UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20222023
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _____ to _____
Commission File Number: 000-03676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Delaware | 54-0649263 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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6348 Walker Lane | | | | |
Alexandria, | Virginia | | | | 22310 |
(Address of Principal Executive Offices) | | | | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.05 per share | | VSEC | | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares of Common Stock outstanding as of July 22, 2022: 12,794,42124, 2023: 15,372,544
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| TABLE OF CONTENTS | |
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PART I | | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II | | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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Forward-Looking Statements
This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement is included for purposes of such safe harbor provisions.
“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, the impact of widespread health developments, such as the ongoing COVID-19 outbreak, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, such as growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified elsewhere in this document, including in Item 1A, Risk Factors, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 filed with the SEC on March 11, 9, 2023 (“2022 (“2021 Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof.
PART I. Financial InformationFINANCIAL INFORMATION
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands except share and per share amounts)
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 371 | | | $ | 518 | |
Receivables (net of allowance of $3.5 million and $1.7 million, respectively) | 102,194 | | | 76,587 | |
Unbilled receivables | 41,310 | | | 31,882 | |
Inventories | 337,753 | | | 322,702 | |
Other current assets | 24,958 | | | 32,304 | |
Total current assets | 506,586 | | | 463,993 | |
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Property and equipment (net of accumulated depreciation of $70 million and $66 million, respectively) | 42,237 | | | 42,486 | |
Intangible assets (net of accumulated amortization of $116 million and $135 million, respectively) | 99,090 | | | 108,263 | |
Goodwill | 248,837 | | | 248,753 | |
Operating lease - right-of-use assets | 25,241 | | | 27,327 | |
Other assets | 25,232 | | | 27,736 | |
Total assets | $ | 947,223 | | | $ | 918,558 | |
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Liabilities and Stockholders' equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 14,162 | | | $ | 14,162 | |
Accounts payable | 112,935 | | | 115,064 | |
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Accrued expenses and other current liabilities | 48,226 | | | 49,465 | |
Dividends payable | 1,279 | | | 1,273 | |
Total current liabilities | 176,602 | | | 179,964 | |
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Long-term debt, less current portion | 294,448 | | | 270,407 | |
Deferred compensation | 11,977 | | | 14,328 | |
Long-term operating lease obligations | 24,537 | | | 27,168 | |
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Deferred tax liabilities | 8,376 | | | 9,108 | |
Other long-term liabilities | — | | | 250 | |
Total liabilities | 515,940 | | | 501,225 | |
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Commitments and contingencies (Note 6) | 0 | | 0 |
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Stockholders' equity: | | | |
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,794,421 and 12,726,659, respectively | 640 | | | 636 | |
Additional paid-in capital | 91,051 | | | 88,515 | |
Retained earnings | 339,592 | | | 328,358 | |
Accumulated other comprehensive loss | — | | | (176) | |
Total stockholders' equity | 431,283 | | | 417,333 | |
Total liabilities and stockholders' equity | $ | 947,223 | | | $ | 918,558 | |
(Unaudited) | | | | | | | | | | | |
| June 30, | | December 31, |
(in thousands except share and per share amounts) | 2023 | | 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 4,163 | | | $ | 305 | |
Receivables (net of allowance of $2.5 million and $2.0 million, respectively) | 114,154 | | | 90,599 | |
Unbilled receivables | 6,229 | | | 7,409 | |
Inventories | 427,822 | | | 380,438 | |
Other current assets | 14,797 | | | 15,202 | |
Current assets held-for-sale | 107,059 | | | 54,925 | |
Total current assets | 674,224 | | | 548,878 | |
Property and equipment (net of accumulated depreciation of $33.6 million and $30.7 million, respectively) | 43,992 | | | 40,501 | |
Intangible assets (net of accumulated amortization of $128.8 million and $121.3 million, respectively) | 82,818 | | | 86,558 | |
Goodwill | 222,023 | | | 217,262 | |
Operating lease - right-of-use assets | 20,194 | | | 21,558 | |
Other assets | 30,220 | | | 29,019 | |
Non-current assets held-for-sale | — | | | 56,013 | |
Total assets | $ | 1,073,471 | | | $ | 999,789 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 10,000 | | | $ | 10,000 | |
Accounts payable | 104,566 | | | 128,504 | |
Accrued expenses and other current liabilities | 30,295 | | | 31,889 | |
Dividends payable | 1,290 | | | 1,282 | |
Current liabilities held-for-sale | 64,070 | | | 52,929 | |
Total current liabilities | 210,221 | | | 224,604 | |
Long-term debt, less current portion | 365,110 | | | 276,300 | |
Deferred compensation | 7,651 | | | 7,398 | |
Long-term operating lease obligations | 17,609 | | | 19,154 | |
Deferred tax liabilities | 3,743 | | | 4,986 | |
Non-current liabilities held-for-sale | — | | | 17,821 | |
Total liabilities | 604,334 | | | 550,263 | |
Commitments and contingencies (Note 8) | | | |
Stockholders' equity: | | | |
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,897,544 and 12,816,613, respectively | 645 | | | 641 | |
Additional paid-in capital | 96,471 | | | 92,620 | |
Retained earnings | 366,690 | | | 351,297 | |
Accumulated other comprehensive income | 5,331 | | | 4,968 | |
Total stockholders' equity | 469,137 | | | 449,526 | |
Total liabilities and stockholders' equity | $ | 1,073,471 | | | $ | 999,789 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Income (Loss)
(in thousands except share and per share amounts)(Unaudited)
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| | For the three months ended June 30, | | For the six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | | |
Products | | $ | 143,576 | | | $ | 84,463 | | | $ | 280,807 | | | $ | 163,043 | |
Services | | 98,137 | | | 90,649 | | | 192,145 | | | 177,050 | |
Total revenues | | 241,713 | | | 175,112 | | | 472,952 | | | 340,093 | |
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Costs and operating expenses: | | | | | | | | |
Products | | 130,978 | | | 101,325 | | | 253,433 | | | 172,037 | |
Services | | 91,282 | | | 80,848 | | | 182,510 | | | 161,188 | |
Selling, general and administrative expenses | | 865 | | | 1,050 | | | 1,771 | | | 1,088 | |
Amortization of intangible assets | | 4,437 | | | 4,603 | | | 9,173 | | | 8,891 | |
Total costs and operating expenses | | 227,562 | | | 187,826 | | | 446,887 | | | 343,204 | |
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Operating income (loss) | | 14,151 | | | (12,714) | | | 26,065 | | | (3,111) | |
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Interest expense, net | | 3,872 | | | 2,666 | | | 7,481 | | | 5,696 | |
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Income (loss) before income taxes | | 10,279 | | | (15,380) | | | 18,584 | | | (8,807) | |
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Provision for income taxes | | 2,731 | | | (3,014) | | | 4,792 | | | (1,552) | |
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Net income (loss) | | $ | 7,548 | | | $ | (12,366) | | | $ | 13,792 | | | $ | (7,255) | |
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Basic earnings (loss) per share | | $ | 0.59 | | | $ | (0.97) | | | $ | 1.08 | | | $ | (0.59) | |
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Basic weighted average shares outstanding | | 12,778,355 | | | 12,702,366 | | | 12,760,026 | | | 12,391,166 | |
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Diluted earnings (loss) per share | | $ | 0.59 | | | $ | (0.97) | | | $ | 1.08 | | | $ | (0.59) | |
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Diluted weighted average shares outstanding | | 12,811,078 | | | 12,702,366 | | | 12,807,249 | | | 12,391,166 | |
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Dividends declared per share | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.20 | | | $ | 0.18 | |
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| | For the three months ended June 30, | | For the six months ended June 30, |
(in thousands except share and per share amounts) | | 2023 | | 2022 | | 2023 | | 2022 |
Revenues: | | | | | | | | |
Products | | $ | 165,997 | | | $ | 142,003 | | | $ | 320,443 | | | $ | 278,172 | |
Services | | 39,226 | | | 27,758 | | | 73,367 | | | 51,909 | |
Total revenues | | 205,223 | | | 169,761 | | | 393,810 | | | 330,081 | |
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Costs and operating expenses: | | | | | | | | |
Products | | 147,139 | | | 129,617 | | | 282,388 | | | 250,714 | |
Services | | 32,327 | | | 25,120 | | | 62,903 | | | 47,525 | |
Selling, general and administrative expenses | | 1,519 | | | 473 | | | 3,564 | | | 1,180 | |
Amortization of intangible assets | | 3,601 | | | 4,016 | | | 7,540 | | | 8,110 | |
Total costs and operating expenses | | 184,586 | | | 159,226 | | | 356,395 | | | 307,529 | |
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Operating income | | 20,637 | | | 10,535 | | | 37,415 | | | 22,552 | |
Interest expense, net | | 7,366 | | | 3,872 | | | 13,346 | | | 7,482 | |
Income from continuing operations before income taxes | | 13,271 | | | 6,663 | | | 24,069 | | | 15,070 | |
Provision for income taxes | | 3,182 | | | 1,908 | | | 5,860 | | | 4,026 | |
Income from continuing operations | | 10,089 | | | 4,755 | | | 18,209 | | | 11,044 | |
(Loss) income from discontinued operations, net of tax | | (1,234) | | | 2,793 | | | (237) | | | 2,748 | |
Net income | | $ | 8,855 | | | $ | 7,548 | | | $ | 17,972 | | | $ | 13,792 | |
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Earnings (loss) per share: | | | | | | | | |
Basic | | | | | | | | |
Continuing operations | | $ | 0.78 | | | $ | 0.37 | | | $ | 1.42 | | | $ | 0.87 | |
Discontinued operations | | (0.10) | | | 0.22 | | | (0.02) | | | 0.21 | |
| | $ | 0.68 | | | $ | 0.59 | | | $ | 1.40 | | | $ | 1.08 | |
Diluted | | | | | | | | |
Continuing operations | | $ | 0.78 | | | $ | 0.37 | | | $ | 1.42 | | | $ | 0.87 | |
Discontinued operations | | (0.10) | | | 0.22 | | | (0.02) | | | 0.21 | |
| | $ | 0.68 | | | $ | 0.59 | | | $ | 1.40 | | | $ | 1.08 | |
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Weighted average shares outstanding: | | | | | | | | |
Basic | | 12,886,100 | | | 12,778,355 | | | 12,865,394 | | | 12,760,026 | |
Diluted | | 12,916,998 | | | 12,811,078 | | | 12,921,826 | | | 12,807,249 | |
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Dividends declared per share | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.20 | | | $ | 0.20 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(in thousands)(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | 7,548 | | | $ | (12,366) | | | $ | 13,792 | | | $ | (7,255) | |
| | | | | | | | |
Change in fair value of interest rate swap agreements, net of tax | | — | | | 152 | | | 176 | | | 663 | |
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Other comprehensive income, net of tax | | — | | | 152 | | | 176 | | | 663 | |
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Comprehensive income (loss) | | $ | 7,548 | | | $ | (12,214) | | | $ | 13,968 | | | $ | (6,592) | |
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| | For the three months ended June 30, | | For the six months ended June 30, |
(in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
Net income | | $ | 8,855 | | | $ | 7,548 | | | $ | 17,972 | | | $ | 13,792 | |
Other comprehensive income, net of tax: | | | | | | | | |
Change in fair value of interest rate swap agreements, net of tax | | 2,361 | | | — | | | 363 | | | 176 | |
Total other comprehensive income, net of tax | | 2,361 | | | — | | | 363 | | | 176 | |
Comprehensive income | | $ | 11,216 | | | $ | 7,548 | | | $ | 18,335 | | | $ | 13,968 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Stockholders' Equity
(in thousands except per share data)(Unaudited)
| | | Three months ended June 30, 2022 | | Three Months Ended June 30, 2023 |
| | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
| | Common Stock | | | Common Stock | |
| Shares | | Amount | | |
Balance at March 31, 2022 | 12,769 | | | $ | 638 | | | $ | 89,830 | | | $ | 333,324 | | | $ | — | | | $ | 423,792 | | |
| (in thousands except per share data) | | (in thousands except per share data) | Shares | | Amount | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
Balance at March 31, 2023 | | Balance at March 31, 2023 | 12,886 | | | $ | 644 | | |
Net income | Net income | — | | | — | | | — | | | 7,548 | | | — | | | 7,548 | | Net income | — | | | — | | |
Stock-based compensation | Stock-based compensation | 26 | | | 2 | | | 1,221 | | | — | | | — | | | 1,223 | | Stock-based compensation | 12 | | | 1 | | | 1,894 | | | — | | | — | | | 1,895 | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 2,361 | | | 2,361 | |
Dividends declared ($0.10 per share) | Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,280) | | | — | | | (1,280) | | Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,289) | | | — | | | (1,289) | |
Balance at June 30, 2022 | 12,795 | | | $ | 640 | | | $ | 91,051 | | | $ | 339,592 | | | $ | — | | | $ | 431,283 | | |
Balance at June 30, 2023 | | Balance at June 30, 2023 | 12,898 | | | $ | 645 | | | $ | 96,471 | | | $ | 366,690 | | | $ | 5,331 | | | $ | 469,137 | |
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| Three Months Ended June 30, 2022 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
| Common Stock | | | | |
(in thousands except per share data) | Shares | | Amount | | | | |
Balance at March 31, 2022 | 12,769 | | | $ | 638 | | | $ | 89,830 | | | $ | 333,324 | | | $ | — | | | $ | 423,792 | |
Net income | — | | | — | | | — | | | 7,548 | | | — | | | 7,548 | |
Stock-based compensation | 26 | | 2 | | 1,221 | | | — | | | — | | | 1,223 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | |
Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,280) | | | — | | | (1,280) | |
Balance at June 30, 2022 | 12,795 | | | $ | 640 | | | $ | 91,051 | | | $ | 339,592 | | | $ | — | | | $ | 431,283 | |
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| Three months ended June 30, 2021 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at March 31, 2021 | 12,691 | | | $ | 635 | | | $ | 85,296 | | | $ | 329,064 | | | $ | (692) | | | $ | 414,303 | |
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Net loss | — | | | — | | | — | | | (12,366) | | | — | | | (12,366) | |
Stock-based compensation | 13 | | — | | | 548 | | — | | | — | | | 548 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 152 | | | 152 | |
Dividends declared ($0.09 per share) | — | | | — | | | — | | | (1,143) | | | — | | | (1,143) | |
Balance at June 30, 2021 | 12,704 | | | $ | 635 | | | $ | 85,844 | | | $ | 315,555 | | | $ | (540) | | | $ | 401,494 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Stockholders' Equity (continued)
(in thousands except per share data)(Unaudited)
| | | Six months ended June 30, 2022 | | Six months ended June 30, 2023 |
| | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
| | Common Stock | | | Common Stock | |
| Shares | | Amount | | |
Balance at December 31, 2021 | 12,727 | | | $ | 636 | | | $ | 88,515 | | | $ | 328,358 | | | $ | (176) | | | $ | 417,333 | | |
(in thousands except per share data) | | (in thousands except per share data) | Shares | | Amount | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
Balance at December 31, 2022 | | Balance at December 31, 2022 | 12,817 | | | $ | 641 | | |
| | Net income | Net income | — | | | — | | | — | | | 13,792 | | | — | | | 13,792 | | Net income | — | | | — | | | — | | | 17,972 | | | — | | | 17,972 | |
Stock-based compensation | Stock-based compensation | 68 | | | 4 | | | 2,536 | | | — | | | — | | | 2,540 | | Stock-based compensation | 81 | | | 4 | | | 3,851 | | | — | | | — | | | 3,855 | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 176 | | | 176 | | Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 363 | | | 363 | |
Dividends declared ($0.20 per share) | Dividends declared ($0.20 per share) | — | | | — | | | — | | | (2,558) | | | — | | | (2,558) | | Dividends declared ($0.20 per share) | — | | | — | | | — | | | (2,579) | | | — | | | (2,579) | |
Balance at June 30, 2022 | 12,795 | | | $ | 640 | | | $ | 91,051 | | | $ | 339,592 | | | $ | — | | | $ | 431,283 | | |
Balance at June 30, 2023 | | Balance at June 30, 2023 | 12,898 | | | $ | 645 | | | $ | 96,471 | | | $ | 366,690 | | | $ | 5,331 | | | $ | 469,137 | |
|
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| Six months ended June 30, 2022 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
(in thousands except per share data) | Shares | | Amount | | | | |
Balance at December 31, 2021 | 12,727 | | | $ | 636 | | | $ | 88,515 | | | $ | 328,358 | | | $ | (176) | | | $ | 417,333 | |
Net income | — | | | — | | | — | | | 13,792 | | | — | | | 13,792 | |
Stock-based compensation | 68 | | | 4 | | | 2,536 | | | — | | | — | | | 2,540 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 176 | | | 176 | |
Dividends declared ($0.20 per share) | — | | | — | | | — | | | (2,558) | | | — | | | (2,558) | |
Balance at June 30, 2022 | 12,795 | | | $ | 640 | | | $ | 91,051 | | | $ | 339,592 | | | $ | — | | | $ | 431,283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at December 31, 2020 | 11,055 | | | $ | 553 | | | $ | 31,870 | | | $ | 325,097 | | | $ | (1,203) | | | $ | 356,317 | |
Issuance of common stock | 1,599 | | | 80 | | | 51,937 | | | — | | | — | | | 52,017 | |
Net loss | — | | | — | | | — | | | (7,255) | | | — | | | (7,255) | |
Stock-based compensation | 50 | | | 2 | | | 2,037 | | | — | | | — | | | 2,039 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 663 | | | 663 | |
Dividends declared ($0.18 per share) | — | | | — | | | — | | | (2,287) | | | — | | | (2,287) | |
Balance at June 30, 2021 | 12,704 | | | $ | 635 | | | $ | 85,844 | | | $ | 315,555 | | | $ | (540) | | | $ | 401,494 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)(Unaudited)
| | | | | | | | | | | | | | |
| | For the six months ended June 30, |
(in thousands) | | 2023 | | 2022 |
| | (a) | | (a) |
Cash flows from operating activities: | | | | |
Net income | | $ | 17,972 | | | $ | 13,792 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 12,011 | | | 12,430 | |
Amortization of debt issuance cost | | 420 | | | 420 | |
Deferred taxes | | (1,533) | | | (790) | |
Stock-based compensation | | 3,894 | | | 2,675 | |
Provision for inventory | | 742 | | | 1,094 | |
Changes in operating assets and liabilities, net of impact of acquisitions: | | | | |
Receivables, net | | (21,082) | | | (25,607) | |
Unbilled Receivables, net | | (110) | | | (9,428) | |
Inventories, net | | (45,580) | | | (16,145) | |
Other current assets and other assets | | (1,274) | | | 6,036 | |
Operating lease assets and liabilities, net | | (67) | | | (69) | |
Accounts payable and deferred compensation | | (27,429) | | | (4,848) | |
Accrued expenses and other current and noncurrent liabilities | | (3,055) | | | 302 | |
Net cash used in operating activities | | (65,091) | | | (20,138) | |
Cash flows from investing activities: | | | | |
Purchases of property and equipment | | (6,137) | | | (2,746) | |
| | | | |
Proceeds from the payment on notes receivable | | 1,557 | | | 3,073 | |
Cash paid for acquisitions, net of cash acquired | | (11,711) | | | — | |
Net cash (used in) provided by investing activities | | (16,291) | | | 327 | |
Cash flows from financing activities: | | | | |
Borrowings on loan agreement | | 322,813 | | | 236,194 | |
Repayments on loan agreement | | (234,423) | | | (212,572) | |
Proceeds from issuance of common stock | | 456 | | | 486 | |
Earn-out obligation payments | | — | | | (1,000) | |
| | | | |
Payment of taxes for equity transactions | | (1,031) | | | (892) | |
Dividends paid | | (2,571) | | | (2,552) | |
Net cash provided by financing activities | | 85,244 | | | 19,664 | |
Net increase (decrease) in cash and cash equivalents | | 3,862 | | | (147) | |
Cash and cash equivalents, beginning of period | | 478 | | | 518 | |
Cash and cash equivalents, end of period | | $ | 4,340 | | | $ | 371 | |
(a) The cash flows related to discontinued operations and held-for-sale assets and liabilities have not been segregated, and remain included in the major classes of assets and liabilities. Accordingly, the Consolidated Statements of Cash Flows include the results of continuing and discontinued operations. |
| | | | | | | | | | | | | | |
| | For the six months ended June 30, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 13,792 | | | $ | (7,255) | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 12,850 | | | 12,267 | |
Deferred taxes | | (790) | | | (3,872) | |
Stock-based compensation | | 2,675 | | | 2,256 | |
Inventory valuation adjustment | | 1,094 | | | 24,420 | |
| | | | |
| | | | |
| | | | |
| | | | |
Changes in operating assets and liabilities, net of impact of acquisitions: | | | | |
Receivables | | (25,607) | | | (17,558) | |
Unbilled receivables | | (9,428) | | | (4,378) | |
Inventories | | (16,145) | | | (45,157) | |
Other current assets and noncurrent assets | | 8,884 | | | (16,693) | |
Accounts payable and deferred compensation | | (4,848) | | | (8,017) | |
Accrued expenses and other current and noncurrent liabilities | | (2,615) | | | 10,019 | |
| | | | |
| | | | |
| | | | |
Net cash used in operating activities | | (20,138) | | | (53,968) | |
| | | | |
Cash flows from investing activities: | | | | |
Purchases of property and equipment | | (2,746) | | | (5,158) | |
Proceeds from the sale of property and equipment | | — | | | 14 | |
Proceeds from payments on notes receivable | | 3,073 | | | 1,138 | |
| | | | |
Cash paid for acquisitions, net of cash acquired | | — | | | (14,785) | |
| | | | |
Net cash provided by (used in) investing activities | | 327 | | | (18,791) | |
| | | | |
Cash flows from financing activities: | | | | |
Borrowings on loan agreement | | 236,194 | | | 258,497 | |
Repayments on loan agreement | | (212,572) | | | (234,976) | |
Proceeds from issuance of common stock | | 486 | | | 52,017 | |
Earn-out obligation payments | | (1,000) | | | — | |
| | | | |
Payments of taxes for equity transactions | | (892) | | | (681) | |
Dividends paid | | (2,552) | | | (2,139) | |
| | | | |
Net cash provided by financing activities | | 19,664 | | | 72,718 | |
| | | | |
Net decreases in cash and cash equivalents | | (147) | | | (41) | |
Cash and cash equivalents at beginning of period | | 518 | | | 378 | |
Cash and cash equivalents at end of period | | $ | 371 | | | $ | 337 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 20222023
(1) Nature of Operations and Basis of Presentation
Nature of Operations
VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to commercial and government markets. Our operations are conducted under three reporting units aligned with our operating segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense.
In February 2021, we completed the issuance and sale of 1,428,600 shares of the Company's common stock, in a public offering at a price of $35.00 per share. The underwriters exercised their option to purchase an additional 170,497 shares. The transaction closed on February 2, 2021. We received net proceeds of approximately $52 million after deducting underwriting discounts, commissions and offering related expenses, which were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 ("20212022 Form 10-K"). In our opinion, all adjustments, (consisting ofincluding normal recurring accruals)items, considered necessary for a fair presentation of results for the interim periods have been included.included in the accompanying unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 20222023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022. 2023.
On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense segment. The consolidated financial statements present the Federal and Defense segment's results of operations as discontinued operations, and the related assets and liabilities as held-for-sale for all periods presented. See Note (3) "Discontinued Operations" for further discussion. Following the completion of the sale transaction, our operations are conducted under two operating segments: Aviation and Fleet.
Certain reclassifications have been made to the prior period financial information to reflect discontinued operations classification. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. The new standard is effective on a prospective basis for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted.We elected to early adopt this standard during the first quarter 2022 and will apply the guidance prospectively to business combinations entered into subsequent to adoption.
(2) Acquisitions
Global Parts Group, Inc.
Precision Fuel Components, LLC
On July 26, 2021, weFebruary 1, 2023, our Aviation segment acquired Global Parts Group, Inc.Precision Fuel Components, LLC ("Global Parts"Precision Fuel") for a preliminary purchase price of $40 million, net$11.7 million. Precision Fuel provides MRO services for engine accessory and fuel systems supporting the business and general aviation ("B&GA") market. Our acquisition of cash acquired.Precision Fuel expanded our MRO capabilities and client base. Precision Fuel operating results are included in the accompanying consolidated financial statements beginning on the acquisition date. The purchase price includes $2 million of contingent consideration, representing the fair value recognized for
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
potential future earn-out payments. See Note (8) "Fair Value Measurements," for additional information regarding the earn-out obligation.acquisition was not material to our consolidated financial statements.
The preliminary allocation of the purchase price resulted in net tangible assets of $3.1 million, goodwill of $4.8 million, and contract and customer-related intangible asset of $3.8 million, which is being amortized over a period of five years. During the three and six months ended June 30, 2021,2023, we incurred $0.2 million of acquisition-related expenses, which are included in selling, general and administrative expenses.
HAECO Special Services, LLCVSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
(3) Discontinued Operations
On MarchMay 1, 2021,2023, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC,entered into a division of HAECO Americas ("HAECO") for the purchase price of $14.8 million. HSS operating results are included indefinitive agreement to sell our Federal and Defense segment.business to Bernhard Capital Partners Management LP for total consideration of up to $100.0 million, consisting of a $50.0 million cash payment at the closing of the transaction and an earn-out payment of up to $50.0 million subject to the achievement of certain milestones. The acquisition was not materialtransaction is expected to our consolidated financial statements.close in late 2023 to early 2024 and is subject to customary closing conditions and approvals.
DuringThe results of operations from discontinued operations for the three and six months ended June 30, 2021, we incurred $0.3 million2023 and 2022, consist of acquisition-related expenses, which are included in selling, generalthe following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Revenues | | $ | 67,039 | | | $ | 71,953 | | | $ | 133,885 | | | $ | 142,871 | |
(Loss) income from discontinued operations before income taxes | | $ | (1,779) | | | $ | 3,616 | | | $ | (621) | | | $ | 3,514 | |
Provision for income taxes | | (545) | | | 823 | | | (384) | | | 766 | |
Net (loss) income from discontinued operations | | $ | (1,234) | | | $ | 2,793 | | | $ | (237) | | | $ | 2,748 | |
The assets and administrative expenses.liabilities reported as held for sale consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | June 30, | | December 31, |
| | | 2023 | | 2022 |
Assets | | | | |
| Cash and cash equivalents | | $ | 178 | | | $ | 173 | |
| Accounts receivable, net | | 12,385 | | | 14,340 | |
| Unbilled receivables | | 32,188 | | | 30,898 | |
| Inventories | | 453 | | | 270 | |
| Other current assets | | 8,760 | | | 9,244 | |
| Property and equipment, net | | 6,612 | | | 7,467 | |
| Intangible assets, net | | 3,505 | | | 4,066 | |
| Goodwill | | 31,575 | | | 31,575 | |
| Operating lease right-of-use assets | | 11,369 | | | 12,854 | |
| Other assets | | 34 | | | 51 | |
| Total assets held-for-sale(a) | | $ | 107,059 | | | $ | 110,938 | |
Liabilities | | | | |
| Accounts payable | | $ | 27,810 | | | $ | 31,096 | |
| Accrued expenses and other current liabilities | | 20,609 | | | 21,833 | |
| Long-term operating lease obligations | | 11,186 | | | 13,186 | |
| Deferred tax liabilities | | 4,465 | | | 4,635 | |
| Total liabilities held-for-sale(a) | | $ | 64,070 | | | $ | 70,750 | |
(a) Amounts have been classified as current for the current period consolidated balance sheet and as current and non-current in the consolidated balance sheet for the prior year period. |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
Selected financial information related to cash flows from discontinued operations is as follows (in thousands):
| | | | | | | | | | | | | | |
| | For the six months ended June 30, |
| | 2023 | | 2022 |
Depreciation and amortization | | $ | 1,437 | | | $ | 1,917 | |
Purchases of property and equipment | | $ | 92 | | | $ | 144 | |
Stock-based compensation | | $ | 73 | | | $ | 20 | |
(3)(4) Revenue
Disaggregation of Revenues
Our revenues are derived from the delivery of products to our customers and from services performed for commercial customers, various government agencies, the United States Department of Defense ("DoD") or federal civilian agencies.and governmental customers.
RevenuesA summary of revenues by customer for our each of our operating segments for the three and six months ended June 30, 2023 and 2022 wereis as follows (in thousands):
| | | Three months ended June 30, 2022 | | Three months ended June 30, 2023 | | Six months ended June 30, 2023 |
| | Aviation | | Fleet | | Federal and Defense | | Total | | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Commercial | Commercial | | $ | 103,349 | | | $ | 26,007 | | | $ | 166 | | | $ | 129,522 | | Commercial | | $ | 123,820 | | | $ | 38,037 | | | $ | 161,857 | | | $ | 235,880 | | | $ | 70,581 | | | $ | 306,461 | |
DoD | | — | | | 1,264 | | | 59,260 | | | 60,524 | | |
| Other government | Other government | | 1,670 | | | 37,471 | | | 12,526 | | | 51,667 | | Other government | | 909 | | | 42,457 | | | 43,366 | | | 2,084 | | | 85,265 | | | 87,349 | |
Total | Total | | $ | 105,019 | | | $ | 64,742 | | | $ | 71,952 | | | $ | 241,713 | | Total | | $ | 124,729 | | | $ | 80,494 | | | $ | 205,223 | | | $ | 237,964 | | | $ | 155,846 | | | $ | 393,810 | |
| | | Six months ended June 30, 2022 | | Three months ended June 30, 2022 | | Six months ended June 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total | | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Commercial | Commercial | | $ | 195,261 | | | $ | 53,863 | | | $ | 258 | | | $ | 249,382 | | Commercial | | $ | 103,349 | | | $ | 26,007 | | | $ | 129,356 | | | $ | 195,261 | | | $ | 53,863 | | | $ | 249,124 | |
DoD | DoD | | — | | | 2,993 | | | 109,655 | | | 112,648 | | DoD | | — | | | 1,264 | | | 1,264 | | | — | | | 2,993 | | | 2,993 | |
Other government | Other government | | 3,048 | | | 74,916 | | | 32,958 | | | 110,922 | | Other government | | 1,670 | | | 37,471 | | | 39,141 | | | 3,048 | | | 74,916 | | | 77,964 | |
Total | Total | | $ | 198,309 | | | $ | 131,772 | | | $ | 142,871 | | | $ | 472,952 | | Total | | $ | 105,019 | | | $ | 64,742 | | | $ | 169,761 | | | $ | 198,309 | | | $ | 131,772 | | | $ | 330,081 | |
RevenuesA summary of revenues by customertype for our each of our operating segments for the three and six months ended June 30, 2021 were2023 and 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 47,465 | | | $ | 17,630 | | | $ | 185 | | | $ | 65,280 | |
DoD | | — | | | 4,676 | | | 62,075 | | | 66,751 | |
Other government | | 50 | | | 35,751 | | | 7,280 | | | 43,081 | |
Total | | $ | 47,515 | | | $ | 58,057 | | | $ | 69,540 | | | $ | 175,112 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2023 | | Six months ended June 30, 2023 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Repair | | $ | 35,561 | | | $ | — | | | $ | 35,561 | | | $ | 67,615 | | | $ | — | | | $ | 67,615 | |
Distribution | | 89,168 | | | 80,494 | | | 169,662 | | | 170,349 | | | 155,846 | | | 326,195 | |
Total | | $ | 124,729 | | | $ | 80,494 | | | $ | 205,223 | | | $ | 237,964 | | | $ | 155,846 | | | $ | 393,810 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 91,811 | | | $ | 32,067 | | | $ | 503 | | | $ | 124,381 | |
DoD | | — | | | 7,778 | | | 104,861 | | | 112,639 | |
Other government | | 75 | | | 72,959 | | | 30,039 | | | 103,073 | |
Total | | $ | 91,886 | | | $ | 112,804 | | | $ | 135,403 | | | $ | 340,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2022 | | Six months ended June 30, 2022 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Repair | | $ | 25,966 | | | $ | — | | | $ | 25,966 | | | $ | 48,329 | | | $ | — | | | $ | 48,329 | |
Distribution | | 79,053 | | | 64,742 | | | 143,795 | | | 149,980 | | | 131,772 | | | 281,752 | |
Total | | $ | 105,019 | | | $ | 64,742 | | | $ | 169,761 | | | $ | 198,309 | | | $ | 131,772 | | | $ | 330,081 | |
Revenues by type for our each of our operating segments for the three and six months ended June 30, 2022 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 25,966 | | | $ | — | | | $ | — | | | $ | 25,966 | |
Distribution | | 79,053 | | | 64,742 | | | — | | | 143,795 | |
Cost Plus Contract | | — | | | — | | | 34,555 | | | 34,555 | |
Fixed Price Contract | | — | | | — | | | 22,278 | | | 22,278 | |
T&M Contract | | — | | | — | | | 15,119 | | | 15,119 | |
Total | | $ | 105,019 | | | $ | 64,742 | | | $ | 71,952 | | | $ | 241,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 48,329 | | | $ | — | | | $ | — | | | $ | 48,329 | |
Distribution | | 149,980 | | | 131,772 | | | — | | | 281,752 | |
Cost Plus Contract | | — | | | — | | | 65,132 | | | 65,132 | |
Fixed Price Contract | | — | | | — | | | 40,639 | | | 40,639 | |
T&M Contract | | — | | | — | | | 37,100 | | | 37,100 | |
Total | | $ | 198,309 | | | $ | 131,772 | | | $ | 142,871 | | | $ | 472,952 | |
Revenues by type for our each of our operating segments for the three and six months ended June 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 19,021 | | | $ | — | | | $ | — | | | $ | 19,021 | |
Distribution | | 28,494 | | | 58,057 | | | — | | | 86,551 | |
Cost Plus Contract | | — | | | — | | | 21,813 | | | 21,813 | |
Fixed Price Contract | | — | | | — | | | 32,430 | | | 32,430 | |
T&M Contract | | — | | | — | | | 15,297 | | | 15,297 | |
Total | | $ | 47,515 | | | $ | 58,057 | | | $ | 69,540 | | | $ | 175,112 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 20222023
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 37,337 | | | $ | — | | | $ | — | | | $ | 37,337 | |
Distribution | | 54,549 | | | 112,804 | | | — | | | 167,353 | |
Cost Plus Contract | | — | | | — | | | 38,364 | | | 38,364 | |
Fixed Price Contract | | — | | | — | | | 56,361 | | | 56,361 | |
T&M Contract | | — | | | — | | | 40,678 | | | 40,678 | |
Total | | $ | 91,886 | | | $ | 112,804 | | | $ | 135,403 | | | $ | 340,093 | |
Contract Balances
Unbilled receivables (contract assets) represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.balances were as follows (in thousands):
We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables were $41.3 million as of June 30, 2022 and $31.9 million as of December 31, 2021. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheets, were $5.5 million as of June 30, 2022 and $7.1 million as of December 31, 2021. | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, | | December 31, |
| | Financial Statement Classification | | 2023 | | 2022 |
Contract assets | | Unbilled receivables | | $ | 6,229 | | | $ | 7,409 | |
Contract liabilities | | Accrued expenses and other current liabilities | | $ | 2,561 | | | $ | 963 | |
For the six months ended June 30, 20222023 and 2021,2022, we recognized revenue that was previously included in the beginning balance of contract liabilities of $2.6$0.8 million and $1.7$0.5 million, respectively.
Performance Obligations
Our performance obligations are satisfied either at a point in time or over time as work progresses. Revenues from products and services transferred to customers at a point in time accounted for approximately 59% for the three and six months ended June 30, 2022 and 49% of our revenues for the three and six months ended June 30, 2021, primarily related to the sale of vehicle and aircraft parts in our Fleet and Aviation segments. Revenues from products and services transferred to customers over time accounted for approximately 41% for the three and six months ended June 30, 2022 and 51% of our revenues for the three and six months ended June 30, 2021, primarily related to revenues in our Federal and Defense segment and MRO services in our Aviation segment.
As of June 30, 2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $183 million. The performance obligations expected to be satisfied within one year and greater than one year are 94% and 6%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.
During the six months ended June 30, 2022 and 2021, revenue recognized from performance obligations satisfied in prior periods was not material.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(4)(5) Debt
Long-term debt consisted of the following (in thousands):
| | | June 30, | | December 31, | | June 30, | | December 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Bank credit facility - term loan | Bank credit facility - term loan | $ | 52,675 | | | $ | 60,175 | | Bank credit facility - term loan | $ | 95,000 | | | $ | 100,000 | |
Bank credit facility - revolver loans | 257,681 | | | 226,559 | | |
Bank credit facility - revolving facility | | Bank credit facility - revolving facility | 282,000 | | | 188,610 | |
Principal amount of long-term debt | Principal amount of long-term debt | 310,356 | | | 286,734 | | Principal amount of long-term debt | 377,000 | | | 288,610 | |
Less debt issuance costs | Less debt issuance costs | (1,746) | | | (2,165) | | Less debt issuance costs | (1,890) | | | (2,310) | |
Total long-term debt | Total long-term debt | 308,610 | | | 284,569 | | Total long-term debt | 375,110 | | | 286,300 | |
Less current portion | Less current portion | (14,162) | | | (14,162) | | Less current portion | (10,000) | | | (10,000) | |
Long-term debt, less current portion | Long-term debt, less current portion | $ | 294,448 | | | $ | 270,407 | | Long-term debt, less current portion | $ | 365,110 | | | $ | 276,300 | |
Borrowings under our term loan and revolving facility mature in October 2025. As of June 30, 2023, the interest rate on our outstanding term loan borrowings and weighted average interest rate on our aggregate outstanding revolving facility was 7.51% and 7.62%, respectively. Interest expense incurred on our term loan and revolving facility was $7.9 million and $14.3 million for the three and six months ended June 30, 2023, respectively, and $3.7 million and $7.1 million for the three and six months ended June 30, 2022, respectively. We had letters of credit outstanding totaling $1.2of $0.7 million and $1.0 million as of June 30, 20222023 and December 31, 2021,2022, respectively.
We pay interest on theFuture required term loan and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. Asfacility payments as of June 30, 2022, the LIBOR margin was 2.25% and the base margin was 4.75%. The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. As of June 30, 2022, interest rates on our outstanding debt ranged from 4.62% to 7.00%, and the effective interest rate on our aggregate outstanding debt was 5.06%.
Interest expense incurred on bank loan borrowings and interest rate hedges was $3.7 million and $2.4 million for the three months ended June 30, 2022 and 2021, respectively, and $7.1 million and $5.1 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was no hedged portion of our debt as our 2 remaining hedges expired in February and March of 2022. As of December 31, 2021, the portion of our debt with interest rate swap agreements was $75 million.
Our required term and revolver loan principal payments after June 30, 20222023 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Year Ending | | Term Loan | | Revolver Loan | | Total |
Remainder of 2022 | | $ | 7,500 | | | $ | — | | | $ | 7,500 | |
2023 | | 15,000 | | | — | | | 15,000 | |
2024 | | 30,175 | | | 257,681 | | | 287,856 | |
Total | | $ | 52,675 | | | $ | 257,681 | | | $ | 310,356 | |
| | | | | | | | | | | | | | | | | | | | |
Year Ending | | Term Loan | | Revolving Facility | | Total |
Remainder of 2023 | | $ | 5,000 | | | $ | — | | | $ | 5,000 | |
2024 | | 10,000 | | | — | | | 10,000 | |
2025 | | 80,000 | | | 282,000 | | | 362,000 | |
Total | | $ | 95,000 | | | $ | 282,000 | | | $ | 377,000 | |
We were in compliance with required ratios and other terms and conditions under our loancredit agreement as of June 30, 2022.2023.
In July 2023, we entered into a fifth amendment to our credit agreement. Refer to Note (13) "Subsequent Events" for further details. After the amendment, our scheduled term loan payments are approximately $9.5 million for the remainder of 2023, $19.0 million in 2024, and $156.5 million in 2025.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
(6) Derivative Instruments and Hedging Activities
Our derivative instruments designated as cash flow hedges as of June 30, 2023 were (in thousands):
| | | | | | | | | | | | | | |
| Notional Amount | Paid Fixed Rate | Receive Variable Rate | Settlement and Termination |
Interest rate swaps | $150,000 | 2.8% | 1-month term SOFR | Monthly through October 31, 2027 |
We are party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of our floating rate debt. For the three and six months ended June 30, 2023, we reclassified $0.8 million and $1.5 million, respectively, from accumulated other comprehensive income to interest expense, net. We estimate that we will reclassify $3.6 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following June 30, 2023.
(5)(7) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards. For the three and six month ended June 30, 2021, diluted earnings per share did not include an adjustment for the potential dilutive effect of the dilutive securities as the effect would have been anti-dilutive to the Company's net loss. The anti-dilutiveThere were no antidilutive common stock equivalents excluded from the diluted per share calculation were not material. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation for the three and six month ended June 30, 2022 were not material.calculation.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows:
| | | | Three months ended June 30, | | Six months ended June 30, | | Three months ended June 30, | | Six months ended June 30, |
| | | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | | | 12,778,355 | | | 12,702,366 | | | 12,760,026 | | | 12,391,166 | | Basic weighted average common shares outstanding | | 12,886,100 | | | 12,778,355 | | | 12,865,394 | | | 12,760,026 | |
Effect of dilutive shares | Effect of dilutive shares | | | 32,723 | | | — | | | 47,223 | | | — | | Effect of dilutive shares | | 30,898 | | | 32,723 | | | 56,432 | | | 47,223 | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | | | 12,811,078 | | | 12,702,366 | | | 12,807,249 | | | 12,391,166 | | Diluted weighted average common shares outstanding | | 12,916,998 | | | 12,811,078 | | | 12,921,826 | | | 12,807,249 | |
(6)(8) Commitments and Contingencies
Contingencies
We are involved in variousmay have certain claims and lawsuits arising in the normal conductcourse of its business, noneincluding legal proceedings, against us and against other parties. In our opinion, the resolution of which we believe, based on current information, is expected tothese claims will not have a material adverse effect on our financial position, results of operations, financial position or cash flows.
Further, from time-to-time, government agencies audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.
(7) Business Segments and Customer Information
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
(9) Business Segments
ManagementThe sale of the Federal and Defense segment is intended to allow us to advance our focus on long-term strategic growth areas. Following the completion of the sale transaction, management of our business operations is conducted under 3two reportable operating segments:
Aviation
Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services.
Fleet
Our Fleet segment provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, and the United States Postal Service ("USPS"), and the DoD.. Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.
Federal and Defense
Our Federal and Defense segment provides aftermarket MRO and logistics services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers. Core services include procurement; supply chain management; vehicle, maritime and aircraft sustainment services; base operations support; IT services and energy consulting.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. Our segment information is as follows (in thousands):
| | | | Three months ended June 30, | | Six months ended June 30, | | | Three months ended June 30, | | Six months ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Aviation | Aviation | | $ | 105,019 | | | $ | 47,515 | | | $ | 198,309 | | | $ | 91,886 | | Aviation | | $ | 124,729 | | | $ | 105,019 | | | $ | 237,964 | | | $ | 198,309 | |
Fleet | Fleet | | 64,742 | | | 58,057 | | | 131,772 | | | 112,804 | | Fleet | | 80,494 | | | 64,742 | | | 155,846 | | | 131,772 | |
Federal and Defense | | 71,952 | | | 69,540 | | | 142,871 | | | 135,403 | | |
Total revenues | Total revenues | | $ | 241,713 | | | $ | 175,112 | | | $ | 472,952 | | | $ | 340,093 | | Total revenues | | $ | 205,223 | | | $ | 169,761 | | | $ | 393,810 | | | $ | 330,081 | |
| Operating income (loss): | Operating income (loss): | | | | | | | | | Operating income (loss): | | | | | | | | |
Aviation | Aviation | | $ | 6,450 | | | $ | (22,272) | | | $ | 14,072 | | | $ | (22,604) | | Aviation | | $ | 15,783 | | | $ | 6,450 | | | $ | 31,447 | | | $ | 14,072 | |
Fleet | Fleet | | 5,366 | | | 4,000 | | | 11,747 | | | 9,741 | | Fleet | | 7,854 | | | 5,366 | | | 13,753 | | | 11,747 | |
Federal and Defense | | 2,552 | | | 6,999 | | | 1,864 | | | 12,024 | | |
Corporate/unallocated expenses | | (217) | | | (1,441) | | | (1,618) | | | (2,272) | | |
Operating income (loss) | | $ | 14,151 | | | $ | (12,714) | | | $ | 26,065 | | | $ | (3,111) | | |
| Corporate/unallocated expenses(a) | | Corporate/unallocated expenses(a) | | (3,000) | | | (1,281) | | | (7,785) | | | (3,267) | |
Operating income | | Operating income | | $ | 20,637 | | | $ | 10,535 | | | $ | 37,415 | | | $ | 22,552 | |
(a) Certain corporate costs previously allocated to the Federal and Defense business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. | | (a) Certain corporate costs previously allocated to the Federal and Defense business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. |
(8)(10) Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2023 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Aviation | | Fleet | | Total |
Balance as of December 31, 2022 | | $ | 154,072 | | | $ | 63,190 | | | $ | 217,262 | |
Acquisitions | | 4,761 | | | — | | | 4,761 | |
Balance as of June 30, 2023 | | $ | 158,833 | | | $ | 63,190 | | | $ | 222,023 | |
Goodwill increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions."
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
Intangible Assets
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Gross carrying value | | Accumulated amortization | | Net carrying value |
June 30, 2023 | | | | | | |
Contract and customer-related | | $ | 202,940 | | | $ | (120,760) | | | $ | 82,180 | |
| | | | | | |
Trade names | | 8,670 | | | (8,032) | | | 638 | |
Total | | $ | 211,610 | | | $ | (128,792) | | | $ | 82,818 | |
| | | | | | |
December 31, 2022 | | | | | | |
Contract and customer-related | | $ | 199,140 | | | $ | (113,796) | | | $ | 85,344 | |
| | | | | | |
Trade names | | 8,670 | | | (7,456) | | | 1,214 | |
Total | | $ | 207,810 | | | $ | (121,252) | | | $ | 86,558 | |
The gross carrying amount of contract and customer-related intangibles increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions."
As of June 30, 2023, the estimated future annual amortization expense related to intangible assets is as follows (in thousands):
| | | | | | | | |
Year Ending | | |
Remainder of 2023 | | $ | 5,114 | |
2024 | | 9,136 | |
2025 | | 9,074 | |
2026 | | 8,950 | |
2027 | | 7,204 | |
Thereafter | | 43,340 | |
Total | | $ | 82,818 | |
(11) Fair Value Measurements
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 20222023 and December 31, 20212022 and the level they fall within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts Recorded at Fair Value | | Financial Statement Classification | | Fair Value Hierarchy | | Fair Value June 30, 2022 | | Fair Value December 31, 2021 |
Non-COLI assets held in Deferred Supplemental Compensation Plan | | Other assets | | Level 1 | | $ | 532 | | | $ | 598 | |
Interest rate swap agreements | | Accrued expenses and other current liabilities | | Level 2 | | $ | — | | | $ | 234 | |
Earn-out obligation - short-term | | Accrued expenses and other current liabilities | | Level 3 | | $ | 250 | | | $ | 1,000 | |
Earn-out obligation - long-term | | Other long-term liabilities | | Level 3 | | $ | — | | | $ | 250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts Recorded at Fair Value | | Financial Statement Classification | | Fair Value Hierarchy | | Fair Value June 30, 2023 | | Fair Value December 31, 2022 |
Non-COLI assets held in Deferred Supplemental Compensation Plan(a) | | Other assets | | Level 1 | | $ | 576 | | | $ | 539 | |
Interest rate swaps | | Other assets | | Level 2 | | $ | 7,103 | | | $ | 6,620 | |
(a) Non-Company Owned Life Insurance ("COLI") assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses. |
Non-Company Owned Life Insurance ("COLI") assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses.
We were a party to interest rate swap agreements qualifying as cash flow hedges under which we hedged a portion of our variable-rate debt until the agreements expired in February and March 2022. As of December 31, 2021, the fair value of such swap agreements was $0.2 million, a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets. As of December 31, 2021, we had $0.2 million, net of an income tax effect of $58 thousand, included in accumulated other comprehensive income in the accompanying balance sheets related to the cash flow hedges. The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
In connection with the acquisition of Global Parts in July 2021, we may be required to pay earn-out obligation payments of up to $2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. Changes in the earn-out obligation measured at fair value on a recurring basis using unobservable inputs (Level 3) for the six months ended June 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Current portion | | Long-term portion | | Total |
Balance as of December 31, 2021 | | $ | 1,000 | | | $ | 250 | | | $ | 1,250 | |
Reclassification from long-term to current | | 250 | | | (250) | | | — | |
Earn-out payments | | (1,000) | | | — | | | (1,000) | |
| | | | | | |
Balance as of June 30, 2022 | | $ | 250 | | | $ | — | | | $ | 250 | |
| | | | | | |
The carrying amounts of cash and cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity. The carrying value of our outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2023
(9)(12) Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year.
Our effective tax rate for continued operations was 26.6%24.0% and 25.8%24.3% for the three and six months ended June 30, 2023, respectively, and 28.6% and 26.7% for the three and six months ended June 30, 2022, respectively, and 19.6% and 17.6%respectively. The effective tax rate was lower for the three and six months ended June 30, 2021, respectively. The effective tax rate was higher for the three and six months ended June 30, 20222023 compared to the same period of prior year primarily due to book expenseincome in connection with the declinefair market value increase in value of our COLI assetsplan in the period ended June 30, 20222023 that was reversed for tax purposes as opposed to book incomeexpense in the same period in 2021.2022.
(10)(13) Subsequent Events
SubsequentDesser Aerospace Acquisition
In July 2023, we completed our previously announced acquisition of Desser-Graham Partnership, L.P. ("Desser Aerospace"), pursuant to the terms of the purchase agreement dated May 3, 2023, for a preliminary purchase price of $124.0 million, subject to post-closing adjustments. Concurrent with the closing of the transaction, we sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for cash consideration of $30.0 million (the “Loar Sale”). During the three and six months ended June 30, 2022,2023, we incurred $0.6 million and $1.7 million, respectively, of acquisition-related expenses, which are included in selling, general and administrative expenses.
Credit Agreement Amendment
In July 2023, we entered into a fifth amendment to our credit agreement which, among other things, provided for the following: (i) the extension of a new term loan in the aggregate principal amount of $90.0 million, which will mature on the same date as the existing term loan; (ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to $25.0 million; (iii) quarterly amortization payments for the new term loan in the amount of $2.25 million; (iv) an increase in the maximum Total Funded Debt to EBITDA Ratio from 4.50x to 5.00x, with such ratios decreasing thereafter; (v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50x; and (vi) expressly permitting the Desser acquisition and the Loar Sale. The net proceeds received under the new term loan were used to fund a portion of the cash consideration for the Desser Aerospace acquisition.
Interest Rate Swap Derivative
In July 2023, we executed forward-startinga fixed interest rate swapsswap that hedgehedges the variability in interest payments on $150$100.0 million of floating rate debt. The tenor of these swaps begin on October 31, 2022. We have designated, and will account for, thesethis fixed interest rate swapsswap as a cash flow hedges.hedge.
Underwritten Public Offering
In July 2023, we entered into an underwriting agreement with William Blair & Company, L.L.C and RBC Capital Markets, acting as representatives of several underwriters, relating to the issuance and sale of 2,475,000 shares of the Company's common stock at a public offering price of $48.50 per share. Under the terms of the agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 371,250 shares of common stock. The offering closed on July 24, 2023 and we received net proceeds of $112.7 million in connection with the offering, net of issuance costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a diversified aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to commercial and government and commercial markets. We provide logistics and distribution services for legacy systems and equipment and professional and technical services to commercial customer and to the government, including federal and civilian agencies and the Department of Defense ("DoD"). Our operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, and other customers. We also provide vehicle and equipment maintenance and refurbishment, logistics, engineering support, energy services, IT and health care IT solutions, and consulting services.
Our operations are conducted within three reportable segments aligned with our operating segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense. We provide more information about each of these reportable segments under Item 1, "Business-History and Organization” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K").
Recent AcquisitionsDevelopments
See Note (2) "Acquisitions" to our Consolidated Financial Statements included in Item 1Sale of this filingFederal and our 2021 Form 10-K for additional information regarding our recent acquisitions.Defense Segment
ImpactIn May 2023, we entered into a definitive agreement to sell our Federal and Defense business to Bernhard Capital Partners Management LP for a total consideration of up to $100.0 million, consisting of a $50.0 million cash payment at the closing of the COVID-19 Pandemic
Ourtransaction and an earn-out payment of up to $50.0 million, subject to the achievement of certain milestones. The transaction is expected to close in late 2023 or early 2024. In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, we determined that the criteria for discontinued operations presentation were met during the second quarter of 2023 and results of operations for the three and six months ended June 30, 2023 and 2022 continued to be impacted byfor our Federal and Defense segment are reported in income from discontinued operations within the COVID-19 global pandemic. We have seen continued improvement in our operating results duringconsolidated statements of operations and the six months endedcarrying value of the related assets and liabilities are presented within assets and liabilities held for sale on the consolidated balance sheets as of June 30, 2022, which2023 and December 31, 2022. See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.
Desser Aerospace Acquisition
In July 2023, we expectcompleted our previously announced acquisition of Desser-Graham Partnership, L.P. ("Desser Aerospace"), pursuant to continue throughout 2022. Allthe terms of the purchase agreement dated May 3, 2023, for a preliminary purchase price of $124.0 million, subject to post-closing adjustments. Concurrent with the closing of the transaction, we sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for cash consideration of approximately $30.0 million (the “Loar Sale”). The acquisition was funded with proceeds from a new term loan (see Note (13) "Subsequent Events" - Credit Agreement Amendment for further information), together with proceeds from the Loar Sale and additional borrowings under our repair, distributionrevolving credit facility.
Underwritten Public Offering
In July 2023, we initiated a public offering of the Company's common stock relating to the issuance and base operations facilities remain open and operational,sale of 2,475,000 shares at a public offering price of $48.50 per share. The offering closed on July 24, 2023 and we continuereceived net proceeds of $112.7 million in connection with the offering, net of issuance costs. We intend to deliver productsuse substantially all of the net proceeds from this offering to repay outstanding borrowings under our revolving credit facility and services to customers without interruption. We continue to closely monitor and address the pandemic and related developments, including the impact to our business, our employees, our customers, and our suppliers.any remaining amounts for general corporate purposes.
Business Trends
The following discussion provides a brief description of some of the key business factors impacting our results of operations detailed by segment.
Aviation Segment
The COVID-19 pandemic impacted our Aviation segment operations. We have seen continued improvement in our sequential quarterly revenue results due to the recovery in demand since the peak of the negative COVID-19 pandemic impact duringDuring the second quarter, of 2020. Our Aviation segment results have benefitedour strong execution on new and existing distribution programs and increase in the second quarter of 2022 from strong performance of both our distribution and repair businesses driven by broader recovery in commercial marketMRO activity together with share gains within the business & general aviation (“B&GA”) market.
During the quarter, our prior investments in growth initiatives have produced positive results, with quarterly revenue of $105reaching $124.7 million for the three months ended June 30, 2023, representing a 121%19% increase year-over-year. These organic investments have provided sustainable revenue sources with viableMarket growth potential, and the associated investment in increased inventory will be beneficial to our future results. Our acquisition of Global Parts in July 2021 expanded our product lines and client base. As we continue to experience recovery and growth in our operations, we see opportunities to strategically align platform offerings to include additional airframe components with our existing offerings.
Market recovery and our growth initiativesshare gains have resulted in a 175%37% and 29%13% year-over-year increase in distributionrepair and repairdistribution revenue, respectively, during the first sixthree months of 2022ended June 30, 2023, compared to the same period for the prior year. Our growth has been driven by several strategic initiatives, including the introduction of new products and service capabilities to our portfolio, further strengthening our position in the market. Additionally, expanding our partnerships with Original Equipment Manufacturers has provided us with a competitive edge, allowing successful entry into new markets with an established customer base. We believe our acquisition of Desser Aerospace in July 2023 will increase our exposure to the high-growth, higher-margin aviation distribution and MRO markets. We believe that the combination of Desser Aerospace’s distribution and repair capabilities with VSE Aviation’s aftermarket business creates a platform for geographic expansion into international markets and provides opportunities to cross-sell products and services.
Fleet Segment
Our Fleet segment continues to increase revenue from commercial fleet customers and e-commerce fulfillment sales. Our commercial client base includes companies in a wide array of businesses that have vehicle fleets required to meet mission critical delivery or service schedules. We continue to execute on our revenue diversification strategy as we capture new customers and increase revenue within e-commerce fulfillment. As a result, commercial customer revenue continues to see a strong growth
trend, increasing approximately 48%Fleet Segment
During the second quarter, growth in our Fleet segment was driven by strong contributions from commercial fleet customers, e-commerce fulfillment volume, and 68% during the quarterUnited States Postal Service ("USPS"). The strong performance in our USPS program is supported by the expansion of our installed base of vehicles and first six monthscontinued support of 2022, respectively, comparedlegacy vehicles. We have made significant progress in executing our revenue diversification strategy through the successful launch of our new e-commerce fulfillment and distribution center, including the completion of initial inventory investments. These strategic initiatives have been instrumental in our ability to the same periods in the prior year. Commercialcapture new customers and drive revenue growth within e-commerce fulfillment. Our commercial revenues were 40.9%47% of total Fleet segment revenue for the sixthree months ended June 30, 20222023 compared to 28.4%40% for the same period in the prior year, demonstrating the continued success of our strategic multi-year diversification strategy.
Federal and Defense Segment
Our Federal and Defense segment continues to focus on building our contract backlog and optimizing legacy programs. We are encouraged to see revenue growth in our Federal and Defense segment driven by strong revenue performance in Naval Sea Systems Command (NAVSEA) in providing Foreign Military Sales (FMS). Activity on our FMS Program has increased over the past year, including work to transfer a frigate to Bahrain. We expect that our focused business development efforts will drive new revenue additions in subsequent years.
Results of Operations
Consolidated Results of Operations
OurThe following table summarizes our consolidated results of operations are as follows (in thousands):
| | | Three months ended June 30, | | | Six months ended June 30, | | | Three months ended June 30, | | Six months ended June 30, |
| | 2022 | | 2021 | | Change ($) | | Change (%) | | | 2022 | | 2021 | | | Change ($) | | Change (%) | | | 2023 | | 2022 | | Change ($) | | Change (%) | | 2023 | | 2022 | | Change ($) | | Change (%) |
Revenues | Revenues | $ | 241,713 | | | $ | 175,112 | | | $ | 66,601 | | | 38 | % | | | $ | 472,952 | | | $ | 340,093 | | | | $ | 132,859 | | | 39 | % | Revenues | | $ | 205,223 | | | $ | 169,761 | | | $ | 35,462 | | | 21 | % | | $ | 393,810 | | | $ | 330,081 | | | $ | 63,729 | | | 19 | % |
Costs and operating expenses | Costs and operating expenses | 227,562 | | | 187,826 | | | 39,736 | | | 21 | % | | | 446,887 | | | 343,204 | | | | 103,683 | | | 30 | % | Costs and operating expenses | | 184,586 | | | 159,226 | | | 25,360 | | | 16 | % | | 356,395 | | | 307,529 | | | 48,866 | | | 16 | % |
Operating income | Operating income | 14,151 | | | (12,714) | | | 26,865 | | | 211 | % | | | 26,065 | | | (3,111) | | | | 29,176 | | | 938 | % | Operating income | | 20,637 | | | 10,535 | | | 10,102 | | | 96 | % | | 37,415 | | | 22,552 | | | 14,863 | | | 66 | % |
Interest expense, net | Interest expense, net | 3,872 | | | 2,666 | | | 1,206 | | | 45 | % | | | 7,481 | | | 5,696 | | | | 1,785 | | | 31 | % | Interest expense, net | | 7,366 | | | 3,872 | | | 3,494 | | | 90 | % | | 13,346 | | | 7,482 | | | 5,864 | | | 78 | % |
Income before income taxes | 10,279 | | | (15,380) | | | 25,659 | | | 167 | % | | | 18,584 | | | (8,807) | | | | 27,391 | | | 311 | % | |
Income from continuing operations before income taxes | | Income from continuing operations before income taxes | | 13,271 | | | 6,663 | | | 6,608 | | | 99 | % | | 24,069 | | | 15,070 | | | 8,999 | | | 60 | % |
Provision for income taxes | Provision for income taxes | 2,731 | | | (3,014) | | | 5,745 | | | 191 | % | | | 4,792 | | | (1,552) | | | | 6,344 | | | 409 | % | Provision for income taxes | | 3,182 | | | 1,908 | | | 1,274 | | | 67 | % | | 5,860 | | | 4,026 | | | 1,834 | | | 46 | % |
Net income | $ | 7,548 | | | $ | (12,366) | | | $ | 19,914 | | | 161 | % | | | $ | 13,792 | | | $ | (7,255) | | | | $ | 21,047 | | | 290 | % | |
Net income from continuing operations | | Net income from continuing operations | | $ | 10,089 | | | $ | 4,755 | | | $ | 5,334 | | | 112 | % | | $ | 18,209 | | | $ | 11,044 | | | $ | 7,165 | | | 65 | % |
Revenues. Revenues increased for the three months ended June 30, 20222023 as compared to the same period in the prior year primarily attributabledue to revenue growth within each of our segments: $57.5 million withinin our Aviation segment $6.7of $19.7 million withinand our Fleet segment and $2.4 million within our Federal and Defense segment.of $15.8 million. See "Segment Operating Results" section below for further discussion of revenues by segment.
Revenues increased for the six months ended June 30, 20222023 as compared to the same period in the prior year primarily attributabledue to revenue growth within each of our segments: $106.4 million withinin our Aviation segment $19.0of $39.7 million withinand our Fleet segment and $7.5 million within our Federal and Defense segment.of $24.1 million. See "Segment Operating Results" section below for further discussion of revenues by segment.
Costs and Operating Expenses. Costs and operating expenses increased for the three and six months ended June 30, 20222023 as compared to the same periods in the prior year primarily due to increases in revenue. Our costsCosts and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.
Operating Income. Operating income increased for the three months ended June 30, 2022 as2023 compared to the same period inof the prior year attributableprimarily due to increasesan increase of $28.7$9.3 million for our Aviation segment and $1.4$2.5 million for our Fleet segment, partially offset by a decrease of $4.4 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment. The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.
Operating income increased for the six months ended June 30, 2022 as2023 compared to the same period inof the prior year attributableprimarily due to increasesan increase of $36.7$17.4 million for our Aviation segment and an increase of $2.0 million for our Fleet segment, partially offset by a decrease of $10.2 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment. The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.
Interest Expense. Interest expense increased for the three and six months ended June 30, 20222023 as compared to the same periodperiods in the prior year primarily due to a higher average interest ratesrate on borrowings outstanding and a higher average debt balance.outstanding.
Provision for Income Taxes. Our effective tax rate for continued operations was 26.6%24.0% and 25.8%24.3% for the three and six months ended June 30, 2022,2023, respectively, and 19.6%28.6% and 17.6%26.7% for the three and six months ended June 30, 2021,2022, respectively. Our 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 ("FDII") deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. Federal income tax rate and our effective tax rate. The higherlower effective tax rate for the three and six months ended June 30, 20222023 primarily resulted from book expenseincome in connection with the declinefair market value increase in the value of our Company Owned Life Insurance ("COLI") assetsplan in the period ended June 30, 20222023 that was reversed for tax purposes as opposed to book incomeexpense in the same period in 2021.2022.
Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Revenues | $ | 105,019 | | | $ | 47,515 | | $ | 57,504 | | | 121 | % | | $ | 198,309 | | $ | 91,886 | | $ | 106,423 | | | 116 | % |
Costs and operating expenses | 98,569 | | | 69,787 | | 28,782 | | | 41 | % | | 184,237 | | | 114,490 | | 69,747 | | | 61 | % |
Operating income (loss) | $ | 6,450 | | | $ | (22,272) | | | $ | 28,722 | | | 129 | % | | $ | 14,072 | | | $ | (22,604) | | | $ | 36,676 | | | 162 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit (loss) percentage | 6.1 | % | | (46.9 | %) | | | | | | 7.1 | % | | (24.6 | %) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2023 | | 2022 | | Change ($) | | Change (%) | | 2023 | | 2022 | | Change ($) | | Change (%) |
Revenues | | $ | 124,729 | | $ | 105,019 | | $ | 19,710 | | | 19 | % | | $ | 237,964 | | $ | 198,309 | | | $ | 39,655 | | | 20 | % |
Costs and operating expenses | | 108,946 | | 98,569 | | 10,377 | | | 11 | % | | 206,517 | | 184,237 | | 22,280 | | | 12 | % |
Operating income | | $ | 15,783 | | $ | 6,450 | | $ | 9,333 | | | 145 | % | | $ | 31,447 | | $ | 14,072 | | $ | 17,375 | | | 123 | % |
Profit percentage | | 12.7 | % | | 6.1 | % | | | | | | 13.2 | % | | 7.1 | % | | | | |
Revenues. Revenues for our Aviation segment increased for the three months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to a $50.6 million, or 177%, growth in distribution revenue driven by contributions from recently initiated distribution contract wins and contributionsimproved demand for our commercial aerospace products and services resulting from the acquisition of Global Parts,continued recovery in global commercial air travel. Aviation distribution revenue increased $10.1 million, or 13%, and a $6.9repair revenue increased $9.6 million, or 37%, growthfor the three months ended June 30, 2023 compared to the same period in repair revenue driven by improved demand in end markets as a result of market recovery.the prior year.
Revenues for our Aviation segment increased for the six months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to distribution revenue growth of $95.4 million, or 175%, driven by contributions from recently initiated distribution contract wins and contributionsimproved demand for our commercial aerospace products and services resulting from the acquisition of Global Parts,continued recovery in global commercial air travel. Aviation distribution revenue increased $20.4 million, or 14%, and repair revenue growth of $11increased $19.3 million, or 29%40%, driven by improved demand in end markets as a result of market recovery.
Costs and Operating Expenses. Costs and operating expenses increased for the three months ended June 30, 2022 as compared to the same period in the prior year primarily due to increased revenues and a $2.3 million non-cash charge to write down accounts receivable and inventory related to Russia and Ukrainian markets during the second quarter of 2022, offset by a $23.7 million inventory valuation adjustment recognized in the same period in the prior year. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $2.3 million for the three months ended June 30, 2022 compared to $2.1 million for the same period in the prior year. Allocated corporate costs were $2.8 million for the three months ended June 30, 2022, compared to $1.8 million for the same period in the prior year.
Costs and operating expenses increased for the six months ended June 30, 2022 as2023 compared to the same period in the prior year primarily due to increased revenues and a $2.3 million non-cash charge to write down accounts receivable and inventory related to Russia and Ukrainian markets for the six months 2022, offset by a $23.7 million inventory valuation adjustment recognized in the same period in the prior year. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $4.7 million for the six months ended June 30, 2022 compared to $4.1 million for the same period in the prior year. Allocated corporate costs were $5.7 million for the six months ended June 30, 2022, compared to $3.8 million for the same period in the prior year.
Operating income. Operating income increased for the three and six months ended June 30, 2022 as compared to the same period in the prior year largely due to revenue growth driven by higher sales volumes in our distribution contract wins and contributions from the Global Parts acquisition.
Fleet Segment Results
The results of operations for our Fleet segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, | | |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) | | |
Revenues | $ | 64,742 | | | $ | 58,057 | | | $ | 6,685 | | | 12 | % | | $ | 131,772 | | | $ | 112,804 | | | $ | 18,968 | | | 17 | % | | |
Costs and operating expenses | 59,376 | | | 54,057 | | | 5,319 | | | 10 | % | | 120,025 | | | 103,063 | | | 16,962 | | | 16 | % | | |
Operating income | $ | 5,366 | | | $ | 4,000 | | | $ | 1,366 | | | 34 | % | | $ | 11,747 | | | $ | 9,741 | | | $ | 2,006 | | | 21 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit percentage | 8.3 | % | | 6.9 | % | | | | | | 8.9 | % | | 8.6 | % | | |
Revenues.Revenues increased for the three months ended June 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to commercial customers of $8.4 million, or 47.5%, driven by growth in our e-commerce fulfillment business, partially offset by decreased revenues of $3.4 million or 73.0%, from sales to DoD customers.
Revenues increased for the six months ended June 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to commercial customers of $21.8 million, or 68.0%, driven by growth in our e-commerce fulfillment business, partially offset by decreased revenues of $4.8 million or 61.5%, from sales to DoD customers.
Costs and Operating Expenses.operating expenses. Costs and operating expenses increased for the three months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $1.7$2.5 million for the three months ended June 30, 2022 and 1.82023 compared to $2.3 million for the same period in the prior year. Expense for allocatedAllocated corporate costs was $1.8were $3.0 million for the threesix months ended June 30, 2022 and $2.32023 compared to $2.8 million for the same period in the prior year.
Costs and operating expenses increased for the six months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $3.4$5.0 million for the six months ended June 30, 2022 and $3.52023 compared to $4.7 million for the same period in the prior year. Expense for allocatedAllocated corporate costs was $3.9were $6.2 million for the six months ended June 30, 2022 and $4.62023 compared to $5.7 million for the same period in the prior year.
Operating income. Operating income increased for the three and six months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to increased commercial customer revenues as described above.revenue growth and a favorable shift in sales mix and pricing.
Fleet Segment Results
The results of operations for our Federal and DefenseFleet segment arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Revenues | $ | 71,952 | | | $ | 69,540 | | | $ | 2,412 | | | 3 | % | | $ | 142,871 | | | $ | 135,403 | | | $ | 7,468 | | | 6 | % |
Costs and operating expenses | 69,400 | | | 62,541 | | | 6,859 | | | 11 | % | | 141,007 | | | 123,379 | | | 17,628 | | | 14 | % |
Operating income | $ | 2,552 | | | $ | 6,999 | | | $ | (4,447) | | | (64) | % | | $ | 1,864 | | | $ | 12,024 | | | $ | (10,160) | | | (84) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit percentage | 3.5 | % | | 10.1 | % | | | | | | 1.3 | % | | 8.9 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2023 | | 2022 | | Change ($) | | Change (%) | | 2023 | | 2022 | | Change ($) | | Change (%) |
Revenues | $ | 80,494 | | $ | 64,742 | | $ | 15,752 | | | 24 | % | | $ | 155,846 | | $ | 131,772 | | $ | 24,074 | | | 18 | % |
Costs and operating expenses | 72,640 | | 59,376 | | 13,264 | | | 22 | % | | 142,093 | | 120,025 | | 22,068 | | | 18 | % |
Operating income | $ | 7,854 | | $ | 5,366 | | $ | 2,488 | | | 46 | % | | $ | 13,753 | | $ | 11,747 | | $ | 2,006 | | | 17 | % |
Profit percentage | 9.8 | % | | 8.3 | % | | | | | | 8.8 | % | | 8.9 | % | | | | |
Revenues. Revenues for our Fleet segment increased for the three months ended June 30, 2023 compared to the same period of the prior year primarily due to increases from commercial customers of $12.0 million, or 46%, and other government customers of $5.0 million, or 13%. These increases were partially offset by decreased revenues from DoD customers of $1.3 million. Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business. Revenues from other government customers increased primarily due to increased support of legacy USPS vehicle fleets.
Revenues for our Fleet segment increased for the six months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to revenuesincreases from our FMS program with the U.S. Navy,commercial customers of $16.7 million, or 31%, and other government customers of $10.3 million, or 14%. These increases were partially offset by declines indecreased revenues from DoD customers of $3.0 million. Commercial customer revenue growth was driven by our U.S. Army workcommercial fleet and e-commerce fulfillment business. Revenues from other government customers increased primarily due to program completions.increased support of legacy USPS vehicle fleets.
Costs and Operating Expenses.operating expense. Costs and operating expenses increased for the three months ended June 30, 2022 as2023 compared to the same period of the prior year primarily due to increased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $1.1 million for the three months ended June 30, 2023 compared to $1.7 million for the same period in the prior year primarily due to increasesyear. Expense for allocated corporate costs was$2.0 millionfor the three months ended June 30, 2023 and $1.8 million for the same period in revenue and contract mix of cost-type contracts.the prior year.
Costs and operating expenses increased for the six months ended June 30, 2022 as2023 compared to the same period of the prior year primarily due to increased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $2.6 million for the six months ended June 30, 2023 compared to $3.4 million for the same period in the prior year due to increasesyear. Expense for allocated corporate costs was$4.0 millionfor the six months ended June 30, 2023 and $3.9 million for the same period in revenue, change in contract mix, and a $3.5 million loss recognized during the first quarter of 2022 on a fixed-price, non-DoD contract with a foreign customer driven by higher than anticipated supply chain material and labor costs.prior year.
Operating income. Operating income decreasedincreased for the three and six months ended June 30, 2022 as2023 compared to the same period inof the prior year primarily due to the completion of a U.S. Army program and an unfavorable contract mix as cost-type contracts generally provide lower profit margins than fixed-price contracts.driven by increased revenues.
Operating income decreased for the six months ended June 30, 2022 as compared to the same period in the prior year primarily due to the completion of a U.S. Army program, an unfavorable change in contract mix, and the contract loss recognized during the period as described above.
Bookings and Funded Backlog
Our funded backlog represents the estimated remaining value of work to be performed under firm contracts. Bookings for our Aviation and Fleet segments occur at the time of sale. Accordingly, our Aviation and Fleet segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues. Revenues for federal government contract work performed by our Federal and Defense segment depend on contract funding ("bookings”), and bookings generally occur when contract funding documentation is received. Funded contract backlog is an indicator of potential future revenue. While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.
A summary of our bookings and revenues for our Federal and Defense segment for the six months ended June 30, 2022 and 2021, and funded contract backlog as of June 30, 2022 and 2021 is as follows (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Bookings | | $ | 155 | | | $ | 170 | |
Revenues | | $ | 143 | | | $ | 135 | |
Funded Contract Backlog | | $ | 183 | | | $ | 224 | |
For the six months ended June 30, 2022, Federal and Defense segment bookings decreased 9% year-over-year to $155 million, while total funded backlog decreased 18% year-over-year to $183 million.
Liquidity and Capital Resources
Liquidity
Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity. Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements. Our accounts receivable and accounts payable levels can be affected by changes in the level of work we perform and by the timing of large purchases. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include capital expenditures; investments in expansion, improvement, and maintenance of our operational and administrative facilities; and investments in the acquisition of businesses.
Our primary source of external financing is from our loancredit agreement with a bank group that expires in July 2024 and includes a term loan facility and a revolving loan facility, which also provides for letterswith an aggregate maximum borrowing capacity of credit. The maximum amount of credit available under our loan agreement for revolving loans and letters of credit is $350$350.0 million. Under the loancredit agreement we may elect to increase the maximum availability of the term loan, facility, the revolving loan facility, or a combination of both, facilities, subject to customary lender commitment approvals. The aggregate limit of incremental increases is $100$100.0 million. Our bank debt increased approximately $23.6 million foroutstanding borrowings under the six months ended June 30, 2022. As of June 30, 2022, we had term loan borrowings outstanding of $52.7 million, revolving loan borrowings outstanding of $257.7 million, and outstanding letters of credit of $1.2 million. We had approximately $91 million of unused bank loan commitments as of June 30, 2022.
As of June 30, 2022, we were in compliance with required ratios and other terms and conditions of our loan agreement.
agreement increased approximately $88.4 million for the six months ended June 30, 2023. As of June 30, 2023, we had borrowings outstanding under our term loan of $95.0 million, borrowings outstanding under our revolving facility of $282.0 million, outstanding letters of credit of $0.7 million, and $67.3 million of unused commitments under the credit agreement.
In July 2023, we entered into a fifth amendment to our credit agreement which, among other things, provided for the following: (i) the extension of a new term loan in the aggregate principal amount of $90.0 million, which will mature on the same date as the existing term loan; (ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to $25.0 million; (iii) quarterly amortization payments for the new term loan in the amount of $2.25 million; (iv) an increase in the maximum Total Funded Debt to EBITDA Ratio from 4.50x to 5.00x, with such ratios decreasing thereafter as indicated in the table below; (v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50x; and (vi) expressly permitting the Desser acquisition and the Loar Sale. The net proceeds received under the new term loan were used to fund a portion of the cash consideration for the Desser acquisition.
| | | | | | | | |
Testing Period | | Maximum Total Funded Debt to EBITDA Ratio |
June 30, 2023 through and including September 30, 2023 | | 5.00 to 1.00 |
December 31, 2023 through and including June 30, 2024 | | 4.75 to 1.00 |
September 30, 2024 | | 4.50 to 1.00 |
December 31, 2024 through and including March 31, 2025 | | 4.25 to 1.00 |
June 30, 2025 | | 4.00 to 1.00 |
September 30, 2025 and thereafter | | 3.75 to 1.00 |
In July 2023, we entered into an underwriting agreement with William Blair & Company, L.L.C and RBC Capital Markets, acting as representatives of several underwriters, relating to the issuance and sale of 2,475,000 shares of the Company's common stock at a public offering price of $48.50 per share. Under the terms of the agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 371,250 shares of common stock. The offering closed on July 24, 2023 and we received net proceeds of $112.7 million in connection with the offering, net of issuance costs.
We believe our existing balances of cash and cash equivalents, along with our cash flows from operations and debt instruments under our credit agreement mentioned above, will provide sufficient liquidity for our business operations as well as capital expenditures, dividends, and other capital requirements associated with our business operations over the next twelve months and thereafter for the foreseeable future.
Cash Flows
The following table summarizes our cash flows for the six months endedJune 30, 2022 and 2021 (in thousand)thousands):
| | | | Six months ended June 30, | | | Six months ended June 30, |
| | | | 2022 | | 2021 | | | | 2023 | | 2022 |
Net cash used in operating activities | Net cash used in operating activities | | | $ | (20,138) | | | $ | (53,968) | | Net cash used in operating activities | | | $ | (65,091) | | | $ | (20,138) | |
Net cash provided by (used in) investing activities | | | 327 | | | (18,791) | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | | (16,291) | | | 327 | |
Net cash provided by financing activities | Net cash provided by financing activities | | | 19,664 | | | 72,718 | | Net cash provided by financing activities | | | 85,244 | | | 19,664 | |
Net decreases in cash and cash equivalents | | | $ | (147) | | | $ | (41) | | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | | $ | 3,862 | | | $ | (147) | |
Cash used in operating activities decreased $33.8increased $44.9 million for the six months ended June 30, 2022, when2023 as compared to the same period of the prior year. The decreaseincrease was primarily due to increased accounts receivable as a result of revenue growth and timing of collections, lowergreater use of cash for inventory purchases and timing of vendor payments.purchases.
Cash provided byused in investing activities was $0.3$16.3 million for the six months ended June 30, 20222023 compared to cash used inprovided by investing activities of $18.8$0.3 million for the same period of the prior year. The change was primarily due to $14.8 million of cash paid for the acquisition of HSSPrecision Fuel in the prior year period and a lower level of purchases of property and equipment of $2.4 million in the current period compared to the prior year period.
Cash provided by financing activities decreased $53.1increased $65.6 million for the six months ended June 30, 2022, when2023 as compared to the same period of the prior year. The decreaseincrease was primarily due $52 million of proceeds received in the prior year period related to our public underwritten offering of our common stock in February 2021 and overall lowerhigher proceeds from net borrowings of our debt during the current period.
We paid cash dividends totaling $2.6 million or $0.20 per share during the six months ending June 30, 2022.2023. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.
Other Obligations and Commitments
There have not been any material changes to our other obligations and commitments that were included in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Inflation and Pricing
There have not been any material changes to this disclosure from those discussed in our most recently filed Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our 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
Our bank loancredit agreement provides available borrowing to us at variable interest rates. Our interest expense is impacted by the overall global economic and interest rate environment. The inflationary environment has also resulted in central banks raising short-term interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. Previously,To mitigate the risks associated with future interest rate movements we have employed the
use of interest rate hedges to fix the rate on a portion of our outstanding borrowings. Our interest rate swaps expired in February and March of 2022. As such, as of June 30, 2022, there is no portion of our debt covered under interest rate swaps.borrowings for various periods.
In July of 2022,2023, we executed forward-startinga fixed interest rate swapsswap that hedgehedges the variability in interest payments on $150$100.0 million of floating rate debt. The tenor of these swaps begin on October 31, 2022.
For additional information related to our debt and interest rate swap agreements, see Note (5) and Note (6), respectively, to our Consolidated Financial Statements contained in this report.
There have been no material changes other than discussed above, to our market risks from those discussed in our most recently filed Annual Report on Form 10-K.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us 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 our 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, our reported results could be materially affected. Actual results may differ significantly from our 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 our 20212022 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been no significant changes in our critical accounting estimates during the six months ended June 30, 20222023 from those disclosed in our most recently filed Annual Report on 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 our consolidated financial statements, see Note (1) "Nature of Business and Summary of Significant Accounting Policies
— Recent Adopted Accounting Pronouncements” of the Notes to our Unaudited Consolidated Financial Statements included in Item 1 of this report.our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market RisksRisk
See "Disclosures About Market Risk" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our 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, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2022,2023, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other InformationOTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the previously disclosedThe risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 ("20212022 Form 10-K”). The risk factors disclosed in our 2021 Form 10-K should also be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 20222023 and under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The risk factors set forth in our 2022 Form 10-K are updated by adding the following:
Circumstances associated with divestitures could adversely affect the Company's results of operations and financial condition.
We may periodically divest businesses, including businesses that are no longer a part of our ongoing strategic plan. These divestitures may require significant investment of time and resources and may disrupt our business, distract management from other responsibilities, and may result in losses on disposal or continued financial involvement in the divested business, including through indemnification or other arrangements, for a period of time following the transaction, which could adversely affect our financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not purchase any of our equity securities during the period covered by this report.
VSE's loan agreement prohibits VSE from paying cash dividends, except that if there is no event of default, no act, event or condition that would constitute an event of default with the giving of notice or the passage of time, or both, and no covenant breach would occur giving effect to the payment of the dividend, VSE may pay cash dividends that do not exceed $6 million in the aggregate in any fiscal year.
Item 5. Other Information
During the three months ended June 30, 2023, no director or "officer," as defined in Rule 16a-1(f) of the Exchange Act, of the Company adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
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(a) Exhibits | | |
Exhibit 2.1 | | |
Exhibit 2.2 | | Agreement and Plan of Merger by and among VSE Aviation, Inc., Diamond Merger Sub 1, LLC, Desser-Graham Partnership, L.P. and Desser Holdings Partnership GP, LLC, as the Representative, dated as of May 3, 2023 (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2023)
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Exhibit 3.1 | | |
Exhibit 3.2 | | |
Exhibit 3.3 | | |
Exhibit 3.4 | |
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Exhibit 10.1 | | |
Exhibit 31.1 | | |
Exhibit 31.2 | | |
Exhibit 32.1 | | |
Exhibit 32.2 | | |
Exhibit 101.INS | | Inline XBRL Instance Document |
Exhibit 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
Exhibit 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
Exhibit 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
Exhibit 101.PRE | | Inline XBRL Taxonomy Extension Presentation Document |
Exhibit 104 | | The cover page from this Quarterly Report on Form 10-Q, formattedCover Page Interactive Data File (formatted as Inline XBRL and contained in inline XBRL.Exhibit 101) |
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | VSE CORPORATION |
| | | |
Date: | July 28, 202227, 2023 | By: | /s/ John A. Cuomo |
| | | John A. Cuomo |
| | | Director, Chief Executive Officer and President |
| | | (Principal Executive Officer) |
| | | | | | | | | | | |
Date: | July 28, 202227, 2023 | By: | /s/ Stephen D. Griffin |
| | | Stephen D. Griffin |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |
| | | |