UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2022


☐			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: 000-03676

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

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 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 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 definitions of "large 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of Common Stock outstanding as of ~~April 22,~~October 21, 2022: ~~12,779,729~~12,799,678


	TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of ~~March 31,~~September 30, 2022 and December 31, 2021	4

	Unaudited Consolidated Statements of Income for the three and nine months ended ~~March 31, 202~~2 September 30, 2022 and 20 212021	5

	Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended ~~March 31, 202~~2September 30, 2022 and 20 212021	6

	Unaudited Consolidated Statements of Stockholders' Equity for the three and nine months ended ~~March~~September 31 ~~, 202~~2 30, 2022 and 20 212021	78

	Unaudited Consolidated Statements of Cash Flows for the three and ~~three~~nine months ended ~~March~~ 31 ~~, 202~~2September 30, 2022 and 20 212021	89

	Notes to Unaudited Consolidated Financial Statements	910

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1718

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	2225

ITEM 4.	Controls and Procedures	2225

PART II

ITEM 1.	Legal Proceedings	2326

ITEM 1A.	Risk Factors	2326

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2326

ITEM 6.	Exhibits	2427

Signatures		2528

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Table of Contents

Forward-Looking Statements

This quarterly report on Form 10-Q (“Form 10-Q”) 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 includes this statement for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities 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, the impact of widespread health developments, such as the ongoing COVID-19 outbreak, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, 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 elsewhere in this document, including in Item 1A, Risk Factors, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 11, 2022 (“2021 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, 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.

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Table of Contents

PART I. Financial Information

Item 1. Financial Statements

VSE Corporation and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands except share and per share amounts)


		March 31,		December 31,			September 30,		December 31,
		2022		2021			2022		2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	498	$	518	Cash and cash equivalents	$	90	$	518
Receivables (net of allowance of $1.6 million and $1.7 million, respectively)		83,958		76,587
Receivables (net of allowance of $3.4 million and $1.7 million, respectively)						Receivables (net of allowance of $3.4 million and $1.7 million, respectively)	91,093		76,587
Unbilled receivables	Unbilled receivables	31,211		31,882		Unbilled receivables	44,084		31,882
Inventories	Inventories	332,023		322,702		Inventories	349,917		322,702
Other current assets	Other current assets	26,966		32,304		Other current assets	28,154		32,304
Total current assets	Total current assets	474,656		463,993		Total current assets	513,338		463,993

Property and equipment (net of accumulated depreciation of $68 million and $66 million, respectively)		44,478		42,486
Intangible assets (net of accumulated amortization of $124 million and $135 million, respectively)		103,527		108,263
Property and equipment (net of accumulated depreciation of $72 million and $66 million, respectively)						Property and equipment (net of accumulated depreciation of $72 million and $66 million, respectively)	44,564		42,486
Intangible assets (net of accumulated amortization of $120 million and $135 million, respectively)						Intangible assets (net of accumulated amortization of $120 million and $135 million, respectively)	94,857		108,263
Goodwill	Goodwill	248,837		248,753		Goodwill	248,837		248,753
Operating lease - right-of-use assets	Operating lease - right-of-use assets	26,061		27,327		Operating lease - right-of-use assets	23,950		27,327
Other assets	Other assets	23,413		27,736		Other assets	31,980		27,736
Total assets	Total assets	$	920,972	$	918,558	Total assets	$	957,526	$	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	$	14,162	$	14,162	Current portion of long-term debt	$	9,162	$	14,162
Accounts payable	Accounts payable	94,923		115,064		Accounts payable	119,093		115,064

Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	46,684		49,465		Accrued expenses and other current liabilities	50,791		49,465
Dividends payable	Dividends payable	1,276		1,273		Dividends payable	1,280		1,273
Total current liabilities	Total current liabilities	157,045		179,964		Total current liabilities	180,326		179,964

Long-term debt, less current portion	Long-term debt, less current portion	289,683		270,407		Long-term debt, less current portion	288,531		270,407
Deferred compensation	Deferred compensation	13,773		14,328		Deferred compensation	10,128		14,328

Long-term operating lease obligations	Long-term operating lease obligations	26,336		27,168		Long-term operating lease obligations	22,947		27,168

Deferred tax liabilities	Deferred tax liabilities	10,343		9,108		Deferred tax liabilities	10,166		9,108
Other long-term liabilities	Other long-term liabilities	—		250		Other long-term liabilities	—		250
Total liabilities	Total liabilities	497,180		501,225		Total liabilities	512,098		501,225

Commitments and contingencies (Note 6)	Commitments and contingencies (Note 6)	0		0		Commitments and contingencies (Note 6)

Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 12,768,983 and 12,726,659, respectively		638		636
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,799,678 and 12,726,659, respectively						Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,799,678 and 12,726,659, respectively	640		636
Additional paid-in capital	Additional paid-in capital	89,830		88,515		Additional paid-in capital	91,706		88,515
Retained earnings	Retained earnings	333,324		328,358		Retained earnings	347,730		328,358
Accumulated other comprehensive loss		—		(176)
Accumulated other comprehensive income (loss)						Accumulated other comprehensive income (loss)	5,352		(176)
Total stockholders' equity	Total stockholders' equity	423,792		417,333		Total stockholders' equity	445,428		417,333
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	920,972	$	918,558	Total liabilities and stockholders' equity	$	957,526	$	918,558

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Income

(in thousands except share and per share amounts)

For the three months ended March 31,
2022 2021
Revenues:
Products $ 137,231 $ 78,580
Services 94,008 86,401
Total revenues 231,239 164,981
Costs and operating expenses:
Products 122,455 70,712
Services 91,228 80,340
Selling, general and administrative expenses 906 38
Amortization of intangible assets 4,736 4,288
Total costs and operating expenses 219,325 155,378
Operating income 11,914 9,603
Interest expense, net 3,609 3,030
Income before income taxes 8,305 6,573
Provision for income taxes 2,061 1,462
Net income $ 6,244 $ 5,111
Basic earnings per share $ 0.49 $ 0.42
Basic weighted average shares outstanding 12,741,394 12,076,509
Diluted earnings per share $ 0.49 $ 0.42
Diluted weighted average shares outstanding 12,803,279 12,171,828
Dividends declared per share $ 0.10 $ 0.09


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2021		2022		2021
Revenues:
Products	$	138,216	$	113,005	$	419,023	$	276,048
Services	104,271		87,577		296,416		264,627
Total revenues	242,487		200,582		715,439		540,675

Costs and operating expenses:
Products	123,348		101,044		376,781		273,081
Services	96,653		79,916		279,163		241,104
Selling, general and administrative expenses	981		809		2,752		1,897
Amortization of intangible assets	4,233		4,921		13,406		13,812
Total costs and operating expenses	225,215		186,690		672,102		529,894

Operating income	17,272		13,892		43,337		10,781

Interest expense, net	4,818		2,780		12,299		8,476

Income before income taxes	12,454		11,112		31,038		2,305

Provision for income taxes	3,035		2,091		7,827		539

Net income	$	9,419	$	9,021	$	23,211	$	1,766

Basic earnings per share	$	0.74	$	0.71	$	1.82	$	0.14

Basic weighted average shares outstanding	12,797,727		12,704,165		12,772,731		12,496,646

Diluted earnings per share	$	0.73	$	0.71	$	1.81	$	0.14

Diluted weighted average shares outstanding	12,834,084		12,774,636		12,816,319		12,573,076

Dividends declared per share	$	0.10	$	0.09	$	0.30	$	0.27

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

For the three months ended March 31,
2022 2021
Net income $ 6,244 $ 5,111
Change in fair value of interest rate swap agreements, net of tax 176 511
Other comprehensive income, net of tax 176 511
Comprehensive income $ 6,420 $ 5,622


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2021		2022		2021
Net income	$	9,419	$	9,021	$	23,211	$	1,766

Change in fair value of interest rate swap agreements, net of tax	5,352		173		5,528		836

Other comprehensive income, net of tax	5,352		173		5,528		836

Comprehensive income	$	14,771	$	9,194	$	28,739	$	2,602

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

(in thousands except per share data)

Three months ended March 31, 2022
Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Stockholders'
Equity
Common Stock
Shares Amount
Balance at December 31, 2021 12,727 $ 636 $ 88,515 $ 328,358 $ (176) $ 417,333
Net income — — — 6,244 — 6,244
Stock-based compensation 42 2 1,315 — — 1,317
Other comprehensive income, net of tax — — — — 176 176
Dividends declared ($0.10 per share) — — — (1,278) — (1,278)
Balance at March 31, 2022 12,769 $ 638 $ 89,830 $ 333,324 $ — $ 423,792


	Three months ended September 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at June 30, 2022	12,795	$	640	$	91,051	$	339,592	$	—	$	431,283

Net income	—	—		—		9,419		—		9,419
Stock-based compensation	5	—		655		—		—		655
Other comprehensive income, net of tax	—	—		—		—		5,352		5,352
Dividends declared ($0.10 per share)	—	—		—		(1,281)		—		(1,281)
Balance at September 30, 2022	12,800	$	640	$	91,706	$	347,730	$	5,352	$	445,428

Three months ended March 31, 2021
Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Stockholders'
Equity
Common Stock
Shares Amount
Balance at December 31, 2020 11,055 $ 553 $ 31,870 $ 325,097 $ (1,203) $ 356,317
Issuance of common stock 1,599 80 51,937 52,017
Net income — — — 5,111 — 5,111
Stock-based compensation 37 2 1,489 — — 1,491
Other comprehensive income, net of tax — — — — 511 511
Dividends declared ($0.09 per share) — — — (1,144) — (1,144)
Balance at March 31, 2021 12,691 $ 635 $ 85,296 $ 329,064 $ (692) $ 414,303


	Three months ended September 30, 2021
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at June 30, 2021	12,704	$	635	$	85,844	$	315,555	$	(540)	$	401,494

Net income	—	—		—		9,021		—		9,021
Stock-based compensation	—	—		1,478		—		—		1,478
Other comprehensive income, net of tax	—	—		—		—		173		173
Dividends declared ($0.09 per share)	—	—		—		(1,145)		—		(1,145)
Balance at September 30, 2021	12,704	$	635	$	87,322	$	323,431	$	(367)	$	411,021

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of ~~Cash Flows~~Stockholders' Equity (continued)

(in ~~thousands)~~thousands except per share data)

For the three months ended March 31,
2022 2021
Cash flows from operating activities:
Net income $ 6,244 $ 5,111
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,547 5,944
Deferred taxes 1,177 1,457
Stock-based compensation 1,308 1,415
Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables (7,371) (2,787)
Unbilled receivables 671 (17,341)
Inventories (9,321) (28,910)
Other current assets and noncurrent assets 6,158 (10,306)
Accounts payable and deferred compensation (20,997) 1,051
Accrued expenses and other current and noncurrent liabilities (2,590) 7,999
Net cash used in operating activities (18,174) (36,367)
Cash flows from investing activities:
Purchases of property and equipment (1,269) (2,109)
Proceeds from the sale of property and equipment — 14
Proceeds from payments on notes receivable 2,662 412
Cash paid for acquisitions, net of cash acquired — (14,785)
Net cash provided by (used in) investing activities 1,393 (16,468)
Cash flows from financing activities:
Borrowings on loan agreement 112,071 146,431
Repayments on loan agreement (93,005) (144,257)
Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs — 52,017
Earn-out obligation payments (500) —
Payments of taxes for equity transactions (530) (390)
Dividends paid (1,275) (997)
Net cash provided by financing activities 16,761 52,804
Net decreases in cash and cash equivalents (20) (31)
Cash and cash equivalents at beginning of period 518 378
Cash and cash equivalents at end of period $ 498 $ 347


	Nine months ended September 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2021	12,727	$	636	$	88,515	$	328,358	$	(176)	$	417,333


Net income	—	—		—		23,211		—		23,211
Stock-based compensation	73	4		3,191		—		—		3,195
Other comprehensive income, net of tax	—	—		—		—		5,528		5,528
Dividends declared ($0.30 per share)	—	—		—		(3,839)		—		(3,839)
Balance at September 30, 2022	12,800	$	640	$	91,706	$	347,730	$	5,352	$	445,428


	Nine months ended September 30, 2021
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2020	11,055	$	553	$	31,870	$	325,097	$	(1,203)	$	356,317
Issuance of common stock	1,599	80		51,937		—		—		52,017
Net income	—	—		—		1,766		—		1,766
Stock-based compensation	50	2		3,515		—		—		3,517
Other comprehensive income, net of tax	—	—		—		—		836		836
Dividends declared ($0.27 per share)	—	—		—		(3,432)		—		(3,432)
Balance at September 30, 2021	12,704	$	635	$	87,322	$	323,431	$	(367)	$	411,021

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	For the nine months ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	23,211	$	1,766
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	19,277		18,996
Deferred taxes	(779)		(4,803)
Stock-based compensation	3,597		2,968
Inventory valuation adjustment	1,094		24,420
Loss on sale of PPE	—		(48)



Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables	(14,506)		(9,321)
Unbilled receivables	(12,202)		(4,484)
Inventories	(28,309)		(66,518)
Other current assets and noncurrent assets	6,189		(18,912)
Accounts payable and deferred compensation	(171)		17,955
Accrued expenses and other current and noncurrent liabilities	(1,607)		7,458



Net cash used in operating activities	(4,206)		(30,523)

Cash flows from investing activities:
Purchases of property and equipment	(7,416)		(7,606)
Proceeds from the sale of property and equipment	—		199
Proceeds from payments on notes receivable	4,235		1,550
Earn-out obligation payments	—		(750)
Cash paid for acquisitions, net of cash acquired	—		(53,232)

Net cash used in investing activities	(3,181)		(59,839)

Cash flows from financing activities:
Borrowings on loan agreement	358,051		394,079
Repayments on loan agreement	(345,554)		(350,956)
Proceeds from issuance of common stock	486		52,017
Earn-out obligation payments	(1,250)		(808)

Payments of taxes for equity transactions	(942)		(681)
Dividends paid	(3,832)		(3,284)

Net cash provided by financing activities	6,959		90,367

Net (decrease) increase in cash and cash equivalents	(428)		5
Cash and cash equivalents at beginning of period	518		378
Cash and cash equivalents at end of period	$	90	$	383

Supplemental disclosure of noncash investing and financing activities:
Earn-out obligation in connection with acquisitions	$	—	$	1,250

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

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

Table of Contents

(1) Nature of Operations and Basis of Presentation

Nature of Operations

VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to commercial and government markets. ~~Our~~We conduct our operations ~~are conducted~~ under three ~~reporting units aligned with our operating~~ segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense.

In February 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, which were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.

Basis of Presentation

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K"). In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended ~~March 31,~~September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with 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 liabilities 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 include fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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.

(2) Acquisitions

Global Parts Group, Inc.

On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a ~~preliminary~~ purchase price of $40 million, net of cash acquired. The ~~preliminary~~ purchase price includes $2 million of contingent consideration, representing the fair value recognized for potential future earn-out payments. During the third quarter of fiscal 2022, we settled the final payment of the obligation. See Note (8) "Fair

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2022

Table of Contents

~~recognized for potential future earn-out payments. See Note (8) "Fair~~ Value Measurements," for additional information regarding the earn-out obligation. Global Parts operating results are included in our Aviation segment.

During the three and nine months ended September 30, 2021, we incurred $0.3 million and $0.5 million, respectively, of acquisition-related expenses, which are included in selling, general and administrative expenses.

HAECO Special Services, LLC

On March 1, 2021, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC, a division of HAECO Americas ("HAECO") for the purchase price of $14.8 million. HSS operating results are included in our Federal and Defense segment. The acquisition was not material to our consolidated financial statements.

During the ~~three~~nine months ended ~~March 31,~~September 30, 2021, we incurred $0.3 million of acquisition-related expenses, which are included in selling, general and administrative expenses.

(3) Revenue

Disaggregation of Revenues

Our revenues are derived from the delivery of products to our customers and from services performed for commercial customers, various government agencies, the United States Department of Defense ("DoD") or federal civilian agencies.

Revenues by customer for ~~our~~ each of our operating segments for the three and nine months ended ~~March 31,~~September 30, 2022 were as follows (in thousands):


	Three months ended September 30, 2022
	Aviation		Fleet		Federal and Defense		Total
Commercial	$	101,735	$	25,394	$	129	$	127,258
DoD	—		183		60,550		60,733
Other government	890		39,177		14,429		54,496
Total	$	102,625	$	64,754	$	75,108	$	242,487


	Nine months ended September 30, 2022
	Aviation		Fleet		Federal and Defense		Total
Commercial	$	296,996	$	79,257	$	387	$	376,640
DoD	—		3,176		170,205		173,381
Other government	3,938		114,093		47,387		165,418
Total	$	300,934	$	196,526	$	217,979	$	715,439

Revenues by customer for each of our operating segments for the three and nine months ended September 30, 2021 were as follows (in thousands):

Three months ended March 31, 2022
Aviation Fleet Federal and Defense Total
Commercial $ 91,912 $ 27,856 $ 92 $ 119,860
DoD — 1,729 50,395 52,124
Other government 1,378 37,445 20,432 59,255
Total $ 93,290 $ 67,030 $ 70,919 $ 231,239

Three months ended March 31, 2021
Aviation Fleet Federal and Defense Total
Commercial $ 44,346 $ 14,437 $ 318 $ 59,101
DoD — 3,102 42,786 45,888
Other government 25 37,208 22,759 59,992
Total $ 44,371 $ 54,747 $ 65,863 $ 164,981


	Three months ended September 30, 2021
	Aviation		Fleet		Federal and Defense		Total
Commercial	$	72,542	$	20,690	$	931	$	94,163
DoD	—		2,739		58,123		60,862
Other government	582		36,839		8,136		45,557
Total	$	73,124	$	60,268	$	67,190	$	200,582

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	Nine months ended September 30, 2021
	Aviation		Fleet		Federal and Defense		Total
Commercial	$	164,353	$	52,757	$	1,434	$	218,544
DoD	—		10,517		162,984		173,501
Other government	657		109,798		38,175		148,630
Total	$	165,010	$	173,072	$	202,593	$	540,675

Revenues by type for ~~our~~ each of our operating segments for the three and nine months ended ~~March 31,~~September 30, 2022 were as follows (in thousands):


	Three months ended September 30, 2022
	Aviation		Fleet		Federal and Defense		Total
Repair	$	28,979	$	—	$	—	$	28,979
Distribution	73,646		64,754		—		138,400
Cost Plus Contract	—		—		40,158		40,158
Fixed Price Contract	—		—		18,430		18,430
T&M Contract	—		—		16,520		16,520
Total	$	102,625	$	64,754	$	75,108	$	242,487


	Nine months ended September 30, 2022
	Aviation		Fleet		Federal and Defense		Total
Repair	$	77,308	$	—	$	—	$	77,308
Distribution	223,626		196,526		—		420,152
Cost Plus Contract	—		—		105,290		105,290
Fixed Price Contract	—		—		59,069		59,069
T&M Contract	—		—		53,620		53,620
Total	$	300,934	$	196,526	$	217,979	$	715,439

Revenues by type for each of our operating segments for the three and nine months ended September 30, 2021 were as follows (in thousands):


		Three months ended March 31, 2022									Three months ended September 30, 2021
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Federal and Defense		Total
Repair	Repair	$	22,363	$	—	$	—	$	22,363	Repair	$	18,714	$	—	$	—	$	18,714
Distribution	Distribution	70,927		67,030		—		137,957		Distribution	54,410		60,268		—		114,678
Cost Plus Contract	Cost Plus Contract	—		—		30,577		30,577		Cost Plus Contract	—		—		26,775		26,775
Fixed Price Contract	Fixed Price Contract	—		—		18,361		18,361		Fixed Price Contract	—		—		25,729		25,729
T&M Contract	T&M Contract	—		—		21,981		21,981		T&M Contract	—		—		14,686		14,686
Total	Total	$	93,290	$	67,030	$	70,919	$	231,239	Total	$	73,124	$	60,268	$	67,190	$	200,582

Three months ended March 31, 2021
Aviation Fleet Federal and Defense Total
Repair $ 18,316 $ — $ — $ 18,316
Distribution 26,055 54,747 — 80,802
Cost Plus Contract — — 16,551 16,551
Fixed Price Contract — — 23,931 23,931
T&M Contract — — 25,381 25,381
Total $ 44,371 $ 54,747 $ 65,863 $ 164,981

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	Nine months ended September 30, 2021
	Aviation		Fleet		Federal and Defense		Total
Repair	$	56,051	$	—	$	—	$	56,051
Distribution	108,959		173,072		—		282,031
Cost Plus Contract	—		—		65,139		65,139
Fixed Price Contract	—		—		82,090		82,090
T&M Contract	—		—		55,364		55,364
Total	$	165,010	$	173,072	$	202,593	$	540,675

Contract Balances

Unbilled receivables (contract assets) represent our right to consideration in exchange for goods or services that we have transferred to 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 related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.

We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables were ~~$31.2~~$44.1 million as of ~~March 31,~~September 30, 2022 and $31.9 million as of December 31, 2021. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheets, were ~~$7.4~~$7.7 million as of ~~March 31,~~September 30, 2022 and $7.1 million as of December 31, 2021. For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, we recognized revenue that was previously included in the beginning balance of contract liabilities of ~~$2.1 million and $0.9 million, respectively.~~$2.7 million.

Performance Obligations

Our performance obligations are satisfied either at a point in time or over time as work progresses. Revenues from products and services transferred to customers at a point in time ~~accounted for approximately 60% and 49% of our revenues for the three months ended March 31, 2022 and 2021, respectively,~~are primarily related to the ~~sale~~sales of vehicle and aircraft parts in our Fleet and Aviation segments. Revenues from products and services transferred to customers ~~over~~at a point in time accounted for approximately ~~40%~~57% and ~~51%~~59% of our revenues for the three and nine months ended ~~March 31,~~September 30, 2022, respectively, and approximately 57% and 52% for the three and nine months ended September 30, 2021, ~~respectively,~~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 from products and services transferred to customers over time accounted for approximately 43% and 41% of our revenues for the three and nine months ended September 30, 2022, respectively, and 43% and 48% of our revenues for the three and nine months ended September 30, 2021, respectively.

As of ~~March 31,~~September 30, 2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was ~~$198~~$199 million. The performance obligations expected to be satisfied within one year and greater than one year are ~~92%~~96% and 8%4%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.

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~~March 31, 2022~~

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During the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, revenue recognized from performance obligations satisfied in prior periods was not material.

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(4) Debt

Long-term debt consisted of the following (in thousands):


		March 31,		December 31,			September 30,		December 31,
		2022		2021			2022		2021
Bank credit facility - term loan	Bank credit facility - term loan	$	56,425	$	60,175	Bank credit facility - term loan	$	48,925	$	60,175
Bank credit facility - revolver loans	Bank credit facility - revolver loans	249,375		226,559		Bank credit facility - revolver loans	250,305		226,559
Principal amount of long-term debt	Principal amount of long-term debt	305,800		286,734		Principal amount of long-term debt	299,230		286,734
Less debt issuance costs	Less debt issuance costs	(1,955)		(2,165)		Less debt issuance costs	(1,537)		(2,165)
Total long-term debt	Total long-term debt	303,845		284,569		Total long-term debt	297,693		284,569
Less current portion	Less current portion	(14,162)		(14,162)		Less current portion	(9,162)		(14,162)
Long-term debt, less current portion	Long-term debt, less current portion	$	289,683	$	270,407	Long-term debt, less current portion	$	288,531	$	270,407

We had letters of credit outstanding totaling $1.2 million and $1.0 million as of ~~March 31,~~September 30, 2022 and December 31, ~~2021.~~2021, respectively.

We pay interest on the term 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 ~~March 31,~~September 30, 2022, the LIBOR margin was 2.25% and the base margin was ~~3.50%~~6.25%. The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. As of ~~March 31,~~September 30, 2022, interest rates on our outstanding debt ranged from ~~4.00%~~6.13% to ~~5.75%~~8.50%, and the effective interest rate on our aggregate outstanding debt was ~~4.09%~~6.42%.

Interest expense incurred on bank loan borrowings, ~~and~~inclusive of the effect of interest rate hedges, was ~~$3.4~~$4.6 million and $2.7 million for the three months ended ~~March 31,~~September 30, 2022 and 2021, ~~respectively. As of March 31,~~respectively, and $11.7 million and $7.9 million for the nine months ended September 30, 2022 ~~there was no hedged portion of our debt as our 2 remaining hedges expired in February~~ and ~~March of 2022. As of December 31,~~ 2021, ~~the portion of our debt with interest rate swap agreements was $75 million.~~respectively.

Our required term and revolver loan principal payments ~~after March 31,~~as of September 30, 2022 are as follows (in thousands):


Year Ending	Year Ending	Term Loan		Revolver Loan		Total		Year Ending	Term Loan		Revolver Loan		Total
Remainder of 2022	Remainder of 2022	$	11,250	$	—	$	11,250	Remainder of 2022	$	3,750	$	—	$	3,750
2023	2023	15,000		—		15,000		2023	15,000		—		15,000
2024	2024	30,175		249,375		279,550		2024	30,175		250,305		280,480
Total	Total	$	56,425	$	249,375	$	305,800	Total	$	48,925	$	250,305	$	299,230

We were in compliance with required ratios and other terms and conditions under our loan agreement as of ~~March 31,~~September 30, 2022.

Subsequent Event

On October 7, 2022, we entered into a 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 $100.0 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 0.00%; and (vi) modified pricing to account for the change from LIBOR to SOFR.

After the amendment, our scheduled term loan payments are approximately $2.5 million for the remainder of 2022, $10.0 million in 2023, $10.0 million in 2024 and $77.5 million in 2025. We have classified the current portion of long-term debt in our consolidated balance sheets as of September 30, 2022 based on the amended amortization payment terms.

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September 30, 2022

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(5) 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 outstanding stock-based awards. ~~There were no antidilutive~~Antidilutive common stock equivalents excluded from the diluted earnings per share ~~calculation.~~calculation for the three and nine month ended September 30, 2022 and 2021 were not material.

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~~March 31, 2022~~

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The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows:


		Three months ended March 31,				Three months ended September 30,	Nine months ended September 30,
			2022	2021			2022	2021	2022	2021
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding		12,741,394	12,076,509	Basic weighted average common shares outstanding		12,797,727	12,704,165	12,772,731	12,496,646
Effect of dilutive shares	Effect of dilutive shares		61,885	95,319	Effect of dilutive shares		36,357	70,471	43,588	76,430
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding		12,803,279	12,171,828	Diluted weighted average common shares outstanding		12,834,084	12,774,636	12,816,319	12,573,076

(6) Commitments and Contingencies

Contingencies

We ~~may have certain~~are involved in various claims and lawsuits arising in the normal ~~course~~conduct of its business, ~~including legal proceedings, against us and against other parties. In our opinion, the resolution~~none of ~~these claims will not~~which we believe, based on current information, is expected to have a material adverse effect on our financial position, 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 many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.

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~~March 31, 2022~~

~~Table of Contents~~

(7) Business Segments and Customer Information

Business Segments

Management of our business operations is conducted under 3three reportable operating segments:

Aviation

Our Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts distribution, engine accessory maintenance, MRO services, rotable exchange and supply chain services.

Fleet

Our Fleet segment provides parts, inventory management, e-commerce fulfillment, logistics, supply chain support and other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the DoD. Core services include vehicle parts distribution, sourcing, IT solutions, customized fleet logistics, warehousing, kitting, just-in-time supply chain management, alternative product sourcing, and engineering and technical support.

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September 30, 2022

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Federal and Defense

Our Federal and Defense segment provides aftermarket MRO and logistics services to improve operational readiness and extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers. Core services include procurement; supply chain management; vehicle, maritime and aircraft sustainment services; base operations support; IT services and energy consulting.

We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude inter-segment sales as these activities are eliminated in consolidation. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. Our segment information is as follows (in thousands):

Three months ended March 31,
2022 2021
Revenues:
Aviation $ 93,290 $ 44,371
Fleet 67,030 54,747
Federal and Defense 70,919 65,863
Total revenues $ 231,239 $ 164,981
Operating income (loss):
Aviation $ 7,622 $ (332)
Fleet 6,381 5,741
Federal and Defense (688) 5,025
Corporate/unallocated expenses (1,401) (831)
Operating income $ 11,914 $ 9,603

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~~March 31, 2022~~

~~Table of Contents~~

~~Customer Information~~

~~The USPS and U.S. Navy are our largest customers. Our customers also include various other commercial entities and government agencies. Our revenue by customer is as follows (in thousands):~~

Three months ended March 31,
Customer 2022 % 2021 %
Commercial $ 119,860 52 $ 59,101 36
DoD 52,124 22 45,888 28
Other government 59,255 26 59,992 36
Total $ 231,239 100 $ 164,981 100


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Revenues:
Aviation	$	102,625	$	73,124	$	300,934	$	165,010
Fleet	64,754		60,268		196,526		173,072
Federal and Defense	75,108		67,190		217,979		202,593
Total revenues	$	242,487	$	200,582	$	715,439	$	540,675

Operating income (loss):
Aviation	$	10,017	$	3,719	$	24,089	$	(18,885)
Fleet	6,539		5,387		18,286		15,128
Federal and Defense	1,939		5,386		3,803		17,410
Corporate/unallocated expenses	(1,223)		(600)		(2,841)		(2,872)
Operating income	$	17,272	$	13,892	$	43,337	$	10,781

(8) Fair Value Measurements

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of ~~March 31,~~September 30, 2022 and December 31, 2021 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 March 31, 2022		Fair Value December 31, 2021		Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value September 30, 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	$	577	$	598	Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	515	$	598
Interest rate swap agreements		Accrued expenses and other current liabilities	Level 2	$	—	$	234
Interest rate swaps								Interest rate swaps	Other assets	Level 2	$	7,131	$	—
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	$	750	$	1,000	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	Earn-out obligation - long-term	Other long-term liabilities	Level 3	$	—	$	250

Non-Company Owned Life Insurance ("COLI")

Non-COLI assets held in our deferred supplemental ~~compensation~~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.

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September 30, 2022

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Interest Rate Swap Derivatives

On July 22, 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% that hedge the variability in interest payments of $150 million of floating rate debt. The tenor of these five-year swaps will begin on October 31, 2022. We have designated, and will account for, these fixed interest rate swaps as cash flow hedges. As of September 30, 2022, we had $5.4 million. net of an income tax effect of $1.8 million, included in accumulated other comprehensive income in the accompanying balance sheets related to these cash flow hedges. We estimate that we will reclassify $2.0 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following September 30, 2022.

We were a party to two fixed interest rate ~~swap agreements~~swaps, entered into in fiscal 2011 and 2012, qualifying as cash flow hedges under which we hedged a portion of our variable-rate debt until the ~~agreements~~swaps expired in February and March 2022. As of December 31, 2021, the fair value of such ~~swap agreements~~swaps was $0.2 million, a liability recorded in accrued expenses and other current liabilities in our consolidated balance sheets. As of December 31, 2021, we had $0.2 million, net of an income tax effect of $58 thousand, included in accumulated other comprehensive income in the accompanying balance sheets related to the cash flow hedges. The amounts paid and received on the ~~swap agreements~~swaps are recorded in interest expense in the period during which the related floating-rate interest is incurred.

Contingent Consideration

In connection with the acquisition of Global Parts in July 2021, we ~~may be~~were required to pay earn-out obligation payments of up to $2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. Final settlement of the obligation was made during the three months ended September 30, 2022. Changes in the earn-out obligation measured at fair value on a recurring basis using unobservable inputs (Level 3) for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 are as follows (in thousands):

Current portion Long-term portion Total
Balance as of December 31, 2021 $ 1,000 $ 250 $ 1,250
Reclassification from long-term to current 250 (250) —
Earn-out payments (500) — (500)
Balance as of March 31, 2022 $ 750 $ — $ 750

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~~VSE CORPORATION AND SUBSIDIARIES~~


	Current portion		Long-term portion		Total
Balance as of December 31, 2021	$	1,000	$	250	$	1,250
Reclassification from long-term to current	250		(250)		—
Earn-out payments	(1,250)		—		(1,250)

Balance as of September 30, 2022	$	—	$	—	$	—

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2022~~

~~Table of Contents~~Other Financial Instruments

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.

(9) Income Taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year.

Our effective tax rate was ~~24.8%~~24.4% and ~~22.2%~~25.2% for the three and nine months ended ~~March 31,~~September 30, 2022, respectively, and 18.8% and 23.4% for the three and nine months ended September 30, 2021, respectively. The effective tax rate was higher for the three and nine months ended ~~March 31,~~September 30, 2022 as compared to the same period ofin the prior year primarily due to 1) book expense in connection with the ~~fair market~~decline in value ~~decrease in~~of our COLI ~~plan~~assets in the period ended ~~March 31,~~September 30, 2022 that was reversed for tax purposes as opposed to book income in the same period in ~~2021, and 2) significantly lower tax deduction projected for foreign derived intangible income ("FDII") in 2022 due to reduced profitability within our Federal and Defense segment.~~2021.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

We are a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets to government and commercial markets. We provide logistics and distribution services for legacy systems and equipment and professional and technical services to commercial customer and to the government, including federal and civilian agencies and the Department of Defense ("DoD"). Our operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, and other customers. We also provide vehicle and equipment maintenance and refurbishment, logistics, engineering support, energy services, IT and health care IT solutions, and consulting services.

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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K").

Recent Acquisitions

See Note (2) "Acquisitions" to our Consolidated Financial Statements included in Item 1 of this filing and our 2021 Form 10-K for additional information regarding our recent acquisitions.

Impact of the COVID-19 Pandemic

~~Our results of~~The coronavirus disease (COVID-19) pandemic continues to negatively affect the global economy, our business and operations, ~~for~~supply chains, and the ~~three months ended March 31, 2022 continued to be impacted by the COVID-19 global pandemic. We~~industries in which we operate. However, we have seen continued improvement in our operating results during the ~~three~~nine months ended ~~March 31,~~September 30, 2022, which we expect to continue ~~throughout~~through the remainder of 2022. 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 continue to closely monitor and address the pandemic and related developments, including the impact to our business, our employees, our customers, and our suppliers.

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~~The COVID-19 pandemic impacted our Aviation segment operations, ~~were impacted by the COVID-19 pandemic.~~particularly in 2020 and 2021. We have seen continued improvement in our ~~sequential~~ quarterly revenue results due to the recovery in demand since the peak of the ~~negative~~ COVID-19 pandemic impact during the second quarter of 2020. Our Aviation segment results have benefited ~~in the first quarter of 2022~~ from strong performance following prior investments in growth initiatives that have produced positive results with quarterly revenue of ~~both~~$103 million, a 40% increase year-over-year.

Growth in our distribution ~~and~~services has been driven by several new distribution initiatives in providing “tip-to-tail” product-line management capabilities, while our repair ~~businesses driven by~~business has benefited from a broader recovery in commercial market activity, together with share gains within the business & general aviation (“B&GA”) market.

Our acquisition of Global Parts in July 2021 expands our product lines and client base. As we continue to experience recovery and growth in our operations, we see opportunities to strategically align platform offerings to include additional airframe components with our existing offerings. Market recovery and our growth initiatives have resulted in a ~~172%~~105% and ~~22%~~38% year-over-year increase in distribution and repair revenue, respectively, during the ~~three~~first nine months ~~ended March 31,~~of 2022 compared to the same period for the prior year.

~~During the quarter, we extended~~We have recently secured key multi-year distribution agreements to ~~secure multi-year contracts that~~both domestic and new international geographic markets. We believe the new distribution initiatives will provide ~~stable,~~sustainable and recurring revenue ~~channels. We expect favorable long-term~~with growth ~~trends as~~potential that will enhance our future results. The acquisition of Global Parts, in July 2021, broadens our product lines and client base, and we ~~scale our industry-leading Aviation parts distribution~~see opportunities to strategically align offerings with both domestic and ~~MRO platform with new business wins with leading global commercial brands.~~international markets.

We expect that the current market conditions will result in strategic opportunities for near and long-term growth. We intend to continue capitalizing on opportunities in those markets, which may require future investment.

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Fleet Segment

Our Fleet segment continues to increase revenue from commercial fleet customers and e-commerce fulfillment ~~sales. Our commercial client base includes companies in~~sales as the business continues to progress towards becoming a ~~wide array of businesses that have vehicle fleets required to meet mission critical delivery or service schedules.~~more diversified enterprise. We continue to execute on our revenue diversification strategy ~~through sustained~~as we capture new customers and increase revenue within e-commerce fulfillment. To support continued e-commerce and e-commerce fulfillment growth, the Fleet segment announced plans to open a new distribution warehouse and e-commerce fulfillment center of excellence in ~~commercial revenue~~Olive Branch, Mississippi (in the greater Memphis, Tennessee area). This new center of excellence will double the size of Fleet's current warehouse footprint while extending Fleet’s geographic reach and expanding product offerings for customers. Operations are expected to ~~expand our presence beyond~~commence at this new location in early 2023 and will enable Fleet to successfully meet the ~~long-term relationship with~~rapidly growing demand for the ~~United States Postal Service ("USPS").~~

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e-commerce fulfillment business. Commercial customer revenue continues to see a strong growth trend, increasing approximately ~~93%~~23% and 50% during the ~~three~~quarter and first nine months ~~ended March 31,~~of 2022, respectively, compared to the same ~~period~~periods in the prior year. Commercial revenues were ~~41.6%~~40% of total Fleet segment revenue for the nine months ended September 30, 2022 compared to ~~26.4%~~30% for the same period in ~~2021,~~the prior year, demonstrating the continued success of our strategic multi-year diversification strategy. ~~We expect continued growth within the commercial channel, coupled with stable contributions from its USPS and government customers.~~

Federal and Defense Segment

Our Federal and Defense segment continues to focus on ~~redefining VSE in the federal marketplace and recently hired new leadership in business development to build~~building our contract backlog and optimizing legacy programs. We recently announced a transition of leadership for our Federal and Defense segment as we work to grow our business and mitigate the impacts of delays in ~~current~~both the timing of contract awards and ~~new markets.~~the funding process. Strong revenue performance in ~~our U.S. Air Force~~U.S Navy work ~~performed by our HSS acquisition~~ enabled us to successfully grow our ~~2022~~third quarter revenue for this segment despite anticipated declines in our U.S. Army work due to program completions. ~~In March 2022, we were awarded a 12-month, $100 million contract by Naval Sea Systems Command (NAVSEA) in providing Foreign Military Sales (FMS) and Follow-on Technical Support (FOTS) to NAVSEA~~. We expect that our ~~investment in~~focused business development efforts will drive new revenue additions in subsequent years. Contract funding increases, including work to transfer a frigate to Bahrain under our FMS Program, have resulted in an increase in bookings of $29.0 million, or 46%, during the three months ended March 31, 2022, further supporting a stable outlook for our federal contracting revenue base.

Results of Operations

~~Quarter Ended March 31, 2022 Compared to Quarter Ended March 31, 2021~~

Consolidated Results of Operations

Our consolidated results of operations are as follows (in thousands):


		Three months ended March 31,					Three months ended September 30,												Nine months ended September 30,
			2022		2021			Change ($)		Change (%)			2022		2021		Change ($)		Change (%)		2022		2021		Change ($)		Change (%)
Revenues	Revenues		$	231,239	$	164,981		$	66,258	40.2	%	Revenues	$	242,487	$	200,582	$	41,905	21	%	$	715,439	$	540,675	$	174,764	32	%
Costs and operating expenses	Costs and operating expenses		219,325		155,378			63,947		41.2	%	Costs and operating expenses	225,215		186,690		38,525		21	%	672,102		529,894		142,208		27	%
Operating income	Operating income		11,914		9,603			2,311		24.1	%	Operating income	17,272		13,892		3,380		24	%	43,337		10,781		32,556		302	%
Interest expense, net	Interest expense, net		3,609		3,030			579		19.1	%	Interest expense, net	4,818		2,780		2,038		73	%	12,299		8,476		3,823		45	%
Income before income taxes	Income before income taxes		8,305		6,573			1,732		26.4	%	Income before income taxes	12,454		11,112		1,342		12	%	31,038		2,305		28,733		1,247	%
Provision for income taxes	Provision for income taxes		2,061		1,462			599		41.0	%	Provision for income taxes	3,035		2,091		944		45	%	7,827		539		7,288		1,352	%
Net income	Net income		$	6,244	$	5,111		$	1,133	22.2	%	Net income	$	9,419	$	9,021	$	398	4	%	$	23,211	$	1,766	$	21,445	1,214	%

~~Revenues~~

Revenues.

Revenues ~~increases were~~increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily attributable to revenue growth within each of our segments: ~~$48.9~~$29.5 million within our Aviation segment, ~~$12.3~~$4.5 million within our Fleet segment, and ~~$5.1~~$7.9 million within our Federal and Defense segment. See "Segment Operating Results" section below for further discussion of revenues by segment.

Revenues increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily attributable to revenue growth within each of our segments: $135.9 million within our Aviation segment, $23.5 million within our Fleet segment, and $15.4 million within our Federal and Defense segment. See "Segment Operating Results" section below for further discussion of revenues by segment.

Costs and Operating ~~Expenses~~

Expenses.

Costs and operating expenses increased for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year primarily due to increases in revenue. ~~Costs~~Our costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.

~~Operating Income~~

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Operating Income.

Operating income increased ~~$8.0~~for the three months ended September 30, 2022 as compared to the same period in the prior year attributable to increases of $6.3 million for our Aviation segment and ~~$0.6~~$1.2 million for our Fleet segment, partially offset by a decrease of ~~$5.7~~$3.4 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment.

Operating income increased for the nine months ended September 30, 2022 as compared to the same period in the prior year attributable to increases of $43.0 million for our Aviation segment and $3.2 million for our Fleet segment, partially offset by a decrease of $13.6 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment.

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Interest ~~Expense~~

Expense.

Interest expense increased for the three and nine months ended September 30, 2022 as compared to the same period in the prior year due to a higher average interest rates on borrowings outstanding.

Provision for Income ~~Taxes~~

Taxes.

Our effective tax rate was ~~24.8%~~24.4% and 25.2% for the three and nine months ended ~~March 31,~~September 30, 2022, respectively, and ~~22.2%~~18.8% and 23.4% for the ~~same period of the prior year.~~three and nine months ended September 30, 2021, respectively. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Permanent differences such as foreign derived intangible income ("FDII") deduction, Section 162(m) limitation, capital gains tax treatment, state income taxes, certain federal and state tax credits and other items caused differences between our statutory U.S. Federal income tax rate and our effective tax rate. The higher effective tax rate for the three and nine months ended ~~March 31,~~September 30, 2022 primarily resulted from 1) book expense in connection with the ~~fair market~~decline in the value ~~decrease in~~of our Company Owned Life Insurance ("COLI") ~~plan~~assets in the period ended ~~March 31,~~September 30 2022 that was reversed for tax purposes as opposed to book income in the same period in ~~2021, and 2) significantly lower tax deduction for FDII in 2022 due to reduced profitability within our Federal and Defense segment.~~2021.

Segment Operating Results

Aviation Segment Results

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

Three months ended March 31,
2022 2021 Change ($) Change (%)
Revenues $ 93,290 $ 44,371 $ 48,919 110 %
Costs and operating expenses 85,668 44,703 40,965 92 %
Operating income (loss) $ 7,622 $ (332) $ 7,954 2,396 %
Profit (loss) percentage 8.2 % (0.7) %


	Three months ended September 30,								Nine months ended September 30,
	2022		2021		Change ($)		Change (%)		2022		2021		Change ($)		Change (%)
Revenues	$	102,625	$	73,124	$	29,501	40	%	$	300,934	$	165,010	$	135,924	82	%
Costs and operating expenses	92,608		69,405		23,203		33	%	276,845		183,895		92,950		51	%
Operating income (loss)	$	10,017	$	3,719	$	6,298	169	%	$	24,089	$	(18,885)	$	42,974	228	%


Profit (loss) percentage			9.8		%				5.1		%																8.0		%				(11.4		%)

Revenues. Revenues increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to a $19.2 million, or 35%, growth in distribution revenue driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of Global Parts, and a $10.3 million, or 55%, growth in repair revenue driven by improved demand in end markets as a result of market recovery and share gains with business and general aviation customers.

Revenues increased for ~~our Aviation segment increased~~the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to distribution revenue growth of ~~$44.9~~$114.7 million, or ~~172%~~105%, driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of Global Parts, and repair revenue growth of ~~$4.0~~$21.3 million, or ~~22%~~38%, driven by improved demand in end markets as a result of market recovery.

Costs and Operating Expenses.Costs and operating expenses increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased ~~revenues.~~revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $2.3 million for the three months ended ~~March 31,~~September 30, 2022 compared to ~~$2.1~~$2.4 million for the same period in the prior year. Allocated corporate costs were ~~$2.9~~$3.3 million for the three months ended ~~March 31,~~September 30, 2022 compared to ~~$2.0~~$2.3 million for the same period in the prior year.

Costs and operating expenses increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues and a $2.3 million non-cash charge to write down accounts receivable and inventory related to the Russian and Ukrainian markets for the nine months 2022, offset by a $23.7 million inventory valuation adjustment recognized in the same period in the prior year. Costs and operating expenses for this segment included expenses for

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amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $7.0 million for the nine months ended September 30, 2022 compared to $6.5 million for the same period in the prior year. Allocated corporate costs were $9.1 million for the nine months ended September 30, 2022, compared to $6.0 million for the same period in the prior year.

Operating income.Operating income increased for the three months ended September 30, 2022 as compared to the same period in the prior year largely due to growth in revenue ~~growth driven by~~attributable to our new distribution programs, increases in higher ~~sales volumes in our distribution contract wins~~margin repair revenue, and contributions from the Global Parts acquisition.

Operating income increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to current year growth in revenue attributable to our new distribution programs, increases in higher margin repair revenue, contributions from the Global Parts acquisition, and a $23.7 million inventory provision which negatively impacted operating income in the prior year.

Fleet Segment Results

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

Three months ended March 31,
2022 2021 Change ($) Change (%)
Revenues $ 67,030 $ 54,747 $ 12,283 22 %
Costs and operating expenses 60,649 49,006 11,643 24 %
Operating income $ 6,381 $ 5,741 $ 640 11 %
Profit percentage 9.5 % 10.5 %


	Three months ended September 30,								Nine months ended September 30,
	2022		2021		Change ($)		Change (%)		2022		2021		Change ($)		Change (%)
Revenues	$	64,754	$	60,268	$	4,486	7	%	$	196,526	$	173,072	$	23,454	14	%
Costs and operating expenses	58,215		54,881		3,334		6	%	178,240		157,944		20,296		13	%
Operating income	$	6,539	$	5,387	$	1,152	21	%	$	18,286	$	15,128	$	3,158	21	%


Profit percentage			10.1		%				8.9		%																9.3		%				8.7		%

Revenues.Revenues increased for ~~our Fleet segment increased~~the three months ended September 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to commercial customers of ~~$13.4~~$4.7 million, or ~~92.9%~~22.7% and sales to other government customers of $2.3 million, or 6.3%, ~~driven by growth in our e-commerce fulfillment business,~~ partially offset by anticipated decreased ~~revenues~~sales to DoD customers of ~~$1.4~~$2.6 million or ~~44.3%,~~93.3%.

Revenues increased for the nine months ended September 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to commercial customers of $26.5 million, or 50.2% and sales to other government customers of $4.3 million or 3.9%, partially offset by anticipated decreased sales to DoD ~~customers.~~customers of $7.3 million or 69.8%.

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~~Table of Contents~~Costs and Operating Expenses.

Costs and operating expenses increased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was ~~$1.8~~$1.5 million for the three months ended ~~March 31,~~September 30, 2022 and ~~2021.~~$1.8 million for the same period in the prior year. Expense for allocated corporate costs was~~$2.1~~ $2.0 millionfor the three months ended ~~March 31,~~September 30, 2022 and ~~$2.3~~$2.1 million for the same period in the prior year.

Costs and operating expenses increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $5.0 million for the nine months ended September 30, 2022 and $5.3 million for the same period in the prior year. Expense for allocated corporate costs was $5.9 million for the nine months ended September 30, 2022 and $6.6 million for the same period in the prior year.

Operating income.Operating income increased for the three and nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased commercial fleet customer ~~revenues~~and e-commerce fulfillment sales as described above.

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Federal and Defense Segment Results

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


		Three months ended March 31,							Three months ended September 30,										Nine months ended September 30,
			2022			2021				Change ($)		Change (%)			2022		2021		Change ($)		Change (%)		2022		2021		Change ($)		Change (%)
Revenues	Revenues		$	70,919		$	65,863			$	5,056	8	%	Revenues	$	75,108	$	67,190	$	7,918	12	%	$	217,979	$	202,593	$	15,386	8	%
Costs and operating expenses	Costs and operating expenses		71,607			60,838				10,769		18	%	Costs and operating expenses	73,169		61,804		11,365		18	%	214,176		185,183		28,993		16	%
Operating income	Operating income		$	(688)		$	5,025			$	(5,713)	(114)	%	Operating income	$	1,939	$	5,386	$	(3,447)	(64)	%	$	3,803	$	17,410	$	(13,607)	(78)	%
Profit percentage			(1.0)		%	7.6		%


Profit percentage			2.6		%				8.0		%																1.7		%				8.6		%

Revenues.Revenues increased for ~~our Federal~~the three and ~~Defense segment increased~~nine months ended September 30, 2022 as compared to the same period in the prior year due to revenues from our ~~FMS~~Foreign Military Sales (FMS) program with the U.S. Navy, partially offset by declines in our U.S. Army work due to program completions.

Costs and operating expenses increased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increases in revenue, an increase in the proportion of cost-type contracts within our contract mix, and a $3.5 million loss recognized ~~during~~for the ~~period~~nine months ended September 30, 2022 on a fixed-price, non-DoD contract with a foreign customer driven by higher than anticipated supply chain material and labor costs.

Operating income.Operating income decreased for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to the completion of a U.S. Army program and a shift in our contract mix to a larger portion of cost-type contracts, which generally provide lower profit margins than fixed-price and T&M contract types.

Operating income decreased for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to the completion of a U.S. Army program, an increase in the portion of cost-type contracts, and the contract loss recognized during the period as described above.

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.

A summary of our bookings and revenues for our Federal and Defense segment for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021, and funded contract backlog as of ~~March 31,~~September 30, 2022 and 2021 is as follows (in millions):


		2022		2021			2022		2021
Bookings	Bookings	$	92	$	63	Bookings	$	250	$	234
Revenues	Revenues	$	71	$	66	Revenues	$	218	$	203
Funded Contract Backlog	Funded Contract Backlog	$	198	$	188	Funded Contract Backlog	$	199	$	218

For the ~~three~~nine months ended ~~March 31,~~September 30, 2022, Federal and Defense segment bookings increased ~~46%~~7% year-over-year to ~~$92~~$250 million, while total funded backlog ~~increased 5%~~decreased 9% year-over-year to ~~$198~~$199 million.

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Liquidity and Capital Resources

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. 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.

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Our primary source of external financing is from our loan agreement with a bank group ~~that expires in July 2024~~ and includes a term loan facility and a revolving loan facility, which also provides for letters of credit. The maximum amount of credit available under our loan agreement for revolving loans and letters of credit is $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 incremental increases is $100 million. Our bank debt increased approximately ~~$19.1~~$12.5 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022. As of ~~March 31,~~September 30, 2022, we had term loan borrowings outstanding of ~~$56.4~~$48.9 million, revolving loan borrowings outstanding of ~~$249.4~~$250.3 million, and ~~outstanding~~ letters of credit outstanding of ~~$1.0~~$1.2 million. We had approximately ~~$100~~$98 million of unused bank loan commitments as of ~~March 31,~~September 30, 2022.

As of ~~March 31,~~September 30, 2022, we were in compliance with required ratios and other terms and conditions of our loan agreement. ~~We continue~~

Bank Loan Amendment

On October 7, 2022, we entered into a fourth amendment to ~~monitor~~our loan agreement which, among other things, provides for the ~~impacts~~following: (i) an extension of ~~COVID-19~~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 ~~our results of operations and liquidity relative~~the term loan from $3.75 million quarterly to ~~compliance with financial covenants; at this time, we expect that we will remain~~$2.50 million quarterly; (iv) an increase in ~~compliance~~the maximum total leverage ratio from 4.25x to 4.50x, with such ~~covenants over~~ratios decreasing thereafter as indicated in the ~~next twelve months.~~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

Cash Flows

The following table summarizes our cash flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 (in thousand):


		Three months ended March 31,						Nine months ended September 30,
			2022		2021				2022		2021
Net cash used in operating activities	Net cash used in operating activities		$	(18,174)	$	(36,367)	Net cash used in operating activities		$	(4,206)	$	(30,523)
Net cash provided by (used in) investing activities			1,393		(16,468)
Net cash used in investing activities							Net cash used in investing activities		(3,181)		(59,839)
Net cash provided by financing activities	Net cash provided by financing activities		16,761		52,804		Net cash provided by financing activities		6,959		90,367
Net decreases in cash and cash equivalents			$	(20)	$	(31)
Net (decrease) increase in cash and cash equivalents							Net (decrease) increase in cash and cash equivalents		$	(428)	$	5

Cash used in operating activities decreased ~~$18.2~~$26.3 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~when~~as compared to the same period ofin the prior year. The decrease was primarily due to ~~strong cash collections of our receivables,~~ lower use of cash for inventory purchases and timing of vendor ~~payments.~~payments partially offset by increased accounts receivable as a result of revenue growth and timing of collections.

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Cash ~~provided by investing activities was $1.4 million for the three months ended March 31, 2022 compared to cash~~ used in investing activities ~~of $16.5~~decreased $56.7 million for the nine months ended September 30, 2022 as compared to the same period ofin the prior year. The ~~change~~decrease was primarily due to cash paid for acquisitions, net of cash acquired, of $53.2 million related to the ~~acquisition~~acquisitions of our HSS and Global Parts subsidiaries in the prior year period.

Cash provided by financing activities decreased ~~$36.0~~$83.4 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2022, ~~when~~as compared to the same period ofin the prior year. The decrease was primarily due to $52.0 million of proceeds received in the prior year period related to our public underwritten offering of our common stock in February 2021 andoverall lower proceeds from net borrowings of our debt during the current period.

We paid cash dividends totaling ~~$1.3~~$3.8 million or ~~$0.10~~$0.30 per share during the ~~three~~nine months ending ~~March 31,~~September 30, 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.

Other Obligations and Commitments

There have not been any material changes to our other obligations and commitments that were included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Inflation and Pricing

There have not been any material changes to this disclosure from those discussed in our most recently filed Annual Report on Form 10-K.

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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.

Disclosures About Market Risk

Interest Rate Risk

Our bank loan agreement provides available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. ~~Previously, we have employed the use of~~We enter into interest rate ~~hedges~~swap agreements from time to ~~fix the~~time to manage or hedge our interest rate onrisks.

In July 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% for a total notional amount of $150 million in order to hedge a portion of our ~~outstanding borrowings. Our interest~~floating rate debt. The tenor of these swaps ~~expired in February and March of 2022. As such, as of March~~will begin on October 31, 2022 ~~there~~and is ~~no portion~~for a term of five years. Subsequent to September 30, 2022, on October 7, 2022, we entered into an amendment to our loan agreement. Among other things, the amendment provides for a modification of the reference rate from LIBOR to SOFR. See Notes (4) "Debt" and (8) "Fair Value Measurements," of Notes to our Unaudited Consolidated Financial Statements in Item 1 of this report for additional information regarding our debt ~~covered under~~and interest rate swaps.

There have been no material changes, other than discussed above, to our market risks from those discussed in our most recently filed Annual Report on Form 10-K.

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, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results

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could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in our 2021 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been no significant changes in our critical accounting estimates during the ~~three~~nine months ended ~~March 31,~~September 30, 2022 from those disclosed in our most recently filed Annual Report on Form 10-K.

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 Note (1) "Nature of Business and Significant Accounting Policies — Recent Accounting Pronouncements” of the Notes to our Unaudited Consolidated Financial Statements in Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

See "Disclosures About Market Risk" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. 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 the disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~March 31,~~September 30, 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

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communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the previously disclosed risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K”). The risk factors disclosed in our 2021 Form 10-K should also be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2022 and under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We did not purchase any of our equity securities during the period covered by this report.

VSE's loan agreement prohibits VSE from paying cash dividends, except that if there is no event of default, no act, event or condition that would constitute an event of default with the giving of notice or the passage of time, or both, and no covenant breach would occur giving effect to the payment of the dividend, VSE may pay cash dividends that do not exceed $6 million in the aggregate in any fiscal year.

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Item 6. Exhibits


(a) Exhibits
Exhibit 10.1						Fourth Amendment to the Fourth Amended and Restated Business Loan and Security Agreement, dated as of October 7, 2022, by and among the Company, as a borrower, various subsidiaries of the Company party thereto as borrowers or guarantors, the lenders from time to time party thereto and Citizens Bank, N.A., as administrative agent
Exhibit 31.1						Section 302 CEO Certification
Exhibit 31.2						Section 302 CFO and PAO Certification
Exhibit 32.1						Section 906 CEO Certification
Exhibit 32.2						Section 906 CFO and PAO Certification
Exhibit 101.INS						XBRL Instance Document
Exhibit 101.SCH						XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB						XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE						XBRL Taxonomy Extension Presentation Document
Exhibit 104						The cover page from this Quarterly Report on Form 10-Q, formatted in inline XBRL.

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VSE CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			VSE CORPORATION

Date:	~~April 28,~~October 27, 2022	By:	/s/ John A. Cuomo
			John A. Cuomo
			Director, Chief Executive Officer and President
			(Principal Executive Officer)


Date:	~~April 28,~~October 27, 2022	By:	/s/ Stephen D. Griffin
			Stephen D. Griffin
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

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	For the three months ended March 31,
		2022		2021
Revenues:
Products		$	137,231	$	78,580
Services		94,008		86,401
Total revenues		231,239		164,981

Costs and operating expenses:
Products		122,455		70,712
Services		91,228		80,340
Selling, general and administrative expenses		906		38
Amortization of intangible assets		4,736		4,288
Total costs and operating expenses		219,325		155,378

Operating income		11,914		9,603

Interest expense, net		3,609		3,030

Income before income taxes		8,305		6,573

Provision for income taxes		2,061		1,462

Net income		$	6,244	$	5,111

Basic earnings per share		$	0.49	$	0.42

Basic weighted average shares outstanding		12,741,394		12,076,509

Diluted earnings per share		$	0.49	$	0.42

Diluted weighted average shares outstanding		12,803,279		12,171,828

Dividends declared per share		$	0.10	$	0.09


	Three months ended March 31, 2021
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2020	11,055	$	553	$	31,870	$	325,097	$	(1,203)	$	356,317
Issuance of common stock	1,599	80		51,937						52,017
Net income	—	—		—		5,111		—		5,111
Stock-based compensation	37	2		1,489		—		—		1,491
Other comprehensive income, net of tax	—	—		—		—		511		511
Dividends declared ($0.09 per share)	—	—		—		(1,144)		—		(1,144)
Balance at March 31, 2021	12,691	$	635	$	85,296	$	329,064	$	(692)	$	414,303


	Three months ended March 31,
Customer		2022		%	2021		%
Commercial		$	119,860	52	$	59,101	36
DoD		52,124		22	45,888		28
Other government		59,255		26	59,992		36
Total		$	231,239	100	$	164,981	100