What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-03 compared with 2024-03-08 · 69 added, 91 removed, 171 unchanged (48% of the section changed)

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Business Overview

We are a leading provider of aftermarket distribution and maintenance, repair and overhaul ("MRO") services for air and land transportation assets for commercial and government markets.

VSE Corporation, through its subsidiaries (collectively, "VSE," the "Company," "we," "us," or "our"), is a leading provider of aftermarket distribution and maintenance, repair and overhaul ("MRO") services for air and land transportation assets for commercial and government markets.

Our operations are conducted within two reportable segments aligned with our operating segments:

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Sale of Federal and Defense Segment

In May 2023, we announced our decision to sell our Federal and Defense segment.

As a result, we have reported the results of operations for the Federal and Defense segment as discontinued operations for all periods presented.

In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets ("FDS Sale").

We have reported the results of operations for the Federal and Defense segment as discontinued operations for all periods presented.

See Note (3) "Discontinued Operations" to our Consolidated Financial Statements for further information.

In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets.

See Note (18) "Subsequent Events" for further information.

Acquisition of Turbine Controls, Inc.

On February 29, 2024, we signed a definitive agreement to acquire Turbine Controls, Inc.

("TCI"), a leading provider of aftermarket MRO support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications.

See Note (18) "Subsequent Events" for further information.

Sale of Fleet Segment

In February 2025, we entered into an agreement to sell the Fleet segment.

See Note (19) "Subsequent Event" for further information.

2024 Acquisitions

In February 2023, we completed the acquisition of Precision Fuel Components, LLC ("Precision Fuel"), a provider of MRO services for engine accessories and fuel systems supporting the business and general aviation ("B&GA") market.

In July 2023, we completed the acquisition of Desser Holding Company LLC ("Desser Aerospace"), a global aftermarket solutions provider of specialty distribution and MRO services.

In September 2023, we entered into an Asset Purchase and License Agreement with Honeywell International Inc.

to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems (the "Honeywell FCS Acquisition").

In April 2024, we completed the acquisition of Turbine Controls, Inc.

("TCI"), a leading provider of aftermarket MRO support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications.

In December 2024, we completed the acquisition of Kellstrom Aerospace Group, Inc.

("Kellstrom Aerospace"), a diversified global distributor and service provider supporting the commercial aerospace engine aftermarket.

See Note (2) "Acquisitions" to the consolidated financial statements for further information.

Underwritten Public Offering

In July 2023, we initiated a public offering of the Company's common stock relating to the issuance and sale of 2,846,250 shares at a public offering price of $48.50 per share.

The offering closed in two transactions, and net proceeds of $129.1 million were received by the Company, which were used to repay outstanding borrowings under our revolving credit facility and for general corporate purposes.

Underwritten Public Offerings

In May 2024, we initiated a public offering of the Company's common stock relating to the issuance and sale of 2,429,577 shares at a public offering price of $71.00 per share.

The offering closed in two transactions, and net proceeds of $162.0 million were received by the Company, which were used to repay outstanding borrowings under our revolving credit facility, including amounts borrowed to pay the purchase price of the TCI acquisition and for general corporate purposes.

In October 2024, we initiated a public offering of the Company's common stock relating to the issuance and sale of 1,982,757 shares at a public offering price of $87.00 per share.

The offering closed on October 17, 2024, and net proceeds of $163.8 million were received by the Company, which were used to finance a portion of the cash consideration for the Kellstrom Aerospace acquisition and repay outstanding borrowings under our revolving facility.

See Note (15) "Capital Stock" to the consolidated financial statements for further information.

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Aviation Segment

Our Aviation segment has seen favorable results due to successful investments in growth initiatives, resulting in a 33% increase in annual revenue, totaling $544 million in 2023.

The expansion of our distribution services was driven by strong execution of new and existing programs.

Our repair business experienced growth driven by increased market share in the commercial and B&GA sectors.

These factors, combined with our growth initiatives, led to a 29% increase in distribution revenue and a 46% increase in repair revenue in 2023 compared to the prior year.

In 2023, we secured key multi-year distribution deals for both domestic and new international markets, including an expansion of our flagship distribution agreement with Pratt & Whitney Canada supporting Europe, the Middle East, and Africa.

These new distribution initiatives are expected to drive sustainable and recurring revenue with growth opportunities, contributing to future positive results.

Investments in the Aviation segment are focused on businesses and programs that broaden our portfolio and reach new customers and geographies.

The February 2023 acquisition of Precision Fuel expands our product offerings and customer base, offering strategic cross-selling opportunities and market share in niche B&GA related markets.

The July 2023 acquisition of Desser Aerospace supports our tip-to-tail aircraft distribution and MRO services strategy and provides a platform for international expansion.

The September 2023 Honeywell FCS Acquisition allows us to exclusively manufacture and support certain of Honeywell's fuel control systems on four key engine platforms.

The Aviation segment is expected to see continued growth due to progress on new initiatives and recent acquisitions, offering a favorable outlook for 2024.

Our strong program execution of new and existing distribution awards, our expanded portfolio of MRO capabilities and contributions from recent acquisitions resulted in record revenue of $786 million for the year ended December 31, 2024, a 45% increase year-over-year.

Distribution and repair revenue increased 27% and 86%, respectively, during the year ended December 31, 2024, compared to the same period in the prior year.

Growth of our distribution business was driven by strong execution of new and existing programs, and contributions from recent acquisitions.

Our repair business's growth was driven by the expansion of new repair capabilities, market share gains in the commercial and business and general aviation ("B&GA") markets, improved throughput across our MRO facilities, and contributions from the TCI acquisition.

In 2024, we ramped up several multi-year distribution and repair programs for both domestic and new international markets, including an expansion of our flagship distribution agreement with Pratt & Whitney Canada supporting Europe, the Middle East, and Africa.

These new programs are expected to drive sustainable and recurring revenue with growth opportunities, contributing to future positive results.

Investments in the Aviation segment are focused on businesses and programs that broaden our portfolio of products, expand our repair capabilities and reach new customers and geographies.

The April 2024 acquisition of TCI strengthens our position in the commercial aviation engine MRO aftermarket, while providing additional opportunities for organic growth.

The December 2024 acquisition of Kellstrom Aerospace improves our position in the commercial aviation engine aftermarket, expands our aftermarket product and capability offerings, and broadens our global footprint.

The Aviation segment is expected to see continued growth due to progress on new and existing programs, an expansion of repair capabilities, and synergies from recent acquisitions.

Fleet Segment

Our Fleet segment continues to see growth in revenue from commercial fleet customers and e-commerce fulfillment, as the segment moves towards revenue diversification.

Fleet is executing its revenue diversification strategy by acquiring new customers and expanding product options for the e-commerce fulfillment business.

Fleet is executing its revenue diversification strategy by continuing to scale our Olive Branch, MS, e-commerce fulfillment distribution facility, acquiring new customers, and expanding product options for our commercial business.

Commercial customer revenue continues to experience strong growth, increasing 18% in 2024 compared to the prior year.

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In 2024, commercial revenues were 61% of total Fleet segment revenue compared to 48% in 2023, demonstrating the continued success of our revenue diversification strategy.

To support commercial revenue, Fleet opened a new distribution warehouse and e-commerce center of excellence in Olive Branch, MS (near Memphis, TN), in January 2023.

The new facility, which is 450,000 square feet, enhances Fleet's geographical coverage and product offerings for customers.

The launch of this new location allowed Fleet to keep up with the growing demand for e-commerce fulfillment.

Additionally, we generated steady revenue from our support of the United States Postal Services ("USPS") delivery vehicle fleet through supplying parts and managing inventory, with revenue increasing 8% in 2023 compared to the prior year.

We continue to monitor USPS vehicle procurement and are ready to support both new vehicles added to the fleet and existing vehicles still in service.

Our experience and understanding of the USPS' needs strategically position us to remain a key partner.

We are committed to remaining agile and supporting the USPS during its vehicle transition.

We expect continued growth within our commercial channels, coupled with stable contributions from the USPS.

The United States Postal Services ("USPS") revenue in 2024 decreased 30%, as compared to the prior year.

During 2024, USPS elected to migrate all of their vehicle maintenance facilities ("VMFs") to a new Fleet Management Information System ("FMIS"), resulting in a temporary decline in maintenance activity.

The transition to the new FMIS was completed in the third quarter of 2024.

As of the fourth quarter of 2024, maintenance activity has begun to improve, which has resulted in increased demand for our parts.

We remain committed to supporting the USPS as they emerge from their FMIS conversion.

Results of Operations

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$ 36,498 $ 43,152 $ (6,654) (15) %

Revenues increased $191.0 million, or 29%, in 2023 compared to 2022 due to revenue growth in our Aviation segment of $135.9 million and our Fleet segment of $55.1 million.

Revenues increased $219.6 million, or 26%, in 2024 compared to 2023 due to revenue growth in our Aviation segment of $242.2 million, partially offset by a decline in our Fleet segment of $22.6 million.

See "Segment Operating Results" section below for further discussion of revenues by segment.

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Operating Income.

Operating income increased $34.4 million, or 64%, in 2023 compared to 2022 attributable to increases of $34.8 million for our Aviation segment and $7.3 million for our Fleet segment.

Operating income decreased $6.6 million, or 7%, in 2024 compared to 2023 primarily attributable to an increase in corporate costs, including net lease abandonment and termination charges of $12.2 million, corporate restructuring charges of $4.2 million, and acquisition-related expenses incurred in connection with current year acquisitions, and a decrease in operating income for our Fleet segment of $14.2 million.

These operating income decreases were partially offset by an increase of $30.2 million for our Aviation segment.

See "Segment Operating Results" section below for further discussion of operating income by segment.

The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.

Interest Expense.

Interest expense increased approximately $13.2 million, or 74% in 2023 compared to 2022 primarily due to an increase in our debt facility borrowings and higher average interest rates on borrowings outstanding.

Interest expense increased approximately $3.9 million, or 12% in 2024 compared to 2023 primarily due to an increase in our average debt facility borrowings during the current period.

Provision for Income Taxes.

The effective tax rate for continued operations was 21.5% in 2024 compared to 24.2% in 2023.

The decrease in our effective tax rate primarily resulted from book income in connection with an increase in the fair market value of our corporate owned life insurance ("COLI") plan assets in 2023 versus book expense recorded in 2022.

For tax purposes, current year COLI book income was nontaxable income resulting in a reduction to our effective tax rate as opposed to 2022 nondeductible COLI loss that increased our effective tax rate.

The decrease in our effective tax rate primarily resulted from a favorable excess stock tax deduction and lower pre-tax book income in 2024.

Our tax rate is also affected by discrete items that may occur in any given year but may not be consistent from year to year.

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$ 101,387 $ 71,168 $ 30,219 42 %

Profit percentage

12.9 % 13.1 %

Revenues increased $242.2 million, or 45%, in 2024 compared to 2023.

Distribution revenue increased $86.2 million, or 29%, driven by strong program execution on new and existing distribution contracts and contributions from the acquisition of Desser Aerospace (which occurred in July 2023).

Repair revenue increased $49.8 million, or 46%, driven by an expansion of repair capabilities, improved end market demand, and share gains with commercial and B&GA customers.

Distribution revenue increased $106.3 million, or 27%, driven by strong program execution on new and existing distribution programs and contributions from the acquisitions of Desser Aerospace (July 2023) and Kellstrom Aerospace (December 2024).

Repair revenue increased $135.9 million, or 86%, driven by an expansion of repair capabilities, improved end market demand, share gains with commercial and B&GA customers, and contributions from the acquisition of TCI (April 2024).

Costs and Operating Expenses.

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Expense for amortization of intangible assets increased $5.9 million in 2024 to $17.6 million from $11.7 million in 2023 driven by newly acquired intangibles in connection with acquisitions completed in the current year.

Expense for allocated corporate costs was $12.9 million for 2023 and 2022, respectively.

Expense for allocated corporate costs was $18.5 million for 2024 as compared to $12.9 million for 2023.

Operating Income.

Operating income increased $34.8 million, or 95%, in 2023 compared to 2022 primarily due to revenue growth and a favorable shift in sales mix and pricing.

Operating income increased $30.2 million, or 42%, in 2024 compared to 2023 primarily due to revenue growth and a favorable shift in sales mix and pricing, partially offset by an increase in intangible amortization and allocated corporate costs.

Fleet Segment Results

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Operating income $ 17,018 $ 31,257 $ (14,239) (46) %

Revenues increased $55.1 million, or 21%, in 2023 compared to 2022.

The increase was primarily from commercial customers of $46.7 million, or 45%, and other government customers (primarily USPS) of $11.5 million, or 7%.

Profit percentage

Revenues decreased $22.6 million, or 7%, in 2024 compared to 2023.

The decrease was primarily driven by a decline in revenues from other government customers of $50.1 million, or 30%, partially offset by an increase in revenues from commercial customers of $27.7 million, or 18%.

Revenues from other government customers decreased primarily due to lower maintenance activity within the USPS vehicle fleet program driven by USPS' transition to a new FMIS.

Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business.

Revenues from other government customers increased primarily due to increased support of legacy USPS vehicle fleets.

These increases were partially offset by a decrease in sales to DoD customers of $3 million, or 94%.

Costs and Operating Expenses.

Costs and operating expenses increased $47.8 million, or 20%, primarily due to increased revenues.

Costs and operating expenses decreased $8.4 million, or 3%, primarily due to decreased revenues.

In addition, costs and operating expenses for this segment included expense for amortization of intangible assets associated with acquisitions and allocated corporate costs.

Expense for amortization of intangible assets decreased $3.8 million in 2023 to $2.6 million from $6.4 million in 2022 driven by intangibles becoming fully amortized during the current year.

Expense for allocated corporate costs was $7.8 million for 2023 and $7.5 million for 2022.

Expense for amortization of intangible assets decreased $2.5 million in 2024 to $0.1 million from $2.6 million in 2023 driven by substantially all intangibles becoming fully amortized during the prior year.

Expense for allocated corporate costs was $7.2 million for 2024 as compared to $7.8 million for 2023.

Operating Income.

Operating income increased $7.3 million, or 31%, in 2023 compared to 2022, primarily driven by increased revenues, a change in mix of products sold, and decreased amortization expense.

Operating income decreased $14.2 million, or 46%, in 2024 compared to 2023, primarily driven by a shift in sales mix, the result of decreased revenues from our USPS vehicle fleet program, partially offset by decreased amortization expense and allocated corporate costs.

Financial Condition

There has been no material adverse change in our financial condition in 2024.

Our outstanding borrowings under our term loan and revolving facility increased $144 million, and we had $216 million of unused commitments under the credit agreement as of December 31, 2023.

In July 2023, we completed an underwritten public offering of 2,846,250 shares of the Company's common stock, generating proceeds of $129.1 million in connection with the offering, net of issuance costs.

Our outstanding borrowings under our term loan and revolving facility decreased $0.5 million, and we had $194 million of unused commitments under the credit agreement as of December 31, 2024.

In May and October 2024, we completed underwritten public offerings of the Company's common stock, generating proceeds, net of issuance costs, of $162.0 million and $163.8 million, respectively.

Changes to other asset and liability accounts were primarily due to our earnings;

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The following table summarizes our cash flows (in thousands):

Year ended December 31,

Net cash (used in) provided by operating activities

For the years ended December 31,

Net cash used in operating activities

$ (31,037) $ (21,829)

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(263,669) (235,690)

Net cash provided by (used in) financing activities

Net cash provided by financing activities

315,806 264,971

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

$ 21,100 $ 7,452

Cash used in operating activities was $21.8 million in 2023 compared to cash provided by operating activities of $8.1 million in 2022.

The change was primarily due to greater use of cash for inventory purchases.

Cash used in investing activities increased $233.3 million in 2023 compared to 2022 primarily due to cash paid for acquisitions, net of cash acquired, of $218.6 million in connection with acquisitions during the current period as discussed in Note (2) "Acquisitions" to the consolidated financial statements.

Cash provided by financing activities was $265.0 million in 2023 compared to cash used in financing activities of $5.7 million in 2022.

The change was primarily due to the receipt of $129.1 million in proceeds related to our public underwritten offering of our common stock in July 2023 and overall higher proceeds from net borrowings of our debt during the current period primarily related to the increase in our term loan facility borrowings to fund cash paid for acquisitions.

Cash used in operating activities increased $9.2 million in 2024 compared to 2023 primarily due to the working capital impact of the FDS Sale and related expenses incurred.

Cash used in investing activities increased $28.0 million in 2024 compared to 2023 primarily due to an increase of $64.5 million in net cash paid for acquisitions completed in the current period as discussed in Note (2) "Acquisitions" to the consolidated financial statements, partially offset by cash provided of $40.2 million related to the FDS sale as discussed in Note (3) "Discontinued Operations" to the consolidated financial statements.

Cash provided by financing activities increased $50.8 million in 2024 compared to 2023 primarily due to an increase of $196.0 million in proceeds related to our public underwritten offerings of our common stock in the current period as compared to the prior year, partially offset by a decrease in net borrowings of our debt during the current period of $144.9 million.

We paid cash dividends totaling approximately $7.1 million, or $0.40 per share, in 2024.

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Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability.

Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity.

Significant increases or decreases in these operating activities can affect our liquidity.

Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements.

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Our primary source of external financing is our credit agreement.

Our credit agreement is with a bank group and includes a term loan and a revolving facility, with an aggregate maximum borrowing capacity under our revolving facility of $350.0 million.

Our credit agreement is with a bank group and includes a term loan and revolving facility, with an aggregate maximum borrowing capacity under our revolving facility of $350.0 million.

Under the credit agreement we may elect to increase the maximum availability of the term loan, the revolving facility, or a combination of both, subject to customary lender commitment approvals.

The aggregate limit of increases is $25.0 million.

In July 2023, we entered into a fifth amendment to our credit agreement which, among other things, provided for the following:

(i) the extension of a new term loan in the aggregate principal amount of $90.0 million;

(ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to $25.0 million;

(iii) quarterly amortization payments for the new term loan in the amount of $2.25 million;

(iv) an increase in the maximum Total Funded Debt to EBITDA Ratio from 4.50x to 5.00x, with such ratios decreasing thereafter (as indicated in the table below);

(v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50x;

and (vi) expressly permitting the Desser Aerospace acquisition and subsequent and simultaneous business sale to Loar Group Inc.

Testing Period Maximum Total Funded Debt to EBITDA Ratio

June 30, 2023 through and including September 30, 2023 5.00 to 1.00

December 31, 2023 through and including June 30, 2024 4.75 to 1.00

September 30, 2024 4.50 to 1.00

December 31, 2024 through and including March 31, 2025 4.25 to 1.00

June 30, 2025 4.00 to 1.00

September 30, 2025 and thereafter 3.75 to 1.00

On December 28, 2023, we entered into a sixth amendment to our credit agreement which, among other things, provided for the following:

(i) an increase in the aggregate principal amount of the term loan from $177.5 million to $300 million and an extension of the maturity date of the term loan by one year to October 7, 2026;

(ii) a modification to the amortization payments on the term loan from $5.0 million quarterly to $7.5 million quarterly, commencing with the first quarterly amortization payment due on April 1, 2024;

and (iii) an extension of the maturity date of the revolving credit facility by one year to October 7, 2026.

As a result of the amendment, the capacity under the revolving facility remained unchanged and we have increased availability under the revolving facility by approximately $122.0 million.

We believe our existing balances of cash and cash equivalents, along with our cash flows from operations and debt instruments under our credit agreement mentioned above, will provide sufficient liquidity for our business operations as well as capital expenditures, dividends, and other capital requirements associated with our business operations over the next twelve months and thereafter for the foreseeable future.

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See Note (7) "Debt" to our Consolidated Financial Statements for information regarding our long-term debt obligations.

We estimate cash requirements for interest payments on our debt facilities to be approximately $32.1 million for 2024, $28.7 million for 2025, and $23.0 million for 2026.

We estimate cash requirements for interest payments on our debt facilities to be approximately $30.1 million for 2025 and $24.2 million for 2026.

The estimates do not take into account future draw downs and repayments on the debt or changes in the variable interest rate, and actual interest may be different.

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Sales returns and allowances for vehicle parts are not significant.

We have applied the practical expedient for our parts sales and MRO services to exclude the amount of remaining performance obligations for contracts with an original expected term of one year or less.

Inventory Valuation

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Inventories for our Fleet segment consist primarily of vehicle replacement parts, and also include related purchasing, storage and handling costs.

We periodically evaluate the carrying value of inventory, considering factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

We periodically evaluate the carrying value of inventory, considering factors such as its physical condition, sales patterns and demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

These estimates could vary significantly from actual amounts based on future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

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We evaluate goodwill for our reporting units for impairment at least annually on the first day of the fourth quarter, or whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable.

We estimate and compare the fair value of each reporting unit to its respective carrying value including goodwill.

When testing goodwill for impairment, we may initially qualitatively assess whether it is necessary to perform a quantitative goodwill impairment test, which is only required if we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount.

In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we considered the totality of all relevant events and circumstances that affect the fair value or carrying amount of a reporting unit in accordance with ASC 350-20-35-3C.

In the event we deem a quantitative impairment test necessary, we estimate and compare the fair value of each reporting unit to its respective carrying value including goodwill.

We estimate the fair value of our reporting units using a weighting of fair values derived from the income approach and market approach.

The analysis relies on significant judgements and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, and financial measures derived from observable market data of comparable public companies.

Based on the annual goodwill impairment test performed during the fourth quarter of 2023, we determined that each reporting unit's fair value significantly exceeded its carrying value.

Based on the annual goodwill impairment test performed during the fourth quarter of 2024, our qualitative impairment test determined that it was more likely than not that each reporting unit's fair value exceeded its carrying value.

Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.

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Recent Accounting Pronouncements

See "Nature of Business and Summary of Significant Accounting Policies—Recent Accounting Pronouncements" in Note (1) to our Consolidated Financial Statements included below in Item 8 of this annual report on Form 10-K for additional information.

See "Recent Accounting Pronouncements" in Note (1) "Nature of Business and Summary of Significant Accounting Policies" to our Consolidated Financial Statements included below in Item 8 of this annual report on Form 10-K for additional information.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis