VSE CORP 10-Q

Item 1. Financial Statements VSE Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) June 30, December 31, (in thousands except share and per share amounts) 2023 2022 Assets Current assets: Cash and cash equivalents $ 4,163 $ 305 Receivables (net of allowance of $ 2.5 million and $ 2.0 million, respectively) 114,154 90,599 Unbilled receivables 6,229 7,409 Inventories 427,822 380,438 Other current assets 14,797 15,202 Current assets held-for-sale 107,059 54,925 Total current assets 674,224 548,878 Property and equipment (net of accumulated depreciation of $ 33.6 million and $ 30.7 million, respectively) 43,992 40,501 Intangible assets (net of accumulated amortization of $ 128.8 million and $ 121.3 million, respectively) 82,818 86,558 Goodwill 222,023 217,262 Operating lease - right-of-use assets 20,194 21,558 Other assets 30,220 29,019 Non-current assets held-for-sale — 56,013 Total assets $ 1,073,471 $ 999,789 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 10,000 $ 10,000 Accounts payable 104,566 128,504 Accrued expenses and other current liabilities 30,295 31,889 Dividends payable 1,290 1,282 Current liabilities held-for-sale 64,070 52,929 Total current liabilities 210,221 224,604 Long-term debt, less current portion 365,110 276,300 Deferred compensation 7,651 7,398 Long-term operating lease obligations 17,609 19,154 Deferred tax liabilities 3,743 4,986 Non-current liabilities held-for-sale — 17,821 Total liabilities 604,334 550,263 Commitments and contingencies (Note 8) Stockholders' equity: Common stock, par value $ 0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,897,544 and 12,816,613 , respectively 645 641 Additional paid-in capital 96,471 92,620 Retained earnings 366,690 351,297 Accumulated other comprehensive income 5,331 4,968 Total stockholders' equity 469,137 449,526 Total liabilities and stockholders' equity $ 1,073,471 $ 999,789 The accompanying notes are an integral part of these consolidated financial statements. -4- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) For the three months ended June 30, For the six months ended June 30, (in thousands except share and per share amounts) 2023 2022 2023 2022 Revenues: Products $ 165,997 $ 142,003 $ 320,443 $ 278,172 Services 39,226 27,758 73,367 51,909 Total revenues 205,223 169,761 393,810 330,081 Costs and operating expenses: Products 147,139 129,617 282,388 250,714 Services 32,327 25,120 62,903 47,525 Selling, general and administrative expenses 1,519 473 3,564 1,180 Amortization of intangible assets 3,601 4,016 7,540 8,110 Total costs and operating expenses 184,586 159,226 356,395 307,529 Operating income 20,637 10,535 37,415 22,552 Interest expense, net 7,366 3,872 13,346 7,482 Income from continuing operations before income taxes 13,271 6,663 24,069 15,070 Provision for income taxes 3,182 1,908 5,860 4,026 Income from continuing operations 10,089 4,755 18,209 11,044 (Loss) income from discontinued operations, net of tax ( 1,234 ) 2,793 ( 237 ) 2,748 Net income $ 8,855 $ 7,548 $ 17,972 $ 13,792 Earnings (loss) per share: Basic Continuing operations $ 0.78 $ 0.37 $ 1.42 $ 0.87 Discontinued operations ( 0.10 ) 0.22 ( 0.02 ) 0.21 $ 0.68 $ 0.59 $ 1.40 $ 1.08 Diluted Continuing operations $ 0.78 $ 0.37 $ 1.42 $ 0.87 Discontinued operations ( 0.10 ) 0.22 ( 0.02 ) 0.21 $ 0.68 $ 0.59 $ 1.40 $ 1.08 Weighted average shares outstanding: Basic 12,886,100 12,778,355 12,865,394 12,760,026 Diluted 12,916,998 12,811,078 12,921,826 12,807,249 Dividends declared per share $ 0.10 $ 0.10 $ 0.20 $ 0.20 The accompanying notes are an integral part of these consolidated financial statements. -5- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited) For the three months ended June 30, For the six months ended June 30, (in thousands) 2023 2022 2023 2022 Net income $ 8,855 $ 7,548 $ 17,972 $ 13,792 Other comprehensive income, net of tax: Change in fair value of interest rate swap agreements, net of tax 2,361 — 363 176 Total other comprehensive income, net of tax 2,361 — 363 176 Comprehensive income $ 11,216 $ 7,548 $ 18,335 $ 13,968 The accompanying notes are an integral part of these consolidated financial statements. -6- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (Unaudited) Three Months Ended June 30, 2023 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity Common Stock (in thousands except per share data) Shares Amount Balance at March 31, 2023 12,886 $ 644 $ 94,577 $ 359,124 $ 2,970 $ 457,315 Net income — — — 8,855 — 8,855 Stock-based compensation 12 1 1,894 — — 1,895 Other comprehensive income, net of tax — — — — 2,361 2,361 Dividends declared ($ 0.10 per share) — — — ( 1,289 ) — ( 1,289 ) Balance at June 30, 2023 12,898 $ 645 $ 96,471 $ 366,690 $ 5,331 $ 469,137 Three Months Ended June 30, 2022 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity Common Stock (in thousands except per share data) Shares Amount Balance at March 31, 2022 12,769 $ 638 $ 89,830 $ 333,324 $ — $ 423,792 Net income — — — 7,548 — 7,548 Stock-based compensation 26 2 1,221 — — 1,223 Other comprehensive income, net of tax — — — — — — Dividends declared ($ 0.10 per share) — — — ( 1,280 ) — ( 1,280 ) Balance at June 30, 2022 12,795 $ 640 $ 91,051 $ 339,592 $ — $ 431,283 The accompanying notes are an integral part of these consolidated financial statements. -7- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (continued) (Unaudited) Six months ended June 30, 2023 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity Common Stock (in thousands except per share data) Shares Amount Balance at December 31, 2022 12,817 $ 641 $ 92,620 $ 351,297 $ 4,968 $ 449,526 Net income — — — 17,972 — 17,972 Stock-based compensation 81 4 3,851 — — 3,855 Other comprehensive income, net of tax — — — — 363 363 Dividends declared ($ 0.20 per share) — — — ( 2,579 ) — ( 2,579 ) Balance at June 30, 2023 12,898 $ 645 $ 96,471 $ 366,690 $ 5,331 $ 469,137 Six months ended June 30, 2022 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders' Equity Common Stock (in thousands except per share data) Shares Amount Balance at December 31, 2021 12,727 $ 636 $ 88,515 $ 328,358 $ ( 176 ) $ 417,333 Net income — — — 13,792 — 13,792 Stock-based compensation 68 4 2,536 — — 2,540 Other comprehensive income, net of tax — — — — 176 176 Dividends declared ($ 0.20 per share) — — — ( 2,558 ) — ( 2,558 ) Balance at June 30, 2022 12,795 $ 640 $ 91,051 $ 339,592 $ — $ 431,283 The accompanying notes are an integral part of these consolidated financial statements. -8- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, (in thousands) 2023 2022 (a) (a) Cash flows from operating activities: Net income $ 17,972 $ 13,792 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,011 12,430 Amortization of debt issuance cost 420 420 Deferred taxes ( 1,533 ) ( 790 ) Stock-based compensation 3,894 2,675 Provision for inventory 742 1,094 Changes in operating assets and liabilities, net of impact of acquisitions: Receivables, net ( 21,082 ) ( 25,607 ) Unbilled Receivables, net ( 110 ) ( 9,428 ) Inventories, net ( 45,580 ) ( 16,145 ) Other current assets and other assets ( 1,274 ) 6,036 Operating lease assets and liabilities, net ( 67 ) ( 69 ) Accounts payable and deferred compensation ( 27,429 ) ( 4,848 ) Accrued expenses and other current and noncurrent liabilities ( 3,055 ) 302 Net cash used in operating activities ( 65,091 ) ( 20,138 ) Cash flows from investing activities: Purchases of property and equipment ( 6,137 ) ( 2,746 ) Proceeds from the payment on notes receivable 1,557 3,073 Cash paid for acquisitions, net of cash acquired ( 11,711 ) — Net cash (used in) provided by investing activities ( 16,291 ) 327 Cash flows from financing activities: Borrowings on loan agreement 322,813 236,194 Repayments on loan agreement ( 234,423 ) ( 212,572 ) Proceeds from issuance of common stock 456 486 Earn-out obligation payments — ( 1,000 ) Payment of taxes for equity transactions ( 1,031 ) ( 892 ) Dividends paid ( 2,571 ) ( 2,552 ) Net cash provided by financing activities 85,244 19,664 Net increase (decrease) in cash and cash equivalents 3,862 ( 147 ) Cash and cash equivalents, beginning of period 478 518 Cash and cash equivalents, end of period $ 4,340 $ 371 (a) The cash flows related to discontinued operations and held-for-sale assets and liabilities have not been segregated, and remain included in the major classes of assets and liabilities. Accordingly, the Consolidated Statements of Cash Flows include the results of continuing and discontinued operations. The accompanying notes are an integral part of these consolidated financial statements. -9- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents (1) Nature of Operations and Basis of Presentation Nature of Operations VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for transportation assets to commercial and government markets. Basis of Presentation Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Form 10-K"). In our opinion, all adjustments, including normal recurring items, considered necessary for a fair presentation of results for the interim periods have been included in the accompanying unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense segment. The consolidated financial statements present the Federal and Defense segment's results of operations as discontinued operations, and the related assets and liabilities as held-for-sale for all periods presented. See Note (3) "Discontinued Operations" for further discussion. Following the completion of the sale transaction, our operations are conducted under two operating segments: Aviation and Fleet. Certain reclassifications have been made to the prior period financial information to reflect discontinued operations classification. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies. (2) Acquisitions Precision Fuel Components, LLC On February 1, 2023, our Aviation segment acquired Precision Fuel Components, LLC ("Precision Fuel") for a purchase price of $ 11.7 million. Precision Fuel provides MRO services for engine accessory and fuel systems supporting the business and general aviation ("B&GA") market. Our acquisition of Precision Fuel expanded our MRO capabilities and client base. Precision Fuel operating results are included in the accompanying consolidated financial statements beginning on the acquisition date. The acquisition was not material to our consolidated financial statements. The preliminary allocation of the purchase price resulted in net tangible assets of $ 3.1 million, goodwill of $ 4.8 million, and contract and customer-related intangible asset of $ 3.8 million, which is being amortized over a period of five years. During the six months ended June 30, 2023, we incurred $ 0.2 million of acquisition-related expenses, which are included in selling, general and administrative expenses. -10- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents (3) Discontinued Operations On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense business to Bernhard Capital Partners Management LP for total consideration of up to $ 100.0 million, consisting of a $ 50.0 million cash payment at the closing of the transaction and an earn-out payment of up to $ 50.0 million subject to the achievement of certain milestones. The transaction is expected to close in late 2023 to early 2024 and is subject to customary closing conditions and approvals. The results of operations from discontinued operations for the three and six months ended June 30, 2023 and 2022, consist of the following (in thousands): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Revenues $ 67,039 $ 71,953 $ 133,885 $ 142,871 (Loss) income from discontinued operations before income taxes $ ( 1,779 ) $ 3,616 $ ( 621 ) $ 3,514 Provision for income taxes ( 545 ) 823 ( 384 ) 766 Net (loss) income from discontinued operations $ ( 1,234 ) $ 2,793 $ ( 237 ) $ 2,748 The assets and liabilities reported as held for sale consist of the following (in thousands): June 30, December 31, 2023 2022 Assets Cash and cash equivalents $ 178 $ 173 Accounts receivable, net 12,385 14,340 Unbilled receivables 32,188 30,898 Inventories 453 270 Other current assets 8,760 9,244 Property and equipment, net 6,612 7,467 Intangible assets, net 3,505 4,066 Goodwill 31,575 31,575 Operating lease right-of-use assets 11,369 12,854 Other assets 34 51 Total assets held-for-sale (a) $ 107,059 $ 110,938 Liabilities Accounts payable $ 27,810 $ 31,096 Accrued expenses and other current liabilities 20,609 21,833 Long-term operating lease obligations 11,186 13,186 Deferred tax liabilities 4,465 4,635 Total liabilities held-for-sale (a) $ 64,070 $ 70,750 (a) Amounts have been classified as current for the current period consolidated balance sheet and as current and non-current in the consolidated balance sheet for the prior year period. -11- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents Selected financial information related to cash flows from discontinued operations is as follows (in thousands): For the six months ended June 30, 2023 2022 Depreciation and amortization $ 1,437 $ 1,917 Purchases of property and equipment $ 92 $ 144 Stock-based compensation $ 73 $ 20 (4) Revenue Disaggregation of Revenues Our revenues are derived from the delivery of products to our customers and from services performed for commercial and governmental customers. A summary of revenues by customer for each of our operating segments for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands): Three months ended June 30, 2023 Six months ended June 30, 2023 Aviation Fleet Total Aviation Fleet Total Commercial $ 123,820 $ 38,037 $ 161,857 $ 235,880 $ 70,581 $ 306,461 Other government 909 42,457 43,366 2,084 85,265 87,349 Total $ 124,729 $ 80,494 $ 205,223 $ 237,964 $ 155,846 $ 393,810 Three months ended June 30, 2022 Six months ended June 30, 2022 Aviation Fleet Total Aviation Fleet Total Commercial $ 103,349 $ 26,007 $ 129,356 $ 195,261 $ 53,863 $ 249,124 DoD — 1,264 1,264 — 2,993 2,993 Other government 1,670 37,471 39,141 3,048 74,916 77,964 Total $ 105,019 $ 64,742 $ 169,761 $ 198,309 $ 131,772 $ 330,081 A summary of revenues by type for each of our operating segments for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands): Three months ended June 30, 2023 Six months ended June 30, 2023 Aviation Fleet Total Aviation Fleet Total Repair $ 35,561 $ — $ 35,561 $ 67,615 $ — $ 67,615 Distribution 89,168 80,494 169,662 170,349 155,846 326,195 Total $ 124,729 $ 80,494 $ 205,223 $ 237,964 $ 155,846 $ 393,810 Three months ended June 30, 2022 Six months ended June 30, 2022 Aviation Fleet Total Aviation Fleet Total Repair $ 25,966 $ — $ 25,966 $ 48,329 $ — $ 48,329 Distribution 79,053 64,742 143,795 149,980 131,772 281,752 Total $ 105,019 $ 64,742 $ 169,761 $ 198,309 $ 131,772 $ 330,081 -12- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents Contract Balances Contract balances were as follows (in thousands): June 30, December 31, Financial Statement Classification 2023 2022 Contract assets Unbilled receivables $ 6,229 $ 7,409 Contract liabilities Accrued expenses and other current liabilities $ 2,561 $ 963 For the six months ended June 30, 2023 and 2022, we recognized revenue that was previously included in the beginning balance of contract liabilities of $ 0.8 million and $ 0.5 million, respectively. (5) Debt Long-term debt consisted of the following (in thousands): June 30, December 31, 2023 2022 Bank credit facility - term loan $ 95,000 $ 100,000 Bank credit facility - revolving facility 282,000 188,610 Principal amount of long-term debt 377,000 288,610 Less debt issuance costs ( 1,890 ) ( 2,310 ) Total long-term debt 375,110 286,300 Less current portion ( 10,000 ) ( 10,000 ) Long-term debt, less current portion $ 365,110 $ 276,300 Borrowings under our term loan and revolving facility mature in October 2025. As of June 30, 2023, the interest rate on our outstanding term loan borrowings and weighted average interest rate on our aggregate outstanding revolving facility was 7.51 % and 7.62 %, respectively. Interest expense incurred on our term loan and revolving facility was $ 7.9 million and $ 14.3 million for the three and six months ended June 30, 2023, respectively, and $ 3.7 million and $ 7.1 million for the three and six months ended June 30, 2022, respectively. We had letters of credit outstanding of $ 0.7 million and $ 1.0 million as of June 30, 2023 and December 31, 2022, respectively. Future required term loan and revolving facility payments as of June 30, 2023 are as follows (in thousands): Year Ending Term Loan Revolving Facility Total Remainder of 2023 $ 5,000 $ — $ 5,000 2024 10,000 — 10,000 2025 80,000 282,000 362,000 Total $ 95,000 $ 282,000 $ 377,000 We were in compliance with required ratios and other terms and conditions under our credit agreement as of June 30, 2023. In July 2023, we entered into a fifth amendment to our credit agreement. Refer to Note (13) "Subsequent Events" for further details. After the amendment, our scheduled term loan payments are approximately $ 9.5 million for the remainder of 2023, $ 19.0 million in 2024, and $ 156.5 million in 2025. -13- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents (6) Derivative Instruments and Hedging Activities Our derivative instruments designated as cash flow hedges as of June 30, 2023 were (in thousands): Notional Amount Paid Fixed Rate Receive Variable Rate Settlement and Termination Interest rate swaps $ 150,000 2.8 % 1-month term SOFR Monthly through October 31, 2027 We are party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of our floating rate debt. For the three and six months ended June 30, 2023, we reclassified $ 0.8 million and $ 1.5 million, respectively, from accumulated other comprehensive income to interest expense, net. We estimate that we will reclassify $ 3.6 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following June 30, 2023. (7) Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards. There were no antidilutive common stock equivalents excluded from the diluted per share calculation. The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows: Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Basic weighted average common shares outstanding 12,886,100 12,778,355 12,865,394 12,760,026 Effect of dilutive shares 30,898 32,723 56,432 47,223 Diluted weighted average common shares outstanding 12,916,998 12,811,078 12,921,826 12,807,249 (8) Commitments and Contingencies Contingencies We may have certain claims in the normal course of business, including legal proceedings, against us and against other parties. In our opinion, the resolution of these claims will not have a material adverse effect on our results of operations, financial position or cash flows. Further, from time-to-time, government agencies audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows. -14- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents (9) Business Segments The sale of the Federal and Defense segment is intended to allow us to advance our focus on long-term strategic growth areas. Following the completion of the sale transaction, management of our business operations is conducted under two reportable operating segments: Aviation Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services. Fleet Our Fleet segment provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, and the United States Postal Service ("USPS"). Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support. We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. Our segment information is as follows (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Revenues: Aviation $ 124,729 $ 105,019 $ 237,964 $ 198,309 Fleet 80,494 64,742 155,846 131,772 Total revenues $ 205,223 $ 169,761 $ 393,810 $ 330,081 Operating income (loss): Aviation $ 15,783 $ 6,450 $ 31,447 $ 14,072 Fleet 7,854 5,366 13,753 11,747 Corporate/unallocated expenses (a) ( 3,000 ) ( 1,281 ) ( 7,785 ) ( 3,267 ) Operating income $ 20,637 $ 10,535 $ 37,415 $ 22,552 (a) Certain corporate costs previously allocated to the Federal and Defense business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations. (10) Goodwill and Intangible Assets Goodwill Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2023 were as follows (in thousands): Aviation Fleet Total Balance as of December 31, 2022 $ 154,072 $ 63,190 $ 217,262 Acquisitions 4,761 — 4,761 Balance as of June 30, 2023 $ 158,833 $ 63,190 $ 222,023 Goodwill increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions." -15- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents Intangible Assets Intangible assets consisted of the following (in thousands): Gross carrying value Accumulated amortization Net carrying value June 30, 2023 Contract and customer-related $ 202,940 $ ( 120,760 ) $ 82,180 Trade names 8,670 ( 8,032 ) 638 Total $ 211,610 $ ( 128,792 ) $ 82,818 December 31, 2022 Contract and customer-related $ 199,140 $ ( 113,796 ) $ 85,344 Trade names 8,670 ( 7,456 ) 1,214 Total $ 207,810 $ ( 121,252 ) $ 86,558 The gross carrying amount of contract and customer-related intangibles increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions." As of June 30, 2023, the estimated future annual amortization expense related to intangible assets is as follows (in thousands): Year Ending Remainder of 2023 $ 5,114 2024 9,136 2025 9,074 2026 8,950 2027 7,204 Thereafter 43,340 Total $ 82,818 (11) Fair Value Measurements The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 and the level they fall within the fair value hierarchy (in thousands): Amounts Recorded at Fair Value Financial Statement Classification Fair Value Hierarchy Fair Value June 30, 2023 Fair Value December 31, 2022 Non-COLI assets held in Deferred Supplemental Compensation Plan (a) Other assets Level 1 $ 576 $ 539 Interest rate swaps Other assets Level 2 $ 7,103 $ 6,620 (a) Non-Company Owned Life Insurance ("COLI") assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses. The carrying amounts of cash and cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity. The carrying value of our outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements. -16- VSE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 Table of Contents (12) Income Taxes Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Our effective tax rate for continued operations was 24.0 % and 24.3 % for the three and six months ended June 30, 2023, respectively, and 28.6 % and 26.7 % for the three and six months ended June 30, 2022, respectively. The effective tax rate was lower for the three and six months ended June 30, 2023 compared to the same period of prior year primarily due to book income in connection with the fair market value increase in our COLI plan in the period ended June 30, 2023 that was reversed for tax purposes as opposed to book expense in the same period in 2022. (13) Subsequent Events Desser Aerospace Acquisition In July 2023, we completed our previously announced acquisition of Desser-Graham Partnership, L.P. ("Desser Aerospace"), pursuant to the terms of the purchase agreement dated May 3, 2023, for a preliminary purchase price of $ 124.0 million, subject to post-closing adjustments. Concurrent with the closing of the transaction, we sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for cash consideration of $ 30.0 million (the “Loar Sale”). During the three and six months ended June 30, 2023, we incurred $ 0.6 million and $ 1.7 million, respectively, of acquisition-related expenses, which are included in selling, general and administrative expenses. Credit Agreement Amendment 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, which will mature on the same date as the existing term loan; (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 4.50 x to 5.00 x, with such ratios decreasing thereafter; (v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50 x; and (vi) expressly permitting the Desser acquisition and the Loar Sale. The net proceeds received under the new term loan were used to fund a portion of the cash consideration for the Desser Aerospace acquisition. Interest Rate Swap Derivative In July 2023, we executed a fixed interest rate swap that hedges the variability in interest payments on $ 100.0 million of floating rate debt. We have designated, and will account for, this fixed interest rate swap as a cash flow hedge. Underwritten Public Offering In July 2023, we entered into an underwriting agreement with William Blair & Company, L.L.C and RBC Capital Markets, acting as representatives of several underwriters, relating to the issuance and sale of 2,475,000 shares of the Company's common stock at a public offering price of $ 48.50 per share. Under the terms of the agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 371,250 shares of common stock. The offering closed on July 24, 2023 and we received net proceeds of $ 112.7 million in connection with the offering, net of issuance costs. -17- Table of Contents