UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| | | | | |
| (Mark One) | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20202022
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _____ to _____
Commission File Number: 000-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| | | | | |
| Delaware | 54-0649263 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | | | | |
| 6348 Walker Lane | | | | |
| Alexandria, | Virginia | | | | 22310 |
| (Address of Principal Executive Offices) | | | | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock, par value $0.05 per share | | VSEC | | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by a check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The aggregate market value of outstanding voting stock held by non-affiliates of the Registrant as of June 30, 2020,2022, the last business day of the registrant's most recently completed second quarter, was approximately $279$396 million based on the last reported sales price of the registrant's common stock on the NASDAQ Global Select Market as of that date.
Number of shares of Common Stock outstanding as of February 26, 2021: 12,670,234.28, 2023:12,835,927
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for the Annual Meeting of Stockholders expected to be held on May 5, 2021,3, 2023, which is expected to be filed with the Securities and Exchange Commission on or about April 2, 2021,2023, have been incorporated herein by reference into Part III of this report.
| | | | | | | | |
| TABLE OF CONTENTS |
| | | Page |
| | |
| | | |
| ITEM 1 | | |
| ITEM 1A | | |
| ITEM 1B | | |
| ITEM 2 | | |
| ITEM 3 | | |
| ITEM 4 | | |
| | | |
| | |
| | | |
| ITEM 5 | | |
| ITEM 6 | | |
| ITEM 7 | | |
| ITEM 7A | | |
| ITEM 8 | | |
| ITEM 9 | | |
| ITEM 9A | | |
| ITEM 9B | | |
| ITEM 9C | | |
| | | |
| | |
| | | |
| ITEM 10 | | |
| ITEM 11 | | |
| ITEM 12 | | |
| ITEM 13 | | |
| ITEM 14 | | |
| | | |
| | |
| | | |
| ITEM 15 | | |
| ITEM 16 | | |
| | |
| | |
| | | |
| | |
| | |
| | |
Forward Looking Statements
This Annual Report on Form 10-K ("Form 10-K") contains statements that, to the extent they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of such safe harbor provisions.
“Forward-looking” statements, as such term is defined by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified in Item 1A, "Risk Factors” in this Form 10-K. All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.
Readers are cautioned not to place undue reliance on these forward looking-statements,forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof.
PART I
ITEM 1. Business
History and Organization
VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing repair services, parts distribution, logistics, and supply chain management supportand consulting services for land, sea and air transportation assets to commercial and information technologygovernment markets. The terms "we," "us," "our," "VSE" and energy consultingthe "Company" means VSE Corporation and its operating businesses unless the context indicates otherwise. We provide logistics and distribution services for legacy systems and equipment and professional and technical services to government and commercial markets. We servecustomers; the United States Government (the "government"),government, including the United States Department of Defense ("DoD"),; and federal civilian agencies,agencies. Our operations include supply chain management solutions, parts supply and commercialdistribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, maritime and other customers.
We also provide vehicle and equipment refurbishment, logistics, engineering support, data management and healthcare IT solutions, and clean energy consulting services. VSE was incorporated in Delaware in 1959 and the parent company serves as a centralized managing and consolidating entity for our three operating segments,segments: Aviation, Fleet and Federal and Defense, each of which consists of one or more wholly owned subsidiaries or unincorporated divisions that perform our services. Our operating segments include
We deliver trusted solutions to inspire the Aviation segment, Fleet segment, and Federal and Defense segment. The term "VSE" or "Company" means VSE and its operating businesses unless the context indicates operationsperformance of only VSE as the parent company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues
(in thousands)
Years ended December 31, |
| | 2020 | | % | | 2019 | | % | | 2018 | | % |
| Aviation | $ | 165,070 | | | 25 | | | $ | 224,546 | | | 30 | | | $ | 145,423 | | | 21 | |
| Fleet | 242,170 | | | 37 | | | 214,520 | | | 28 | | | 214,809 | | | 31 | |
| Federal and Defense | 254,419 | | | 38 | | | 313,561 | | | 42 | | | 336,986 | | | 48 | |
| | $ | 661,659 | | | 100 | | | $ | 752,627 | | | 100 | | | $ | 697,218 | | | 100 | |
Aviation
Our Aviation segment accounted for 43%, 33%, and 25% of our consolidated revenues in 2022, 2021 and 2020, respectively. The Aviation segment provides international parts supply and distribution, supply chain solutions, and component and engine accessory maintenance, repair and overhaul ("MRO")MRO services supporting global aftermarket commercial and business and general aviation customers. This business offers a range of services to a diversified global client base of commercial airlines, regional airlines, cargo transporters, MRO integrators and providers, aviation manufacturers, corporate and private aircraft owners, and fixed-base operators ("FBOs").
In 2021, we acquired Global Parts Group, Inc. ("Global Parts"), which provides distribution and MRO services for business and general aviation ("B&GA") aircraft families. The Aviation segment generated approximately 25%acquisition expands our existing B&GA focus and further diversifies our product and platform offerings to include additional airframe components, while expanding our customer base of our consolidated revenues in 2020. This segment did not have any one client that comprised more than 10% of our consolidated revenues in 2020, 2019regional and 2018.global B&GA customers.
Fleet
Our Fleet segment accounted for 27%, 31%, and 37% of our consolidated revenues in 2022, 2021 and 2020, respectively. The Fleet segment provides parts supply,distribution, inventory management, e-commerce fulfillment, logistics data management, and other services to assist aftermarket commercial and federal customersgovernment agencies with their supply chain management. Operations of thisFleet segment operations are conducted by our wholly owned subsidiaryunder the brand Wheeler Fleet Solutions, which supports the government and commercial truck fleets with parts, sustainment solutions and managed inventory services. Revenues for this business are derived from the sale of vehicle parts and mission critical supply chain services to support client truck fleets. The Fleet segment generated approximately 37% of our consolidated revenues in 2020. The United States Postal Service ("USPS") comprised approximately 27%, 22%, and 25% of our consolidated revenues in 2020, 2019 and 2018, respectively.
Federal and Defense
Our Federal and Defense segment accounted for 30%, 36%, and 38% of our consolidated revenues in 2022, 2021 and 2020, respectively. The Federal and Defense segment provides aftermarket refurbishment and sustainment services to extend and maintain the life cycle of military vehicles, ships and aircraft for the DoD. The segment provides foreign military sales services, engineering, logistics, maintenance, configuration management, prototyping, technology, and field support services to the DoD and other customers. We also provide energy consulting services and IT solutions to various DoD, federal civilian agencies and commercial clients. The Federal
In 2021, we acquired HAECO Special Services, LLC ("HSS"), which offers scheduled depot maintenance, contract field deployment and Defense segment generated approximately 38%unscheduled drop-in maintenance for the DoD, primarily for the sustainment of our consolidated revenues in 2020. The foreign military sales program with the U.S. Department of NavyAir Force ("FMS Program"USAF") comprised approximately 15%, 12%, and 21% of our consolidated revenues in 2020, 2019 and 2018, respectively.KC-10 fleet.
Acquisition and Divestitures
In January 2019, we acquired 1st Choice Aerospace Inc. ("1st Choice Aerospace"), with operations in Florida and Kentucky. 1st Choice Aerospace provides component MRO services and products for new generation and legacy commercial aircraft families. 1st Choice Aerospace is a subsidiary of VSE Aviation, Inc., under our Aviation segment.
In February 2020, we sold our subsidiary Prime Turbines, LLC ("Prime Turbines") and certain related inventory assets for $20.0 million in cash and a $8.3 million note receivable to be paid over a period from 2020 through 2024. Our Aviation segment discontinued turboprop engine MRO services, and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets. Prime Turbines' revenues totaled less than 1% and approximately 4% of our revenue for 2020 and 2019, respectively.
In June 2020, we sold all of the inventory of our subsidiary CT Aerospace, LLC ("CT Aerospace") for a $6.9 million note receivable to be paid to us over a period from 2020 through 2025. Our Aviation segment discontinued sales and leasing of engines and supply of used serviceable engine parts. CT Aerospace's revenues totaled less than 1% and less than 2% of our revenue for 2020 and 2019, respectively.
See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our acquisition and divestitures.
Products and Services
We provide a broad array of capabilities and resources to support our clients’ aftermarket transportation assets, vehicle fleets, aircraft, systems, equipment and processes. We focus on creating value by sustaining and extending the life and improving the performance of our client assets through core offerings in supply chain management, parts supply and distribution, MRO, equipment refurbishment, logistics and engineering. We also provide IT solutions and energy consulting services.
Typical offerings include supply chain and inventory management services; vehicle fleet sustainment programs; vehicle fleet parts supply and distribution; MRO of aircraft components and engine accessories; aircraft engine and airframe parts supply and distribution; engineering support for military vehicles; military equipment refurbishment and modification; ship MRO and follow-on technical support; logistics management support; sustainable energy supply and electric power grid modernization projects, IT infrastructure and data management, and IT data services for health and public safety. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for more information regarding our business.
Revenues and Contracts
We offer our products and professional services through various ordering arrangements, including master service agreements (MSAs), commercial contracts, and federal contract awards. Our revenues are derived from the delivery of products and from contract services performed for our customers. We offercustomers for each of our products and professional and technical services through various ordering agreements and negotiated and competitive contract arrangements.three segments as follows:
•Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services forto private and commercial aircraft owners, aviation MRO providers, aviation original equipment manufacturers and other clients. Revenues for the sale of aircraft parts are recognized at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped. Revenues for MRO services are recognized over time as the services are transferred to the customer. MRO services revenue recognized is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore the services transferred to date.
•Our Fleet segment revenues result from the sale of aftermarket vehicle parts to government and commercial clients. We recognize revenue from the sale of vehicle parts when the customer takes ownership of the parts.
•Our Federal and Defense segment revenues result from providing professional and technical services that are performed forprimarily to U.S. government 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, with revenue recognized in direct proportion to our present right to consideration for progress toward the complete satisfaction of the performance obligation. Revenues on fixed-price contracts are recorded as work is performed over the period. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion. Revenues for time and
materials contracts are recorded based on the amount we have the right to invoice our customers for work performed and materials delivered.
Customers
Our customers include various commercial entities and government clientsclients. In 2022, our commercial customers represented 53% of our consolidated revenues, up from 43% and commercial entities.31% in 2021 and 2020, respectively. Our consolidated revenue by customer type are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | % | | 2021 | | % | | 2020 | | % |
| Commercial | | $ | 507,900 | | | 53 | | | $ | 322,318 | | | 43 | | | $ | 208,305 | | | 31 | |
| DoD | | 227,722 | | | 24 | | | 233,422 | | | 31 | | | 236,397 | | | 36 | |
Other government (a) | | 214,140 | | | 23 | | | 195,113 | | | 26 | | | 216,957 | | | 33 | |
| Total | | $ | 949,762 | | | 100 | | | $ | 750,853 | | | 100 | | | $ | 661,659 | | | 100 | |
| (a) Includes USPS revenue | | | | | | | | | | | | |
Our largest customers by revenue for each of the last three fiscal years were the USPS work and FMS Programthe U.S. Navy. The USPS revenues, reported within our Fleet segment, comprised approximately 27%16%, 20%, and 15%27% of our 2020 consolidated revenues in 2022, 2021 and 2020, respectively. NoneThe U.S. Navy revenue, reported within our Federal and Defense segment, comprised approximately 15%, 13%, and 16% of our other customers comprise a significant amount of ourconsolidated revenues in 2022, 2021 and 2020, consolidated revenues.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues by Customer
(dollars in thousands)
Years ended December 31, |
| Customer | | 2020 | | % | | 2019 | | % | | 2018 | | % |
| DoD | | $ | 236,397 | | | 36 | | | $ | 304,334 | | | 41 | | | $ | 334,494 | | | 48 | |
Other government* | | 216,957 | | | 33 | | | 205,775 | | | 27 | | | 212,118 | | | 30 | |
| Commercial | | 208,305 | | | 31 | | | 242,518 | | | 32 | | | 150,606 | | | 22 | |
| Total | | $ | 661,659 | | | 100 | | | $ | 752,627 | | | 100 | | | $ | 697,218 | | | 100 | |
*USPS is part of Other governmentrespectively.
Backlog
FundedOur funded backlog represents a measurethe estimated remaining value of potential future revenues from work to be performed onunder firm contracts under our Federal and Defense segment government contracts. Fundedsegment. Bookings for our Aviation and Fleet segments occur at the time of sale, and therefore, these segments do not generally have funded contract backlog and backlog is defined as the appropriated and funded valuenot an indicator of contracts, less the amount of revenues recognized on such contracts. Our reported backlog is comprised of funding received in incremental amounts for work that is generally expected to be completed within six to twelve months following the award of the funding.their potential future revenues. Our funded backlog for our Federal and Defense segment as of December 31, 2020, 20192022, 2021 and 20182020 was approximately $183$187 million,$213 $185 million and $290$183 million, respectively. ChangesFor a complete description of our backlog, see "Bookings and Funded Backlog" in funded backlog on contracts are sometimes unpredictable due to uncertainties associated with changing government program priorities"Management's Discussion and availabilityAnalysis of funds, which is heavily dependent upon the congressional authorizationFinancial Condition and appropriation process. DelaysResults of Operations" in Part II of this process may temporarily diminish the availabilityreport.
In addition to funded backlog levels, we have contract ceiling amounts available for use on multiple award, indefinite delivery, indefinite quantity contracts with DoD and federal civilian agencies. While these contracts increase the opportunities available for us to pursue future work, the actual amount of future work is indeterminate until task orders are placed on the contracts. Frequently, these task orders are competitively awarded. Additionally, these task orders must be funded by the procuring agencies before we can perform work and begin generating revenues.
Marketing
Our marketing activities are conducted by each of our businesses by industry-specific sales representatives and professional marketing and business development staff. New customer contacts and information concerning new programs, requirements and opportunities become available through sales calls and client visits, negotiation with key business partners, and formal and informal briefings. We also participate in various professional organizations and trade associations, and also attend industry trade shows and events in the course of contract performance,order to increase our brand awareness and obtain literature published by government, trade associations, professional organizations and commercial entities.strengthen our service offerings.
Human Capital Resources
Workforce Demographics
Our employees have a variety of specialized experience, training and skills that provide the expertise required to service our clients.customers. As of December 31, 2020,2022, we had approximately 1,900 employees, compared to approximately 2,800 as of December 31, 2019.employed over 2,000 employees. Principal employee categories include (a) mechanics and vehicle, aircraft and equipment technicians, (b) logisticians, (c) warehouse and sales personnel, (d) engineers and technicians in mechanical, electronic, industrial, energy services, and (e) information technology professionals in computer systems, applications and products, configuration, change and data management disciplines. The expertise required by our customers frequently includes knowledge of government regulations and procedures. The amount of our unionized employees varies depending on the types of U.S. Government programs that we are supporting at any given time. As of December 31, 2020,approximately 35% of our total workforce was unionized, compared to 35% as of December 31, 2019.
We actively seek initiativesEmployee Health and participate in outreach programs to assist individuals who served in the U.S. Armed Forces. These efforts include an emphasis on hiring military veterans to enhance the quality of our workforce.Safety
We are committed to providing a safe working environment for our employees. Supported by our Health, Environmental and Safety Program, we strive to minimize the risk of injury or illness to workers. We provide our employees with upfront and ongoing safety trainingstraining to ensure thatcommunicate and implement safety policies and procedures are effectively communicated and implemented.procedures. We also provide our employees with any additional information, leadership, support and equipment needed to safely perform their job function.
Talent Acquisition, Retention and Development
We strive to attract and retain top talent at all levels of the company. To support this objective, we seek to provide opportunities for professional development and career growth and recognize and reward our employees for their contributions and accomplishments.
We encourage employees to provide feedback about their experience and we regularly conduct employee engagement surveys to gauge employee satisfaction and to understand the effectiveness of engaging our employees on all levels. These surveys provide valuable information on drivers of engagement and areas of improvement to help us maintain an employee-focused experience and culture. We also host quarterly town hall meetings to provide an open and frequent line of communication for all employees.
Company culture is a priority. We model our values and focus on our cultural beliefs through recognition, storytelling and creating experiences. Our people and teams remain a key market differentiator for our business.
We offer competitive pay and comprehensive benefits to attract, reward and retain a qualified and diverse workforce to achieve our vision and mission and meet the dynamic needs of employees and their families. In addition to competitive base pay, we offer annual bonus opportunities, a Company matched 401(k) plan, an employee stock purchase plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave,holiday pay, flexible work schedules, and education reimbursement and employee assistance programs.
Inclusion and Diversity
We embrace and encourage inclusion in orderand strive to achievebuild a culture and company environment supporting inclusion and diversity. Our inclusion and diversity initiatives include our practices and policies on employee recruitment and hiring, professional training and development, employee engagement and the development of a work environment built on the premise of diversity and equity. In 2020, we formed the VSE Inclusion & Diversity Council an employee led("I&D Council"), a leader-led group focused on creating a framework and action plan for inclusion and diversity related initiatives across the organization. Our I&D Council regularly hosts roundtable discussions aimed at increasing cultural awareness and promoting dialogue to encourage a culture that values inclusive behavior in our workplace. We also support employee resource groups, which are voluntary, employee-led groups that are open to all employees and provide a forum for diverse employees and allies from a variety of different backgrounds to share experiences and support our company's diversity initiatives. We believe our employee resource groups, which include Women in the Workforce, Pride, and Latinos Unidos, help foster a diverse and inclusive workplace, build
awareness and drive change within our organization. Additionally, we actively seek initiatives and participate in outreach programs to assist individuals who served in the U.S. Armed Forces. These efforts include an emphasis on hiring military veterans to enhance the quality of our workforce.
Code of Business Conduct and Ethics
We are committed to the highest ethical standards and we expect all of our directors, officers and employees to comply with our standards and applicable laws and regulations in the conduct of our business. Our Code of Business Conduct and Ethics (the "Code") sets forth our policies and expectations on what is appropriate behavior and guides ethical business decisions that maintain a commitment to integrity. In addition, we require annual ethics and compliance training for all of our employees to provide them with the knowledge necessary to maintain our standards of ethics and compliance.
Government Regulation and Supervision
Our businesses are subject to extensive regulation in the markets we serve. We work with numerous U.S. government agencies and entities, including but not limited to, all branches of the DoD and the Federal Aviation Administration ("FAA"). Similar government authorities and Defense segment businessregulations exist in the other countries in which we do business.
Commercial Aircraft
The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States. Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. The inspection, maintenance and repair procedures for various types of aircraft and equipment are prescribed by these regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. The FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services.
Government Contracts
We must comply with and are affected by a variety of laws and regulations relating to the award, administration, and performance of U.S. Government contracts. See Item A, "Risk Factors".
Our Federal and Defense segment operates in a heavily regulated environment and isWe are routinely audited and reviewed by the U.S. Government and its agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency. These agencies evaluate our contract performance, cost structures, and compliance with applicable laws, regulations, and standards, as well as review the adequacy of our business systems and processes relative to U.S. Government requirements. Business systems subject to audit or review include our accounting systems, purchasing systems, government property management systems, and estimating systems. If an audit uncovers improper or illegal activities, we may be subject to administrative, civil, or criminal proceedings, which could result in fines, penalties, repayments, or compensatory, treble, or other damages. Certain U.S. Government findings against a contractor can also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. In addition, any costs we incur that are determined to be unallowable or improperly allocated to a specific contract will not be recovered or must be refunded if already reimbursed.
The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or partially withhold contract payments if it determines significant deficiencies exist in one or more such systems.
The U.S. Government generally has the ability to terminate contracts, in whole or in part, with little or no prior notice, for convenience or for default based on performance.our failure to meet specified performance requirements. In the event of termination of a contract for convenience, a contractor is customarilywe would be able to recover costs already incurred on the contract and receive profit on those costs up to the amount authorized under the contract, but not the anticipated profit that would have been earned had the contract been completed. Such a termination could also result in the cancellation of future work on the related program. Termination resulting from our default could expose us to various liabilities, including excess re-procurement costs, and could have a material effect on our ability to compete for future contracts.
OurFor additional information on regulations and risks affecting our business, our contracts with various agencies of the U.S. Government, and our subcontracts with other prime contractors are subjectrefer to a variety of laws and regulations, including, but not limited to, the Federal Acquisition Regulation, the Truth in Negotiations Act, the Procurement Integrity Act, the False Claims Act, U.S. Cost Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act. A noncompliance determination by a government agency may result in reductions in contract values, contract modifications or terminations, penalties, fines, repayments, compensatory, treble, or other damages, or suspension or debarment.
We have incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations. We believe that our operations currently are being conducted in substantial compliance with all applicable regulations. From time to time, we may experience incidents and encounter conditions that are not in compliance with regulations. We may occasionally receive notices from governmental agencies regarding potential violations of these laws or regulations. In such cases, we will
work with the agencies to address any issues and to implement appropriate corrective action when necessary. However, we do not know of any fact or condition that would result in any material liabilities being incurred in the future.Item 1A., "Risk Factors".
Competition
The supply chain, logistics, distribution,All of our businesses operate in highly competitive industries that include numerous competitors, many of which are larger in size and MRO services offered by our Aviation and Fleet segments and the federally contracted professional and technical services offered by our Federal and Defense segment are conducted in very competitive operating environments. The vehicle parts aftermarket and aviation parts and repair markets are fragmented, with many large and small global private and public competitors that compete for our customer base.
Large, diversified federal contracting firms withhave greater financialname recognition, financials resources and larger technical staff are capable of providing the same services offered by us. than we do. We also compete against smaller, more specialized competitors that concentrate their resources on narrower service offerings.
Government agencies emphasize awarding contracts on a competitive basis, as opposed to a sole source or other noncompetitive basis. Most of the significant contracts under which our Federal and Defense segment currently performperforms services were either initially awarded on a competitive basis or have been renewed at least once on a competitive basis. These contracts may be indefinite delivery/indefinite quantity type contracts for which the government makes awards for work among several other eligible contract holders, or they may be single award contracts with multiple option years that may or may not be exercised. Accordingly, there can be no assurance regarding the level of work we may obtain under some of these contracts. Government budgets, and in particular the budgets of certain government agencies, can also affect competition in our business.
A reallocation of government spending priorities or reallocation of work for small business set-aside programs that results in lower levels of potential business in the markets we serve or the services we offer can cause increased competition.
The extent of competition that we will encounter as a result of changing economic or competitive conditions, customer requirements or technological developments is unpredictable. We believe the principal competitive factors for our business are customer knowledge, technical and financial qualifications, past performance, government budgetary priorities, sales force initiatives and price.
Available Information
CopiesWe maintain an internet website at www.vsecorp.com. We make available free of charge through our publicly availablewebsite, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are filed with or otherwise furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. Such reports and amendments are also available to the public free of charge through our website www.vsecorp.comAct as soon as reasonably practicable after the reports are electronically filed with the SEC. The information on or obtainable through our website is not intended to be incorporate into this Annual Report on Form 10-K. The SEC also maintains an Internet siteinternet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM 1A. Risk Factors
Our future results may differ materially from past results and from those projected in the forward-looking statements contained in this Form 10-K due to various uncertainties and risks, including those risks set forth below, nonrecurring events and other important factors disclosed previously and from time to time in our other reports filed with the SEC.
Operational Risks
The COVID-19 outbreak has adversely affectedWe face various risks related to health epidemics, pandemics and similar outbreaks, which could in the future continue to adversely affect our business.
We face a wide variety of risks related to health epidemics, pandemics and similar outbreaks, including COVID-19. The ongoing COVID-19 pandemic ishas adversely affecting,affected, and is expected tomay continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience varying levels of reductions in demand for our products and services, particularly in the aviation aftermarket.systems. The global aviation market is experiencingexperienced a significant decline during the peak of the COVID-19 pandemic, specifically in global commercial air travel, which is havinghad a significant impact on the parts distribution and maintenance, repair and overhaul services markets supporting general aviation and commercial aircraft. Our Aviation segment experienced the most impactful reduction in demand for our products and services during fiscal 2021 and fiscal 2020 compared to fiscal 2019, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services. WeWhile we have seen recovery in the overall demand for commercial air travel and currently expect this reduction in demandthat recovery to continue, throughoutany future outbreaks of COVID-19 or other epidemics, pandemics, crises or public health concerns in regions of the first half of 2021. This decrease in demand willworld where we have operations or sell products, together with governmental and regulatory responses thereto, could adversely impact the Aviation segment and our operating results for 2021. We cannot estimate with certainty the severity of this impact, but we expect it to be consistent with overall aviation industry trends.results.
We operate numerous “touch labor” warehouse and maintenance facilities supporting eachThe extent of our three business segments both in our own facilities and customer facilities. A local outbreak of the virus in any of these facilities could temporarily shut down operations at those facilities until they have been thoroughly cleaned. Employees who become exposed to the virus would need to be quarantined and would be unable to work for 14 days or longer. Similarly, customers who have warehouse or maintenance facilities could be impacted, slowing or reducing demand for our parts distribution services.
Due to the impact of COVID-19 or other epidemics, pandemics, crises or public health concerns on our business, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, will depend on numerous evolving factors that we cannot accurately predict or assess, including the negative impact it has on global and regional economies and economic activity; decisions by our customers to delay the use of, or permanently retire, certain aircraft, demand levels for aviation disruption inventory, could decrease in the near term or midterm, which could result in a and adversely affect our results of operations; write-down of existing inventory to adjust to current market trendstrends; and disruption in demand, which adversely affect our results of operations. Furthermore, as a result of COVID-19, some ofimpacts our commercial customers in the Aviation segment have beensegment. Any of these events could exacerbate the other risks and uncertainties described herein, or in other reports filed with the SEC from time to time, and could continuematerially adversely affect our business, financial condition, results of operations and/or stock price.
Supply chain delays, disruptions, and potential geopolitical uncertainty could adversely affect our business operations and expenses
Due to current economic and geopolitical uncertainty and supply chain disruptions, our business could be negativelyadversely impacted by delays or the inability to source products and services for our customers. If our suppliers experience increased disruptions to their operations as a result of disruptionthese dynamics, they may be unable to fill our supply needs in demand, which has led toa timely, compliant and cost-effective manner. We have incurred and may in the future incur additional costs and delays and could lead to defaults on collections of receivables from them. Such continued delays could further negatively impactin our business, results of operationsincluding higher prices, schedule delays or the costs associated with identifying alternative suppliers. In instances where we may not be able to mitigate these consequences, our ability to perform on our contracts may be impacted, which could result in reduced revenues and financial condition.profits.
The impact of the COVID-19 pandemic continues to evolve, and while we expect it toWe continue to have an adverse effect onmonitor these dynamics and assess potential implications to our business, financial condition, liquidity, cash flowsupply chain and results of operations,customers, and take certain actions in an effort to mitigate potential adverse impacts. Given the uncertainties, we are unable to predict the extent, nature or duration of these impacts at this time, although we expect such negative impacts to continue in the first half of 2021.time.
Certain programs comprise a material portion of our revenue. Our work on large government programs presents a risk to revenue growth and sustainability and profit margins.
The eventual expiration of large government programs or the loss of or disruption of revenues on a single contract may reduce our revenues and profits. Such revenue losses could also erode profits on our remaining programs that would have to absorb a larger portion of the fixed corporate costs previously allocated to the expiring programs or discontinued contract work. Our USPS managed inventory program and our FMS Program each constitute a material portion of our revenues and profits. This concentration of our revenue subjects us to the risk of material adverse revenue disruptions if customer operational decisions, government contractual or other issues prevent or delay the fulfillment of work requirements associated with these key programs. In recent years, revenue levels for our FMS Program have fluctuated widely enough to cause material changes in our
overall revenue levels and affect our profit margins. Similarly, variations in volume and types of parts purchased by the USPS in recent years have caused changes in our profit margins.
The USPS has initiated a fleet replacement program for a next generation of the delivery vehicle fleet. The timing of both the roll out of a new fleet and the retirement of the current vehicles and their decision on how many of such vehicles will remain in the fleet could potentially have a significant impact on our future revenues and profits.
Acquisitions, which have beenare a part of our business strategy, in recent years, present certain risks.
A key element of our business strategy is growth through the acquisition of additional companies. VSE is focused on acquiring complementary assets that add new products, new customers, and new capabilities or new geographic and/or operational competitive advantages in both new and existing markets within our core competencies. Our acquisition strategy is affected by, and poses a number of challenges and risks, including availability of suitable acquisition candidates, availability of capital, diversion of management’s attention, effective integration of the operations and personnel of acquired companies, potential write downs of acquired intangible assets, potential loss of key employees of acquired companies, use of a significant portion of our available cash, compliance with debt covenants and consummation of acquisitions on satisfactory terms.
We may not be able to successfully execute our acquisition strategy, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Changes in future business conditions could cause business investments, recorded goodwill, and/or purchased intangible assets to become impaired, resulting in substantial losses and write-downs that would reduce our operating income.
As part of our business strategy, we acquire non-controlling and controlling interests in businesses. We make acquisitions and investments following careful analysis and due diligence processes designed to achieve a desired return or strategic objective. Business acquisitions involve estimates, assumptions, and judgments to determine acquisition prices, which are allocated among acquired assets, including goodwill, based upon fair market values. Notwithstanding our analyses, due diligence processes, and business integration efforts, actual operating results of acquired businesses may vary significantly from initial estimates. In such events, we may be required to write down our carrying value of the related goodwill and/or purchased intangible assets. In addition, declines in the trading price of our common stock or the market as a whole can result in goodwill and/or purchased intangible asset impairment charges associated with our existing businesses.
As of December 31, 2020,2022, goodwill and purchased intangible assets, generated from prior business acquisitionsnet of amortization, accounted for approximately 31%25% and 13%9%, respectively, of our total assets. We evaluatetest our goodwill values for impairment annually in the fourth quarter or when evidence of potential impairment exists. We also evaluate the values of purchasedtest acquired intangible assets when evidence of potentialfor impairment exists.whenever events or changes in circumstances indicate their carrying value may be impaired. The impairment tests are based on several factors requiring judgments. As a general matter, a significant decrease in expected cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or purchased intangible assets.
Adverse equity market conditions that result in a decline in market multiples and the trading price of our common stock, or other events, such as reductions in future contract awards or significant adverse changes in our operating margins or the operating results of acquired businesses that vary significantly from projected results on which purchase prices are based, could result in an impairment of goodwill or other intangible assets. Any such impairments that result in us recording additional goodwill or intangible asset impairment charges could have a material adverse effect on our financial position or results of operations.
Intense competitionCompetition from existing and new competitors may harm our business.
The aviation and vehicle parts industries are highly fragmented, have several highly visible leading companies, and are characterized by intense competition. Some of our OEM competitors have greater name recognition than VSE or our subsidiaries, as well as complementary lines of business and financial, marketing and other resources that we do not have. In addition, OEMs, aircraft maintenance providers, leasing companies and U.S. Federal Aviation Administration ("FAA") certificated repair facilities may attempt to bundle their services and product offerings in the supply industry, thereby significantly increasing industry competition.
Pressure on government budgets may adversely affect the flow of work to federal contractors, particularly new programs. Competitor contractors that experience a loss of government work have tended to redirect their marketing efforts toward the types of work that we perform. This increase in competition for our service offerings may adversely affect our ability to win
new work or successor contracts to continue work that is currently performed by us under expiring contracts. Unsuccessful bidders frequently protest contract awards, which can delay or reverse the contract awards. Additionally, the government has frequently used contract award criteria that emphasizes lowest price, technically acceptable bids, which further intensifies competition in our government markets.
Our success is highly dependent on the performance of the aviation aftermarket, which could be impacted by lower demand for business aviation and commercial air travel or airline fleet changes causing lower demand for our goods and services.
General global industry and economic conditions that affect the aviation industry may also affect our business. We are subject to macroeconomic cycles, and when recessions occur, we may experience reduced orders, payment delays, supply chain disruptions or other factors as a result of the economic challenges faced by our customers, prospective customers and suppliers. Further, the aviation industry has historically, from time to time, been subject to downward cycles which reduce the overall demand for jet engine and aircraft component replacement parts and repair and overhaul services, and such downward cycles result in lower sales and greater credit risk. Demand for commercial air travel can be influenced by airline industry profitability, world trade policies, government-to-government relations, terrorism, disease outbreaks, environmental constraints imposed upon aircraft operations, technological changes, price and other competitive factors. These global industry and economic conditions may have a material adverse effect on our business, financial condition and results of operations.
The COVID-19 pandemic has resulted in travel disruption has had an adverse impact on airline spending and demand that has caused a reduction in demand for our aviation products and services for most of 2020. At this point, the extent or duration of the impact that the COVID-19 pandemic may have on our future results remains uncertain.
Global economic conditions and political factors could adversely affect our revenues.
Revenues for work performed in or products delivered to foreign countries are subject to economic conditions in these countries and to political risks posed by ongoing foreign conflicts and potential terrorist activity. Significant domestic and political unrest in client countries can constrain our ability to maintain consistent staffing levels, resulting in a fluctuating level of services performed by our employees. We cannot predict when these conditions will occur or the effect it will have on our revenues. Regime changes in these countries can result in government restrictions upon the continuation of ongoing work. Economic conditions in both the United States and foreign countries, and global prices and availability of oil and other commodities could potentially have an adverse effect on the demand for some of our services, including our aviation services.
Prolonged periods of inflation where we do not have adequate inflation protections in our customer contracts may adversely affect us by increasing costs beyond what we can recover through price increases.
Recently, inflation has increased throughout the U.S. economy. Inflation can adversely affect us by increasing the costs of labor, material and other costs. In addition, inflation is often accompanied by higher interest rates, which could increase the cost of our outstanding debt obligations. In an inflationary environment, depending on economic conditions, we may be unable to raise prices enough to keep up with the rate of inflation, which would reduce our profit margins. Although we have minimized the effect of inflation on our business through contractual protections, the presence of longer pricing periods within our contracts increases the likelihood that there will be sustained or higher than anticipated increases in costs of labor or material. We have experienced, and continue to experience, increases in the prices of labor, materials and other costs of providing service. Continued inflationary pressures could impact our profitability.
The nature of our operations and work performed by our employees present certain challenges related to work forceworkforce management.
Our financial performance is heavily dependent on the abilities of our operating and administrative staff with respect to technical skills, operating performance, pricing, cost management, safety, and administrative and compliance efforts. A wide diversity of contract types, nature of work, work locations, and legal and regulatory complexities challenges our administrative staff and skill sets. We also face challenges associated with our quality of workforce, quality of work, safety, and labor relations compliance. Our current and projected work in foreign countries exposes us to challenges associated with export and ethics compliance, local laws and customs, workforce issues, extended supply chain, political unrest and war zone threats. Failure to attract or retain an adequately skilled workforce, lack of knowledge or training in critical functions, or inadequate staffing levels can result in lost work, reduced profit margins, losses from cost overruns, performance deficiencies, workplace accidents, and regulatory noncompliance.
Our business could be adversely affected by incidents that could cause an interruption in our operations or impose a significant financial liability on us.
Disruption of our operations due to internal or external system or service failures, accidents or incidents involving employees or third parties working in high-risk locations, or natural disasters, health crisis, epidemics or pandemics, including the COVID-19
pandemic, or other crises could adversely affect our financial performance and condition. The COVID-19 pandemic could potentially impact our global supply chain network for any of our segments. A fire, flood, earthquake, or other natural disaster, health crises, epidemic, pandemic or other crisis at or affecting physical facilities that support key revenue generating operations, or a procurement system or contractual delay could potentially interrupt the revenues from our operations.
Investments in inventory and facilities could cause losses if certain work is disrupted or discontinued.
We have made investments in inventory, facilities and lease commitments to support specific business programs, work requirements, and service offerings. A slowing or disruption of these business programs, work requirements, or service offerings that results in operating below intended levels could cause us to suffer financial losses.
We are dependent on access to and the performance of third‑third party package delivery companies.
Our ability to provide efficient distribution of the products we sell to our customers is an integral component of our overall business strategy, both domestic and international. We do not maintain our own delivery networks, and instead rely on third‑party package delivery companies. We cannot assure that we will always be able to ensure access to preferred shipping and delivery companies or that these companies will continue to meet our needs or provide reasonable pricing terms. In addition, if the package delivery companies on which we rely on experience delays resulting from inclement weather or other disruptions, we may be unable to maintain products in inventory and deliver products to our customers on a timely basis, which may adversely affect our results of operations and financial condition.
Uncertain government budgets and shifting government priorities could delay contract awards and funding and adversely affect our ability to continue work under our government contracts. Additionally, federal procurement directives could result in our loss of work on current programs to small business set-asides and large multiple award contracts.
Our government business is subject to funding delays, terminations (including at the government's convenience), reductions, in-sourcing, extensions and moratoriums associated with the government’s budgeting and contracting process. The federal procurement environment is unpredictable and could adversely affect our ability to perform work under new and existing contracts. We have experienced delays in contract awards and funding on our contracts in recent years that have adversely affected our ability to continue existing work and to replace expiring work. Additionally, our government business is subject to the risk that one or more of our potential contracts or contract extensions may be diverted by the contracting agency to a small or disadvantaged or minority-owned business pursuant to set-aside programs administered by the U.S. Small Business Administration, or may be bundled into large multiple award contracts for very large businesses. These risks can potentially have an adverse effect on our revenue growth and profit margins.
Changes to DoD business practices could have a material effect on DoD's procurement process and adversely impact our current programs and potential new awards.
The defense industry has experienced, and we expect will continue to experience, significant changes to business practices resulting from greater DoD focus on affordability, efficiencies, business systems, recovery of costs, and a re-prioritization of available defense funds to key areas for future defense spending. The DoD continues to adjust its procurement practices, requirements criteria, and source selection methodology in an ongoing effort to reduce costs, gain efficiencies, and enhance program management and control. We expect the DoD's focus on business practices to impact the contracting environment in which we operate as we and others in the industry adjust our practices to address the DoD's initiatives and the reduced level of spending by the DoD. Depending on how these initiatives are implemented, they could have an impact on our current programs, as well as new business opportunities with the DoD. As a result of certain of these initiatives, we experienced, and may continue to experience, a higher number of audits and/or lengthened periods of time required to close open audits. Such additional or lengthier audits could have a material adverse effect on our business, financial condition and results of operations.
Legal and Regulatory Risks
Our business could be adversely affected by government audits or investigations.
Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and the Department of Labor, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the
contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed and any such costs already reimbursed must be refunded.
The scope and rigor of government agency audits and investigations have increased in recent years, resulting in a greater likelihood that an audit or investigation may result in an adverse outcome. We have been subject to unfavorable findings and recommendations from various government agencies from time to time. We expect that government agencies will continue to rigorously audit and investigate us and there may be adverse or disputed findings, resulting in corrective action plans and/or settlements.
If an audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with the government. In addition, we could suffer serious harm to our reputation if
allegations of impropriety were made. Performance of international work can expose us to risks associated with the Foreign Corrupt Practices Act and Export Control Act compliance.
We are subject to numerous government rules and regulations that could expose us to potential liabilities or work loss.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts. A violation of laws or regulations could result in the imposition of fines and penalties or the termination of contracts or debarment from working or bidding on government contracts.
In some instances, these government contract laws and regulations impose terms or rights that are significantly more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the government may terminate any government contract or subcontract at its convenience, as well as for performance default.
A termination for default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. A termination for default could also impact our past performance and ability to obtain new or additional work. In addition, the government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of services provided by us as a subcontractor.
Additionally, our contract work that is performed by our subcontractors is subject to government compliance, performance requirements and financial risks. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor may be jeopardized.
The aviation industry is highly regulated by the FAA and similar regulatory agencies in other countries. Aviation engines, engine accessories and components that we sell must meet certain airworthiness standards established by the FAA or the equivalent agencies in certain other countries. We also operate repair facilities that are licensed by the FAA and equivalent agencies of certain other countries to perform such services. New and more stringent regulations may be adopted in the future that could have an adverse effect on us.
Lastly, border tariffs and new trade deals could have significant effects on our customers and, in turn, on our suppliers, which may impact our business.
Due to the nature of our work, we could potentially be exposed to legal actions arising from our operations.
Our work includes many manual tasks, including warehousing, shipping and packing of truck parts inventory, maintaining and repairing military and non-military vehicles, aircraft and equipment, and maintaining and overhauling U.S. Navy ships. Some of our work efforts involve the handling of hazardous materials. These services may pose certain challenges that could cause us to be exposed to legal and other liabilities arising from performance issues, work related incidents or employee misconduct that result in damages, injury or death to third parties. Such events could cause us to suffer financial losses and adversely affect our financial condition. See Item 3, "Legal Proceedings” below.
Environmental and pollution risks could potentially impact our financial results.
Our operations are subject to and affected by a variety of existing federal, state, and local environmental protection laws and regulations. In addition, we could be affected by future laws or regulations, including those imposed in response to concerns over climate change, other aspects of the environment, or natural resources. We expect to incur future capital and operating costs to comply with current and future environmental laws and regulations, and such costs could be substantial, depending on
the future proliferation of environmental rules and regulations and the extent to which we discover currently unknown environmental conditions.
Some of our contract work includes the use of chemical solvents and the handling of hazardous materials to maintain, repair, and refurbish vehicles, aircraft engines, and equipment. This exposes us to certain environmental and pollution risks. Various federal, state, and local environmental laws and regulations impose restrictions on the discharge of pollutants into the environment and establish standards for the transportation, storage, and disposal of toxic and hazardous wastes. Substantial fines, penalties, and criminal sanctions may be imposed for noncompliance, and certain environmental laws impose joint and several "strict liability" for remediation of spills and releases of oil and hazardous substances. Such laws and regulations impose liability upon a party for environmental cleanup and remediation costs and damage without regard to negligence or fault on the part of such party and could expose us to liability for the conduct of or conditions caused by third parties.
Costs associated with compliance with Federal, State and local provisions regulating the discharge of materials or that otherwise relate to the protection of the environment have not had a material adverse effect on our capital expenditures, earnings, or competitive position. However, we cannot predict the likelihood of such a material adverse effect should we experience the occurrence of a future environmental or pollution event.
The adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations, imposition of new cleanup requirements, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover related costs under our government contracts, or the financial insolvency of other responsible parties could cause us to incur costs that could have a material adverse effect on our financial position, results of operations, or cash flows.
Technology Risks
Technology security and cyber-attack risks could potentially impact our financial results.
We face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients' proprietary or classified information.
Some of our contract work includes data management and technology services associated with Social Security Administration and military medical and health records. This exposes us to certain information and technology security risks. If there is a security breach of sensitive data in our custody or for which we provide services, we could possibly be held liable for damages to third parties related to such security breach and incur costs to prevent future incidents. We also provide refurbishment, maintenance and training services support to international clients directly and through the DoD. Foreign nations with interests that conflict with the international clients we support could be motivated to conduct a cyber-attack to access information on these programs.
We maintain a cybersecurity risk management program to monitor and mitigate cybersecurity threats and an incident response plan for emerging threats. Costs associated with preventing or remediating information management security breaches or complying with related laws and regulations have not had a material adverse effect on our capital expenditures, earnings or competitive position. Additionally, we have obtained insurance that provides coverage for certain cybersecurity incidents. However, the occurrence of a future security breach event could potentially have such an adverse effect.
Financial Risks
There can be no assurance we will continue to pay dividends at current levels or in the future.
The payment of cash dividends and repurchases of our common stock are subject to limitations under applicable law and our bank loan agreement, and to the discretion of our board of directors, considered in the context of then current conditions, including our earnings, other operating results, and capital requirements. Declines in asset values or increases in liabilities, including liabilities associated with benefit plans and assets and liabilities associated with taxes, can reduce stockholders’ equity. A deficit in stockholders’ equity could limit our ability under Delaware law to pay dividends.
Our debt exposes us to certain risks.
As of December 31, 2020,2022, we had $251286 millionof total debt outstanding (net of unamortized debt issuance costs). The amount of our existing debt, combined with our ability to incur significant amounts of debt in the future, could have important consequences, including:
•Increasing our vulnerability to adverse economic or industry conditions;
•Requiring us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, strategic initiatives, and general corporate purposes;
•Increasing our vulnerability to, and limiting our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
•Exposing us to the risk of higher interest rates on borrowings under our Credit Facility, which are subject to variable rates of interest;
•Placing us at a competitive disadvantage compared to our competitors that have less debt; and
•Limiting our ability to borrow additional funds.
In addition, the interest rate on our term loan borrowings and revolving loan borrowings is based on the London Interbank Offered Rate (“LIBOR”). LIBOR is the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. The consequences of the discontinuance of the LIBOR benchmark cannot be entirely predicted but could result in an increase in the cost of our variable rate indebtedness.
Market volatility and adverse capital market conditions may affect our ability to access cost-effective sources of funding and may expose us to risks associated with the financial viability of suppliers and subcontractors.
The financial markets can experience high levels of volatility and disruption, reducing the availability of credit for certain issuers. We may access these markets from time to time to support certain business activities, including funding acquisitions and refinancing existing indebtedness. We may also access these markets to acquire credit support for our letters of credit. A number of factors could cause us to incur higher borrowing costs and experience greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook, or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations, meet contractual commitments, make future investments or desirable acquisitions, or respond to competitive challenges.
If the disruptions caused by the COVID-19 global pandemic continue to adversely impact our operations and financial performance, we may face further challenges regarding compliance with the financial covenants in our debt facility.
We have a loan agreement with a bank group comprised of ten banks. Under the terms of our debt facility, we are required to maintain certain financial covenants. As a result of the COVID-19 global pandemic, our business operations have been and could be further disrupted, which could adversely affect our ability to satisfy our financial covenant requirements. In June 2020, we amended our loan agreement to provide increased financial covenant flexibility. We believe the amendment will provide sufficient covenant relief for future near term compliance, however, there can be no assurance that any further future disruption will not adversely impact our business and result in an inability to comply with the financial covenants in our loan agreement. There can be no assurance that we would be able to obtain future changes in a timely manner, on acceptable terms, or at all. If we were not able to satisfactorily obtain further changes to the debt facility, we could be in default, which could trigger an acceleration of repayment provisions that we would be unable to meet and would impair our ability to operate our businesses. If we make changes, it may lead to fees, increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable to us under the debt facility.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
As of December 31, 2022, we owned or leased building space (including offices, warehouses, shops, and other facilities) at 30 locations. Our executive and administrative headquartersmajor operations are located in a five-story building in Alexandria, Virginia, with approximately 95,000 square feet of office space leased by us through April 2027.
We own facilities located in an industrial park in Somerset, Pennsylvania where we conduct our Fleet segment operations. These properties consist of approximately 30 acres of land and buildings totaling approximately 271,000 square feet of office, engineering and warehouse space.
We own two properties that we use to conduct our Aviation segment operations. The first property consists of a building with approximately 30,500 square feet of warehouse and office space in Independence, Kansas that is located on leased municipal airport land. The second property consists of approximately nine acres of land and a building with approximately 60,000 square feet of warehouse and office space in Hebron, Kentucky, acquired in 2019.
We own and operate two facilities in Ladysmith, Virginia. One of these properties consists of approximately 44 acres of land and multiple storage and vehicle maintenance buildings totaling approximately 56,000 square feet of space. The other property consists of 30 acres of land and buildings totaling approximately 13,500 square feet of space. We also own and operate a property in Texarkana, Arkansas consisting of approximately 10 acres of land and a building totaling approximately 79,000 square feet. We use these properties primarily to provide refurbishment services for military equipment, storage and maintenance.at the following locations:
We also provide servicesAviation - Doral and products from facilities generally occupied under short-term leases primarily located near customer sites to facilitate communicationsMiramar, Florida; Independence and enhance program performance. AsAugusta, Kansas; Hebron, Kentucky; and Phoenix, Arizona
Fleet - Somerset, Pennsylvania; Olive Branch, Mississippi; and Grand Prairie, Texas
Federal and Defense - Alexandria, Virginia; Ladysmith, Virginia; Texarkana, Arkansas; Kahului, Hawaii; Columbia, Maryland; Greensboro, North Carolina; Charleston, South Carolina; and Sterling Heights, Michigan
Corporate - Alexandria, Virginia
The following is a summary of the square footage our of floor space as of December 31, 2020, we leased approximately 13 such2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Owned | | Leased | | Total |
| Aviation Segment | | 91 | | | 180 | | | 271 |
| Fleet Segment | | 271 | | | 592 | | | 863 |
| Federal and Defense Segment | | 148 | | | 344 | | | 492 |
| Corporate | | — | | | 95 | | 95 |
| Total | | 510 | | | 1,211 | | | 1,721 |
We consider our facilities with a total of approximately 254,000square feet of office, shopto be in good operating condition and warehouse space. Our employees often provide services at customer facilities, limitingsufficient to meet our requirementoperational needs for additional space. We also provide services from locations outside of the United States, generally at foreign shipyards, U.S. military installations and aircraft parts distribution facilities.foreseeable future.
ITEM 3. Legal Proceedings
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. 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 many 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.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
VSE common stock, par value $0.05 per share, is traded on the NASDAQ Global Select Market ("NASDAQ"), trading symbol, "VSEC."
Common Stock - Dividend Paid Per Share
| | | Dividend Paid Per Share | | Dividend Paid Per Share |
| Quarter Ended | Quarter Ended | | 2020 | | 2019 | Quarter Ended | | 2022 | | 2021 |
| March 31 | March 31 | | $ | 0.09 | | | $ | 0.08 | | March 31 | | $ | 0.10 | | | $ | 0.09 | |
| June 30 | June 30 | | 0.09 | | | 0.09 | | June 30 | | $ | 0.10 | | | $ | 0.09 | |
| September 30 | September 30 | | 0.09 | | | 0.09 | | September 30 | | $ | 0.10 | | | $ | 0.09 | |
| December 31 | December 31 | | 0.09 | | | 0.09 | | December 31 | | $ | 0.10 | | | $ | 0.10 | |
| For the Year | For the Year | | $ | 0.36 | | | $ | 0.35 | | For the Year | | $ | 0.40 | | | $ | 0.37 | |
Holders
As of February 1, 2021,2023, VSE common stock, par value $0.05 per share, was held by approximately 226216 stockholders of record. The number of stockholders of record is not representative of the number of beneficial holders because many of VSE's shares are held by depositories, brokers or nominees.
Dividends
Pursuant to our bank loan agreement, as discussed in Note (8)(7) "Debt" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K, the payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973 and have increased our dividend each year since 2004.1973.
Certain Sales and Repurchases of VSE Common Stock
During the fiscal year covered by this Form 10-K, VSE did not sell any of its equity securities that were not registered under the Securities Act. During the fourth quarter of the fiscal year covered by this Form 10-K, no purchases of equity securities of VSE were made by or on behalf of VSE or any "affiliated purchaser" (as defined in Rule 10b-18 (a)(3) under the Exchange Act) other than 25,85923,044 shares of our restricted common stock that were voluntarily forfeited to VSE by participants in its 2006 Restricted Stock Plan (the "2006 Plan") to cover their personal tax liability for restrictedvesting stock awards under the VSE Corporation 2006 Restricted Stock Plan (the "2006 Restricted Stock Plan").Plan.
Equity Compensation Plan Information
We have onetwo compensation planplans approved by our stockholders under which our equity securities are authorized for issuance to employees and directors: the 2006 RestrictedPlan and the VSE Corporation 2021 Employee Stock Plan.Purchase Plan ("ESPP"). The following table sets forth the amounts of securities authorized for issuance under the 2006 Restricted Stock Plan and the ESPP as of December 31, 2020.2022.
| | | | | | | | | | | | | | | | | |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | — | | | $ | — | | | 725,945 | |
Equity compensation plans not approved by security holders | — | | | $ | — | | | — | |
Total | — | | | $ | — | | | 725,945 | |
| | | | | | | | | | | | | | | | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | 136,086 | | | $ | 42.94 | | | 926,607 | |
| Equity compensation plans not approved by security holders | — | | | $ | — | | | — | |
| Total | 136,086 | | | $ | 42.94 | | | 926,607 | |
See Note (10) "Stock-Based Compensation Plans" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding the 2006 Restricted Stock Plan.Plan and the ESPP.
Performance Graph
Set forth below is a lineThe following graph comparingcompares the cumulative total return of VSEon our common stock with (a)(i) a performance index for the broad market, the NASDAQ Global Select Market, on which VSEour common stock is traded, (ii) a published industry index, the S&P 500 Aerospace & Defense Index, and (b) a the Company's(iii) our previous peer group which is comprised of other public companies that operate in industries or lines of businesses similar to ours. These companies includethe following: Heico Corporation, Dorman Products, Inc., Navistar International Corporation, Vectrus,V2X Inc., ManTech International Corporation, and CACI International Inc. Due to recent consolidations within our peer group, we replaced our peer group with the S&P 500 Aerospace & Defense index.
The companies in the Peer Group have been weighted based on their relative market capitalization each year. The graph assumes thatan initial investment of $100 was invested in our then outstanding common stock, the NASDAQ and the Peer Group index at the beginning of the five-year periodon 12/31/17 and that all dividends werehave been reinvested. The comparisons are not intended to be indicative of future performance of our common stock.
*$100 invested on 12/31/1517 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Performance Graph Table
| | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| VSE | VSE | 100 | | 125.82 | | 157.85 | | 98.18 | | 126.24 | | 129.43 | VSE | 100 | | 62.20 | | 79.97 | | 82.00 | | 130.82 | | 101.58 |
| NASDAQ Composite | NASDAQ Composite | 100 | | 108.87 | | 141.13 | | 137.12 | | 187.44 | | 271.64 | NASDAQ Composite | 100 | | 97.16 | | 132.81 | | 192.47 | | 235.15 | | 158.65 |
| Peer Group | 100 | | 163.24 | | 193.41 | | 199.86 | | 274.02 | | 315.43 | |
| S&P Aerospace & Defense | | S&P Aerospace & Defense | 100 | | 91.93 | | 119.81 | | 100.56 | | 113.86 | | 133.64 |
| Previous Peer Group | | Previous Peer Group | 100 | | 125.18 | | 179.30 | | 199.71 | | 220.89 | | 228.02 |
ITEM 6. [Reserved]
ITEM 6. Selected Financial Data
This consolidated summary of selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K and with the Consolidated Financial Statements and related Notes included in Item 8 of this Form 10-K. Results for reporting periods beginning after January 1, 2018 are presented under the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. Effective January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), prior periods were not restated for the adoption of ASU 2016-02. The historical results set forth in this Item 6 are not necessarily indicative of VSE's future results of operations.
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | | | | | | |
| Revenues | $ | 661,659 | | | $ | 752,627 | | | $ | 697,218 | | | $ | 760,113 | | | $ | 691,790 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net (loss) income (1) | $ | (5,171) | | | $ | 37,024 | | | $ | 35,080 | | | $ | 39,096 | | | $ | 26,793 | |
| | | | | | | | | |
| Basic earnings per share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net (loss) income (1) | $ | (0.47) | | | $ | 3.38 | | | $ | 3.23 | | | $ | 3.61 | | | $ | 2.48 | |
| | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net (loss) income (1) | $ | (0.47) | | | $ | 3.35 | | | $ | 3.21 | | | $ | 3.60 | | | $ | 2.47 | |
| | | | | | | | | |
| Cash dividends per common share | $ | 0.36 | | | $ | 0.35 | | | $ | 0.31 | | | $ | 0.270 | | | $ | 0.235 | |
(1) Net income and basic and diluted earnings per share prior to 2017 were not impacted by the Tax Cuts and Jobs Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | | | | | | |
| Working capital | $ | 215,729 | | | $ | 191,158 | | | $ | 176,342 | | | $ | 134,563 | | | $ | 110,021 | |
| | | | | | | | | |
| Total assets | $ | 780,081 | | | $ | 845,864 | | | $ | 638,828 | | | $ | 629,013 | | | $ | 661,839 | |
| | | | | | | | | |
| Long-term debt | $ | 230,714 | | | $ | 253,128 | | | $ | 151,133 | | | $ | 165,614 | | | $ | 193,621 | |
| | | | | | | | | |
| Long-term operating lease obligations | $ | 22,815 | | | $ | 24,441 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
| Long-term lease obligations | $ | — | | | $ | — | | | $ | 18,913 | | | $ | 20,581 | | | $ | 21,959 | |
| | | | | | | | | |
| Stockholders' equity | $ | 356,317 | | | $ | 363,101 | | | $ | 328,395 | | | $ | 293,095 | | | $ | 255,194 | |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General OverviewThe following discussion and analysis should be read in conjunction with our consolidated statements and related notes included in Item 8. "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. The following generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found under Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for fiscal year ended December 31, 2021, filed with the SEC on March 11, 2022.
Our
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 in the publicto government and private sectors. We provide logistics and distribution services for legacy systems and equipment and professional and technical services to the government, including the Department of Defense ("DoD"), federal civilian agencies, and to commercial and other customers. Our operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, and other customers. We also provide vehicle and equipment maintenance and refurbishment, logistics, engineering support, energy services, IT and health care IT solutions, and consulting services. See Item 1, “Business-Customers” above for revenues by customer.
The following discussion should be read along with our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Acquisition and Divestitures
In January 2019, we acquired 1st Choice Aerospace Inc. ("1st Choice Aerospace"), with operations in Florida and Kentucky. 1st Choice Aerospace provides component MRO services and products for new generation and legacy commercial aircraft families. 1st Choice Aerospace is a subsidiary of VSE Aviation, Inc. under our Aviation segment.
In February 2020, we sold our subsidiary Prime Turbines, LLC ("Prime Turbines") and certain related inventory assets for $20.0 million in cash and a $8.3 million note receivable to be paid over a period from 2020 through 2024. Our Aviation segment discontinued turboprop engine MRO services, and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets. Prime Turbines' revenues totaled less than 1% and approximately 4% of our revenue for 2020 and 2019, respectively.
In June 2020, we sold all of the inventory of our subsidiary CT Aerospace, LLC ("CT Aerospace") for a $6.9 million note receivable to be paid to us over a period from 2020 through 2025. Our Aviation segment discontinued sales and leasing of engines and supply of used serviceable engine parts. CT Aerospace's revenues totaled less than 1% and less than 2% of our revenue for 2020 and 2019, respectively.
See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our acquisition and divestitures.
Public Common Stock Offering
In February 2021, we completed an underwritten public offering of common stock, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million through the issuance of 1,599,097 shares of common stock, including an additional 170,497 shares that were issued pursuant to the underwriters' exercise of their option to purchase additional shares, at an offering price of $35.00 per share. We expect to use the net proceeds for general corporate purposes, which may include among other things, financing strategic acquisitions, working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.
Organization and Segments
Our operations are conducted within three reportable segments aligned with our operating segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense. We provide more information about each of these reportable segments under Item 1, “Business-History and Organization.”
Concentration of Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands)
Years ended December 31, |
| Source of Revenues | | 2020 | | % | | 2019 | | % | | 2018 | | % |
| DoD | | $ | 236,397 | | | 36 | | | $ | 304,334 | | | 41 | | | $ | 334,494 | | | 48 | |
| Other government | | 216,957 | | | 33 | | | 205,775 | | | 27 | | | 212,118 | | | 30 | |
| Commercial | | 208,305 | | | 31 | | | 242,518 | | | 32 | | | 150,606 | | | 22 | |
| Total Revenues | | $ | 661,659 | | | 100 | | | $ | 752,627 | | | 100 | | | $ | 697,218 | | | 100 | |
COVID-19 Discussion
Forward Looking Information
Disclosures that address business and operating considerations associated with the COVID-19 pandemic are made under highly uncertain conditions and may involve forward looking information that is based on assumptions and expectations regarding future events. Please refer to the discussion under Item 1A, "Risk Factors" of this annual report on Form 10-K with respect to our discussion of trends or uncertainties arising from or impacted by the COVID-19 pandemic.
Demand for Products and Services, Operating Results, and Financial Condition
All of our businesses have remained operational since the onset of the COVID-19 pandemic through the end of 2020, and we continue to operate with limited disruption. We have experienced varying levels of reduction in demand for our services and products, and have adjusted our cost structure to support the current and near-term forecasted demand environment. The majority of the cost reductions occurred within our Aviation, segment, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services. We currently anticipate demand levels within the Aviation segment will remain muted through the first half of 2021, pending a recovery in the broader market. This decrease in demand adversely impacted our operating results for 2020.
While current conditions raise the potential for a decline in performance for our Fleet segment and our Federal and Defense segment, we anticipate limited disruption in demand for the products and services they offer, as compared to other industries, due to the nature of their government, defense and e-commerce customer bases. Our parts supply for truck fleets, including the United States Postal Service ("USPS") delivery vehicles and our DoD program services, provide support for the essential services conducted by our customers.
We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic; however, a prolonged disruption in the demand for our products and services could have an adverse impact on our operating results and cause a material adverse change in our financial condition. We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.
Capital, Financial Resources, Credit Losses, and Liquidity
Our debt capital and liquidity position have not experienced a material adverse change resulting from the COVID-19 pandemic at this time, and we are meeting our obligations in a timely manner. We currently have sufficient cash flows and unused loan commitments to meet our obligations in the near term. Weakness in our Aviation segment customer markets has caused a delay in receivables collections and an increase in bad debt expense. This trend may continue in future periods. We do not anticipate receivables collections to negatively impact our Fleet or Federal and Defense segments.
We have a loan agreement with a bank group comprised of ten banks, including multiple large banks and multiple regional banks. Our revolving credit facility under this loan agreement provides $350 million in loan commitments, of which we have currently borrowed approximately 50%. The potential for additional declines in our earnings may impact our financial covenant ratios in future periods. Accordingly, in the second quarter of 2020, we amended the loan agreement to provide increased financial covenant flexibility through 2021.
Material Impairments
Due to the continued market volatility caused by the COVID-19 pandemic, we performed an interim impairment analysis of our goodwill during the second quarter of 2020. Our interim analysis indicated that our reporting units in our Fleet and Federal and Defense segments had fair values substantially in excess of their carrying values, and we believe the COVID-19 pandemic induced economic crisis is not likely to have a material adverse impact on customer demand for products and services provided by these two segments. Accordingly, at this time we do not anticipate any impairments in these two business segments.Defense.
Our interim impairment analysis indicated that our VSE Aviation reporting unit, within our Aviation segment, had a fair value less than its carrying value and had incurred an impairment. We recognized a goodwill impairment charge of $30.9 million for our VSE Aviation reporting unit in the second quarter of 2020. Prior to the onset of the COVID-19 pandemic, our Aviation segment was performing strongly. Our VSE Aviation reporting unit experienced lower customer demand in 2020 as compared to 2019, and we expect it will continue to experience lower customer demand during the first half of 2021, but we believe market opportunities will increase for us in the long term. Accordingly, at this time we do not anticipate any further material impairments in our Aviation segment. However, should the magnitude and duration of the downturn be greater than we anticipated in our analysis, there could be further impairment.
Balance Sheet Asset Valuation
Our goodwill and intangible assets could be impacted by changes in economic conditions affecting our revenue projections and the market valuation of public companies. See "Material Impairments" above for further details. We do not believe that there are or will be significant changes in judgments in determining the fair value of other assets on our balance sheet or that our ability to timely account for them will be negatively impacted. While the COVID-19 pandemic may cause some delays in collecting some of our accounts receivable and potentially give rise to some bad debt write offs, we do not expect this to have a material impact on our accounts receivable. We have made opportunistic purchases of aviation parts, resulting in an increase in our inventory levels. While the COVID-19 pandemic has slowed demand for our products, we do not expect a material adverse impact to the carrying value of our inventory. If we experience further slowness in demand or if the lower level of demand lasts significantly longer than we anticipate, our inventory may be subject to valuation adjustments.
Administrative Continuity and Reporting Systems
We have modified our workforce policies, procedures and capabilities for most of our administrative personnel to work remotely, including our financial reporting personnel. This remote work arrangement is working as intended and has not had any adverse effect on our ability to maintain financial operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Business Continuity Plans
As the COVID-19 pandemic continues to drive global uncertainty, we remain focused on protecting the safety of our employees, continuing to serve our customers with the highest quality product and repair services, and on upholding the strength of the business.
Our business operations are deemed critical and essential by Federal and State governments. All of our repair, distribution and base operations facilities remain open and operational, and we continue to deliver products and services to customers without interruption. We implemented virus prevention protocols consistent with guidelines issued by the U.S. Centers for Disease Control and Prevention, and mandated remote working where practicable.
We do not anticipate any material expenditures or resource constraints in supporting our operations at this time.
Impact on Supply Chain
Major customers and suppliers of our Fleet, Federal and Defense, and Aviation segments remain open and continue to operate. Our Fleet segment customers provide essential services, and we, along with our suppliers, play a key role in keeping truck fleets operable. Our Federal and Defense segment customers continue their mission critical essential services. Our Aviation segment customers continue to operate, albeit at lower rates. While the overall economic downturn may cause some slowness in every industry, we do not anticipate any parts availability concerns, disruptions in our supply of materials or resources, or an adverse impact on our procurement capabilities or product costs.
Health and Safety
The health and safety of our employees, customers and communities are of primary concern. We have taken significant steps to protect our workforce including but not limited to, working remotely. For our locations with an active on-site workforce, we implemented virus prevention protocols consistent with guidelines issued by the U.S. Centers for Disease Control and Prevention and are following local ordinances and guidance. We have taken steps at our facilities to ensure additional employee safety, including implementing separate operational shifts, strict social distancing requirements, providing personal protective equipment and stringent requirements for cleaning and sanitizing at our work sites. We do not anticipate our operations being materially impacted by any constraints or other impacts on our human capital resources and productivity.
In the second quarter of 2020, we implemented a cost reduction plan which included a reduction in workforce and reduced approximately $13 million in expenses on an annualized basis.
Travel Restrictions
Travel restrictions and border closures may limit the manner in which our sales and support staff service our customers. We do not anticipate this will have a material impact on our ability to continue to operate.
Business Trends
The following discussion provides a brief description of some of the key business factors impacting our results of operations detailed by segment.
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 COVID-19 pandemic caused a reduction in global demand for air travelexpansion 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 decreased revenue passenger miles, which had an adverse impact on demand for our Aviation products and services beginningincreased market share in the second quarter of 2020. Duebusiness 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 uncertaintyprior 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 travel industry associated with the COVID-19 pandemic, we expect decreased demanddistribution 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 continue into the first half of 2021. Revenue in our non-divested Aviation businessessee continued growth due to progress on new initiatives, offering a favorable outlook for the fourth quarter of 2020 decreased approximately 26% from the fourth quarter of 2019. Despite the year over year decline, we believe that the second quarter of 2020 represented the bottom of the revenue decline, as revenue in our non-divested Aviation businesses for the third and fourth quarters of 2020 have increased sequentially since the second quarter of 2020.
In the first quarter of 2020, we divested our Prime Turbines subsidiary, a business offering turboprop engine MRO services. In the second quarter of 2020, we sold all of the inventory assets of our CT Aerospace subsidiary, a business offering turboprop engine and engine parts sales. We will no longer offer these services, focusing instead on higher growth component and accessory repair and parts distribution.
We expect that the current disruption in market conditions will result in strategic opportunities for near and long term growth. We intend to pursue these opportunities, which may require future investment.2023.
Fleet Segment
Our Fleet segment continues to focus on bothsee growth in revenue from commercial fleet customers and e-commerce fulfillment, as the segment moves towards revenue diversification. Fleet is executing its core USPSrevenue diversification strategy by acquiring new customers and DoD customer base and commercial customer diversification. We are expanding our presence in both new and existing markets, includingproduct options for the e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs to new commercial customers.fulfillment business. Commercial customer revenue continues to see aexperience strong growth, trend, increasing more than 80% during the fourth quarter of 202042% in 2022 compared to the same periodprior year. We anticipate continued growth as we extend our reach to meet the increasing demand from the commercial market. In 2022, commercial revenues were 40% of total Fleet segment revenue compared to 18% in 2019, driven by a 185% increase in e-commerce fulfillment revenues. We believe2020, demonstrating the COVID-19 pandemic is likely to have a limited adverse impact on revenues for this segmentcontinued success of our business, asrevenue diversification strategy. 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. 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 truck fleet customers and our e-commerce platforms has remained consistent.channels, coupled with stable contributions from USPS.
Federal and Defense Segment
We entered 2020In 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 a focus on redefining VSE in the federal marketplace, investing in business development, growing our capability and product offerings, and broadening our range of new business targets to build our contract backlog and expand our markets and offerings. The anticipated revenue decline experienced by this segment in 2020 is primarily attributable to the expirationtransfer of a large U.S. Army contract in January 2020. We expect that our refocused business development efforts in 2020Navy ship to Bahrain
will producebeing a major contributor for the revenue growthincrease. 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 subsequent years.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 expect the COVID-19 pandemicaim to have a limited adverse impact on revenuesenhance our services and pursue new opportunities to support long-term growth for this segment, as the U.S. government is expected to maintain critical DoD preparedness programs.segment.
Financial Statement Presentation
Results of Operations
The following discussion provides a brief description of certain key items that appear intable summarizes our consolidated financial statements:results of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Years ended December 31, |
| | 2022 | | % | | 2021 | | % | | 2020 | | % |
| Revenues | $ | 949,762 | | | 100.0 | | | $ | 750,853 | | | 100.0 | | | $ | 661,659 | | | 100.0 | |
| Costs and operating expenses | 894,631 | | | 94.2 | | | 729,333 | | | 97.1 | | | 606,896 | | | 91.7 | |
| 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 | 55,131 | | | 5.8 | | | 21,520 | | | 2.9 | | | 13,923 | | | 2.2 | |
| Interest expense, net | 17,885 | | | 1.9 | | | 12,069 | | | 1.6 | | | 13,496 | | | 2.0 | |
| Income before income taxes | 37,246 | | | 3.9 | | | 9,451 | | | 1.3 | | | 427 | | | 0.2 | |
| Provision for income taxes | 9,187 | | | 1.0 | | | 1,485 | | | 0.2 | | | 5,598 | | | 0.8 | |
| Net income (loss) | $ | 28,059 | | | 2.9 | | | $ | 7,966 | | | 1.1 | | | $ | (5,171) | | | (0.6) | |
Revenues.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.
Revenues are derived from the delivery of products and from professional and technical services performed through various ordering agreements and contract agreements. Our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost-type, fixed-price, and time and materials. Revenues from these contract types result from work performed on these contracts and from costs for materials and other work-related contract allowable costs. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers.
Costs and Operating Expenses
Expenses.
Costs and operating expenses consist primarily of cost of inventoryincreased $165 million, or 23%, in 2022 compared to 2021. Costs and delivery of our products sold; direct costs, including labor, material, and supplies used in the performance of our contract work; indirect costs associated with our direct contract costs; sales, general, and administrativeoperating expenses associated withfor our operating segments and corporate management; and certain costs and charges arising from nonrecurring events outside the ordinary course of business. These costs will generally increase orand decrease in conjunction with ourthe level of products soldbusiness activity and revenues generated by each segment. See "Segment Operating Results" below for further information 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.
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.
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.
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. In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income ("FDII") deduction, I.R.C. Section 162(m) executive compensation limitation and unrealized investment income or loss from our COLI plan caused differences between the statutory U.S. federal income tax rate and our effective tax rate.
Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| 2022 | | % | | 2021 | | % | | 2020 | | % |
| Revenues | $ | 408,112 | | | 100.0 | | | $ | 247,852 | | | 100.0 | | | $ | 165,070 | | | 100.0 | |
| Costs and operating expenses | 371,696 | | | 91.1 | | | 262,225 | | | 105.8 | | | 159,743 | | | 96.8 | |
| 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) | |
Revenues. Revenues increased $160 million, or 65%, in 2022 compared to 2021. Distribution revenue increased $129 million, or 75%, driven by contributions from recently initiated distribution contract work performed.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.
Costs and Operating Expenses. Costs and operating expenses alsoincreased $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.
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.
Fleet Segment Results
The results of operations for our Fleet segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2022 | | % | | 2021 | | % | | 2020 | | % |
| Revenues | $ | 261,336 | | | 100.0 | | | $ | 233,532 | | | 100.0 | | | $ | 242,170 | | | 100.0 | |
| Costs and operating expenses | 237,425 | | | 90.9 | | | 213,106 | | | 91.3 | | | 215,511 | | | 89.0 | |
| Operating income | $ | 23,911 | | | 9.1 | | | $ | 20,426 | | | 8.7 | | | $ | 26,659 | | | 11.0 | |
Revenues. Revenues increased $27.8 million, or 12%, in 2022 compared to 2021. The increase was primarily from commercial customers of $31 million, or 42%, and other government customers of $7 million, or 5%. These increases were partially offset by a decrease in sales to DoD customers of $9 million, or 74%.
Costs and Operating Expenses. Costs and operating expenses increased $24.3 million, or 11%, primarily due to increased revenues. Costs and operating expenses for this segment include expense for amortization of intangible assets acquired through our acquisitions.associated with acquisitions and allocated corporate costs. Expense for amortization of acquisition related intangible assets is included in the segment results in which the acquisition is included. Segment results also include expensewas $6.4 million for an allocation of2022 and $7.1 million for 2021. Expense for allocated corporate management costs. We reduced controllable costs during 2020 in line with the anticipated decrease in demand resulting from the COVID-19 pandemic.was $7.5 million for 2022 and $8.5 million for 2021.
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. 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, 2020,2022, Federal and Defense segment bookings increased 18%decreased 6% year-over-year to $270$294 million, while total funded backlog declined 14%increased 1% year-over-year to $183$187 million. The decline in funded backlog was primarily attributable to the completion of certain DoD contracts in 2020. The current management team is focused on revitalizing this business, with an emphasis on growing backlog to promote future revenue growth.
Financial Condition
There has been no material adverse change in our financial condition in 2022. Our bank debt increased $2 million, and we had $160 million of unused bank loan commitments as of December 31, 2022. 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; and collections from our customers.
Liquidity and Capital Resources
Cash Flows
The following table summarizes our cash flows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| 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 bookingsHSS 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.
We paid cash dividends totaling approximately $5.1 million or $0.40 per share in 2022. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.
Liquidity
Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity. 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. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include capital expenditures; investments in expansion; improvement and maintenance of our operational and administrative facilities; 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. The aggregate limit of increases is $100 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.
| | | | | | | | |
| 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.
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. The estimates included variable rate interest obligations estimated based on rates as of December 31, 2022. 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.
Inflation and Pricing
Our Aviation and Fleet segments have experienced broad-based inflationary impacts consistent with overall trends in the aerospace and industrial distribution market, due primarily to increased materials, labor and services costs. 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 years ended December 31, 2020, 2019non-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 2018, and funded contract backlog for this segment as of December 31, 2020, 2019 and 2018 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Bookings | $ | 270 | | | $ | 228 | | | $ | 321 | |
| Revenues | $ | 254 | | | $ | 314 | | | $ | 337 | |
| Funded Backlog | $ | 183 | | | $ | 213 | | | $ | 290 | |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements. The development and selection of these critical accounting policies have been determined by our management. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties
could choose different assumptions and reach different conclusions. We consider our policies relating to the following matters to be critical accounting policies.
Revenue Recognition
We account for revenue in accordance with ASC 606. The unit of account in ASC 606 is a performance obligation. 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 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. 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 for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers.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. 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 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. 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. RevenueWe 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 to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer.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.
A substantial portion
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 administrative costs are subjectalso 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 audit byfactors such as its physical condition, sales patterns and expected future demand in order to estimate the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 2017 and prior years with no material adjustmentsamount necessary to our results of operationswrite down any slow moving, obsolete or financial position. While we maintain reserves to coverdamaged 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 risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.estimated write-downs were made.
Business Combinations
We account for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and liabilities assumed is allocated to goodwill. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair values becomes available. We will recognize any adjustments to provisional amounts that are identified during the period not to exceed twelve months from the acquisition date (the "measurement period") in which the adjustments are determined. Acquisition costs are expensed as incurred. 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. 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 firstsecond quarter of 2020, despitedue to the excess fair value identified in our 2019 impairment assessment, market conditions as a result of the COVID-19 pandemic resulted in a significant decline in our market capitalization as well as an overall stock market decline amid market volatility triggeringas a result of the need for an interim goodwill impairment test. WeCOVID-19 pandemic, we performed an interim impairment analysis as of March 31, 2020,test utilizing a qualitative approach forquantitative assessment approach. Based on the assessment, our VSE Aviation reporting units. Under this approach, we reviewed our previous forecastsunit was determined to be impaired and assumptions baseda $30.9 million impairment charge was recognized. Based on our current projectionsannual goodwill impairment test performed in the fourth quarter of 2020, for which a qualitative assessment approach was utilized, it was determined that are subject to various risks and uncertainties, which included the duration and extent of the impact to our business from the COVID-19 pandemic. 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. Under the income approach, the fair value of our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate discount rate. We used our updated forecasts which considered recent events to estimate future cash flows. Our forecasts assumed containment of the COVID-19 pandemic to be achieved by mid-2020 with a gradual increase in travel demand beginning mid-to-late 2020 and into 2021, with substantial recovery thereafter. Based on our assessment, it was determined that the fair value of the VSE Aviation reporting unit approximated its carrying value and no impairment charge was required.
Given the continued presence and impact of the COVID-19 pandemic on the global economy, we performed an interim impairment analysis in the second quarter of 2020 utilizing a quantitative assessment approach for all reporting units. Based on our quantitative impairment assessment as of June 1, 2020, we determined that the fair value of our reporting units, with the exception of our VSE Aviation reporting unit, significantly exceeded their carrying value, and no additional impairment charge was required. The estimated fair value of our VSE Aviation reporting unit was determined to be below its carrying value. 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. The internal forecasts used to estimate future cash flows in the quantitative analysis for our VSE Aviation reporting unit projected lower forecasted revenues and operating results than those used in the first quarter interim analysis. The decline in revenue projections was due to lower demand for the reporting unit's products and services, which was impacted by reduced global air travel and decreased passenger miles caused by the COVID-19 pandemic. The lower projections also considered updated assumptions regarding the uncertainty surrounding the timing and speed at which recovery from the COVID-19 pandemic could occur. The updated forecasts assumed suppressed demand to continue throughout 2020 and into 2021, with a slower and more gradual recovery thereafter. These lower operating results and cash flows from the reductions in revenue, resulted in a substantial decline in the fair value of the VSE Aviation reporting unit. As a result, we recognized an impairment charge in the second quarter of 2020 of $30.9 million, which is the amount by which the carrying amount exceeded the reporting unit's fair value.recognized.
In the fourth quarter of 2020, we performed our annual goodwill analysis, electing to perform a qualitative assessment for each of our reporting units. In performing this assessment, we reviewed key assumptions and information, including updated macroeconomic indicators that impact the markets we serve, financial forecast information for each reporting unit, and recent performance of the Company's share price. Our qualitative assessment determined that it is more likely than not that the fair value of the reporting unit exceeded the carrying value and therefore a quantitative analysis was not necessary. We will continue to closely monitor the operational performance of these reporting units as they relate to goodwill impairment.
Our VSE Aviation reporting unit had approximately $144 million of remaining goodwill as of December 31, 2020. The remaining goodwill balance of this reporting unit continues to be at risk for future impairment due to the uncertainty surrounding the macroeconomic factors impacting this reporting unit. A sustained downturn, significantly extended recovery, a change in long-term operating growth, or negative change in any of the key assumptions for this reporting unit could increase the likelihood of additional impairment in future periods.
We also review the recoverability of our long-livedIntangible assets with finite lives when an indicatorare amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of impairment exists. For the same reasons discussed above, we assessed the recoverability of the long-lived assets with finiteeconomic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Based on our analysis of estimated undiscounted future cash flows expected to result from the use of these long-livedIntangible assets with finite lives we determinedare assessed for impairment whenever events or changes in circumstances indicate that theirthe carrying values werevalue may not be recoverable.
As of December 31, 2020, we had no intangible assets with indefinite lives and we had an aggregate of approximately $238 million of goodwill associated with our acquisitions.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits, such as net operating loss and capital loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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.assets within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. 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.
Results of Operations
The following discussion of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 2020 to fiscal 2019. For a similar discussion that compares fiscal 2019 to fiscal 2018, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Form 10-K for the fiscal year ended December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Income
(in thousands)
Years ended December 31, |
| | 2020 | | % | | 2019 | | % | | 2018 | | % |
| Revenues | $ | 661,659 | | | 100.0 | | | $ | 752,627 | | | 100.0 | | | $ | 697,218 | | | 100.0 | |
| Costs and operating expenses | 606,896 | | | 91.7 | | | 692,370 | | | 92.0 | | | 644,688 | | | 92.4 | |
| 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) | | | — | | | — | | | — | | | — | |
| Gain on sale of contract | — | | | — | | | — | | | — | | | 1,700 | | | 0.2 | |
| Operating income | 13,923 | | | 2.2 | | | 60,257 | | | 8.0 | | | 54,230 | | | 7.8 | |
| Interest expense, net | 13,496 | | | 2.0 | | | 13,830 | | | 1.8 | | | 8,982 | | | 1.3 | |
| Income before income taxes | 427 | | | 0.2 | | | 46,427 | | | 6.2 | | | 45,248 | | | 6.5 | |
| Provision for income taxes | 5,598 | | | 0.8 | | | 9,403 | | | 1.3 | | | 10,168 | | | 1.5 | |
| Net (loss) income | $ | (5,171) | | | (0.6) | | | $ | 37,024 | | | 4.9 | | | $ | 35,080 | | | 5.0 | |
Year Ended 2020 Compared to Year Ended 2019
Revenues
Our revenues decreased by approximately $91 million or 12%% for the year ended December 31, 2020 as compared to the prior year. The change in revenues for this period resulted from decreases in our Aviation segment and Federal and Defense segment revenues of approximately $59 million and $59 million respectively, and an increase in our Fleet segment revenues of approximately $28 million. See "Segment Operating Results" for a breakdown of our results of operations by segment.
Costs and Operating Expenses
Our costs and operating expenses decreased approximately $85 million or 12% in 2020 as compared to 2019. 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.
Costs and operating expenses for 2020 included an expense reduction of approximately $5.0 million for an adjustment to our earn-out obligation, an expense of approximately $1.0 million for executive transition costs, and an expense of approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand. Costs and expenses for 2019 included expenses of approximately $2.3 million for acquisition related and executive transition costs.
Loss on Sale of a Business Entity and Certain Assets
Loss on sale of a business entity and certain assets of $8.2 million is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of
2020, plus the difference between the carrying value on our books of our CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.
Gain on Sale of Property
Gain on sale of property of $1.1 million is comprised the sale of a Miami, Florida real estate holding during the first quarter of 2020.
Goodwill and Intangible Asset Impairment
Goodwill and intangible asset impairment of $33.7 million is comprised of a charge to write down the carrying value of our Aviation businesses in the second quarter of 2020 due to an anticipated decline in demand for these services caused by the global aviation industry downturn associated with the COVID-19 pandemic and a charge to write down the carrying value of CT Aerospace related intangible assets in the second quarter of 2020 that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.
Operating Income
Our operating income decreased approximately $46.3 million or 76.9% for 2020 as compared to 2019. Operating income decreased approximately $53.0 million for our Aviation segment and approximately $3.2 million for our Fleet segment, and increased approximately $8.0 million for our Federal and Defense segment. The decrease in the operating income for our Aviation segment was primarily due to a $33.7 million goodwill and intangible asset impairment charge and a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory. Operating income for 2020 increased approximately $5.0 million for an adjustment to our earn-out obligation and $1.1 million for a gain on the sale of certain real estate holdings, and decreased approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand. Operating income for 2019 decreased approximately $2.3 million for acquisition related and executive transition costs.
Interest Expense
Interest expense decreased approximately $334 thousand in 2020 as compared to 2019 primarily due to a reduction in bank borrowing and lower average interest rates.
Provision for Income Taxes
Our effective tax rate was 1,311.0% for 2020 and 20.3% for 2019. The increase in the effective tax rate for 2020 compared to 2019 primarily results from: (1) significantly lower pre-tax book income in the current year, (2) approximately $16.4 million of our goodwill impairment loss that is non-deductible for income tax purposes, and (3) a full valuation allowance established to offset the capital loss benefit in connection with our divestiture of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period.
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. In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income ("FDII") deduction and unrealized investment income or loss from our COLI plan caused differences between the statutory U.S. federal income tax rate and our effective tax rate.
Segment Operating Results
Aviation Segment Results
The results of operations for our Aviation segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2020 | | % | | 2019 | | % | | 2018 | | % |
| Revenues | $ | 165,070 | | | 100.0 | | | $ | 224,546 | | | 100.0 | | | $ | 145,423 | | | 100.0 | |
| Costs and operating expenses | 159,743 | | | 96.8 | | | 206,645 | | | 92.0 | | | 134,347 | | | 92.4 | |
| 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 (loss) income | $ | (35,513) | | | (21.5) | | | $ | 17,901 | | | 8.0 | | | $ | 11,076 | | | 7.6 | |
Revenues for our Aviation segment decreased approximately $59 million or 26% for 2020 as compared to the prior year. Distribution revenues decreased approximately $23 million and repair revenues decreased approximately $36 million. The revenue declines are primarily attributable to the impact of the COVID-19 pandemic on the broader aviation markets that has lowered demand from our Aviation customers and the divestiture of Prime Turbines in February 2020 and the sale of all of CT Aerospace inventory in June 2020. Revenues for the divested businesses were approximately $8.9 million for 2020 compared to approximately $38 million for 2019.
Costs and operating expenses decreased approximately $47 million or 23% for 2020 compared to 2019 due to decreased demand for our products and services, as a result of the COVID-19 pandemic, cost reduction actions implemented in response to the reduction in demand, and the elimination of costs and expenses associated with our divested businesses. Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions, allocated corporate costs, and valuation adjustments to accrued earn-out obligations associated with acquisitions. Expense for amortization of intangible assets was approximately $8.8 million and $10 million for 2020 and 2019, respectively. Expense for allocated corporate costs was approximately $5.8 million and $6.6 million for 2020 and 2019, respectively. Valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximately $5.0 million for 2020 and increased costs and operating expenses approximately $1.9 million for 2019.
Loss on sale of a business entity and certain assets of $8.2 million for 2020 is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of 2020, plus the difference between the carrying value on our books of CT Aerospace inventory and the sale price of the inventory upon sale in the second quarter of 2020.
Gain on sale of property for 2020 is comprised of approximately $1.1 million associated with the sale of a Miami, Florida real estate holding.
The goodwill and intangible asset impairment of $33.7 million for 2020 is comprised of a charge to write down the goodwill carrying value of our Aviation businesses due to an anticipated decline in demand for these services caused by the global aviation industry downturn associated with the COVID-19 pandemic and a charge to write down the carrying value of CT Aerospace related intangible assets that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.
We had an operating loss of approximately $35.5 million in 2020 compared to operating income of approximately $17.9 million in 2019, a decrease of approximately $53.4 million or 298%. The primary components of the decrease were a $33.7 million goodwill and intangible asset impairment charge, a $8.2 million loss on the divestiture of Prime Turbines and sale of CT Aerospace inventory, non-recurring expenses of approximately $1.1 million for inventory valuation adjustments and other closing costs related to the relocation of our German facility operations, and a decline in profits for our continuing businesses due to a decrease in demand for our products and services associated with the COVID-19 pandemic. Partially offsetting the decrease was a $1.1 million gain on the sale of certain real estate holdings and $5.0 million benefit for an adjustment to our earn-out obligation in connection with the acquisition of 1st Choice Aerospace.
Fleet Segment Results
The results of operations for our Fleet segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2020 | | % | | 2019 | | % | | 2018 | | % |
| Revenues | $ | 242,170 | | | 100.0 | | | $ | 214,520 | | | 100.0 | | | $ | 214,809 | | | 100.0 | |
| Costs and operating expenses | 215,511 | | | 89.0 | | | 184,701 | | | 86.1 | | | 184,183 | | | 85.7 | |
| Operating income | $ | 26,659 | | | 11.0 | | | $ | 29,819 | | | 13.9 | | | $ | 30,626 | | | 14.3 | |
Revenues for our Fleet segment increased approximately $28 million or 13% for 2020, as compared to the prior year. Revenues from commercial customers increased approximately $21 million or 93%, driven by growth in our e-commerce fulfillment business. Revenues from sales to DoD customers decreased approximately $4 million or 14%, and revenues from sales to other government customers increased approximately $11 million or 6%. Sales to other government customers included revenue of approximately $26.6 million for fulfillment of a non-recurring order for COVID-19 related supplies.
Costs and operating expenses increased approximately $31 million or 16.7%, primarily due to the non-recurring order for COVID-19 related supplies. 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 approximately $7.4 million for 2020 and approximately $7.9 million for 2019. Expense for allocated corporate costs was approximately $8.0 million for 2020 and approximately $6.2 million for 2019.
Operating income decreased by approximately $3.2 million or 11% for 2020 as compared to the prior year, primarily due to a change in the mix of products sold, including increased commercial customer revenues and the non-recurring order for COVID-19 related supplies, which had a nominal profit margin.
Federal and Defense Segment Results
The results of operations for our Federal and Defense segment are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| 2020 | | % | | 2019 | | % | | 2018 | | % |
| Revenues | $ | 254,419 | | | 100.0 | | | $ | 313,561 | | | 100.0 | | | $ | 336,986 | | | 100.0 | |
| Costs and operating expenses | 228,110 | | | 89.7 | | | 295,417 | | | 94.2 | | | 322,889 | | | 95.8 | |
| Gain on sale of contract | — | | | — | | | — | | | — | | | 1,700 | | | 0.5 | |
| Operating income | $ | 26,309 | | | 10.3 | | | $ | 18,144 | | | 5.8 | | | $ | 15,797 | | | 4.7 | |
Revenues for our Federal and Defense segment decreased approximately $59 million or 19% and costs and operating expenses decreased approximately $67 million or 23% for 2020, as compared to the prior year primarily due to the expiration of a large U.S. Army contract in January 2020 and two other U.S. Army contracts in the second half of 2020. Other changes affecting our revenues and costs and operating expenses included increased revenues from existing U.S. Navy and U. S. Army work.
Operating income increased approximately $8.2 million or 45% for 2020 compared to the prior year. Revenue declines occurred in our lower margin work, resulting in minimal loss of operating income, and we have increased operating income through margin improvements primarily due to work performed under fixed price contracts.
Financial Condition
There has been no material adverse change in our financial condition in 2020. Our bank debt decreased approximately $19.3 million and our earn-out obligation in connection with the acquisition of 1st Choice Aerospace decreased approximately $36.7 million. We had $175 million of unused bank loan commitments as of December 31, 2020. In June 2020, we amended our loan agreement with our banks to provide increased financial covenant flexibility due to market volatility resulting from the COVID-19 pandemic. Changes to other asset and liability accounts were primarily due to our earnings; our level of business activity; the timing of inventory purchases, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work; the timing of government contract funding awarded; collections from our customers; the sale of a real estate holding in Miami, Florida; and the divestiture of our Prime Turbines business and sale of CT Aerospace inventory.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $356 thousand during 2020.
Cash provided by operating activities increased approximately $17.8 million in 2020 as compared to 2019. The change was attributable to a decrease of approximately $42.2 million in cash provided by net income, an increase of approximately $31.4 million in other non-cash operating activities and an increase of approximately $28.6 million due to changes in the levels of operating assets and liabilities.
Inventories and accounts receivable represent a significant amount of our assets, and accounts payable represent a significant amount of our operating liabilities. Cash used related to increases in inventory was approximately $50.2 million, cash provided by decreases in receivables and unbilled receivables was approximately $27.4 million, and cash provided by increases in accounts payable and deferred compensation was approximately $3.5 million for 2020. The increase in our inventory levels were primarily due to purchases of inventory in connection with new program initiatives. A significant portion of accounts receivable and accounts payable result from the use of subcontractors to perform work on our contracts and from the purchase of materials and inventory to fulfill contract obligations and distribution agreements. Accordingly, our levels of accounts receivable and accounts payable may fluctuate depending on the timing of material and inventory purchases, services ordered, product sales, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received for services. Such timing differences have the potential to cause significant increases and decreases in our inventory, accounts receivable, and accounts payable in short time periods, and accordingly, can cause increases or decreases in our cash provided by operations. We have recently experienced and expect to continue to experience delays in some of our Aviation segment receivables as a result of the COVID-19 economic down-turn.
Cash provided by investing activities was approximately $20.2 million for 2020 compared to cash used in investing activities of approximately $122.8 million for 2019. In 2019, approximately $113 million was used for the acquisition of 1st Choice Aerospace and in 2020, approximately $24.2 million was provided by proceeds from the divestiture of our Prime Turbines business and CT Aerospace inventory and the sale of a Miami, Florida real estate holding. Other cash used in investing activities consisted primarily of purchases of property and equipment.
Cash used in financing activities was approximately $56.3 million in 2020 as compared to cash provided by financing activities of approximately $105.4 million in 2019. Financing activities consisted primarily of borrowing and repayment of debt, earn-out obligation payments and dividend payments.
We paid cash dividends totaling approximately $4.0 million or $0.36 per share during 2020. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.
Liquidity
Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity. Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases. 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.
We also purchase property and equipment; invest in expansion, improvement, and maintenance of our operational and administrative facilities; and invest in the acquisition of other companies.
We have considered the effects of the COVID-19 pandemic on our liquidity and capital resources, and we currently do not expect a material adverse impact on our ability to meet future liquidity needs. See “COVID-19 Discussion-Capital, Financial Resources, Credit Losses, and Liquidity” and Item 1A, "Risk Factors" for additional details regarding the impact of COVID-19 on our liquidity and capital resources. As discussed in greater detail below, under the terms of our existing loan agreement, we are required to maintain certain financial covenants. The COVID-19 pandemic has disrupted the demand for our Aviation segment products and services and further disruption is possible. Accordingly, we amended our existing loan agreement with our banks in the second quarter of 2020 to provide increased financial covenant flexibility.
Our external financing consists of a loan agreement with a bank group that was amended in June 2020 and expires in January 2023. The loan agreement includes a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters of credit.
The term loan requires quarterly installment payments. Our required term loan payments after December 31, 2020 are approximately $21.6 million in 2021, $22.5 million in 2022, and $33.9 million in 2023. The amount of term loan borrowings outstanding as of December 31, 2020 was $78.0 million.
The maximum amount of credit available to us under the loan agreement for revolving loans and letters of credit as of December 31, 2020 was $350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $175.5 million in revolving loan amounts outstanding and no of letters of credit outstanding as of December 31, 2020. We had approximately $152.0 million in revolving loan amounts outstanding and $54 thousand 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 a combination of both facilities. The aggregate limit of incremental increases is $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. The applicable LIBOR rate has a floor of 0.75%. 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 executed compliant interest rate hedges. As of December 31, 2020, interest rates on portions of our outstanding debt ranged from 3.75% to 6.32%, and the effective interest rate on our aggregate outstanding debt was 4.80%.
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. The restrictive covenants require that we maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a maximum Total Funded Debt to EBITDA Ratio that varies over future periods as indicated in the table below. We were in compliance with required ratios and other terms and conditions as of December 31, 2020. 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.
In January 2021, we initiated a public offering of shares of VSE common stock pursuant to an effective shelf registration statement. The offering closed in February 2021 with the sale of 1,599,097 shares, including an additional 170,497 shares that were sold pursuant to the underwriters' exercise of their option to purchase additional shares resulting in net proceeds of approximately $52 million. We expect to use the net proceeds for general corporate purposes, which may include among other things, financing strategic acquisitions, working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.
| | | | | | | | | | | |
Testing Period | Maximum Total Funded Debt to EBITDA Ratio |
First Amendment Effective Date (November 26, 2019) through and including March 31, 2020 | 3.50 to 1.00 |
From April 1, 2020 through and including September 30, 2020 | 4.00 to 1.00 |
From October 1, 2020 through and including March 31, 2021 | 4.25 to 1.00 |
From April 1, 2021 through and including June 30, 2021 | 4.00 to 1.00 |
From July 1, 2021 through and including September 30, 2021 | 3.75 to 1.00 |
From October 1, 2021 through and including December 31, 2021 | 3.50 to 1.00 |
From January 1, 2022 and thereafter | 3.25 to 1.00 |
We currently do not use public debt security financing.
Contractual Obligations
Our contractual obligations as of December 31, 2020 are (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Bank loan debt | | $ | 253,461 | | | $ | 21,563 | | | $ | 231,898 | | | $ | — | | | $ | — | |
| Operating lease obligations | | 31,594 | | | 5,366 | | | 10,348 | | | 10,465 | | | 5,415 | |
| Total | | $ | 285,055 | | | $ | 26,929 | | | $ | 242,246 | | | $ | 10,465 | | | $ | 5,415 | |
Estimated cash requirements for interest on our bank loan debt are approximately $9.0 million for 2021 and $6.0 million for 2022.
Inflation and Pricing
Most of our contracts provide for estimates of future labor costs to be escalated for any option periods, while the non-labor costs in our contracts are normally considered reimbursable at cost. Our property and equipment consist principally of land, buildings and improvements, shop and warehouse equipment, computer systems equipment, and furniture and fixtures. We do not expect the overall impact of inflation on replacement costs of our property and equipment to be material to our future results of operations or financial condition.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest Rates
Our bank loan agreement provides available borrowing to us at variable interest rates. Our interest expense is impacted by the overall global economic and interest rate environment. The inflationary environment has also resulted in central banks raising short-term interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. To mitigate the risks associated with future interest rate movements we have employed interest rate hedges to fix the rate on a portion of our outstanding borrowings for various periods.
In February 2018, we entered intoA hypothetical 1% increase to interest rates would have increased interest expense by approximately $3.3 million, and would have decreased our net income and operating cash flows by a LIBOR basedcomparable amount.
For additional information related to our debt and interest rate swap onagreements, see Note (7) and Note (8), respectively, to our term loan for a term of three years with a notional amount of $10 million for the first year and $50 million for the second and third years. We pay an effective interest rate of 2.54% plus our base margin on the debt matched toConsolidated Financial Statements contained in this swap.report.
In February 2019, we entered into a LIBOR based interest rate swap on our revolving loan for a term of three years with a notional amount of $75 million. This swap amount decreases in increments on an annual basis to $45 million for the second year and to $25 million for the third year. We pay an effective interest rate of 2.805% plus our base margin on the debt matched to it.
In March 2020, we entered into a LIBOR based interest rate swap on our revolving loan for a term of two years with a notional amount of $50 million. We pay an effective interest rate of 0.73% plus our base margin on the debt matched to this swap.
LIBOR is used as a reference rate for borrowings under our loan agreement and related interest rate swap agreements. LIBOR is expected to be phased out by the end of 2021, which is before the maturity of our loan agreement. At this time, there is no definitive information regarding the future transition of LIBOR to a replacement rate; however, we continue to monitor the developments with respect to the potential discontinuance of LIBOR after 2021 and intend to work with our bank group to minimize the impact of such discontinuance on our financial condition and results of operations. The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our variable rate debt.
ITEM 8. Financial Statements and Supplementary Data
| | | | | |
| Index to Consolidated Financial Statements |
| | |
| | Page |
| | |
| |
| |
| |
| |
| |
| |
| |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
VSE Corporation
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, 20202022 and 2019,2021, the related consolidated statements of (loss) income (loss), comprehensive (loss) income changes in(loss), stockholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 2020,2022, and the related notes and financial statement schedule included under Item 15(a)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, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2020,2022, 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, 2020,2022, 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 5, 20219, 2023 expressed an unqualified opinion.
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.
Critical audit mattersmatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates 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 mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Revenue Recognition based onAssessment of the percentagewrite-down of completion methodAviation inventories
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 further in Note 1 to the consolidated financial statements, the Company’s FDS segment recognizes revenue over time as control transfers to a customer,Company records inventory within its Aviation Segment at the lower of cost or net realizable value. The Company periodically evaluates the carrying value of inventory which requires the write-down of slow-moving inventory for excess or obsolete inventory based on certain inputs and assumptions used to determine the extent of progress towards satisfactionnet realizable value. These assumptions include future demand and sales patterns. Changes in these assumptions could have a significant impact on the valuation of the related performance obligation. The selection ofinventory for 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.Aviation Segment.
The principal considerations for our determination that the useassessment of estimates-at-completion in recognizing revenuethe write-down of inventories, within the Aviation Segment, is a critical audit matter are the judgments involvedmagnitude of the inventory balance in the initial creationAviation Segment and subsequent updates tothat 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. Inputsinputs and assumptions requiringused in determining the write-down are subject to significant management judgment included anticipated direct labor, subcontract labor,judgement. The inputs and other direct costsassumptions used in determining the write-down of slow-moving inventory includes the future demand and sales patterns, 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 to deliver on unfinished performance obligations.a high degree of auditor judgement in evaluating the future customer demand for slow moving inventory.
Our audit procedures in responserelated to this matterthe write-down of inventory 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’sCompany’s inventory 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 internalincluding controls over the Company’s goodwill impairment process. This included controls over management’s identificationevaluation 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 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 managementrecovery rates applied to recent forecasts, current backlog and project estimates, and the Company’s historical results. We assessed the historical accuracy ofslow moving inventory are consistent with 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 reviewedassessed the reconciliationidentification of specific inventory with declining usage trends by evaluating external industry information.
•We conducted sensitivity analysis around the fair value of all reporting unitsreserve assumptions applied 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 utilizedaged inventory included in the market approach valuations.perpetual listing as of year-end.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.2019. | | | | | |
| |
| Arlington, Virginia | |
March 5, 20219, 2023 | |
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
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| | | | As of December 31, | | As of December 31, |
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Assets | Assets | | | | Assets | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 378 | | | $ | 734 | | Cash and cash equivalents | $ | 478 | | | $ | 518 | |
| Receivables, net | Receivables, net | 55,471 | | | 70,630 | | Receivables, net | 103,193 | | | 76,587 | |
| Unbilled receivables, net | 22,358 | | | 46,279 | | |
| Inventories, net | 253,422 | | | 218,627 | | |
| Unbilled receivables | | Unbilled receivables | 38,307 | | | 31,882 | |
| Inventories | | Inventories | 380,707 | | | 322,702 | |
| Other current assets | Other current assets | 23,328 | | | 19,071 | | Other current assets | 26,193 | | | 32,304 | |
| Total current assets | Total current assets | 354,957 | | | 355,341 | | Total current assets | 548,878 | | | 463,993 | |
| | Property and equipment, net | Property and equipment, net | 36,363 | | | 43,465 | | Property and equipment, net | 47,969 | | | 42,486 | |
| Intangible assets, net | Intangible assets, net | 103,595 | | | 132,175 | | Intangible assets, net | 90,624 | | | 108,263 | |
| Goodwill | Goodwill | 238,126 | | | 276,450 | | Goodwill | 248,837 | | | 248,753 | |
| Operating lease - right-of-use assets | Operating lease - right-of-use assets | 20,515 | | | 20,943 | | Operating lease - right-of-use assets | 34,412 | | | 27,327 | |
| Other assets | Other assets | 26,525 | | | 17,490 | | Other assets | 29,069 | | | 27,736 | |
| Total assets | Total assets | $ | 780,081 | | | $ | 845,864 | | Total assets | $ | 999,789 | | | $ | 918,558 | |
| | Liabilities and Stockholders' equity | Liabilities and Stockholders' equity | | | | Liabilities and Stockholders' equity | | | |
| Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
| Current portion of long-term debt | Current portion of long-term debt | $ | 20,379 | | | $ | 16,883 | | Current portion of long-term debt | $ | 10,000 | | | $ | 14,162 | |
| Accounts payable | Accounts payable | 72,682 | | | 68,099 | | Accounts payable | 159,600 | | | 115,064 | |
| Current portion of earn-out obligation | 0 | | | 31,700 | | |
| | Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 45,172 | | | 46,514 | | Accrued expenses and other current liabilities | 53,722 | | | 49,465 | |
| Dividends payable | Dividends payable | 995 | | | 987 | | Dividends payable | 1,282 | | | 1,273 | |
| Total current liabilities | Total current liabilities | 139,228 | | | 164,183 | | Total current liabilities | 224,604 | | | 179,964 | |
| | Long-term debt, less current portion | Long-term debt, less current portion | 230,714 | | | 253,128 | | Long-term debt, less current portion | 276,300 | | | 270,407 | |
| Deferred compensation | Deferred compensation | 16,027 | | | 18,146 | | Deferred compensation | 7,398 | | | 14,328 | |
| Long-term operating lease obligations | | Long-term operating lease obligations | 32,340 | | | 27,168 | |
| | Long-term operating lease obligations | 22,815 | | | 24,441 | | |
| Earn-out obligation, less current portion | 0 | | | 5,000 | | |
| Deferred tax liabilities | Deferred tax liabilities | 14,897 | | | 17,865 | | Deferred tax liabilities | 9,621 | | | 9,108 | |
| Other long-term liabilities | Other long-term liabilities | 83 | | 0 | | Other long-term liabilities | — | | | 250 | |
| Total liabilities | Total liabilities | 423,764 | | | 482,763 | | Total liabilities | 550,263 | | | 501,225 | |
| | Commitments and contingencies (Note 12) | 0 | | 0 | |
| Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | |
| | Stockholders' equity: | Stockholders' equity: | | | | Stockholders' equity: | | | |
| Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 11,055,037 and 10,970,123 respectively | 553 | | | 549 | | |
| Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,816,613 and 12,726,659 respectively | | Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,816,613 and 12,726,659 respectively | 641 | | | 636 | |
| Additional paid-in capital | Additional paid-in capital | 31,870 | | | 29,411 | | Additional paid-in capital | 92,620 | | | 88,515 | |
| Retained earnings | Retained earnings | 325,097 | | | 334,246 | | Retained earnings | 351,297 | | | 328,358 | |
| Accumulated other comprehensive loss | (1,203) | | | (1,105) | | |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | 4,968 | | | (176) | |
| Total stockholders' equity | Total stockholders' equity | 356,317 | | | 363,101 | | Total stockholders' equity | 449,526 | | | 417,333 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 780,081 | | | $ | 845,864 | | Total liabilities and stockholders' equity | $ | 999,789 | | | $ | 918,558 | |
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Income (Loss) Income
(in thousands, except share and per share amounts)
| | | | For the years ended December 31, | | For the years ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
| Revenues: | Revenues: | | | | | | Revenues: | | | | | |
| Products | Products | $ | 318,324 | | | $ | 311,617 | | | $ | 293,950 | | Products | $ | 562,482 | | | $ | 400,935 | | | $ | 318,324 | |
| Services | Services | 343,335 | | | 441,010 | | | 403,268 | | Services | 387,280 | | | 349,918 | | | 343,335 | |
| Total revenues | Total revenues | 661,659 | | | 752,627 | | | 697,218 | | Total revenues | 949,762 | | | 750,853 | | | 661,659 | |
| | Costs and operating expenses: | Costs and operating expenses: | | | | | | Costs and operating expenses: | | | | | |
| Products | Products | 283,814 | | | 266,443 | | | 248,701 | | Products | 503,932 | | | 385,065 | | | 283,814 | |
| Services | Services | 302,458 | | | 402,418 | | | 376,256 | | Services | 367,897 | | | 322,161 | | | 302,458 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 3,120 | | | 4,192 | | | 3,714 | | Selling, general and administrative expenses | 5,163 | | | 3,625 | | | 3,120 | |
| Amortization of intangible assets | Amortization of intangible assets | 17,504 | | | 19,317 | | | 16,017 | | Amortization of intangible assets | 17,639 | | | 18,482 | | | 17,504 | |
| Total costs and operating expenses | Total costs and operating expenses | 606,896 | | | 692,370 | | | 644,688 | | Total costs and operating expenses | 894,631 | | | 729,333 | | | 606,896 | |
| | | 54,763 | | | 60,257 | | | 52,530 | | | 55,131 | | | 21,520 | | | 54,763 | |
| | Loss on sale of a business entity and certain assets | Loss on sale of a business entity and certain assets | (8,214) | | | 0 | | | 0 | | Loss on sale of a business entity and certain assets | — | | | — | | | (8,214) | |
| Gain on sale of property | Gain on sale of property | 1,108 | | | 0 | | | 0 | | Gain on sale of property | — | | | — | | | 1,108 | |
| Goodwill and intangible asset impairment | Goodwill and intangible asset impairment | (33,734) | | | 0 | | | 0 | | Goodwill and intangible asset impairment | — | | | — | | | (33,734) | |
| Gain on sale of contract | 0 | | | 0 | | | 1,700 | | |
| | Operating income | Operating income | 13,923 | | | 60,257 | | | 54,230 | | Operating income | 55,131 | | | 21,520 | | | 13,923 | |
| | Interest expense, net | Interest expense, net | 13,496 | | | 13,830 | | | 8,982 | | Interest expense, net | 17,885 | | | 12,069 | | | 13,496 | |
| | Income before income taxes | Income before income taxes | 427 | | | 46,427 | | | 45,248 | | Income before income taxes | 37,246 | | | 9,451 | | | 427 | |
| | Provision for income taxes | Provision for income taxes | 5,598 | | | 9,403 | | | 10,168 | | Provision for income taxes | 9,187 | | | 1,485 | | | 5,598 | |
| | Net (loss) income | $ | (5,171) | | | $ | 37,024 | | | $ | 35,080 | | |
| Net income (loss) | | Net income (loss) | $ | 28,059 | | | $ | 7,966 | | | $ | (5,171) | |
| | Basic (loss) earnings per share | $ | (0.47) | | | $ | 3.38 | | | $ | 3.23 | | |
| Basic earnings (loss) per share | | Basic earnings (loss) per share | $ | 2.20 | | | $ | 0.63 | | | $ | (0.47) | |
| | Basic weighted average shares outstanding | Basic weighted average shares outstanding | 11,034,256 | | | 10,957,750 | | | 10,876,201 | | Basic weighted average shares outstanding | 12,780,117 | | | 12,551,459 | | | 11,034,256 | |
| | Diluted (loss) earnings per share | $ | (0.47) | | | $ | 3.35 | | | $ | 3.21 | | |
| Diluted earnings (loss) per share | | Diluted earnings (loss) per share | $ | 2.19 | | | $ | 0.63 | | | $ | (0.47) | |
| | Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | 11,034,256 | | | 11,044,731 | | | 10,936,057 | | Diluted weighted average shares outstanding | 12,827,894 | | | 12,632,874 | | | 11,034,256 | |
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) Income
(in thousands)
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| Net (loss) income | $ | (5,171) | | | $ | 37,024 | | | $ | 35,080 | |
| Change in fair value of interest rate swap agreements, net of tax | (98) | | | (1,251) | | | (35) | |
| Other comprehensive loss, net of tax | (98) | | | (1,251) | | | (35) | |
| Comprehensive (loss) income | $ | (5,269) | | | $ | 35,773 | | | $ | 35,045 | |
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Net income (loss) | $ | 28,059 | | | $ | 7,966 | | | $ | (5,171) | |
| Change in fair value of interest rate swap agreements, net of tax | 5,144 | | | 1,027 | | | (98) | |
| Other comprehensive income (loss), net of tax | 5,144 | | | 1,027 | | | (98) | |
| Comprehensive income (loss) | $ | 33,203 | | | $ | 8,993 | | | $ | (5,269) | |
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands except per share data)
| | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders'
Equity | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total
Stockholders'
Equity |
| | | Common Stock | | | Common Stock | |
| | | Shares | | Amount | | | Shares | | Amount | |
| Balance at December 31, 2017 | 10,839 | | | $ | 542 | | | $ | 24,470 | | | $ | 267,902 | | | $ | 181 | | | $ | 293,095 | | |
Cumulative effect of adoption of ASU 2014-09, net of tax | — | | | — | | | — | | | 1,465 | | | — | | | 1,465 | | |
| Net income | — | | | — | | | — | | | 35,080 | | | — | | | 35,080 | | |
| Stock-based compensation | 47 | | | 2 | | | 2,162 | | | — | | | — | | | 2,164 | | |
| Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | (35) | | | (35) | | |
| Dividends declared ($0.31 per share) | — | | | — | | | — | | | (3,374) | | | — | | | (3,374) | | |
| Balance at December 31, 2018 | 10,886 | | | 544 | | | 26,632 | | | 301,073 | | | 146 | | | 328,395 | | |
Cumulative effect of adoption of ASU 2016-02, net of tax | — | | | — | | | — | | | (9) | | | — | | | (9) | | |
| Net income | — | | | — | | | — | | | 37,024 | | | — | | | 37,024 | | |
| Stock-based compensation | 84 | | | 5 | | | 2,779 | | | — | | | — | | | 2,784 | | |
| Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | (1,251) | | | (1,251) | | |
| Dividends declared ($0.35 per share) | — | | | — | | | — | | | (3,842) | | | — | | | (3,842) | | |
| Balance at December 31, 2019 | Balance at December 31, 2019 | 10,970 | | | 549 | | | 29,411 | | | 334,246 | | | (1,105) | | | 363,101 | | Balance at December 31, 2019 | 10,970 | | | $ | 549 | | | $ | 29,411 | | | $ | 334,246 | | | $ | (1,105) | | | $ | 363,101 | |
| | Net loss | Net loss | — | | | — | | | — | | | (5,171) | | | — | | | (5,171) | | Net loss | — | | | — | | | — | | | (5,171) | | | — | | | (5,171) | |
| Stock-based compensation | Stock-based compensation | 85 | | | 4 | | | 2,459 | | | — | | | — | | | 2,463 | | Stock-based compensation | 85 | | | 4 | | | 2,459 | | | — | | | — | | | 2,463 | |
| Change in fair value of interest rate swap agreements, net of tax | Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | (98) | | | (98) | | Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | (98) | | | (98) | |
| Dividends declared ($0.36 per share) | Dividends declared ($0.36 per share) | — | | | — | | | — | | | (3,978) | | | — | | | (3,978) | | Dividends declared ($0.36 per share) | — | | | — | | | — | | | (3,978) | | | — | | | (3,978) | |
| Balance at December 31, 2020 | Balance at December 31, 2020 | 11,055 | | | $ | 553 | | | $ | 31,870 | | | $ | 325,097 | | | $ | (1,203) | | | $ | 356,317 | | Balance at December 31, 2020 | 11,055 | | | 553 | | | 31,870 | | | 325,097 | | | (1,203) | | | 356,317 | |
| Issuance of common stock | | Issuance of common stock | 1,599 | | | 80 | | | 51,937 | | | — | | | — | | | 52,017 | |
| Net income | | Net income | — | | | — | | | — | | | 7,966 | | | — | | | 7,966 | |
| Stock-based compensation | | Stock-based compensation | 73 | | | 3 | | | 4,708 | | | — | | | — | | | 4,711 | |
| Change in fair value of interest rate swap agreements, net of tax | | Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | 1,027 | | | 1,027 | |
| Dividends declared ($0.37 per share) | | Dividends declared ($0.37 per share) | — | | | — | | | — | | | (4,705) | | | — | | | (4,705) | |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | 12,727 | | | 636 | | | 88,515 | | | 328,358 | | | (176) | | | 417,333 | |
| Net income | | Net income | — | | | — | | | — | | | 28,059 | | | — | | | 28,059 | |
| Stock-based compensation | | Stock-based compensation | 90 | | | 5 | | | 4,105 | | | — | | | — | | | 4,110 | |
| Change in fair value of interest rate swap agreements, net of tax | | Change in fair value of interest rate swap agreements, net of tax | — | | | — | | | — | | | — | | | 5,144 | | | 5,144 | |
| Dividends declared ($0.40 per share) | | Dividends declared ($0.40 per share) | — | | | — | | | — | | | (5,120) | | | — | | | (5,120) | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 12,817 | | | $ | 641 | | | $ | 92,620 | | | $ | 351,297 | | | $ | 4,968 | | | $ | 449,526 | |
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| 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
activities: | | | | | |
| Depreciation and amortization | 24,135 | | | 26,927 | | | 25,224 | |
| Deferred taxes | 106 | | | (505) | | | (1,371) | |
| Stock-based compensation | 2,858 | | | 3,264 | | | 3,027 | |
| Loss on sale of a business entity and certain assets | 8,214 | | | 0 | | | 0 |
| Gain on sale of property and equipment | (1,051) | | | 0 | | | 0 | |
| Goodwill and intangible asset impairment | 33,734 | | | 0 | | | 0 | |
| Gain on sale of contract | 0 | | | 0 | | | (1,700) | |
| Earn-out obligation fair value adjustment | (4,999) | | | 1,900 | | | 0 | |
| Changes in operating assets and liabilities, net of impact of acquisitions: | | | | | |
| Receivables | 7,732 | | | (3,331) | | | (3,754) | |
| Unbilled receivables | 19,694 | | | (4,593) | | | 4,706 | |
| Inventories | (50,172) | | | (44,219) | | | (35,558) | |
| Other current assets and noncurrent assets | (1,722) | | | (7,405) | | | 4,789 | |
| Accounts payable and deferred compensation | 3,503 | | | 7,725 | | | (7,405) | |
| Accrued expenses and other current liabilities | (1,183) | | | 1,207 | | | (2,515) | |
| Long-term lease obligations | 0 | | | 0 | | | (1,668) | |
| Other long-term liabilities | 83 | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Net cash provided by operating activities | 35,761 | | | 17,994 | | | 18,855 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (4,427) | | | (9,630) | | | (3,117) | |
| Proceeds from the sale of property and equipment | 2,875 | | | 4 | | | 122 | |
| Proceeds from sale of a business entity and certain assets | 21,771 | | | 0 | | | 0 | |
| Proceeds from the sale of contract | 0 | | | 0 | | | 1,700 | |
| Cash paid for acquisitions, net of cash acquired | 0 | | | (113,181) | | | 0 | |
| | | | | |
| Net cash provided by (used in) investing activities | 20,219 | | | (122,807) | | | (1,295) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Borrowings on loan agreement | 432,999 | | | 752,259 | | | 539,471 | |
| Repayments on loan agreement | (452,338) | | | (642,193) | | | (550,436) | |
| Earn-out obligation payments | (31,701) | | | 0 | | | 0 | |
| Payment of debt financing costs | (636) | | | 0 | | | (1,702) | |
| Payments on financing lease obligations | 0 | | | 0 | | | (1,452) | |
| Payment of taxes for equity transactions | (690) | | | (955) | | | (641) | |
| Dividends paid | (3,970) | | | (3,726) | | | (3,262) | |
| | | | | |
| 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) | |
| Cash and cash equivalents at beginning of year | 734 | | | 162 | | | 624 | |
| Cash and cash equivalents at end of year | $ | 378 | | | $ | 734 | | | $ | 162 | |
| | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 28,059 | | | $ | 7,966 | | | $ | (5,171) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Depreciation and amortization | 25,570 | | | 25,600 | | | 24,135 | |
| Deferred taxes | (1,139) | | | (4,356) | | | 106 | |
| Stock-based compensation | 4,465 | | | 3,932 | | | 2,858 | |
| Provision for inventory | 1,094 | | | 24,420 | | | — | |
| | | | | |
| Loss on sale of a business entity and certain assets | — | | | — | | | 8,214 | |
| Loss (gain) on sale of property and equipment | 122 | | | (64) | | | (1,051) | |
| Goodwill and intangible asset impairment | — | | | — | | | 33,734 | |
| Earn-out obligation fair value adjustment | — | | | — | | | (4,999) | |
| Changes in operating assets and liabilities, net of impact of acquisitions: | | | | | |
| Receivables | (26,606) | | | (9,413) | | | 7,732 | |
| Unbilled receivables | (6,425) | | | (5,542) | | | 19,694 | |
| Inventories | (59,099) | | | (80,021) | | | (50,172) | |
| Other current assets and noncurrent assets | (4,522) | | | (14,247) | | | (1,722) | |
| Accounts payable and deferred compensation | 36,193 | | | 33,210 | | | 3,503 | |
| Accrued expenses and other current and noncurrent liabilities | 10,339 | | | 913 | | | (1,100) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) operating activities | 8,051 | | | (17,602) | | | 35,761 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (11,212) | | | (10,520) | | | (4,427) | |
| Proceeds from the sale of property and equipment | — | | | 68 | | | 2,875 | |
| Proceeds from payments on notes receivable | 8,835 | | | 2,906 | | | 1,856 | |
| Proceeds from sale of a business entity and certain assets | — | | | — | | | 19,915 | |
| Earn-out obligation payments | — | | | (750) | | | |
| Cash paid for acquisitions, net of cash acquired | — | | | (53,336) | | | — | |
| | | | | |
| Net cash (used in) provided by investing activities | (2,377) | | | (61,632) | | | 20,219 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Borrowings on loan agreement | 520,223 | | | 491,567 | | | 432,999 | |
| Repayments on loan agreement | (518,347) | | | (458,294) | | | (452,338) | |
| Proceeds from issuance of common stock | 899 | | | 52,017 | | | — | |
| Earn-out obligation payments | (1,250) | | | — | | | (31,701) | |
| Payment of debt financing costs | (1,113) | | | (808) | | | (636) | |
| Payment of taxes for equity transactions | (1,015) | | | (681) | | | (690) | |
| Dividends paid | (5,111) | | | (4,427) | | | (3,970) | |
| | | | | |
| 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 and cash equivalents at beginning of year | 518 | | | 378 | | | 734 | |
| Cash and cash equivalents at end of year | $ | 478 | | | $ | 518 | | | $ | 378 | |
The accompanying notes are an integral part of these financial statements.
| | | | | | | | | | | | | | | | | |
| | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 13,936 | | | $ | 13,468 | | | $ | 7,523 | |
| Cash paid for income taxes | $ | 4,759 | | | $ | 11,645 | | | $ | 9,534 | |
| | | | | |
| Supplemental disclosure of noncash investing and financing activities: | | | | | |
| Notes receivable from the sale of a business entity and certain assets | $ | 12,852 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Supplemental cash flow disclosures: | | | | | |
| Cash paid for interest | $ | 16,423 | | | $ | 12,146 | | | $ | 13,936 | |
| Cash paid for income taxes | $ | 10,332 | | | $ | 7,536 | | | $ | 4,759 | |
| | | | | |
| Supplemental disclosure of noncash investing and financing activities: | | | | | |
| Notes receivable from the sale of a business entity and certain assets | $ | — | | | $ | — | | | $ | 12,852 | |
| Earn-out obligation in connection with acquisitions | $ | — | | | $ | 1,250 | | | $ | — | |
The accompanying notes are an integral part of these financial statements.
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20202022
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
The term "VSE," the "Company," "us," "we," or "our" means VSE and its subsidiaries and divisions unless the context indicates operations of only VSE as the parent company.
Our operations include aftermarket supply chain management solutions and parts supply for vehicle fleets; maintenance, repair, and overhaul ("MRO") services and parts supply for aviation clients; vehicle and equipment maintenance and refurbishment; logistics; engineering; energy services; IT and health care IT solutions; and consulting services. We serve the United States Government (the "government"), including the United States Department of Defense ("DoD"), federal civilian agencies, and other commercial and other customers.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements consist of the operations of our parent company and 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.subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiescontingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements may include, accruals for contract disallowance reserves, costsbut are not limited to, completefair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on fixed price contracts, and recoverabilitydeferred tax assets, fair value of goodwill and other 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 pandemicassets 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 3 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 FinancialInstruments, 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.contingencies.
Stock-Based Compensation
We account for share-basedissue stock-based awards in accordance with the applicable accounting rules that require the measurementas compensation to employees and recognition ofdirectors. Stock-based awards include stock-settled bonus awards, vesting stock awards and performance share awards. We recognize stock-based compensation expense for all share-based payment awards based on estimatedover the underlying award’s requisite service period, as measured using the award’s grant date fair values, which is determined based on the closing price of our common stock on the date of grant.value. Our policy is to recognize forfeitures of restricted stock as they occur. TheFor performance share awards, we assess the probability of achieving the performance conditions at each reporting period end and adjust compensation expense included in costs and operating expenses is amortized overbased on the requisite service period using the accelerated attribution method.number of shares we expect to ultimately issue.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. 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 stockoutstanding 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 arewere not material.
| | | | Years Ended December 31, | | Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
| Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | 11,034,256 | | | 10,957,750 | | | 10,876,201 | | Basic weighted average common shares outstanding | 12,780,117 | | | 12,551,459 | | | 11,034,256 | |
| Effect of dilutive shares | Effect of dilutive shares | 0 | | | 86,981 | | | 59,856 | | Effect of dilutive shares | 47,777 | | | 81,415 | | | — | |
| Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 11,034,256 | | | 11,044,731 | | | 10,936,057 | | Diluted weighted average common shares outstanding | 12,827,894 | | | 12,632,874 | | | 11,034,256 | |
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, the carrying values on our consolidated balance sheets approximate fair value.
Property and Equipment
Property and equipment areis recorded at cost.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 is provided principally by the straight-line method over periods offrom three to 15 years. Depreciation ofyears; and buildings and land improvements is provided by the straight-line method over periods of approximatelyfrom 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.
Leases
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.
terms. We recognize at lease commencement a right-of-use ("ROU") asset and a lease liability based on the present valueupon commencement of our operating leases. The initial lease liability is equal to the future fixed minimum lease payments over the lease term, determineddiscounted 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 ata secured basis. The lease commencement to discount leaseterm includes option renewal periods and early termination payments to present value. Certain of our leases include options to extend the term of the lease or to terminate the lease. Whenwhen it is reasonably certain that we will exercise the option, we include the impactthose rights. The initial measurement of the optionROU 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 lease termperiod in which the obligation 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.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 recognizeOperating lease expense for these leasescost is included in costs and operating expenses on a straight-line basis over the termour consolidated statement of the lease.income.
Concentration of Credit Risk/Fair Value of Financial InstrumentsRisk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents andour trade receivables. Our trade receivables consist of amounts due from various commercial entities and government clients and commercial entities.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. Contracts with the government, either as a prime or subcontractor, accounted for approximately 69%47%, 68%57%, and 78%69% of revenues for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively. The credit risk, with respect to contracts with the government, is limited due to the creditworthiness of the respective governmental entity. We perform ongoing credit evaluations and monitoring of the financial condition of all our customers. 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
We account for revenue in accordance with ASC 606. The unit of account in ASC 606 is a performance obligation. 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 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. 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 our 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 for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers. 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. 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 3three primary types of contracts used are cost-type, fixed-price and time and materials.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-typecost-plus 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. 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. RevenueWe 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 to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer.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 impact 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 ("T&M") 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.
A substantial portion of contract and administrative costs are subject to audit by the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 20172021 and prior years with no material adjustments to our results of operations or financial position. While we maintain reserves to cover the risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.
Receivables and Unbilled Receivables
Receivables are recorded at amounts earned less an allowance. We review our receivables regularly to determine if there are any potentially uncollectible accounts. The majority of our receivables are from government agencies, where there is minimal credit risk.
Unbilled receivables include amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Unbilled receivables are classified as current based on our contract operating cycle.
Allowance for Credit Losses
We establish allowances for credit losses on our accounts receivable and unbilled receivables. To measure expected credit losses, we have disaggregated pools of receivable balances where we have elected to pool our receivables by segment. Within each segment, receivables exhibit similar risk characteristics. In determining the amount of the allowance for credit losses, we consider historical collectibilitycollectability based on past due status. We also consider current market conditions and reasonable and supportable forecasts of future economic conditions to inform potential
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. The adequacy of these allowances areis 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
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method. Inventories consist primarily of finished goods replacement parts for our Fleet segment primarily consists of vehicle replacement parts. Included in inventory areand Aviation segments, and also include related purchasing, storage and handling costs. Inventories for our Aviation segment consist primarily consist of aftermarket parts for distribution, and general aviation engine accessories and parts. Included in inventory areparts, 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
We have a deferred compensation plan,established the VSE Corporation Deferred Supplemental Compensation Plan ("DSC Plan"), to provide incentive and reward for the benefit of certain key management employees to be incentivized and rewarded based on overall corporatecompany performance. We maintain the underlying assets of therecognized DSC Plan in a Rabbi Trustexpenses of $0.3 million, $0.4 million and changes in asset values are included in costs$1.0 million for the years ended December 31, 2022, 2021 and operating expenses on the accompanying consolidated statements of income. 2020, respectively.
We invest the assets held by the Rabbi Trust in both corporate owned life insurance ("COLI") products and in mutual funds.funds that are held in a Rabbi Trust to fund the DSC Plan obligations. The COLI investments are recorded at cash surrender value and the mutual fund investments are recorded at fair value. 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 Gains and losses recognized on the changes in fair value of the investments are recorded as costsselling, general and operatingadministrative expenses inon the accompanying consolidated statements of incomeincome. We recorded a net gain of $22 thousand and net losses of $0.6 million and $0.9 million for the years ended December 31, 2020, 20192022, 2021 and 2018 was approximately $970 thousand, $1.7 million and $2.1 million,2020, respectively.
Impairment of Long-Lived AssetsDerivative Instruments
Long-lived assets include amortizable intangible assetsDerivative instruments are recorded on the consolidated balance sheets at fair value. Unrealized gains and propertylosses on derivatives designated as cash flow hedges are report in other comprehensive income (loss) and equipment to be held and used. We reviewreclassified into earnings in a manner that matches 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 flowstiming 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 valueearnings impact 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. NaN impairment charges related to long-lived assets were recorded in the years ended December 31, 2019 and December 31, 2018.hedged transactions.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
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.
GoodwillBusiness Combinations
We test goodwillallocate 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 tested for potential impairment at the reporting unit level annually inat the beginning of the fourth quarter, andor whenever events or changes in circumstances indicate that the carrying value of goodwill 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
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 quantitative assessment.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 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 amount of impairment expense is equal to the difference is recorded as an impairment loss.
Forbetween the quantitative assessment, we estimate thereporting unit’s 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.unit’s carrying value.
Intangible Assets
Intangible assets consistwith finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of the value of contract-related intangible assets, trade names and acquired technologies acquired in acquisitions. We amortize intangible assetseconomic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives unless their usefullives. 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 indefinite. The amountsimpaired, we record related to acquired intangibles are determined by us consideringrecognize an impairment charge in the resultscurrent period for the difference between the fair value 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 6 trade names that are amortized over an estimated useful life of approximately two to nine years. We have an acquired technologies intangiblethe 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.and its carrying value.
Recently IssuedRecent Adopted Accounting Pronouncements Not Yet Adopted
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 elected to early adopt this standard during the first quarter 2022 and will apply the guidance prospectively to business combinations entered into subsequent to adoption.
In March 2020, the FASB issued ASU 2020-04, "Reference"Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. 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 evaluatingamended our contracts and the optional expedients provided by the new standard.loan agreement in October 2022, which is discussed in Note (7) "Debt". The change from LIBOR rates did not have a material impact on our consolidated financial statements.
(2) AcquisitionAcquisitions and Divestitures
AcquisitionAcquisitions
Global Parts Group, Inc
On January 10, 2019,July 26, 2021, our wholly owned subsidiary VSE Aviation segment acquired 100% of the equity of 1st Choice AerospaceGlobal Parts Group, Inc. ("1st Choice Aerospace"Global Parts"), a provider ofprivately owned company with operations in Augusta, Kansas. Global Parts provides distribution and MRO services for business and products for new generationgeneral aviation ("B&GA") aircraft families. The acquisition expands our existing B&GA focus and legacy commercial aircraft platforms. 1st Choice Aerospace has operations in Floridafurther diversifies our existing product and Kentucky. We retained key members
platform offerings to include additional airframe components, while expanding our customer base of regional and global B&GA customers.
The initialcash purchase consideration paid at closingprice for 1st Choice AerospaceGlobal Parts was approximately $113 million, which included $1.1 million as an estimated net working capital adjustment.
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 paymentnet of approximately $31.7cash acquired, which was funded using our existing bank revolving loan. The purchase price included $2 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. Changes in the fair value of the earn-out obligations arerecognized in earnings in the period of change through settlement.contingent consideration. Refer to Note (16)(17) "Fair Value Measurements"Measurements," for additional information regarding the earn-out obligation.
We completed the purchase accounting valuation for this transaction in 2021 and recorded the final purchase price allocation 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 value attributed to the customer relationship intangible asset is being amortized on a straight-line basis using a useful life of 15 years. None of the value attributed to goodwill and customer relationships was deductible for income tax purposes. Goodwill resulting from the 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 $408 thousand$0.5 million of acquisition-related expenses associated with our Global Parts acquisition for the year ended December 31, 2019,2021, which are included in selling, general and administrative expenses.
The following VSEGlobal 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 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 duringbasis for the year ended December 31, 2019. This information is for comparative purposes only2021 and does2020 would not necessarily reflect the results that would have occurred or may occur in the future.been materially different than our reported amounts.
HAECO Special Services, LLC
On March 1, 2021, our Federal and Defense segment 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. 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 unauditedacquisition was not material to our consolidated pro forma resultsfinancial statements.
The final allocation of the purchase price resulted in approximately $7.0 million to the fair value of net tangible assets (including $9.2 million of accounts receivable), $0.7 million 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 $0.3 million of acquisition-related expenses associated with our HSS acquisition for the year ended December 31, 2021, which are as follows (in thousands except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year ended December 31, |
| | | | | | | | 2018 |
Revenue | | | | | | | | $ | 743,347 | |
Net Income | | | | | | | | $ | 35,963 | |
Basic earnings per share | | | | | | | | $ | 3.31 | |
Diluted earnings per share | | | | | | | | $ | 3.29 | |
included in selling, general and administrative expenses.
Divestitures
Prime Turbines Sale
OnIn January 28, 2020, VSE’s subsidiary VSE Aviation, Inc. entered into 2two 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%.
CT Aerospace Asset Sale
OnIn June 26, 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 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.
(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 includeand from services performed for commercial customers, the DoD, and various other government agencies and commercial clients.agencies.
A summary of revenues by customer for each of our operating segments by customer for the years ended December 31, 2022, 2021 and 2020 2019 and 2018 arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Fleet | | Aviation | | Federal and Defense | | Total |
| DoD | | $ | 20,744 | | | $ | 1,093 | | | $ | 214,560 | | | $ | 236,397 | |
| Other government | | 178,693 | | | 282 | | | 37,982 | | | 216,957 | |
| Commercial | | 42,733 | | | 163,695 | | | 1,877 | | | 208,305 | |
| Total | | $ | 242,170 | | | $ | 165,070 | | | $ | 254,419 | | | $ | 661,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | |
| DoD | | $ | 24,246 | | | $ | 3,775 | | | $ | 276,313 | | | $ | 304,334 | |
| Other government | | 168,113 | | | 1,885 | | | 35,777 | | | 205,775 | |
| Commercial | | 22,161 | | | 218,886 | | | 1,471 | | | 242,518 | |
| Total | | $ | 214,520 | | | $ | 224,546 | | | $ | 313,561 | | | $ | 752,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 | | | | | | | | |
| DoD | | $ | 24,280 | | | $ | 7,387 | | | $ | 302,827 | | | $ | 334,494 | |
| Other government | | 176,200 | | | 2,172 | | | 33,746 | | | 212,118 | |
| Commercial | | 14,329 | | | 135,864 | | | 413 | | | 150,606 | |
| Total | | $ | 214,809 | | | $ | 145,423 | | | $ | 336,986 | | | $ | 697,218 | |
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. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Fleet | | Aviation | | Federal and Defense | | Total |
| Commercial | | $ | 104,162 | | | $ | 403,155 | | | $ | 583 | | | $ | 507,900 | |
| DoD | | 3,286 | | | — | | | 224,436 | | | 227,722 | |
| Other government | | 153,888 | | | 4,957 | | | 55,295 | | | 214,140 | |
| Total | | $ | 261,336 | | | $ | 408,112 | | | $ | 280,314 | | | $ | 949,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | |
| 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 | |
| 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 | |
| Total | | $ | 242,170 | | | $ | 165,070 | | | $ | 254,419 | | | $ | 661,659 | |
A summary of revenues by type for each of our operating segments for the year ended December 31, 2022, 2021 and 2020 2019 and 2018 arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Fleet | | Aviation | | Federal and Defense | | Total |
| Repair | | $ | 0 | | | $ | 82,445 | | | $ | 0 | | | $ | 82,445 | |
| Distribution | | 242,170 | | | 82,625 | | | 0 | | | 324,795 | |
| Cost Plus Contract | | 0 | | | 0 | | | 79,064 | | | 79,064 | |
| Fixed Price Contract | | 0 | | | 0 | | | 138,406 | | | 138,406 | |
| T&M Contract | | 0 | | | 0 | | | 36,949 | | | 36,949 | |
| Total | | $ | 242,170 | | | $ | 165,070 | | | $ | 254,419 | | | $ | 661,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | |
| Repair | | $ | 0 | | | $ | 119,044 | | | $ | 0 | | | $ | 119,044 | |
| Distribution | | 214,520 | | | 105,502 | | | 0 | | | 320,022 | |
| Cost Plus Contract | | 0 | | | 0 | | | 144,600 | | | 144,600 | |
| Fixed Price Contract | | 0 | | | 0 | | | 78,163 | | | 78,163 | |
| T&M Contract | | 0 | | | 0 | | | 90,798 | | | 90,798 | |
| Total | | $ | 214,520 | | | $ | 224,546 | | | $ | 313,561 | | | $ | 752,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Fleet | | Aviation | | Federal and Defense | | Total |
| Repair | | $ | — | | | $ | 107,399 | | | $ | — | | | $ | 107,399 | |
| Distribution | | 261,336 | | | 300,713 | | | — | | | 562,049 | |
| Cost Plus Contract | | — | | | — | | | 139,958 | | | 139,958 | |
| Fixed Price Contract | | — | | | — | | | 98,674 | | | 98,674 | |
| T&M Contract | | — | | | — | | | 41,682 | | | 41,682 | |
| Total | | $ | 261,336 | | | $ | 408,112 | | | $ | 280,314 | | | $ | 949,762 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | |
| Repair | | $ | — | | | $ | 75,725 | | | $ | — | | | $ | 75,725 | |
| Distribution | | 233,532 | | | 172,127 | | | — | | | 405,659 | |
| Cost Plus Contract | | — | | | — | | | 93,694 | | | 93,694 | |
| Fixed Price Contract | | — | | | — | | | 105,495 | | | 105,495 | |
| T&M Contract | | — | | | — | | | 70,280 | | | 70,280 | |
| Total | | $ | 233,532 | | | $ | 247,852 | | | $ | 269,469 | | | $ | 750,853 | |
| | Year Ended December 31, 2018 | | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2020 | |
| Repair | Repair | | $ | 0 | | | $ | 55,960 | | | $ | 0 | | | $ | 55,960 | | Repair | | $ | — | | | $ | 82,445 | | | $ | — | | | $ | 82,445 | |
| Distribution | Distribution | | 214,809 | | | 89,463 | | | 0 | | | 304,272 | | Distribution | | 242,170 | | | 82,625 | | | — | | | 324,795 | |
| Cost Plus Contract | Cost Plus Contract | | 0 | | | 0 | | | 188,867 | | | 188,867 | | Cost Plus Contract | | — | | | — | | | 79,064 | | | 79,064 | |
| Fixed Price Contract | Fixed Price Contract | | 0 | | | 0 | | | 70,669 | | | 70,669 | | Fixed Price Contract | | — | | | — | | | 138,406 | | | 138,406 | |
| T&M Contract | T&M Contract | | 0 | | | 0 | | | 77,450 | | | 77,450 | | T&M Contract | | — | | | — | | | 36,949 | | | 36,949 | |
| Total | Total | | $ | 214,809 | | | $ | 145,423 | | | $ | 336,986 | | | $ | 697,218 | | Total | | $ | 242,170 | | | $ | 165,070 | | | $ | 254,419 | | | $ | 661,659 | |
Contract Balances
Billed receivables, unbilled receivables (contract assets), and contract liabilities are the results of revenue recognition, customer billing, and timing of payment receipts. Billed receivables,Receivables, net, represent unconditional rights to consideration, underwhich are unconditional other than the termspassage of thetime. A contract and include amounts billed and currently due from our customers. Unbilled receivables represent ourasset is a right to consideration in exchange for goods or services that we have transferred tois conditional upon factors other than the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a periodpassage of time.
We present our Contract assets include unbilled receivables and contract retentions but exclude billed receivables. Contract liabilities include customer advances, billings in excess of revenues and deferred revenue. Contract assets and liabilities are recorded net on a contract-by-contract basis. If abasis and are generally classified as current based on our contract liability exists, it is netted against theoperating cycle.
Receivables, net and unbilled receivables balance for that contract. as of December 31, 2022 and 2021, respectively, were as follows (in thousands):
| | | | | | | | | | | |
| | 2022 | | 2021 |
Receivables, net(1) | $ | 103,193 | | | $ | 76,587 | |
| Unbilled receivables | 38,307 | | | 31,882 | |
| Total | $ | 141,500 | | | $ | 108,469 | |
(1) Net of allowance of $2.1 million and $1.7 million as of December 31, 2022 and 2021, respectively. | | | |
Unbilled receivables decreased from $46.3increased to $38.3 million atas of December 31, 2019 to $22.42022 from $31.9 million atas of December 31, 2020,2021, primarily due to the billings of our customersrevenue recognized in excess of revenue recognized as performance obligations were satisfied. billings.
Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $5.0$6.4 million atas of December 31, 20192022 and $10.1$7.1 million atas of December 31, 2020.2021. For the year ended December 31, 20202022 and 2019,2021, we recognized revenue of $2.2$3.9 million and $2.2$5.1 million, respectively, that was previously included in the beginning balance of contract liabilities.
Performance Obligations
Our performance obligations are satisfied either at a point in time or 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.progresses. Revenues from products and services transferred to customers at a point in time accounted for approximately 49% and 43% of our revenues forare primarily related to the year ended December 31, 2020 and 2019, respectively. The majority of our revenue recognized at a point in time is for the salesales of vehicle and aircraft parts in our Fleet and Aviation segments. Revenue recognized at a point in time accounted for approximately 59% and 54% of our revenues for the
year ended December 31, 2022 and 2021, respectively. Revenues from products and services transferred to customers over time are primarily related to revenues in our Federal and Defense segment and MRO services in our Aviation segment. Revenues recognized over time accounted for approximately 41% and 46% of our revenues for the year ended December 31, 2022 and 2021, respectively.
As of December 31, 2020,2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $183$187 million. Performance obligations expected to be satisfied within one year and greater than
one year are 92%97% and 8%3%, 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.
During the year ended December 31, 2020,2022, revenue recognized from performance obligations satisfied in prior periods was not material.
(4) Receivables and Unbilled Receivables
Receivables, net and unbilled receivables, net as of December 31, 2020 and 2019, respectively, were as follows (in thousands):
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Receivables, net | $ | 55,471 | | | $ | 70,630 | |
| Unbilled receivables, net | 22,358 | | | 46,279 | |
| Total | $ | 77,829 | | | $ | 116,909 | |
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. We expect to invoice substantially all unbilled receivables during 2021.
(5) Other Current Assets and Other Assets
Other current assets consisted of the following as of December 31, 20202022 and 20192021 (in thousands):
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Self insurance reserves | $ | 9,535 | | | $ | 7,566 | |
| Current portion of notes receivable | 2,721 | | | 0 | |
| Deferred contract costs | 3,514 | | | 4,141 | |
| Other | 7,558 | | | 7,364 | |
| Total | $ | 23,328 | | | $ | 19,071 | |
Other assets consisted of the following as of December 31, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Deferred compensation plan assets | $ | 14,370 | | | $ | 16,708 | |
| Long-term portion of notes receivable | 9,856 | | | 0 | |
| Other | 2,299 | | | 782 | |
| Total | $ | 26,525 | | | $ | 17,490 | |
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. | | | | | | | | | | | |
| | 2022 | | 2021 |
| Self insurance trust assets | $ | — | | | $ | 5,993 | |
| Current portion of notes receivable | — | | | 2,820 | |
| Vendor advances | 14,998 | | | 14,552 | |
| Other | 11,195 | | | 8,939 | |
| Total | $ | 26,193 | | | $ | 32,304 | |
(6)(5) Property and Equipment
Property and equipment, net consisted of the following as of December 31, 20202022 and 20192021 (in thousands):
| | | | 2020 | | 2019 | | 2022 | | 2021 |
| Buildings and building improvements | Buildings and building improvements | $ | 29,537 | | | $ | 31,463 | | Buildings and building improvements | $ | 30,482 | | | $ | 29,596 | |
| Computer equipment | Computer equipment | 26,492 | | | 26,697 | | Computer equipment | 29,728 | | | 28,084 | |
| Furniture, fixtures, equipment and other | Furniture, fixtures, equipment and other | 33,322 | | | 38,637 | | Furniture, fixtures, equipment and other | 48,788 | | | 39,377 | |
| Leasehold improvements | Leasehold improvements | 3,140 | | | 3,717 | | Leasehold improvements | 7,495 | | | 7,164 | |
| Land and land improvements | Land and land improvements | 4,726 | | | 5,151 | | Land and land improvements | 4,681 | | | 4,726 | |
| | | 97,217 | | | 105,665 | | | 121,174 | | | 108,947 | |
| Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (60,854) | | | (62,200) | | Less accumulated depreciation and amortization | (73,205) | | | (66,461) | |
| Total property and equipment, net | Total property and equipment, net | $ | 36,363 | | | $ | 43,465 | | Total property and equipment, net | $ | 47,969 | | | $ | 42,486 | |
Depreciation and amortization expense for property and equipment for the years ended December 31, 2022, 2021 and 2020 2019 and 2018 was approximately $5.6$7.1 million, $7.0$6.1 million and $8.5$5.6 million, respectively.
(7)(6) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 20202022 and 2019 are2021 by operating segment were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fleet | | Federal and Defense | | Aviation | | Total |
| Balance as of December 31, 2018 | $ | 63,190 | | | $ | 30,883 | | | $ | 104,549 | | | $ | 198,622 | |
| Increase from acquisitions | 0 | | | 0 | | | 77,828 | | | 77,828 | |
| Balance as of December 31, 2019 | $ | 63,190 | | | $ | 30,883 | | | $ | 182,377 | | | $ | 276,450 | |
| Impairment charge | 0 | | | 0 | | | (30,945) | | | (30,945) | |
| Decrease from divestiture | 0 | | | 0 | | | (7,379) | | | (7,379) | |
| Balance as of December 31, 2020 | $ | 63,190 | | | $ | 30,883 | | | $ | 144,053 | | | $ | 238,126 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fleet | | Federal and Defense | | Aviation (1) | | Total |
| Balance as of December 31, 2020 | $ | 63,190 | | | $ | 30,883 | | | $ | 144,053 | | | $ | 238,126 | |
| Goodwill acquired | — | | | 608 | | | 10,019 | | | 10,627 | |
| Balance as of December 31, 2021 | $ | 63,190 | | | $ | 31,491 | | | $ | 154,072 | | | $ | 248,753 | |
| Adjustments to goodwill | — | | | 84 | | | — | | | 84 | |
| Balance as of December 31, 2022 | $ | 63,190 | | | $ | 31,575 | | | $ | 154,072 | | | $ | 248,837 | |
(1) As of December 2022 and 2021, the Aviation segment accumulated goodwill impairment loss was $30.9 million. |
InGoodwill increased during the first quarteryear ended December 31, 2021 in connection with acquisitions completed during the period as discussed in Note (2) "Acquisitions and Divestitures." There were no impairments of goodwill during the years ended December 31, 2022 and 2021. During the year ended December 31, 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 inresulting from the second quarternegative impact of 2020. Refer to Note (16) "Fair Value Measurements" for additional informationthe COVID-19 pandemic on the valuation methodology assumptions.our Aviation reporting unit.
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.
Intangible assets consisted of the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| | Cost | | Accumulated Amortization | | Accumulated Impairment Loss | | Net Intangible Assets |
| December 31, 2020 | | | | | | | |
| Contract and customer-related | $ | 213,194 | | | $ | (110,917) | | | $ | (3,814) | | | $ | 98,463 | |
| Acquired technologies | 12,400 | | | (10,787) | | | 0 | | | 1,613 | |
| Trade names | 18,770 | | | (15,251) | | | 0 | | | 3,519 | |
| Total | $ | 244,364 | | | $ | (136,955) | | | $ | (3,814) | | | $ | 103,595 | |
| | | | | | | |
| December 31, 2019 | | | | | | | |
| Contract and customer-related | $ | 227,594 | | | $ | (102,169) | | | $ | (1,025) | | | $ | 124,400 | |
| Acquired technologies | 12,400 | | | (9,660) | | | 0 | | | 2,740 | |
| Trade names | 18,770 | | | (13,735) | | | 0 | | | 5,035 | |
| Total | $ | 258,764 | | | $ | (125,564) | | | $ | (1,025) | | | $ | 132,175 | |
| | | | | | | | | | | | | | | | | |
| | Cost | | Accumulated Amortization | | Net Intangible Assets |
| December 31, 2022 | | | | | |
| Contract and customer-related | $ | 206,291 | | | $ | (116,881) | | | $ | 89,410 | |
| Trade names | 8,670 | | | (7,456) | | | 1,214 | |
| Total | $ | 214,961 | | | $ | (124,337) | | | $ | 90,624 | |
| | | | | |
| December 31, 2021 | | | | | |
| Contract and customer-related | $ | 221,796 | | | $ | (116,385) | | | $ | 105,411 | |
| Acquired technologies | 12,400 | | | (11,915) | | | 485 | |
| Trade names | 8,670 | | | (6,303) | | | 2,367 | |
| Total | $ | 242,866 | | | $ | (134,603) | | | $ | 108,263 | |
DuringIntangible assets with a gross carrying value of 27.9 million were fully amortized during the year and are no longer reflected in the intangible asset values as of December 31, 2022. There were no impairment losses during 2022 and 2021. We recognized an impairment expense, included in goodwill and intangible impairment, of $2.8 million within the Aviation segment during the second quarter of 2020 we completedin connection with the sale of all of the inventory of theour 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.subsidiary.
Amortization expense for the years ended December 31, 2022, 2021 and 2020 2019was $17.6 million, $18.5 million and 2018 was approximately $17.5 million, $19.3 million and $16.0 million, respectively.
The estimated future annual amortization expense related to intangible assets are as follows (in thousands):
| | | | | |
| Year Ending December 31, | |
| 2023 | $ | 13,639 | |
| 2024 | 10,059 | |
| 2025 | 9,015 | |
| 2026 | 8,190 | |
| 2027 | 6,444 | |
| Thereafter | 43,277 | |
| Total | $ | 90,624 | |
Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands):
| | | | | |
| | Amortization |
| 2021 | $ | 16,636 | |
| 2022 | 14,890 | |
| 2023 | 10,890 | |
| 2024 | 7,309 | |
| 2025 | 7,248 | |
| Thereafter | 46,622 | |
| Total | $ | 103,595 | |
(8)(7) Debt
Long-term debt consisted of the following (in thousands):
| | | December 31, | | December 31, |
| | | 2020 | | 2019 | | 2022 | | 2021 |
| Bank credit facility - term loan | Bank credit facility - term loan | $ | 77,988 | | | $ | 120,800 | | Bank credit facility - term loan | $ | 100,000 | | | $ | 60,175 | |
| Bank credit facility - revolver loans | Bank credit facility - revolver loans | 175,473 | | | 152,000 | | Bank credit facility - revolver loans | 188,610 | | | 226,559 | |
| Principal amount of long-term debt | Principal amount of long-term debt | 253,461 | | | 272,800 | | Principal amount of long-term debt | 288,610 | | | 286,734 | |
| Less debt issuance costs | Less debt issuance costs | (2,368) | | | (2,789) | | Less debt issuance costs | (2,310) | | | (2,165) | |
| Total long-term debt | Total long-term debt | 251,093 | | | 270,011 | | Total long-term debt | 286,300 | | | 284,569 | |
| Less current portion | Less current portion | (20,379) | | | (16,883) | | Less current portion | (10,000) | | | (14,162) | |
| Long-term debt, net of current portion | Long-term debt, net of current portion | $ | 230,714 | | | $ | 253,128 | | Long-term debt, net of current portion | $ | 276,300 | | | $ | 270,407 | |
As of December 31, 2022, the interest rate on our outstanding term debt and weighted average interest rate on our aggregate outstanding revolver debt was 6.93% and 7.01%, respectively. Interest expense incurred on bank credit facilities was approximately $17.4 million, $11.2 million and $12.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
We have a loan agreement with a group of banks that expires in January 2023. Wefrom 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. In June 2020, we amended theThe revolving loan agreement to provide increased covenant flexibility in response to changes in financial operating performance resulting from the COVID-19 pandemic. Financing costs associated with the loan agreement amendmentfacility provides for revolving loans and letters of approximately $636 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, 2020 are as follows (in thousands):
| | | | | | | | |
| Year ending December 31, | | |
| 2021 | | $ | 21,563 | |
| 2022 | | 22,500 | |
| 2023* | | 209,398 | |
| | |
| Total | | $ | 253,461 | |
*Includes the revolver loan required payment of $175.5 million.
credit. The maximum amount of credit available under the loan agreement for revolving loans and letters of credit as of December 31, 2020 wasis $350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had 0 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 subject to lender approvals. The loan agreement also provides for letters of credit aggregating up to $25 million. As of December 31, 2022 and 2021, we had approximately $1.0 million in letters of credit outstanding.
On October 7, 2022, we entered into the Fourth Amendment to our loan agreement which, among other things, (i) extended the maturity date from July 23, 2024 to October 7, 2025; (ii) reset the aggregate principal amount of the term loan to $100 million, (iii) modified the quarterly amortization payments on the term loan from $3.75 million to $2.50 million, (iv) increased the maximum Total Funded Debt to EBITDA Ratio from 4.25x to 4.50x, with such ratios decreasing thereafter, (v) changed the benchmark rate from LIBOR to Secured Overnight Financing Rate (SOFR) with a SOFR floor of 0%; and (vi) modified pricing to account for the change from LIBOR to SOFR.
Borrowings under our loan agreement bear interest at a variable rate of interest based on Term SOFR or a base rate, plus in each case an applicable margin (based on our Total Funded Debt to EBITDA Ratio). The base rate for any day is a fluctuating rate per annum equal to the highest of (i) the Federal Funds Rate plus .50%; (ii) the Prime Rate and (iii) the sum of Term SOFR for a one month interest period, plus the difference between the additional Term SOFR interest margin for SOFR rate loans and the additional base rate interest margin for base rate loans. The applicable margins for SOFR loans ranges from 1.50% to 3.75% and .50% to 2.75% for base rate loans. We also pay a commitment fee with respect to undrawn amounts under the revolving loan facility ranging from .25% to .50% (based on our Total Funded Debt to EBITDA Ratio) and fees on letters of credit that are issued.
We pay interest onincurred and deferred $1.1 million of debt issuance costs in connection with 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 asFourth Amendment to our Total Funded Debt/EBITDA Ratio increases or decreases.
The loan agreement, requires uswhich are amortized to have interest rate hedges on a portionexpense over the remaining term of the outstanding term loan until February 6, 2021. We have executed compliant interest rate hedges. The amountloan. Amortization of our debt with interest rate swap agreementsissuance costs was $145.0$1.0 million, as of December 31, 2020. After taking into account the impact of hedging instruments, as of December 31, 2020 interest rates on portions of our outstanding debt ranged from 3.75% to 6.32%, and the effective interest rate on our aggregate outstanding debt was 4.80%.
Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $12.7$1.0 million, $13.3$1.1 million and $6.9 million duringfor the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively.
Future required term and revolver loan payments as of December 31, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Year Ending | | Term | | Revolver | | Total |
| 2023 | | $ | 10,000 | | | $ | — | | | $ | 10,000 | |
| 2024 | | 10,000 | | | — | | | 10,000 | |
| 2025 | | 80,000 | | | 188,610 | | | 268,610 | |
| Total | | $ | 100,000 | | | $ | 188,610 | | | $ | 288,610 | |
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/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, 2020. 2022.
(8) Derivative Instruments and Hedging Activities
We continueare party to monitorfixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of our floating rate debt.
Our derivative instruments designated as cash flow hedges as of December 31, 2022 were (in thousands):
| | | | | | | | | | | | | | |
| Notional Amount | Paid Fixed Rate | Receive Variable Rate | Settlement and Termination |
Interest rate swap(1) | $150,000 | 2.8% | 1-month term SOFR | Monthly through October 31, 2027 |
(1) On July 22, 2022, we executed forward-starting fixed interest rate swap, the tenor of which began on October 31, 2022. |
These derivative instruments are recorded on the impactsconsolidated balance sheets at fair value. Unrealized changes in the fair value on cash flow hedges are recognized in other comprehensive income (loss) and the amounts are reclassified from accumulated other comprehensive income (loss) into earnings in a manner that matches the timing of COVID-19 on our resultsthe earnings impact of operations and liquidity relative to compliance with financial covenants; at this time, we expectthe hedged transactions. We estimate that we will remainreclassify $2.9 million of unrealized gains from accumulated other comprehensive income into earnings in compliance with such covenants over the next twelve months.months following December 31, 2022.
(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):
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Accrued compensation and benefits | $ | 23,298 | | | $ | 24,395 | |
| Contract liabilities | 6,402 | | | 7,147 | |
| Accrued customer rebates and royalties | 6,240 | | | 4,514 | |
| Current portion of lease liabilities | 7,254 | | | 5,991 | |
| Other | 10,528 | | | 7,418 | |
| Total | $ | 53,722 | | | $ | 49,465 | |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Accrued compensation and benefits | $ | 21,525 | | | $ | 24,225 | |
| Contract liabilities | 9,858 | | | 3,714 | |
| Accrued customer rebates and royalties | 2,756 | | | 3,067 | |
| Customer advances | 1,080 | | | 2,669 | |
| Interest rate swap liability | 1,603 | | | 1,473 | |
| Current portion of lease liabilities | 4,012 | | | 3,710 | |
| Other | 4,338 | | | 7,656 | |
| Total | $ | 45,172 | | | $ | 46,514 | |
(10) Stock-Based Compensation Plans
In 2006, our stockholders approved theThe VSE Corporation 2006 Restricted Stock Plan, for VSE's directors, officers and other employeesas 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,As of December 31, 2022, we are authorized to issue up to 1,500,000 shares of our common stock and as of December 31, 2020, 725,945598,637 shares remained available for issuanceissuance. As of December 31, 2022, we have outstanding stock-settled bonus awards, vesting stock awards, and performance share awards 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.this plan.
The total stock-based compensation expense related to restricted stockStock-settled bonus awards forare a fixed dollar-denominated award that vests over a three-year service period in three equal tranches. As each tranche vests, the years ended December 31, are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Employees | $ | 2,223 | | | $ | 2,667 | | | $ | 2,332 | |
| Non-employee Directors | 635 | | | 597 | | | 553 | |
| Total | $ | 2,858 | | | $ | 3,264 | | | $ | 2,885 | |
Employees are permitted to use a certain numberfixed dollar value of the vested portion of the award is converted into 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 flowsbased on the consolidated statementsclosing market price 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 restrictedour stock awards was included in costs and operating expenses and provision for income taxes onat 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.conversion. On each vesting date, 100% of the vested award is paid in stock that is 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 shares. Thestock 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, 2022, the purchase price was 12% off the lesser of ourthe 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 $123 thousand. As of December 31, 2022, 500,000 shares of VSE common stock onare authorized for issuance under the vesting date. OnESPP.
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, was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Stock-settled bonus awards | $ | 1,186 | | | $ | 820 | | | $ | 1,265 | |
| Vesting stock awards | 2,089 | | | 2,273 | | | 1,593 | |
| Performance share awards | 1,067 | | | 784 | | | — | |
| Total | $ | 4,342 | | | $ | 3,877 | | | $ | 2,858 | |
| Tax benefit recognized from stock-based compensation | $ | 1,083 | | | $ | 967 | | | $ | 713 | |
Stock-Settled Bonus Awards
In March 2, 2020,2022, the employees eligible for the 20192021 awards, 20182020 awards and 20172019 awards received a total of 42,94621,871 shares of common stock. The grant-date fair value of these awards was $28.67$43.30 per share. The total compensation cost related to non-vested stock-settled bonus awards not yet recognized was approximately $0.9 million with a weighted average amortization period of 1.4 years as of December 31, 2022. The total fair value of stock-settled bonus awards that vested in the years ended December 31, 2022, 2021 and 2020 was $0.9 million, $0.9 million and $1.2 million, respectively.
Other RestrictedVesting Stock Awards
UnderVesting stock award activity for the 2006 Plan, restrictedyear ended December 31, 2022 was:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2021 | | 61,351 | | $ | 38.80 | |
| Granted | | 46,463 | | | $ | 43.01 | |
| Vested | | (38,509) | | | $ | 36.37 | |
| Forfeited | | (5,380) | | $ | 42.53 | |
| Unvested as of December 31, 2022 | | 63,925 | | $ | 43.01 | |
The grant date fair value of vesting stock inawards is based on the form of sharesclosing market price of our common stock can be awarded to key employees pursuant toon the termsgrant date. The weighted average grant date fair value of their employment agreements. The following table summarizes the activity of non-vested restrictedvesting stock awards in shares duringgranted for the years ended December 31, 2022, 2021 and 2020 was $43.01, $41.90 and 2019. There$33.68, respectively. As of December 31, 2022 there was no activity$2.0 million of unrecognized compensation cost related to unvested restrictedvesting stock awards, issuedwhich is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of vesting stock awards that vested in shares during the yearyears ended December 31, 2018.
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2018 | | 0 | | $ | 0 | |
| Granted | | 86,911 | | 31.92 | |
| Vested | | (29,110) | | 30.66 | |
| Forfeited | | 0 | | 0 | |
| Unvested as of December 31, 2019 | | 57,801 | | 32.56 | |
| Granted | | 30,500 | | 31.50 | |
| Vested | | (32,017) | | 32.14 | |
| Forfeited | | 0 | | 0 | |
| Unvested as of December 31, 2020 | | 56,284 | | $ | 32.23 | |
Performance Share Awards
Performance Share award activity for the year ended December 31, 2022 was:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
| Unvested as of December 31, 2021 | | 42,173 | | $ | 42.01 | |
| Granted | | 51,441 | | | $ | 43.30 | |
| Vested | | (10,542) | | | $ | 42.01 | |
| Forfeited | | (10,911) | | $ | 42.36 | |
| | | | |
| Unvested as of December 31, 2022 | | 72,161 | | $ | 42.88 | |
The actual number of shares to be issued upon vesting range between 0-100% of the target number of shares granted. The weighted average grant date fair value of the vesting stock awards granted for the year ended December 31, 2022 was $42.01. As of December 31, 2022 there was $1.2 million of unrecognized compensation cost related to vesting stock awards, which is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of vesting stock awards that vested in the year ended December 31, 2022 was $0.5 million.
(11) Income Taxes
We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. We have concluded all U.S. federal income tax matters as well as material state and local tax matters for years through 2015.2017.
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, 2022, 2021 and 2020 2019 and 2018 arewere as follows (in thousands):
| | | | 2020 | | 2019 | | 2018 | | 2022 | | 2021 | | 2020 |
| Current | | | | | | |
| Current: | | Current: | | | | | |
| Federal | Federal | $ | 4,086 | | | $ | 7,739 | | | $ | 9,667 | | Federal | $ | 8,880 | | | $ | 3,919 | | | $ | 4,086 | |
| State | State | 1,262 | | | 1,344 | | | 1,758 | | State | 1,411 | | | 856 | | | 1,262 | |
| Foreign | Foreign | 144 | | | 825 | | | 140 | | Foreign | 35 | | | 1,066 | | | 144 | |
| | | 5,492 | | | 9,908 | | | 11,565 | | | 10,326 | | | 5,841 | | | 5,492 | |
| Deferred | | | | | | |
| Deferred: | | Deferred: | | | | | |
| Federal | Federal | (78) | | | (66) | | | (1,114) | | Federal | (1,050) | | | (3,318) | | | (78) | |
| State | State | 163 | | | (490) | | | (347) | | State | (89) | | | (1,038) | | | 163 | |
| Foreign | Foreign | 21 | | | 51 | | | 64 | | Foreign | — | | | — | | | 21 | |
| | | 106 | | | (505) | | | (1,397) | | | (1,139) | | | (4,356) | | | 106 | |
| Provision for income taxes | Provision for income taxes | $ | 5,598 | | | $ | 9,403 | | | $ | 10,168 | | Provision for income taxes | $ | 9,187 | | | $ | 1,485 | | | $ | 5,598 | |
The differences between the amount of tax computed at the federal statutory rate of 21% in 2020, 20192022, 2021 and 2018,2020, and the provision for income taxes from continuing operations for the years ended December 31, 2022, 2021 and 2020 2019 and 2018 arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| Tax at statutory federal income tax rate | $ | 89 | | | $ | 9,749 | | | $ | 9,502 | |
| Increases (decreases) in tax resulting from: | | | | | |
| State taxes, net of federal tax benefit | (52) | | | 1,805 | | | 1,861 | |
| Permanent differences, net | (1,406) | | | (195) | | | 367 | |
| Impact of Tax Act | 0 | | | 0 | | | (795) | |
| Tax credits | (195) | | | (612) | | | (375) | |
| Prior year true-up adjustment | 397 | | | (1,274) | | | (113) | |
| Valuation allowance | 6,716 | | | (137) | | | 107 | |
| Other provision adjustments | 49 | | | 67 | | | (386) | |
| Provision for income taxes | $ | 5,598 | | | $ | 9,403 | | | $ | 10,168 | |
Certain amounts from the prior years have been reclassified to conform to the current year presentation. | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Tax at statutory federal income tax rate | $ | 7,822 | | | $ | 1,985 | | | $ | 89 | |
| Increases (decreases) in tax resulting from: | | | | | |
| State taxes, net of federal tax benefit | 1,523 | | | 383 | | | (52) | |
| Permanent differences, net | (52) | | | (839) | | | (1,406) | |
| | | | | |
| Tax credits | (579) | | | (434) | | | (195) | |
| Prior year true-up adjustment | 189 | | | 83 | | | 397 | |
| Valuation allowance | 338 | | | 331 | | | 6,716 | |
| Other provision adjustments | (54) | | | (24) | | | 49 | |
| Provision for income taxes | $ | 9,187 | | | $ | 1,485 | | | $ | 5,598 | |
The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31, 20202022 and 2019 are2021 was as follows (in thousands): | | | | 2020 | | 2019 | | 2022 | | 2021 |
| Gross deferred tax assets | | | | |
| | Deferred compensation and accrued paid leave | Deferred compensation and accrued paid leave | $ | 6,302 | | | $ | 7,498 | | Deferred compensation and accrued paid leave | $ | 4,552 | | | $ | 5,422 | |
| Operating lease liabilities | 6,984 | | | 7,009 | | |
| Accrued Expense | | Accrued Expense | 1,158 | | | — | |
| Inventory reserve | | Inventory reserve | 12,984 | | | 12,465 | |
| Operating Lease Liabilities | | Operating Lease Liabilities | 9,840 | | | 7,805 | |
| Stock-based compensation | Stock-based compensation | 605 | | | 678 | | Stock-based compensation | 942 | | | 775 | |
| Interest rate swaps | Interest rate swaps | 400 | | | 367 | | Interest rate swaps | — | | | 58 | |
| Reserve for contract disallowance | 195 | | | 145 | | |
| | Capitalized inventory | Capitalized inventory | 573 | | | 0 | | Capitalized inventory | 1,128 | | | 900 | |
| US operating and capital loss carryforward | US operating and capital loss carryforward | 5,989 | | | 24 | | US operating and capital loss carryforward | 6,040 | | | 6,045 | |
| Tax credit carryforward | Tax credit carryforward | 1,412 | | | 1,547 | | Tax credit carryforward | 1,537 | | | 1,411 | |
| Foreign country operating loss carryforward | Foreign country operating loss carryforward | 583 | | | 0 | | Foreign country operating loss carryforward | 749 | | | 892 | |
| Other | | Other | 278 | | | — | |
| | 23,043 | | | 17,268 | | | 39,208 | | | 35,773 | |
| Valuation allowance (a) | (7,926) | | | (1,165) | | |
| Valuation allowance (1) | | Valuation allowance (1) | (8,337) | | | (8,257) | |
| Total gross deferred tax assets | Total gross deferred tax assets | 15,117 | | | 16,103 | | Total gross deferred tax assets | 30,871 | | | 27,516 | |
| | Gross deferred tax liabilities | | |
| | Interest rate swaps | | Interest rate swaps | (1,652) | | | — | |
| Depreciation | Depreciation | (3,061) | | | (2,498) | | Depreciation | (3,017) | | | (3,895) | |
| Deferred revenues | Deferred revenues | (1,816) | | | (1,681) | | Deferred revenues | (1,087) | | | (1,358) | |
| Goodwill and intangible assets | Goodwill and intangible assets | (19,470) | | | (23,383) | | Goodwill and intangible assets | (26,226) | | | (24,836) | |
| Operating lease right-of-use assets | (5,384) | | | (5,323) | | |
| Capitalized inventory | 0 | | | (240) | | |
| Operating Lease Right-of-Use Assets | | Operating Lease Right-of-Use Assets | (8,510) | | | (6,375) | |
| Other | Other | (283) | | | (823) | | Other | — | | | (160) | |
| Total gross deferred tax liabilities | Total gross deferred tax liabilities | (30,014) | | | (33,948) | | Total gross deferred tax liabilities | (40,492) | | | (36,624) | |
| | Net deferred tax liabilities | Net deferred tax liabilities | $ | (14,897) | | | $ | (17,845) | | Net deferred tax liabilities | $ | (9,621) | | | $ | (9,108) | |
(a)(1) 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)(2) Certain amounts from prior year have been reclassified to conform with current year presentation.presentation.
We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. With few exceptions, the statute of limitations for these jurisdictions is no longer open for audit or examinations for the years before 2016.2018.
AtAs of December 31, 2020,2022, 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 2030;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 ContingenciesLeases
Leases and Other CommitmentsOur operating lease cost included the following components for the year ended December 31, (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Operating lease cost | | $ | 6,804 | | | $ | 5,868 | | | $ | 5,032 | |
| Short-term lease cost | | 204 | | | 202 | | | 622 | |
| Less: sublease income | | (294) | | | (152) | | | (666) | |
| Total lease cost, net | | $ | 6,714 | | | $ | 5,918 | | | $ | 4,988 | |
Substantially all of our leases are long-term operating leases primarily for warehouse and office for facilities with fixed payment terms between 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 agreementsarrangements 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 |
| Operating lease cost | | $ | 5,032 | | | $ | 6,106 | |
| Short-term lease cost | | 622 | | | 698 | |
| Less: sublease income | | (666) | | | (1,022) | |
| Total lease cost, net | | $ | 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. The lease provides us with an option to extend the lease upon the expiration of its term in April 2026 for 2two additional five-yearfive-year periods. In connection with the sale and leaseback transaction, we recognized a gain of $1.1 million, after incurring $200 thousand innet of selling expenses.
The table below summarizes future minimum lease payments under operating leases, recorded on the balance sheet, as of December 31, 20202022 (in thousands):
| | Operating Leases | |
| 2021 | | $ | 5,366 | | |
| 2022 | | 5,226 | | |
| Year ending December 31, | | Year ending December 31, | |
| 2023 | 2023 | | 5,122 | | 2023 | | $ | 9,217 | |
| 2024 | 2024 | | 5,193 | | 2024 | | 9,424 | |
| 2025 | 2025 | | 5,272 | | 2025 | | 9,192 | |
| After 2025 | | 5,415 | | |
| 2026 | | 2026 | | 7,785 | |
| 2027 | | 2027 | | 3,666 | |
| Thereafter | | Thereafter | | 6,843 | |
| Minimum lease payments | Minimum lease payments | | 31,594 | | Minimum lease payments | | 46,127 | |
| Less: imputed interest | Less: imputed interest | | (4,767) | | Less: imputed interest | | (6,533) | |
| Present value of minimum lease payments | Present value of minimum lease payments | | 26,827 | | Present value of minimum lease payments | | 39,594 | |
| Less: current maturities of lease liabilities | | (4,012) | | |
Less: current portion of lease liabilities(1) | | Less: current portion of lease liabilities(1) | | (7,254) | |
| Long-term lease liabilities | Long-term lease liabilities | | $ | 22,815 | | Long-term lease liabilities | | $ | 32,340 | |
| (1) Current portion of lease liabilities are presented within Accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note (9) "Accrued Expenses and Other Current Liabilities." | | (1) Current portion of lease liabilities are presented within Accrued expenses and other current liabilities on our consolidated balance sheets. Refer to Note (9) "Accrued Expenses and Other Current Liabilities." |
We made cash payments of approximately $3.7 million and $5.7 millionOther supplemental operating lease information 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. As of December 31, 2020, the weighted averagewas as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 7,372 | | | $ | 6,309 | | | $ | 3,681 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 12,295 | | | $ | 11,175 | | | $ | 4,728 | |
The weighted-average remaining lease term and the weighted-average discount rate for our operating leases were approximately 5.8was 5.1 years and 5.4%,5.5% as of December 31, 2022, respectively, and 5.1 years and 4.8% as of December 31, 2021, respectively.
(13)Commitments and Contingencies
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. 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 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 mostmany 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)(14) Business Segments and Customer Information
Segment Information
Management of our business operations is conducted under 3three 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, 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").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 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; procurement; supply chain management; vehicle, maritime and aircraft sustainment services; IT services and energy consulting.
The operating segments reported below are theour 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. 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.
Our segment information is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Revenues | | | | | |
| Aviation | $ | 165,070 | | | $ | 224,546 | | | $ | 145,423 | |
| Fleet | 242,170 | | | 214,520 | | | 214,809 | |
| Federal and Defense | 254,419 | | | 313,561 | | | 336,986 | |
| Total revenues | $ | 661,659 | | | $ | 752,627 | | | $ | 697,218 | |
| | | | | |
| Operating income (loss): | | | | | |
| Aviation | $ | (35,513) | | | $ | 17,901 | | | $ | 11,076 | |
| Fleet | 26,659 | | | 29,819 | | | 30,626 | |
| Federal and Defense | 26,309 | | | 18,144 | | | 15,797 | |
| Corporate expenses | (3,532) | | | (5,607) | | | (3,269) | |
| Operating income | $ | 13,923 | | | $ | 60,257 | | | $ | 54,230 | |
| | | | | |
| Depreciation and amortization expense: | | | | | |
| Aviation | $ | 10,874 | | | $ | 12,546 | | | $ | 5,123 | |
| Fleet | 10,260 | | | 11,085 | | | 7,299 | |
| Federal and Defense | 3,001 | | | 3,296 | | | 12,802 | |
| Total depreciation and amortization | $ | 24,135 | | | $ | 26,927 | | | $ | 25,224 | |
| | | | | |
| Capital expenditures: | | | | | |
| Aviation | $ | 3,445 | | | $ | 8,396 | | | $ | 1,772 | |
| Fleet | 675 | | | 1,076 | | | 802 | |
| Federal and Defense | 148 | | | 58 | | | 209 | |
| Corporate | 159 | | | 130 | | | 334 | |
| Total capital expenditures | $ | 4,427 | | | $ | 9,660 | | | $ | 3,117 | |
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Total assets: | | | |
| Aviation | $ | 478,861 | | | $ | 522,446 | |
| Fleet | 161,088 | | | 170,142 | |
| Federal and Defense | 66,808 | | | 88,966 | |
| Corporate | 73,324 | | | 64,310 | |
| Total assets | $ | 780,081 | | | $ | 845,864 | |
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.
Our segment information is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenues | | | | | |
| Aviation | $ | 408,112 | | | $ | 247,852 | | | $ | 165,070 | |
| Fleet | 261,336 | | | 233,532 | | | 242,170 | |
| Federal and Defense | 280,314 | | | 269,469 | | | 254,419 | |
| Total revenues | $ | 949,762 | | | $ | 750,853 | | | $ | 661,659 | |
| | | | | |
| Operating income (loss): | | | | | |
| Aviation | $ | 36,416 | | | $ | (14,373) | | | $ | (35,513) | |
| Fleet | 23,911 | | | 20,426 | | | 26,659 | |
| Federal and Defense | (805) | | | 19,897 | | | 26,309 | |
| Corporate expenses | (4,391) | | | (4,430) | | | (3,532) | |
| Operating income | $ | 55,131 | | | $ | 21,520 | | | $ | 13,923 | |
| | | | | |
| Depreciation and amortization expense: | | | | | |
| Aviation | $ | 13,174 | | | $ | 11,374 | | | $ | 10,874 | |
| Fleet | 8,783 | | | 9,679 | | | 10,260 | |
| Federal and Defense | 3,613 | | | 4,547 | | | 3,001 | |
| Total depreciation and amortization | $ | 25,570 | | | $ | 25,600 | | | $ | 24,135 | |
| | | | | |
| Capital expenditures: | | | | | |
| Aviation | $ | 5,961 | | | $ | 7,468 | | | $ | 3,445 | |
| Fleet | 5,502 | | | 1,669 | | | 675 | |
| Federal and Defense | 26 | | | 124 | | | 148 | |
| Corporate | 1,162 | | | 1,259 | | | 159 | |
| Total capital expenditures | $ | 12,651 | | | $ | 10,520 | | | $ | 4,427 | |
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Total assets: | | | |
| Aviation | $ | 637,615 | | | $ | 580,156 | |
| Fleet | 218,138 | | | 182,089 | |
| Federal and Defense | 93,728 | | | 92,571 | |
| Corporate | 50,308 | | | 63,742 | |
| Total assets | $ | 999,789 | | | $ | 918,558 | |
Customer Information
Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to ourand services performed for commercial clients.customers and the U.S. government, including the DoD and various other government agencies. The USPS U.S. Armyrevenues, reported within our Fleet segment, comprised approximately 16%, 20%, and Army Reserve,27% of our consolidated revenues in 2022, 2021 and 2020, respectively. U.S. Navy arerevenues, reported within our largest customers.Federal and Defense segment, comprised approximately 15%, 13%, and 16% of our consolidated revenues in 2022, 2021 and 2020, respectively. Our customers also include various other commercial entities and government agencies and commercial entities. Ouragencies. See Note (3) "Revenue Recognition" for revenue by customer is as follows for the years ended December 31, (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| Source of Revenues | | 2020 | | % | | 2019 | | % | | 2018 | | % |
| DoD | | $ | 236,397 | | | 36 | | | $ | 304,334 | | | 41 | | | $ | 334,494 | | | 48 | |
| Other government | | 216,957 | | | 33 | | | 205,775 | | | 27 | | | 212,118 | | | 30 | |
| Commercial | | 208,305 | | | 31 | | | 242,518 | | | 32 | | | 150,606 | | | 22 | |
| Total Revenues | | $ | 661,659 | | | 100 | | | $ | 752,627 | | | 100 | | | $ | 697,218 | | | 100 | |
We do not measure revenue or profit by product or service lines, either for internal management or external financial reporting purposes, because it would be impractical to do so. Products offered and services performed are determined by contract requirements and the types of products and services provided for one contract bear no relation to similar products and services provided on another contract. Products and services provided vary when new contracts begin or current contracts expire. In many cases, more than one product or service is provided under a contract or contract task order. Accordingly, cost and revenue tracking are designed to best serve contract requirements and segregating costs and revenues by product or service lines in situations for which it is not required would be difficult and costly to both us and our customers.
Geographical Information
Revenue by geography is based on the billing address of the customer. Our revenue by geographic area is as follows (in thousands):
| | | | | Years ended December 31, | | | Years ended December 31, |
| | | | 2020 | | 2019 | | 2018 | | | 2022 | | 2021 | | 2020 |
| United States | United States | | $ | 598,142 | | | $ | 659,451 | | | $ | 647,168 | | United States | | $ | 837,929 | | | $ | 668,892 | | | $ | 598,142 | |
Other Countries (1) | Other Countries (1) | | 63,517 | | | 93,176 | | | 50,050 | | Other Countries(1) | | 111,833 | | | 81,961 | | | 63,517 | |
| Total revenue | Total revenue | | $ | 661,659 | | | $ | 752,627 | | | $ | 697,218 | | Total revenue | | $ | 949,762 | | | $ | 750,853 | | | $ | 661,659 | |
(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented.
(14)(15) Capital Stock
Common Stock
Our common stock has a par value of $0.05 per share. Proceeds from common stock issuances that are greater than $0.05 per share are credited to additional paid in capital. Holders of common stock are entitled to 1one vote per common share held on all matters voted on by our stockholders. Stockholders of record are entitled to the amount of dividends declared per common share held.
In 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)(16) 401(k) Plan
We maintain a defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, that covers substantially all of our employees. Under the provisions of our 401(k) plan, employees' eligible contributions are matched at rates specified in the plan documents. Our expense associated with this plan was approximately $5.9$7.1 million, $5.5$6.6 million and $5.9 million for the years ended December 31, 2020, 2019,2022, 2021, and 2018,2020, respectively.
(16)(17) Fair Value Measurements
We utilize fair value measurement guidance prescribed by GAAP to value our financial instruments. 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 fairthree-tier value hierarchy, established in the standardwhich prioritizes the inputs used in valuation techniques into three levelsmeasuring fair value as follows:
Level 1 – Observable observable inputs –such as quoted prices in active markets for identical assets and liabilities;
Level 2 – Observable(Level 1); 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 inputsthat are observable either directly or indirectly (Level 2); and unobservable inputs in active markets; andwhich 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 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.measurement.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20202022 and December 31, 20192021 and the level they fall within the fair value hierarchy (in thousands):
| | Amounts Recorded at Fair Value | Amounts Recorded at Fair Value | | Financial Statement Classification | | Fair Value Hierarchy | | Fair Value December 31, 2020 | | Fair Value December 31, 2019 | Amounts Recorded at Fair Value | | Financial Statement Classification | | Fair Value Hierarchy | | Fair Value December 31, 2022 | | Fair Value December 31, 2021 |
Non-COLI assets held in Deferred Supplemental Compensation Plan | Non-COLI assets held in Deferred Supplemental Compensation Plan | | Other assets | | Level 1 | | $ | 1,120 | | | $ | 710 | | Non-COLI assets held in Deferred Supplemental Compensation Plan | | Other assets | | Level 1 | | $ | 539 | | | $ | 598 | |
| Interest rate swaps | Interest rate swaps | | Accrued expenses | | Level 2 | | $ | 1,603 | | | $ | 1,473 | | Interest rate swaps | | Other assets | | Level 2 | | $ | 6,620 | | | $ | — | |
| Earn-out obligation-current | | Current portion of earn-out obligation | | Level 3 | | $ | 0 | | | $ | 31,700 | | |
| Earn-out obligation-long-term | | Earn-out obligation | | Level 3 | | $ | 0 | | | $ | 5,000 | | |
| Interest rate swaps | | Interest rate swaps | | Accrued expenses and other current liabilities | | Level 2 | | $ | — | | | $ | 234 | |
| Earn-out obligation - short-term | | Earn-out obligation - short-term | | Accrued expenses and other current liabilities | | Level 3 | | $ | — | | | $ | 1,000 | |
| Earn-out obligation - long-term | | Earn-out obligation - long-term | | Other long-term liabilities | | Level 3 | | $ | — | | | $ | 250 | |
| (1) Non-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. | | (1) Non-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. |
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.Contingent Consideration
We account for our interest rate swap agreements underIn connection with the provisionsacquisition of ASC 815, DerivativesGlobal Parts in July 2021, we were 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 Hedging, and have determined that our swap agreements qualify as cash flow hedges. Accordingly, the fair valuemeet a certain milestone event on or before March 2023. Final settlement 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. 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 effectiveobligation was made during the remaining termsthird quarter of the swap agreements. We determine the fair value of the swap agreements based on a valuation model using market data inputs.fiscal 2022.
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 yearyears ended December 31, 20202022 and 20192021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Current portion | | Long-term portion | | Total |
| Balance as of December 31, 2018 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Acquisition date fair value of contingent consideration | | 34,800 | | | 0 | | | 34,800 | |
| Fair value adjustment included in costs and operating expenses | | 1,900 | | | 0 | | | 1,900 | |
| Reclassification from long-term to current | | (5,000) | | | 5,000 | | | 0 | |
| Balance as of December 31, 2019 | | 31,700 | | | 5,000 | | | 36,700 | |
| Earn-out payments | | (31,700) | | | 0 | | | (31,700) | |
| Reclassification from long-term to current | | 5,000 | | | (5,000) | | | 0 | |
| Fair value adjustment included in costs and operating expenses | | (5,000) | | | 0 | | | (5,000) | |
| Balance as of December 31, 2020 | | $ | 0 | | | $ | 0 | | | $ | 0 | |
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):
| | | | | | | | |
| | Goodwill |
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 | |
Balance as of December 31, 2020 | | $ | 238,126 | |
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: | | | | | | | |
Net income | $ | 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: | | | | | | | |
Net income | $ | 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.
| | | | | | | | | | | | | | | | | | | | |
| | | Current portion | | Long-term portion | | Total |
| Balance as of December 31, 2020 | | $ | — | | | $ | — | | | $ | — | |
| 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 | |
| Reclassifications from long-term to current | | 250 | | | (250) | | | — | |
| Earn-out payments | | (1,250) | | | — | | | (1,250) | |
| Balance as of December 31, 2022 | | $ | — | | | $ | — | | | $ | — | |
(18) Subsequent Events
On January 29, 2021, we entered into an underwriting agreement with William Blair & Company, L.L.C. and Canaccord GenuityAcquisition of Precision Fuel Components, 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 underwriters1, 2023, our Aviation segment acquired Precision Fuel Components, LLC ("Precision Fuel"), a privately owned company with operations out 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”). HSSEverett, Washington. Precision Fuel is a leadingmarket-leading provider of fully integrated MRO support solutionsservices for militaryengine accessory and government aircraft.fuel systems supporting the B&GA market. The acquisition is insignificantwill expand the Aviation segment's repair capabilities across a diverse base of global rotorcraft, fixed wing, and B&GA customers and complement our existing service capabilities. The aggregate initial cash purchase price for Precision Fuel was approximately $11.8 million, subject to the financial statements taken as a whole.certain post-closing and working capital adjustments.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2020,2022, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision andOur management, with the participation of our management, including ourthe Chief Executive Officer and Chief Financial Officer, we conducted an assessment ofhas evaluated the effectiveness of our internal control over financial reporting as of December 31, 20202022 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on ourits assessment, under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.2022. Grant Thornton LLP, ouran independent registered public accounting firm, has issued an opinionaudited our consolidated financial statements included in this report and our internal control over financial reporting, and the firm's report on our internal control over financial reporting. This opinion appears in the Report of Independent Registered Public Accounting Firmreporting are set forth below.
Change in Internal Controls
During the fourth quarter of fiscal year 2020,2022, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), that have materially affected these controls or are reasonably likely to materially affect these controls subsequent to the evaluation of these controls.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
VSE Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of VSE Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020,2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020,2022, and our report dated March 5, 20219, 2023 expressed an unqualified opinionon those financial statements.
Basis for opinionopinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
| | | | | |
| Arlington, Virginia | |
March 5, 20219, 2023 | |
ITEM 9B. Other Information
None.
ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Except as otherwise indicated below, the information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance of General Instruction G(3) to Form 10-K and is incorporated herein by reference to our definitive proxy statement to be filed with the SEC not later than 120 days after December 31, 20202022 in respect of the Annual Meeting of VSE's stockholders scheduled to be held on May 5, 20213, 2023 (the "Proxy Statement").
ITEM 10. Directors, Executive Officers and Corporate Governance
Information called on by Item 10 will be set forth in our Proxy Statement, which information is incorporated herein by reference.
ITEM 11. Executive Compensation
Information called on by Item 11 will be set forth in our Proxy Statement, which information is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except for the "Equity Compensation Plan Information" disclosed in Item 5 above, the information called on by this Item 12 will be set forth in our Proxy Statement, which information is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information called on by Item 13 will be set forth in our Proxy Statement, which information is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
Information called on by Item 14 will be set forth in our Proxy Statement, which information is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
1.Financial Statements
The consolidated financial statements are listed under Item 8 of this Form 10-K.
2.Supplemental Financial Statement Schedules
The following financial statement schedule is included herein:
All other schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the financial statements or notes to the financial statements.
3.Exhibits
See "Exhibit Index" hereinafter contained and incorporated by reference.
ITEM 16. Form 10-K Summary
None.
VSE Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
| | | Balance at Beginning of Year | Additions Charged to Statement of Income Accounts | | Other (1) | Deductions | Balance at End of Year | |
| �� | | �� | Balance at Beginning of Year | Additions Charged to Statement of Income Accounts | | Deductions | Balance at End of Year |
| (in thousands) | (in thousands) | | (in thousands) | |
| Allowance for credit losses on accounts receivable | Allowance for credit losses on accounts receivable | | Allowance for credit losses on accounts receivable | |
| Year ended December 31, 2022 | | Year ended December 31, 2022 | 1,677 | | 2,177 | | | 1,742 | | 2,112 | |
| Year ended December 31, 2021 | | Year ended December 31, 2021 | 1,493 | | 572 | | | 388 | | 1,677 | |
| Year ended December 31, 2020 | Year ended December 31, 2020 | 396 | | 1,767 | | (2) | 0 | | 670 | | 1,493 | | Year ended December 31, 2020 | 396 | | 1,767 | | (1) | 670 | | 1,493 | |
| Year ended December 31, 2019 | 79 | | 244 | | | 148 | | 75 | | 396 | | |
| | Valuation allowance for deferred tax assets | Valuation allowance for deferred tax assets | | Valuation allowance for deferred tax assets | |
| Year ended December 31, 2022 | | Year ended December 31, 2022 | 8,257 | | 78 | | | — | | 8,335 | |
| Year ended December 31, 2021 | | Year ended December 31, 2021 | 7,926 | | 331 | | | — | | 8,257 | |
| Year ended December 31, 2020 | Year ended December 31, 2020 | 1,165 | | 6,761 | | (3) | 0 | | 0 | | 7,926 | | Year ended December 31, 2020 | 1,165 | | 6,761 | | (2) | — | | 7,926 | |
| Year ended December 31, 2019 | 107 | | 1,165 | | | 0 | | 107 | | 1,165 | | |
| (1) Represents opening allowance balance related to acquisition made during the period indicated. | |
(2) Increase in 2020 primarily due to allowances booked as a result of the financial impact from the COVID-19 pandemic. | |
(3) Increase in 2020 primarily due to full valuation allowance established against capital loss DTA in connection with the Prime Turbines stock sale and full valuation allowance against foreign tax loss DTA. | |
(1) Increase in 2020 primarily due to allowances booked as a result of the financial impact from the COVID-19 pandemic. | | (1) Increase in 2020 primarily due to allowances booked as a result of the financial impact from the COVID-19 pandemic. |
(2) Increase in 2020 primarily due to full valuation allowance established against capital loss DTA in connection with the Prime Turbines stock sale and full valuation allowance against foreign tax loss DTA. | | (2) Increase in 2020 primarily due to full valuation allowance established against capital loss DTA in connection with the Prime Turbines stock sale and full valuation allowance against foreign tax loss DTA. |
| | | | | | | | | | | |
| | EXHIBIT INDEX | | |
| | | | |
Reference No.
Per Item 601 of
Regulation S-K | Description of Exhibit | Exhibit No.
In this Form 10-K | |
| | | | |
| 3.1 | | Exhibit 3.1* | |
| 3.2 | | * | |
| 3.3 | | Exhibit No. 3.1 | |
| 3.4 | | *Exhibit No. 3.2 | |
| 4.1 | Specimen Stock Certificate as of May 19, 1983 (Exhibit 4 to Registration Statement No. 2-83255 dated April 22, 1983 on Form S-2) | * + P | |
| 4.2 | | Exhibit 4.2* + | |
| 10.1 | | * + |
10.2 | | * + |
10.3 | | * + |
10.4 | | * + | |
10.510.2 | | * + | |
| 10.3 |
| * + | |
| 10.4 | | * + | |
| 10.5 | | * + | |
| 10.6 | | * + | |
| 10.7 | | Exhibit 10.2 + | |
| 10.8 | | * + | |
| 10.9 | | * | |
10.810.10 | | * | |
| | | | | | | | | | | |
10.910.11 | | * | |
10.1010.12 | | * | |
| 10.13 | | * | |
| 10.14 | | * |
| | | | | | | | |
10.1110.15 | | * + | |
| 10.16 | | Exhibit 10.1 | |
| 10.17 | | * + | |
| 21.1 | | Exhibit 21 | |
| 23.1 | | Exhibit 23.1 |
23.2 | | Exhibit 23.2 |
| 31.1 | | Exhibit 31.1 | |
| 31.2 | | Exhibit 31.2 | |
| 32.1 | | Exhibit 32.1 | |
| 32.2 | | Exhibit 32.2 | |
| 99.1 | | * | |
| 101.INS | XBRL Instance Document | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | |
| 104 | The cover page from VSE Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 has been formatted in Inline XBRL. | | |
* Document has been filed as indicated and is incorporated by reference herein.
+ Indicates management contract or compensatory plan or arrangement.
P Indicates exhibit was submitted to the Securities and Exchange Commission as a paper filing prior to the time that electronic filing on EDGAR became mandatory.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| | | VSE CORPORATION |
| | | |
| Date: | March 5, 20219, 2023 | By: | /s/ John A. Cuomo |
| | | John A. Cuomo |
| | | Chief Executive Officer and President |
| | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
| | | | | | | | |
| Name | Title | Date |
| | | |
| | | |
| /s/ John A. Cuomo | Director, Chief Executive | March 5, 20219, 2023 |
| John A. Cuomo | Officer and President | |
| (Principal Executive Officer) | |
| | | |
| | | |
| /s/ Stephen D. Griffin | Senior Vice President | March 5, 20219, 2023 |
| Stephen D. Griffin | and Chief Financial Officer | |
| | (Principal Financial Officer | |
| and Principal Accounting Officer) | |
| | | |
| | |
| /s/ Ralph E. Eberhart | Chairman/Director | March 5, 20219, 2023 |
| Ralph E. Eberhart | | |
| | |
| | |
| /s/ Calvin S. Koonce | Director | March 5, 20219, 2023 |
| Calvin S. Koonce | | |
| | |
| | | |
| /s/ James F. Lafond | Director | March 5, 20219, 2023 |
| James F. Lafond | | |
| | | |
| | |
| /s/ Bonnie K. Wachtel | Director | March 5, 20219, 2023 |
| Bonnie K. Wachtel | | |
| | | |
| | |
/s/ Jack C. Stultz | Director | March 5, 2021 |
Jack C. Stultz | | |
| | |
| | |
| /s/ John E. Potter | Director | March 5, 20219, 2023 |
| John E. Potter | | |
| | |
| | | |
| /s/ Mark E. Ferguson III | Director | March 5, 20219, 2023 |
| Mark E. Ferguson III | | |
| | |
| /s/ Edward P. Dolanski | Director | March 9, 2023 |
| Edward P. Dolanski | | |
| | |
| /s/ Anita D. Britt | Director | March 9, 2023 |
| Anita D. Britt | | |
| | |
| /s/ Lloyd E. Johnson | Director | March 9, 2023 |
| Lloyd E. Johnson | | |
