Registrant's Telephone Number, Including Area Code:  (703) 960-4600

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐ No ☒

The aggregate market value of outstanding voting stock held by non-affiliates of the Registrant as of June 30, 2020,2021, the last business day of the registrant's most recently completed second quarter, was approximately $279$521 million based on the last reported sales price of the registrant's common stock on the NASDAQ Global Select Market as of that date.

Portions of Registrant's definitive proxy statement for the Annual Meeting of Stockholders expected to be held on May 5, 2021,4, 2022, which is expected to be filed with the Securities and Exchange Commission on or about April 2, 2021,2022, have been incorporated herein by reference into Part III of this report.

This Annual Report on Form 10-K ("Form 10-K") contains statements that, to the extent they are not recitations of historical fact, constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such statements are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified in Item 1A, "Risk Factors” in this Form 10-K. All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

Readers are cautioned not to place undue reliance on these forward looking-statements,forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that occur or arise after the date hereof.

VSE Corporation (“VSE,” the “Company,” “we,” “us,” or “our”) is a diversified aftermarket products and services company providing repair services, parts distribution, logistics, and supply chain management supportand consulting services for land, sea and air transportation assets to commercial and information technologygovernment markets. We provide logistics and energy consultingdistribution services for legacy systems and equipment and professional and technical services to government and commercial markets. We servecustomers; the United States Government (the "government"),government, including the United States Department of Defense ("DoD"),; and federal civilian agencies,agencies. Our operations include supply chain management solutions, parts supply and commercialdistribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, 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.

VSE was incorporated in Delaware in 1959 and the parent company serves as a centralized managing and consolidating entity for our three operating segments, each of which consists of one or more wholly owned subsidiaries or unincorporated divisions that perform our services. Our operating segments include the Aviation segment, Fleet segment, and Federal and Defense segment. The term "VSE" or "Company" means VSE and its operating businesses unless the context indicates operations of only VSE as the parent company.

Our Aviation segment provides international parts supply and distribution, supply chain solutions, and component and engine accessory maintenance, repair and overhaul ("MRO")MRO services supporting global aftermarket commercial and business and general aviation customers. This business offers a range of services to a diversified global client base of commercial airlines, regional airlines, cargo transporters, MRO integrators and providers, aviation manufacturers, corporate and private aircraft owners, and fixed-base operators ("FBOs"). The Aviation segment generated approximately 25% of our consolidated revenues in 2020. This segment did not have any one client that comprised more than 10% of our consolidated revenues in 2021, 2020 2019 and 2018.or 2019.

Our Fleet segment provides parts supply, inventory management, e-commerce fulfillment, logistics data management, and other services to assist aftermarket commercial and federal customers with their supply chain management. Operations of this segment are conducted by our wholly owned subsidiary Wheeler Fleet Solutions, which supports the government and commercial truck fleets with parts, sustainment solutions and managed inventory services. Revenues for this business are derived from the sale of vehicle parts and mission critical supply chain services to support client truck fleets. The Fleet segment generated approximately 37% of our consolidated revenues in 2020. The United States Postal Service ("USPS") comprised approximately 27%20%, 22%27%, and 25%22% of our consolidated revenues in 2021, 2020 2019 and 2018,2019, respectively.

AcquisitionIn July 2021, we acquired Global Parts Group, Inc. ("Global Parts"), which provides distribution and DivestituresMRO services for business and general aviation ("B&GA") aircraft families. The acquisition expands our existing B&GA focus and further diversifies our product and platform offerings to include additional airframe components, while expanding our customer base of regional and global B&GA customers. Global Parts is a subsidiary of VSE Aviation, Inc. under our Aviation segment.

In January 2019, we acquired 1st Choice Aerospace Inc. ("1st Choice Aerospace"), with operations in Florida and Kentucky. 1st Choice Aerospace provides component MRO services and products for new generation and legacy commercial aircraft families. 1st Choice Aerospace is a subsidiary of VSE Aviation, Inc., under our Aviation segment.

In February 2020, we sold our subsidiary Prime Turbines, LLC ("Prime Turbines") and certain related inventory assets for $20.0 million in cash and a $8.3 million note receivable to be paid over a period from 2020 through 2024. Our Aviation segment discontinued turboprop engine MRO services and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets. Prime Turbines' revenues totaled less than 1% and approximately 4% of our revenue for 2020 and 2019, respectively.

In June 2020, we sold all of the inventory of our subsidiary CT Aerospace, LLC ("CT Aerospace") for a $6.9 million note receivable to be paid to us over a period from 2020 through 2025. Our Aviation segment discontinued sales and leasing of engines and supply of used serviceable engine parts. CT Aerospace's revenues totaled less than 1% and less than 2% of our revenue for 2020 and 2019, respectively.

See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our acquisition and divestitures.

We provide a broad array of capabilities and resources to support our clients’ aftermarket transportation assets, vehicle fleets, aircraft, systems, equipment and processes. We focus on creating value by sustaining and extending the life and improving the performance of our client assets through core offerings in supply chain management, parts supply and distribution, MRO, equipment refurbishment, logistics and engineering. We also provide IT solutions and energy consulting services.

Typical offerings include supply chain and inventory management services; vehicle fleet sustainment programs; vehicle fleet parts supply and distribution; MRO of aircraft components and engine accessories; aircraft engine and airframe parts supply and distribution; engineering support for military vehicles; military equipment refurbishment and modification; ship MRO and follow-on technical support; logistics management support; sustainable energy supply and electric power grid modernization projects, IT infrastructure and data management, and IT data services for health and public safety. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for more information regarding our business.

Our revenues are derived from the delivery of products and from contract services performed for our customers. We offer our products and professional and technical services through various ordering agreements and negotiated and competitive contract arrangements. Our revenues are derived from the delivery of products and from contract services performed for our customers for each of our three segments as follows:

Our customers include various commercial entities and government clientsclients. In 2021, our commercial customers represented 43% of our consolidated revenues, up from 31% and commercial entities.32% in 2020 and 2019, respectively. Our USPS work and FMS Program comprised approximately 27%20% and 15%13% of our 20202021 consolidated revenues, respectively. None of our other customers comprise a significant amount of our 20202021 consolidated revenues.

    

Our marketing activities are conducted by each of our businesses by industry-specific sales representatives and professional marketing and business development staff. New customer contacts and information concerning new programs, requirements and opportunities become available through sales calls and client visits, negotiation with key business partners, and formal and informal briefings. We also participate in various professional organizations and trade association, and also attend industry trade shows and events in the course of contract performance,order to increase our brand awareness and obtain literature published by government, trade associations, professional organizations and commercial entities.strengthen our service offerings.

We are committed to providing a safe working environment for our employees. Supported by our Health, Environmental and Safety Program, we strive to minimize the risk of injury or illness to workers. We provide our employees with upfront and ongoing safety trainings to ensure that safety policies and procedures are effectively communicated and implemented. We also provide our employees with any additional information, leadership, support and equipment needed to safely perform their job function.

We offer competitive pay and comprehensive benefits to attract, reward and retain a qualified and diverse workforce to achieve our vision and mission and meet the dynamic needs of employees and their families. In addition to competitive base pay, we offer annual bonus opportunities, a Company matched 401(k) plan, an employee stock purchase plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave,holiday pay, flexible work schedules, and employee assistance programs.

We embrace and encourage inclusion in order to achieve a culture and company environment supporting diversity. Our inclusion and diversity initiatives include our practices and policies on employee recruitment and hiring, professional training and development, employee engagement and the development of a work environment built on the premise of diversity and equity. In 2020, we formed the VSE Inclusion & Diversity Council ("I&D Council"), an employee led group focused on creating a framework and action plan for inclusion and diversity related initiatives across the organization. Our I&D Council regularly hosts roundtable discussions aimed at increasing cultural awareness and promoting dialogue to encourage a culture that values inclusive behavior in our workplace. We also support employee resource groups, which are voluntary, employee-led groups that are open to all employees and provide a forum for diverse employees and allies from a variety of different backgrounds to share experiences and support our company's diversity initiatives. These groups help foster a diverse and inclusive workplace, build awareness and drive change within our organization. Additionally, we actively seek initiatives and participate in outreach programs to assist individuals who served in the U.S. Armed Forces. These efforts include an emphasis on hiring military veterans to enhance the quality of our workforce.

Our businesses are subject to extensive regulation in the markets we serve. We work with numerous U.S. government agencies and entities, including but not limited to, all branches of the DoD and the Federal Aviation Administration ("FAA"). Similar government authorities and Defense segment businessregulations exist in the other countries in which we do business.

The FAA regulates the manufacture, repair and operation of all aircraft and aircraft parts operated in the United States. Its regulations are designed to ensure that all aircraft and aviation equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. The inspection, maintenance and repair procedures for various types of aircraft and equipment are prescribed by these regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. The FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services.

We must comply with and are affected by a variety of laws and regulations relating to the award, administration, and performance of U.S. Government contracts. See Item A, "Risk Factors".

the ability to terminate contracts, in whole or in part, with little or no prior notice, for convenience or for default based on performance.our failure to meet specified performance requirements. In the event of termination of a contract for convenience, a contractor is customarilywe would generally be able to recover costs already incurred on the contract and receive profit on those costs up to the amount authorized under the contract, but not the anticipated profit that would have been earned had the contract been completed. Such a termination could also result in the cancellation of future work on the related program. Termination resulting from our default could expose us to various liabilities, including excess re-procurement costs, and could have a material effect on our ability to compete for future contracts.

OurFor additional information on regulations and risks affecting our business, our contracts with various agencies of the U.S. Government, and our subcontracts with other prime contractors are subjectrefer to a variety of laws and regulations, including, but not limited to, the Federal Acquisition Regulation, the Truth in Negotiations Act, the Procurement Integrity Act, the False Claims Act, U.S. Cost Accounting Standards, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act. A noncompliance determination by a government agency may result in reductions in contract values, contract modifications or terminations, penalties, fines, repayments, compensatory, treble, or other damages, or suspension or debarment.

The supply chain, logistics, distribution,All of our businesses operate in highly competitive industries that include numerous competitors, many of which are larger in size and MRO services offered by our Aviation and Fleet segments and the federally contracted professional and technical services offered by our Federal and Defense segment are conducted in very competitive operating environments. The vehicle parts aftermarket and aviation parts and repair markets are fragmented, with many large and small global private and public competitors that compete for our customer base.

Government agencies emphasize awarding contracts on a competitive basis, as opposed to a sole source or other noncompetitive basis. Most of the significant contracts under which our Federal and Defense segment currently perform services were either initially awarded on a competitive basis or have been renewed at least once on a competitive basis. These contracts may be indefinite delivery/indefinite quantity type contracts for which the government makes awards for work among several other eligible contract holders, or they may be single award contracts with multiple option years that may or may not be exercised. Accordingly, there can be no assurance regarding the level of work we may obtain under some of these contracts. Government budgets, and in particular the budgets of certain government agencies, can also affect competition in our business. A reallocation of government spending priorities or reallocation of work for small business set-aside programs that results in lower levels of potential business in the markets we serve or the services we offer can cause increased competition.

The extent of competition that we will encounter as a result of changing economic or competitive conditions, customer requirements or technological developments is unpredictable. We believe the principal competitive factors for our business are customer knowledge, technical and financial qualifications, past performance, government budgetary priorities, sales force initiatives and price.

The ongoing COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience varying levels of reductions in demand for our products and services, particularly in the aviation aftermarket.aftermarket as compared to pre-pandemic levels. The global aviation market is experiencingexperienced a significant decline, specifically in global commercial air travel, which is havinghad a significant impact on the parts distribution and maintenance, repair and overhaul services markets supporting general aviation and commercial aircraft. Our Aviation segment experienced the most impactful reduction in demand for our products and services during fiscal 2021 and fiscal 2020 compared to fiscal 2019, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services. We expect thisThis reduction in demand moderated to some extent but otherwise continued throughout 2021 and may continue throughoutinto 2022, subject to the first halfduration and severity of 2021.the pandemic. This decrease in demand willmay continue to adversely impact our operating results for 2021.2022. We cannot estimate with certainty the severity of this impact, but we expect it to be consistent with overall aviation industry trends.

Due to the impact of COVID-19 and decisions by our customers to delay the use of, or permanently retire, certain aircraft, demand levels for aviation disruption inventory could decrease in the near term or midterm, which could result in a write-down of existing inventory to adjust to current market trends and adversely affect our results of operations. Furthermore, as a result of COVID-19, some of our commercial customers in the Aviation segment have been and could continue to be negatively impacted as a result of disruption in demand, which has led to delays and could lead to defaults on collections of receivables from them. Such continued delays could further negatively impact our business, results of operations and financial condition. We are unable to predict the extent, nature or duration of these impacts at this time.

Due to the ongoing pandemic, supply chain disruptions, and geopolitical uncertainty our business could be adversely impacted by delays or the inability to source products and services for our customers. If our suppliers experience increased disruptions to their operations as a result of these dynamics, they may be unable to fill our supply needs in a timely, compliant and cost-effective manner. We have incurred and may in the COVID-19 pandemic continuesfuture incur additional costs and delays in our business, including higher prices, schedule delays or the costs associated with identifying alternative suppliers. In instances where we may not be able to evolve,mitigate these consequences, our ability to perform on our contracts may be impacted, which could result in reduced revenues and while we expect it toprofits.

We continue to have an adverse effect onmonitor these dynamics and assess potential implications to our business, financial condition, liquidity, cash flowsupply chain and results of operations,customers, and take certain actions in an effort to mitigate potential adverse impacts. Given the uncertainties, we are unable to predict the extent, nature or duration of these impacts at this time, although we expect such negative impacts to continue in the first half of 2021.time.

The eventual expiration of large government programs or the loss of or disruption of revenues on a single contract may reduce our revenues and profits. Such revenue losses could also erode profits on our remaining programs that would have to absorb a larger portion of the fixed corporate costs previously allocated to the expiring programs or discontinued contract work. Our USPS managed inventory program and our FMS Program each constitute a material portion of our revenues and profits. This concentration of our revenue subjects us to the risk of material adverse revenue disruptions if customer operational decisions, government contractual or other issues prevent or delay the fulfillment of work requirements associated with these key programs. In recent years, revenue levels for our FMS Program have fluctuated widely enough to cause material changes in our overall revenue levels and affect our profit margins. Similarly, variations in volume and types of parts purchased by the USPS in recent years have caused changes in our profit margins.

The USPS has initiated a fleet replacement program for a next generation of the delivery vehicle fleet. The timing of both the roll out of a new fleet and the retirement of the current vehicles and their decision on how many of such vehicles will remain in the fleet could potentially have a significant impact on our future revenues and profits.

A key element of our business strategy is growth through the acquisition of additional companies. VSE is focused on acquiring complementary assets that add new products, new customers, and new capabilities or new geographic and/or operational competitive advantages in both new and existing markets within our core competencies. Our acquisition strategy is affected by, and poses a number of challenges and risks, including availability of suitable acquisition candidates, availability of capital, diversion of management’s attention, effective integration of the operations and personnel of acquired companies, potential write downs of acquired intangible assets, potential loss of key employees of acquired companies, use of a significant portion of our available cash, compliance with debt covenants and consummation of acquisitions on satisfactory terms.

We may not be able to successfully execute our acquisition strategy, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations.

As part of our business strategy, we acquire non-controlling and controlling interests in businesses. We make acquisitions and investments following careful analysis and due diligence processes designed to achieve a desired return or strategic objective. Business acquisitions involve estimates, assumptions, and judgments to determine acquisition prices, which are allocated among acquired assets, including goodwill, based upon fair market values. Notwithstanding our analyses, due diligence processes, and business integration efforts, actual operating results of acquired businesses may vary significantly from initial estimates. In such events, we may be required to write down our carrying value of the related goodwill and/or purchased intangible assets. In addition, declines in the trading price of our common stock or the market as a whole can result in goodwill and/or purchased intangible asset impairment charges associated with our existing businesses.

As of December 31, 2020,2021, goodwill and purchased intangible assets, generated from prior business acquisitionsnet of amortization, accounted for approximately 31%27% and 13%12%, respectively, of our total assets. We evaluatetest our goodwill values for impairment annually in the fourth quarter or when evidence of potential impairment exists. We also evaluate the values of purchasedtest acquired intangible assets when evidence of potentialfor impairment exists.whenever events or changes in circumstances indicate their carrying value may be impaired. The impairment tests are based on several factors requiring judgments. As a general matter, a significant decrease in expected cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or purchased intangible assets.

Adverse equity market conditions that result in a decline in market multiples and the trading price of our common stock, or other events, such as reductions in future contract awards or significant adverse changes in our operating margins or the operating results of acquired businesses that vary significantly from projected results on which purchase prices are based, could result in an impairment of goodwill or other intangible assets. Any such impairments that result in us recording additional goodwill or intangible asset impairment charges could have a material adverse effect on our financial position or results of operations.

The aviation and vehicle parts industries are highly fragmented, have several highly visible leading companies, and are characterized by intense competition. Some of our OEM competitors have greater name recognition than VSE or our subsidiaries, as well as complementary lines of business and financial, marketing and other resources that we do not have. In addition, OEMs, aircraft maintenance providers, leasing companies and U.S. Federal Aviation Administration ("FAA") certificated repair facilities may attempt to bundle their services and product offerings in the supply industry, thereby significantly increasing industry competition.

Pressure on government budgets may adversely affect the flow of work to federal contractors, particularly new programs. Competitor contractors that experience a loss of government work have tended to redirect their marketing efforts toward the types of work that we perform. This increase in competition for our service offerings may adversely affect our ability to win new work or successor contracts to continue work that is currently performed by us under expiring contracts. Unsuccessful bidders frequently protest contract awards, which can delay or reverse the contract awards. Additionally, the government has

frequently used contract award criteria that emphasizes lowest price, technically acceptable bids, which further intensifies competition in our government markets.

General global industry and economic conditions that affect the aviation industry may also affect our business. We are subject to macroeconomic cycles, and when recessions occur, we may experience reduced orders, payment delays, supply chain disruptions or other factors as a result of the economic challenges faced by our customers, prospective customers and suppliers. Further, the aviation industry has historically, from time to time, been subject to downward cycles which reduce the overall demand for jet engine and aircraft component replacement parts and repair and overhaul services, and such downward cycles result in lower sales and greater credit risk. Demand for commercial air travel can be influenced by airline industry profitability, world trade policies, government-to-government relations, terrorism, disease outbreaks, environmental constraints imposed upon aircraft operations, technological changes, price and other competitive factors. These global industry and economic conditions may have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic has resulted in travel disruption has had an adverse impact on airline spending and demand that has caused a reduction in demand for our aviation products and services for most of 2020.2020 and into 2021. At this point, the extent or duration of the impact that the COVID-19 pandemic may have on our future results remains uncertain.uncertain, and the reduction in demand could extend into 2022.

Revenues for work performed in or products delivered to foreign countries are subject to economic conditions in these countries and to political risks posed by ongoing foreign conflicts and potential terrorist activity. Significant domestic and political unrest in client countries can constrain our ability to maintain consistent staffing levels, resulting in a fluctuating level of services performed by our employees. We cannot predict when these conditions will occur or the effect it will have on our revenues. Regime changes in these countries can result in government restrictions upon the continuation of ongoing work. Economic conditions in both the United States and foreign countries, and global prices and availability of oil and other commodities could potentially have an adverse effect on the demand for some of our services, including our aviation services.

Our financial performance is heavily dependent on the abilities of our operating and administrative staff with respect to technical skills, operating performance, pricing, cost management, safety, and administrative and compliance efforts. A wide diversity of contract types, nature of work, work locations, and legal and regulatory complexities challenges our administrative staff and skill sets. We also face challenges associated with our quality of workforce, quality of work, safety, and labor relations compliance. Our current and projected work in foreign countries exposes us to challenges associated with export and ethics compliance, local laws and customs, workforce issues, extended supply chain, political unrest and war zone threats. Failure to attract or retain an adequately skilled workforce, lack of knowledge or training in critical functions, or inadequate staffing levels can result in lost work, reduced profit margins, losses from cost overruns, performance deficiencies, workplace accidents, and regulatory noncompliance.

Disruption of our operations due to internal or external system or service failures, accidents or incidents involving employees or third parties working in high-risk locations, or natural disasters, health crisis, epidemics or pandemics, including the COVID-19 pandemic, or other crises could adversely affect our financial performance and condition. The COVID-19 pandemic could potentially impact our global supply chain network for any of our segments. A fire, flood, earthquake, or other natural disaster, health crises, epidemic, pandemic or other crisis at or affecting physical facilities that support key revenue generating operations, or a procurement system or contractual delay could potentially interrupt the revenues from our operations.

We have made investments in inventory, facilities and lease commitments to support specific business programs, work requirements, and service offerings. A slowing or disruption of these business programs, work requirements, or service offerings that results in operating below intended levels could cause us to suffer financial losses.

Our ability to provide efficient distribution of the products we sell to our customers is an integral component of our overall business strategy, both domestic and international. We do not maintain our own delivery networks, and instead rely on third‑party package delivery companies. We cannot assure that we will always be able to ensure access to preferred shipping and delivery companies or that these companies will continue to meet our needs or provide reasonable pricing terms. In addition, if the package delivery companies on which we rely on experience delays resulting from inclement weather or other disruptions, we may be unable to maintain products in inventory and deliver products to our customers on a timely basis, which may adversely affect our results of operations and financial condition.

Our government business is subject to funding delays, terminations (including at the government's convenience), reductions, in-sourcing, extensions and moratoriums associated with the government’s budgeting and contracting process. The federal procurement environment is unpredictable and could adversely affect our ability to perform work under new and existing contracts. We have experienced delays in contract awards and funding on our contracts in recent years that have adversely affected our ability to continue existing work and to replace expiring work. Additionally, our government business is subject to the risk that one or more of our potential contracts or contract extensions may be diverted by the contracting agency to a small or disadvantaged or minority-owned business pursuant to set-aside programs administered by the U.S. Small Business Administration, or may be bundled into large multiple award contracts for very large businesses. These risks can potentially have an adverse effect on our revenue growth and profit margins.

The defense industry has experienced, and we expect will continue to experience, significant changes to business practices resulting from greater DoD focus on affordability, efficiencies, business systems, recovery of costs, and a re-prioritization of available defense funds to key areas for future defense spending. The DoD continues to adjust its procurement practices, requirements criteria, and source selection methodology in an ongoing effort to reduce costs, gain efficiencies, and enhance program management and control. We expect the DoD's focus on business practices to impact the contracting environment in which we operate as we and others in the industry adjust our practices to address the DoD's initiatives and the reduced level of spending by the DoD. Depending on how these initiatives are implemented, they could have an impact on our current programs, as well as new business opportunities with the DoD. As a result of certain of these initiatives, we experienced, and may continue to experience, a higher number of audits and/or lengthened periods of time required to close open audits. Such additional or lengthier audits could have a material adverse effect on our business, financial condition and results of operations.

Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and the Department of Labor, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed and any such costs already reimbursed must be refunded.

The scope and rigor of government agency audits and investigations have increased in recent years, resulting in a greater likelihood that an audit or investigation may result in an adverse outcome. We have been subject to unfavorable findings and recommendations from various government agencies from time to time. We expect that government agencies will continue to rigorously audit and investigate us and there may be adverse or disputed findings, resulting in corrective action plans and/or settlements.

If an audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with the government. In addition, we could suffer serious harm to our reputation if

We must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts. A violation of laws or regulations could result in the imposition of fines and penalties or the termination of contracts or debarment from working or bidding on government contracts.

In some instances, these government contract laws and regulations impose terms or rights that are significantly more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the government may terminate any government contract or subcontract at its convenience, as well as for performance default.

A termination for default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. A termination for default could also impact our past performance and ability to obtain new or additional work. In addition, the government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of services provided by us as a subcontractor.

Additionally, our contract work that is performed by our subcontractors is subject to government compliance, performance requirements and financial risks. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor may be jeopardized.

The aviation industry is highly regulated by the FAA and similar regulatory agencies in other countries. Aviation engines, engine accessories and components that we sell must meet certain airworthiness standards established by the FAA or the equivalent agencies in certain other countries. We also operate repair facilities that are licensed by the FAA and equivalent agencies of certain other countries to perform such services. New and more stringent regulations may be adopted in the future that could have an adverse effect on us.

Lastly, border tariffs and new trade deals could have significant effects on our customers and, in turn, on our suppliers, which may impact our business.

Our work includes many manual tasks, including warehousing, shipping and packing of truck parts inventory, maintaining and repairing military and non-military vehicles, aircraft and equipment, and maintaining and overhauling U.S. Navy ships. Some of our work efforts involve the handling of hazardous materials. These services may pose certain challenges that could cause us to be exposed to legal and other liabilities arising from performance issues, work related incidents or employee misconduct that result in damages, injury or death to third parties. Such events could cause us to suffer financial losses and adversely affect our financial condition. See Item 3, "Legal Proceedings” below.

Our operations are subject to and affected by a variety of existing federal, state, and local environmental protection laws and regulations. In addition, we could be affected by future laws or regulations, including those imposed in response to concerns over climate change, other aspects of the environment, or natural resources. We expect to incur future capital and operating costs to comply with current and future environmental laws and regulations, and such costs could be substantial, depending on the future proliferation of environmental rules and regulations and the extent to which we discover currently unknown environmental conditions.

Some of our contract work includes the use of chemical solvents and the handling of hazardous materials to maintain, repair, and refurbish vehicles, aircraft engines, and equipment. This exposes us to certain environmental and pollution risks. Various federal, state, and local environmental laws and regulations impose restrictions on the discharge of pollutants into the environment and establish standards for the transportation, storage, and disposal of toxic and hazardous wastes. Substantial fines, penalties, and criminal sanctions may be imposed for noncompliance, and certain environmental laws impose joint and several "strict liability" for remediation of spills and releases of oil and hazardous substances. Such laws and regulations impose liability upon a party for environmental cleanup and remediation costs and damage without regard to negligence or fault on the part of such party and could expose us to liability for the conduct of or conditions caused by third parties.

The adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations, imposition of new cleanup requirements, discovery of previously unknown or more extensive contamination, litigation involving environmental impacts, our inability to recover related costs under our government contracts, or the financial insolvency of other responsible parties could cause us to incur costs that could have a material adverse effect on our financial position, results of operations, or cash flows.

We face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients' proprietary or classified information.

Some of our contract work includes data management and technology services associated with Social Security Administration and military medical and health records. This exposes us to certain information and technology security risks. If there is a security breach of sensitive data in our custody or for which we provide services, we could possibly be held liable for damages to third parties related to such security breach and incur costs to prevent future incidents. We also provide refurbishment, maintenance and training services support to international clients directly and through the DoD. Foreign nations with interests that conflict with the international clients we support could be motivated to conduct a cyber-attack to access information on these programs.

The payment of cash dividends and repurchases of our common stock are subject to limitations under applicable law and our bank loan agreement, and to the discretion of our board of directors, considered in the context of then current conditions, including our earnings, other operating results, and capital requirements. Declines in asset values or increases in liabilities,

including liabilities associated with benefit plans and assets and liabilities associated with taxes, can reduce stockholders’ equity. A deficit in stockholders’ equity could limit our ability under Delaware law to pay dividends.

The financial markets can experience high levels of volatility and disruption, reducing the availability of credit for certain issuers. We may access these markets from time to time to support certain business activities, including funding acquisitions and refinancing existing indebtedness. We may also access these markets to acquire credit support for our letters of credit. A number of factors could cause us to incur higher borrowing costs and experience greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook, or credit ratings. The occurrence of any or all of these events may adversely affect our ability to fund our operations, meet contractual commitments, make future investments or desirable acquisitions, or respond to competitive challenges.

Our executive and administrative headquarters are located in a five-story building in Alexandria, Virginia, with approximately 95,000 square feet of office space leased by us through April 2027.

We own facilities located in an industrial park in Somerset, Pennsylvania where we conduct our Fleet segment operations. These properties consist of approximately 30 acres of land and buildings totaling approximately 271,000 square feet of office, engineering and warehouse space.

We own two properties that we use to conduct our Aviation segment operations. The first property consists of a building with approximately 30,500 square feet of warehouse and office space in Independence, Kansas that is located on leased municipal airport land. The second property consists of approximately nine acres of land and a building with approximately 60,000 square feet of warehouse and office space in Hebron, Kentucky, acquired in 2019.

We own and operate two facilities in Ladysmith, Virginia. One of these properties consists of approximately 44 acres of land and multiple storage and vehicle maintenance buildings totaling approximately 56,000 square feet of space. The other property consists of 30 acres of land and buildings totaling approximately 13,500 square feet of space. We also own and operate a property in Texarkana, Arkansas consisting of approximately 10 acres of land and a building totaling approximately 79,000 square feet. We use these properties primarily to provide refurbishment services for military equipment, storage and maintenance.

We may have certain claims in the normal course of business, including legal proceedings against us and against other parties. In our opinion, the resolution of these other claims will not have a material adverse effect on our results of operations, financial position or cash flows. However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated.

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

Not applicable.

VSE common stock, par value $0.05 per share, is traded on the NASDAQ Global Select Market ("NASDAQ"), trading symbol, "VSEC."

Pursuant to our bank loan agreement, as discussed in Note (8) "Debt" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K, the payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973 and have increased our dividend each year since 2004.1973.

We have onetwo compensation planplans approved by our stockholders under which our equity securities are authorized for issuance to employees and directors: the 2006 RestrictedPlan and the VSE Corporation 2021 Employee Stock Plan.Purchase Plan ("ESPP"). The following table sets forth the amounts of securities authorized for issuance under the 2006 Restricted Stock Plan and the ESPP as of December 31, 2020.2021.

See Note (10) "Stock-Based Compensation Plans" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding the 2006 Restricted Stock Plan.Plan and the ESPP.

Set forth below is a line graph comparing the cumulative total return of VSE common stock with (a) a performance index for the broad market, the NASDAQ Global Select Market, on which VSE common stock is traded and (b) a the Company's peer group which is comprised of other public companies that operate in industries or lines of businesses similar to ours. These companies include Heico Corporation, Dorman Products, Inc., Navistar International Corporation, Vectrus, Inc., ManTech International Corporation, and CACI International Inc.

The companies in the Peer Group have been weighted based on their relative market capitalization each year. The graph assumes that $100 was invested in our then outstanding common stock, the NASDAQ and the Peer Group index at the beginning of the five-year period and that all dividends were reinvested. The comparisons are not intended to be indicative of future performance of our common stock.

We are a diversified aftermarket products and services company providing repair services, parts distribution, logistics, supply chain management and consulting services for land, sea and air transportation assets in the publicto government and private sectors.commercial markets. We provide logistics and distribution services for legacy systems and equipment and professional and technical services to commercial customers and to the government, including federal civilian agencies and the Department of Defense ("DoD"), federal civilian agencies, and to commercial and other customers.. Our operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul ("MRO") services for vehicle fleet, aviation, and other customers. We also provide vehicle and equipment maintenance and refurbishment, logistics, engineering support, energy services, IT and health care IT solutions, and consulting services. See Item 1, “Business-Customers” above for revenues by customer.

The following discussion should be read along with our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

In January 2019, we acquired 1st Choice Aerospace Inc. ("1st Choice Aerospace"), with operations in Florida and Kentucky. 1st Choice Aerospace provides component MRO services and products for new generation and legacy commercial aircraft families. 1st Choice Aerospace is a subsidiary of VSE Aviation, Inc. under our Aviation segment.

In February 2020, we sold our subsidiary Prime Turbines, LLC ("Prime Turbines") and certain related inventory assets for $20.0 million in cash and a $8.3 million note receivable to be paid over a period from 2020 through 2024. Our Aviation segment discontinued turboprop engine MRO services and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets. Prime Turbines' revenues totaled less than 1% and approximately 4% of our revenue for 2020 and 2019, respectively.

In June 2020, we sold all of the inventory of our subsidiary CT Aerospace, LLC ("CT Aerospace") for a $6.9 million note receivable to be paid to us over a period from 2020 through 2025. Our Aviation segment discontinued sales and leasing of engines and supply of used serviceable engine parts. CT Aerospace's revenues totaled less than 1% and less than 2% of our revenue for 2020 and 2019, respectively.

See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our acquisition and divestitures.

In February 2021, we completed an underwritten public offering of common stock, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million through the issuance of 1,599,097 shares of common stock, including an additionalinclusive of 170,497 shares that were issued pursuant to the underwriters' exercise of their option to purchase additional shares, at ana public offering price of $35.00 per share. We expect to use thereceived net proceeds of approximately $52 million, after deducting underwriting discounts and other offering expenses of approximately $4 million. The net proceeds were used for general corporate purposes, which may include among other things,including financing strategic acquisitions and working capital requirements for new program launches, and repaying outstanding borrowings under our revolving credit facility.launches.

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.”

While current conditions raiseWe continue to closely monitor and address the pandemic and related developments, including the impact to our business, our employees, our customers, and our suppliers. We have been focused and continue to remain focused on protecting the health and safety of our employees, continuing to serve our customers with the highest quality product and repair services, and on positioning the company for long-term success. Our actions taken to lessen the potential for a decline in performance foradverse impacts, both health and economic, have varied depending on the spread of COVID-19 and applicable government requirements, the needs of our Fleet segmentemployees, the needs of our customers and the needs of our Federal and Defense segment, we anticipate limited disruption in demand for the products and services they offer, as comparedbusiness. We will continue to other industries, due toevaluate the nature and extent of their government, defense and e-commerce customer bases. Our parts supply for truck fleets, includingfuture impacts of the United States Postal Service ("USPS") delivery vehicles andCOVID-19 pandemic on our DoD program services, provide support for the essential services conducted by our customers.business.

The ultimate impact of the continued spread of COVID-19 on our operations and financial performance in future periods remains uncertain and will depend on future pandemic-related developments, which are uncertain and cannot be predicted. We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic; however, a prolonged disruption in the demand for our products and services could have an adverse impact on our operating results and cause a material adverse change in our financial condition. We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.

Capital, Financial Resources, Credit Losses,Refer to the discussion under Item 1A, "Risk Factors" of this annual report on Form 10-K with respect to our discussion of trends or uncertainties arising from or impacted by the COVID-19 pandemic. Additionally, a discussion of the impact of COVID-19 on our operations can also be found in the "Business Trends" and Liquidity"Results of Operations" sections below.

The following discussion provides a brief description of some of the key business factors impacting our results of operations detailed by segment.

During the second quarter of 2020 represented2021, we reviewed the bottomassumptions and calculations utilized in the valuation of the revenue decline, as revenueexcess and obsolete inventory and recorded an additional reserve of $23.7 million primarily due to excess and slow-moving quantities of certain Aviation segment inventory, including inventory supporting specific international region distribution programs entered into prior to 2019 at levels higher than our updated forecasts of future demand. The increase in our non-divested Aviation businesses for the third and fourth quarters of 2020 have increased sequentially sinceinventory valuation reserves in the second quarter takes into consideration slower than anticipated air travel recovery in certain regions, primarily in the Asia Pacific region, impacted by the COVID-19 pandemic. While some countries have removed or eased travel restrictions, others have maintained international testing requirements and travel restrictions due to recent rebounds in the number of 2020.cases and low vaccination rates within those countries, which has lowered demand for our products. While the COVID-19 pandemic has slowed demand for certain aviation products in international regions, we do not expect any additional material adverse impact to the carrying value of our inventory. Additionally, we do not anticipate the lower international demand to materially impact the recovery of our Aviation segment, where our distribution business continues to operate with revenues in excess of pre-pandemic levels in 2021.

In the first quarter of 2020, we divested our Prime Turbines subsidiary, a business offering turboprop engine MRO services. In the second quarter of 2020, we sold all of the inventory assets of our CT Aerospace subsidiary, a business offering turboprop engine and engine parts sales. We will no longer offer these services, focusing instead on higher growthhigher-growth component and accessory repair and parts distribution.

We expect that the current disruption in market conditions will result in strategic opportunities for nearnear-and long-term growth for our Aviation segment, given its offerings and long term growth. We intendvalue-added services. As we continue to pursue these opportunities, which may require future investment.experience growth in our distribution business and see recovery in some commercial markets, our long-term focus continues to emphasize investing in businesses and programs that will expand or complement our current portfolio and allow access to new customers.

Our Fleet segment continues to focus on both its coreparts supply and inventory management support for the USPS and DoD customer base anddelivery vehicle fleet while expanding presence to new commercial customer diversification. We are expanding our presencecustomers in both new and existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs to new commercial customers.programs. Commercial customer revenue continues to see a strong growth trend, increasing more than 80% during the fourth quarter of 202072% in 2021 compared to the same periodprior year. We anticipate continued growth of this service offering going forward as we continue to expand to support further commercial market demand. In 2021, commercial revenues were 32% of total Fleet segment revenue compared to 10% in 2019, driven bydemonstrating the continued success of our revenue diversification strategy.

In an effort to support the continued commercial focus for the Fleet segment, we opened a 185% increasenew leased facility of approximately 58,000 square feet to allow for continued process improvements and efficiencies as commercial market demand continues to drive a shift in e-commerce fulfillment revenues. segment growth.

We believe the COVID-19 pandemic is likely to continue to have a limited adverse impact on revenues for this segment of our business, as demand from our commercial truck fleet customers and our e-commerce platforms has remained consistent.continue to grow.

We entered 2020 with aOur Federal and Defense segment continues to focus on redefining VSE in the federal marketplace and investing in business development growing our capability and product offerings, and broadening our range of new business targets to build our contract backlog in current and expandnew markets. Strong revenue performance in our marketsU.S. Department of Justice program and offerings. The anticipatednew revenues from the U.S. Air Force work performed by our HSS acquisition enabled us to successfully grow our 2021 revenue decline experienced byfor this segment despite anticipated declines in 2020 is primarily attributable to the expiration of a largeour U.S. Army contract in January 2020.work due to program completions. We expect thatcontinuously strive to strengthen our refocused business development efforts in 2020portfolio of services to meet the current and future needs of our customers. We are well

will produce revenue growthpositioned in subsequent years. our pursuit of opportunities to expand our services supporting our traditional government clients, and to capture new work to expand or complement our current portfolio.

We expect the COVID-19 pandemic to continue to have a limited adverse impact on revenues for this segment, as the U.S. government is expected to maintain critical DoD preparedness programs.

The following discussion provides a brief description of certain key items that appear in our consolidated financial statements:

Revenues are derived from the delivery of products and from professional and technical services performed through various ordering agreements and contract agreements. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers. Our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost-type, fixed-price, and time and materials. Revenues from these contract types result from work performed on these contracts and from costs for materials and other work-related contract allowable costs. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers.

Costs and operating expenses consist primarily of cost of inventory and material associated with the delivery of our products sold; direct costs, includingand labor material, and supplies used in the performance of our contract work;other indirect costs associated with our direct contract costs;services rendered for customers. Costs and operating expense also include other sales, general and administrative expenses associated with our operating segmentssegment and corporate management;management and certain other costs and charges arising from nonrecurring events outside the ordinary course of business. These costs will generally increase or decrease in conjunction with our level of products sold or contract workservices performed. Costs and operating expenses also include expense for amortization of intangible assets acquired through our acquisitions. Expense for amortization of acquisition related intangible assets is included in the segment results in which the acquisition is included. Segment results also include expense for an allocation of corporate management costs. We reduced controllable costs during 2020 in line with the anticipated decrease in demand resulting from the COVID-19 pandemic.

For the year ended December 31, 2020, Federal and Defense segment bookings increased 18% year-over-year to $270 million, while total funded backlog declined 14% year-over-year to $183 million. The declineChanges in funded backlog was primarily attributableon contracts are sometimes unpredictable due to uncertainties associated with changing government program priorities and availability of funds, which is heavily dependent upon the completioncongressional authorization and appropriation process. Delays in this process may temporarily diminish the availability of certain DoD contracts in 2020. The current management team is focused on revitalizing this business, with an emphasis on growing backlog to promote future revenue growth.funds for ongoing and planned work.

A summary of our bookings and revenues for our Federal and Defense segment for the years ended December 31, 2021, 2020 2019 and 2018,2019, and funded contract backlog for this segment as of December 31, 2021, 2020 2019 and 20182019 is as follows (in millions):

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements. The development and selection of these critical accounting policies have been determined by our management. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties

We account for revenue in accordance with ASC 606. The unit of account in ASC 606 is a performance obligation. At the inception of each contract with a customer, we determine our performance obligations under the contract and the contract's transaction price. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the respective goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For product sales, each product sold to a customer typically represents a distinct performance obligation. Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and therefore are accounted for as part of the existing contract.

Substantially all Fleet segment revenues from the sale of vehicle parts to customers are recognized at the point in time of the transfer of control to the customer. Sales returns and allowances for vehicle parts are not significant.

Our Aviation segment revenues result from the sale of aircraft parts and performance of MRO services for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers.services. Our Aviation segment recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped. Our Aviation segment recognizes revenues for MRO services over time as the services are transferred to the customer. MRO services revenue recognized is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore the services transferred to date. Sales returns and allowances are not significant.

Our Federal and Defense segment revenues result from professional and technical services, which we perform for customers on a contract basis. Revenue is recognized for performance obligations over time as we transfer the services to the customer. The three primary types of contracts used are cost-type, fixed-price and time and materials. Revenues result from work performed on these contracts by our employees and our subcontractors and from costs for materials and other work-related costs allowed under our contracts.

Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned. Variable consideration typically in the form of award fees, is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not

occur, when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment based on current facts and circumstances.

Revenues on fixed-price contracts are recorded as work is performed over the period. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. For such contracts, we estimate total costs at the inception of the contract based on our assumptions of the cost elements required to complete the associated tasks of the contract and assess the effects of the risks on our estimates of total costs to complete the contract. Our cost estimates are based on assumptions that include the complexity of the work, our employee labor costs, the cost of materials and the performance of our subcontractors. These cost estimates are subject to change as we perform under the contract and as a result, the timing of revenues and amount of profit on a contract may change as there are changes in estimated costs to complete the contract. Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes.

Revenues for time and materials contracts are recorded based on the amount for which we have the right to invoice our customers, because the amount directly reflects the value of our work performed for the customer. Revenues are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in performance on the contract. Generally, profits on time and materials contracts result from the difference between the cost of services performed and the contract defined billing rates for these services.

A substantial portionMost of the Federal and Defense segment contract revenues and administrative costs are subject to audit by the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 20172019 and prior years with no material adjustments to our results of operations or financial position. While we maintain reserves to cover the risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.

We account for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and liabilities assumed is allocated to goodwill. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair values becomes available. We will recognize any adjustments to provisional amounts that are identified during the period not to exceed twelve months from the acquisition date (the "measurement period") in which the adjustments are determined. Acquisition costs are expensed as incurred. The results of operations of businesses acquired are included in the consolidated financial statements from their dates of acquisition.

As part of the agreement to acquire certain subsidiaries, we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition. As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach. Under

this approach, a set of potential future subsidiary earnings is estimated based on various revenue growth rate assumptions for each scenario. A probability of likelihood is then assigned to each potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate. The fair value is measured each reporting period subsequent to the acquisition date and any changes are recorded within cost and operating expenses within our consolidated statement of income. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of the contingent consideration accrued.

In the firstfourth quarter of 2021, we performed our annual goodwill test for each of our reporting units. Based on our impairment test, we determined there was no impairment of our goodwill. The fair value of each of our reporting units as of December 31, 2021, exceeded its carrying value.

In the second quarter of 2020, despitedue to the excess fair value identified in our 2019 impairment assessment, market conditions as a result of the COVID-19 pandemic resulted in a significant decline in our market capitalization as well as an overall stock market decline amid market volatility triggeringas a result of the need for an interim goodwill impairment test. WeCOVID-19 pandemic, we performed an interim impairment analysis as of March 31, 2020,test utilizing a qualitative approach forquantitative assessment approach. Based on the assessment, our VSE Aviation reporting units. Under this approach, we reviewed our previous forecastsunit was determined to be impaired and assumptions baseda $30.9 million impairment charge was recognized. Based on our current projectionsannual goodwill impairment test performed in the fourth quarter of 2020, for which a qualitative assessment approach was utilized, it was determined that are subject to various risks and uncertainties, which included the duration and extent of the impact to our business from the COVID-19 pandemic. We concluded it was more likely than not that the fair value exceeded the carrying value of our reporting units with the exception of our VSE Aviation reporting unit, which required a quantitative impairment test. Under the income approach, the fair value of our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate discount rate. We used our updated forecasts which considered recent events to estimate future cash flows. Our forecasts assumed containment of the COVID-19 pandemic to be achieved by mid-2020 with a gradual increase in travel demand beginning mid-to-late 2020 and into 2021, with substantial recovery thereafter. Based on our assessment, it was determined that the fair value of the VSE Aviation reporting unit approximated its carrying value and no impairment charge was required.

Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits, such as net operating loss and capital loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

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

The following discussion of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal 20202021 to fiscal 2019.2020. For a similar discussion that compares fiscal 20192020 to fiscal 2018,2019, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Form 10-K for the fiscal year ended December 31, 2019.2020.

Our revenues decreased by approximately $91increased $89.2 million or 12%%13.5% for the year ended December 31, 20202021 as compared to the prior year. The changeincrease in revenues for this period resulted from decreasesan increase in our Aviation segment andof $82.8 million, an increase in our Federal and Defense segment revenues of approximately $59$15.1 million, and $59 million respectively, and an increasewas partially offset by a decrease in our Fleet segment revenues of approximately $28$8.6 million. See "Segment Operating Results" for a breakdown of our results of operations by segment.

Our costs and operating expenses decreased approximately $85increased $122 million or 12%20% in 20202021 as compared to 2019.the prior year. 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.

In 2020, the business recorded the following related to our Aviation segment (1) a loss on the sale of a business entity and certain assets of $8.2 million, is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of

See "Segment Operating income for 2020 increased approximately $5.0 million for an adjustment to our earn-out obligation and $1.1 millionResults" for a gain on the salebreakdown of certain real estate holdings, and decreased approximately $700 thousand for severance pay related to a reduction in workforce associated with the COVID-19 pandemic induced reduction in demand. Operating income for 2019 decreased approximately $2.3 million for acquisition related and executive transition costs.our results of operations by segment.

Interest expense decreased approximately $334 thousand$1.4 million or 10.6% in 20202021 as compared to 2019the prior year primarily due to a reduction in bank borrowing and lower average interest rates.rate on borrowings outstanding.

    

Our effective tax rate was 15.7% for 2021 and 1,311.0% for 2020 and 20.3% for 2019.2020. The increase in thelower effective tax rate for 20202021 compared to 20192020 primarily resultsresulted from: (1) significantly lower pre-tax book income in the current year,2020, (2) approximately $16.4 million of our goodwill impairment loss that isrecognized in 2020, of which $16.4 million was non-deductible for income tax purposes, and (3) a full valuation allowance established in 2020 to offset the capital loss benefit in connection with our divestiture of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period.

Our tax rate is also affected by discrete items that may occur in any given year but may not be consistent from year to year. In addition to state income taxes, certain federal and state tax credits and permanent book-tax differences such as foreign derived intangible income ("FDII") deduction and unrealized investment income or loss from our COLI plan caused differences between the statutory U.S. federal income tax rate and our effective tax rate.

Revenues for our Aviation segment decreased approximately $59increased $83 million or 26% for 202050% in 2021 as compared to the prior year. Distribution revenues decreased approximately $23 million and repair revenues decreased approximately $36 million. The revenue declines aregrowth is primarily attributable to revenue contributions from recently initiated distribution contract wins, contributions from the impactacquisition of the COVID-19 pandemic on the broader aviation markets that has loweredGlobal Parts, and improved demand from our Aviation customers andin end markets. The increases in revenue were partially offset by the divestiture of Prime Turbines in February of 2020 and the sale of all of CT Aerospace inventory in June 2020. RevenuesWe did not have revenue for thethese two divested businesses were approximatelyin 2021 compared to combined revenues for these divested businesses of $8.9 million for 2020 compared to approximately $38 million for 2019.in 2020.

Costs and operating expenses decreasedincreased approximately $47$102 million or 23% for 202064% in 2021 compared to 2019the prior year primarily due to decreasedimproved demand for our products and services asand a result$23.7 million inventory valuation reserve recognized in the second quarter of the COVID-19 pandemic, cost reduction actions implemented in response to the reduction in demand, and the elimination of costs and expenses associated with our divested businesses.2021. Costs and operating expenses for this segment include expenseexpenses for amortization of intangible assets associated with acquisitions, allocated corporate costs, and charges to expense for valuation adjustments to accrued earn-out obligations associated with acquisitions. Expense for amortization of intangible assets was approximately $8.7 million and $8.8 million for 2021 and $10 million for 2020, and 2019, respectively. Expense for allocated corporate costs was approximately $8.8 million and $5.8 million for 2021 and $6.6 million2020, respectively. There was no expense for 2020 and 2019, respectively. Valuation adjustments to the accrued earn-out obligation decreased costs and operating expenses approximatelyvaluation adjustments in 2021 compared to a reduction in expense of $5.0 million for 2020 and increased costs and operating expenses approximately $1.9 million for 2019.in 2020.

In 2020, a loss on sale of a business entity and certain assets of $8.2 million for 2020 iswas recognized, which comprised of (1) the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture, in the first quarter of 2020, plus the difference between the carrying value on our books of inventory sold that is used to support the operations of our divested Prime Turbines business and the sale price of the inventory upon divestiture, and (2) the difference between the carrying value on our books of our CT Aerospace subsidiary's inventory and the sale price of the inventory upon sale in the second quarter of 2020.sale.

GainIn 2020, a gain on sale of property for 2020 is comprised of approximately $1.1 million was recognized associated with the sale of a Miami, Florida real estate holding.

TheIn 2020, a goodwill and intangible asset impairment of $33.7 million for 2020 iswas recognized, which comprised of a charge to write down the goodwill carrying value of our Aviation businesses due to an anticipated decline in demand for these services caused by the global aviation industry downturn associated with the COVID-19 pandemic and a charge to write down the carrying value of CT Aerospace related intangible assets that were determined to have no residual value or ongoing future cash flows due to the sale of all the subsidiary's inventory.

Revenues for our Fleet segment increased approximately $28decreased $8.6 million or 13% for 2020,3.6% in 2021 as compared to the prior year. Revenues from commercial customers increased approximately $21 million or 93%, driven by growth in our e-commerce fulfillment business. Revenues from sales to DoD customers decreased approximately $4$8 million or 14%39%, and revenues from sales to other government customers increased approximately $11decreased $31 million or 6%. Sales18% primarily due to other government customers included revenue of approximatelya non-recurring $26.6 million for fulfillment of a non-recurring order for COVID-19 related supplies.supplies in 2020. These decreases in revenue were partially offset by increased revenues from commercial customers of $31 million or 72%, driven by growth in our e-commerce fulfillment business.

Costs and operating expenses increased approximately $31decreased $2.4 million or 16.7%1.1%, primarily due to the non-recurring order for COVID-19 related supplies.decreased revenues. Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was approximately$7.1 million for 2021 and $7.4 million for 2020 and approximately $7.9 million for 2019.2020. Expense for allocated corporate costs was approximately$8.5 million for 2021 and $8.0 million for 2020 and approximately $6.2 million for 2019.2020.

Operating income decreased by approximately $3.2$6.2 million or 11% for 202023% in 2021 as compared to the prior year, primarily due to a change in the mix of products sold, including increased commercial customer revenues, an increase in allocated corporate costs, and a $0.7 million inventory valuation reserve recognized in the non-recurring order for COVID-19 related supplies, which had a nominal profit margin.second quarter of 2021.

Revenues for our Federal and Defense segment decreased approximately $59increased $15 million or 19%5.9% and costs and operating expenses decreasedincreased approximately $67$21 million or 23%9% for 2020,2021, as compared to the prior year primarily due to the expiration of a largerevenue performance on our U.S. Army contract in January 2020 and two other U.S. Army contracts in the second half of 2020. Other changes affecting our revenues and costs and operating expenses included increased revenues from existing U.S. Navy and U. S. Army work.

There has been no material adverse change in our financial condition in 2020.2021. Our bank debt decreased approximately $19.3increased $33 million, and our earn-out obligation in connection with the acquisition of 1st Choice Aerospace decreased approximately $36.7 million. Wewe had $175$122 million of unused bank loan commitments as of December 31, 2020.2021. In June 2020,February 2021, we amended our loan agreement with our bankscompleted an underwritten public offering of 1,599,097 shares of common stock, inclusive of 170,497 shares pursuant to provide increased financial covenant flexibility duethe underwriters' exercise of their option to market volatility resulting from the COVID-19 pandemic.purchase additional shares, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million. Changes to other asset and liability accounts were primarily due to our earnings; our level of business activity; the timing and level of inventory purchases to support new distribution programs, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work; the timing of government contract funding awarded; collections from our customers; the saleand our acquisition of a real estate holding in Miami, Florida;HSS and the divestiture of our Prime Turbines business and sale of CT Aerospace inventory.Global Parts.

Cash and cash equivalents decreasedincreased by approximately $356$140 thousand during 2020.2021.

Cash used in operating activities was $17.6 million for 2021 compared to cash provided by operating activities increased approximately $17.8of $35.8 million in 2020 as compared to 2019.for the prior year. The change was attributable tocomprised of a decrease of approximately $42.2 million in cash provided by net income, an increase of approximately $31.4$13.5 million in other non-cash operating activities and an increasea decrease of approximately $28.6$53 million due to changes in the levels of operating assets and liabilities.

Cash used in investing activities was $61.6 million for 2021 compared to cash provided by investing activities was approximatelyof $20.2 million for 2020 compared tothe prior year. Net cash used in investing activities in 2021 related primarily to acquisitions of approximately $122.8 million for 2019.$53.3 million. In 2019, approximately $113 million was used for the acquisition of 1st Choice Aerospace and2020, net cash provided in 2020, approximately $24.2 million was provided byinvesting activities related primarily to proceeds from the divestituredivestitures of our Prime Turbines business and CT Aerospace inventory, and the sale of a Miami, Florida real estate holding.holding, and the sale of other property and equipment of $22.8 million. Other cash used in investing activities consisted primarily of purchases of property and equipment.equipment and proceeds from payments on notes receivable in connection with the divestiture of Prime Turbines and sale of CT Aerospace inventory.

Cash provided by financing activities was $79.4 million for 2021 as compared to cash used in financing activities was approximatelyof $56.3 million in 2020 as compared to cash provided by financing activities of approximately $105.4for the prior year. In 2021, we received $52.0 million in 2019. Financingproceeds from the public underwritten offering of our common stock in February 2021, which is net of underwriters' discounts and issuance costs. In 2020, $31.7 million was used for the payment of an earn-out obligation in connection with the 2019 acquisition of our 1st Choice Aerospace subsidiary. Other financing activities consisted primarily of borrowing and repayment of debt earn-out obligation payments and dividend payments.payment of dividends.

We paid cash dividends totaling approximately $4.0$4.4 million or $0.36$0.37 per share during 2020.in 2021. 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.

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.purchases and by distributor agreement requirements. Our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform, by the timing of large materials purchases and subcontractor efforts used in our contracts, and by delays in the award of contractual coverage and funding and payments. Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.

We also purchase property and equipment; invest in expansion, improvement, and maintenance of our operational and administrative facilities; and invest in the acquisition of other companies.

The term loan requires quarterly installment payments. Our required term loan payments after December 31, 20202021 are approximately $21.6 million in 2021, $22.5$15.0 million in 2022, and $33.9$15.0 million in 2023.2023, and $30.2 million in 2024. The amount of term loan borrowings outstanding as of December 31, 20202021 was $78.0$60.2 million.

The maximum amount of credit available to us under the loan agreement for revolving loans and letters of credit as of December 31, 20202021 was $350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $175.5$226.6 million in revolving loan amounts outstanding and no$1.0 million of letters of credit outstanding as of December 31, 2020. We had approximately $152.0 million in revolving loan amounts outstanding and $54 thousand letters of credit outstanding as of December 31, 2019.2021.

Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or a combination of both facilities.facilities, subject to customary lender commitment approvals. The aggregate limit of incremental increases is $100 million.

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. The applicable LIBOR rate has a floor of 0.75%0.50%. As of December 31, 2020,2021, the LIBOR margin was 3.25% and the base margin was 3.00% and2.25%. The amendment to the baseloan agreement in July 2021 provides procedures for determining a replacement or alternative rate base margin was 1.75%.in the event that LIBOR is unavailable. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

The loan agreement requires us to haveWe use interest rate hedges on a portion of the outstanding term loan until February 6, 2021. We executed compliant interest rate hedges.our debt. As of December 31, 2020,2021, interest rates on portions of our outstanding debt ranged from 3.75%4.00% to 6.32%6.66%, and the effective interest rate on our aggregate outstanding debt was 4.80%4.39%.

The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. The restrictive covenants require that we maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a maximum Total Funded Debt to EBITDA Ratio that varies over future periods as indicated in the table below.

We were in compliance with required ratios and other terms and conditions as of December 31, 2020.2021. We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants; at this time, we expect that we will remain in compliance with such covenants over the next twelve months.