VSE (VSEC) - 2021 Q3 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows Unaudited Consolidated Balance Sheets The company's assets, liabilities, and stockholders' equity show significant year-over-year growth Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2021 | Dec 31, 2020 | Change | |---|---|---|---| | Assets | | | | | Total current assets | $459,861 | $354,957 | +$104,904 | | Total assets | $912,938 | $780,081 | +$132,857 | | Liabilities | | | | | Total current liabilities | $166,695 | $139,228 | +$27,467 | | Total liabilities | $501,917 | $423,764 | +$78,153 | | Stockholders' Equity | | | | | Total stockholders' equity | $411,021 | $356,317 | +$54,704 | Unaudited Consolidated Statements of Income (Loss) Revenues increased, leading to a significant turnaround from net loss to net income for the nine-month period Consolidated Statements of Income (Loss) Highlights (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Total revenues | $200,582 | $165,505 | $540,675 | $511,638 | | Total costs and operating expenses | $186,690 | $151,320 | $529,894 | $468,789 | | Operating income | $13,892 | $14,185 | $10,781 | $2,009 | | Net income (loss) | $9,021 | $8,108 | $1,766 | $(11,184) | | Basic earnings (loss) per share | $0.71 | $0.73 | $0.14 | $(1.01) | | Diluted earnings (loss) per share | $0.71 | $0.73 | $0.14 | $(1.01) | | Dividends declared per share | $0.09 | $0.09 | $0.27 | $0.27 | Unaudited Consolidated Statements of Comprehensive Income (Loss) Comprehensive income grew in Q3 and showed a significant positive swing for the nine-month period Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Net income (loss) | $9,021 | $8,108 | $1,766 | $(11,184) | | Other comprehensive income (loss), net of tax | $173 | $388 | $836 | $(564) | | Comprehensive income (loss) | $9,194 | $8,496 | $2,602 | $(11,748) | Unaudited Consolidated Statements of Stockholders' Equity Stockholders' equity increased primarily due to a common stock issuance and net income Stockholders' Equity Changes (9 Months Ended Sep 30, 2021, in thousands) | Item | Shares | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |---|---|---|---|---|---|---| | Balance at Dec 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 income | — | — | — | $1,766 | — | $1,766 | | Stock-based compensation | 50 | $2 | $3,515 | — | — | $3,517 | | Other comprehensive income, net of tax | — | — | — | — | $836 | $836 | | Dividends declared ($0.27 per share) | — | — | — | $(3,432) | — | $(3,432) | | Balance at Sep 30, 2021 | 12,704 | $635 | $87,322 | $323,431 | $(367) | $411,021 | Unaudited Consolidated Statements of Cash Flows Cash flow from operations turned negative, while financing activities provided significant cash inflows Consolidated Statements of Cash Flows Highlights (9 Months Ended Sep 30, in thousands) | Cash Flow Activity | 2021 | 2020 | |---|---|---| | Net cash (used in) provided by operating activities | $(30,523) | $35,235 | | Net cash (used in) provided by investing activities | $(59,839) | $20,644 | | Net cash provided by (used in) financing activities | $90,367 | $(56,062) | | Net increase (decrease) in cash and cash equivalents | $5 | $(183) | | Cash and cash equivalents at end of period | $383 | $551 | Notes to Unaudited Consolidated Financial Statements These notes detail the basis of presentation, acquisitions, revenue sources, debt, and other key financial items (1) Basis of Presentation Financials are prepared under U.S. GAAP for interim reporting, noting COVID-19 impacts and a recent stock offering - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC Form 10-Q instructions[24][25] - The COVID-19 pandemic continued to adversely impact the Aviation segment in the first nine months of 2021, with demand remaining below pre-pandemic levels[26] - In January 2021, the company completed a public offering of 1,599,097 shares of common stock at $35.00 per share, generating approximately $52 million in net proceeds[27][99] (2) Acquisitions and Divestitures The company completed two strategic acquisitions in 2021 while having divested non-core assets in 2020 - Acquired HAECO Special Services, LLC (HSS) on March 1, 2021, for $14.8 million, enhancing the Federal and Defense segment's MRO support for military aircraft[28][30] - Acquired Global Parts Group, Inc. on July 26, 2021, for approximately $38 million cash, expanding the Aviation segment's business and general aviation (B&GA) distribution and MRO services[32][33] - Divested Prime Turbines LLC in February 2020 for $20.0 million cash and an $8.3 million note receivable, shifting the Aviation segment's focus to higher-growth areas[38][39][96][97] (3) Revenue Revenue is detailed by customer type and revenue stream, with commercial revenue showing strong growth Revenue by Customer (in thousands) | Customer | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Commercial | $94,163 | $48,974 | $218,544 | $156,430 | | DoD | $60,862 | $56,935 | $173,501 | $185,956 | | Other government | $45,557 | $59,596 | $148,630 | $169,252 | | Total | $200,582 | $165,505 | $540,675 | $511,638 | Revenue by Type (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Repair | $18,714 | $17,280 | $56,051 | $66,936 | | Distribution | $114,678 | $82,657 | $282,031 | $247,728 | | Cost Plus Contract | $26,775 | $18,194 | $65,139 | $61,182 | | Fixed Price Contract | $25,729 | $32,937 | $82,090 | $107,932 | | T&M Contract | $14,686 | $14,437 | $55,364 | $27,860 | | Total | $200,582 | $165,505 | $540,675 | $511,638 | - Unbilled receivables increased from $22.4 million to $30.8 million, primarily due to the HSS acquisition and revenue recognition exceeding billings[49] - Approximately 57% of revenues for the three and nine months ended September 30, 2021, were recognized at a point in time (product sales)[50] (4) Debt Long-term debt increased to fund operations and acquisitions, with the company remaining in covenant compliance Long-term Debt (in thousands) | Debt Type | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Bank credit facility - term loan | $63,925 | $77,988 | | Bank credit facility - revolver loans | $232,659 | $175,473 | | Principal amount of long-term debt | $296,584 | $253,461 | | Total long-term debt, less current portion | $280,047 | $230,714 | - On July 23, 2021, the company amended its loan agreement, extending maturity dates to July 2024 and modifying financial covenants[55] - The company uses interest rate hedges on a portion of its debt ($75 million as of Sep 30, 2021), resulting in an effective interest rate of 3.90% on aggregate outstanding debt[61] - The company was in compliance with all loan agreement covenants as of September 30, 2021, and expects to remain compliant for the next twelve months[63] (5) Earnings Per Share Weighted average shares outstanding increased due to the January 2021 public stock offering Weighted Average Common Shares Outstanding | Share Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Basic weighted average common shares outstanding | 12,704,165 | 11,043,246 | 12,496,646 | 11,028,283 | | Diluted weighted average common shares outstanding | 12,774,636 | 11,100,356 | 12,573,076 | 11,028,283 | (6) Commitments and Contingencies The company faces various legal proceedings and government audits that are not expected to have a material adverse effect - The company is involved in various claims and legal proceedings in the normal course of business, but management believes their resolution will not have a material adverse effect on financial results[68] - Government audits and investigations are ongoing, but the company believes the outcome will not materially impact its financial condition or results of operations[69] (7) Business Segments and Customer Information The Aviation segment showed strong revenue growth, while an inventory reserve impacted its operating income - The company operates in three reportable segments: Aviation, Fleet, and Federal and Defense[70][71][72] Segment Revenues (in thousands) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Aviation | $73,124 | $36,218 | $165,010 | $126,519 | | Fleet | $60,268 | $63,719 | $173,072 | $188,145 | | Federal and Defense | $67,190 | $65,568 | $202,593 | $196,974 | | Total revenues | $200,582 | $165,505 | $540,675 | $511,638 | Segment Operating Income (Loss) (in thousands) | Segment | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | |---|---|---|---|---| | Aviation | $3,719 | $1,586 | $(18,885) | $(34,680) | | Fleet | $5,387 | $6,589 | $15,128 | $20,509 | | Federal and Defense | $5,386 | $6,746 | $17,410 | $18,441 | | Corporate/unallocated expenses | $(600) | $(736) | $(2,872) | $(2,261) | | Operating income | $13,892 | $14,185 | $10,781 | $2,009 | - Aviation segment operating income for the first nine months of 2021 was reduced by $23.7 million due to an inventory reserve expense related to the COVID-19 pandemic[74] Revenue by Customer Percentage | Customer | 3 Months Ended Sep 30, 2021 (%) | 3 Months Ended Sep 30, 2020 (%) | 9 Months Ended Sep 30, 2021 (%) | 9 Months Ended Sep 30, 2020 (%) | |---|---|---|---|---| | Commercial | 47% | 30% | 41% | 31% | | DoD | 30% | 34% | 32% | 36% | | Other government | 23% | 36% | 27% | 33% | | Total | 100% | 100% | 100% | 100% | (8) Goodwill and Intangible Assets Goodwill and intangible assets increased due to recent acquisitions in the Aviation segment Goodwill Changes (9 Months Ended Sep 30, 2021, in thousands) | Segment | Balance as of Dec 31, 2020 | Increase from acquisitions | Balance as of Sep 30, 2021 | |---|---|---|---| | Fleet | $63,190 | — | $63,190 | | Federal and Defense | $30,883 | — | $30,883 | | Aviation | $144,053 | $2,700 | $146,753 | | Total | $238,126 | $2,700 | $240,826 | Intangible Assets, Net (in thousands) | Intangible Asset Type | Sep 30, 2021 | Dec 31, 2020 | |---|---|---| | Contract and customer-related | $113,619 | $98,463 | | Acquired technologies | $767 | $1,613 | | Trade names | $2,655 | $3,519 | | Total | $117,041 | $103,595 | - The increase in contract and customer-related intangibles is due to the HSS and Global Parts acquisitions[79] - Amortization expense for intangible assets was $4.9 million for Q3 2021 and $13.8 million for the first nine months of 2021[80] (9) Fair Value Measurements The company details assets and liabilities measured at fair value, including a new earn-out obligation Financial Assets and Liabilities Measured at Fair Value (in thousands) | Item | Fair Value Hierarchy | Sep 30, 2021 | Dec 31, 2020 | |---|---|---|---| | Non-COLI assets held in Deferred Supplemental Compensation Plan | Level 1 | $1,299 | $1,120 | | Interest rate swap agreements | Level 2 | $490 | $1,603 | | Earn-out obligation - short-term | Level 3 | $1,000 | — | | Earn-out obligation - long-term | Level 3 | $250 | — | - Interest rate swap agreements are accounted for as highly effective cash flow hedges[82][84] - The earn-out obligation for the Global Parts acquisition (up to $2.0 million) is measured at fair value using a probability-based scenario analysis (Level 3)[85] (10) Income Taxes The effective tax rate for 2021 reflects a shift from book loss to book income compared to 2020 Effective Tax Rates | Period | 2021 | 2020 | |---|---|---| | Three months ended Sep 30 | 18.8% | 23.9% | | Nine months ended Sep 30 | 23.4% | (38.4)% | - The difference in effective tax rates is primarily due to a significantly higher tax loss in 2020 and the shift from book loss in 2020 to book income in 2021[88] (11) Recently Issued Accounting Pronouncements Not Yet Adopted The company is currently evaluating the impact of reference rate reform on its financial statements - The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) on its financial statements, particularly concerning the transition from LIBOR[89][91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, business trends, COVID-19 impacts, and critical accounting policies General Overview The company provides diversified aftermarket services and has pursued strategic acquisitions and divestitures - VSE Corporation is a diversified aftermarket products and services company serving government and commercial markets[93] - Key acquisitions in 2021 include Global Parts Group, Inc. and HAECO Special Services, LLC, expanding MRO and distribution capabilities[94][95] - Divestitures in 2020 included Prime Turbines, LLC and CT Aerospace, LLC inventory, allowing the Aviation segment to focus on higher-growth areas[96][97] - A public offering of common stock in February 2021 generated $52 million in net proceeds for general corporate purposes[99] COVID-19 Discussion The pandemic continues to impact the Aviation segment, while supply chain and labor challenges persist - All businesses remained operational, but the Aviation segment experienced reduced demand due to decreased commercial airline travel[103] - The Fleet and Federal and Defense segments anticipate limited disruption due to their essential services customer bases[104] - The company recorded a $30.9 million goodwill impairment charge for the VSE Aviation reporting unit in Q2 2020 due to COVID-19 impacts[109] - An additional $24.4 million inventory reserve was recorded in Q2 2021 for the Aviation segment due to excess and slow-moving inventory[111] - Supply chain challenges persist, including material sourcing constraints, strained logistics capacity, and labor availability issues[116] - New federal contractor vaccination requirements could lead to attrition and labor challenges[118][119][120] Business Trends All segments are pursuing strategic growth initiatives, with Aviation recovering and Federal and Defense growing its backlog - Aviation Segment: Experienced sustained sequential quarterly revenue increases, with 83% year-over-year distribution revenue growth in the first nine months of 2021[124][125][126] - Fleet Segment: Focused on commercial customer diversification, with commercial revenue increasing approximately 66% in Q3 2021[129][130] - Federal and Defense Segment: Bookings increased 20% year-over-year to $234 million for the first nine months of 2021, with funded backlog up 23% to $218 million[131][132][136][137] Financial Statement Presentation Revenue sources vary by segment, with costs and operating expenses generally fluctuating with business activity - Revenues are derived from product delivery and professional/technical services across the company's segments[133] - Costs and operating expenses include cost of goods sold, direct/indirect contract costs, SG&A, amortization, and nonrecurring charges[134] Federal and Defense Segment Bookings and Backlog (in millions) | Metric | 2021 (9 Months) | 2020 (9 Months) | |---|---|---| | Bookings | $234 | $195 | | Revenues | $203 | $197 | | Funded Contract Backlog (as of Sep 30) | $218 | $177 | Critical Accounting Policies, Estimates and Judgments Key accounting policies involve significant estimates for revenue recognition, business combinations, goodwill, and income taxes - Revenue recognition follows ASC 606, with performance obligations satisfied either at a point in time or over time[139][142][143][145] - Business combinations are accounted for using the acquisition method, which involves significant management judgment and estimates[149] - Goodwill is reviewed for impairment annually, with the VSE Aviation reporting unit ($147 million goodwill) remaining at risk for future impairment[151][152][153] - Income taxes are accounted for under the asset and liability method, relying on assumptions about future taxable income[157][158] Results of Operations Consolidated revenues grew, and operating income improved significantly for the nine-month period despite higher operating expenses Consolidated Results of Operations (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (3 Months) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (9 Months) | |---|---|---|---|---|---|---| | Revenues | $200,582 | $165,505 | +$35,077 | $540,675 | $511,638 | +$29,037 | | Costs and operating expenses | $186,690 | $151,320 | +$35,370 | $529,894 | $468,789 | +$61,105 | | Operating income | $13,892 | $14,185 | $(293) | $10,781 | $2,009 | +$8,772 | | Net income (loss) | $9,021 | $8,108 | +$913 | $1,766 | $(11,184) | +$12,950 | - Q3 2021 revenues increased 21.2% YoY, driven by Aviation (+102%) and Federal and Defense (+2%), partially offset by Fleet (-5%)[163] - Q3 2021 operating income decreased 2.1% YoY, with decreases in Federal and Defense and Fleet, partially offset by an increase in Aviation[165] - 9M 2021 revenues increased 5.7% YoY, primarily from Aviation (+30%) and Federal and Defense (+3%), partially offset by Fleet (-8%)[168] - 9M 2021 operating income increased 437% YoY, driven by Aviation, despite decreases in Fleet and Federal and Defense[169][172][173] - Interest expense decreased in both Q3 and 9M 2021 due to lower average interest rates on borrowings[166][174] - The effective tax rate for 9M 2021 was 23.4% compared to (38.4)% in 9M 2020, primarily due to the shift from book loss to book income[175] Segment Operating Results Aviation revenue surged due to new contracts and acquisitions, while Fleet and Federal and Defense faced mixed results Aviation Segment Results (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (3 Months) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (9 Months) | |---|---|---|---|---|---|---| | Revenues | $73,124 | $36,218 | +$36,906 | $165,010 | $126,519 | +$38,491 | | Operating income (loss) | $3,719 | $1,586 | +$2,133 | $(18,885) | $(34,680) | +$15,795 | | Profit (loss) percentage | 5.1% | 4.4% | | (11.4)% | (27.4)% | | - Aviation revenue growth in Q3 2021 was 102% YoY, driven by new distribution contracts and the Global Parts acquisition[177][180] - Aviation operating loss decreased by $15.8 million (46%) for 9M 2021, impacted by a $23.7 million inventory reserve in Q2 2021 and a $33.7 million goodwill impairment in 2020[181][184] Fleet Segment Results (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (3 Months) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (9 Months) | |---|---|---|---|---|---|---| | Revenues | $60,268 | $63,719 | $(3,451) | $173,072 | $188,145 | $(15,073) | | Operating income | $5,387 | $6,589 | $(1,202) | $15,128 | $20,509 | $(5,381) | | Profit percentage | 8.9% | 10.3% | | 8.7% | 10.9% | | - Fleet revenues decreased 5% in Q3 2021 YoY, primarily due to a $7.1 million non-recurring COVID-19 related order in Q3 2020[185] - Fleet operating income decreased 26% for 9M 2021, due to changes in product mix and a $0.7 million inventory valuation reserve[190] Federal and Defense Segment Results (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change (3 Months) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change (9 Months) | |---|---|---|---|---|---|---| | Revenues | $67,190 | $65,568 | +$1,622 | $202,593 | $196,974 | +$5,619 | | Operating income | $5,386 | $6,746 | $(1,360) | $17,410 | $18,441 | $(1,031) | | Profit percentage | 8.0% | 10.3% | | 8.6% | 9.4% | | - Federal and Defense revenues increased 2% in Q3 2021 YoY, driven by new U.S. Air Force work from the HSS acquisition[192] - Federal and Defense operating income decreased 6% for 9M 2021, primarily due to a less favorable mix of fixed-price awards[195] Financial Condition The company's financial condition remains stable, supported by a recent stock offering and available credit - No material adverse change in financial condition in Q3 2021, with $117 million in unused bank loan commitments[196] - The February 2021 public offering generated $52 million in net proceeds, contributing to financial resources[196] Liquidity and Capital Resources Cash from operations decreased due to inventory investment, while financing activities provided significant capital - Cash and cash equivalents increased by $5 thousand during the first nine months of 2021[197] - Cash used in operating activities was $30.5 million in 9M 2021, a significant change from $35.2 million provided in 9M 2020, primarily due to increased inventory investment[198][199] - Cash used in investing activities was $59.8 million in 9M 2021, mainly for the HSS and Global Parts acquisitions ($53.2 million)[202] - Cash provided by financing activities was $90.4 million in 9M 2021, largely from $52.0 million in common stock proceeds[203] - The company paid $3.3 million ($0.27 per share) in cash dividends in 9M 2021[204] - The company has a loan agreement expiring in July 2024 and expects to remain compliant with financial covenants[208][209][210][214] Maximum Total Funded Debt to EBITDA Ratio Covenants | Testing Period | Maximum Total Funded Debt to EBITDA Ratio | |---|---| | From July 23, 2021 through and including December 31, 2021 | 4.50 to 1.00 | | From January 1, 2022 through and including June 30, 2022 | 4.25 to 1.00 | | From July 1, 2022 through and including September 30, 2022 | 4.00 to 1.00 | | From October 1, 2022 through and including December 31, 2022 | 3.75 to 1.00 | | From January 1, 2023 through and including March 31, 2023 | 3.50 to 1.00 | | From April 1, 2023 and thereafter | 3.25 to 1.00 | Item 3. Quantitative and Qualitative Disclosures About Market Risks The company is exposed to interest rate risk from its variable-rate debt, which it mitigates with interest rate swaps - The company is exposed to variable interest rate risk on its bank loan agreement and uses LIBOR-based interest rate swaps to mitigate this[218][219][221] - The phase-out of LIBOR poses a risk, as the consequences of its discontinuance are uncertain and could lead to increased variable rate debt[222] Item 4. Controls and Procedures Management concluded that disclosure controls were effective, noting changes related to the Global Parts acquisition - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2021[225] - Internal control over financial reporting changed due to the Global Parts acquisition, with corporate functions integrated and control structures modified[226] - No other material changes to internal control over financial reporting occurred during Q3 2021[227] PART II. Other Information Item 1. Legal Proceedings The company reported no legal proceedings for the period covered by this report - No legal proceedings were reported[229] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes to previously disclosed risk factors in the 2020 Form 10-K[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase equity securities, and its dividend policy is restricted by its loan agreement - The company did not purchase any of its equity securities during the period[231] - VSE's loan agreement limits annual cash dividends to $6 million, contingent on no event of default or covenant breach[232] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements and certifications - Exhibits include an Executive Employment Agreement, Section 302 and 906 CEO/CFO Certifications, and various XBRL taxonomy documents[234] Signatures The report is duly signed on behalf of VSE Corporation by its CEO and CFO - The report was signed by John A. Cuomo, Director, Chief Executive Officer and President, and Stephen D. Griffin, Senior Vice President and Chief Financial Officer, on October 28, 2021[239]