VSE CORP 10-K

ITEM 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 36 Consolidated Balance Sheets as of December 31, 2021 and 2020 38 Consolidated Statements of Income (Loss) for the years ended December 31, 2021, 2020 and 2019 39 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019 40 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021, 2020 and 2019 41 Consolidated Statements of Cash Flows for the years ended December 31, 202 1 , 20 20 and 20 19 42 Notes to Consolidated Financial Statements 44 -35- 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, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule included under Item 15.2 (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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 10, 2022 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 matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the write-down of Aviation inventories As described further in Note 1 to the consolidated financial statements, the Company’s inventory balance as of December 31, 2021 was $322.7 million. The Company records inventory within its Aviation Segment at the lower of cost or net realizable value. The write-down of slow moving inventory is recorded for excess or obsolete inventory based on certain inputs and assumptions used to determine the net realizable value. These assumptions include the number of days transpiring from the date the inventory was originally received and the historical sales of the inventory to determine recovery rates. Other inputs include current and expected future aviation usage trends, replacement values, expected future demand, and historical scrap recovery rates. The principal considerations for our determination that the assessment of the write-down of inventories within the Aviation Segment is a critical audit matter are that the inputs and assumptions used in determining the write-down are subject to significant management judgement. The inputs and assumptions used in determining the write-down of slow moving inventory include the historical recovery rates, which are based on the number of dates transpiring from the date the inventory was originally received, the historical sales of inventory, the identification of specific inventories associated with aircraft with declining usage trends and the impact of recently executed distribution agreements. The assessment of these inputs required a high degree of auditor judgement in evaluating the future customer demand for slow moving inventory. -36- Table of Contents Our audit procedures related to the write-down of inventory included the following procedures, among others: • We tested the design and operating effectiveness of controls relating to the Company’s inventory process, including controls over the Company’s evaluation of the impact on the estimate of net realizable value based on the number of days transpiring from the date the inventory was original received, historical sales of the inventory, specific inventories identified to relate to aircraft with declining usage and the approval and evaluation of new distribution agreements. • We assessed that the recovery rates applied to slow moving inventory were consistent with forecasted demand. • We assessed the completeness of management's identification of specific inventory with declining usage trends by evaluating external industry information. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2019. Arlington, Virginia March 10, 2022 -37- Table of Contents VSE Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share amounts) As of December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 518 $ 378 Receivables, net 76,587 55,471 Unbilled receivables, net 31,882 22,358 Inventories 322,702 253,422 Other current assets 32,304 23,328 Total current assets 463,993 354,957 Property and equipment, net 42,486 36,363 Intangible assets, net 108,263 103,595 Goodwill 248,753 238,126 Operating lease - right-of-use assets 27,327 20,515 Other assets 27,736 26,525 Total assets $ 918,558 $ 780,081 Liabilities and Stockholders' equity Current liabilities: Current portion of long-term debt $ 14,162 $ 20,379 Accounts payable 115,064 72,682 Accrued expenses and other current liabilities 49,465 45,172 Dividends payable 1,273 995 Total current liabilities 179,964 139,228 Long-term debt, less current portion 270,407 230,714 Deferred compensation 14,328 16,027 Long-term operating lease obligations 27,168 22,815 Deferred tax liabilities 9,108 14,897 Other long-term liabilities 250 83 Total liabilities 501,225 423,764 Commitments and contingencies (Note 12) Stockholders' equity: Common stock, par value $ 0.05 per share, authorized 15,000,000 shares; issued and outstanding 12,726,659 and 11,055,037 respectively 636 553 Additional paid-in capital 88,515 31,870 Retained earnings 328,358 325,097 Accumulated other comprehensive loss ( 176 ) ( 1,203 ) Total stockholders' equity 417,333 356,317 Total liabilities and stockholders' equity $ 918,558 $ 780,081 The accompanying notes are an integral part of these financial statements. -38- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Income (Loss) (in thousands, except share and per share amounts) For the years ended December 31, 2021 2020 2019 Revenues: Products $ 400,935 $ 318,324 $ 311,617 Services 349,918 343,335 441,010 Total revenues 750,853 661,659 752,627 Costs and operating expenses: Products 385,065 283,814 266,443 Services 322,161 302,458 402,418 Selling, general and administrative expenses 3,625 3,120 4,192 Amortization of intangible assets 18,482 17,504 19,317 Total costs and operating expenses 729,333 606,896 692,370 21,520 54,763 60,257 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 ) — Operating income 21,520 13,923 60,257 Interest expense, net 12,069 13,496 13,830 Income before income taxes 9,451 427 46,427 Provision for income taxes 1,485 5,598 9,403 Net income (loss) $ 7,966 $ ( 5,171 ) $ 37,024 Basic earnings (loss) per share $ 0.63 $ ( 0.47 ) $ 3.38 Basic weighted average shares outstanding 12,551,459 11,034,256 10,957,750 Diluted earnings (loss) per share $ 0.63 $ ( 0.47 ) $ 3.35 Diluted weighted average shares outstanding 12,632,874 11,034,256 11,044,731 The accompanying notes are an integral part of these financial statements. -39- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (in thousands) For the years ended December 31, 2021 2020 2019 Net income (loss) $ 7,966 $ ( 5,171 ) $ 37,024 Change in fair value of interest rate swap agreements, net of tax 1,027 ( 98 ) ( 1,251 ) Other comprehensive income (loss), net of tax 1,027 ( 98 ) ( 1,251 ) Comprehensive income (loss) $ 8,993 $ ( 5,269 ) $ 35,773 The accompanying notes are an integral part of these financial statements. -40- 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, 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 Issuance of common stock 1,599 80 51,937 — — 52,017 Net income — — — 7,966 — 7,966 Stock-based compensation 73 3 4,708 — — 4,711 Change in fair value of interest rate swap agreements, net of tax — — — — 1,027 1,027 Dividends declared ($ 0.37 per share) — — — ( 4,705 ) — ( 4,705 ) Balance at December 31, 2021 12,727 $ 636 $ 88,515 $ 328,358 $ ( 176 ) $ 417,333 The accompanying notes are an integral part of these financial statements. -41- Table of Contents VSE Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands) For the years ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income (loss) $ 7,966 $ ( 5,171 ) $ 37,024 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 25,600 24,135 26,927 Deferred taxes ( 4,356 ) 106 ( 505 ) Stock-based compensation 3,932 2,858 3,264 Provision for inventory 24,420 — — Loss on sale of a business entity and certain assets — 8,214 — Gain on sale of property and equipment ( 64 ) ( 1,051 ) — Goodwill and intangible asset impairment — 33,734 — Earn-out obligation fair value adjustment — ( 4,999 ) 1,900 Changes in operating assets and liabilities, net of impact of acquisitions: Receivables ( 9,413 ) 7,732 ( 3,331 ) Unbilled receivables ( 5,542 ) 19,694 ( 4,593 ) Inventories ( 80,021 ) ( 50,172 ) ( 44,219 ) Other current assets and noncurrent assets ( 14,247 ) ( 1,722 ) ( 7,405 ) Accounts payable and deferred compensation 33,210 3,503 7,725 Accrued expenses and other current and noncurrent liabilities 913 ( 1,100 ) 1,207 Net cash (used in) provided by operating activities ( 17,602 ) 35,761 17,994 Cash flows from investing activities: Purchases of property and equipment ( 10,520 ) ( 4,427 ) ( 9,630 ) Proceeds from the sale of property and equipment 68 2,875 4 Proceeds from payments on notes receivable 2,906 1,856 — Proceeds from sale of a business entity and certain assets — 19,915 — Earn-out obligation payments ( 750 ) — — Cash paid for acquisitions, net of cash acquired ( 53,336 ) — ( 113,181 ) Net cash (used in) provided by investing activities ( 61,632 ) 20,219 ( 122,807 ) Cash flows from financing activities: Borrowings on loan agreement 491,567 432,999 752,259 Repayments on loan agreement ( 458,294 ) ( 452,338 ) ( 642,193 ) Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs 52,017 — — Earn-out obligation payments — ( 31,701 ) — Payment of debt financing costs ( 808 ) ( 636 ) — Payment of taxes for equity transactions ( 681 ) ( 690 ) ( 955 ) Dividends paid ( 4,427 ) ( 3,970 ) ( 3,726 ) Net cash provided by (used in) financing activities 79,374 ( 56,336 ) 105,385 Net increase (decrease) in cash and cash equivalents 140 ( 356 ) 572 Cash and cash equivalents at beginning of year 378 734 162 Cash and cash equivalents at end of year $ 518 $ 378 $ 734 The accompanying notes are an integral part of these financial statements. -42- Table of Contents Supplemental cash flow disclosures: Cash paid for interest $ 12,146 $ 13,936 $ 13,468 Cash paid for income taxes $ 7,536 $ 4,759 $ 11,645 Supplemental disclosure of noncash investing and financing activities: Notes receivable from the sale of a business entity and certain assets $ — $ 12,852 $ — Earn-out obligation in connection with acquisitions $ 1,250 $ — $ 36,700 The accompanying notes are an integral part of these financial statements. -43- Table of Contents VSE Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2021 (1) Nature of Business and Summary of 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 and Basis of Presentation The consolidated financial statements consist of the operations of our parent company, our wholly owned subsidiaries, VSE Aviation, Inc., a Delaware corporation ("VSE Aviation"), Energetics Incorporated, Akimeka, LLC, Wheeler Fleet Solutions, Co., and our unincorporated divisions. All intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation. Use of Estimates 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 fair value measurements, inventory provisions, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies. Stock-Based Compensation We issue stock-based awards as compensation to employees and directors. Stock-based awards include stock-settled bonus awards, vesting stock awards and performance share awards. We recognize stock-based compensation expense on a straight-line basis over the underlying award’s requisite service period, as measured using the award’s grant date fair value. Our policy is to recognize forfeitures as they occur. For performance share awards, we assess the probability of achieving the performance conditions at each reporting period end and adjust compensation expense based on the number of shares we expect to ultimately issue. 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 outstanding stock-based awards. As a result of incurring a net loss for the year ended December 31, 2020, potential dilutive shares were excluded from diluted loss per share as the effect would have been anti-dilutive. The antidilutive common stock equivalents excluded from the diluted per share calculation were not material. Years Ended December 31, 2021 2020 2019 Basic weighted average common shares outstanding 12,551,459 11,034,256 10,957,750 Effect of dilutive shares 81,415 — 86,981 Diluted weighted average common shares outstanding 12,632,874 11,034,256 11,044,731 -44- Table of Contents 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 is recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization is generally provided on the straight-line method over the estimated useful lives of the various assets. Property and equipment is generally depreciated over the following estimated useful lives: computer equipment, furniture, other equipment from three to 15 years; and buildings and land improvements from 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. Leases 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. We recognize a right-of-use ("ROU") asset and a lease liability upon commencement of our operating leases. The initial lease liability is equal to the future fixed minimum lease payments discounted using our incremental borrowing rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it is reasonably certain that we will exercise those rights. The initial measurement of the ROU asset is equal to the initial lease liability plus any initial indirect costs and prepayments, less any lease incentives. We recognize lease costs on a straight-line basis over the remaining lease term, except for variable lease payments that are expensed in the period in which the obligation for those payments is incurred. 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. Operating lease cost is included in costs and operating expenses on our consolidated statement of income. Concentration of Credit Risk Financial instruments that potentially subject us to concentration of credit risk consist primarily of our trade receivables. Our trade receivables consist of amounts due from various commercial entities and government clients. 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 57 %, 69 %, and 68 % of revenues for the years ended December 31, 2021, 2020 and 2019, 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. 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. -45- Table of Contents Substantially all our Fleet segment revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer. Sales returns and allowances for vehicle parts are not significant. Our Aviation 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 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 2019 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. -46- 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 collectability based on past due status. We also consider current market conditions and forecasts of future economic conditions to inform potential adjustments to historical loss data. In addition, 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. 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 consist primarily of vehicle replacement parts, and also include related purchasing, storage and handling costs. Inventories for our Aviation segment consist primarily of aftermarket parts for distribution, and general aviation engine accessories and parts, and also include related purchasing, overhaul labor, storage and handling costs. We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made. During 2021, we recorded a $ 24.4 million provision for inventory within cost and operating expenses primarily related to slow moving and excess quantities of Aviation segment inventory supporting certain international region distribution programs entered into prior to 2019. 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 recorded deferred compensation plan expenses of $ 433 thousand, $ 970 thousand and $ 1.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. 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. Gains and losses recognized on the changes in fair value of the investments are recorded as selling, general and administrative expenses on the accompanying consolidated statements of income. We recorded net losses of $ 626 thousand, $ 863 thousand, and $ 1.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. 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. 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. -47- Table of Contents Business Combinations We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values, with any excess recorded as goodwill. The operating results of acquired businesses are included in our results of operations beginning as of their effective acquisition dates. For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations. Goodwill and Other Intangible Assets Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but rather tested for potential impairment annually at the beginning of the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level. We estimate and compare the fair value of each reporting unit to its respective carrying value including goodwill. The fair value of our reporting units is determined using a combination of the income approach and the market approach, which involves the use of estimates and assumptions, including projected future operating results and cash flows, the cost of capital, and financial measures derived from observable market data of comparable public companies. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit’s fair value and the reporting unit’s carrying value. Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment of Long-Lived Assets (Excluding Goodwill) We review our long-lived assets, including amortizable intangible assets and property and equipment, for impairment whenever events or changes in facts and circumstances indicate that their carrying values may not be fully 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. 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. Our credit facility contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark. We will continue to monitor the impact of this transition until it is completed. In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. The new standard is effective on a prospective basis for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows. -48- Table of Contents (2) Acquisition and Divestitures Acquisitions Global Parts Group, Inc. On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts"), a privately owned company with operations in Augusta, Kansas. Global Parts provides distribution and MRO services for business and general aviation ("B&GA") aircraft families. The acquisition expands our existing B&GA focus and further diversifies our existing product and platform offerings to include additional airframe components, while expanding our customer base of regional and global B&GA customers. Global Parts will operate as a subsidiary of VSE Aviation, Inc. under our Aviation segment. The cash purchase price for Global Parts was approximately $ 38 million, net of cash acquired, which was funded using our existing bank revolving loan. We may also be required to make earn-out payments of up to $ 2 million should Global Parts meet certain revenue targets during the first twelve months following the acquisition and a certain milestone event on or before March 2023. See Note (16) "Fair Value Measurements," for additional information regarding the earn-out obligation. The purchase price was allocated on a preliminary basis, among assets acquired and liabilities assumed at fair value on the acquisition date based on the best available information, with the excess purchase price recorded as goodwill. The fair values assigned to our Global Parts earn-out obligation, inventory and intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques. We have not yet obtained all the information required to complete the purchase price allocation related to this acquisition. We are in the process of finalizing our valuation and the allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until we obtain final information regarding their fair values. We expect to have sufficient information available to resolve these items by the second quarter of 2022, which could potentially result in changes in assets or liabilities on Global Parts' opening balance sheet and an adjustment to goodwill. During the fourth quarter of 2021, we adjusted the purchase price allocation as a result of certain measurement period adjustments to acquired assets and liabilities assumed due to updated valuation reports received from our external valuation specialist, as well as revisions to internal estimates. These measurement period adjustments included: a decrease in inventories of $ 5.5 million; a decrease in customer relationship intangible asset of $ 4.0 million; a decrease in long-term deferred tax liabilities of $ 2.4 million; and $ 200 thousand decrease to net working capital. These adjustments resulted in an increase to goodwill of $ 7.3 million. The adjusted preliminary purchase price is as follows (in thousands): Description Fair Value Accounts receivable $ 6,410 Inventories 13,240 Prepaid expenses and other current assets 620 Property and equipment 368 Intangibles - customer related 16,000 Goodwill 10,019 Operating lease right-of-use-assets 3,043 Long-term deferred tax assets 1,775 Accounts payable ( 6,112 ) Accrued expenses and other current liabilities ( 1,936 ) Long-term operating lease liabilities ( 2,874 ) Net assets acquired, excluding cash $ 40,553 Cash consideration, net of cash acquired $ 38,553 Acquisition date estimated fair value of earn-out obligation 2,000 Total consideration $ 40,553 -49- Table of Contents The estimated value attributed to the customer relationship intangible asset is being amortized on a straight-line basis using a useful life of 15 years. No ne of the value attributed to goodwill and customer relationships is deductible for income tax purposes. The preliminary amount of goodwill recorded for our Global Parts acquisition reflects the strategic advantage of expanding our supply chain management capabilities through the diversification of our existing product and platform offerings to new customers. We incurred approximately $ 532 thousand of acquisition-related expenses associated with our Global Parts acquisition for the year ended December 31, 2021, which are included in selling, general and administrative expenses. Global Parts' results of operations are included in our Aviation segment in the accompanying consolidated financial statements beginning on the acquisition date of July 26, 2021. Had the acquisition occurred as of January 1, 2020, revenue and net income (loss) from consolidated operations, and basic and diluted earnings (loss) per share on a pro forma basis for the year ended December 31, 2021 and 2020 would not have been materially different than our reported amounts. HAECO Special Services, LLC On March 1, 2021, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC, a division of HAECO Americas ("HAECO") for the purchase price of $ 14.8 million. HSS is a leading provider of fully integrated MRO support solutions for military and government aircraft. HSS provides scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for a United States DoD contract specifically for the sustainment of the U.S. Air Force ("USAF") KC-10 fleet. The acquisition was not material to our consolidated financial statements. HSS operating results are included in our Federal and Defense segment in the accompanying consolidated financial statements beginning on the acquisition date of March 1, 2021. The allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is based on the best available information regarding their fair values. Based on estimates, we allocated approximately $ 7.0 million to the fair value of net tangible assets (including $ 9.2 million of accounts receivable), $ 608 thousand to goodwill, and $ 7.2 million to customer relationship intangible asset, which is being amortized over approximately 4 years from the acquisition date. We incurred approximately $ 333 thousand of acquisition-related expenses associated with our HSS acquisition for the year ended December 31, 2021, which are included in selling, general and administrative expenses. 1st Choice Aerospace, Inc. In January 2019, our wholly owned subsidiary VSE Aviation, Inc. 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 with operations in Florida and Kentucky, for a purchase price of $ 113 million. 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 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. Divestitures Prime Turbines Sale In January 2020, VSE’s subsidiary VSE Aviation, Inc. 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. 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 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income. As of December 31, 2021 and 2020, the total outstanding balance of the note receivable from PTB was $ 4.7 million and $ 6.1 million, respectively, which represents the -50- Table of Contents present value of the consideration to be received with an imputed interest rate discount, of which $ 1.5 million and $ 1.4 million were current as of December 31, 2021 and 2020, respectively. The note receivable balance is included in other assets and other current assets in our consolidated balance sheets. CT Aerospace Asset Sale In June 2020, VSE's subsidiary VSE Aviation, Inc. 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 2020, which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income. As of December 31, 2021 and 2020, the total outstanding balance of the note receivable from Legacy Turbines was $ 5.2 million and $ 6.4 million, respectively, net of a variable discount of $ 275 thousand, of which $ 1.3 million was current as of December 31, 2021 and 2020. The note receivable balance is included in other assets and other current assets in our consolidated balance sheets. (3) Revenue Recognition Disaggregated Revenue Our revenues are derived from the delivery of products to our customers and from services performed for commercial customers, various government agencies, the DoD or federal civilian agencies. A summary of revenues by customer for our operating segments for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands): Year Ended December 31, 2021 Fleet Aviation Federal and Defense Total Commercial $ 73,606 $ 245,380 $ 3,332 $ 322,318 DoD 12,689 — 220,733 233,422 Other government 147,237 2,472 45,404 195,113 Total $ 233,532 $ 247,852 $ 269,469 $ 750,853 Year Ended December 31, 2020 Commercial $ 42,733 $ 163,695 $ 1,877 $ 208,305 DoD 20,744 1,093 214,560 236,397 Other government 178,693 282 37,982 216,957 Total $ 242,170 $ 165,070 $ 254,419 $ 661,659 Year Ended December 31, 2019 Commercial $ 22,161 $ 218,886 $ 1,471 $ 242,518 DoD 24,246 3,775 276,313 304,334 Other government 168,113 1,885 35,777 205,775 Total $ 214,520 $ 224,546 $ 313,561 $ 752,627 -51- Table of Contents A summary of revenues by type for our operating segments for the year ended December 31, 2021, 2020 and 2019 are as follows (in thousands): Year Ended December 31, 2021 Fleet Aviation Federal and Defense Total Repair $ — $ 75,725 $ — $ 75,725 Distribution 233,532 172,127 — 405,659 Cost Plus Contract — — 93,694 93,694 Fixed Price Contract — — 105,495 105,495 T&M Contract — — 70,280 70,280 Total $ 233,532 $ 247,852 $ 269,469 $ 750,853 Year Ended December 31, 2020 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 (a) 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 (a) Historical presentation has been realigned to conform to its current period presentation and did not affect the reported results of operations for each reported segment. 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 increased to $ 31.9 million as of December 31, 2021 from $ 22.4 million as of December 31, 2020, primarily due to performance obligations satisfied in excess of billings and unbilled receivables acquired as part of the HSS acquisition. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $ 7.1 million as of December 31, 2021 and $ 10.1 million as of December 31, 2020. For the year ended December 31, 2021 and 2020, we recognized revenue of $ 5.1 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 at a point in time accounted for approximately 54 % and 49 % of our revenues for the year ended December 31, 2021 and 2020, 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. Revenues from products and services transferred to customers over time accounted for approximately 46 % and 51 % of our revenues for the year ended December 31, 2021 and 2020, respectively, primarily related to revenues in our Federal and Defense segment and for MRO services in our Aviation segment. -52- Table of Contents As of December 31, 2021, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $ 185 million. Performance obligations expected to be satisfied within one year and greater than one year are 86 % and 14 %, 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, 2021, 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, 2021 and 2020, respectively, were as follows (in thousands): 2021 2020 Receivables, net $ 76,587 $ 55,471 Unbilled receivables, net 31,882 22,358 Total $ 108,469 $ 77,829 Receivables, net are recorded at face value less an allowance for credit losses of approximately $ 1.7 million and $ 1.5 million as of December 31, 2021 and 2020, respectively. The unbilled receivables balance includes certain costs for work performed at risk but which we believe will be funded by the government totaling $ 3.6 million and $ 2.6 million as of December 31, 2021 and 2020, respectively. We expect to invoice substantially all unbilled receivables during 2022. (5) Other Current Assets and Other Assets Other current assets consisted of the following as of December 31, 2021 and 2020 (in thousands): 2021 2020 Self insurance trust assets $ 5,993 $ 9,535 Current portion of notes receivable 2,820 2,721 Deferred contract costs 6,148 3,514 Vendor advances 14,552 5,564 Other 2,791 1,994 Total $ 32,304 $ 23,328 Other assets consisted of the following as of December 31, 2021 and 2020 (in thousands): 2021 2020 Deferred compensation plan assets $ 14,840 $ 14,370 Long-term portion of notes receivable 7,042 9,856 Other 5,854 2,299 Total $ 27,736 $ 26,525 -53- Table of Contents (6) Property and Equipment Property and equipment, net consisted of the following as of December 31, 2021 and 2020 (in thousands): 2021 2020 Buildings and building improvements $ 29,596 $ 29,537 Computer equipment 28,084 26,492 Furniture, fixtures, equipment and other 39,377 33,322 Leasehold improvements 7,164 3,140 Land and land improvements 4,726 4,726 108,947 97,217 Less accumulated depreciation and amortization ( 66,461 ) ( 60,854 ) Total property and equipment, net $ 42,486 $ 36,363 Depreciation and amortization expense for property and equipment for the years ended December 31, 2021, 2020 and 2019 was approximately $ 6.1 million, $ 5.6 million and $ 7.0 million, respectively. (7) Goodwill and Intangible Assets Changes in goodwill for the years ended December 31, 2021 and 2020 are as follows (in thousands): Fleet Federal and Defense Aviation Total 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 Increase from acquisitions — 608 10,019 10,627 Balance as of December 31, 2021 $ 63,190 $ 31,491 $ 154,072 $ 248,753 Goodwill increased during the year ended December 31, 2021 in connection with acquisitions completed during the year. See Note (2) "Acquisitions and Divestitures" for additional details regarding these acquisitions. Based on our annual goodwill impairment test performed in the fourth quarter of 2021, it was determined there was no impairment of goodwill and the fair value of each of the reporting units exceeded their carrying value. During the second quarter of 2020, due to the negative impact of the COVID-19 pandemic on our Aviation reporting unit, we recorded a $ 30.9 million goodwill interim impairment charge within goodwill and intangible impairment in the consolidated statements of income. Our 2020 annual goodwill impairment test determined no incremental impairment. In 2020, in connection with the sale of our Prime Turbines subsidiary within our Aviation segment, 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. -54- Table of Contents Intangible assets consisted of the following (in thousands): Cost Accumulated Amortization Accumulated Impairment Loss Net Intangible Assets December 31, 2021 Contract and customer-related $ 221,796 $ ( 116,385 ) $ — $ 105,411 Acquired technologies 12,400 ( 11,915 ) — 485 Trade names 8,670 ( 6,303 ) — 2,367 Total $ 242,866 $ ( 134,603 ) $ — $ 108,263 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 Intangible assets with a gross carrying value of $ 20.8 million are no longer reflected in the gross carrying value and accumulated amortization as of December 31, 2021. The increase in the gross carrying amount of contract and customer-related intangibles during the year ended December 31, 2021 relates to customer relationship intangible assets recognized in connection with acquisitions completed during the year, partially offset by the removal of fully amortized assets of $ 10.7 million. See Note (2) "Acquisitions and Divestitures" for additional details regarding these acquisitions. There were no impairment losses during 2021. During 2020, we recorded an impairment charge of $ 2.8 million in connection with the sale of all of the inventory of our CT Aerospace subsidiary, which was part of our Aviation segment. The impairment is presented within goodwill and intangible impairment in the consolidated statements of income. Amortization expense for the years ended December 31, 2021, 2020 and 2019 was approximately $ 18.5 million, $ 17.5 million and $ 19.3 million, respectively. Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands): 2022 $ 17,639 2023 13,639 2024 10,059 2025 9,015 2026 8,190 Thereafter 49,721 Total $ 108,263 -55- Table of Contents (8) Debt Long-term debt consisted of the following (in thousands): December 31, 2021 2020 Bank credit facility - term loan $ 60,175 $ 77,988 Bank credit facility - revolver loans 226,559 175,473 Principal amount of long-term debt 286,734 253,461 Less debt issuance costs ( 2,165 ) ( 2,368 ) Total long-term debt 284,569 251,093 Less current portion ( 14,162 ) ( 20,379 ) Long-term debt, net of current portion $ 270,407 $ 230,714 We have a loan agreement with a group of banks from which we borrow amounts under the loan agreement to provide working capital support, fund letters of credit, and finance acquisitions. The loan agreement includes term and revolving loan facilities. The revolving loan facility provides for revolving loans and letters of credit. On July 23, 2021, we entered into a third amendment to our loan agreement which, among other things, extended the maturity dates with respect to the revolving credit facility and term loan facility to July 2024, lowered the applicable LIBOR rate floor, and modified the maximum Total Funded Debt to EBITDA Ratio. Except as described above, the amended loan agreement has substantially the same terms as the existing loan agreement, including covenants and events of default. Financing costs associated with the loan agreement amendment of approximately $ 808 thousand were capitalized and are being amortized over the remaining term of the loan. Our required term and revolver loan payments after December 31, 2021 are as follows (in thousands): Year ending December 31, 2022 $ 15,000 2023 15,000 2024 (a) 256,734 Total $ 286,734 (a) Includes the revolver loan required payment of $ 227 million. The maximum amount of credit available under the loan agreement for revolving loans and letters of credit as of December 31, 2021 was $ 350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had $ 1.0 million letters of credit outstanding as of December 31, 2021 and no letters of credit outstanding as of December 31, 2020. 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 subject to lender approvals. We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a margin or at a base rate (typically the prime rate) plus a base margin. As of December 31, 2021, the LIBOR margin was 3.25 % and the base margin was 2.25 %. The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. We use interest rate hedges on a portion of our debt. The amount of our debt with interest rate swap agreements was $ 75.0 million as of December 31, 2021. After taking into account the impact of hedging instruments, as of December 31, 2021 interest rates on portions of our outstanding debt ranged from 4.00 % to 6.66 %, and the effective interest rate on our aggregate outstanding debt was 4.39 %. Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $ 11.2 million, $ 12.7 million and $ 13.3 million for the years ended December 31, 2021, 2020 and 2019, 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 -56- Table of Contents maximum Total Funded Debt to 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, 2021. (9) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2021 2020 Accrued compensation and benefits $ 24,395 $ 21,525 Contract liabilities 7,147 9,858 Accrued customer rebates and royalties 4,514 2,756 Customer advances 1,087 1,080 Interest rate swap liability 234 1,603 Current portion of lease liabilities 5,991 4,012 Other 6,097 4,338 Total $ 49,465 $ 45,172 (10) Stock-Based Compensation Plans The VSE Corporation 2006 Restricted Stock Plan, as amended (the "2006 Plan"), provides VSE's employees and directors the opportunity to receive various types of stock-based compensation and cash awards. 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. As of December 31, 2021, we are authorized to issue up to 1,500,000 shares of our common stock and 661,126 shares remained available for issuance. As of December 31, 2021, we have outstanding stock-settled bonus awards, vesting stock awards, and performance share awards under this plan. Stock-settled bonus awards are a fixed dollar-denominated award that vests over a three-year service period in three equal tranches. As each tranche vests, the fixed dollar value of the vested portion of the award is converted into shares based on the closing market price of our stock at the date of conversion. On each vesting date, 100 % of the vested award is paid in stock that are subject to a two-year stock sales restriction. Expense is recognized on a straight-line basis over the requisite service period for each tranche, which results in an accelerated pattern for an award. Employee vesting stock awards generally vest over a three-year service period in equal installments on each anniversary of the grant date. Our directors receive a grant of vesting stock annually as part of their compensation and the stock vests immediately upon grant. We grant performance share awards to certain employees under the 2006 Plan. Performance share awards are rights to receive shares of our stock on the satisfaction of service requirements and performance conditions. These awards vest ratably in equal installments over a three-year period on the anniversary of each grant date, subject to meeting the minimum service requirements and the achievement of certain annual or cumulative financial metrics of our performance, with the number of shares ultimately issued, if any, ranging up to 100 % of the specified target shares. If performance is below the minimum threshold level of performance, no shares will be issued. For all performance share awards granted, the annual and cumulative financial metrics are based on our achievement of a return on equity. During fiscal 2021, we established the Employee Stock Purchase Plan (ESPP) to allow eligible employees to purchase shares of our VSE common stock at a discount of up to 15 % of the fair market value on specified dates. For ESPP offerings in the year ended December 31, 2021, the purchase price was 12 % off the lesser of the fair market value on the date of the offering and the fair market value on the date of purchase, thereby resulting in stock compensation expense of $ 55 thousand. As of December 31, 2021, 500,000 shares of VSE common stock are authorized for issuance under the ESPP. -57- Table of Contents Expense and Related Tax Benefits Recognized Stock-based compensation expense and related tax benefits recognized under the 2006 Plan for the years ended December 31, are as follows (in thousands): 2021 2020 2019 Stock-settled bonus awards $ 820 $ 1,265 $ 1,685 Vesting stock awards 2,273 1,593 1,579 Performance share awards 784 — — Total $ 3,877 $ 2,858 $ 3,264 Tax benefit recognized from stock-based compensation $ 967 $ 713 $ 663 Stock-Settled Bonus Awards In March 2021, the employees eligible for the 2020 awards, 2019 awards and 2018 awards received a total of 21,336 shares of common stock. The grant-date fair value of these awards was $ 41.42 per share. The total compensation cost related to non-vested stock-settled bonus awards not yet recognized was approximately $ 649 thousand with a weighted average amortization period of 1.9 years as of December 31, 2021. The fair value of stock-settled bonus awards that vested in the years ended December 31, 2021, 2020 and 2019 was $ 884 thousand, $ 1.2 million and $ 1.6 million, respectively. Vesting Stock Awards Vesting stock award activity for the year ended December 31, 2021 was: Number of Shares Weighted Average Grant Date Fair Value Unvested as of December 31, 2020 56,284 $ 32.23 Granted 54,449 $ 41.90 Vested ( 49,382 ) $ 34.55 Forfeited — $ — Unvested as of December 31, 2021 61,351 $ 38.80 The grant date fair value of vesting stock awards is based on the closing market price of our common stock on the grant date. The weighted average grant date fair value of the vesting stock awards granted for the years ended December 31, 2021, 2020 and 2019 was $ 41.90 , $ 33.68 and $ 32.16 , respectively. As of December 31, 2021 there was $ 1.4 million of unrecognized compensation cost related to vesting stock awards, which is expected to be recognized over a weighted-average period of 1.9 years. The weighted average fair value of vesting stock awards that vested in the years ended December 31, 2021, 2020 and 2019 was $ 1.7 million, $ 1.6 million and $ 597 thousand, respectively. Performance Share Awards During the year ended December 31, 2021, we granted 42,000 performance share awards at target with a weighted average grant date fair value of $ 42.01 . The actual number of shares to be issued upon vesting range between 0 - 100 % of the target number of shares granted. For those awards outstanding as of December 31, 2021, we expect to issue approximately 36,000 shares of our common stock in the future based on estimated target achievement of the performance goals. The grant date fair value of performance share awards is based on the closing market price of our common stock on the grant date. As of December 31, 2021, there was $ 722 thousand of unrecognized compensation cost related to performance share awards, which is expected to be recognized over a weighted-average period of 2 years. (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 2016. -58- Table of Contents We file consolidated federal income tax returns that include all of our U.S. subsidiaries. The components of the provision for income taxes from continuing operations for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands): 2021 2020 2019 Current: Federal $ 3,919 $ 4,086 $ 7,739 State 856 1,262 1,344 Foreign 1,066 144 825 5,841 5,492 9,908 Deferred: Federal ( 3,318 ) ( 78 ) ( 66 ) State ( 1,038 ) 163 ( 490 ) Foreign — 21 51 ( 4,356 ) 106 ( 505 ) Provision for income taxes $ 1,485 $ 5,598 $ 9,403 The differences between the amount of tax computed at the federal statutory rate of 21% in 2021, 2020 and 2019, and the provision for income taxes from continuing operations for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands): 2021 2020 2019 Tax at statutory federal income tax rate $ 1,985 $ 89 $ 9,749 Increases (decreases) in tax resulting from: State taxes, net of federal tax benefit 383 ( 52 ) 1,805 Permanent differences, net ( 839 ) ( 1,406 ) ( 195 ) Tax credits ( 434 ) ( 195 ) ( 612 ) Prior year true-up adjustment 83 397 ( 1,274 ) Valuation allowance 331 6,716 ( 137 ) Other provision adjustments ( 24 ) 49 67 Provision for income taxes $ 1,485 $ 5,598 $ 9,403 Certain amounts from prior years have been reclassified to conform to the current year presentation. -59- Table of Contents The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows (in thousands): 2021 2020 Gross deferred tax assets Deferred compensation and accrued paid leave $ 5,422 $ 6,302 Inventory reserve 12,465 432 Operating lease liabilities 7,805 6,984 Stock-based compensation 775 605 Interest rate swaps 58 400 Reserve for contract disallowance 114 195 Capitalized inventory 900 573 US operating and capital loss carryforward 6,045 5,989 Tax credit carryforward 1,411 1,412 Foreign country operating loss carryforward 892 583 35,887 23,475 Valuation allowance (a) ( 8,257 ) ( 7,926 ) Total gross deferred tax assets 27,630 15,549 Gross deferred tax liabilities Depreciation ( 3,895 ) ( 3,061 ) Deferred revenues ( 1,358 ) ( 1,816 ) Goodwill and intangible assets ( 24,836 ) ( 19,470 ) Operating lease right-of-use assets ( 6,375 ) ( 5,384 ) Other ( 274 ) ( 715 ) Total gross deferred tax liabilities ( 36,738 ) ( 30,446 ) Net deferred tax liabilities $ ( 9,108 ) $ ( 14,897 ) (a) A valuation allowance was provided against US capital loss in connection with the stock sale of Prime Turbines, certain state net operating loss, 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 2017. As of December 31, 2021, 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 2034; however, some may be carried forward indefinitely. (12) Commitments and Contingencies Leases and Other Commitments Our operating lease cost included the following components for the year ended December 31, (in thousands): 2021 2020 2019 Operating lease cost $ 5,868 $ 5,032 $ 6,106 Short-term lease cost 202 622 698 Less: sublease income ( 152 ) ( 666 ) ( 1,022 ) Total lease cost, net $ 5,918 $ 4,988 $ 5,782 Our lease arrangements do not contain any material residual guarantees, variable payment provisions, or restrictive covenants. In 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 -60- Table of Contents 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, 2021 (in thousands): Year ending December 31, 2022 $ 7,428 2023 7,374 2024 7,228 2025 6,930 2026 5,585 Thereafter 3,236 Minimum lease payments 37,781 Less: imputed interest ( 4,622 ) Present value of minimum lease payments 33,159 Less: current maturities of lease liabilities ( 5,991 ) Long-term lease liabilities $ 27,168 We made cash payments of approximately $ 6.3 million, $ 3.7 million and $ 5.7 million for operating leases during the year ended December 31, 2021, 2020 and 2019, respectively, which are included in cash flows from operating activities in our consolidated statement of cash flows. As of December 31, 2021, the weighted average remaining lease term and discount rate for our operating leases were approximately 5.1 years and 4.8 %, 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 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 audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or 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 many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows. (13) Business Segments and Customer Information Segment Information Management of our business operations is conducted under three reportable operating segments: Aviation Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services. Fleet Our Fleet segment 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 DoD. Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics, -61- Table of Contents warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support. Federal and Defense Our Federal and Defense segment provides aftermarket MRO and logistics and sustainment 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 our segments 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. 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. Our segment information is as follows (in thousands): For the years ended December 31, 2021 2020 2019 Revenues Aviation $ 247,852 $ 165,070 $ 224,546 Fleet 233,532 242,170 214,520 Federal and Defense 269,469 254,419 313,561 Total revenues $ 750,853 $ 661,659 $ 752,627 Operating income (loss): Aviation $ ( 14,373 ) $ ( 35,513 ) $ 17,901 Fleet 20,426 26,659 29,819 Federal and Defense 19,897 26,309 18,144 Corporate expenses ( 4,430 ) ( 3,532 ) ( 5,607 ) Operating income $ 21,520 $ 13,923 $ 60,257 Depreciation and amortization expense: Aviation $ 11,374 $ 10,874 $ 12,546 Fleet 9,679 10,260 11,085 Federal and Defense 4,547 3,001 3,296 Total depreciation and amortization $ 25,600 $ 24,135 $ 26,927 Capital expenditures: Aviation $ 7,468 $ 3,445 $ 8,396 Fleet 1,669 675 1,076 Federal and Defense 124 148 58 Corporate 1,259 159 130 Total capital expenditures $ 10,520 $ 4,427 $ 9,660 December 31, 2021 2020 Total assets: Aviation $ 580,156 $ 478,861 Fleet 182,089 161,088 Federal and Defense 92,571 66,808 Corporate 63,742 73,324 Total assets $ 918,558 $ 780,081 -62- Table of Contents Customer Information Our revenues are derived from the delivery of products and services performed for commercial clients, DoD agencies or federal civilian agencies. The USPS and U.S. Navy are our largest customers. Our customers also include various other commercial entities and government agencies. Our revenue by customer is as follows (in thousands): Years ended December 31, Source of Revenues 2021 % 2020 % 2019 % Commercial $ 322,318 43 $ 208,305 31 $ 242,518 32 DoD 233,422 31 236,397 36 304,334 41 Other government 195,113 26 216,957 33 205,775 27 Total Revenues $ 750,853 100 $ 661,659 100 $ 752,627 100 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, 2021 2020 2019 United States $ 668,892 $ 598,142 $ 659,451 Other Countries (a) 81,961 63,517 93,176 Total revenue $ 750,853 $ 661,659 $ 752,627 (a) 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. On January 29, 2021, we completed the issuance and sale of 1,428,600 shares of the Company's common stock, in a public offering at a price of $ 35.00 per share. The underwriters exercised their option to purchase an additional 170,497 shares. The transaction closed on February 2, 2021. We received net proceeds of approximately $ 52 million after deducting underwriting discounts, commissions and offering related expenses. (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 $ 6.6 million, $ 5.9 million and $ 5.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. -63- Table of Contents (16) Fair Value Measurements We utilize fair value measurement guidance prescribed by GAAP to value our financial instruments. The accounting standard for fair value measurements establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). The carrying amounts of cash and cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity. The carrying value of our outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements. Non-financial assets acquired and liabilities assumed in business combinations were measured at fair value using income, market and cost valuation methodologies. See Note (2), "Acquisitions and Divestitures." The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020 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, 2021 Fair Value December 31, 2020 Non-COLI assets held in Deferred Supplemental Compensation Plan Other assets Level 1 $ 598 $ 1,120 Interest rate swaps Accrued expenses Level 2 $ 234 $ 1,603 Earn-out obligation-current Accrued expenses Level 3 $ 1,000 $ — Earn-out obligation-long-term Other long-term liabilities Level 3 $ 250 $ — COLI assets held in our 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 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 highly effective cash flow hedges. We evaluate our hedges to determine their effectiveness and as of December 31, 2021 and 2020, the swaps were determined to be fully effective. Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets, of $ 234 thousand and $ 1.6 million as of December 31, 2021 and 2020, respectively. The offset, net of an income tax effect of $ 58 thousand and $ 400 thousand was included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2021 and 2020, 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 primarily observable market data inputs. In connection with the acquisition of Global Parts in July 2021, we may be required to make earn-out obligation payments of up to $ 2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. The preliminary fair value of the earn-out obligation was determined using a probability-based scenario analysis approach. Any change in the fair value of contingent consideration from events after the acquisition date will be recognized in earnings of the period when the event occurs. The probability-based approach used to fair value earn-out obligation is based on significant inputs not observed in the market and thus represents a Level 3 measurement. The significant unobservable inputs include projected revenues and percentage probability of occurrence. Changes in the revenue assumptions could result in a material change to the amount of the fair value measurement. Under the agreement, we were required to make an advanced payment of the earn-out obligation. The payment was made in August 2021. In 2020, in connection with the 2019 acquisition of 1st Choice Aerospace, we made a payment of approximately $ 31.7 million to satisfy the earn-out and the remaining fair value of the earn-out obligation of $ 5 million was reversed and recognized in earnings. -64- Table of Contents Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020 are as follows (in thousands): Current portion Long-term portion Total 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 — — — Acquisition date fair value of contingent consideration 1,750 250 2,000 Earn-out payments ( 750 ) — ( 750 ) Balance as of December 31, 2021 $ 1,000 $ 250 $ 1,250 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.