1 unchanged sentence
General Overview
−Removed: 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 in the public and private sectors.
−Removed: We provide logistics and distribution services for legacy systems and equipment and professional and technical services to the government, including the Department of Defense ("DoD"), federal civilian agencies, and to commercial and other customers.
+Added: 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.
+Added: 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.
3 unchanged sentences
Acquisition and Divestitures
+Added: In July 2021, we acquired Global Parts Group, Inc.
+Added: ("Global Parts"), a privately owned company with operations in Augusta, Kansas.
+Added: Global Parts provides distribution and MRO services for business and general aviation ("B&GA") aircraft families.
+Added: 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.
+Added: Global Parts is a subsidiary of VSE Aviation, Inc.
+Added: under our Aviation segment.
+Added: In March 2021, we acquired HAECO Special Services, LLC ("HSS"), in an all-cash transaction.
+Added: HSS is a leading provider of fully integrated MRO support solutions for military and government aircraft.
+Added: HSS offers scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for the DoD primarily for the sustainment of the U.S.
+Added: Air Force ("USAF") KC-10 fleet.
+Added: The experienced workforce of HSS operates from two hangar locations in Greensboro, North Carolina.
+Added: HSS is a subsidiary of VSE Corporation under our Federal & Defense Services segment.
In January 2019, we acquired 1st Choice Aerospace Inc.
11 unchanged sentences
Public Common Stock Offering
−Removed: In February 2021, we completed an underwritten public offering of common stock, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million through the issuance of 1,599,097 shares of common stock, including an additional 170,497 shares that were issued pursuant to the underwriters' exercise of their option to purchase additional shares, at an offering price of $35.00 per share.
−Removed: We expect to use the net proceeds for general corporate purposes, which may include among other things, financing strategic acquisitions, working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.
+Added: 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.
+Added: We received net proceeds of approximately $52 million, after deducting underwriting discounts and other offering expenses of approximately $4 million.
+Added: The net proceeds were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.
Organization and Segments
7 unchanged sentences
Source of Revenues 2021 % 2020 % 2019 %
+Added: 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
−Removed: Commercial 208,305 31 242,518 32 150,606 22
Total Revenues $ 750,853 100 $ 661,659 100 $ 752,627 100
COVID-19 Discussion
−Removed: Forward Looking Information
−Removed: Disclosures that address business and operating considerations associated with the COVID-19 pandemic are made under highly uncertain conditions and may involve forward looking information that is based on assumptions and expectations regarding future events.
−Removed: Please 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.
−Removed: Demand for Products and Services, Operating Results, and Financial Condition
−Removed: All of our businesses have remained operational since the onset of the COVID-19 pandemic through the end of 2020, and we continue to operate with limited disruption.
−Removed: We have experienced varying levels of reduction in demand for our services and products, and have adjusted our cost structure to support the current and near-term forecasted demand environment.
−Removed: The majority of the cost reductions occurred within our Aviation segment, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services.
−Removed: We currently anticipate demand levels within the Aviation segment will remain muted through the first half of 2021, pending a recovery in the broader market.
−Removed: This decrease in demand adversely impacted our operating results for 2020.
−Removed: While current conditions raise the potential for a decline in performance for our Fleet segment and our Federal and Defense segment, we anticipate limited disruption in demand for the products and services they offer, as compared to other industries, due to the nature of their government, defense and e-commerce customer bases.
−Removed: Our parts supply for truck fleets, including the United States Postal Service ("USPS") delivery vehicles and our DoD program services, provide support for the essential services conducted by our customers.
−Removed: We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic;
−Removed: 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.
−Removed: We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.
−Removed: Capital, Financial Resources, Credit Losses, and Liquidity
−Removed: Our debt capital and liquidity position have not experienced a material adverse change resulting from the COVID-19 pandemic at this time, and we are meeting our obligations in a timely manner.
−Removed: We currently have sufficient cash flows and unused loan commitments to meet our obligations in the near term.
−Removed: Weakness in our Aviation segment customer markets has caused a delay in receivables collections and an increase in bad debt expense.
−Removed: This trend may continue in future periods.
−Removed: We do not anticipate receivables collections to negatively impact our Fleet or Federal and Defense segments.
−Removed: We have a loan agreement with a bank group comprised of ten banks, including multiple large banks and multiple regional banks.
−Removed: Our revolving credit facility under this loan agreement provides $350 million in loan commitments, of which we have currently borrowed approximately 50%.
−Removed: The potential for additional declines in our earnings may impact our financial covenant ratios in future periods.
−Removed: Accordingly, in the second quarter of 2020, we amended the loan agreement to provide increased financial covenant flexibility through 2021.
−Removed: Material Impairments
−Removed: Due to the continued market volatility caused by the COVID-19 pandemic, we performed an interim impairment analysis of our goodwill during the second quarter of 2020.
−Removed: Our interim analysis indicated that our reporting units in our Fleet and Federal and Defense segments had fair values substantially in excess of their carrying values, and we believe the COVID-19 pandemic induced economic crisis is not likely to have a material adverse impact on customer demand for products and services provided by these two segments.
−Removed: Accordingly, at this time we do not anticipate any impairments in these two business segments.
−Removed: Our interim impairment analysis indicated that our VSE Aviation reporting unit, within our Aviation segment, had a fair value less than its carrying value and had incurred an impairment.
−Removed: We recognized a goodwill impairment charge of $30.9 million for our VSE Aviation reporting unit in the second quarter of 2020.
−Removed: Prior to the onset of the COVID-19 pandemic, our Aviation segment was performing strongly.
−Removed: Our VSE Aviation reporting unit experienced lower customer demand in 2020 as compared to 2019, and we expect it will continue to experience lower customer demand during the first half of 2021, but we believe market opportunities will increase for us in the long term.
−Removed: Accordingly, at this time we do not anticipate any further material impairments in our Aviation segment.
−Removed: However, should the magnitude and duration of the downturn be greater than we anticipated in our analysis, there could be further impairment.
−Removed: Balance Sheet Asset Valuation
−Removed: Our goodwill and intangible assets could be impacted by changes in economic conditions affecting our revenue projections and the market valuation of public companies.
−Removed: See "Material Impairments" above for further details.
−Removed: We do not believe that there are or will be significant changes in judgments in determining the fair value of other assets on our balance sheet or that our ability to timely account for them will be negatively impacted.
−Removed: While the COVID-19 pandemic may cause some delays in collecting some of our accounts receivable and potentially give rise to some bad debt write offs, we do not expect this to have a material impact on our accounts receivable.
−Removed: We have made opportunistic purchases of aviation parts, resulting in an increase in our inventory levels.
−Removed: While the COVID-19 pandemic has slowed demand for our products, we do not expect a material adverse impact to the carrying value of our inventory.
−Removed: If we experience further slowness in demand or if the lower level of demand lasts significantly longer than we anticipate, our inventory may be subject to valuation adjustments.
−Removed: Administrative Continuity and Reporting Systems
−Removed: We have modified our workforce policies, procedures and capabilities for most of our administrative personnel to work remotely, including our financial reporting personnel.
−Removed: This remote work arrangement is working as intended and has not had any adverse effect on our ability to maintain financial operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
−Removed: Business Continuity Plans
−Removed: As the COVID-19 pandemic continues to drive global uncertainty, we remain focused on protecting the safety of our employees, continuing to serve our customers with the highest quality product and repair services, and on upholding the strength of the business.
+Added: Our results of operations in fiscal 2021 continued to reflect the adverse impact from the COVID-19 global pandemic.
+Added: 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.
−Removed: We implemented virus prevention protocols consistent with guidelines issued by the U.S.
−Removed: Centers for Disease Control and Prevention, and mandated remote working where practicable.
−Removed: We do not anticipate any material expenditures or resource constraints in supporting our operations at this time.
−Removed: Impact on Supply Chain
−Removed: Major customers and suppliers of our Fleet, Federal and Defense, and Aviation segments remain open and continue to operate.
−Removed: Our Fleet segment customers provide essential services, and we, along with our suppliers, play a key role in keeping truck fleets operable.
−Removed: Our Federal and Defense segment customers continue their mission critical essential services.
−Removed: Our Aviation segment customers continue to operate, albeit at lower rates.
−Removed: While the overall economic downturn may cause some slowness in every industry, we do not anticipate any parts availability concerns, disruptions in our supply of materials or resources, or an adverse impact on our procurement capabilities or product costs.
−Removed: Health and Safety
−Removed: The health and safety of our employees, customers and communities are of primary concern.
−Removed: We have taken significant steps to protect our workforce including but not limited to, working remotely.
−Removed: For our locations with an active on-site workforce, we implemented virus prevention protocols consistent with guidelines issued by the U.S.
−Removed: Centers for Disease Control and Prevention and are following local ordinances and guidance.
−Removed: We have taken steps at our facilities to ensure additional employee safety, including implementing separate operational shifts, strict social distancing requirements, providing personal protective equipment and stringent requirements for cleaning and sanitizing at our work sites.
−Removed: We do not anticipate our operations being materially impacted by any constraints or other impacts on our human capital resources and productivity.
−Removed: In the second quarter of 2020, we implemented a cost reduction plan which included a reduction in workforce and reduced approximately $13 million in expenses on an annualized basis.
−Removed: Travel Restrictions
−Removed: Travel restrictions and border closures may limit the manner in which our sales and support staff service our customers.
−Removed: We do not anticipate this will have a material impact on our ability to continue to operate.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.
+Added: 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.
+Added: We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic;
+Added: 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.
+Added: 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.
+Added: 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.
Business Trends
1 unchanged sentence
Aviation Segment
−Removed: The COVID-19 pandemic caused a reduction in global demand for air travel and decreased revenue passenger miles, which had an adverse impact on demand for our Aviation products and services beginning in the second quarter of 2020.
−Removed: Due to the uncertainty in the travel industry associated with the COVID-19 pandemic, we expect decreased demand to continue into the first half of 2021.
−Removed: Revenue in our non-divested Aviation businesses for the fourth quarter of 2020 decreased approximately 26% from the fourth quarter of 2019.
−Removed: Despite the year over year decline, we believe that the second quarter of 2020 represented the bottom of the revenue decline, as revenue in our non-divested Aviation businesses for the third and fourth quarters of 2020 have increased sequentially since the second quarter of 2020.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
−Removed: In the second quarter of 2020, we sold all of the inventory assets of our CT Aerospace subsidiary, a business offering turboprop engine and engine parts sales.
−Removed: We will no longer offer these services, focusing instead on higher growth component and accessory repair and parts distribution.
−Removed: We expect that the current disruption in market conditions will result in strategic opportunities for near and long term growth.
−Removed: We intend to pursue these opportunities, which may require future investment.
+Added: 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.
+Added: We no longer offer these services, focusing instead on higher-growth component and accessory repair and parts distribution.
+Added: Our Aviation segment pursued multiple opportunities prioritizing strong, efficient future revenue growth and expanding our geographic footprint.
+Added: 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.
+Added: We continue to enhance key strategic relationships through extensions to our existing distribution agreements.
+Added: 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.
+Added: Our new development initiatives allow us to expand our repair capabilities to service additional engine accessory exchange units.
+Added: 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.
+Added: 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.
Fleet Segment
−Removed: Our Fleet segment continues to focus on both its core USPS and DoD customer base and commercial customer diversification.
−Removed: We are expanding our presence 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 to new commercial customers.
−Removed: Commercial customer revenue continues to see a strong growth trend, increasing more than 80% during the fourth quarter of 2020 compared to the same period in 2019, driven by a 185% increase in e-commerce fulfillment revenues.
−Removed: We believe the COVID-19 pandemic is likely 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 has remained consistent.
+Added: 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.
+Added: Commercial customer revenue continues to see a strong growth trend, increasing 72% in 2021 compared to the prior year.
+Added: We anticipate continued growth of this service offering going forward as we continue to expand to support further commercial market demand.
+Added: In 2021, commercial revenues were 32% of total Fleet segment revenue compared to 10% in 2019, demonstrating the continued success of our revenue diversification strategy.
+Added: 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.
+Added: 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.
Federal and Defense Segment
−Removed: We entered 2020 with a focus on redefining VSE in the federal marketplace, investing in business development, growing our capability and product offerings, and broadening our range of new business targets to build our contract backlog and expand our markets and offerings.
−Removed: The anticipated revenue decline experienced by this segment in 2020 is primarily attributable to the expiration of a large U.S.
−Removed: Army contract in January 2020.
−Removed: We expect that our refocused business development efforts in 2020
−Removed: will produce revenue growth in subsequent years.
−Removed: We expect the COVID-19 pandemic to have a limited adverse impact on revenues for this segment, as the U.S.
+Added: 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.
+Added: Strong revenue performance in our U.S.
+Added: Department of Justice program and new revenues from the U.S.
+Added: 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.
+Added: Army work due to program completions.
+Added: We continuously strive to strengthen our portfolio of services to meet the current and future needs of our customers.
+Added: 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.
+Added: 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.
2 unchanged sentences
Revenues are derived from the delivery of products and from professional and technical services performed through various ordering agreements and contract agreements.
+Added: 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.
−Removed: Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers.
Costs and Operating Expenses
−Removed: Costs and operating expenses consist primarily of cost of inventory and delivery of our products sold;
−Removed: direct costs, including labor, material, and supplies used in the performance of our contract work;
−Removed: indirect costs associated with our direct contract costs;
−Removed: sales, general, and administrative expenses associated with our operating segments and corporate management;
−Removed: and certain costs and charges arising from nonrecurring events outside the ordinary course of business.
−Removed: These costs will generally increase or decrease in conjunction with our level of products sold or contract work performed.
+Added: 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.
+Added: 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.
+Added: 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.
1 unchanged sentence
Segment results also include expense for an allocation of corporate management costs.
−Removed: We reduced controllable costs during 2020 in line with the anticipated decrease in demand resulting from the COVID-19 pandemic.
Bookings and Funded Backlog
+Added: Our funded backlog represents the estimated remaining value of work to be performed under firm contracts.
+Added: Bookings for our Aviation and Fleet segments occur at the time of sale.
+Added: Accordingly, our Aviation and Fleet segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues.
Revenues for federal government contract work performed by our Federal and Defense segment depend on contract funding ("bookings”), and bookings generally occur when contract funding documentation is received.
1 unchanged sentence
While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.
−Removed: For the year ended December 31, 2020, Federal and Defense segment bookings increased 18% year-over-year to $270 million, while total funded backlog declined 14% year-over-year to $183 million.
−Removed: The decline in funded backlog was primarily attributable to the completion of certain DoD contracts in 2020.
−Removed: The current management team is focused on revitalizing this business, with an emphasis on growing backlog to promote future revenue growth.
+Added: 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.
+Added: Delays in this process may temporarily diminish the availability of funds for ongoing and planned work.
+Added: In addition to funded backlog levels, we have contract ceiling amounts available for use on multiple award, indefinite delivery, indefinite quantity contracts (IDIQ) with DoD and federal civilian agencies.
+Added: 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.
+Added: Frequently, these task orders are competitively awarded.
+Added: Additionally, these task orders must be funded by the procuring agencies before we can perform work and begin generating revenues.
+Added: 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):
3 unchanged sentences
Funded Backlog $ 185 $ 183 $ 213
+Added: 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.
+Added: 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.
+Added: The effect of this reduced backlog by $36 million as of December 31, 2021.
Critical Accounting Policies, Estimates and Judgments
−Removed: Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which require us to make estimates and assumptions.
+Added: Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S.
+Added: GAAP"), which require us to make estimates and assumptions.
Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements.
The development and selection of these critical accounting policies have been determined by our management.
−Removed: We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.
−Removed: Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties
−Removed: could choose different assumptions and reach different conclusions.
+Added: Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties could choose different assumptions and reach different conclusions.
We consider our policies relating to the following matters to be critical accounting policies.
13 unchanged sentences
Sales returns and allowances for vehicle parts are not significant.
−Removed: Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers.
+Added: Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services.
Our Aviation segment recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped.
7 unchanged sentences
Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned.
−Removed: Variable consideration, typically in the form of award fees, is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not occur, when there is a basis to reasonably estimate the amount of the fee.
+Added: Variable consideration is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not
+Added: 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.
10 unchanged sentences
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.
−Removed: A substantial portion of contract and administrative costs are subject to audit by the Defense Contract Audit Agency.
+Added: 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.
+Added: Inventory Valuation
+Added: Inventories are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method.
+Added: Inventories for our Fleet segment consist primarily of vehicle replacement parts, and also include related purchasing, storage and handling costs.
+Added: Inventories for our Aviation segment consist primarily of aftermarket parts for distribution, and general aviation engine accessories and parts, and also include related purchasing, overhaul labor, storage and handling costs.
+Added: We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.
+Added: These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
Business Combinations
10 unchanged sentences
As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach.
−Removed: Under this approach, a set of potential future subsidiary earnings is estimated based on various revenue growth rate assumptions for each scenario.
+Added: 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.
4 unchanged sentences
We perform an annual review of goodwill for impairment during the fourth quarter and whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable.
+Added: The goodwill impairment test is performed at the reporting unit level.
+Added: We estimate and compare the fair value of each reporting unit to its respective carrying value including goodwill.
+Added: If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit’s fair value and the reporting unit’s carrying value.
+Added: Determining the fair value of a reporting unit requires the exercise of significant management judgments and the use of estimates and assumptions.
We estimate the fair value of our reporting units using a weighting of fair values derived from the income approach and market approach.
2 unchanged sentences
The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows.
−Removed: In the first quarter of 2020, despite the excess fair value identified in our 2019 impairment assessment, market conditions as a result of the COVID-19 pandemic resulted in a significant decline in our market capitalization as well as an overall stock market decline amid market volatility, triggering the need for an interim goodwill impairment test.
−Removed: We performed an interim impairment analysis as of March 31, 2020, utilizing a qualitative approach for our reporting units.
−Removed: Under this approach, we reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, which included the duration and extent of the impact to our business from the COVID-19 pandemic.
−Removed: We concluded it was more likely than not that the fair value exceeded the carrying value of our reporting units with the exception of our VSE Aviation reporting unit, which required a quantitative impairment test.
−Removed: Under the income approach, the fair value of our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate discount rate.
−Removed: We used our updated forecasts which considered recent events to estimate future cash flows.
−Removed: Our forecasts assumed containment of the COVID-19 pandemic to be achieved by mid-2020 with a gradual increase in travel demand beginning mid-to-late 2020 and into 2021, with substantial recovery thereafter.
−Removed: Based on our assessment, it was determined that the fair value of the VSE Aviation reporting unit approximated its carrying value and no impairment charge was required.
−Removed: Given the continued presence and impact of the COVID-19 pandemic on the global economy, we performed an interim impairment analysis in the second quarter of 2020 utilizing a quantitative assessment approach for all reporting units.
−Removed: Based on our quantitative impairment assessment as of June 1, 2020, we determined that the fair value of our reporting units, with the exception of our VSE Aviation reporting unit, significantly exceeded their carrying value and no impairment charge was required.
−Removed: The estimated fair value of our VSE Aviation reporting unit was determined to be below its carrying value.
−Removed: The key assumptions used to determine the fair value of the VSE Aviation reporting unit were:
−Removed: (a) expected cash flows with a compounded revenue growth rate of approximately 6% for a period of seven years;
−Removed: (b) long-term growth rate of 3% in the terminal year;
−Removed: and (c) a discount rate of 13.5%.
−Removed: The discount rate was based on a weighted average cost of capital adjusted for relevant risks of the reporting unit's future cash flow assumptions, taking into consideration the risks due to the uncertainty surrounding the effects of the COVID-19 pandemic on our operations.
−Removed: The internal forecasts used to estimate future cash flows in the quantitative analysis for our VSE Aviation reporting unit projected lower forecasted revenues and operating results than those used in the first quarter interim analysis.
−Removed: The decline in revenue projections was due to lower demand for the reporting unit's products and services, which was impacted by reduced global air travel and decreased passenger miles caused by the COVID-19 pandemic.
−Removed: The lower projections also considered updated assumptions regarding the uncertainty surrounding the timing and speed at which recovery from the COVID-19 pandemic could occur.
−Removed: The updated forecasts assumed suppressed demand to continue throughout 2020 and into 2021, with a slower and more gradual recovery thereafter.
−Removed: These lower operating results and cash flows from the reductions in revenue, resulted in a substantial decline in the fair value of the VSE Aviation reporting unit.
−Removed: As a result, we recognized an impairment charge in the second quarter of 2020 of $30.9 million, which is the amount by which the carrying amount exceeded the reporting unit's fair value.
−Removed: In the fourth quarter of 2020, we performed our annual goodwill analysis, electing to perform a qualitative assessment for each of our reporting units.
−Removed: In performing this assessment, we reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve, financial forecast information for each reporting unit, and recent performance of the Company's share price.
−Removed: Our qualitative assessment determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value and therefore a quantitative analysis was not necessary.
−Removed: We will continue to closely monitor the operational performance of these reporting units as they relate to goodwill impairment.
−Removed: Our VSE Aviation reporting unit had approximately $144 million of remaining goodwill as of December 31, 2020.
−Removed: The remaining goodwill balance of this reporting unit continues to be at risk for future impairment due to the uncertainty surrounding the macroeconomic factors impacting this reporting unit.
−Removed: A sustained downturn, significantly extended recovery, a change in long-term operating growth, or negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods.
−Removed: We also review the recoverability of our long-lived assets with finite lives when an indicator of impairment exists.
−Removed: For the same reasons discussed above, we assessed the recoverability of the long-lived assets with finite lives.
−Removed: Based on our analysis of estimated undiscounted future cash flows expected to result from the use of these long-lived assets with finite lives, we determined that their carrying values were recoverable.
−Removed: As of December 31, 2020, we had no intangible assets with indefinite lives and we had an aggregate of approximately $238 million of goodwill associated with our acquisitions.
+Added: Under the market approach, we estimate the fair value of a reporting unit based on multiples of earnings derived from observable market data of comparable public companies.
+Added: We evaluate companies within our industry that have operations with observable and comparable economic characteristics and are similar in nature, scope and size to the reporting unit being compared.
+Added: We analyze historical acquisitions in our industry to estimate a control premium that we incorporate into the fair value estimate of a reporting unit under the market approach.
+Added: The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill.
+Added: There are no significant allocations of amounts held at the Corporate level to the reporting units.
+Added: In the fourth quarter of 2021, we performed our annual goodwill test for each of our reporting units.
+Added: Based on our impairment test, we determined there was no impairment of our goodwill.
+Added: The fair value of each of our reporting units as of December 31, 2021, exceeded its carrying value.
+Added: 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.
+Added: Based on the assessment, our VSE Aviation reporting unit was determined to be impaired and a $30.9 million impairment charge was recognized.
+Added: Based on our annual goodwill impairment test performed in the fourth quarter of 2020, for which a qualitative assessment approach was utilized, it was determined that it was more likely than not that the fair value of our reporting units exceeded their carrying value, and no additional impairment was recognized.
+Added: Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.
+Added: Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
−Removed: This method also requires the recognition of future tax benefits, such as net operating and capital loss carryforwards, to the extent that realization of such benefits is more likely than not.
+Added: This method also requires the recognition of future tax benefits, such as net operating loss and capital loss carryforwards, to the extent that realization of such benefits is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
15 unchanged sentences
Goodwill and intangible asset impairment — — (33,734) (5.1) —
−Removed: Gain on sale of contract — — — — 1,700 0.2
Operating income 21,520 2.9 13,923 2.2 60,257 8.0
2 unchanged sentences
Provision for income taxes 1,485 0.2 5,598 0.8 9,403 1.3
−Removed: Net (loss) income $ (5,171) (0.6) $ 37,024 4.9 $ 35,080 5.0
+Added: Net income (loss) $ 7,966 1.1 $ (5,171) (0.6) $ 37,024 4.9
Year Ended 2021 Compared to Year Ended 2020
−Removed: Our revenues decreased by approximately $91 million or 12%% for the year ended December 31, 2020 as compared to the prior year.
−Removed: The change in revenues for this period resulted from decreases in our Aviation segment and Federal and Defense segment revenues of approximately $59 million and $59 million respectively, and an increase in our Fleet segment revenues of approximately $28 million.
+Added: Our revenues increased $89.2 million or 13.5% for the year ended December 31, 2021 as compared to the prior year.
+Added: 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
−Removed: Our costs and operating expenses decreased approximately $85 million or 12% in 2020 as compared to 2019.
+Added: 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.
−Removed: Costs and operating expenses for 2020 included an expense reduction of approximately $5.0 million for an adjustment to our earn-out obligation, 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.
−Removed: Costs and expenses for 2019 included expenses of approximately $2.3 million for acquisition related and executive transition costs.
−Removed: Loss on Sale of a Business Entity and Certain Assets
−Removed: Loss on sale of a business entity and certain assets of $8.2 million is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of
−Removed: 2020, plus the difference between the carrying value on our books of our CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.
−Removed: Gain on Sale of Property
−Removed: Gain on sale of property of $1.1 million is comprised the sale of a Miami, Florida real estate holding during the first quarter of 2020.
−Removed: Goodwill and Intangible Asset Impairment
−Removed: Goodwill and intangible asset impairment of $33.7 million is comprised of a charge to write down the carrying value of our Aviation businesses in the second quarter of 2020 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 in the second quarter of 2020 that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.
+Added: See "Segment Operating Results" for a breakdown of our results of operations by segment.
+Added: 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.
+Added: The inventory reserve increase was primarily due excess quantities of inventory at levels higher than our updated forecasts of future demand.
+Added: 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
−Removed: Our operating income decreased approximately $46.3 million or 76.9% for 2020 as compared to 2019.
−Removed: Operating income decreased approximately $53.0 million for our Aviation segment and approximately $3.2 million for our Fleet segment, and increased approximately $8.0 million for our Federal and Defense segment.
−Removed: The decrease in the operating income for our Aviation segment was primarily due to a $33.7 million goodwill and intangible asset impairment charge and a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory.
−Removed: Operating income for 2020 increased approximately $5.0 million for an adjustment to our earn-out obligation and $1.1 million for a gain on the sale of certain real estate holdings, and decreased approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand.
−Removed: Operating income for 2019 decreased approximately $2.3 million for acquisition related and executive transition costs.
+Added: Our operating income increased $7.6 million or 54.6% in 2021 as compared to the prior year.
+Added: 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.
+Added: 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.
+Added: See "Segment Operating Results" for a breakdown of our results of operations by segment.
Interest Expense
−Removed: Interest expense decreased approximately $334 thousand in 2020 as compared to 2019 primarily due to a reduction in bank borrowing and lower average interest rates.
+Added: 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.
−Removed: The increase in the effective tax rate for 2020 compared to 2019 primarily results from:
−Removed: (1) significantly lower pre-tax book income in the current year, (2) approximately $16.4 million of our goodwill impairment loss that is non-deductible for income tax purposes, and (3) a full valuation allowance established 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.
+Added: The lower effective tax rate for 2021 compared to 2020 primarily resulted from:
+Added: (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.
3 unchanged sentences
Aviation Segment Results
−Removed: The results of operations for our Aviation segment are (in thousands):
+Added: The results of operations for our Aviation segment are as follows (in thousands):
Years ended December 31,
6 unchanged sentences
Operating (loss) income $ (14,373) (5.8) $ (35,513) (21.5) $ 17,901 8.0
−Removed: Revenues for our Aviation segment decreased approximately $59 million or 26% for 2020 as compared to the prior year.
−Removed: Distribution revenues decreased approximately $23 million and repair revenues decreased approximately $36 million.
−Removed: The revenue declines are primarily attributable to the impact of the COVID-19 pandemic on the broader aviation markets that has lowered demand from our Aviation customers and the divestiture of Prime Turbines in February 2020 and the sale of all of CT Aerospace inventory in June 2020.
−Removed: Revenues for the divested businesses were approximately $8.9 million for 2020 compared to approximately $38 million for 2019.
−Removed: Costs and operating expenses decreased approximately $47 million or 23% for 2020 compared to 2019 due to decreased demand for our products and services, as a result of the COVID-19 pandemic, cost reduction actions implemented in response to the reduction in demand, and the elimination of costs and expenses associated with our divested businesses.
−Removed: Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions, allocated corporate costs, and valuation adjustments to accrued earn-out obligations associated with acquisitions.
+Added: Revenues for our Aviation segment increased $83 million or 50% in 2021 as compared to the prior year.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
−Removed: Valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximately $5.0 million for 2020 and increased costs and operating expenses approximately $1.9 million for 2019.
−Removed: Loss on sale of a business entity and certain assets of $8.2 million for 2020 is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of 2020, plus the difference between the carrying value on our books of CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.
−Removed: Gain on sale of property for 2020 is comprised of approximately $1.1 million associated with the sale of a Miami, Florida real estate holding.
−Removed: The goodwill and intangible asset impairment of $33.7 million for 2020 is 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.
−Removed: We had an operating loss of approximately $35.5 million in 2020 compared to operating income of approximately $17.9 million in 2019, a decrease of approximately $53.4 million or 298%.
−Removed: The primary components of the decrease were a $33.7 million goodwill and intangible asset impairment charge, a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory, non-recurring expenses of approximately $1.1 million for inventory valuation adjustments and other closing costs related to the relocation of our German facility operations, and a decline in profits for our continuing businesses due to a decrease in demand for our products and services associated with the COVID-19 pandemic.
−Removed: Partially offsetting the decrease was a $1.1 million gain on the sale of certain real estate holdings and $5.0 million benefit for an adjustment to our earn-out obligation in connection with the acquisition of 1st Choice Aerospace.
+Added: There was no expense for earn-out obligation valuation adjustments in 2021 compared to a reduction in expense of $5.0 million in 2020.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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
−Removed: The results of operations for our Fleet segment are (in thousands):
+Added: The results of operations for our Fleet segment are as follows (in thousands):
Years ended December 31,
3 unchanged sentences
Operating income $ 20,426 8.7 $ 26,659 11.0 $ 29,819 13.9
−Removed: Revenues for our Fleet segment increased approximately $28 million or 13% for 2020, as compared to the prior year.
−Removed: Revenues from commercial customers increased approximately $21 million or 93%, driven by growth in our e-commerce fulfillment business.
−Removed: Revenues from sales to DoD customers decreased approximately $4 million or 14%, and revenues from sales to other government customers increased approximately $11 million or 6%.
−Removed: Sales to other government customers included revenue of approximately $26.6 million for fulfillment of a non-recurring order for COVID-19 related supplies.
−Removed: Costs and operating expenses increased approximately $31 million or 16.7%, primarily due to the non-recurring order for COVID-19 related supplies.
+Added: Revenues for our Fleet segment decreased $8.6 million or 3.6% in 2021 as compared to the prior year.
+Added: 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.
+Added: 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.
+Added: 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.
−Removed: Expense for amortization of intangible assets was approximately $7.4 million for 2020 and approximately $7.9 million for 2019.
−Removed: Expense for allocated corporate costs was approximately $8.0 million for 2020 and approximately $6.2 million for 2019.
−Removed: Operating income decreased by approximately $3.2 million or 11% for 2020 as compared to the prior year, primarily due to a change in the mix of products sold, including increased commercial customer revenues and the non-recurring order for COVID-19 related supplies, which had a nominal profit margin.
+Added: Expense for amortization of intangible assets was $7.1 million for 2021 and $7.4 million for 2020.
+Added: Expense for allocated corporate costs was $8.5 million for 2021 and $8.0 million for 2020.
+Added: 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
−Removed: The results of operations for our Federal and Defense segment are (in thousands):
+Added: The results of operations for our Federal and Defense segment are as follows (in thousands):
Years ended December 31,
2 unchanged sentences
Costs and operating expenses 249,572 92.6 228,110 89.7 295,417 94.2
−Removed: Gain on sale of contract — — — — 1,700 0.5
Operating income $ 19,897 7.4 $ 26,309 10.3 $ 18,144 5.8
−Removed: Revenues for our Federal and Defense segment decreased approximately $59 million or 19% and costs and operating expenses decreased approximately $67 million or 23% for 2020, as compared to the prior year primarily due to the expiration of a large U.S.
−Removed: Army contract in January 2020 and two other U.S.
−Removed: Army contracts in the second half of 2020.
−Removed: Other changes affecting our revenues and costs and operating expenses included increased revenues from existing U.S.
−Removed: Operating income increased approximately $8.2 million or 45% for 2020 compared to the prior year.
−Removed: Revenue declines occurred in our lower margin work, resulting in minimal loss of operating income, and we have increased operating income through margin improvements primarily due to work performed under fixed price contracts.
+Added: 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.
+Added: Department of Justice program and new revenues from the U.S.
+Added: Air Force work performed by our HSS acquisition.
+Added: These increases were partially offset by declines in our U.S.
+Added: Army work due to program completions and a decline in our U.S.
+Added: 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.
−Removed: Our bank debt decreased approximately $19.3 million and our earn-out obligation in connection with the acquisition of 1st Choice Aerospace decreased approximately $36.7 million.
−Removed: We had $175 million of unused bank loan commitments as of December 31, 2020.
−Removed: In June 2020, we amended our loan agreement with our banks to provide increased financial covenant flexibility due to market volatility resulting from the COVID-19 pandemic.
+Added: Our bank debt increased $33 million, and we had $122 million of unused bank loan commitments as of December 31, 2021.
+Added: 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, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million.
Changes to other asset and liability accounts were primarily due to our earnings;
our level of business activity;
−Removed: the timing of inventory purchases, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work;
+Added: 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;
−Removed: the sale of a real estate holding in Miami, Florida;
−Removed: and the divestiture of our Prime Turbines business and sale of CT Aerospace inventory.
+Added: and our acquisition of HSS and Global Parts.
Liquidity and Capital Resources
−Removed: Cash and cash equivalents decreased by approximately $356 thousand during 2020.
−Removed: Cash provided by operating activities increased approximately $17.8 million in 2020 as compared to 2019.
−Removed: The change was attributable to a decrease of approximately $42.2 million in cash provided by net income, an increase of approximately $31.4 million in other non-cash operating activities and an increase of approximately $28.6 million due to changes in the levels of operating assets and liabilities.
−Removed: Inventories and accounts receivable represent a significant amount of our assets, and accounts payable represent a significant amount of our operating liabilities.
−Removed: Cash used related to increases in inventory was approximately $50.2 million, cash provided by decreases in receivables and unbilled receivables was approximately $27.4 million, and cash provided by increases in accounts payable and deferred compensation was approximately $3.5 million for 2020.
−Removed: The increase in our inventory levels were primarily due to purchases of inventory in connection with new program initiatives.
−Removed: A significant portion of accounts receivable and accounts payable result from the use of subcontractors to perform work on our contracts and from the purchase of materials and inventory to fulfill contract obligations and distribution agreements.
−Removed: Accordingly, 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.
+Added: Cash and cash equivalents increased by approximately $140 thousand during 2021.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
−Removed: 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 economic down-turn.
−Removed: Cash provided by investing activities was approximately $20.2 million for 2020 compared to cash used in investing activities of approximately $122.8 million for 2019.
−Removed: In 2019, approximately $113 million was used for the acquisition of 1st Choice Aerospace and in 2020, approximately $24.2 million was provided by proceeds from the divestiture of our Prime Turbines business and CT Aerospace inventory and the sale of a Miami, Florida real estate holding.
−Removed: Other cash used in investing activities consisted primarily of purchases of property and equipment.
−Removed: Cash used in financing activities was approximately $56.3 million in 2020 as compared to cash provided by financing activities of approximately $105.4 million in 2019.
−Removed: Financing activities consisted primarily of borrowing and repayment of debt, earn-out obligation payments and dividend payments.
−Removed: We paid cash dividends totaling approximately $4.0 million or $0.36 per share during 2020.
+Added: 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.
+Added: 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.
+Added: Net cash used in investing activities in 2021 related primarily to acquisitions of $53.3 million.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: Other financing activities consisted primarily of borrowing and repayment of debt and payment of dividends.
+Added: 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.
1 unchanged sentence
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.
−Removed: Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity.
−Removed: Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases.
+Added: Significant increases or decreases in
+Added: revenues and inventory, accounts receivable and accounts payable can affect our liquidity.
+Added: 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.
3 unchanged sentences
and invest in the acquisition of other companies.
−Removed: We have considered the effects of the COVID-19 pandemic on our liquidity and capital resources, and we currently do not expect a material adverse impact on our ability to meet future liquidity needs.
−Removed: See “COVID-19 Discussion-Capital, Financial Resources, Credit Losses, and Liquidity” and Item 1A, "Risk Factors" for additional details regarding the impact of COVID-19 on our liquidity and capital resources.
−Removed: As discussed in greater detail below, under the terms of our existing loan agreement, we are required to maintain certain financial covenants.
−Removed: The COVID-19 pandemic has disrupted the demand for our Aviation segment products and services and further disruption is possible.
−Removed: Accordingly, we amended our existing loan agreement with our banks in the second quarter of 2020 to provide increased financial covenant flexibility.
−Removed: Our external financing consists of a loan agreement with a bank group that was amended in June 2020 and expires in January 2023.
+Added: 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.
5 unchanged sentences
We pay an unused commitment fee and fees on letters of credit that are issued.
−Removed: We had approximately $175.5 million in revolving loan amounts outstanding and no of letters of credit outstanding as of December 31, 2020.
−Removed: We had approximately $152.0 million in revolving loan amounts outstanding and $54 thousand letters of credit outstanding as of December 31, 2019.
−Removed: 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.
+Added: 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.
+Added: 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 incremental increases is $100 million.
1 unchanged sentence
The applicable LIBOR rate has a floor of 0.50%.
−Removed: As of December 31, 2020, the LIBOR base margin was 3.00% and the base rate base margin was 1.75%.
+Added: As of December 31, 2021, the LIBOR margin was 3.25% and the base margin was 2.25%.
+Added: 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.
−Removed: The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan until February 6, 2021.
−Removed: We executed compliant interest rate hedges.
+Added: 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%.
1 unchanged sentence
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.
−Removed: We were in compliance with required ratios and other terms and conditions as of December 31, 2020.
−Removed: We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants;
−Removed: at this time, we expect that we will remain in compliance with such covenants over the next twelve months.
−Removed: In January 2021, we initiated a public offering of shares of VSE common stock pursuant to an effective shelf registration statement.
−Removed: The offering closed in February 2021 with the sale of 1,599,097 shares, including an additional 170,497 shares that were sold pursuant to the underwriters' exercise of their option to purchase additional shares resulting in net proceeds of approximately $52 million.
−Removed: We expect to use the net proceeds for general corporate purposes, which may include among other things, financing strategic acquisitions, working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.
Testing Period Maximum Total Funded Debt to EBITDA Ratio
−Removed: First Amendment Effective Date (November 26, 2019) through and including March 31, 2020 3.50 to 1.00
−Removed: From April 1, 2020 through and including September 30, 2020 4.00 to 1.00
−Removed: From October 1, 2020 through and including March 31, 2021 4.25 to 1.00
−Removed: From April 1, 2021 through and including June 30, 2021 4.00 to 1.00
+Added: From July 23, 2021 through and including December 31, 2021 4.50 to 1.00
+Added: 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
−Removed: From January 1, 2022 and thereafter 3.25 to 1.00
−Removed: We currently do not use public debt security financing.
−Removed: Contractual Obligations
−Removed: Our contractual obligations as of December 31, 2020 are (in thousands):
−Removed: Payments Due by Period
−Removed: Contractual Obligations Total Less than 1 year
−Removed: 1-3 years 4-5 years After 5 years
−Removed: Bank loan debt $ 253,461 $ 21,563 $ 231,898 $ — $ —
−Removed: Operating lease obligations 31,594 5,366 10,348 10,465 5,415
−Removed: Total $ 285,055 $ 26,929 $ 242,246 $ 10,465 $ 5,415
−Removed: Estimated cash requirements for interest on our bank loan debt are approximately $9.0 million for 2021 and $6.0 million for 2022.
+Added: From January 1, 2023 through and including March 31, 2023 3.50 to 1.00
+Added: From April 1, 2023 and thereafter 3.25 to 1.00
+Added: We were in compliance with required ratios and other terms and conditions as of December 31, 2021.
+Added: We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants;
+Added: at this time, we expect that we will remain in compliance with such covenants over the next twelve months.
+Added: Other Obligations and Commitments
+Added: See Note (8) "Debt" to our Consolidated Financial Statements for information regarding our long-term debt obligations.
+Added: 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.
+Added: The estimates included variable rate interest obligations estimated based on rates as of December 31, 2021.
+Added: The interest payments are estimated through the maturity date of our term loan.
+Added: Interest payments under our revolver loans have been excluded because a reasonable estimate of timing and amount of cash out flows cannot be determined.
+Added: 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.
+Added: See Note (16) "Fair Value Measurements" to our Consolidated Financial Statements for information pertaining to contingent consideration obligations.
Inflation and Pricing
−Removed: 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 normally considered reimbursable at cost.
−Removed: Our property and equipment consist principally of land, buildings and improvements, shop and warehouse equipment, computer systems equipment, and furniture and fixtures.
−Removed: We do not expect the overall impact of inflation on replacement costs of our property and equipment to be material to our future results of operations or financial condition.
+Added: 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.
+Added: 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.
+Added: 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.
+Added: Given broader inflation in the economy, we are monitoring the risk inflation presents to active and future contracts.
Off-Balance Sheet Arrangements
1 unchanged sentence
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.