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 ~~September~~June 30, ~~2022~~2023


☐			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 ~~October 21, 2022: 12,799,678~~July 24, 2023: 15,372,544


	TABLE OF CONTENTS


		Page
PART I	~~PART I~~FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022	4

	Unaudited Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2022~~2023 and ~~2021~~2022	5

	Unaudited Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	6

	Unaudited Consolidated Statements of Stockholders' Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	8

	Unaudited Consolidated Statements of Cash Flows for the ~~three and~~ ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	9

	Notes to Unaudited Consolidated Financial Statements	10

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market ~~Risks~~Risk	2524

ITEM 4.	Controls and Procedures	2524

PART II	~~PART II~~OTHER INFORMATION

ITEM 1.	Legal Proceedings	2625

ITEM 1A.	Risk Factors	2625

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2625

ITEM 5.	Other Information	25

ITEM 6.	Exhibits	2726

Signatures		2827

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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 is included 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, such as 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~~2022 filed with the SEC on March ~~11,~~ 9, 2023 (“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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PART I. ~~Financial Information~~FINANCIAL INFORMATION

Item 1. Financial Statements

VSE Corporation and Subsidiaries

~~Unaudited~~ Consolidated Balance Sheets

~~(in thousands except share and per share amounts)~~

September 30, December 31,
2022 2021
Assets
Current assets:
Cash and cash equivalents $ 90 $ 518
Receivables (net of allowance of $3.4 million and $1.7 million, respectively) 91,093 76,587
Unbilled receivables 44,084 31,882
Inventories 349,917 322,702
Other current assets 28,154 32,304
Total current assets 513,338 463,993
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) 94,857 108,263
Goodwill 248,837 248,753
Operating lease - right-of-use assets 23,950 27,327
Other assets 31,980 27,736
Total assets $ 957,526 $ 918,558
Liabilities and Stockholders' equity
Current liabilities:
Current portion of long-term debt $ 9,162 $ 14,162
Accounts payable 119,093 115,064
Accrued expenses and other current liabilities 50,791 49,465
Dividends payable 1,280 1,273
Total current liabilities 180,326 179,964
Long-term debt, less current portion 288,531 270,407
Deferred compensation 10,128 14,328
Long-term operating lease obligations 22,947 27,168
Deferred tax liabilities 10,166 9,108
Other long-term liabilities — 250
Total liabilities 512,098 501,225
Commitments and contingencies (Note 6)
Stockholders' equity:
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 91,706 88,515
Retained earnings 347,730 328,358
Accumulated other comprehensive income (loss) 5,352 (176)
Total stockholders' equity 445,428 417,333
Total liabilities and stockholders' equity $ 957,526 $ 918,558

(Unaudited)


	June 30,		December 31,
(in thousands except share and per share amounts)	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	4,163	$	305
Receivables (net of allowance of $2.5 million and $2.0 million, respectively)	114,154		90,599
Unbilled receivables	6,229		7,409
Inventories	427,822		380,438
Other current assets	14,797		15,202
Current assets held-for-sale	107,059		54,925
Total current assets	674,224		548,878
Property and equipment (net of accumulated depreciation of $33.6 million and $30.7 million, respectively)	43,992		40,501
Intangible assets (net of accumulated amortization of $128.8 million and $121.3 million, respectively)	82,818		86,558
Goodwill	222,023		217,262
Operating lease - right-of-use assets	20,194		21,558
Other assets	30,220		29,019
Non-current assets held-for-sale	—		56,013
Total assets	$	1,073,471	$	999,789
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	10,000	$	10,000
Accounts payable	104,566		128,504
Accrued expenses and other current liabilities	30,295		31,889
Dividends payable	1,290		1,282
Current liabilities held-for-sale	64,070		52,929
Total current liabilities	210,221		224,604
Long-term debt, less current portion	365,110		276,300
Deferred compensation	7,651		7,398
Long-term operating lease obligations	17,609		19,154
Deferred tax liabilities	3,743		4,986
Non-current liabilities held-for-sale	—		17,821
Total liabilities	604,334		550,263
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, par value $0.05 per share, authorized 23,000,000 shares; issued and outstanding 12,897,544 and 12,816,613, respectively	645		641
Additional paid-in capital	96,471		92,620
Retained earnings	366,690		351,297
Accumulated other comprehensive income	5,331		4,968
Total stockholders' equity	469,137		449,526
Total liabilities and stockholders' equity	$	1,073,471	$	999,789

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

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VSE Corporation and Subsidiaries

~~Unaudited~~ Consolidated Statements of Income

~~(in thousands except share and per share amounts)~~(Unaudited)

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


	For the three months ended June 30,				For the six months ended June 30,
(in thousands except share and per share amounts)	2023		2022		2023		2022
Revenues:
Products	$	165,997	$	142,003	$	320,443	$	278,172
Services	39,226		27,758		73,367		51,909
Total revenues	205,223		169,761		393,810		330,081

Costs and operating expenses:
Products	147,139		129,617		282,388		250,714
Services	32,327		25,120		62,903		47,525
Selling, general and administrative expenses	1,519		473		3,564		1,180
Amortization of intangible assets	3,601		4,016		7,540		8,110
Total costs and operating expenses	184,586		159,226		356,395		307,529

Operating income	20,637		10,535		37,415		22,552
Interest expense, net	7,366		3,872		13,346		7,482
Income from continuing operations before income taxes	13,271		6,663		24,069		15,070
Provision for income taxes	3,182		1,908		5,860		4,026
Income from continuing operations	10,089		4,755		18,209		11,044
(Loss) income from discontinued operations, net of tax	(1,234)		2,793		(237)		2,748
Net income	$	8,855	$	7,548	$	17,972	$	13,792

Earnings (loss) per share:
Basic
Continuing operations	$	0.78	$	0.37	$	1.42	$	0.87
Discontinued operations	(0.10)		0.22		(0.02)		0.21
	$	0.68	$	0.59	$	1.40	$	1.08
Diluted
Continuing operations	$	0.78	$	0.37	$	1.42	$	0.87
Discontinued operations	(0.10)		0.22		(0.02)		0.21
	$	0.68	$	0.59	$	1.40	$	1.08

Weighted average shares outstanding:
Basic	12,886,100		12,778,355		12,865,394		12,760,026
Diluted	12,916,998		12,811,078		12,921,826		12,807,249

Dividends declared per share	$	0.10	$	0.10	$	0.20	$	0.20

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

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VSE Corporation and Subsidiaries

~~Unaudited~~ Consolidated Statements of Comprehensive Income

~~(in thousands)~~(Unaudited)


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended June 30,				For the six months ended June 30,
		2022		2021		2022		2021
(in thousands)										(in thousands)	2023		2022		2023		2022
Net income	Net income	$	9,419	$	9,021	$	23,211	$	1,766	Net income	$	8,855	$	7,548	$	17,972	$	13,792

Other comprehensive income, net of tax:										Other comprehensive income, net of tax:
Change in fair value of interest rate swap agreements, net of tax	Change in fair value of interest rate swap agreements, net of tax	5,352		173		5,528		836		Change in fair value of interest rate swap agreements, net of tax	2,361		—		363		176

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

Total other comprehensive income, net of tax										Total other comprehensive income, net of tax	2,361		—		363		176
Comprehensive income	Comprehensive income	$	14,771	$	9,194	$	28,739	$	2,602	Comprehensive income	$	11,216	$	7,548	$	18,335	$	13,968

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

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VSE Corporation and Subsidiaries

~~Unaudited~~ Consolidated Statements of Stockholders' Equity

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


		Three months ended September 30, 2022																	Three Months Ended June 30, 2023
					Additional Paid-In Capital				Retained Earnings			Accumulated Other Comprehensive Income				Total Stockholders' Equity											Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
		Common Stock									Common Stock
		Shares	Amount
Balance at June 30, 2022		12,795	$	640			$	91,051						$	339,592					$	—		$	431,283

(in thousands except per share data)																		(in thousands except per share data)	Shares			Amount					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at March 31, 2023																		Balance at March 31, 2023	12,886			$	644
Net income	Net income	—	—				—							9,419					—			9,419			Net income	—						—
Stock-based compensation	Stock-based compensation	5	—		655				—			—				655		Stock-based compensation	12			1							1,894				—				—	1,895
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—				—			5,352				5,352		Other comprehensive income, net of tax	—			—						—			—			2,361		2,361
Dividends declared ($0.10 per share)	Dividends declared ($0.10 per share)	—	—		—				(1,281)			—				(1,281)		Dividends declared ($0.10 per share)	—			—					—				(1,289)			—		(1,289)
Balance at September 30, 2022		12,800	$	640	$	91,706			$	347,730		$	5,352			$	445,428
Balance at June 30, 2023																		Balance at June 30, 2023	12,898			$	645				$	96,471		$	366,690		$	5,331	$	469,137


	Three Months Ended June 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at March 31, 2022	12,769	$	638	$	89,830	$	333,324	$	—	$	423,792
Net income	—	—		—		7,548		—		7,548
Stock-based compensation	26	2		1,221		—		—		1,223
Other comprehensive income, net of tax	—	—		—		—		—		—
Dividends declared ($0.10 per share)	—	—		—		(1,280)		—		(1,280)
Balance at June 30, 2022	12,795	$	640	$	91,051	$	339,592	$	—	$	431,283

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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VSE Corporation and Subsidiaries

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

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


		Nine months ended September 30, 2022																	Six months ended June 30, 2023
					Additional Paid-In Capital				Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity											Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
		Common Stock									Common Stock
		Shares	Amount
Balance at December 31, 2021		12,727	$	636			$	88,515						$	328,358					$	(176)		$	417,333
(in thousands except per share data)																		(in thousands except per share data)	Shares			Amount					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at December 31, 2022																		Balance at December 31, 2022	12,817			$	641

Net income	Net income	—	—				—							23,211					—			23,211			Net income	—						—					—		17,972	—	17,972
Stock-based compensation	Stock-based compensation	73	4		3,191				—			—				3,195		Stock-based compensation	81			4							3,851				—		—			3,855
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—	—		—				—			5,528				5,528		Other comprehensive income, net of tax	—			—						—			—			363		363
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
Dividends declared ($0.20 per share)																		Dividends declared ($0.20 per share)	—			—					—				(2,579)			—		(2,579)
Balance at June 30, 2023																		Balance at June 30, 2023	12,898			$	645				$	96,471		$	366,690		$	5,331	$	469,137


	Six months ended June 30, 2022
				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Common Stock
(in thousands except per share data)	Shares	Amount
Balance at December 31, 2021	12,727	$	636	$	88,515	$	328,358	$	(176)	$	417,333
Net income	—	—		—		13,792		—		13,792
Stock-based compensation	68	4		2,536		—		—		2,540
Other comprehensive income, net of tax	—	—		—		—		176		176
Dividends declared ($0.20 per share)	—	—		—		(2,558)		—		(2,558)
Balance at June 30, 2022	12,795	$	640	$	91,051	$	339,592	$	—	$	431,283

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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VSE Corporation and Subsidiaries

~~Unaudited~~ Consolidated Statements of Cash Flows

~~(in thousands)~~(Unaudited)


	For the six months ended June 30,
(in thousands)	2023		2022
	(a)		(a)
Cash flows from operating activities:
Net income	$	17,972	$	13,792
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,011		12,430
Amortization of debt issuance cost	420		420
Deferred taxes	(1,533)		(790)
Stock-based compensation	3,894		2,675
Provision for inventory	742		1,094
Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables, net	(21,082)		(25,607)
Unbilled Receivables, net	(110)		(9,428)
Inventories, net	(45,580)		(16,145)
Other current assets and other assets	(1,274)		6,036
Operating lease assets and liabilities, net	(67)		(69)
Accounts payable and deferred compensation	(27,429)		(4,848)
Accrued expenses and other current and noncurrent liabilities	(3,055)		302
Net cash used in operating activities	(65,091)		(20,138)
Cash flows from investing activities:
Purchases of property and equipment	(6,137)		(2,746)

Proceeds from the payment on notes receivable	1,557		3,073
Cash paid for acquisitions, net of cash acquired	(11,711)		—
Net cash (used in) provided by investing activities	(16,291)		327
Cash flows from financing activities:
Borrowings on loan agreement	322,813		236,194
Repayments on loan agreement	(234,423)		(212,572)
Proceeds from issuance of common stock	456		486
Earn-out obligation payments	—		(1,000)

Payment of taxes for equity transactions	(1,031)		(892)
Dividends paid	(2,571)		(2,552)
Net cash provided by financing activities	85,244		19,664
Net increase (decrease) in cash and cash equivalents	3,862		(147)
Cash and cash equivalents, beginning of period	478		518
Cash and cash equivalents, end of period	$	4,340	$	371
(a) The cash flows related to discontinued operations and held-for-sale assets and liabilities have not been segregated, and remain included in the major classes of assets and liabilities. Accordingly, the Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.

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.

-9-

VSE CORPORATION AND SUBSIDIARIES

NOTES TO ~~UNAUDITED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~September~~(UNAUDITED)

June 30, ~~2022~~2023

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 maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for ~~land, sea and air~~ transportation assets to commercial and government markets. ~~We conduct our operations under three 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~~2022 ("~~2021~~2022 Form 10-K"). In our opinion, all adjustments, ~~(consisting of~~including normal recurring ~~accruals)~~items, considered necessary for a fair presentation of results for the interim periods have been ~~included.~~included in the accompanying unaudited consolidated financial statements. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2022.~~ 2023.

On May 1, 2023, we entered into a definitive agreement to sell our Federal and Defense segment. The consolidated financial statements present the Federal and Defense segment's results of operations as discontinued operations, and the related assets and liabilities as held-for-sale for all periods presented. See Note (3) "Discontinued Operations" for further discussion. Following the completion of the sale transaction, our operations are conducted under two operating segments: Aviation and Fleet.

Certain reclassifications have been made to the prior period financial information to reflect discontinued operations classification. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.

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.~~

Precision Fuel Components, LLC

On ~~July 26, 2021, we~~February 1, 2023, our Aviation segment acquired ~~Global Parts Group, Inc.~~Precision Fuel Components, LLC ("~~Global Parts"~~Precision Fuel") for a purchase price of ~~$40 million, net~~$11.7 million. Precision Fuel provides MRO services for engine accessory and fuel systems supporting the business and general aviation ("B&GA") market. Our acquisition of ~~cash acquired.~~Precision Fuel expanded our MRO capabilities and client base. Precision Fuel operating results are included in the accompanying consolidated financial statements beginning on the acquisition date. The acquisition was not material to our consolidated financial statements.

The preliminary allocation of the purchase price ~~includes $2~~resulted in net tangible assets of $3.1 million, goodwill of $4.8 million, and contract and customer-related intangible asset of $3.8 million, which is being amortized over a period of five years. During the six months ended June 30, 2023, we incurred $0.2 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) "Fairacquisition-related expenses, which are included in selling, general and administrative expenses.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO ~~UNAUDITED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~September~~(UNAUDITED)

June 30, ~~2022~~2023

Table of Contents

~~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~~(3) Discontinued Operations

On ~~March~~May 1, ~~2021,~~2023, we ~~acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC,~~entered into a ~~division of HAECO Americas ("HAECO") for the purchase price of $14.8 million. HSS operating results are included in~~definitive agreement to sell our Federal and Defense ~~segment.~~business to Bernhard Capital Partners Management LP for total consideration of up to $100.0 million, consisting of a $50.0 million cash payment at the closing of the transaction and an earn-out payment of up to $50.0 million subject to the achievement of certain milestones. The ~~acquisition was not material~~transaction is expected to ~~our consolidated financial statements.~~close in late 2023 to early 2024 and is subject to customary closing conditions and approvals.

~~During~~The results of operations from discontinued operations for the ~~nine~~three and six months ended ~~September~~June 30, ~~2021, we incurred $0.3 million~~2023 and 2022, consist of ~~acquisition-related expenses, which are included in selling, general~~the following (in thousands):


	For the three months ended June 30,				For the six months ended June 30,
	2023		2022		2023		2022
Revenues	$	67,039	$	71,953	$	133,885	$	142,871
(Loss) income from discontinued operations before income taxes	$	(1,779)	$	3,616	$	(621)	$	3,514
Provision for income taxes	(545)		823		(384)		766
Net (loss) income from discontinued operations	$	(1,234)	$	2,793	$	(237)	$	2,748

The assets and ~~administrative expenses.~~liabilities reported as held for sale consist of the following (in thousands):


		June 30,		December 31,
		2023		2022
Assets
	Cash and cash equivalents	$	178	$	173
	Accounts receivable, net	12,385		14,340
	Unbilled receivables	32,188		30,898
	Inventories	453		270
	Other current assets	8,760		9,244
	Property and equipment, net	6,612		7,467
	Intangible assets, net	3,505		4,066
	Goodwill	31,575		31,575
	Operating lease right-of-use assets	11,369		12,854
	Other assets	34		51
	Total assets held-for-sale(a)	$	107,059	$	110,938
Liabilities
	Accounts payable	$	27,810	$	31,096
	Accrued expenses and other current liabilities	20,609		21,833
	Long-term operating lease obligations	11,186		13,186
	Deferred tax liabilities	4,465		4,635
	Total liabilities held-for-sale(a)	$	64,070	$	70,750
(a) Amounts have been classified as current for the current period consolidated balance sheet and as current and non-current in the consolidated balance sheet for the prior year period.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

Selected financial information related to cash flows from discontinued operations is as follows (in thousands):


	For the six months ended June 30,
	2023		2022
Depreciation and amortization	$	1,437	$	1,917
Purchases of property and equipment	$	92	$	144
Stock-based compensation	$	73	$	20

~~(3)~~(4) 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.~~and governmental customers.

~~Revenues~~A summary of revenues by customer for each of our operating segments for the three and ~~nine~~six months ended ~~September~~June 30, 2023 and 2022 ~~were~~is as follows (in thousands):


		Three months ended September 30, 2022									Three months ended June 30, 2023						Six months ended June 30, 2023
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Total		Aviation		Fleet		Total
Commercial	Commercial	$	101,735	$	25,394	$	129	$	127,258	Commercial	$	123,820	$	38,037	$	161,857	$	235,880	$	70,581	$	306,461
DoD		—		183		60,550		60,733

Other government	Other government	890		39,177		14,429		54,496		Other government	909		42,457		43,366		2,084		85,265		87,349
Total	Total	$	102,625	$	64,754	$	75,108	$	242,487	Total	$	124,729	$	80,494	$	205,223	$	237,964	$	155,846	$	393,810


		Nine months ended September 30, 2022									Three months ended June 30, 2022						Six months ended June 30, 2022
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Total		Aviation		Fleet		Total
Commercial	Commercial	$	296,996	$	79,257	$	387	$	376,640	Commercial	$	103,349	$	26,007	$	129,356	$	195,261	$	53,863	$	249,124
DoD	DoD	—		3,176		170,205		173,381		DoD	—		1,264		1,264		—		2,993		2,993
Other government	Other government	3,938		114,093		47,387		165,418		Other government	1,670		37,471		39,141		3,048		74,916		77,964
Total	Total	$	300,934	$	196,526	$	217,979	$	715,439	Total	$	105,019	$	64,742	$	169,761	$	198,309	$	131,772	$	330,081

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

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

~~-11-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~Table of Contents~~

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~~revenues by type for each of our operating segments for the three and ~~nine~~six months ended ~~September~~June 30, 2023 and 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~~is as follows (in thousands):


		Three months ended September 30, 2021									Three months ended June 30, 2023						Six months ended June 30, 2023
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Total		Aviation		Fleet		Total
Repair	Repair	$	18,714	$	—	$	—	$	18,714	Repair	$	35,561	$	—	$	35,561	$	67,615	$	—	$	67,615
Distribution	Distribution	54,410		60,268		—		114,678		Distribution	89,168		80,494		169,662		170,349		155,846		326,195
Cost Plus Contract		—		—		26,775		26,775
Fixed Price Contract		—		—		25,729		25,729
T&M Contract		—		—		14,686		14,686
Total	Total	$	73,124	$	60,268	$	67,190	$	200,582	Total	$	124,729	$	80,494	$	205,223	$	237,964	$	155,846	$	393,810


	Three months ended June 30, 2022						Six months ended June 30, 2022
	Aviation		Fleet		Total		Aviation		Fleet		Total
Repair	$	25,966	$	—	$	25,966	$	48,329	$	—	$	48,329
Distribution	79,053		64,742		143,795		149,980		131,772		281,752
Total	$	105,019	$	64,742	$	169,761	$	198,309	$	131,772	$	330,081

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO ~~UNAUDITED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~September~~(UNAUDITED)

June 30, ~~2022~~2023

Table of Contents

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.balances were as follows (in thousands):

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 $44.1 million as of 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 $7.7 million as of September 30, 2022 and $7.1 million as of December 31, 2021.


		June 30,		December 31,
	Financial Statement Classification	2023		2022
Contract assets	Unbilled receivables	$	6,229	$	7,409
Contract liabilities	Accrued expenses and other current liabilities	$	2,561	$	963

For the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, we recognized revenue that was previously included in the beginning balance of contract liabilities of ~~$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~~$0.8 million and services transferred to customers at a point in time are primarily related to the sales of vehicle and aircraft parts in our Fleet and Aviation segments. Revenues from products and services transferred to customers at a point in time accounted for approximately 57% and 59% of our revenues for the three and nine months ended September 30, 2022, respectively, and approximately 57% and 52% for the three and nine months ended September 30, 2021,$0.5 million, 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 September 30, 2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $199 million. The performance obligations expected to be satisfied within one year and greater than one year are 96% and 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.

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

~~-13-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~Table of Contents~~

~~(4)~~(5) Debt

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


		September 30,		December 31,			June 30,		December 31,
		2022		2021			2023		2022
Bank credit facility - term loan	Bank credit facility - term loan	$	48,925	$	60,175	Bank credit facility - term loan	$	95,000	$	100,000
Bank credit facility - revolver loans		250,305		226,559
Bank credit facility - revolving facility						Bank credit facility - revolving facility	282,000		188,610
Principal amount of long-term debt	Principal amount of long-term debt	299,230		286,734		Principal amount of long-term debt	377,000		288,610
Less debt issuance costs	Less debt issuance costs	(1,537)		(2,165)		Less debt issuance costs	(1,890)		(2,310)
Total long-term debt	Total long-term debt	297,693		284,569		Total long-term debt	375,110		286,300
Less current portion	Less current portion	(9,162)		(14,162)		Less current portion	(10,000)		(10,000)
Long-term debt, less current portion	Long-term debt, less current portion	$	288,531	$	270,407	Long-term debt, less current portion	$	365,110	$	276,300

Borrowings under our term loan and revolving facility mature in October 2025. As of June 30, 2023, the interest rate on our outstanding term loan borrowings and weighted average interest rate on our aggregate outstanding revolving facility was 7.51% and 7.62%, respectively. Interest expense incurred on our term loan and revolving facility was $7.9 million and $14.3 million for the three and six months ended June 30, 2023, respectively, and $3.7 million and $7.1 million for the three and six months ended June 30, 2022, respectively. We had letters of credit outstanding ~~totaling $1.2~~of $0.7 million and $1.0 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

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

Interest expense incurred on bank loan borrowings, inclusive of the effect of interest rate hedges, was $4.6 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.7 million and $7.9 million for the nine months ended September 30, 2022 and 2021, respectively.

~~Our required term and revolver loan principal~~facility payments as of ~~September~~June 30, ~~2022~~2023 are as follows (in thousands):

Year Ending Term Loan Revolver Loan Total
Remainder of 2022 $ 3,750 $ — $ 3,750
2023 15,000 — 15,000
2024 30,175 250,305 280,480
Total $ 48,925 $ 250,305 $ 299,230


Year Ending	Term Loan		Revolving Facility		Total
Remainder of 2023	$	5,000	$	—	$	5,000
2024	10,000		—		10,000
2025	80,000		282,000		362,000
Total	$	95,000	$	282,000	$	377,000

We were in compliance with required ratios and other terms and conditions under our ~~loan~~credit agreement as of ~~September~~June 30, ~~2022.~~2023.

~~Subsequent Event~~

~~On October 7, 2022,~~In July 2023, we entered into a ~~fourth~~fifth amendment to our ~~loan agreement which, among other things, (i) extended the maturity date from July 23, 2024~~credit agreement. Refer 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 accountNote (13) "Subsequent Events" for ~~the change from LIBOR to SOFR.~~

further details. After the amendment, our scheduled term loan payments are approximately ~~$2.5~~$9.5 million for the remainder of ~~2022, $10.0 million in~~ 2023, ~~$10.0~~$19.0 million in 2024, and ~~$77.5~~$156.5 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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VSE CORPORATION AND SUBSIDIARIES

NOTES TO ~~UNAUDITED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~September~~(UNAUDITED)

June 30, ~~2022~~2023

Table of Contents

~~(5)~~

(6) Derivative Instruments and Hedging Activities

Our derivative instruments designated as cash flow hedges as of June 30, 2023 were (in thousands):

Notional Amount

Paid Fixed Rate

Receive Variable Rate

Settlement and Termination

Interest rate swaps

$150,000

2.8%

1-month term SOFR

Monthly through October 31, 2027

We are party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of our floating rate debt. For the three and six months ended June 30, 2023, we reclassified $0.8 million and $1.5 million, respectively, from accumulated other comprehensive income to interest expense, net. We estimate that we will reclassify $3.6 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following June 30, 2023.

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

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


		Three months ended September 30,		Nine months ended September 30,			Three months ended June 30,			Six months ended June 30,
			2022	2021	2022	2021			2023	2022	2023	2022
Basic weighted average common shares outstanding	Basic weighted average common shares outstanding		12,797,727	12,704,165	12,772,731	12,496,646		Basic weighted average common shares outstanding	12,886,100	12,778,355	12,865,394	12,760,026
Effect of dilutive shares	Effect of dilutive shares		36,357	70,471	43,588	76,430		Effect of dilutive shares	30,898	32,723	56,432	47,223
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding		12,834,084	12,774,636	12,816,319	12,573,076		Diluted weighted average common shares outstanding	12,916,998	12,811,078	12,921,826	12,807,249

~~(6)~~(8) Commitments and Contingencies

Contingencies

We ~~are involved in various~~may have certain claims ~~and lawsuits arising~~ in the normal ~~conduct~~course of ~~its~~ business, ~~none~~including legal proceedings, against us and against other parties. In our opinion, the resolution of ~~which we believe, based on current information, is expected to~~these claims will not have a material adverse effect on our ~~financial position,~~ results of operations, financial position or cash flows.

Further, from time-to-time, government agencies audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes, audits and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.

~~(7) Business Segments and Customer Information~~

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

(9) Business Segments

~~Management~~The sale of the Federal and Defense segment is intended to allow us to advance our focus on long-term strategic growth areas. Following the completion of the sale transaction, management of our business operations is conducted under ~~three~~two 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, and 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.

~~-15-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~Table of Contents~~

~~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 September 30,				Nine months ended September 30,					Three months ended June 30,				Six months ended June 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Revenues:	Revenues:									Revenues:
Aviation	Aviation	$	102,625	$	73,124	$	300,934	$	165,010	Aviation	$	124,729	$	105,019	$	237,964	$	198,309
Fleet	Fleet	64,754		60,268		196,526		173,072		Fleet	80,494		64,742		155,846		131,772
Federal and Defense		75,108		67,190		217,979		202,593
Total revenues	Total revenues	$	242,487	$	200,582	$	715,439	$	540,675	Total revenues	$	205,223	$	169,761	$	393,810	$	330,081

Operating income (loss):	Operating income (loss):									Operating income (loss):
Aviation	Aviation	$	10,017	$	3,719	$	24,089	$	(18,885)	Aviation	$	15,783	$	6,450	$	31,447	$	14,072
Fleet	Fleet	6,539		5,387		18,286		15,128		Fleet	7,854		5,366		13,753		11,747
Federal and Defense		1,939		5,386		3,803		17,410
Corporate/unallocated expenses		(1,223)		(600)		(2,841)		(2,872)
Corporate/unallocated expenses(a)										Corporate/unallocated expenses(a)	(3,000)		(1,281)		(7,785)		(3,267)
Operating income	Operating income	$	17,272	$	13,892	$	43,337	$	10,781	Operating income	$	20,637	$	10,535	$	37,415	$	22,552

(a) Certain corporate costs previously allocated to the Federal and Defense business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.										(a) Certain corporate costs previously allocated to the Federal and Defense business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.

~~(8)~~(10) Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by segment for the six months ended June 30, 2023 were as follows (in thousands):


	Aviation		Fleet		Total
Balance as of December 31, 2022	$	154,072	$	63,190	$	217,262
Acquisitions	4,761		—		4,761
Balance as of June 30, 2023	$	158,833	$	63,190	$	222,023

Goodwill increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions."

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

Intangible Assets

Intangible assets consisted of the following (in thousands):


	Gross carrying value		Accumulated amortization		Net carrying value
June 30, 2023
Contract and customer-related	$	202,940	$	(120,760)	$	82,180

Trade names	8,670		(8,032)		638
Total	$	211,610	$	(128,792)	$	82,818

December 31, 2022
Contract and customer-related	$	199,140	$	(113,796)	$	85,344

Trade names	8,670		(7,456)		1,214
Total	$	207,810	$	(121,252)	$	86,558

The gross carrying amount of contract and customer-related intangibles increased during the six months ended June 30, 2023 in connection with the acquisition during the period as discussed in Note (2) "Acquisitions."

As of June 30, 2023, the estimated future annual amortization expense related to intangible assets is as follows (in thousands):


Year Ending
Remainder of 2023	$	5,114
2024	9,136
2025	9,074
2026	8,950
2027	7,204
Thereafter	43,340
Total	$	82,818

(11) Fair Value Measurements

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 and the level they fall within the fair value hierarchy (in thousands):

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 Other assets Level 1 $ 515 $ 598
Interest rate swaps Other assets Level 2 $ 7,131 $ —
Interest rate swaps Accrued expenses and other current liabilities Level 2 $ — $ 234
Earn-out obligation - short-term Accrued expenses and other current liabilities Level 3 $ — $ 1,000
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 co~~mpensation 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.

~~-16-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2022~~

~~Table of Contents~~

~~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 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 swaps expired in February and March 2022. As of December 31, 2021, the fair value of such 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 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 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 nine months ended 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 (1,250) — (1,250)
Balance as of September 30, 2022 $ — $ — $ —

~~Other Financial Instruments~~


Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value June 30, 2023		Fair Value December 31, 2022
Non-COLI assets held in Deferred Supplemental Compensation Plan(a)	Other assets	Level 1	$	576	$	539
Interest rate swaps	Other assets	Level 2	$	7,103	$	6,620
(a) Non-Company Owned Life Insurance ("COLI") assets held in our deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses.

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.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2023

Table of Contents

~~(9)~~(12) 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 for continued operations was ~~24.4%~~24.0% and ~~25.2%~~24.3% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, and ~~18.8%~~28.6% and ~~23.4%~~26.7% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively. The effective tax rate was ~~higher~~lower for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period ~~in the~~of prior year primarily due to book ~~expense~~income in connection with the ~~decline~~fair market value increase in ~~value of~~ our COLI ~~assets~~plan in the period ended ~~September~~June 30, ~~2022~~2023 that was reversed for tax purposes as opposed to book ~~income~~expense in the same period in ~~2021.~~2022.

(13) Subsequent Events

Desser Aerospace Acquisition

In July 2023, we completed our previously announced acquisition of Desser-Graham Partnership, L.P. ("Desser Aerospace"), pursuant to the terms of the purchase agreement dated May 3, 2023, for a preliminary purchase price of $124.0 million, subject to post-closing adjustments. Concurrent with the closing of the transaction, we sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for cash consideration of $30.0 million (the “Loar Sale”). During the three and six months ended June 30, 2023, we incurred $0.6 million and $1.7 million, respectively, of acquisition-related expenses, which are included in selling, general and administrative expenses.

Credit Agreement Amendment

In July 2023, we entered into a fifth amendment to our credit agreement which, among other things, provided for the following: (i) the extension of a new term loan in the aggregate principal amount of $90.0 million, which will mature on the same date as the existing term loan; (ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to $25.0 million; (iii) quarterly amortization payments for the new term loan in the amount of $2.25 million; (iv) an increase in the maximum Total Funded Debt to EBITDA Ratio from 4.50x to 5.00x, with such ratios decreasing thereafter; (v) the addition of a tier to the top of the pricing grid if the Total Funded Debt to EBITDA ratio exceeds 4.50x; and (vi) expressly permitting the Desser acquisition and the Loar Sale. The net proceeds received under the new term loan were used to fund a portion of the cash consideration for the Desser Aerospace acquisition.

Interest Rate Swap Derivative

In July 2023, we executed a fixed interest rate swap that hedges the variability in interest payments on $100.0 million of floating rate debt. We have designated, and will account for, this fixed interest rate swap as a cash flow hedge.

Underwritten Public Offering

In July 2023, we entered into an underwriting agreement with William Blair & Company, L.L.C and RBC Capital Markets, acting as representatives of several underwriters, relating to the issuance and sale of 2,475,000 shares of the Company's common stock at a public offering price of $48.50 per share. Under the terms of the agreement, we granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 371,250 shares of common stock. The offering closed on July 24, 2023 and we received net proceeds of $112.7 million in connection with the offering, net of issuance costs.

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Table of Contents

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 maintenance, repair and overhaul ("MRO") services, parts distribution, logistics, supply chain management and consulting services for ~~land, sea and air~~ transportation assets to commercial and 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~~Developments

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

~~Impact~~In May 2023, we entered into a definitive agreement to sell our Federal and Defense business to Bernhard Capital Partners Management LP for a total consideration of up to $100.0 million, consisting of a $50.0 million cash payment at the closing of the ~~COVID-19 Pandemic~~transaction and an earn-out payment of up to $50.0 million, subject to the achievement of certain milestones. The transaction is expected to close in late 2023 or early 2024. In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations, we determined that the criteria for discontinued operations presentation were met during the second quarter of 2023 and results for the three and six months ended June 30, 2023 and 2022 for our Federal and Defense segment are reported in income from discontinued operations within the consolidated statements of operations and the carrying value of the related assets and liabilities are presented within assets and liabilities held for sale on the consolidated balance sheets as of June 30, 2023 and December 31, 2022. See Note (3) "Discontinued Operations" to the consolidated financial statements for further information.

Desser Aerospace Acquisition

In July 2023, we completed our previously announced acquisition of Desser-Graham Partnership, L.P. ("Desser Aerospace"), pursuant to the terms of the purchase agreement dated May 3, 2023, for a preliminary purchase price of $124.0 million, subject to post-closing adjustments. Concurrent with the closing of the transaction, we sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for cash consideration of approximately $30.0 million (the “Loar Sale”). The ~~coronavirus disease (COVID-19) pandemic continues~~acquisition was funded with proceeds from a new term loan (see Note (13) "Subsequent Events" - Credit Agreement Amendment for further information), together with proceeds from the Loar Sale and additional borrowings under our revolving credit facility.

Underwritten Public Offering

In July 2023, we initiated a public offering of the Company's common stock relating to ~~negatively affect~~ the ~~global economy, our business~~issuance and operations, supply chains, and the industries in which we operate. However, we have seen continued improvement in our operating results during the nine months ended September 30, 2022, which we expect to continue through the remaindersale of ~~2022. All~~2,475,000 shares at a public offering price of ~~our repair, distribution and base operations facilities remain open and operational,~~$48.50 per share. The offering closed on July 24, 2023 and we ~~continue~~received net proceeds of $112.7 million in connection with the offering, net of issuance costs. We intend to ~~deliver products~~use substantially all of the net proceeds from this offering to repay outstanding borrowings under our revolving credit facility 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.any remaining amounts for general corporate purposes.

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

The COVID-19 pandemic impacted our Aviation segment operations, particularly in 2020 and 2021. We have seen continued improvement in our quarterly revenue results due to the recovery in demand since the peak of the COVID-19 pandemic impact duringDuring the second quarter, ~~of 2020. Our Aviation segment results have benefited from~~our strong ~~performance following prior investments~~execution on new and existing distribution programs and increase in ~~growth initiatives that have~~MRO activity produced positive results, with quarterly revenue ~~of $103~~reaching $124.7 million for the three months ended June 30, 2023, representing a ~~40%~~19% increase year-over-year.

Growth in our distribution services has been driven by several new distribution initiatives in providing “tip-to-tail” product-line management capabilities, while our repair business has benefited from a broader recovery in commercial market activity, together with Market growth and share gains ~~within the business & general aviation (“B&GA”) market. Market recovery and our growth initiatives~~ have resulted in a ~~105%~~37% and ~~38%~~13% year-over-year increase in ~~distribution~~repair and ~~repair~~distribution revenue, respectively, during the ~~first nine~~three months ~~of 2022~~ended June 30, 2023, compared to the same period for the prior year.

Our growth has been driven by several strategic initiatives, including the introduction of new products and service capabilities to our portfolio, further strengthening our position in the market. Additionally, expanding our partnerships with Original Equipment Manufacturers has provided us with a competitive edge, allowing successful entry into new markets with an established customer base. We ~~have recently secured key multi-year~~believe our acquisition of Desser Aerospace in July 2023 will increase our exposure to the high-growth, higher-margin aviation distribution ~~agreements to both domestic~~ and ~~new international geographic~~MRO markets. We believe that the ~~new~~combination of Desser Aerospace’s distribution ~~initiatives will provide sustainable~~ and ~~recurring revenue~~repair capabilities with ~~growth potential that will enhance our future results. The acquisition of Global Parts, in July 2021, broadens our product lines~~VSE Aviation’s aftermarket business creates a platform for geographic expansion into international markets and ~~client base, and we see~~provides opportunities to ~~strategically align offerings with both domestic~~cross-sell products and ~~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.

services.

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Table of Contents

Fleet Segment

~~Our~~During the second quarter, growth in our Fleet segment ~~continues to increase revenue~~was driven by strong contributions from commercial fleet customers, ~~and~~ e-commerce fulfillment ~~sales as~~volume, and the ~~business continues to~~United States Postal Service ("USPS"). The strong performance in our USPS program is supported by the expansion of our installed base of vehicles and continued support of legacy vehicles. We have made significant progress ~~towards becoming a more diversified enterprise. We continue to execute on~~in executing our revenue diversification strategy ~~as we~~through the successful launch of our new e-commerce fulfillment and distribution center, including the completion of initial inventory investments. These strategic initiatives have been instrumental in our ability to capture new customers and ~~increase~~drive revenue growth 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 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 commence at this new location in early 2023 and will enable Fleet to successfully meet the rapidly growing demand for the e-commerce fulfillment business. Commercial customer revenue continues to see a strong growth trend, increasing approximately 23% and 50% during the quarter and first nine months of 2022, respectively, compared to the same periods in the prior year. CommercialOur commercial revenues were ~~40%~~47% of total Fleet segment revenue for the ~~nine~~three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~30%~~40% for the same period in the prior year, demonstrating the continued success of our ~~strategic multi-year~~ diversification strategy.

~~Federal and Defense Segment~~

Our Federal and Defense segment continues to focus on 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 both the timing of contract awards and the funding process. Strong revenue performance in U.S Navy work enabled us to successfully grow our third quarter revenue for this segment despite anticipated declines in our U.S. Army work due to program completions. We expect that our focused business development efforts will drive new revenue additions in subsequent years.

Results of Operations

Consolidated Results of Operations

~~Our~~The following table summarizes our consolidated results of operations ~~are as follows~~ (in thousands):


		Three months ended September 30,								Nine months ended September 30,							Three months ended June 30,											Six months ended June 30,
		2022		2021		Change ($)		Change (%)			2022		2021		Change ($)			Change (%)				2023			2022			Change ($)			Change (%)				2023			2022			Change ($)			Change (%)
Revenues	Revenues	$	242,487	$	200,582	$	41,905	21	%		$	715,439	$	540,675	$	174,764		32	%	Revenues		$	205,223		$	169,761		$	35,462		21		%		$	393,810		$	330,081		$	63,729		19		%
Costs and operating expenses	Costs and operating expenses	225,215		186,690		38,525		21	%		672,102		529,894		142,208			27	%	Costs and operating expenses		184,586			159,226			25,360			16		%		356,395			307,529			48,866			16		%
Operating income	Operating income	17,272		13,892		3,380		24	%		43,337		10,781		32,556			302	%	Operating income		20,637			10,535			10,102			96		%		37,415			22,552			14,863			66		%
Interest expense, net	Interest expense, net	4,818		2,780		2,038		73	%		12,299		8,476		3,823			45	%	Interest expense, net		7,366			3,872			3,494			90		%		13,346			7,482			5,864			78		%
Income before income taxes		12,454		11,112		1,342		12	%		31,038		2,305		28,733			1,247	%
Income from continuing operations before income taxes																			Income from continuing operations before income taxes		13,271			6,663			6,608			99		%		24,069			15,070			8,999			60		%
Provision for income taxes	Provision for income taxes	3,035		2,091		944		45	%		7,827		539		7,288			1,352	%	Provision for income taxes		3,182			1,908			1,274			67		%		5,860			4,026			1,834			46		%
Net income		$	9,419	$	9,021	$	398	4	%		$	23,211	$	1,766	$	21,445		1,214	%
Net income from continuing operations																			Net income from continuing operations		$	10,089		$	4,755		$	5,334		112		%		$	18,209		$	11,044		$	7,165		65		%

Revenues. Revenues increased for the three months ended ~~September~~June 30, ~~2022~~2023 as compared to the same period in the prior year primarily ~~attributable~~due to ~~revenue~~ growth ~~within each of our segments: $29.5 million within~~in our Aviation segment ~~$4.5~~of $19.7 million ~~within~~and our Fleet segment ~~and $7.9 million within our Federal and Defense segment.~~of $15.8 million. See "Segment Operating Results" section below for further discussion of revenues by segment.

Revenues increased for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to the same period in the prior year primarily ~~attributable~~due to ~~revenue~~ growth ~~within each of our segments: $135.9 million within~~in our Aviation segment ~~$23.5~~of $39.7 million ~~within~~and our Fleet segment ~~and $15.4 million within our Federal and Defense segment.~~of $24.1 million. See "Segment Operating Results" section below for further discussion of revenues by segment.

Costs and Operating Expenses. Costs and operating expenses increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to the same periods in the prior year primarily due to increases in revenue. ~~Our costs~~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.

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~~Table of Contents~~

Operating Income. Operating income increased for the three months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof the prior year ~~attributable~~primarily due to ~~increases~~an increase of ~~$6.3~~$9.3 million for our Aviation segment and ~~$1.2~~$2.5 million for our Fleet ~~segment, partially offset by a decrease of $3.4 million for our Federal and Defense~~ segment. See "Segment Operating Results" for a discussion of operating income by segment. The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.

Operating income increased for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof the prior year ~~attributable~~primarily due to ~~increases~~an increase of ~~$43.0~~$17.4 million for our Aviation segment and ~~$3.2~~an increase of $2.0 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. The operating income increase attributable to our segments was partially offset by an increase in corporate costs, including acquisition and integration costs incurred during the current period.

Interest Expense. Interest expense increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to the same ~~period~~periods in the prior year primarily due to a higher average interest ~~rates~~rate on borrowings outstanding.

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Provision for Income Taxes. Our effective tax rate for continued operations was ~~24.4%~~24.0% and ~~25.2%~~24.3% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, and ~~18.8%~~28.6% and ~~23.4%~~26.7% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, 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~~lower effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 primarily resulted from book ~~expense~~income in connection with the ~~decline~~fair market value increase in ~~the value of~~ our Company Owned Life Insurance ~~("COLI") assets~~plan in the period ended ~~September~~June 30, ~~2022~~2023 that was reversed for tax purposes as opposed to book ~~income~~expense in the same period in ~~2021.~~2022.

Segment Operating Results

Aviation Segment Results

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

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 %)


	Three months ended June 30,										Six months ended June 30,
	2023			2022			Change ($)		Change (%)		2023			2022			Change ($)		Change (%)
Revenues	$	124,729		$	105,019		$	19,710	19	%	$	237,964		$	198,309		$	39,655	20	%
Costs and operating expenses	108,946			98,569			10,377		11	%	206,517			184,237			22,280		12	%
Operating income	$	15,783		$	6,450		$	9,333	145	%	$	31,447		$	14,072		$	17,375	123	%
Profit percentage	12.7		%	6.1		%					13.2		%	7.1		%

Revenues. Revenues for our Aviation segment increased for the three months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof 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~~improved demand for our commercial aerospace products and services resulting from ~~the acquisition of Global Parts, and a $10.3~~continued recovery in global commercial air travel. Aviation distribution revenue increased $10.1 million, or ~~55%~~13%, ~~growth in~~and 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 $9.6 million, or 37%, for the ~~nine~~three months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period in the prior year.

Revenues for our Aviation segment increased for the six months ended June 30, 2023 compared to the same period of the prior year primarily ~~due to distribution revenue growth of $114.7 million, or 105%,~~ driven by contributions from recently initiated distribution contract wins and ~~contributions~~improved demand for our commercial aerospace products and services resulting from ~~the acquisition of Global Parts,~~continued recovery in global commercial air travel. Aviation distribution revenue increased $20.4 million, or 14%, and repair revenue ~~growth of $21.3~~increased $19.3 million, or ~~38%~~40%, ~~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~~six months ended ~~September~~June 30, ~~2022 as~~2023 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 $2.3 million for the three months ended September 30, 2022 compared to $2.4 million for the same period in the prior year. Allocated corporate costs were $3.3 million for the three months ended September 30, 2022 compared to $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 attributable to our new distribution programs, increases in higher 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 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 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 $4.7 million, or 22.7% and sales to other government customers of $2.3 million, or 6.3%, partially offset by anticipated decreased sales to DoD customers of $2.6 million or 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 of $7.3 million or 69.8%.

Costs and ~~Operating Expenses.~~operating expenses. Costs and operating expenses increased for the three months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof 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 ~~$1.5~~$2.5 million for the three months ended ~~September~~June 30, ~~2022 and $1.8~~2023 compared to $2.3 million for the same period in the prior year. ~~Expense for allocated~~Allocated corporate costs ~~was $2.0~~were $3.0 million for the ~~three~~six months ended ~~September~~June 30, ~~2022 and $2.1~~2023 compared to $2.8 million for the same period in the prior year.

Costs and operating expenses increased for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof 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~~six months ended ~~September~~June 30, ~~2022 and $5.3~~2023 compared to $4.7 million for the same period in the prior year. ~~Expense for allocated~~Allocated corporate costs ~~was $5.9~~were $6.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022 and $6.6~~2023 compared to $5.7 million for the same period in the prior year.

Operating income. Operating income increased for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof the prior year primarily due to ~~increased commercial fleet customer~~revenue growth and ~~e-commerce fulfillment~~a favorable shift in sales ~~as described above.~~

mix and pricing.

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~~Federal and Defense~~Fleet Segment Results

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

Three months ended September 30, Nine months ended September 30,
2022 2021 Change ($) Change (%) 2022 2021 Change ($) Change (%)
Revenues $ 75,108 $ 67,190 $ 7,918 12 % $ 217,979 $ 202,593 $ 15,386 8 %
Costs and operating expenses 73,169 61,804 11,365 18 % 214,176 185,183 28,993 16 %
Operating income $ 1,939 $ 5,386 $ (3,447) (64) % $ 3,803 $ 17,410 $ (13,607) (78) %

~~Profit percentage 2.6 % 8.0 % 1.7 % 8.6 %~~


	Three months ended June 30,										Six months ended June 30,
	2023			2022			Change ($)		Change (%)		2023			2022			Change ($)		Change (%)
Revenues	$	80,494		$	64,742		$	15,752	24	%	$	155,846		$	131,772		$	24,074	18	%
Costs and operating expenses	72,640			59,376			13,264		22	%	142,093			120,025			22,068		18	%
Operating income	$	7,854		$	5,366		$	2,488	46	%	$	13,753		$	11,747		$	2,006	17	%
Profit percentage	9.8		%	8.3		%					8.8		%	8.9		%

Revenues. Revenues for our Fleet segment increased for the three ~~and nine~~ months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof the prior year primarily due to ~~revenues~~increases from ~~our Foreign Military Sales (FMS) program with the U.S. Navy,~~commercial customers of $12.0 million, or 46%, and other government customers of $5.0 million, or 13%. These increases were partially offset by ~~declines in~~decreased revenues from DoD customers of $1.3 million. Commercial customer revenue growth was driven by our ~~U.S. Army work~~commercial fleet and e-commerce fulfillment business. Revenues from other government customers increased primarily due to ~~program completions.~~increased support of legacy USPS vehicle fleets.

Revenues for our Fleet segment increased for the six months ended June 30, 2023 compared to the same period of the prior year primarily due to increases from commercial customers of $16.7 million, or 31%, and other government customers of $10.3 million, or 14%. These increases were partially offset by decreased revenues from DoD customers of $3.0 million. Commercial customer revenue growth was driven by our commercial fleet and e-commerce fulfillment business. Revenues from other government customers increased primarily due to increased support of legacy USPS vehicle fleets.

Costs and ~~Operating Expenses.~~operating expense. Costs and operating expenses increased for the three months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period of the prior year primarily due to increased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $1.1 million for the three months ended June 30, 2023 compared to $1.7 million for the same period in the prior ~~year primarily due to increases~~year. Expense for allocated corporate costs was$2.0 millionfor the three months ended June 30, 2023 and $1.8 million for the same period in ~~revenue and a shift in our contract mix to a larger proportion of cost-type contracts.~~the prior year.

Costs and operating expenses increased for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period of the prior year primarily due to increased revenues. In addition, costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $2.6 million for the six months ended June 30, 2023 compared to $3.4 million for the same period in the prior ~~year primarily due to increases in revenue, an increase~~year. Expense for allocated corporate costs was$4.0 millionfor the six months ended June 30, 2023 and $3.9 million for the same period in the proportion of cost-type contracts within our contract mix, and a $3.5 million loss recognized for the 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.prior year.

Operating income. Operating income ~~decreased~~increased for the three and six months ended ~~September~~June 30, ~~2022 as~~2023 compared to the same period inof 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.driven by increased revenues.

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 nine months ended September 30, 2022 and 2021, and funded contract backlog as of September 30, 2022 and 2021 is as follows (in millions):

2022 2021
Bookings $ 250 $ 234
Revenues $ 218 $ 203
Funded Contract Backlog $ 199 $ 218

~~For the nine months ended September 30, 2022, Federal and Defense segment bookings increased 7% year-over-year to $250 million, while total funded backlog decreased 9% year-over-year to $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. Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements. Our accounts receivable and accounts payable levels can be affected by changes in the level of work we perform and by the timing of large purchases. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include capital expenditures; ~~investments in expansion, improvement, and maintenance of our operational and administrative facilities;~~ and investments in the acquisition of businesses.

Our primary source of external financing is ~~from~~ our ~~loan~~credit agreement with a bank group and includes a term loan ~~facility~~ and a revolving ~~loan~~ facility, ~~which also provides for letters~~with an aggregate maximum borrowing capacity of ~~credit. The maximum amount of credit available under our loan agreement for revolving loans and letters of credit is $350~~$350.0 million. Under the ~~loan~~credit 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~~$100.0 million. Our ~~bank debt~~outstanding borrowings under the credit

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agreement increased approximately ~~$12.5~~$88.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023. As of ~~September~~June 30, ~~2022,~~2023, we had borrowings outstanding under our term loan of $95.0 million, borrowings outstanding under our revolving facility of ~~$48.9~~$282.0 million, ~~revolving loan borrowings~~ outstanding ~~of $250.3 million, and~~ letters of credit ~~outstanding~~ of ~~$1.2 million. We had approximately $98~~$0.7 million, and $67.3 million of unused ~~bank loan~~ commitments ~~as of September 30, 2022.~~

~~As of September 30, 2022, we were in compliance with required ratios and other terms and conditions of our loan~~under the credit agreement.

~~Bank Loan Amendment~~

~~On October 7, 2022,~~In July 2023, we entered into a ~~fourth~~fifth amendment to our ~~loan~~credit agreement which, among other things, ~~provides~~provided for the following: (i) anthe extension of ~~the maturity date from July 23, 2024 to October 7, 2025; (ii)~~ a ~~reset of~~new term loan in the aggregate principal amount of $90.0 million, which will mature on the same date as the existing term loan; (ii) a reduction in our capacity to incur incremental revolving or term loan credit facilities from $100.0 million to ~~$100.0~~$25.0 million; (iii) ~~a modification to the~~quarterly amortization payments onfor the new term loan ~~from $3.75 million quarterly to $2.50 million quarterly;~~in the amount of $2.25 million; (iv) an increase in the maximum ~~total leverage ratio~~Total Funded Debt to EBITDA Ratio from ~~4.25x~~4.50x to ~~4.50x,~~5.00x, with such ratios decreasing thereafter as indicated in the table below; (v) the addition of a ~~change in~~tier to the ~~benchmark rate from LIBOR~~top of the pricing grid if the Total Funded Debt to ~~SOFR with a SOFR floor of 0.00%;~~EBITDA ratio exceeds 4.50x; and (vi) expressly permitting the Desser acquisition and the Loar Sale. The net proceeds received under the new term loan were used to fund a ~~corresponding change in pricing to account~~portion of the cash consideration for the ~~change from LIBOR to SOFR.~~Desser acquisition.


Testing Period						Maximum Total Funded Debt to EBITDA Ratio
~~From the Fourth Amendment Effective Date~~June 30, 2023 through and including September 30, 2023						5.00 to 1.00
December 31, 2023 through and including June 30, ~~2023~~2024						4.75 to 1.00
September 30, 2024						4.50 to 1.00
~~From July 1, 2023~~December 31, 2024 through and including ~~December~~March 31, ~~2023~~2025						4.25 to 1.00
~~From January 24, 2024 through and including~~ June 30, ~~2024~~2025						4.00 to 1.00
~~From July 1, 2024 through and including~~ September 30, ~~2024~~2025 and thereafter						3.75 to 1.00
~~From October 1, 2024 and thereafter~~						~~3.50 to 1.00~~

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

Cash Flows

The following table summarizes our cash flows ~~for the nine months endedSeptember 30, 2022 and 2021~~ (in ~~thousand)~~thousands):


		Nine months ended September 30,						Six months ended June 30,
			2022		2021				2023		2022
Net cash used in operating activities	Net cash used in operating activities		$	(4,206)	$	(30,523)	Net cash used in operating activities		$	(65,091)	$	(20,138)
Net cash used in investing activities			(3,181)		(59,839)
Net cash (used in) provided by investing activities							Net cash (used in) provided by investing activities		(16,291)		327
Net cash provided by financing activities	Net cash provided by financing activities		6,959		90,367		Net cash provided by financing activities		85,244		19,664
Net (decrease) increase in cash and cash equivalents			$	(428)	$	5
Net increase (decrease) in cash and cash equivalents							Net increase (decrease) in cash and cash equivalents		$	3,862	$	(147)

Cash used in operating activities ~~decreased $26.3~~increased $44.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 as compared to the same period inof the prior year. The ~~decrease~~increase was primarily due to ~~lower~~greater use of cash for inventory ~~purchases and timing of vendor payments partially offset by increased accounts receivable as a result of revenue growth and timing of collections.~~purchases.

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Cash used in investing activities ~~decreased $56.7~~was $16.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022 as~~2023 compared to cash provided by investing activities of $0.3 million for the same period inof the prior year. The ~~decrease~~change was primarily due to cash paid for ~~acquisitions, net~~the acquisition of ~~cash acquired, of $53.2 million related to the acquisitions of our HSS and Global Parts subsidiaries~~Precision Fuel in the ~~prior year~~current period.

Cash provided by financing activities ~~decreased $83.4~~increased $65.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023 as compared to the same period inof the prior year. The ~~decrease~~increase 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 and~~overall ~~lower~~higher proceeds from net borrowings of our debt during the current period.

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We paid cash dividends totaling ~~$3.8~~$2.6 million or ~~$0.30~~$0.20 per share during the ~~nine~~six months ending ~~September~~June 30, ~~2022.~~2023. 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.~~2022.

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.

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~~credit agreement provides available borrowing to us at variable interest rates. Our interest expense is impacted by the overall global economic and interest rate environment. The inflationary environment has also resulted in central banks raising short-term interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. ~~We enter into~~To mitigate the risks associated with future interest rate ~~swap agreements from time to time to manage or hedge our~~movements we have employed interest rate ~~risks.~~hedges to fix the rate on a portion of our outstanding borrowings for various periods.

In July ~~2022,~~2023, we executed ~~two SOFR-based forward-starting~~a fixed interest rate ~~swaps with a fixed rate~~swap that hedges the variability in interest payments on $100.0 million of ~~2.8% for a total notional amount of $150 million in order to hedge a portion of our~~ floating rate debt. The tenor of these swaps will begin on October 31, 2022 and is 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

For additional information ~~regarding~~related to our debt and interest rate ~~swaps.~~swap agreements, see Note (5) and Note (6), respectively, to our Consolidated Financial Statements contained in this report.

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~~2022 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 ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 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 Summary of Significant Accounting Policies

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— Recent Adopted Accounting Pronouncements” ~~of the Notes~~ to our ~~Unaudited~~ Consolidated Financial Statements included in ~~Item 1 of this report.~~our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market ~~Risks~~Risk

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 ~~September~~June 30, ~~2022,~~2023, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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~~OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

~~There have been no material changes to the previously disclosed~~The risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 ("~~2021~~2022 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 ~~September~~June 30, ~~2022~~2023 and under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The risk factors set forth in our 2022 Form 10-K are updated by adding the following:

Circumstances associated with divestitures could adversely affect the Company's results of operations and financial condition.

We may periodically divest businesses, including businesses that are no longer a part of our ongoing strategic plan. These divestitures may require significant investment of time and resources and may disrupt our business, distract management from other responsibilities, and may result in losses on disposal or continued financial involvement in the divested business, including through indemnification or other arrangements, for a period of time following the transaction, which could adversely affect our financial results.

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.

Item 5. Other Information

During the three months ended June 30, 2023, no director or "officer," as defined in Rule 16a-1(f) of the Exchange Act, of the Company adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408 of Regulation S-K.

~~-26-~~-25-

Item 6. Exhibits


(a) Exhibits
Exhibit 2.1						Membership Interest Purchase Agreement, dated as of May 1, 2023, by and among VSE Corporation, a wholly-owned subsidiary of VSE Corporation, and ASG Operations, LLC. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2023)
Exhibit 2.2						Agreement and Plan of Merger by and among VSE Aviation, Inc., Diamond Merger Sub 1, LLC, Desser-Graham Partnership, L.P. and Desser Holdings Partnership GP, LLC, as the Representative, dated as of May 3, 2023 (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the SEC on May 5, 2023)
Exhibit 3.1						Restated Certificate of Incorporation of VSE Corporation dated as of March 4, 1996 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the SEC on March 10, 2023)
Exhibit 3.2						Certificate of Amendment of the Restated Certificate of Incorporation of VSE Corporation dated as of May 2, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 1, 2006)
Exhibit 3.3						Certificate of Amendment of the Restated Certificate of Incorporation of VSE Corporation dated as of May 4, 2022 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the SEC on March 10, 2023)
Exhibit 3.4						By-Laws of VSE Corporation as amended through October 22, 2022 (filed herewith)
Exhibit 10.1						~~Fourth~~Fifth Amendment to the Fourth Amended and Restated Business Loan and Security Agreement, dated as of ~~October 7, 2022,~~July 3, 2023, 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						Inline XBRL Instance Document
Exhibit 101.SCH						Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE						Inline XBRL Taxonomy Extension Presentation Document
Exhibit 104						~~The cover page from this Quarterly Report on Form 10-Q, formatted~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in ~~inline XBRL.~~Exhibit 101)

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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:	~~October~~July 27, ~~2022~~2023	By:	/s/ John A. Cuomo
			John A. Cuomo
			Director, Chief Executive Officer and President
			(Principal Executive Officer)


Date:	~~October~~July 27, ~~2022~~2023	By:	/s/ Stephen D. Griffin
			Stephen D. Griffin
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

~~-28-~~-27-


	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


Year Ending	Term Loan		Revolver Loan		Total
Remainder of 2022	$	3,750	$	—	$	3,750
2023	15,000		—		15,000
2024	30,175		250,305		280,480
Total	$	48,925	$	250,305	$	299,230


	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	$	—	$	—	$	—


	2022		2021
Bookings	$	250	$	234
Revenues	$	218	$	203
Funded Contract Backlog	$	199	$	218