VSE CORP (VSEC)

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

VSE Corporation, through its subsidiaries (collectively, "VSE" or the "Company"), is a leading provider of aftermarket distribution and maintenance, repair and overhaul ("MRO") services for air transportation assets for commercial and government markets. The Company operates as a single reportable segment aligned with the Company's operating segment.

Recent Developments

Acquisitions

On May 5, 2026, the Company completed the acquisition of Precision Aviation Group, Inc. ("PAG" or "PAG Acquisition"). PAG is a leading global provider of aviation aftermarket MRO and supply chain services delivering technical expertise across engines, components, avionics, and proprietary repair solutions. The acquisition enhances the Company's global reach, technical capabilities, and integrated MRO services and distribution offerings to a diverse customer base across commercial, business and general aviation, rotorcraft, original equipment manufacturer (“OEM”), and defense markets.

On April 1, 2026, the Company acquired NorthStar Technologies, LLC ("NorthStar"), a provider of MRO services, third-party logistics, and kitting services supporting the engine aftermarket. The acquisition expands the Company’s engine service capabilities within business and general aviation and strengthens its OEM-focused strategy by enhancing integration within an engine OEM’s aftermarket supply chain and supporting growing demand for engine teardown and labor-intensive services.

See Note (2) "Acquisitions" to the consolidated financial statements for further information.

Credit Agreement Amendment

In connection with the completed stock purchase agreement to acquire PAG, the Company entered into an amended agreement with certain financial institutions on May 5, 2026 to provide new senior secured financing, consisting of a $900.0 million term loan B facility and an upsize of the Company's existing revolving facility from $400.0 million to $500.0 million (as amended and restated, supplemented or otherwise modified, the "Credit Agreement"). In connection with the Credit Agreement, the Company paid off its existing Term Loan A Facility in full. See Note (5) “Debt” to the consolidated financial statements for further information.

Underwritten Public Offerings

In February 2026, the Company completed concurrent underwritten public offerings of (i) 4,587,766 shares of its common stock at a public offering price of $188.00 per share (the “Common Stock Offering”) and (ii) 9,200,000 5.750% tangible equity units, each with a stated value of $50.00 (the “Units Offering,” and together with the Common Stock Offering, the “Offerings”). The Common Stock Offering closed on February 4, 2026, and the Units Offering closed on February 5, 2026. Net proceeds of approximately $1.3 billion were received by the Company, which were used to finance a portion of the cash consideration for the PAG Acquisition. See Note (13) “Common Stock and Tangible Equity Unit Public Offerings” to the consolidated financial statements for further information.

Business Trends

During the second quarter of 2026, the Company delivered record results driven by strong execution on new and existing distribution awards, expansion of product offerings and MRO capabilities, increased end-market demand, and contributions from recent acquisitions. Revenue for the three months ended June 30, 2026 was $449.1 million, representing a 65% increase year-over-year.

Market growth and share gains drove increases in repair and distribution revenue of 149% and 17%, respectively, during the three months ended June 30, 2026, compared to the same period for the prior year. Growth was supported by several strategic initiatives, including the execution of newly awarded OEM distribution agreements, expansion of repair capabilities and capacity, the realization of synergies from recent acquisitions, and continued advancement of the Company’s OEM licensed manufacturing programs. These initiatives have further strengthened the Company’s position in the aviation aftermarket, while deeper OEM partnerships have expanded access to new markets and established customer bases.

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Recent acquisitions, including Aero 3 in December 2025 and PAG in May 2026, are aligned with the Company’s core strategy and have increased exposure to the high-growth, higher-margin commercial and business and general aviation MRO and distribution aftermarkets.

Results of Operations

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

Revenues. Revenues increased for the three and six months ended June 30, 2026, compared to the same periods of the prior year primarily driven by contributions from the acquisitions of PAG, NorthStar, Aero 3 and Turbine Weld. PAG contributed $104.5 million of revenue during the three and six months ended June 30, 2026. Revenue growth also reflected recently initiated distribution contract wins and improved demand for the Company's commercial aerospace products and services resulting from strong end market activity in global commercial air travel. Distribution revenue increased $29.8 million, or 17%, and repair revenue increased $147.2 million, or 149%, for the three months ended June 30, 2026, compared to the same period in the prior year. Distribution revenue increased $71.6 million, or 21%, and repair revenue increased $173.9 million, or 90%, for the six months ended June 30, 2026, compared to the same period in the prior year.

Operating Income. Operating income increased for the three and six months ended June 30, 2026, compared to the same periods of the prior year, primarily due to the previously discussed increase in revenues and a $5.9 million earn-out receivable fair value adjustment charge recognized in the prior year in connection with the Fleet Sale. These increases were partially offset by higher costs and operating expenses associated with increased revenue, increased amortization of intangible assets of $12.0 million and $14.9 million for the three and six month periods, respectively, and higher acquisition, integration and restructuring costs of $7.2 million and $9.7 million for the three and six month periods, respectively.

Interest Expense, net. Interest expense, net decreased for the three and six months ended June 30, 2026, as compared to the same periods of the prior year. The decrease was primarily due to (i) interest income earned on excess cash proceeds from the Company's February 2026 underwritten public offerings prior to the use of such proceeds to fund the PAG Acquisition, (ii) interest income earned on a note receivable, (iii) lower average borrowings outstanding under the Company's debt facilities prior to the PAG Acquisition, and (iv) a decrease in the average interest rate on outstanding borrowings. The decrease was partially offset by higher average borrowings outstanding under the Company's debt facilities following the PAG Acquisition and interest expense incurred on the amortizing notes issued in connection with the Company's February 2026 Units Offering.

Loss on debt extinguishment. The Company recorded a loss on debt extinguishment of $4.5 million during the three and six months ended June 30, 2026 in connection with its amended Credit Agreement, which resulted in the extinguishment of its previous term loan. See Note (5) “Debt” to the consolidated financial statements for further information.

Provision for Income Taxes. The Company's effective tax rate for continuing operations was 27.3% and 21.6% for the three and six months ended June 30, 2026 respectively, and 15.1% and 15.4% for the three and six months ended June 30, 2025, 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 rate for the three and six months ended June 30, 2026 compared to the same periods of the prior year was primarily due to unfavorable permanent differences associated

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with increased acquisition costs during the current year, as well as a prior period valuation allowance reversal for certain tax attributes which lowered the provision for income taxes during the prior periods.

Liquidity and Capital Resources

Liquidity

On May 5, 2026, the Company entered into a first amendment to its existing senior secured credit agreement, dated as of May 2, 2025 (the Credit Agreement), which provides for, among other things, a new senior secured term loan B facility in an aggregate principal amount of $900.0 million (the “New Term Facility”) and an upsize to the Company’s existing senior secured revolving credit facility from $400.0 million to $500.0 million (the “Revolving Facility”), maturing on May 5, 2033 and May 2, 2030, respectively. The Credit Agreement provides greater flexibility and increased borrowing capacity. The amendment replaced the Company's previous term loan.

Borrowings under the Credit Agreement will accrue interest at either the Term SOFR or ABR (as defined in the Credit Agreement), plus in each case an applicable margin, based on the Company's Net Leverage Ratio (as defined in the Credit Agreement). The Company, at its option may select between one, three or six month Term SOFR Rates.

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 si

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Results of Operations

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

Revenues. Revenues increased driven by contributions from recent acquisitions, recently initiated distribution contract wins and improved demand for the Company's commercial aerospace and business and general aviation products and services. Increased revenues were supported by strong end market conditions, reflecting sustained activity in air travel. Aviation distribution revenue increased $221.1 million or 46% and repair revenue increased $104.9 million or 35%.

Costs and Operating Expenses. Costs and operating expenses increased primarily as a result of increased revenues. Costs and operating expenses include intangible asset amortization expense, which increased to $26.0 million for the year ended December 31, 2025, as compared to $17.6 million for prior year period, due to recent acquisitions. In addition, during the year ended December 31, 2025, the Company recognized a $29.2 million charge related to the fair value remeasurement of the earn-out receivable associated with the Fleet Sale.

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Operating Income. Operating income increased primarily attributable to revenue growth and the non-recurrence of certain one-time charges incurred in the prior year, including net lease abandonment charges of $12.2 million and corporate restructuring charges of $4.2 million. The operating income increase was partially offset by higher intangible asset amortization expense, a charge related to the fair value remeasurement of the earn-out receivable, and increased corporate acquisition and integration costs incurred during the current period.

Interest Expense, Net. Interest expense decreased primarily due to a reduction in the Company's average borrowings under its debt facilities and a lower average interest rate on outstanding borrowings during the period. In addition, interest income earned on the utilization of excess cash proceeds from the October 2025 underwritten public offering and on the note receivable further contributed to the overall decrease in interest expense.

Provision for Income Taxes. The effective tax rate for continued operations was 22.5% in 2025 compared to 18.5% in 2024. The higher tax rate in 2025 was primarily attributable to the reduced impact from favorable permanent adjustments, such as foreign derived intangible income ("FDII") and excess stock tax benefits, due to higher pre-tax book income in 2025, as well as adjustments to a tax settlement payment associated with a foreign subsidiary that is in the process of dissolution.

The Company's tax rate is also affected by discrete items that may occur in any given year but may not be consistent from year to year. In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income deduction, I.R.C. Section 162(m) executive compensation limitation and unrealized investment income or loss from the Company's COLI plan caused differences between the statutory U.S. federal income tax rate and the effective tax rate.

Financial Condition

There has been no material adverse change in the Company's financial condition in 2025. The Company's outstanding borrowings under the Company's term loan and revolving facility decreased $136.3 million, and the Company had $399.4 million of unused commitments under the credit agreement as of December 31, 2025. Changes to other asset and liability accounts were primarily due to the Company's earnings; the level of business activity; the sale of the Fleet segment; the timing and level of inventory purchases to support new distribution programs, vendor payments required to perform work; and collections from customers.

Liquidity and Capital Resources

Cash Flows

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

Cash provided by operating activities increased by $58.0 million primarily due to higher net income from continuing operations, adjusted for non-cash expenses.

Cash used in investing activities increased by $12.8 million primarily reflecting higher net cash paid for current year acquisitions of $111.0 million, partially offset by an increase in net cash proceeds from the sale of business segments of $98.8 million. See Note (2) "Acquisitions" and Note (3) "Discontinued Operations" to the consolidated financial statement for further information.

Cash provided by financing activities decreased by $26.0 million primarily due to higher net repayments of the Company's debt during the current period of $135.8 million, partially offset by increased proceeds of $116.2 million from the issuance of common stock compared to the prior year.

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The Company paid cash dividends totaling $8.3 million, or $0.40 per share, in 2025. Pursuant to the Company's credit agreement, payment of cash dividends is subject to annual restrictions. The Company has paid cash dividends each year since 1973.

Liquidity

The Company's internal sources of liquidity are primarily from operating activities, specifically from changes in the Company's level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability. Significant increases or decreases in these operating activities 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.

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. See Note (7) “Debt” to the consolidated financial statements for further information.

The Company's outstanding borrowings under the credit agreement decreased approximately $136.3 million for the year ended December 31, 2025. The decrease was driven by the repayment of all outstanding borrowings under the revolving facility, principally from the utilization of proceeds from the Fleet Sale and the Company's October 2025 underwritten public offering. See Note (3) "Discontinued Operations" and Note (15) "Capital Stock", respectively, for further information. As of December 31, 2025, the Company had outstanding borrowings under its term loan of $296.3 million, outstanding letters of credit of $0.6 million, and $399.4 million of unused commitments under the credit agreement.

In October 2025, the Company initiated a public offering of its common stock that resulted in net proceeds of $441.6 million, which were used to finance the cash consideration for the Aero 3 acquisition and general corporate purposes, including repaying outstanding borrowings under the Company's revolving facility. See Note (15) "Capital Stock" to the consolidated financial statements for further information.

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.

Other Obligations and Commitments

The Company's contractual cash obligations as of December 31, 2025 include payments of interest on its debt facilities and operating lease obligations. See Note (7) "Debt" and Note (12) "Leases" to the Consolidated Financial Statements for information regarding the Company's long-term debt obligations and future minimum lease payments on operating lease obligations, respectively.

The Company estimates cash requirements for interest payments on its debt facilities to be approximately $15.3 million for 2026, $14.8 million for 2027, $13.9 million for 2028, $12.8 million for 2029, and $4.1 million for 2030 when the Company's facilities mature. The estimates do not take into account future draw downs and repayments on the debt, the impact of interest rate swaps, or changes in the variable interest rate, and actual interest may be different. The estimates included variable rate interest obligations estimated based on rates as of December 31, 2025. The interest payments are estimated through the maturity date of the Company's term loan. Interest payments under the revolving facility have been excluded because a reasonable estimate of timing and amount of cash out flows cannot be determined.

Inflation and Pricing

The Company has experienced broad-based inflationary and tariff impacts consistent with overall trends in the aerospace industry, due primarily to increased materials, labor, and services costs. The effect of these increased costs on consolidated net income has been mitigated with improved efficiency in the Company's underlying business through productivity improvements and pass-through price increases. Given broader inflation in the economy, the Company is monitoring the risk inflation presents to active and future contracts.

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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 the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates and Judgments

The Company's consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require the Company to make estimates and assumptions. Certain critical accounting estimates affect the more significant accounts, particularly those that involve judgments and assumptions used in the preparation of the consolidated financial statements. Due to the significant judgment involved in selecting certain of the assumptions used in these estimates, it is possible that different parties could choose different assumptions and reach different conclusions. The Company considers estimates relating to the following matters to be critical accounting estimates.

Revenue Recognition

The Company accounts

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