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Item 7. Management’s Discussion and Analysis

2021-03-05 compared with 2020-03-09 · 289 added, 123 removed, 184 unchanged (69% of the section changed)

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General Overview

We are an aftermarket products and services company providing repair services, distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets in the public and private sectors.

We provide logistics and distribution services for legacy systems and equipment and professional and technical services to the government, including the DoD, federal civilian agencies, and to commercial and other customers.

Our operations include supply chain management solutions, parts supply and distribution, and MRO services for vehicle fleet, aviation, and other customers.

We are a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets in the public and private sectors.

We provide logistics and distribution services for legacy systems and equipment and professional and technical services to the government, including the Department of Defense ("DoD"), federal civilian agencies, and to commercial and other customers.

Our operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, and other customers.

We also provide vehicle and equipment maintenance and refurbishment, logistics, engineering support, energy services, IT and health care IT solutions, and consulting services.

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The following discussion should be read along with our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

1st Choice Aerospace Acquisition

In January 2019, we acquired 1st Choice Aerospace, with operations in Florida and Kentucky.

1st Choice provides component MRO services and products for new generation and legacy commercial aircraft families.

Acquisition and Divestitures

In January 2019, we acquired 1st Choice Aerospace Inc.

("1st Choice Aerospace"), with operations in Florida and Kentucky.

1st Choice Aerospace provides component MRO services and products for new generation and legacy commercial aircraft families.

1st Choice Aerospace is a subsidiary of VSE Aviation, Inc.

under our Aviation Group.

See Note (2) "Acquisition" to our Consolidated Financial Statements included below in Item 8 for additional information regarding our acquisition of 1st Choice Aerospace.

under our Aviation segment.

In February 2020, we sold our subsidiary Prime Turbines, LLC ("Prime Turbines") and certain related inventory assets for $20.0 million in cash and a $8.3 million note receivable to be paid over a period from 2020 through 2024.

Our Aviation segment discontinued turboprop engine MRO services, and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets.

Prime Turbines' revenues totaled less than 1% and approximately 4% of our revenue for 2020 and 2019, respectively.

In June 2020, we sold all of the inventory of our subsidiary CT Aerospace, LLC ("CT Aerospace") for a $6.9 million note receivable to be paid to us over a period from 2020 through 2025.

Our Aviation segment discontinued sales and leasing of engines and supply of used serviceable engine parts.

CT Aerospace's revenues totaled less than 1% and less than 2% of our revenue for 2020 and 2019, respectively.

See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our acquisition and divestitures.

Public Common Stock Offering

In February 2021, we completed an underwritten public offering of common stock, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million through the issuance of 1,599,097 shares of common stock, including an additional 170,497 shares that were issued pursuant to the underwriters' exercise of their option to purchase additional shares, at an offering price of $35.00 per share.

We expect to use the net proceeds for general corporate purposes, which may include among other things, financing strategic acquisitions, working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.

Organization and Segments

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

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

(1) Aviation;

(2) Supply Chain Management;

and (3) Federal Services.

and (3) Federal and Defense.

We provide more information about each of these reportable segments under Item 1, “Business-History and Organization.”

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Source of Revenues 2020 % 2019 % 2018 %

DoD $ 236,397 36 $ 304,334 41 $ 334,494 48

Other government 216,957 33 205,775 27 212,118 30

Commercial 208,305 31 242,518 32 150,606 22

Total Revenues $ 661,659 100 $ 752,627 100 $ 697,218 100

COVID-19 Discussion

Forward Looking Information

Disclosures that address business and operating considerations associated with the COVID-19 pandemic are made under highly uncertain conditions and may involve forward looking information that is based on assumptions and expectations regarding future events.

Please refer to the discussion under Item 1A, "Risk Factors" of this annual report on Form 10-K with respect to our discussion of trends or uncertainties arising from or impacted by the COVID-19 pandemic.

Demand for Products and Services, Operating Results, and Financial Condition

All of our businesses have remained operational since the onset of the COVID-19 pandemic through the end of 2020, and we continue to operate with limited disruption.

We have experienced varying levels of reduction in demand for our services and products, and have adjusted our cost structure to support the current and near-term forecasted demand environment.

The majority of the cost reductions occurred within our Aviation segment, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services.

We currently anticipate demand levels within the Aviation segment will remain muted through the first half of 2021, pending a recovery in the broader market.

This decrease in demand adversely impacted our operating results for 2020.

While current conditions raise the potential for a decline in performance for our Fleet segment and our Federal and Defense segment, we anticipate limited disruption in demand for the products and services they offer, as compared to other industries, due to the nature of their government, defense and e-commerce customer bases.

Our parts supply for truck fleets, including the United States Postal Service ("USPS") delivery vehicles and our DoD program services, provide support for the essential services conducted by our customers.

We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic;

however, a prolonged disruption in the demand for our products and services could have an adverse impact on our operating results and cause a material adverse change in our financial condition.

We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.

Capital, Financial Resources, Credit Losses, and Liquidity

Our debt capital and liquidity position have not experienced a material adverse change resulting from the COVID-19 pandemic at this time, and we are meeting our obligations in a timely manner.

We currently have sufficient cash flows and unused loan commitments to meet our obligations in the near term.

Weakness in our Aviation segment customer markets has caused a delay in receivables collections and an increase in bad debt expense.

This trend may continue in future periods.

We do not anticipate receivables collections to negatively impact our Fleet or Federal and Defense segments.

We have a loan agreement with a bank group comprised of ten banks, including multiple large banks and multiple regional banks.

Our revolving credit facility under this loan agreement provides $350 million in loan commitments, of which we have currently borrowed approximately 50%.

The potential for additional declines in our earnings may impact our financial covenant ratios in future periods.

Accordingly, in the second quarter of 2020, we amended the loan agreement to provide increased financial covenant flexibility through 2021.

Material Impairments

Due to the continued market volatility caused by the COVID-19 pandemic, we performed an interim impairment analysis of our goodwill during the second quarter of 2020.

Our interim analysis indicated that our reporting units in our Fleet and Federal and Defense segments had fair values substantially in excess of their carrying values, and we believe the COVID-19 pandemic induced economic crisis is not likely to have a material adverse impact on customer demand for products and services provided by these two segments.

Accordingly, at this time we do not anticipate any impairments in these two business segments.

Our interim impairment analysis indicated that our VSE Aviation reporting unit, within our Aviation segment, had a fair value less than its carrying value and had incurred an impairment.

We recognized a goodwill impairment charge of $30.9 million for our VSE Aviation reporting unit in the second quarter of 2020.

Prior to the onset of the COVID-19 pandemic, our Aviation segment was performing strongly.

Our VSE Aviation reporting unit experienced lower customer demand in 2020 as compared to 2019, and we expect it will continue to experience lower customer demand during the first half of 2021, but we believe market opportunities will increase for us in the long term.

Accordingly, at this time we do not anticipate any further material impairments in our Aviation segment.

However, should the magnitude and duration of the downturn be greater than we anticipated in our analysis, there could be further impairment.

Balance Sheet Asset Valuation

Our goodwill and intangible assets could be impacted by changes in economic conditions affecting our revenue projections and the market valuation of public companies.

See "Material Impairments" above for further details.

We do not believe that there are or will be significant changes in judgments in determining the fair value of other assets on our balance sheet or that our ability to timely account for them will be negatively impacted.

While the COVID-19 pandemic may cause some delays in collecting some of our accounts receivable and potentially give rise to some bad debt write offs, we do not expect this to have a material impact on our accounts receivable.

We have made opportunistic purchases of aviation parts, resulting in an increase in our inventory levels.

While the COVID-19 pandemic has slowed demand for our products, we do not expect a material adverse impact to the carrying value of our inventory.

If we experience further slowness in demand or if the lower level of demand lasts significantly longer than we anticipate, our inventory may be subject to valuation adjustments.

Administrative Continuity and Reporting Systems

We have modified our workforce policies, procedures and capabilities for most of our administrative personnel to work remotely, including our financial reporting personnel.

This remote work arrangement is working as intended and has not had any adverse effect on our ability to maintain financial operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.

Business Continuity Plans

As the COVID-19 pandemic continues to drive global uncertainty, we remain focused on protecting the safety of our employees, continuing to serve our customers with the highest quality product and repair services, and on upholding the strength of the business.

Our business operations are deemed critical and essential by Federal and State governments.

All of our repair, distribution and base operations facilities remain open and operational, and we continue to deliver products and services to customers without interruption.

We implemented virus prevention protocols consistent with guidelines issued by the U.S.

Centers for Disease Control and Prevention, and mandated remote working where practicable.

We do not anticipate any material expenditures or resource constraints in supporting our operations at this time.

Impact on Supply Chain

Major customers and suppliers of our Fleet, Federal and Defense, and Aviation segments remain open and continue to operate.

Our Fleet segment customers provide essential services, and we, along with our suppliers, play a key role in keeping truck fleets operable.

Our Federal and Defense segment customers continue their mission critical essential services.

Our Aviation segment customers continue to operate, albeit at lower rates.

While the overall economic downturn may cause some slowness in every industry, we do not anticipate any parts availability concerns, disruptions in our supply of materials or resources, or an adverse impact on our procurement capabilities or product costs.

Health and Safety

The health and safety of our employees, customers and communities are of primary concern.

We have taken significant steps to protect our workforce including but not limited to, working remotely.

For our locations with an active on-site workforce, we implemented virus prevention protocols consistent with guidelines issued by the U.S.

Centers for Disease Control and Prevention and are following local ordinances and guidance.

We have taken steps at our facilities to ensure additional employee safety, including implementing separate operational shifts, strict social distancing requirements, providing personal protective equipment and stringent requirements for cleaning and sanitizing at our work sites.

We do not anticipate our operations being materially impacted by any constraints or other impacts on our human capital resources and productivity.

In the second quarter of 2020, we implemented a cost reduction plan which included a reduction in workforce and reduced approximately $13 million in expenses on an annualized basis.

Travel Restrictions

Travel restrictions and border closures may limit the manner in which our sales and support staff service our customers.

We do not anticipate this will have a material impact on our ability to continue to operate.

Business Trends

The following discussion provides a brief description of some of the key business factors impacting our results of operations detailed by segment.

Aviation Group

Organic revenue growth in our existing businesses was approximately 11%.

Including contributions from the 1st Choice Aerospace acquisition, revenues increased approximately 54% .

Growth in our distribution services was driven by our parts distribution expansion to global commercial and business and general aviation customers.

Growth in our MRO services was driven by our acquisition of 1st Choice Aerospace.

Since the acquisition, 1st Choice Aerospace's financial performance has exceeded our expectations on a revenue and operating income basis.

We believe this progress, together with the introduction of new sales initiatives, have positioned us for further growth going forward.

We have a positive outlook for the Aviation Group in 2020.

Aviation Segment

The COVID-19 pandemic caused a reduction in global demand for air travel and decreased revenue passenger miles, which had an adverse impact on demand for our Aviation products and services beginning in the second quarter of 2020.

Due to the uncertainty in the travel industry associated with the COVID-19 pandemic, we expect decreased demand to continue into the first half of 2021.

Revenue in our non-divested Aviation businesses for the fourth quarter of 2020 decreased approximately 26% from the fourth quarter of 2019.

Despite the year over year decline, we believe that the second quarter of 2020 represented the bottom of the revenue decline, as revenue in our non-divested Aviation businesses for the third and fourth quarters of 2020 have increased sequentially since the second quarter of 2020.

In the first quarter of 2020, we divested our Prime Turbines subsidiary, a business offering turboprop engine MRO services.

In the second quarter of 2020, we sold all of the inventory assets of our CT Aerospace subsidiary, a business offering turboprop engine and engine parts sales.

We will no longer offer these services, focusing instead on higher growth component and accessory repair and parts distribution.

Supply Chain Management Group

Our Supply Chain Management Group continues to diversify beyond the USPS managed inventory program, with non-USPS group revenue growing nearly 20% on a year-over-year basis in 2019, supported by increased activity with commercial parts distribution.

To enable this transition, we are focused on expanding its presence in both new and existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs.

Our e-commerce fulfillment services showed promising growth in 2019 and we expect continued expansion of this service offering going forward.

We have a positive outlook for the Supply Chain Group in 2020.

Federal Services Group

In the fourth quarter of 2019, we hired new leadership for our Federal Services Group as we prepare to navigate through a challenging year ahead for this group with a greater focus on growth and redefining VSE in the federal marketplace.

We are investing in business development, growing our capability offerings, and broadening our range of new business targets to build our contract backlog and expand our markets.

We expect positive results from these efforts over time and the revenue decline experienced in this business in 2019 may extend into 2020.

This potential decline is primarily attributable to the completion of a large U.

We expect that the current disruption in market conditions will result in strategic opportunities for near and long term growth.

We intend to pursue these opportunities, which may require future investment.

Fleet Segment

Our Fleet segment continues to focus on both its core USPS and DoD customer base and commercial customer diversification.

We are expanding our presence in both new and existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs to new commercial customers.

Commercial customer revenue continues to see a strong growth trend, increasing more than 80% during the fourth quarter of 2020 compared to the same period in 2019, driven by a 185% increase in e-commerce fulfillment revenues.

We believe the COVID-19 pandemic is likely to have a limited adverse impact on revenues for this segment of our business, as demand from our commercial truck fleet customers and our e-commerce platforms has remained consistent.

Federal and Defense Segment

We entered 2020 with a focus on redefining VSE in the federal marketplace, investing in business development, growing our capability and product offerings, and broadening our range of new business targets to build our contract backlog and expand our markets and offerings.

The anticipated revenue decline experienced by this segment in 2020 is primarily attributable to the expiration of a large U.S.

Army contract in January 2020.

We expect our refocused business development efforts in 2020 to produce revenue growth in subsequent years.

We expect that our refocused business development efforts in 2020

will produce revenue growth in subsequent years.

We expect the COVID-19 pandemic to have a limited adverse impact on revenues for this segment, as the U.S.

government is expected to maintain critical DoD preparedness programs.

Financial Statement Presentation

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Revenues are derived from the delivery of products and from professional and technical services performed through various ordering agreements and contract agreements.

The three primary types of contracts used are cost-type, fixed-price, and time and materials.

Revenues from these contracts result from work performed on these contracts and from costs for materials and other work-related contract allowable costs.

Our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost-type, fixed-price, and time and materials.

Revenues from these contract types result from work performed on these contracts and from costs for materials and other work-related contract allowable costs.

Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers.

Costs and Operating Expenses

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indirect costs associated with our direct contract costs;

sales, general, and administrative expenses associated with our operating groups and corporate management;

sales, general, and administrative expenses associated with our operating segments and corporate management;

and certain costs and charges arising from nonrecurring events outside the ordinary course of business.

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Segment results also include expense for an allocation of corporate management costs.

We reduced controllable costs during 2020 in line with the anticipated decrease in demand resulting from the COVID-19 pandemic.

Bookings and Funded Backlog

Revenues for government contract work performed by our Federal Services Group depend on contract funding (“bookings”), and bookings generally occur when contract funding documentation is received.

Revenues for federal government contract work performed by our Federal and Defense segment depend on contract funding (“bookings”), and bookings generally occur when contract funding documentation is received.

Funded contract backlog is an indicator of potential future revenue.

While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.

A summary of our bookings and revenues for our Federal Services Group for the years ended December 31, 2019 , 2018 and 2017 , and funded contract backlog for this group as of December 31, 2019 , 2018 and 2017 is as follows (in millions):

For the year ended December 31, 2020, Federal and Defense segment bookings increased 18% year-over-year to $270 million, while total funded backlog declined 14% year-over-year to $183 million.

The decline in funded backlog was primarily attributable to the completion of certain DoD contracts in 2020.

The current management team is focused on revitalizing this business, with an emphasis on growing backlog to promote future revenue growth.

A summary of our bookings and revenues for our Federal and Defense segment for the years ended December 31, 2020, 2019 and 2018, and funded contract backlog for this segment as of December 31, 2020, 2019 and 2018 is as follows (in millions):

2020 2019 2018

Bookings $ 270 $ 228 $ 321

Revenues $ 254 $ 314 $ 337

Funded Backlog $ 183 $ 213 $ 290

Critical Accounting Policies, Estimates and Judgments

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.

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, 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.

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We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.

Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties could choose different assumptions and reach different conclusions.

Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties

could choose different assumptions and reach different conclusions.

We consider our policies relating to the following matters to be critical accounting policies.

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In most instances, contract modifications are for goods or services that are not distinct, and therefore are accounted for as part of the existing contract.

Substantially all Supply Chain Management Group revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer.

Substantially all Fleet segment revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer.

Sales returns and allowances for vehicle parts are not significant.

Our Aviation Group revenues result from the sale of aircraft parts and performance of MRO services for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers.

Our Aviation Group recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped.

Our Aviation Group recognizes revenues for MRO services over time as the services are transferred to the customer.

Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers.

Our Aviation segment recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped.

Our Aviation segment recognizes revenues for MRO services over time as the services are transferred to the customer.

MRO services revenue recognized is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore the services transferred to date.

Sales returns and allowances are not significant.

Our Federal Services Group revenues result from professional and technical services, which we perform for customers on a contract basis.

Our Federal and Defense segment revenues result from professional and technical services, which we perform for customers on a contract basis.

Revenue is recognized for performance obligations over time as we transfer the services to the customer.

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The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows.

In the fourth quarter of 2019, we performed our annual goodwill impairment analysis for each of our reporting units with goodwill.

The results of the impairment analysis indicated that our reporting units had fair values substantially in excess of their carrying values except for our VSE Aviation reporting unit.

The fair value of our VSE Aviation reporting unit, within our Aviation Group, exceeded its carrying value by approximately 6%.

While the revenue and operating income of our Aviation reporting unit improved since the prior year impairment test, the fair value of our Aviation reporting unit can be significantly impacted by changes in expected future orders, discount rates and long

term growth rates, along with other significant judgments.

Recent operating performance, along with assumptions for specific customer and industry opportunities, were considered in the key assumptions used during the 2019 impairment analysis.

The key valuation assumptions used in the analysis of this reporting unit are a discount rate of 13% and an average revenue growth rate of 10% over a seven-year period, and a long-term revenue growth rate of 3% in the terminal year.

We determined this reporting unit may have an increased likelihood of impairment if a prolonged downturn in customer demand were to occur, or if the reporting unit was not able to execute against customer opportunities, and the long-term outlook of its cash flows were adversely impacted.

Furthermore, the fair value of the reporting unit could be adversely affected by other market factors such as an increase in the discount rate used in the income approach or a decrease in the market multiples used in the market approach, or an increase in the carrying value of this reporting unit.

The carrying value of our VSE Aviation reporting unit included goodwill of approximately $182.4 million as of December 31, 2019 , which includes $77.8 million of goodwill resulting from the acquisition of 1 st Choice Aerospace .

As of December 31, 2019 , we have no intangible assets with indefinite lives and we had an aggregate of approximately $276 million of goodwill associated with our acquisitions.

In the first quarter of 2020, despite the excess fair value identified in our 2019 impairment assessment, market conditions as a result of the COVID-19 pandemic resulted in a significant decline in our market capitalization as well as an overall stock market decline amid market volatility, triggering the need for an interim goodwill impairment test.

We performed an interim impairment analysis as of March 31, 2020, utilizing a qualitative approach for our reporting units.

Under this approach, we reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, which included the duration and extent of the impact to our business from the COVID-19 pandemic.

We concluded it was more likely than not that the fair value exceeded the carrying value of our reporting units with the exception of our VSE Aviation reporting unit, which required a quantitative impairment test.

Under the income approach, the fair value of our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate discount rate.

We used our updated forecasts which considered recent events to estimate future cash flows.

Our forecasts assumed containment of the COVID-19 pandemic to be achieved by mid-2020 with a gradual increase in travel demand beginning mid-to-late 2020 and into 2021, with substantial recovery thereafter.

Based on our assessment, it was determined that the fair value of the VSE Aviation reporting unit approximated its carrying value and no impairment charge was required.

Given the continued presence and impact of the COVID-19 pandemic on the global economy, we performed an interim impairment analysis in the second quarter of 2020 utilizing a quantitative assessment approach for all reporting units.

Based on our quantitative impairment assessment as of June 1, 2020, we determined that the fair value of our reporting units, with the exception of our VSE Aviation reporting unit, significantly exceeded their carrying value and no impairment charge was required.

The estimated fair value of our VSE Aviation reporting unit was determined to be below its carrying value.

The key assumptions used to determine the fair value of the VSE Aviation reporting unit were:

(a) expected cash flows with a compounded revenue growth rate of approximately 6% for a period of seven years;

(b) long-term growth rate of 3% in the terminal year;

and (c) a discount rate of 13.5%.

The discount rate was based on a weighted average cost of capital adjusted for relevant risks of the reporting unit's future cash flow assumptions, taking into consideration the risks due to the uncertainty surrounding the effects of the COVID-19 pandemic on our operations.

The internal forecasts used to estimate future cash flows in the quantitative analysis for our VSE Aviation reporting unit projected lower forecasted revenues and operating results than those used in the first quarter interim analysis.

The decline in revenue projections was due to lower demand for the reporting unit's products and services, which was impacted by reduced global air travel and decreased passenger miles caused by the COVID-19 pandemic.

The lower projections also considered updated assumptions regarding the uncertainty surrounding the timing and speed at which recovery from the COVID-19 pandemic could occur.

The updated forecasts assumed suppressed demand to continue throughout 2020 and into 2021, with a slower and more gradual recovery thereafter.

These lower operating results and cash flows from the reductions in revenue, resulted in a substantial decline in the fair value of the VSE Aviation reporting unit.

As a result, we recognized an impairment charge in the second quarter of 2020 of $30.9 million, which is the amount by which the carrying amount exceeded the reporting unit's fair value.

In the fourth quarter of 2020, we performed our annual goodwill analysis, electing to perform a qualitative assessment for each of our reporting units.

In performing this assessment, we reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve, financial forecast information for each reporting unit, and recent performance of the Company's share price.

Our qualitative assessment determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value and therefore a quantitative analysis was not necessary.

We will continue to closely monitor the operational performance of these reporting units as they relate to goodwill impairment.

Our VSE Aviation reporting unit had approximately $144 million of remaining goodwill as of December 31, 2020.

The remaining goodwill balance of this reporting unit continues to be at risk for future impairment due to the uncertainty surrounding the macroeconomic factors impacting this reporting unit.

A sustained downturn, significantly extended recovery, a change in long-term operating growth, or negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods.

We also review the recoverability of our long-lived assets with finite lives when an indicator of impairment exists.

For the same reasons discussed above, we assessed the recoverability of the long-lived assets with finite lives.

Based on our analysis of estimated undiscounted future cash flows expected to result from the use of these long-lived assets with finite lives, we determined that their carrying values were recoverable.

As of December 31, 2020, we had no intangible assets with indefinite lives and we had an aggregate of approximately $238 million of goodwill associated with our acquisitions.

Income taxes are accounted for under the asset and liability method.

Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not.

This method also requires the recognition of future tax benefits, such as net operating and capital loss carryforwards, to the extent that realization of such benefits is more likely than not.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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Recently Issued Accounting Pronouncements

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Recently Issued Accounting Pronouncements" in Note 1 to our Consolidated Financial Statements included below in Item 8.

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Nature of Business and Significant Accounting Policies-Recently Issued Accounting Pronouncements" in Note (1) to our Consolidated Financial Statements included below in Item 8.

Results of Operations

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Years ended December 31,

2020 % 2019 % 2018 %

Revenues $ 661,659 100.0 $ 752,627 100.0 $ 697,218 100.0

Costs and operating expenses 606,896 91.7 692,370 92.0 644,688 92.4

Loss on sale of business entity and certain assets (8,214) (1.2) — — — —

Gain on sale of property 1,108 0.2 — — — —

Goodwill and intangible asset impairment (33,734) (5.1) — — — —

Gain on sale of contract — — — — 1,700 0.2

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Provision for income taxes 5,598 0.8 9,403 1.3 10,168 1.5

Net (loss) income $ (5,171) (0.6) $ 37,024 4.9 $ 35,080 5.0

Year Ended 2020 Compared to Year Ended 2019

Our revenues increased by approximately $ 55 million or 8 % for the year ended December 31, 2019 as compared to the prior year.

The change in revenues for this period resulted from an increase in our Aviation Group revenues of approximately $ 79 million and a decrease in Federal Services Group revenues of approximately $ 23 million.

Our Supply Chain Management Group revenues were substantially unchanged from the prior year.

Our revenues decreased by approximately $91 million or 12%% for the year ended December 31, 2020 as compared to the prior year.

The change in revenues for this period resulted from decreases in our Aviation segment and Federal and Defense segment revenues of approximately $59 million and $59 million respectively, and an increase in our Fleet segment revenues of approximately $28 million.

See "Segment Operating Results" for a breakdown of our results of operations by segment.

Costs and Operating Expenses

Our costs and operating expenses increased by approximately $48 million or 7% in 2019 as compared to 2018.

The change in costs and operating expenses resulted primarily from an increase in our Aviation Group of approximately $ 72 million , an increase in our Supply Chain Management Group of approximately $ 0.5 million, and a decrease in our Federal Services Group of approximately $ 27 million.

Costs and expenses for 2019 included approximately $2.3 million of acquisition related and executive succession costs.

Our costs and operating expenses decreased approximately $85 million or 12% in 2020 as compared to 2019.

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.

Costs and operating expenses for 2020 included an expense reduction of approximately $5.0 million for an adjustment to our earn-out obligation, an expense of approximately $1.0 million for executive transition costs, and an expense of approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand.

Costs and expenses for 2019 included expenses of approximately $2.3 million for acquisition related and executive transition costs.

Loss on Sale of a Business Entity and Certain Assets

Loss on sale of a business entity and certain assets of $8.2 million is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of

2020, plus the difference between the carrying value on our books of our CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.

Gain on Sale of Property

Gain on sale of property of $1.1 million is comprised the sale of a Miami, Florida real estate holding during the first quarter of 2020.

Goodwill and Intangible Asset Impairment

Goodwill and intangible asset impairment of $33.7 million is comprised of a charge to write down the carrying value of our Aviation businesses in the second quarter of 2020 due to an anticipated decline in demand for these services caused by the global aviation industry downturn associated with the COVID-19 pandemic and a charge to write down the carrying value of CT Aerospace related intangible assets in the second quarter of 2020 that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.

Operating Income

Our operating income for 2019 increased approximately $6.0 million or 11.1% as compared to 2018 .

Operating income increased by approximately $ 6.8 million for our Aviation Group and approximately $ 2.3 million for our Federal Services Group and decreased by approximately $0.8 million for our Supply Chain Management Group.

Operating income for 2019 was decreased by approximately $2.3 million due to the costs and expenses associated with acquisition related and executive succession costs.

Our operating income decreased approximately $46.3 million or 76.9% for 2020 as compared to 2019.

Operating income decreased approximately $53.0 million for our Aviation segment and approximately $3.2 million for our Fleet segment, and increased approximately $8.0 million for our Federal and Defense segment.

The decrease in the operating income for our Aviation segment was primarily due to a $33.7 million goodwill and intangible asset impairment charge and a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory.

Operating income for 2020 increased approximately $5.0 million for an adjustment to our earn-out obligation and $1.1 million for a gain on the sale of certain real estate holdings, and decreased approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand.

Operating income for 2019 decreased approximately $2.3 million for acquisition related and executive transition costs.

Interest Expense

Interest expense increased approximately $4.8 million in 2019 as compared to 2018 primarily due to additional borrowing associated with the 1 st Choice Aerospace acquisition in January 2019.

Interest expense decreased approximately $334 thousand in 2020 as compared to 2019 primarily due to a reduction in bank borrowing and lower average interest rates.

Provision for Income Taxes

Our effective tax rate was 20.3% for 2019 , 22.5% for 2018 , and 13.3% for 2017 .

The Tax Act passed in December 2017 resulted in a decrease to our federal tax rate and cash tax payments beginning 2018.

Due to the Tax Act, we recorded a one-time reduction in our deferred tax liabilities in the fourth quarter of 2017 that resulted in a reduction in our provision for income taxes of approximately $10.6 million for the year and lowered our effective tax rate for 2017.

The reduction in our effective tax rate in 2019 from 2018 was primarily attributable to:

(1) unrealized investment gain from our COLI plan in the current year;

(2) specific Tax Act related regulations issued by the Treasury in 2019 that resulted in favorable adjustment to our prior year estimates;

and (3) some state job tax credits approved in 2019.

Our effective tax rate was 1,311.0% for 2020 and 20.3% for 2019.

The increase in the effective tax rate for 2020 compared to 2019 primarily results from:

(1) significantly lower pre-tax book income in the current year, (2) approximately $16.4 million of our goodwill impairment loss that is non-deductible for income tax purposes, and (3) a full valuation allowance established to offset the capital loss benefit in connection with our divestiture of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period.

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.

In addition to state income taxes, certain tax credits and other items caused differences between our statutory U.S.

In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income ("FDII") deduction and unrealized investment income or loss from our COLI plan caused differences between the statutory U.S.

federal income tax rate and our effective tax rate.

Other permanent differences and federal and state tax credits such as foreign derived intangible income ("FDII") deduction, the work opportunity tax credit, and educational improvement tax credits provide benefit to our tax rates.

Segment Operating Results

Aviation Group Results

The results of operations for our Aviation Group are (in thousands):

Aviation Segment Results

The results of operations for our Aviation segment are (in thousands):

Years ended December 31,

2020 % 2019 % 2018 %

Revenues $ 165,070 100.0 $ 224,546 100.0 $ 145,423 100.0

Costs and operating expenses 159,743 96.8 206,645 92.0 134,347 92.4

Operating income

Revenues for our Aviation Group increased approximately $79 million or 54% for 2019 as compared to the prior year.

Distribution revenues increased approximately $30 million and repair revenues increased approximately $49 million.

Costs and operating expenses increased approximately $72 million or 54% and operating income increased approximately $7 million or 62% for 2019, primarily due to the revenue increase.

Our 2019 results include repair revenues, costs and expenses, and operating income from our January 2019 acquisition of 1 st Choice Aerospace.

Costs and operating expenses for this group include expense for amortization of intangible assets associated with acquisitions, allocated corporate costs, and valuation adjustments to accrued earn-out obligations associated with acquisitions.

Loss on sale of business entity and certain assets (8,214) (5.0) — — — —

Gain on sale of property 1,108 0.7 — — — —

Goodwill and intangible asset impairment (33,734) (20.4) — — — —

Operating (loss) income $ (35,513) (21.5) $ 17,901 8.0 $ 11,076 7.6

Revenues for our Aviation segment decreased approximately $59 million or 26% for 2020 as compared to the prior year.

Distribution revenues decreased approximately $23 million and repair revenues decreased approximately $36 million.

The revenue declines are primarily attributable to the impact of the COVID-19 pandemic on the broader aviation markets that has lowered demand from our Aviation customers and the divestiture of Prime Turbines in February 2020 and the sale of all of CT Aerospace inventory in June 2020.

Revenues for the divested businesses were approximately $8.9 million for 2020 compared to approximately $38 million for 2019.

Costs and operating expenses decreased approximately $47 million or 23% for 2020 compared to 2019 due to decreased demand for our products and services, as a result of the COVID-19 pandemic, cost reduction actions implemented in response to the reduction in demand, and the elimination of costs and expenses associated with our divested businesses.

Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions, allocated corporate costs, and valuation adjustments to accrued earn-out obligations associated with acquisitions.

Expense for amortization of intangible assets was approximately $8.8 million and $10 million for 2020 and 2019, respectively.

Expense for allocated corporate costs was approximately $5.8 million and $6.6 million for 2020 and 2019, respectively.

Valuation adjustments to the accrued earn-out obligation increased costs and operating expenses approximately $1.9 million for 2019.

Supply Chain Management Group Results

The results of operations for our Supply Chain Management Group are (in thousands):

Valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximately $5.0 million for 2020 and increased costs and operating expenses approximately $1.9 million for 2019.

Loss on sale of a business entity and certain assets of $8.2 million for 2020 is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of 2020, plus the difference between the carrying value on our books of CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.

Gain on sale of property for 2020 is comprised of approximately $1.1 million associated with the sale of a Miami, Florida real estate holding.

The goodwill and intangible asset impairment of $33.7 million for 2020 is comprised of a charge to write down the goodwill carrying value of our Aviation businesses due to an anticipated decline in demand for these services caused by the global aviation industry downturn associated with the COVID-19 pandemic and a charge to write down the carrying value of CT Aerospace related intangible assets that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.

We had an operating loss of approximately $35.5 million in 2020 compared to operating income of approximately $17.9 million in 2019, a decrease of approximately $53.4 million or 298%.

The primary components of the decrease were a $33.7 million goodwill and intangible asset impairment charge, a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory, non-recurring expenses of approximately $1.1 million for inventory valuation adjustments and other closing costs related to the relocation of our German facility operations, and a decline in profits for our continuing businesses due to a decrease in demand for our products and services associated with the COVID-19 pandemic.

Partially offsetting the decrease was a $1.1 million gain on the sale of certain real estate holdings and $5.0 million benefit for an adjustment to our earn-out obligation in connection with the acquisition of 1st Choice Aerospace.

Fleet Segment Results

The results of operations for our Fleet segment are (in thousands):

Years ended December 31,

2020 % 2019 % 2018 %

Revenues $ 242,170 100.0 $ 214,520 100.0 $ 214,809 100.0

Costs and operating expenses 215,511 89.0 184,701 86.1 184,183 85.7

Operating income $ 26,659 11.0 $ 29,819 13.9 $ 30,626 14.3

Revenues for our Supply Chain Management Group were substantially unchanged for 2019 , as compared to the prior year.

Revenues from sales to the DoD were substantially unchanged, revenues from sales to other government customers decreased approximately $8.1 million or 5%, and revenues from commercial customers increased approximately $7.8 million or 55%.

Costs and operating expenses increased approximately $0.5 million or 0.3% and operating income decreased by approximately $0.8 million or 3% for 2019 as compared to the prior year.

The decrease in operating income was primarily attributable to a change in the mix of customers and products sold, which lowered our profit margins.

Federal Services Group Results

The results of operations for our Federal Group are (in thousands):

Revenues for our Fleet segment increased approximately $28 million or 13% for 2020, as compared to the prior year.

Revenues from commercial customers increased approximately $21 million or 93%, driven by growth in our e-commerce fulfillment business.

Revenues from sales to DoD customers decreased approximately $4 million or 14%, and revenues from sales to other government customers increased approximately $11 million or 6%.

Sales to other government customers included revenue of approximately $26.6 million for fulfillment of a non-recurring order for COVID-19 related supplies.

Costs and operating expenses increased approximately $31 million or 16.7%, primarily due to the non-recurring order for COVID-19 related supplies.

Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions and allocated corporate costs.

Expense for amortization of intangible assets was approximately $7.4 million for 2020 and approximately $7.9 million for 2019.

Expense for allocated corporate costs was approximately $8.0 million for 2020 and approximately $6.2 million for 2019.

Operating income decreased by approximately $3.2 million or 11% for 2020 as compared to the prior year, primarily due to a change in the mix of products sold, including increased commercial customer revenues and the non-recurring order for COVID-19 related supplies, which had a nominal profit margin.

Federal and Defense Segment Results

The results of operations for our Federal and Defense segment are (in thousands):

Years ended December 31,

2020 % 2019 % 2018 %

Revenues $ 254,419 100.0 $ 313,561 100.0 $ 336,986 100.0

Costs and operating expenses 228,110 89.7 295,417 94.2 322,889 95.8

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Operating income $ 26,309 10.3 $ 18,144 5.8 $ 15,797 4.7

Revenues for our Federal Services Group decreased approximately $ 23 million or 7 % and costs and operating expenses decreased approximately $27 million or 9% for 2019 , as compared to the prior year primarily due to the changes in the level of work required on our existing contracts.

Significant items affecting changes in our revenues and costs and operating expenses for 2019 included a decrease of approximately $51 million in revenues from our FMS Program, an increase of approximately $23 million in revenues from our U.

Army work, and increased revenues of approximately $5 million from other work.

Gain on sale of contract is comprised of $1.7 million associated with the sale of an indefinite-delivery/indefinite-quantity government-wide acquisition contract in the third quarter of 2018.

Revenues for our Federal and Defense segment decreased approximately $59 million or 19% and costs and operating expenses decreased approximately $67 million or 23% for 2020, as compared to the prior year primarily due to the expiration of a large U.S.

Army contract in January 2020 and two other U.S.

Army contracts in the second half of 2020.

Other changes affecting our revenues and costs and operating expenses included increased revenues from existing U.S.

Operating income increased approximately $8.2 million or 45% for 2020 compared to the prior year.

Revenue declines occurred in our lower margin work, resulting in minimal loss of operating income, and we have increased operating income through margin improvements on our other work.

Revenue declines occurred in our lower margin work, resulting in minimal loss of operating income, and we have increased operating income through margin improvements primarily due to work performed under fixed price contracts.

Financial Condition

There has been no material adverse change in our financial condition in 2020.

Our bank debt increased approximately $110 million primarily due to our acquisition of 1st Choice Aerospace in January 2019.

Changes to asset and liability accounts were primarily due to our earnings, our level of business activity, the timing of inventory purchases, contract delivery schedules, subcontractor and vendor payments required to perform our contract work, the timing of associated billings to and collections from our customers, and the acquisition.

In November 2019, we amended our bank loan agreement to increase the amount of bank loan commitments available to us from $373.3 million to $473.3 million and modify other terms and conditions.

Our bank debt decreased approximately $19.3 million and our earn-out obligation in connection with the acquisition of 1st Choice Aerospace decreased approximately $36.7 million.

We had $175 million of unused bank loan commitments as of December 31, 2020.

In June 2020, we amended our loan agreement with our banks to provide increased financial covenant flexibility due to market volatility resulting from the COVID-19 pandemic.

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

our level of business activity;

the timing of inventory purchases, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work;

the timing of government contract funding awarded;

collections from our customers;

the sale of a real estate holding in Miami, Florida;

and the divestiture of our Prime Turbines business and sale of CT Aerospace inventory.

Liquidity and Capital Resources

Cash and cash equivalents increased by approximately $572 thousand during 2019.

Cash provided by operating activities decreased approximately $861 thousand in 2019 as compared to 2018.

The change was attributable to an increase of approximately $1.9 million in cash provided by net income, an increase of approximately $6.4 million in other non-cash operating activities and a decrease of approximately $9.2 million due to changes in the levels of operating assets and liabilities.

Cash and cash equivalents decreased by approximately $356 thousand during 2020.

Cash provided by operating activities increased approximately $17.8 million in 2020 as compared to 2019.

The change was attributable to a decrease of approximately $42.2 million in cash provided by net income, an increase of approximately $31.4 million in other non-cash operating activities and an increase of approximately $28.6 million due to changes in the levels of operating assets and liabilities.

Inventories and accounts receivable represent a significant amount of our assets, and accounts payable represent a significant amount of our operating liabilities.

Cash used related to increases in inventory was approximately $44.2 million , cash used related to increases in receivables and unbilled receivables was approximately $7.9 million , and cash provided by increases in accounts payable and deferred compensation was approximately $7.7 million for 2019.

Cash used related to increases in inventory was approximately $50.2 million, cash provided by decreases in receivables and unbilled receivables was approximately $27.4 million, and cash provided by increases in accounts payable and deferred compensation was approximately $3.5 million for 2020.

The increase in our inventory levels were primarily due to purchases of inventory in connection with new program initiatives.

A significant portion of accounts receivable and accounts payable result from the use of subcontractors to perform work on our contracts and from the purchase of materials and inventory to fulfill contract obligations and distribution agreements.

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Such timing differences have the potential to cause significant increases and decreases in our inventory, accounts receivable, and accounts payable in short time periods, and accordingly, can cause increases or decreases in our cash provided by operations.

Cash used in investing activities increased approximately $121.5 million in 2019 as compared to 2018.

In 2019, approximately $113.0 million was used for the acquisition of 1st Choice Aerospace and approximately $5.0 million was used for the purchase of an operating facility for 1st Choice Aerospace.

Other cash used in investing activities in 2019 and 2018 consisted primarily of purchases of property and equipment and the sale of a contract in 2018.

Cash provided by financing activities was approximately $105.4 million in 2019 as compared to cash used in financing activities of approximately $18.0 million in 2018.

Financing activities consisted primarily of borrowing and repayment of debt, payment of dividends and debt financing costs.

We have recently experienced and expect to continue to experience delays in some of our Aviation segment receivables as a result of the COVID-19 economic down-turn.

Cash provided by investing activities was approximately $20.2 million for 2020 compared to cash used in investing activities of approximately $122.8 million for 2019.

In 2019, approximately $113 million was used for the acquisition of 1st Choice Aerospace and in 2020, approximately $24.2 million was provided by proceeds from the divestiture of our Prime Turbines business and CT Aerospace inventory and the sale of a Miami, Florida real estate holding.

Other cash used in investing activities consisted primarily of purchases of property and equipment.

Cash used in financing activities was approximately $56.3 million in 2020 as compared to cash provided by financing activities of approximately $105.4 million in 2019.

Financing activities consisted primarily of borrowing and repayment of debt, earn-out obligation payments and dividend payments.

We paid cash dividends totaling approximately $4.0 million or $0.36 per share during 2020.

Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions.

We have paid cash dividends each year since 1973 and have increased our dividend each year since 2004.

We have paid cash dividends each year since 1973.

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.

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and invest in the acquisition of other companies.

Our external financing consists of a loan agreement with a bank group that provides for a term loan, revolving loans and letters of credit.

The loan agreement, which was amended in November 2019 and expires in January 2023, has a term loan facility and a revolving loan facility.

We have considered the effects of the COVID-19 pandemic on our liquidity and capital resources, and we currently do not expect a material adverse impact on our ability to meet future liquidity needs.

See “COVID-19 Discussion-Capital, Financial Resources, Credit Losses, and Liquidity” and Item 1A, "Risk Factors" for additional details regarding the impact of COVID-19 on our liquidity and capital resources.

As discussed in greater detail below, under the terms of our existing loan agreement, we are required to maintain certain financial covenants.

The COVID-19 pandemic has disrupted the demand for our Aviation segment products and services and further disruption is possible.

Accordingly, we amended our existing loan agreement with our banks in the second quarter of 2020 to provide increased financial covenant flexibility.

Our external financing consists of a loan agreement with a bank group that was amended in June 2020 and expires in January 2023.

The loan agreement includes a term loan facility and a revolving loan facility.

The revolving loan facility provides for revolving loans and letters of credit.

The term loan requires quarterly installment payments.

Our required term loan payments after December 31, 2019 are approximately $17.8 million in 2020, $21.6 million in 2021, $22.5 million in 2022, and $58.9 million in 2023.

Our required term loan payments after December 31, 2020 are approximately $21.6 million in 2021, $22.5 million in 2022, and $33.9 million in 2023.

The amount of term loan borrowings outstanding as of December 31, 2020 was $78.0 million.

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We pay an unused commitment fee and fees on letters of credit that are issued.

We had approximately $152.0 million in revolving loan amounts outstanding and $54 thousand of letters of credit outstanding as of December 31, 2019 .

We had approximately $175.5 million in revolving loan amounts outstanding and no of letters of credit outstanding as of December 31, 2020.

We had approximately $152.0 million in revolving loan amounts outstanding and $54 thousand letters of credit outstanding as of December 31, 2019.

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The aggregate limit of incremental increases is $100 million.

Total bank loan borrowed funds outstanding, including term loan borrowings and revolving loan borrowings, were approximately $272.8 million and $162.7 million as of December 31, 2019 and 2018 , respectively.

These amounts exclude unamortized deferred financing costs of approximately $2.8 million and $2.1 million as of December 31, 2019 and 2018 , respectively.

The fair value of outstanding debt under our bank loan facilities as of December 31, 2019 approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin.

The applicable LIBOR rate has a floor of 0.75%.

As of December 31, 2020, the LIBOR base margin was 3.00% and the base rate base margin was 1.75%.

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As of December 31, 2020, interest rates on portions of our outstanding debt ranged from 3.75% to 6.32%, and the effective interest rate on our aggregate outstanding debt was 4.80%.

Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $13.3 million and $6.9 million during the years ended December 31, 2019 and 2018 , respectively.

The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations.

The restrictive covenants require that we maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a Funded Debt/EBITDA Ratio of not more than 3.50 to 1.00 (subject to adjustment, in certain circumstances).

The restrictive covenants require that we maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a maximum Total Funded Debt to EBITDA Ratio that varies over future periods as indicated in the table below.

We were in compliance with required ratios and other terms and conditions as of December 31, 2020.

We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants;

at this time, we expect that we will remain in compliance with such covenants over the next twelve months.

In January 2021, we initiated a public offering of shares of VSE common stock pursuant to an effective shelf registration statement.

The offering closed in February 2021 with the sale of 1,599,097 shares, including an additional 170,497 shares that were sold pursuant to the underwriters' exercise of their option to purchase additional shares resulting in net proceeds of approximately $52 million.

Testing Period Maximum Total Funded Debt to EBITDA Ratio

First Amendment Effective Date (November 26, 2019) through and including March 31, 2020 3.50 to 1.00

From April 1, 2020 through and including September 30, 2020 4.00 to 1.00

From October 1, 2020 through and including March 31, 2021 4.25 to 1.00

From April 1, 2021 through and including June 30, 2021 4.00 to 1.00

From July 1, 2021 through and including September 30, 2021 3.75 to 1.00

From October 1, 2021 through and including December 31, 2021 3.50 to 1.00

From January 1, 2022 and thereafter 3.25 to 1.00

We currently do not use public debt security financing.

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Payments Due by Period

Contractual Obligations

Less than 1 year

After 5 years

Contractual Obligations Total Less than 1 year

1-3 years 4-5 years After 5 years

Bank loan debt $ 253,461 $ 21,563 $ 231,898 $ — $ —

Operating lease obligations 31,594 5,366 10,348 10,465 5,415

Purchase obligations

Total $ 285,055 $ 26,929 $ 242,246 $ 10,465 $ 5,415

Estimated cash requirements for interest on our bank loan debt are approximately $9.0 million for 2021 and $6.0 million for 2022.

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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