What changed in this filing

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Item 1. Business

2021-03-05 compared with 2020-03-09 · 77 added, 53 removed, 87 unchanged (60% of the section changed)

History and Organization

VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified products and services aftermarket company providing repair services, distribution, logistics, supply chain management support and consulting services for land, sea and air transportation assets in the public and private sectors.

We serve the United States Government (the "government"), including the United States Department of Defense ("DoD"), federal civilian agencies, as well as commercial and other customers.

Our operations include parts supply and distribution, and maintenance, repair, and overhaul (“MRO”) services for ground transport and aviation component and accessories;

vehicle and equipment refurbishment;

IT and health care IT solutions;

and energy and management consulting services.

VSE was incorporated in Delaware in 1959 and the parent company serves as a centralized managing and consolidating entity for our three operating groups, each of which consists of one or more wholly owned subsidiaries or unincorporated divisions that perform our services.

Our operating segments include the Aviation Group, Supply Chain Management Group, and Federal Services Group.

VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing repair services, parts distribution, logistics, and supply chain management support services for land, sea and air transportation assets and information technology and energy consulting services to government and commercial markets.

We serve the United States Government (the "government"), including the United States Department of Defense ("DoD"), federal civilian agencies, and commercial and other customers.

VSE was incorporated in Delaware in 1959 and the parent company serves as a centralized managing and consolidating entity for our three operating segments, each of which consists of one or more wholly owned subsidiaries or unincorporated divisions that perform our services.

Our operating segments include the Aviation segment, Fleet segment, and Federal and Defense segment.

The term "VSE" or "Company" means VSE and its operating businesses unless the context indicates operations of only VSE as the parent company.

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Years ended December 31,

Aviation Group

Supply Chain Management Group

Federal Services Group

Aviation Group

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

2020 % 2019 % 2018 %

Aviation $ 165,070 25 $ 224,546 30 $ 145,423 21

Fleet 242,170 37 214,520 28 214,809 31

Federal and Defense 254,419 38 313,561 42 336,986 48

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

Our Aviation segment provides international parts supply and distribution, supply chain solutions, and component and engine accessory maintenance, repair and overhaul ("MRO") services supporting global aftermarket commercial and business and general aviation customers.

This business offers a range of services to a diversified global client base of commercial airlines, regional airlines, cargo transporters, MRO integrators and providers, aviation manufacturers, corporate and private aircraft owners, and fixed-base operators ("FBOs").

The Aviation Group generated approximately 30% of our consolidated revenues in 2019.

This group did not have any one client that comprised more than 10% of our consolidated revenues in 2019.

Supply Chain Management Group

Our Supply Chain Management Group provides parts supply, inventory management, e-commerce fulfillment, logistics, data management, and other services to assist aftermarket commercial and federal customers with their supply chain management.

Operations of this group are conducted by our wholly owned subsidiary Wheeler Bros., Inc., which supports the government and commercial truck fleets with parts, sustainment solutions and managed inventory services.

The Aviation segment generated approximately 25% of our consolidated revenues in 2020.

This segment did not have any one client that comprised more than 10% of our consolidated revenues in 2020, 2019 and 2018.

Our Fleet segment provides parts supply, inventory management, e-commerce fulfillment, logistics, data management, and other services to assist aftermarket commercial and federal customers with their supply chain management.

Operations of this segment are conducted by our wholly owned subsidiary Wheeler Fleet Solutions, which supports the government and commercial truck fleets with parts, sustainment solutions and managed inventory services.

Revenues for this business are derived from the sale of vehicle parts and mission critical supply chain services to support client truck fleets.

The Supply Chain Management Group generated approximately 28% of our consolidated revenues in 2019.

The United States Postal Service ("USPS") comprised approximately 22% of our consolidated revenues in 2019.

Federal Services Group

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

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

The Fleet segment generated approximately 37% of our consolidated revenues in 2020.

The United States Postal Service ("USPS") comprised approximately 27%, 22%, and 25% of our consolidated revenues in 2020, 2019 and 2018, respectively.

Federal and Defense

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

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

We also provide energy consulting services and IT solutions to various DoD, federal civilian agencies and commercial clients.

The Federal Services Group generated approximately 42% of our consolidated revenues in 2019.

The Federal and Defense segment generated approximately 38% of our consolidated revenues in 2020.

The foreign military sales program with the U.S.

Department of Navy ("FMS Program") comprised approximately 12% of our consolidated revenues in 2019.

1st Choice Aerospace Acquisition

Department of Navy ("FMS Program") comprised approximately 15%, 12% , and 21% of our consolidated revenues in 2020, 2019 and 2018, respectively.

Acquisition and Divestitures

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

("1st Choice Aerospace").

1st Choice Aerospace has operations in Florida and Kentucky and provides component MRO services and products for new generation and legacy commercial aircraft platforms.

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

under our Aviation Group.

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

1st Choice Aerospace revenues for 2019 was approximately $63.0 million and 20% above our expectations driven primarily by expansion of service offerings.

("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.

Products and Services

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We focus on creating value by sustaining and extending the life and improving the performance of our client assets through core offerings in supply chain management, parts supply and distribution, MRO, equipment refurbishment, logistics and engineering.

We also provide IT solutions, health care IT, and consulting services.

We also provide IT solutions and energy consulting services.

Typical offerings include supply chain and inventory management services;

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vehicle fleet parts supply and distribution;

MRO of aircraft components and engines accessories;

MRO of aircraft components and engine accessories;

aircraft engine and airframe parts supply and distribution;

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We offer our products and professional and technical services through various ordering agreements and negotiated and competitive contract arrangements.

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

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

Revenues for the sale of aircraft parts are recognized at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped.

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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.

Our Supply Chain Management Group revenues result from the sale of aftermarket vehicle parts to government and commercial clients.

Our Fleet segment revenues result from the sale of aftermarket vehicle parts to government and commercial clients.

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

Our Federal Services Group revenues result from professional and technical services that are performed for customers on a contract basis.

Our Federal and Defense segment revenues result from professional and technical services that are performed for customers on a contract basis.

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

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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 based on application of the right to invoice practical expedient in which revenue is recognized in direct proportion to our present right to consideration for progress towards the complete satisfaction of the performance obligation.

Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned, with revenue recognized in direct proportion to our present right to consideration for progress toward the complete satisfaction of the performance obligation.

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.

Revenues for time and materials contracts are recorded based on the amount we have the right to invoice our customers for work performed and materials delivered.

Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion.

Revenues for time and

materials contracts are recorded based on the amount we have the right to invoice our customers for work performed and materials delivered.

Our customers include various government clients and commercial entities.

None of our customers comprise a significant amount of our 2019 consolidated revenues except our USPS work and FMS Program which was approximately 20% and 12%, respectively.

Our USPS work and FMS Program comprised approximately 27% and 15% of our 2020 consolidated revenues, respectively.

None of our other customers comprise a significant amount of our 2020 consolidated revenues.

Revenues by Customer

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Years ended December 31,

Customer 2020 % 2019 % 2018 %

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

Other government *

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

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

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

*USPS is part of Other government

Funded backlog represents a measure of potential future revenues from work performed on Federal Services Group government contracts.

Funded backlog represents a measure of potential future revenues from work performed on Federal and Defense segment government contracts.

Funded backlog is defined as the appropriated and funded value of contracts, less the amount of revenues recognized on such contracts.

Our reported backlog is comprised of funding received in incremental amounts for work that is generally expected to be completed within six to twelve months following the award of the funding.

Our funded backlog for our Federal Services Group as of December 31, 2019 , 2018 and 2017 was approximately $213 million , $290 million and $324 million , respectively.

Our funded backlog for our Federal and Defense segment as of December 31, 2020, 2019 and 2018 was approximately $183 million, $213 million and $290 million, respectively.

Changes in funded backlog on contracts are sometimes unpredictable due to uncertainties associated with changing government program priorities and availability of funds, which is heavily dependent upon the congressional authorization and appropriation process.

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We also participate in professional organizations, attend industry trade shows and events in the course of contract performance, and obtain literature published by government, trade associations, professional organizations and commercial entities.

Human Capital Resources

Our employees have a variety of specialized experience, training and skills that provide the expertise required to service our clients.

As of December 31, 2019 , we had 2,776 employees, compared to 2,228 as of December 31, 2018 .

As of December 31, 2020, we had approximately 1,900 employees, compared to approximately 2,800 as of December 31, 2019.

Principal employee categories include (a) mechanics and vehicle, aircraft and equipment technicians, (b) logisticians, (c) warehouse and sales personnel, (d) engineers and technicians in mechanical, electronic, industrial, energy services, and (e) information technology professionals in computer systems, applications and products, configuration, change and data management disciplines.

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These efforts include an emphasis on hiring military veterans to enhance the quality of our workforce.

We are committed to providing a safe working environment for our employees.

Supported by our Health, Environmental and Safety Program, we strive to minimize the risk of injury or illness to workers.

We provide our employees with upfront and ongoing safety trainings to ensure that safety policies and procedures are effectively communicated and implemented.

We also provide our employees with any additional information, leadership, support and equipment needed to safely perform their job function.

We offer competitive pay and comprehensive benefits to attract, reward and retain a qualified and diverse workforce to achieve our vision and mission and meet the dynamic needs of employees and their families.

In addition to competitive base pay, we offer annual bonus opportunities, a Company matched 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs.

We embrace and encourage inclusion in order to achieve a culture and company environment supporting diversity.

Our inclusion and diversity initiatives include our practices and policies on employee recruitment and hiring, professional training and development, employee engagement and the development of a work environment built on the premise of diversity and equity.

In 2020, we formed the VSE Inclusion & Diversity Council, an employee led group focused on creating a framework and action plan for inclusion and diversity related initiatives across the organization.

Government Regulation and Supervision

Our Federal Services Group business is affected by a variety of laws and regulations relating to the award, administration, and performance of U.S.

Our Federal and Defense segment business is affected by a variety of laws and regulations relating to the award, administration, and performance of U.S.

Government contracts.

See Risk Factors in Item 1A.

Our Federal Services Group operates in a heavily regulated environment and is routinely audited and reviewed by the U.S.

Government and its agencies, including the Defense Contract Audit Agency ("DCAA"), and the Defense Contract Management Agency ("DCMA").

See Item A, "Risk Factors".

Our Federal and Defense segment operates in a heavily regulated environment and is routinely audited and reviewed by the U.S.

Government and its agencies, including the Defense Contract Audit Agency, and the Defense Contract Management Agency.

These agencies evaluate our contract performance, cost structures, and compliance with applicable laws, regulations, and standards, as well as review the adequacy of our business systems and processes relative to U.S.

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Our business, our contracts with various agencies of the U.S.

Government, and our subcontracts with other prime contractors are subject to a variety of laws and regulations, including, but not limited to, the Federal Acquisition Regulation ("FAR"), the Truth in Negotiations Act, the Procurement Integrity Act, the False Claims Act, U.S.

Cost Accounting Standards ("CAS"), the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act.

Government, and our subcontracts with other prime contractors are subject to a variety of laws and regulations, including, but not limited to, the Federal Acquisition Regulation, the Truth in Negotiations Act, the Procurement Integrity Act, the False Claims Act, U.S.

Cost Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act.

A noncompliance determination by a government agency may result in reductions in contract values, contract modifications or terminations, penalties, fines, repayments, compensatory, treble, or other damages, or suspension or debarment.

The supply chain, logistics, distribution, and MRO services offered by our Aviation and Supply Chain Management groups and the federally contracted professional and technical services offered by our Federal Services Group are conducted in very competitive operating environments.

We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations.

We believe that our operations currently are being conducted in substantial compliance with all applicable regulations.

From time to time, we may experience incidents and encounter conditions that are not in compliance with regulations.

We may occasionally receive notices from governmental agencies regarding potential violations of these laws or regulations.

In such cases, we will

work with the agencies to address any issues and to implement appropriate corrective action when necessary.

However, we do not know of any fact or condition that would result in any material liabilities being incurred in the future.

The supply chain, logistics, distribution, and MRO services offered by our Aviation and Fleet segments and the federally contracted professional and technical services offered by our Federal and Defense segment are conducted in very competitive operating environments.

The vehicle parts aftermarket and aviation parts and repair markets are fragmented, with many large and small global private and public competitors that compete for our customer base.

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Government agencies emphasize awarding contracts on a competitive basis, as opposed to a sole source or other noncompetitive basis.

Most of the significant contracts under which our Federal Services Group currently perform services were either initially awarded on a competitive basis or have been renewed at least once on a competitive basis.

Most of the significant contracts under which our Federal and Defense segment currently perform services were either initially awarded on a competitive basis, or have been renewed at least once on a competitive basis.

These contracts may be indefinite delivery/indefinite quantity type contracts for which the government makes awards for work among several other eligible contract holders, or they may be single award contracts with multiple option years that may or may not be exercised.

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Available Information

Copies of our publicly available Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are filed with or otherwise furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.

Such reports and amendments are also available to the public free of charge through our website www.vsecorp.com as soon as reasonably practicable after the reports are electronically filed with the SEC.

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

What changed 10-K

Item 1. Business