VSE Corporation — Form 10-Q Summary
Business Context and Reporting Period
VSE Corporation provides aviation distribution and maintenance, repair and overhaul services; fleet parts distribution and logistics; and federal and defense logistics and sustainment services. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
All businesses remained operational during the COVID-19 pandemic. Aviation demand weakened materially, while Fleet and Federal and Defense experienced comparatively limited disruption.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $168.7 million | $189.1 million | $346.1 million | $359.0 million |
| Operating income (loss) | $(21.9) million | $16.4 million | $(12.2) million | $28.2 million |
| Net income (loss) | $(22.6) million | $9.9 million | $(19.3) million | $16.5 million |
| Diluted EPS | $(2.05) | $0.89 | $(1.75) | $1.50 |
| Operating margin | (13.0)% | 8.7% | (3.5)% | 7.9% |
| Net margin | (13.4)% | 5.2% | (5.6)% | 4.6% |
| Cash flow from operations | Not separately reported for the quarter | $22.8 million | $4.1 million |
Products revenue increased to $85.7 million in the second quarter from $77.0 million, while services revenue declined to $83.0 million from $112.2 million. The company declared dividends of $0.09 per share for the quarter and $0.18 per share for the six-month period.
Segment Performance and Material Changes
- Aviation: Second-quarter revenue declined 41.4% to $32.2 million, and six-month revenue declined 13.5% to $90.3 million. The segment recorded operating losses of $34.4 million for the quarter and $36.3 million year to date, including a $33.7 million goodwill and intangible-asset impairment charge and divestiture-related losses.
- Fleet: Second-quarter revenue increased 32.4% to $71.2 million and six-month revenue increased 17.9% to $124.4 million. Operating income was $7.0 million for the quarter and $13.9 million year to date. Results included approximately $19.5 million of revenue from partial fulfillment of a non-recurring $26.6 million COVID-19-related supply order.
- Federal and Defense: Second-quarter revenue declined 18.7% to $65.3 million and six-month revenue declined 11.9% to $131.4 million, primarily because a large U.S. Army contract expired in January 2020. Operating income nevertheless increased to $6.8 million for the quarter and $11.7 million year to date, reflecting improved margins.
- Divestitures: Prime Turbines was sold in February 2020 for $20.0 million of cash and an $8.3 million note receivable, generating an approximately $7.5 million non-cash loss. CT Aerospace inventory and certain assets were sold in June 2020 for a $6.9 million note receivable, generating a $678 thousand loss.
- Goodwill and intangible assets: The company recorded a $30.9 million Aviation goodwill impairment and a $2.8 million impairment of CT Aerospace-related intangible assets. Aviation goodwill was reduced to approximately $144.1 million, while total goodwill was $238.1 million at June 30, 2020.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $213 thousand at June 30, 2020, compared with $734 thousand at December 31, 2019.
- Operating activities generated $22.8 million of cash in the first six months, compared with $4.1 million in the prior-year period. Inventory investment used $19.9 million of cash.
- Investing activities provided $21.3 million, primarily from proceeds from business and asset sales. Prior-year investing activities used $119.0 million, principally for the 1st Choice Aerospace acquisition.
- Financing activities used $44.7 million, including $31.7 million of earn-out payments and $9.7 million of net debt repayments. Total debt was $260.1 million, including $165.7 million of revolver borrowings and $97.4 million of term debt.
- The bank facility expires in January 2023 and provides $350 million of revolving capacity. Management reported approximately $184 million of unused commitments and no letters of credit outstanding at June 30, 2020.
- The June 2020 loan amendment increased covenant flexibility through 2021. The company was in compliance with its covenants at quarter-end and expected to remain compliant over the next twelve months, although further COVID-19 disruption could create risk.
- Debt carried an effective aggregate interest rate of 4.54%, with portions of outstanding debt ranging from 3.73% to 5.81%. Interest-rate swaps covered $145 million of debt.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance was provided. Management expects Aviation demand to remain depressed through the remainder of 2020, with recovery timing uncertain.
- Management expects COVID-19 to have a limited adverse impact on Fleet and Federal and Defense because of their essential-service and government customer bases. Fleet growth is expected to continue in e-commerce fulfillment, while Federal and Defense is focused on rebuilding bookings and backlog.
- Federal and Defense bookings declined 9% year over year to $112 million, and funded backlog declined 36% to $171 million, primarily because of the expired U.S. Army contract.
- The company implemented a workforce reduction and other cost actions expected to reduce annualized expenses by approximately $13 million.
- Key risks include prolonged aviation-market weakness, further goodwill or intangible-asset impairments, delayed Aviation receivable collections, higher credit losses, debt-covenant noncompliance, and potential acceleration of debt if covenant relief is insufficient.
- LIBOR is expected to be phased out by the end of 2021. The company is evaluating the potential effects on its variable-rate debt and interest-rate swaps.
- The filing reports no material legal proceedings and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether Aviation demand and margins recover as assumed and whether additional impairment charges are required.
- The sustainability of Fleet results after the non-recurring COVID-19 supply order.
- Federal and Defense bookings, funded backlog and replacement of the expired U.S. Army contract.
- Available revolver capacity, debt maturities, covenant compliance and the terms of the June 2020 amendment.
- Collection timing for Aviation receivables and the performance of notes receivable from the Prime Turbines and CT Aerospace divestitures.
- The effect of workforce reductions and other cost actions on future operating expenses.
- The transition from LIBOR and any resulting changes in borrowing costs or hedge effectiveness.