What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-11 compared with 2021-03-05 · 335 added, 460 removed, 579 unchanged (58% of the section changed)

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Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of (Loss) Income for the years ended December 31, 20 20 , 201 9 and 201 8

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 20 2 0 , 201 9 and 201 8

Consolidated Statements of Income (Loss) for the years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2021, 2020 and 2019

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of VSE Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of (loss) income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of VSE Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule included under Item 15.2 (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 10, 2022 expressed an unqualified opinion.

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We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition based on the percentage of completion method

For the year ended December 31, 2020, the Company’s Federal and Defense Segment (“FDS”) recognized $254.4 million in contract revenue, of which $138.4 million was recognized from services provided on firm-fixed price contract types.

As more fully described in Note 1 to the consolidated financial statements, the Company’s FDS segment recognizes revenue over time as control transfers to a customer, based on the extent of progress towards satisfaction of the related performance obligation.

The selection of the method used to measure progress requires judgment and is dependent on the contract type selected by the customer during contract negotiation and the nature of the services and solutions to be provided.

For performance obligations requiring the delivery of a service for a fixed price, the Company’s FDS segment uses the ratio of actual costs incurred to total estimated costs, provided that costs incurred (an input model) represents a reasonable measure of progress toward the satisfaction of a performance obligation, in order to estimate the portion of total transaction price earned.

We identified the initial development and subsequent changes related to estimates-at-completion as a critical audit matter.

The principal considerations for our determination that the use of estimates-at-completion in recognizing revenue is a critical audit matter are the judgments involved in the initial creation and subsequent updates to the Company’s FDS segment estimates-at-completion and related profit recognized which required challenging and significant auditor judgment in the execution of our procedures.

Inputs and assumptions requiring significant management judgment included anticipated direct labor, subcontract labor, and other direct costs required to deliver on unfinished performance obligations.

Our audit procedures in response to this matter included the following, among others.

• We tested the design and operating effectiveness of controls relating to the initial drafting of estimates-at-completion and the ongoing monitoring of changes in estimates specific to the estimates-at-completion.

• We tested management’s process for developing, revising and applying estimates-at-completion to a sample of contracts.

Our testing included evaluating key inputs and assumptions by comparing them to underlying supporting documentation or other corroborating evidence, such as subcontractor agreements, historical hours for similar service offerings, or other contractual documentation that supports estimated costs.

• We obtained subsequent event information on a contract-by-contract basis and performed a “look-back” analysis of contracts completed during the year ended December 31, 2020 and compared the final gross margin to the estimated margins throughout the contract life cycle to assess the Company’s FDS segment’s ability to develop reliable estimates.

Goodwill Impairment Assessment – VSE Aviation Reporting Unit

At December 31, 2020, the Company’s Aviation reporting unit had a goodwill balance of $144.1 million which represented approximately 19% of total assets.

As more fully described in Note 1 and Note 7 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level using either a qualitative or quantitative approach.

As part of the quantitative approach, the Company determines the fair value of the reporting unit through a combination of an income-based approach using a discounted cash flow method and market-based valuation methodologies.

An impairment charge will be recognized to the extent that the fair value of the reporting unit is less than its carrying value.

The principal considerations for our determination that performing procedures relating to the quantitative goodwill impairment assessments is a critical audit matter are the significant judgements by management when developing the fair value of the VSE Aviation Reporting Unit.

In particular, the fair value estimate was sensitive to significant assumptions, such as revenue growth rates, operating margins, cash flows, terminal value, discount rates, weighted average costs of capital, and identification of peer group and related market multiples which are affected by expectations about future market or economic conditions and expected future operating results of the Aviation segment business.

Our audit procedures in response to this matter included the following, among others:

• We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s goodwill impairment process.

This included controls over management’s identification and evaluation of triggering events that necessitate the need for an interim goodwill impairment assessment as well as management’s review of the valuation model and significant assumptions underlying the fair value determination, as described above.

• We obtained management’s analysis of triggering events occurring each quarter of fiscal year 2020 and tested the completeness of such evaluation by comparing such events to current economic data and trends and the Company’s press releases specific to major changes in the business.

• We assessed the valuation models used and tested the significant assumptions and the underlying data used by the Company in its analysis.

We compared the revenue and operating margin projections used by management to recent forecasts, current backlog and project estimates, and the Company’s historical results.

We assessed the historical accuracy of management’s revenue and operating margin projections.

We compared the growth rates to current industry and economic trends and other guideline companies within the same industry.

• We reviewed the reconciliation of the fair value of all reporting units to the market capitalization of the Company, including assessing the implied control premium.

We involved our valuation specialists to assist in reviewing the valuation methodology and tested the terminal values and weighted average cost of capital, including company specific risk premiums for the reporting unit.

Our valuation specialist also reviewed the multiples and underlying calculations utilized in the market approach valuations.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of the write-down of Aviation inventories

As described further in Note 1 to the consolidated financial statements, the Company’s inventory balance as of December 31, 2021 was $322.7 million.

The Company records inventory within its Aviation Segment at the lower of cost or net realizable value.

The write-down of slow moving inventory is recorded for excess or obsolete inventory based on certain inputs and assumptions used to determine the net realizable value.

These assumptions include the number of days transpiring from the date the inventory was originally received and the historical sales of the inventory to determine recovery rates.

Other inputs include current and expected future aviation usage trends, replacement values, expected future demand, and historical scrap recovery rates.

The principal considerations for our determination that the assessment of the write-down of inventories within the Aviation Segment is a critical audit matter are that the inputs and assumptions used in determining the write-down are subject to significant management judgement.

The inputs and assumptions used in determining the write-down of slow moving inventory include the historical recovery rates, which are based on the number of dates transpiring from the date the inventory was originally received, the historical sales of inventory, the identification of specific inventories associated with aircraft with declining usage trends and the impact of recently executed distribution agreements.

The assessment of these inputs required a high degree of auditor judgement in evaluating the future customer demand for slow moving inventory.

Our audit procedures related to the write-down of inventory included the following procedures, among others:

• We tested the design and operating effectiveness of controls relating to the Company’s inventory process, including controls over the Company’s evaluation of the impact on the estimate of net realizable value based on the number of days transpiring from the date the inventory was original received, historical sales of the inventory, specific inventories identified to relate to aircraft with declining usage and the approval and evaluation of new distribution agreements.

• We assessed that the recovery rates applied to slow moving inventory were consistent with forecasted demand.

• We assessed the completeness of management's identification of specific inventory with declining usage trends by evaluating external industry information.

/s/ GRANT THORNTON LLP

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March 10, 2022

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of VSE Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity and cash flows of VSE Corporation and Subsidiaries (the Company) for the year ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2018, in conformity with U.S.

generally accepted accounting principles .

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We served as the Company’s auditor from 2002 to 2019.

Tysons, Virginia

March 6, 2019

VSE Corporation and Subsidiaries

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Unbilled receivables, net 31,882 22,358

Inventories, net 253,422 218,627

Inventories 322,702 253,422

Other current assets 32,304 23,328

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Accounts payable 115,064 72,682

Current portion of earn-out obligation — 31,700

Accrued expenses and other current liabilities 49,465 45,172

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Long-term operating lease obligations 27,168 22,815

Earn-out obligation, less current portion — 5,000

Deferred tax liabilities 9,108 14,897

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VSE Corporation and Subsidiaries

Consolidated Statements of (Loss) Income

Consolidated Statements of Income (Loss)

(in thousands, except share and per share amounts)

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

Gain on sale of contract — — 1,700

Operating income 21,520 13,923 60,257

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Provision for income taxes 1,485 5,598 9,403

Net (loss) income $ ( 5,171 ) $ 37,024 $ 35,080

Basic (loss) earnings per share $ ( 0.47 ) $ 3.38 $ 3.23

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

Basic earnings (loss) per share $ 0.63 $ ( 0.47 ) $ 3.38

Basic weighted average shares outstanding 12,551,459 11,034,256 10,957,750

Diluted (loss) earnings per share $ ( 0.47 ) $ 3.35 $ 3.21

Diluted earnings (loss) per share $ 0.63 $ ( 0.47 ) $ 3.35

Diluted weighted average shares outstanding 12,632,874 11,034,256 11,044,731

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VSE Corporation and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

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2021 2020 2019

Net (loss) income $ ( 5,171 ) $ 37,024 $ 35,080

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

Change in fair value of interest rate swap agreements, net of tax 1,027 ( 98 ) ( 1,251 )

Other comprehensive loss, net of tax ( 98 ) ( 1,251 ) ( 35 )

Comprehensive (loss) income $ ( 5,269 ) $ 35,773 $ 35,045

Other comprehensive income (loss), net of tax 1,027 ( 98 ) ( 1,251 )

Comprehensive income (loss) $ 8,993 $ ( 5,269 ) $ 35,773

The accompanying notes are an integral part of these financial statements.

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Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss) Total

Earnings Accumulated Other Comprehensive Income (Loss) Total

Stockholders'

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Balance at December 31, 2019 10,970 549 29,411 334,246 ( 1,105 ) 363,101

Cumulative effect of adoption of ASU 2016-02 , net of tax

— — — ( 9 ) — ( 9 )

Net income — — — 37,024 — 37,024

Net loss — — — ( 5,171 ) — ( 5,171 )

Stock-based compensation 85 4 2,459 — — 2,463

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Balance at December 31, 2020 11,055 553 31,870 325,097 ( 1,203 ) 356,317

Net loss — — — ( 5,171 ) — ( 5,171 )

Issuance of common stock 1,599 80 51,937 — — 52,017

Net income — — — 7,966 — 7,966

Stock-based compensation 73 3 4,708 — — 4,711

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Cash flows from operating activities:

Net (loss) income $ ( 5,171 ) $ 37,024 $ 35,080

Adjustments to reconcile net income to net cash provided by operating

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

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 25,600 24,135 26,927

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Stock-based compensation 3,932 2,858 3,264

Provision for inventory 24,420 — —

Loss on sale of a business entity and certain assets — 8,214 —

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Goodwill and intangible asset impairment — 33,734 —

Gain on sale of contract — — ( 1,700 )

Earn-out obligation fair value adjustment — ( 4,999 ) 1,900

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Accounts payable and deferred compensation 33,210 3,503 7,725

Accrued expenses and other current liabilities ( 1,183 ) 1,207 ( 2,515 )

Long-term lease obligations — — ( 1,668 )

Other long-term liabilities 83 — —

Net cash provided by operating activities 35,761 17,994 18,855

Accrued expenses and other current and noncurrent liabilities 913 ( 1,100 ) 1,207

Net cash (used in) provided by operating activities ( 17,602 ) 35,761 17,994

Cash flows from investing activities:

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Proceeds from the sale of property and equipment 68 2,875 4

Proceeds from payments on notes receivable 2,906 1,856 —

Proceeds from sale of a business entity and certain assets — 19,915 —

Proceeds from the sale of contract — — 1,700

Earn-out obligation payments ( 750 ) — —

Cash paid for acquisitions, net of cash acquired ( 53,336 ) — ( 113,181 )

Net cash provided by (used in) investing activities 20,219 ( 122,807 ) ( 1,295 )

Net cash (used in) provided by investing activities ( 61,632 ) 20,219 ( 122,807 )

Cash flows from financing activities:

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Repayments on loan agreement ( 458,294 ) ( 452,338 ) ( 642,193 )

Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs 52,017 — —

Earn-out obligation payments — ( 31,701 ) —

Payment of debt financing costs ( 808 ) ( 636 ) —

Payments on financing lease obligations — — ( 1,452 )

Payment of taxes for equity transactions ( 681 ) ( 690 ) ( 955 )

Dividends paid ( 4,427 ) ( 3,970 ) ( 3,726 )

Net cash (used in) provided by financing activities ( 56,336 ) 105,385 ( 18,022 )

Net (decrease) increase in cash and cash equivalents ( 356 ) 572 ( 462 )

Net cash provided by (used in) financing activities 79,374 ( 56,336 ) 105,385

Net increase (decrease) in cash and cash equivalents 140 ( 356 ) 572

Cash and cash equivalents at beginning of year 378 734 162

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Notes receivable from the sale of a business entity and certain assets $ — $ 12,852 $ —

Earn-out obligation in connection with acquisitions $ 1,250 $ — $ 36,700

The accompanying notes are an integral part of these financial statements.

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December 31, 2021

(1) Nature of Business and Significant Accounting Policies

(1) Nature of Business and Summary of Significant Accounting Policies

Nature of Business

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

Principles of Consolidation

The consolidated financial statements consist of the operations of our parent company, our wholly owned subsidiaries, Energetics Incorporated, Akimeka, LLC, Wheeler Fleet Solutions, Co.

and VSE Aviation, Inc., a Delaware corporation ("VSE Aviation"), and our unincorporated divisions.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements consist of the operations of our parent company, our wholly owned subsidiaries, VSE Aviation, Inc., a Delaware corporation ("VSE Aviation"), Energetics Incorporated, Akimeka, LLC, Wheeler Fleet Solutions, Co., and our unincorporated divisions.

All intercompany transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("U.S.

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Actual results could differ from those estimates.

Significant estimates affecting the financial statements include accruals for contract disallowance reserves, costs to complete on fixed price contracts, and recoverability of goodwill and intangible assets.

Coronavirus (COVID-19) Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus disease, known as COVID-19, as a global pandemic.

The pandemic and the containment and mitigation efforts by governments to attempt to control its spread created uncertainties and disruptions in the economic and financial markets.

The pandemic triggered a decline in demand for our Aviation segment products and services beginning with the second quarter of 2020 and continuing through the end of the year.

This decrease in demand adversely impacted our operating results for 2020.

Although demand began to improve during the third quarter of 2020, demand remains below the prior year levels.

The impact of COVID-19 on us is evolving and its future effects are highly uncertain and unpredictable.

We are closely monitoring the effects and risks of COVID-19 to assess its impact on our business, financial condition and results of operations.

In April 2020, we completed a cost reduction plan which included a reduction in workforce.

We maintain a robust continuity plan to adequately respond to situations such as the COVID-19 pandemic, including a framework for remote work arrangements, in order to effectively maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.

Reclassifications

Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation, which include reclassification of products and services revenue and the renaming of our three operating segments as further described in Note (13) "Business Segments and Customer Information" and certain deferred tax reclassifications as described in Note (11) "Income Taxes." These reclassifications had no effect on the reported results of operations.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on

net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements.

The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.

We adopted ASU 2018-13 in the first quarter of 2020.

The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements.

The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted.

We adopted ASU 2018-15 in the first quarter of 2020 and applied the standard prospectively.

The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and certain other instruments, including trade receivables and contract assets.

The new standard replaces the current incurred loss model for measurement of credit losses on financial assets with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts.

The new standard is effective for reporting periods beginning after December 15, 2019.

We adopted the standard in the first quarter of 2020 using the modified-retrospective approach, which requires the standard to be applied on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective.

Upon adoption, we did not record an adjustment to opening retained earnings as of January 1, 2020 because the adoption did not have a material impact on our financial position, results of operations or cash flows.

Significant estimates affecting the financial statements include fair value measurements, inventory provisions, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.

Stock-Based Compensation

We account for share-based awards in accordance with the applicable accounting rules that require the measurement and recognition of compensation expense for all share-based payment awards based on estimated fair values, which is determined based on the closing price of our common stock on the date of grant.

Our policy is to recognize forfeitures of restricted stock as they occur.

The compensation expense included in costs and operating expenses is amortized over the requisite service period using the accelerated attribution method.

We issue stock-based awards as compensation to employees and directors.

Stock-based awards include stock-settled bonus awards, vesting stock awards and performance share awards.

We recognize stock-based compensation expense on a straight-line basis over the underlying award’s requisite service period, as measured using the award’s grant date fair value.

Our policy is to recognize forfeitures as they occur.

For performance share awards, we assess the probability of achieving the performance conditions at each reporting period end and adjust compensation expense based on the number of shares we expect to ultimately issue.

Earnings Per Share

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Shares issued during the period are weighted for the portion of the period that they were outstanding.

Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of restricted stock awards.

The antidilutive common stock equivalents excluded from the diluted per share calculation are not material.

Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards.

As a result of incurring a net loss for the year ended December 31, 2020, potential dilutive shares were excluded from diluted loss per share as the effect would have been anti-dilutive.

The antidilutive common stock equivalents excluded from the diluted per share calculation were not material.

Years Ended December 31,

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Property and Equipment

Property and equipment are recorded at cost.

Depreciation of computer equipment, furniture, other equipment is provided principally by the straight-line method over periods of three to 15 years.

Depreciation of buildings and land improvements is provided by the straight-line method over periods of approximately 15 to 20 years.

Property and equipment is recorded at cost, net of accumulated depreciation and amortization.

Depreciation and amortization is generally provided on the straight-line method over the estimated useful lives of the various assets.

Property and equipment is generally depreciated over the following estimated useful lives:

computer equipment, furniture, other equipment from three to 15 years;

and buildings and land improvements from 15 to 20 years.

Amortization of leasehold improvements is provided by the straight-line method over the lesser of their useful life or the remaining term of the lease.

We adopted a comprehensive new lease accounting standard effective January 1, 2019 using the optional modified retrospective transition method;

accordingly, the comparative information for the year ended December 31, 2018 has not been adjusted and continues to be reported under the previous lease standard.

We determine at inception whether an arrangement that provides us control over the use of an asset is a lease.

Substantially all of our leases are long-term operating leases for facilities with fixed payment terms between two and 15 years.

Payments under our lease agreements are primarily fixed payments, which are recognized as operating lease cost on a straight-line basis over the lease term.

We recognize at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term, determined using the discount rate for the lease at commencement date.

Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors.

Instead, we estimate our incremental borrowing rate based on information available at lease commencement to discount lease payments to present value.

Certain of our leases include options to extend the term of the lease or to terminate the lease.

When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments.

Our operating lease ROU assets are recorded in operating lease right-of-use assets on our accompanying consolidated balance sheet.

The current portion of operating lease liabilities are presented within accrued expenses and other current liabilities, and the non-current portion of operating lease liabilities are presented under long-term operating lease liabilities on our accompanying consolidated balance sheet.

We recognize a right-of-use ("ROU") asset and a lease liability upon commencement of our operating leases.

The initial lease liability is equal to the future fixed minimum lease payments discounted using our incremental borrowing rate, on a secured basis.

The lease term includes option renewal periods and early termination payments when it is reasonably certain that we will exercise those rights.

The initial measurement of the ROU asset is equal to the initial lease liability plus any initial indirect costs and prepayments, less any lease incentives.

We recognize lease costs on a straight-line basis over the remaining lease term, except for variable lease payments that are expensed in the period in which the obligation for those payments is incurred.

Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet.

We recognize lease expense for these leases on a straight-line basis over the term of the lease.

Concentration of Credit Risk/Fair Value of Financial Instruments

Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and trade receivables.

Our trade receivables consist of amounts due from various government clients and commercial entities.

Operating lease cost is included in costs and operating expenses on our consolidated statement of income.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist primarily of our trade receivables.

Our trade receivables consist of amounts due from various commercial entities and government clients.

We believe that concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the customer base and their dispersion across many different geographic regions.

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We maintain an allowance for credit losses based upon several factors, including historical collection experience, current aging status of the customer accounts and financial condition of our customers.

We believe that the fair market value of all financial instruments, including debt, approximate book value.

Revenue Recognition

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

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.

Variable consideration is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not occur, when there is a basis to reasonably estimate the amount of the fee.

These estimates are based on historical award experience, anticipated performance and our best judgment based on current facts and circumstances.

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Within each segment, receivables exhibit similar risk characteristics.

In determining the amount of the allowance for credit losses, we consider historical collectibility based on past due status.

We also consider current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.

In addition to the loss-rate calculations discussed above, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as concerns about a specific customer's inability to meet its financial obligation to us.

In determining the amount of the allowance for credit losses, we consider historical collectability based on past due status.

We also consider current market conditions and forecasts of future economic conditions to inform potential adjustments to historical loss data.

In addition, we also record allowance for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as concerns about a specific customer's inability to meet its financial obligation to us.

The adequacy of these allowances are assessed quarterly through consideration of factors on a collective basis where similar characteristics exist and on an individual basis.

During the year ended December 31, 2020, we increased our loss rates and increased our specific reserves primarily due to the economic disruption caused by the COVID-19 pandemic.

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method.

Inventories for our Fleet segment primarily consists of vehicle replacement parts.

Included in inventory are related purchasing, storage and handling costs.

Inventories for our Aviation segment primarily consist of aftermarket parts for distribution, and general aviation engine accessories and parts.

Included in inventory are related purchasing, overhaul labor, storage and handling costs.

Inventories for our Fleet segment consist primarily of vehicle replacement parts, and also include related purchasing, storage and handling costs.

Inventories for our Aviation segment consist primarily of aftermarket parts for distribution, and general aviation engine accessories and parts, and also include related purchasing, overhaul labor, storage and handling costs.

We periodically evaluate the carrying value of inventory, giving consideration to factors such as its physical condition, sales patterns and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

During 2021, we recorded a $ 24.4 million provision for inventory within cost and operating expenses primarily related to slow moving and excess quantities of Aviation segment inventory supporting certain international region distribution programs entered into prior to 2019.

Deferred Compensation Plans

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We maintain the underlying assets of the DSC Plan in a Rabbi Trust and changes in asset values are included in costs and operating expenses on the accompanying consolidated statements of income.

We recorded deferred compensation plan expenses of $ 433 thousand, $ 970 thousand and $ 1.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We invest the assets held by the Rabbi Trust in both corporate owned life insurance ("COLI") products and in mutual funds.

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The DSC Plan assets are included in other assets and the obligation to the participants is included in deferred compensation on the accompanying consolidated balance sheets.

Deferred compensation plan expense recorded as costs and operating expenses in the accompanying consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 was approximately $ 970 thousand, $ 1.7 million and $ 2.1 million, respectively.

Impairment of Long-Lived Assets

Long-lived assets include amortizable intangible assets and property and equipment to be held and used.

We review the carrying values of long-lived assets other than goodwill for impairment if events or changes in the facts and circumstances indicate that their carrying values may not be recoverable.

We assess impairment by comparing the estimated undiscounted future cash flows of the related asset to its carrying value.

If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying value.

For the year ended December 31, 2020, we recognized a $ 2.8 million impairment charge on the carrying value of the certain long-lived assets of a subsidiary within our Aviation segment upon completion of the sale of all of the inventory during the second quarter of 2020.

See Note (2) "Acquisition and Divestitures" and Note (7) "Goodwill and Intangible Assets" for additional details.

No impairment charges related to long-lived assets were recorded in the years ended December 31, 2019 and December 31, 2018.

Gains and losses recognized on the changes in fair value of the investments are recorded as selling, general and administrative expenses on the accompanying consolidated statements of income.

We recorded net losses of $ 626 thousand, $ 863 thousand, and $ 1.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Income taxes are accounted for under the asset and liability method.

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The carrying value of net deferred tax assets is based on assumptions regarding our ability to generate sufficient future taxable income to utilize these deferred tax assets.

We test goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

Business Combinations

We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values, with any excess recorded as goodwill.

The operating results of acquired businesses are included in our results of operations beginning as of their effective acquisition dates.

For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations.

Goodwill and Other Intangible Assets

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination.

Goodwill is not amortized, but rather tested for potential impairment annually at the beginning of the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Goodwill is tested for impairment at the reporting unit level.

A qualitative assessment can be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.

If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value using a quantitative assessment.

If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired.

If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss.

For the quantitative assessment, we estimate the fair value of each reporting unit using a combination of an income approach using a discounted cash flow ("DCF") analysis and a market-based valuation approach based on comparable public company trading values.

Determining the fair value of a reporting unit requires the exercise of significant management judgments, including the amount and timing of projected future revenues, earnings and cash flows, discount rates, long-term growth rates and comparable public company revenues and earnings multiples.

The projected results used in our quantitative assessment are based on our best estimate as of the testing date of future revenues, earnings and cash flows after considering factors such as recent operating performance, general market and industry conditions, existing and expected future contracts, changes in working capital and long-term business plans and growth initiatives.

The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill.

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

During the first and second quarter of 2020, the decline of the macroeconomic environment and the decrease in our market capitalization caused by the COVID-19 pandemic was determined to be an indicator of impairment and, based on the results of interim testing, we recognized an impairment charge of $ 30.9 million in the second quarter of 2020 related to our VSE Aviation reporting unit.

Our annual goodwill impairment analysis performed in the fourth quarter of 2020 resulted in no impairment of goodwill.

Intangible Assets

Intangible assets consist of the value of contract-related intangible assets, trade names and acquired technologies acquired in acquisitions.

We amortize intangible assets on a straight-line basis over their estimated useful lives unless their useful lives are determined to be indefinite.

The amounts we record related to acquired intangibles are determined by us considering the results of independent valuations.

Our contract-related intangibles are amortized over their estimated useful lives of approximately five to 18 years with a weighted-average life of approximately 14.2 years as of December 31, 2020.

We have six trade names that are amortized over an estimated useful life of approximately two to nine years .

We have an acquired technologies intangible asset that is amortized over an estimated useful life of 11 years.

The weighted-average life for all amortizable intangible assets is approximately 13.8 years as of December 31, 2020.

We estimate and compare the fair value of each reporting unit to its respective carrying value including goodwill.

The fair value of our reporting units is determined using a combination of the income approach and the market approach, which involves the use of estimates and assumptions, including projected future operating results and cash flows, the cost of capital, and financial measures derived from observable market data of comparable public companies.

If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit’s fair value and the reporting unit’s carrying value.

Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives.

Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Impairment of Long-Lived Assets (Excluding Goodwill)

We review our long-lived assets, including amortizable intangible assets and property and equipment, for impairment whenever events or changes in facts and circumstances indicate that their carrying values may not be fully recoverable.

We assess impairment by comparing the estimated undiscounted future cash flows of the related asset to its carrying value.

If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying value.

Recently Issued Accounting Pronouncements Not Yet Adopted

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These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We are currently evaluating our contracts and the optional expedients provided by the new standard.

Our credit facility contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark.

We will continue to monitor the impact of this transition until it is completed.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts.

The new standard is effective on a prospective basis for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted.

We are currently evaluating the effect, if any, the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.

(2) Acquisition and Divestitures

On January 10, 2019, our wholly owned subsidiary VSE Aviation acquired 100 % of the equity of 1st Choice Aerospace Inc.

("1st Choice Aerospace"), a provider of MRO services and products for new generation and legacy commercial aircraft platforms.

1st Choice Aerospace has operations in Florida and Kentucky.

We retained key members of 1st Choice Aerospace's management team under three -year employment contracts with five -year non-compete covenants.

The initial purchase consideration paid at closing for 1st Choice Aerospace was approximately $ 113 million, which included $ 1.1 million as an estimated net working capital adjustment.

Global Parts Group, Inc.

On July 26, 2021, we acquired Global Parts Group, Inc.

("Global Parts"), a privately owned company with operations in Augusta, Kansas.

Global Parts provides distribution and MRO services for business and general aviation ("B&GA") aircraft families.

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

Global Parts will operate as a subsidiary of VSE Aviation, Inc.

under our Aviation segment.

The cash purchase price for Global Parts was approximately $ 38 million, net of cash acquired, which was funded using our existing bank revolving loan.

We may also be required to make earn-out payments of up to $ 2 million should Global Parts meet certain revenue targets during the first twelve months following the acquisition and a certain milestone event on or before March 2023.

See Note (16) "Fair Value Measurements," for additional information regarding the earn-out obligation.

The purchase price was allocated on a preliminary basis, among assets acquired and liabilities assumed at fair value on the acquisition date based on the best available information, with the excess purchase price recorded as goodwill.

The fair values assigned to our Global Parts earn-out obligation, inventory and intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.

We have not yet obtained all the information required to complete the purchase price allocation related to this acquisition.

We are in the process of finalizing our valuation and the allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until we obtain final information regarding their fair values.

We expect to have sufficient information available to resolve these items by the second quarter of 2022, which could potentially result in changes in assets or liabilities on Global Parts' opening balance sheet and an adjustment to goodwill.

During the fourth quarter of 2021, we adjusted the purchase price allocation as a result of certain measurement period adjustments to acquired assets and liabilities assumed due to updated valuation reports received from our external valuation specialist, as well as revisions to internal estimates.

These measurement period adjustments included:

a decrease in inventories of $ 5.5 million;

a decrease in customer relationship intangible asset of $ 4.0 million;

a decrease in long-term deferred tax liabilities of $ 2.4 million;

and $ 200 thousand decrease to net working capital.

These adjustments resulted in an increase to goodwill of $ 7.3 million.

The adjusted preliminary purchase price is as follows (in thousands):

Description Fair Value

Accounts receivable $ 6,410

Inventories 13,240

Prepaid expenses and other current assets 620

Property and equipment 368

Intangibles - customer related 16,000

Goodwill 10,019

Operating lease right-of-use-assets 3,043

Long-term deferred tax assets 1,775

Accounts payable ( 6,112 )

Accrued expenses and other current liabilities ( 1,936 )

Long-term operating lease liabilities ( 2,874 )

Net assets acquired, excluding cash $ 40,553

Cash consideration, net of cash acquired $ 38,553

Acquisition date estimated fair value of earn-out obligation 2,000

Total consideration $ 40,553

The estimated value attributed to the customer relationship intangible asset is being amortized on a straight-line basis using a useful life of 15 years.

No ne of the value attributed to goodwill and customer relationships is deductible for income tax purposes.

The preliminary amount of goodwill recorded for our Global Parts acquisition reflects the strategic advantage of expanding our supply chain management capabilities through the diversification of our existing product and platform offerings to new customers.

We incurred approximately $ 532 thousand of acquisition-related expenses associated with our Global Parts acquisition for the year ended December 31, 2021, which are included in selling, general and administrative expenses.

Global Parts' results of operations are included in our Aviation segment in the accompanying consolidated financial statements beginning on the acquisition date of July 26, 2021.

Had the acquisition occurred as of January 1, 2020, revenue and net income (loss) from consolidated operations, and basic and diluted earnings (loss) per share on a pro forma basis for the year ended December 31, 2021 and 2020 would not have been materially different than our reported amounts.

HAECO Special Services, LLC

On March 1, 2021, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC, a division of HAECO Americas ("HAECO") for the purchase price of $ 14.8 million.

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

HSS provides scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for a United States DoD contract specifically for the sustainment of the U.S.

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

The acquisition was not material to our consolidated financial statements.

HSS operating results are included in our Federal and Defense segment in the accompanying consolidated financial statements beginning on the acquisition date of March 1, 2021.

The allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is based on the best available information regarding their fair values.

Based on estimates, we allocated approximately $ 7.0 million to the fair value of net tangible assets (including $ 9.2 million of accounts receivable), $ 608 thousand to goodwill, and $ 7.2 million to customer relationship intangible asset, which is being amortized over approximately 4 years from the acquisition date.

We incurred approximately $ 333 thousand of acquisition-related expenses associated with our HSS acquisition for the year ended December 31, 2021, which are included in selling, general and administrative expenses.

1st Choice Aerospace, Inc.

In January 2019, our wholly owned subsidiary VSE Aviation, Inc.

acquired 100 % of the equity of 1st Choice Aerospace, Inc.

("1st Choice Aerospace"), a provider of MRO services and products for new generation and legacy commercial aircraft platforms with operations in Florida and Kentucky, for a purchase price of $ 113 million.

In connection with the acquisition, we were required to make earn-out payments of up to $ 40 million if 1st Choice Aerospace met certain financial targets during 2019 and 2020.

In January 2020, we made a payment of approximately $ 31.7 million to satisfy the earn-out payment for the 2019 performance year.

In 2020, we made a payment of approximately $ 31.7 million to satisfy the earn-out payment for the 2019 performance year.

During 2020 it was determined that the financial targets for the 2020 performance year were not met, and the remaining fair value of the earn-out obligation was reversed.

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We incurred approximately $ 408 thousand of acquisition-related expenses for the year ended December 31, 2019, which are included in selling, general and administrative expenses.

The following VSE consolidated pro forma results are prepared as if the 1st Choice Aerospace acquisition had occurred on January 1, 2018.

Significant pro forma adjustments incorporated into the pro forma results below include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to debt incurred to finance the acquisition.

Significant nonrecurring adjustments include the elimination of non-recurring acquisition-related expenses incurred during the year ended December 31, 2019.

This information is for comparative purposes only and does not necessarily reflect the results that would have occurred or may occur in the future.

The unaudited consolidated pro forma results of operations are as follows (in thousands except per share amounts):

Year ended December 31,

Revenue $ 743,347

Net Income $ 35,963

Basic earnings per share $ 3.31

Diluted earnings per share $ 3.29

Prime Turbines Sale

On January 28, 2020, VSE’s subsidiary VSE Aviation entered into two definitive agreements to sell (1) Prime Turbines LLC ("Prime Turbines") and (2) certain related inventory assets to PTB Holdings USA, LLC ("PTB").

In January 2020, VSE’s subsidiary VSE Aviation, Inc.

entered into two definitive agreements to sell (1) Prime Turbines LLC ("Prime Turbines") and (2) certain related inventory assets to PTB Holdings USA, LLC ("PTB").

The transaction was completed on February 26, 2020 with cash proceeds of $ 20.0 million, including final working capital adjustments, and a note receivable of $ 8.3 million received as consideration.

Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines.

Prime Turbines was included in our Aviation segment.

The divestiture of Prime Turbines does not have a major effect on our operations and financial results, and therefore does not qualify for reporting as a discontinued operation.

As a result of the sale of the business and inventory, we derecognized the assets and liabilities of Prime Turbines and recorded a $ 7.5 million loss in the first quarter of 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

The note receivable from PTB of $ 4.7 million and $ 1.4 million is included in other assets, and other current assets in our consolidated balance sheets as of December 31, 2020, respectively, which represents the present value of the consideration to be received with an imputed interest rate discount of 3.4 %.

As a result of the sale of the business and inventory, we derecognized the assets and liabilities of Prime Turbines and recorded a $ 7.5 million loss in 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

As of December 31, 2021 and 2020, the total outstanding balance of the note receivable from PTB was $ 4.7 million and $ 6.1 million, respectively, which represents the

present value of the consideration to be received with an imputed interest rate discount, of which $ 1.5 million and $ 1.4 million were current as of December 31, 2021 and 2020, respectively.

The note receivable balance is included in other assets and other current assets in our consolidated balance sheets.

CT Aerospace Asset Sale

On June 26, 2020, VSE's subsidiary VSE Aviation entered into an asset purchase agreement to sell CT Aerospace, LLC ("CT Aerospace") inventory and certain assets to Legacy Turbines, LLC ("Legacy Turbines") for $ 6.9 million, with a note receivable received as consideration.

As a result of the sale, we recorded a $ 678 thousand loss in the second quarter of 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

The note receivable from Legacy Turbines of $ 5.2 million, net of a variable discount of $ 275 thousand, is included in other assets and $ 1.3 million in other current assets in our consolidated balance sheets as of December 31, 2020.

In June 2020, VSE's subsidiary VSE Aviation, Inc.

entered into an asset purchase agreement to sell CT Aerospace, LLC ("CT Aerospace") inventory and certain assets to Legacy Turbines, LLC ("Legacy Turbines") for $ 6.9 million, with a note receivable received as consideration.

As a result of the sale, we recorded a $ 678 thousand loss in 2020, which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income.

As of December 31, 2021 and 2020, the total outstanding balance of the note receivable from Legacy Turbines was $ 5.2 million and $ 6.4 million, respectively, net of a variable discount of $ 275 thousand, of which $ 1.3 million was current as of December 31, 2021 and 2020.

The note receivable balance is included in other assets and other current assets in our consolidated balance sheets.

(3) Revenue Recognition

Disaggregated Revenue

Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our customers.

Our customers also include various other government agencies and commercial clients.

A summary of revenues for our operating segments by customer for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

Our revenues are derived from the delivery of products to our customers and from services performed for commercial customers, various government agencies, the DoD or federal civilian agencies.

A summary of revenues by customer for our operating segments for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

Year Ended December 31, 2021 Fleet Aviation Federal and Defense Total

Commercial $ 73,606 $ 245,380 $ 3,332 $ 322,318

DoD 12,689 — 220,733 233,422

Other government 147,237 2,472 45,404 195,113

Commercial 42,733 163,695 1,877 208,305

Total $ 233,532 $ 247,852 $ 269,469 $ 750,853

Year Ended December 31, 2020

Commercial $ 42,733 $ 163,695 $ 1,877 $ 208,305

DoD 20,744 1,093 214,560 236,397

Other government 178,693 282 37,982 216,957

Commercial 22,161 218,886 1,471 242,518

Total $ 242,170 $ 165,070 $ 254,419 $ 661,659

Year Ended December 31, 2019

Commercial $ 22,161 $ 218,886 $ 1,471 $ 242,518

DoD 24,246 3,775 276,313 304,334

Other government 168,113 1,885 35,777 205,775

Commercial 14,329 135,864 413 150,606

Total $ 214,520 $ 224,546 $ 313,561 $ 752,627

We changed our disaggregated revenue by type presentation below in the first quarter of 2020 to better align with our operating segments.

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 plus, fixed price and time and materials contract types.

This change provides a clearer picture of the nature of each segment's contractual arrangements, how revenues derived from those contracts are affected by economic factors, and underlying performance trends impacting each segment.

Additionally, the presentation is more in-line with how each segments' results are evaluated by our Chief Executive Officer in deciding how to allocate resources and evaluate performance.

The change in disaggregated revenue presentation did not result in any changes in our reported segments and had no effect on the reported results of operations.

A summary of revenues by type for our operating segments for the year ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

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Total $ 242,170 $ 165,070 $ 254,419 $ 661,659

Year Ended December 31, 2018

Year Ended December 31, 2019 (a)

Repair $ — $ 119,044 $ — $ 119,044

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Total $ 214,520 $ 224,546 $ 313,561 $ 752,627

(a) Historical presentation has been realigned to conform to its current period presentation and did not affect the reported results of operations for each reported segment.

Contract Balances

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If a contract liability exists, it is netted against the unbilled receivables balance for that contract.

Unbilled receivables decreased from $ 46.3 million at December 31, 2019 to $ 22.4 million at December 31, 2020, primarily due to the billings of our customers in excess of revenue recognized as performance obligations were satisfied.

Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $ 5.0 million at December 31, 2019 and $ 10.1 million at December 31, 2020.

Unbilled receivables increased to $ 31.9 million as of December 31, 2021 from $ 22.4 million as of December 31, 2020, primarily due to performance obligations satisfied in excess of billings and unbilled receivables acquired as part of the HSS acquisition.

Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $ 7.1 million as of December 31, 2021 and $ 10.1 million as of December 31, 2020.

For the year ended December 31, 2021 and 2020, we recognized revenue of $ 5.1 million and $ 2.2 million, respectively, that was previously included in the beginning balance of contract liabilities.

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Our performance obligations are satisfied over time as work progresses or at a point in time.

Revenues from products and services transferred to customers over time accounted for approximately 51 % and 57 % of our revenues for the year ended December 31, 2020 and 2019, respectively, primarily related to revenues in our Federal and Defense segment and for MRO services in our Aviation segment.

Revenues from products and services transferred to customers at a point in time accounted for approximately 54 % and 49 % of our revenues for the year ended December 31, 2021 and 2020, respectively.

The majority of our revenue recognized at a point in time is for the sale of vehicle and aircraft parts in our Fleet and Aviation segments.

Revenues from products and services transferred to customers over time accounted for approximately 46 % and 51 % of our revenues for the year ended December 31, 2021 and 2020, respectively, primarily related to revenues in our Federal and Defense segment and for MRO services in our Aviation segment.

As of December 31, 2021, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $ 185 million.

Performance obligations expected to be satisfied within one year and greater than

one year are 92 % and 8 %, respectively.

Performance obligations expected to be satisfied within one year and greater than one year are 86 % and 14 %, respectively.

We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.

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Total $ 108,469 $ 77,829

Receivables, net are recorded at face value less an allowance for credit losses of approximately $ 1.5 million and $ 396 thousand as of December 31, 2020 and 2019, respectively.

The allowance for credit loss is determined using a combination of specific reserves for accounts that are deemed to exhibit credit loss indicators and general reserves that are judgmental determined using loss rates based on historical write-offs and consideration of recent forecasted information, including underlying economic expectations.

The credit loss reserves are updated quarterly for most recent write-offs and collections information and underlying expectations, which for the year ended December 31, 2020 included consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic.

A summary of activity in our allowance for credit losses for the year ended December 31, 2020 is as follows (in thousands):

Balance as of December 31, 2019 $ 396

Change in estimates 1,767

Write-offs ( 441 )

Recoveries ( 229 )

Balance as of December 31, 2020 $ 1,493

The unbilled receivables balance includes certain costs for work performed at risk but which we believe will be funded by the government totaling approximately $ 2.6 million and $ 15.2 million as of December 31, 2020 and 2019, respectively.

Receivables, net are recorded at face value less an allowance for credit losses of approximately $ 1.7 million and $ 1.5 million as of December 31, 2021 and 2020, respectively.

The unbilled receivables balance includes certain costs for work performed at risk but which we believe will be funded by the government totaling $ 3.6 million and $ 2.6 million as of December 31, 2021 and 2020, respectively.

We expect to invoice substantially all unbilled receivables during 2022.

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Other current assets consisted of the following as of December 31, 2021 and 2020 (in thousands):

Self insurance reserves $ 9,535 $ 7,566

Self insurance trust assets $ 5,993 $ 9,535

Current portion of notes receivable 2,820 2,721

Deferred contract costs 6,148 3,514

Vendor advances 14,552 5,564

Other 2,791 1,994

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Total $ 27,736 $ 26,525

At December 31, 2020, current and long-term portion of notes receivable balances consist of notes receivables received as consideration in connection with the sale of our Prime Turbines business and the inventory assets of our CT Aerospace subsidiary in the first and second quarter of 2020, respectively.

Refer to Note (2) "Acquisition and Divestitures" for additional information regarding our divestitures.

(6) Property and Equipment

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Balance as of December 31, 2019 $ 63,190 $ 30,883 $ 182,377 $ 276,450

Increase from acquisitions — — 77,828 77,828

Balance as of December 31, 2019 $ 63,190 $ 30,883 $ 182,377 $ 276,450

Impairment charge — — ( 30,945 ) ( 30,945 )

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Balance as of December 31, 2020 $ 63,190 $ 30,883 $ 144,053 $ 238,126

In the first quarter of 2020, we completed the sale of our Prime Turbines subsidiary and certain related inventory assets and recognized a loss on the sale of the business and inventory.

Prime Turbines was reported within our Aviation segment.

As part of determining the loss on sale, goodwill of $ 7.4 million was allocated to the disposal group on a relative fair value basis and was written-off upon the completion of the sale.

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.

As a result of the decline in the macroeconomic environment caused by the COVID-19 pandemic and the decrease in our market capitalization, we performed an interim impairment analysis during the first quarter of 2020, utilizing a qualitative approach.

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.

The fair value of the reporting unit was determined using a combination of an income approach using a discounted cash flow analysis and a market-based valuation approach based on relevant data from guideline public companies.

The result of the quantitative impairment test indicated that the VSE Aviation reporting unit was not impaired.

Due to the ongoing impact of the COVID-19 pandemic, we performed an interim impairment analysis during the second quarter of 2020, utilizing a quantitative approach.

The result of the impairment analysis indicated that the fair value of our reporting units, with the exception of our VSE Aviation reporting unit, exceeded their carrying values and no impairment charge was required.

The estimated fair value of our VSE Aviation reporting unit was determined to be below its carrying value, which resulted in a $ 30.9 million goodwill impairment charge in the second quarter of 2020.

Refer to Note (16) "Fair Value Measurements" for additional information on the valuation methodology assumptions.

For our 2020 annual analysis of goodwill, we elected to perform a qualitative assessment.

The results of our annual goodwill impairment assessment in the fourth quarter of 2020 indicated that it was more likely than not that the fair value of our reporting units exceeded their carrying values.

We did not record impairment charges related to goodwill in 2019 or 2018.

Increase from acquisitions — 608 10,019 10,627

Balance as of December 31, 2021 $ 63,190 $ 31,491 $ 154,072 $ 248,753

Goodwill increased during the year ended December 31, 2021 in connection with acquisitions completed during the year.

See Note (2) "Acquisitions and Divestitures" for additional details regarding these acquisitions.

Based on our annual goodwill impairment test performed in the fourth quarter of 2021, it was determined there was no impairment of goodwill and the fair value of each of the reporting units exceeded their carrying value.

During the second quarter of 2020, due to the negative impact of the COVID-19 pandemic on our Aviation reporting unit, we recorded a $ 30.9 million goodwill interim impairment charge within goodwill and intangible impairment in the consolidated statements of income.

Our 2020 annual goodwill impairment test determined no incremental impairment.

In 2020, in connection with the sale of our Prime Turbines subsidiary within our Aviation segment, goodwill of $ 7.4 million was allocated to the disposal group on a relative fair value basis and was written-off upon the completion of the sale.

Intangible assets consisted of the following (in thousands):

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Total $ 244,364 $ ( 136,955 ) $ ( 3,814 ) $ 103,595

During the second quarter of 2020, we completed the sale of all of the inventory of the CT Aerospace subsidiary, which is reported within our Aviation segment.

As a result of the sale, we concluded that the useful life of certain long-lived assets, which represented the intangible assets acquired in the acquisition of the subsidiary, was zero and that there was no ongoing expected future cash flows related to these long-lived assets and no residual value.

As a result, such assets were determined to be fully impaired and an impairment charge of approximately $ 2.8 million, representing the carrying value of these intangible assets, was recorded during the second quarter of 2020, which is reflected within goodwill and intangible impairment in the consolidated statements of income.

As the sale did not represent a disposition of a business, no goodwill was allocated to the disposal group.

Intangible assets with a gross carrying value of $ 20.8 million are no longer reflected in the gross carrying value and accumulated amortization as of December 31, 2021.

The increase in the gross carrying amount of contract and customer-related intangibles during the year ended December 31, 2021 relates to customer relationship intangible assets recognized in connection with acquisitions completed during the year, partially offset by the removal of fully amortized assets of $ 10.7 million.

See Note (2) "Acquisitions and Divestitures" for additional details regarding these acquisitions.

There were no impairment losses during 2021.

During 2020, we recorded an impairment charge of $ 2.8 million in connection with the sale of all of the inventory of our CT Aerospace subsidiary, which was part of our Aviation segment.

The impairment is presented within goodwill and intangible impairment in the consolidated statements of income.

Amortization expense for the years ended December 31, 2021, 2020 and 2019 was approximately $ 18.5 million, $ 17.5 million and $ 19.3 million, respectively.

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Long-term debt, net of current portion $ 270,407 $ 230,714

We have a loan agreement with a group of banks that expires in January 2023.

We borrow under the loan agreement to provide working capital support, fund letters of credit and finance acquisitions.

The loan agreement includes term and revolving facilities.

In June 2020, we amended the loan agreement to provide increased covenant flexibility in response to changes in financial operating performance resulting from the COVID-19 pandemic.

We have a loan agreement with a group of banks from which we borrow amounts under the loan agreement to provide working capital support, fund letters of credit, and finance acquisitions.

The loan agreement includes term and revolving loan facilities.

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

On July 23, 2021, we entered into a third amendment to our loan agreement which, among other things, extended the maturity dates with respect to the revolving credit facility and term loan facility to July 2024, lowered the applicable LIBOR rate floor, and modified the maximum Total Funded Debt to EBITDA Ratio.

Except as described above, the amended loan agreement has substantially the same terms as the existing loan agreement, including covenants and events of default.

Financing costs associated with the loan agreement amendment of approximately $ 808 thousand were capitalized and are being amortized over the remaining term of the loan.

The fair value of outstanding debt as of December 31, 2020 under our bank loan facilities approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.

Our required term and revolver loan payments after December 31, 2021 are as follows (in thousands):

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2022 $ 15,000

2023* 209,398

Total $ 286,734

*Includes the revolver loan required payment of $ 175.5 million.

(a) Includes the revolver loan required payment of $ 227 million.

The maximum amount of credit available under the loan agreement for revolving loans and letters of credit as of December 31, 2021 was $ 350 million.

We pay an unused commitment fee and fees on letters of credit that are issued.

We had no letters of credit outstanding as of December 31, 2020 and approximately $ 54 thousand of letters of credit outstanding as of December 31, 2019.

Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or both facilities up to an aggregate additional amount of $ 100 million.

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin.

As of December 31, 2020, the LIBOR base margin was 3.00 % and the base rate

base margin was 1.75 %.

The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan until February 6, 2021.

We have executed compliant interest rate hedges.

We had $ 1.0 million letters of credit outstanding as of December 31, 2021 and no letters of credit outstanding as of December 31, 2020.

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a margin or at a base rate (typically the prime rate) plus a base margin.

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

The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

We use interest rate hedges on a portion of our debt.

The amount of our debt with interest rate swap agreements was $ 75.0 million as of December 31, 2021.

After taking into account the impact of hedging instruments, as of December 31, 2021 interest rates on portions of our outstanding debt ranged from 4.00 % to 6.66 %, and the effective interest rate on our aggregate outstanding debt was 4.39 %.

Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $ 12.7 million, $ 13.3 million and $ 6.9 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $ 11.2 million, $ 12.7 million and $ 13.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio and a minimum Fixed Charge Coverage Ratio.

Restrictive covenants include a

maximum Total Funded Debt to EBITDA Ratio and a minimum Fixed Charge Coverage Ratio.

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

We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants;

at this time, we expect that we will remain in compliance with such covenants over the next twelve months.

(9) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2020 and 2019 (in thousands):

Accrued expenses and other current liabilities consisted of the following (in thousands):

Accrued compensation and benefits $ 24,395 $ 21,525

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(10) Stock-Based Compensation Plans

In 2006, our stockholders approved the VSE Corporation 2006 Restricted Stock Plan for VSE's directors, officers and other employees (the "2006 Plan").

The VSE Corporation 2006 Restricted Stock Plan, as amended (the "2006 Plan"), provides VSE's employees and directors the opportunity to receive various types of stock-based compensation and cash awards.

In May 2020, the stockholders approved amendments to the 2006 Plan extending its term until May 6, 2027 and authorizing an additional 500,000 shares of our common stock for issuance under the 2006 Plan.

Under the 2006 Plan, we are authorized to issue up to 1,500,000 shares of our common stock and, as of December 31, 2020, 725,945 shares remained available for issuance under the 2006 Plan.

The Compensation Committee is responsible for the administration of the 2006 Plan and determines each recipient of an award under the 2006 Plan, the number of restricted shares of common stock subject to such award and the period of continued employment required for the vesting of such award.

These terms are included in award agreements between VSE and the recipients of the award.

The total stock-based compensation expense related to restricted stock awards for the years ended December 31, are as follows (in thousands):

As of December 31, 2021, we are authorized to issue up to 1,500,000 shares of our common stock and 661,126 shares remained available for issuance.

As of December 31, 2021, we have outstanding stock-settled bonus awards, vesting stock awards, and performance share awards under this plan.

Stock-settled bonus awards are a fixed dollar-denominated award that vests over a three-year service period in three equal tranches.

As each tranche vests, the fixed dollar value of the vested portion of the award is converted into shares based on the closing market price of our stock at the date of conversion.

On each vesting date, 100 % of the vested award is paid in stock that are subject to a two-year stock sales restriction.

Expense is recognized on a straight-line basis over the requisite service period for each tranche, which results in an accelerated pattern for an award.

Employee vesting stock awards generally vest over a three-year service period in equal installments on each anniversary of the grant date.

Our directors receive a grant of vesting stock annually as part of their compensation and the stock vests immediately upon grant.

We grant performance share awards to certain employees under the 2006 Plan.

Performance share awards are rights to receive shares of our stock on the satisfaction of service requirements and performance conditions.

These awards vest ratably in equal installments over a three-year period on the anniversary of each grant date, subject to meeting the minimum service requirements and the achievement of certain annual or cumulative financial metrics of our performance, with the number of shares ultimately issued, if any, ranging up to 100 % of the specified target shares.

If performance is below the minimum threshold level of performance, no shares will be issued.

For all performance share awards granted, the annual and cumulative financial metrics are based on our achievement of a return on equity.

During fiscal 2021, we established the Employee Stock Purchase Plan (ESPP) to allow eligible employees to purchase shares of our VSE common stock at a discount of up to 15 % of the fair market value on specified dates.

For ESPP offerings in the year ended December 31, 2021, the purchase price was 12 % off the lesser of the fair market value on the date of the offering and the fair market value on the date of purchase, thereby resulting in stock compensation expense of $ 55 thousand.

As of December 31, 2021, 500,000 shares of VSE common stock are authorized for issuance under the ESPP.

Expense and Related Tax Benefits Recognized

Stock-based compensation expense and related tax benefits recognized under the 2006 Plan for the years ended December 31, are as follows (in thousands):

2021 2020 2019

Employees $ 2,223 $ 2,667 $ 2,332

Non-employee Directors 635 597 553

Stock-settled bonus awards $ 820 $ 1,265 $ 1,685

Vesting stock awards 2,273 1,593 1,579

Performance share awards

Total $ 3,877 $ 2,858 $ 3,264

Employees are permitted to use a certain number of shares of restricted stock to cover their personal tax liability for restricted stock awards.

We paid approximately $ 690 thousand, $ 688 thousand and $ 641 thousand, to cover this liability in the years

ended December 31, 2020, 2019 and 2018, respectively.

These payments are classified as financing cash flows on the consolidated statements of cash flows.

The total compensation cost related to non-vested awards not yet recognized was approximately $ 873 thousand with a weighted average amortization period of 1.6 years as of December 31, 2020.

Stock-based compensation consisting of restricted stock awards was included in costs and operating expenses and provision for income taxes on the accompanying statements of income for the years ended December 31, 2020, 2019 and 2018 (in thousands):

2020 2019 2018

Stock-based compensation included in costs and operating expenses $ 2,858 $ 3,264 $ 3,027

Income tax benefit recognized for stock-based compensation ( 713 ) ( 663 ) ( 755 )

Stock-based compensation expense, net of income tax benefit $ 2,145 $ 2,601 $ 2,272

Non-Employee Restricted Stock Awards

During 2020, 2019 and 2018, non-employee directors were awarded 16,100 , 18,900 and 11,200 shares of restricted stock, respectively, under the 2006 Plan.

The weighted average grant-date fair value of these restricted stock grants was $ 37.55 per share, $ 31.58 per share, and $ 49.38 per share for the shares awarded in 2020, 2019 and 2018, respectively.

The shares issued vested immediately and, without the Compensation Committee's approval, cannot be sold, transferred, pledged or assigned before the second anniversary of the grant date.

Compensation expense related to these grants was approximately $ 605 thousand, $ 597 thousand and $ 553 thousand during 2020, 2019 and 2018, respectively.

Performance-Based Restricted Stock Awards

In January of every year since 2007, we have notified certain employees that they are eligible to receive awards of VSE stock under our 2006 Plan, based on our financial performance for the respective fiscal years.

These restricted stock awards vest ratably over three years and are expensed on an accelerated basis over the vesting period of approximately three years.

Upon issuance of shares on each vesting date, the liability is reduced and additional paid-in capital is increased.

The date of award determination is expected to be in March 2021 for the 2020 awards.

The date of award determination for the 2019 awards and the 2018 awards was March 2, 2020 and March 2, 2019, respectively.

On each vesting date, 100 % of the vested award is paid in our shares.

The number of shares issued is based on the fair market value of our common stock on the vesting date.

On March 2, 2020, the employees eligible for the 2019 awards, 2018 awards and 2017 awards received a total of 42,946 shares of common stock.

Tax benefit recognized from stock-based compensation $ 967 $ 713 $ 663

Stock-Settled Bonus Awards

In March 2021, the employees eligible for the 2020 awards, 2019 awards and 2018 awards received a total of 21,336 shares of common stock.

The grant-date fair value of these awards was $ 41.42 per share.

Other Restricted Stock Awards

Under the 2006 Plan, restricted stock in the form of shares of our common stock can be awarded to key employees pursuant to the terms of their employment agreements.

The following table summarizes the activity of non-vested restricted stock awards in shares during the years ended December 31, 2020 and 2019.

There was no activity related to unvested restricted stock awards issued in shares during the year ended December 31, 2018.

The total compensation cost related to non-vested stock-settled bonus awards not yet recognized was approximately $ 649 thousand with a weighted average amortization period of 1.9 years as of December 31, 2021.

The fair value of stock-settled bonus awards that vested in the years ended December 31, 2021, 2020 and 2019 was $ 884 thousand, $ 1.2 million and $ 1.6 million, respectively.

Vesting Stock Awards

Vesting stock award activity for the year ended December 31, 2021 was:

Number of Shares

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Unvested as of December 31, 2021 61,351 $ 38.80

Granted 30,500 31.50

Vested ( 32,017 ) 32.14

Forfeited — —

Unvested as of December 31, 2020 56,284 $ 32.23

The grant date fair value of vesting stock awards is based on the closing market price of our common stock on the grant date.

The weighted average grant date fair value of the vesting stock awards granted for the years ended December 31, 2021, 2020 and 2019 was $ 41.90 , $ 33.68 and $ 32.16 , respectively.

As of December 31, 2021 there was $ 1.4 million of unrecognized compensation cost related to vesting stock awards, which is expected to be recognized over a weighted-average period of 1.9 years.

The weighted average fair value of vesting stock awards that vested in the years ended December 31, 2021, 2020 and 2019 was $ 1.7 million, $ 1.6 million and $ 597 thousand, respectively.

Performance Share Awards

During the year ended December 31, 2021, we granted 42,000 performance share awards at target with a weighted average grant date fair value of $ 42.01 .

The actual number of shares to be issued upon vesting range between 0 - 100 % of the target number of shares granted.

For those awards outstanding as of December 31, 2021, we expect to issue approximately 36,000 shares of our common stock in the future based on estimated target achievement of the performance goals.

The grant date fair value of performance share awards is based on the closing market price of our common stock on the grant date.

As of December 31, 2021, there was $ 722 thousand of unrecognized compensation cost related to performance share awards, which is expected to be recognized over a weighted-average period of 2 years.

(11) Income Taxes

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federal income tax matters as well as material state and local tax matters for years through 2016.

We file consolidated federal income tax returns that include all of our subsidiaries.

We file consolidated federal income tax returns that include all of our U.S.

subsidiaries.

The components of the provision for income taxes from continuing operations for the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

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Permanent differences, net ( 839 ) ( 1,406 ) ( 195 )

Impact of Tax Act — — ( 795 )

Tax credits ( 434 ) ( 195 ) ( 612 )

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Provision for income taxes $ 1,485 $ 5,598 $ 9,403

Certain amounts from the prior years have been reclassified to conform to the current year presentation.

Certain amounts from prior years have been reclassified to conform to the current year presentation.

The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows (in thousands):

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Deferred compensation and accrued paid leave $ 5,422 $ 6,302

Inventory reserve 12,465 432

Operating lease liabilities 7,805 6,984

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Valuation allowance (a)

( 8,257 ) ( 7,926 )

Total gross deferred tax assets 27,630 15,549

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Operating lease right-of-use assets ( 6,375 ) ( 5,384 )

Capitalized inventory — ( 240 )

Other ( 274 ) ( 715 )

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Net deferred tax liabilities $ ( 9,108 ) $ ( 14,897 )

(a) A valuation allowance was provided against US capital loss in connection with the stock sale of Prime Turbines, certain state tax credit and foreign tax loss deferred tax assets arising from carryforwards of unused tax benefits.

(a) A valuation allowance was provided against US capital loss in connection with the stock sale of Prime Turbines, certain state net operating loss, tax credit, and foreign tax loss deferred tax assets arising from carryforwards of unused tax benefits.

(b) Certain amounts from prior year have been reclassified to conform with current year presentation.

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With few exceptions, the statute of limitations for these jurisdictions is no longer open for audit or examinations for the years before 2017.

At December 31, 2020, we have various tax losses and tax credits that may be applied against future taxable income.

As of December 31, 2021, we have various tax losses and tax credits that may be applied against future taxable income.

The majority of such tax attributes will expire in 2026 through 2034;

however, some may be carried forward indefinitely.

In March 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted.

The CARES Act includes certain changes to U.S.

tax law, which we do not believe had a significant impact on our 2020 effective tax rate.

(12) Commitments and Contingencies

Leases and Other Commitments

Substantially all of our leases are long-term operating leases primarily for warehouse and office for facilities with fixed payment terms betwee n two and 15 years.

Operating lease cost primarily represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term and is included in costs and operating expenses on our consolidated statement of income.

Our lease agreements do not contain any material residual value guarantees, material variable payment provisions or material restrictive covenants.

Our lease cost for the year ended December 31, 2020 and 2019 included the following components (in thousands):

Year ended Year ended

December 31, 2020 December 31, 2019

Our operating lease cost included the following components for the year ended December 31, (in thousands):

2021 2020 2019

Operating lease cost $ 5,868 $ 5,032 $ 6,106

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Total lease cost, net $ 5,918 $ 4,988 $ 5,782

For the year ended December 31, 2018, total lease expense on our operating leases under the previous lease standard, net of sublease rentals, was $ 2.2 million.

In the first quarter of 2020, we closed on a sale-leaseback agreement involving land and an office building utilized by our Aviation segment to conduct operations in Miami, Florida.

Under the agreement, the land and building, with a net book value of $ 1.3 million was sold for a sale price of $ 2.6 million and leased back under a 6 -year term operating lease commencing upon the closing of the transaction.

Our lease arrangements do not contain any material residual guarantees, variable payment provisions, or restrictive covenants.

In 2020, we closed on a sale-leaseback agreement involving land and an office building utilized by our Aviation segment to conduct operations in Miami, Florida.

Under the agreement, the land and building, with a net book value of $ 1.3 million was

sold for a sale price of $ 2.6 million and leased back under a 6 -year term operating lease commencing upon the closing of the transaction.

The lease provides us with an option to extend the lease upon the expiration of its term in April 2026 for two additional five-year periods.

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The table below summarizes future minimum lease payments under operating leases, recorded on the balance sheet, as of December 31, 2021 (in thousands):

Operating Leases

After 2025 5,415

Year ending December 31,

Thereafter 3,236

Minimum lease payments 37,781

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Long-term lease liabilities $ 27,168

We made cash payments of approximately $ 3.7 million and $ 5.7 million for operating leases during the year ended December 31, 2020 and 2019, respectively, which are included in cash flows from operating activities in our consolidated statement of cash flows.

We made cash payments of approximately $ 6.3 million, $ 3.7 million and $ 5.7 million for operating leases during the year ended December 31, 2021, 2020 and 2019, respectively, which are included in cash flows from operating activities in our consolidated statement of cash flows.

As of December 31, 2021, the weighted average remaining lease term and discount rate for our operating leases were approximately 5.1 years and 4.8 %, respectively.

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We may have certain claims in the normal course of business, including legal proceedings, against us and against other parties.

In our opinion, the resolution of these other claims will not have a material adverse effect on our results of operations, financial position or cash flows.

In our opinion, the resolution of these claims will not have a material adverse effect on our results of operations, financial position or cash flows.

However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated.

Further, from time-to-time, government agencies investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements.

Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting.

Government investigations often take years to complete and most result in no adverse action against us.

We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.

Further, from time-to-time, government agencies audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements.

Government audits or investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting.

Government investigations often take years to complete and many result in no adverse action against us.

We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.

(13) Business Segments and Customer Information

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Management of our business operations is conducted under three reportable operating segments:

Aviation – Distribution and MRO Services

Our Aviation segment (formerly Aviation Group) provides aftermarket repair and distribution services to commercial, cargo, business and general aviation, military and defense, and rotorcraft customers globally.

Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally.

Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services.

Fleet – Distribution and Fleet Services

Our Fleet segment (formerly Supply Chain Management Group) provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the United States Department of Defense ("DoD").

Core services include vehicle parts distribution, sourcing, IT solutions customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.

Federal and Defense – Logistics and Sustainment Services

Our Federal and Defense segment (formerly Federal Services Group) provides aftermarket MRO and logistics services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers.

Our Fleet segment provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the DoD.

Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics,

warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.

Federal and Defense

Our Federal and Defense segment provides aftermarket MRO and logistics and sustainment services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers.

Core services include base operations support;

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IT services and energy consulting.

The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance.

The operating segments reported below are our segments for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance.

We evaluate segment performance based on consolidated revenues and operating income.

Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation.

Corporate expenses are primarily selling, general and administrative expenses not allocated to segments.

Corporate assets are primarily cash, property and equipment and investments held in separate trust.

Our segment information is as follows (in thousands):

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Total assets $ 918,558 $ 780,081

Revenues are net of inter-segment eliminations.

Corporate expenses are primarily selling, general and administrative expenses not allocated to segments.

Corporate assets are primarily cash, property and equipment and investments held in separate trust.

In 2020 and 2019, we allocated depreciation and amortization expense to each segment based on the segment in which each asset was utilized.

In 2018, the allocation method for certain amortization expenses was based on each segment’s percentage of overall cost.

The primary reason for the change is to allocate depreciation and amortization expense to a specific segment depending on the asset deployment.

Depreciation and amortization expense by segment for 2018 was not recast for these allocation changes, and this change did not impact our previously reported consolidated financial results.

The impact for 2018, under the new allocation method, would have been a decrease in depreciation and amortization expense for the Federal and Defense segment of $ 8.1 million, with a corresponding increase for Aviation segment and Fleet segment of $ 3.7 million and $ 4.4 million, respectively.

Customer Information

Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our commercial clients.

The USPS, U.S.

Army and Army Reserve, and U.S.

Our revenues are derived from the delivery of products and services performed for commercial clients, DoD agencies or federal civilian agencies.

The USPS and U.S.

Navy are our largest customers.

Our customers also include various other government agencies and commercial entities.

Our revenue by customer is as follows for the years ended December 31, (in thousands):

Our customers also include various other commercial entities and government agencies.

Our revenue by customer is as follows (in thousands):

Years ended December 31,

Source of Revenues 2021 % 2020 % 2019 %

Commercial $ 322,318 43 $ 208,305 31 $ 242,518 32

DoD 233,422 31 236,397 36 304,334 41

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

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

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

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United States $ 668,892 $ 598,142 $ 659,451

Other Countries (1)

Other Countries (a)

81,961 63,517 93,176

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

(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented .

(a) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented .

(14) Capital Stock

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Stockholders of record are entitled to the amount of dividends declared per common share held.

On January 29, 2021, we completed the issuance and sale of 1,428,600 shares of the Company's common stock, in a public offering at a price of $ 35.00 per share.

The underwriters exercised their option to purchase an additional 170,497 shares.

The transaction closed on February 2, 2021.

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

(15) 401(k) Plan

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(16) Fair Value Measurements

The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value.

The standard is applicable whenever assets and liabilities are measured at fair value.

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;

Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets;

Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

We utilize fair value measurement guidance prescribed by GAAP to value our financial instruments.

The accounting standard for fair value measurements establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

observable inputs such as quoted prices in active markets (Level 1);

inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2);

and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3).

The carrying amounts of cash and cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity.

The carrying value of our outstanding debt obligations approximates its fair value.

The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements.

Non-financial assets acquired and liabilities assumed in business combinations were measured at fair value using income, market and cost valuation methodologies.

See Note (2), "Acquisitions and Divestitures." The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020 and the level they fall within the fair value hierarchy (in thousands):

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Interest rate swaps Accrued expenses Level 2 $ 234 $ 1,603

Earn-out obligation-current Current portion of earn-out obligation Level 3 $ — $ 31,700

Earn-out obligation-long-term Earn-out obligation Level 3 $ — $ 5,000

Non-COLI assets held in the deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in its fair value are recorded as selling, general and administrative expenses.

We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging , and have determined that our swap agreements qualify as cash flow hedges.

Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities, of approximately $ 1.6 million and approximately $ 1.5 million at December 31, 2020 and 2019, respectively.

The offset, net of an income tax effect of approximately $ 400 thousand and $ 367 thousand is included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2020 and 2019, respectively.

Earn-out obligation-current Accrued expenses Level 3 $ 1,000 $ —

Earn-out obligation-long-term Other long-term liabilities Level 3 $ 250 $ —

COLI assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses.

We account for our interest rate swap agreements under the provisions of ASC 815, Derivatives and Hedging , and have determined that our swap agreements qualify as highly effective cash flow hedges.

We evaluate our hedges to determine their effectiveness and as of December 31, 2021 and 2020, the swaps were determined to be fully effective.

Accordingly, the fair value of the swap agreements, which is a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets, of $ 234 thousand and $ 1.6 million as of December 31, 2021 and 2020, respectively.

The offset, net of an income tax effect of $ 58 thousand and $ 400 thousand was included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2021 and 2020, respectively.

The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred.

We expect the hedges to remain fully effective during the remaining terms of the swap agreements.

We determine the fair value of the swap agreements based on a valuation model using market data inputs.

We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation.

Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate.

If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement.

Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020 and 2019 are as follows (in thousands):

We determine the fair value of the swap agreements based on a valuation model using primarily observable market data inputs.

In connection with the acquisition of Global Parts in July 2021, we may be required to make earn-out obligation payments of up to $ 2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023.

The preliminary fair value of the earn-out obligation was determined using a probability-based scenario analysis approach.

Any change in the fair value of contingent consideration from events after the acquisition date will be recognized in earnings of the period when the event occurs.

The probability-based approach used to fair value earn-out obligation is based on significant inputs not observed in the market and thus represents a Level 3 measurement.

The significant unobservable inputs include projected revenues and percentage probability of occurrence.

Changes in the revenue assumptions could result in a material change to the amount of the fair value measurement.

Under the agreement, we were required to make an advanced payment of the earn-out obligation.

The payment was made in August 2021.

In 2020, in connection with the 2019 acquisition of 1st Choice Aerospace, we made a payment of approximately $ 31.7 million to satisfy the earn-out and the remaining fair value of the earn-out obligation of $ 5 million was reversed and recognized in earnings.

Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020 are as follows (in thousands):

Current portion Long-term portion Total

Balance as of December 31, 2019 $ 31,700 $ 5,000 $ 36,700

Acquisition date fair value of contingent consideration 34,800 — 34,800

Fair value adjustment included in costs and operating expenses 1,900 — 1,900

Reclassification from long-term to current ( 5,000 ) 5,000 —

Balance as of December 31, 2019 31,700 5,000 36,700

Earn-out payments ( 31,700 ) — ( 31,700 )

2 unchanged sentences

Balance as of December 31, 2020 — — —

Measurements on a Non-recurring Basis

The following table presents changes in the Level 3 fair value of certain assets measured on a non-recurring basis for the year ended December 31, 2020 (in thousands):

Assets subject to impairment charges:

Balance as of December 31, 2019 $ 182,377

Goodwill allocated to divested business ( 7,379 )

Carrying value prior to impairment 174,998

Impairment charge ( 30,945 )

Carrying value after impairment 144,053

Carrying value of assets not subject to impairment charge 94,073

Acquisition date fair value of contingent consideration 1,750 250 2,000

Earn-out payments ( 750 ) — ( 750 )

Balance as of December 31, 2021 $ 1,000 $ 250 $ 1,250

Goodwill is tested annually or upon the occurrence of a triggering event indicating that an impairment loss may have been incurred.

Goodwill is measured on a non-recurring basis using fair value measurements with unobservable inputs (Level 3).

The goodwill fair value is determined using a weighting of fair values derived from the income and market approach.

Fair value is measured as of the impairment date.

Goodwill for the VSE Aviation reporting unit was determined to be impaired and was written down to its estimated fair value during the second quarter of 2020.

The key assumptions used to determine the fair value of the VSE Aviation reporting unit were:

(a) expected cash flows with a compounded revenue growth rate of approximately 6% for a period of seven years;

(b) long-term growth rate of 3% in the terminal year;

and (c) a discount rate of 13.5%.

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.

A negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods.

For further discussion of the impairment, refer to Note (7) "Goodwill and Intangible Assets."

(17) Selected Quarterly Data (Unaudited)

The following table shows selected quarterly data for 2020 and 2019, in thousands, except earnings per share.

2020 Quarters

1st 2nd 3rd 4th

Revenues $ 177,418 $ 168,715 $ 165,505 $ 150,021

Costs and operating expenses $ 161,256 $ 156,213 $ 151,320 $ 138,107

Operating income

$ 9,734 $ ( 21,910 ) $ 14,185 $ 11,914

Net income (1)

$ 3,332 $ ( 22,624 ) $ 8,108 $ 6,013

Basic earnings per share:

Net income (1)

$ 0.30 $ ( 2.05 ) $ 0.73 $ 0.54

Basic weighted average shares outstanding 11,000 11,041 11,043 11,052

Diluted earnings per share:

$ 0.30 $ ( 2.05 ) $ 0.73 $ 0.54

Diluted weighted average shares outstanding 11,101 11,041 11,100 11,141

2019 Quarters

1st 2nd 3rd 4th

Revenues $ 169,919 $ 189,111 $ 198,326 $ 195,271

Costs and operating expenses $ 158,106 $ 172,695 $ 181,111 $ 180,458

Operating income $ 11,813 $ 16,416 $ 17,215 $ 14,813

Net income $ 6,603 $ 9,898 $ 10,527 $ 9,996

Basic earnings per share:

Net income $ 0.60 $ 0.90 $ 0.96 $ 0.92

Basic weighted average shares outstanding 10,920 10,970 10,970 10,970

Diluted earnings per share:

$ 0.60 $ 0.89 $ 0.95 $ 0.90

Diluted weighted average shares outstanding 10,974 11,073 11,060 11,071

(1) Operating income for the first quarter of 2020 includes a $ 7.5 million loss of our Prime Turbines business offset by a $ 1.1 million gain from the sale of a Miami, FL real estate holding.

Operating income for the second quarter of 2020 includes a $ 33.7 million goodwill and intangible asset impairment charge and a $ 678 thousand loss from the sale of all of the inventory assets of our CT Aerospace subsidiary.

(18) Subsequent Events

On January 29, 2021, we entered into an underwriting agreement with William Blair & Company, L.L.C.

and Canaccord Genuity LLC, acting as representatives of several underwriters, relating to an underwritten public offering of 1,428,600 shares of the Company's common stock, at the public offering price of $ 35.00 per share.

The transaction closed on February 2, 2021.

On February 18, 2021, we issued and sold an additional 170,497 shares pursuant to the exercise by the underwriters of their over-allotment option to purchase additional shares.

We received net proceeds of approximately $ 52 million after deducting underwriting discounts and commissions and offering related expenses.

The shares were issues pursuant to an effective shelf registration statement filed on Form S-3 (File No.

333-248139) that was previously filed with the Securities and Exchange Commission and declared effective on August 31, 2020.

On March 1, 2021, the Company acquired HAECO Special Services, LLC (“HSS”) from HAECO Airframe Services, LLC, a division of HAECO Americas (“HAECO”).

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

The acquisition is insignificant to the financial statements taken as a whole.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data