VSE CORP 10-K

ITEM 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 39 Consolidated Balance Sheets as of December 31, 20 20 and 201 9 42 Consolidated Statements of (Loss) Income for the years ended December 31, 20 20 , 201 9 and 201 8 43 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 20 2 0 , 201 9 and 201 8 44 Consolidated Statements of Stockholders' Equity for the years ended December 31, 20 20 , 201 9 and 201 8 45 Consolidated Statements of Cash Flows for the years ended December 31, 20 20 , 201 9 and 201 8 46 Notes to Consolidated Financial Statements 48 -38- Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders VSE Corporation Opinion on the financial statements 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. 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 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 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 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. -39- Table of Contents • 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 We have served as the Company’s auditor since 2019 . Arlington, Virginia March 5, 2021 -40- Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of VSE Corporation Opinion on the Financial Statements 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 . 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 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 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 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. /s/ Ernst & Young LLP We served as the Company’s auditor from 2002 to 2019. Tysons, Virginia March 6, 2019 -41- Table of Contents VSE Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 378 $ 734 Receivables, net 55,471 70,630 Unbilled receivables, net 22,358 46,279 Inventories, net 253,422 218,627 Other current assets 23,328 19,071 Total current assets 354,957 355,341 Property and equipment, net 36,363 43,465 Intangible assets, net 103,595 132,175 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 Current liabilities: Current portion of long-term debt $ 20,379 $ 16,883 Accounts payable 72,682 68,099 Current portion of earn-out obligation — 31,700 Accrued expenses and other current liabilities 45,172 46,514 Dividends payable 995 987 Total current liabilities 139,228 164,183 Long-term debt, less current portion 230,714 253,128 Deferred compensation 16,027 18,146 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 Commitments and contingencies (Note 12) Stockholders' equity: Common stock, par value $ 0.05 per share, authorized 15,000,000 shares; issued and outstanding 11,055,037 and 10,970,123 respectively 553 549 Additional paid-in capital 31,870 29,411 Retained earnings 325,097 334,246 Accumulated other comprehensive loss ( 1,203 ) ( 1,105 ) Total stockholders' equity 356,317 363,101 Total liabilities and stockholders' equity $ 780,081 $ 845,864 The accompanying notes are an integral part of these financial statements. -42- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of (Loss) Income (in thousands, except share and per share amounts) For the years ended December 31, 2020 2019 2018 Revenues: 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 Amortization of intangible assets 17,504 19,317 16,017 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 Operating income 13,923 60,257 54,230 Interest expense, net 13,496 13,830 8,982 Income before income taxes 427 46,427 45,248 Provision for income taxes 5,598 9,403 10,168 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 (loss) earnings per share $ ( 0.47 ) $ 3.35 $ 3.21 Diluted weighted average shares outstanding 11,034,256 11,044,731 10,936,057 The accompanying notes are an integral part of these financial statements. -43- Table of Contents VSE Corporation and Subsidiaries 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, 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. -44- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (in thousands except per share data) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Common Stock 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 Change in fair value of interest rate swap agreements, net of tax — — — — ( 35 ) ( 35 ) 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 Change in fair value of interest rate swap agreements, net of tax — — — — ( 1,251 ) ( 1,251 ) 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 Net loss — — — ( 5,171 ) — ( 5,171 ) Stock-based compensation 85 4 2,459 — — 2,463 Change in fair value of interest rate swap agreements, net of tax — — — — ( 98 ) ( 98 ) 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 The accompanying notes are an integral part of these financial statements. -45- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands) 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 activities: Depreciation and amortization 24,135 26,927 25,224 Deferred taxes 106 ( 505 ) ( 1,371 ) 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 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 Accounts payable and deferred compensation 3,503 7,725 ( 7,405 ) Accrued expenses and other current liabilities ( 1,183 ) 1,207 ( 2,515 ) Long-term lease obligations — — ( 1,668 ) Other long-term liabilities 83 — — Net cash provided by operating activities 35,761 17,994 18,855 Cash flows from investing activities: Purchases of property and equipment ( 4,427 ) ( 9,630 ) ( 3,117 ) 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 provided by (used in) investing activities 20,219 ( 122,807 ) ( 1,295 ) Cash flows from financing activities: Borrowings on loan agreement 432,999 752,259 539,471 Repayments on loan agreement ( 452,338 ) ( 642,193 ) ( 550,436 ) Earn-out obligation payments ( 31,701 ) — — Payment of debt financing costs ( 636 ) — ( 1,702 ) Payments on financing lease obligations — — ( 1,452 ) Payment of taxes for equity transactions ( 690 ) ( 955 ) ( 641 ) Dividends paid ( 3,970 ) ( 3,726 ) ( 3,262 ) 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. -46- Table of Contents Supplemental cash flow disclosures: 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. -47- Table of Contents VSE Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 (1) Nature of Business and Significant Accounting Policies Nature of Business The term "VSE," the "Company," "us," "we," or "our" means VSE and its subsidiaries and divisions unless the context indicates operations of only VSE as the parent company. Our operations include aftermarket supply chain management solutions and parts supply for vehicle fleets; maintenance, repair, and overhaul ("MRO") services and parts supply for aviation clients; vehicle and equipment maintenance and refurbishment; logistics; engineering; energy services; IT and health care IT solutions; and consulting services. We serve the United States Government (the "government"), including the United States Department of Defense ("DoD"), federal civilian agencies, and commercial and other customers. Principles of Consolidation 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. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on -48- Table of Contents 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, which is determined based on the closing price of our common stock on the date of grant. 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. Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. 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 Effect of dilutive shares — 86,981 59,856 Diluted weighted average common shares outstanding 11,034,256 11,044,731 10,936,057 Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, the carrying values on our consolidated balance sheets approximate fair value. Property and Equipment Property and equipment are recorded at cost. Depreciation of computer equipment, furniture, other equipment is provided principally by the straight-line method over periods of three to 15 years. Depreciation of buildings and land improvements is provided by the straight-line method over periods of approximately 15 to 20 years. 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. -49- Table of Contents Leases 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 Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and trade receivables. Our trade receivables consist of amounts due from various government clients and commercial entities. We believe that concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the customer base and their dispersion across many different geographic regions. Contracts with the government, either as a prime or subcontractor, accounted for approximately 69 %, 68 %, and 78 % of revenues for the years ended December 31, 2020, 2019 and 2018, respectively. The credit risk, with respect to contracts with the government, is limited due to the creditworthiness of the respective governmental entity. 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. Revenue Recognition We account for revenue in accordance with ASC 606. The unit of account in ASC 606 is a performance obligation. At the inception of each contract with a customer, we determine our performance obligations under the contract and the contract's transaction price. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the respective goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For product sales, each product sold to a customer typically represents a distinct performance obligation. Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. 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 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. -50- Table of Contents 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 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. 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. Variable consideration, typically in the form of award fees, is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not occur, when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment based on current facts and circumstances. Revenues on fixed-price contracts are recorded as work is performed over the period. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. For such contracts, we estimate total costs at the inception of the contract based on our assumptions of the cost elements required to complete the associated tasks of the contract and assess the impact of the risks on our estimates of total costs to complete the contract. Our cost estimates are based on assumptions that include the complexity of the work, our employee labor costs, the cost of materials and the performance of our subcontractors. These cost estimates are subject to change as we perform under the contract and as a result, the timing of revenues and amount of profit on a contract may change as there are changes in estimated costs to complete the contract. Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes. 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. 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. Revenues related to work performed on government contracts at risk, which is work performed at the customer's request prior to the government formalizing funding, is not recognized until it can be reliably estimated and its realization is probable. A substantial portion of contract and administrative costs are subject to audit by the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 2017 and prior years with no material adjustments to our results of operations or financial position. 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. 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. 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. The amounts may not exceed their estimated net realizable value. Unbilled receivables are classified as current based on our contract operating cycle. -51- Table of Contents 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 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. 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. Deferred Compensation Plans We have a deferred compensation plan, the VSE Corporation Deferred Supplemental Compensation Plan ("DSC Plan"), to provide incentive and reward for certain key management employees based on overall corporate performance. We maintain the underlying assets of the DSC Plan in a Rabbi Trust and changes in asset values are included in costs and operating expenses on the accompanying consolidated statements of income. We invest the assets held by the Rabbi Trust in both corporate owned life insurance ("COLI") products and in mutual funds. The COLI investments are recorded at cash surrender value and the mutual fund investments are recorded at fair value. 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, 2020, 2019 and 2018 was approximately $ 970 thousand, $ 1.7 million and $ 2.1 million, respectively. Impairment of Long-Lived Assets Long-lived assets include amortizable intangible assets and property and equipment to be held and used. We review the carrying values of long-lived assets other than goodwill for impairment if events or changes in the facts and circumstances indicate that their carrying values may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of the related asset to its carrying value. 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. 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 Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. -52- Table of Contents The carrying value of net deferred tax assets is based on assumptions regarding our ability to generate sufficient future taxable income to utilize these deferred tax assets. Goodwill We test goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Goodwill is tested for impairment at the reporting unit level. A qualitative assessment can be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value using a quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss. For the quantitative assessment, we estimate the fair value of each reporting unit using a combination of an income approach using a discounted cash flow ("DCF") analysis and a market-based valuation approach based on comparable public company trading values. Determining the fair value of a reporting unit requires the exercise of significant management judgments, including the amount and timing of projected future revenues, earnings and cash flows, discount rates, long-term growth rates and comparable public company revenues and earnings multiples. 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. There are no significant allocations of amounts held at the Corporate level to the reporting units. 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 Intangible assets consist of the value of contract-related intangible assets, trade names and acquired technologies acquired in acquisitions. We amortize intangible assets on a straight-line basis over their estimated useful lives unless their useful lives are determined to be indefinite. The amounts we record related to acquired intangibles are determined by us considering the results of independent valuations. Our contract-related intangibles are amortized over their estimated useful lives of approximately five to 18 years with a weighted-average life of approximately 14.2 years as of December 31, 2020. We have six trade names that are amortized over an estimated useful life of approximately two to nine years . We have an acquired technologies intangible asset that is amortized over an estimated useful life of 11 years. The weighted-average life for all amortizable intangible assets is approximately 13.8 years as of December 31, 2020. Recently Issued Accounting Pronouncements Not Yet Adopted 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. -53- Table of Contents (2) Acquisition and Divestitures Acquisition 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. 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. 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. The following VSE consolidated pro forma results are prepared as if the 1st Choice Aerospace acquisition had occurred on January 1, 2018. Significant pro forma adjustments incorporated into the pro forma results below include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to debt incurred to finance the acquisition. Significant nonrecurring adjustments include the elimination of non-recurring acquisition-related expenses incurred during the year ended December 31, 2019. This information is for comparative purposes only and does not necessarily reflect the results that would have occurred or may occur in the future. The unaudited consolidated pro forma results of operations are as follows (in thousands except per share amounts): Year ended December 31, 2018 Revenue $ 743,347 Net Income $ 35,963 Basic earnings per share $ 3.31 Diluted earnings per share $ 3.29 Divestitures 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 %. -54- Table of Contents 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 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 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 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. -55- Table of Contents 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 Billed receivables, unbilled receivables (contract assets), and contract liabilities are the results of revenue recognition, customer billing, and timing of payment receipts. Billed receivables, net, represent unconditional rights to consideration under the terms of the contract and include amounts billed and currently due from our customers. Unbilled receivables represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time. We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. 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. For the year ended December 31, 2020 and 2019, we recognized revenue of $ 2.2 million and $ 2.2 million, respectively, that was previously included in the beginning balance of contract liabilities. Performance Obligations 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 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 -56- Table of Contents 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. During the year ended December 31, 2020, revenue recognized from performance obligations satisfied in prior periods was not material. (4) Receivables and Unbilled Receivables Receivables, net and unbilled receivables, net as of December 31, 2020 and 2019, respectively, were as follows (in thousands): 2020 2019 Receivables, net $ 55,471 $ 70,630 Unbilled receivables, net 22,358 46,279 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. We expect to invoice substantially all unbilled receivables during 2021. (5) Other Current Assets and Other Assets Other current assets consisted of the following as of December 31, 2020 and 2019 (in thousands): 2020 2019 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 -57- Table of Contents Other assets consisted of the following as of December 31, 2020 and 2019 (in thousands): 2020 2019 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 Property and equipment, net consisted of the following as of December 31, 2020 and 2019 (in thousands): 2020 2019 Buildings and building improvements $ 29,537 $ 31,463 Computer equipment 26,492 26,697 Furniture, fixtures, equipment and other 33,322 38,637 Leasehold improvements 3,140 3,717 Land and land improvements 4,726 5,151 97,217 105,665 Less accumulated depreciation and amortization ( 60,854 ) ( 62,200 ) Total property and equipment, net $ 36,363 $ 43,465 Depreciation and amortization expense for property and equipment for the years ended December 31, 2020, 2019 and 2018 was approximately $ 5.6 million, $ 7.0 million and $ 8.5 million, respectively. (7) Goodwill and Intangible Assets Changes in goodwill for the years ended December 31, 2020 and 2019 are as follows (in thousands): Fleet Federal and Defense Aviation Total Balance as of December 31, 2018 $ 63,190 $ 30,883 $ 104,549 $ 198,622 Increase from acquisitions — — 77,828 77,828 Balance as of December 31, 2019 $ 63,190 $ 30,883 $ 182,377 $ 276,450 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 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. -58- Table of Contents 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 Contract and customer-related $ 213,194 $ ( 110,917 ) $ ( 3,814 ) $ 98,463 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 Contract and customer-related $ 227,594 $ ( 102,169 ) $ ( 1,025 ) $ 124,400 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. -59- Table of Contents Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands): Amortization 2021 $ 16,636 2022 14,890 2023 10,890 2024 7,309 2025 7,248 Thereafter 46,622 Total $ 103,595 (8) Debt Long-term debt consisted of the following (in thousands): December 31, 2020 2019 Bank credit facility - term loan $ 77,988 $ 120,800 Bank credit facility - revolver loans 175,473 152,000 Principal amount of long-term debt 253,461 272,800 Less debt issuance costs ( 2,368 ) ( 2,789 ) Total long-term debt 251,093 270,011 Less current portion ( 20,379 ) ( 16,883 ) Long-term debt, net of current portion $ 230,714 $ 253,128 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, 2021 $ 21,563 2022 22,500 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 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, 2020, the LIBOR base margin was 3.00 % and the base rate -60- Table of Contents base margin was 1.75 %. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan until February 6, 2021. 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 %. Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $ 12.7 million, $ 13.3 million and $ 6.9 million during the years ended December 31, 2020, 2019 and 2018, respectively. The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio and a minimum Fixed Charge Coverage Ratio. 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 consisted of the following as of December 31, 2020 and 2019 (in thousands): 2020 2019 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 In 2006, our stockholders approved the VSE Corporation 2006 Restricted Stock Plan for VSE's directors, officers and other employees (the "2006 Plan"). In May 2020, the stockholders approved amendments to the 2006 Plan extending its term until May 6, 2027 and authorizing an additional 500,000 shares of our common stock for issuance under the 2006 Plan. Under the 2006 Plan, we are authorized to issue up to 1,500,000 shares of our common stock and, as of December 31, 2020, 725,945 shares remained available for issuance under the 2006 Plan. The Compensation Committee is responsible for the administration of the 2006 Plan and determines each recipient of an award under the 2006 Plan, the number of restricted shares of common stock subject to such award and the period of continued employment required for the vesting of such award. 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 -61- Table of Contents 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. The weighted average grant-date fair value of these restricted stock grants was $ 37.55 per share, $ 31.58 per share, and $ 49.38 per share for the shares awarded in 2020, 2019 and 2018, respectively. The shares issued vested immediately and, without the Compensation Committee's approval, cannot be sold, transferred, pledged or assigned before the second anniversary of the grant date. 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. These restricted stock awards vest ratably over three years and are expensed on an accelerated basis over the vesting period of approximately three years. Upon issuance of shares on each vesting date, the liability is reduced and additional paid-in capital is increased. The date of award determination is expected to be in March 2021 for the 2020 awards. The date of award determination for the 2019 awards and the 2018 awards was March 2, 2020 and March 2, 2019, respectively. On each vesting date, 100 % of the vested award is paid in our shares. The number of shares issued is based on the fair market value of our common stock on the vesting date. On March 2, 2020, the employees eligible for the 2019 awards, 2018 awards and 2017 awards received a total of 42,946 shares of common stock. The grant-date fair value of these awards was $ 28.67 per share. 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 -62- Table of Contents (11) Income Taxes We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. We have concluded all U.S. federal income tax matters as well as material state and local tax matters for years through 2015. 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 Current Federal $ 4,086 $ 7,739 $ 9,667 State 1,262 1,344 1,758 Foreign 144 825 140 5,492 9,908 11,565 Deferred 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 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 Increases (decreases) in tax resulting from: State taxes, net of federal tax benefit ( 52 ) 1,805 1,861 Permanent differences, net ( 1,406 ) ( 195 ) 367 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 ) Provision for income taxes $ 5,598 $ 9,403 $ 10,168 Certain amounts from the prior years have been reclassified to conform to the current year presentation. -63- Table of Contents The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows (in thousands): 2020 2019 Gross deferred tax assets Deferred compensation and accrued paid leave $ 6,302 $ 7,498 Operating lease liabilities 6,984 7,009 Stock-based compensation 605 678 Interest rate swaps 400 367 Reserve for contract disallowance 195 145 Capitalized inventory 573 — 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 ) Total gross deferred tax assets 15,117 16,103 Gross deferred tax liabilities Depreciation ( 3,061 ) ( 2,498 ) Deferred revenues ( 1,816 ) ( 1,681 ) Goodwill and intangible assets ( 19,470 ) ( 23,383 ) 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 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 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. -64- Table of Contents 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 Short-term lease cost 622 698 Less: sublease income ( 666 ) ( 1,022 ) Total lease cost, net $ 4,988 $ 5,782 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 2021 $ 5,366 2022 5,226 2023 5,122 2024 5,193 2025 5,272 After 2025 5,415 Minimum lease payments 31,594 Less: imputed interest ( 4,767 ) Present value of minimum lease payments 26,827 Less: current maturities of lease liabilities ( 4,012 ) Long-term lease liabilities $ 22,815 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. However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated. Further, from time-to-time, government agencies investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. 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. We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows. -65- Table of Contents (13) Business Segments and Customer Information Segment Information Management of our business operations is conducted under three reportable operating segments: 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; procurement; 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 inter-segment sales as these activities are eliminated in consolidation. -66- Table of Contents Our segment information is as follows (in thousands): For the years ended December 31, 2020 2019 2018 Revenues 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 (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 ) Operating income $ 13,923 $ 60,257 $ 54,230 Depreciation and amortization expense: 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 $ 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 December 31, 2020 2019 Total assets: 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. Corporate assets are primarily cash, property and equipment and investments held in separate trust. 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 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. -67- Table of Contents Customer Information Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our commercial clients. The USPS, U.S. Army and Army Reserve, and U.S. Navy are our largest customers. Our customers also include various other government agencies and commercial entities. Our revenue by customer is as follows for the years ended December 31, (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 We do not measure revenue or profit by product or service lines, either for internal management or external financial reporting purposes, because it would be impractical to do so. Products offered and services performed are determined by contract requirements and the types of products and services provided for one contract bear no relation to similar products and services provided on another contract. Products and services provided vary when new contracts begin or current contracts expire. In many cases, more than one product or service is provided under a contract or contract task order. Accordingly, cost and revenue tracking are designed to best serve contract requirements and segregating costs and revenues by product or service lines in situations for which it is not required would be difficult and costly to both us and our customers. Geographical Information Revenue by geography is based on the billing address of the customer. Our revenue by geographic area is as follows (in thousands): 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 (1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented . (14) Capital Stock Common Stock Our common stock has a par value of $ 0.05 per share. Proceeds from common stock issuances that are greater than $ 0.05 per share are credited to additional paid in capital. Holders of common stock are entitled to one vote per common share held on all matters voted on by our stockholders. Stockholders of record are entitled to the amount of dividends declared per common share held. (15) 401(k) Plan We maintain a defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, that covers substantially all of our employees. Under the provisions of our 401(k) plan, employees' eligible contributions are matched at rates specified in the plan documents. Our expense associated with this plan was approximately $ 5.9 million, $ 5.5 million and $ 5.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. -68- Table of Contents (16) Fair Value Measurements The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows: Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities; Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions. 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, 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 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. We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation. Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate. If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement. -69- Table of Contents 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): Goodwill 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." -70- Table of Contents (17) Selected Quarterly Data (Unaudited) The following table shows selected quarterly data for 2020 and 2019, in thousands, except earnings per share. 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: Net income $ 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 Operating income $ 11,813 $ 16,416 $ 17,215 $ 14,813 Net income $ 6,603 $ 9,898 $ 10,527 $ 9,996 Basic earnings per share: Net income $ 0.60 $ 0.90 $ 0.96 $ 0.92 Basic weighted average shares outstanding 10,920 10,970 10,970 10,970 Diluted earnings per share: Net income $ 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 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 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. -71- Table of Contents 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. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.