VSE Corp: Form 10-Q for the period ended Sep 30, 2025

Business Overview

VSE is a diversified aviation aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for transportation assets to commercial and government markets.

Recent Developments

Sale of Fleet Segment

In April 2025, the Company completed the previously announced sale of its Fleet segment. See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Acquisition of Turbine Weld Industries, LLC

In May 2025, the Company completed the acquisition of Turbine Weld Industries, LLC ("Turbine Weld"), a specialized MRO provider of complex technical and proprietary engine components for business and general aviation platforms. See Note (2) "Acquisitions" for further information.

New Credit Agreement

In May 2025, the Company entered into a new credit agreement, which fully replaced its previous credit agreement. See Note (5) "Debt" to the consolidated financial statements for further information

Business Trends

During the third quarter of 2025, the Company's strong execution of new and existing distribution awards, the expansion of product line and repair capabilities, and contributions from recent acquisitions generated strong results, with quarterly revenue reaching $282.9 million for the three months ended September 30, 2025, representing a 39% increase year-over-year. Market growth, share gains and contributions from the recent acquisitions of Kellstrom Aerospace and Turbine Weld have resulted in increased repair and distribution revenue of 25% and 49%, respectively, during the three months ended September 30, 2025, compared to the same period for the prior year. The Company's growth has been driven by several strategic initiatives, including executing on newly awarded distribution agreements, the introduction of new products and repair capabilities, including its Original Equipment Manufacturers ("OEM") licensed manufacturing program, and investments to increase capacity and the addition of new capabilities supporting recent acquisitions.

The Company believes the acquisitions of TCI in April 2024, Kellstrom Aerospace in December 2024 and Turbine Weld in May 2025 are strongly aligned with VSE's core business and increase its exposure to the high-growth, higher-margin engine aftermarket. Furthermore, the Company believes that the Honeywell FCS acquisition in September 2023 to exclusively manufacture, sell, market, distribute, and repair certain fuel control systems, expands the Company's existing capabilities and provides access to new customers and end markets while strengthening the Company's partnership with Honeywell.

Results of Operations

The following table summarizes the Company's consolidated results of operations (in thousands):

Revenues. Revenues increased for the three and nine months ended September 30, 2025, compared to the same periods in the prior year primarily driven by contributions from the acquisitions of Kellstrom Aerospace and Turbine Weld, new distribution contract wins and improved demand for the Company's commercial aerospace and business and general aviation products and services resulting from solid end market activity in global commercial air travel. The revenue increase during the nine months ended September 30, 2025 was also driven by contributions from the acquisition of TCI. Aviation distribution revenue increased $57.7 million, or 49%, and repair revenue increased $21.6 million or 25%, for the three months ended September 30, 2025, compared to the same period in the prior year. Aviation distribution revenue increased $168.4 million, or 49%, and repair revenue increased $83.9 million, or 39%, for the nine months ended September 30, 2025, compared to the same period in the prior year.

Costs and Operating Expenses. Costs and operating expenses increased for the three and nine months ended September 30, 2025, compared to the same periods in the prior year primarily due to increases in revenue. Included in costs and operating expenses is the amortization of intangible assets related to acquisitions, which was $6.7 million for the three months ended September 30, 2025, compared to $4.8 million for the same period in the prior year. Amortization of intangible assets was $19.3 million for the nine months ended September 30, 2025, compared to $12.5 million for the same period in the prior year. Additionally, for the three and nine months ended September 30, 2025, the Company recognized a $23.3 million and a $29.2 million charge, respectively, on the fair value of the earn-out receivable from the Fleet Sale.

Operating Income. Operating income decreased for the three months ended September 30, 2025, compared to the same period of the prior year primarily due to the $23.3 million valuation adjustment charge on the earn-out receivable from the Fleet Sale and increased intangible asset amortization, partially offset by the previously mentioned increased revenues. Operating income increased for the nine months ended September 30, 2025, compared to the same period of the prior year primarily due to increased revenues as well as one-time prior year charges, including a lease abandonment charge of $12.2 million and corporate restructuring charges of $4.0 million. The operating income increase was partially offset by the previously mentioned increased amortization of intangible assets, earn-out valuation adjustment charges, and an increase in corporate acquisition and integration costs incurred during the current period.

Interest Expense. Interest expense decreased for the three and nine months ended September 30, 2025, as compared to the same periods in the prior year primarily due to a decrease in the Company's debt facility borrowings and a lower average interest rate on borrowings outstanding. The Company also recognized interest income on the note receivable of $1.3 million during the three and nine months ended September 30, 2025.

Provision for Income Taxes. The Company's effective tax rate for continuing operations was 37.5% and 18.7% for the three and nine months ended September 30, 2025 respectively, and 21.1% and 12.8% for the three and nine months ended September 30, 2024 respectively. The Company's tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between the Company's statutory U.S. federal income tax rate and its effective tax rate. The higher effective tax rates for the three and nine months ended September 30, 2025 is primarily due to the recognition of an accrual for a potential tax dispute associated with the dissolution of a foreign subsidiary. Additionally, higher pre-tax book income in the nine months ended September 30, 2025 compared to the same period in 2024 reduced the favorable tax rate impact arising from various discrete tax adjustments in 2025.

Liquidity and Capital Resources

Liquidity

On May 2, 2025, the Company entered into a new credit agreement, which provides for a $300 million term loan facility and a $400 million revolving credit facility, both maturing on May 2, 2030. The new debt agreement provides a lower interest rate, greater flexibility and increased borrowing capacity. The new credit agreement replaced the Company's previous term loan and revolving credit facility, which were scheduled to mature in October 2026.

Borrowings under the new credit agreement will accrue interest at either the term SOFR rate plus the SOFR margin or ABR plus the ABR margin. The Company, at its option may select between one, three or six month Term SOFR Rates. The applicable SOFR margin or ABR margin will be determined based on the Company’s Total Net Leverage Ratio.

The Company's primary sources of external financing are the capital markets and its credit agreement. The Company's internal sources of liquidity are primarily from operating activities, specifically from changes in the level of revenues and associated inventory, accounts receivable and accounts payable, and profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect the Company's liquidity. Inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements. Accounts receivable and accounts payable levels can be affected by changes in the level of work the Company performs and by the timing of large purchases. In addition to operating cash flows, other significant factors that affect the Company's overall management of liquidity include capital expenditures, divestitures, and investments in the acquisition of businesses.

The Company's outstanding borrowings under the credit agreement decreased approximately $72.8 million for the nine months ended September 30, 2025. As of September 30, 2025, the Company had borrowings outstanding under its term loan of $298.1 million, borrowings outstanding under its revolving facility of $61.6 million, outstanding letters of credit of $0.6 million, and $337.8 million of unused commitments under the credit agreement.

The Company believes its existing balances of cash and cash equivalents, along with its cash flows from operations and debt instruments under its credit agreement mentioned above, will provide sufficient liquidity for business operations as well as capital expenditures, dividends, and other capital requirements associated with its business operations over the next twelve months and thereafter for the foreseeable future.

Cash Flows

The following table summarizes the Company's cash flows (in thousands):

Cash used in operating activities decreased $75.8 million for the nine months ended September 30, 2025, as compared to the same period of the prior year. The decrease was primarily due to an increase in net income from continuing operations, after adjusting for non-cash expenses, and improved working capital management.

Cash provided by investing activities increased $164.1 million for the nine months ended September 30, 2025, as compared to the same period of the prior year. The increase was primarily due to cash provided during the current period of $138.8 million related to the Fleet and FDS sales, net of cash divested, offset by cash provided in the prior period of $42.1 million related to the FDS sale. The increase was also driven by higher cash paid for the prior year TCI acquisition, net of cash acquired, of $112.3 million, as compared to cash paid for the current year Turbine Weld acquisition, net of cash acquired, of $49.9 million. See Note (2) "Acquisitions" and Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Cash used in financing activities increased $260.1 million for the nine months ended September 30, 2025, as compared to the same period of the prior year. The increase was primarily due to net repayments of debt during the current period of $72.8 million, as compared to net borrowings of debt during the prior period of $20.0 million. The increase was also driven by the prior period receipt of $161.7 million in proceeds related to the Company's public underwritten offering of its common stock in May 2024.

The Company paid cash dividends totaling $6.2 million or $0.30 per share during the nine months ending September 30, 2025. Pursuant to the Company's credit agreement, the payment of cash dividends is subject to annual restrictions. The Company has paid cash dividends each year since 1973.

Other Obligations and Commitments

There have not been any material changes to the Company's other obligations and commitments that were included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 ("2024 Form 10-K").

Inflation and Pricing

There have not been any material changes to this disclosure from those discussed in the Company's 2024 Form 10-K.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on its financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Disclosures About Market Risk

Interest Rate Risk

The Company's credit agreement provides available borrowing at variable interest rates. The Company's interest expense is impacted by the overall global economic and interest rate environment. Accordingly, future interest rate changes could potentially put the Company at risk for a material adverse impact on future earnings and cash flows. To mitigate this risk, the Company has employed interest rate hedges to fix rates on a portion of its outstanding borrowings for specified periods. For additional information related to the Company's debt and interest rate swaps, see Note (5) and Note (6), respectively, to the Consolidated Financial Statements.

The Company believes there have been no material changes in market risks from those discussed in the Company's 2024 Form 10-K.

Critical Accounting Policies, Estimates and Judgments

The Company's consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"), which requires the Company to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of the Company's consolidated financial statements, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, the Company's reported results could be materially affected. Actual results may differ significantly from the Company's estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in the Company's 2024 Annual Report on Form 10-K for further discussions of the Company's significant accounting policies and estimates. There have been no significant changes in the Company's critical accounting estimates during the nine months ended September 30, 2025, from those disclosed in the Company's 2024 Form 10-K.

Recently Issued Accounting Pronouncements

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on the Company's consolidated financial statements, see Note (1) "Nature of Business and Summary of Significant Accounting Policies — Recent Adopted Accounting Pronouncements” to the Company's Consolidated Financial Statements included in its 2024 Form 10-K.

See "Disclosures About Market Risk" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Evaluation of Disclosure Controls and Procedures

Management of the Company has evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2025, disclosure controls and procedures were effective to ensure that information the Company is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

In connection with the Company's acquisitions of Kellstrom Aerospace and Turbine Weld, certain areas of the Company's internal control over financial reporting changed. These areas are primarily related to integrating corporate functions such as entity level controls and certain financial reporting controls. Certain control structure items remain in operation at Kellstrom Aerospace and Turbine Weld, primarily related to information technology, inventory management, human resources, processing and billing of revenues, and collection of those revenues. The control structures at Kellstrom Aerospace and Turbine Weld have been modified to appropriately oversee and incorporate these activities into the overall control structure. The Company will continue to evaluate the need for additional internal controls over financial reporting.

There have been no additional changes in the Company's internal control over financial reporting during the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Other than as disclosed in this section, there have been no material changes to the previously disclosed risk factors in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024 ("2024 Form 10-K”) and in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2025 and June 30, 2025 (the "2025 10-Qs"). The risk factors disclosed in the Company's 2024 Form 10-K and 2025 10-Qs should be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2025, and under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Global economic conditions and political factors could adversely affect the Company's revenues.

Revenues for work performed in, or products delivered to, foreign countries are subject to economic conditions in those countries and to political risks posed by ongoing conditions or foreign conflicts, including the continuing Russia-Ukraine and Middle East conflicts, potential terrorist activity, and evolving global trade tensions, including those involving China. Changes in government policies or regimes in these regions may affect the Company's ability to continue ongoing work or initiate new projects. Political and economic conditions in both the United States and abroad, as well as global prices and availability of oil and other commodities, could also influence demand for certain of our products and services. VSE Corporation has been added to China’s Ministry of Commerce “Unreliable Entity List.” Under applicable provisions, entities on this list may be subject to restrictions on import and export activities, investment in China, or cooperation with Chinese organizations and individuals. The Company currently believes that any potential restrictions would apply only to the parent company, VSE Corporation, and not to its operating subsidiaries, which are the entities conducting business involving China. At this time, the Company has not experienced any material impact on its operations as a result of this designation. However, the Company continues to monitor the situation, as future developments could affect the Company's ability to source products, serve customers, or maintain consistent operations.