VSE CORP

Previous wording

In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets. See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Current wording

In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets ("FDS Sale"). See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Previous wording

On April 24, 2024, we completed the acquisition of our previously announced 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 (13) "Subsequent Events" for further information.

Current wording

On April 24, 2024, we completed the acquisition of our previously announced definitive agreement to acquire Turbine Controls, LLC ("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 (2) "Acquisitions" for further information.

Previous wording

During the first quarter of 2024, our strong program execution of new and existing distribution awards, an expansion of product offerings and MRO capabilities, increased market activity, and contributions from recent acquisitions produced strong results, with quarterly revenue reaching $162.4 million for the three months ended March 31, 2024, representing a 43% increase year-over-year. Market growth and share gains have resulted in increased repair and distribution revenue of 58% and 38%, respectively, during the three months ended March 31, 2024, compared to the same period for the prior year. Our growth has been driven by several strategic initiatives, including executing on newly awarded distribution agreements, the introduction of new products and service capabilities to our portfolio, and the launch of a new distribution facility in Europe, all of which further strengthened our position in the aviation aftermarket. Additionally, expanding our partnerships with Original Equipment Manufacturers has provided us new opportunities, including access to new markets with an established customer base.

Current wording

During the second quarter of 2024, our strong program execution of new and existing distribution awards, our expanded portfolio of MRO capabilities, and contributions from recent acquisitions produced strong results, with quarterly revenue reaching $192.8 million for the three months ended June 30, 2024, representing a 55% increase year-over-year. Market growth and share gains have resulted in increased repair and distribution revenue of 112% and 32%, respectively, during the three months ended June 30, 2024, compared to the same period for the prior year. Our growth has been driven by several strategic initiatives, including executing on newly awarded distribution agreements, most notably the Pratt Whitney Canada EMEA program, the introduction of new products and service capabilities to our portfolio, including our new Original Equipment Manufacturers ("OEM") licensed

Previous wording

We believe the July 2023 acquisition of Desser Aerospace and the recently completed acquisition of Turbine Controls, Inc. in April 2024 will increase our exposure to the high-growth, higher-margin aviation distribution and MRO markets. Furthermore, we believe that the Honeywell FCS Acquisition to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems expands our existing capabilities and provides access to new customers and end markets while strengthening our partnership with Honeywell.

Current wording

We believe the July 2023 acquisition of Desser Aerospace and the recently completed acquisition of TCI in April 2024 will increase our exposure to the high-growth, higher-margin aviation distribution and MRO markets. Furthermore, we believe that the Honeywell FCS acquisition in September 2023 to exclusively manufacture, sell, market, distribute, and repair certain fuel control systems, expands our existing capabilities and provides access to new customers and end markets while strengthening our partnership with Honeywell.

Previous wording

During the first quarter, growth in our Fleet segment was driven by contributions from commercial fleet customers, e-commerce fulfillment volume which was partially offset by a decline in activity within the United States Postal Service ("USPS"). The decline in USPS revenue is the result of USPS' transition to a new Fleet Management Information System, which has led to a temporary reduction in maintenance-related activity and parts usage. We continue to make significant progress in executing our revenue diversification strategy through the successful launch of our new e-commerce fulfillment and distribution center ("Olive Branch facility"). The scaling of the Olive Branch facility has been instrumental in our ability to capture new customers and drive revenue growth within e-commerce fulfillment. Our commercial revenues were 56% of total Fleet segment revenue for the three

Current wording

During the second quarter of 2024, our Fleet segment's growth was negatively impacted by a decline in activity within the United States Postal Service ("USPS"), partially offset by growth in e-commerce fulfillment and commercial fleet sales. The decline in USPS revenue is the result of USPS' transition to a new Fleet Management Information System, which has led to a temporary reduction in maintenance-related activity and parts usage. We continue to make progress in executing our revenue diversification strategy through the scaling of our new e-commerce fulfillment and distribution center ("Olive Branch facility"). The expansion of the Olive Branch facility has been instrumental in our ability to capture new customers and drive revenue growth within e-commerce fulfillment. Our commercial revenues were 64% of total Fleet segment revenue for the three months ended June 30, 2024, compared to 47% for the same period in the prior year.

Previous wording

Revenues. Revenues increased for the three months ended March 31, 2024, compared to the same period in the prior year due to growth in our Aviation segment of $49.1 million and our Fleet segment of $3.8 million. See "Segment Operating Results" section below for further discussion of revenues by segment.

Current wording

Revenues. Revenues increased for the three months ended June 30, 2024, compared to the same period in the prior year due to growth in our Aviation segment of $68.1 million, partially offset by declines in our Fleet segment of $7.4 million. See "Segment Operating Results" section below for further discussion of revenues by segment.

Previous wording

Costs and Operating Expenses. Costs and operating expenses increased for the three months ended March 31, 2024, compared to the same periods in the prior year primarily due to increases in revenue. Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.

Current wording

Costs and Operating Expenses. Costs and operating expenses increased for the three and six months ended June 30, 2024, compared to the same periods in the prior year primarily due to increases in revenue. Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.

Previous wording

Operating Income. Operating income increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to an increase of $6.6 million for our Aviation segment and an increase of $0.7 million for our Fleet segment. See "Segment Operating Results" for a 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.

Current wording

Operating Income. Operating income decreased for the three months ended June 30, 2024, compared to the same period of the prior year primarily due to an increase in corporate costs, including a lease abandonment charge of $12.9 million, corporate restructuring charges of $3.8 million, and a decrease in operating income of $5.6 million for our Fleet segment. These operating income decreases were partially offset by an increase of $8.7 million for our Aviation segment. See "Segment Operating Results" for a discussion of operating income by segment.

Previous wording

Interest Expense. Interest expense increased for the three months ended March 31, 2024, as compared to the same periods in the prior year primarily due to an increase in our debt facility borrowings and a higher average interest rate on borrowings outstanding.

Current wording

Interest Expense. Interest expense increased for the three and six months ended June 30, 2024, as compared to the same periods in the prior year primarily due to an increase in our debt facility borrowings and a higher average interest rate on borrowings outstanding.

Previous wording

Provision for Income Taxes. Our effective tax rate for continued operations was 19.3% and 24.8% for the three months ended March 31, 2024 and 2023, respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. federal income tax rate and our effective tax rate. The lower effective tax rate for the three months ended March 31, 2024 primarily resulted from excess stock compensation recognized for tax purposes in connection with stock vesting in the current year.

Current wording

Provision for Income Taxes. Our effective tax rate for continued operations was 24.8% and 17.4% for the three and six months ended June 30, 2024 respectively, and 24.0% and 24.3% for the three and six months ended June 30, 2023 respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. federal income tax rate and our effective tax rate. The higher effective tax rate for the three months ended June 30, 2024 primarily resulted from lower book income and higher disallowed compensation pursuant to Section 162(m) in 2024. The lower effective tax rate for the six months ended June 30, 2024 primarily resulted from lower book income in 2024 and higher excess stock compensation deduction for tax purposes in connection with current year stock vesting.

Previous wording

Revenues. Revenues for our Aviation segment increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily driven by contributions from our acquisition of Desser Aerospace, recently initiated distribution contract wins and improved demand for our commercial aerospace products and services resulting from strong end market activity in global commercial air travel. Aviation distribution revenue increased $30.5 million, or 38%, and repair revenue increased $18.6 million, or 58%, for the three months ended March 31, 2024, compared to the same period in the prior year.

Current wording

Revenues. Revenues for our Aviation segment increased for the three months ended June 30, 2024, compared to the same period of the prior year primarily driven by contributions from our acquisitions of Desser and TCI, the launch and expansion of recently awarded distribution agreements, and improved demand for our products and services resulting from strong end market activity in global air travel. Aviation distribution revenue increased $28.3 million, or 32%, and repair revenue increased $39.8 million, or 112%, for the three months ended June 30, 2024, compared to the same period in the prior year.

Previous wording

Costs and operating expenses. Costs and operating expenses increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $3.4 million for the three months ended March 31, 2024, compared to $2.5 million for the same period in the prior year. Allocated corporate costs were $4.3 million for the three months ended March 31, 2024, compared to $3.2 million for the same period in the prior year.

Current wording

Costs and operating expenses. Costs and operating expenses increased for the three months ended June 30, 2024, compared to the same period of the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $4.3 million for the three months ended June 30, 2024, compared to $2.5 million for the same period in the prior year. Allocated corporate costs were $4.6 million for the three months ended June 30, 2024, compared to $3.0 million for the same period in the prior year.

Previous wording

Operating income. Operating income increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to revenue growth and a favorable shift in sales mix and pricing offset by increased amortization of intangible assets and allocated corporate costs.

Current wording

Operating income. Operating income increased for the three and six months ended June 30, 2024, compared to the same period of the prior year primarily due to revenue growth and a favorable shift in sales mix and pricing, and contributions from our newly launched OEM licensed manufacturing program, offset by increased amortization of intangible assets and allocated corporate costs.

Previous wording

Revenues. Revenues for our Fleet segment increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to increases from commercial customers of $12.1 million, or 37%, partially offset by a decline in revenue in other government customers of $8.3 million, or 19%. Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business. Revenues from other government customers decreased primarily due to lower maintenance activity within the USPS vehicle fleet program.

Current wording

Revenues. Revenues for our Fleet segment decreased for the three months ended June 30, 2024, compared to the same period of the prior year primarily due to a decline in activity by other government customers of $15.8 million, or 37%, partially offset by increases from commercial customers of $8.4 million, or 22%. 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 Fleet Management Information System. Commercial customer revenue growth was driven by our e-commerce fulfillment and commercial fleet businesses.

Previous wording

Costs and operating expense. Costs and operating expenses increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily due to increased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was immaterial for the three months ended March 31, 2024, compared to $1.5 million for the same period in the prior year. Allocated corporate costs were $2.1 million for the three months ended March 31, 2024, compared to $2.0 million for the same period in the prior year.

Current wording

Costs and operating expense. Costs and operating expenses decreased for the three months ended June 30, 2024, compared to the same period of the prior year primarily due to decreased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was immaterial for the three months ended June 30, 2024, compared to $1.1 million for the same period in the prior year. Allocated corporate costs were $1.8 million for the three months ended June 30, 2024, compared to $2.0 million for the same period in the prior year.

Previous wording

Operating income. Operating income increased for the three months ended March 31, 2024, compared to the same period of the prior year primarily driven by a reduction in the amortization of intangible assets, partially offset by a sales mix shift due to a decrease in revenues from our USPS vehicle fleet program.

Current wording

Operating income. Operating income decreased for the three and six months ended June 30, 2024, compared to the same period of the prior year primarily driven by a sales mix shift due to a decrease in revenues from our USPS vehicle fleet program, partially offset by a reduction in the amortization of intangible assets.

Previous wording

Our primary sources of external financing are the capital markets and 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 of 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. Our outstanding borrowings under the credit agreement increased approximately $51.9 million for the three months ended March 31, 2024. As of March 31, 2024, we had borrowings outstanding under our term loan of $300.0 million, borrowings outstanding under our revolving facility of $184.9 million, outstanding letters of credit of $0.8 million, and $164.2 million of unused commitments under the credit agreement.

Current wording

Our primary sources of external financing are the capital markets and 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 of 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. Our outstanding borrowings under the credit agreement increased approximately $33.5 million for the six months ended June 30, 2024. As of June 30, 2024, we had borrowings outstanding under our term loan of $292.5 million, borrowings outstanding under our revolving facility of $174.0 million, outstanding letters of credit of $0.8 million, and $175.2 million of unused commitments under the credit agreement.

Previous wording

Cash used in operating activities increased $30.4 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The increase was primarily due to greater use of cash for inventory purchases.

Current wording

Cash used in operating activities increased $31.5 million for the six months ended June 30, 2024, as compared to the same period of the prior year. The increase was primarily due to greater use of cash for inventory purchases.

Previous wording

Cash provided by investing activities increased $48.0 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The increase was primarily due to cash provided of $41.1 million related to sale of the Federal and Defense segment as discussed in Note (3) "Discontinued Operations" to the consolidated financial statements.

Current wording

Cash used in investing activities increased $65.5 million for the six months ended June 30, 2024, as compared to the same period of the prior year. The increase was primarily due to cash paid for the TCI acquisition, net of cash acquired, of $112.3 million, offset by cash provided of $42.1 million related to the FDS sale. See Note (2) "Acquisitions" and Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Previous wording

Cash provided by financing activities decreased $15.0 million for the three months ended March 31, 2024, as compared to the same period of the prior year. The decrease was primarily due to the overall lower proceeds from net borrowings of our debt during the current period.

Current wording

Cash provided by financing activities increased $104.2 million for the six months ended June 30, 2024, as compared to the same period of the prior year. The increase was primarily due to the receipt of $162.0 million in proceeds related to our public underwritten offering of our common stock in May 2024, offset by lower proceeds from net borrowings of our debt during the current period due to the decrease in our term loan facility.

Previous wording

We paid cash dividends totaling $1.6 million or 0.10 per share during the three months ending March 31, 2024. Pursuant to our credit agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.

Current wording

We paid cash dividends totaling $3.2 million or $0.20 per share during the six months ending June 30, 2024. Pursuant to our credit agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.

Previous wording

Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in our 2023 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2024, from those disclosed in our most recently filed Annual Report on Form 10-K.

Current wording

Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in our 2023 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2024, from those disclosed in our most recently filed Annual Report on Form 10-K.