SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~


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

For the ~~Quarter Ended~~quarterly period ended September 30, ~~2017~~ 2022


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

For the Transition Period from _____ to _____

(Exact Name of Registrant as Specified in its Charter)



~~DELAWARE~~	~~54-0649263~~
~~(State or Other Jurisdiction of~~	~~(I.R.S. Employer~~
~~Incorporation or Organization)~~	~~Identification No.)~~



Delaware			54-0649263
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

6348 Walker Lane

Alexandria, ~~Virginia~~

Virginia

~~22310~~

~~www.vsecorp.com~~

22310

(Address of Principal Executive Offices)

(Zip Code)

~~(Webpage)~~

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.05 per share

VSEC

The NASDAQ Global Select Market

~~Securities registered pursuant to Section 12(g) of the Act: None~~

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ 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 ~~[x]~~☒ No ~~[ ]~~☐

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

Large accelerated filer ~~[ ]~~

☐

Accelerated filer ~~[x]~~

☒

Non-accelerated filer ~~[ ]~~

☐

Smaller reporting company ~~[ ]~~

☐

Emerging growth company ~~[ ]~~

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ~~[ ]~~☐ No ~~[x]~~☒

Number of shares of Common Stock outstanding as of October ~~20, 2017: 10,838,435~~

21, 2022: 12,799,678

~~VSE Corporation and Subsidiaries~~

~~Forward Looking~~Forward-Looking Statements

This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute ~~"forward looking~~"forward-looking statements" ~~under federal securities laws.~~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 ~~subject to~~covered by the safe harbor protection provided by applicable securities laws. For discussions identifying some important factors that could cause actual results of VSE Corporation ("VSE," the "Company," "us," "our," or "we") to differ materially from those anticipated in the forward lookingprovisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this ~~report, see VSE's discussions captioned "Business," "Risk~~statement for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, the impact of widespread health developments, such as the ongoing COVID-19 outbreak, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified elsewhere in this document, including in Item 1A, Risk Factors,~~" "Management's~~ Item 2, Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations"~~Operations, and ~~"Notes~~Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to ~~Consolidated Financial Statements" contained~~the risks described in ~~VSE's~~Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2021 filed with the ~~Securities and Exchange Commission ("SEC")~~SEC on March ~~1, 2017 ("2016~~11, 2022 (“2021 Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

Readers are cautioned not to place undue reliance on these ~~forward looking~~forward-looking statements, which reflect management's analysis only as of the date hereof. ~~We undertake~~The Company undertakes no obligation to publicly revise ~~publicly~~ these ~~forward looking~~forward-looking statements to reflect events or circumstances that occur or arise after the date hereof. Readers should carefully review the risk factors described in our 2016 Form 10-K and in the reports and other documents the Company files from time to time with the SEC, including this and other Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K that we have filed or will file with the SEC subsequent to our 2016 Form 10-K.

PART I. Financial Information

Item 1. Financial Statements

VSE Corporation and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands except share and per share amounts)


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

Property and equipment (net of accumulated depreciation of $72 million and $66 million, respectively)	44,564		42,486
Intangible assets (net of accumulated amortization of $120 million and $135 million, respectively)	94,857		108,263
Goodwill	248,837		248,753
Operating lease - right-of-use assets	23,950		27,327
Other assets	31,980		27,736
Total assets	$	957,526	$	918,558

Liabilities and Stockholders' equity
Current liabilities:
Current portion of long-term debt	$	9,162	$	14,162
Accounts payable	119,093		115,064

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

Long-term debt, less current portion	288,531		270,407
Deferred compensation	10,128		14,328
Long-term operating lease obligations	22,947		27,168

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

Commitments and contingencies (Note 6)

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

September 30, 2017 December 31, 2016
Assets
Current assets:
Cash and cash equivalents $ 472
$ 428
Receivables, net 72,874
101,218
Inventories, net 135,525
136,340
Other current assets 24,376
20,477
Total current assets 233,247
258,463

Property and equipment, net 56,857
62,061
Intangible assets, net 114,913
126,926
Goodwill 198,622
198,622
Other assets 15,405
15,767
Total assets $ 619,044
$ 661,839

Liabilities and Stockholders' equity

Current liabilities:

Current portion of long-term debt $ 25,710
$ 21,023
Accounts payable 48,560
93,999
Accrued expenses and other current liabilities 47,852
32,772
Dividends payable —
648
Total current liabilities 122,122
148,442

Long-term debt, less current portion 155,083
193,621
Deferred compensation 15,749
12,751
Long-term lease obligations, less current portion 20,917
21,959
Deferred tax liabilities 27,981
29,872
Total liabilities 341,852
406,645

Commitments and contingencies

Stockholders' equity:

Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 10,838,435 and 10,798,927, respectively 542
540
Additional paid-in capital 24,455
22,876
Retained earnings 252,061
231,733
Accumulated other comprehensive income 134
45
Total stockholders' equity 277,192
255,194
Total liabilities and stockholders' equity $ 619,044
$ 661,839

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Income

(in thousands except share and per share amounts)


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

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

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

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

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

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

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

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

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

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

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

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

For the three months ended September 30, For the nine months ended September 30,
2017 2016 2017 2016
Revenues:
Products $ 82,314
$ 87,060
$ 260,585
$ 254,325
Services 91,850
85,720
304,733
222,564
Total revenues 174,164
172,780
565,318
476,889

Costs and operating expenses:

Products 68,678
70,884
217,606
207,001
Services 88,989
83,599
293,083
215,409
Selling, general and administrative expenses 255
652
1,178
4,173
Amortization of intangible assets 4,005
4,022
12,013
12,063
Total costs and operating expenses 161,927
159,157
523,880
438,646

Operating income 12,237
13,623
41,438
38,243

Interest expense, net 2,347
2,509
7,158
7,406

Income before income taxes 9,890
11,114
34,280
30,837

Provision for income taxes 3,251
4,026
12,541
11,228

Net income $ 6,639
$ 7,088
$ 21,739
$ 19,609

Basic earnings per share $ 0.61
$ 0.66
$ 2.01
$ 1.82

Basic weighted average shares outstanding 10,838,435
10,798,684
10,833,237
10,792,046

Diluted earnings per share $ 0.61
$ 0.65
$ 2.00
$ 1.81

Diluted weighted average shares outstanding 10,856,675
10,826,007
10,855,983
10,819,697

Dividends declared per share $ —
$ —
$ 0.130
$ 0.115

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income


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

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

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

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

For the three months ended September 30, For the nine months ended September 30,
2017 2016 2017 2016
Net income $ 6,639
$ 7,088
$ 21,739
$ 19,609

Change in fair value of interest rate swap agreements 20
337
89
(235 )

Other comprehensive (loss) income, net of tax 20
337
89
(235 )

Comprehensive income $ 6,659
$ 7,425
$ 21,828
$ 19,374

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of ~~Cash Flows~~Stockholders' Equity

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

For the nine months ended September 30,
2017 2016
Cash flows from operating activities:
Net income $ 21,739
$ 19,609
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 19,584
19,515
Deferred taxes (1,947 ) (3,047 )
Stock-based compensation 1,935
1,747
Earn-out obligation adjustment —
(1,329 )
Changes in operating assets and liabilities:

Receivables, net 28,344
(7,636 )
Inventories, net 815
(19,812 )
Other current assets and noncurrent assets (3,392 ) (8,015 )
Accounts payable and deferred compensation (42,441 ) 19,651
Accrued expenses and other current liabilities 15,916
8,639
Long-term lease obligations (1,042 ) (930 )

Net cash provided by operating activities 39,511
28,392

Cash flows from investing activities:

Purchases of property and equipment (2,387 ) (5,438 )
Proceeds from the sale of property and equipment 689
74
Cash paid for acquisitions, net of cash acquired —
(63 )

Net cash used in investing activities (1,698 ) (5,427 )

Cash flows from financing activities:

Borrowings on loan agreement 258,657
231,139
Repayments on loan agreement (292,913 ) (232,608 )
Earn-out obligation payments —
(18,515 )
Payments on capital lease obligations (954 ) (835 )
Payments of taxes for equity transactions (500 ) (499 )
Dividends paid (2,059 ) (1,834 )

Net cash used in financing activities (37,769 ) (23,152 )

Net increase (decrease) in cash and cash equivalents 44
(187 )
Cash and cash equivalents at beginning of period 428
740
Cash and cash equivalents at end of period $ 472
$ 553


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

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


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

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

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity (continued)

(in thousands except per share data)


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


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


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

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows


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



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



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

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

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

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

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

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

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

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

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

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022

Table of Contents

(1) Nature of ~~Business~~Operations and Basis of Presentation

Nature of Operations

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

In February 2021, we completed the issuance and sale of 1,428,600 shares of the Company's common stock, in a public offering at a price of $35.00 per share. The underwriters exercised their option to purchase an additional 170,497 shares. The transaction closed on February 2, 2021. We received net proceeds of approximately $52 million after deducting underwriting discounts, commissions and offering related expenses, which were used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.

Basis of Presentation

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. ~~Accordingly, they~~Therefore, such financial statements do not include all of the information and footnotes required by U.S. ~~generally accepted accounting principles~~GAAP for complete financial ~~statements.~~statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K"). In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2017~~2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017. For further information refer to the consolidated financial statements and footnotes thereto included in our 2016 Form 10-K.~~2022.

The preparation of financial statements in conformity with U.S. ~~generally accepted accounting principles~~GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include ~~accruals for contract disallowance reserves, recoverability~~fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and ~~earn-out obligations.~~contingencies.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

~~Effective January 1, 2017, we adopted the~~ ~~Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)~~ ~~No. 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~, which is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We have elected to account for forfeitures as they occur. ~~The adoption of ASU 2016-09 did not have a significant impact on our consolidated financial position, results of operations or cash flows.~~

~~Stock Split Effected in Form of Stock Dividend~~

In May 2016, our Board of Directors approved a two-for-one stock split effected in the form of a stock dividend ("Stock Split"). The Stock Split had a record date of July 20, 2016 and the stock distribution occurred on August 3, 2016. All references made to share or per share amounts in the accompanying unaudited consolidated financial statements and disclosures have been retroactively adjusted to reflect the Stock Split.

(2) ~~Debt~~Acquisitions

~~We have~~Global Parts Group, Inc.

On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a ~~loan agreement with a group~~purchase price of ~~banks that was amended in January 2015 to fund our Aviation Acquisition and provide working capital~~$40 million, net of cash acquired. The purchase price includes $2 million of contingent consideration, representing the fair value recognized for ~~our continuing operations. The loan agreement, which expires in January 2020, is comprised~~potential future earn-out payments. During the third quarter of ~~a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters~~fiscal 2022, we settled the final payment of ~~credit.~~the obligation. See Note (8) "Fair

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022

Table of Contents

Value Measurements," for additional information regarding the earn-out obligation. Global Parts operating results are included in our Aviation segment.

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

HAECO Special Services, LLC

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

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

Disaggregation of Revenues

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

Revenues by customer for each of our operating segments for the three and nine months ended September 30, ~~2017 are approximately $5.6 million in 2017, $28.1 million in 2018, $30.0 million in 2019,~~2022 were as follows (in thousands):


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


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

Revenues by customer for each of our operating segments for the three and ~~$36.3 million in 2020. The amount of term loan borrowings outstanding as of~~nine months ended September 30, ~~2017 was $100.0 million.~~2021 were as follows (in thousands):


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

~~The maximum amount~~

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Table of ~~credit available~~Contents


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

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


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


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

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


	Three months ended September 30, 2021
	Aviation		Fleet		Federal and Defense		Total
Repair	$	18,714	$	—	$	—	$	18,714
Distribution	54,410		60,268		—		114,678
Cost Plus Contract	—		—		26,775		26,775
Fixed Price Contract	—		—		25,729		25,729
T&M Contract	—		—		14,686		14,686
Total	$	73,124	$	60,268	$	67,190	$	200,582

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Table of Contents


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

Unbilled receivables (contract assets) represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.

We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the ~~loan agreement~~unbilled receivables balance for revolving loans and letters of credit as of September 30, 2017 was $150 million. We may borrow and repay the revolving loan borrowings as our cash flows require or permit. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $82.1 million in revolving loan amounts outstanding and no letters of credit outstanding as of September 30, 2017. We had approximately $100.4 million in revolving loan amounts outstanding and no letters of credit outstanding as of December 31, 2016.

Performance Obligations

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

As of September 30, 2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $199 million. The performance obligations expected to be satisfied within one year and greater than one year are 96% and 4%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which ~~are being amortized over a five-year period through July 2020. The fair value~~we recognize revenue in proportion to the amount we have the right to invoice for services performed.

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

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Table of Contents

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


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

We had letters of credit outstanding ~~debt~~totaling $1.2 million and $1.0 million as of September 30, 2017 under our bank loan facilities approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.2022 and December 31, 2021, respectively.

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. As of September 30, ~~2017,~~2022, the LIBOR margin was 2.25% and the base margin was ~~2.00% and the base rate base margin was 0.75%~~6.25%. The ~~base~~ margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

Interest expense incurred on bank loan borrowings, ~~and~~inclusive of the effect of interest rate hedges, was ~~approximately $1.8~~$4.6 million and ~~$2.0~~$2.7 million for the ~~quarters~~three months ended September 30, ~~2017~~2022 and ~~2016, respectively. Interest expense incurred on bank loan borrowings~~2021, respectively, and ~~interest rate hedges was approximately $5.6~~$11.7 millionand~~$5.8~~ $7.9 millionfor the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, respectively.

~~The~~Our required term and revolver loan agreement contains collateral requirements to secure our borrowings and other loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions, and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. principal payments as of September 30, 2022 are as follows (in thousands):


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

We were in compliance with required ratios and other terms and conditions atunder our loan agreement as of September 30, ~~2017.~~2022.

~~(3)~~On October 7, 2022, we entered into a fourth amendment to our loan agreement which, among other things, (i) extended the maturity date from July 23, 2024 to October 7, 2025; (ii) reset the aggregate principal amount of the term loan to $100.0 million, (iii) modified the quarterly amortization payments on the term loan from $3.75 million to $2.50 million, (iv) increased the maximum Total Funded Debt to EBITDA Ratio from 4.25x to 4.50x, with such ratios decreasing thereafter, (v) changed the benchmark rate from LIBOR to Secured Overnight Financing Rate (SOFR) with a SOFR floor of 0.00%; and (vi) modified pricing to account for the change from LIBOR to SOFR.

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

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Table of Contents

(5) Earnings Per Share

Basic earnings per share ("EPS") ~~has been~~is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for anthe assumed vesting of ~~restricted~~outstanding stock-based awards. Antidilutive common stock ~~awards.~~

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Basic weighted average common shares outstanding 10,838,435
10,798,684
10,833,237
10,792,046
Effect of dilutive shares 18,240
27,323
22,746
27,651
Diluted weighted average common shares outstanding 10,856,675
10,826,007
10,855,983
10,819,697

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

equivalents excluded from the diluted earnings per share calculation for the three and nine month ended September 30, ~~2017~~2022 and 2021 were not material.


	Three months ended September 30,		Nine months ended September 30,
		2022	2021	2022	2021
Basic weighted average common shares outstanding		12,797,727	12,704,165	12,772,731	12,496,646
Effect of dilutive shares		36,357	70,471	43,588	76,430
Diluted weighted average common shares outstanding		12,834,084	12,774,636	12,816,319	12,573,076

~~(4)~~(6) Commitments and Contingencies

~~Hawaii Litigation~~

~~Aviation Litigation~~

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

~~(5)~~(7) Business Segments and Customer Information

Beginning in 2017, we changed our structure and as a result our former IT, Energy and Management Consulting Group is now combined with our Federal Services Group. Consequently, our segment financial information for 2016 has been restated to reflect such change. Management of our business operations is conducted under three reportable operating segments:

~~Supply Chain Management Group~~ – Aviation

Our ~~Supply Chain Management Group supplies vehicle~~Aviation segment provides aftermarket repair and distribution services to commercial, business and general aviation, cargo, military and defense, and rotorcraft customers globally. Core services include parts ~~primarily through a Managed Inventory Program ("MIP")~~distribution, engine accessory maintenance, MRO services, rotable exchange and ~~direct sales~~supply chain services.

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

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022

Table of Contents

~~Aviation Group~~ – Our ~~Aviation Group~~Federal and Defense segment provides ~~maintenance, repair~~aftermarket MRO and ~~overhaul ("MRO")~~logistics services ~~parts supply~~to improve operational readiness and ~~distribution,~~extend the life cycle of military vehicles, ships and aircraft for the DoD, federal agencies and international defense customers. Core services include procurement; supply chain ~~solutions for general aviation jet~~management; vehicle, maritime and aircraft ~~engines~~sustainment services; base operations support; IT services and ~~engine accessories.~~energy consulting.

~~Federal Services Group~~ – Our Federal Services Group provides engineering, industrial, logistics, foreign military sales, legacy equipment sustainment services, IT and technical and consulting services primarily to the United States Department of Defense ("DoD") and other government agencies.


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

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

Three months Nine months
2017 2016 2017 2016
Revenues:
Supply Chain Management Group $ 51,174
$ 51,152
$ 163,663
$ 152,080
Aviation Group 31,059
34,688
96,003
100,298
Federal Services Group 91,931
86,940
305,652
224,511
Total revenues $ 174,164
$ 172,780
$ 565,318
$ 476,889

Operating income:

Supply Chain Management Group $ 8,178
$ 8,749
$ 25,611
$ 26,600
Aviation Group 1,983
3,950
6,898
9,896
Federal Services Group 2,593
1,650
10,503
5,041
Corporate/unallocated expenses (517 ) (726 ) (1,574 ) (3,294 )
Operating income $ 12,237
$ 13,623
$ 41,438
$ 38,243

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~Customer Information~~

Three months ended September 30, Nine months ended September 30,
Customer 2017 % 2016 % 2017 % 2016 %
U.S. Postal Service $ 43,833
25.2 % $ 44,433
25.7 % $ 136,261
24.1 % $ 135,025
28.3 %

U.S. Navy 38,895
22.3 % 43,424
25.1 % 143,421
25.4 % 109,884
23.0 %
U.S. Army 45,717
26.3 % 40,155
23.3 % 150,217
26.6 % 96,656
20.2 %
U.S. Air Force 2,967
1.7 % 757
0.4 % 5,807
1.0 % 2,614
0.6 %
Total - DoD 87,579
50.3 % 84,336
48.8 % 299,445
53.0 % 209,154
43.8 %

Commercial aviation 30,637
17.6 % 32,489
18.8 % 94,706
16.8 % 98,099
20.6 %
Other commercial 2,833
1.6 % 2,720
1.6 % 9,270
1.6 % 7,807
1.6 %
Total - Commercial 33,470
19.2 % 35,209
20.4 % 103,976
18.4 % 105,906
22.2 %

Other civilian agencies 9,282
5.3 % 8,802
5.1 % 25,636
4.5 % 26,804
5.7 %

Total $ 174,164
100 % $ 172,780
100 % $ 565,318
100 % $ 476,889
100 %

~~(6) Goodwill and Intangible Assets~~

Supply Chain Management Federal Services Aviation Total
Balance as of December 31, 2016 $ 63,190
$ 30,883
$ 104,549
$ 198,622

Balance as of September 30, 2017 $ 63,190
$ 30,883
$ 104,549
$ 198,622

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

Cost Accumulated Amortization
Accumulated
Impairment Loss
Net Intangible Assets
September 30, 2017
Contract and customer-related $ 173,094
$ (69,653 ) $ (1,025 ) $ 102,416
Acquired technologies 12,400
(7,124 ) —
5,276
Trade names 16,670
(9,449 ) —
7,221
Total $ 202,164
$ (86,226 ) $ (1,025 ) $ 114,913

December 31, 2016

Contract and customer-related $ 173,094
$ (59,799 ) $ (1,025 ) $ 112,270
Acquired technologies 12,400
(6,278 ) —
6,122
Trade names 16,670
(8,136 ) —
8,534
Total $ 202,164
$ (74,213 ) $ (1,025 ) $ 126,926

~~(7)~~(8) Fair Value Measurements

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021 and the level they fall within the fair value hierarchy (in thousands):


Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value September 30, 2022		Fair Value December 31, 2021
Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	515	$	598
Interest rate swaps	Other assets	Level 2	$	7,131	$	—
Interest rate swaps	Accrued expenses and other current liabilities	Level 2	$	—	$	234
Earn-out obligation - short-term	Accrued expenses and other current liabilities	Level 3	$	—	$	1,000
Earn-out obligation - long-term	Other long-term liabilities	Level 3	$	—	$	250

Amounts Recorded at Fair Value Financial Statement Classification Fair Value Hierarchy Fair Value September 30, 2017 Fair Value December 31, 2016
Non-COLI assets held in Deferred Supplemental Compensation Plan Other assets Level 1 $ 367
$ 299
Interest rate swaps Other current assets Level 2 $ 218
$ 73

Non-Company Owned Life Insurance ("COLI")

Non-COLI assets held in ~~the~~our deferred supplemental ~~compensation~~compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in fair value are recorded as selling, general and administrative expenses.

~~We account for our interest rate swap agreements under the provisions of ASC 815,~~ ~~Derivatives and Hedging~~, and have determined that our swap agreements qualify as highly effective cash flow hedges. The fair value of the swap agreements was approximately $218 thousand and $73 thousand at September 30, 2017 and December 31, 2016, respectively. The offset, net of an income tax effect of approximately $84 thousand and $28 thousand, was included in accumulated other comprehensive income in the accompanying balance sheets as of September 30, 2017 and December 31, 2016, respectively. The amounts paid and received on the swap agreements

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2022

Table of Contents

Interest Rate Swap Derivatives

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

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

Contingent Consideration

In connection with the acquisition of Global Parts in July 2021, we were required to pay earn-out obligation payments of up to $2.0 million should Global Parts meet certain financial targets during the twelve months following the acquisition and meet a certain milestone event on or before March 2023. Final settlement of the obligation was made during the three months ended September 30, 2022. Changes in the earn-out obligation measured at fair value ~~of the swap agreements based~~ on a ~~valuation model~~recurring basis using ~~primarily observable market data inputs.~~

~~(8) Income Taxes~~


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

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

Other Financial Instruments

The carrying amounts of cash and ~~2016, respectively.~~ cash equivalents, receivables, accounts payable and amounts included in other current assets and accrued expenses and other current liabilities that meet the definition of a financial instrument approximate fair value due to their relatively short maturity. The carrying value of our outstanding debt obligations approximates its fair value. The fair value of long-term debt is calculated using Level 2 inputs based on interest rates available for debt with terms and maturities similar to our existing debt arrangements.

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

~~(9) Recently Issued Accounting Pronouncements~~

Table of ~~when we recognize revenues and costs on~~ ~~MRO services for aviation clients and~~ certain fixed price delivery contracts will change from the date of delivery to recognition over time as progress is made to satisfy the performance obligation, and (3) the pattern in which we recognize revenue on certain fixed price services contracts may change from a straight-line basis over the contract period to measuring progress using input measures, such as costs incurred. While we have identified these areas of change under the new standard, we are also identifying and implementing changes to our business processes, systems and controls to support adoption of the new standard in 2018. The new standard requires additional detailed disclosures regarding the company’s contracts with customers, including disclosure of remaining unsatisfied performance obligations, in the first quarter 2018 which we are continuing to assess. The new standard will be effective beginning January 1, 2018 and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. The cumulative catch-up adjustment that will be recorded through shareholders’ equity on January 1, 2018 is still being quantified. We will continue evaluating the impact of the standard on our contract portfolio through the date of adoption.Contents

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

~~Executive~~Business Overview

We are a diversified aftermarket products and services company ~~that assists our clients in sustaining, extending the service life~~providing repair services, parts distribution, logistics, supply chain management and ~~improving the performance of their~~consulting services for land, sea and air transportation ~~equipment~~assets to government and ~~other assets and systems.~~commercial markets. We provide ~~sustainment~~logistics and distribution services for ~~mission critical~~ legacy systems and equipment and professional and technical services to commercial customer and to the ~~United States Government (the "government"),~~government, including federal and civilian agencies and the ~~United States~~ Department of Defense ("DoD")~~, the United States Postal Service ("USPS"), and other federal civilian agencies, commercial customers and other customers. Our largest customers are the DoD and USPS.~~. Our operations include supply chain management solutions, ~~and~~ parts supply ~~for vehicle fleets; parts supply~~and distribution, and maintenance, repair and overhaul ~~(“MRO”~~("MRO") services for vehicle fleet, aviation, ~~clients;~~and other customers. We also provide vehicle and equipment maintenance and ~~refurbishment; logistics; engineering;~~refurbishment, logistics, engineering support, energy ~~and environmental services;~~services, IT and health care IT ~~solutions;~~solutions, and consulting services.

~~Organization and Segments~~

Our operations are conducted within three reportable segments aligned with our ~~management groups: 1) Supply Chain Management; 2)~~operating segments: (1) Aviation; (2) Fleet; and 3)(3) Federal ~~Services. Beginning~~and Defense. We provide more information about each of these reportable segments under Item 1, "Business-History and Organization” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K").

Recent Acquisitions

See Note (2) "Acquisitions" to our Consolidated Financial Statements included in ~~2017,~~Item 1 of this filing and our 2021 Form 10-K for additional information regarding our recent acquisitions.

Impact of the COVID-19 Pandemic

The coronavirus disease (COVID-19) pandemic continues to negatively affect the global economy, our business and operations, supply chains, and the industries in which we operate. However, we have ~~combined~~seen continued improvement in our ~~former IT, Energy~~operating results during the nine months ended September 30, 2022, which we expect to continue through the remainder of 2022. All of our repair, distribution and ~~Management Consulting Group with our Federal Services Group.~~

~~Supply Chain Management Group~~ - ~~Our Supply Chain Management Group provides sourcing, acquisition, scheduling, transportation, shipping, logistics, data management,~~base operations facilities remain open and ~~other~~operational, and we continue to deliver products and services to ~~assist~~customers without interruption. We continue to closely monitor and address the pandemic and related developments, including the impact to our ~~clients with supply chain management efforts. Operations~~business, our employees, our customers, and our suppliers.

Business Trends

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

Aviation Segment

The COVID-19 pandemic impacted our ~~wholly owned subsidiary Wheeler Bros., Inc., which supports~~Aviation segment operations, particularly in 2020 and 2021. We have seen continued improvement in our quarterly revenue results due to the ~~USPS, commercial truck fleets, and DoD with fleet management and sustainment solutions, managed inventory services, and other vehicle parts solutions. The primary revenue source for this group is~~recovery in demand since the ~~USPS Managed Inventory Program ("MIP") that supplies vehicle parts and mission critical supply chain support for~~peak of the ~~USPS truck fleet.~~

~~Aviation Group~~ - COVID-19 pandemic impact during the second quarter of 2020. Our Aviation ~~Group provides parts supply and~~segment results have benefited from strong performance following prior investments in growth initiatives that have produced positive results with quarterly revenue of $103 million, a 40% increase year-over-year.

Growth in our distribution ~~supply chain solutions, and MRO~~ services ~~for~~has been driven by several new distribution initiatives in providing “tip-to-tail” product-line management capabilities, while our repair business has benefited from a broader recovery in commercial market activity, together with share gains within the business & general aviation jet aircraft engines and engine accessories. This group offers a range of complimentary services and supplies to a diversified client base of corporate and private aircraft owners, regional airlines, aviation manufacturers, other aviation MRO providers, cargo transporters, and agricultural clients.

~~Federal Services Group~~ - Our Federal Services Group provides foreign military sales services, refurbishment services to extend and enhance the life of existing vehicles and equipment, fleet-wide ship and aircraft support, aircraft sustainment and maintenance, and other technical, management, engineering, logistics, maintenance, configuration management, prototyping, technology, and field support services to the U.S. Navy and Marine Corps, U.S. Army and Army Reserve, U.S. Air Force, and other customers. Significant work efforts for this group include assistance to the U.S. Navy in executing its Foreign Military Sales (“~~FMS”~~B&GA”) Program for surface ships sold, leased or granted to foreign countries, our Red River Army Depot Equipment Related Services Program (“RRAD ERS”) providing on-site logistics support for Red River Army Depot at Texarkana, Texas, our Fort Benning Logistics Support Services Program supporting base operations and logistics at Fort Benning, Georgia, our U.S. Army Reserve vehicle refurbishment program and various vehicle and equipment refurbishment, maintenance and sustainment programs for U.S. Army commands, and various task orders under the U.S. Air Force Contract Field Teams (“CFT”) Program.

Beginning in 2017, our Federal Services Group includes our wholly owned subsidiaries Energetics Incorporated ("Energetics") and Akimeka, LLC ("Akimeka"). Energetics provides technical, policy, business, and management support in areas of energy modernization, clean and efficient energy, climate change mitigation, and infrastructure protection. Akimeka offers solutions in fields that include medical logistics, medical command and control, e-health, information assurance, public safety, enterprise architecture development, business continuity, program and portfolio management, network IT services, cloud managed services, systems design and integration, quality assurance services, and product and process improvement services. Energetics and Akimeka clients include various DoD and federal civilian agencies, including the United States Departments of Energy, Homeland Security, Commerce, Treasury, and Interior; the Social Security Administration; the National Institutes of Health; customers in the military health system; and other government agencies and commercial clients.

Concentration of Revenues
(dollars in thousands)
For the nine months ended September 30,
2017 2016
Source of Revenue Revenues % Revenues %
USPS $ 136,261
24 $ 135,025
28
FMS Program 130,306
23 95,258
20
Other 298,751
53 246,606
52
Total revenues $ 565,318
100 $ 476,889
100

~~Management Outlook~~

Our sharpened focus on longer term growth in recent years has produced year over year increases in consolidated revenue through the third quarter of 2017. Our Federal Services Group has been the primary driver of our 2017 increases,market. Market recovery and our ~~Supply Chain Management Group has also contributed to the increase. We are pursuing~~growth initiatives have resulted in ~~each of our groups to sustain our growth.~~

~~Revenue on our FMS Program for~~a 105% and 38% year-over-year increase in distribution and repair revenue, respectively, during the first nine months of ~~2017 increased 37%~~2022 compared to the same period for the prior year.

We have recently secured key multi-year distribution agreements to both domestic and new international geographic markets. We believe the new distribution initiatives will provide sustainable and recurring revenue with growth potential that will enhance our future results. The acquisition of Global Parts, in July 2021, broadens our product lines and client base, and we see opportunities to strategically align offerings with both domestic and international markets.

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

-18-

Table of Contents

Fleet Segment

Our Fleet segment continues to increase revenue from commercial fleet customers and e-commerce fulfillment sales as the business continues to progress towards becoming a more diversified enterprise. We continue to execute on our revenue diversification strategy as we capture new customers and increase revenue within e-commerce fulfillment. To support continued e-commerce and e-commerce fulfillment growth, the Fleet segment announced plans to open a new distribution warehouse and e-commerce fulfillment center of excellence in Olive Branch, Mississippi (in the greater Memphis, Tennessee area). This new center of excellence will double the size of Fleet's current warehouse footprint while extending Fleet’s geographic reach and expanding product offerings for customers. Operations are expected to commence at this new location in early 2023 and will enable Fleet to successfully meet the rapidly growing demand for the e-commerce fulfillment business. Commercial customer revenue continues to see a strong growth trend, increasing approximately 23% and 50% during the quarter and first nine months of 2022, respectively, compared to the same periods in the prior year. Commercial revenues were 40% of total Fleet segment revenue for the nine months ended September 30, 2022 compared to 30% for the same period in the prior year, ~~over year, resulting~~demonstrating the continued success of our strategic multi-year diversification strategy.

Federal and Defense Segment

Our Federal and Defense segment continues to focus on building our contract backlog and optimizing legacy programs. We recently announced a transition of leadership for our Federal and Defense segment as we work to grow our business and mitigate the impacts of delays in ~~part from~~both the ~~transfer~~timing of ~~two frigates~~contract awards and the funding process. Strong revenue performance in U.S Navy work enabled us to ~~Taiwan completed~~successfully grow our third quarter revenue for this segment despite anticipated declines in ~~March 2017, and from intensified marketing efforts to support FMS client countries. Revenue from our equipment sustainment, refurbishment, logistics support, and parts supply services for~~ our U.S. Army ~~clients also increased.~~ work due to program completions. We expect that our focused business development efforts will drive new revenue additions in subsequent years.

Results of Operations

Consolidated Results of Operations

Our ~~contract funded backlog remains strong, which we believe should continue~~consolidated results of operations are as follows (in thousands):


	Three months ended September 30,								Nine months ended September 30,
	2022		2021		Change ($)		Change (%)			2022		2021		Change ($)		Change (%)
Revenues	$	242,487	$	200,582	$	41,905	21	%		$	715,439	$	540,675	$	174,764	32	%
Costs and operating expenses	225,215		186,690		38,525		21	%		672,102		529,894		142,208		27	%
Operating income	17,272		13,892		3,380		24	%		43,337		10,781		32,556		302	%
Interest expense, net	4,818		2,780		2,038		73	%		12,299		8,476		3,823		45	%
Income before income taxes	12,454		11,112		1,342		12	%		31,038		2,305		28,733		1,247	%
Provision for income taxes	3,035		2,091		944		45	%		7,827		539		7,288		1,352	%
Net income	$	9,419	$	9,021	$	398	4	%		$	23,211	$	1,766	$	21,445	1,214	%

Revenues.Revenues increased for the three months ended September 30, 2022 as compared to ~~benefit~~the same period in the prior year primarily attributable to revenue growth within each of our ~~DoD revenues. We are well positioned in~~segments: $29.5 million within our ~~pursuit of opportunities to expand~~Aviation segment, $4.5 million within our ~~services supporting our traditional government clients,~~Fleet segment, and ~~to capture new work for which~~$7.9 million within our Federal ~~Services Group can team with~~and Defense segment. See "Segment Operating Results" section below for further discussion of revenues by segment.

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

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

-19-

Table of Contents

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

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

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

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

Segment Operating Results

Aviation Segment Results

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


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


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

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

~~We have directed resources and management efforts~~Revenues increased for the nine months ended September 30, 2022 as compared to ~~diversify and expand our Supply Chain Management Group operational capacity, market channels, and client base. It is notable that~~the same period in the prior year primarily due to distribution revenue growth of $114.7 million, or 105%, driven by contributions from recently initiated distribution contract wins and contributions from the acquisition of Global Parts, and repair revenue growth of $21.3 million, or 38%, driven by improved demand in end markets as a result of market recovery.

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

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

-20-

Table of Contents

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

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

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

Fleet Segment Results

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


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


Profit percentage			10.1		%				8.9		%																9.3		%				8.7		%

Revenues.Revenues increased for the three months ended September 30, 2022 as compared to the same period in the prior year as a result of increased revenue from sales to ~~the DoD~~commercial customers of $4.7 million, or 22.7% and ~~increased supply chain and inventory management support for commercial vehicle fleets. Parts~~sales to other government customers of $2.3 million, or 6.3%, partially offset by anticipated decreased sales to DoD customers of $2.6 million or 93.3%.

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

Costs and Operating Expenses.Costs and operating expenses increased ~~83%~~for the three months ended September 30, 2022 as compared to the same period in the prior year primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was $1.5 million for the three months ended September 30, 2022 and $1.8 million for the same period in the prior year. Expense for allocated corporate costs was $2.0 million for the three months ended September 30, 2022 and $2.1 million for the same period in the prior year.

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

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

-21-

Table of Contents

Federal and Defense Segment Results

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


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


Profit percentage			2.6		%				8.0		%																1.7		%				8.6		%

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

Costs and operating expenses increased ~~25%~~for the nine months ended September 30, 2022 as compared to the same period in the prior year primarily due to increases in revenue, an increase in the proportion of cost-type contracts within our contract mix, and a $3.5 million loss recognized for the nine months ended September 30, 2022 on a ~~year~~fixed-price, non-DoD contract with a foreign customer driven by higher than anticipated supply chain material and labor costs.

Operating income. Operating income decreased for the three months ended September 30, 2022 as compared to ~~date basis through~~ the third quarter of 2017. Through our direct marketing efforts, we are capturing and on-boarding new commercial customers at an accelerated pace. Our commercial client base now includes companies in food distribution, oil field services, waste management, linen and uniform, commercial long haul shipping, bus transportation, and other clients that have vehicle fleets required to meet mission critical delivery or service schedules. We are also capturing new customers and increasing revenue using e-commerce solutions. We aresame period in the ~~beginning stages~~prior year primarily due to the completion of a U.S. Army program and a shift in our ~~relationship with many~~contract mix to a larger portion of ~~these new clients,~~cost-type contracts, which generally provide lower profit margins than fixed-price and ~~we look forward~~T&M contract types.

Operating income decreased for the nine months ended September 30, 2022 as compared to ~~further developing these relationships~~the same period in the prior year primarily due to the completion of a U.S. Army program, an increase in the portion of cost-type contracts, and ~~adding new clients to grow our revenues from commercial markets.~~

~~We continue to closely monitor~~ the USPS delivery vehicle procurement efforts and are positioning ourselves to support both newly procured vehicles as they are placed in service and old vehicles that remain in service. Overall, USPS buying levels of parts and services provided by our Supply Chain Management Group to support the current vehicle fleet have been steady. While we cannot predict with certainty the impact of the USPS new delivery vehicle deployment on our future revenues, we believe that our years of service and knowledge of this client’s needs strategically position us to continue to serve as a key strategic vehicle fleet sustainment partner. We will remain agile and support this client during its complex vehicle procurement initiative.

Our Aviation Group is pursuing multiple opportunities to promote future revenue growth. This includes teaming with our Federal Services Group to provide aviation related logistics, material sourcing, and maintenance, repair and overhaul (“MRO”) support to our U.S. and international government client base, and extending our gas turbine MRO competency to maritime applications. We are pursuing new aviation supply chain and distribution agreements with key original equipment manufacturers and adding new MRO engine programs to our offerings. We are expanding our geographic distribution footprint and strengthening our international business development efforts through key strategic relationships and hiring initiatives.

~~We have reduced our bank debt~~contract loss recognized during the ~~second and third quarters of 2017 by approximately $35 million and our leverage ratio has declined. We anticipate further progress in this regard~~period as ~~we go forward.~~described above.

Bookings and Funded Backlog

Our funded backlog represents the estimated remaining value of work to be performed under firm contracts. Bookings for our Aviation and Fleet segments occur at the time of sale. Accordingly, our Aviation and Fleet segments do not generally have funded contract backlog and backlog is not an indicator of their potential future revenues. Revenues for federal government contract work performed by our Federal ~~Services Group~~and Defense segment depend on contract funding (“("bookings”), and bookings generally occur when contract funding documentation is received. Funded contract backlog is an indicator of potential future revenue. While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.

A summary of our bookings and revenues for our Federal ~~Services Group~~and Defense segment for the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, and funded contract backlog as of September 30, ~~2017~~2022 and ~~2016 was~~2021 is as follows (in millions):


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

2017 2016
Bookings $ 398
$ 405
Revenues $ 306
$ 225
Funded Contract Backlog $ 403
$ 400

~~Recently Issued Accounting Pronouncements~~

For ~~a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see~~ ~~Recently Issued Accounting Pronouncements~~ ~~in Note 9 of the Notes to our Unaudited Consolidated Financial Statements in this report.~~

~~Critical Accounting Policies~~

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. See our 2016 Form 10-K for a full discussion of our critical accounting policies.

~~Revenue by Contract Type~~

Federal government contract work is performed by our Federal Services Group under three general government contract types. Revenues of our Supply Chain Management and Aviation groups are generated under ordering or sales agreements, and this revenue is not classified by government contract type. Our revenues are classified as follows (dollars in thousands):

Nine months ended September 30,
Contract Type 2017 % 2016 %
Cost-type $ 163,275
29 $ 122,892
26
Fixed-price 72,941
13 52,895
11
Time and materials 69,436
12 48,724
10
Total Federal Services revenues 305,652
54 224,511
47
Supply Chain Management and Aviation revenues 259,666
46 252,378
53
Total revenues $ 565,318
100 $ 476,889
100

~~Goodwill and Intangible Assets~~

Goodwill is subject to a review for impairment at least annually. We perform an annual review of goodwill for impairment during the fourth quarter and whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable. We estimate the fair value of our reporting units using a weighting of fair values derived from the income approach, market approach, and comparative transactions approach with the heaviest weighting placed on the income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows.

In the fourth quarter of 2016, we performed our annual goodwill impairment analysis for each of our reporting units with goodwill. The results of the impairment analysis indicated that our reporting units had fair values substantially in excess of their carrying values with the exception of our Akimeka and VSE Aviation reporting units.

The fair value of our Akimeka reporting unit, within our Federal Services Group, exceeded its carrying value by approximately 7% as of our 2016 annual goodwill impairment analysis. Akimeka had experienced a reduction in services performed in prior years due to a decline in services ordered by clients on contracts and a loss of work performed on expiring contracts for which the follow-on work was often awarded to small businesses as set-aside contracts. Based on these circumstances and Akimeka's revenues and operating income for the first nine months of 2017, we performed an interim goodwill impairment during the third quarter. The result of this impairment analysis shows that Akimeka’s fair value exceeded its carrying value by approximately 12%. Based on the results of our analysis, our assessment is that we remain at risk of a future goodwill impairment if there is further deterioration of projected cash flows or negative changes in market factors, such as an increase in the weighted average cost of capital used in the income approach or decreases in the market multiples used in the market approach. The carrying value of Akimeka as of September 30, 2017 included goodwill of approximately $29.8 million.

The fair value of our VSE Aviation reporting unit, within our Aviation Group, exceeded its carrying value by approximately 10% as of our 2016 annual goodwill impairment analysis. While there has not been a significant contract or customer loss, VSE Aviation’s revenue and operating income for the first nine months of 2017 did not meet our cash flow projections utilized in our 2016 annual impairment analysis. This decrease was primarily related to a decreased demand for new parts and slower than anticipated development of new business opportunities. We believe that these conditions are temporary and that the overall outlook for our Aviation business remains consistent with our long-term projections. However, based on the current operating performance, we have determined that VSE Aviation is at risk of a future goodwill impairment if there are future declines in our projections or if we are unsuccessful in implementing our revenue growth plans. Additionally, the fair value could be adversely affected by other market factors such as an increase in the weighted average cost of capital used in the income approach or decreases in the market multiples used in the market approach. The carrying value of our VSE Aviation reporting unit included goodwill of approximately $104.5 million as of September 30, 2017.

~~As of September 30, 2017, we have no intangible assets with indefinite lives and we had an aggregate of approximately $199 million of goodwill associated with our acquisitions.~~

~~Results of Operations~~

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

Three months Nine months Change
ended September 30, ended September 30, Three Nine
2017 2016 2017 2016 Months Months
Revenues $ 174,164
$ 172,780
$ 565,318
$ 476,889
$ 1,384
$ 88,429
Costs and operating expenses 161,927
159,157
523,880
438,646
2,770
85,234
Operating income 12,237
13,623
41,438
38,243
(1,386 ) 3,195
Interest expense, net 2,347
2,509
7,158
7,406
(162 ) (248 )
Income before income taxes 9,890
11,114
34,280
30,837
(1,224 ) 3,443
Provision for income taxes 3,251
4,026
12,541
11,228
(775 ) 1,313
Net income $ 6,639
$ 7,088
$ 21,739
$ 19,609
$ (449 ) $ 2,130

Our revenues increased approximately $1 million or 1%, for the third quarter of 2017, and approximately $88 million or 19% for the first nine months of 2017, as compared to the same periods of 2016. Revenues from our Federal Services Group increased for the third quarter and for the first nine months. Revenues from our Supply Chain Management Group were substantially unchanged for the third quarter and increased for the first nine months. Revenues from our Aviation Group decreased for the third quarter and for the first nine months.

Costs and operating expenses consist primarily of cost of inventory and delivery of our products sold; direct costs including labor, material, and supplies used in the performance of our contract work; indirect costs associated with our direct contract costs; sales, general, and administrative expenses associated with our operating groups and corporate management; and certain 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 work 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.

Our costs and operating expenses increased approximately $3 million or 2% for the third quarter of 2017, and approximately $85 million or 19% for the first nine months of 2017, as compared to the same periods of 2016. Costs and operating expenses for our Federal Services and Supply Chain Management groups increased for the third quarter and for the first nine months. Costs and operating expenses for our Aviation Group decreased for the third quarter and for the first nine months.

Our operating income decreased approximately $1 million or 10% for the third quarter of 2017, and increased approximately $3 million or 8% for the first nine months of 2017, as compared to the same periods of 2016. Operating income from our Federal Services Group increased for the third quarter and for the first nine months of 2017. Operating income from our Supply Chain Management and Aviation groups decreased for the third quarter and for the first nine months of 2017.

~~Changes in revenues, costs and operating expenses, and operating income are further discussed in the summaries of our segment results that follow.~~

Interest expense decreased approximately $248 thousand for the first nine months of 2017, as compared to the same period of 2016, due primarily to a decrease in our average level of bank borrowing in 2017. Interest expense also includes interest associated with capitalized construction costs related to our executive and administrative headquarters facility lease. The amount of interest expense associated with this capital lease in the first nine months of 2017 was approximately $1.1 million, as compared to $1.2 million for the same period of 2016.

~~Our effective tax rate was 36.6% and 36.4% for~~ the nine months ended September 30, ~~2017~~2022, Federal and 2016, respectively. Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items that are recorded in the period in which they occur. Our tax rate is affected by discrete items that may occur in any given year, but may not be consistent from yearDefense segment bookings increased 7% year-over-year to ~~year.~~$250 million, while total funded backlog decreased 9% year-over-year to $199 million.

~~Supply Chain Management Group Results~~

~~The results of operations for our Supply Chain Management Group are as follows (dollars in thousands):~~

-22-

Three months Nine months Change
ended September 30, ended September 30, Three Nine
2017 2016 2017 2016 Months Months
Revenues $ 51,174
$ 51,152
$ 163,663
$ 152,080
$ 22
$ 11,583
Costs and operating expenses 42,996
42,403
138,052
125,480
593
12,572
Operating income $ 8,178
$ 8,749
$ 25,611
$ 26,600
$ (571 ) $ (989 )
Profit percentage 16.0 % 17.1 % 15.6 % 17.5 %

~~Revenues for our Supply Chain Management Group remained substantially unchanged for the third quarter~~Table of 2017 and increased approximately $11.6 million or 8% for the nine months ended September 30, 2017, as compared to the same periods of 2016. Revenues from sales to the USPS decreased approximately $600 thousand for the third quarter and increased approximately $1.2 million for the nine months. Revenues from sales to other customers, including sales to government and commercial customers, increased approximately $638 thousand or 10% for the third quarter and approximately $10.3 million or 60% for the nine months. Costs and operating expenses increased by approximately $593 thousand or 1% for the third quarter and approximately $12.6 million or 10% for the first nine months, primarily due to the increase in revenues.Contents

Operating income decreased by approximately $571 thousand or 7% for the third quarter of 2017 and decreased approximately $989 thousand or 4% for the first nine months of 2017. Lower margins were attributable to increased competition for our USPS vehicle parts sales and to lower margins typically associated with DoD sales.

~~Aviation Group Results~~

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

Three months Nine months Change
ended September 30, ended September 30, Three Nine
2017 2016 2017 2016 Months Months
Revenues $ 31,059
$ 34,688
$ 96,003
$ 100,298
$ (3,629 ) $ (4,295 )
Costs and operating expenses 29,076
30,738
89,105
90,402
(1,662 ) (1,297 )
Operating income $ 1,983
$ 3,950
$ 6,898
$ 9,896
$ (1,967 ) $ (2,998 )
Profit percentage 6.4 % 11.4 % 7.2 % 9.9 %

Revenues for our Aviation Group decreased approximately $3.6 million or 10% for the third quarter of 2017 and decreased approximately $4.3 million or 4% for the nine months ended September 30, 2017, as compared to the same periods of 2016. Revenues were adversely affected by a decrease in the demand in our parts distribution businesses.

Costs and operating expenses decreased by approximately $1.7 million or 5% for the third quarter of 2017 and decreased approximately $1.3 million or 1% for the first nine months of 2017, primarily due to the decrease in revenues. For the first nine months of 2016, costs and operating expenses were reduced by approximately $1.3 million for a valuation adjustment to the accrued earn-out obligation associated with the acquisition of our aviation businesses and were increased by approximately $300 thousand due to expense associated with a settlement agreement.

Our operating income decreased approximately $2 million or 50% for the third quarter of 2017, and approximately $3 million or 30% for the first nine months of 2017, as compared to the same periods of 2016. Factors affecting the change in our operating income for the third quarter included a decrease in the demand in our parts distribution businesses and decreases in operating income from engine MRO services. Factors affecting the change in our operating income for the first nine months included a decrease in the demand in our parts distribution businesses, an increase in operating income from engine MRO services and engine accessories services, and the adjustments to 2016 operating income for the earn-out obligation valuation adjustment and the settlement agreement expense mentioned above.

~~Federal Services Group Results~~

~~The results of operations for our Federal Services Group are as follows (dollars in thousands):~~

Three months Nine months Change
ended September 30, ended September 30, Three Nine
2017 2016 2017 2016 Months Months
Revenues $ 91,931
$ 86,940
$ 305,652
$ 224,511
$ 4,991
$ 81,141
Costs and operating expenses 89,338
85,290
295,149
219,470
4,048
75,679
Operating Income $ 2,593
$ 1,650
$ 10,503
$ 5,041
$ 943
$ 5,462
Profit percentage 2.8 % 1.9 % 3.4 % 2.2 %

Revenues for our Federal Services Group increased approximately $5.0 million or 6% for the third quarter of 2017 and approximately $81.1 million or 36% for the nine months ended September 30, 2017, as compared to the same periods of 2016. Items affecting our third quarter revenue on a year to year comparative basis include a net increase in revenues of approximately $7 million on various U. S. Army contracts, a decrease of approximately $6 million in revenues on our FMS Program, and changes in the level of work on other program efforts. Items affecting our first nine months revenue on a year to year comparative basis include an increase of approximately $35 million in revenues on our FMS Program, increased revenues of approximately $24 million due to the start of our RRAD ERS Program in the second quarter of 2016, and changes in the level of work on other program efforts.

Costs and operating expenses increased approximately $4 million or 5% for the third quarter of 2017 and approximately $75.7 million or 34% for the first nine months of 2017, as compared to the same periods of 2016. The increases in costs and operating expenses are primarily attributable to the increased level of work associated with our revenue increases.

Operating income increased by approximately $943 thousand or 57% for the third quarter of 2017 and approximately $5 million or 108% for the first nine months of 2017, compared to the same periods of 2016. The increases in operating income resulted primarily from an increase of award fees earned on our FMS Program of approximately $2.3 million for the first nine months; from an improvement in profit margins on vehicle and equipment refurbishment, maintenance, and sustainment work supporting various U.S. Army and Army Reserve programs; and from increases in revenues. Award fee evaluations on our FMS program occur three times per year. We typically recognize award fee revenue and income on this program in the first, second, and fourth quarters each year. Operating income was adversely affected by a contract related loss of approximately $1.2 million for the third quarter and approximately $1.6 million for the first nine months of 2017. We expect no further loss on this contract prior to its expected completion in the fourth quarter of 2017.

~~Financial Condition~~

There has been no material adverse change in our financial condition in the first nine months of 2017. Changes to asset and liability accounts were due primarily to our earnings, our level of business activity, the timing of inventory purchases, contract delivery schedules, subcontractor and vendor payments required to perform our contract work, and the timing of associated billings to and collections from our customers.

Liquidity and Capital Resources

~~Cash Flows~~

~~Cash and cash equivalents increased approximately $44 thousand during the first nine months of 2017.~~

Cash provided by operating activities increased approximately $11.1 million in the first nine months of 2017 as compared to the first nine months of 2016. The change is primarily attributable to an increase of approximately $6.3 million due to changes in the levels of operating assets and liabilities, an increase of approximately $2.7 million in non-cash operating activities, and an increase of approximately $2.1 million in cash provided by net income.

A significant portion of our accounts payable decreases in the first nine months of 2017 resulted from payments for inventory purchases made by our Aviation Group and subcontractor work performed on our FMS program in 2016. Our levels of inventory, accounts receivable and accounts payable may fluctuate depending on the timing of services ordered and products sold, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received for services. Such timing differences have the potential to cause significant increases and decreases in our inventory, accounts receivable, and accounts payable balances in short time periods, and accordingly, can cause significant increases or decreases in our cash provided by operations.

Cash used in investing activities decreased approximately $3.7 million in the first nine months of 2017 as compared to the first nine months of 2016. Cash used in investing activities consisted primarily of purchases of property and equipment.

Cash used in financing activities increased approximately $14.6 million in the first nine months of 2017 as compared to the first nine months of 2016. Cash used in financing activities in 2017 consisted primarily of bank borrowing repayments and payment of dividends. Cash used in financing activities in 2016 consisted primarily of earn-out obligation payments associated with the acquisition of our aviation businesses and payment of dividends.

We paid cash dividends totaling approximately $2.1 million or $0.19 per share in the first nine months of 2017. Our payment of cash dividends is subject to restrictions in our loan agreement, including a restriction on the annual aggregate amount of dividends we may pay. We have paid cash dividends each year since 1973 and have increased our dividend each year since 2004.

Liquidity

Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and ~~from~~ profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can ~~impact~~affect our liquidity. ~~Our inventory and accounts payable levels can be affected by the timing~~In addition to operating cash flows, other significant factors that affect our overall management of large opportunistic inventory purchases. Our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform, by the timing of large materials purchases and subcontractor efforts

used in our contracts, and by delays in the award of contractual coverage and funding and payments. Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.

~~We also purchase property and equipment; invest~~liquidity include capital expenditures; investments in expansion, improvement, and maintenance of our operational and administrative facilities; and ~~invest~~investments in the acquisition of ~~other companies.~~businesses.

Our primary source of external financing ~~consists of a~~is from our loan agreement with a bank group ~~that provides for~~and includes a term loan facility and a revolving ~~loans, and~~loan facility, which also provides for letters of credit. The termination date of the loan agreement is January 2020. This agreement was implemented in January 2015 concurrent with the acquisition of our aviation businesses. Our outstanding debt of approximately $180.8 million as of September 30, 2017 was net of unamortized deferred financing costs of approximately $1.3 million.

The term loan requires quarterly installment payments. Our required term loan payments after September 30, 2017 are approximately $5.6 million in 2017, $28.1 million in 2018, $30.0 million in 2019, and $36.3 million in 2020. The amount of term loan borrowings outstanding as of September 30, 2017 was $100 million.

The maximum amount of credit available ~~to us~~ under our loan agreement for revolving loans and letters of credit ~~as of September 30, 2017 was $150~~is $350 million. ~~We may borrow and repay~~Under the revolving loan borrowings as our cash flows require or permit. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $82.1 million in revolving loan amounts outstanding and no letters of credit outstanding as of September 30, 2017. The timing of certain payments made and collections received associated with our inventory, subcontractor, and materials requirements and other operating expenses can cause fluctuations in our outstanding revolving loan amounts. Delays in government funding of our work performed can also cause additional borrowing requirements.

~~Under our~~ 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, upsubject to ancustomary lender commitment approvals. The aggregate ~~additional amount~~limit of ~~$75~~incremental increases is $100 million.

~~We pay interest on~~ Our bank debt increased approximately $12.5 million for 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.~~nine months ended September 30, 2022. As of September 30, ~~2017, the LIBOR base margin was 2.00% and the base rate base margin was 0.75%. The base margins increase or decrease in steps as our Total Funded Debt/EBITDA Ratio increases or decreases.~~

~~Our loan agreement requires us to have interest rate hedges on a portion of the outstanding~~2022, we had term loan ~~for the first three years~~borrowings outstanding of ~~the agreement.~~$48.9 million, revolving loan borrowings outstanding of $250.3 million, and letters of credit outstanding of $1.2 million. We ~~executed compliant interest rate hedges in February 2015.~~ had approximately $98 million of unused bank loan commitments as of September 30, 2022.

As of September 30, 2017, the effective interest rate on our hedged debt was 3.25% and interest rates on portions of our outstanding unhedged debt ranged from 3.24% to 5.00%. The effective interest rate on our aggregate outstanding debt was 3.36%.

Our loan agreement contains collateral requirements to secure our loan obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. We2022, we were in compliance with ~~the financial covenants~~required ratios and other terms and conditions ~~at September 30, 2017.~~of our loan agreement.

Bank Loan Amendment

On October 7, 2022, we entered into a fourth amendment to our loan agreement which, among other things, provides for the following: (i) an extension of the maturity date from July 23, 2024 to October 7, 2025; (ii) a reset of the aggregate principal amount of the term loan to $100.0 million; (iii) a modification to the amortization payments on the term loan from $3.75 million quarterly to $2.50 million quarterly; (iv) an increase in the maximum total leverage ratio from 4.25x to 4.50x, with such ratios decreasing thereafter as indicated in the table below; (v) a change in the benchmark rate from LIBOR to SOFR with a SOFR floor of 0.00%; and (vi) a corresponding change in pricing to account for the change from LIBOR to SOFR.



Testing Period	~~Current~~ Maximum Total Funded Debt to EBITDA Ratio	~~Actual Ratio~~
~~Total Funded Debt/EBITDA Ratio~~From the Fourth Amendment Effective Date through and including June 30, 2023	~~3.00~~4.50 to 1.00
From July 1, 2023 through and including December 31, 2023	~~2.19~~4.25 to 1.00
From January 24, 2024 through and including June 30, 2024	4.00 to 1.00
From July 1, 2024 through and including September 30, 2024	3.75 to 1.00
From October 1, 2024 and thereafter	3.50 to 1.00

Cash Flows

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


	Nine months ended September 30,
		2022		2021
Net cash used in operating activities		$	(4,206)	$	(30,523)
Net cash used in investing activities		(3,181)		(59,839)
Net cash provided by financing activities		6,959		90,367
Net (decrease) increase in cash and cash equivalents		$	(428)	$	5

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

-23-

Table of Contents



	~~Minimum Ratio~~	~~Actual Ratio~~
~~Fixed Charge Coverage Ratio~~	~~1.20 to 1~~	~~1.99 to 1~~

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

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

We ~~currently do~~paid cash dividends totaling $3.8 million or $0.30 per share during the nine months ending September 30, 2022. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.

Other Obligations and Commitments

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

Inflation and Pricing

~~Most of our contracts under which services are performed for the government provide for estimates of future labor costs~~There have not been any material changes to ~~be escalated for any option periods, while the non-labor costs~~this disclosure from those discussed in our contracts are normally considered reimbursable at cost. Our property and equipment consists principally of land, buildings and improvements, shop and warehouse equipment, computer systems equipment, and furniture and fixtures. most recently filed Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We do not ~~expect the overall impact of inflation~~have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on ~~replacement costs of~~ our ~~property and equipment to be material to our future~~financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or ~~financial condition.~~capital resources.

Disclosures About Market Risk

Interest ~~Rates~~Rate Risk

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

In July 2022, we executed two SOFR-based forward-starting fixed interest rate swaps with a fixed rate of 2.8% for a total notional amount of $150 million in order to ~~fix the rate on~~hedge a portion of our ~~outstanding borrowings for various periods.~~floating rate debt. The ~~resulting fixed rates~~tenor of these swaps will begin on ~~this portion of our debt have given us protection against interest rate increases.~~

~~In February 2015, we entered into a LIBOR based interest rate swap on our term loan~~October 31, 2022 and is for a term of ~~four years with a notional amount of $100 million. The swap amount on our term loan decreases in increments on an annual basis. As of~~five years. Subsequent to September 30, ~~2017, the amount of the term loan swap was $60 million and with the term loan swap in place, we pay an effective interest rate of 1.25% plus our base margin. Also in February 2015,~~2022, on October 7, 2022, we entered into an amendment to our loan agreement. Among other things, the amendment provides for a modification of the reference rate from LIBOR ~~based~~to SOFR. See Notes (4) "Debt" and (8) "Fair Value Measurements," of Notes to our Unaudited Consolidated Financial Statements in Item 1 of this report for additional information regarding our debt and interest rate ~~swap~~swaps.

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

Critical Accounting Policies, Estimates and Judgments

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial statements, including revenue recognition, inventory valuation, business combinations, goodwill and intangible assets, and income taxes. If any of these estimates, assumptions or judgments prove to be incorrect, our reported results

-24-

Table of Contents

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

Recently Issued Accounting Pronouncements

For a description of recently announced accounting standards, including the expected dates of adoption and estimated effects, if any, on our ~~revolving loan for a term~~consolidated financial statements, see Note (1) "Nature of ~~three years with a notional amount~~Business and Significant Accounting Policies — Recent Accounting Pronouncements” of ~~$25 million. As~~the Notes to our Unaudited Consolidated Financial Statements in Item 1 of ~~September 30, 2017, with the revolving loan swap in place, we pay an effective rate of 1.25% plus our base margin.~~this report.

~~VSE CORPORATIONS AND SUBSIDIARIES~~

Item 3. Quantitative and Qualitative Disclosures About Market Risks

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

Item 4. Controls and Procedures

AsEvaluation of ~~the end of the period covered by this report, based on management's evaluation,~~Disclosure Controls and Procedures

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")),. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures ~~are~~were effective ~~in ensuring~~to ensure that information we are required to ~~be disclosed by us~~disclose in reports ~~filed~~that we file or ~~submitted~~submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in ~~the SEC's~~SEC rules and forms and that such information ~~required to be disclosed by us in the reports that we file or submit under the Exchange Act~~ is accumulated and communicated to our management, including our ~~principal executive~~Chief Executive Officer and ~~principal financial officers, or persons performing similar functions,~~Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There ~~was~~have been no ~~change~~changes in our internal control over financial reporting during ~~our third quarter of fiscal 2017~~the quarterly period covered by this report that ~~has~~ materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

-25-

Table of Contents

PART II. Other Information

Item 1. Legal Proceedings

~~In 2012,~~None.

Item 1A. Risk Factors

There have been no material changes to the ~~estates of five deceased individuals and their relatives filed complaints~~previously disclosed risk factors in ~~a state court~~our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K”). The risk factors disclosed in Hawaii against VSE and other entities and individuals for unspecified damages, alleging that the explosion of fireworks and diesel fuel that killed the five individuals in April 2011 was caused by negligence of VSE and the other defendants. The five deceased plaintiffs were employees of a vendor retained by VSE to dispose of fireworks and other explosives seized by the federal government. In September 2017, VSEour 2021 Form 10-K should also be considered together with ~~its insurance carriers, agreed~~information included in ~~principle with all~~this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and under "Forward-Looking Statements" and "Management's Discussion and Analysis of ~~the plaintiffs to settle this litigation. The settlement documents are being finalized~~Financial Condition and ~~the settlement will be fully funded by VSE’s insurers, resulting in no material adverse effect on our results~~Results of ~~operations, financial condition, or cash flows.~~Operations."

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

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

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

-26-

Item 6. Exhibits



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

~~Pursuant to the requirements~~

-27-

Table of the Exchange Act, VSE has omitted all other items contained in "Part II. Other Information" because such other items are not applicable or are not required if the answer is negative or because the information required to be reported therein has been previously reported.Contents

VSE CORPORATION AND SUBSIDIARIES

SIGNATURES

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


			VSE CORPORATION

Date:	October 27, 2022	By:	~~VSE CORPORATION~~/s/ John A. Cuomo
~~Date:~~	~~October 27, 2017~~	~~By:~~	~~/s/ M.~~John A. ~~Gauthier~~Cuomo
			~~M. A. Gauthier~~
	Director, Chief Executive Officer and President
			~~President and Chief Operating Officer~~(Principal Executive Officer)



Date:	October 27, ~~2017~~2022	By:	/s/ ~~T. R. Loftus~~Stephen D. Griffin
			~~T. R. Loftus~~Stephen D. Griffin
			~~Executive~~Senior Vice President and
	Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

~~-26-~~

-28-



	TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021	4

	Unaudited Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021	5

	Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021	6

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

	Unaudited Consolidated Statements of Cash Flows for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021	79

	Notes to Unaudited Consolidated Financial Statements	810

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1518

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	2425

ITEM 4.	Controls and Procedures	2425

PART II

ITEM 1.	Legal Proceedings	2426

ITEM 1A.	Risk Factors	26

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2426

ITEM 6.	Exhibits ~~Financial Statements and Schedules~~	2527

Signatures		2628



	September 30, 2017		December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	472	$	428
Receivables, net	72,874		101,218
Inventories, net	135,525		136,340
Other current assets	24,376		20,477
Total current assets	233,247		258,463

Property and equipment, net	56,857		62,061
Intangible assets, net	114,913		126,926
Goodwill	198,622		198,622
Other assets	15,405		15,767
Total assets	$	619,044	$	661,839

Liabilities and Stockholders' equity
Current liabilities:
Current portion of long-term debt	$	25,710	$	21,023
Accounts payable	48,560		93,999
Accrued expenses and other current liabilities	47,852		32,772
Dividends payable	—		648
Total current liabilities	122,122		148,442

Long-term debt, less current portion	155,083		193,621
Deferred compensation	15,749		12,751
Long-term lease obligations, less current portion	20,917		21,959
Deferred tax liabilities	27,981		29,872
Total liabilities	341,852		406,645

Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 10,838,435 and 10,798,927, respectively	542		540
Additional paid-in capital	24,455		22,876
Retained earnings	252,061		231,733
Accumulated other comprehensive income	134		45
Total stockholders' equity	277,192		255,194
Total liabilities and stockholders' equity	$	619,044	$	661,839



	For the three months ended September 30,				For the nine months ended September 30,
	2017		2016		2017		2016
Revenues:
Products	$	82,314	$	87,060	$	260,585	$	254,325
Services	91,850		85,720		304,733		222,564
Total revenues	174,164		172,780		565,318		476,889

Costs and operating expenses:
Products	68,678		70,884		217,606		207,001
Services	88,989		83,599		293,083		215,409
Selling, general and administrative expenses	255		652		1,178		4,173
Amortization of intangible assets	4,005		4,022		12,013		12,063
Total costs and operating expenses	161,927		159,157		523,880		438,646

Operating income	12,237		13,623		41,438		38,243

Interest expense, net	2,347		2,509		7,158		7,406

Income before income taxes	9,890		11,114		34,280		30,837

Provision for income taxes	3,251		4,026		12,541		11,228

Net income	$	6,639	$	7,088	$	21,739	$	19,609

Basic earnings per share	$	0.61	$	0.66	$	2.01	$	1.82

Basic weighted average shares outstanding	10,838,435		10,798,684		10,833,237		10,792,046

Diluted earnings per share	$	0.61	$	0.65	$	2.00	$	1.81

Diluted weighted average shares outstanding	10,856,675		10,826,007		10,855,983		10,819,697

Dividends declared per share	$	—	$	—	$	0.130	$	0.115



	Three months						Nine months
	2017			2016			2017			2016
Revenues:
Supply Chain Management Group	$	51,174		$	51,152		$	163,663		$	152,080
Aviation Group	31,059			34,688			96,003			100,298
Federal Services Group	91,931			86,940			305,652			224,511
Total revenues	$	174,164		$	172,780		$	565,318		$	476,889

Operating income:
Supply Chain Management Group	$	8,178		$	8,749		$	25,611		$	26,600
Aviation Group	1,983			3,950			6,898			9,896
Federal Services Group	2,593			1,650			10,503			5,041
Corporate/unallocated expenses	(517		)	(726		)	(1,574		)	(3,294		)
Operating income	$	12,237		$	13,623		$	41,438		$	38,243



	Three months ended September 30,								Nine months ended September 30,
Customer	2017		%		2016		%		2017		%		2016		%
U.S. Postal Service	$	43,833	25.2	%	$	44,433	25.7	%	$	136,261	24.1	%	$	135,025	28.3	%

U.S. Navy	38,895		22.3	%	43,424		25.1	%	143,421		25.4	%	109,884		23.0	%
U.S. Army	45,717		26.3	%	40,155		23.3	%	150,217		26.6	%	96,656		20.2	%
U.S. Air Force	2,967		1.7	%	757		0.4	%	5,807		1.0	%	2,614		0.6	%
Total - DoD	87,579		50.3	%	84,336		48.8	%	299,445		53.0	%	209,154		43.8	%

Commercial aviation	30,637		17.6	%	32,489		18.8	%	94,706		16.8	%	98,099		20.6	%
Other commercial	2,833		1.6	%	2,720		1.6	%	9,270		1.6	%	7,807		1.6	%
Total - Commercial	33,470		19.2	%	35,209		20.4	%	103,976		18.4	%	105,906		22.2	%

Other civilian agencies	9,282		5.3	%	8,802		5.1	%	25,636		4.5	%	26,804		5.7	%

Total	$	174,164	100	%	$	172,780	100	%	$	565,318	100	%	$	476,889	100	%



	Supply Chain Management		Federal Services		Aviation		Total
Balance as of December 31, 2016	$	63,190	$	30,883	$	104,549	$	198,622

Balance as of September 30, 2017	$	63,190	$	30,883	$	104,549	$	198,622



	Cost		Accumulated Amortization			Accumulated Impairment Loss			Net Intangible Assets
September 30, 2017
Contract and customer-related	$	173,094	$	(69,653	)	$	(1,025	)	$	102,416
Acquired technologies	12,400		(7,124		)	—			5,276
Trade names	16,670		(9,449		)	—			7,221
Total	$	202,164	$	(86,226	)	$	(1,025	)	$	114,913

December 31, 2016
Contract and customer-related	$	173,094	$	(59,799	)	$	(1,025	)	$	112,270
Acquired technologies	12,400		(6,278		)	—			6,122
Trade names	16,670		(8,136		)	—			8,534
Total	$	202,164	$	(74,213	)	$	(1,025	)	$	126,926



Concentration of Revenues
(dollars in thousands)
	For the nine months ended September 30,
	2017			2016
Source of Revenue	Revenues		%	Revenues		%
USPS	$	136,261	24	$	135,025	28
FMS Program	130,306		23	95,258		20
Other	298,751		53	246,606		52
Total revenues	$	565,318	100	$	476,889	100



	Nine months ended September 30,
Contract Type	2017		%	2016		%
Cost-type	$	163,275	29	$	122,892	26
Fixed-price	72,941		13	52,895		11
Time and materials	69,436		12	48,724		10
Total Federal Services revenues	305,652		54	224,511		47
Supply Chain Management and Aviation revenues	259,666		46	252,378		53
Total revenues	$	565,318	100	$	476,889	100



	Three months				Nine months				Change
	ended September 30,				ended September 30,				Three			Nine
	2017		2016		2017		2016		Months			Months
Revenues	$	174,164	$	172,780	$	565,318	$	476,889	$	1,384		$	88,429
Costs and operating expenses	161,927		159,157		523,880		438,646		2,770			85,234
Operating income	12,237		13,623		41,438		38,243		(1,386		)	3,195
Interest expense, net	2,347		2,509		7,158		7,406		(162		)	(248		)
Income before income taxes	9,890		11,114		34,280		30,837		(1,224		)	3,443
Provision for income taxes	3,251		4,026		12,541		11,228		(775		)	1,313
Net income	$	6,639	$	7,088	$	21,739	$	19,609	$	(449	)	$	2,130