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VSE Corporation Announces Third Quarter 2022 Results

ALEXANDRIA, Va., October 26, 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 third quarter 2022.

THIRD QUARTER 2022 RESULTS

(As compared to the Third Quarter 2021)

  • Total Revenues of $242.5 million increased 21%

  • GAAP Net Income of $9.4 million decreased 4%

  • GAAP EPS (Diluted) of $0.73 decreased 3%

  • Adjusted EBITDA of $24.0 million increased 12%

  • Adjusted Net Income of $9.8 million remained flat

  • Adjusted EPS (Diluted) of $0.76 remained flat

MANAGEMENT COMMENTARY

"VSE delivered a strong quarter with growth in revenue, profitability and free cash flow; as our teams continue to successfully execute our long-term business transformation strategy," stated John Cuomo, President and CEO of VSE Corporation. "All three business segments reported year-over-year revenue growth, with the Aviation and Fleet segments recording their highest year-to-date revenue in company history," continued Cuomo.

"Our Aviation segment reported revenue increases of 40% and an adjusted EBITDA increase of 86% or 326 basis points in the third quarter. Strong margins drove the quarter, along with revenue increases supported by growth in both MRO and distribution across all customer market segments. In addition to a strong quarter of financial results and program execution, we announced significant new business that expands our geographic presence and leverage our proven distribution and product line management capabilities. These include four new exclusive distribution agreements valued at approximately $350 million," continued Cuomo.

"In the Fleet segment, commercial revenue increased by 23% on a year-over-year basis, representing approximately 40% of total Fleet segment revenue for the third consecutive quarter. To meet growing commercial demand and drive our revenue diversification strategy, we announced a new distribution facility outside of Memphis, Tennessee which will be dedicated to supporting commercial and e-commerce fulfillment customers," continued Cuomo.

"Through the first nine months of 2022, we’ve won significant new business, accelerated our long-term business transformation strategy, and generated strong year-over-year organic growth in revenue, net income, and EBITDA. I’m proud of the VSE team, the strong customer and supplier focused implementation of new programs, and the many recent new business awards," concluded Cuomo.

"Disciplined balance sheet management remains a key area of focus for our team," stated Stephen Griffin, CFO of VSE Corporation. "VSE generated strong free cash flow of $11.3 million in the third quarter, in line with our previously communicated expectations. In October, we amended the existing loan agreement with our commercial banking syndicate and extended the term to 2025. This amendment supports the flexibility to grow revenue through organic and inorganic investments, including the recent new business announcements. We expect strong cash flow to continue following these new investments, which will further our goal of driving sustainable, long-term revenue."

STRATEGIC UPDATE

During the third quarter, VSE continued to effectively execute its business transformation roadmap, with a focus on developing a leading aftermarket parts distribution and MRO services platform that addresses underserved, high-growth market segments. This value creation strategy is driven by a focus on new business and sustainable recurring revenue channels, growth in adjusted EBITDA, and optimization of legacy programs.

New Business and Long-Term, Sustainable Revenue Channels:

  • In October 2022, the Aviation segment announced an expansion of the existing Pratt & Whitney Canada distribution agreement to now include the Asia Pacific region. Under the terms of this new expanded agreement, VSE Aviation will provide engine spare parts and engine accessory exchange support to Business & General Aviation (B&GA) engine operators, customers, and maintenance providers throughout the Asia Pacific region. This 15-year agreement expands the Company’s international reach and builds upon the success of recent program execution excellence.

  • During the quarter, the Aviation segment secured a new 2-year agreement to distribute over 200,000 spare parts supporting Embraer business jets, including Phenom, Praetor, Legacy, and Lineage airframes. This new agreement builds on the VSE brand of supporting airframe OEMs with aftermarket support for both in-production and late-in-life stages in the B&GA market.

  • The Fleet segment revenue diversification strategy continued to progress in the quarter with commercial revenue growth of 23% year-over-year. Year-to-date commercial revenue represented 39% of total segment revenue.

  • 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 the greater Memphis, Tennessee area. This new, state-of-the-art, 425,000 square foot facility will double the company’s existing warehouse footprint. The facility is scheduled to begin servicing customers in the first quarter of 2023, with on-hand stock of more than 175,000 SKUs once fully operational.

  • The Federal & Defense segment secured $5 million in new bookings with the new VSE Distribution and Logistics capability and delivered a book to bill of 2.6x in the third quarter 2022. This new capability and revenue opportunity remains a growth channel for the segment.

Growing Adjusted EBITDA:

  • Aviation segment adjusted EBITDA grew to $13.6 million in the third quarter, an increase of 86% versus the prior-year period, with segment EBITDA margin expansion of +326 bps year-over-year. The successful implementation of recently awarded distribution programs and increased MRO activity drove profitability improvements.

  • Fleet segment adjusted EBITDA grew to $8.7 million, up 13% year-over-year. Steady contributions from USPS revenue combined with strong commercial growth contributed to adjusted EBITDA growth. Growing total segment adjusted EBITDA remains a critical component of Fleet segment strategy.

Optimizing Legacy Programs:

  • The Aviation segment secured multiple multi-year contract renewals supporting sustained revenue while expanding VSE's scope and improving cross-selling opportunities. In October 2022, VSE Aviation entered into two exclusive distribution agreements with an established OEM partner to distribute inertial reference systems globally and fuselage mounted antenna (FMA) systems in Europe, Middle East, Africa and India (EMEAI). The expanded agreements will generate revenue opportunities as both new and existing business jet customers leverage the full breadth of the Company’s combined distribution and repair capabilities.

  • Fleet segment USPS revenue grew to $39.1 million, up 7% in the third quarter versus the prior-year period. For the past 33 years, the Fleet segment has been, and continues to be, an essential part of USPS maintenance operations in support of its complex supply chain, servicing all vehicle types in the 230,000+ unit USPS fleet.

  • Federal & Defense segment revenue increased in the quarter supported by the Naval Sea Systems Command (NAVSEA) program, which increased 82% year-over-year in the third quarter, primarily resulting from Foreign Military Sales (FMS) support. Activity on our FMS Program increased over the past year, driven by work to transfer a naval frigate to Bahrain. Additionally, in August 2022, the Federal & Defense segment was awarded an $86 million ceiling addition to the existing NAVSEA bridge contract in support of FMS requirements for the Egyptian Navy, supporting follow on technical services through 2024.

SEGMENT RESULTS

Aviation segment revenue increased 40% year-over-year to a record $102.6 million in the third quarter 2022. The year-over-year revenue improvement was attributable to share gains within the B&GA market and continued commercial aftermarket recovery, aligned with global revenue passenger kilometers. Aviation distribution and repair revenue increased 35% and 55%, respectively, in the third quarter versus the prior-year period. The Aviation segment reported operating income of $10.0 million in the third quarter, compared to $3.7 million in the same period of 2021. Segment adjusted EBITDA increased by 86% in the third quarter to $13.6 million, versus $7.3 million in the prior-year period. Adjusted EBITDA margins were 13.2%, an increase of 326 basis points versus the prior-year period, driven by execution of new program awards and continued end-market recovery.

Fleet segment revenue increased 7% year-over-year to $64.8 million in the third quarter 2022. Revenues from commercial customers increased 23% on a year-over-year basis, driven by growth in commercial fleet demand and e-commerce fulfillment sales. Commercial revenue represented more than 39% of total Fleet segment revenue in the period for the third consecutive quarter. Segment adjusted EBITDA increased 13% year-over-year to $8.7 million, while adjusted EBITDA margin was 13.5%, an increase of 64 basis points versus the prior-year period.

Federal & Defense segment revenue increased 12% year-over-year to $75.1 million in the third 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. The Federal & Defense segment reported operating income of $1.9 million in the third quarter 2022. Segment adjusted EBITDA declined 57% year-over-year to $2.8 million in the period, given a higher mix of cost-plus contracts. Funded backlog increased 8% year-to-date to $199 million, while bookings increased 7% on a year-to-date basis.

FINANCIAL RESOURCES AND LIQUIDITY

As of September 30, 2022, the Company had $99 million in cash and unused commitment availability under its $350 million revolving credit facility maturing in 2024. As of September 30, 2022, VSE had total net debt outstanding of $298 million and $86.9 million of trailing-twelve months adjusted EBITDA.

In October 2022, the Company entered into an amendment to its loan agreement which, among other things, extended the maturity dates with respect to the revolving credit facility and term loan facility to October 2025, transitioned its index to Secured Overnight Financing Rate (SOFR) term rates, and lowered the applicable base margins with modified Total Funded Debt to EBITDA Ratio requirements.

THIRD QUARTER RESULTS

Three months ended September 30,

Nine months ended September 30,

(in thousands, except per share data)

2022

2021

% Change

2022

2021

% Change

Revenues

$

242,487

$

200,582

20.9

%

$

715,439

$

540,675

32.3

%

Operating income

$

17,272

$

13,892

24.3

%

$

43,337

$

10,781

302.0

%

Net income

$

9,419

$

9,021

4.4

%

$

23,211

$

1,766

1,214.3

%

EPS (Diluted)

$

0.73

$

0.71

2.8

%

$

1.81

$

0.14

1,192.9

%

THIRD QUARTER SEGMENT RESULTS

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

Three months ended September 30,

Nine months ended September 30,

(in thousands)

2022

2021

% Change

2022

2021

% Change

Revenues:

Aviation

$

102,625

$

73,124

40.3

%

$

300,934

$

165,010

82.4

%

Fleet

64,754

60,268

7.4

%

196,526

173,072

13.6

%

Federal & Defense

75,108

67,190

11.8

%

217,979

202,593

7.6

%

Total revenues

$

242,487

$

200,582

20.9

%

$

715,439

$

540,675

32.3

%

Operating income (loss):

Aviation

$

10,017

$

3,719

169.3

%

$

24,089

$

(18,885

)

NM(1)

Fleet

6,539

5,387

21.4

%

18,286

15,128

20.9

%

Federal & Defense

1,939

5,386

(64.0

)%

3,803

17,410

(78.2

)%

Corporate/unallocated expenses

(1,223

)

(600

)

103.8

%

(2,841

)

(2,872

)

(1.1

)%

Operating income

$

17,272

$

13,892

24.3

%

$

43,337

$

10,781

302.0

%

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

The Company reported $4.7 million and $7.4 million of total capital expenditures for three and nine months ended September 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 September 30,

Nine months ended September 30,

(in thousands)

2022

2021

2022

2021

Net income

$

9,419

$

9,021

$

23,211

$

1,766

Adjustments to net income:

Acquisition, integration and restructuring costs

353

876

985

1,422

Executive transition costs

84

905

Inventory reserve

24,420

Non-recurring professional fees

111

329

Forward contract loss provision

3,482

Russia/Ukraine conflict (1)

2,335

9,883

9,981

30,342

28,513

Tax impact of adjusted items

(116

)

(240

)

(1,781

)

(5,838

)

Adjusted net income

$

9,767

$

9,741

$

28,561

$

22,675

Weighted average dilutive shares

12,834

12,775

12,816

12,573

Adjusted EPS (Diluted)

$

0.76

$

0.76

$

2.23

$

1.80

(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 September 30,

Nine months ended September 30,

(in thousands)

2022

2021

2022

2021

Net income

$

9,419

$

9,021

$

23,211

$

1,766

Interest expense

4,818

2,780

12,299

8,476

Income taxes

3,035

2,091

7,827

539

Amortization of intangible assets

4,233

4,921

13,406

13,812

Depreciation and other amortization

1,986

1,599

5,244

4,383

EBITDA

23,491

20,412

61,987

28,976

Acquisition, integration and restructuring costs

353

876

985

1,422

Executive transition costs

84

905

Inventory reserve

24,420

Non-recurring professional fees

111

329

Forward contract loss provision

3,482

Russia/Ukraine conflict (1)

2,335

Adjusted EBITDA

$

23,955

$

21,372

$

69,118

$

55,723

(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 September 30,

Nine months ended September 30,

(in thousands)

2022

2021

% Change

2022

2021

% Change

Aviation

$

13,570

$

7,282

86.3

%

$

36,369

$

13,514

169.1

%

Fleet

8,719

7,732

12.8

%

25,251

22,854

10.5

%

Federal & Defense

2,778

6,498

(57.2

) %

9,987

20,401

(51.0

) %

Adjusted Corporate expenses (2)

(1,112

)

(140

)

694.3

%

(2,489

)

(1,046

)

138.0

%

Adjusted EBITDA

$

23,955

$

21,372

12.1

%

$

69,118

$

55,723

24.0

%

(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 September 30,

Nine months ended September 30,

(in thousands)

2022

2021

2022

2021

Aviation

Operating income (loss)

$

10,017

$

3,719

$

24,089

$

(18,885

)

Depreciation and amortization

3,413

3,062

9,558

8,171

EBITDA

13,430

6,781

33,647

(10,714

)

Acquisition, integration and restructuring costs

140

501

387

501

Inventory reserve

23,727

Russia/Ukraine conflict (1)

2,335

Adjusted EBITDA

$

13,570

$

7,282

$

36,369

$

13,514

Fleet

Operating income

$

6,539

$

5,387

$

18,286

$

15,128

Depreciation and amortization

2,037

2,345

6,611

7,033

EBITDA

8,576

7,732

24,897

22,161

Acquisition, integration and restructuring costs

143

354

Inventory reserve

...