vsec-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____ to _____

Commission File Number: 000-03676

VSE CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware			54-0649263
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

6348 Walker Lane

Alexandria,

Virginia

22310

(Address of Principal Executive Offices)

(Zip Code)

Registrant's Telephone Number, Including Area Code: (703) 960-4600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.05 per share

VSEC

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of Common Stock outstanding as of July 24, 2023: 15,372,544


	TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	4

	Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022	5

	Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022	6

	Unaudited Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2023 and 2022	8

	Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	9

	Notes to Unaudited Consolidated Financial Statements	10

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24

ITEM 4.	Controls and Procedures	24

PART II	OTHER INFORMATION

ITEM 1.	Legal Proceedings	25

ITEM 1A.	Risk Factors	25

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

ITEM 5.	Other Information	25

ITEM 6.	Exhibits	26

Signatures		27

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Table of Contents

Forward-Looking Statements

This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and this statement is included for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, the impact of widespread health developments, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, such as growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified elsewhere in this document, including in Item 1A, Risk Factors, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 9, 2023 (“2022 Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof.

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VSE Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


	June 30,		December 31,
(in thousands except share and per share amounts)	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	4,163	$	305
Receivables (net of allowance of $2.5 million and $2.0 million, respectively)	114,154		90,599
Unbilled receivables	6,229		7,409
Inventories	427,822		380,438
Other current assets	14,797		15,202
Current assets held-for-sale	107,059		54,925
Total current assets	674,224		548,878
Property and equipment (net of accumulated depreciation of $33.6 million and $30.7 million, respectively)	43,992		40,501
Intangible assets (net of accumulated amortization of $128.8 million and $121.3 million, respectively)	82,818		86,558
Goodwill	222,023		217,262
Operating lease - right-of-use assets	20,194		21,558
Other assets	30,220		29,019
Non-current assets held-for-sale	—		56,013
Total assets	$	1,073,471	$	999,789
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	10,000	$	10,000
Accounts payable	104,566		128,504
Accrued expenses and other current liabilities	30,295		31,889
Dividends payable	1,290		1,282
Current liabilities held-for-sale	64,070		52,929
Total current liabilities	210,221		224,604
Long-term debt, less current portion	365,110		276,300
Deferred compensation	7,651		7,398
Long-term operating lease obligations	17,609		19,154
Deferred tax liabilities	3,743		4,986
Non-current liabilities held-for-sale	—		17,821
Total liabilities	604,334		550,263
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,897,544 and 12,816,613, respectively	645		641
Additional paid-in capital	96,471		92,620
Retained earnings	366,690		351,297
Accumulated other comprehensive income	5,331		4,968
Total stockholders' equity	469,137		449,526
Total liabilities and stockholders' equity	$	1,073,471	$	999,789

The accompanying notes are an integral part of these consolidated financial statements.

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VSE Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	For the three months ended June 30,				For the six months ended June 30,
(in thousands except share and per share amounts)	2023		2022		2023		2022
Revenues:
Products	$	165,997	$	142,003	$	320,443	$	278,172
Services	39,226		27,758		73,367		51,909
Total revenues	205,223		169,761		393,810		330,081

Costs and operating expenses:
Products	147,139		129,617		282,388		250,714
Services	32,327		25,120		62,903		47,525
Selling, general and administrative expenses	1,519		473		3,564		1,180
Amortization of intangible assets	3,601		4,016		7,540		8,110
Total costs and operating expenses	184,586		159,226		356,395		307,529

Operating income	20,637		10,535		37,415		22,552
Interest expense, net	7,366		3,872		13,346		7,482
Income from continuing operations before income taxes	13,271		6,663		24,069		15,070
Provision for income taxes	3,182		1,908		5,860		4,026
Income from continuing operations	10,089		4,755		18,209		11,044
(Loss) income from discontinued operations, net of tax	(1,234)		2,793		(237)		2,748
Net income	$	8,855	$	7,548	$	17,972	$	13,792

Earnings (loss) per share:
Basic
Continuing operations	$	0.78	$	0.37	$	1.42	$	0.87
Discontinued operations	(0.10)		0.22		(0.02)		0.21
	$	0.68	$	0.59	$	1.40	$	1.08
Diluted
Continuing operations	$	0.78	$	0.37	$	1.42	$	0.87
Discontinued operations	(0.10)		0.22		(0.02)		0.21
	$	0.68	$	0.59	$	1.40	$	1.08

Weighted average shares outstanding:
Basic	12,886,100		12,778,355		12,865,394		12,760,026
Diluted	12,916,998		12,811,078		12,921,826		12,807,249

Dividends declared per share	$	0.10	$	0.10	$	0.20	$	0.20

The accompanying notes are an integral part of these consolidated financial statements.

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VSE Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2023		2022		2023		2022
Net income	$	8,855	$	7,548	$	17,972	$	13,792
Other comprehensive income, net of tax:
Change in fair value of interest rate swap agreements, net of tax	2,361		—		363		176
Total other comprehensive income, net of tax	2,361		—		363		176
Comprehensive income	$	11,216	$	7,548	$	18,335	$	13,968

The accompanying notes are an integral part of these consolidated financial statements.

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VSE Corporation and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)


	Three Months Ended June 30, 2023
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at March 31, 2023	12,886	$	644	$	94,577	$	359,124	$	2,970	$	457,315
Net income	—	—		—		8,855		—		8,855
Stock-based compensation	12	1		1,894		—		—		1,895
Other comprehensive income, net of tax	—	—		—		—		2,361		2,361
Dividends declared ($0.10 per share)	—	—		—		(1,289)		—		(1,289)
Balance at June 30, 2023	12,898	$	645	$	96,471	$	366,690	$	5,331	$	469,137


	Three Months Ended June 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at March 31, 2022	12,769	$	638	$	89,830	$	333,324	$	—	$	423,792
Net income	—	—		—		7,548		—		7,548
Stock-based compensation	26	2		1,221		—		—		1,223
Other comprehensive income, net of tax	—	—		—		—		—		—
Dividends declared ($0.10 per share)	—	—		—		(1,280)		—		(1,280)
Balance at June 30, 2022	12,795	$	640	$	91,051	$	339,592	$	—	$	431,283

The accompanying notes are an integral part of these consolidated financial statements.

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VSE Corporation and Subsidiaries

Consolidated Statements of Stockholders' Equity (continued)

(Unaudited)


	Six months ended June 30, 2023
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at December 31, 2022	12,817	$	641	$	92,620	$	351,297	$	4,968	$	449,526


Net income	—	—		—		17,972		—		17,972
Stock-based compensation	81	4		3,851		—		—		3,855
Other comprehensive income, net of tax	—	—		—		—		363		363
Dividends declared ($0.20 per share)	—	—		—		(2,579)		—		(2,579)
Balance at June 30, 2023	12,898	$	645	$	96,471	$	366,690	$	5,331	$	469,137


	Six months ended June 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at December 31, 2021	12,727	$	636	$	88,515	$	328,358	$	(176)	$	417,333
Net income	—	—		—		13,792		—		13,792
Stock-based compensation	68	4		2,536		—		—		2,540
Other comprehensive income, net of tax	—	—		—		—		176		176
Dividends declared ($0.20 per share)	—	—		—		(2,558)		—		(2,558)
Balance at June 30, 2022	12,795	$	640	$	91,051	$	339,592	$	—	$	431,283

The accompanying notes are an integral part of these consolidated financial statements.

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VSE Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	For the six months ended June 30,
(in thousands)	2023		2022
	(a)		(a)
Cash flows from operating activities:
Net income	$	17,972	$	13,792
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,011		12,430
Amortization of debt issuance cost	420		420
Deferred taxes	(1,533)		(790)
Stock-based compensation	3,894		2,675
Provision for inventory	742		1,094
Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables, net	(21,082)		(25,607)
Unbilled Receivables, net	(110)		(9,428)
Inventories, net	(45,580)		(16,145)
Other current assets and other assets	(1,274)		6,036
Operating lease assets and liabilities, net	(67)		(69)
Accounts payable and deferred compensation	(27,429)		(4,848)
Accrued expenses and other current and noncurrent liabilities	(3,055)		302
Net cash used in operating activities	(65,091)		(20,138)
Cash flows from investing activities:
Purchases of property and equipment	(6,137)		(2,746)

Proceeds from the payment on notes receivable	1,557		3,073
Cash paid for acquisitions, net of cash acquired	(11,711)		—
Net cash (used in) provided by investing activities	(16,291)		327
Cash flows from financing activities:
Borrowings on loan agreement	322,813		236,194
Repayments on loan agreement	(234,423)		(212,572)
Proceeds from issuance of common stock	456		486
Earn-out obligation payments	—		(1,000)

Payment of taxes for equity transactions	(1,031)		(892)
Dividends paid	(2,571)		(2,552)
Net cash provided by financing activities	85,244		19,664
Net increase (decrease) in cash and cash equivalents	3,862		(147)
Cash and cash equivalents, beginning of period	478		518
Cash and cash equivalents, end of period	$	4,340	$	371
(a) The cash flows related to discontinued operations and held-for-sale assets and liabilities have not been segregated, and remain included in the major classes of assets and liabilities. Accordingly, the Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.

The accompanying notes are an integral part of these consolidated financial statements.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

(1) Nature of Operations and Basis of Presentation

Nature of Operations

VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for transportation assets to commercial and government markets.

Basis of Presentation

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Form 10-K"). In our opinion, all adjustments, including normal recurring items, considered necessary for a fair presentation of results for the interim periods have been included in the accompanying unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023.

On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense segment. The consolidated financial statements present the Federal and Defense segment's results of operations as discontinued operations, and the related assets and liabilities as held-for-sale for all periods presented. See Note (3) "Discontinued Operations" for further discussion. Following the completion of the sale transaction, our operations are conducted under two operating segments: Aviation and Fleet.

Certain reclassifications have been made to the prior period financial information to reflect discontinued operations classification. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.

(2) Acquisitions

Precision Fuel Components, LLC

On February 1, 2023, our Aviation segment acquired Precision Fuel Components, LLC ("Precision Fuel") for a purchase price of $11.7 million. Precision Fuel provides MRO services for engine accessory and fuel systems supporting the business and general aviation ("B&GA") market. Our acquisition of Precision Fuel expanded our MRO capabilities and client base. Precision Fuel operating results are included in the accompanying consolidated financial statements beginning on the acquisition date. The acquisition was not material to our consolidated financial statements.

The preliminary allocation of the purchase price resulted in net tangible assets of $3.1 million, goodwill of $4.8 million, and contract and customer-related intangible asset of $3.8 million, which is being amortized over a period of five years. During the six months ended June 30, 2023, we incurred $0.2 million of acquisition-related expenses, which are included in selling, general and administrative expenses.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

(3) Discontinued Operations

On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense business to Bernhard Capital Partners Management LP for total consideration of up to $100.0 million, consisting of a $50.0 million cash payment at the closing of the transaction and an earn-out payment of up to $50.0 million subject to the achievement of certain milestones. The transaction is expected to close in late 2023 to early 2024 and is subject to customary closing conditions and approvals.

The results of operations from discontinued operations for the three and six months ended June 30, 2023 and 2022, consist of the following (in thousands):


	For the three months ended June 30,				For the six months ended June 30,
	2023		2022		2023		2022
Revenues	$	67,039	$	71,953	$	133,885	$	142,871
(Loss) income from discontinued operations before income taxes	$	(1,779)	$	3,616	$	(621)	$	3,514
Provision for income taxes	(545)		823		(384)		766
Net (loss) income from discontinued operations	$	(1,234)	$	2,793	$	(237)	$	2,748

The assets and liabilities reported as held for sale consist of the following (in thousands):


		June 30,		December 31,
		2023		2022
Assets
	Cash and cash equivalents	$	178	$	173
	Accounts receivable, net

SEC Form 10-Q filed by VSE Corporation