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VSE CORP (VSEC)·Q2 2025 Earnings Summary

Executive Summary

  • VSE delivered record Q2 results: revenue $272.1M (+41.1% YoY), consolidated adjusted EBITDA $43.5M (~16% margin), and adjusted EPS $0.97. Results beat S&P Global consensus on revenue ($261.9M*) and EPS ($0.70*) with strength across Distribution and MRO and earlier-than-expected synergy capture. Management raised 2025 Aviation adjusted EBITDA margin guidance to 16.5–17% (high end), while reaffirming 35–40% revenue growth .
  • Free cash flow turned positive ($6.3M) and adjusted net leverage improved to 2.2x. Liquidity remained strong with $333M cash and revolver capacity available; interest expense outlook for FY25 is $26–28M post-refinancing ($700M facility at SOFR+175 bps) .
  • Strategic actions in Q2: sale of Fleet segment completed (portfolio now pure-play Aviation), acquisition of Turbine Weld (complex engine component MRO), and Eaton naming VSE Aviation its first authorized aerospace service center in the Americas (hydraulics) .
  • Management tone constructive: modest early-quarter softness tied to tariffs rebounded in May/June; guidance assumes no tariff escalation or recession. Focus remains on engine aftermarket (now >50% of Aviation revenue), USM mix/pruning to lift margins, and integration synergies (Kellstrom $4M cost saves tracking ahead) .

What Went Well and What Went Wrong

  • What Went Well

    • Record revenue, profitability and margins; Aviation adjusted EBITDA margin reached 17.1%, aided by pricing, mix, OEM-licensed manufacturing, and synergy capture ahead of plan. CEO: “record revenue and profitability… record margins” .
    • Strategic focus sharpened: Fleet divestiture closed; Turbine Weld acquired to expand proprietary engine component repairs; Eaton designated VSE as first authorized service center for hydraulics—expanding OEM partnerships and MRO scope .
    • Free cash flow positive in Q2 ($6.3M) and leverage down to 2.2x; CFO expects stronger 2H FCF and interest expense $26–28M for FY25 after refinancing .

  • What Went Wrong

    • Working capital remained a headwind in 1H (YTD FCF -$43.2M) despite Q2 improvement; management cites seasonality and strategic inventory build, with better 2H expected .
    • USM revenue is being pruned (down ~20% run-rate at Kellstrom in 1H) to shift from transactional parts trading to a “new/used/repair” model; near-term top-line impact offsets positive margin mix effects .
    • Early Q2 aftermarket softness linked to tariff uncertainty, though activity rebounded later in the quarter; FY25 guidance assumes no further tariff escalation .

Financial Results

Headline metrics (actuals across periods)

MetricQ4 2024Q1 2025Q2 2025
Revenue ($M)$299.0 $256.0 $272.1
Adjusted EBITDA ($M)$39.5 $40.4 $43.5
Adjusted EBITDA Margin (%)—15.8% ~16%
GAAP Diluted EPS$0.77 $0.67 $0.66
Adjusted EPS (Diluted)$0.90 $0.78 $0.97

Actuals vs S&P Global consensus

Q4 2024 EstimateQ4 2024 ActualQ1 2025 EstimateQ1 2025 ActualQ2 2025 EstimateQ2 2025 Actual
Revenue ($M)$290.4*$299.0 $246.8*$256.0 $261.9*$272.1
EPS (Primary/Adjusted) ($)$0.718*$0.90 $0.577*$0.78 $0.702*$0.97

Values retrieved from S&P Global.*

Q2 2025 YoY change

MetricYoY Change vs Q2 2024
Revenue+41.1%
Adjusted EBITDA+51.9%
Adjusted EPS (Diluted)+106.4%

Segment/product mix and KPIs

MetricQ1 2025Q2 2025
Products (Distribution) Revenue ($M)$160.6 $173.6
Services (MRO) Revenue ($M)$95.5 $98.5
Distribution YoY Growth+49% +50.4%
MRO YoY Growth+76% +27.3%

Cash flow, leverage and liquidity

KPIQ4 2024Q1 2025Q2 2025
Operating Cash Flow ($M)$55.4 $(46.6) $11.9
Free Cash Flow ($M)$52.1 $(49.5) $6.3
Net Debt ($M)$401.1 $459.3 $362.3
Adjusted Net Leverage (x)2.5x 2.2x 2.2x

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Aviation Revenue GrowthFY2025+35% to +40% (Q4 ’24) (reaffirmed Q1 ’25) +35% to +40% (reaffirmed Q2 ’25) Maintained
Aviation Adjusted EBITDA MarginFY202515.5%–16.5% (Q4 ’24) → 16%–17% (Q1 ’25, incl. +50 bps stock comp add-back) 16.5%–17% (raised to high end) Raised
Interest ExpenseFY2025$31–33M (pre-divestiture, Q4 ’24) $26–28M (Q1 & Q2 updates) Lowered
Effective Tax RateFY2025—~25% for remaining 2Q; ~22% blended FY Established
Unallocated Corporate Costs (ex-SBC)FY2025~$21M pre-reclass; $14–15M ex-SBC (Q1) $14–15M ex-SBC (Q2 reiteration) Maintained
Stock-based Comp (SBC)FY2025~$3M/quarter (Q1) ~$3M/quarter (Q2) Maintained
D&AFY2025$38–40M (Q1) $38–40M (Q2) Maintained
DividendQ3 2025 Payable—$0.10/share payable July 30; record July 16 Declared

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2: Q4’24; Q-1: Q1’25)Current Period (Q2’25)Trend
OEM-licensed manufacturing (Honeywell fuel control)Strong 2024 contribution; full transition in 2025; optimization continues Margin contribution “fully reflected”; focus on perfect execution through early 2026 before adding programs Stable to improving
Tariffs / MacroCautious monitoring; mitigations via inventory, logistics, USMCA Early-quarter softness; activity rebounded in May/June; guidance assumes no escalation Improving
USM strategyRefocus to strategic “new/used/repair”; pruning low-margin trading USM run-rate down ~20% at Kellstrom; accretive to margins, modest top-line drag Margin-accretive shift
Engine vs. component mixEngines outpacing components; capacity constraints support growth >50% of Aviation revenue engine-related; strongest demand persists Positive engine mix
Integration synergiesKellstrom $4M cost saves targeted; 2H’25 synergy ramp Synergies tracking ahead (pulled into Q2); further top-line synergies/insourcing ahead Ahead of plan
Free cash flowQ4’24 FCF strong; Q1 seasonality negative; 2H improvement expected Q2 positive FCF; stronger 2H expected Improving
Leverage/RefiAdj net leverage 2.5x (Q4); new $700M facility SOFR+175 Adjusted net leverage 2.2x; targeting <2x by YE25 Deleveraging

Management Commentary

  • “VSE delivered record revenue and profitability in the second quarter… underscoring the strength of our aviation-focused strategy… Both our distribution and MRO businesses achieved record sales and profitability during the quarter.” – John Cuomo, CEO .
  • “Adjusted EBITDA margin was 16% in the quarter… improved… driven by favorable pricing and product mix, higher margin aftermarket sales from our OEM licensed manufacturing program, lower contributions from our less profitable USM, and increased insourcing…” – Adam Cohn, CFO .
  • “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%.” – CFO .
  • “Our adjusted net leverage ratio was 2.2 times… we are expecting to generate improved free cash flow in the second half of the year.” – CFO .

Q&A Highlights

  • Organic growth and mix: Engines remain most robust; commercial stronger than BG&A; USM pruning offsets some top-line but improves margins as VSE shifts to a “new/used/repair” solution set .
  • Margins outlook: Seasonality favors 1H; Kellstrom synergies arrived earlier than planned in Q2; management cautious on maintaining 17.1% quarterly run-rate in back half but high-end full-year margin reaffirmed/raised .
  • Free cash flow: Q2 positive; stronger 2H expected as inventory investments and seasonality normalize; acquisitions (e.g., Kellstrom) are less working-capital intensive .
  • M&A and OEM partnerships: Pipeline “very healthy”; Eaton hydraulics program launched; OEM-licensed fuel control program financials embedded, with emphasis on flawless execution before pursuing additional programs (earliest late 2026) .

Estimates Context

  • Q2 2025: Revenue $272.1M vs S&P Global consensus $261.9M*; Adjusted/Primary EPS $0.97 vs $0.70*; 6 estimates each for revenue/EPS. Q1 2025 and Q4 2024 also beat on both revenue and EPS versus S&P Global consensus [GetEstimates]* .
  • With stronger margins and earlier synergy realization, Street models may need to raise FY25 Aviation margin assumptions toward 16.5–17% and lower interest expense run-rate to $26–28M per guidance .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Broad-based beat: Revenue and adjusted EPS exceeded consensus for the third straight quarter, with record Aviation margins and positive Q2 free cash flow—supportive of estimate revisions and potential multiple resilience .
  • Margin trajectory improving: FY25 Aviation adjusted EBITDA margin guidance raised to 16.5–17% on mix, pricing, USM pruning, and faster synergy capture; expect seasonal moderation Q3 but high-end FY outcome targeted .
  • Engine-led growth: Engine-related revenue now >50% of Aviation, with demand outpacing capacity; investments (TCI capacity, Turbine Weld) and OEM partnerships (Eaton hydraulics, Honeywell fuel controls) deepen exposure to the fastest-growing aftermarket niches .
  • Deleveraging underway: Adjusted net leverage at 2.2x; CFO aims for <2x by YE25; refinancing reduces interest burden to $26–28M .
  • Cash flow turning: After 1H working-capital use, Q2 positive FCF and stronger 2H free cash flow expected as inventory normalizes and integration efficiencies materialize .
  • Watch USM strategy and tariffs: USM revenue pruning is a margin tailwind but modest top-line headwind; tariff backdrop remains a monitored variable—no escalation embedded in guidance .
  • Near-term catalysts: Continued margin execution in Q3/Q4, synergy updates (Kellstrom), engine MRO capacity expansions, and incremental OEM awards (e.g., Eaton hydraulics) could drive sentiment .

Appendix: Additional Relevant Q2 2025 Releases

  • Completed sale of Fleet segment (April 1) .
  • Acquired Turbine Weld (May 1) for ~$50M to expand engine component MRO .
  • Refinanced debt facilities: $300M TLA, $400M revolver at SOFR+175 bps (May 2) .
  • Declared $0.10 quarterly dividend (May 8) .