VSE Corporation

Good day, and thank you for standing by. Welcome to the VSE Corporation's third quarter 2025 results conference call. At this time, all participants are in the listen-only mode. 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, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you. Welcome to VSE Corporation's third quarter 2025 results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohn, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today's discussion contains forward-looking statements about future business and financial expectations. actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including those described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We are using non-GAAP financial measures in our presentation. Where available, the appropriate GAAP financial reconciliations are incorporated into our presentation and posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. With that, I'd like to turn the call over to John.

Thank you, Michael, and thank you for joining us today for VSE's third quarter 2025 conference call. We appreciate your flexibility in joining us on short notice. We advanced our earnings call to provide timely and detailed information about today's announced acquisition of Arrow 3. Before we begin the presentation, I want to share a brief update on the third quarter of 2025. I'm proud to report that VSC delivered another exceptional quarter, achieving record revenue and record profitability while continuing to improve free cash flow generation. The financial results we are sharing today highlight the strength of our markets, the resilience of our aviation aftermarket platform, and the disciplined execution of our 2025 operating plan. At the same time, our team continues to execute on our strategic objectives, integrating recent acquisitions, capturing synergies, advancing OEM license manufacturing, expanding MRO capabilities, and growing our organic pipeline. Let's now begin on slide three of our presentation. We are pleased to announce that VSE has signed a definitive agreement to acquire Arrow 3, a diversified global maintenance repair and overhaul service provider and parts distributor, offering a comprehensive suite of wheel and brake aftermarket solutions to support commercial, business, and general aviation operators. Aero3 is a global market leader built around three complementary business units. The first and largest is wheel and brake MRO services, which represents approximately 75% of Aero3's revenue. This business operates nine strategically located repair and overhaul facilities across the US, Canada, and the UK, providing proximity to key customer operations, reduced logistics costs, and industry-leading turnaround times and performance. The second business unit is distribution, accounting for roughly 20% of revenue. This segment provides OEM-authorized distribution of wheel and brake components further expanding VSE's position as a trusted OEM partner. And third is proprietary solutions, which represents approximately 5% of revenue. This unit focuses on engineering and production of proprietary custom-designed aircraft components, enhancing VSE's exposure to higher-margin, differentiated proprietary products. Total cash consideration for the business is $350 million, subject to working capital adjustments. This transaction is expected to close in the fourth quarter of 2025, subject to regulatory approvals and customary closing conditions. Arrow 3 generated approximately $120 million of revenue during the trailing 12-month period ending August 2025, with strong adjusted EBITDA margins in excess of 20%. And year to date, on a pro forma basis, the acquisition of Arrow 3 enhances VSC's consolidated adjusted EBITDA margin by more than 50 basis points. The acquisition is expected to be funded through anticipated proceeds from an equity financing and, if appropriate, borrowings under our existing credit facility. Our intent is to maintain leverage consistent with or below current levels ensuring we maintain the balance sheet flexibility to execute on potential future M&A opportunities and to support organic growth investments. As we look ahead, our 2026 M&A and organic pipelines remain robust, and we remain confident in our ability to continue to capitalize on both to drive long-term growth and margin expansion. Let's now move to slide four. Aero3 operates a highly attractive and well-diversified business mix characterized by minimal customer concentration and a deep network of blue chip aircraft operators with most top customers supported by long-term agreements. They support a broad and deep range of aircraft coverage with an intentional focus on regional and narrow body platforms, the fastest growing and most utilized aircraft globally. They support a global customer base that includes a leading presence in the US, Canada, and Europe. Aero3 is a strong strategic fit with VSC's core focus areas, increasing our exposure and market leadership in the global wheel and brake aftermarket. First, Aero3 builds on our 2023 acquisition of Dessert Aerospace, a leading tire, tube, and battery distributor with two wheel and brake MRO facilities. By combining Desert Tire's expertise with Arrow 3's wheel and brake MRO capabilities, the combined business creates a unified solution for fleet operators. The integrated facility footprint enables stronger support through national programs while seamlessly incorporating tire repair and replacement into wheel and brake aftermarket services. This will drive strong sales synergies as we bring our businesses together. Second, Arrow 3 expands VSE's global MRO footprint and capabilities with the addition of nine wheel and brake repair and overhaul facilities located across the United States, Canada, and the United Kingdom, supporting both current and new customers for VSE. Third, Arrow 3 deepens VSE's OEM alignment. The company supports all major wheel and brake OEMs and strengthens VSE strategy as a trusted OEM-aligned partner across aviation services. Fourth, Arrow 3 enhances VSE distribution capabilities with the addition of new authorized OEM product lines, enabling VSE to offer global customers expanded, fully integrated aftermarket repair and parts solutions. Fifth, Arrow 3's proprietary solutions business accelerates the growth of differentiated high-margin products, enhancing our engineering and manufacturing capabilities, and expanding our intellectual property-driven portfolio. And finally, and most importantly, Arrow 3 adds experienced leadership and expertise in this market. The Arrow 3 leadership team, led by Daniel Bell, will remain with the business and continue driving growth and operational excellence across VSE's entire global wheel and brake group. As you can see, we're incredibly excited to welcome Arrow 3 to the VSC family. With this acquisition, we're taking another major step forward, creating a business built around three powerful complementary capabilities, engine accessories and components, component repair, including hydraulics, pneumatics, and avionics, and now expanding wheel and brake services. Across each of these areas, we'll bring together MRO, new and used part distribution, and proprietary solutions to deliver a differentiated high-value experience for our global aviation aftermarket customers. It's a combination that truly positions VSE for the next phase of growth. With each VSE acquisition, we've strengthened our market position and continue to differentiate ourselves through how we integrate businesses and drive synergies in revenue and margin. We've been successful not only in acquiring high quality businesses, but in bringing them together to deliver above market growth and meaningful synergies. You can see that success evidenced in our recent and ongoing integration of TCI and Kellstrom. We are successfully integrating systems and organizations, sharing best practices, and creating cross-selling and new business opportunities, all of which are reflected in our 2025 organic revenue growth and EBITDA expansion. We look forward to continuing that momentum in capturing the synergy and growth opportunities as Arrow 3 becomes part of the VSE family. Let's now continue onto slide five and review our recently announced organic growth initiatives, program awards, and operating plan updates. First, KELS from Aerospace, led by Executive Vice President Daniel Adansky, extended its exclusive global distribution agreement to both Ametek sensors and fluid management systems and Hughes Tritler product lines, including sensors and control line replaceable unit and piece parts, oil coolers, and heat exchangers, supporting a broad range of engine platforms. Second, we expanded our strategic collaboration with Eaton and launched a used serviceable material distribution program. Through this program, we will acquire and manage as removed material and finished overhaul components, improving the availability of rotable and exchange assets available to the market, while building upon our previously announced hydraulic systems repair agreement. Third, we were awarded a global distribution agreement with Bridgestone Aircraft Tire. This partnership expands market access to Bridgestone Aircraft Tire's portfolio of new and retread tires supporting commercial aviation operators across Boeing, Airbus, and regional aircraft platforms. Fourth, we signed a new long-term agreement to provide repair and overhaul services for engine fuel units powering the Navy's TH-73 Brasher helicopter fleet. This agreement expands VSE Aviation's MRO offering into direct defense sustainment support. Finally, we partnered with Lumen Ultra to distribute bug count fuel and innovative microbial contamination fuel test servicing the aerospace market. In addition to our new business wins and contract renewals, the third quarter represented a strong execution quarter for our operating plan. We continue to make meaningful progress on our acquisition integrations, and our OEM license program implementation is advancing towards completion. Our successful integration and program implementation efforts combined with ongoing investments in new capabilities and capacity have driven a notable improvement in margins across the business. I will now provide a brief update on the current market environment, which continues to benefit from strong aftermarket fundamentals. The aviation aftermarket remains robust, supported by strong passenger demand, high fleet utilization, and a slow pace of retirement, factors that continue to drive demand for maintenance services. Within commercial aviation, demand remains specifically strong in the engine segment, driven by an aging global fleet, ongoing supply chain constraints, and limited new aircraft availability. The business and general aviation aftermarket also remains healthy, supported by steady activity in North America and Europe, growth in emerging markets, and solid customer demand. Looking ahead, we expect continued strength across the aviation aftermarket through 2026. Organic growth rates, however, are likely to moderate slightly as we cycle through several years of exceptional organic growth performance, reflecting a healthy and sustainable stabilization in the aftermarket. Let's now move to slide six to discuss our financial performance. Once again, the VSE team delivered an outstanding quarter, generating record aviation revenue and record aviation margins, all while driving stronger and improved free cash flow. In the third quarter of 2025, our consolidated revenues increased 39% to $283 million, driven by execution of new and existing distribution programs, expanded MRO capacity, the addition of new product lines and repair capabilities, and contributions from recent acquisitions, all supported by solid and market demand. Consolidated adjusted EBITDA increased 58% to $47 million, or 16.7% of revenue, while aviation adjusted EBITDA increased by 51% in the quarter to a record $50 million, or 17.8% of revenue. Our record adjusted EBITDA was driven by a higher mix of proprietary and higher value aftermarket products and repair work, increased insourcing synergies, sales from the OEM licensed manufacturing program, and the earlier than planned realization of cost and margin synergies from recent acquisitions. And finally, we ended the third quarter with a stronger balance sheet, improving our adjusted net leverage ratio to two times driven by solid free cash flow generation and improved working capital management. I will now turn the call over to Adam to discuss the details of our financial performance.

Thank you, John. Let's turn to slide seven of the conference call materials, where I will provide an overview of our third quarter consolidated financial performance. VSE generated $283 million of revenue in the quarter. an increase of 39% over the same period in the prior year. In the third quarter, we recorded a non-cash fair value adjustment of $23 million related to the earn-out receivable from the divestiture of our non-core fleet business based on updated results and forecasts provided by the buyer. This charge only impacted consolidated operating income and had no effect on our aviation segment results. Consolidated adjusted EBITDA increased 58% to $47 million compared to the third quarter of 2024. Adjusted EBITDA margin was 16.7% in the quarter, an approximate 200 basis point improvement over the prior year period. Adjusted net income was $20 million and adjusted diluted earnings per share was 99 cents, an increase of 111% and 87%. respectively, over the prior year period. Now turning to slide eight, where I will review our aviation segment's record third quarter performance. VFC aviation generated $283 million of revenue in the quarter, an increase of 39% over the prior year period. Distribution revenue increased 49% in the period, driven by balanced operational execution of new and existing programs, product line expansion, market share gains, and strong contributions from the Kellstrom acquisition. MRO revenue increased 25% in the quarter, driven by higher margin product mix, the addition of new repair capabilities, an increase from insourcing repair activity, strong end market demand, and contributions from the turbine weld acquisition. Excluding the impact of recent acquisitions, Organic aviation segment revenue increased by approximately 10% in the third quarter as compared to the prior year period. Aviation adjusted EBITDA increased by 51% in the quarter to a record $50 million or 17.8% of revenue. Adjusted EBITDA margin improved 140 basis points year over year, driven by an increased focus on higher margin product and repair activity, including a refinement of our USM strategy, an increase from insourcing activity, favorable mix, higher margin aftermarket sales from our OEM licensed manufacturing program, and the continued realization of synergies from recent acquisitions. Let's now turn to slide nine of our presentation materials to review our aviation segment guidance for the full year 2025. Our guidance assumes current market conditions and no significant changes in tariff or macroeconomic environment. We are increasing full year 2025 aviation segment revenue growth guidance to 38 to 40% from prior guidance of 35 to 40%. We expect fourth quarter revenue to be flat to slightly down sequentially compared to the third quarter reflecting normal seasonality in our business. We are raising our 2025 full-year aviation adjusted EBITDA margin guidance to 17 to 17.25% from our prior guidance of 16.5 to 17%, driven by strong year-to-date margin performance. The updated guidance assumes lower margin in the fourth quarter, which reflects normal seasonal trending for our business. The earlier quarters benefit from selling lower-cost inventory purchased in the prior year. In addition to our formal guidance commentary, I want to provide some additional modeling details for the fourth quarter. Adjusted unallocated corporate costs, which include incremental stranded costs associated with the fleet divestiture, are anticipated to be approximately $4 million in the fourth quarter. Stock-based compensation, which beginning in Q1 is excluded from adjusted EBITDA, is expected to be approximately $3 million, split relatively evenly between aviation and corporate. Depreciation and amortization in total are projected to be approximately $11 million for the fourth quarter. Interest expense is expected to be approximately $5 million for the fourth quarter. And finally, our effective tax rate is expected to be approximately 25% in the fourth quarter. Turning to slide 10 to review our balance sheet. At the end of the third quarter, our total net debt outstanding was $347 million and cash and availability under our $400 million revolving credit facility was $347 million. During the third quarter, we generated approximately $18 million of free cash flow driven by record operating results and disciplined working capital management. This was an improvement of approximately $14 million versus Q3 of last year and a nearly $80 million improvement year to date. we are expecting to once again generate strong free cash flow in the fourth quarter. And finally, our adjusted net leverage ratio improved to two times at the end of the third quarter from 2.2 times in the second quarter. With that, I will turn it back over to John.

Thanks, Adam. I'd like to conclude our prepared remarks by providing a brief update on our fourth quarter 2025 priorities. Integration. All projects remain on or ahead of schedule, and our synergy capture plans are significantly ahead of expectations. Our focus is to maintain a disciplined integration approach and complete all open projects in 2026. Focus on 2026. We are accelerating capability expansion, operational capacity increases, and new program wins to drive another strong year of performance. We're also advancing our OEM license manufacturing transition, which remains on track for 2026 completion. In addition, we remain focused on building our organic growth pipeline, deepening OEM partnerships, and expanding our market presence to support growth in 2026 and beyond. And finally, we're preparing to welcome Daniel Bell and the entire Arrow 3 team to VSE as we continue to strengthen our global wheel and brake platform. I'll close by thanking our shareholders, customers, and suppliers for their continued trust and support. And most importantly, to our exceptional VSE team, congratulations and thank you for another outstanding quarter.

Thank you, John and Adam. Due to the acceleration of today's earnings announcement, we will not be conducting a question and answer session following today's prepared remarks. Thank you.

thank you for your participation in today's conference this does conclude the program you may now disconnect