VSE Corporation 2020 Form 10-K Summary
Business context and reporting period
VSE Corporation is a diversified aftermarket products and services company serving U.S. government, defense, commercial transportation, aviation, fleet, logistics, supply-chain, information technology and energy markets. Operations are reported through Aviation, Fleet, and Federal and Defense segments.
The filing covers the fiscal year ended December 31, 2020, with unaudited quarterly data for the fourth quarter ended December 31, 2020. The company filed the Form 10-K on March 5, 2021.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $661.7 million | $752.6 million | Down 12% |
| Operating income | $13.9 million | $60.3 million | Down 77% |
| Operating margin | 2.2% | 8.0% | Down 5.8 points |
| Net income (loss) | $(5.2) million | $37.0 million | Declined $42.2 million |
| Diluted EPS | $(0.47) | $3.35 | Declined $3.82 |
| Cash provided by operating activities | $35.8 million | $18.0 million | Up $17.8 million |
| Capital expenditures | $4.4 million | $9.6 million | Down approximately $5.2 million |
| Cash and cash equivalents | $0.4 million | $0.7 million | Down $0.4 million |
| Total debt, net of issuance costs | $251.1 million | $270.0 million | Down $18.9 million |
| Working capital | $215.7 million | $191.2 million | Up $24.6 million |
Annual revenue mix was 25% Aviation, 37% Fleet, and 38% Federal and Defense. Government customers represented approximately 69% of revenue, including 36% from the Department of Defense and 33% from other government customers. Commercial revenue represented 31%.
Fourth-quarter revenue was $150.0 million, operating income was $11.9 million, and net income was $6.0 million, compared with fourth-quarter 2019 revenue of $195.3 million, operating income of $14.8 million, and net income of $10.0 million.
The company paid $4.0 million of dividends in 2020, or $0.36 per share. The quarterly dividend was $0.09 per share.
Segment performance and material changes
- Aviation: Revenue declined 26% to $165.1 million, principally because COVID-19 reduced commercial aviation demand and because Prime Turbines and CT Aerospace activities were divested. The segment reported a $35.5 million operating loss versus $17.9 million of operating income in 2019.
- Fleet: Revenue increased 13% to $242.2 million, supported by commercial growth and e-commerce fulfillment. Operating income declined 11% to $26.7 million because of product mix and a low-margin, nonrecurring $26.6 million COVID-19 supply order.
- Federal and Defense: Revenue declined 19% to $254.4 million, primarily because of the expiration of a large U.S. Army contract in January 2020 and two additional Army contracts later in the year. Operating income increased 45% to $26.3 million as lower-margin work declined and fixed-price contract margins improved.
- Divestitures: Prime Turbines was sold in February 2020 for $20.0 million in cash plus an $8.3 million note receivable. CT Aerospace inventory was sold in June 2020 for a $6.9 million note receivable. The transactions generated an aggregate $8.2 million loss on sale.
- Impairment: The company recorded $33.7 million of goodwill and intangible-asset impairment, including a $30.9 million goodwill charge related to VSE Aviation and a $2.8 million impairment of CT Aerospace-related intangible assets.
- Workforce and costs: A 2020 cost-reduction plan included workforce reductions and was expected to reduce annualized expenses by approximately $13 million. Employees decreased to approximately 1,900 at year-end from approximately 2,800 at year-end 2019.
Liquidity, debt and cash flow
Operating cash flow was $35.8 million. Investing activities provided $20.2 million, primarily from divestiture and property-sale proceeds. Financing activities used $56.3 million, including debt repayments, a $31.7 million earn-out payment, and dividends. Cash declined by approximately $0.4 million during the year.
At December 31, 2020, total principal debt was $253.5 million, consisting of $78.0 million of term debt and $175.5 million of revolver borrowings. The company had approximately $175.5 million of unused loan commitments under its $350 million revolving facility and no outstanding letters of credit. The facility expires in January 2023.
Required term-loan payments after year-end were approximately $21.6 million in 2021, $22.5 million in 2022, and $33.9 million in 2023; the revolver balance is also due in 2023 under the disclosed schedule. The weighted-average effective interest rate on aggregate debt was 4.80% at year-end. Borrowings reference LIBOR or a base rate, creating transition and variable-rate risk.
The company amended its credit agreement in June 2020 to increase covenant flexibility. It was in compliance with its covenants at December 31, 2020 and expected to remain compliant over the following twelve months, although further COVID-19-related deterioration could affect compliance.
Guidance, outlook, risks and unusual items
- Management expected Aviation demand to remain muted through the first half of 2021, with recovery dependent on broader commercial aviation conditions.
- Management expected COVID-19 to have a more limited effect on Fleet and Federal and Defense demand because of essential government, defense and e-commerce customers.
- Federal and Defense bookings increased 18% to $270 million, but funded backlog declined 14% to $183 million from $213 million, reflecting contract completions. Management is focused on rebuilding backlog and pursuing subsequent revenue growth.
- COVID-19 increased aviation receivable collection delays, bad-debt expense, inventory risk and impairment risk. The filing does not provide a clear standalone amount for COVID-19-related bad-debt expense.
- Remaining Aviation goodwill of approximately $144 million was identified as at risk of further impairment if the downturn is prolonged or forecast assumptions deteriorate.
- Other material risks include dependence on USPS and the Navy foreign military sales program, government funding and contract renewals, contract termination rights, audits and regulatory compliance, competition, workforce availability, cybersecurity, environmental liabilities, interest rates and LIBOR replacement.
- In February 2021, the company completed a common-stock offering that generated approximately $52 million of net proceeds. Intended uses included acquisitions, working capital and repayment of revolver borrowings.
- On March 1, 2021, the company acquired HAECO Special Services, LLC; management stated the acquisition was insignificant to the financial statements as a whole.
Investor verification checklist
- Verify the pace and durability of commercial aviation recovery and its effect on Aviation revenue, margins, receivables and inventory valuations.
- Assess the company’s ability to rebuild Federal and Defense funded backlog after the decline to $183 million.
- Review USPS purchasing volumes, fleet-replacement timing and the foreign military sales program for concentration and renewal risk.
- Confirm debt repayments, revolver refinancing or repayment plans before the January 2023 maturity and ongoing covenant compliance.
- Monitor the transition from LIBOR and the effect of variable interest rates on interest expense and cash flow.
- Evaluate the risk of additional Aviation goodwill or intangible-asset impairments.
- Reconcile the February 2021 equity offering, subsequent HAECO acquisition and use of proceeds with post-year-end leverage and share-count changes.
- Review the significant estimates underlying fixed-price contract revenue recognition and the company’s disclosed critical audit matters.