What changed in this filing

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Item 1. Business

2022-03-11 compared with 2021-03-05 · 78 added, 77 removed, 87 unchanged (64% of the section changed)

History and Organization

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 Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is 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 commercial and government markets.

We provide logistics and distribution services for legacy systems and equipment and professional and technical services to commercial customers;

the government, including the United States Department of Defense ("DoD");

and federal civilian agencies.

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.

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.

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Federal and Defense 269,469 36 254,419 38 313,561 42

$ 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.

Total $ 750,853 100 $ 661,659 100 $ 752,627 100

Our Aviation segment 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.

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 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.

This segment did not have any one client that comprised more than 10% of our consolidated revenues in 2021, 2020 or 2019.

Our Fleet segment provides parts supply, inventory management, e-commerce fulfillment, logistics 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 Fleet segment generated approximately 37% of our consolidated revenues in 2020.

The United States Postal Service ("USPS") comprised approximately 20%, 27%, and 22% of our consolidated revenues in 2021, 2020 and 2019, respectively.

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

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

The foreign military sales program with the U.S.

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Acquisition and Divestitures

In July 2021, we acquired Global Parts Group, Inc.

("Global Parts"), which 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"), which 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.

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

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

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MRO of aircraft components and engine accessories;

aircraft engine and airframe parts supply and distribution;

aircraft and airframe parts supply and distribution;

engineering support for military vehicles;

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Revenues and Contracts

Our revenues are derived from the delivery of products and from contract services performed for our customers.

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

Our revenues are derived from the delivery of products and from contract services performed for our customers for each of our three segments as follows:

• 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.

Revenues for MRO services are recognized 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.

• 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 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.

• Our Federal and Defense segment revenues result from providing professional and technical services primarily to U.S government customers on a contract basis.

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

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

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

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.

Our customers include various commercial entities and government clients.

In 2021, our commercial customers represented 43% of our consolidated revenues, up from 31% and 32% in 2020 and 2019, respectively.

Our USPS work and FMS Program comprised approximately 20% and 13% of our 2021 consolidated revenues, respectively.

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Customer 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 *

Other government (a)

195,113 26 216,957 33 205,775 27

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

Total $ 750,853 100 $ 661,659 100 $ 752,627 100

*USPS is part of Other government

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.

(a) USPS is part of Other government

Our funded backlog represents the estimated remaining value of work to be performed under firm contracts under our Federal and Defense segment.

Bookings for our Aviation and Fleet segments occur at the time of sale, and therefore, these segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues.

Our funded backlog for our Federal and Defense segment as of December 31, 2021, 2020 and 2019 was approximately $185 million, $183 million and $213 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.

Delays in this process may temporarily diminish the availability of funds for ongoing and planned work.

In addition to funded backlog levels, we have contract ceiling amounts available for use on multiple award, indefinite delivery, indefinite quantity contracts with DoD and federal civilian agencies.

While these contracts increase the opportunities available for us to pursue future work, the actual amount of future work is indeterminate until task orders are placed on the contracts.

Frequently, these task orders are competitively awarded.

Additionally, these task orders must be funded by the procuring agencies before we can perform work and begin generating revenues.

For a complete description of our backlog, see "Bookings and Funded Backlog" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this report.

Our marketing activities are conducted by each of our businesses by industry-specific sales representatives and professional marketing and business development staff.

New customer contacts and information concerning new programs, requirements and opportunities become available through sales calls and client visits, negotiation with key business partners, and formal and informal briefings.

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.

We participate in various professional organizations and trade association, and also attend industry trade shows and events in order to increase our brand awareness and strengthen our service offerings.

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, 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.

The expertise required by our customers frequently includes knowledge of government regulations and procedures.

The amount of our unionized employees varies depending on the types of U.S.

Government programs that we are supporting at any given time.

As of December 31, 2020, approximately 35% of our total workforce was unionized, compared to 35% as of December 31, 2019.

We actively seek initiatives and participate in outreach programs to assist individuals who served in the U.S.

Armed Forces.

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

Workforce Demographics

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

As of December 31, 2021, we had approximately 2,500 employees.

As of December 31, 2021, approximately 17% of our employees, all within our Federal and Defense segment, were unionized .

Employee Health and Safety

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

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

Talent Acquisition, Retention and Development

We strive to attract and retain top talent at all levels of the company.

To support this objective we seek to provide opportunities for professional development and career growth, and recognize and reward our employees for their contributions and accomplishments.

We encourage employees to provide feedback about their experience and we regularly conduct employee engagement surveys to gauge employee satisfaction and to understand the effectiveness of engaging our employees on all levels.

These surveys provide valuable information on drivers of engagement and areas of improvement to ensure that we maintain an employee-focused experience and culture.

We also host quarterly town hall meetings to provide an open and frequent line of communication for all employees.

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.

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

Diversity and Inclusion

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.

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

Our I&D Council regularly hosts roundtable discussions aimed at increasing cultural awareness and promoting dialogue to encourage a culture that values inclusive behavior in our workplace.

We also support employee resource groups, which are voluntary, employee-led groups that are open to all employees and provide a forum for diverse employees and allies from a variety of different backgrounds to share experiences and support our company's diversity initiatives.

These groups help foster a diverse and inclusive workplace, build awareness and drive change within our organization.

Additionally, we actively seek initiatives and participate in outreach programs to assist individuals who served in the U.S.

Armed Forces.

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

Code of Business Conduct and Ethics

We are committed to the highest ethical standards and we expect all of our directors, officers and employees to comply with our standards and applicable laws and regulations in the conduct of our business.

Our Code of Business Conduct and Ethics (the "Code") sets forth our policies and expectations on what is appropriate behavior and guides ethical business decisions that maintain a commitment to integrity.

In addition, we require annual ethics and compliance training for all of our employees to provide them with the knowledge necessary to maintain our standards of ethics and compliance.

Government Regulation and Supervision

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.

Our businesses are subject to extensive regulation in the markets we serve.

We work with numerous U.S.

government agencies and entities, including but not limited to, all branches of the DoD and the Federal Aviation Administration ("FAA").

Similar government authorities and regulations exist in the other countries in which we do business.

Commercial Aircraft

The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States.

Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft.

The inspection, maintenance and repair procedures for various types of aircraft and equipment are prescribed by these regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians.

Certification and conformance is required prior to installation of a part on an aircraft.

The FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services.

Government Contracts

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.

We must comply with and are affected by a variety of laws and regulations relating to the award, administration, and performance of U.S.

Government contracts.

We are routinely audited and reviewed by the U.S.

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

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Government requirements.

Business systems subject to audit or review include our accounting systems, purchasing systems, government property management systems, and estimating systems.

If an audit uncovers improper or illegal activities, we may be subject to administrative, civil, or criminal proceedings, which could result in fines, penalties, repayments, or compensatory, treble, or other damages.

Government findings against a contractor can also lead to suspension or debarment from future U.S.

Government contracts or the loss of export privileges.

In addition, any costs we incur that are determined to be unallowable or improperly allocated to a specific contract will not be recovered or must be refunded if already reimbursed.

Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or partially withhold contract payments if it determines significant deficiencies exist in one or more such systems.

Government generally has the ability to terminate contracts, in whole or in part, with little or no prior notice, for convenience or for default based on performance.

In the event of termination of a contract for convenience, a contractor is customarily able to recover costs already incurred on the contract and receive profit on those costs up to the amount authorized under the contract, but not the anticipated profit that would have been earned had the contract been completed.

Government generally has

the ability to terminate contracts, in whole or in part, with little or no prior notice, for convenience or for default based on our failure to meet specified performance requirements.

In the event of termination of a contract for convenience, we would generally be able to recover costs already incurred on the contract and receive profit on those costs up to the amount authorized under the contract, but not the anticipated profit that would have been earned had the contract been completed.

Such a termination could also result in the cancellation of future work on the related program.

Termination resulting from our default could expose us to various liabilities, including excess re-procurement costs, and could have a material effect on our ability to compete for future contracts.

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, 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.

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.

Large, diversified federal contracting firms with greater financial resources and larger technical staff are capable of providing the same services offered by us.

For additional information on regulations and risks affecting our business, refer to Item 1A., "Risk Factors".

All of our businesses operate in highly competitive industries that include numerous competitors, many of which are larger in size and have greater name recognition, financials resources and larger technical staff than we do.

We also compete against smaller, more specialized competitors that concentrate their resources on narrower service offerings.

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

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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 Exchange Act.

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.

The SEC maintains an Internet site ( http://www.sec.gov ) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

We maintain an internet website at www.vsecorp.com .

We make available free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed with or otherwise furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the reports are electronically filed with the SEC.

The information on or obtainable through our website is not intended to be incorporated into this Annual Report on Form 10-K.

The SEC also maintains an internet website ( http://www.sec.gov ) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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