Executive Summary / Key Takeaways

• VSE Corporation has successfully completed a multi-year transformation, emerging as a pure-play aviation aftermarket parts distribution and Maintenance, Repair, and Overhaul (MRO) services provider, divesting non-core assets to focus on higher-growth, higher-margin opportunities.
• The company delivered record financial performance in Q3 2025, with total revenues increasing 38.9% year-over-year to $282.9 million and Adjusted EBITDA surging 58.4% to $47.4 million, reflecting robust market demand and effective integration of strategic acquisitions.
• VSE's strategy is deeply OEM-centric, leveraging specialized MRO capabilities, proprietary repair specifications, and licensed manufacturing programs to drive organic growth and capture market share in the high-demand engine aftermarket.
• Recent acquisitions, including Turbine Controls, Kellstrom Aerospace, Turbine Weld, and the pending Aero 3 deal, significantly expand VSE's presence and capabilities in the commercial and business/general aviation engine and component MRO sectors.
• With a strengthened balance sheet, improved liquidity, and a positive outlook for the aviation aftermarket, VSE is poised for continued growth and margin expansion, targeting an adjusted net leverage ratio below 2x by year-end 2025.

A Transformed Enterprise in a Dynamic Market

VSE Corporation, with a history stretching back to 1959 and a consistent record of paying cash dividends since 1973, has undergone a profound strategic transformation, culminating in its emergence as a focused, pure-play aviation aftermarket powerhouse. This multi-year journey, marked by strategic divestitures and targeted acquisitions, has repositioned the company to capitalize on the robust and growing demands of the global aviation sector. VSE's core business now revolves around providing essential aftermarket parts distribution and specialized Maintenance, Repair, and Overhaul (MRO) services for air transportation assets across commercial and government markets.

The industry landscape in which VSE operates is characterized by strong tailwinds. Global passenger traffic continues to drive demand, while declining OEM production rates and persistent supply chain disruptions for new aircraft compel airlines to extend the operational life of existing fleets. This dynamic fuels a sustained need for aftermarket parts and maintenance services. The engine aftermarket, in particular, stands out as one of the fastest-growing and most supply-constrained segments, representing over 50% of VSE's total aviation revenue as of Q2 2025. Management anticipates this trend to continue, with the engine aftermarket outpacing the component side for the foreseeable future due to ongoing MRO capacity constraints.

VSE's overarching strategy is firmly OEM-centric, focusing on deep partnerships with Original Equipment Manufacturers to provide comprehensive lifecycle support for critical aviation components. This approach allows VSE to address market needs that often fall outside the direct scope of OEMs, creating a symbiotic relationship that enhances market reach and service capabilities. The company's strategic initiatives include expanding MRO capabilities, introducing new products, and leveraging acquisitions to accelerate growth and capture market share.

Technological Edge and Operational Excellence

VSE's competitive advantage is significantly bolstered by its technological differentiators and operational expertise in specialized MRO services. The company's core capabilities extend beyond simple parts distribution to include complex technical and proprietary repair offerings. For instance, the acquisition of Turbine Weld Industries in May 2025 brought specialized MRO services for complex engine components, including proprietary repair specifications, particularly for widely used engine platforms like the PW100 and PT6 in business and general aviation. This enhances VSE's MRO portfolio by broadening technical capabilities and deepening OEM relationships.

A cornerstone of VSE's technological roadmap is its OEM licensed manufacturing program, exemplified by the Honeywell (HON) Fuel Control program. This initiative involves VSE taking on the exclusive manufacturing, selling, marketing, distribution, and repair of certain fuel control systems. The program made strong progress in Q2 2025 with the successful production of its first approved units and is on track for full production by early 2026. This program is a significant margin contributor, with its financial impact fully reflected in current guidance. VSE aims for "perfect" execution of this program by Q1 2026 before considering similar new initiatives, demonstrating a disciplined approach to leveraging advanced manufacturing capabilities.

Furthermore, VSE's MRO centers of excellence are focused on higher-value technical repair capabilities across avionics, fuel, pneumatics, hydraulics, and wheel and brake systems. The company's new five-year authorized service center agreement with Eaton (ETN) for hydraulic pump MRO support, Eaton's first such aftermarket repair partnership, underscores VSE's ability to expand its MRO capabilities into new areas and reinforce its OEM partner value proposition. These specialized capabilities, combined with a focus on faster turnaround times, are critical differentiators in the market, enabling VSE to win new business and maintain a competitive edge.

Competitive Landscape and Strategic Positioning

VSE operates within a competitive landscape that includes both highly specialized aerospace aftermarket players and diversified government contractors. Key publicly traded competitors include HEICO Corporation (HEI), AAR Corp. (AIR), Curtiss-Wright Corporation (CW), and KBR Inc. (KBR). VSE's market positioning is characterized by its diversified offerings and strong relationships within the federal and defense sectors, which provide a stable revenue base.

Compared to HEICO, which is highly specialized in aerospace parts manufacturing and distribution, VSE offers a broader, more integrated suite of aftermarket services across aviation, fleet (historically), and defense. While HEICO is known for its speed in aviation-specific innovation, VSE's strength lies in its comprehensive supply chain solutions and end-to-end sustainment for military assets, leveraging its established DoD relationships. These relationships translate into recurring revenue from long-term contracts, potentially offering superior margins and growth stability.

Against AAR Corp., a specialist in aviation services and logistics, VSE's integrated approach across aviation, fleet, and defense provides a competitive edge in bundled services. VSE's supply chain expertise allows for efficient inventory management, which can be a differentiator against AAR's logistics-focused model. However, AAR might demonstrate superior operational efficiency in logistics, potentially leading to lower costs.

In comparison to Curtiss-Wright and KBR, which have significant presences in defense and government contracting, VSE's focus on aftermarket MRO and parts distribution for transportation assets offers a more specialized approach to sustainment. While Curtiss-Wright excels in engineered systems and KBR in large-scale project execution, VSE differentiates itself through its vehicle and equipment lifecycle management, leading in operational adaptability. VSE's growth is driven by OEM-centric partnerships, traditional market share gains against larger distribution players, and creating capacity in its MRO businesses where demand outstrips supply.

VSE's strategic refinement of its Used Serviceable Material (USM) business is another competitive move. By shifting away from speculative parts trading to a "new used and repair model" aligned with higher-margin product lines and in-house repair capabilities, VSE aims to drive stronger margins, even if it means some pruning of top-line USM revenue. This disciplined approach enhances profitability and aligns with the company's focus on value-added services.

Financial Performance and Liquidity

VSE Corporation's financial performance in 2025 reflects the successful execution of its strategic transformation. For the three months ended September 30, 2025, total revenues increased by 38.9% year-over-year to $282.9 million. This growth was primarily driven by contributions from the Kellstrom Aerospace and Turbine Weld acquisitions, new distribution contract wins, and improved demand in commercial aerospace and business and general aviation. Aviation distribution revenue increased 49% and repair revenue increased 25% for the quarter compared to the prior year.

Adjusted EBITDA for the third quarter of 2025 surged by 58.4% to $47.4 million, with an Adjusted EBITDA margin of 17.1%. This margin improvement was attributed to a favorable pricing and product mix, higher-margin aftermarket sales from the OEM licensed manufacturing program, lower contributions from the less profitable USM business, and increased in-sourcing of repair work. For the nine months ended September 30, 2025, revenues grew 45% to $811.1 million, and operating income increased 49% to $57.1 million.

Despite strong revenue growth, operating income for Q3 2025 decreased by 50% year-over-year, primarily due to a $23.3 million valuation adjustment charge on the earn-out receivable from the Fleet Sale and increased intangible asset amortization. However, operating income for the nine months ended September 30, 2025, increased significantly, driven by higher revenues and the absence of one-time charges incurred in the prior year.

VSE has also significantly strengthened its liquidity and capital structure. In May 2025, the company secured a new $700 million credit facility, comprising a $300 million term loan and a $400 million revolving credit facility, both maturing in May 2030. This refinancing provides increased flexibility and a lower cost of capital. The company generated approximately $6 million in free cash flow in Q2 2025, a notable improvement of about $28 million compared to Q2 2024, driven by disciplined working capital management. Cash used in operating activities decreased by $75.8 million for the nine months ended September 30, 2025, reflecting improved net income and working capital management.

As of September 30, 2025, VSE had $298.1 million outstanding on its term loan, $61.6 million on its revolving facility, and $337.8 million in unused commitments. The company's adjusted net leverage ratio stood at 2.2x in Q2 2025, with an expectation to be "south of 2x" by year-end 2025.

Outlook and Risks

VSE's outlook for the aviation aftermarket remains robust, with management anticipating continued strength, particularly in the engine segment, through the second half of 2025 and into 2026. The company reaffirmed its full-year 2025 Aviation segment revenue growth guidance of 35% to 40%, supported by contributions from recent acquisitions (26% to 28%) and high single-digit to low double-digit organic growth. Full-year 2025 Aviation adjusted EBITDA margin guidance was raised to the high end of the range, now 16.5% to 17%, reflecting a favorable product mix and the strategic shift in the USM business.

Key financial guidance for the full year 2025 includes adjusted unallocated corporate costs between $14 million and $15 million (excluding stock-based compensation), depreciation and amortization of $38 million to $40 million, and interest expense of $26 million to $28 million. The effective tax rate for the remaining quarters of 2025 is expected to be approximately 25%, leading to a full-year blended rate of 22%.

Despite this positive outlook, VSE faces certain risks. The company has been added to China's Ministry of Commerce Unreliable Entity List, which could lead to restrictions on import/export activities or investment. While VSE believes this would primarily affect the parent company and has not yet experienced a material impact, it continues to monitor the situation. Broader global market uncertainties, including evolving tariff policies, also present a risk, though VSE has implemented mitigation strategies such as leveraging inventory, optimizing logistics, and utilizing trade exemptions. Management explicitly states that their 2025 guidance does not assume further tariff escalation or a global recession.

Conclusion

VSE Corporation has successfully executed a transformative strategy, shedding non-core assets to become a focused, high-growth aviation aftermarket leader. The company's OEM-centric approach, coupled with strategic acquisitions and a commitment to expanding specialized MRO capabilities, positions it strongly within the resilient and expanding aviation sector, particularly in the high-demand engine segment. Record financial performance in Q3 2025, driven by organic growth and synergistic contributions from recent deals, underscores the effectiveness of this strategy.

With a strengthened balance sheet, robust liquidity, and a clear roadmap for margin expansion through operational efficiencies and technological differentiators like its licensed manufacturing program, VSE is well-equipped to capitalize on favorable industry trends. While geopolitical and economic uncertainties persist, the company's proactive risk mitigation and disciplined capital allocation provide a solid foundation. VSE's journey from a diversified conglomerate to a specialized aviation powerhouse presents a compelling investment thesis, driven by strategic focus, operational excellence, and a commitment to long-term value creation in a critical global industry.