VSE Corporation Q3 2025 Earnings Call - Acquisition of Arrow Three Strengthens Global Wheel and Brake Aftermarket Leadership

Conference Operator: Good day, and thank you for standing by. Welcome to the VSE Corporation’s Third Quarter twenty twenty five Results Conference Call. At this time, all participants are in a 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.

Michael Perlman, Vice President of Investor Relations and Treasurer, VSE Corporation: Thank you. Welcome to VSE Corporation’s third quarter twenty twenty five results conference call. We will begin with remarks from John Cuomo, President and CEO, followed by a financial update from Adam Cohen, our Chief Financial Officer. The presentation we are sharing today is on our website, and we encourage you to follow along accordingly. Today’s discussion contains forward looking statements about future business and financial expectations.

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.

John Cuomo, President and CEO, VSE Corporation: Thank you, Michael, and thank you for joining us today for VSE’s third quarter twenty twenty five 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 three. Before we begin the presentation, I want to share a brief update on the 2025. I’m proud to report that BSE 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 BSE has signed a definitive agreement to acquire Arrow three, 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. Arrow three 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 Arrow three’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 BSE’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 $350,000,000 subject to working capital adjustments. This transaction is expected to close in the 2025, subject to regulatory approvals and customary closing conditions. Arrow three generated approximately $120,000,000 of revenue during the trailing twelve month period ending August 2025, with strong adjusted EBITDA margin in excess of 20%. And year to date, on a pro form a basis, the acquisition of Arrow three enhances VSE’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 and A opportunities and to support organic growth investments. As we look ahead, our twenty twenty six ms and 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. Arrow three 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. And they support a global customer base that includes a leading presence in The U. S, Canada and Europe. Arrow three is a strong strategic fit with VSE’s core focus areas, increasing our exposure and market leadership in the global wheel and brake aftermarket. First, ARO three builds on our 2023 acquisition of Desser Aerospace, a leading tire, tube and battery distributor with two wheel and brake MRO facilities.

By combining Desser Tire’s expertise with Arrow three’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 three expands BSE’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 BSE. Third, Arrow three deepens BSE’s OEM alignment.

The company supports all major wheel and brake OEMs and strengthens VSE’s strategy as a trusted OEM aligned partner across aviation services. Fourth, Arrow three enhances VSE distribution capabilities with the addition of new authorized OEM product lines, enabling BSE to offer global customers expanded fully integrated aftermarket repair and parts solutions. Fifth, Arrow three’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 three has experienced leadership and expertise in this market. The ARROW3 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 three to the VSE 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 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 integrations of TCI and Kaelstrom. 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 and capturing the synergy and growth opportunities as Era three becomes part of the VSE family. Let’s now continue on to Slide five and review our recently announced organic growth initiatives, program awards and operating plan updates.

First, Kelsrom Aerospace, led by Executive Vice President, Daniel Adansky, extended its exclusive global distribution agreement to both AMETEK sensors and fluid management systems and Hughes Treitler product lines, including sensors and control lines, 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-seventy three Thrasher helicopter fleet. This agreement expands DSE Aviation’s MRO offering into direct defense sustainment support. Finally, we partnered with Lumen Ultra to distribute bug count fuel, an 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 retirements, 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 in 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 2025, our consolidated revenues increased 39% to $283,000,000 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 end market demand.

Consolidated adjusted EBITDA increased 58% to $47,000,000 or 16.7% of revenue, while aviation adjusted EBITDA increased by 51% in the quarter to a record $50,000,000 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 in sourcing synergies, sales from the OEM license 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 2x, 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.

Michael Perlman, Vice President of Investor Relations and Treasurer, VSE Corporation: 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 $283,000,000 of revenue in the quarter, an increase of 39 over the same period in the prior year. In the third quarter, we recorded a noncash fair value adjustment of $23,000,000 related to the earn out receivable from the divestiture of our noncore 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 $47,000,000 compared to the 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 $20,000,000 and adjusted diluted earnings per share was $0.99 an increase of 11187%, respectively, over the prior year period. Now turning to Slide eight, where I will review our Aviation segment’s record third quarter performance. VSE Aviation generated $283,000,000 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 KELstrom acquisition. MRO revenue increased 25% in the quarter, driven by higher margin product mix, the addition of new repair capabilities, an increase from in sourcing 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 $50,000,000 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 in sourcing activity, favorable mix, higher margin aftermarket sales from our OEM license 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 twenty twenty five 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 $4,000,000 in the fourth quarter. Stock based compensation, which beginning in Q1 is excluded from adjusted EBITDA, is expected to be approximately $3,000,000 split relatively evenly between aviation and corporate.

Depreciation and amortization in total are projected to be approximately $11,000,000 for the fourth quarter. Interest expense is expected to be approximately $5,000,000 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 $347,000,000 and cash and availability under our $400,000,000 revolving credit facility was $347,000,000 During the third quarter, we generated approximately $18,000,000 of free cash flow, driven by record operating results and disciplined working capital management.

This was an improvement of approximately $14,000,000 versus Q3 of last year and a nearly $80,000,000 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.

John Cuomo, President and CEO, VSE Corporation: Thanks, Adam. I’d like to conclude our prepared remarks by providing a brief update on our fourth quarter twenty twenty five 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 three 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.

Michael Perlman, Vice President of Investor Relations and Treasurer, VSE Corporation: 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.

Conference Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.