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
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Endedquarterly period ended September 30, 2017 2022
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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: 0‑3676000-03676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE | 54-0649263 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
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Delaware | 54-0649263 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | | | | |
6348 Walker Lane | | | | |
Alexandria, Virginia | Virginia | 22310 | | www.vsecorp.com | 22310 |
(Address of Principal Executive Offices) | | | | (Zip Code) | | (Webpage) |
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 |
Securities registered pursuant to Section 12(g) of the Act: None
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 [x]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [x]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a smaller reporting company, or an emerging growth company. See definitiondefinitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and large accelerated filer""emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer [ ] | ☐ | Accelerated filer [x] |
☒ | 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.☐
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]☐ No [x]☒
Number of shares of Common Stock outstanding as of October 20, 2017: 10,838,435
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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VSE Corporation and Subsidiaries
Forward LookingForward-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"forward-looking statements" under federal securities laws.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 subject tocovered by the safe harbor protection provided by applicable securities laws. For discussions identifying some important factors that could cause actual results of VSE Corporation ("VSE," the "Company," "us," "our," or "we") to differ materially from those anticipated in the forward lookingprovisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this report, see VSE's discussions captioned "Business," "Riskstatement 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," "Management's Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations, and "NotesItem 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to Consolidated Financial Statements" containedthe risks described in VSE'sItem 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, 20162021 filed with the Securities and Exchange Commission ("SEC")SEC on March 1, 2017 ("201611, 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 lookingforward-looking statements, which reflect management's analysis only as of the date hereof. We undertakeThe Company undertakes no obligation to publicly revise publicly these forward lookingforward-looking statements to reflect events or circumstances that occur or arise after the date hereof. Readers should carefully review the risk factors described in our 2016 Form 10-K and in the reports and other documents the Company files from time to time with the SEC, including this and other Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we have filed or will file with the SEC subsequent to our 2016 Form 10-K.
PART I. Financial Information
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands except share and per share amounts)
| | | | | | | | | | | |
| 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 | |
| | | |
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 | |
| | | |
Liabilities and Stockholders' equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 9,162 | | | $ | 14,162 | |
Accounts payable | 119,093 | | | 115,064 | |
| | | |
Accrued expenses and other current liabilities | 50,791 | | | 49,465 | |
Dividends payable | 1,280 | | | 1,273 | |
Total current liabilities | 180,326 | | | 179,964 | |
| | | |
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 | |
| | | |
Deferred tax liabilities | 10,166 | | | 9,108 | |
Other long-term liabilities | — | | | 250 | |
Total liabilities | 512,098 | | | 501,225 | |
| | | |
Commitments and contingencies (Note 6) | | | |
| | | |
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 | |
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| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 472 |
| | $ | 428 |
|
Receivables, net | 72,874 |
| | 101,218 |
|
Inventories, net | 135,525 |
| | 136,340 |
|
Other current assets | 24,376 |
| | 20,477 |
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Total current assets | 233,247 |
| | 258,463 |
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Property and equipment, net | 56,857 |
| | 62,061 |
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Intangible assets, net | 114,913 |
| | 126,926 |
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Goodwill | 198,622 |
| | 198,622 |
|
Other assets | 15,405 |
| | 15,767 |
|
Total assets | $ | 619,044 |
| | $ | 661,839 |
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Liabilities and Stockholders' equity | |
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Current liabilities: | |
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Current portion of long-term debt | $ | 25,710 |
| | $ | 21,023 |
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Accounts payable | 48,560 |
| | 93,999 |
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Accrued expenses and other current liabilities | 47,852 |
| | 32,772 |
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Dividends payable | — |
| | 648 |
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Total current liabilities | 122,122 |
| | 148,442 |
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Long-term debt, less current portion | 155,083 |
| | 193,621 |
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Deferred compensation | 15,749 |
| | 12,751 |
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Long-term lease obligations, less current portion | 20,917 |
| | 21,959 |
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Deferred tax liabilities | 27,981 |
| | 29,872 |
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Total liabilities | 341,852 |
| | 406,645 |
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Commitments and contingencies |
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Stockholders' equity: | |
| | |
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Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 10,838,435 and 10,798,927, respectively | 542 |
| | 540 |
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Additional paid-in capital | 24,455 |
| | 22,876 |
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Retained earnings | 252,061 |
| | 231,733 |
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Accumulated other comprehensive income | 134 |
| | 45 |
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Total stockholders' equity | 277,192 |
| | 255,194 |
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Total liabilities and stockholders' equity | $ | 619,044 |
| | $ | 661,839 |
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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)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | |
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 | |
| | | | | | | | |
Operating income | | 17,272 | | | 13,892 | | | 43,337 | | | 10,781 | |
| | | | | | | | |
Interest expense, net | | 4,818 | | | 2,780 | | | 12,299 | | | 8,476 | |
| | | | | | | | |
Income before income taxes | | 12,454 | | | 11,112 | | | 31,038 | | | 2,305 | |
| | | | | | | | |
Provision for income taxes | | 3,035 | | | 2,091 | | | 7,827 | | | 539 | |
| | | | | | | | |
Net income | | $ | 9,419 | | | $ | 9,021 | | | $ | 23,211 | | | $ | 1,766 | |
| | | | | | | | |
Basic earnings per share | | $ | 0.74 | | | $ | 0.71 | | | $ | 1.82 | | | $ | 0.14 | |
| | | | | | | | |
Basic weighted average shares outstanding | | 12,797,727 | | | 12,704,165 | | | 12,772,731 | | | 12,496,646 | |
| | | | | | | | |
Diluted earnings per share | | $ | 0.73 | | | $ | 0.71 | | | $ | 1.81 | | | $ | 0.14 | |
| | | | | | | | |
Diluted weighted average shares outstanding | | 12,834,084 | | | 12,774,636 | | | 12,816,319 | | | 12,573,076 | |
| | | | | | | | |
Dividends declared per share | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.30 | | | $ | 0.27 | |
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| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | |
Products | | $ | 82,314 |
| | $ | 87,060 |
| | $ | 260,585 |
| | $ | 254,325 |
|
Services | | 91,850 |
| | 85,720 |
| | 304,733 |
| | 222,564 |
|
Total revenues | | 174,164 |
| | 172,780 |
| | 565,318 |
| | 476,889 |
|
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Costs and operating expenses: | | |
| | |
| | |
| | |
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Products | | 68,678 |
| | 70,884 |
| | 217,606 |
| | 207,001 |
|
Services | | 88,989 |
| | 83,599 |
| | 293,083 |
| | 215,409 |
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Selling, general and administrative expenses | | 255 |
| | 652 |
| | 1,178 |
| | 4,173 |
|
Amortization of intangible assets | | 4,005 |
| | 4,022 |
| | 12,013 |
| | 12,063 |
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Total costs and operating expenses | | 161,927 |
| | 159,157 |
| | 523,880 |
| | 438,646 |
|
| | | | | | | | |
Operating income | | 12,237 |
| | 13,623 |
| | 41,438 |
| | 38,243 |
|
| | | | | | | | |
Interest expense, net | | 2,347 |
| | 2,509 |
| | 7,158 |
| | 7,406 |
|
| | | | | | | | |
Income before income taxes | | 9,890 |
| | 11,114 |
| | 34,280 |
| | 30,837 |
|
| | | | | | | | |
Provision for income taxes | | 3,251 |
| | 4,026 |
| | 12,541 |
| | 11,228 |
|
| | | | | | | | |
Net income | | $ | 6,639 |
| | $ | 7,088 |
| | $ | 21,739 |
| | $ | 19,609 |
|
| | | | | | | | |
Basic earnings per share | | $ | 0.61 |
| | $ | 0.66 |
| | $ | 2.01 |
| | $ | 1.82 |
|
| | | | | | | | |
Basic weighted average shares outstanding | | 10,838,435 |
| | 10,798,684 |
| | 10,833,237 |
| | 10,792,046 |
|
| | | | | | | | |
Diluted earnings per share | | $ | 0.61 |
| | $ | 0.65 |
| | $ | 2.00 |
| | $ | 1.81 |
|
| | | | | | | | |
Diluted weighted average shares outstanding | | 10,856,675 |
| | 10,826,007 |
| | 10,855,983 |
| | 10,819,697 |
|
| | | | | | | | |
Dividends declared per share | | $ | — |
| | $ | — |
| | $ | 0.130 |
| | $ | 0.115 |
|
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | |
Change in fair value of interest rate swap agreements, net of tax | | 5,352 | | | 173 | | | 5,528 | | | 836 | |
| | | | | | | | |
Other comprehensive income, net of tax | | 5,352 | | | 173 | | | 5,528 | | | 836 | |
| | | | | | | | |
Comprehensive income | | $ | 14,771 | | | $ | 9,194 | | | $ | 28,739 | | | $ | 2,602 | |
|
| | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 6,639 |
| | $ | 7,088 |
| | $ | 21,739 |
| | $ | 19,609 |
|
| | | | | | | | |
Change in fair value of interest rate swap agreements | | 20 |
| | 337 |
| | 89 |
| | (235 | ) |
| | | | | | | | |
Other comprehensive (loss) income, net of tax | | 20 |
| | 337 |
| | 89 |
| | (235 | ) |
| | | | | | | | |
Comprehensive income | | $ | 6,659 |
| | $ | 7,425 |
| | $ | 21,828 |
| | $ | 19,374 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VSE Corporation and Subsidiaries
Unaudited Consolidated Statements of Cash FlowsStockholders' Equity
(in thousands)thousands except per share data)
|
| | | | | | | | |
| | For the nine months ended September 30, |
| | 2017 | | 2016 |
Cash flows from operating activities: | | | | |
Net income | | $ | 21,739 |
| | $ | 19,609 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 19,584 |
| | 19,515 |
|
Deferred taxes | | (1,947 | ) | | (3,047 | ) |
Stock-based compensation | | 1,935 |
| | 1,747 |
|
Earn-out obligation adjustment | | — |
| | (1,329 | ) |
Changes in operating assets and liabilities: | | |
| | |
|
Receivables, net | | 28,344 |
| | (7,636 | ) |
Inventories, net | | 815 |
| | (19,812 | ) |
Other current assets and noncurrent assets | | (3,392 | ) | | (8,015 | ) |
Accounts payable and deferred compensation | | (42,441 | ) | | 19,651 |
|
Accrued expenses and other current liabilities | | 15,916 |
| | 8,639 |
|
Long-term lease obligations | | (1,042 | ) | | (930 | ) |
| | | | |
Net cash provided by operating activities | | 39,511 |
| | 28,392 |
|
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Cash flows from investing activities: | | |
| | |
|
Purchases of property and equipment | | (2,387 | ) | | (5,438 | ) |
Proceeds from the sale of property and equipment | | 689 |
| | 74 |
|
Cash paid for acquisitions, net of cash acquired | | — |
| | (63 | ) |
| | | | |
Net cash used in investing activities | | (1,698 | ) | | (5,427 | ) |
| | | | |
Cash flows from financing activities: | | |
| | |
|
Borrowings on loan agreement | | 258,657 |
| | 231,139 |
|
Repayments on loan agreement | | (292,913 | ) | | (232,608 | ) |
Earn-out obligation payments | | — |
| | (18,515 | ) |
Payments on capital lease obligations | | (954 | ) | | (835 | ) |
Payments of taxes for equity transactions | | (500 | ) | | (499 | ) |
Dividends paid | | (2,059 | ) | | (1,834 | ) |
| | | | |
Net cash used in financing activities | | (37,769 | ) | | (23,152 | ) |
| | | | |
Net increase (decrease) in cash and cash equivalents | | 44 |
| | (187 | ) |
Cash and cash equivalents at beginning of period | | 428 |
| | 740 |
|
Cash and cash equivalents at end of period | | $ | 472 |
| | $ | 553 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
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 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | |
| | | | |
| | | | |
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 | |
| | | | |
| | | | |
| | | | |
Net cash used in operating activities | | (4,206) | | | (30,523) | |
| | | | |
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) | |
| | | | |
Net cash used in investing activities | | (3,181) | | | (59,839) | |
| | | | |
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) | |
| | | | |
Payments of taxes for equity transactions | | (942) | | | (681) | |
Dividends paid | | (3,832) | | | (3,284) | |
| | | | |
Net cash provided by financing activities | | 6,959 | | | 90,367 | |
| | | | |
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 | |
| | | | |
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, 20172022
(1) Nature of BusinessOperations 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. Accordingly, theyTherefore, such financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principlesGAAP for complete financial statements.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, 20172022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. For further information refer to the consolidated financial statements and footnotes thereto included in our 2016 Form 10-K.2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP 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 accruals for contract disallowance reserves, recoverabilityfair 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 earn-out obligations.contingencies.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2017, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We have elected to account for forfeitures as they occur. The adoption of ASU 2016-09 did not have a significant impact on our consolidated financial position, results of operations or cash flows.
Effective January 1, 2017, we adopted ASU No. 2015-11, Simplifying the Measurement of Inventory, which clarifies that, for inventories measured at the lower of cost and net realizable value, net realizable value should be determined based on the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The adoption of ASU 2015-11 did not have a significant impact on our consolidated financial position, results of operations or cash flows.
In January 2017,October 2021, the FASB issued ASU No. 2017-04, Simplifying the Test2021-08, "Business Combinations (Topic 805): Accounting for Goodwill Impairment,Contract Assets and Contract Liabilities from Contracts with Customers," which eliminates the requirement to determine the fair value of individualrequires contract assets and contract liabilities ofacquired in a reporting unitbusiness combination to measure goodwill impairment. Underbe recognized and measured by the amendmentsacquirer on the acquisition date in ASU 2017-04, goodwill impairment testing will be performed by comparingaccordance with ASC 606, "Revenue from Contracts with Customers," as if the fair value ofacquirer had originated the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.contracts. The new standard is effective on a prospective basis for annualfiscal years and interim goodwill impairment tests inreporting periods within those fiscal years beginning after December 15, 2019, and should be applied on a prospective basis2022, with early adoption permitted.We elected to early adopt ASU 2017-04 effective April 1, 2017this standard during the first quarter 2022 and will apply the new standardguidance prospectively to our 2017 annual goodwill impairment test, as well as any interim tests. The adoption is not expectedbusiness combinations entered into subsequent to have a significant impact on our consolidated financial position, results of operations or cash flows.adoption.
Stock Split Effected in Form of Stock Dividend
In May 2016, our Board of Directors approved a two-for-one stock split effected in the form of a stock dividend ("Stock Split"). The Stock Split had a record date of July 20, 2016 and the stock distribution occurred on August 3, 2016. All references made to share or per share amounts in the accompanying unaudited consolidated financial statements and disclosures have been retroactively adjusted to reflect the Stock Split.
(2) DebtAcquisitions
We haveGlobal Parts Group, Inc.
On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a loan agreement with a grouppurchase price of banks that was amended in January 2015 to fund our Aviation Acquisition and provide working capital$40 million, net of cash acquired. The purchase price includes $2 million of contingent consideration, representing the fair value recognized for our continuing operations. The loan agreement, which expires in January 2020, is comprisedpotential future earn-out payments. During the third quarter of a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and lettersfiscal 2022, we settled the final payment of credit.the obligation. See Note (8) "Fair
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
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 required term loan payments afterrevenues 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, 2017 are approximately $5.6 million in 2017, $28.1 million in 2018, $30.0 million in 2019,2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 $36.3 million in 2020. The amount of term loan borrowings outstanding as ofnine months ended September 30, 2017 was $100.0 million.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 | |
The maximum amount
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 loan agreementunbilled receivables balance for revolving loans and letters of credit as of September 30, 2017 was $150 million. We may borrow and repay the revolving loan borrowings as our cash flows require or permit. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $82.1 million in revolving loan amounts outstanding and no letters of credit outstanding as of September 30, 2017. We had approximately $100.4 million in revolving loan amounts outstanding and no letters of credit outstanding as of December 31, 2016.
Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or both facilities up to an aggregate additional amount of $75 million.
Total bank loan borrowed funds outstanding, including term loan borrowings and revolving loan borrowings,contract. Unbilled receivables were approximately $182.1 million and $216.3$44.1 million as of September 30, 20172022 and $31.9 million as of December 31, 2016, respectively. These amounts exclude unamortized deferred financing costs of approximately $1.3 million2021. Contract liabilities, which are included in accrued expenses and $1.7other current liabilities in our consolidated balance sheets, were $7.7 million as of September 30, 20172022 and $7.1 million as of December 31, 2016,2021. 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 are being amortized over a five-year period through July 2020. The fair valuewe 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 debttotaling $1.2 million and $1.0 million as of September 30, 2017 under our bank loan facilities approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.2022 and December 31, 2021, respectively.
We pay interest on the term loan borrowings 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, 2017,2022, the LIBOR margin was 2.25% and the base margin was 2.00% and the base rate base margin was 0.75%6.25%. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.
The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan for the first three years after the January 2015 amendment date of the agreement. We executed interest rate swap agreements in February 2015 that complied with the loan agreement. The notional amount of the interest rate swap agreements as As of September 30, 2017 was $85 million.
After taking into account the impact of interest rate swap agreements, as of September 30, 2017,2022, interest rates on portions of our outstanding debt ranged from 3.24%6.13% to 5.00%8.50%, and the effective interest rate on our aggregate outstanding debt was 3.36%6.42%.
Interest expense incurred on bank loan borrowings, andinclusive of the effect of interest rate hedges, was approximately $1.8$4.6 million and $2.0$2.7 million for the quartersthree months ended September 30, 20172022 and 2016, respectively. Interest expense incurred on bank loan borrowings2021, respectively, and interest rate hedges was approximately $5.6$11.7 millionand$5.8 $7.9 millionfor the nine months ended September 30, 20172022 and 2016,2021, respectively.
TheOur required term and revolver loan agreement contains collateral requirements to secure our borrowings and other loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions, and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. 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 atunder our loan agreement as of September 30, 2017.2022.
Subsequent Event
(3)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") has beenis 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 anthe assumed vesting of restrictedoutstanding stock-based awards. Antidilutive common stock awards.
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Basic weighted average common shares outstanding | | 10,838,435 |
| | 10,798,684 |
| | 10,833,237 |
| | 10,792,046 |
|
Effect of dilutive shares | | 18,240 |
| | 27,323 |
| | 22,746 |
| | 27,651 |
|
Diluted weighted average common shares outstanding | | 10,856,675 |
| | 10,826,007 |
| | 10,855,983 |
| | 10,819,697 |
|
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
equivalents excluded from the diluted earnings per share calculation for the three and nine month ended September 30, 20172022 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 | |
(4)(6) Commitments and Contingencies
Contingencies
Hawaii Litigation
In 2012,We are involved in various claims and lawsuits arising in the estatesnormal conduct of five deceased individuals and their relatives filed complaints in a state court in Hawaii against VSE and other entities and individuals for unspecified damages, alleging that the explosionits business, none of fireworks and diesel fuel that killed the five individuals in April 2011 was caused by negligence of VSE and the other defendants. The five deceased plaintiffs were employees of a vendor retained by VSE to dispose of fireworks and other explosives seized by the federal government. In September 2017, VSE together with its insurance carriers, agreed in principle with all of the plaintiffs to settle this litigation. The settlement documents are being finalized and the settlement will be fully funded by VSE’s insurers, resulting in no material adverse effect on our results of operations, financial condition, or cash flows. We have recorded as of September 30, 2017 a liability for our estimated amount of the settlement and a related receivable from our insurers for our estimated recovery, which we believe, is probable of recovery based on our evaluation of insurance coverage and the insurers’ agreement and abilitycurrent information, is expected to fully fund the settlement.
Aviation Litigation
In November 2016, a lawsuit, Arrieta et al vs. Prime Turbines LLC et al, was filed in the District Court of Texas in Dallas County, by Edgar Arrieta, and four other plaintiffs against VSE subsidiaries, Kansas Aviation of Independence, L.L.C. and Prime Turbines LLC, and three other unrelated defendants. The other named defendants are Pratt & Whitney of Canada Corporation, Cessna Aircraft Company and Woodward Inc. The plaintiffs allege that on April 1, 2016, a plane crashed resulting in the death of three plaintiffs and serious injuries to six other plaintiffs and that VSE's subsidiaries were negligent in providing maintenance, service and inspection of the airplane engine prior to the crash. Plaintiffs are seeking monetary relief over $1.0 million from the defendants. Trial is scheduled for May 2018. VSE together with its insurance carrier, will aggressively defend the proceedings. While the results of legal proceedings cannot be predicted with certainty and the amount of loss, if any, cannot be reasonably estimated, we do not anticipate that this lawsuit will have a material adverse effect on our financial position, results of operation, financial condition,operations or cash flows.
Other Matters
In addition to the above-referenced legal proceedings, 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 other claims will not have a material adverse effect on our results of operations, financial position, or cash flows. However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated.
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 position,condition or cash flows.
(5)(7) Business Segments and Customer Information
Business Segments
Beginning in 2017, we changed our structure and as a result our former IT, Energy and Management Consulting Group is now combined with our Federal Services Group. Consequently, our segment financial information for 2016 has been restated to reflect such change. Management of our business operations is conducted under three reportable operating segments:
Supply Chain Management Group – Aviation
Our Supply Chain Management Group supplies vehicleAviation 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 primarily through a Managed Inventory Program ("MIP")distribution, engine accessory maintenance, MRO services, rotable exchange and direct salessupply 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 to other customers.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, 20172022
Federal and Defense
Aviation Group – Our Aviation GroupFederal and Defense segment provides maintenance, repairaftermarket MRO and overhaul ("MRO")logistics services parts supplyto improve operational readiness and distribution,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 solutions for general aviation jetmanagement; vehicle, maritime and aircraft enginessustainment services; base operations support; IT services and engine accessories.energy consulting.
Federal Services Group – Our Federal Services Group provides engineering, industrial, logistics, foreign military sales, legacy equipment sustainment services, IT and technical and consulting services primarily to the United States Department of Defense ("DoD") and other government agencies.
The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance. We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude intersegmentinter-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 for the three and nine months ended September 30, 2017 and 2016 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 | | (1,223) | | | (600) | | | (2,841) | | | (2,872) | |
Operating income | | $ | 17,272 | | | $ | 13,892 | | | $ | 43,337 | | | $ | 10,781 | |
|
|
| | | | | | | | | | | | | | | | |
| | Three months | | Nine months |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | |
Supply Chain Management Group | | $ | 51,174 |
| | $ | 51,152 |
| | $ | 163,663 |
| | $ | 152,080 |
|
Aviation Group | | 31,059 |
| | 34,688 |
| | 96,003 |
| | 100,298 |
|
Federal Services Group | | 91,931 |
| | 86,940 |
| | 305,652 |
| | 224,511 |
|
Total revenues | | $ | 174,164 |
| | $ | 172,780 |
| | $ | 565,318 |
| | $ | 476,889 |
|
| | | | | | | | |
Operating income: | | |
| | |
| | |
| | |
|
Supply Chain Management Group | | $ | 8,178 |
| | $ | 8,749 |
| | $ | 25,611 |
| | $ | 26,600 |
|
Aviation Group | | 1,983 |
| | 3,950 |
| | 6,898 |
| | 9,896 |
|
Federal Services Group | | 2,593 |
| | 1,650 |
| | 10,503 |
| | 5,041 |
|
Corporate/unallocated expenses | | (517 | ) | | (726 | ) | | (1,574 | ) | | (3,294 | ) |
Operating income | | $ | 12,237 |
| | $ | 13,623 |
| | $ | 41,438 |
| | $ | 38,243 |
|
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
Customer Information
Our revenue by customer is as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
Customer | | 2017 | | % | | 2016 | | % | | 2017 | | % | | 2016 | | % |
U.S. Postal Service | | $ | 43,833 |
| | 25.2 | % | | $ | 44,433 |
| | 25.7 | % | | $ | 136,261 |
| | 24.1 | % | | $ | 135,025 |
| | 28.3 | % |
| | | | | | | | | | | | | | | | |
U.S. Navy | | 38,895 |
| | 22.3 | % | | 43,424 |
| | 25.1 | % | | 143,421 |
| | 25.4 | % | | 109,884 |
| | 23.0 | % |
U.S. Army | | 45,717 |
| | 26.3 | % | | 40,155 |
| | 23.3 | % | | 150,217 |
| | 26.6 | % | | 96,656 |
| | 20.2 | % |
U.S. Air Force | | 2,967 |
| | 1.7 | % | | 757 |
| | 0.4 | % | | 5,807 |
| | 1.0 | % | | 2,614 |
| | 0.6 | % |
Total - DoD | | 87,579 |
| | 50.3 | % | | 84,336 |
| | 48.8 | % | | 299,445 |
| | 53.0 | % | | 209,154 |
| | 43.8 | % |
| | | | | | | | | | | | | | | | |
Commercial aviation | | 30,637 |
| | 17.6 | % | | 32,489 |
| | 18.8 | % | | 94,706 |
| | 16.8 | % | | 98,099 |
| | 20.6 | % |
Other commercial | | 2,833 |
| | 1.6 | % | | 2,720 |
| | 1.6 | % | | 9,270 |
| | 1.6 | % | | 7,807 |
| | 1.6 | % |
Total - Commercial | | 33,470 |
| | 19.2 | % | | 35,209 |
| | 20.4 | % | | 103,976 |
| | 18.4 | % | | 105,906 |
| | 22.2 | % |
| | | | | | | | | | | | | | | | |
Other civilian agencies | | 9,282 |
| | 5.3 | % | | 8,802 |
| | 5.1 | % | | 25,636 |
| | 4.5 | % | | 26,804 |
| | 5.7 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 174,164 |
| | 100 | % | | $ | 172,780 |
| | 100 | % | | $ | 565,318 |
| | 100 | % | | $ | 476,889 |
| | 100 | % |
(6) Goodwill and Intangible Assets
Changes in goodwill for the nine months ended September 30, 2017 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Supply Chain Management | | Federal Services | | Aviation | | Total |
Balance as of December 31, 2016 | | $ | 63,190 |
| | $ | 30,883 |
| | $ | 104,549 |
| | $ | 198,622 |
|
| |
|
| |
|
| |
|
| |
|
|
Balance as of September 30, 2017 | | $ | 63,190 |
| | $ | 30,883 |
| | $ | 104,549 |
| | $ | 198,622 |
|
Intangible assets consist of the value of contract and customer-related intangible assets, acquired technologies and trade names. Amortization expense was approximately $4.0 million and $12.0 million for the three and nine months ended September 30, 2017 and approximately $4.0 million and $12.1 million for the three and nine months ended September 30, 2016, respectively.
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
Intangible assets were comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Cost | | Accumulated Amortization | | Accumulated Impairment Loss | | Net Intangible Assets |
September 30, 2017 | | | | | | | | |
Contract and customer-related | | $ | 173,094 |
| | $ | (69,653 | ) | | $ | (1,025 | ) | | $ | 102,416 |
|
Acquired technologies | | 12,400 |
| | (7,124 | ) | | — |
| | 5,276 |
|
Trade names | | 16,670 |
| | (9,449 | ) | | — |
| | 7,221 |
|
Total | | $ | 202,164 |
| | $ | (86,226 | ) | | $ | (1,025 | ) | | $ | 114,913 |
|
| | | | | | | | |
December 31, 2016 | | |
| | |
| | |
| | |
|
Contract and customer-related | | $ | 173,094 |
| | $ | (59,799 | ) | | $ | (1,025 | ) | | $ | 112,270 |
|
Acquired technologies | | 12,400 |
| | (6,278 | ) | | — |
| | 6,122 |
|
Trade names | | 16,670 |
| | (8,136 | ) | | — |
| | 8,534 |
|
Total | | $ | 202,164 |
| | $ | (74,213 | ) | | $ | (1,025 | ) | | $ | 126,926 |
|
(7)(8) Fair Value Measurements
The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value.
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1–Observable inputs–quoted prices in active markets for identical assets and liabilities;
Level 2–Observable inputs-other than the quoted prices in active markets for identical assets and liabilities–includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets and amounts derived from valuation models where all significant inputs are observable in active markets; and
Level 3–Unobservable inputs–includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20172022 and December 31, 20162021 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, 2022 | | Fair Value December 31, 2021 |
Non-COLI assets held in Deferred Supplemental Compensation Plan | | Other assets | | Level 1 | | $ | 515 | | | $ | 598 | |
Interest rate swaps | | Other assets | | Level 2 | | $ | 7,131 | | | $ | — | |
Interest rate swaps | | Accrued expenses and other current liabilities | | Level 2 | | $ | — | | | $ | 234 | |
Earn-out obligation - short-term | | Accrued expenses and other current liabilities | | Level 3 | | $ | — | | | $ | 1,000 | |
Earn-out obligation - long-term | | Other long-term liabilities | | Level 3 | | $ | — | | | $ | 250 | |
|
| | | | | | | | | | | | |
Amounts Recorded at Fair Value | | Financial Statement Classification | | Fair Value Hierarchy | | Fair Value September 30, 2017 | | Fair Value December 31, 2016 |
Non-COLI assets held in Deferred Supplemental Compensation Plan | | Other assets | | Level 1 | | $ | 367 |
| | $ | 299 |
|
Interest rate swaps | | Other current assets | | Level 2 | | $ | 218 |
| | $ | 73 |
|
Non-Company Owned Life Insurance ("COLI")
Non-COLI assets held in theour deferred supplemental compensationcompensation 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.
We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging, and have determined that our swap agreements qualify as highly effective cash flow hedges. The fair value of the swap agreements was approximately $218 thousand and $73 thousand at September 30, 2017 and December 31, 2016, respectively. The offset, net of an income tax effect of approximately $84 thousand and $28 thousand, was included in accumulated other comprehensive income in the accompanying balance sheets as of September 30, 2017 and December 31, 2016, respectively. The amounts paid and received on the swap agreements
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
Interest Rate Swap Derivatives
On July 22, 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% that hedge the variability in interest payments of $150 million of floating rate debt. The tenor of these five-year swaps will begin on October 31, 2022. We have designated, and will account for, these fixed interest rate swaps as cash flow hedges. As of September 30, 2022, we had $5.4 million. net of an income tax effect of $1.8 million, included in accumulated other comprehensive income in the accompanying balance sheets related to these cash flow hedges. We estimate that we will reclassify $2.0 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following September 30, 2022.
We were a party to two fixed interest rate swaps, entered into in fiscal 2011 and 2012, qualifying as cash flow hedges under which we hedged a portion of our variable-rate debt until the swaps expired in February and March 2022. As of December 31, 2021, the fair value of such swaps was $0.2 million, a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets. As of December 31, 2021, we had $0.2 million, net of an income tax effect of $58 thousand, included in accumulated other comprehensive income in the accompanying balance sheets related to the cash flow hedges. The amounts paid and received on the swaps are recorded in interest expense in the period during which the related floating-rate interest is incurred. We determine
Contingent Consideration
In connection with the acquisition of Global Parts in July 2021, we were required to pay earn-out obligation payments of up to $2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. Final settlement of the obligation was made during the three months ended September 30, 2022. Changes in the earn-out obligation measured at fair value of the swap agreements based on a valuation modelrecurring basis using primarily observable market data inputs.
(8) Income Taxes
Our effective tax rate was 36.6% and 36.4%unobservable inputs (Level 3) for the nine months ended September 30, 20172022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Current portion | | Long-term portion | | Total |
Balance as of December 31, 2021 | | $ | 1,000 | | | $ | 250 | | | $ | 1,250 | |
Reclassification from long-term to current | | 250 | | | (250) | | | — | |
Earn-out payments | | (1,250) | | | — | | | (1,250) | |
| | | | | | |
Balance as of September 30, 2022 | | $ | — | | | $ | — | | | $ | — | |
| | | | | | |
Other Financial Instruments
The carrying amounts of cash and 2016, respectively. 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.
(9) 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.
(9) Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on FinancialInstruments, which changes the methodology for measuring credit losses on financial instrumentsOur effective tax rate was 24.4% and the timing of when such losses are recorded. The new standard is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for reporting periods beginning after December 15, 2018. We currently are assessing the impact that this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. We currently are assessing the impact that this standard will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange25.2% for the goods or services.three and nine months ended September 30, 2022, respectively, and 18.8% and 23.4% for the three and nine months ended September 30, 2021, respectively. The standard is requiredeffective tax rate was higher for the three and nine months ended September 30, 2022 as compared to be applied either retrospectivelythe same period in the prior year primarily due to each prior reporting period presented or retrospectivelybook expense in connection with the cumulative effectdecline in value of initially applying it recognized at the date of initial application. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments andour COLI assets recognized from costs incurred to fulfill a contract.
We are in the process of comparing our current revenue recognition policiesperiod ended September 30, 2022 that was reversed for tax purposes as opposed to the requirements of the new standard for each of our revenue categories and evaluating the effect of adoption on our consolidated financial statements by assessing a selection of contracts. Based on the assessment we have completed thus far, we believe the primary impacts of adopting the new standard will be on (1) the timing of when we recognize revenue on our contracts with award fees, which is currently based on when we receive customer authorization will change to recognition of the award fees as the performance obligation is satisfied resulting in revenue being recognized earlierbook income in the contractsame period, (2) the timing in 2021.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
ExecutiveBusiness Overview
We are a diversified aftermarket products and services company that assists our clients in sustaining, extending the service lifeproviding repair services, parts distribution, logistics, supply chain management and improving the performance of theirconsulting services for land, sea and air transportation equipmentassets to government and other assets and systems.commercial markets. We provide sustainmentlogistics and distribution services for mission critical legacy systems and equipment and professional and technical services to commercial customer and to the United States Government (the "government"),government, including federal and civilian agencies and the United States Department of Defense ("DoD"), the United States Postal Service ("USPS"), and other federal civilian agencies, commercial customers and other customers. Our largest customers are the DoD and USPS.. Our operations include supply chain management solutions, and parts supply for vehicle fleets; parts supplyand distribution, and maintenance, repair and overhaul (“MRO”("MRO") services for vehicle fleet, aviation, clients;and other customers. We also provide vehicle and equipment maintenance and refurbishment; logistics; engineering;refurbishment, logistics, engineering support, energy and environmental services;services, IT and health care IT solutions;solutions, and consulting services.
Organization and Segments
Our operations are conducted within three reportable segments aligned with our management groups: 1) Supply Chain Management; 2)operating segments: (1) Aviation; (2) Fleet; and 3)(3) Federal Services. Beginningand Defense. We provide more information about each of these reportable segments under Item 1, "Business-History and Organization” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K").
Recent Acquisitions
See Note (2) "Acquisitions" to our Consolidated Financial Statements included in 2017,Item 1 of this filing and our 2021 Form 10-K for additional information regarding our recent acquisitions.
Impact of the COVID-19 Pandemic
The coronavirus disease (COVID-19) pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate. However, we have combinedseen continued improvement in our former IT, Energyoperating results during the nine months ended September 30, 2022, which we expect to continue through the remainder of 2022. All of our repair, distribution and Management Consulting Group with our Federal Services Group.
Supply Chain Management Group - Our Supply Chain Management Group provides sourcing, acquisition, scheduling, transportation, shipping, logistics, data management,base operations facilities remain open and otheroperational, and we continue to deliver products and services to assistcustomers without interruption. We continue to closely monitor and address the pandemic and related developments, including the impact to our clients with supply chain management efforts. Operationsbusiness, our employees, our customers, and our suppliers.
Business Trends
The following discussion provides a brief description of this group are conductedsome of the key business factors impacting our results of operations detailed by segment.
Aviation Segment
The COVID-19 pandemic impacted our wholly owned subsidiary Wheeler Bros., Inc., which supportsAviation segment operations, particularly in 2020 and 2021. We have seen continued improvement in our quarterly revenue results due to the USPS, commercial truck fleets, and DoD with fleet management and sustainment solutions, managed inventory services, and other vehicle parts solutions. The primary revenue source for this group isrecovery in demand since the USPS Managed Inventory Program ("MIP") that supplies vehicle parts and mission critical supply chain support forpeak of the USPS truck fleet.
Aviation Group - COVID-19 pandemic impact during the second quarter of 2020. Our Aviation Group provides parts supply andsegment results have benefited from strong performance following prior investments in growth initiatives that have produced positive results with quarterly revenue of $103 million, a 40% increase year-over-year.
Growth in our distribution supply chain solutions, and MRO services forhas been driven by several new distribution initiatives in providing “tip-to-tail” product-line management capabilities, while our repair business has benefited from a broader recovery in commercial market activity, together with share gains within the business & general aviation jet aircraft engines and engine accessories. This group offers a range of complimentary services and supplies to a diversified client base of corporate and private aircraft owners, regional airlines, aviation manufacturers, other aviation MRO providers, cargo transporters, and agricultural clients.
Federal Services Group - Our Federal Services Group provides foreign military sales services, refurbishment services to extend and enhance the life of existing vehicles and equipment, fleet-wide ship and aircraft support, aircraft sustainment and maintenance, and other technical, management, engineering, logistics, maintenance, configuration management, prototyping, technology, and field support services to the U.S. Navy and Marine Corps, U.S. Army and Army Reserve, U.S. Air Force, and other customers. Significant work efforts for this group include assistance to the U.S. Navy in executing its Foreign Military Sales (“FMS”B&GA”) Program for surface ships sold, leased or granted to foreign countries, our Red River Army Depot Equipment Related Services Program (“RRAD ERS”) providing on-site logistics support for Red River Army Depot at Texarkana, Texas, our Fort Benning Logistics Support Services Program supporting base operations and logistics at Fort Benning, Georgia, our U.S. Army Reserve vehicle refurbishment program and various vehicle and equipment refurbishment, maintenance and sustainment programs for U.S. Army commands, and various task orders under the U.S. Air Force Contract Field Teams (“CFT”) Program.
Beginning in 2017, our Federal Services Group includes our wholly owned subsidiaries Energetics Incorporated ("Energetics") and Akimeka, LLC ("Akimeka"). Energetics provides technical, policy, business, and management support in areas of energy modernization, clean and efficient energy, climate change mitigation, and infrastructure protection. Akimeka offers solutions in fields that include medical logistics, medical command and control, e-health, information assurance, public safety, enterprise architecture development, business continuity, program and portfolio management, network IT services, cloud managed services, systems design and integration, quality assurance services, and product and process improvement services. Energetics and Akimeka clients include various DoD and federal civilian agencies, including the United States Departments of Energy, Homeland Security, Commerce, Treasury, and Interior; the Social Security Administration; the National Institutes of Health; customers in the military health system; and other government agencies and commercial clients.
|
| | | | | | | | | | | | |
Concentration of Revenues | | |
(dollars in thousands) | | |
| | For the nine months ended September 30, |
| | 2017 | | | | 2016 | | |
Source of Revenue | | Revenues | | % | | Revenues | | % |
USPS | | $ | 136,261 |
| | 24 | | $ | 135,025 |
| | 28 |
FMS Program | | 130,306 |
| | 23 | | 95,258 |
| | 20 |
Other | | 298,751 |
| | 53 | | 246,606 |
| | 52 |
Total revenues | | $ | 565,318 |
| | 100 | | $ | 476,889 |
| | 100 |
Management Outlook
Our sharpened focus on longer term growth in recent years has produced year over year increases in consolidated revenue through the third quarter of 2017. Our Federal Services Group has been the primary driver of our 2017 increases,market. Market recovery and our Supply Chain Management Group has also contributed to the increase. We are pursuinggrowth initiatives have resulted in each of our groups to sustain our growth.
Revenue on our FMS Program fora 105% and 38% year-over-year increase in distribution and repair revenue, respectively, during the first nine months of 2017 increased 37%2022 compared to the same period for the prior year.
We have recently secured key multi-year distribution agreements to both domestic and new international geographic markets. We believe the new distribution initiatives will provide sustainable and recurring revenue with growth potential that will enhance our future results. The acquisition of Global Parts, in July 2021, broadens our product lines and client base, and we see opportunities to strategically align offerings with both domestic and international markets.
We expect that the current market conditions will result in strategic opportunities for near and long-term growth. We intend to continue capitalizing on opportunities in those markets, which may require future investment.
Fleet Segment
Our Fleet segment continues to increase revenue from commercial fleet customers and e-commerce fulfillment sales as the business continues to progress towards becoming a more diversified enterprise. We continue to execute on our revenue diversification strategy as we capture new customers and increase revenue within e-commerce fulfillment. To support continued e-commerce and e-commerce fulfillment growth, the Fleet segment announced plans to open a new distribution warehouse and e-commerce fulfillment center of excellence in Olive Branch, Mississippi (in the greater Memphis, Tennessee area). This new center of excellence will double the size of Fleet's current warehouse footprint while extending Fleet’s geographic reach and expanding product offerings for customers. Operations are expected to commence at this new location in early 2023 and will enable Fleet to successfully meet the rapidly growing demand for the e-commerce fulfillment business. Commercial customer revenue continues to see a strong growth trend, increasing approximately 23% and 50% during the quarter and first nine months of 2022, respectively, compared to the same periods in the prior year. Commercial revenues were 40% of total Fleet segment revenue for the nine months ended September 30, 2022 compared to 30% for the same period in the prior year, over year, resultingdemonstrating the continued success of our strategic multi-year diversification strategy.
Federal and Defense Segment
Our Federal and Defense segment continues to focus on building our contract backlog and optimizing legacy programs. We recently announced a transition of leadership for our Federal and Defense segment as we work to grow our business and mitigate the impacts of delays in part fromboth the transfertiming of two frigatescontract awards and the funding process. Strong revenue performance in U.S Navy work enabled us to Taiwan completedsuccessfully grow our third quarter revenue for this segment despite anticipated declines in March 2017, and from intensified marketing efforts to support FMS client countries. Revenue from our equipment sustainment, refurbishment, logistics support, and parts supply services for our U.S. Army clients also increased. work due to program completions. We expect that our focused business development efforts will drive new revenue additions in subsequent years.
Results of Operations
Consolidated Results of Operations
Our contract funded backlog remains strong, which we believe should continueconsolidated results of operations are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | | | Nine months ended September 30, |
| 2022 | | 2021 | | Change ($) | | Change (%) | | | | | | 2022 | | 2021 | | | | Change ($) | | Change (%) |
Revenues | $ | 242,487 | | | $ | 200,582 | | | $ | 41,905 | | | 21 | % | | | | | | $ | 715,439 | | | $ | 540,675 | | | | | $ | 174,764 | | | 32 | % |
Costs and operating expenses | 225,215 | | | 186,690 | | | 38,525 | | | 21 | % | | | | | | 672,102 | | | 529,894 | | | | | 142,208 | | | 27 | % |
Operating income | 17,272 | | | 13,892 | | | 3,380 | | | 24 | % | | | | | | 43,337 | | | 10,781 | | | | | 32,556 | | | 302 | % |
Interest expense, net | 4,818 | | | 2,780 | | | 2,038 | | | 73 | % | | | | | | 12,299 | | | 8,476 | | | | | 3,823 | | | 45 | % |
Income before income taxes | 12,454 | | | 11,112 | | | 1,342 | | | 12 | % | | | | | | 31,038 | | | 2,305 | | | | | 28,733 | | | 1,247 | % |
Provision for income taxes | 3,035 | | | 2,091 | | | 944 | | | 45 | % | | | | | | 7,827 | | | 539 | | | | | 7,288 | | | 1,352 | % |
Net income | $ | 9,419 | | | $ | 9,021 | | | $ | 398 | | | 4 | % | | | | | | $ | 23,211 | | | $ | 1,766 | | | | | $ | 21,445 | | | 1,214 | % |
Revenues.Revenues increased for the three months ended September 30, 2022 as compared to benefitthe same period in the prior year primarily attributable to revenue growth within each of our DoD revenues. We are well positioned insegments: $29.5 million within our pursuit of opportunities to expandAviation segment, $4.5 million within our services supporting our traditional government clients,Fleet segment, and to capture new work for which$7.9 million within our Federal Services Group can team withand Defense segment. See "Segment Operating Results" section below for further discussion of revenues by segment.
Revenues increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily attributable to revenue growth within each of our segments: $135.9 million within our Aviation Groupsegment, $23.5 million within our Fleet segment, and $15.4 million within our Federal and Defense segment. 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, 2022 as compared to provide enhanced competenciesthe same periods in the prior year primarily due to increases in revenue. Our costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.
Operating Income.Operating income increased for the three months ended September 30, 2022 as compared to the same period in the prior year attributable to increases of $6.3 million for our Aviation segment and $1.2 million for our Fleet segment, partially offset by a decrease of $3.4 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment.
Operating income increased for the nine months ended September 30, 2022 as compared to the same period in the prior year attributable to increases of $43.0 million for our Aviation segment and $3.2 million for our Fleet segment, partially offset by a decrease of $13.6 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment.
Interest Expense.Interest expense increased for the three and nine months ended September 30, 2022 as compared to the same period in the prior year due to higher average interest rates on borrowings outstanding.
Provision for Income Taxes.Our effective tax rate was 24.4% and 25.2% for the three and nine months ended September 30, 2022, respectively, and 18.8% and 23.4% for the three and nine months ended September 30, 2021, respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income ("FDII") deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. Federal income tax rate and our effective tax rate. The higher effective tax rate for the three and nine months ended September 30, 2022 primarily resulted from book expense in connection with the decline in the value of our Company Owned Life Insurance ("COLI") assets in the period ended September 30 2022 that was reversed for tax purposes as opposed to book income in the same period in 2021.
Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Revenues | $ | 102,625 | | | $ | 73,124 | | $ | 29,501 | | | 40 | % | | $ | 300,934 | | $ | 165,010 | | $ | 135,924 | | | 82 | % |
Costs and operating expenses | 92,608 | | | 69,405 | | 23,203 | | | 33 | % | | 276,845 | | | 183,895 | | 92,950 | | | 51 | % |
Operating income (loss) | $ | 10,017 | | | $ | 3,719 | | | $ | 6,298 | | | 169 | % | | $ | 24,089 | | | $ | (18,885) | | | $ | 42,974 | | | 228 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit (loss) percentage | 9.8 | % | | 5.1 | % | | | | | | 8.0 | % | | (11.4 | %) | | |
Revenues. Revenues increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to a wider range$19.2 million, or 35%, growth in distribution revenue driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of governmentGlobal Parts, and international clients.a $10.3 million, or 55%, growth in repair revenue driven by improved demand in end markets as a result of market recovery and share gains with business and general aviation customers.
We have directed resources and management effortsRevenues increased for the nine months ended September 30, 2022 as compared to diversify and expand our Supply Chain Management Group operational capacity, market channels, and client base. It is notable thatthe same period in the prior year primarily due to distribution revenue growth of $114.7 million, or 105%, driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of Global Parts, and repair revenue growth of $21.3 million, or 38%, driven by improved demand in end markets as a result of market recovery.
Costs and Operating Expenses. Costs and operating expenses increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this group has been providedsegment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $2.3 million for the three months ended September 30, 2022 compared to $2.4 million for the same period in the prior year. Allocated corporate costs were $3.3 million for the three months ended September 30, 2022 compared to $2.3 million for the same period in the prior year.
Costs and operating expenses increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues and a $2.3 million non-cash charge to write down accounts receivable and inventory related to the Russian and Ukrainian markets for the nine months 2022, offset by a $23.7 million inventory valuation adjustment recognized in the same period in the prior year. 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 $7.0 million for the nine months ended September 30, 2022 compared to $6.5 million for the same period in the prior year. Allocated corporate costs were $9.1 million for the nine months ended September 30, 2022, compared to $6.0 million for the same period in the prior year.
Operating income. Operating income increased for the three months ended September 30, 2022 as compared to the same period in the prior year largely due to growth in revenue attributable to our new distribution programs, increases in higher margin repair revenue, and contributions from the Global Parts acquisition.
Operating income increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to current year growth in revenue attributable to our new distribution programs, increases in higher margin repair revenue, contributions from the Global Parts acquisition, and a $23.7 million inventory provision which negatively impacted operating income in the prior year.
Fleet Segment Results
The results of partsoperations for our Fleet segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) | | |
Revenues | $ | 64,754 | | | $ | 60,268 | | | $ | 4,486 | | | 7 | % | | $ | 196,526 | | | $ | 173,072 | | | $ | 23,454 | | | 14 | % | | |
Costs and operating expenses | 58,215 | | | 54,881 | | | 3,334 | | | 6 | % | | 178,240 | | | 157,944 | | | 20,296 | | | 13 | % | | |
Operating income | $ | 6,539 | | | $ | 5,387 | | | $ | 1,152 | | | 21 | % | | $ | 18,286 | | | $ | 15,128 | | | $ | 3,158 | | | 21 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit percentage | 10.1 | % | | 8.9 | % | | | | | | 9.3 | % | | 8.7 | % | | |
Revenues.Revenues increased for the three months ended September 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to the DoDcommercial customers of $4.7 million, or 22.7% and increased supply chain and inventory management support for commercial vehicle fleets. Partssales to other government customers of $2.3 million, or 6.3%, partially offset by anticipated decreased sales to DoD customers of $2.6 million or 93.3%.
Revenues increased for the nine months ended September 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to commercial customers of $26.5 million, or 50.2% and sales to other government agencies havecustomers of $4.3 million or 3.9%, partially offset by anticipated decreased sales to DoD customers of $7.3 million or 69.8%.
Costs and Operating Expenses.Costs and operating expenses increased 83%for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $1.5 million for the three months ended September 30, 2022 and $1.8 million for the same period in the prior year. Expense for allocated corporate costs was $2.0 million for the three months ended September 30, 2022 and $2.1 million for the same period in the prior year.
Costs and operating expenses increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $5.0 million for the nine months ended September 30, 2022 and $5.3 million for the same period in the prior year. Expense for allocated corporate costs was $5.9 million for the nine months ended September 30, 2022 and $6.6 million for the same period in the prior year.
Operating income.Operating income increased for the three and nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased commercial fleet customer and e-commerce fulfillment sales as described above.
Federal and Defense Segment Results
The results of operations for our Federal and Defense segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | Change ($) | | Change (%) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Revenues | $ | 75,108 | | | $ | 67,190 | | | $ | 7,918 | | | 12 | % | | $ | 217,979 | | | $ | 202,593 | | | $ | 15,386 | | | 8 | % |
Costs and operating expenses | 73,169 | | | 61,804 | | | 11,365 | | | 18 | % | | 214,176 | | | 185,183 | | | 28,993 | | | 16 | % |
Operating income | $ | 1,939 | | | $ | 5,386 | | | $ | (3,447) | | | (64) | % | | $ | 3,803 | | | $ | 17,410 | | | $ | (13,607) | | | (78) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit percentage | 2.6 | % | | 8.0 | % | | | | | | 1.7 | % | | 8.6 | % | | | | |
Revenues. Revenues increased for the three and nine months ended September 30, 2022 as compared to the same period in the prior year due to revenues from our Foreign Military Sales (FMS) program with the U.S. Navy, partially offset by declines in our U.S. Army work due to program completions.
Costs and Operating Expenses. Costs and operating expenses increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increases in revenue from commercial customers hasand a shift in our contract mix to a larger proportion of cost-type contracts.
Costs and operating expenses increased 25%for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increases in revenue, an increase in the proportion of cost-type contracts within our contract mix, and a $3.5 million loss recognized for the nine months ended September 30, 2022 on a yearfixed-price, non-DoD contract with a foreign customer driven by higher than anticipated supply chain material and labor costs.
Operating income. Operating income decreased for the three months ended September 30, 2022 as compared to date basis through the third quarter of 2017. Through our direct marketing efforts, we are capturing and on-boarding new commercial customers at an accelerated pace. Our commercial client base now includes companies in food distribution, oil field services, waste management, linen and uniform, commercial long haul shipping, bus transportation, and other clients that have vehicle fleets required to meet mission critical delivery or service schedules. We are also capturing new customers and increasing revenue using e-commerce solutions. We aresame period in the beginning stagesprior year primarily due to the completion of a U.S. Army program and a shift in our relationship with manycontract mix to a larger portion of these new clients,cost-type contracts, which generally provide lower profit margins than fixed-price and we look forwardT&M contract types.
Operating income decreased for the nine months ended September 30, 2022 as compared to further developing these relationshipsthe same period in the prior year primarily due to the completion of a U.S. Army program, an increase in the portion of cost-type contracts, and adding new clients to grow our revenues from commercial markets.
We continue to closely monitor the USPS delivery vehicle procurement efforts and are positioning ourselves to support both newly procured vehicles as they are placed in service and old vehicles that remain in service. Overall, USPS buying levels of parts and services provided by our Supply Chain Management Group to support the current vehicle fleet have been steady. While we cannot predict with certainty the impact of the USPS new delivery vehicle deployment on our future revenues, we believe that our years of service and knowledge of this client’s needs strategically position us to continue to serve as a key strategic vehicle fleet sustainment partner. We will remain agile and support this client during its complex vehicle procurement initiative.
Our Aviation Group is pursuing multiple opportunities to promote future revenue growth. This includes teaming with our Federal Services Group to provide aviation related logistics, material sourcing, and maintenance, repair and overhaul (“MRO”) support to our U.S. and international government client base, and extending our gas turbine MRO competency to maritime applications. We are pursuing new aviation supply chain and distribution agreements with key original equipment manufacturers and adding new MRO engine programs to our offerings. We are expanding our geographic distribution footprint and strengthening our international business development efforts through key strategic relationships and hiring initiatives.
We have reduced our bank debtcontract loss recognized during the second and third quarters of 2017 by approximately $35 million and our leverage ratio has declined. We anticipate further progress in this regardperiod as we go forward.described above.
Bookings and Funded Backlog
Our funded backlog represents the estimated remaining value of work to be performed under firm contracts. Bookings for our Aviation and Fleet segments occur at the time of sale. Accordingly, our Aviation and Fleet segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues. Revenues for federal government contract work performed by our Federal Services Groupand Defense segment depend on contract funding (“("bookings”), and bookings generally occur when contract funding documentation is received. Funded contract backlog is an indicator of potential future revenue. While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.
A summary of our bookings and revenues for our Federal Services Groupand Defense segment for the nine months ended September 30, 20172022 and 2016,2021, and funded contract backlog as of September 30, 20172022 and 2016 was2021 is as follows (in millions):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Bookings | | $ | 250 | | | $ | 234 | |
Revenues | | $ | 218 | | | $ | 203 | |
Funded Contract Backlog | | $ | 199 | | | $ | 218 | |
|
| | | | | | | | |
| | 2017 | | 2016 |
Bookings | | $ | 398 |
| | $ | 405 |
|
Revenues | | $ | 306 |
| | $ | 225 |
|
Funded Contract Backlog | | $ | 403 |
| | $ | 400 |
|
Recently Issued Accounting Pronouncements
For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Recently Issued Accounting Pronouncements in Note 9 of the Notes to our Unaudited Consolidated Financial Statements in this report.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. See our 2016 Form 10-K for a full discussion of our critical accounting policies.
Revenue by Contract Type
Federal government contract work is performed by our Federal Services Group under three general government contract types. Revenues of our Supply Chain Management and Aviation groups are generated under ordering or sales agreements, and this revenue is not classified by government contract type. Our revenues are classified as follows (dollars in thousands):
|
| | | | | | | | | | | | |
| | Nine months ended September 30, |
Contract Type | | 2017 | | % | | 2016 | | % |
Cost-type | | $ | 163,275 |
| | 29 | | $ | 122,892 |
| | 26 |
Fixed-price | | 72,941 |
| | 13 | | 52,895 |
| | 11 |
Time and materials | | 69,436 |
| | 12 | | 48,724 |
| | 10 |
Total Federal Services revenues | | 305,652 |
| | 54 | | 224,511 |
| | 47 |
Supply Chain Management and Aviation revenues | | 259,666 |
| | 46 | | 252,378 |
| | 53 |
Total revenues | | $ | 565,318 |
| | 100 | | $ | 476,889 |
| | 100 |
Goodwill and Intangible Assets
Goodwill is subject to a review for impairment at least annually. We perform an annual review of goodwill for impairment during the fourth quarter and whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable. We estimate the fair value of our reporting units using a weighting of fair values derived from the income approach, market approach, and comparative transactions approach with the heaviest weighting placed on the income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows.
In the fourth quarter of 2016, we performed our annual goodwill impairment analysis for each of our reporting units with goodwill. The results of the impairment analysis indicated that our reporting units had fair values substantially in excess of their carrying values with the exception of our Akimeka and VSE Aviation reporting units.
The fair value of our Akimeka reporting unit, within our Federal Services Group, exceeded its carrying value by approximately 7% as of our 2016 annual goodwill impairment analysis. Akimeka had experienced a reduction in services performed in prior years due to a decline in services ordered by clients on contracts and a loss of work performed on expiring contracts for which the follow-on work was often awarded to small businesses as set-aside contracts. Based on these circumstances and Akimeka's revenues and operating income for the first nine months of 2017, we performed an interim goodwill impairment during the third quarter. The result of this impairment analysis shows that Akimeka’s fair value exceeded its carrying value by approximately 12%. Based on the results of our analysis, our assessment is that we remain at risk of a future goodwill impairment if there is further deterioration of projected cash flows or negative changes in market factors, such as an increase in the weighted average cost of capital used in the income approach or decreases in the market multiples used in the market approach. The carrying value of Akimeka as of September 30, 2017 included goodwill of approximately $29.8 million.
The fair value of our VSE Aviation reporting unit, within our Aviation Group, exceeded its carrying value by approximately 10% as of our 2016 annual goodwill impairment analysis. While there has not been a significant contract or customer loss, VSE Aviation’s revenue and operating income for the first nine months of 2017 did not meet our cash flow projections utilized in our 2016 annual impairment analysis. This decrease was primarily related to a decreased demand for new parts and slower than anticipated development of new business opportunities. We believe that these conditions are temporary and that the overall outlook for our Aviation business remains consistent with our long-term projections. However, based on the current operating performance, we have determined that VSE Aviation is at risk of a future goodwill impairment if there are future declines in our projections or if we are unsuccessful in implementing our revenue growth plans. Additionally, the fair value could be adversely affected by other market factors such as an increase in the weighted average cost of capital used in the income approach or decreases in the market multiples used in the market approach. The carrying value of our VSE Aviation reporting unit included goodwill of approximately $104.5 million as of September 30, 2017.
As of September 30, 2017, we have no intangible assets with indefinite lives and we had an aggregate of approximately $199 million of goodwill associated with our acquisitions.
Results of Operations
Our results of operations are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Nine months | | Change |
| | ended September 30, | | ended September 30, | | Three | | Nine |
| | 2017 | | 2016 | | 2017 | | 2016 | | Months | | Months |
Revenues | | $ | 174,164 |
| | $ | 172,780 |
| | $ | 565,318 |
| | $ | 476,889 |
| | $ | 1,384 |
| | $ | 88,429 |
|
Costs and operating expenses | | 161,927 |
| | 159,157 |
| | 523,880 |
| | 438,646 |
| | 2,770 |
| | 85,234 |
|
Operating income | | 12,237 |
| | 13,623 |
| | 41,438 |
| | 38,243 |
| | (1,386 | ) | | 3,195 |
|
Interest expense, net | | 2,347 |
| | 2,509 |
| | 7,158 |
| | 7,406 |
| | (162 | ) | | (248 | ) |
Income before income taxes | | 9,890 |
| | 11,114 |
| | 34,280 |
| | 30,837 |
| | (1,224 | ) | | 3,443 |
|
Provision for income taxes | | 3,251 |
| | 4,026 |
| | 12,541 |
| | 11,228 |
| | (775 | ) | | 1,313 |
|
Net income | | $ | 6,639 |
| | $ | 7,088 |
| | $ | 21,739 |
| | $ | 19,609 |
| | $ | (449 | ) | | $ | 2,130 |
|
Our revenues increased approximately $1 million or 1%, for the third quarter of 2017, and approximately $88 million or 19% for the first nine months of 2017, as compared to the same periods of 2016. Revenues from our Federal Services Group increased for the third quarter and for the first nine months. Revenues from our Supply Chain Management Group were substantially unchanged for the third quarter and increased for the first nine months. Revenues from our Aviation Group decreased for the third quarter and for the first nine months.
Costs and operating expenses consist primarily of cost of inventory and delivery of our products sold; direct costs including labor, material, and supplies used in the performance of our contract work; indirect costs associated with our direct contract costs; sales, general, and administrative expenses associated with our operating groups and corporate management; and certain costs and charges arising from nonrecurring events outside the ordinary course of business. These costs will generally increase or decrease in conjunction
with our level of products sold or contract work performed. Costs and operating expenses also include expense for amortization of intangible assets acquired through our acquisitions. Expense for amortization of acquisition related intangible assets is included in the segment results in which the acquisition is included. Segment results also include expense for an allocation of corporate management costs.
Our costs and operating expenses increased approximately $3 million or 2% for the third quarter of 2017, and approximately $85 million or 19% for the first nine months of 2017, as compared to the same periods of 2016. Costs and operating expenses for our Federal Services and Supply Chain Management groups increased for the third quarter and for the first nine months. Costs and operating expenses for our Aviation Group decreased for the third quarter and for the first nine months.
Our operating income decreased approximately $1 million or 10% for the third quarter of 2017, and increased approximately $3 million or 8% for the first nine months of 2017, as compared to the same periods of 2016. Operating income from our Federal Services Group increased for the third quarter and for the first nine months of 2017. Operating income from our Supply Chain Management and Aviation groups decreased for the third quarter and for the first nine months of 2017.
Changes in revenues, costs and operating expenses, and operating income are further discussed in the summaries of our segment results that follow.
Interest expense decreased approximately $248 thousand for the first nine months of 2017, as compared to the same period of 2016, due primarily to a decrease in our average level of bank borrowing in 2017. Interest expense also includes interest associated with capitalized construction costs related to our executive and administrative headquarters facility lease. The amount of interest expense associated with this capital lease in the first nine months of 2017 was approximately $1.1 million, as compared to $1.2 million for the same period of 2016.
Our effective tax rate was 36.6% and 36.4% for the nine months ended September 30, 20172022, Federal and 2016, respectively. 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 yearDefense segment bookings increased 7% year-over-year to year.$250 million, while total funded backlog decreased 9% year-over-year to $199 million.
Supply Chain Management Group Results
The results of operations for our Supply Chain Management Group are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Nine months | | Change |
| | ended September 30, | | ended September 30, | | Three | | Nine |
| | 2017 | | 2016 | | 2017 | | 2016 | | Months | | Months |
Revenues | | $ | 51,174 |
| | $ | 51,152 |
| | $ | 163,663 |
| | $ | 152,080 |
| | $ | 22 |
| | $ | 11,583 |
|
Costs and operating expenses | | 42,996 |
| | 42,403 |
| | 138,052 |
| | 125,480 |
| | 593 |
| | 12,572 |
|
Operating income | | $ | 8,178 |
| | $ | 8,749 |
| | $ | 25,611 |
| | $ | 26,600 |
| | $ | (571 | ) | | $ | (989 | ) |
Profit percentage | | 16.0 | % | | 17.1 | % | | 15.6 | % | | 17.5 | % | | |
| | |
|
Operating income decreased by approximately $571 thousand or 7% for the third quarter of 2017 and decreased approximately $989 thousand or 4% for the first nine months of 2017. Lower margins were attributable to increased competition for our USPS vehicle parts sales and to lower margins typically associated with DoD sales.
Aviation Group Results
The results of operations for our Aviation Group are as follows (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Nine months | | Change |
| | ended September 30, | | ended September 30, | | Three | | Nine |
| | 2017 | | 2016 | | 2017 | | 2016 | | Months | | Months |
Revenues | | $ | 31,059 |
| | $ | 34,688 |
| | $ | 96,003 |
| | $ | 100,298 |
| | $ | (3,629 | ) | | $ | (4,295 | ) |
Costs and operating expenses | | 29,076 |
| | 30,738 |
| | 89,105 |
| | 90,402 |
| | (1,662 | ) | | (1,297 | ) |
Operating income | | $ | 1,983 |
| | $ | 3,950 |
| | $ | 6,898 |
| | $ | 9,896 |
| | $ | (1,967 | ) | | $ | (2,998 | ) |
Profit percentage | | 6.4 | % | | 11.4 | % | | 7.2 | % | | 9.9 | % | | |
| | |
|
Revenues for our Aviation Group decreased approximately $3.6 million or 10% for the third quarter of 2017 and decreased approximately $4.3 million or 4% for the nine months ended September 30, 2017, as compared to the same periods of 2016. Revenues were adversely affected by a decrease in the demand in our parts distribution businesses.
Costs and operating expenses decreased by approximately $1.7 million or 5% for the third quarter of 2017 and decreased approximately $1.3 million or 1% for the first nine months of 2017, primarily due to the decrease in revenues. For the first nine months of 2016, costs and operating expenses were reduced by approximately $1.3 million for a valuation adjustment to the accrued earn-out obligation associated with the acquisition of our aviation businesses and were increased by approximately $300 thousand due to expense associated with a settlement agreement.
Our operating income decreased approximately $2 million or 50% for the third quarter of 2017, and approximately $3 million or 30% for the first nine months of 2017, as compared to the same periods of 2016. Factors affecting the change in our operating income for the third quarter included a decrease in the demand in our parts distribution businesses and decreases in operating income from engine MRO services. Factors affecting the change in our operating income for the first nine months included a decrease in the demand in our parts distribution businesses, an increase in operating income from engine MRO services and engine accessories services, and the adjustments to 2016 operating income for the earn-out obligation valuation adjustment and the settlement agreement expense mentioned above.
Federal Services Group Results
The results of operations for our Federal Services Group are as follows (dollars in thousands):
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Nine months | | Change |
| | ended September 30, | | ended September 30, | | Three | | Nine |
| | 2017 | | 2016 | | 2017 | | 2016 | | Months | | Months |
Revenues | | $ | 91,931 |
| | $ | 86,940 |
| | $ | 305,652 |
| | $ | 224,511 |
| | $ | 4,991 |
| | $ | 81,141 |
|
Costs and operating expenses | | 89,338 |
| | 85,290 |
| | 295,149 |
| | 219,470 |
| | 4,048 |
| | 75,679 |
|
Operating Income | | $ | 2,593 |
| | $ | 1,650 |
| | $ | 10,503 |
| | $ | 5,041 |
| | $ | 943 |
| | $ | 5,462 |
|
Profit percentage | | 2.8 | % | | 1.9 | % | | 3.4 | % | | 2.2 | % | | |
| | |
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Revenues for our Federal Services Group increased approximately $5.0 million or 6% for the third quarter of 2017 and approximately $81.1 million or 36% for the nine months ended September 30, 2017, as compared to the same periods of 2016. Items affecting our third quarter revenue on a year to year comparative basis include a net increase in revenues of approximately $7 million on various U. S. Army contracts, a decrease of approximately $6 million in revenues on our FMS Program, and changes in the level of work on other program efforts. Items affecting our first nine months revenue on a year to year comparative basis include an increase of approximately $35 million in revenues on our FMS Program, increased revenues of approximately $24 million due to the start of our RRAD ERS Program in the second quarter of 2016, and changes in the level of work on other program efforts.
Costs and operating expenses increased approximately $4 million or 5% for the third quarter of 2017 and approximately $75.7 million or 34% for the first nine months of 2017, as compared to the same periods of 2016. The increases in costs and operating expenses are primarily attributable to the increased level of work associated with our revenue increases.
Operating income increased by approximately $943 thousand or 57% for the third quarter of 2017 and approximately $5 million or 108% for the first nine months of 2017, compared to the same periods of 2016. The increases in operating income resulted primarily from an increase of award fees earned on our FMS Program of approximately $2.3 million for the first nine months; from an improvement in profit margins on vehicle and equipment refurbishment, maintenance, and sustainment work supporting various U.S. Army and Army Reserve programs; and from increases in revenues. Award fee evaluations on our FMS program occur three times per year. We typically recognize award fee revenue and income on this program in the first, second, and fourth quarters each year. Operating income was adversely affected by a contract related loss of approximately $1.2 million for the third quarter and approximately $1.6 million for the first nine months of 2017. We expect no further loss on this contract prior to its expected completion in the fourth quarter of 2017.
Financial Condition
There has been no material adverse change in our financial condition in the first nine months of 2017. Changes to asset and liability accounts were due primarily to our earnings, our level of business activity, the timing of inventory purchases, contract delivery schedules, subcontractor and vendor payments required to perform our contract work, and the timing of associated billings to and collections from our customers.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased approximately $44 thousand during the first nine months of 2017.
Cash provided by operating activities increased approximately $11.1 million in the first nine months of 2017 as compared to the first nine months of 2016. The change is primarily attributable to an increase of approximately $6.3 million due to changes in the levels of operating assets and liabilities, an increase of approximately $2.7 million in non-cash operating activities, and an increase of approximately $2.1 million in cash provided by net income.
A significant portion of our accounts payable decreases in the first nine months of 2017 resulted from payments for inventory purchases made by our Aviation Group and subcontractor work performed on our FMS program in 2016. Our levels of inventory, accounts receivable and accounts payable may fluctuate depending on the timing of services ordered and products sold, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received for services. Such timing differences have the potential to cause significant increases and decreases in our inventory, accounts receivable, and accounts payable balances in short time periods, and accordingly, can cause significant increases or decreases in our cash provided by operations.
Cash used in investing activities decreased approximately $3.7 million in the first nine months of 2017 as compared to the first nine months of 2016. Cash used in investing activities consisted primarily of purchases of property and equipment.
Cash used in financing activities increased approximately $14.6 million in the first nine months of 2017 as compared to the first nine months of 2016. Cash used in financing activities in 2017 consisted primarily of bank borrowing repayments and payment of dividends. Cash used in financing activities in 2016 consisted primarily of earn-out obligation payments associated with the acquisition of our aviation businesses and payment of dividends.
We paid cash dividends totaling approximately $2.1 million or $0.19 per share in the first nine months of 2017. Our payment of cash dividends is subject to restrictions in our loan agreement, including a restriction on the annual aggregate amount of dividends we may pay. We have paid cash dividends each year since 1973 and have increased our dividend each year since 2004.
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 impactaffect our liquidity. Our inventory and accounts payable levels can be affected by the timingIn addition to operating cash flows, other significant factors that affect our overall management of large opportunistic inventory purchases. Our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform, by the timing of large materials purchases and subcontractor efforts
used in our contracts, and by delays in the award of contractual coverage and funding and payments. Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.
We also purchase property and equipment; investliquidity include capital expenditures; investments in expansion, improvement, and maintenance of our operational and administrative facilities; and investinvestments in the acquisition of other companies.businesses.
Our primary source of external financing consists of ais from our loan agreement with a bank group that provides forand includes a term loan facility and a revolving loans, andloan facility, which also provides for letters of credit. The termination date of the loan agreement is January 2020. This agreement was implemented in January 2015 concurrent with the acquisition of our aviation businesses. Our outstanding debt of approximately $180.8 million as of September 30, 2017 was net of unamortized deferred financing costs of approximately $1.3 million.
The term loan requires quarterly installment payments. Our required term loan payments after September 30, 2017 are approximately $5.6 million in 2017, $28.1 million in 2018, $30.0 million in 2019, and $36.3 million in 2020. The amount of term loan borrowings outstanding as of September 30, 2017 was $100 million.
The maximum amount of credit available to us under our loan agreement for revolving loans and letters of credit as of September 30, 2017 was $150is $350 million. We may borrow and repayUnder the revolving loan borrowings as our cash flows require or permit. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $82.1 million in revolving loan amounts outstanding and no letters of credit outstanding as of September 30, 2017. The timing of certain payments made and collections received associated with our inventory, subcontractor, and materials requirements and other operating expenses can cause fluctuations in our outstanding revolving loan amounts. Delays in government funding of our work performed can also cause additional borrowing requirements.
Under our loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or a combination of both facilities, upsubject to ancustomary lender commitment approvals. The aggregate additional amountlimit of $75incremental increases is $100 million.
We pay interest on Our bank debt increased approximately $12.5 million for the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin.nine months ended September 30, 2022. As of September 30, 2017, the LIBOR base margin was 2.00% and the base rate base margin was 0.75%. The base margins increase or decrease in steps as our Total Funded Debt/EBITDA Ratio increases or decreases.
Our loan agreement requires us to have interest rate hedges on a portion of the outstanding2022, we had term loan for the first three yearsborrowings outstanding of the agreement.$48.9 million, revolving loan borrowings outstanding of $250.3 million, and letters of credit outstanding of $1.2 million. We executed compliant interest rate hedges in February 2015. had approximately $98 million of unused bank loan commitments as of September 30, 2022.
As of September 30, 2017, the effective interest rate on our hedged debt was 3.25% and interest rates on portions of our outstanding unhedged debt ranged from 3.24% to 5.00%. The effective interest rate on our aggregate outstanding debt was 3.36%.
Our loan agreement contains collateral requirements to secure our loan obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. We2022, we were in compliance with the financial covenantsrequired ratios and other terms and conditions at September 30, 2017.of our loan agreement.
Bank Loan Amendment
On October 7, 2022, we entered into a fourth amendment to our loan agreement which, among other things, provides for the following: (i) an extension of the maturity date from July 23, 2024 to October 7, 2025; (ii) a reset of the aggregate principal amount of the term loan to $100.0 million; (iii) a modification to the amortization payments on the term loan from $3.75 million quarterly to $2.50 million quarterly; (iv) an increase in the maximum total leverage ratio from 4.25x to 4.50x, with such ratios decreasing thereafter as indicated in the table below; (v) a change in the benchmark rate from LIBOR to SOFR with a SOFR floor of 0.00%; and (vi) a corresponding change in pricing to account for the change from LIBOR to SOFR.
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| | | | | | | |
Testing Period | | Current Maximum Total Funded Debt to EBITDA Ratio | | Actual Ratio |
Total Funded Debt/EBITDA RatioFrom the Fourth Amendment Effective Date through and including June 30, 2023 | | 3.004.50 to 1.00 |
From July 1, 2023 through and including December 31, 2023 | | 2.194.25 to 1.00 |
From January 24, 2024 through and including June 30, 2024 | | 4.00 to 1.00 |
From July 1, 2024 through and including September 30, 2024 | | 3.75 to 1.00 |
From October 1, 2024 and thereafter | | 3.50 to 1.00 |
Cash Flows
The following table summarizes our cash flows for the nine months endedSeptember 30, 2022 and 2021 (in thousand):
| | | | | | | | | | | | | | | | | | |
| | | | Nine months ended September 30, |
| | | | | | 2022 | | 2021 |
Net cash used in operating activities | | | | | | $ | (4,206) | | | $ | (30,523) | |
Net cash used in investing activities | | | | | | (3,181) | | | (59,839) | |
Net cash provided by financing activities | | | | | | 6,959 | | | 90,367 | |
Net (decrease) increase in cash and cash equivalents | | | | | | $ | (428) | | | $ | 5 | |
Cash used in operating activities decreased $26.3 million for the nine months ended September 30, 2022 as compared to the same period in the prior year. The decrease was primarily due to lower use of cash for inventory purchases and timing of vendor payments partially offset by increased accounts receivable as a result of revenue growth and timing of collections.
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| | | | |
| | Minimum Ratio | | Actual Ratio |
Fixed Charge Coverage Ratio | | 1.20 to 1 | | 1.99 to 1 |
Cash used in investing activities decreased $56.7 million for the nine months ended September 30, 2022 as compared to the same period in the prior year. The decrease was primarily due to cash paid for acquisitions, net of cash acquired, of $53.2 million related to the acquisitions of our HSS and Global Parts subsidiaries in the prior year period.
Cash provided by financing activities decreased $83.4 million for the nine months ended September 30, 2022, as compared to the same period in the prior year. The decrease was primarily due to $52.0 million of proceeds received in the prior year period related to our public underwritten offering of our common stock in February 2021 andoverall lower proceeds from net borrowings of our debt during the current period.
We currently dopaid cash dividends totaling $3.8 million or $0.30 per share during the nine months ending September 30, 2022. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.
Other Obligations and Commitments
There have not use public debt security financing.been any material changes to our other obligations and commitments that were included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Inflation and Pricing
Most of our contracts under which services are performed for the government provide for estimates of future labor costsThere have not been any material changes to be escalated for any option periods, while the non-labor coststhis disclosure from those discussed in our contracts are normally considered reimbursable at cost. Our property and equipment consists principally of land, buildings and improvements, shop and warehouse equipment, computer systems equipment, and furniture and fixtures. most recently filed Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not expect the overall impact of inflationhave any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on replacement costs of our property and equipment to be material to our futurefinancial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or financial condition.capital resources.
Disclosures About Market Risk
Interest RatesRate Risk
Our bank loan agreement provides available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. To mitigate the risks associated with futureWe enter into interest rate movements we have employedswap agreements from time to time to manage or hedge our interest rate hedgesrisks.
In July 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% for a total notional amount of $150 million in order to fix the rate onhedge a portion of our outstanding borrowings for various periods.floating rate debt. The resulting fixed ratestenor of these swaps will begin on this portion of our debt have given us protection against interest rate increases.
In February 2015, we entered into a LIBOR based interest rate swap on our term loanOctober 31, 2022 and is for a term of four years with a notional amount of $100 million. The swap amount on our term loan decreases in increments on an annual basis. As offive years. Subsequent to September 30, 2017, the amount of the term loan swap was $60 million and with the term loan swap in place, we pay an effective interest rate of 1.25% plus our base margin. Also in February 2015,2022, on October 7, 2022, we entered into an amendment to our loan agreement. Among other things, the amendment provides for a modification of the reference rate from LIBOR basedto SOFR. See Notes (4) "Debt" and (8) "Fair Value Measurements," of Notes to our Unaudited Consolidated Financial Statements in Item 1 of this report for additional information regarding our debt and interest rate swapswaps.
There have been no material changes, other than discussed above, to our market risks from those discussed in our most recently filed Annual Report on Form 10-K.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results
could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in our 2021 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2022 from those disclosed in our most recently filed Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our revolving loan for a termconsolidated financial statements, see Note (1) "Nature of three years with a notional amountBusiness and Significant Accounting Policies — Recent Accounting Pronouncements” of $25 million. Asthe Notes to our Unaudited Consolidated Financial Statements in Item 1 of September 30, 2017, with the revolving loan swap in place, we pay an effective rate of 1.25% plus our base margin.this report.
VSE CORPORATIONS AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risks
See "Disclosures About Market Risk" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
AsEvaluation of the end of the period covered by this report, based on management's evaluation,Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")),. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures arewere effective in ensuringto ensure that information we are required to be disclosed by usdisclose in reports filedthat we file or submittedsubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC rules and forms and that such information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executiveChief Executive Officer and principal financial officers, or persons performing similar functions,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There washave been no changechanges in our internal control over financial reporting during our third quarter of fiscal 2017the quarterly period covered by this report that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
In 2012,None.
Item 1A. Risk Factors
There have been no material changes to the estates of five deceased individuals and their relatives filed complaintspreviously disclosed risk factors in a state courtour Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K”). The risk factors disclosed in Hawaii against VSE and other entities and individuals for unspecified damages, alleging that the explosion of fireworks and diesel fuel that killed the five individuals in April 2011 was caused by negligence of VSE and the other defendants. The five deceased plaintiffs were employees of a vendor retained by VSE to dispose of fireworks and other explosives seized by the federal government. In September 2017, VSEour 2021 Form 10-K should also be considered together with its insurance carriers, agreedinformation included in principle with allthis Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and under "Forward-Looking Statements" and "Management's Discussion and Analysis of the plaintiffs to settle this litigation. The settlement documents are being finalizedFinancial Condition and the settlement will be fully funded by VSE’s insurers, resulting in no material adverse effect on our resultsResults of operations, financial condition, or cash flows.Operations."
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not purchase any of our equity securities during the period covered by this report.
VSE's loan agreement prohibits VSE from paying cash dividends, except that if there is no event of default, no act, event or condition that would constitute an event of default with the giving of notice or the passage of time, or both, and no covenant breach would occur giving effect to the payment of the dividend, VSE may pay cash dividends that do not exceed $6 million in the aggregate in any fiscal year.
Item 6. Exhibits
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(a) Exhibits | | |
Exhibit 10.1 | | |
Exhibit 31.1 | | |
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Exhibit 101.INS | | XBRL Instance Document |
Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document |
Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
Exhibit 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Document |
Exhibit 104 | | The cover page from this Quarterly Report on Form 10-Q, formatted in inline XBRL. |
Pursuant to the requirements
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | VSE CORPORATION |
| | | |
Date: | October 27, 2022 | By: | VSE CORPORATION/s/ John A. Cuomo |
Date: | October 27, 2017 | By: | /s/ M.John A. GauthierCuomo |
| | | M. A. Gauthier |
| | | Director, Chief Executive Officer and President |
| | | President and Chief Operating Officer(Principal Executive Officer) |
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Date: | October 27, 20172022 | By: | /s/ T. R. LoftusStephen D. Griffin |
| | | T. R. LoftusStephen D. Griffin |
| | | ExecutiveSenior Vice President and |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Principal Accounting Officer) |
| | | |