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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 September 30, 2022
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _____ to _____
Commission File Number: 000-03676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Delaware | 54-0649263 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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6348 Walker Lane | | | | |
Alexandria, | Virginia | | | | 22310 |
(Address of Principal Executive Offices) | | | | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.05 per share | | VSEC | | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares of Common Stock outstanding as of October 21, 2022: 12,799,678
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| TABLE OF CONTENTS | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 6. | | |
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Forward-Looking Statements
This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of such safe harbor provisions.
“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, the impact of widespread health developments, such as the ongoing COVID-19 outbreak, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified elsewhere in this document, including in Item 1A, Risk Factors, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 11, 2022 (“2021 Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof.
PART I. Financial Information
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands except share and per share amounts)
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| September 30, | | December 31, |
| 2022 | | 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 90 | | | $ | 518 | |
Receivables (net of allowance of $3.4 million and $1.7 million, respectively) | 91,093 | | | 76,587 | |
Unbilled receivables | 44,084 | | | 31,882 | |
Inventories | 349,917 | | | 322,702 | |
Other current assets | 28,154 | | | 32,304 | |
Total current assets | 513,338 | | | 463,993 | |
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Property and equipment (net of accumulated depreciation of $72 million and $66 million, respectively) | 44,564 | | | 42,486 | |
Intangible assets (net of accumulated amortization of $120 million and $135 million, respectively) | 94,857 | | | 108,263 | |
Goodwill | 248,837 | | | 248,753 | |
Operating lease - right-of-use assets | 23,950 | | | 27,327 | |
Other assets | 31,980 | | | 27,736 | |
Total assets | $ | 957,526 | | | $ | 918,558 | |
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Liabilities and Stockholders' equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 9,162 | | | $ | 14,162 | |
Accounts payable | 119,093 | | | 115,064 | |
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Accrued expenses and other current liabilities | 50,791 | | | 49,465 | |
Dividends payable | 1,280 | | | 1,273 | |
Total current liabilities | 180,326 | | | 179,964 | |
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Long-term debt, less current portion | 288,531 | | | 270,407 | |
Deferred compensation | 10,128 | | | 14,328 | |
Long-term operating lease obligations | 22,947 | | | 27,168 | |
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Deferred tax liabilities | 10,166 | | | 9,108 | |
Other long-term liabilities | — | | | 250 | |
Total liabilities | 512,098 | | | 501,225 | |
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Commitments and contingencies (Note 6) | | | |
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Stockholders' equity: | | | |
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,799,678 and 12,726,659, respectively | 640 | | | 636 | |
Additional paid-in capital | 91,706 | | | 88,515 | |
Retained earnings | 347,730 | | | 328,358 | |
Accumulated other comprehensive income (loss) | 5,352 | | | (176) | |
Total stockholders' equity | 445,428 | | | 417,333 | |
Total liabilities and stockholders' equity | $ | 957,526 | | | $ | 918,558 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Income
(in thousands except share and per share amounts)
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| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | | |
Products | | $ | 138,216 | | | $ | 113,005 | | | $ | 419,023 | | | $ | 276,048 | |
Services | | 104,271 | | | 87,577 | | | 296,416 | | | 264,627 | |
Total revenues | | 242,487 | | | 200,582 | | | 715,439 | | | 540,675 | |
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Costs and operating expenses: | | | | | | | | |
Products | | 123,348 | | | 101,044 | | | 376,781 | | | 273,081 | |
Services | | 96,653 | | | 79,916 | | | 279,163 | | | 241,104 | |
Selling, general and administrative expenses | | 981 | | | 809 | | | 2,752 | | | 1,897 | |
Amortization of intangible assets | | 4,233 | | | 4,921 | | | 13,406 | | | 13,812 | |
Total costs and operating expenses | | 225,215 | | | 186,690 | | | 672,102 | | | 529,894 | |
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Operating income | | 17,272 | | | 13,892 | | | 43,337 | | | 10,781 | |
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Interest expense, net | | 4,818 | | | 2,780 | | | 12,299 | | | 8,476 | |
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Income before income taxes | | 12,454 | | | 11,112 | | | 31,038 | | | 2,305 | |
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Provision for income taxes | | 3,035 | | | 2,091 | | | 7,827 | | | 539 | |
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Net income | | $ | 9,419 | | | $ | 9,021 | | | $ | 23,211 | | | $ | 1,766 | |
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Basic earnings per share | | $ | 0.74 | | | $ | 0.71 | | | $ | 1.82 | | | $ | 0.14 | |
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Basic weighted average shares outstanding | | 12,797,727 | | | 12,704,165 | | | 12,772,731 | | | 12,496,646 | |
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Diluted earnings per share | | $ | 0.73 | | | $ | 0.71 | | | $ | 1.81 | | | $ | 0.14 | |
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Diluted weighted average shares outstanding | | 12,834,084 | | | 12,774,636 | | | 12,816,319 | | | 12,573,076 | |
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Dividends declared per share | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.30 | | | $ | 0.27 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(in thousands)
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| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 9,419 | | | $ | 9,021 | | | $ | 23,211 | | | $ | 1,766 | |
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Change in fair value of interest rate swap agreements, net of tax | | 5,352 | | | 173 | | | 5,528 | | | 836 | |
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Other comprehensive income, net of tax | | 5,352 | | | 173 | | | 5,528 | | | 836 | |
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Comprehensive income | | $ | 14,771 | | | $ | 9,194 | | | $ | 28,739 | | | $ | 2,602 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Stockholders' Equity
(in thousands except per share data)
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| Three months ended September 30, 2022 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at June 30, 2022 | 12,795 | | | $ | 640 | | | $ | 91,051 | | | $ | 339,592 | | | $ | — | | | $ | 431,283 | |
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Net income | — | | | — | | | — | | | 9,419 | | | — | | | 9,419 | |
Stock-based compensation | 5 | | | — | | | 655 | | | — | | | — | | | 655 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 5,352 | | | 5,352 | |
Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,281) | | | — | | | (1,281) | |
Balance at September 30, 2022 | 12,800 | | | $ | 640 | | | $ | 91,706 | | | $ | 347,730 | | | $ | 5,352 | | | $ | 445,428 | |
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| Three months ended September 30, 2021 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at June 30, 2021 | 12,704 | | | $ | 635 | | | $ | 85,844 | | | $ | 315,555 | | | $ | (540) | | | $ | 401,494 | |
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Net income | — | | | — | | | — | | | 9,021 | | | — | | | 9,021 | |
Stock-based compensation | — | | | — | | | 1,478 | | | — | | | — | | | 1,478 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 173 | | | 173 | |
Dividends declared ($0.09 per share) | — | | | — | | | — | | | (1,145) | | | — | | | (1,145) | |
Balance at September 30, 2021 | 12,704 | | | $ | 635 | | | $ | 87,322 | | | $ | 323,431 | | | $ | (367) | | | $ | 411,021 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Stockholders' Equity (continued)
(in thousands except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at December 31, 2021 | 12,727 | | | $ | 636 | | | $ | 88,515 | | | $ | 328,358 | | | $ | (176) | | | $ | 417,333 | |
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Net income | — | | | — | | | — | | | 23,211 | | | — | | | 23,211 | |
Stock-based compensation | 73 | | | 4 | | | 3,191 | | | — | | | — | | | 3,195 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 5,528 | | | 5,528 | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (3,839) | | | — | | | (3,839) | |
Balance at September 30, 2022 | 12,800 | | | $ | 640 | | | $ | 91,706 | | | $ | 347,730 | | | $ | 5,352 | | | $ | 445,428 | |
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| Nine months ended September 30, 2021 |
| | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance at December 31, 2020 | 11,055 | | | $ | 553 | | | $ | 31,870 | | | $ | 325,097 | | | $ | (1,203) | | | $ | 356,317 | |
Issuance of common stock | 1,599 | | | 80 | | | 51,937 | | | — | | | — | | | 52,017 | |
Net 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 September 30, 2021 | 12,704 | | | $ | 635 | | | $ | 87,322 | | | $ | 323,431 | | | $ | (367) | | | $ | 411,021 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income | | $ | 23,211 | | | $ | 1,766 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Depreciation and amortization | | 19,277 | | | 18,996 | |
Deferred taxes | | (779) | | | (4,803) | |
Stock-based compensation | | 3,597 | | | 2,968 | |
Inventory valuation adjustment | | 1,094 | | | 24,420 | |
Loss on sale of PPE | | — | | | (48) | |
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Changes in operating assets and liabilities, net of impact of acquisitions: | | | | |
Receivables | | (14,506) | | | (9,321) | |
Unbilled receivables | | (12,202) | | | (4,484) | |
Inventories | | (28,309) | | | (66,518) | |
Other current assets and noncurrent assets | | 6,189 | | | (18,912) | |
Accounts payable and deferred compensation | | (171) | | | 17,955 | |
Accrued expenses and other current and noncurrent liabilities | | (1,607) | | | 7,458 | |
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Net cash used in operating activities | | (4,206) | | | (30,523) | |
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Cash flows from investing activities: | | | | |
Purchases of property and equipment | | (7,416) | | | (7,606) | |
Proceeds from the sale of property and equipment | | — | | | 199 | |
Proceeds from payments on notes receivable | | 4,235 | | | 1,550 | |
Earn-out obligation payments | | — | | | (750) | |
Cash paid for acquisitions, net of cash acquired | | — | | | (53,232) | |
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Net cash used in investing activities | | (3,181) | | | (59,839) | |
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Cash flows from financing activities: | | | | |
Borrowings on loan agreement | | 358,051 | | | 394,079 | |
Repayments on loan agreement | | (345,554) | | | (350,956) | |
Proceeds from issuance of common stock | | 486 | | | 52,017 | |
Earn-out obligation payments | | (1,250) | | | (808) | |
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Payments of taxes for equity transactions | | (942) | | | (681) | |
Dividends paid | | (3,832) | | | (3,284) | |
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Net cash provided by financing activities | | 6,959 | | | 90,367 | |
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Net (decrease) increase in cash and cash equivalents | | (428) | | | 5 | |
Cash and cash equivalents at beginning of period | | 518 | | | 378 | |
Cash and cash equivalents at end of period | | $ | 90 | | | $ | 383 | |
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Supplemental disclosure of noncash investing and financing activities: | | | | |
Earn-out obligation in connection with acquisitions | | $ | — | | | $ | 1,250 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(1) Nature of Operations and Basis of Presentation
Nature of Operations
VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to commercial and government markets. We conduct our operations under three segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense.
In February 2021, we completed the issuance and sale of 1,428,600 shares of the Company's common stock, in a public offering at a price of $35.00 per share. The underwriters exercised their option to purchase an additional 170,497 shares. The transaction closed on February 2, 2021. We received net proceeds of approximately $52 million after deducting underwriting discounts, commissions and offering related expenses, which were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K"). In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. The new standard is effective on a prospective basis for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted. We elected to early adopt this standard during the first quarter 2022 and will apply the guidance prospectively to business combinations entered into subsequent to adoption.
(2) Acquisitions
Global Parts Group, Inc.
On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a purchase price of $40 million, net of cash acquired. The purchase price includes $2 million of contingent consideration, representing the fair value recognized for potential future earn-out payments. During the third quarter of fiscal 2022, we settled the final payment of the obligation. See Note (8) "Fair
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
Value Measurements," for additional information regarding the earn-out obligation. Global Parts operating results are included in our Aviation segment.
During the three and nine months ended September 30, 2021, we incurred $0.3 million and $0.5 million, respectively, of acquisition-related expenses, which are included in selling, general and administrative expenses.
HAECO Special Services, LLC
On March 1, 2021, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC, a division of HAECO Americas ("HAECO") for the purchase price of $14.8 million. HSS operating results are included in our Federal and Defense segment. The acquisition was not material to our consolidated financial statements.
During the nine months ended September 30, 2021, we incurred $0.3 million of acquisition-related expenses, which are included in selling, general and administrative expenses.
(3) Revenue
Disaggregation of Revenues
Our revenues are derived from the delivery of products to our customers and from services performed for commercial customers, various government agencies, the United States Department of Defense ("DoD") or federal civilian agencies.
Revenues by customer for each of our operating segments for the three and nine months ended September 30, 2022 were as follows (in thousands):
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| | Three months ended September 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 101,735 | | | $ | 25,394 | | | $ | 129 | | | $ | 127,258 | |
DoD | | — | | | 183 | | | 60,550 | | | 60,733 | |
Other government | | 890 | | | 39,177 | | | 14,429 | | | 54,496 | |
Total | | $ | 102,625 | | | $ | 64,754 | | | $ | 75,108 | | | $ | 242,487 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 296,996 | | | $ | 79,257 | | | $ | 387 | | | $ | 376,640 | |
DoD | | — | | | 3,176 | | | 170,205 | | | 173,381 | |
Other government | | 3,938 | | | 114,093 | | | 47,387 | | | 165,418 | |
Total | | $ | 300,934 | | | $ | 196,526 | | | $ | 217,979 | | | $ | 715,439 | |
Revenues by customer for each of our operating segments for the three and nine months ended September 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 72,542 | | | $ | 20,690 | | | $ | 931 | | | $ | 94,163 | |
DoD | | — | | | 2,739 | | | 58,123 | | | 60,862 | |
Other government | | 582 | | | 36,839 | | | 8,136 | | | 45,557 | |
Total | | $ | 73,124 | | | $ | 60,268 | | | $ | 67,190 | | | $ | 200,582 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Commercial | | $ | 164,353 | | | $ | 52,757 | | | $ | 1,434 | | | $ | 218,544 | |
DoD | | — | | | 10,517 | | | 162,984 | | | 173,501 | |
Other government | | 657 | | | 109,798 | | | 38,175 | | | 148,630 | |
Total | | $ | 165,010 | | | $ | 173,072 | | | $ | 202,593 | | | $ | 540,675 | |
Revenues by type for each of our operating segments for the three and nine months ended September 30, 2022 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 28,979 | | | $ | — | | | $ | — | | | $ | 28,979 | |
Distribution | | 73,646 | | | 64,754 | | | — | | | 138,400 | |
Cost Plus Contract | | — | | | — | | | 40,158 | | | 40,158 | |
Fixed Price Contract | | — | | | — | | | 18,430 | | | 18,430 | |
T&M Contract | | — | | | — | | | 16,520 | | | 16,520 | |
Total | | $ | 102,625 | | | $ | 64,754 | | | $ | 75,108 | | | $ | 242,487 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2022 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 77,308 | | | $ | — | | | $ | — | | | $ | 77,308 | |
Distribution | | 223,626 | | | 196,526 | | | — | | | 420,152 | |
Cost Plus Contract | | — | | | — | | | 105,290 | | | 105,290 | |
Fixed Price Contract | | — | | | — | | | 59,069 | | | 59,069 | |
T&M Contract | | — | | | — | | | 53,620 | | | 53,620 | |
Total | | $ | 300,934 | | | $ | 196,526 | | | $ | 217,979 | | | $ | 715,439 | |
Revenues by type for each of our operating segments for the three and nine months ended September 30, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 18,714 | | | $ | — | | | $ | — | | | $ | 18,714 | |
Distribution | | 54,410 | | | 60,268 | | | — | | | 114,678 | |
Cost Plus Contract | | — | | | — | | | 26,775 | | | 26,775 | |
Fixed Price Contract | | — | | | — | | | 25,729 | | | 25,729 | |
T&M Contract | | — | | | — | | | 14,686 | | | 14,686 | |
Total | | $ | 73,124 | | | $ | 60,268 | | | $ | 67,190 | | | $ | 200,582 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2021 |
| | Aviation | | Fleet | | Federal and Defense | | Total |
Repair | | $ | 56,051 | | | $ | — | | | $ | — | | | $ | 56,051 | |
Distribution | | 108,959 | | | 173,072 | | | — | | | 282,031 | |
Cost Plus Contract | | — | | | — | | | 65,139 | | | 65,139 | |
Fixed Price Contract | | — | | | — | | | 82,090 | | | 82,090 | |
T&M Contract | | — | | | — | | | 55,364 | | | 55,364 | |
Total | | $ | 165,010 | | | $ | 173,072 | | | $ | 202,593 | | | $ | 540,675 | |
Contract Balances
Unbilled receivables (contract assets) represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.
We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables were $44.1 million as of September 30, 2022 and $31.9 million as of December 31, 2021. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheets, were $7.7 million as of September 30, 2022 and $7.1 million as of December 31, 2021. For the nine months ended September 30, 2022 and 2021, we recognized revenue that was previously included in the beginning balance of contract liabilities of $2.7 million.
Performance Obligations
Our performance obligations are satisfied either at a point in time or over time as work progresses. Revenues from products and services transferred to customers at a point in time are primarily related to the sales of vehicle and aircraft parts in our Fleet and Aviation segments. Revenues from products and services transferred to customers at a point in time accounted for approximately 57% and 59% of our revenues for the three and nine months ended September 30, 2022, respectively, and approximately 57% and 52% for the three and nine months ended September 30, 2021, respectively. Revenues from products and services transferred to customers over time are primarily related to revenues in our Federal and Defense segment and MRO services in our Aviation segment. Revenues from products and services transferred to customers over time accounted for approximately 43% and 41% of our revenues for the three and nine months ended September 30, 2022, respectively, and 43% and 48% of our revenues for the three and nine months ended September 30, 2021, respectively.
As of September 30, 2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $199 million. The performance obligations expected to be satisfied within one year and greater than one year are 96% and 4%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.
During the nine months ended September 30, 2022 and 2021, revenue recognized from performance obligations satisfied in prior periods was not material.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(4) Debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
Bank credit facility - term loan | $ | 48,925 | | | $ | 60,175 | |
Bank credit facility - revolver loans | 250,305 | | | 226,559 | |
Principal amount of long-term debt | 299,230 | | | 286,734 | |
Less debt issuance costs | (1,537) | | | (2,165) | |
Total long-term debt | 297,693 | | | 284,569 | |
Less current portion | (9,162) | | | (14,162) | |
Long-term debt, less current portion | $ | 288,531 | | | $ | 270,407 | |
We had letters of credit outstanding totaling $1.2 million and $1.0 million as of September 30, 2022 and December 31, 2021, respectively.
We pay interest on the term and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. As of September 30, 2022, the LIBOR margin was 2.25% and the base margin was 6.25%. The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. As of September 30, 2022, interest rates on our outstanding debt ranged from 6.13% to 8.50%, and the effective interest rate on our aggregate outstanding debt was 6.42%.
Interest expense incurred on bank loan borrowings, inclusive of the effect of interest rate hedges, was $4.6 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.7 million and $7.9 million for the nine months ended September 30, 2022 and 2021, respectively.
Our required term and revolver loan principal payments as of September 30, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Year Ending | | Term Loan | | Revolver Loan | | Total |
Remainder of 2022 | | $ | 3,750 | | | $ | — | | | $ | 3,750 | |
2023 | | 15,000 | | | — | | | 15,000 | |
2024 | | 30,175 | | | 250,305 | | | 280,480 | |
Total | | $ | 48,925 | | | $ | 250,305 | | | $ | 299,230 | |
We were in compliance with required ratios and other terms and conditions under our loan agreement as of September 30, 2022.
Subsequent Event
On October 7, 2022, we entered into a fourth amendment to our loan agreement which, among other things, (i) extended the maturity date from July 23, 2024 to October 7, 2025; (ii) reset the aggregate principal amount of the term loan to $100.0 million, (iii) modified the quarterly amortization payments on the term loan from $3.75 million to $2.50 million, (iv) increased the maximum Total Funded Debt to EBITDA Ratio from 4.25x to 4.50x, with such ratios decreasing thereafter, (v) changed the benchmark rate from LIBOR to Secured Overnight Financing Rate (SOFR) with a SOFR floor of 0.00%; and (vi) modified pricing to account for the change from LIBOR to SOFR.
After the amendment, our scheduled term loan payments are approximately $2.5 million for the remainder of 2022, $10.0 million in 2023, $10.0 million in 2024 and $77.5 million in 2025. We have classified the current portion of long-term debt in our consolidated balance sheets as of September 30, 2022 based on the amended amortization payment terms.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(5) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation for the three and nine month ended September 30, 2022 and 2021 were not material.
The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, | | Nine months ended September 30, |
| | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Basic weighted average common shares outstanding | | | | | | 12,797,727 | | | 12,704,165 | | | 12,772,731 | | | 12,496,646 | |
Effect of dilutive shares | | | | | | 36,357 | | | 70,471 | | | 43,588 | | | 76,430 | |
Diluted weighted average common shares outstanding | | | | | | 12,834,084 | | | 12,774,636 | | | 12,816,319 | | | 12,573,076 | |
(6) Commitments and Contingencies
Contingencies
We are involved in various claims and lawsuits arising in the normal conduct of its business, none of which we believe, based on current information, is expected to have a material adverse effect on our financial position, results of operations or cash flows.
Further, from time-to-time, government agencies audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.
(7) Business Segments and Customer Information
Business Segments
Management of our business operations is conducted under three reportable operating segments:
Aviation
Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services.
Fleet
Our Fleet segment provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the DoD. Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
Federal and Defense
Our Federal and Defense segment provides aftermarket MRO and logistics services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers. Core services include procurement; supply chain management; vehicle, maritime and aircraft sustainment services; base operations support; IT services and energy consulting.
We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. Our segment information is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | | |
Aviation | | $ | 102,625 | | | $ | 73,124 | | | $ | 300,934 | | | $ | 165,010 | |
Fleet | | 64,754 | | | 60,268 | | | 196,526 | | | 173,072 | |
Federal and Defense | | 75,108 | | | 67,190 | | | 217,979 | | | 202,593 | |
Total revenues | | $ | 242,487 | | | $ | 200,582 | | | $ | 715,439 | | | $ | 540,675 | |
| | | | | | | | |
Operating income (loss): | | | | | | | | |
Aviation | | $ | 10,017 | | | $ | 3,719 | | | $ | 24,089 | | | $ | (18,885) | |
Fleet | | 6,539 | | | 5,387 | | | 18,286 | | | 15,128 | |
Federal and Defense | | 1,939 | | | 5,386 | | | 3,803 | | | 17,410 | |
Corporate/unallocated expenses | |