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Item 7. Management’s Discussion and Analysis

2024-03-08 compared with 2023-03-10 · 138 added, 196 removed, 124 unchanged (73% of the section changed)

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Business Overview

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

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

Aviation, Fleet and Federal and Defense.

We are a leading provider of aftermarket distribution and maintenance, repair and overhaul ("MRO") services for air and land transportation assets for commercial and government markets.

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

Aviation and Fleet.

Recent Developments

Sale of Federal and Defense Segment

In May 2023, we announced our decision to sell our Federal and Defense segment.

As a result, we have reported the results of operations for the Federal and Defense segment as discontinued operations for all periods presented.

See Note (3) "Discontinued Operations" to our Consolidated Financial Statements for further information.

In February 2024, we entered into two separate agreements to sell substantially all of the Federal and Defense segment assets.

See Note (18) "Subsequent Events" for further information.

Acquisition of Turbine Controls, Inc.

On February 29, 2024, we signed a definitive agreement to acquire Turbine Controls, Inc.

("TCI"), a leading provider of aftermarket MRO support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications.

See Note (18) "Subsequent Events" for further information.

2023 Acquisitions

In February 2023, we completed the acquisition of Precision Fuel Components, LLC ("Precision Fuel"), a provider of MRO services for engine accessories and fuel systems supporting the business and general aviation ("B&GA") market.

In July 2023, we completed the acquisition of Desser Holding Company LLC ("Desser Aerospace"), a global aftermarket solutions provider of specialty distribution and MRO services.

In September 2023, we entered into an Asset Purchase and License Agreement with Honeywell International Inc.

to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems (the "Honeywell FCS Acquisition").

See Note (2) "Acquisitions" to the consolidated financial statements for further information.

Underwritten Public Offering

In July 2023, we initiated a public offering of the Company's common stock relating to the issuance and sale of 2,846,250 shares at a public offering price of $48.50 per share.

The offering closed in two transactions, and net proceeds of $129.1 million were received by the Company, which were used to repay outstanding borrowings under our revolving credit facility and for general corporate purposes.

See Note (15) "Capital Stock" to the consolidated financial statements for further information.

Business Trends

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Aviation Segment

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

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

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

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

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

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

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

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

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

Our Aviation segment has seen favorable results due to successful investments in growth initiatives, resulting in a 33% increase in annual revenue, totaling $544 million in 2023.

The expansion of our distribution services was driven by strong execution of new and existing programs.

Our repair business experienced growth driven by increased market share in the commercial and B&GA sectors.

These factors, combined with our growth initiatives, led to a 29% increase in distribution revenue and a 46% increase in repair revenue in 2023 compared to the prior year.

In 2023, we secured key multi-year distribution deals for both domestic and new international markets, including an expansion of our flagship distribution agreement with Pratt & Whitney Canada supporting Europe, the Middle East, and Africa.

These new distribution initiatives are expected to drive sustainable and recurring revenue with growth opportunities, contributing to future positive results.

Investments in the Aviation segment are focused on businesses and programs that broaden our portfolio and reach new customers and geographies.

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

The July 2023 acquisition of Desser Aerospace supports our tip-to-tail aircraft distribution and MRO services strategy and provides a platform for international expansion.

The September 2023 Honeywell FCS Acquisition allows us to exclusively manufacture and support certain of Honeywell's fuel control systems on four key engine platforms.

The Aviation segment is expected to see continued growth due to progress on new initiatives and recent acquisitions, offering a favorable outlook for 2024.

Fleet Segment

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

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

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

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

The new facility, which is 450,000 square feet, enhances Fleet's geographical coverage and product offerings for customers.

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

Additionally, we generated steady revenue from our support of the United States Postal Services ("USPS") delivery vehicle fleet through supplying parts and managing inventory, with revenue increasing 8% in 2023 compared to the prior year.

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

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

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

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

Federal and Defense Segment

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

Navy ship to Bahrain

being a major contributor for the revenue increase.

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

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

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

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

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

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

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

Results of Operations

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Years ended December 31,

2022 % 2021 % 2020 %

2023 2022 Change ($)

Revenues $ 860,488 $ 669,448 $ 191,040 29 %

Costs and operating expenses 772,492 615,844 156,648 25 %

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

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

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

Operating income 87,996 53,604 34,392 64 %

Interest expense, net 31,083 17,893 13,190 74 %

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

Income from continuing operations before income taxes

56,913 35,711 21,202 59 %

Provision for income taxes 13,761 9,052 4,709 52 %

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

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

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

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

Net income from continuing operations

$ 43,152 $ 26,659 $ 16,493 62 %

Revenues increased $191.0 million, or 29%, in 2023 compared to 2022 due to revenue growth in our Aviation segment of $135.9 million and our Fleet segment of $55.1 million.

See "Segment Operating Results" section below for further discussion of revenues by segment.

Costs and Operating Expenses.

Costs and operating expenses increased $156.6 million, or 25%, in 2023 compared to 2022.

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

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

Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business

activity and revenues generated by each segment.

See "Segment Operating Results" section below for further discussion of costs and operating expenses by segment.

Operating Income.

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

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

Operating income increased $34.4 million, or 64%, in 2023 compared to 2022 attributable to increases of $34.8 million for our Aviation segment and $7.3 million for our Fleet segment.

See "Segment Operating Results" section below for further discussion of operating income by segment.

The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.

Interest Expense.

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

Interest expense increased approximately $13.2 million, or 74% in 2023 compared to 2022 primarily due to an increase in our debt facility borrowings and higher average interest rates on borrowings outstanding.

Provision for Income Taxes.

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

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

book income recorded in 2021.

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

The effective tax rate for continued operations was 24.2% in 2023 compared to 25.3% in 2022.

The decrease in our effective tax rate primarily resulted from book income in connection with an increase in the fair market value of our corporate owned life insurance ("COLI") plan assets in 2023 versus book expense recorded in 2022.

For tax purposes, current year COLI book income was nontaxable income resulting in a reduction to our effective tax rate as opposed to 2022 nondeductible COLI loss that increased our effective tax rate.

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

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Aviation Segment Results

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

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

Years ended December 31,

2022 % 2021 % 2020 %

2023 2022 Change ($)

Revenues $ 544,020 $ 408,112 $ 135,908 33 %

Costs and operating expenses 472,852 371,696 101,156 27 %

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

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

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

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

Operating income

$ 71,168 $ 36,416 $ 34,752 95 %

Revenues increased $135.9 million, or 33%, in 2023 compared to 2022.

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

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

Distribution revenue increased $86.2 million, or 29%, driven by strong program execution on new and existing distribution contracts and contributions from the acquisition of Desser Aerospace (which occurred in July 2023).

Repair revenue increased $49.8 million, or 46%, driven by an expansion of repair capabilities, improved end market demand, and share gains with commercial and B&GA customers.

Costs and Operating Expenses.

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

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

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

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

Costs and operating expenses increased $101.2 million, or 27%, in 2023 compared to 2022 primarily due to increased revenues as discussed above.

In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs.

Expense for amortization of intangible assets increased $2.4 million in 2023 to $11.7 million from $9.3 million in 2022 driven by newly acquired intangibles in connection with acquisitions completed in the current year.

Expense for allocated corporate costs was $12.9 million for 2023 and 2022, respectively.

Operating Income.

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

Operating income increased $34.8 million, or 95%, in 2023 compared to 2022 primarily due to revenue growth and a favorable shift in sales mix and pricing.

Fleet Segment Results

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

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

Years ended December 31,

2022 % 2021 % 2020 %

2023 2022 Change ($)

Revenues $ 316,468 $ 261,336 $ 55,132 21 %

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Revenues increased $55.1 million, or 21%, in 2023 compared to 2022.

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

The increase was primarily from commercial customers of $46.7 million, or 45%, and other government customers (primarily USPS) of $11.5 million, or 7%.

Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business.

Revenues from other government customers increased primarily due to increased support of legacy USPS vehicle fleets.

These increases were partially offset by a decrease in sales to DoD customers of $3 million, or 94%.

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Costs and operating expenses increased $47.8 million, or 20%, primarily due to increased revenues.

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

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

In addition, costs and operating expenses for this segment included expense for amortization of intangible assets associated with acquisitions and allocated corporate costs.

Expense for amortization of intangible assets decreased $3.8 million in 2023 to $2.6 million from $6.4 million in 2022 driven by intangibles becoming fully amortized during the current year.

Expense for allocated corporate costs was $7.8 million for 2023 and $7.5 million for 2022.

Operating Income.

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

Federal and Defense Segment Results

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

Years ended December 31,

2022 % 2021 % 2020 %

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

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

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

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

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

Army work as a result of program completions.

Costs and Operating Expenses.

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

Operating (Loss) Income.

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

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

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

We have completed work on this contract in 2022.

Bookings and Funded Backlog

Our funded backlog represents the estimated remaining value of work to be performed under firm contracts.

Bookings for our Aviation and Fleet segments occur at the time of sale.

Accordingly, our Aviation and Fleet segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues.

Revenues for federal government contract work performed by our Federal and Defense segment depend on contract funding ("bookings”), and bookings generally occur when contract funding documentation is received.

Funded contract backlog is an indicator of potential future revenue.

While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.

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

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

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

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

Frequently, these task orders are competitively awarded.

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

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

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

Year Ended December 31,

2022 2021 2020

Bookings $ 294 $ 314 $ 270

Revenues $ 280 $ 269 $ 254

Funded Backlog $ 187 $ 185 $ 183

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

Operating income increased $7.3 million, or 31%, in 2023 compared to 2022, primarily driven by increased revenues, a change in mix of products sold, and decreased amortization expense.

Financial Condition

There has been no material adverse change in our financial condition in 2023.

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

Our outstanding borrowings under our term loan and revolving facility increased $144 million, and we had $216 million of unused commitments under the credit agreement as of December 31, 2023.

In July 2023, we completed an underwritten public offering of 2,846,250 shares of the Company's common stock, generating proceeds of $129.1 million in connection with the offering, net of issuance costs.

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

our level of business activity;

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

the timing of government contract funding awarded;

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

and collections from our customers.

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Year ended December 31,

Net cash (used in) provided by operating activities

$ (21,829) $ 8,051

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

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

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

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

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

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

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

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

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

Net cash used in investing activities

(235,690) (2,377)

Net cash provided by (used in) financing activities

264,971 (5,714)

Net increase (decrease) in cash and cash equivalents

$ 7,452 $ (40)

Cash used in operating activities was $21.8 million in 2023 compared to cash provided by operating activities of $8.1 million in 2022.

The change was primarily due to greater use of cash for inventory purchases.

Cash used in investing activities increased $233.3 million in 2023 compared to 2022 primarily due to cash paid for acquisitions, net of cash acquired, of $218.6 million in connection with acquisitions during the current period as discussed in Note (2) "Acquisitions" to the consolidated financial statements.

Cash provided by financing activities was $265.0 million in 2023 compared to cash used in financing activities of $5.7 million in 2022.

The change was primarily due to the receipt of $129.1 million in proceeds related to our public underwritten offering of our common stock in July 2023 and overall higher proceeds from net borrowings of our debt during the current period primarily related to the increase in our term loan facility borrowings to fund cash paid for acquisitions.

We paid cash dividends totaling approximately $5.4 million, or $0.40 per share, in 2023.

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

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

We have paid cash dividends each year since 1973.

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

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

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

Our accounts receivable and accounts payable levels can be affected by changes in the level of work we perform and by the timing of large purchases.

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

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and investments in the acquisition of businesses.

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

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

Our primary source of external financing is our credit agreement.

Our credit agreement is with a bank group and includes a term loan and a revolving facility, with an aggregate maximum borrowing capacity under our revolving facility of $350.0 million.

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

The aggregate limit of increases is $25.0 million.

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

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

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

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

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

ratios decreasing thereafter as indicated in the table below;

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

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

In July 2023, we entered into a fifth amendment to our credit agreement which, among other things, provided for the following:

(i) the extension of a new term loan in the aggregate principal amount of $90.0 million;

(ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to $25.0 million;

(iii) quarterly amortization payments for the new term loan in the amount of $2.25 million;

(iv) an increase in the maximum Total Funded Debt to EBITDA Ratio from 4.50x to 5.00x, with such ratios decreasing thereafter (as indicated in the table below);

(v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50x;

and (vi) expressly permitting the Desser Aerospace acquisition and subsequent and simultaneous business sale to Loar Group Inc.

Testing Period Maximum Total Funded Debt to EBITDA Ratio

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

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

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

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

From October 1, 2024 and thereafter 3.50 to 1.00

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

June 30, 2023 through and including September 30, 2023 5.00 to 1.00

December 31, 2023 through and including June 30, 2024 4.75 to 1.00

September 30, 2024 4.50 to 1.00

December 31, 2024 through and including March 31, 2025 4.25 to 1.00

June 30, 2025 4.00 to 1.00

September 30, 2025 and thereafter 3.75 to 1.00

On December 28, 2023, we entered into a sixth amendment to our credit agreement which, among other things, provided for the following:

(i) an increase in the aggregate principal amount of the term loan from $177.5 million to $300 million and an extension of the maturity date of the term loan by one year to October 7, 2026;

(ii) a modification to the amortization payments on the term loan from $5.0 million quarterly to $7.5 million quarterly, commencing with the first quarterly amortization payment due on April 1, 2024;

and (iii) an extension of the maturity date of the revolving credit facility by one year to October 7, 2026.

As a result of the amendment, the capacity under the revolving facility remained unchanged and we have increased availability under the revolving facility by approximately $122.0 million.

We believe our existing balances of cash and cash equivalents, along with our cash flows from operations and debt instruments under our credit agreement mentioned above, will provide sufficient liquidity for our business operations as well as capital expenditures, dividends, and other capital requirements associated with our business operations over the next twelve months and thereafter for the foreseeable future.

Other Obligations and Commitments

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

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

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

We estimate cash requirements for interest payments on our debt facilities to be approximately $32.1 million for 2024, $28.7 million for 2025, and $23.0 million for 2026.

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

The estimates included variable rate interest obligations estimated based on rates as of December 31, 2023.

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

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

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

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

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

Inflation and Pricing

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

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

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

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At the inception of each contract with a customer, we determine our performance obligations under the contract and the contract's transaction price.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and

is defined as the unit of account.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied.

The majority of our contracts have a single performance obligation as the promise to transfer the respective goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct.

For product sales, each product sold to a customer typically represents a distinct performance obligation.

The majority of our contracts have a single performance obligation to transfer goods or services.

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers.

Contract modifications are routine in the performance of our contracts.

Contracts are often modified to account for changes in contract specifications or requirements.

In most instances, contract modifications are for goods or services that are not distinct, and therefore are accounted for as part of the existing contract.

Substantially all Fleet segment revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer.

Sales returns and allowances for vehicle parts are not significant.

Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services.

Our Aviation segment revenues result from the sale of aircraft parts and the performance of MRO services.

Our Aviation segment recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped.

Our Aviation segment recognizes revenues for MRO services over time as the services are transferred to the customer.

MRO services revenue recognized is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore the services transferred to date.

MRO services revenue recognition is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore, the services transferred to date.

Sales returns and allowances are not significant.

Our Federal and Defense segment revenues result from professional and technical services, which we perform for customers on a contract basis.

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

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

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

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

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

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

Revenues on fixed-price contracts are recorded as work is performed over the period.

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

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

For such contracts, we estimate total costs at the inception of the contract based on our assumptions of the cost elements required to complete the associated tasks of the contract and assess the effects of the risks on our estimates of total costs to complete the contract.

Our cost estimates are based on assumptions that include the complexity of the work, our employee labor costs, the cost of materials and the performance of our subcontractors.

These cost estimates are subject to change as we perform under the contract and as a result, the timing of revenues and amount of profit on a contract may change as there are changes in estimated costs to complete the contract.

Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes.

Revenues for time and materials contracts are recorded based on the amount for which we have the right to invoice our customers, because the amount directly reflects the value of our work performed for the customer.

Revenues are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in performance on the contract.

Generally, profits on time and materials contracts result from the difference between the cost of services performed and the contract defined billing rates for these services.

Revenues related to work performed on government contracts at risk, which is work performed at the customer's request prior to the government formalizing funding, is not recognized until it can be reliably estimated, and its realization is probable.

Substantially all Fleet segment revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer.

Sales returns and allowances for vehicle parts are not significant.

Inventory Valuation

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 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.

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

We periodically evaluate the carrying value of inventory, considering 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 on future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Business Combinations

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The results of operations of businesses acquired are included in the consolidated financial statements from their dates of acquisition.

As part of the agreement to acquire certain subsidiaries, we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition.

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

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

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

The fair value is measured each reporting period subsequent to the acquisition date and any changes are recorded within cost and operating expenses within our consolidated statement of income.

Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of the contingent consideration accrued.

Goodwill and Intangible Assets

Goodwill is subject to a review for impairment at least annually.

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.

The goodwill impairment test is performed at the reporting unit level.

Valuation of Goodwill and Intangible Assets

Goodwill represents the excess of fair value of consideration paid for an acquisition over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date.

We evaluate goodwill for our reporting units for impairment at least annually on the first day of the fourth quarter, or whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable.

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

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.

Determining the fair value of a reporting unit requires the exercise of significant management judgments and the use of estimates and assumptions.

We estimate the fair value of our reporting units using a weighting of fair values derived from the income approach and market approach.

Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.

Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions.

The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows.

Under the market approach, we estimate the fair value of a reporting unit based on multiples of earnings derived from observable market data of comparable public companies.

We evaluate companies within our industry that have operations with observable and comparable economic characteristics and are similar in nature, scope and size to the reporting unit being compared.

We analyze historical acquisitions in our industry to estimate a control premium that we incorporate into the fair value estimate of a reporting unit under the market approach.

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.

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

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

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

Based on the assessment, our VSE Aviation reporting unit was determined to be impaired and a $30.9 million impairment charge was recognized.

Based on our annual goodwill impairment test performed in the fourth quarter of 2020, for which a qualitative assessment approach was utilized, it was determined that it was more likely than not that the fair value of our reporting units exceeded their carrying value, and no additional impairment was recognized.

The analysis relies on significant judgements and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, and financial measures derived from observable market data of comparable public companies.

Based on the annual goodwill impairment test performed during the fourth quarter of 2023, we determined that each reporting unit's fair value significantly exceeded its 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.

Accounting for Income Taxes

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

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

Recently Issued Accounting Pronouncements

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

Recent Accounting Pronouncements

See "Nature of Business and Summary of Significant Accounting Policies—Recent Accounting Pronouncements" in Note (1) to our Consolidated Financial Statements included below in Item 8 of this annual report on Form 10-K for additional information.

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What changed 10-K

Item 7. Management’s Discussion and Analysis