Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. VSE CORP (102752) 10-Q published on May 01, 2020 at 4:42 pm
Reporting Period: Mar 30, 2020
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus disease, known as COVID-19, as a global pandemic. The pandemic and the containment and mitigation efforts by governments to attempt to control its spread created uncertainties and disruptions in the economic and financial markets. The impact of COVID-19 on us is evolving and its future effects are highly uncertain and unpredictable. We are closely monitoring the effects and risks of COVID-19 to assess its impact on our business, financial condition and results of operations. In April 2020, we completed a cost reduction plan which included a reduction in workforce. We maintain a robust continuity plan to adequately respond to situations such as the COVID-19 pandemic, including a framework for remote work arrangements, in order to effectively maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
Our Aviation segment operating income for the first quarter of 2020 was reduced by $7.5 million as a result of the loss on the sale of our Prime Turbines LLC subsidiary and certain related inventory assets. See Note (3) "Divestiture" to our Consolidated Financial Statements for additional details regarding this transaction. This decrease was offset by a gain of $1.1 million realized upon the completion of a sale-leaseback transaction for a property we owned in Miami, Florida. In the first quarter of 2020, we closed on a sale-leaseback agreement involving land and an office building utilized by our Aviation segment to conduct operations in Miami, Florida. Under the agreement, the land and building, with a net book value of $1.3 million was sold for a sale price of $2.6 million and leased back under a 6-year term operating lease commencing upon the closing of the transaction. The lease provides us with an option to extend the lease upon the expiration of its term in April 2026 for two additional five-year periods. In connection with the sale and leaseback transaction, we recognized the gain after incurring $200 thousand in selling expenses.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the optional expedients provided by the new standard.
Declines were driven by the uncertainty surrounding the outbreak of the COVID-19 and macroeconomic events, which resulted in decreases in air travel. Accordingly, an interim quantitative impairment test was performed as of March 31, 2020 for our VSE Aviation reporting unit. Under the income approach, the fair value for our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, updated for recent events, to estimate future cash flows and an increased discount rate of 100 basis points from the rate used in the analysis performed in the prior year. Based on our interim goodwill impairment analysis, the fair value of our VSE Aviation reporting unit approximated its carrying value. Because the fair value of our VSE Aviation reporting unit approximated its carrying value, a negative change in the key assumptions used in the interim impairment analysis or an increase in the carrying value may result in a future impairment of this reporting unit's goodwill. Any significant adverse changes in future periods to our internal forecasts or external market conditions could reasonably be expected to negatively affect our key assumptions and may result in future goodwill impairment charges which could be material. For example, keeping all other assumptions the same, an additional increase in the discount rate or an increase in the carrying value could result in an impairment in the reporting unit's goodwill.
We have a loan agreement with a bank group comprised of ten banks. Under the terms of our debt facility, we are required to maintain certain financial covenants. As a result of the COVID-19 global pandemic, our business operations have been and could be further disrupted and if we are unable to re-commence normal operations in the near term, we may be not be able to satisfy our financial covenant requirements. We are working with our bank group to mitigate this circumstance, which may result in waivers, consents, modifications, amendments, extensions, or other changes to the facility. There can be no assurance that we would be able to obtain future changes in a timely manner, on acceptable terms, or at all. If we were not able to obtain satisfactory changes to the debt facility, we could be in default, which could trigger an acceleration of repayment provisions that we would be unable to meet and would impair our ability to operate our businesses. If we make changes, it may lead to fees, increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable to us under the debt facility.
The COVID-19 outbreak has adversely impacted our global supply chain network, which could result in significant shipping delays and a material reduction of available products.