks, Josh.

[Operator]

Thank you. And our next question comes from the line of Michael Ciarmoli with Truist Securities.

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

Hey, morning guys. Nice results. Thanks for taking the question. Hey, just maybe back to Sheila's question on the USM, moving away from that maybe transactional speculative, should we think about some of this new focus being accretive to your repair margins, especially as we think about sort of overall engine repairs? Are you going to be out there looking for certain USM parts to drive down repair costs?

[John Cuomo, President & CEO at VSE]

Yeah. I I'd love to answer the question next quarter or the quarter after, because we're just in the beginning of launching the strategy. But it's a great question, and it's exactly how we're looking at it. So I don't want to say unequivocally yes, until I know that we can execute on the strategy. But I would say it's a couple of things.

[John Cuomo, President & CEO at VSE]

Number one is how do you, if you think about when something is broken, the question is do you need a new part? Do you need a used part? Or do you need a repair? And bringing those three together so that you, again, looking at it through the customer's lens, rather than them shipping a part to us into one of our MRO shops, we come back with a quote on price and lead time, turnaround time, and they basically say it's beyond economical repair and then the numbers don't work. And if we don't have a rotable pool or a used USM pool, we're not in a position to offer them an alternative at that point in time.

[John Cuomo, President & CEO at VSE]

So tying those two together, number one, is extremely customer friendly, and we think that's a very good strategy for us. The second piece is exactly where, you know, your initial comments are, is how do we continue to look at, for lack of a better word, insourcing our own work so that we can continue to focus on margin expansion. We've already taken some of the Vortex work, which is the Kelsrom services business, and we're insourcing that into our TCI component shop up in Connecticut. So looking at those types of opportunities within the business continues to be a priority in terms of margin expansion.

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

Got it. Got it. And then, maybe if you could just parse out a little bit. I think I heard 50% revenue exposure to engines, maybe how that breaks out between commercial BGA and should we think about, you talked about more alignment with some of the newer engines like LEAP. Should we look at kind of the LEAP shop visit forecast as a good proxy for for your engine growth in commercial going forward?

[John Cuomo, President & CEO at VSE]

Yeah. I mean, I think, first, Michael, did we break it did we break out the data on on the market segments when you did the engine work?

[Michael Perlman, VP - IR & Treasury at VSE]

No, we didn't give that level of granularity.

[John Cuomo, President & CEO at VSE]

Okay. Yes. But Mike, we'll try to get you some of that data for another quarter to get to the data around that question. But EU, it's north of 50% in terms of engine work, and that's both on the MRO side and on the distribution side of the business compare. And it's I would say it's probably not very different in our two market segments, but we'll get some data around it.

[John Cuomo, President & CEO at VSE]

The second question was regarding to LEAP. I would say it was a little early to use that data for trends for us. We are still more on legacy engines. We are focused on kind of continuing to evolve that. But if you look at our core Pratt and Whitney Canada, our Pratt and Whitney US, GE, Safran type engines, we're probably heavier on kind of legacy engines today.

[John Cuomo, President & CEO at VSE]

And continuing to focus on evolution to more newer type engines.

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

Got it. Got it. And then just last one, Adam, do you have a target leverage ratio for year end?

[Adam Cohn, CFO at VSE]

Mean, given where we are right now, Mike, at 2.2 times with the EBITDA growth and free cash flow generation, we should be south of two times by end of the year. We didn't give a specific target, but we should be lower than two times.

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

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

[John Cuomo, President & CEO at VSE]

That's a good number. I don't know if I ever had that number before.

[Operator]

Thank you. And our next question comes from the line of Ken Herbert with RBC Capital Markets.

[Ken Herbert, Managing Director at RBC Capital Markets]

Hey, John. Appreciate the follow-up. Just wanted to ask the engine question maybe a slightly different way. Do you see better opportunity today as you look to build out that exposure on maybe the MRO side? It sounds like it may be relative to distribution as you think about engine and specifically sort of the organic pipeline.

[Ken Herbert, Managing Director at RBC Capital Markets]

And then as part of that, does your existing relationship on the engine side in particular with Pratt, does that preclude you at all from working with other engine OEMs on the distribution side?

[John Cuomo, President & CEO at VSE]

No, mean, so first, more of our direct engine OEM distribution businesses on business in general aviation engines than it is on the commercial side. Our commercial distribution work that we do that's supporting engines is less engine OEM work, and it's more other OEMs that are supporting that engine. So I think we have opportunity to support far more commercial distribution opportunities. And then with regard to OEMs, we're very, very OEM centric. And in our MRO shops, we have centers of excellence that support different OEMs, and we don't see working with one precluding us from an opportunity to work with another.

[Ken Herbert, Managing Director at RBC Capital Markets]

Great. Thank you.

[Operator]

Thank you. And I'm showing no further questions. So with that, I'll now turn the call back over to President and CEO, John Cuomo, for any closing remarks.

[John Cuomo, President & CEO at VSE]

Thanks everybody for joining our call today. We appreciate the the continued support of the story. Have a great Thursday.

[Operator]

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

Participants

Executives

• Michael Perlman, VP - IR & Treasury
• John Cuomo, President & CEO
• Adam Cohn, CFO

Analysts

• Ken Herbert, Managing Director at RBC Capital Markets
• Sheila Kahyaoglu, Aerospace, Defense & Airlines Equity Research at Jefferies
• Noah Levitz, Equity Research Associate at William Blair
• Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co
• Josh Sullivan, Equity Research Analyst - Industrial Technology, Aerospace & Defense at The Benchmark Company LLC
• Michael Ciarmoli, MD - Aerospace & Defense Equity Research at Truist Securities