VSE (VSEC) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for H1 2023 reflect significant revenue and income growth from continuing operations compared to the prior year Consolidated Balance Sheets Total assets increased to $1.07 billion and liabilities to $604.3 million by June 30, 2023, driven by inventories and debt Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $674,224 | $548,878 | | Inventories | $427,822 | $380,438 | | Current assets held-for-sale | $107,059 | $54,925 | | Total assets | $1,073,471 | $999,789 | | Long-term debt, less current portion | $365,110 | $276,300 | | Current liabilities held-for-sale | $64,070 | $52,929 | | Total liabilities | $604,334 | $550,263 | | Total stockholders' equity | $469,137 | $449,526 | Consolidated Statements of Income Q2 2023 revenues from continuing operations increased 21% to $205.2 million, with net income more than doubling to $10.1 million Q2 2023 vs Q2 2022 Performance (in thousands, except EPS) | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $205,223 | $169,761 | 21.0% | | Operating Income | $20,637 | $10,535 | 95.9% | | Income from Continuing Operations | $10,089 | $4,755 | 112.2% | | Diluted EPS (Continuing Ops) | $0.78 | $0.37 | 110.8% | H1 2023 vs H1 2022 Performance (in thousands, except EPS) | Metric | H1 2023 | H1 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $393,810 | $330,081 | 19.3% | | Operating Income | $37,415 | $22,552 | 65.9% | | Income from Continuing Operations | $18,209 | $11,044 | 64.9% | | Diluted EPS (Continuing Ops) | $1.42 | $0.87 | 63.2% | - The company reported a loss from discontinued operations of $1.2 million in Q2 2023, compared to an income of $2.8 million in Q2 2022, reflecting the performance of the Federal and Defense segment which is being sold[14] Consolidated Statements of Cash Flows Net cash used in operating activities increased to $65.1 million in H1 2023, primarily due to inventory investments, offset by financing activities Six-Month Cash Flow Summary (in thousands) | Cash Flow Activity | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(65,091) | $(20,138) | | Net cash (used in) provided by investing activities | $(16,291) | $327 | | Net cash provided by financing activities | $85,244 | $19,664 | | Net increase (decrease) in cash | $3,862 | $(147) | - The primary drivers for the increased use of cash in operations were a $45.6 million increase in inventories and a $27.4 million decrease in accounts payable, partially offset by higher net income[24] Notes to Unaudited Consolidated Financial Statements Notes detail the sale of the Federal and Defense segment, the acquisition of Precision Fuel Components, and significant subsequent events - On May 1, 2023, the company entered into a definitive agreement to sell its Federal and Defense segment for up to $100.0 million, consequently reporting this segment's results as discontinued operations[30][37] - The Aviation segment acquired Precision Fuel Components, LLC on February 1, 2023, for $11.7 million to expand its MRO capabilities[33] - Subsequent to the quarter's end, in July 2023, the company completed the acquisition of Desser Aerospace for $124.0 million, amended its credit agreement to secure a new $90.0 million term loan, and raised $112.7 million in net proceeds from a public stock offering[67][68][70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q2 2023 growth, strategic divestitures and acquisitions, and sufficient liquidity Recent Developments and Business Trends The company is strategically transforming by divesting its Federal and Defense segment to focus on core Aviation and Fleet businesses, which are showing strong growth - The company entered an agreement to sell its Federal and Defense business for up to $100 million to sharpen its focus on aftermarket products and services[72] - Aviation segment revenue grew 19% year-over-year in Q2 2023, driven by a 37% increase in repair revenue and a 13% increase in distribution revenue[76] - The Fleet segment's revenue diversification strategy is succeeding, with commercial revenues growing to 47% of the segment's total in Q2 2023, up from 40% in the prior year[77] Results of Operations Consolidated revenues for Q2 2023 increased 21%, with operating income rising 96%, driven by strong Aviation and Fleet segment performance Consolidated Results of Operations (in thousands) | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $205,223 | $169,761 | 21% | | Operating Income | $20,637 | $10,535 | 96% | Aviation Segment Q2 Results (in thousands) | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $124,729 | $105,019 | 19% | | Operating Income | $15,783 | $6,450 | 145% | | Profit Percentage | 12.7% | 6.1% | - | Fleet Segment Q2 Results (in thousands) | Metric | Q2 2023 | Q2 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $80,494 | $64,742 | 24% | | Operating Income | $7,854 | $5,366 | 46% | | Profit Percentage | 9.8% | 8.3% | - | Liquidity and Capital Resources The company's liquidity is supported by operating cash flows, an amended credit facility, and $112.7 million in net proceeds from a public stock offering - As of June 30, 2023, the company had $95.0 million outstanding on its term loan and $282.0 million on its revolving facility, with $67.3 million of unused commitments[99] - In July 2023, the credit agreement was amended, providing a new $90.0 million term loan and increasing the maximum Total Funded Debt to EBITDA Ratio to 5.00x through September 2023[100] - A public stock offering in July 2023 raised net proceeds of $112.7 million, intended to repay outstanding borrowings under the revolving credit facility[101] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk from its variable-rate debt through interest rate swap agreements, including a new $100.0 million hedge - The company's primary market risk is interest rate risk from its variable-rate credit facility[110] - To manage interest rate risk, the company uses interest rate hedges, executing a new interest rate swap in July 2023 to hedge the variability on $100.0 million of floating-rate debt[110][111] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[117] - No changes occurred in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[118] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reported no material legal proceedings during the period - There are no legal proceedings to report[121] Item 1A. Risk Factors A new risk factor was added to address potential adverse effects from business divestitures, including disruption and financial losses - A new risk factor was added to address potential adverse effects from business divestitures, such as disruption, management distraction, and potential financial losses or ongoing liabilities[123] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not engage in any purchases of its own equity securities during the second quarter of 2023 - The company did not purchase any of its equity securities during the reporting period[124] Item 5. Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the second quarter of 2023 - No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2023[125] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including key agreements for the Federal and Defense segment sale and credit agreement amendment - Key exhibits filed include the Membership Interest Purchase Agreement for the sale of the Federal and Defense segment and the Fifth Amendment to the Business Loan and Security Agreement[127]