VSE Corporation (VSEC) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the VSE Corporation Fourth Quarter and Full Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Noel Ryan of Investor Relations. Thank you. You may begin.

Thank you. Welcome to VSE Corporation's fourth quarter and full year 2020 results conference call. Leading the call today are our President and CEO, John Cuomo; and Chief Financial Officer, Steve Griffin. 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 materially and significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks 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 are using non-GAAP financial measures in our presentation. The appropriate GAAP financial reconciliations are incorporated into our presentation where available, which is posted on our website. All percentages in today's discussion refer to year-over-year progress, except where noted. At the conclusion of our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to John Cuomo for his prepared remarks.

Thank you, Noel. Welcome everyone and thank you for taking the time to join our call today. During 2020, VSE successfully navigated pandemic related disruptions for the global aviation market, while continuing to execute on our multiyear business transformation plan. We refined our strategic focus, while introducing differentiated value proposition to the market with an emphasis on higher-margin product and service offering. During the year, we won new multiyear contracts, increased our presence within existing markets, expanded our product and service capabilities, and grew our contract bidding activity and backlog. Additionally, we divested of non-core assets, reduced overhead costs to align with current demand conditions and built a new leadership team capable of driving our strategy forward and generating above market returns. In 2020, we generated $29.5 million of adjusted net income, while growing free cash flow by more than $24 million on a year-over-year basis. We also continued to pay our quarterly dividend and reduce debt by $19 million. At a business segment level our balanced stable military and government customers and contracts offset the pandemic-related impact to our commercial market. We continue to see a recovery within our aviation markets during the fourth quarter with revenues increasing sequentially in the fourth quarter as compared to the third quarter supported by improved business in general aviation and narrow-body activity together with market share gains. Although revenue passenger miles remain below historic levels, we believe the markets we serve have bottomed and are poised for recovery during the second half of 2021. Our business continues to outpace the recovery supported by a balanced commercial and business and general aviation customer mix and new business wins to offset the market decline. In our Federal & Defense segment, bidding activity increased 37% versus the prior year. This growth in bidding activity and bookings reflect our more aggressive focus on business development and our higher-margin technical services focused strategy. In our Fleet segment, commercial fleet and e-commerce fulfillment demand remains strong providing a complement to our core USPS business which remains a stable source of earnings and free cash flow. The diversification strategy for this segment is taking shape. In 2020 non-USPS revenue grew 93% compared to 2019. Turning now to slide 3 in our presentation materials. Before we share our thoughts on where we're taking the business in 2021, it's important to highlight the progress we've made during the last 12 months including those specific actions taken to advance our business transformation and corporate strategy. New business and key account growth was a major area of focus last year and remained so in 2021. Our Honeywell awards announced in July, our exclusive landing gear distribution agreement with Triumph announced in October together with our recently announced exclusive Life-of-Program APU distribution agreement with Pratt & Whitney Canada were all major wins for the team that validate our value proposition to the market. And set the stage for both segment revenue and margin expansion in 2021. Another achievement in 2020 was within service and capability expansion where we expanded avionic MRO capabilities in our aviation segment, launched new commercial fleet and e-commerce fulfillment business units within our fleet segment, and introduced the new logistics and supply chain management division within our Federal & Defense segment. We took action to streamline operations during the past year, closed nonessential operations and reduce costs throughout the business. We've divested of two noncore aviation assets, closed three facilities and consolidated operations into strategically located Centers of Excellence, while removing $13 million of annualized costs from the business. At the leadership level, we made several important organizational changes. Since I joined VSE just under two years ago, we brought aboard a new group President of Aviation, a new group President of Federal and Defense Services, a Chief Human Resource Officer; and most recently Steve Griffin, our new Chief Financial Officer who I'm pleased to have joining me for his first VSE earnings call today. At the same time, we realigned our incentive structure to ensure a pay-for-performance model in keeping with our commitment to attracting top talent and supporting short and long-term shareholder interest. Moving now to slide 4. Earlier this week, we announced the acquisition of HAECO Special Services or HSS. HSS is a military aircraft maintenance organization providing heavy checks for the United States Air Force KC-10 fleet with strong backlog and contract revenue visibility into 2025. These capabilities expand VSE's existing U.S. Air Force program and Contract Field Team programs. This transaction provides VSE with access to new capabilities, technical expertise and contract past performance required to provide end-to-end support for government aircraft fleet. This acquisition will help support growth with new contract opportunities including targeted prime and subcontractor roles on various aircraft sustainment and modification program. This transaction, which had a total purchase price under $20 million, is a blueprint for the types of bolt-on transactions we are evaluating. The transaction was funded with cash proceeds from our heavily subscribed underwritten public offering of common stock completed earlier in January of this year, which resulted in net proceeds of $52 million. We are very excited to welcome the 275 HSS team members to the VSE family. With that, I will now turn it over to Steve Griffin, our CFO to introduce himself and comment on our fourth quarter and full year 2020 financials. Steve?

Thanks, John, and welcome to everyone joining us today. Before I get into the financials, I want to share my initial impressions since joining the company in November 2020 from GE Aviation. Both John and myself agree that the aftermarket is fragmented and inefficient, creating an opportunity for agile, well-capitalized suppliers to gain share. VSE is uniquely positioned to win in this market. Although we're a small organization, we have the deep contract experience of a much larger organization, which provides credibility with global, commercial and defense customers we serve. I view VSE is one of the best positioned small supplier platforms in the market, which is the primary reason why I'm here. I'm also here because of John's vision for the organization together with the high-caliber management team he has assembled. This is a team that understands the importance of driving culture change to achieve its strategic objectives. Culture change begins with personal accountability from the top down. Ours is a team that is committed to winning guided by shared purpose. In my first several months with the company, I've had the opportunity to visit several of our facilities and interact with many of our employees. I have been very impressed with our in-house overhaul and engineering capabilities, as well as with our employees focus on exceeding customer expectations. Within the organization my mandate will be to focus on building a data centric culture, driving financial accountability throughout the organization with a strong focus on margin rate expansion and cash flow generation, and acting with a sense of urgency to implement measurable changes that support profitable growth. Already in 2021, we've successfully completed a secondary equity offering, which added many new shareholders and increased our daily float in the stock. We announced the new life-of-program Pratt & Whitney award and we completed our first acquisition welcoming HAECO Special Services to VSE. Internally with our employees, I'm seeing that the speed at which we're moving is creating a positive force for change and is making our business that much more exciting to be a part of. Across the finance function, we remain focused on delivering for our shareholders and helping to align our business priorities to our strategic initiatives. Now, moving into the financial results for the fourth quarter. Starting on slide 5, we'll cover our GAAP results. We reported total revenue of $150 million in the fourth quarter versus $195 million in the prior year period. This was primarily driven by lower aviation and Federal & Defense segment revenue, offset by slightly higher revenue from our fleet segment. Our Aviation segment reported sequentially higher revenue versus the third quarter 2020 and represents our second straight quarter of sequential revenue growth. Our reported net income for the quarter was $6 million, versus $10 million in the prior year period. On slide 6, adjusted net income was $6.2 million and our adjusted diluted earnings per share was $0.52, versus $11.5 million and $1.04 respectively in the fourth quarter of 2019. Adjusted EBITDA declined to $17.3 million in the fourth quarter versus $23.1 million for the same period in 2019. Our profitability was impacted by the lower volume in our Aviation segment. However, this was partially offset by margin expansion in our Federal & Defense segment. On slide 7, we detail the drivers of our revenue and adjusted EBITDA for the fourth quarter 2020 versus 2019, as well as for the full year 2020 versus 2019. Starting with the fourth quarter, our overall EBITDA margin rate fell from 11.8% in 2019 to 11.5% in 2020, primarily as a result of our Aviation segment and the associated impacts from the COVID-19 pandemic on revenue passenger miles. This was offset however, by the margin improvement in our Federal & Defense segment, where the completion of certain U.S. Department of Defense contracts in addition to higher-margin, fixed-price contracts, helped drive incremental profitability despite lower revenue. When looking at the full year 2020 results versus 2019, we see a similar story as in the fourth quarter, where overall EBITDA margins dropped 70 basis points from 12.1% to 11.4%. For the full year, Aviation and Fleet segment margin erosion was partially offset by improvements in our Federal & Defense segment. On slide 6, we'll cover our Aviation segment where revenue, excluding the previously divested Prime Turbines and CT Aerospace assets, declined 26% on a year-over-year basis, as lower revenue passenger miles at major airline customers resulted in reduced commercial MRO activity. Aviation segment revenue increased 7%, when compared to the third quarter 2020, supported by a combination of market share gains within our parts distribution business, together with the increased demand for higher-margin, technical sales from our business and general aviation customers. We continue to invest in the businesses capabilities to gain incremental share of wallet and expect to see our margins increase throughout 2021. On slide 9, our Fleet segment fourth quarter revenue increased 1% on a year-over-year basis, as our growth in commercial fleet and e-commerce fulfillment offset a slight decline in US Postal service-related revenue. We continue to see opportunities to grow at an outsized pace with our e-commerce and commercial channels, helping to offset reductions in USPS revenue. In the quarter, our non-USPS revenue grew 83% year-over-year. And for the full year, our non USPS revenue grew 93% year-over-year. On slide 10, our Federal & Defense segment revenue declined 29% on a year-over-year basis, primarily due to the completion of a DoD program during the first quarter of 2020. Federal & Defense segment continued the trend in 2020 of improving profitability, despite lower revenue, as we continue to diversify our offerings. We are continuing our business development efforts and saw contract bidding increase by 37% for the full year 2020 versus 2019, which helped contribute to the 97% growth in segment bookings for the fourth quarter 2020 versus the same period in 2019. Now turning to slide 11. As of December 31, 2020, we had $175 million in unused commitments available under our $350 million revolving credit facility that matures in January 2023. In addition, our total net debt was $251 million versus $269 million in the fourth quarter 2019. For the fourth quarter, our free cash flow was negative $900,000. However, this included a $10.7 million disbursement for inventory associated with our new Pratt & Whitney Canada APU distribution agreement. Excluding the effect of this new business, our underlying business generated just under $10 million for the quarter. Our ratio of net debt to trailing 12-month EBITDA was 3.3 times. Following year-end 2020 and January 2021, we priced a previously announced underwritten public offering of 1.4 million shares of common stock at a price to the public of $35 per share, resulting in net proceeds to the company of $52 million after transaction-related expenses. We expect to use net proceeds from this offering for general corporate purposes, which may include among other things financing strategic acquisitions, such as the purchase of HAECO Special Services announced earlier this week; working capital requirements for new program launches as evidenced by our recently announced Pratt & Whitney APU deal; and repaying borrowings under our revolving credit facility. With that I'll turn it back over to John.

Thanks, Steve. It's great to have you here and I'm motivated by our quick chemistry and partnership. Now turning to Slide 12. While 2020 was a year defined by the COVID-19 pandemic and our decisive response to changing market conditions. We also remain focused on transforming the business, culture, processes, strategy, systems and organization. This foundational work gives me great confidence that 2021 will be defined as a year of growth for VSE. We have listed our strategies in the market, received positive market feedback and are prepared to accelerate both organic and inorganic growth opportunities. Organic opportunities continue to center around aerospace distribution, commercial fleet expansion and federal and defense backlog building. Inorganic growth centers around bolt-on acquisitions in our Aviation and Defense segment, specifically to support market niches in component repair, part distribution, supply chain, MRO and business in general aviation, all while applying a very disciplined approach to market accretive opportunities. Moving now to Slide 13. VSE's culture and business transformation continues into 2021 with a focus on new customer wins, market share gains, further product and service line expansion and increased focus on margin expansion and inorganic growth. Within our Aviation segment, we expect to outpace the ongoing market recovery. While driving organic operating margin expansion through a combination of recently awarded distribution agreements, expanded MRO capabilities, together with new partnerships that position us to capture incremental market share. We will also seek to make a deeper move into underserved niche markets, where we can leverage our expertise in proprietary part distribution and component and engine accessory MRO. Within our Fleet segment, we seek to drive commercial growth to offset a relatively flat USPS business, with above-market growth from commercial fleet customers, new commercial products, just-in-time services along with the acceleration of e-commerce proprietary technology and e-commerce fulfillment sales. Within the Federal & Defense segment, we will seek to increase our exposure to new and existing DoD programs, specifically with respect to military aviation services, where we can leverage our existing capabilities and the new capabilities of our recently acquired business. We will continue to build strong quality backlog from core capabilities and expanded supply chain logistics, technical and aircraft maintenance and sustainment offerings. Finally, we will expand our focus on growing our share of wallet with an existing Army and Navy programs with a focus on more technical higher-margin offerings. While organic growth remains a top priority in 2021, we intend to become a more active acquirer of complementary businesses that accelerate our growth strategy. Looking ahead, we anticipate, 2021 will be back-end loaded with approximately 40% of adjusted EBITDA being generated in the first half and 60% in the back half of the year, as new contract activity accelerates. We anticipate progressive organic involvement in revenues across all segments as we move through the year, not including contributions from the HAECO acquisition. While we expect to be both net income and free cash flow positive for the full year 2021, we intend to invest aggressively in product inventory to support recent and future aviation program wins. We believe these investments are necessary to support our entrance into higher-margin businesses with the potential to support long-term profitable growth as these markets recover. In closing, I want to thank our investors for their ongoing support of VSE. 2021 has started on strong footing, supported by improved market conditions, new business wins, execution of recent awards and the acquisition of HAECO Special Services. As a management team, we are excited by the significant opportunities for both organic and inorganic growth as we create value for all stakeholders. We look forward to connecting with many of you over the coming months as we share what we believe is one of the most exciting stories in the 60-year history of VSE. I want to offer a big thank you to our VSE team across the globe. We pushed the team hard in 2020 as we transformed and repositioned the business for all that is to come in 2021 and beyond. Finally, I want to again welcome the outstanding HSS employees to the VSE family and I look forward to building this business with you in the years to come. Operator, we are now ready for the question-and-answer portion of our call.

Thank you. [Operator Instructions] Our first question has come from the line of Michael Ciarmoli with Truist Securities. Please proceed with your questions.

Hey. Good morning, guys. Thanks for taking the questions. Nice results.

Morning, Mike.

John, maybe you kind of went through all the detail in the prepared remarks, what US postal service obviously they're in the process, they bid out the new contract, how should we think of that in light of the current business? And of course, it's probably going to take years for them to transition to new vehicles, but how do we get comfortable with your presence supporting them? And just maybe level set us on what the expectations could be there as the Postal Service transitions to new vehicles?

Sure. I mean, a couple of things there. So there's just been a recent announcement. We don't have the complete details yet of delivery and if everything is going to be accepted in the contract and so on and so forth. But we've been supporting the Postal Service since the mid-80s. And we support -- everybody talks about the LLV and that fleet specifically. And we've supported that fleet as well as the rest of the vehicles that are in the fleet today. So when we look at this, this is just an ordinary transition that we had anticipated and our plan is to support their aftermarket. We are the largest supplier for the types of products in which we serve the postal service. And we see the same opportunity for us to continue to serve the aftermarket. Now with regard to scheduling, Steve, do you want to talk about kind of what's been public out there in terms of what we see right now as we try to model this out there? So the USPS is publicize, that the LLVs will be in their fleet for at least nine years. The new vehicles -- the earliest from what we see right now is they're expected to arrive like late 2023 and it will probably be a seven-year phase. So I mean Steve did I cover everything? Or anything else you wanted to add there from a data perspective?

[Indiscernible] 23.50:

Got it. That's helpful. John, just can you provide us any color on -- certainly you guys have had some really nice new contract wins on the aviation side, most notably with Triumph. Obviously, margins in the business strain now, but can you give us any color as to what the margin profile or how you're thinking of potential profitability on some of these new contracts? Just -- as I'm not going to ask for specific margin guidance in aviation, but just trying to get a sense of are you seeing margins in line with historical norms on some of these distribution and accessory repair programs? Is there some pricing power that you're having? Or is there some price degradation? Any color you can give on that?

Sure. I mean, so Steve, I'll toss it over to you in a second. So what we've consistently -- what I said prior to kind of Steve's arrival was, when I scaled the business down, I didn't scale it down to the traditional operating margin because we knew we had a strong pipeline and I wanted to make sure that we had the resources to get the businesses and get these transition -- the programs transition as quickly as we could. And to start to drive back to historic margins by the back half of the year. Steve, do you want to address Mike's question specifically about the program margins?

Yes. I mean we've kind of said at this point that we're expecting around mid-teens for this business in the long run. And so I think that's where you should expect some of these distribution deals in terms of the future profitability. One element that's important for us to discuss is the notion around working capital investments as we've mentioned on our call and just in general. We take a pretty aggressive approach on our team -- I should say conservative approach with our teams to make sure that we take into consideration where we're making investments. And so where you see larger inventory purchases it's safe to assume we're going to sit in a higher margin rate in the future to make up for that cost of capital. And so that's a pretty diligent process that we go through in terms of making the decision of where we want to be playing versus not and how it equates to the overall margin rate of the deal.

Got it. And last one just to be clear it sounds like more second half 2021 weighted you'll start to see some of the benefits of these deals flow through and that's kind of driving some of that EBITDA split?

Yes. That is exactly what you should expect. As we mentioned earlier -- we're starting to see some of the fruits of the new programs. They're not big dollars quite yet but we are definitely seeing the traction in the market. But you should expect the larger dollars to start to accrete as the second half continues.

Got it. I will jump back in the queue.

The last thing I want to add Mike is that we -- the APU deal with Pratt that we closed right at the end of the year we're already seeing initial revenue from that deal in Q1.

Got it. All right, thanks guys. I will jump back in the queue.

Thank you. Our next question comes from the line of Ken Herbert with Canaccord. Please proceed with your question.

Yes, hi. Good morning. I just -- I wanted to -- hey John, I wanted to follow-up on those comments on the Aviation segment. You saw a sort of 6% to 7% sequential growth in the segment from the third quarter on the topline. Is that a trend that continues here into the first and second quarter? Or how should we think about sequential growth coming out of the fourth quarter in the Aviation segment?

Sure. Yes Steve do you want to address that?

Sure thing. Thanks for joining Ken. Thanks for the question. Here's what I would say. I think we're anticipating that the market is going to look mostly flat sequentially from 4Q to 1Q and then we're looking at sort of modest increases from a market perspective from 1Q to 2Q with the real recovery starting in the back half. We've shared that our expectations for an aviation business to be able to grow sequentially quarter-over-quarter. And that's primarily due to the new programs the market share gains. And then we think we've got an accelerated recovery as a result of the business in General Aviation segment which we think we're well positioned in. At the end of the day, you'll be able to see some of the splits which we publish the 10-K in terms of the splits between distribution and repair later. But it's safe to say that we expect to see the distribution base business pick up more quickly through the beginning of this year.

Okay. Great. That's helpful. And if I could I wanted to ask on the HSS acquisition you just completed. Is that company exclusively on the KC-10? And can you talk about maybe potential timing of -- with the new capabilities other as other contracts could potentially get layered into that? And can you provide maybe just any context around how we should think of that in terms of the growth contribution to either the segment or the company in 2021?

Yes. So I'll kick it off. And then Steve I'll turn it over to you to talk through a little bit more of the financials. So Ken from a strategic perspective what the deal does is it really -- our Air Force programs today are really line maintenance and they're on base. So this takes us to heavy maintenance and off base. So now we've got the full scope of work where we can now go bid as a prime or a subcontractor on any other program. So we've got two hangers in the Greensboro area that we're performing this work. We've got access to other hangers that we can start now going to bid pretty quickly. So the first thing is get the business. We're going to do a slight integration of systems and get it integrated into our business. The second thing is, where there's opportunities kind of cross segment whether with our supply chain organization or some of our component or repair businesses that can help augment and add value to that business. And then the third element is where we have ability pretty quickly we've got some near-term opportunities that we want to start getting the pipeline out there and get the business development teams starting to bid using these new capabilities. So that's kind of -- this fits really nicely into the strategy of moving a little further upstream from more of that base operation support kind of cost-plus work that we were traditionally doing to more of the fixed price higher-margin technical work. Steve, do you want to talk about a little bit how Ken should think about it from a modeling perspective?

Yes. Sure. So from a business perspective, we view the current run rate of the business to be about $25 million of revenue per year. And then, I think we shared it before earlier, but just in general, I think the business's EBITDA rate is going to be accretive. It's in excess of what we have within our FDS business. And so, you can look that up. I mean it's in the filings today as well as in the presentation in terms of the trailing 12-month EBITDA rate. But, it will be in excess of that, which is what we're excited about in terms of the transition in terms of our focus and priorities and capabilities.

That's great. I really appreciate the color. Just finally, you've really called out some really nice growth. I know, it's obviously off a small base, but in the fleet business, on the non-USPS business, can you give any more details John, on maybe some of the examples of customers, maybe some of those types of contracts? And if your visibility on that sort of the non-USPS growth and the opportunity there, how that looks into 2021 and 2022?

Sure. I mean, I'm really, really excited about the strategy for our Wheeler business. They've is this tremendous distribution asset in the company, and they've traditionally serviced, the Postal Service and government customers. So, expanding that -- but it runs like a commercial business, so expanding into the commercial market has been a pretty easy transition. So, we really have a few different kind of revenue streams. First is through our own e-commerce site and just utilizing our distribution capabilities. The second is what we call e-commerce fulfillment, and that's where we will connect our inventory through other e-commerce sites out there. It could be general sites like an Amazon. It could be more specific automotive or heavy-duty or other type of vehicle aftermarket sites as well. And the third is, our program with the Postal Service is a full just-in-time program. So, a very similar to my past world, it reminds me a lot of that world where we really get embedded and then transfer the customer. And you can see from the longevity of our Postal Service relationship and from the consistency of the market share that we've had, that embedded relationship and the execution has been quite strong. So, we've launched that program, and now we've got some key platform customers. So think of people like utility vehicles, think of your delivery vehicles, your -- we've got a bakery company kind of food services industry. Those types of vehicle, fleet owners, who have multitude of fleet, typically will go towards that just-in-time model. Those who are more on the transactional side are going more towards our e-commerce model. We're staying away from that more heavy CapEx brick-and-mortar type focused world. So, when you look at kind of how do you look at the forecast? This is a very short book-to-bill kind of business, which I have lived my entire life in. So, it's -- for us, it's about how do you take share? And how do you have that consistency of growth on a month-over-month basis? And we feel really confident in our plans for 2021 and the team that we have in place to execute on that. So, I say for modeling -- yes. I'd say just last thing Ken, on the modeling perspective, I'd say, we've been growing at a double-digit growth rate. I'd say you can expect that that side of the business you can expect that to continue in 2021.

Great. Thanks, John. I’ll pass it back there.

Thanks, Ken.

Thank you. Our next question has come from the line of Josh Sullivan with The Benchmark Company. Please proceed with your questions.

Hey, Josh.

Hey. Good morning, John, Noel. Welcome Stephen. Yes, just with regard to the comments on being a little more acquisitive. There's been some headlines out here over the last day or so about another aerospace OEM, looking at divest and some aerospace service assets. Can you just talk about the balance between organically addressing some of these opportunities that are opening up versus inorganically? Are OEM assets interesting to you at this point? Just some color on that would be great.

Yes. I mean it's a good question and kind of one we talk about a lot here. So, what we've done in 2020 in the first 18 months of we've been with the business is really, really focused on being very clear on our strategy. So, we know exactly where we want to play. We know exactly what we want to do, and we know the gaps on that strategy, whether they're geography, customers, products or service capabilities. So, we have a very disciplined approach. We'll look at every transaction or divestiture asset that's out there, and say, does it meet this criteria? Then, can it -- from a cultural and a business perspective, can it be integrated into the business and then to the financials work? So, all of that has to kind of check the box before we'll kind of move forward. So I'd say that where we see opportunities today, we mentioned -- we're looking at businesses in all of our segments. We've kind of left out our Fleet segment in some of the public kind of communication, because they're going to go through an ERP conversion and we've talked about the ability to integrate and they're just not in the place to integrate a business in the first half of this year. When you look at our other businesses, it's very much around the MRO capabilities, or distribution type assets that's still these market niches. So we are looking, but I'd say, expect it to be very, very disciplined in our approach. This asset we're very excited about. It filled the gap -- the HSS asset filled the gap for us in our federal business brought some nice synergies between our aviation business -- our Aviation segment and our Federal segment and continue to see assets like that as we move forward.

Yeah. And then maybe just one on HSS. I think, I read, they were averaging about 30 inductions a year. Where could that go? Or is inductions sort of -- the number of induction is not the right way to look at the opportunity?

Yes. I mean, I'd say, this is the way we looked at the opportunity is it's got a -- I love end-of-life programs, because I think it's when the OEM really is looking for a true partner and you can build strong, strong relationships with that OEM that translate into future opportunities as well both on other end-of-life programs, or other places where they're struggling. The second thing is you just don't see as much aftermarket activity around that asset, because everybody is focused on the newer assets. So this fits into that model and it's something that we do in all of our other business segments as well. So there was a key component of that that was attractive to us. We like that we've got very strong visibility into the backlog, and therefore, the revenue earnings and free cash flow generation through 2025. But I'd say, the next step is really about how we take the capabilities and then focus on the new business development.

Got it. Got it. And then just one last one on aviation. Can you just talk a little bit about what you're seeing in aftermarket activity maybe between business and general aviation versus commercial aerospace just as airlines gear up for a COVID recovery. Anything there coming in faster than you expected or maybe even slower than expected at this point?

Yes. I'd say that we're seeing -- business and general aviation -- if I break things out, business and general aviation is leading the commercial recovery. From a commercial perspective, we're seeing more narrow-body work than we are seeing wide-body work. And then from distribution to repair, our MRO businesses we're seeing our distribution business kind of start to recover faster than our MRO businesses. So I don't know if that kind of qualitatively answers the question. Steve, do you have any more color on that?

Yes. No, I think you summarized well. Distribution is going to be the area. I mentioned this earlier when we're talking about Ken, the distribution was the area that we expect to see a recovery faster. And it's just driven by our business model. 90% of our products are proprietary. So we do believe they're going to move in line with the recovery, which we're pleased about. And then as John mentioned, the DGA space, we are seeing that pick up more quickly.

Thank you for the time.

Thanks, Josh. Appreciate it.

Thank you. Our next question is come from the line of Louie DiPalma with William Blair. Please proceed with your questions.

John, Steve and Noel, good morning.

Hey, Louie. How are you?

Good morning.

Not bad. Regarding the trio of exclusive distribution agreements with Honeywell Triumph and Pratt. These three OEMs have massive product portfolios. And should investors view the announced contracts over the past year as starting point with these three large partners?

Absolutely. I think, there's a couple of things. I'd like to have a diversified business. So we look at business in generally from an aviation perspective specifically. We look at business in general aviation and commercial. We want to have a strong diversification and mix between those two. And then from a distribution perspective, we want a mix of the OEMs that we represent as well as the aircraft that we're on. So you'll see us -- there will be opportunities with those OEMs, but also we want to make sure that we're continuing that diversification strategy. So we're -- we build a very balanced portfolio from a distribution perspective. But we look at each of them not only as exclusive OEM deals, but what else we can do with them. So I'll give you an example like the Triumph deal. So you look at that landing gear deal, and you say, okay. So what else does that do for us? So what else are those customers buying and whether that's consumable and expendable type product that's non-proprietary? Or are there other proprietary lines that we can look to bring in together so that we can create a better offering to the market as well? So, that we look at it in both of those ways.

Great. That's helpful. And for the Federal & Defense business, EBITDA grew 37% in 2020. John and Steve, you and Rob Moore, appear to be executing well on the strategy to optimize profitability with the higher-margin technical services. And you also suggested that HSS acquisition is positive for the margin. I mean, with that being said, do you expect that segment continue growing EBITDA in 2021?

Yeah. Thank you for the question, Louie. So at the end of the day, we benefited this year from a mix shift of our fixed price versus cost plus contracts, which inevitably allowed us to take advantage of some incremental productivity and drive productivity on the contracts. That's what primarily drove some of the margin increases that we've walked through in terms of the financials earlier. What I'd say is that, that's sort of a short-term thing. So we are seeing a little bit of headwind as we face into 2021, associated with that shift in contract. However, as you're seeing, we are chasing after more of those technical services higher-margin capability. And we think the margin rates that we've demonstrated this year are sort of where we want to be as we move forward, hence why the HSS acquisition is a great place for us to continue to grow.

Great. And one, final one, there's been a lot of M&A activity within defense logistics services. Recently AECOM acquired DynCorp's Amentum. Have you witnessed any change in the competitive environment, as it relates to the elimination of some key competitors? And should that also be positive for the margin structure in this business?

Yeah. I mean, there's, a couple of things, Louis. So first is, what we've seen is, the traditional business that VSE really supported, a lot of that base operation. And that's why, last year I said, you might see the revenue a little lumpier in the federal business as we focus on shifting, to that higher margin more technical services type work. What we've seen in the larger kind of cost-plus base operations work, is actually a more competitive landscape. And we have minimum margin thresholds. We are focused on driving margin growth much more than we are focused on driving revenue growth. So we -- I'd say that, in that area we saw the competitive landscape really become even more compressed and more competitive. Now, with that, and with the acquisitions, and also, watching some of the assets that have been brought on, I mean the transportation assets in the last few years, from all three, Army, Navy and Air Force. We are seeing some gaps in some of the technical and supply chain offerings that are out there in the market. So meaning, the customers want things, that aren't necessarily readily available in the market. And that's where we see our opportunity for growth. So in some areas a little bit more competitive. And that's why we pivoted, to fill the gaps that we see out there.

Great. So is the competitive environment -- I guess, as it relates to the aviation MRO services for defense customers, like similar to what you acquired with HSS is that, like less competitive or more favorable than the base operations work?

I would say, it's -- let me say it this way. The base operations work doesn't require -- it's very, commoditized. So it's a cost-plus contract. It's much more about labor than it is about technical services. So the reason the HSS acquisition was important to us, is that, there's a tremendous amount of technical capabilities that we acquired with that business. And that -- and the more technically capable that you are, the more that you can differentiate and the more that you can pull away, and separate yourself from a competitive perspective.

Perfect. Thanks.

Thank you. There are no further questions at this time. I would like to turn the call back over to John Cuomo, for any closing comments.

Thanks everybody for the time today. We really appreciate your continued interest in VSE. And we look forward to speaking with you later this year, on our first quarter earnings call. Thanks everybody. And have a wonderful day.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, at this time. Have a great day.