UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024
| 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
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||
| (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:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
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 (§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.
| Large 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 May 3, 2024: 15,982,806
| TABLE OF CONTENTS | ||||||||
| Page | ||||||||
| PART I | ||||||||
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| PART II | ||||||||
| ITEM 1. | ||||||||
| ITEM 1A. | ||||||||
| ITEM 2. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
-2-
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 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, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, such as growth, acquisition and disposition 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, 2023 filed with the SEC on March 8, 2024 (“2023 Form 10-K") and in Item 1A. Risk Factors of this report. 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.
-3-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| March 31, | December 31, | ||||||||||
| (in thousands, except share and per share amounts) | 2024 | 2023 | |||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables (net of allowance of $ | |||||||||||
Contract assets | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Current assets held-for-sale | |||||||||||
| Total current assets | |||||||||||
Property and equipment (net of accumulated depreciation of $ | |||||||||||
Intangible assets (net of accumulated amortization of $ | |||||||||||
| Goodwill | |||||||||||
Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Dividends payable | |||||||||||
| Current liabilities held-for-sale | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Deferred compensation | |||||||||||
| Long-term operating lease obligations | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders' equity: | |||||||||||
Common stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Statements of (Loss) Income
(Unaudited)
| For the three months ended March 31, | ||||||||||||||
| (in thousands, except share and per share amounts) | 2024 | 2023 | ||||||||||||
| Revenues: | ||||||||||||||
| Products | $ | $ | ||||||||||||
| Services | ||||||||||||||
| Total revenues | ||||||||||||||
| Costs and operating expenses: | ||||||||||||||
| Products | ||||||||||||||
| Services | ||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Total costs and operating expenses | ||||||||||||||
| Operating income | ||||||||||||||
| Interest expense, net | ||||||||||||||
| Income from continuing operations before income taxes | ||||||||||||||
| Provision for income taxes | ||||||||||||||
| Net income from continuing operations | ||||||||||||||
| (Loss) income from discontinued operations, net of tax | ( | |||||||||||||
| Net (loss) income | $ | ( | $ | |||||||||||
| Earnings (loss) per share: | ||||||||||||||
| Basic | ||||||||||||||
| Continuing operations | $ | $ | ||||||||||||
| Discontinued operations | ( | |||||||||||||
| $ | ( | $ | ||||||||||||
| Diluted | ||||||||||||||
| Continuing operations | $ | $ | ||||||||||||
| Discontinued operations | ( | |||||||||||||
| $ | ( | $ | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
| Dividends declared per share | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-5-
VSE Corporation and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
| For the three months ended March 31, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net (loss) income | $ | ( | $ | |||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||
| Change in fair value of interest rate swap agreements, net of tax | ( | |||||||||||||
| Total other comprehensive income (loss), net of tax | ( | |||||||||||||
| Comprehensive (loss) income | $ | ( | $ | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-6-
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
| Three months ended March 31, 2024 | |||||||||||||||||||||||||||||||||||
| 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 December 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
Dividends declared ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Three months ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| 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 December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Dividends declared ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-7-
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| For the three months ended March 31, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
(a) | (a) | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net (loss) income | $ | ( | $ | |||||||||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of debt issuance cost | ||||||||||||||
| Deferred taxes | ( | |||||||||||||
| Stock-based compensation | ||||||||||||||
| Impairment and loss on sale of business segment | ||||||||||||||
| Loss on sale of property and equipment | ||||||||||||||
| Changes in operating assets and liabilities, net of impact of acquisitions: | ||||||||||||||
| Receivables | ( | ( | ||||||||||||
| Contract assets | ||||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other current assets and other assets | ( | |||||||||||||
| Operating lease assets and liabilities, net | ( | |||||||||||||
| Accounts payable and deferred compensation | ( | ( | ||||||||||||
| Accrued expenses and other liabilities | ( | ( | ||||||||||||
Net cash used in operating activities | ( | ( | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Proceeds from the sale of business segment | ||||||||||||||
| Cash paid for acquisitions, net of cash acquired | ( | |||||||||||||
| Net cash provided (used) in investing activities | ( | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||
Borrowings on bank credit facilities | ||||||||||||||
Repayments on bank credit facilities | ( | ( | ||||||||||||
| Proceeds from issuance of common stock | ||||||||||||||
| Payment of taxes for equity transactions | ( | ( | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Net increase in cash and cash equivalents | ||||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||||||||
(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. | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-8-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(1) Nature of Operations and Basis of Presentation
Nature of Operations
VSE Corporation (collectively, with its consolidated subsidiaries), "VSE," the "Company," "us," "we," or "our" is a leading provider of aftermarket parts distribution and maintenance, repair and overhaul ("MRO") services for air and land transportation assets for commercial and government markets. We operate in two reportable segments aligned with our operating segments: Aviation and Fleet.
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 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 year ended December 31, 2023 ("2023 Form 10-K"). In our opinion, all adjustments, including normal recurring items, considered necessary for a fair presentation of results for the interim periods have been included in the accompanying unaudited consolidated financial statements. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024.
In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets. See Note (3) "Discontinued Operations" for further information. The consolidated financial statements reflect the Federal and Defense segment's results of operations as discontinued operations for all periods presented, and the related assets and liabilities as held-for-sale as of December 31, 2023.
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.
(2) Acquisitions
Precision Fuel Components, LLC
On February 1, 2023, our Aviation segment acquired Precision Fuel Components, LLC ("Precision Fuel") for a purchase price of $11.7 million. Precision Fuel operating results are included in our Aviation segment beginning on the acquisition date. The acquisition was not material to our consolidated financial statements.
During the three months ended March 31, 2023, we incurred $0.2 million of acquisition-related expenses related to the acquisition of Precision Fuel, which are included in selling, general and administrative expenses.
-9-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
Desser Aerospace
On July 3, 2023, we completed the acquisition of Desser Holding Company LLC ("Desser Aerospace"), a global aftermarket solutions provider of specialty distribution and MRO services. We purchased Desser Aerospace for a preliminary cash consideration of $133.7 million, which included $9.5 million as an estimated net working capital adjustment (subject to post-closing adjustments). Concurrent with the closing of the transaction, we immediately sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for a cash consideration of $31.8 million, which included $1.8 million as an estimated net working capital adjustment (the “Loar Sale”).
The purchase price for Desser Aerospace was allocated on a preliminary basis, among assets acquired, and liabilities assumed, at fair value based on the best available information on the acquisition date, with the excess purchase price recorded as goodwill. The fair values of the non-financial assets acquired, and liabilities assumed, were determined based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations utilizing established industry valuation techniques. We have not yet finalized the determination of the fair values allocated to various assets and liabilities, including, but not limited to, working capital and income taxes. Therefore, the allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired, and liabilities assumed, is preliminary until we obtain final information regarding their fair values, which could potentially result in changes to the Desser Aerospace opening balance sheet.
During the first quarter of 2024, we adjusted the purchase price allocation as a result of certain measurement period adjustments to acquired assets and liabilities assumed due to updated valuation reports received from our external valuation specialist. The measurement period adjustment resulted in a decrease in deferred tax liabilities of $0.7 million with a corresponding decrease in goodwill of $0.7 million.
The preliminary purchase price allocation is as follows (in thousands):
Receivables | $ | |||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property and equipment | ||||||||
| Intangibles - customer related | ||||||||
| Goodwill | ||||||||
| Operating lease right-of-use-assets | ||||||||
Total assets acquired | ||||||||
| Accounts payable | ( | |||||||
| Accrued expenses and other current liabilities | ( | |||||||
Long-term operating lease obligations | ( | |||||||
Deferred tax liabilities | ( | |||||||
Total liabilities assumed | ( | |||||||
| Net assets acquired, excluding cash | $ | |||||||
Cash consideration, net of cash acquired | $ | |||||||
Estimated post-close adjustment | ( | |||||||
Total | $ | |||||||
Goodwill resulting from the acquisition of Desser Aerospace reflects the strategic advantage of expanding our specialty distribution and MRO services to new customers. The value attributed to goodwill and customer relationships is not fully deductible for income tax purposes. The estimated value attributed to the customer relationship intangible assets is being amortized on a straight-line basis using a weighted average useful life of 8.5 years.
-10-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
The following unaudited pro forma financial information presents the combined results of operations for Desser Aerospace and VSE Corporation for the three months ended March 31, 2024 and 2023, respectively. The unaudited consolidated pro forma results of operations are as follows (in thousands):
| For the three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
Revenue | $ | $ | ||||||||||||
Income from continuing operations | $ | $ | ||||||||||||
The unaudited pro forma combined financial information presented above has been prepared from historical financial statements that have been adjusted to give effect to the acquisition of Desser Aerospace as though it had occurred on January 1, 2023 and includes adjustments for intangible asset amortization; interest expense and debt issuance costs on long-term debt; acquisition and other transaction costs; and certain costs allocated from the former parent. The unaudited pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had occurred on January 1, 2023, nor is it indicative of future operating results.
Honeywell Fuel Control Systems
On September 27, 2023, our Aviation segment entered into an Asset Purchase and License Agreement with Honeywell International Inc., for a purchase price of $105.0 million, to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems (the "Honeywell FCS Acquisition"). The purchase price of this acquisition was funded by borrowings under our revolving credit facility. This agreement expands existing distribution and MRO capabilities supporting certain Honeywell’s fuel control systems and associated subcomponents.
The acquisition was accounted for as a business combination under ASC 805, Business Combinations. The purchase price for the acquisition was allocated on a preliminary basis, among assets acquired, at fair value based on the best available information on the acquisition date, with the excess purchase price recorded as goodwill. The fair values of the non-financial assets acquired were determined based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations utilizing established industry valuation techniques. We have not yet finalized the purchase price allocation related to this acquisition due to the fact that while legal control has occurred, we have not received physical possession of the prepaid inventory and property and equipment, and thus these assets will be subject to settlement adjustments upon transfer as outlined in the Asset Purchase and License Agreement with Honeywell. Therefore, the allocation of the total consideration for the acquisition is preliminary until we obtain final information regarding their fair values, which could potentially result in changes in the fair values and an adjustment to goodwill. There were no changes in the preliminary purchase price allocation for the three months ended March 31, 2024.
The adjusted preliminary purchase price allocation is as follows (in thousands):
Other current assets (a) | $ | |||||||
Property and equipment | ||||||||
Intangible assets | ||||||||
Goodwill | ||||||||
Total assets acquired | $ | |||||||
Cash consideration | $ | |||||||
Total consideration | $ | |||||||
(a) Represents prepaid inventory consisting of finished goods acquired but not in our physical possession as of the acquisition date. | ||||||||
The pro-forma impact of the acquisition is not material to the Company’s results of operations.
-11-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(3) Discontinued Operations
In February 2024, we entered into two separate agreements to sell substantially all the Federal and Defense segment's operational assets ("FDS Sale") for a cash consideration of $44.0 million, including amounts in escrow, subject to post-closing adjustments. The FDS Sale is consistent with our long-term strategic growth strategy focused on higher margin and higher growth aftermarket parts distribution and MRO businesses.
We recorded a pre-tax loss on the FDS sale of $12.7 million and transaction fees of $2.5 million for the three months ended March 31, 2024, which are included in (loss) income from discontinued operations, net of tax in the consolidated statements of (loss) income.
The components of (loss) income from discontinued operations, net of tax for the three months ended March 31, 2024 and 2023, consist of the following (in thousands):
| For the three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | ||||||||||||
Costs and operating expenses | ||||||||||||||
| (Loss) income from discontinued operations | ( | |||||||||||||
| Other FDS impairment | ||||||||||||||
| Loss on the sale of discontinued operations | ||||||||||||||
| Total (loss) income before income taxes | ( | |||||||||||||
| Provision for income taxes | ( | |||||||||||||
| (Loss) income from discontinued operations, net of tax | $ | ( | $ | |||||||||||
Certain assets and liabilities previously reported as held-for-sale were excluded from the FDS sale and were reclassified as held and used, at their respective fair values, on the consolidated balance sheet as of March 31, 2024. The reclassification primarily related to our Alexandria, VA headquarters and consisted of an operating lease right-of-use-asset of $7.1 million, property and equipment of $2.6 million and an operating lease obligation of $11.0 million.
-12-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
The assets and liabilities reported as held-for-sale consist of the following (in thousands):
| December 31, | ||||||||||||||
| 2023 | ||||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||
Receivables, net | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventories | ||||||||||||||
| Other current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets held-for-sale | $ | |||||||||||||
| Liabilities | ||||||||||||||
| Accounts payable | $ | |||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Long-term operating lease obligations | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Total liabilities held-for-sale | $ | |||||||||||||
Selected financial information related to cash flows from discontinued operations is as follows (in thousands):
| For the three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Depreciation and amortization | $ | $ | ||||||||||||
| Purchases of property and equipment | $ | $ | ||||||||||||
-13-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(4) Revenue
Disaggregation of Revenues
Our revenues are derived from the delivery of products to our customers and from services performed for commercial and government customers.
A summary of revenues by customer for each of our operating segments for the three months ended March 31, 2024 and 2023 is as follows (in thousands):
| Three months ended March 31, 2024 | ||||||||||||||||||||
| Aviation | Fleet | Total | ||||||||||||||||||
| Commercial | $ | $ | $ | |||||||||||||||||
| Other government | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Three months ended March 31, 2023 | ||||||||||||||||||||
| Aviation | Fleet | Total | ||||||||||||||||||
| Commercial | $ | $ | $ | |||||||||||||||||
| Other government | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
A summary of revenues by type for each of our operating segments for the three months ended March 31, 2024 and 2023 is as follows (in thousands):
| Three months ended March 31, 2024 | ||||||||||||||||||||
| Aviation | Fleet | Total | ||||||||||||||||||
| Repair | $ | $ | $ | |||||||||||||||||
| Distribution | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Three months ended March 31, 2023 | ||||||||||||||||||||
| Aviation | Fleet | Total | ||||||||||||||||||
| Repair | $ | $ | $ | |||||||||||||||||
| Distribution | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
Contract Balances
Contract balances were as follows (in thousands):
| March 31, | December 31, | |||||||||||||||||||
| Financial Statement Classification | 2024 | 2023 | ||||||||||||||||||
Billed and billable receivables | Receivables, net | $ | $ | |||||||||||||||||
Contract assets - unbilled receivables | Contract assets | $ | $ | |||||||||||||||||
| Contract liabilities | Accrued expenses and other current liabilities | $ | $ | |||||||||||||||||
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(5) Debt
Long-term debt consisted of the following (in thousands):
| March 31, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Bank credit facility - term loan | $ | $ | |||||||||
| Bank credit facility - revolving facility | |||||||||||
| Principal amount of long-term debt | |||||||||||
Less: debt issuance costs | ( | ( | |||||||||
| Total long-term debt | |||||||||||
Less: current portion | ( | ( | |||||||||
| Long-term debt, less current portion | $ | $ | |||||||||
Borrowings under our term loan and revolving facility mature in October 2025. As of March 31, 2024, the interest rate on our outstanding term loan borrowings and weighted average interest rate on our aggregate outstanding revolving facility was 8.18 % and 8.54 %, respectively. We had letters of credit outstanding of $0.8
Future required term loan and revolving facility payments as of March 31, 2024 are as follows (in thousands):
| Year Ending | Term Loan | Revolving Facility | Total | |||||||||||||||||
| Remainder of 2024 | $ | $ | $ | |||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
(6) Derivative Instruments and Hedging Activities
Our derivative instruments designated as cash flow hedges as of March 31, 2024 were as follows (in thousands):
| Notional Amount | Paid Fixed Rate | Receive Variable Rate | Settlement and Termination | |||||||||||
| Interest rate swaps | $ | 1-month term SOFR | Monthly through October 31, 2027 | |||||||||||
Interest rate swaps | $ | 1-month term SOFR | Monthly through July 31, 2026 | |||||||||||
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 months ended March 31, 2024, we reclassified $1.2 million from accumulated other comprehensive income to interest expense, net. We estimate that we will reclassify $3.5 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following March 31, 2024.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(7) Earnings Per Share
The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows:
| Three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||
| Effect of dilutive shares | ||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||
(8) Commitments and Contingencies
Contingencies
We may have certain claims in the normal course of business, including legal proceedings, against us and against other parties. In our opinion, the resolution of these claims will not have a material adverse effect on our results of operations, financial condition, 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.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(9) Business Segments
The sale of our Federal and Defense segment allows us to focus on a long-term strategic growth strategy focused on higher margin and higher growth aftermarket parts distribution and MRO businesses. Following the sale of our Federal and Defense segment, management of our business operations is conducted under two reportable operating segments:
Aviation
Our Aviation segment provides aftermarket MRO and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, MRO services including engine components and accessories, fuel controls, avionics, pneumatics, hydraulics, wheel and brake, and 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"). 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.
| Three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||
| Aviation | $ | $ | ||||||||||||
| Fleet | ||||||||||||||
| Total revenues | $ | $ | ||||||||||||
| Operating income (loss): | ||||||||||||||
| Aviation | $ | $ | ||||||||||||
| Fleet | ||||||||||||||
Corporate/unallocated expenses(a) | ( | ( | ||||||||||||
| Operating income | $ | $ | ||||||||||||
| (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. | ||||||||||||||
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(10) Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by segment for the three months ended March 31, 2024 were as follows (in thousands):
| Aviation | Fleet | Total | ||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | |||||||||||||||||
| Measurement period adjustment | ( | ( | ||||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | |||||||||||||||||
Goodwill decreased during the three months ended March 31, 2024 in connection with a measurement period adjustment for the Desser Aerospace acquisition discussed in Note (2) "Acquisitions."
Intangible Assets
Intangible assets consisted of the following (in thousands):
Cost | Accumulated Amortization | Net Intangible Assets | ||||||||||||||||||
| March 31, 2024 | ||||||||||||||||||||
| Contract and customer-related | $ | $ | ( | $ | ||||||||||||||||
| Trade names | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||
| Contract and customer-related | $ | $ | ( | $ | ||||||||||||||||
| Trade names | ( | |||||||||||||||||||
| Total | $ | $ | ( | $ | ||||||||||||||||
Intangible assets with a cost of $69.4 million were fully amortized and are no longer reflected in the intangible asset values as of March 31, 2024.
As of March 31, 2024, the estimated future annual amortization expense related to intangible assets is as follows (in thousands):
| Year Ending | Amount | |||||||
| Remainder of 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
(11) Fair Value Measurements
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis 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 March 31, 2024 | Fair Value December 31, 2023 | ||||||||||||||||||||||
Non-COLI assets held in Deferred Supplemental Compensation Plan(a) | Other assets | Level 1 | $ | $ | ||||||||||||||||||||||
| Interest rate swaps | Other assets | Level 2 | $ | $ | ||||||||||||||||||||||
(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. | ||||||||||||||||||||||||||
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.
(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.
(13) Subsequent Event
Acquisition of Turbine Controls, Inc
In April 2024, we completed our previously announced acquisition Turbine Controls, Inc. ("TCI") pursuant to the terms of the purchase agreement dated February 29, 2024. TCI is leading provider of aftermarket MRO support services for complex engine components, as well as engine and airframe accessories across commercial and military applications. Total consideration is approximately $120.0 million, comprising $110.0 million in cash and $10.0 million in shares of VSE common stock, subject to certain post-closing and working capital adjustments. The cash portion of the consideration was funded through a combination of cash on hand and additional borrowings under the revolving facility under our credit agreement. TCI will be reported within our Aviation segment. It is not practical to disclose the preliminary purchase price allocation given the short period of time between the acquisition date and the issuance of these unaudited consolidated financial statements.
During the three months ended March 31, 2024, we incurred $1.6 million of acquisition-related expenses, which are included in selling, general and administrative expenses.
Credit Agreement Amendment
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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 transportation assets to commercial and government markets.
Recent Developments
Sale of Federal and Defense Segment
In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets. See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.
Strategic Review
On February 29, 2024, we announced a process to explore and evaluate strategic alternatives involving our Fleet segment with a view to enhance shareholder value (the “Strategic Process”). The Strategic Process could include, among other alternatives, a possible sale of the Fleet segment. Any potential strategic alternative will be evaluated by our Board of Directors.
Acquisition of Turbine Controls, Inc
On April 24, 2024, we completed the acquisition of our previously announced definitive agreement to acquire Turbine Controls, Inc. ("TCI"), a leading provider of aftermarket MRO support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications. See Note (13) "Subsequent Events" for further information.
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
During the first quarter of 2024, our strong program execution of new and existing distribution awards, an expansion of product offerings and MRO capabilities, increased market activity, and contributions from recent acquisitions produced strong results, with quarterly revenue reaching $162.4 million for the three months ended March 31, 2024, representing a 43% increase year-over-year. Market growth and share gains have resulted in increased repair and distribution revenue of 58% and 38%, respectively, during the three months ended March 31, 2024, compared to the same period for the prior year. Our growth has been driven by several strategic initiatives, including executing on newly awarded distribution agreements, the introduction of new products and service capabilities to our portfolio, and the launch of a new distribution facility in Europe, all of which further strengthened our position in the aviation aftermarket. Additionally, expanding our partnerships with Original Equipment Manufacturers has provided us new opportunities, including access to new markets with an established customer base.
We believe the July 2023 acquisition of Desser Aerospace and the recently completed acquisition of Turbine Controls, Inc. in April 2024 will increase our exposure to the high-growth, higher-margin aviation distribution and MRO markets. Furthermore, we believe that the Honeywell FCS Acquisition to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems expands our existing capabilities and provides access to new customers and end markets while strengthening our partnership with Honeywell.
Fleet Segment
During the first quarter, growth in our Fleet segment was driven by contributions from commercial fleet customers, e-commerce fulfillment volume which was partially offset by a decline in activity within the United States Postal Service ("USPS"). The decline in USPS revenue is the result of USPS' transition to a new Fleet Management Information System, which has led to a temporary reduction in maintenance-related activity and parts usage. We continue to make significant progress in executing our revenue diversification strategy through the successful launch of our new e-commerce fulfillment and distribution center ("Olive Branch facility"). The scaling of the Olive Branch facility has been instrumental in our ability to capture new customers and drive revenue growth within e-commerce fulfillment. Our commercial revenues were 56% of total Fleet segment revenue for the three
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months ended March 31, 2024, compared to 43% for the same period in the prior year, demonstrating the continued success of our diversification strategy.
Results of Operations
Consolidated Results of Operations
The following table summarizes our consolidated results of operations (in thousands):
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | Change ($) | Change (%) | |||||||||||||||||||||||
| Revenues | $ | 241,539 | $ | 188,587 | $ | 52,952 | 28 | % | ||||||||||||||||||
| Costs and operating expenses | 217,365 | 171,809 | 45,556 | 27 | % | |||||||||||||||||||||
| Operating income | 24,174 | 16,778 | 7,396 | 44 | % | |||||||||||||||||||||
| Interest expense, net | 9,187 | 5,980 | 3,207 | 54 | % | |||||||||||||||||||||
| Income from continuing operations before income taxes | 14,987 | 10,798 | 4,189 | 39 | % | |||||||||||||||||||||
| Provision for income taxes | 2,887 | 2,678 | 209 | 8 | % | |||||||||||||||||||||
| Net income from continuing operations | $ | 12,100 | $ | 8,120 | $ | 3,980 | 49 | % | ||||||||||||||||||
Revenues. Revenues increased for the three months ended March 31, 2024, compared to the same period in the prior year due to growth in our Aviation segment of $49.1 million and our Fleet segment of $3.8 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 months ended March 31, 2024, compared to the same periods in the prior year primarily due to increases in revenue. Costs 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 March 31, 2024, compared to the same period of the prior year primarily due to an increase of $6.6 million for our Aviation segment and an increase of $0.7 million for our Fleet segment. See "Segment Operating Results" for a discussion of operating income by segment. The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.
Interest Expense. Interest expense increased for the three months ended March 31, 2024, as compared to the same periods in the prior year primarily due to an increase in our debt facility borrowings and a higher average interest rate on borrowings outstanding.
Provision for Income Taxes. Our effective tax rate for continued operations was 19.3% and 24.8% for the three months ended March 31, 2024 and 2023, respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. federal income tax rate and our effective tax rate. The lower effective tax rate for the three months ended March 31, 2024 primarily resulted from excess stock compensation recognized for tax purposes in connection with stock vesting in the current year.
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Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment were as follows (in thousands):
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | Change ($) | Change (%) | |||||||||||||||||||||||
| Revenues | $ | 162,383 | $ | 113,235 | $ | 49,148 | 43 | % | ||||||||||||||||||
| Costs and operating expenses | 140,073 | 97,571 | 42,502 | 44 | % | |||||||||||||||||||||
| Operating income | $ | 22,310 | $ | 15,664 | $ | 6,646 | 42 | % | ||||||||||||||||||
| Profit percentage | 13.7 | % | 13.8 | % | ||||||||||||||||||||||
Revenues. Revenues for our Aviation segment increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily driven by contributions from our acquisition of Desser Aerospace, recently initiated distribution contract wins and improved demand for our commercial aerospace products and services resulting from strong end market activity in global commercial air travel. Aviation distribution revenue increased $30.5 million, or 38%, and repair revenue increased $18.6 million, or 58%, for the three months ended March 31, 2024, compared to the same period in the prior year.
Costs and operating expenses. Costs and operating expenses increased for the three months ended March 31, 2024, compared to the same period of 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 million for the three months ended March 31, 2024, compared to $2.5 million for the same period in the prior year. Allocated corporate costs were $4.3 million for the three months ended March 31, 2024, compared to $3.2 million for the same period in the prior year.
Operating income. Operating income increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to revenue growth and a favorable shift in sales mix and pricing offset by increased amortization of intangible assets and allocated corporate costs.
Fleet Segment Results
The results of operations for our Fleet segment were as follows (in thousands):
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | Change ($) | Change (%) | |||||||||||||||||||||||
| Revenues | $ | 79,156 | $ | 75,352 | $ | 3,804 | 5 | % | ||||||||||||||||||
| Costs and operating expenses | 72,539 | 69,453 | 3,086 | 4 | % | |||||||||||||||||||||
| Operating income | $ | 6,617 | $ | 5,899 | $ | 718 | 12 | % | ||||||||||||||||||
| Profit percentage | 8.4 | % | 7.8 | % | ||||||||||||||||||||||
Revenues. Revenues for our Fleet segment increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to increases from commercial customers of $12.1 million, or 37%, partially offset by a decline in revenue in other government customers of $8.3 million, or 19%. Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business. Revenues from other government customers decreased primarily due to lower maintenance activity within the USPS vehicle fleet program.
Costs and operating expense. Costs and operating expenses increased for the three months ended March 31, 2024, 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 immaterial for the three months ended March 31, 2024, compared to $1.5 million for the same period in the prior year. Allocated corporate costs were $2.1 million for the three months ended March 31, 2024, compared to $2.0 million for the same period in the prior year.
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Operating income. Operating income increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily driven by a reduction in the amortization of intangible assets, partially offset by a sales mix shift due to a decrease in revenues from our USPS vehicle fleet program.
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, and investments in the acquisition of businesses.
Our primary sources of external financing are the capital markets and our credit agreement. Our credit agreement is with a bank group and includes a term loan and a revolving facility, with an aggregate maximum borrowing capacity of our revolving facility of $350.0 million. Under the credit agreement we may elect to increase the maximum availability of the term loan, the revolving facility, or a combination of both, subject to customary lender commitment approvals. The aggregate limit of increases is $25.0 million. Our outstanding borrowings under the credit agreement increased approximately $51.9 million for the three months ended March 31, 2024. As of March 31, 2024, we had borrowings outstanding under our term loan of $300.0 million, borrowings outstanding under our revolving facility of $184.9 million, outstanding letters of credit of $0.8 million, and $164.2 million of unused commitments under the credit agreement.
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 (in thousands):
| Three months ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net cash used in operating activities | $ | (79,060) | $ | (48,674) | ||||||||||
Net cash provided (used) in investing activities | 33,408 | (14,594) | ||||||||||||
| Net cash provided by financing activities | 48,291 | 63,322 | ||||||||||||
| Net increase in cash and cash equivalents | $ | 2,639 | $ | 54 | ||||||||||
Cash used in operating activities increased $30.4 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The increase was primarily due to greater use of cash for inventory purchases.
Cash provided by investing activities increased $48.0 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The increase was primarily due to cash provided of $41.1 million related to sale of the Federal and Defense segment as discussed in Note (3) "Discontinued Operations" to the consolidated financial statements.
Cash provided by financing activities decreased $15.0 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The decrease was primarily due to the overall lower proceeds from net borrowings of our debt during the current period.
We paid cash dividends totaling $1.6 million or 0.10 per share during the three months ending March 31, 2024. Pursuant to our credit agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.
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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, 2023.
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 credit 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. To mitigate the risks associated with future interest rate movements we have employed interest rate hedges to fix the rate on a portion of our outstanding borrowings for various periods.
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.
Other than as discussed above, there have been no material changes 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 2023 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 three months ended March 31, 2024, 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” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Disclosures About Market Risk" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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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 March 31, 2024, 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
In connection with our acquisition of Desser Aerospace, certain areas of internal control over financial reporting changed. These areas are primarily related to integrating our corporate functions such as entity level controls and certain financial reporting controls. Certain control structure items remain in operation at Desser Aerospace, primarily related to information technology, inventory management, human resources, processing and billing of revenues, and collection of those revenues. The control structure at Desser Aerospace has been modified to appropriately oversee and incorporate these activities into the overall control structure. We will continue to evaluate the need for additional internal controls over financial reporting.
There have been no additional 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the previously disclosed risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 ("2023 Form 10-K”). The risk factors disclosed in our 2023 Form 10-K should be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, and under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
We did not purchase any of our equity securities during the period covered by this report.
Item 5. Other Information
During the three months ended March 31, 2024, no director or "officer," as defined in Rule 16a-1(f) of the Exchange Act, of the Company adopted terminated
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Item 6. Exhibits
| (a) Exhibits | ||||||||
Exhibit 4.1 | ||||||||
| 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 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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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: | May 9, 2024 | By: | /s/ John A. Cuomo | ||||||||
| John A. Cuomo | |||||||||||
| Director, Chief Executive Officer and President | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: | May 9, 2024 | By: | /s/ Stephen D. Griffin | ||||||||
| Stephen D. Griffin | |||||||||||
| Senior Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer and Principal Accounting Officer) | |||||||||||
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