ALEXANDRIA, Va.- VSE Corporation (NASDAQ: VSEC, 'VSE', or the 'Company'), a leading provider of aftermarket distribution and maintenance, repair and overhaul ('MRO') services for air and land transportation assets for commercial and government markets, announced today results for the third quarter 2023.
* Record Revenue and Profitability for Aviation Segment
* Raised Full-Year Revenue Guidance for Aviation Segment
* Positive Cash from Operations and Free Cash Flow to Accelerate in the Fourth Quarter
THIRD QUARTER 2023 RESULTS1
(As compared to the Third Quarter 2022; excludes discontinued operations of Federal & Defense segment)
Total Revenues of $231.4 million increased 38.2%
GAAP Net Income of $12.1 million increased 57.3%
GAAP EPS (Diluted) of $0.80 increased 33.3%
Adjusted EBITDA of $32.3 million increased 55.6%
Adjusted Net Income of $13.8 million increased 74.6%
Adjusted EPS (Diluted) of $0.92 increased 48.4%
1 From continuing operations
MANAGEMENT COMMENTARY
'Third quarter results reflected record financial performance in our Aviation segment and continued progress and disciplined revenue growth and customer diversification in our Fleet segment,' said John Cuomo, President and CEO of VSE Corporation. 'We delivered our fourth consecutive quarter of record revenue and profit in our Aviation segment, driven by strong program execution, continued market share gains, expansion of our product lines and service capabilities, and robust end-market activity. In our Fleet segment, we continue to grow and scale our commercial business with contributions from our newly opened Memphis distribution center of excellence, all while continuing to grow and support legacy fleets and customers.'
Steve Griffin, CFO of VSE Corporation, commented, 'We made strong progress against our financial and operating plans, which drove improved overall margins and cash flow in the third quarter. Our secondary equity offering in July, along with improved cash generation in the third quarter, allowed us to pay down debt and execute on two inorganic strategic growth initiatives, including a transformational investment with Honeywell. Our pro forma net leverage ratio was 3.7x at the end of the third quarter and is on track to improve to below 3.5x by the end of the year, driven by an acceleration in cash generation and strong operating and earnings performance.'
STRATEGIC UPDATE
Acquisition of Honeywell Fuel Control Systems License Agreement
In October 2023, the Aviation segment announced that it had entered into an asset purchase and perpetual license agreement with Honeywell International Inc. ('Honeywell') to exclusively manufacture and support certain of Honeywell's fuel control systems on four key engine platforms.
The new agreement strengthens and expands VSE Aviation's existing exclusive distributor relationship and MRO support for these Honeywell fuel control systems.
Acquisition of Desser Aerospace
On July 3, 2023, VSE completed the acquisition of Desser Holding Company LLC ('Desser Aerospace'), a global aftermarket solutions provider of specialty distribution and MRO services.
The acquisition expands and diversifies the Company's Aviation segment product and MRO capabilities and provides a platform for growth into international markets.
Desser Aerospace is expected to be fully integrated into the Aviation segment systems, processes, and organization by the end of 2024.
Federal & Defense Segment
In September 2023, VSE announced a mutual agreement to terminate the sale of the Federal and Defense segment to Bernhard Capital Partners Management LP.
The Company will continue to pursue the near-term divestiture of the Federal and Defense business segment's assets, and the segment will remain in discontinued operations.
BALANCE SHEET OPTIMIZATION
In July 2023, VSE completed a follow-on equity offering of 2,846,250 shares of common stock at $48.50 per share ('Offering'), resulting in net cash proceeds of approximately $130 million.
In July 2023, VSE executed a 3-year fixed interest rate swap ('Swap') that hedges the variability in interest payments on $100 million of floating rate debt. As of the end of the third quarter and following the execution of the Swap, VSE has hedged an aggregate of $250 million of its variable debt.
THIRD QUARTER SEGMENT RESULTS
Aviation segment revenue increased 48% year-over-year to a record $152.4 million in the third quarter 2023. The year-over-year revenue improvement was attributable to strong program execution of new and existing distribution awards, increased MRO activity, the addition of Desser Aerospace, and robust end-market activity. Aviation distribution and repair revenue increased 46% and 54%, respectively, in the third quarter 2023, versus the prior-year period. The Aviation segment reported operating income of $21.0 million in the third quarter, compared to $10.0 million in the same period of 2022. Segment Adjusted EBITDA increased by 87% in the third quarter to $25.3 million, versus $13.6 million in the prior-year period. Adjusted EBITDA margin was 16.6%, an increase of approximately 340 basis points versus the prior-year period, driven primarily by favorable price and product mix, along with strong MRO revenue growth.
Fleet segment revenue increased 22% year-over-year to $79.0 million in the third quarter 2023. Revenue from commercial customers increased 47% on a year-over-year basis, driven by growth in e-commerce fulfillment and commercial fleet sales. Commercial revenue represented 47% of total Fleet segment revenue in the period, an approximate 800 basis point increase year-over-year. Revenue from the United States Postal Service (USPS) increased approximately 6% on a year-over-year basis, driven by growth of the installed base and increased support of legacy vehicle fleets. The Fleet segment reported operating income of $8.5 million in the third quarter, compared to $6.5 million in the same period of 2022. Segment Adjusted EBITDA increased 5% year-over-year to $9.2 million, and Adjusted EBITDA margin declined approximately 190 basis points to 11.6%, primarily impacted by customer and product mix and under-absorption of fixed costs at the newly launched distribution and e-commerce fulfillment facility.
FINANCIAL RESOURCES AND LIQUIDITY
As of September 30, 2023, the Company had $89 million in cash and unused commitment availability under its $350 million revolving credit facility maturing in 2025. As of September 30, 2023, VSE had total net debt outstanding of $440 million. Pro forma net leverage2 was approximately 3.7 times as of the end of the third quarter.
VSE anticipates the pro forma net leverage ratio to be below 3.5 times by the end of the fourth quarter 2023, following Adjusted EBITDA contribution and accelerated free cash flow generation in the fourth quarter.
In July 2023, the Company amended its credit facility with its lending syndicate in connection with the Desser Aerospace acquisition. The amendment provided for an incremental $90 million Term Loan A and a revision of certain financial covenants of the existing facility.
2 Pro forma net leverage trailing-twelve-month Adjusted EBITDA includes contributions from prior acquisitions and the recent purchase of the Honeywell fuel control license
GUIDANCE
VSE increased its full year 2023 revenue growth and its Adjusted EBITDA margin guidance for its Aviation segment, reaffirmed its revenue growth and Adjusted EBITDA margin guidance for its Fleet segment, and expects positive free cash flow to accelerate in the fourth quarter. The guidance is as follows:
Aviation segment full year 2023 revenue growth of 30 to 35%, as compared to the prior year
Aviation segment Adjusted EBITDA margin expected to be toward the higher end of the previously provided guidance range of 14 to 16%
Fleet segment full year 2023 revenue growth of 20 to 25%, as compared to the prior year
Fleet segment Adjusted EBITDA margin guidance range of 11 to 13%
The Company expects free cash flow to accelerate in the fourth quarter 2023
THIRD QUARTER RESULTS: See full release at:
https://ir.vsecorp.com/news/press-releases/detail/342/vse-corporation-announces-third-quarter-2023-results
VSE CORPORATION 
