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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _____ to _____
Commission File Number: 000-03676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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Delaware | 54-0649263 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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3361 Enterprise Way | | | | |
Miramar, | Florida | | | | 33025 |
(Address of Principal Executive Offices) | | | | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (954) 430-6600
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 (§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 November 1, 2024: 20,411,712
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| TABLE OF CONTENTS | |
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PART I | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 2. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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Forward-Looking Statements
This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and 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 anticipated risks, impacts or benefits of growth, acquisition and disposition strategies, investments and future operational plans, including the recent agreement to acquire Kellstrom Aerospace Group, Inc. 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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited) | | | | | | | | | | | |
| September 30, | | December 31, |
(in thousands, except share and per share amounts) | 2024 | | 2023 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 7,907 | | | $ | 7,768 | |
Receivables (net of allowance of $6.8 million and $3.4 million, respectively) | 162,665 | | | 127,958 | |
Contract assets | 29,549 | | | 8,049 | |
Inventories | 533,773 | | | 500,864 | |
Other current assets | 41,403 | | | 36,389 | |
Current assets held-for-sale | — | | | 93,002 | |
Total current assets | 775,297 | | | 774,030 | |
Property and equipment (net of accumulated depreciation of $45.4 million and $37.4 million, respectively) | 74,631 | | | 58,076 | |
Intangible assets (net of accumulated amortization of $78.8 million and $135.6 million, respectively) | 160,580 | | | 114,130 | |
Goodwill | 390,636 | | | 351,781 | |
Operating lease right-of-use assets | 33,549 | | | 28,684 | |
Other assets | 29,306 | | | 23,637 | |
Total assets | $ | 1,463,999 | | | $ | 1,350,338 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 30,000 | | | $ | 22,500 | |
Accounts payable | 122,740 | | | 173,036 | |
Accrued expenses and other current liabilities | 55,524 | | | 36,383 | |
Dividends payable | 1,843 | | | 1,576 | |
Current liabilities held-for-sale | — | | | 53,391 | |
Total current liabilities | 210,107 | | | 286,886 | |
Long-term debt, less current portion | 420,341 | | | 406,844 | |
Deferred compensation | 7,683 | | | 7,939 | |
Long-term operating lease obligations | 29,061 | | | 24,959 | |
Deferred tax liabilities | — | | | 6,985 | |
Other long-term liabilities | 9,011 | | | — | |
Total liabilities | 676,203 | | | 733,613 | |
Commitments and contingencies (Note 8) | | | |
Stockholders' equity: | | | |
Common stock, par value $0.05 per share; authorized 23,000,000 shares; issued and outstanding 18,428,955 and 15,756,918, respectively | 921 | | | 788 | |
Additional paid-in capital | 404,983 | | | 229,103 | |
Retained earnings | 381,680 | | | 384,702 | |
Accumulated other comprehensive income | 212 | | | 2,132 | |
Total stockholders' equity | 787,796 | | | 616,725 | |
Total liabilities and stockholders' equity | $ | 1,463,999 | | | $ | 1,350,338 | |
The accompanying notes are an integral part of these consolidated financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands, except share and per share amounts) | | 2024 | | 2023 | | 2024 | | 2023 |
Revenues: | | | | | | | | |
Products | | $ | 188,334 | | | $ | 184,691 | | | $ | 564,092 | | | $ | 505,135 | |
Services | | 85,279 | | | 46,662 | | | 217,019 | | | 120,028 | |
Total revenues | | 273,613 | | | 231,353 | | | 781,111 | | | 625,163 | |
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Costs and operating expenses: | | | | | | | | |
Products | | 166,139 | | | 160,326 | | | 495,177 | | | 442,714 | |
Services | | 77,014 | | | 40,004 | | | 197,454 | | | 102,908 | |
Selling, general and administrative expenses | | 2,605 | | | 2,556 | | | 9,721 | | | 6,121 | |
Lease abandonment and termination (benefits) costs | | (652) | | | — | | | 12,205 | | | — | |
Amortization of intangible assets | | 4,809 | | | 3,203 | | | 12,550 | | | 10,743 | |
Total costs and operating expenses | | 249,915 | | | 206,089 | | | 727,107 | | | 562,486 | |
Operating income | | 23,698 | | | 25,264 | | | 54,004 | | | 62,677 | |
| | | | | | | | |
Interest expense, net | | 8,983 | | | 8,459 | | | 27,996 | | | 21,805 | |
Income from continuing operations before income taxes | | 14,715 | | | 16,805 | | | 26,008 | | | 40,872 | |
Provision for income taxes | | 3,065 | | | 4,694 | | | 5,035 | | | 10,554 | |
Net income from continuing operations | | 11,650 | | | 12,111 | | | 20,973 | | | 30,318 | |
Loss from discontinued operations, net of tax | | — | | | (2,554) | | | (18,711) | | | (2,789) | |
Net income | | $ | 11,650 | | | $ | 9,557 | | | $ | 2,262 | | | $ | 27,529 | |
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | | | | | | | |
Continuing operations | | $ | 0.63 | | | $ | 0.81 | | | $ | 1.22 | | | $ | 2.23 | |
Discontinued operations | | — | | | (0.17) | | | (1.09) | | | (0.20) | |
| | $ | 0.63 | | | $ | 0.64 | | | $ | 0.13 | | | $ | 2.03 | |
Diluted | | | | | | | | |
Continuing operations | | $ | 0.63 | | | $ | 0.80 | | | $ | 1.22 | | | $ | 2.22 | |
Discontinued operations | | — | | | (0.17) | | | (1.09) | | | (0.20) | |
| | $ | 0.63 | | | $ | 0.63 | | | $ | 0.13 | | | $ | 2.02 | |
| | | | | | | | |
Weighted average shares outstanding: | | | | | | | | |
Basic | | 18,425,643 | | | 15,001,908 | | | 17,125,502 | | | 13,585,391 | |
Diluted | | 18,479,123 | | | 15,050,062 | | | 17,211,825 | | | 13,639,064 | |
| | | | | | | | |
Dividends declared per share | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.30 | | | $ | 0.30 | |
The accompanying notes are an integral part of these consolidated financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Net income | $ | 11,650 | | | $ | 9,557 | | | $ | 2,262 | | | $ | 27,529 | |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Change in fair value of interest rate swap agreements, net of tax | (4,645) | | | 1,647 | | | (1,920) | | | 2,010 | |
Total other comprehensive (loss) income, net of tax | (4,645) | | | 1,647 | | | (1,920) | | | 2,010 | |
Comprehensive income, net of tax | $ | 7,005 | | | $ | 11,204 | | | $ | 342 | | | $ | 29,539 | |
The accompanying notes are an integral part of these consolidated financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 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 June 30, 2024 | 18,420 | | | $ | 921 | | | $ | 403,666 | | | $ | 371,872 | | | $ | 4,857 | | | $ | 781,316 | |
Net income | — | | | — | | | — | | | 11,650 | | | — | | | 11,650 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation | 9 | | | — | | | 1,317 | | | — | | | — | | | 1,317 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (4,645) | | | (4,645) | |
Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,842) | | | — | | | (1,842) | |
Balance at September 30, 2024 | 18,429 | | | $ | 921 | | | $ | 404,983 | | | $ | 381,680 | | | $ | 212 | | | $ | 787,796 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 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 June 30, 2023 | 12,898 | | | $ | 645 | | | $ | 96,471 | | | $ | 366,690 | | | $ | 5,331 | | | $ | 469,137 | |
Net income | — | | | — | | | — | | | 9,557 | | | — | | | 9,557 | |
Issuance of common stock | 2,846 | | | 142 | | | 128,968 | | | | | | | 129,110 | |
Stock-based compensation | 3 | | | — | | | 1,644 | | | — | | | — | | | 1,644 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 1,647 | | | 1,647 | |
Dividends declared ($0.10 per share) | — | | | — | | | — | | | (1,575) | | | — | | | (1,575) | |
Balance at September 30, 2023 | 15,747 | | | $ | 787 | | | $ | 227,083 | | | $ | 374,672 | | | $ | 6,978 | | | $ | 609,520 | |
The accompanying notes are an integral part of these consolidated financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 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 | 15,757 | | | $ | 788 | | | $ | 229,103 | | | $ | 384,702 | | | $ | 2,132 | | | $ | 616,725 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income | — | | | — | | | — | | | 2,262 | | | — | | | 2,262 | |
Issuance of common stock | 2,430 | | | 122 | | | 161,571 | | | — | | | — | | | 161,693 | |
Stock issuance in connection with acquisition | 127 | | | 6 | | | 9,994 | | | — | | | — | | | 10,000 | |
Stock-based compensation | 115 | | | 5 | | | 4,315 | | | — | | | — | | | 4,320 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (1,920) | | | (1,920) | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (5,284) | | | — | | | (5,284) | |
Balance at September 30, 2024 | 18,429 | | | $ | 921 | | | $ | 404,983 | | | $ | 381,680 | | | $ | 212 | | | $ | 787,796 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 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 | 12,817 | | | $ | 641 | | | $ | 92,620 | | | $ | 351,297 | | | $ | 4,968 | | | $ | 449,526 | |
Net income | — | | | — | | | — | | | 27,529 | | | — | | | 27,529 | |
Issuance of common stock | 2,846 | | | 142 | | | 128,968 | | | — | | | — | | | 129,110 | |
Stock-based compensation | 84 | | | 4 | | | 5,495 | | | — | | | — | | | 5,499 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 2,010 | | | 2,010 | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (4,154) | | | — | | | (4,154) | |
Balance at September 30, 2023 | 15,747 | | | $ | 787 | | | $ | 227,083 | | | $ | 374,672 | | | $ | 6,978 | | | $ | 609,520 | |
The accompanying notes are an integral part of these consolidated financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
(in thousands) | | 2024 | | 2023 |
| | (a) | | (a) |
Cash flows from operating activities: | | | | |
Net income | | $ | 2,262 | | | $ | 27,529 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Depreciation and amortization | | 20,411 | | | 17,461 | |
Amortization of debt issuance cost | | 997 | | | 1,028 | |
Deferred taxes | | (9,840) | | | (1,179) | |
Stock-based compensation | | 6,497 | | | 5,811 | |
Provision for inventory | | — | | | 742 | |
Impairment and loss on sale of business segment | | 16,867 | | | — | |
Loss on sale of property and equipment | | 421 | | | — | |
Lease abandonment and termination costs | | 12,205 | | | — | |
Changes in operating assets and liabilities, net of impact of acquisitions: | | | | |
Receivables | | (32,720) | | | (25,304) | |
Contract assets | | 5,267 | | | 5,409 | |
Inventories | | (26,808) | | | (60,867) | |
Other current assets and other assets | | (8,232) | | | 2,122 | |
Operating lease assets and liabilities, net | | (10,442) | | | (262) | |
Accounts payable and deferred compensation | | (67,860) | | | (16,717) | |
Accrued expenses and other liabilities | | 4,563 | | | (5,544) | |
Net cash used in operating activities | | (86,412) | | | (49,771) | |
Cash flows from investing activities: | | | | |
Purchases of property and equipment | | (17,439) | | | (10,795) | |
| | | | |
Proceeds from the sale of business segment | | 42,118 | | | — | |
Proceeds from the payment on notes receivable | | — | | | 1,557 | |
Cash paid for acquisitions, net of cash acquired | | (112,206) | | | (218,674) | |
Net cash used in investing activities | | (87,527) | | | (227,912) | |
Cash flows from financing activities: | | | | |
Borrowings on bank credit facilities | | 527,165 | | | 610,188 | |
Repayments on bank credit facilities | | (507,165) | | | (435,298) | |
Proceeds from issuance of common stock | | 161,693 | | | 129,566 | |
Payment of debt financing costs | | — | | | (1,448) | |
Payment of taxes for equity transactions | | (2,758) | | | (1,113) | |
Dividends paid | | (5,019) | | | (3,861) | |
Net cash provided by financing activities | | 173,916 | | | 298,034 | |
Net (decrease) increase in cash and cash equivalents | | (23) | | | 20,351 | |
Cash and cash equivalents, beginning of period | | 7,930 | | | 478 | |
Cash and cash equivalents, end of period | | $ | 7,907 | | | $ | 20,829 | |
(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.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 and nine months ended September 30, 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.
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, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.
Underwritten Public Offering
In May 2024, we entered into an underwriting agreement with certain underwriters, relating to the issuance and sale of up to 2,429,577 shares of the Company's common stock at a public offering price of $71.00 per share. On May 17, 2024, the Company issued 2,429,577 shares pursuant to the agreement, which included the exercise by the underwriters of their option to purchase additional shares. We received proceeds of approximately $162 million in connection with the offerings, net of issuance costs. We used substantially all of the proceeds of the public offering to repay outstanding borrowings under our revolving credit facility, including amounts borrowed to pay the purchase price of the acquisition of Turbine Controls, LLC ("TCI"), and for general corporate purposes.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
Recent Accounting Pronouncement
Recently Issued Accounting Pronouncement Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This guidance will be adopted by us beginning with the annual period of 2024. We are currently evaluating the impact that adoption of ASU 2023-07 may have on our consolidated financial statements and disclosure.
(2) Acquisitions
Turbine Controls, LLC
On April 24, 2024, we completed the acquisition of TCI for a total consideration of $122.2 million, consisting of net cash consideration of $112.2 million, which included $1.5 million as a net working capital adjustment, and in-kind payment in the form of shares of the Company's common stock with a value equal to approximately $10.0 million. The purchase price of this acquisition was funded by borrowings under our revolving credit facility. TCI is a leading provider of aftermarket maintenance, repair and overhaul ("MRO") support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications. The acquisition presents an opportunity for VSE's Aviation segment to accelerate its MRO strategy, including expanding our repair capability offerings and adding several new OEM relationships.
The purchase price for TCI 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, 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 TCI opening balance sheet.
During the third quarter of 2024, we adjusted the purchase price allocation as a result of working capital and measurement period adjustments. The adjustments were recorded as a result of new information obtained about facts and circumstances that existed as of the acquisition date and resulted in immaterial impacts to accrued expense and other current liabilities, goodwill, and cash consideration, net of cash acquired.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
The preliminary purchase price allocation is as follows (in thousands):
| | | | | | | | |
| | |
Receivables | | $ | 9,122 | |
Contract assets | | 16,193 | |
Inventories | | 5,512 | |
Other current assets | | 570 | |
Other assets | | 214 | |
Property and equipment, net | | 6,434 | |
Intangible asset - customer related | | 59,000 | |
Goodwill | | 40,095 | |
Operating lease right-of-use assets | | 7,832 | |
Total assets acquired | | 144,972 | |
Accounts payable | | (9,764) | |
Accrued expense and other current liabilities | | (5,680) | |
Long-term operating lease obligations | | (7,339) | |
Total liabilities assumed | | (22,783) | |
Net assets acquired, excluding cash | | $ | 122,189 | |
| | |
Cash consideration, net of cash acquired | | $ | 112,189 | |
VSE Common stock, at fair value | | 10,000 | |
Total | | $ | 122,189 | |
Goodwill resulting from the acquisition of TCI reflects the strategic advantage of expanding our MRO services to new customers. The value attributed to goodwill and customer relationships is 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 useful life of 10 years.
We incurred $0.1 million and $2.2 million of acquisition-related expenses related to the TCI acquisition during the three and nine months ended September 30, 2024, respectively, which are included in selling, general and administrative expenses.
The operating results of TCI were included in our consolidated results of operations from the date of acquisition. Our consolidated revenues and operating income include $30.7 million and $2.1 million, respectively, for the three months ended September 30, 2024, and $54.2 million and $3.9 million, respectively, for the nine months ended September 30, 2024, from the acquisition of TCI. Operating income does not include the impact of acquisition-related expenses incurred by VSE Corporation.
The following unaudited pro forma financial information presents the combined results of operations for TCI and VSE Corporation for the three and nine months ended September 30, 2024, and 2023, respectively. The unaudited consolidated pro forma results of operations are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenue | 273,613 | | | 253,508 | | | 812,893 | | | 686,520 | |
Income from continuing operations | 11,739 | | | 11,262 | | | 21,712 | | | 26,378 | |
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 TCI 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; and acquisition and
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
other transaction costs. 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.
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 nine months ended September 30, 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.
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 cash consideration of $131.5 million. 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.
During the nine months ended September 30, 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, revisions to internal estimates, and new information obtained about facts and circumstances that existed as of the acquisition date. The measurement period adjustments included: a decrease in deferred tax liabilities of $1.6 million and an increase in inventories of $0.1 million These adjustments resulted in a decrease to goodwill of $1.7 million.
We completed the purchase accounting valuation for Desser Aerospace during the second quarter of 2024. The final purchase price allocation is as follows (in thousands):
| | | | | | | | |
| | |
Receivables | | $ | 7,383 | |
Inventories | | 31,228 | |
Other current assets | | 515 | |
Property and equipment | | 2,527 | |
Intangible assets | | 21,950 | |
Goodwill | | 53,942 | |
Operating lease right-of-use assets | | 6,679 | |
Total assets acquired | | 124,224 | |
Accounts payable | | (10,128) | |
Accrued expenses and other current liabilities | | (5,793) | |
Long-term operating lease obligations | | (5,937) | |
Deferred tax liabilities | | (2,666) | |
Total liabilities assumed | | (24,524) | |
Net assets acquired, excluding cash | | $ | 99,700 | |
| | |
Cash consideration | | $ | 101,870 | |
Post-close adjustment | | (2,170) | |
Total | | $ | 99,700 | |
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
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
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 8.3 years.
We incurred $1.2 million and $3.0 million of acquisition-related expenses related to the Desser Aerospace acquisition during the three and nine ended September 30, 2023, respectively, which are included in selling, general and administrative expenses.
The following unaudited pro forma financial information presents the combined results of operations for Desser Aerospace and VSE Corporation for the nine months ended September 30, 2023. The unaudited consolidated pro forma results of operations are as follows (in thousands):
| | | | | | | | |
| | Nine months ended September 30, 2023 |
Revenue | | $ | 672,918 | |
Income from continuing operations | | $ | 31,377 | |
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. During the third quarter of 2024, we adjusted the purchase price allocation as a result of a measurement period adjustment to acquired assets due to updated valuation reports received from Honeywell. The adjustment was recorded as a result of new information obtained about facts and circumstances that existed as of the acquisition date. The measurement period adjustment resulted in a decrease in other current assets of $0.5 million, with a corresponding increase to goodwill. We completed the purchase accounting valuation for the Honeywell FCS Acquisition during the third quarter of 2024.
The final purchase price allocation is as follows (in thousands):
| | | | | | | | |
| | |
Other current assets (a) | | $ | 11,500 | |
Property and equipment | | 2,714 | |
Intangible assets | | 16,200 | |
Goodwill | | 74,586 | |
Total assets acquired | | $ | 105,000 | |
| | |
Cash consideration | | $ | 105,000 | |
Total consideration | | $ | 105,000 | |
(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.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 during the first quarter of 2024, which are included in loss from discontinued operations, net of tax in the consolidated statements of income.
The components of loss from discontinued operations, net of tax for the three and nine months ended September 30, 2024 and 2023, consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Revenues | | $ | — | | | $ | 61,622 | | | $ | 26,268 | | | $ | 195,507 | |
Costs and operating expenses | | — | | | 65,202 | | | 34,629 | | | 199,706 | |
Loss from discontinued operations | | — | | | (3,580) | | | (8,361) | | | (4,199) | |
Other FDS impairment | | — | | | — | | | 4,204 | | | — | |
Loss on the sale of discontinued operations | | — | | | — | | | 12,663 | | | — | |
Total loss before income taxes | | — | | | (3,580) | | | (25,228) | | | (4,199) | |
Provision for income taxes | | — | | | (1,026) | | | (6,517) | | | (1,410) | |
Loss from discontinued operations, net of tax | | $ | — | | | $ | (2,554) | | | $ | (18,711) | | | $ | (2,789) | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
The assets and liabilities reported as held-for-sale consist of the following (in thousands):
| | | | | | | | | | | |
| | | December 31, |
| | 2023 |
Assets | | |
| Cash and cash equivalents | | $ | 162 | |
| Receivables, net | | 10,805 | |
| Contract assets | | 25,109 | |
| Inventories | | 472 | |
| Other current assets | | 6,154 | |
| Property and equipment, net | | 6,102 | |
| Intangible assets, net | | 3,505 | |
| Goodwill | | 31,575 | |
| Operating lease right-of-use assets | | 9,097 | |
| Other assets | | 21 | |
| Total assets held-for-sale | | $ | 93,002 | |
Liabilities | | |
| Accounts payable | | $ | 20,893 | |
| Accrued expenses and other current liabilities | | 19,537 | |
| Long-term operating lease obligations | | 8,942 | |
| Deferred tax liabilities | | 4,019 | |
| Total liabilities held-for-sale | | $ | 53,391 | |
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 sheets during the first quarter of 2024. The reclassification related to our Alexandria, VA headquarters office space 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. During the second quarter of 2024, we vacated the headquarters office space and, as a result, wrote down the associated lease right-of-use asset and property and equipment. During the third quarter of 2024, we terminated the lease for the vacated headquarters office space. See Note (13) "Lease Abandonment, Lease Termination and Other Restructuring Costs" for further information.
The FDS sale resulted in the divestiture of certain government contracts requiring novation. Until the novation process is finalized, we continue to receive cash collections related to these contracts, which are due to the purchaser. As of September 30, 2024, we have recorded a $3.2 million liability for these collections within accrued expenses and other current liabilities on our consolidated balance sheets.
Selected financial information related to cash flows from discontinued operations is as follows (in thousands):
| | | | | | | | | | | | | | |
| | For the nine months ended September 30, |
| | 2024 | | 2023 |
Depreciation and amortization | | $ | 150 | | | $ | 1,849 | |
Purchases of property and equipment | | $ | — | | | $ | 98 | |
Stock-based compensation | | $ | — | | | $ | 85 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 and nine months ended September 30, 2024 and 2023 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2024 | | Nine months ended September 30, 2024 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Commercial | | $ | 202,786 | | | $ | 44,828 | | | $ | 247,614 | | | $ | 552,066 | | | $ | 135,911 | | | $ | 687,977 | |
| | | | | | | | | | | | |
Other government | | 856 | | | 25,143 | | | 25,999 | | | 6,787 | | | 86,347 | | | 93,134 | |
Total | | $ | 203,642 | | | $ | 69,971 | | | $ | 273,613 | | | $ | 558,853 | | | $ | 222,258 | | | $ | 781,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2023 | | Nine months ended September 30, 2023 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Commercial | | $ | 150,715 | | | $ | 37,430 | | | $ | 188,145 | | | $ | 386,595 | | | $ | 108,011 | | | $ | 494,606 | |
| | | | | | | | | | | | |
Other government | | 1,640 | | | 41,568 | | | 43,208 | | | 3,724 | | | 126,833 | | | 130,557 | |
Total | | $ | 152,355 | | | $ | 78,998 | | | $ | 231,353 | | | $ | 390,319 | | | $ | 234,844 | | | $ | 625,163 | |
A summary of revenues by type for each of our operating segments for the three and nine months ended September 30, 2024 and 2023 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2024 | | Nine months ended September 30, 2024 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Repair | | $ | 83,012 | | | $ | — | | | $ | 83,012 | | | $ | 209,056 | | | $ | — | | | $ | 209,056 | |
Distribution | | 120,630 | | | 69,971 | | | 190,601 | | | 349,797 | | | 222,258 | | | 572,055 | |
Total | | $ | 203,642 | | | $ | 69,971 | | | $ | 273,613 | | | $ | 558,853 | | | $ | 222,258 | | | $ | 781,111 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2023 | | Nine months ended September 30, 2023 |
| | Aviation | | Fleet | | Total | | Aviation | | Fleet | | Total |
Repair | | $ | 44,713 | | | $ | — | | | $ | 44,713 | | | $ | 112,328 | | | $ | — | | | $ | 112,328 | |
Distribution | | 107,642 | | | 78,998 | | | 186,640 | | | 277,991 | | | 234,844 | | | 512,835 | |
Total | | $ | 152,355 | | | $ | 78,998 | | | $ | 231,353 | | | $ | 390,319 | | | $ | 234,844 | | | $ | 625,163 | |
Contract Balances
Contract balances were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | September 30, | | December 31, |
| | Financial Statement Classification | | 2024 | | 2023 |
Billed and billable receivables | | Receivables, net | | $ | 162,665 | | | $ | 127,958 | |
Contract assets - unbilled receivables | | Contract assets | | $ | 29,549 | | | $ | 8,049 | |
Contract liabilities | | Accrued expenses and other current liabilities | | $ | 6,039 | | | $ | 2,785 | |
| | | | |
For the nine months ended September 30, 2024 and 2023, we recognized revenue that was previously included in the beginning balance of contract liabilities of $1.8 million and $0.9 million, respectively.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
(5) Debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2024 | | 2023 |
Bank credit facility - term loan | $ | 285,000 | | | $ | 300,000 | |
Bank credit facility - revolving facility | 168,000 | | | 133,000 | |
Principal amount of long-term debt | 453,000 | | | 433,000 | |
Less: debt issuance costs | (2,659) | | | (3,656) | |
Total debt | 450,341 | | | 429,344 | |
Less: current portion | (30,000) | | | (22,500) | |
Long-term debt, less current portion | $ | 420,341 | | | $ | 406,844 | |
Borrowings under our term loan and revolving facility mature in October 2026. As of September 30, 2024, the interest rate on our outstanding term loan borrowings and weighted average interest rate on our aggregate outstanding revolving facility was 8.05% and 7.94%, respectively. We had letters of credit outstanding of $0.8 million as of September 30, 2024 and December 31, 2023.
Future required term loan and revolving facility payments as of September 30, 2024 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Year Ending | | Term Loan | | Revolving Facility | | Total |
Remainder of 2024 | | $ | 7,500 | | | $ | — | | | $ | 7,500 | |
2025 | | 30,000 | | | — | | | 30,000 | |
2026 | | 247,500 | | | 168,000 | | | 415,500 | |
Total | | $ | 285,000 | | | $ | 168,000 | | | $ | 453,000 | |
We were in compliance with required ratios and other terms and conditions under our credit agreement as of September 30, 2024.
(6) Derivative Instruments and Hedging Activities
Our derivative instruments designated as cash flow hedges as of September 30, 2024 were as follows (in thousands):
| | | | | | | | | | | | | | |
| Notional Amount | Paid Fixed Rate | Receive Variable Rate | Settlement and Termination |
Interest rate swaps | $150,000 | 2.8% | 1-month term SOFR | Monthly through October 31, 2027 |
Interest rate swaps | $100,000 | 4.5% | 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 and nine months ended September 30, 2024, we reclassified $1.2 million and $3.5 million, respectively, from accumulated other comprehensive income to interest expense, net. We estimate that we will reclassify $0.7 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following September 30, 2024. See Note (11) "Fair Value Measurements" for the fair value of the interest rate swaps.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
(7) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards. The antidilutive common stock equivalents excluded from the diluted per share calculation are 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, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Basic weighted average common shares outstanding | | 18,425,643 | | | 15,001,908 | | | 17,125,502 | | | 13,585,391 | |
Effect of dilutive shares | | 53,480 | | | 48,154 | | | 86,323 | | | 53,673 | |
Diluted weighted average common shares outstanding | | 18,479,123 | | | 15,050,062 | | | 17,211,825 | | | 13,639,064 | |
(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.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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.
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, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Revenues: | | | | | | | | |
Aviation | | $ | 203,642 | | | $ | 152,355 | | | $ | 558,853 | | | $ | 390,319 | |
Fleet | | 69,971 | | | 78,998 | | | 222,258 | | | 234,844 | |
Total revenues | | $ | 273,613 | | | $ | 231,353 | | | $ | 781,111 | | | $ | 625,163 | |
| | | | | | | | |
Operating income: | | | | | | | | |
Aviation | | $ | 25,435 | | | $ | 20,951 | | | $ | 72,214 | | | $ | 52,397 | |
Fleet | | 2,471 | | | 8,531 | | | 11,299 | | | 22,284 | |
Corporate/unallocated expenses(a) | | (4,208) | | | (4,218) | | | (29,509) | | | (12,004) | |
Operating income | | $ | 23,698 | | | $ | 25,264 | | | $ | 54,004 | | | $ | 62,677 | |
(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. |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2024
(10) Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2024 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Aviation | | Fleet | | Total |
Balance as of December 31, 2023 | | $ | 288,591 | | | $ | 63,190 | | | $ | 351,781 | |
Acquisitions | | 40,093 | | | — | | | 40,093 | |
Measurement period adjustment | | (1,238) | | | — | | | (1,238) | |
Balance as of September 30, 2024 | | $ | 327,446 | | | $ | 63,190 | | | $ | 390,636 | |
Goodwill increased during the nine months ended September 30, 2024 in connection with the acquisition of TCI during the period, offset by a net decrease in connection with measurement period adjustments for the Desser Aerospace, Honeywell FCS and TCI acquisitions. See Note (2) "Acquisitions" for further information on these acquisitions.
Intangible Assets
Intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Cost | | Accumulated Amortization | | Net Intangible Assets |
September 30, 2024 | | | | | | |
Contract and customer-related | | $ | 230,690 | | | $ | (70,110) | | | $ | 160,580 | |
Trade names | | 8,670 | | | (8,670) | | | — | |
Total | | $ | 239,360 | | | $ | (78,780) | | | $ | 160,580 | |
| | | | | | |
December 31, 2023 | | | | | | |
Contract and customer-related | | $ | 241,090 | | | $ | (127,022) | | | $ | 114,068 | |
Trade names | | 8,670 | | | (8,608) | | | 62 | |
Total | | $ | 249,760 | | | $ | (135,630) | | | $ | 114,130 | |
The gross carrying amount of contract and customer-related intangibles decreased during the nine months ended September 30, 2024 due to intangible assets with a cost of $69.4 million being fully amortized and no longer reflected in the intangible asset values as of September 30, 2024, partially offset by an increase in connection with the acquisition during the period as discussed in Note (2) "Acquisitions."
As of September 30, 2024, the estimated future annual amortization expense related to intangible assets is as follows (in thousands):
| | | | | | | | |
Year Ending | | Amount |
Remainder of 2024 | | $ | 4,809 | |
2025 | | 19,235 | |
2026 | | 19,111 | |
2027 | | 17,365 | |
2028 | | 16,531 | |
Thereafter | | 83,529 | |
Total | | $ | 160,580 | |
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 September 30, 2024 | | Fair Value December 31, 2023 |
Non-COLI assets held in Deferred Supplemental Compensation Plan(a) | | Other assets | | Level 1 | | $ | 635 | | | $ | 594 | |
Interest rate swaps | | Other assets | | Level 2 | | $ | 283 | | | $ | 2,840 | |
(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.
Our effective tax rate for continuing operations was 20.8% and 19.4% for the three and nine months ended September 30, 2024 respectively, and 27.9% and 25.8% for the three and nine months ended September 30, 2023 respectively. The effective tax rates were lower for the three and the nine months ended September 30, 2024 compared to the same periods of the prior year primarily due to lower book income in 2024 and higher excess stock compensation deduction recognized for tax purposes in connection with current year stock vesting.
(13) Lease Abandonment, Lease Termination and Other Restructuring Costs
In connection with the FDS sale as described in Note (3) "Discontinued Operations", we implemented changes during the second quarter of 2024 that resulted in one-time charges primarily related to the lease abandonment of our headquarters office space and certain other corporate restructuring actions.
On June 28, 2024, we ceased use of our 95,000 sq. ft. leased office space in Alexandria, VA. We relocated our VA based corporate staff to a 4,000 sq. ft. office space in Vienna, VA under a new short-term lease. During the second quarter of 2024, we recognized one-time lease abandonment costs of $12.9 million, which comprised of a reduction in our operating lease right-of-use assets of $6.7 million, exit costs of $3.7 million, and a non-cash write-off of certain property and equipment of $2.5 million. These one-time costs are included within lease abandonment and termination (benefits) costs on our consolidated statements of income.
On September 4, 2024, we entered into an agreement to immediately terminate the Alexandria, VA, office space lease in exchange for $12.0 million, payable in two equal installments due in January 2025 and January 2026. During the three months ended September 30, 2024, we recognized a lease termination gain of $0.7 million, which comprised of a $1.1 million net liability reduction, partially offset by a $0.4 million decrease in our remaining operating lease right-of-use asset. The lease termination gain is included within lease abandonment and termination (benefits) costs on our consolidated statements of income. As of September 30, 2024, $6.0 million of the $12.0 million due as a result of the lease termination is classified within accrued expenses and other current liabilities, while the remaining $6.0 million is classified within other long-term liabilities.
During the three and nine months ended September 30, 2024, we incurred $0.2 million and $4.0 million, respectively, of corporate restructuring expenses, which are included in selling, general and administrative expenses, primarily related to the cancellation of contracts and leasing agreements associated with the FDS Sale. As of September 30, 2024, approximately $0.8 million of these costs are included within accrued expenses and other current liabilities on our consolidated balance sheets. Our corporate restructuring activities related to the FDS Sale are substantially complete, and we do not expect to incur additional material costs associated with these activities.
(14) Subsequent Events
Kellstrom Aerospace Acquisition
In October 2024, we signed a definitive agreement to acquire Kellstrom Aerospace Group, Inc. ("Kellstrom Aerospace"), a diversified global distributor and service provider supporting the commercial aerospace engine aftermarket, for a preliminary purchase price of $200 million, comprised of approximately $185 million in cash and approximately 172,414 shares of common stock to be issued in a private placement pursuant to Section 4(a)(2) of the Securities Act, subject to working capital adjustments (the "Kellstrom Aerospace Acquisition"). The transaction is subject to customary closing conditions, including regulatory review, and is expected to close in the fourth quarter of 2024.
Underwritten Public Offering
In October 2024, we entered into an underwriting agreement with Jefferies and RBC Capital Markets, acting as representatives of several underwriters, relating to the issuance and sale of 1,724,137 shares of the Company's common stock at a public offering price of $87.00 per share. Under the terms of the agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 258,620 shares of common stock. The offering closed on October 17, 2024, resulting in the issuance of 1,982,757 shares, which included the exercise by the underwriters of their option to purchase additional shares, pursuant to the underwriting agreement, for which we received net proceeds of $163.8 million, net of issuance costs.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
We are a diversified aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for 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 ("FDS Sale"). 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 stockholder 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, LLC
On April 24, 2024, we completed the acquisition of our previously announced definitive agreement to acquire Turbine Controls, LLC ("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 (2) "Acquisitions" for further information.
Acquisition of Kellstrom Aerospace
In October 2024, we signed a definitive agreement to acquire Kellstrom Aerospace Group, Inc. ("Kellstrom Aerospace"), a diversified global distributor and service provider supporting the commercial aerospace engine aftermarket. See Note (14) "Subsequent Events" for further information.
Underwritten Public Offerings
In May 2024, we entered into an underwriting agreement with certain underwriters, relating to the issuance and sale of up to 2,429,577 shares of the Company's common stock at a public offering price of $71.00 per share. On May 17, 2024, the Company issued 2,429,577 shares, which included the exercise by the underwriters of their option to purchase additional shares, pursuant to the underwriting agreement. Net proceeds of $162.0 million were received by the Company, which were used to repay outstanding borrowings under our revolving credit facility, including amounts borrowed to pay the purchase price of the acquisition of TCI and for general corporate purposes.
In October 2024, we entered into an underwriting agreement with certain underwriters, relating to the issuance and sale of up to 1,982,757 shares of the Company's common stock at a public offering price of $87.00 per share. See Note (14) "Subsequent Events" for further information.
Lease Abandonment and Termination
As a result of the Federal and Defense business segment divestiture and evaluation of our facilities, in June 2024, we vacated our corporate and Federal and Defense headquarters office space in Alexandria, Virginia, and relocated the remaining Virginia-based corporate staff to a smaller office space in Vienna, VA. In September 2024, the Alexandria, Virginia office space lease was terminated. The relocation resulted in non-recurring lease abandonment and termination costs, which included the non-cash write-off of the operating lease right-of-use assets, associated property and equipment and lease liabilities. See Note (13) "Lease Abandonment, Lease Termination and Other Restructuring Costs" to the consolidated financial statements 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 third quarter of 2024, our strong program execution of new and existing distribution awards, our expanded portfolio of MRO capabilities, and contributions from recent acquisitions generated strong results, with quarterly revenue reaching $203.6 million for the three months ended September 30, 2024, representing a 34% increase year-over-year. Market growth, share gains and contributions from a recent acquisition have resulted in increased repair and distribution revenue of 86% and 12%, respectively, during the three months ended September 30, 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, most notably the Pratt Whitney Canada EMEA program, the introduction of new products and service capabilities to our portfolio, including our new Original Equipment Manufacturers ("OEM") licensed manufacturing program, and contributions from TCI.
We believe the acquisition of TCI in April 2024, combined with the recently announced Kellstrom Aerospace Acquisition in October 2024, will increase our exposure to the high-growth, higher-margin aviation distribution and MRO markets focused on the engine aftermarket. Furthermore, we believe that the Honeywell FCS acquisition in September 2023 to exclusively manufacture, sell, market, distribute, and repair certain 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 third quarter of 2024, our Fleet segment's growth was negatively impacted by a decline in activity within the United States Postal Service ("USPS"), partially offset by growth in e-commerce fulfillment and commercial fleet sales. 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 progress in scaling our e-commerce fulfillment and distribution center in Olive Branch, MS ("Olive Branch facility"). The expansion 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 64% of total Fleet segment revenue for the three months ended September 30, 2024, compared to 47% for the same period in the prior year.
Results of Operations
Consolidated Results of Operations
The following table summarizes our consolidated results of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2024 | | 2023 | | Change ($) | | Change (%) | | 2024 | | 2023 | | Change ($) | | Change (%) |
Revenues | | $ | 273,613 | | | $ | 231,353 | | | $ | 42,260 | | | 18 | % | | $ | 781,111 | | | $ | 625,163 | | | $ | 155,948 | | | 25 | % |
Costs and operating expenses | | 249,915 | | | 206,089 | | | 43,826 | | | 21 | % | | 727,107 | | | 562,486 | | | 164,621 | | | 29 | % |
Operating income | | 23,698 | | | 25,264 | | | (1,566) | | | (6) | % | | 54,004 | | | 62,677 | | | (8,673) | | | (14) | % |
Interest expense, net | | 8,983 | | | 8,459 | | | 524 | | | 6 | % | | 27,996 | | | 21,805 | | | 6,191 | | | 28 | % |
Income from continuing operations before income taxes | | 14,715 | | | 16,805 | | | (2,090) | | | (12) | % | | 26,008 | | | 40,872 | | | (14,864) | | | (36) | % |
Provision for income taxes | | 3,065 | | | 4,694 | | | (1,629) | | | (35) | % | | 5,035 | | | 10,554 | | | (5,519) | | | (52) | % |
Net income from continuing operations | | $ | 11,650 | | | $ | 12,111 | | | $ | (461) | | | (4) | % | | $ | 20,973 | | | $ | 30,318 | | | $ | (9,345) | | | (31) | % |
Revenues. Revenues increased for the three months ended September 30, 2024, compared to the same period in the prior year due to growth in our Aviation segment of $51.3 million, partially offset by declines in our Fleet segment of $9.0 million. See "Segment Operating Results" section below for further discussion of revenues by segment.
Revenues increased for the nine months ended September 30, 2024, compared to the same period in the prior year due to growth in our Aviation segment of $168.5 million, partially offset by declines in our Fleet segment of $12.6 million. See "Segment Operating Results" section below for further discussion of revenues by segment.
Costs and Operating Expenses. Costs and operating expenses increased for the three and nine months ended September 30, 2024, compared to the same periods in the prior year primarily due to increases in volume. 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 decreased for the three months ended September 30, 2024, compared to the same period of the prior year primarily due to a decrease in operating income of $6.1 million for our Fleet segment. This operating income decrease was partially offset by an increase of $4.5 million for our Aviation segment. See "Segment Operating Results" for a discussion of operating income by segment.
Operating income decreased for the nine months ended September 30, 2024, compared to the same period of the prior year primarily due to an increase in corporate costs, including net lease abandonment and termination charges of $12.2 million, corporate restructuring charges of $4.0 million, and a decrease in operating income of $11.0 million for our Fleet segment. These operating income decreases were partially offset by an increase of $19.8 million for our Aviation segment. See "Segment Operating Results" for a discussion of operating income by segment.
Interest Expense. Interest expense increased for the three months ended September 30, 2024, as compared to the same period in the prior year primarily due to an increase in our debt facility borrowings. Interest expense increased for the nine months ended September 30, 2024, as compared to the same period in the prior year primarily due to an increase in our debt facility borrowings and a higher average interest rate on borrowings outstanding.
Provision for Income Taxes. Our effective tax rate for continued operations was 20.8% and 19.4% for the three and nine months ended September 30, 2024 respectively, and 27.9% and 25.8% for the three and nine months ended September 30, 2023 respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. federal income tax rate and our effective tax rate. The lower effective tax rates for the three and nine months ended September 30, 2024 primarily resulted from lower book income and higher excess stock compensation deduction for tax purposes in connection with current year stock vesting in 2024.
Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2024 | | 2023 | | Change ($) | | Change (%) | | 2024 | | 2023 | | Change ($) | | Change (%) |
Revenues | | $ | 203,642 | | $ | 152,355 | | $ | 51,287 | | | 34 | % | | $ | 558,853 | | $ | 390,319 | | | $ | 168,534 | | | 43 | % |
Costs and operating expenses | | 178,207 | | 131,404 | | 46,803 | | | 36 | % | | 486,639 | | 337,922 | | 148,717 | | | 44 | % |
Operating income | | $ | 25,435 | | $ | 20,951 | | $ | 4,484 | | | 21 | % | | $ | 72,214 | | $ | 52,397 | | $ | 19,817 | | | 38 | % |
Profit percentage | | 12.5 | % | | 13.8 | % | | | | | | 12.9 | % | | 13.4 | % | | | | |
Revenues. Revenues for our Aviation segment increased for the three months ended September 30, 2024, compared to the same period of the prior year primarily driven by contributions from our acquisition of TCI, strong program execution of new and existing distribution awards, and our expanded portfolio of MRO capabilities. Aviation distribution revenue increased $13.0 million, or 12%, and repair revenue increased $38.3 million, or 86%, for the three months ended September 30, 2024, compared to the same period in the prior year.
Revenues for our Aviation segment increased for the nine months ended September 30, 2024, compared to the same period of the prior year primarily driven by the contributions from our acquisitions of Desser and TCI, the launch and expansion of recently awarded distribution agreements and improved demand for our products and services as a result of strong end market activity. Aviation distribution revenue increased $71.8 million, or 26%, and repair revenue increased $96.7 million, or 86%, for the nine months ended September 30, 2024, compared to the same period in the prior year.
Costs and operating expenses. Costs and operating expenses increased for the three months ended September 30, 2024, compared to the same period of the prior year primarily due to increased volume. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization
of intangible assets was $4.8 million for the three months ended September 30, 2024, compared to $3.2 million for the same period in the prior year. Allocated corporate costs were $4.5 million for the three months ended September 30, 2024, compared to $3.1 million for the same period in the prior year.
Costs and operating expenses increased for the nine months ended September 30, 2024, compared to the same period of the prior year primarily due to increased volume. 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 $12.5 million for the nine months ended September 30, 2024, compared to $8.1 million for the same period in the prior year. Allocated corporate costs were $13.4 million for the nine months ended September 30, 2024, compared to $9.3 million for the same period in the prior year.
Operating income. Operating income increased for the three and nine months ended September 30, 2024, compared to the same period of the prior year primarily due to revenue growth and a favorable shift in sales mix and pricing, and contributions from our newly launched OEM licensed manufacturing program, offset by increased amortization of intangible assets and allocated corporate costs.
Fleet Segment Results
The results of operations for our Fleet segment were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2024 | | 2023 | | Change ($) | | Change (%) | | 2024 | | 2023 | | Change ($) | | Change (%) |
Revenues | $ | 69,971 | | $ | 78,998 | | $ | (9,027) | | | (11) | % | | $ | 222,258 | | $ | 234,844 | | $ | (12,586) | | | (5) | % |
Costs and operating expenses | 67,500 | | 70,467 | | (2,967) | | | (4) | % | | 210,959 | | 212,560 | | (1,601) | | | (1) | % |
Operating income | $ | 2,471 | | $ | 8,531 | | $ | (6,060) | | | (71) | % | | $ | 11,299 | | $ | 22,284 | | $ | (10,985) | | | (49) | % |
Profit percentage | 3.5 | % | | 10.8 | % | | | | | | 5.1 | % | | 9.5 | % | | | | |
Revenues. Revenues for our Fleet segment decreased for the three months ended September 30, 2024, compared to the same period of the prior year primarily due to a decline in activity by other government customers of $16.4 million, or 40%, partially offset by increases from commercial customers of $7.4 million, or 20%. Revenues from other government customers decreased primarily due to lower maintenance activity within the USPS vehicle fleet program driven by USPS' transition to a new Fleet Management Information System. Commercial customer revenue growth was driven by our e-commerce fulfillment and commercial fleet businesses.
Revenues for our Fleet segment decreased for the nine months ended September 30, 2024, compared to the same period of the prior year primarily due to a decline in activity by other government customers of $40.5 million, or 32%, partially offset by increases from commercial customers of $27.9 million or 26%. Revenues from other government customers decreased primarily due to lower maintenance activity within the USPS vehicle fleet program driven by USPS' transition to a new Fleet Management Information System. Commercial customer revenue growth was driven by our e-commerce fulfillment and commercial fleet businesses.
Costs and operating expense. Costs and operating expenses decreased for the three months ended September 30, 2024, compared to the same period of the prior year primarily due to decreased revenues. In addition, costs and operating expenses for this segment included expenses for allocated corporate costs. Allocated corporate costs were $1.4 million for the three months ended September 30, 2024, compared to $2.0 million for the same period in the prior year.
Costs and operating expenses decreased for the nine months ended September 30, 2024, compared to the same period of the prior year primarily due to shift in sales mix. 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 $0.1 million for the nine months ended September 30, 2024, compared to $2.6 million for the same period in the prior year. Allocated corporate costs were $5.4 million for the nine months ended September 30, 2024, compared to $6.1 million for the same period in the prior year.
Operating income. Operating income decreased for the three and nine months ended September 30, 2024, compared to the same period of the prior year primarily driven by a sales mix shift due to a decrease in revenues from our USPS vehicle fleet program.
The operating income decrease for the nine months ended September 30, 2024 was partially offset by a reduction in the amortization of intangible assets.
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 $20.0 million for the nine months ended September 30, 2024. As of September 30, 2024, we had borrowings outstanding under our term loan of $285.0 million, borrowings outstanding under our revolving facility of $168.0 million, outstanding letters of credit of $0.8 million, and $181.2 million of unused commitments under the credit agreement.
In May 2024, we completed an underwritten public offering of 2,429,577 shares of the Company's common stock, generating proceeds of $162.0 million in connection with the offering, net of issuance costs. We used substantially all of the proceeds of the public offering to repay outstanding borrowings under our revolving credit facility, including amounts borrowed to pay the purchase price of the acquisition of TCI and for general corporate purposes.
In October 2024, we completed an underwritten public offering of 1,982,757 shares of the Company's common stock, generating proceeds of $163.8 million in connection with the offering, net of issuance costs. The net proceeds will be used to finance a portion of the cash consideration for the Kellstrom Aerospace Acquisition, which is expected to close in the fourth quarter of 2024, subject to customary closing conditions including regulatory review. Pending the application of the net proceeds as described above, the Company may use the net proceeds from the offering for general corporate purposes, including to invest in short-term, investment grade, interest-bearing securities or to repay outstanding borrowings under the revolving facility.
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):
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2024 | | 2023 |
Net cash used in operating activities | | $ | (86,412) | | | $ | (49,771) | |
Net cash used in investing activities | | (87,527) | | | (227,912) | |
Net cash provided by financing activities | | 173,916 | | | 298,034 | |
Net (decrease) increase in cash and cash equivalents | | $ | (23) | | | $ | 20,3 |