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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 203 added, 302 removed, 117 unchanged (81% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

The following discussion and analysis should be read in conjunction with our consolidated statements and related notes included in Item 8.

"Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

The following generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found under Item 7.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.

Business Overview

We are a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to government and commercial markets.

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

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

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

See Item 1, “Business-Customers” above for revenues by customer.

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

Acquisition and Divestitures

In July 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 product and platform offerings to include additional airframe components, while expanding our customer base of regional and global B&GA customers.

Global Parts is a subsidiary of VSE Aviation, Inc.

under our Aviation segment.

In March 2021, we acquired HAECO Special Services, LLC ("HSS"), in an all-cash transaction.

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

HSS offers scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for the DoD primarily for the sustainment of the U.S.

Air Force ("USAF") KC-10 fleet.

The experienced workforce of HSS operates from two hangar locations in Greensboro, North Carolina.

HSS is a subsidiary of VSE Corporation under our Federal & Defense Services segment.

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

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

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

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

under our Aviation segment.

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

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

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

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

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

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

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

Public Common Stock Offering

In February 2021, we completed an underwritten public offering of 1,599,097 shares of common stock, inclusive of 170,497 shares pursuant to the underwriters' exercise of their option to purchase additional shares, at a public offering price of $35.00 per share.

We received net proceeds of approximately $52 million, after deducting underwriting discounts and other offering expenses of approximately $4 million.

The net proceeds were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.

Organization and Segments

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

(1) Aviation;

and (3) Federal and Defense.

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

Concentration of Revenues

(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

COVID-19 Discussion

Our results of operations in fiscal 2021 continued to reflect the adverse impact from the COVID-19 global pandemic.

Despite the challenges faced by the ongoing pandemic, all of our businesses have remained operational through the end of 2021, and we continue to operate with limited disruption.

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

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

We continue to closely monitor and address the pandemic and related developments, including the impact to our business, our employees, our customers, and our suppliers.

We have been focused and continue to remain focused on protecting the health and safety of our employees, continuing to serve our customers with the highest quality product and repair services, and on positioning the company for long-term success.

Our actions taken to lessen the potential adverse impacts, both health and economic, have varied depending on the spread of COVID-19 and applicable government requirements, the needs of our employees, the needs of our customers and the needs of our business.

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

The ultimate impact of the continued spread of COVID-19 on our operations and financial performance in future periods remains uncertain and will depend on future pandemic-related developments, which are uncertain and cannot be predicted.

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

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

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

Additionally, a discussion of the impact of COVID-19 on our operations can also be found in the "Business Trends" and "Results of Operations" sections below.

Aviation, Fleet and Federal and Defense.

Business Trends

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Aviation Segment

Our Aviation segment was significantly impacted by the COVID-19 pandemic as reduced global demand for air travel and decreased revenue passenger miles had an adverse impact on demand for our Aviation products and services.

Despite the challenges faced during the COVID-19 pandemic, we have sustained six consecutive quarters of revenue increases due to the recovery in demand since the peak of the negative COVID-19 pandemic impact during the second quarter of 2020.

Our 2021 results reflect changes in our revenue profile as new distribution programs in our Aviation segment and our acquisition of Global Parts have increased and broadened our revenue base.

Our growth initiatives have resulted in a 108% year over year distribution revenue increase in 2021 compared to the prior year, demonstrating the current momentum in the aftermarket recovery.

Our July 2021 acquisition of Global Parts expands our existing B&GA focus and further diversifies our product and platform offerings to include additional airframe components, while expanding our customer base of regional and global B&GA customers.

During the second quarter of 2021, we reviewed the assumptions and calculations utilized in the valuation of excess and obsolete inventory and recorded an additional reserve of $23.7 million primarily due to excess and slow-moving quantities of certain Aviation segment inventory, including inventory supporting specific international region distribution programs entered into prior to 2019 at levels higher than our updated forecasts of future demand.

The increase in our inventory valuation reserves in the second quarter takes into consideration slower than anticipated air travel recovery in certain regions, primarily in the Asia Pacific region, impacted by the COVID-19 pandemic.

While some countries have removed or eased travel restrictions, others have maintained international testing requirements and travel restrictions due to recent rebounds in the number of cases and low vaccination rates within those countries, which has lowered demand for our products.

While the COVID-19 pandemic has slowed demand for certain aviation products in international regions, we do not expect any additional material adverse impact to the carrying value of our inventory.

Additionally, we do not anticipate the lower international demand to materially impact the recovery of our Aviation segment, where our distribution business continues to operate with revenues in excess of pre-pandemic levels in 2021.

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

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

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

Our Aviation segment pursued multiple opportunities prioritizing strong, efficient future revenue growth and expanding our geographic footprint.

We extended our worldwide exclusivity as the distributor of new fuel control systems and associated spare parts to the B&GA market for a leading global manufacturer.

We continue to enhance key strategic relationships through extensions to our existing distribution agreements.

We remained focused on accelerating business transformation as a well-established leader in engine accessory repair and proprietary parts distribution through our new engine accessories distribution agreement with a global aircraft engine manufacturer.

Our new development initiatives allow us to expand our repair capabilities to service additional engine accessory exchange units.

We expect that the current disruption in market conditions will result in strategic opportunities for near-and long-term growth for our Aviation segment, given its offerings and value-added services.

As we continue to experience growth in our distribution business and see recovery in some commercial markets, our long-term focus continues to emphasize investing in businesses and programs that will expand or complement our current portfolio and allow access to new customers.

Our Aviation segment has seen favorable results due to successful investments in growth initiatives, resulting in a 65% increase in annual revenue, totaling $408 million.

The expansion of our distribution services was driven by new initiatives offering comprehensive “tip-to-tail” product-line solutions.

Our repair business experienced growth from both the recovery of the commercial market and increased market share in the business and general aviation sector.

These factors, combined with our growth initiatives, led to a 75% increase in distribution revenue and a 42% increase in repair revenue in 2022 compared to the prior period.

In 2022, we secured key multi-year distribution deals for both domestic and new international markets.

The new distribution initiatives are expected to bring in sustainable and recurring revenue with growth opportunities, contributing to future positive results.

With continued growth in the distribution business and recovery in commercial markets, our focus is on investing in businesses and programs that will broaden our portfolio and reach new customers.

The January 2023 acquisition of Precision Fuel Components expands our product offerings and customer base, offering strategic cross-selling opportunities and market share in niche B&GA related markets.

The Aviation segment is expected to see continued growth due to progress on new initiatives, offering a favorable outlook for 2023.

Fleet Segment

Our Fleet segment continues to focus on parts supply and inventory management support for the USPS delivery vehicle fleet while expanding presence to new commercial customers in both new and existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs.

Commercial customer revenue continues to see a strong growth trend, increasing 72% in 2021 compared to the prior year.

We anticipate continued growth of this service offering going forward as we continue to expand to support further commercial market demand.

Our Fleet segment continues to see growth in revenue from commercial fleet customers and e-commerce fulfillment, as the segment moves towards revenue diversification.

Fleet is executing its revenue diversification strategy by acquiring new customers and expanding product options for the e-commerce fulfillment business.

Commercial customer revenue continues to experience strong growth, increasing 42% in 2022 compared to the prior year.

We anticipate continued growth as we extend our reach to meet the increasing demand from the commercial market.

In 2022, commercial revenues were 40% of total Fleet segment revenue compared to 18% in 2020, demonstrating the continued success of our revenue diversification strategy.

In an effort to support the continued commercial focus for the Fleet segment, we opened a new leased facility of approximately 58,000 square feet to allow for continued process improvements and efficiencies as commercial market demand continues to drive a shift in segment growth.

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

To support commercial revenue, Fleet opened a new distribution warehouse and e-commerce center of excellence in Olive Branch, MS (near Memphis, TN), in January 2023.

The new facility, which doubles the existing warehouse space, enhances Fleet's geographical coverage and product offerings for customers.

The launch of the new location will allow Fleet to keep up with the growing demand for e-commerce fulfillment.

Additionally, we generated steady revenue from our support of the USPS delivery vehicle fleet through supplying parts and managing inventory, with revenue increasing 4% in 2022 compared to the prior year.

We continue to monitor USPS vehicle procurement and are ready to support both new vehicles added to the fleet and existing vehicles still in service.

Our experience and understanding of the USPS's needs strategically position us to remain a key partner.

We are committed to remain agile and supporting the USPS during its vehicle transition.

We expect continued growth within our commercial channels, coupled with stable contributions from USPS.

Federal and Defense Segment

Our Federal and Defense segment continues to focus on redefining VSE in the federal marketplace and investing in business development to build our contract backlog in current and new markets.

Strong revenue performance in our U.S.

Department of Justice program and new revenues from the U.S.

Air Force work performed by our HSS acquisition enabled us to successfully grow our 2021 revenue for this segment despite anticipated declines in our U.S.

Army work due to program completions.

We continuously strive to strengthen our portfolio of services to meet the current and future needs of our customers.

positioned in our pursuit of opportunities to expand our services supporting our traditional government clients, and to capture new work to expand or complement our current portfolio.

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

government is expected to maintain critical DoD preparedness programs.

Financial Statement Presentation

The following discussion provides a brief description of certain key items that appear in our consolidated financial statements:

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

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-type, fixed-price, and time and materials.

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

In 2022, our Federal and Defense segment experienced revenue growth driven by strong performance in our Naval Sea Systems Command (NAVSEA) program in providing Foreign Military Sales (FMS), with the transfer of a U.S.

Navy ship to Bahrain

being a major contributor for the revenue increase.

We experienced margin impacts from an unfavorable contract mix and recognized a loss on a non-Department of Defense contract with a foreign customer that was completed in 2022.

To address these challenges, the Federal and Defense segment is reshaping its presence in the federal market by investing in business development.

This includes a change in leadership and a focus on maintaining core operations while expanding our client base and capabilities.

We aim to enhance our services and pursue new opportunities to support long-term growth for this segment.

Results of Operations

The following table summarizes our consolidated results of operations (in thousands):

Years ended December 31,

2022 % 2021 % 2020 %

Revenues $ 949,762 100.0 $ 750,853 100.0 $ 661,659 100.0

Costs and operating expenses 894,631 94.2 729,333 97.1 606,896 91.7

Costs and operating expenses consist primarily of cost of inventory and material associated with the delivery of products and labor and other indirect costs associated with services rendered for customers.

Costs and operating expense also include other sales, general and administrative expenses associated with segment and corporate management and certain other costs and charges arising from events outside the ordinary course of business.

These costs will generally increase or decrease in conjunction with our level of products sold or services performed.

Costs and operating expenses also include expense for amortization of intangible assets acquired through our acquisitions.

Expense for amortization of acquisition related intangible assets is included in the segment results in which the acquisition is included.

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

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

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

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

Operating income 55,131 5.8 21,520 2.9 13,923 2.2

Interest expense, net 17,885 1.9 12,069 1.6 13,496 2.0

Income before income taxes 37,246 3.9 9,451 1.3 427 0.2

Provision for income taxes 9,187 1.0 1,485 0.2 5,598 0.8

Net income (loss) $ 28,059 2.9 $ 7,966 1.1 $ (5,171) (0.6)

Revenues increased $198.9 million, or 26.5%, in 2022 compared to 2021 due to revenue growth in our Aviation segment of $160.3 million, our Fleet segment of $27.8 million and our Federal and Defense segment of $10.8 million.

See "Segment Operating Results" below for further information by segment.

See Note (3) to the consolidated financial statements for information regarding sales by type and customer type for each of our segments.

Costs and Operating Expenses.

Costs and operating expenses increased $165 million, or 23%, in 2022 compared to 2021.

Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment.

See "Segment Operating Results" below for further information by segment.

Operating Income.

Operating income increased $33.6 million, or 156%, in 2022 compared to 2021 attributable to increases of $50.8 million for our Aviation segment and $3.5 million for our Fleet segment, partially offset by a decrease of $20.7 million for our Federal and Defense segment.

See "Segment Operating Results" below for further information by segment.

Interest Expense.

Interest expense increased approximately $5.8 million or 48.2% in 2022 compared to 2021 primarily due to higher average interest rates on borrowings outstanding.

Provision for Income Taxes.

The effective tax rate was 24.7% in 2022 compared 15.7% in 2021.

The increase in our effective tax rate primarily resulted from book expense in connection with a decline in the fair market value of our corporate owned life insurance ("COLI") assets in 2022 vs.

book income recorded in 2021.

For tax purposes, current year COLI book expense was reversed resulting in an unfavorable adjustment to the effective tax rate as opposed to a favorable adjustment reported in 2021.

Our tax rate is also affected by discrete items that may occur in any given year but may not be consistent from year to year.

In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income ("FDII") deduction, I.R.C.

Section 162(m) executive compensation limitation and unrealized investment income or loss from our COLI plan caused differences between the statutory U.S.

federal income tax rate and our effective tax rate.

Segment Operating Results

Aviation Segment Results

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

Years ended December 31,

2022 % 2021 % 2020 %

Revenues $ 408,112 100.0 $ 247,852 100.0 $ 165,070 100.0

Costs and operating expenses 371,696 91.1 262,225 105.8 159,743 96.8

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

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

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

Operating income (loss) $ 36,416 8.9 $ (14,373) (5.8) $ (35,513) (21.5)

Revenues increased $160 million, or 65%, in 2022 compared to 2021.

Distribution revenue increased $129 million, or 75%, driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of Global Parts (which occurred in the third quarter of the prior year).

Repair revenue increased $32 million, or 42%, driven by improved demand in end markets as a result of market recovery and share gains with business and general aviation customers.

Costs and Operating Expenses.

Costs and operating expenses increased $109 million, or 42%, in 2022 compared to 2021 primarily due to revenues increase as noted above and a $2.3 million non-cash charge to write down accounts receivable and inventory related to the Russian and Ukrainian markets, partially offset by a decrease in costs due to the absence of a $23.7 million inventory valuation reserve recognized in the prior year.

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

Expense for amortization of intangible assets was approximately $9.3 million and $8.7 million for 2022 and 2021, respectively.

Expense for allocated corporate costs was approximately $12.9 million and $8.8 million for 2022 and 2021, respectively.

Operating Income.

Operating income increased $50.8 million, or 353%, in 2022 compared to 2021 primarily due to contributions from new distribution programs, increases in higher margin repair revenue, and contributions from the Global Parts acquisition.

Fleet Segment Results

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

Years ended December 31,

2022 % 2021 % 2020 %

Revenues $ 261,336 100.0 $ 233,532 100.0 $ 242,170 100.0

Costs and operating expenses 237,425 90.9 213,106 91.3 215,511 89.0

Operating income $ 23,911 9.1 $ 20,426 8.7 $ 26,659 11.0

Revenues increased $27.8 million, or 12%, in 2022 compared to 2021.

The increase was primarily from commercial customers of $31 million, or 42%, and other government customers of $7 million, or 5%.

These increases were partially offset by a decrease in sales to DoD customers of $9 million, or 74%.

Costs and Operating Expenses.

Costs and operating expenses increased $24.3 million, or 11%, primarily due to increased revenues.

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

Expense for amortization of intangible assets was $6.4 million for 2022 and $7.1 million for 2021.

Expense for allocated corporate costs was $7.5 million for 2022 and $8.5 million for 2021.

Operating Income.

Operating income increased $3.5 million, or 17%, in 2022 compared to 2021, primarily due to a change in mix of products sold, including increased commercial fleet customer and e-commerce fulfillment sales as described above.

Federal and Defense Segment Results

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

Years ended December 31,

2022 % 2021 % 2020 %

Revenues $ 280,314 100.0 $ 269,469 100.0 $ 254,419 100.0

Costs and operating expenses 281,119 100.3 249,572 92.6 228,110 89.7

Operating (loss) income $ (805) (0.3) $ 19,897 7.4 $ 26,309 10.3

Revenues increased $11 million, or 4%, in 2022 compared to 2021 due to revenues from our Foreign Military Sales (FMS) program with the U.S.

Navy, partially offset by declines in our U.S.

Army work as a result of program completions.

Costs and Operating Expenses.

Costs and operating expenses increased $32 million, or 13%, in 2022 compared to 2021 due to increased revenue and a shift in our contract mix to a larger proportion of cost-plus contracts.

Operating (Loss) Income.

Operating income decreased approximately $20.7 million, or 104%, in 2022 compared to 2021 primarily due to the completion of a U.S.

Army program and a shift in our contract mix to a larger portion of cost-plus contracts, which generally provide lower profit margins compared to fixed-price and T&M contract types.

Additionally, we recorded a $7.8 million loss in 2022 related to a specific fixed-price, non-DoD contract with a foreign customer.

We have completed work on this contract in 2022.

Bookings and Funded Backlog

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We do not include in backlog estimates of revenues to be derived from IDIQ contracts, but rather record backlog and bookings when task orders are awarded and funded on these contracts.

A summary of our bookings and revenues for our Federal and Defense segment for the years ended December 31, 2021, 2020 and 2019, and funded contract backlog for this segment as of December 31, 2021, 2020 and 2019 is as follows (in millions):

A summary of our bookings, revenues and funded contract backlog for our Federal and Defense segment is as follows (in millions):

Year Ended December 31,

2022 2021 2020

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Funded Backlog $ 187 $ 185 $ 183

For the year ended December 31, 2021, Federal and Defense segment bookings increased 16% year-over-year to $314 million, while total funded backlog increased 1% year-over-year to $185 million.

In the fourth quarter of fiscal 2021, we included a valuation adjustment for open unfulfilled contracts that, in our judgment, may not be converted to future sales, but which have not been closed or de-obligated by the customer.

The effect of this reduced backlog by $36 million as of December 31, 2021.

For the year ended December 31, 2022, Federal and Defense segment bookings decreased 6% year-over-year to $294 million, while total funded backlog increased 1% year-over-year to $ 187 million.

Financial Condition

There has been no material adverse change in our financial condition in 2022.

Our bank debt increased $2 million, and we had $160 million of unused bank loan commitments as of December 31, 2022.

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

our level of business activity;

the timing and level of inventory purchases to support new distribution programs, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work;

the timing of government contract funding awarded;

and collections from our customers.

Liquidity and Capital Resources

The following table summarizes our cash flows (in thousands):

Year ended December 31,

2022 2021 2020

Net cash provided by (used in) operating activities $ 8,051 $ (17,602) $ 35,761

Net cash (used in) provided by investing activities (2,377) (61,632) 20,219

Net cash (used in) provided by financing activities (5,714) 79,374 (56,336)

Net (decrease) increase in cash and cash equivalents $ (40) $ 140 $ (356)

Cash provided by operating activities was $8.1 million in 2022 compared to cash used in operating activities of $17.6 million in 2021.

The change was primarily due to lower use of cash for inventory purchases and timing of vendor payments, partially offset by increased accounts receivable as a result of overall revenue growth and timing of collections.

Cash used in investing activities decreased $59.3 million in 2022 compared to 2021 primarily due to cash paid for acquisitions, net of cash acquired, of $53.3 million related to the acquisitions of our HSS and Global Parts subsidiaries in the prior year.

Cash used in financing activities was $5.7 million in 2022 as compared to cash provided by financing activities of $79.4 million in 2021.

The change was primarily due to $52.0 million of proceeds received in the prior year related to our public underwritten offering of our common stock in February 2021 and overall lower net borrowings of our debt in 2022.

We paid cash dividends totaling approximately $5.1 million or $0.40 per share in 2022.

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

We have paid cash dividends each year since 1973.

Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability.

Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity.

Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements.

Our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform, by the timing of large materials purchases and subcontractor efforts used in our contracts, and by delays in the award of contractual coverage and funding and payments.

Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.

In addition to operating cash flows, other significant factors that affect our overall management of liquidity include capital expenditures;

investments in expansion;

improvement and maintenance of our operational and administrative facilities;

and investments in the acquisition of businesses.

Our primary source of external financing is our loan agreement with a bank group and includes a term loan facility and a revolving loan facility, with an aggregate maximum borrowing capacity of $350 million.

Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or a combination of both facilities, subject to customary lender commitment approvals.

The aggregate limit of increases is $100 million.

On October 7, 2022, we entered into a fourth amendment to our loan agreement which, among other things, provides for the following:

(i) an extension of the maturity date from July 23, 2024 to October 7, 2025;

(ii) a reset of the aggregate principal amount of the term loan to $100.0 million;

(iii) a modification to the amortization payments on the term loan from $3.75 million quarterly to $2.50 million quarterly;

(iv) an increase in the maximum total leverage ratio from 4.25x to 4.50x, with such

ratios decreasing thereafter as indicated in the table below;

(v) a change in the benchmark rate from LIBOR to SOFR with a SOFR floor of 0.00%;

and (vi) a corresponding change in pricing to account for the change from LIBOR to SOFR.

Testing Period Maximum Total Funded Debt to EBITDA Ratio

From the Fourth Amendment Effective Date through and including June 30, 2023 4.50 to 1.00

From July 1, 2023 through and including December 31, 2023 4.25 to 1.00

From January 24, 2024 through and including June 30, 2024 4.00 to 1.00

From July 1, 2024 through and including September 30, 2024 3.75 to 1.00

From October 1, 2024 and thereafter 3.50 to 1.00

See Note (7) "Debt" to our Consolidated Financial Statements for information regarding our loan agreement.

Other Obligations and Commitments

See Note (7) "Debt" to our Consolidated Financial Statements for information regarding our long-term debt obligations.

We estimate cash requirements for interest payments on our bank loan debt to be approximately $20.6 million for 2023, $19.8 million for 2024 and $16.2 million for 2025.

The estimates do not take into account future drawdowns and repayments on the debt or changes in the variable interest rate, and actual interest may be different.

The estimates included variable rate interest obligations estimated based on rates as of December 31, 2022.

The interest payments are estimated through the maturity date of our term loan.

Interest payments under our revolver loans have been excluded because a reasonable estimate of timing and amount of cash out flows cannot be determined.

See Note (12) "Leases" to our Consolidated Financial Statements for information pertaining to future minimum lease payments relating to our operating and lease obligations.

Inflation and Pricing

Our Aviation and Fleet segments have experienced broad-based inflationary impacts consistent with overall trends in the aerospace and industrial distribution market, due primarily to increased materials, labor and services costs.

The effect of these increased costs on total company net income has been mitigated with improved efficiency in our underlying business through productivity improvements and pass-through price increases.

Our Federal and Defense segment has limited inflation risk as most of our contracts provide for estimates of future labor costs to be escalated for any option periods, while the non-labor costs in our contracts are typically reimbursable at cost.

Given broader inflation in the economy, we are monitoring the risk inflation presents to active and future contracts.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies, Estimates and Judgments

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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 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.

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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.

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.

We generally recognize revenue using the time-elapsed output method for our fixed-price service offering performance obligations.

For certain deliverable-based fixed-price performance obligations, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion.

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 effects of the risks on our estimates of total costs to complete the contract.

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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.

Most of the Federal and Defense segment contract revenues 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.

Inventory Valuation

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As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach.

this approach, a set of potential future subsidiary earnings is estimated based on various revenue growth rate assumptions for each scenario.

Under this approach, a set of potential future subsidiary earnings is estimated based on various revenue growth rate assumptions for each scenario.

A probability of likelihood is then assigned to each potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate.

17 unchanged sentences

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

In the fourth quarter of 2021, we performed our annual goodwill test for each of our reporting units.

Based on our impairment test, we determined there was no impairment of our goodwill.

The fair value of each of our reporting units as of December 31, 2021, exceeded its carrying value.

The results of our annual goodwill impairment tests in fiscal 2022 and 2021, respectively, indicated that the estimated fair value of each reporting unit exceeded its carrying value.

There were no impairment charges recorded in the years ended December 31, 2022 and 2021.

In the second quarter of 2020, due to the significant decline in our market capitalization as well as an overall stock market decline amid market volatility as a result of the COVID-19 pandemic, we performed an interim impairment test utilizing a quantitative assessment approach.

8 unchanged sentences

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.

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 within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction.

Deferred tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted.

Recently Issued Accounting Pronouncements

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

Results of Operations

The following discussion of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 2021 to fiscal 2020.

For a similar discussion that compares fiscal 2020 to fiscal 2019, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Form 10-K for the fiscal year ended December 31, 2020.

Consolidated Statements of Income

(in thousands)

Years ended December 31,

2021 % 2020 % 2019 %

Revenues $ 750,853 100.0 $ 661,659 100.0 $ 752,627 100.0

Costs and operating expenses 729,333 97.1 606,896 91.7 692,370 92.0

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

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

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

Operating income 21,520 2.9 13,923 2.2 60,257 8.0

Interest expense, net 12,069 1.6 13,496 2.0 13,830 1.8

Income before income taxes 9,451 1.3 427 0.2 46,427 6.2

Provision for income taxes 1,485 0.2 5,598 0.8 9,403 1.3

Net income (loss) $ 7,966 1.1 $ (5,171) (0.6) $ 37,024 4.9

Year Ended 2021 Compared to Year Ended 2020

Our revenues increased $89.2 million or 13.5% for the year ended December 31, 2021 as compared to the prior year.

The increase in revenues resulted from an increase in our Aviation segment of $82.8 million, an increase in our Federal and Defense segment of $15.1 million, and was partially offset by a decrease in our Fleet segment of $8.6 million.

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

Costs and Operating Expenses

Our costs and operating expenses increased $122 million or 20% in 2021 as compared to the prior year.

Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment.

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

The increase includes the effects of COVID-19 on the valuation of inventory reserves which increased costs and operating expenses by $24.4 million in the second quarter of 2021.

The inventory reserve increase was primarily due excess quantities of inventory at levels higher than our updated forecasts of future demand.

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

Operating Income

Our operating income increased $7.6 million or 54.6% in 2021 as compared to the prior year.

Operating income increased approximately $21.1 million for our Aviation segment and was partially offset by a decrease of $6.2 million for our Fleet segment and a decrease of $6.4 million for our Federal and Defense segment.

In 2020, the business recorded the following related to our Aviation segment (1) a loss on the sale of a business entity and certain assets of $8.2 million, (2) a gain on sale of property of $1.1 million, and (3) a goodwill and intangible asset impairment charge of $33.7 million.

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

Interest Expense

Interest expense decreased approximately $1.4 million or 10.6% in 2021 as compared to the prior year primarily due to a lower average interest rate on borrowings outstanding.

Provision for Income Taxes

Our effective tax rate was 15.7% for 2021 and 1,311.0% for 2020.

The lower effective tax rate for 2021 compared to 2020 primarily resulted from:

(1) significantly lower pre-tax book income in 2020, (2) goodwill impairment loss recognized in 2020, of which $16.4 million was non-deductible for income tax purposes, and (3) a full valuation allowance established in 2020 to offset the capital loss benefit in connection with our divestiture of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period.

Our tax rate is also affected by discrete items that may occur in any given year but may not be consistent from year to year.

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

federal income tax rate and our effective tax rate.

Segment Operating Results

Aviation Segment Results

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

Years ended December 31,

2021 % 2020 % 2019 %

Revenues $ 247,852 100.0 $ 165,070 100.0 $ 224,546 100.0

Costs and operating expenses 262,225 105.8 159,743 96.8 206,645 92.0

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

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

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

Operating (loss) income $ (14,373) (5.8) $ (35,513) (21.5) $ 17,901 8.0

Revenues for our Aviation segment increased $83 million or 50% in 2021 as compared to the prior year.

The revenue growth is primarily attributable to revenue contributions from recently initiated distribution contract wins, contributions from the acquisition of Global Parts, and improved demand in end markets.

The increases in revenue were partially offset by the divestiture of Prime Turbines in February of 2020 and the sale of all of CT Aerospace inventory in June 2020.

We did not have revenue for these two divested businesses in 2021 compared to combined revenues for these divested businesses of $8.9 million in 2020.

Costs and operating expenses increased approximately $102 million or 64% in 2021 compared to the prior year primarily due to improved demand for our products and services and a $23.7 million inventory valuation reserve recognized in the second quarter of 2021.

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

Expense for amortization of intangible assets was approximately $8.7 million and $8.8 million for 2021 and 2020, respectively.

Expense for allocated corporate costs was approximately $8.8 million and $5.8 million for 2021 and 2020, respectively.

There was no expense for earn-out obligation valuation adjustments in 2021 compared to a reduction in expense of $5.0 million in 2020.

In 2020, a loss on sale of a business entity and certain assets of $8.2 million was recognized, which comprised of (1) the difference between the carrying value on our books for our Prime Turbines business and the sale price upon divestiture, plus the difference between the carrying value on our books of inventory sold that is used to support the operations of our divested Prime Turbines business and the sale price of the inventory upon divestiture, and (2) the difference between the carrying value on our books of our CT Aerospace subsidiary's inventory and the sale price of the inventory upon sale.

In 2020, a gain on sale of property of $1.1 million was recognized associated with the sale of a Miami, Florida real estate holding.

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

Operating loss decreased $21.1 million or 59.5% in 2021 compared to the prior year, which primarily reflects the previously mentioned revenue growth, partially offset by the increase in costs as a result of the additional inventory valuation reserve.

The decrease was also attributable to nonrecurring expenses recognized in 2020 related to the loss on sale of Prime Turbines business and CT Aerospace inventory and the goodwill impairment charge.

Fleet Segment Results

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

Years ended December 31,

2021 % 2020 % 2019 %

Revenues $ 233,532 100.0 $ 242,170 100.0 $ 214,520 100.0

Costs and operating expenses 213,106 91.3 215,511 89.0 184,701 86.1

Operating income $ 20,426 8.7 $ 26,659 11.0 $ 29,819 13.9

Revenues for our Fleet segment decreased $8.6 million or 3.6% in 2021 as compared to the prior year.

Revenues from sales to DoD customers decreased $8 million or 39%, and revenues from sales to other government customers decreased $31 million or 18% primarily due to a non-recurring $26.6 million order for COVID-19 related supplies in 2020.

These decreases in revenue were partially offset by increased revenues from commercial customers of $31 million or 72%, driven by growth in our e-commerce fulfillment business.

Costs and operating expenses decreased $2.4 million or 1.1%, primarily due to decreased revenues.

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

Expense for amortization of intangible assets was $7.1 million for 2021 and $7.4 million for 2020.

Expense for allocated corporate costs was $8.5 million for 2021 and $8.0 million for 2020.

Operating income decreased $6.2 million or 23% in 2021 as compared to the prior year, primarily due to a change in the mix of products sold, including increased commercial customer revenues, an increase in allocated corporate costs, and a $0.7 million inventory valuation reserve recognized in the second quarter of 2021.

Federal and Defense Segment Results

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

Years ended December 31,

2021 % 2020 % 2019 %

Revenues $ 269,469 100.0 $ 254,419 100.0 $ 313,561 100.0

Costs and operating expenses 249,572 92.6 228,110 89.7 295,417 94.2

Operating income $ 19,897 7.4 $ 26,309 10.3 $ 18,144 5.8

Revenues for our Federal and Defense segment increased $15 million or 5.9% and costs and operating expenses increased approximately $21 million or 9% for 2021, as compared to the prior year primarily due to revenue performance on our U.S.

Department of Justice program and new revenues from the U.S.

Air Force work performed by our HSS acquisition.

These increases were partially offset by declines in our U.S.

Army work due to program completions and a decline in our U.S.

Operating income decreased approximately $6.4 million or 24% for 2021 compared to the prior year primarily due to a unfavorable mix of fixed priced awards in 2021 compared to 2020.

Financial Condition

There has been no material adverse change in our financial condition in 2021.

Our bank debt increased $33 million, and we had $122 million of unused bank loan commitments as of December 31, 2021.

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

our level of business activity;

the timing and level of inventory purchases to support new distribution programs, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work;

the timing of government contract funding awarded;

collections from our customers;

and our acquisition of HSS and Global Parts.

Liquidity and Capital Resources

Cash and cash equivalents increased by approximately $140 thousand during 2021.

Cash used in operating activities was $17.6 million for 2021 compared to cash provided by operating activities of $35.8 million for the prior year.

The change was comprised of a decrease of $13.5 million in other non-cash operating activities and a decrease of $53 million due to changes in the levels of operating assets and liabilities, partially offset by a reduction of $13.1 million in net loss.

The net decrease in the level of operating assets and liabilities was primarily due to $80 million used for investments in new inventory to support recent distribution program wins and program launches within our Aviation segment and $15 million increase in billed and unbilled receivables primarily due to the timing of collections and customer billings, partially offset by $33.2 million increase in accounts payable and deferred compensation primarily resulting from timing of payments.

Our levels of accounts receivable and accounts payable may fluctuate depending on the timing of material and inventory purchases, services ordered, product sales, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received for services.

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

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

Cash used in investing activities was $61.6 million for 2021 compared to cash provided by investing activities of $20.2 million for the prior year.

Net cash used in investing activities in 2021 related primarily to acquisitions of $53.3 million.

In 2020, net cash provided in investing activities related primarily to proceeds from the divestitures of our Prime Turbines business and CT Aerospace inventory, the sale of a Miami, Florida real estate holding, and the sale of other property and equipment of $22.8 million.

Other investing activities consisted of purchases of property and equipment and proceeds from payments on notes receivable in connection with the divestiture of Prime Turbines and sale of CT Aerospace inventory.

Cash provided by financing activities was $79.4 million for 2021 as compared to cash used in financing activities of $56.3 million for the prior year.

In 2021, we received $52.0 million in proceeds from the public underwritten offering of our common stock in February 2021, which is net of underwriters' discounts and issuance costs.

In 2020, $31.7 million was used for the payment of an earn-out obligation in connection with the 2019 acquisition of our 1st Choice Aerospace subsidiary.

Other financing activities consisted primarily of borrowing and repayment of debt and payment of dividends.

We paid cash dividends totaling approximately $4.4 million or $0.37 per share in 2021.

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

We have paid cash dividends each year since 1973.

Significant increases or decreases in

revenues and inventory, accounts receivable and accounts payable can affect our liquidity.

Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements.

Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.

We also purchase property and equipment;

invest in expansion, improvement, and maintenance of our operational and administrative facilities;

and invest in the acquisition of other companies.

Our external financing consists of a loan agreement with a bank group that we amended in July 2021 and that expires in July 2024.

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

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

The term loan requires quarterly installment payments.

Our required term loan payments after December 31, 2021 are approximately $15.0 million in 2022, $15.0 million in 2023, and $30.2 million in 2024.

The amount of term loan borrowings outstanding as of December 31, 2021 was $60.2 million.

The maximum amount of credit available to us 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 approximately $226.6 million in revolving loan amounts outstanding and $1.0 million of letters of credit outstanding as of December 31, 2021.

The aggregate limit of incremental increases is $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.

The applicable LIBOR rate has a floor of 0.50%.

As of December 31, 2021, the LIBOR margin was 3.25% and the base margin was 2.25%.

The amendment to the loan agreement in July 2021 provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.

The base 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.

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%.

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

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

Testing Period Maximum Total Funded Debt to EBITDA Ratio

From July 23, 2021 through and including December 31, 2021 4.50 to 1.00

From January 1, 2022 through and including June 30, 2022 4.25 to 1.00

From July 1, 2022 through and including September 30, 2022 4.00 to 1.00

From October 1, 2022 through and including December 31, 2022 3.75 to 1.00

From January 1, 2023 through and including March 31, 2023 3.50 to 1.00

From April 1, 2023 and thereafter 3.25 to 1.00

We were in compliance with required ratios and other terms and conditions as of December 31, 2021.

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.

Other Obligations and Commitments

See Note (8) "Debt" to our Consolidated Financial Statements for information regarding our long-term debt obligations.

We estimate cash requirements for interest payments on our bank loan debt to be approximately $2.2 million for 2022, $1.5 million for 2023 and $500 thousand for 2024.

The estimates included variable rate interest obligations estimated based on rates as of December 31, 2021.

The interest payments are estimated through the maturity date of our term loan.

Interest payments under our revolver loans have been excluded because a reasonable estimate of timing and amount of cash out flows cannot be determined.

See Note (12) "Commitments and Contingencies" to our Consolidated Financial Statements for information pertaining to future minimum lease payments relating to our operating and lease obligations.

See Note (16) "Fair Value Measurements" to our Consolidated Financial Statements for information pertaining to contingent consideration obligations.

Inflation and Pricing

Given broader inflation in the economy, we are monitoring the risk inflation presents to active and future contracts.

Off-Balance Sheet Arrangements

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis