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VSE Corporation Announces Second Quarter 2022 Results

·12-min read

Revenue Increased 38% Year-over-Year; Record Setting $105 Million Revenue Quarter for Aviation

ALEXANDRIA, Va., July 27, 2022--(BUSINESS WIRE)--VSE Corporation (NASDAQ: VSEC, "VSE", or the "Company"), a leading provider of aftermarket distribution and maintenance, repair and overhaul ("MRO") services for land, sea and air transportation assets for government and commercial markets, today announced results for the second quarter 2022.

SECOND QUARTER 2022 RESULTS

(As compared to the Second Quarter 2021)

  • Total Revenues of $241.7 million increased 38%

  • GAAP Net Income of $7.5 million increased $19.9 million

  • GAAP EPS (Diluted) of $0.59 increased $1.56

  • Adjusted EBITDA of $22.9 million increased 21%

  • Adjusted Net Income of $9.6 million increased 25%

  • Adjusted EPS (Diluted) of $0.75 increased 25%

Aviation segment revenue increased 121% year-over-year to a record $105.0 million in the second quarter 2022. The year-over-year revenue improvement was attributable to share gains within the Business and General Aviation (B&GA) market and continued commercial end-market recovery. Aviation distribution and repair revenue increased 177% and 37%, respectively, in the second quarter 2022 versus the prior-year period. The Aviation segment reported operating income of $6.5 million in the second quarter, compared to an operating loss of $22.3 million in the same period of 2021. Segment adjusted EBITDA increased by 198% in the second quarter to $11.9 million, versus $4.0 million in the prior-year period. Adjusted EBITDA margin was 11.4%, an increase of 293 basis points versus the prior-year period, driven by execution of new program awards and end-market recovery.

Fleet segment revenue increased 12% year-over-year to $64.7 million in the second quarter 2022. Revenues from commercial customers increased 48% on a year-over-year basis, driven by growth in commercial fleet demand and e-commerce fulfillment sales. Commercial revenue represented 40% of total Fleet segment revenue in the period. Segment adjusted EBITDA increased 10% year-over-year to $7.7 million, while adjusted EBITDA margin was 12.0%, flat with the prior-year period.

Federal and Defense segment revenue increased 3% year-over-year to $72.0 million in the second quarter 2022, driven by growth in the Foreign Military Sales (FMS) program with the U.S. Navy along with a steady increase in Defense Logistics Agency (DLA) distribution services, offset by the expiration of a certain U.S. Army contract. Segment adjusted EBITDA declined 58% year-over-year to $3.4 million in the period, given a higher mix of cost-plus contracts. Funded backlog decreased 1% year-to-date to $183 million while bookings decreased 9% year-to-date, primarily driven by the expiration of a certain U.S. Army contract.

STRATEGIC UPDATE

During the second quarter, VSE continued to effectively execute its business transformation roadmap, with a focus on developing a market-leading aftermarket parts distribution and MRO services platform supporting higher-growth end-markets. Building long-term sustainable revenue channels, growing adjusted EBITDA, and optimizing legacy programs remain key focus areas for value creation. The Company’s second quarter results demonstrate strong execution on recently awarded new business, organic investments to drive growth, and the continued optimization of legacy programs.

Building Long-Term, Sustainable Revenue Channels:

  • During the second quarter, Aviation achieved its first-ever quarter exceeding $100M of revenue, growing more than 121% year-over-year, supported by growth in distribution and MRO revenue channels, and growth within both commercial and business and general aviation (B&GA) customer markets.

  • More than 50% of Aviation second quarter revenue is a result of the successful implementation of more than $1.5B of new awards signed in the last 18 months, and contributions from the 2021 Global Parts Group Inc. acquisition. VSE Aviation successfully launched new programs with a specific focus on the B&GA market. These programs expanded VSE's B&GA customer base from 100 in 2020 to over 3,000 unique B&GA customers in 2022. Further, all programs and integrations are performing ahead of initial expectations.

  • Aviation MRO revenue increased 37% versus the prior-year period, driven by higher B&GA flight activity and maintenance, as well as recovery within commercial MRO customers. New, organic repair capability additions and share of wallet expansion in the B&GA space contributed to this outperformance.

  • During the second quarter, Fleet continued to generate strong revenue growth across its commercial fleet and e-commerce fulfillment businesses, resulting in a 48% year-over-year increase in commercial revenue. The continued diversification strategy is reflected in commercial revenue now comprising 40% of Fleet segment total revenue, up from 10% in 2019. These results are driven by sustained program execution and strong end-market demand. The Fleet segment continues to expand operations and supply chain capabilities to meet growing demand.

  • The Federal and Defense segment won $4 million of new Distribution and Logistics Agency (DLA) awards in the second quarter, representing a 2.5x book-to-bill ratio year-to-date. This revenue channel builds on new capabilities, allowing the Federal and Defense segment to serve its customers by providing more comprehensive solutions for their global supply chain.

Growing Adjusted EBITDA:

  • Aviation segment adjusted EBITDA grew to $11.9 million in the second quarter, an increase of 198% versus the prior-year period. Increased MRO activity continued to drive margin expansion. Commercial MRO revenue remains at approximately 75% of 2019 levels, in line with commercial airline end-market activity, and is anticipated to recover by 2024.

  • Fleet segment adjusted EBITDA grew to $7.7 million, up 10% year-over-year. The segment's strong focus on commercial growth continues, underpinned by robust class 4-8 and heavy-duty vehicle aftermarket activity.

Optimizing Legacy Programs:

  • Fleet segment's USPS revenue grew to $36.9 million, up 4% in the second quarter versus the prior-year period. Servicing all vehicle types in the 230,000+ USPS vehicle fleet, the Fleet segment continues its long history of serving as an essential part of USPS maintenance operations in support of their complex supply chain.

  • Federal and Defense revenue on the Naval Sea Systems Command (NAVSEA) contract increased 43% year-over-year in the second quarter of 2022, primarily resulting from efforts related to Foreign Military Sales (FMS) support in Bahrain.

MANAGEMENT COMMENTARY

"During the second quarter, we continued to advance our growth and diversification strategy, while demonstrating focused execution on new program wins, both of which contributed to strong year-over-year growth in revenue and profitability," stated John Cuomo, President and CEO of VSE Corporation. "We delivered another record-revenue quarter within both Aviation and commercial Fleet, leveraging our customer-centric aftermarket distribution and MRO value proposition. Our results for the first half of 2022 demonstrate the strength and resiliency of the VSE team, and the demand for our products and services in the growing, fragmented markets we serve."

"Our Aviation segment reported a record quarter, as revenue increased 121% on a year-over-year basis to more than $105 million, while adjusted EBITDA margin increased 293 basis points to 11.4% in the second quarter," continued Cuomo. "This performance was supported by a combination of recent market share gains, together with improved demand within both commercial aviation and B&GA end-markets. The Aviation segment continues to execute with excellence on both legacy and new programs wins."

"Within our Fleet segment, commercial revenue increased 48% on a year-year basis in the second quarter, supported by demand across both our commercial fleet and e-commerce channels," continued Cuomo. "We will continue to make investments in this growing market, as our customers value our team's ability to solve their complex supply chain distribution challenges."

"We generated strong momentum across all of our business segments in the first half of 2022," stated Stephen Griffin, CFO of VSE Corporation. "Our second quarter adjusted EBITDA of $22.9 million, up $4.0 million year-over-year, supports the growth and profitability outlook we communicated in first quarter 2022," continued Griffin. "As previously communicated, we expect to generate positive cash flow for the full year, as well as a corresponding improvement in net leverage. We look forward to updating shareholders on the progress of our strategy during our Investor Day later this year."

FINANCIAL RESOURCES AND LIQUIDITY

As of June 30, 2022, the Company had $91 million in cash and unused commitment availability under its $350 million revolving credit facility maturing in 2024. As of June 30, 2022, VSE had total net debt outstanding of $308 million and $84.3 million of trailing-twelve months adjusted EBITDA.

SECOND QUARTER RESULTS

Three months ended June 30,

Six months ended June 30,

(in thousands, except per share data)

2022

2021

% Change

2022

2021

% Change

Revenues

$

241,713

$

175,112

38.0

%

$

472,952

$

340,093

39.1

%

Operating income (loss)

$

14,151

$

(12,714

)

NM(1)

$

26,065

$

(3,111

)

NM(1)

Net income (loss)

$

7,548

$

(12,366

)

NM(1)

$

13,792

$

(7,255

)

NM(1)

EPS (Diluted)

$

0.59

$

(0.97

)

NM(1)

$

1.08

$

(0.59

)

NM(1)

(1) Not meaningful as prior period was a net loss

SECOND QUARTER SEGMENT RESULTS

The following is a summary of revenues and operating income (loss) for the three and six months ended June 30, 2022 and June 30, 2021:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

% Change

2022

2021

% Change

Revenues:

Aviation

$

105,019

$

47,515

121.0

%

$

198,309

$

91,886

115.8

%

Fleet

64,742

58,057

11.5

%

131,772

112,804

16.8

%

Federal & Defense

71,952

69,540

3.5

%

142,871

135,403

5.5

%

Total revenues

$

241,713

$

175,112

38.0

%

$

472,952

$

340,093

39.1

%

Operating income (loss):

Aviation

$

6,450

$

(22,272

)

NM(1)

$

14,072

$

(22,604

)

NM(1)

Fleet

5,366

4,000

34.2

%

11,747

9,741

20.6

%

Federal & Defense

2,552

6,999

(63.5

)%

1,864

12,024

(84.5

)%

Corporate/unallocated expenses

(217

)

(1,441

)

(84.9

)%

(1,618

)

(2,272

)

(28.8

)%

Operating income (loss)

$

14,151

$

(12,714

)

(211.3

)%

$

26,065

$

(3,111

)

(937.8

)%

(1) Not meaningful as prior period was a net loss

The Company reported $1.5 million and $2.7 million of total capital expenditures for three and six months ended June 30, 2022.

NON-GAAP MEASURES

In addition to the financial measures prepared in accordance with generally accepted accounting principles ("GAAP"), this earnings release also contains Non-GAAP financial measures. These measures provide useful information to investors, and a reconciliation of these measures to the most directly comparable GAAP measures and other information relating to these Non-GAAP measures is included in the supplemental schedules attached.

NON-GAAP FINANCIAL INFORMATION

Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Net income (loss)

$

7,548

$

(12,366

)

$

13,792

$

(7,255

)

Adjustments to net income:

Acquisition, integration and restructuring costs

344

236

632

546

Executive transition costs

905

905

Inventory reserve

24,420

24,420

Non-recurring professional fees

218

Forward contract loss provision

3,482

Russia/Ukraine conflict (1)

2,335

2,335

10,227

13,195

20,459

18,616

Tax impact of adjusted items

(669

)

(5,541

)

(1,665

)

(5,619

)

Adjusted net income

$

9,558

$

7,654

$

18,794

$

12,997

Weighted average dilutive shares

12,811

12,702

12,807

12,391

Adjusted EPS (Diluted)

$

0.75

$

0.60

$

1.47

$

1.05

(1) Adjustment represents a non-cash charge recorded to reduce the carrying amount of accounts receivable and inventory related to the Russia/Ukraine military conflict.

Reconciliation of Consolidated EBITDA and Adjusted EBITDA to Net Income

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Net income (loss)

$

7,548

$

(12,366

)

$

13,792

$

(7,255

)

Interest expense

3,872

2,666

7,481

5,696

Income taxes

2,731

(3,014

)

4,792

(1,552

)

Amortization of intangible assets

4,437

4,603

9,173

8,891

Depreciation and other amortization

1,659

1,424

3,258

2,784

EBITDA

20,247

(6,687

)

38,496

8,564

Acquisition, integration and restructuring costs

344

236

632

546

Executive transition costs

905

905

Inventory reserve

24,420

24,420

Non-recurring professional fees

218

Forward contract loss provision

3,482

Russia/Ukraine conflict (1)

2,335

2,335

Adjusted EBITDA

$

22,926

$

18,874

$

45,163

$

34,435

(1) Adjustment represents a non-cash charge recorded to reduce the carrying amount of accounts receivable and inventory related to the Russia/Ukraine military conflict.

Adjusted EBITDA Summary

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

% Change

2022

2021

% Change

Aviation

$

11,935

$

4,009

197.7

%

$

22,798

$

6,231

265.9

%

Fleet

7,741

7,041

9.9

%

16,532

15,122

9.3

%

Federal & Defense

3,443

8,123

(57.6

)%

7,209

13,902

(48.1

)%

Adjusted Corporate expenses (2)

(193

)

(299

)

(35.5

)%

(1,376

)

(820

)

67.8

%

Adjusted EBITDA

$

22,926

$

18,874

21.5

%

$

45,163

$

34,435

31.2

%

(2) Includes certain adjustments not directly attributable to any of our segments.

Reconciliation of Segment EBITDA and Adjusted EBITDA to Operating Income (Loss)

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Aviation

Operating income (loss)

$

6,450

$

(22,272

)

$

14,072

$

(22,604

)

Depreciation and amortization

3,110

2,554

6,145

5,108

EBITDA

9,560

(19,718

)

20,217

(17,496

)

Acquisition, integration and restructuring costs

40

246

Inventory reserve

23,727

23,727

Russia/Ukraine conflict (1)

2,335

2,335

Adjusted EBITDA

$

11,935

$

4,009

$

22,798

$

6,231

Fleet

Operating income

$

5,366

$

4,000

$

11,747

$

9,741

Depreciation and amortization

2,246

2,348

4,575

4,688

EBITDA

7,612

6,348

16,322

14,429

Acquisition, integration and restructuring costs

129

210

Inventory reserve

693

693

Adjusted EBITDA

$

7,741

$

7,041

...