VSE Corp 2026 Q2 Earnings Call

Welcome to VSE Corporation's second quarter 2026 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're 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.

Before we begin, I'd like to highlight that VSE will host an investor day on Wednesday, December 9th at Current Pier 59 in New York City. We look forward to sharing more on our strategy and long-term outlook there. Save-the-date invitations will be sent out later this month, with full details to follow in September. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'd like to turn the call over to John.

Good morning, everyone, and thank you for joining us today. Let's begin on slide three, where I will review our second quarter highlights. This second quarter marked a defining step forward for VSE. We closed two strategic acquisitions, delivered record revenue and profitability, including a record consolidated adjusted EBITDA margin, and launched integration and synergy capture workstreams across the combined platform. Importantly, the quarter demonstrated the underlying strength of our core business and the earnings power of the platform we're building. Let me now walk through our second quarter highlights. First, we completed the acquisition of PAG, the largest transaction in VSE's history and a major milestone in our transformation. Together, PAG, NorthStar, and our legacy VSE Aviation businesses create a differentiated global aviation aftermarket platform with greater scale, broader capabilities, and deeper customer relevance.

We are advancing our strategy to become the world's leading independent provider of aviation aftermarket distribution and repair services while remaining firmly grounded in the OEM-centric strategy that has guided our transformation. Second, the strength of the platform is already evident in our financial performance and progress. We delivered record revenue and profitability in the second quarter, with results above prior expectations. Organic revenue grew approximately 14%, with strength across both repair and distribution, supported by strength in the commercial engine aftermarket, new business wins, expanded capabilities, market share gains, and increased share of wallet. Adjusted EBITDA nearly doubled year-over-year, significantly outpacing revenue growth, and adjusted EBITDA margins reached a record 19.2% in the quarter. This performance represents meaningful progress towards our long-term objective of consolidated adjusted EBITDA margins above 20% and supports our decision to raise both revenue and margin guidance for the full year.

Integration, execution, and synergy capture are underway. We've established clear business plans, integration governance, and executive-owned workstreams across the combined platform. Integration is a core VSE capability and an important competitive differentiator. In the short time since closing, our teams have already begun advancing tangible opportunities in insourcing, joint sales channel alignment, and operating efficiency. It remains early, but the pace of execution and the quality of the opportunities identified reinforced our confidence in the revenue synergy and margin expansion potential of the combined platform. Let's now move to slide four, where I will highlight our recent acquisitions in greater detail. Let me start with the acquisition of PAG, which we closed on May 5th. We completed the acquisition from GenNx360 Capital Partners in a transaction valued at approximately $2 billion in cash and equity.

The acquisition materially expands VSE scale, global reach, proprietary content, and repair capabilities across commercial business, general aviation, rotorcraft, OEM, and defense end markets. We recently hosted our first employee connection summit, bringing together leaders from VSE and PAG to accelerate integration planning and commercial collaboration. The teams aligned on sales channel strategy, systems priorities, insourcing, and joint commercial opportunities. Execution is now underway across these workstreams. While we are still early in the integration, we are encouraged by both the breadth of the opportunities identified and the engagement of the combined teams. Just as important, PAG brings an exceptional team, highly complementary capabilities, and a strong customer-focused culture. This combination is strengthening VSE strategically, operationally, and commercially. Moving now to our NorthStar acquisition, which closed on April 1st. This acquisition adds engine-related MRO, third-party logistics, and component support capabilities to our aftermarket offering.

NorthStar's teardown, kitting, and component-level capabilities span multiple engine platforms and deepen our role within the OEM aftermarket supply chains. Since completing the acquisition, we have already rebranded the business as VSE Aviation Services, aligned its leadership structure, and launched key integration initiatives to expand logistics, repair capacity, and engine component support. Let me provide an update on the current aviation aftermarket environment. The fundamentals supporting our business remain healthy and continue to reinforce our confidence in the long-term demand environment. The broader macroeconomic and geopolitical environment remains dynamic, including volatility in energy prices. We continue to monitor these conditions closely and remain disciplined in our planning. Our updated guidance reflects what we are seeing in the business today: strong first half execution, healthy customer demand, and solid program visibility.

To date, we have not seen any recent uncertainty translate into any meaningful change in a customer demand or operator behavior. Customer activity remains healthy across our platforms, and the demand signals we see support confidence in the durability of our business. At the same time, we will continue to stay close to our customers and respond quickly if market conditions should change. Global air traffic and fleet utilization remain resilient. An aging installed base, continued constraints on new aircraft and engine availability, and the need to keep existing assets operating are sustaining demand for aftermarket parts and repair services. These are durable demand drivers across our platform. In business and general aviation, conditions also remain unchanged. The diversity of this customer base and the mission-critical nature support the aftermarket demand.

This market provides an important and complementary source of revenue alongside the strength we continue to see in commercial aviation. Taken together, the breadth of our markets, customers, capabilities, and revenue streams give us confidence in the resilience of our business as we enter the second half, remain optimistic about the opportunity ahead, while maintaining discipline around execution and external risk. Let's now turn to slide five, where I'll briefly walk through our second quarter 2026 financial highlights. We delivered an outstanding quarter, headlined by record revenue and profitability. The results reflect strong execution in our core aviation businesses, continued organic momentum, and contributions from our recent acquisitions. Our revenue of $449 million increased 65% year-over-year, including 14% organic growth. Revenue growth was driven by new business wins, expanded product and repair capabilities, market share gains, increased share of wallet, and contributions from recent acquisitions.

Adjusted EBITDA reached a record $86 million in the quarter, increasing 98% year-over-year and significantly outpacing revenue growth. Adjusted EBITDA margin expanded approximately 320 basis points to a record 19.2% in the quarter. The result reflects favorable product and repair mix, strong operating execution, synergies from prior acquisitions, and contributions from PAG. The level of profitability exceeded our expectations for the quarter and demonstrates the earning power of the platform, although quarterly mix and timing can create variability from period to period. Adjusted net income of $55 million increased 101%, while adjusted diluted earnings per share of $1.75 increased 33% year-over-year. Our record profitability reinforces our confidence in the long-term earnings potential of VSE and our path toward consolidated Adjusted EBITDA margins above 20% over time. I'll now turn the call over to Adam to walk through the financial details.

Thank you, John. Let's turn to slide six of the conference call materials, where I will provide a detailed overview of our second quarter consolidated financial results. For the second quarter of 2026, we generated $449 million of revenue, an increase of 65% year-over-year. Both MRO and distribution delivered strong results, with MRO revenue increasing 149% and distribution revenue increasing 17% year-over-year. The 149% increase in MRO revenue was driven by expanded repair capabilities and capacity, strong growth in engine content, market share gains, increased share of wallet with existing OEM partners, and contributions from recent acquisitions, primarily PAG and Aero-3. The 17% increase in distribution revenue was driven by solid execution on new business wins, product line expansion, market share gains Strong commercial engine end market demand and contributions from the Aero-3 acquisition.

Excluding recent acquisitions, organic revenue increased approximately 14% year-over-year, reflecting strong underlying demand and execution across the business. This growth rate is net of intercompany eliminations between VSE and PAG since the May 5th closing. Consolidated adjusted EBITDA increased 98% to $86 million. Adjusted EBITDA margin was 19.2%, an increase of approximately 320 basis points from the prior year period. The expansion was driven primarily by a greater mix of higher margin product and repair activity, synergies from previously completed acquisitions and contributions from PAG. Adjusted net income was $55 million and adjusted diluted earnings per share was $1.75 per share. For the current and prior year periods, adjusted net income and adjusted diluted earnings per share have been updated to exclude amortization of intangible assets and stock-based compensation. Turning to slide seven and our balance sheet.

During the quarter, we closed on a $900 million Term Loan B and upsized our revolving credit facility to $500 million. These new facilities replace our prior Term Loan A and revolver structure. Together they strengthen our balance sheet and give us the flexibility to execute against our strategic priorities. At the end of the second quarter, total debt outstanding was $967 million, including our new Term Loan B and the debt portion of the tangible equity units. Debt issuance costs were approximately $20 million, and we had approximately $75 million of cash and cash equivalents on hand, resulting in a net debt of approximately $872 million. We had no borrowings under our recently upsized $500 million revolving credit facility. During the second quarter, we generated approximately $19 million of free cash flow, a significant improvement from the first quarter and from the second quarter of last year.