What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-05 compared with 2020-03-09 · 532 added, 312 removed, 507 unchanged (62% of the section changed)

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Consolidated Balance Sheets as of December 31, 20 20 and 201 9

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of (Loss) Income for the years ended December 31, 20 20 , 201 9 and 201 8

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 20 2 0 , 201 9 and 201 8

Consolidated Statements of Stockholders' Equity for the years ended December 31, 20 20 , 201 9 and 201 8

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of VSE Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of VSE Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of (loss) income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 5, 2021 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, in accordance with the adoption of Accounting Standards Codification ("ASC") Topic 842, Leases .

Basis for opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition based on the percentage of completion method

For the year ended December 31, 2020, the Company’s Federal and Defense Segment (“FDS”) recognized $254.4 million in contract revenue, of which $138.4 million was recognized from services provided on firm-fixed price contract types.

As more fully described in Note 1 to the consolidated financial statements, the Company’s FDS segment recognizes revenue over time as control transfers to a customer, based on the extent of progress towards satisfaction of the related performance obligation.

The selection of the method used to measure progress requires judgment and is dependent on the contract type selected by the customer during contract negotiation and the nature of the services and solutions to be provided.

For performance obligations requiring the delivery of a service for a fixed price, the Company’s FDS segment uses the ratio of actual costs incurred to total estimated costs, provided that costs incurred (an input model) represents a reasonable measure of progress toward the satisfaction of a performance obligation, in order to estimate the portion of total transaction price earned.

We identified the initial development and subsequent changes related to estimates-at-completion as a critical audit matter.

The principal considerations for our determination that the use of estimates-at-completion in recognizing revenue is a critical audit matter are the judgments involved in the initial creation and subsequent updates to the Company’s FDS segment estimates-at-completion and related profit recognized which required challenging and significant auditor judgment in the execution of our procedures.

Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations.

Our audit procedures in response to this matter included the following, among others.

• We tested the design and operating effectiveness of controls relating to the initial drafting of estimates-at-completion and the ongoing monitoring of changes in estimates specific to the estimates-at-completion.

• We tested management’s process for developing, revising and applying estimates-at-completion to a sample of contracts.

Our testing included evaluating key inputs and assumptions by comparing them to underlying supporting documentation or other corroborating evidence, such as subcontractor agreements, historical hours for similar service offerings, or other contractual documentation that supports estimated costs.

• We obtained subsequent event information on a contract-by-contract basis and performed a “look-back” analysis of contracts completed during the year ended December 31, 2020 and compared the final gross margin to the estimated margins throughout the contract life cycle to assess the Company’s FDS segment’s ability to develop reliable estimates.

Goodwill Impairment Assessment – VSE Aviation Reporting Unit

At December 31, 2020, the Company’s Aviation reporting unit had a goodwill balance of $144.1 million which represented approximately 19% of total assets.

As more fully described in Note 1 and Note 7 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level using either a qualitative or quantitative approach.

As part of the quantitative approach, the Company determines the fair value of the reporting unit through a combination of an income-based approach using a discounted cash flow method and market-based valuation methodologies.

An impairment charge will be recognized to the extent that the fair value of the reporting unit is less than its carrying value.

The principal considerations for our determination that performing procedures relating to the quantitative goodwill impairment assessments is a critical audit matter are the significant judgements by management when developing the fair value of the VSE Aviation Reporting Unit.

In particular, the fair value estimate was sensitive to significant assumptions, such as revenue growth rates, operating margins, cash flows, terminal value, discount rates, weighted average costs of capital, and identification of peer group and related market multiples which are affected by expectations about future market or economic conditions and expected future operating results of the Aviation segment business.

Our audit procedures in response to this matter included the following, among others:

• We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s goodwill impairment process.

This included controls over management’s identification and evaluation of triggering events that necessitate the need for an interim goodwill impairment assessment as well as management’s review of the valuation model and significant assumptions underlying the fair value determination, as described above.

• We obtained management’s analysis of triggering events occurring each quarter of fiscal year 2020 and tested the completeness of such evaluation by comparing such events to current economic data and trends and the Company’s press releases specific to major changes in the business.

• We assessed the valuation models used and tested the significant assumptions and the underlying data used by the Company in its analysis.

We compared the revenue and operating margin projections used by management to recent forecasts, current backlog and project estimates, and the Company’s historical results.

We assessed the historical accuracy of management’s revenue and operating margin projections.

We compared the growth rates to current industry and economic trends and other guideline companies within the same industry.

• We reviewed the reconciliation of the fair value of all reporting units to the market capitalization of the Company, including assessing the implied control premium.

We involved our valuation specialists to assist in reviewing the valuation methodology and tested the terminal values and weighted average cost of capital, including company specific risk premiums for the reporting unit.

Our valuation specialist also reviewed the multiples and underlying calculations utilized in the market approach valuations.

/s/ GRANT THORNTON LLP

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of VSE Corporation and Subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with U.S.

We have audited the accompanying consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity and cash flows of VSE Corporation and Subsidiaries (the Company) for the year ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2018, in conformity with U.S.

generally accepted accounting principles .

Adoption of Accounting Standards Update (ASU) No.

2014-09, Revenue from Contracts with Customers (Topic 606)

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018 due to the adoption of Accounting Standards Update (ASU) No.

2014-09, Revenue from Contracts with Customers (Topic 606) , and the related amendments.

Basis for Opinion

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Intangible assets, net 103,595 132,175

Operating lease - right-of-use asset

Goodwill 238,126 276,450

Operating lease - right-of-use assets 20,515 20,943

Other assets 26,525 17,490

Total assets $ 780,081 $ 845,864

Liabilities and Stockholders' equity

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Accounts payable 72,682 68,099

Current portion of earn-out obligations

Current portion of earn-out obligation — 31,700

Accrued expenses and other current liabilities 45,172 46,514

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Deferred compensation 16,027 18,146

Long-term lease obligations, less current portion

Long-term lease obligations under operating leases

Earn-out obligations, less current portion

Long-term operating lease obligations 22,815 24,441

Earn-out obligation, less current portion — 5,000

Deferred tax liabilities 14,897 17,865

Other long-term liabilities 83 —

Total liabilities 423,764 482,763

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Retained earnings 325,097 334,246

Accumulated other comprehensive income

Accumulated other comprehensive loss ( 1,203 ) ( 1,105 )

Total stockholders' equity 356,317 363,101

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VSE Corporation and Subsidiaries

Consolidated Statements of Income

Consolidated Statements of (Loss) Income

(in thousands, except share and per share amounts)

For the years ended December 31,

2020 2019 2018

Products $ 318,324 $ 311,617 $ 293,950

Services 343,335 441,010 403,268

Total revenues 661,659 752,627 697,218

Costs and operating expenses:

Products 283,814 266,443 248,701

Services 302,458 402,418 376,256

Selling, general and administrative expenses 3,120 4,192 3,714

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Total costs and operating expenses 606,896 692,370 644,688

54,763 60,257 52,530

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

Gain on sale of property 1,108 — —

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

Gain on sale of contract — — 1,700

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Provision for income taxes 5,598 9,403 10,168

Basic earnings per share:

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

Basic (loss) earnings per share $ ( 0.47 ) $ 3.38 $ 3.23

Basic weighted average shares outstanding 11,034,256 10,957,750 10,876,201

Diluted earnings per share:

Diluted (loss) earnings per share $ ( 0.47 ) $ 3.35 $ 3.21

Diluted weighted average shares outstanding 11,034,256 11,044,731 10,936,057

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VSE Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

For the years ended December 31,

2020 2019 2018

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

Change in fair value of interest rate swap agreements, net of tax ( 98 ) ( 1,251 ) ( 35 )

Other comprehensive (loss) income, net of tax

Comprehensive income

Other comprehensive loss, net of tax ( 98 ) ( 1,251 ) ( 35 )

Comprehensive (loss) income $ ( 5,269 ) $ 35,773 $ 35,045

The accompanying notes are an integral part of these financial statements.

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(in thousands except per share data)

Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Income (Loss) Total

Stockholders'

Shares Amount

Balance at December 31, 2017 10,839 $ 542 $ 24,470 $ 267,902 $ 181 $ 293,095

Cumulative effect of adoption of ASU 2014-09 , net of tax

— — — 1,465 — 1,465

Net income — — — 35,080 — 35,080

Stock-based compensation 47 2 2,162 — — 2,164

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Dividends declared ($ 0.31 per share)

— — — ( 3,374 ) — ( 3,374 )

Balance at December 31, 2018 10,886 544 26,632 301,073 146 328,395

Cumulative effect of adoption of ASU 2016-02 , net of tax

— — — ( 9 ) — ( 9 )

Net income — — — 37,024 — 37,024

Stock-based compensation 84 5 2,779 — — 2,784

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Dividends declared ($ 0.35 per share)

— — — ( 3,842 ) — ( 3,842 )

Balance at December 31, 2019 10,970 549 29,411 334,246 ( 1,105 ) 363,101

Cumulative effect of adoption of ASU 2016-02, net of tax

Net loss — — — ( 5,171 ) — ( 5,171 )

Stock-based compensation 85 4 2,459 — — 2,463

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Dividends declared ($ 0.36 per share)

— — — ( 3,978 ) — ( 3,978 )

Balance at December 31, 2020 11,055 $ 553 $ 31,870 $ 325,097 $ ( 1,203 ) $ 356,317

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For the years ended December 31,

2020 2019 2018

Cash flows from operating activities:

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

Adjustments to reconcile net income to net cash provided by operating

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Stock-based compensation 2,858 3,264 3,027

Loss on sale of a business entity and certain assets 8,214 —

Gain on sale of property and equipment ( 1,051 ) — —

Goodwill and intangible asset impairment 33,734 — —

Gain on sale of contract — — ( 1,700 )

Earn-out obligation adjustment

Earn-out obligation fair value adjustment ( 4,999 ) 1,900 —

Changes in operating assets and liabilities, net of impact of acquisitions:

Receivables 7,732 ( 3,331 ) ( 3,754 )

Unbilled receivables 19,694 ( 4,593 ) 4,706

Inventories ( 50,172 ) ( 44,219 ) ( 35,558 )

Other current assets and noncurrent assets ( 1,722 ) ( 7,405 ) 4,789

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Long-term lease obligations — — ( 1,668 )

Other long-term liabilities 83 — —

Net cash provided by operating activities 35,761 17,994 18,855

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Proceeds from the sale of property and equipment 2,875 4 122

Proceeds from sale of a business entity and certain assets 21,771 — —

Proceeds from the sale of contract — — 1,700

Cash paid for acquisitions, net of cash acquired — ( 113,181 ) —

Net cash used in investing activities

Net cash provided by (used in) investing activities 20,219 ( 122,807 ) ( 1,295 )

Cash flows from financing activities:

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Repayments on loan agreement ( 452,338 ) ( 642,193 ) ( 550,436 )

Earn-out obligation payments ( 31,701 ) — —

Payment of debt financing costs ( 636 ) — ( 1,702 )

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Dividends paid ( 3,970 ) ( 3,726 ) ( 3,262 )

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net cash (used in) provided by financing activities ( 56,336 ) 105,385 ( 18,022 )

Net (decrease) increase in cash and cash equivalents ( 356 ) 572 ( 462 )

Cash and cash equivalents at beginning of year 734 162 624

Cash and cash equivalents at end of year $ 378 $ 734 $ 162

The accompanying notes are an integral part of these financial statements.

Supplemental cash flow disclosures:

Cash paid for:

Cash paid for interest $ 13,936 $ 13,468 $ 7,523

Cash paid for income taxes $ 4,759 $ 11,645 $ 9,534

Supplemental disclosure of noncash investing and financing activities:

Notes receivable from the sale of a business entity and certain assets $ 12,852 $ — $ —

The accompanying notes are an integral part of these financial statements.

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Principles of Consolidation

The consolidated financial statements consist of the operations of our parent company, our wholly owned subsidiaries, Energetics Incorporated ("Energetics"), Akimeka, LLC ("Akimeka"), Wheeler Bros., Inc.

("WBI") and VSE Aviation, Inc.

("VSE Aviation"), and our unincorporated divisions.

The consolidated financial statements consist of the operations of our parent company, our wholly owned subsidiaries, Energetics Incorporated, Akimeka, LLC, Wheeler Fleet Solutions, Co.

and VSE Aviation, Inc., a Delaware corporation ("VSE Aviation"), and our unincorporated divisions.

All intercompany transactions have been eliminated in consolidation.

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Actual results could differ from those estimates.

Significant estimates affecting the financial statements include accruals for contract disallowance reserves, recoverability of goodwill and intangible assets, and earn-out obligations.

Significant estimates affecting the financial statements include accruals for contract disallowance reserves, costs to complete on fixed price contracts, and recoverability of goodwill and intangible assets.

Coronavirus (COVID-19) Pandemic

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 pandemic triggered a decline in demand for our Aviation segment products and services beginning with the second quarter of 2020 and continuing through the end of the year.

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

Although demand began to improve during the third quarter of 2020, demand remains below the prior year levels.

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.

Reclassifications

Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation, which include reclassification of products and services revenue and the renaming of our three operating segments as further described in Note (13) "Business Segments and Customer Information" and certain deferred tax reclassifications as described in Note (11) "Income Taxes." These reclassifications had no effect on the reported results of operations.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2016-02, Leases (Topic 842) ("ASC 842"), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The new standard is required to be adopted using a modified retrospective method and is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.

In July 2018, the FASB provided an alternative transition method of adoption through ASU No.

2018-11, Targeted Improvements, which provides entities with an optional transition method to apply the transition provisions of ASU 2016-02 at the beginning of the period of adoption.

On January 1, 2019, we adopted ASC 842 using the alternative transition method provided by ASU 2018-11 recording right-of-use assets and lease liabilities for our existing leases as of January 1, 2019, as well as a cumulative-effect adjustment to retained earnings of initially applying the new standard as of January 1, 2019.

We have elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to lease identification, lease classification, and treatment for initial direct lease costs.

We have not elected the practical expedients pertaining to the use of hindsight and land easements.

The adoption of the new lease standard resulted in the recharacterization of our headquarters lease, which was accounted for using the financing method under previously existing build-to-suit accounting rules, to an operating lease under ASC 842.

Upon adoption of the new lease standard on January 1, 2019, we derecognized existing liabilities of approximately $20.3 million and fixed assets of $15.2 million and recorded a right-of-use asset of $21.3 million , property and equipment of $2.8 million , and operating lease liability of $29.6 million , with immaterial changes to other balance sheet accounts.

The recharacterization resulted in an immaterial cumulative-effect adjustment to retained earnings, net of taxes, as of January 1, 2019.

The new standard did not have a significant impact on our consolidated results of operations or cash flows.

Certain amounts for our ASC 842 adoption have been adjusted to conform to the current period presentation.

These adjustments have no effect on our reported financial condition, results of operations, or cash flows.

Financial information for periods prior to January 1, 2019, has not been restated for the adoption of ASU 2016-02.

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements.

The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.

We adopted ASU 2018-13 in the first quarter of 2020.

The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements.

The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.

We adopted ASU 2018-15 in the first quarter of 2020 and applied the standard prospectively.

The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and certain other instruments, including trade receivables and contract assets.

The new standard replaces the current incurred loss model for measurement of credit losses on financial assets with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts.

The new standard is effective for reporting periods beginning after December 15, 2019.

We adopted the standard in the first quarter of 2020 using the modified-retrospective approach, which requires the standard to be applied on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective.

Upon adoption, we did not record an adjustment to opening retained earnings as of January 1, 2020 because the adoption did not have a material impact on our financial position, results of operations or cash flows.

Stock-Based Compensation

We account for share-based awards in accordance with the applicable accounting rules that require the measurement and recognition of compensation expense for all share-based payment awards based on estimated fair values.

Our policy is to recognize forfeitures of restricted stock as they occur.

The compensation expense included in costs and operating expenses is amortized over the requisite service period using the accelerated attribution method.

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Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of restricted stock awards.

The antidilutive common stock equivalents excluded from the diluted per share calculation are not material.

Years Ended December 31,

2020 2019 2018

Basic weighted average common shares outstanding 11,034,256 10,957,750 10,876,201

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Amortization of leasehold improvements is provided by the straight-line method over the lesser of their useful life or the remaining term of the lease.

We adopted a comprehensive new lease accounting standard effective January 1, 2019 using the optional modified retrospective transition method;

accordingly, the comparative information for the year ended December 31, 2018 has not been adjusted and continues to be reported under the previous lease standard.

We determine at inception whether an arrangement that provides us control over the use of an asset is a lease.

Substantially all of our leases are long-term operating leases for facilities with fixed payment terms between two and 15 years.

Payments under our lease agreements are primarily fixed payments, which are recognized as operating lease cost on a straight-line basis over the lease term.

We recognize at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term, determined using the discount rate for the lease at commencement date.

Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors.

Instead, we estimate our incremental borrowing rate based on information available at lease commencement to discount lease payments to present value.

Certain of our leases include options to extend the term of the lease or to terminate the lease.

When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments.

Our operating lease ROU assets are recorded in operating lease right-of-use assets on our accompanying consolidated balance sheet.

The current portion of operating lease liabilities are presented within accrued expenses and other current liabilities, and the non-current portion of operating lease liabilities are presented under long-term operating lease liabilities on our accompanying consolidated balance sheet.

Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet.

We recognize lease expense for these leases on a straight-line basis over the term of the lease.

Concentration of Credit Risk/Fair Value of Financial Instruments

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We perform ongoing credit evaluations and monitoring of the financial condition of all our customers.

We maintain an allowance for credit losses based upon several factors, including historical collection experience, current aging status of the customer accounts and financial condition of our customers.

We believe that the fair market value of all financial instruments, including debt, approximate book value.

Revenues for 2019 and 2018

On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018, including the aggregate effect of modifications to such contracts through January 1, 2018.

Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Revenue Recognition

We account for revenue in accordance with ASC 606.

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

Substantially all our 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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Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes.

Revenues for time and materials contracts are recorded based on the amount for which we have the right to invoice our customers, because the amount directly reflects the value of our work performed for the customer.

Revenues for time and materials ("T&M") contracts are recorded based on the amount for which we have the right to invoice our customers, because the amount directly reflects the value of our work performed for the customer.

Revenues are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in performance on the contract.

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While we maintain reserves to cover the risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.

Revenues for 2017

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is probable.

Substantially all of our Supply Chain Management Group revenues result from the sale of vehicle parts to clients.

We recognize revenue from the sale of vehicle parts when the customer takes ownership of the parts.

Sales returns and allowances are not significant.

Our Aviation Group revenues are recognized upon the shipment or delivery of products to customers based on when title or risk of loss transfers to the customer.

Sales returns and allowances are not significant.

Substantially all of our Federal Services work is performed for our customers on a contract basis.

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

Revenues result from work performed on these contracts by our employees and our subcontractors and from costs for materials and other work related costs allowed under our contracts.

Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned.

Our FMS Program contract is a cost plus award fee contract.

This contract has terms that specify award fee payments that are determined by performance and level of contract activity.

Award fees are made during the year through a contract modification authorizing the award fee that is issued subsequent to the period in which the work is performed.

We recognize award fee income on the FMS Program contract when the fees are fixed or determinable.

Due to such timing and fluctuations in the level of revenues, profits as a percentage of revenues on this contract will fluctuate from period to period.

Revenue recognition methods on fixed-price contracts will vary depending on the nature of the work and the contract terms.

Revenues on fixed-price service contracts are recorded as work is performed, typically ratably over the service period.

Revenues on fixed price contracts that require delivery of specific items are recorded based on a price per unit as units are delivered.

Revenues for time and materials contracts are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in performance on the contract.

Generally, profits on time and materials contracts result from the difference between the cost of services performed and the contract defined billing rates for these services.

Receivables and Allowance for Doubtful Accounts

Receivables are recorded at amounts earned less an allowance for doubtful accounts.

Receivables and Unbilled Receivables

Receivables are recorded at amounts earned less an allowance.

We review our receivables regularly to determine if there are any potentially uncollectible accounts.

The majority of our receivables are from government agencies, where there is minimal credit risk.

We record allowances for bad debt as a reduction to receivables and an increase to bad debt expense.

We assess the adequacy of these reserves by considering general factors, such as the length of time individual receivables are past due and historical collection experience.

Unbilled Receivables

Unbilled receivables include amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer.

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Unbilled receivables are classified as current based on our contract operating cycle.

Inventories for our Supply Chain Group are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method.

Allowance for Credit Losses

We establish allowances for credit losses on our accounts receivable and unbilled receivables.

To measure expected credit losses, we have disaggregated pools of receivable balances, where we have elected to pool our receivables by segment.

Within each segment, receivables exhibit similar risk characteristics.

In determining the amount of the allowance for credit losses, we consider historical collectibility based on past due status.

We also consider current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.

In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as concerns about a specific customer's inability to meet its financial obligation to us.

The adequacy of these allowances are assessed quarterly through consideration of factors on a collective basis where similar characteristics exist and on an individual basis.

During the year ended December 31, 2020, we increased our loss rates and increased our specific reserves primarily due to the economic disruption caused by the COVID-19 pandemic.

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method.

Inventories for our Fleet segment primarily consists of vehicle replacement parts.

Included in inventory are related purchasing, storage and handling costs.

Our inventory primarily consists of vehicle replacement parts.

Inventories for our Aviation Group are stated at lower of cost or net realizable value.

Inventories for our Aviation Group primarily consist of aftermarket parts for distribution, general aviation jet aircraft engines and engine accessories and parts.

The cost for purchased engines and parts is determined by the specific identification method.

Inventories for our Aviation segment primarily consist of aftermarket parts for distribution, and general aviation engine accessories and parts.

Included in inventory are related purchasing, overhaul labor, storage and handling costs.

We also purchase aircraft engines for disassembly into individual parts and components.

Deferred Compensation Plans

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The DSC Plan assets are included in other assets and the obligation to the participants is included in deferred compensation on the accompanying consolidated balance sheets.

Deferred compensation plan expense recorded as costs and operating expenses in the accompanying consolidated statements of income for the years ended December 31, 2019 , 2018 and 2017 was approximately $1.7 million , $2.1 million and $1.9 million , respectively.

Deferred compensation plan expense recorded as costs and operating expenses in the accompanying consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 was approximately $ 970 thousand, $ 1.7 million and $ 2.1 million, respectively.

Impairment of Long-Lived Assets

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If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying value.

No impairment charges related to long-lived assets were recorded in the years ended December 31, 2019 , December 31, 2018 and December 31, 2017 .

For the year ended December 31, 2020, we recognized a $ 2.8 million impairment charge on the carrying value of the certain long-lived assets of a subsidiary within our Aviation segment upon completion of the sale of all of the inventory during the second quarter of 2020.

See Note (2) "Acquisition and Divestitures" and Note (7) "Goodwill and Intangible Assets" for additional details.

No impairment charges related to long-lived assets were recorded in the years ended December 31, 2019 and December 31, 2018.

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

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The projected results used in our quantitative assessment are based on our best estimate as of the testing date of future revenues, earnings and cash flows after considering factors such as recent operating performance, general market and industry conditions, existing and expected future contracts, changes in working capital and long-term business plans and growth initiatives.

The carrying value of each reporting unit includes the assets and liabilities

employed in its operations and goodwill.

The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill.

There are no significant allocations of amounts held at the Corporate level to the reporting units.

Based on our annual goodwill impairment analysis we performed in the fourth quarter of 2019 , the fair value of our reporting units exceeded their carrying values.

During the first and second quarter of 2020, the decline of the macroeconomic environment and the decrease in our market capitalization caused by the COVID-19 pandemic was determined to be an indicator of impairment and, based on the results of interim testing, we recognized an impairment charge of $ 30.9 million in the second quarter of 2020 related to our VSE Aviation reporting unit.

Our annual goodwill impairment analysis performed in the fourth quarter of 2020 resulted in no impairment of goodwill.

Intangible Assets

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Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.

The new standard is effective for reporting periods beginning after December 15, 2019.

We have adopted the new standard effective January 1, 2020.

We do not anticipate that the adoption of the new standard will have a significant impact on our operating results, financial position or cash flows.

In August 2018, the FASB issued ASU No.

2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements.

The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.

We currently are assessing the impact this standard will have on our consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which clarifies the accounting for implementation costs in cloud computing arrangements.

The new standard is effective for fiscal years beginning after December 15, 2019.

We have adopted the new standard effective January 1, 2020.

We do not anticipate that the adoption of the new standard will have a significant impact on our operating results, financial position or cash flows.

(2) Acquisition

On January 10, 2019, our wholly owned subsidiary VSE Aviation, Inc.

("VSE Aviation") acquired 100% of the equity of 1st Choice Aerospace Inc.

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.

(2) Acquisition and Divestitures

On January 10, 2019, our wholly owned subsidiary VSE Aviation acquired 100 % of the equity of 1st Choice Aerospace Inc.

("1st Choice Aerospace"), a provider of MRO services and products for new generation and legacy commercial aircraft platforms.

1st Choice Aerospace has operations in Florida and Kentucky.

Key members of 1st Choice Aerospace's management team were retained under three -year employment contracts with five -year non-compete covenants.

We retained key members of 1st Choice Aerospace's management team under three -year employment contracts with five -year non-compete covenants.

The initial purchase consideration paid at closing for 1st Choice Aerospace was approximately $ 113 million, which included $ 1.1 million as an estimated net working capital adjustment.

We will also be required to make earn-out payments of up to $40 million if 1st Choice Aerospace meets certain financial targets during 2019 and 2020.

Approximately $1.1 million of our closing payments were deposited into an escrow account to secure the sellers' indemnification obligations.

Any amount remaining in such escrow account at the end of the indemnification period less any then pending indemnification claims will be distributed to the sellers.

1st Choice Aerospace's results of operations are included in our Aviation Group in the accompanying consolidated financial statements beginning on the acquisition date of January 10, 2019.

1st Choice Aerospace had revenues of approximately $63.0 million and operating income of approximately $14.0 million before amortization of intangible assets of approximately $3.3 million and allocated corporate costs of approximately $1.7 million from the acquisition date through December 31, 2019.

The purchase accounting entries above include the impact of the Section 338(h)(10) election under the current U.S.

We reflected the $1.7 million impact of this election in the purchase price.

Our tax advantages resulting from the 338(h) (10) election are expected to significantly exceed the additional payment that was made to the sellers.

We completed our purchase price allocation.

During the year ended December 31, 2019, we recorded an increase to goodwill of $17.2 million related to measurement-period adjustments to the preliminary purchase price allocation.

The measurement-period adjustments were primarily related to reduction of $5.9 million to the valuation of intangibles - trade name, as well as a $9.8 million and $1.7 million adjustments to the fair value of the earn-out obligation and Section 338(h)(10) election, respectively, that increased the purchase price.

The measurement-period adjustments were not significant to our previously reported consolidated results of operations or cash flows.

The fair values assigned to our earn-out obligation and intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.

Based on the Company's valuation, the total consideration of approximately $113 million (excluding any earn-out payments), which includes a final cash and net working capital consideration of $1.1 million , has been allocated to assets acquired (including identifiable intangible assets and goodwill) and liabilities assumed, as follows (in thousands):

Accounts receivable

Unbilled receivables

Prepaid expenses and other current assets

Property and equipment

Intangibles - customer related

Intangibles - trade name

Operating lease right-of-use assets

Other current liabilities

Long-term operating lease liabilities

Cash consideration

Acquisition date estimated fair value of earn-out obligation

Section 338(h)(10) election

The value attributed to customer relationships is being amortized on a straight-line basis using weighted average useful lives of 18 years .

The value attributed to trade name is being amortized on a straight-line basis over five years .

The amount of goodwill recorded for our 1st Choice Aerospace acquisition was approximately $77.8 million , all of which is expected to be amortizable for income tax purposes.

The goodwill recognized reflects the strategic advantage of expanding our sustainment services into the aviation supply chain market.

In connection with the acquisition, we were required to make earn-out payments of up to $ 40 million if 1st Choice Aerospace met certain financial targets during 2019 and 2020.

In January 2020, we made a payment of approximately $ 31.7 million to satisfy the earn-out payment for the 2019 performance year.

During 2020 it was determined that the financial targets for the 2020 performance year were not met, and the remaining fair value of the earn-out obligation was reversed.

Changes in the fair value of the earn-out obligations are recognized in earnings in the period of change through settlement.

Refer to Note (16) "Fair Value Measurements" for additional information regarding earn-out obligation.

We incurred approximately $ 408 thousand of acquisition-related expenses for the year ended December 31, 2019, which are included in selling, general and administrative expenses.

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Year ended December 31,

Revenue $ 743,347

Net Income $ 35,963

Basic earnings per share $ 3.31

Diluted earnings per share $ 3.29

Prime Turbines Sale

On January 28, 2020, VSE’s subsidiary VSE Aviation entered into two definitive agreements to sell (1) Prime Turbines LLC ("Prime Turbines") and (2) certain related inventory assets to PTB Holdings USA, LLC ("PTB").

The transaction was completed on February 26, 2020 with cash proceeds of $ 20.0 million, including final working capital adjustments, and a note receivable of $ 8.3 million received as consideration.

Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines.

Prime Turbines was included in our Aviation segment.

The divestiture of Prime Turbines does not have a major effect on our operations and financial results, and therefore does not qualify for reporting as a discontinued operation.

As a result of the sale of the business and inventory, we derecognized the assets and liabilities of Prime Turbines and recorded a $ 7.5 million loss in the first quarter of 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

The note receivable from PTB of $ 4.7 million and $ 1.4 million is included in other assets, and other current assets in our consolidated balance sheets as of December 31, 2020, respectively, which represents the present value of the consideration to be received with an imputed interest rate discount of 3.4 %.

CT Aerospace Asset Sale

On June 26, 2020, VSE's subsidiary VSE Aviation entered into an asset purchase agreement to sell CT Aerospace, LLC ("CT Aerospace") inventory and certain assets to Legacy Turbines, LLC ("Legacy Turbines") for $ 6.9 million, with a note receivable received as consideration.

As a result of the sale, we recorded a $ 678 thousand loss in the second quarter of 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

The note receivable from Legacy Turbines of $ 5.2 million, net of a variable discount of $ 275 thousand, is included in other assets and $ 1.3 million in other current assets in our consolidated balance sheets as of December 31, 2020.

(3) Revenue Recognition

Disaggregated Revenue

Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our clients.

Our customers also include various other government agencies and commercial entities.

A summary of revenues for our operating groups by customer for the year ended December 31, 2019 is as follows (in thousands):

Supply Chain Management

Federal Services

Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our customers.

Our customers also include various other government agencies and commercial clients.

A summary of revenues for our operating segments by customer for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

Year Ended December 31, 2020 Fleet Aviation Federal and Defense Total

DoD $ 20,744 $ 1,093 $ 214,560 $ 236,397

Other government 178,693 282 37,982 216,957

A summary of revenues for our operating groups by customer for the year ended December 31, 2018 is as follows (in thousands):

Supply Chain Management

Federal Services

Commercial 42,733 163,695 1,877 208,305

Total $ 242,170 $ 165,070 $ 254,419 $ 661,659

Year Ended December 31, 2019

DoD $ 24,246 $ 3,775 $ 276,313 $ 304,334

Other government 168,113 1,885 35,777 205,775

A summary of revenues for our operating groups by contract type for the year ended December 31, 2019 is as follows (in thousands):

Contract Type

Supply Chain Management

Federal Services

Time and materials

Total revenues

A summary of revenues for our operating groups by contract type for the year ended December 31, 2018 is as follows (in thousands):

Contract Type

Supply Chain Management

Federal Services

Time and materials

Total revenues

Commercial 22,161 218,886 1,471 242,518

Total $ 214,520 $ 224,546 $ 313,561 $ 752,627

Year Ended December 31, 2018

DoD $ 24,280 $ 7,387 $ 302,827 $ 334,494

Other government 176,200 2,172 33,746 212,118

Commercial 14,329 135,864 413 150,606

Total $ 214,809 $ 145,423 $ 336,986 $ 697,218

We changed our disaggregated revenue by type presentation below in the first quarter of 2020 to better align with our operating segments.

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

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

This change provides a clearer picture of the nature of each segment's contractual arrangements, how revenues derived from those contracts are affected by economic factors, and underlying performance trends impacting each segment.

Additionally, the presentation is more in-line with how each segments' results are evaluated by our Chief Executive Officer in deciding how to allocate resources and evaluate performance.

The change in disaggregated revenue presentation did not result in any changes in our reported segments and had no effect on the reported results of operations.

A summary of revenues by type for our operating segments for the year ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

Year Ended December 31, 2020 Fleet Aviation Federal and Defense Total

Repair $ — $ 82,445 $ — $ 82,445

Distribution 242,170 82,625 — 324,795

Cost Plus Contract — — 79,064 79,064

Fixed Price Contract — — 138,406 138,406

T&M Contract — — 36,949 36,949

Total $ 242,170 $ 165,070 $ 254,419 $ 661,659

Year Ended December 31, 2019

Repair $ — $ 119,044 $ — $ 119,044

Distribution 214,520 105,502 — 320,022

Cost Plus Contract — — 144,600 144,600

Fixed Price Contract — — 78,163 78,163

T&M Contract — — 90,798 90,798

Total $ 214,520 $ 224,546 $ 313,561 $ 752,627

Year Ended December 31, 2018

Repair $ — $ 55,960 $ — $ 55,960

Distribution 214,809 89,463 — 304,272

Cost Plus Contract — — 188,867 188,867

Fixed Price Contract — — 70,669 70,669

T&M Contract — — 77,450 77,450

Total $ 214,809 $ 145,423 $ 336,986 $ 697,218

Contract Balances

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If a contract liability exists, it is netted against the unbilled receivables balance for that contract.

Unbilled receivables increased from $41.3 million at December 31, 2018 to $46.3 million at December 31, 2019, primarily due to revenue recognized in excess of billings.

Unbilled receivables decreased from $ 46.3 million at December 31, 2019 to $ 22.4 million at December 31, 2020, primarily due to the billings of our customers in excess of revenue recognized as performance obligations were satisfied.

Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $ 5.0 million at December 31, 2019 and $ 10.1 million at December 31, 2020.

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Our performance obligations are satisfied over time as work progresses or at a point in time.

Revenues from products and services transferred to customers over time accounted for approximately 57% of our revenues for the year ended December 31, 2019 and 2018, primarily related to revenues in our Federal Services Group and for MRO services in our Aviation Group.

Revenues from products and services transferred to customers at a point in time accounted for approximately 43% of our revenues for the year ended December 31, 2019 and 2018.

The majority of our revenue recognized at a point in time is for the sale of vehicle and aircraft parts in our Supply Chain Management and Aviation groups.

Revenues from products and services transferred to customers over time accounted for approximately 51 % and 57 % of our revenues for the year ended December 31, 2020 and 2019, respectively, primarily related to revenues in our Federal and Defense segment and for MRO services in our Aviation segment.

Revenues from products and services transferred to customers at a point in time accounted for approximately 49 % and 43 % of our revenues for the year ended December 31, 2020 and 2019, respectively.

The majority of our revenue recognized at a point in time is for the sale of vehicle and aircraft parts in our Fleet and Aviation segments.

As of December 31, 2020, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $ 183 million.

Performance obligations expected to be satisfied within one year and greater than one year are 95% and 5% , respectively.

Performance obligations expected to be satisfied within one year and greater than

one year are 92 % and 8 %, respectively.

We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.

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Unbilled receivables, net 22,358 46,279

Receivables, net are recorded at face value less an allowance for doubtful accounts of approximately $396 thousand and $79 thousand as of December 31, 2019 and 2018 , respectively.

Total $ 77,829 $ 116,909

Receivables, net are recorded at face value less an allowance for credit losses of approximately $ 1.5 million and $ 396 thousand as of December 31, 2020 and 2019, respectively.

The allowance for credit loss is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmental determined using loss rates based on historical write-offs and consideration of recent forecasted information, including underlying economic expectations.

The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying expectations, which for the year ended December 31, 2020 included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic.

A summary of activity in our allowance for credit losses for the year ended December 31, 2020 is as follows (in thousands):

Balance as of December 31, 2019 $ 396

Change in estimates 1,767

Write-offs ( 441 )

Recoveries ( 229 )

Balance as of December 31, 2020 $ 1,493

The unbilled receivables balance includes certain costs for work performed at risk but which we believe will be funded by the government totaling approximately $ 2.6 million and $ 15.2 million as of December 31, 2020 and 2019, respectively.

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(5) Other Current Assets and Other Assets

At December 31, 2019 and 2018 , other current assets primarily consisted of vendor advances, prepaid rents and deposits, prepaid income taxes, software licenses, prepaid maintenance agreements and deferred contract costs.

At December 31, 2019 and 2018 , other assets primarily consisted of deferred compensation plan assets.

Other current assets consisted of the following as of December 31, 2020 and 2019 (in thousands):

Self insurance reserves $ 9,535 $ 7,566

Current portion of notes receivable 2,721 —

Deferred contract costs 3,514 4,141

Other 7,558 7,364

Total $ 23,328 $ 19,071

Other assets consisted of the following as of December 31, 2020 and 2019 (in thousands):

Deferred compensation plan assets $ 14,370 $ 16,708

Long-term portion of notes receivable 9,856 —

Other 2,299 782

Total $ 26,525 $ 17,490

At December 31, 2020, current and long-term portion of notes receivable balances consist of notes receivables received as consideration in connection with the sale of our Prime Turbines business and the inventory assets of our CT Aerospace subsidiary in the first and second quarter of 2020, respectively.

Refer to Note (2) "Acquisition and Divestitures" for additional information regarding our divestitures.

(6) Property and Equipment

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Land and land improvements 4,726 5,151

97,217 105,665

Less accumulated depreciation and amortization ( 60,854 ) ( 62,200 )

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Changes in goodwill for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Supply Chain Management

Federal Services

Fleet Federal and Defense Aviation Total

Balance as of December 31, 2018 $ 63,190 $ 30,883 $ 104,549 $ 198,622

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Balance as of December 31, 2019 $ 63,190 $ 30,883 $ 182,377 $ 276,450

Increase from acquisitions

Impairment charge — — ( 30,945 ) ( 30,945 )

Decrease from divestiture — — ( 7,379 ) ( 7,379 )

Balance as of December 31, 2020 $ 63,190 $ 30,883 $ 144,053 $ 238,126

The results of our annual goodwill impairment testing in the fourth quarter of 2019 indicated that the fair value of our reporting units exceeded their carrying values.

Intangible assets consist of the value of contract-related assets, technologies and trade names.

Amortization expense for the years ended December 31, 2019 , 2018 and 2017 was approximately $19.3 million , $16.0 million and $16.0 million , respectively.

Intangible assets were comprised of the following (in thousands):

Accumulated Amortization

Accumulated Impairment Loss

Net Intangible Assets

In the first quarter of 2020, we completed the sale of our Prime Turbines subsidiary and certain related inventory assets and recognized a loss on the sale of the business and inventory.

Prime Turbines was reported within our Aviation segment.

As part of determining the loss on sale, goodwill of $ 7.4 million was allocated to the disposal group on a relative fair value basis and was written-off upon the completion of the sale.

We perform an annual review of goodwill for impairment during the fourth quarter and whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable.

As a result of the decline in the macroeconomic environment caused by the COVID-19 pandemic and the decrease in our market capitalization, we performed an interim impairment analysis during the first quarter of 2020, utilizing a qualitative approach.

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.

The fair value of the reporting unit was determined using a combination of an income approach using a discounted cash flow analysis and a market-based valuation approach based on relevant data from guideline public companies.

The result of the quantitative impairment test indicated that the VSE Aviation reporting unit was not impaired.

Due to the ongoing impact of the COVID-19 pandemic, we performed an interim impairment analysis during the second quarter of 2020, utilizing a quantitative approach.

The result of the impairment analysis indicated that the fair value of our reporting units, with the exception of our VSE Aviation reporting unit, exceeded their carrying values and no impairment charge was required.

The estimated fair value of our VSE Aviation reporting unit was determined to be below its carrying value, which resulted in a $ 30.9 million goodwill impairment charge in the second quarter of 2020.

Refer to Note (16) "Fair Value Measurements" for additional information on the valuation methodology assumptions.

For our 2020 annual analysis of goodwill, we elected to perform a qualitative assessment.

The results of our annual goodwill impairment assessment in the fourth quarter of 2020 indicated that it was more likely than not that the fair value of our reporting units exceeded their carrying values.

We did not record impairment charges related to goodwill in 2019 or 2018.

Intangible assets consisted of the following (in thousands):

Cost Accumulated Amortization Accumulated Impairment Loss Net Intangible Assets

December 31, 2020

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Acquired technologies 12,400 ( 10,787 ) — 1,613

Trade names 18,770 ( 15,251 ) — 3,519

Total $ 244,364 $ ( 136,955 ) $ ( 3,814 ) $ 103,595

December 31, 2019

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Acquired technologies 12,400 ( 9,660 ) — 2,740

Trade names 18,770 ( 13,735 ) — 5,035

Total $ 258,764 $ ( 125,564 ) $ ( 1,025 ) $ 132,175

During the second quarter of 2020, we completed the sale of all of the inventory of the CT Aerospace subsidiary, which is reported within our Aviation segment.

As a result of the sale, we concluded that the useful life of certain long-lived assets, which represented the intangible assets acquired in the acquisition of the subsidiary, was zero and that there was no ongoing expected future cash flows related to these long-lived assets and no residual value.

As a result, such assets were determined to be fully impaired and an impairment charge of approximately $ 2.8 million, representing the carrying value of these intangible assets, was recorded during the second quarter of 2020, which is reflected within goodwill and intangible impairment in the consolidated statements of income.

As the sale did not represent a disposition of a business, no goodwill was allocated to the disposal group.

Amortization expense for the years ended December 31, 2020, 2019 and 2018 was approximately $ 17.5 million, $ 19.3 million and $ 16.0 million, respectively.

Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands):

2021 $ 16,636

Thereafter 46,622

Total $ 103,595

Long-term debt consisted of the following (in thousands):

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Long-term debt, net of current portion $ 230,714 $ 253,128

We have a loan agreement with a group of banks to provide working capital support, letters of credit and finance acquisitions.

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

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

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.

Our required term loan payments after December 31, 2019 are as follows (in thousands):

We have a loan agreement with a group of banks that expires in January 2023.

We borrow under the loan agreement to provide working capital support, fund letters of credit and finance acquisitions.

The loan agreement includes term and revolving facilities.

In June 2020, we amended the loan agreement to provide increased covenant flexibility in response to changes in financial operating performance resulting from the COVID-19 pandemic.

Financing costs associated with the loan agreement amendment of approximately $ 636 thousand were capitalized and are being amortized over the remaining term of the loan.

The fair value of outstanding debt as of December 31, 2020 under our bank loan facilities 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.

Our required term and revolver loan payments after December 31, 2020 are as follows (in thousands):

Year ending December 31,

The maximum amount of credit available to us under the loan agreement for revolving loans and letters of credit as of December 31, 2019 was $350 million .

We may borrow and repay the revolving loan borrowings as our cash flows require or permit.

2021 $ 21,563

2023* 209,398

Total $ 253,461

*Includes the revolver loan required payment of $ 175.5 million.

The maximum amount of credit available under the loan agreement for revolving loans and letters of credit as of December 31, 2020 was $ 350 million.

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

We had approximately $54 thousand letters of credit outstanding as of December 31, 2019 and $57 thousand of letters of credit outstanding as of December 31, 2018 .

We had no letters of credit outstanding as of December 31, 2020 and approximately $ 54 thousand of letters of credit outstanding as of December 31, 2019.

Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or both facilities up to an aggregate additional amount of $ 100 million.

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.

As of December 31, 2019 , the LIBOR base margin was 2.50% and the base rate base margin was 1.25% .

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

base margin was 1.75 %.

The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

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We have executed compliant interest rate hedges.

The amount of our debt with interest rate swap agreements was $ 145.0 million as of December 31, 2020.

After taking into account the impact of hedging instruments, 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 %.

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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.

(9) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist primarily of accrued compensation and benefits of approximately $24.2 million and $24.6 million as of December 31, 2019 and 2018 , respectively.

The accrued compensation and benefits amounts include bonus, salaries and related payroll taxes, vacation and deferred compensation.

Accrued expenses and other current liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands):

Accrued compensation and benefits $ 21,525 $ 24,225

Contract liabilities 9,858 3,714

Accrued customer rebates and royalties 2,756 3,067

Customer advances 1,080 2,669

Interest rate swap liability 1,603 1,473

Current portion of lease liabilities 4,012 3,710

Other 4,338 7,656

Total $ 45,172 $ 46,514

(10) Stock-Based Compensation Plans

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These terms are included in award agreements between VSE and the recipients of the award.

The total stock-based compensation expense related to restricted stock awards for the years ended December 31, are as follows (in thousands):

2020 2019 2018

Employees $ 2,223 $ 2,667 $ 2,332

Non-employee Directors 635 597 553

Total $ 2,858 $ 3,264 $ 2,885

Employees are permitted to use a certain number of shares of restricted stock to cover their personal tax liability for restricted stock awards.

We paid approximately $ 690 thousand, $ 688 thousand and $ 641 thousand, to cover this liability in the years

ended December 31, 2020, 2019 and 2018, respectively.

These payments are classified as financing cash flows on the consolidated statements of cash flows.

The total compensation cost related to non-vested awards not yet recognized was approximately $ 873 thousand with a weighted average amortization period of 1.6 years as of December 31, 2020.

Stock-based compensation consisting of restricted stock awards was included in costs and operating expenses and provision for income taxes on the accompanying statements of income for the years ended December 31, 2020, 2019 and 2018 (in thousands):

2020 2019 2018

Stock-based compensation included in costs and operating expenses $ 2,858 $ 3,264 $ 3,027

Income tax benefit recognized for stock-based compensation ( 713 ) ( 663 ) ( 755 )

Stock-based compensation expense, net of income tax benefit $ 2,145 $ 2,601 $ 2,272

Non-Employee Restricted Stock Awards

During 2020, 2019 and 2018, non-employee directors were awarded 16,100 , 18,900 and 11,200 shares of restricted stock, respectively, under the 2006 Plan.

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Compensation expense related to these grants was approximately $ 605 thousand, $ 597 thousand and $ 553 thousand during 2020, 2019 and 2018, respectively.

Performance-Based Restricted Stock Awards

In January of every year since 2007, we have notified certain employees that they are eligible to receive awards of VSE stock under our 2006 Plan, based on our financial performance for the respective fiscal years.

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The grant-date fair value of these awards was $ 28.67 per share.

In April 2019, upon the resignation of our CEO, President and Chief Operating Officer, we awarded to him 20,348 shares of restricted VSE common stock under the 2006 Plan.

The grant-date fair value of this award was $30.66 per share.

We paid approximately $267 thousand to cover the personal tax liability related to this award.

The shares issued vested immediately and cannot be sold, transferred, pledged or assigned before the second anniversary of the grant date.

Compensation expense related to this award was approximately $736 thousand for the year ended December 31, 2019.

The total stock-based compensation expense related to restricted stock awards for the years ended December 31, are as follows (in thousands):

Non-employee Directors

Employees are permitted to use a certain number of shares of restricted stock to cover their personal tax liability for restricted stock awards.

We paid approximately $688 thousand , $641 thousand and $500 thousand , to cover this liability in the years ended December 31, 2019 , 2018 and 2017 , respectively.

These payments are classified as financing cash flows on the consolidated statements of cash flows.

The total compensation cost related to non-vested awards not yet recognized was approximately $873 thousand with a weighted average amortization period of 1.8 years and $1.5 million with a weighted average amortization period of 1.8 years as of December 31, 2019 and 2018 , respectively.

Stock-based compensation included in costs and operating expenses

Income tax benefit recognized for stock-based compensation

Stock-based compensation expense, net of income tax benefit

Other Restricted Stock Awards

Under the 2006 Plan, restricted stock in the form of shares of our common stock can be awarded to key employees pursuant to the terms of their employment agreements.

The following table summarizes the activity of non-vested restricted stock awards in shares during the years ended December 31, 2020 and 2019.

There was no activity related to unvested restricted stock awards issued in shares during the year ended December 31, 2018.

Number of Shares

Weighted Average Grant Date Fair Value

Unvested as of December 31, 2018 — $ —

Granted 86,911 31.92

Vested ( 29,110 ) 30.66

Forfeited — —

Unvested as of December 31, 2019 57,801 32.56

Granted 30,500 31.50

Vested ( 32,017 ) 32.14

Forfeited — —

Unvested as of December 31, 2020 56,284 $ 32.23

(11) Income Taxes

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federal income tax matters as well as material state and local tax matters for years through 2015.

The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017.

The Tax Act significantly affects the U.S.

corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%.

In connection with the permanent reduction in the U.S.

statutory corporate tax rate, we recalculated our net deferred tax liabilities as of December 31, 2017 and recorded a provisional tax benefit of approximately $10.6 million in 2017.

We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018.

At December 31, 2017, we had substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of such effects.

During 2018, we refined our calculations, evaluated changes in interpretations and assumptions that we had made, applied additional guidance issued by the U.S.

Government, and evaluated actions and related accounting policy decisions we have made.

As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and identified an additional tax benefit of approximately $795 thousand to the provisional one-time charge for the year ended December 31, 2017, related to the Tax Act.

We file consolidated federal income tax returns that include all of our subsidiaries.

The components of the provision for income taxes from continuing operations for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

2020 2019 2018

Federal $ 4,086 $ 7,739 $ 9,667

State 1,262 1,344 1,758

Foreign 144 825 140

5,492 9,908 11,565

Federal ( 78 ) ( 66 ) ( 1,114 )

State 163 ( 490 ) ( 347 )

Foreign 21 51 64

106 ( 505 ) ( 1,397 )

Provision for income taxes $ 5,598 $ 9,403 $ 10,168

The differences between the amount of tax computed at the federal statutory rate of 21% in 2019 and 2018, and 35% in 2017, and the provision for income taxes from continuing operations for the years ended December 31, 2019 , 2018 and 2017 are as follows (in thousands):

The differences between the amount of tax computed at the federal statutory rate of 21% in 2020, 2019 and 2018, and the provision for income taxes from continuing operations for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

2020 2019 2018

Tax at statutory federal income tax rate $ 89 $ 9,749 $ 9,502

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Impact of Tax Act — — ( 795 )

Tax credits ( 195 ) ( 612 ) ( 375 )

Prior year true-up adjustment 397 ( 1,274 ) ( 113 )

Valuation allowance 6,716 ( 137 ) 107

Other provision adjustments 49 67 ( 386 )

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Deferred compensation and accrued paid leave $ 6,302 $ 7,498

Accrued expenses

Operating lease liabilities 6,984 7,009

Stock-based compensation 605 678

Interest rate swaps 400 367

Reserve for contract disallowances

Acquisition-related expenses

Reserve for contract disallowance 195 145

Capitalized inventory 573 —

State operating loss carryforward

US operating and capital loss carryforward 5,989 24

Tax credit carryforward 1,412 1,547

Foreign country operating loss carryforward 583 —

23,043 17,268

Valuation allowance (a) ( 7,926 ) ( 1,165 )

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Gross deferred tax liabilities

Interest rate swaps

Depreciation ( 3,061 ) ( 2,498 )

Deferred revenues ( 1,816 ) ( 1,681 )

Goodwill and intangible assets ( 19,470 ) ( 23,383 )

Prepaid expenses

Operating lease right-of-use assets ( 5,384 ) ( 5,323 )

Capitalized inventory — ( 240 )

Other ( 283 ) ( 823 )

Total gross deferred tax liabilities ( 30,014 ) ( 33,948 )

Net deferred tax liabilities $ ( 14,897 ) $ ( 17,845 )

(a) A valuation allowance was provided against certain state tax credit and foreign tax loss deferred tax assets arising from carryforwards of unused tax benefits.

(a) A valuation allowance was provided against US capital loss in connection with the stock sale of Prime Turbines, certain state tax credit and foreign tax loss deferred tax assets arising from carryforwards of unused tax benefits.

(b) Certain amounts from prior year have been reclassified to conform with current year presentation .

We file income tax returns in the U.S.

federal jurisdiction and in various state and foreign jurisdictions.

With few exceptions, the statute of limitations for these jurisdictions is no longer open for audit or examinations for the years before 2016.

At December 31, 2020, we have various tax losses and tax credits that may be applied against future taxable income.

The majority of such tax attributes will expire in 2026 through 2030;

however, some may be carried forward indefinitely.

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted.

The CARES Act includes certain changes to U.S.

tax law, which we do not believe had a significant impact on our 2020 effective tax rate.

(12) Commitments and Contingencies

(a) Leases and Other Commitments

We adopted a comprehensive new lease accounting standard effective January 1, 2019 using optional modified retrospective transition method;

accordingly, the comparative information as of December 31, 2018 and for the years ended December 31, 2018 and 2017 have not been adjusted and continue to be reported under the previous lease standard.

See “Recently Adopted Accounting Pronouncements” in Note 1 for details of the significant changes to our accounting policies resulting from the adoption of the new accounting standard.

We determine at inception whether an arrangement that provides us control over the use of an asset is a lease.

We recognize at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term.

Substantially all of our leases are long-term operating leases for facilities with fixed payment terms between two and 15 years .

Our operating lease ROU assets are recorded in operating lease right-of-use assets on our accompanying consolidated balance sheet.

For leases with terms greater than 12 months, we record the related asset and lease liability at the present value of lease payments over the lease term.

Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet.

We recognize lease expense for these leases on a straight-line basis over the term of the lease.

Our lease cost for the year ended December 31, 2019 included the following components (in thousands):

December 31, 2019

Leases and Other Commitments

Substantially all of our leases are long-term operating leases primarily for warehouse and office for facilities with fixed payment terms betwee n two and 15 years.

Operating lease cost primarily represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term and is included in costs and operating expenses on our consolidated statement of income.

Our lease agreements do not contain any material residual value guarantees, material variable payment provisions or material restrictive covenants.

Our lease cost for the year ended December 31, 2020 and 2019 included the following components (in thousands):

Year ended Year ended

December 31, 2020 December 31, 2019

Operating lease cost $ 5,032 $ 6,106

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Total lease cost, net $ 4,988 $ 5,782

For the years ended December 31, 2018 and 2017, total lease expense on our operating leases under the previous lease standard, net of sublease rentals, were $2.2 million and $3.8 million , respectively.

Certain of our leases include options to extend the term of the lease or to terminate the lease.

When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments.

Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors.

Instead, we estimate our incremental borrowing rate based on information available at lease commencement to discount lease payments to present value.

For the year ended December 31, 2018, total lease expense on our operating leases under the previous lease standard, net of sublease rentals, was $ 2.2 million.

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 a gain of $ 1.1 million after incurring $ 200 thousand in selling expenses.

The table below summarizes future minimum lease payments under operating leases, recorded on the balance sheet, as of December 31, 2020 (in thousands):

Operating Leases

After 2025 5,415

Minimum lease payments 31,594

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Long-term lease liabilities $ 22,815

We made cash payments of approximately $5.7 million for operating leases during the year ended December 31, 2019, which are included in cash flows from operating activities in our consolidated statement of cash flows.

The weighted average remaining lease term and discount rate for our operating leases were approximately 6.6 years and 6.0% , respectively at December 31, 2019 .

(b) Contingencies

As previously reported, on or about April 19, 2018 Joseph Waggoner, on behalf of himself and all similarly situated individuals, filed a lawsuit against VSE and two of our subcontractors in the United State District Court, Eastern District of Texas, Texarkana Division, alleging overtime compensation entitlement at a rate of one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek.

The plaintiffs worked under VSE’s contract with the United States Army at the Red River Army Depot in Texas.

On January 14, 2020, the parties settled the lawsuit.

While the settlement amount VSE agreed to pay the defendants was in excess of the amount that VSE had previously accrued as a loss provision in respect of the lawsuit, the difference was not material.

In addition to the above-referenced legal proceeding, we may have certain claims in the normal course of business, including legal proceedings, against us and against other parties.

We made cash payments of approximately $ 3.7 million and $ 5.7 million for operating leases during the year ended December 31, 2020 and 2019, respectively, which are included in cash flows from operating activities in our consolidated statement of cash flows.

As of December 31, 2020, the weighted average remaining lease term and discount rate for our operating leases were approximately 5.8 years and 5.4 %, respectively.

Contingencies

We may have certain claims in the normal course of business, including legal proceedings, against us and against other parties.

In our opinion, the resolution of these other claims will not have a material adverse effect on our results of operations, financial position or cash flows.

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Further, from time-to-time, government agencies investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements.

being imposed upon us, or could lead to suspension or debarment from future government contracting.

Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting.

Government investigations often take years to complete and most result in no adverse action against us.

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Management of our business operations is conducted under three reportable operating segments:

Aviation Group – Our Aviation Group provides international parts supply and distribution, supply chain solutions, component and engine accessory repair services supporting global aftermarket commercial and business and general aviation customers through product distribution and MRO services.

Supply Chain Management Group – Our Supply Chain Management Group provides parts supply, inventory management, e-commerce fulfillment, logistics, data management, and other services to assist aftermarket United States Postal Service ("USPS"), DoD and aftermarket commercial high duty-cycle truck and fleet customers.

Federal Services Group – Our Federal Services Group provides aftermarket refurbishment and sustainment services to extend and maintain the life cycle of military vehicles, ships, and aircraft for the DoD.

The group provides foreign military sales services, engineering, logistics, maintenance, configuration management, prototyping, technology, and field support services to the DoD and other customers.

We also provide energy consulting services and healthcare IT and IT data solutions.

Aviation – Distribution and MRO Services

Our Aviation segment (formerly Aviation Group) provides aftermarket repair and distribution services to commercial, cargo, business and general aviation, military and defense, and rotorcraft customers globally.

Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services.

Fleet – Distribution and Fleet Services

Our Fleet segment (formerly Supply Chain Management Group) provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the United States Department of Defense ("DoD").

Core services include vehicle parts distribution, sourcing, IT solutions customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.

Federal and Defense – Logistics and Sustainment Services

Our Federal and Defense segment (formerly Federal Services Group) provides aftermarket MRO and logistics services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers.

Core services include base operations support;

supply chain management;

vehicle, maritime and aircraft sustainment services;

IT services and energy consulting.

The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance.

We evaluate segment performance based on consolidated revenues and operating income.

Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation.

Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation.

Our segment information is as follows (in thousands):

For the years ended December 31,

Aviation Group

Supply Chain Management Group

Federal Services Group

2020 2019 2018

Aviation $ 165,070 $ 224,546 $ 145,423

Fleet 242,170 214,520 214,809

Federal and Defense 254,419 313,561 336,986

Total revenues $ 661,659 $ 752,627 $ 697,218

Operating income:

Aviation Group

Supply Chain Management Group

Federal Services Group

Operating income (loss):

Aviation $ ( 35,513 ) $ 17,901 $ 11,076

Fleet 26,659 29,819 30,626

Federal and Defense 26,309 18,144 15,797

Corporate expenses ( 3,532 ) ( 5,607 ) ( 3,269 )

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Depreciation and amortization expense:

Aviation Group

Supply Chain Management Group

Federal Services Group

Aviation $ 10,874 $ 12,546 $ 5,123

Fleet 10,260 11,085 7,299

Federal and Defense 3,001 3,296 12,802

Total depreciation and amortization $ 24,135 $ 26,927 $ 25,224

Capital expenditures:

Aviation Group

Supply Chain Management Group

Federal Services Group

Aviation $ 3,445 $ 8,396 $ 1,772

Fleet 675 1,076 802

Federal and Defense 148 58 209

Corporate 159 130 334

Total capital expenditures $ 4,427 $ 9,660 $ 3,117

Total assets:

Aviation Group

Supply Chain Management Group

Federal Services Group

Aviation $ 478,861 $ 522,446

Fleet 161,088 170,142

Federal and Defense 66,808 88,966

Corporate 73,324 64,310

Total assets $ 780,081 $ 845,864

Revenues are net of inter-segment eliminations.

Corporate expenses are primarily selling, general and administrative expenses not allocated to segments.

In the third quarter of 2018, we completed the sale of a contract we had been awarded by the National Institutes of Health, which resulted in a $1.7 million gain recorded within our Federal Services Group.

Corporate assets are primarily cash, property and equipment and investments held in separate trust.

In 2019, we allocated depreciation and amortization expense to each segment based on the segment in which each asset was utilized.

In 2018 and 2017, the allocation method for certain amortization expenses was based on each segment’s percentage of overall cost.

In 2020 and 2019, we allocated depreciation and amortization expense to each segment based on the segment in which each asset was utilized.

In 2018, the allocation method for certain amortization expenses was based on each segment’s percentage of overall cost.

The primary reason for the change is to allocate depreciation and amortization expense to a specific segment depending on the asset deployment.

Depreciation and amortization expense by segment for 2018 and 2017 was not recast for these allocation changes, and this change did not impact our previously reported consolidated financial results.

The impact for 2018, under the new allocation method, would have been a decrease in depreciation and amortization expense for the Federal Services Group of $8.1 million , with a corresponding increase for Aviation Group and Supply Chain Group of $3.7 million and $4.4 million , respectively.

The impact for 2017 would have been a decrease in depreciation and amortization expense for the Federal Services Group of $9.1 million , with a corresponding increase for Aviation Group and Supply Chain Group of $4.1 million and $5.0 million , respectively.

Depreciation and amortization expense by segment for 2018 was not recast for these allocation changes, and this change did not impact our previously reported consolidated financial results.

The impact for 2018, under the new allocation method, would have been a decrease in depreciation and amortization expense for the Federal and Defense segment of $ 8.1 million, with a corresponding increase for Aviation segment and Fleet segment of $ 3.7 million and $ 4.4 million, respectively.

Customer Information

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Our revenue by customer is as follows for the years ended December 31, (in thousands):

(in thousands)

Years ended December 31,

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

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Years ended December 31,

2020 2019 2018

United States $ 598,142 $ 659,451 $ 647,168

Other Countries (1)

63,517 93,176 50,050

Total revenue $ 661,659 $ 752,627 $ 697,218

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The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 and the level they fall within the fair value hierarchy (in thousands):

Amounts Recorded at Fair Value

Financial Statement Classification

Fair Value Hierarchy

Fair Value December 31, 2019

Fair Value December 31, 2018

Non-COLI assets held in Deferred Supplemental Compensation Plan

Interest rate swaps

Accrued expenses/Other current assets

Earn-out obligation-current

Current portion of earn-out obligation

Earn-out obligation-long-term

Earn-out obligation

Amounts Recorded at Fair Value Financial Statement Classification Fair Value Hierarchy Fair Value December 31, 2020 Fair Value December 31, 2019

Non-COLI assets held in Deferred Supplemental Compensation Plan Other assets Level 1 $ 1,120 $ 710

Interest rate swaps Accrued expenses Level 2 $ 1,603 $ 1,473

Earn-out obligation-current Current portion of earn-out obligation Level 3 $ — $ 31,700

Earn-out obligation-long-term Earn-out obligation Level 3 $ — $ 5,000

Non-COLI assets held in the deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in its fair value are recorded as selling, general and administrative expenses.

We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging , and have determined that our swap agreements qualify as cash flow hedges.

Accordingly, the fair value of the swap agreements, which is an asset recorded in other current assets of approximately $1.5 million and approximately $195 thousand at December 31, 2019 and 2018 , respectively.

Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities, of approximately $ 1.6 million and approximately $ 1.5 million at December 31, 2020 and 2019, respectively.

The offset, net of an income tax effect of approximately $ 400 thousand and $ 367 thousand is included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2020 and 2019, respectively.

The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred.

We expect the hedges to remain fully effective during the remaining terms of the swap agreements.

We determine the fair value of the swap agreements based on a valuation model using market data inputs.

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If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement.

In January 2020, after obtaining the sellers' consent to our proposed amount of the earn-out payment for the 2019 performance year, we made a payment of approximately $31.7 million to satisfy the 2019 performance year obligation.

The fair value of the earn-out obligation increased by $1.9 million during the fourth quarter of 2019.

Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020 and 2019 are as follows (in thousands):

Current portion Long-term portion Total

Balance as of December 31, 2018 $ — $ — $ —

Acquisition date fair value of contingent consideration 34,800 — 34,800

Fair value adjustment included in costs and operating expenses 1,900 — 1,900

Reclassification from long-term to current ( 5,000 ) 5,000 —

Balance as of December 31, 2019 31,700 5,000 36,700

Earn-out payments ( 31,700 ) — ( 31,700 )

Reclassification from long-term to current 5,000 ( 5,000 ) —

Fair value adjustment included in costs and operating expenses ( 5,000 ) — ( 5,000 )

Balance as of December 31, 2020 $ — $ — $ —

Measurements on a Non-recurring Basis

The following table presents changes in the Level 3 fair value of certain assets measured on a non-recurring basis for the year ended December 31, 2020 (in thousands):

Assets subject to impairment charges:

Balance as of December 31, 2019 $ 182,377

Goodwill allocated to divested business ( 7,379 )

Carrying value prior to impairment 174,998

Impairment charge ( 30,945 )

Carrying value after impairment 144,053

Carrying value of assets not subject to impairment charge 94,073

Balance as of December 31, 2020 $ 238,126

Goodwill is tested annually or upon the occurrence of a triggering event indicating that an impairment loss may have been incurred.

Goodwill is measured on a non-recurring basis using fair value measurements with unobservable inputs (Level 3).

The goodwill fair value is determined using a weighting of fair values derived from the income and market approach.

Fair value is measured as of the impairment date.

Goodwill for the VSE Aviation reporting unit was determined to be impaired and was written down to its estimated fair value during the second quarter of 2020.

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.

A negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods.

For further discussion of the impairment, refer to Note (7) "Goodwill and Intangible Assets."

(17) Selected Quarterly Data (Unaudited)

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2020 Quarters

1st 2nd 3rd 4th

Revenues $ 177,418 $ 168,715 $ 165,505 $ 150,021

Costs and operating expenses $ 161,256 $ 156,213 $ 151,320 $ 138,107

Operating income

$ 9,734 $ ( 21,910 ) $ 14,185 $ 11,914

Net income (1)

$ 3,332 $ ( 22,624 ) $ 8,108 $ 6,013

Basic earnings per share:

Net income (1)

$ 0.30 $ ( 2.05 ) $ 0.73 $ 0.54

Basic weighted average shares outstanding 11,000 11,041 11,043 11,052

Diluted earnings per share:

$ 0.30 $ ( 2.05 ) $ 0.73 $ 0.54

Diluted weighted average shares outstanding 11,101 11,041 11,100 11,141

2019 Quarters

1st 2nd 3rd 4th

Revenues $ 169,919 $ 189,111 $ 198,326 $ 195,271

Costs and operating expenses $ 158,106 $ 172,695 $ 181,111 $ 180,458

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Diluted earnings per share:

$ 0.60 $ 0.89 $ 0.95 $ 0.90

Diluted weighted average shares outstanding 10,974 11,073 11,060 11,071

(1) Operating income for the third quarter of 2018 includes a $1.7 million gain from the sale of a contract.

(1) Operating income for the first quarter of 2020 includes a $ 7.5 million loss of our Prime Turbines business offset by a $ 1.1 million gain from the sale of a Miami, FL real estate holding.

Operating income for the second quarter of 2020 includes a $ 33.7 million goodwill and intangible asset impairment charge and a $ 678 thousand loss from the sale of all of the inventory assets of our CT Aerospace subsidiary.

(18) Subsequent Events

On January 28, 2020 VSE’s subsidiary VSE Aviation, Inc entered into a definitive agreement to sell Prime Turbines LLC (Prime Turbines) to PTB Holdings USA, LLC for a sale price of $21 million .

The transaction was completed on February 26, 2020.

Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines and is included in our Aviation Group segment.

VSE estimates that it will incur a non-cash loss ranging from $6 million to $7.5 million in respect of the sale of Prime Turbines.

Prime Turbines did not meet the held for sale criteria per ASC 360 at December 31, 2019, and as such, Prime Turbines assets and liabilities as of December 31, 2019, and results of operations for all periods presented are classified as held and used in the consolidated financial statements.

On January 29, 2021, we entered into an underwriting agreement with William Blair & Company, L.L.C.

and Canaccord Genuity LLC, acting as representatives of several underwriters, relating to an underwritten public offering of 1,428,600 shares of the Company's common stock, at the public offering price of $ 35.00 per share.

The transaction closed on February 2, 2021.

On February 18, 2021, we issued and sold an additional 170,497 shares pursuant to the exercise by the underwriters of their over-allotment option to purchase additional shares.

We received net proceeds of approximately $ 52 million after deducting underwriting discounts and commissions and offering related expenses.

The shares were issues pursuant to an effective shelf registration statement filed on Form S-3 (File No.

333-248139) that was previously filed with the Securities and Exchange Commission and declared effective on August 31, 2020.

On March 1, 2021, the Company acquired HAECO Special Services, LLC (“HSS”) from HAECO Airframe Services, LLC, a division of HAECO Americas (“HAECO”).

HSS is a leading provider of fully integrated MRO support solutions for military and government aircraft.

The acquisition is insignificant to the financial statements taken as a whole.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data