UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended ~~September 30, 2019~~March 31, 2020 Commission File Number: 0‑3676

VSE CORPORATION

(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.)



6348 Walker Lane
Alexandria, Virginia	~~22310~~	~~www.vsecorp.com~~22310
(Address of Principal Executive Offices)	~~(Zip Code)~~	~~(Webpage)~~(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.05 per share	VSEC	The NASDAQ Global Select Market

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

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

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. See definition of "accelerated filer and large accelerated filer" 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 [ ]

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

Yes [ ] No [ ]

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~~April 22, ~~2019: 10,970,123~~2020: 11,043,246



	TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	4

	Unaudited Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5

	Unaudited Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

	Unaudited Consolidated Statements of Stockholders' Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	7

	Unaudited Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	98

	Notes to Unaudited Consolidated Financial Statements	109

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2219

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	3132

ITEM 4.	Controls and Procedures	3132

PART II

ITEM 1.	Legal Proceedings	3132

ITEM 1A.	Risk Factors	32

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3133

ITEM 6.	Exhibits ~~Financial Statements and Schedules~~	3234

Signatures		3335

VSE Corporation and Subsidiaries

Forward Looking Statements

This quarterly report on Form 10-Q (“Form 10-Q”) contains statements that, to the extent they are not recitations of historical fact, constitute "forward looking statements" ~~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 ~~forward looking~~ 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, 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, ~~2018~~2019 filed with the U.S. Securities and Exchange Commission ~~("SEC"~~(“SEC”) on March 7, 9, 2020 (“2019 ~~("2018~~ Form ~~10-K")~~10-K). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

Readers are cautioned not to place undue reliance on these forward ~~looking statements,~~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 2018 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 December 31, 2018.

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,		March 31,			December 31,
	2019			2018		2020			2019
Assets
Current assets:
Cash and cash equivalents	$	1,095		$	162	$	543		$	734
Receivables, net	69,793			60,004		70,793			70,630
Unbilled receivables, net	54,151			41,255		43,928			46,279
Inventories, net	202,811			166,392		210,030			218,627
Other current assets	12,652			13,407		17,332			19,071
Total current assets	340,502			281,220		342,626			355,341

Property and equipment, net	43,792			49,606		37,276			43,465
Intangible assets, net	142,907			94,892		119,166			132,175
Goodwill	259,212			198,622		269,071			276,450
Operating lease right-of-use assets	24,375			—
Operating lease - right-of-use assets						21,334			20,943
Other assets	16,845			14,488		21,936			17,490
Total assets	$	827,633		$	638,828	$	811,409		$	845,864

Liabilities and Stockholders' equity
Current liabilities:
Current portion of long-term debt	$	10,716		$	9,466	$	17,820		$	16,883
Accounts payable	71,668			57,408		67,709			68,099
Current portion of earn-out obligation	10,700			—		5,300			31,700
Accrued expenses and other current liabilities	45,314			37,133		38,345			46,514
Dividends payable	987			871		993			987
Total current liabilities	139,385			104,878		130,167			164,183

Long-term debt, less current portion	257,815			151,133		255,880			253,128
Deferred compensation	17,417			17,027		17,985			18,146
Long-term lease obligations, less current portion	—			18,913
Long-term operating lease liabilities	25,124			—
Earn-out obligation	14,300			—
Long-term lease obligations under operating leases						25,014			24,441
Earn-out obligation, less current portion						—			5,000
Deferred tax liabilities	17,732			18,482		15,962			17,865
Total liabilities	471,773			310,433		445,008			482,763

Commitments and contingencies (Note 6)
Commitments and contingencies (Note 7)

Stockholders' equity:
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 10,970,123 and 10,886,036, respectively	549			544
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 11,029,169 and 10,970,123, respectively						551			549
Additional paid-in capital	29,411			26,632		31,244			29,411
Retained earnings	327,191			301,073		336,584			334,246
Accumulated other comprehensive (loss) income	(1,291		)	146
Accumulated other comprehensive loss						(1,978		)	(1,105		)
Total stockholders' equity	355,860			328,395		366,401			363,101
Total liabilities and stockholders' equity	$	827,633		$	638,828	$	811,409		$	845,864

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,
2019 2018 2019 2018
Revenues:
Products $ 96,832
$ 85,886
$ 279,608
$ 264,678
Services 101,494
83,045
277,748
251,544
Total revenues 198,326
168,931
557,356
516,222

Costs and operating expenses:

Products 81,988
72,256
237,661
222,816
Services 93,568
77,810
256,355
239,536
Selling, general and administrative expenses 541
863
2,911
2,412
Amortization of intangible assets 5,014
4,005
14,985
12,013
Total costs and operating expenses 181,111
154,934
511,912
476,777

Gain on sale of contract —
1,700
—
1,700

Operating income 17,215
15,697
45,444
41,145

Interest expense, net 3,706
2,340
10,262
6,697

Income before income taxes 13,509
13,357
35,182
34,448

Provision for income taxes 2,982
3,323
8,154
8,611

Net income $ 10,527
$ 10,034
$ 27,028
$ 25,837

Basic earnings per share $ 0.96
$ 0.92
$ 2.47
$ 2.38

Basic weighted average shares outstanding 10,970,123
10,881,106
10,953,581
10,874,331

Diluted earnings per share $ 0.95
$ 0.92
$ 2.45
$ 2.37

Diluted weighted average shares outstanding 11,060,081
10,935,112
11,035,951
10,916,989

Dividends declared per share $ 0.09
$ 0.08
$ 0.26
$ 0.23



	For the three months ended March 31,
	2020			2019
Revenues:
Products	$	76,342		$	73,741
Services	101,076			96,178
Total revenues	177,418			169,919

Costs and operating expenses:
Products	65,527			62,857
Services	90,758			88,876
Selling, general and administrative expenses	248			1,382
Amortization of intangible assets	4,723			4,991
Total costs and operating expenses	161,256			158,106

	16,162			11,813

Loss on sale of a business entity and certain assets	(7,536		)	—
Gain on sale of property	1,108			—

Operating income	9,734			11,813

Interest expense, net	3,486			3,158

Income before income taxes	6,248			8,655

Provision for income taxes	2,916			2,052

Net income	$	3,332		$	6,603

Basic earnings per share	$	0.30		$	0.60

Basic weighted average shares outstanding	11,000,204			10,920,171

Diluted earnings per share	$	0.30		$	0.60

Diluted weighted average shares outstanding	11,100,506			10,974,081

Dividends declared per share	$	0.09		$	0.08

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)


	For the three months ended September 30,					For the nine months ended September 30,					For the three months ended March 31,
	2019			2018		2019			2018		2020			2019
Net income	$	10,527		$	10,034	$	27,028		$	25,837	$	3,332		$	6,603

Change in fair value of interest rate swap agreements, net of tax	(16		)	28		(1,437		)	362		(873		)	(692		)

Other comprehensive (loss) income, net of tax	(16		)	28		(1,437		)	362
Other comprehensive loss, net of tax											(873		)	(692		)

Comprehensive income	$	10,511		$	10,062	$	25,591		$	26,199	$	2,459		$	5,911

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

(in thousands except per share data)


	Three months ended September 30, 2019																	Three months ended March 31, 2020
				Additional Paid-In Capital			Retained Earnings				Accumulated Other Comprehensive Loss				Total Stockholders' Equity									Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
	Common Stock					Common Stock
	Shares	Amount				Shares								Amount
Balance at June 30, 2019	10,970	$	549			$				29,411				$				317,652			$	(1,275	)	$	346,337
Balance at December 31, 2019																		10,970			$	549		$	29,411		$	334,246		$	(1,105	)	$	363,101
Net income	—	—				—				10,527				—					10,527			—		—			—			3,332			—			3,332
Stock-based compensation																		59			2			1,833			—			—			1,835
Other comprehensive loss, net of tax	—	—		—				—				(16		)			(16		)	—			—			—			—			(873	)		(873	)
Dividends declared ($0.09 per share)	—	—		—			(988		)		—				(988		)	—			—			—			(994		)	—			(994		)
Balance at September 30, 2019	10,970	$	549	$	29,411		$	327,191			$	(1,291	)		$	355,860
Balance at March 31, 2020																		11,029			$	551		$	31,244		$	336,584		$	(1,978	)	$	366,401

Three months ended September 30, 2018

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Stockholders'
Equity
Common Stock
Shares Amount
Balance at June 30, 2018 10,881
$ 544
$ 26,490
$ 283,767
$ 515
$ 311,316
Net income —
—
—
10,034
—
10,034
Other comprehensive income, net of tax —
—
—
—
28
28
Dividends declared ($0.08 per share) —
—
—
(871 ) —
(871 )
Balance at September 30, 2018 10,881
$ 544
$ 26,490
$ 292,930
$ 543
$ 320,507

~~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, 2019

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders'
Equity
Common Stock
Shares Amount
Balance at December 31, 2018 10,886
$ 544
$ 26,632
$ 301,073
$ 146
$ 328,395
Cumulative effect of adoption of ASU 2016-02, net of tax —
—
—
1,944
—
1,944
Net income —
—
—
27,028
—
27,028
Stock-based compensation 84
5
2,779
—
—
2,784
Other comprehensive loss, net of tax —
—
—
—
(1,437 ) (1,437 )
Dividends declared ($0.26 per share) —
—
—
(2,854 ) —
(2,854 )
Balance at September 30, 2019 10,970
$ 549
$ 29,411
$ 327,191
$ (1,291 ) $ 355,860

Nine months ended September 30, 2018

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Stockholders'
Equity
Common Stock
Shares Amount
Balance at December 31, 2017 10,839
$ 542
$ 24,470
$ 267,902
$ 181
$ 293,095
Cumulative effect of adoption of ASU 2014-09, net of tax —
—
—
1,695
—
1,695
Net income —
—
—
25,837
—
25,837
Stock-based compensation 42
2
2,020
—
—
2,022
Other comprehensive income, net of tax —
—
—
—
362
362
Dividends declared ($0.23 per share) —
—
—
(2,504 ) —
(2,504 )
Balance at September 30, 2018 10,881
$ 544
$ 26,490
$ 292,930
$ 543
$ 320,507



	Three months ended March 31, 2019
				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2018	10,886	$	544	$	26,632	$	301,073		$	146		$	328,395
Cumulative effect of adoption of ASU 2016-02, net of tax	—	—		—		1,943			—			1,943
Net income	—	—		—		6,603			—			6,603
Stock-based compensation	64	3		2,156		—			—			2,159
Other comprehensive loss, net of tax	—	—		—		—			(692		)	(692		)
Dividends declared ($0.08 per share)	—	—		—		(877		)	—			(877		)
Balance at March 31, 2019	10,950	$	547	$	28,788	$	308,742		$	(546	)	$	337,531

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

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	For the nine months ended September 30,						For the three months ended March 31,
	2019			2018			2020			2019
Cash flows from operating activities:
Net income	$	27,028		$	25,837		$	3,332		$	6,603
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,622			18,984			6,475			7,430
Deferred taxes	(1,230		)	(1,733		)	1,592			(564		)
Stock-based compensation	2,592			2,146			897			1,640
Gain on sale of contract	—			(1,700		)
Loss on sale of a business entity and certain assets							7,536			—
Gain on sale of property and equipment							(1,127		)	—
Earn-out obligation adjustment							301			—
Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables, net	(2,380		)	738
Unbilled receivables, net	(12,896		)	11,298
Inventories, net	(29,540		)	(36,448		)
Receivables							(163		)	2,667
Unbilled receivables							(2,041		)	(3,195		)
Inventories							(8,255		)	(7,798		)
Other current assets and noncurrent assets	(481		)	3,518			2,777			(6,692		)
Accounts payable and deferred compensation	11,793			(14,972		)	395			2,653
Accrued expenses and other current and noncurrent liabilities	1,931			(3,010		)	(4,961		)	(1,675		)
Long-term lease obligations	—			(1,237		)

Net cash provided by operating activities	17,439			3,421			6,758			1,069

Cash flows from investing activities:
Purchases of property and equipment	(7,689		)	(2,522		)	(724		)	(601		)
Proceeds from the sale of property and equipment	4			51			2,424			3
Proceeds from the sale of contract	—			1,700
Proceeds from the sale of a business entity and certain assets							21,127			—
Cash paid for acquisitions, net of cash acquired	(112,660		)	—			—			(112,660		)

Net cash used in investing activities	(120,345		)	(771		)
Net cash provided by (used in) investing activities							22,827			(113,258		)

Cash flows from financing activities:
Borrowings on loan agreement	382,501			468,949			131,148			194,598
Repayments on loan agreement	(274,969		)	(465,521		)	(127,692		)	(80,183		)
Payment of debt financing costs	—			(1,702		)
Payments on capital lease obligations	—			(1,077		)
Earn-out obligation payments							(31,701		)	—
Payments of taxes for equity transactions	(955		)	(641		)	(543		)	(687		)
Dividends paid	(2,738		)	(2,393		)	(988		)	(872		)

Net cash provided by (used in) financing activities	103,839			(2,385		)
Net cash (used in) provided by financing activities							(29,776		)	112,856

Net increase in cash and cash equivalents	933			265			(191		)	667
Cash and cash equivalents at beginning of period	162			624			734			162
Cash and cash equivalents at end of period	$	1,095		$	889		$	543		$	829



Supplemental disclosure of noncash investing activities:
Note receivable from the sale of a business entity and certain assets	$	7,461	$	—

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

~~-9-~~

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2019~~March 31, 2020

Table of Contents

(1) ~~Nature of Business and~~ 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,~~Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial ~~statements.~~statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our 2019 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, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2019. For further information refer to the consolidated financial statements and footnotes thereto included in our 2018 Form 10-K.~~2020.

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include accruals for contract disallowance reserves, award fee revenues, costs to complete on fixed price contracts, recoverability of goodwill and intangible assets, and earn-out obligations.

Coronavirus (COVID-19) Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus disease, known as COVID-19, as a global pandemic. The pandemic and the containment and mitigation efforts by governments to attempt to control its spread created uncertainties and disruptions in the economic and financial markets. The impact of COVID-19 on us is evolving and its future effects are highly uncertain and unpredictable. We are closely monitoring the effects and risks of COVID-19 to assess its impact on our business, financial condition and results of operations. In April 2020, we completed a cost reduction plan which included a reduction in workforce. We maintain a robust continuity plan to adequately respond to situations such as the COVID-19 pandemic, including a framework for remote work arrangements, in order to effectively maintain operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.

Reclassifications

Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation which include reclassification of products and services revenue and the renaming of our three operating segments as further described in Note (8) "Business Segments and Customer Information." These reclassifications had no effect on the reported results of operations.

Recently Adopted Accounting Pronouncements

In ~~February 2016,~~August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. ~~2016-02,~~2018-13, ~~Leases (Topic 842)~~Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted ASU 2018-13 in the first quarter of 2020. The adoption had no impact on our consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018-15, ~~("ASC 842"), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the ~~balance sheet and disclosing key information about leasing~~accounting for implementation costs in cloud computing arrangements. The new standard is ~~required to be~~effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted ~~using~~ASU 2018-15 in the first quarter of 2020 and applied the standard prospectively. The adoption did not have a ~~modified retrospective method~~material impact on our consolidated financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on FinancialInstruments, which changes the methodology for measuring credit losses on financial instruments and certain other instruments, including trade receivables and contract assets. The new standard replaces the current incurred loss model for measurement of credit losses on financial assets with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts. The new standard is effective for reporting periods beginning after December 15, ~~2018,~~2019. We adopted the standard in the first quarter of 2020 using the modified-retrospective approach, which requires the standard to be applied on a prospective basis with ~~early adoption permitted. In July 2018, the FASB provided an alternative transition method~~a cumulative-

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

Table of ~~adoption through ASU No. 2018-11,~~ ~~Targeted Improvements, which provides entities with an optional transition method~~Contents

effect adjustment to ~~apply the transition provisions~~retained earnings as of ~~ASU 2016-02 at~~ the beginning of the period ~~of adoption.~~

~~On January 1, 2019,~~in which the guidance is effective. Upon adoption, we ~~adopted ASC 842 using the alternative transition method provided by ASU 2018-11 recording right-of-use assets and lease liabilities for our existing leases~~did not record an adjustment to opening retained earnings as of January 1, ~~2019,~~2020 as ~~well as~~the standard did not have a cumulative-effect adjustment to retained earnings of initially applying the new standard as of January 1, 2019. We have elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to lease identification, lease classification, and treatmentmaterial impact on our consolidated allowance for ~~initial direct lease costs. We have not elected the practical expedients pertaining to the use of hindsight and land easements.~~

credit losses. The adoption of the new lease standard resulted in the recharacterization of our headquarters lease, which was accounted for using the financing method under previously existing build-to-suit accounting rules, to an operating lease under ASC 842.Upon adoption of the new lease standard on January 1, 2019, we recorded a right-of-use asset of $24.3 million, property and equipment of $2.8 million, and operating lease liability of $29.6 million, with immaterial changes to other balance sheet accounts. The recharacterization resulted in a cumulative-effect adjustment to retained earnings of approximately $1.9 million, net of taxes, as of January 1, 2019. The new standard did not have a significant impact on our ~~consolidated~~financial position, results of operations or cash flows.

(2) Acquisition

On January 10, 2019, our wholly owned subsidiary VSE Aviation, Inc. ("VSE Aviation") acquired 100% of the equity of 1st Choice Aerospace Inc. ("1st Choice Aerospace"), a provider of maintenance, repair and overhaul ("MRO") services and products for new generation and legacy commercial aircraft. 1st Choice Aerospace has operations in Florida and Kentucky. We ~~have~~ retained key members of 1st Choice Aerospace's management team under three-year employment contracts with five-year non-compete covenants.

~~The initial purchase consideration paid at closing for 1st Choice Aerospace was approximately $113 million, which included $1.1 million as an estimated net working capital adjustment.~~ We ~~will also~~may be required to make earn-out payments of up to $40 million if 1st Choice Aerospace meets certain financial targets during 2019 and 2020. ~~Approximately $1.1 million of our closing payments was deposited into an escrow account to secure~~In January 2020, after obtaining the sellers' ~~indemnification obligations. Any~~consent to our proposed amount ~~remaining in such escrow account at the end~~ of the ~~indemnification period less any then pending indemnification claims will be distributed~~earn-out payment for the 2019 performance year, we made a payment of approximately $31.7 million to satisfy the ~~sellers. 1st Choice Aerospace's results~~2019 performance year obligation. Included in earn-out obligation on our March 31, 2020 balance sheet is approximately $5.3 million classified as the current portion of ~~operations are included in~~earn-out obligation, which represents our ~~Aviation Group~~best estimate of the present value of such earn-out obligation for the 2020 performance year. Changes in the ~~accompanying unaudited consolidated financial statements beginning on the acquisition date of January 10, 2019. 1st Choice Aerospace had unaudited revenues of approximately $45.1 million~~

~~-10-~~

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~~September 30, 2019~~

~~Table of Contents~~

and operating income of approximately $10.5 million before amortization of intangible assets of approximately $3.0 million and allocated corporate costs of approximately $1.2 million from the acquisition date through September 30, 2019.

~~We have not finalized our assessment~~fair value of the ~~fair values of~~earn-out obligations are recognized in earnings in the assets acquired and liabilities assumed as there has been insufficient time between the acquisition date and the issuance of these financial statements to complete our fair value review and final determination. As the amounts recorded for certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the acquisition date. The final determination of fair values of certain assets and liabilities will be completed within the measurement period of ~~up to one-year from the acquisition date as permitted under U.S. GAAP.~~

~~The 1~~^st Choice Aerospace acquisition requires the need to use the full one-year measurement period to adequately analyze and assess several factors used in establishing the asset acquired and liability assumed fair values as of the acquisition date, including intangibles, inventory and finalizing the estimated probability of each year’s earn-out obligation target being achieved. Any potential adjustments made could be material in relation to the preliminary values presented in the table below. Based on our preliminary valuation, the total estimated purchase price has been allocated to assets acquired (including identifiable intangible assets and goodwill) and liabilities assumed, as follows (in thousands):

Description Fair Value
Cash $ 396
Accounts receivable 7,409
Inventories 6,879
Prepaid expenses and other current assets 382
Property and equipment 4,044
Intangibles - customer related 55,000
Intangibles - trade name 8,000
Goodwill 60,590
Operating lease right-of-use assets 2,643
Other assets 333
Other current liabilities (5,244 )
Long-term operating lease liabilities (2,376 )
$ 138,056

Cash consideration $ 113,056
Acquisition date estimated fair value of earn-out obligation 25,000
Total $ 138,056

The estimated value attributed to customer relationships is being amortized on a straight-line basis using weighted average useful lives of 17 years. The estimated value attributed to trade name is being amortized on a straight-line basis over nine years. The preliminary amount of goodwill recorded for our 1st Choice Aerospace acquisition was approximately $61 million, all of which is expected to be amortizable for income tax purposes. The goodwill recognized reflects the strategic advantage of expanding our sustainment services into the aviation supply chain market.

We incurred approximately $408 thousand of acquisition-related expenses for the nine months ended September 30, 2019, which are included in selling, general and administrative expenses. The following VSE consolidated pro forma results are prepared as if the 1st Choice Aerospace acquisition had occurred on January 1, 2018. This information is for comparative purposes only and does not necessarily reflect the results that would have occurred or may occur in the future.

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~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2019~~

~~Table of Contents~~

~~The unaudited consolidated pro forma results of operations are as follows (in thousands except per share amounts):~~

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Revenue $ 198,326
$ 181,464
$ 558,915
$ 550,452
Net Income $ 10,532
$ 10,294
$ 27,596
$ 26,465
Basic earnings per share $ 0.96
$ 0.94
$ 2.52
$ 2.43
Diluted earnings per share $ 0.95
$ 0.94
$ 2.50
$ 2.42
change through settlement.

(3) Divestiture

On January 28, 2020 VSE’s subsidiary VSE Aviation, Inc. entered into two definitive agreements to sell (1) Prime Turbines LLC ("Prime Turbines") for a sale price of $20.7 million and (2) certain related inventory assets for $8.5 million to PTB Holdings USA, LLC ("PTB"). The transaction was completed on February 26, 2020 with cash proceeds of $20.7 million, subject to working capital adjustments, and a note receivable of $8.5 million received as consideration.

Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines. Prime Turbines was included in our Aviation segment.

The divestiture of Prime Turbines will not have a material impact on the Company’s operations and financial results, and therefore does not qualify for reporting as a discontinued operation.

As a result of the sale of the business and inventory, the Company derecognized the assets and liabilities of Prime Turbines and recorded a $7.5 million non-cash loss during the three months ended March 31, 2020 which is reflected as loss on sale of a business entity and certain assets in the consolidated statements of income. Additionally, a note receivable from PTB of $6.0 million and $1.5 million as of March 31, 2020 is included in other assets, and other current assets in our consolidated balance sheets, respectively, which represents the present value of the consideration to be received with an imputed interest rate discount.

(4) Revenue

Disaggregated Revenue

Our revenues are derived from contract services performed for the ~~United States Postal Service ("USPS"),~~ United States Department of Defense ("DoD") agencies or federal civilian agencies and from the delivery of products to our customers. Our customers also include various other government agencies and commercial ~~customers.~~clients.

~~A summary of revenues for our operating groups by customer for the three and nine months ended September 30, 2019 are as follows (in thousands):~~

Three months ended September 30, 2019
Customer Supply Chain Management Aviation Federal Services Total
USPS $ 42,282
$ —
$ —
$ 42,282
DoD 6,935
1,613
76,505
85,053
Commercial 6,015
56,839
—
62,854
Other government 137
734
7,266
8,137
$ 55,369
$ 59,186
$ 83,771
$ 198,326

Nine months ended September 30, 2019
Customer Supply Chain Management Aviation Federal Services Total
USPS $ 127,077
$ —
$ —
$ 127,077
DoD 18,238
2,768
201,828
222,834
Commercial 15,085
159,400
1,104
175,589
Other government 478
1,385
29,993
31,856
$ 160,878
$ 163,553
$ 232,925
$ 557,356

~~A summary of revenues for our operating groups by customer for the three and nine months ended September 30, 2018 are as follows (in thousands):~~

Three months ended September 30, 2018
Customer Supply Chain Management Aviation Federal Services Total
USPS $ 43,031
$ —
$ —
$ 43,031
DoD 5,479
913
73,610
80,002
Commercial 3,324
32,641
62
36,027
Other government —
446
9,425
9,871
$ 51,834
$ 34,000
$ 83,097
$ 168,931

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~~September 30, 2019~~March 31, 2020

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Nine months ended September 30, 2018
Customer Supply Chain Management Aviation Federal Services Total
USPS $ 130,151
$ —
$ —
$ 130,151
DoD 21,180
3,153
225,509
249,842
Commercial 10,123
98,213
295
108,631
Other government 507
1,188
25,903
27,598
$ 161,961
$ 102,554
$ 251,707
$ 516,222

A summary of revenues for our operating ~~groups~~segments by ~~contract type~~customer for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 are as follows (in thousands):



	Aviation		Fleet		Federal and Defense		Total
DoD	$	—	$	4,567	$	59,567	$	64,134
Other government	30		39,815		6,145		45,990
Commercial	58,050		8,822		422		67,294
	$	58,080	$	53,204	$	66,134	$	177,418

A summary of revenues for our operating segments by customer for the three months ended March 31, 2019 are as follows (in thousands):

Three months ended September 30, 2019
Contract Type Supply Chain Management Aviation Federal Services Total
Cost-type $ —
$ 315
$ 41,691
$ 42,006
Fixed-price 55,369
26,268
19,078
100,715
Time and materials —
32,603
23,002
55,605
Total revenues $ 55,369
$ 59,186
$ 83,771
$ 198,326



	Aviation		Fleet		Federal and Defense		Total
DoD	$	895	$	4,842	$	56,964	$	62,701
Other government	—		42,882		10,777		53,659
Commercial	48,475		3,980		1,104		53,559
	$	49,370	$	51,704	$	68,845	$	169,919

We changed our disaggregated revenue presentation by type below to better align with our operating segments. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers. Our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost plus, fixed price and time and materials contract types. This change provides a clearer picture of the nature of each segment's contractual arrangements, how revenues derived from those contracts are affected by economic factors, and underlying performance trends impacting each segment. Additionally, the presentation is more in-line with how each segments' results are evaluated by our Chief Executive Officer in deciding how to allocate resources and evaluate performance.

Nine months ended September 30, 2019
Contract Type Supply Chain Management Aviation Federal Services Total
Cost-type $ —
$ 696
$ 103,027
$ 103,723
Fixed-price 160,878
75,260
58,098
294,236
Time and materials —
87,597
71,800
159,397
Total revenues $ 160,878
$ 163,553
$ 232,925
$ 557,356

The change in disaggregated revenue presentation did not result in any changes in our reported segments and had no effect on the reported results of operations.

A summary of revenues ~~for our~~by type and operating ~~groups by contract type~~segment for the three ~~and nine~~ months ended ~~September 30, 2018 are~~March 31, 2020 is as follows (in thousands):

Three months ended September 30, 2018
Contract Type Supply Chain Management Aviation Federal Services Total
Cost-type $ —
$ —
$ 44,638
$ 44,638
Fixed-price 51,834
20,152
19,234
91,220
Time and materials —
13,848
19,225
33,073
Total revenues $ 51,834
$ 34,000
$ 83,097
$ 168,931

Nine months ended September 30, 2018
Contract Type Supply Chain Management Aviation Federal Services Total
Cost-type $ —
$ 1,098
$ 137,560
$ 138,658
Fixed-price 161,961
59,525
51,577
273,063
Time and materials —
41,931
62,570
104,501
Total revenues $ 161,961
$ 102,554
$ 251,707
$ 516,222



	Aviation		Fleet		Federal and Defense		Total
Repair	$	32,808	$	—	$	—	$	32,808
Distribution	25,272		53,204		—		78,476
Cost Plus Contract	—		—		19,681		19,681
Fixed Price Contract	—		—		38,916		38,916
T&M Contract	—		—		7,537		7,537
Total	$	58,080	$	53,204	$	66,134	$	177,418

~~-13-~~

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~~September 30, 2019~~March 31, 2020

Table of Contents

A summary of revenues by type and operating segment for the three months ended March 31, 2019 is as follows (in thousands):



	Aviation		Fleet		Federal and Defense		Total
Repair	$	25,434	$	—	$	—	$	25,434
Distribution	23,936		51,704		—		75,640
Cost Plus Contract	—		—		27,840		27,840
Fixed Price Contract	—		—		19,867		19,867
T&M Contract	—		—		21,138		21,138
Total	$	49,370	$	51,704	$	68,845	$	169,919

Contract Balances

Billed receivables, unbilled receivables (contract assets), and contract liabilities are the results of revenue recognition, customer billing, and timing of payment receipts. Billed receivables, net, represent unconditional rights to consideration under the terms of the contract and include amounts billed and currently due from our customers. Unbilled receivables represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.

We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables ~~increased~~decreased from ~~$41.3~~$46.3 million at December 31, ~~2018~~2019 to ~~$54.2~~$43.9 million at ~~September 30, 2019,~~March 31, 2020, primarily due to the billing of our customers in excess of revenue recognized as performance obligations were ~~satisfied prior to the billing of our customers.~~satisfied. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, decreased from $5.0 million at December 31, ~~2018~~2019 to ~~$4.9~~$4.5 million at ~~September 30, 2019,~~March 31, 2020, primarily due to revenue recognized in excess of advance payments received. For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018,~~ we recognized revenue that was previously included in the beginning balance of contract liabilities of ~~$2.1~~$700 thousandand $1.5 million, ~~and $8.1 million,~~ respectively.

Performance Obligations

Our performance obligations are satisfied either at a point in time or over time as work ~~progresses or~~progresses. The majority of our revenue recognized at a point in ~~time. Revenues from products and services transferred to customers over~~ time ~~accounted for approximately 57% of our revenues~~is for the ~~three~~sale of vehicle and ~~nine months ended September 30, 2019 and September 30, 2018, primarily related to revenues~~aircraft parts in our ~~Federal Services Group~~Fleet and ~~for MRO services in our~~ Aviation ~~Group.~~segments. Revenues from products and services transferred to customers at a point in time accounted for approximately 43% of our revenues for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~September 30, 2018. The majority~~March 31, 2019. Revenues from products and services transferred to customers over time accounted for approximately 57% of our ~~revenue recognized at a point in time is~~revenues for the ~~sale of vehicle~~three months ended March 31, 2020 and ~~aircraft parts~~March 31, 2019, primarily related to revenues in our ~~Supply Chain Management~~Federal and Defense segment and MRO services in our Aviation ~~groups.~~segment.

As of ~~September 30, 2019,~~March 31, 2020, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was ~~$252~~$201 million. Performance obligations expected to be satisfied within one year and greater than one year are 97% and 3%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018,~~ revenue recognized from performance obligations satisfied in prior periods was not material.

~~(4)~~

VSE CORPORATION AND SUBSIDIARIES

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March 31, 2020

Table of Contents

(5) Debt

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


	September 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019
Bank credit facility - term loan	$	73,300		$	80,800		$	102,050		$	120,800
Bank credit facility - revolver loans	196,966			81,934			174,206			152,000
Principal amount of long-term debt	270,266			162,734			276,256			272,800
Less debt issuance costs	(1,735		)	(2,135		)	(2,556		)	(2,789		)
Total long-term debt	268,531			160,599			273,700			270,011
Less current portion	(10,716		)	(9,466		)	(17,820		)	(16,883		)
Long-term debt, less current portion	$	257,815		$	151,133		$	255,880		$	253,128

We have a loan agreement with a group of banks to provide working capital support, letters of credit and ~~acquisition financing.~~to finance acquisitions. The loan agreement, which was amended in ~~January 2018~~November 2019 and expires in January 2023, ~~has~~comprises a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters of credit. Financing costs associated with the loan agreement

~~-14-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2019~~

~~Table of Contents~~

amendment of approximately $1.5 million were capitalized and are being amortized over the five-year life of the loan. The fair value of outstanding debt as of ~~September 30, 2019~~March 31, 2020 under our bank loan facilities approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.

Our required term loan payments after ~~September 30, 2019~~March 31, 2020 are as follows (in thousands):


2019	$	2,500
2020	11,875		14,062
2021	14,375		21,563
2022	15,000		22,500
2023	29,550		43,925
Total	$	73,300	$	102,050

The maximum amount of credit available ~~to us~~ under the loan agreement for revolving loans and letters of credit as of ~~September 30, 2019~~March 31, 2020 was ~~$300~~$350 million. ~~Subject to the terms of the loan agreement, 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~~$72 thousand and $57 thousand in~~ no letters of credit outstanding as of ~~September 30, 2019~~March 31, 2020 and $54 thousand letters of credit outstanding as of December 31, ~~2018, respectively.~~2019.

Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or both facilities, up to an aggregate additional amount of $100 million.

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, 2019,~~March 31, 2020, the LIBOR base margin was 2.50% and the base rate base margin was 1.25%. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or ~~decreases, respectively.~~decreases.

The loan agreement requires ~~us to have~~ interest rate hedges on a portion of the outstanding term loan ~~for the first three years after the January 2018 amendment date of the agreement. To mitigate the risks associated with future~~until February 6, 2021. We have executed compliant interest rate ~~movements we have employed interest rate hedges to fix the rate on a portion~~hedges. The amount of our ~~outstanding borrowings for various periods. We executed interest rate swap agreements in February 2019 and February 2018. The notional amount of the~~debt with interest rate swap agreements was ~~$125~~$145 million and ~~$50~~$125 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

After taking into account the impact of interest rate swap agreements, as of ~~September 30, 2019,~~March 31, 2020, interest rates on portions of our outstanding debt ranged from ~~4.53%~~3.11% to ~~6.25%~~5.31%, and the effective interest rate on our aggregate outstanding debt was ~~4.91%~~4.06%.

Interest expense incurred on bank loan borrowings and interest rate hedges was approximately ~~$3.6~~$3.4 million and ~~$1.9~~$2.9 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, and 2018, respectively. Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $9.9 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively.

The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions, and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio and a minimum Fixed Charge Coverage Ratio. We were in compliance with required ratios and other ~~terms and conditions at September 30, 2019.~~

~~-15-~~

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~~September 30, 2019~~March 31, 2020

Table of Contents

~~(5)~~terms and conditions as of March 31, 2020. In the event that we are unable to maintain compliance with such covenants, we expect to obtain an amendment or waiver from our lenders, refinance the indebtedness subject to covenants or take other mitigating actions prior to a potential breach.

(6) 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 an assumed vesting of restricted stock awards.


	Three months ended September 30,		Nine months ended September 30,		Three months ended March 31,
	2019	2018	2019	2018	2020	2019
Basic weighted average common shares outstanding	10,970,123	10,881,106	10,953,581	10,874,331	11,000,204	10,920,171
Effect of dilutive shares	89,958	54,006	82,370	42,658	100,302	53,910
Diluted weighted average common shares outstanding	11,060,081	10,935,112	11,035,951	10,916,989	11,100,506	10,974,081

~~(6)~~(7) Commitments and Contingencies

~~Leases~~Contingencies

We determine at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term. Substantially all of our leases are long-term operating leases for facilities with fixed payment terms between two and 15 years. Our operating lease ROU assets are recorded in operating lease right-of-use assets on our accompanying unaudited consolidated balance sheet. The current portion of operating lease liabilities are presented within accrued expenses and other current liabilities, and the non-current portion of operating lease liabilities are presented under long-term operating lease liabilities on our accompanying unaudited consolidated balance sheet.

For leases with terms greater than 12 months, we record the related asset and lease liability at the present value of lease payments over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the term of the lease.

~~Our lease cost for the three and nine months ended September 30, 2019 included the following components (in thousands):~~

Three months Nine months
Operating lease cost $ 1,465
$ 4,715
Short-term lease cost 146
445
Less: sublease income (251 ) (791 )
Total lease cost, net $ 1,360
$ 4,369

Certain of our leases include options to extend the term of the lease or to terminate the lease. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors. Instead, we estimate our incremental borrowing rate based on information available at lease commencement to discount lease payments to present value.

~~-16-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2019~~

~~Table of Contents~~

~~The table below summarizes future minimum lease payments under operating leases, recorded on the balance sheet, as of September 30, 2019 (in thousands):~~

Operating Leases
Last three months of 2019 $ 972
2020 5,486
2021 5,192
2022 5,156
2023 4,790
After 2023 14,149
Minimum lease payments 35,745
Less: imputed interest (6,654 )
Present value of minimum lease payments 29,091
Less: current maturities of lease liabilities (3,967 )
Long-term lease liabilities $ 25,124

We made cash payments of approximately $4.8 million for operating leases during the nine months ended September 30, 2019, which are included in cash flows from operating activities in our unaudited consolidated statement of cash flows. The weighted average remaining lease term and discount rate for our operating leases were approximately 6.8 years and 6.0%, respectively at September 30, 2019.

~~Contingencies~~

On or about April 19, 2018 Joseph Waggoner, on behalf of himself and all similarly situated individuals, filed a lawsuit against VSE and two of our subcontractors in the United States District Court, Eastern District of Texas, Texarkana Division, alleging overtime compensation entitlement at a rate of one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek. The plaintiffs are seeking to certify the case as a collective action for similarly situated individuals. The plaintiffs work under a contract between defendants and the United States Army at the Red River Army Depot in Texas. The plaintiffs assert that employees' 15-minute unpaid work breaks should have been included as "working hours" in calculating overtime. Because we believe it is probable that VSE will incur a loss related to this matter, we have accrued a loss provision for this matter, which represents our reasonable estimate related to a possible unfavorable settlement. While we do not believe that we will have any additional liability that is material, there can be no guaranty that the ultimate resolution will not result in an additional liability that is material.

~~Other Matters~~

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

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

~~-17-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2019~~

~~Table of Contents~~

~~(7)~~(8) Business Segments and Customer Information

Business Segments

The following business segments names were changed effective January 1, 2020 as indicated below. The organization and financial reporting structure was not impacted by this change.

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

Aviation – Distribution and Repair Services

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

Fleet – Distribution and Fleet Services

Our Fleet segment (formerly Supply Chain Management ~~Group~~ ~~– Our Supply Chain Management Group supplies vehicle~~Group) provides parts, ~~primarily through a Managed Inventory Program ("MIP")~~inventory management, e-commerce fulfillment, logistics, supply chain support and ~~direct sales~~other services to support the commercial aftermarket medium- and heavy-duty truck market, the United States Postal Service ("USPS"), and the United States Department of Defense ("DoD") ~~and to commercial customers.~~. Core services include vehicle parts

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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~~Aviation Group~~ ~~– Our Aviation Group provides maintenance, repair and overhaul ("MRO") services, parts supply and~~ distribution, ~~and~~sourcing, IT solutions, customized fleet logistics, warehousing, kitting, just-in-time supply chain ~~solutions for commercial aerospace~~management, alternative product sourcing, and ~~business~~engineering and ~~general aviation jet aircraft engines and engine accessories.~~technical support.

Federal ~~Services Group~~and Defense – Logistics and Sustainment Services

Our Federal and Defense segment (formerly Federal Services ~~Group~~Group) provides ~~engineering, industrial,~~aftermarket MRO and logistics ~~foreign~~services to improve operational readiness and extend the life cycle of military ~~sales, legacy equipment~~vehicles, ships and aircraft for the DoD, federal agencies and international defense customers. Core services include base operations support; procurement; supply chain management; vehicle, maritime and aircraft sustainment services; IT services IT and ~~technical and consulting services primarily to DoD and other government agencies.~~energy consulting.

The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance. We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Our segment information is as follows (in thousands):

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Revenues:
Supply Chain Management Group $ 55,369
$ 51,834
$ 160,878
$ 161,961
Aviation Group 59,186
34,000
163,553
102,554
Federal Services Group 83,771
83,097
232,925
251,707
Total revenues $ 198,326
$ 168,931
$ 557,356
$ 516,222

Operating income:

Supply Chain Management Group $ 7,843
$ 7,783
$ 22,388
$ 23,547
Aviation Group 6,568
2,184
14,820
7,291
Federal Services Group 4,524
6,186
12,968
12,270
Corporate/unallocated expenses (1,720 ) (456 ) (4,732 ) (1,963 )
Operating income $ 17,215
$ 15,697
$ 45,444
$ 41,145



	Three months ended March 31,
	2020			2019
Revenues:
Aviation	$	58,080		$	49,370
Fleet	53,204			51,704
Federal and Defense	66,134			68,845
Total revenues	$	177,418		$	169,919

Operating income:
Aviation	$	(1,880	)	$	3,048
Fleet	6,906			6,988
Federal and Defense	4,924			3,385
Corporate/unallocated expenses	(216		)	(1,608		)
Operating income	$	9,734		$	11,813

Our Aviation segment operating income for the first quarter of 2020 was reduced by $7.5 million as a result of the loss on the sale of our Prime Turbines LLC subsidiary and certain related inventory assets. See Note (3) "Divestiture" to our Consolidated Financial Statements for additional details regarding this transaction. This decrease was offset by a gain of $1.1 million realized upon the completion of a sale-leaseback transaction for a property we owned in Miami, Florida. In the first quarter of 2020, we closed on a sale-leaseback agreement involving land and an office building utilized by our Aviation segment to conduct operations in Miami, Florida. Under the agreement, the land and building, with a net book value of $1.3 million was sold for a sale price of $2.6 million and leased back under a 6-year term operating lease commencing upon the closing of the transaction. The lease provides us with an option to extend the lease upon the expiration of its term in April 2026 for two additional five-year periods. In connection with the sale and leaseback transaction, we recognized the gain after incurring $200 thousand in selling expenses.

~~-18-~~

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2019~~March 31, 2020

Table of Contents

Customer Information

Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our commercial clients. The USPS, U.S. Army and Army Reserve, and U.S. Navy are our largest customers. Our customers also include various other government agencies and commercial entities. Our revenue by customer is as follows ~~(dollars in~~for the quarters ended March 31, (in thousands):

Three months ended September 30, Nine months ended September 30,
Customer 2019 % 2018 % 2019 % 2018 %
USPS $ 42,282
21.3 % $ 43,031
25.5 % $ 127,077
22.8 % $ 130,151
25.2 %

U.S. Navy 30,123
15.2 % 37,013
21.9 % 72,930
13.1 % 115,294
22.4 %
U.S. Army 48,529
24.5 % 38,167
22.6 % 132,581
23.8 % 122,502
23.7 %
U.S. Air Force 6,401
3.2 % 4,822
2.9 % 17,323
3.1 % 12,046
2.3 %
Total - DoD 85,053
42.9 % 80,002
47.4 % 222,834
40.0 % 249,842
48.4 %

Commercial aviation 56,839
28.7 % 32,641
19.3 % 159,400
28.6 % 98,213
19.0 %
Other commercial 6,015
3.0 % 3,386
2.0 % 16,189
2.9 % 10,418
2.0 %
Total - Commercial 62,854
31.7 % 36,027
21.3 % 175,589
31.5 % 108,631
21.0 %

Other government 8,137
4.1 % 9,871
5.8 % 31,856
5.7 % 27,598
5.4 %

Total $ 198,326
100 % $ 168,931
100 % $ 557,356
100 % $ 516,222
100 %



	Three months ended March 31,
Customer	2020		%		2019		%
DoD	$	64,134	36	%	$	62,701	37	%
Other government	45,990		26	%	53,659		32	%
Commercial	67,294		38	%	53,559		31	%
Total	$	177,418	100	%	$	169,919	100	%

~~(8)~~(9) Goodwill and Intangible Assets

Changes in goodwill for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 are as follows (in thousands):

Supply Chain Management Federal Services Aviation Total
Balance as of December 31, 2018 $ 63,190
$ 30,883
$ 104,549
$ 198,622
Increase from acquisition —
—
60,590
60,590
Balance as of September 30, 2019 $ 63,190
$ 30,883
$ 165,139
$ 259,212



	Fleet		Federal and Defense		Aviation			Total
Balance as of December 31, 2019	$	63,190	$	30,883	$	182,377		$	276,450
Decrease from divestiture	—		—		(7,379		)	(7,379		)
Balance as of March 31, 2020	$	63,190	$	30,883	$	174,998		$	269,071

We perform an annual review of goodwill for impairment during the fourth quarter and whenever events or other changes in circumstances indicate that the carrying value may not be fully recoverable. As a result of the decline in the macroeconomic environment caused by the COVID-19 pandemic and the decrease in our market capitalization, we performed an interim impairment analysis as of March 31, 2020. The result of the impairment analysis indicated that our reporting units' goodwill was not impaired. We will continue to evaluate these reporting units for potential goodwill impairment in 2020 as market conditions evolve.

In the first quarter of 2020, we completed the sale of the Prime Turbines subsidiary and certain related inventory assets and recognized a loss on the sale of the business and inventory of $7.5 million. Prime Turbines was reported within our Aviation segment. As part of determining the loss on sale, goodwill of $7.4 million was allocated to the disposal group on a relative fair value basis and was written-off upon the completion of the sale.

Intangible assets consist of the value of contract and customer-related intangible assets, acquired technologies and trade names. Amortization expense was approximately ~~$5.0~~$4.7 million and ~~$15.0~~$5.0 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and March 31, 2019, ~~respectively, and $4.0 million and $12.0 million for the three and nine months ended September 30, 2018,~~ respectively.

~~-19-~~

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2019~~March 31, 2020

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Intangible assets, net ~~were~~ comprised of the following (in thousands):


	Cost		Accumulated Amortization			Accumulated Impairment Loss			Net Intangible Assets		Cost		Accumulated Amortization			Accumulated Impairment Loss			Net Intangible Assets
September 30, 2019
March 31, 2020
Contract and customer-related	$	228,094	$	(98,278	)	$	(1,025	)	$	128,791	$	213,194	$	(99,997	)	$	(1,025	)	$	112,172
Acquired technologies	12,400		(9,378		)	—			3,022		12,400		(9,942		)	—			2,458
Trade names	24,670		(13,576		)	—			11,094		18,770		(14,234		)	—			4,536
Total	$	265,164	$	(121,232	)	$	(1,025	)	$	142,907	$	244,364	$	(124,173	)	$	(1,025	)	$	119,166

December 31, 2018
December 31, 2019
Contract and customer-related	$	173,094	$	(86,076	)	$	(1,025	)	$	85,993	$	227,594	$	(102,169	)	$	(1,025	)	$	124,400
Acquired technologies	12,400		(8,533		)	—			3,867		12,400		(9,660		)	—			2,740
Trade names	16,670		(11,638		)	—			5,032		18,770		(13,735		)	—			5,035
Total	$	202,164	$	(106,247	)	$	(1,025	)	$	94,892	$	258,764	$	(125,564	)	$	(1,025	)	$	132,175

~~(9)~~(10) Fair Value Measurements

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value.

The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1–Observable ~~inputs–~~inputs – quoted prices in active markets for identical assets and liabilities;

Level 2–Observable inputs other than the quoted prices in active markets for identical assets and ~~liabilities–~~liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets and amounts derived from valuation models where all significant inputs are observable in active markets; and

Level 3–Unobservable ~~inputs–~~inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 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, 2019 Fair Value December 31, 2018
Non-COLI assets held in Deferred Supplemental Compensation Plan Other assets Level 1 $ 651
$ 403
Interest rate swap agreements Accrued expenses/Other current assets Level 2 $ 1,720
$ 195
Earn-out obligation - short-term Current portion of earn-out obligation Level 3 $ 10,700
$ —
Earn-out obligation - long-term Earn-out obligation Level 3 $ 14,300
$ —

~~-20-~~

~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2019~~

~~Table of Contents~~



Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value March 31, 2020		Fair Value December 31, 2019
Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	946	$	710
Interest rate swap agreements	Accrued expenses	Level 2	$	2,636	$	1,473
Earn-out obligation - short-term	Current portion of earn-out obligation	Level 3	$	5,300	$	31,700
Earn-out obligation - long-term	Earn-out obligation	Level 3	$	—	$	5,000

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

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~~We evaluate our hedges to determine their effectiveness and

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

Table of Contents

as of March 31, 2020 and December 31, 2019, the swaps were determined to be fully effective. Accordingly, the fair value of the swap agreements, which is a liability ~~of approximately $1.7 million, has been reported~~recorded in accrued expenses ~~at September 30, 2019. The fair value of the swap agreements, which was an asset of approximately $195 thousand, was reported in~~and other current ~~assets~~liabilities in our consolidated balance sheets, was approximately $2.6 million and $1.5 million at March 31, 2020 and December 31, ~~2018.~~2019, respectively. The offset, net of an income tax effect of approximately ~~$429~~$658 thousand and ~~$49~~$367 thousand, was included in accumulated other comprehensive income in the accompanying balance sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred. We expect the hedges to remain fully effective during the remaining terms of the swap agreements. We determine the fair value of the swap agreements based on a valuation model using primarily observable market data inputs.

We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation. Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate. If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement.

Changes in earn-out obligation measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 are as follows (in thousands):



	Current portion			Long-term portion			Total
Balance as of December 31, 2019	$	31,700		$	5,000		$	36,700
Earn-out payments	(31,700		)	—			(31,700		)
Fair value adjustment included in net income	300			—			300
Reclassification from long-term to current	5,000			(5,000		)	—
Balance as of March 31, 2020	$	5,300		$	—		$	5,300

~~(10)~~(11) Income Taxes

Our effective tax rate was ~~22.1%~~46.7% and ~~23.2%~~23.7% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively, and 24.9% and 25.0% for the three and nine months ended September 30, 2018,~~ 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 year to year. The higher effective tax rate for the three months ended March 31, 2020 primarily results from a full valuation allowance established to offset the capital loss benefit in connection with our sale of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period. We expect a lower effective tax rate for the ~~nine months~~year ended ~~September 30, 2019 primarily results from~~December 31, 2020 than the ~~fair value increase~~first quarter rate when the impact of ~~approximately $1.7 million to our COLI assets and an increase in foreign-derived intangible income ("FDII") deduction estimated for 2019.~~the discrete item is spread over the entire twelve month period.

~~(11)~~(12) Recently Issued Accounting Pronouncements Not Yet Adopted

In ~~June 2016,~~March 2020, the FASB issued ASU ~~No. 2016-13,~~2020-04, ~~Measurement~~"Reference Rate Reform (Topic 848): Facilitation of ~~Credit Losses~~the Effects of Reference Rate Reform on Financial ~~Instruments~~Reporting."~~, which requires companies~~ The amendments provide optional guidance for a limited time to ~~record an allowance~~ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected ~~credit losses over~~to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the ~~contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. We will adopt~~optional expedients provided by the new ~~standard effective January 1, 2020. We currently are assessing the impact that this standard will have on our consolidated financial statements.~~

~~In August 2018, the FASB issued ASU No. 2018-13,~~ ~~Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~, which eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We currently are assessing the impact that this standard will have on our consolidated financial statements.

~~In August 2018, the FASB issued ASU No. 2018-15,~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,~~ which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We currently are assessing the impact that this standard will have on our consolidated financial statements.standard.

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

~~Executive~~General Overview

~~Customers and Services~~Our Business

~~We are~~VSE is a ~~diversified services~~leading provider of aftermarket distribution and supply chain management company that assists our customers in maintaining, extending the service life, and improving the performance of their transportation equipment and other assets and systems. We provide logistics and distributionrepair services for ~~systems~~land, sea and ~~equipment~~air transportation assets for government and ~~professional and technical~~commercial markets. Our core services to the United States Government (the "government"), including the United States Department of Defense ("DoD"), the United States Postal Service ("USPS"), federal civilian agencies, and to commercial and other customers. Our largest customers are the DoD and the USPS. Our operations include ~~supply chain management solutions, parts supply and distribution, and~~ maintenance, repair and overhaul ~~(“MRO”~~("MRO") services, parts distribution, supply chain management and logistics, engineering support, and consulting and training services for ~~vehicle fleet, aviation~~global commercial, federal, and ~~other customers; vehicle~~military and ~~equipment maintenance~~defense customers. We also provide information technology and ~~refurbishment; logistics; engineering;~~ energy ~~services; IT and health care IT solutions; and~~ consulting services.

1st Choice Aerospace Acquisition

In January 2019, we acquired 1st Choice Aerospace, ~~Inc. ("~~with operations in Florida and Kentucky. 1st Choice ~~Aerospace"), a provider of~~provides component MRO services and products for new generation and legacy commercial ~~aircraft.~~aircraft families. 1st Choice Aerospace ~~has operations in Florida and Kentucky and operates as part~~is a subsidiary of VSE Aviation, Inc. under our Aviation ~~Group.~~segment. See Note (2) "Acquisition" to our Consolidated Financial Statements included in Item 1 of this filing for additional information regarding our acquisition of 1st Choice Aerospace.

~~CEO Succession~~Prime Turbines Divestiture

~~Our Board~~In February 2020, we sold our subsidiary Prime Turbines, LLC for $20.7 million in cash. VSE’s Aviation segment will no longer offer turboprop engine MRO services, and will concentrate on higher growth potential component/accessory repair and parts distribution while further expanding our presence within the global commercial and general aviation markets. Prime Turbines' revenues totaled approximately 4% of ~~Directors appointed John A. Cuomo as Chief Executive Officer and President and as a member of the Board of Directors effective April 15,~~VSE’s revenue for 2019.

Organization and Segments

~~We have~~Our operations are conducted within three reportable segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense. We provide more information about each of these reportable segments ~~aligned~~under Item 1 "Business-History and Organization” in our Form 10-K for the year 2019.

Concentration of Revenues




	(in thousands)
	For the three months ended March 31,
Source of Revenue	2020		%	2019		%
DoD	$	64,134	36	$	62,701	37
Other government	45,990		26	53,659		32
Commercial	67,294		38	53,559		31
Total revenues	$177,418		100	$	169,919	100

COVID-19 Discussion

Forward Looking Information

Disclosures that address business and operating considerations associated with the COVID-19 pandemic are made under highly uncertain conditions and may involve forward looking information that is based on assumptions and expectations regarding future events. Please refer to the discussion under Part II, Item 1A "Risk Factors" of this Form 10-Q with respect to our discussion of trends or uncertainties arising from or impacted by the COVID-19 pandemic.

Demand for Products and Services, Operating Results, and Financial Condition

As further discussed below, the COVID-19 global pandemic did not have a significant impact on any of our businesses through the end of the first quarter as compared to other industries, and we have continued to operate with limited disruption. Our Aviation

segment will see a reduction in demand from customers for our products and services throughout the remainder of 2020. A significant decrease in demand would adversely impact our operating ~~groups: 1) Supply Chain Management; 2) Aviation; and 3) Federal Services.~~

~~Supply Chain Management Group~~ - ~~Our Supply Chain Management Group provides sourcing, acquisition, scheduling, transportation, shipping, logistics, data management and other services to assist our clients~~results for 2020. We cannot estimate with ~~supply chain management efforts. Operations~~certainty the severity of this ~~group are conducted by~~impact at this time. While current conditions raise the potential for sluggish performance for our ~~wholly owned subsidiary Wheeler Bros., Inc., which supports~~Fleet segment and our Federal and Defense segment, we anticipate limited disruption in demand for the ~~USPS, commercial truck fleets,~~products and ~~DoD with fleet management and maintenance solutions, managed inventory~~ services ~~and~~they offer, as compared to other ~~vehicle parts solutions. The primary revenue source for this group is generated from~~industries, due to the ~~sale~~nature of ~~vehicle parts and performance of mission critical supply chain services to support the USPS delivery fleet.~~

~~Aviation Group~~ - their customer bases. Our ~~Aviation Group provides~~ parts supply ~~and distribution, supply chain solutions, and MRO services~~ for commercial aerospace and business and general aviation aircraft, engines and accessories. This group offers a range of complementary services and supplies to a diversified client base of commercial and regional airlines, corporate and private aircraft owners, aviation manufacturers, other aviation MRO providers, cargo transporters and agricultural clients.

~~Federal Services Group~~ - Our Federal Services Group performs 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. Customers include the U.S. Navy and Marine Corps, U.S. Army and Army Reserve, U.S. Air Force, and various other DoD and federal government customers. Significant work efforts for this group include assistance to the U.S. Navy in executing its Foreign Military Sales (“FMS”) 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, various vehicle and equipment refurbishment and maintenance programs for U.S. Army commands, and various task orders under the U.S. Air Force Contract Field Teams (“CFT”) Program.

~~Our Federal Services Group also provides energy and environmental consulting services and IT solutions and services for various DoD and federal civilian agencies,~~truck fleets, including the United States ~~Department~~Postal Service ("USPS") delivery vehicles and our DoD program services, provide support for the essential services conducted by our customers. We have near-term opportunities to provide COVID-19 related products to one of ~~Energy; 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,
2019 2018
Source of Revenue Revenues % Revenues %
USPS $ 127,077
23 $ 130,151
25
FMS Program 63,201
11 103,955
20
Other 367,078
66 282,116
55
Total revenues $ 557,356
100 $ 516,222
100

~~Management Outlook~~these customers.

We ~~finished~~have not experienced a material adverse change in our financial condition at this time, however, a prolonged disruption in the third quarter of 2019 with increases in revenues and operating income over both the third quarter of the prior year and the second quarter of the current year. Our 1st Choice Aerospace acquisition in January 2019 and new distribution programs implemented in 2018 are driving our Aviation Group to stronger results. Quarterly revenuesdemand for our ~~Supply Chain Management Group improved over the prior year~~products and ~~prior quarter of the current year. Quarterly revenues for~~services could have an adverse impact on our ~~Federal Services Group were flat compared to the prior year~~operating results and ~~improved over the prior quarter of the current year.~~

~~Aviation Group~~

~~Our Aviation Group results have benefited from strong performance of both our distribution and MRO businesses. Growth~~cause a material adverse change in our distribution services has been driven by our international operations in Singapore and Germany. Growth in our MRO services has been driven by our acquisition of 1st Choice Aerospace. We believe that our international distribution businesses and our acquisition of 1st Choice Aerospace have positioned us in commercial airline markets that are larger and have greater growth potential than our traditional business and general aviation markets. Products and services provided by these newer businesses comprise approximately 42% of revenues for this group in 2019.financial condition. We will continue to ~~service~~evaluate the nature and extent of future impacts of COVID-19 on our ~~traditional business~~business.

Capital, Financial Resources, Credit Losses, and ~~general aviation market lanes while focusing on growth in our newer commercial aerospace markets.~~Liquidity

Our ~~Singapore operation began generating revenue~~debt capital and liquidity position have not experienced a material adverse change resulting from COVID-19 at this time, and we are meeting our obligations in a timely manner. We currently have sufficient cash flows and unused loan commitments to meet our obligations in the ~~second quarter of 2018 as we extended new product lines to new end-user clients~~near term. Weakness in the Asia-Pacific market. Our facility in Germany has transitioned from a repair shop to a regional distribution business and its revenues have increased. We have extended key distribution agreements to new geographic markets. We believe our distribution initiatives will provide sustainable revenue sources with viable growth potential that will enhance our future results. The addition of 1st Choice Aerospace broadens our product lines and client base, and we see opportunities to strategically align 1st Choice Aerospace’s offerings with our existing domestic and international markets, including our Singapore and European initiatives. Since acquisition, 1st Choice Aerospace's financial performance has exceeded our expectations. We are optimistic about the outlook for our Aviation ~~Group.~~

~~Supply Chain Management Group~~

~~Our Supply Chain Management Group continues~~segment customer markets has caused a delay in receivables collections and may increase bad debt expense in future periods. We do not anticipate receivables collections to ~~increase parts sales~~negatively impact our Fleet or Federal and supply chain and inventory management support services to commercial customers. Our commercial client base includes companies in a wide array of businesses that have vehicle fleets required to meet mission critical delivery or service schedules. We are capturing new customers and increasing revenue using e-commerce solutions. Overall revenues for the third quarter showed improvement over both the third quarter of the prior year and the second quarter of 2019.Defense segments.

We have a loan agreement with a bank group comprised of ten banks, including multiple large banks and multiple regional banks. Our banks have been supportive in the past and during the current COVID-19 crisis, and we are ~~closely monitoring~~confident that they will work with us to meet the ~~USPS next-generation delivery vehicle (“NGDV”) procurement effort, which is progressing slower than~~challenges presented by the ~~USPS had previously expected.~~current economic conditions created by COVID-19. The potential for future declines in our earnings may impact our financial covenant ratios in future periods, and may challenge our ability to meet these covenants. We are ~~also positioning ourselves~~proactively working with our bank group to ~~support newly procured vehicles eventually placed~~mitigate this circumstance.

Balance Sheet Asset Valuation

The valuation of our goodwill and intangible assets could be impacted by changes in service and aging vehicles that remain in service. While it will likely be several years before the NGDV is placed in service in significant numbers, the USPS has begun some shorter-term annual vehicle acquisitions through the procurement of commercial off-the-shelf ("COTS") mass-market vehicleseconomic conditions affecting our revenue projections and the ~~retirement~~valuation of ~~some of its aging COTS vehicles. This transition has contributed to a decline~~public companies used in ~~sales to the USPS of about 2%~~our valuation process. See "Material Impairments, Restructuring Charges" for the nine months ended September 30, 2019. As the new COTS vehicles begin to age, we expect the demand for replacement parts will increase. As a matter of USPS practice, we are a provider of replacement parts for all USPS vehicle fleet assets, including the COTS vehicles. While we cannot predict with certainty the impact of the USPS NGDV procurement and concurrent retirement of older fleet assets on our future revenues, wefurther details. We currently do not believe that ~~our years of service, unique~~

knowledge of this client’s complex operational model and maintenance facility processes and procedures, and our superior performance strategically position us to continue to serve as a key vehicle fleet sustainment partner regardless of sourcethere are or ~~vintage. We expect to continue supporting USPS during its comprehensive NGDV transition, embracing emerging technologies spanning the next decade or longer.~~

~~Federal Services Group~~

We recently hired new leadership for our Federal Services Group as we prepare to navigate through a challenging year ahead for this group with a sharper focus on growth. The contract for our RRAD ERS program is scheduled to expire in November 2019 and our work on this program will ~~cease. While this program has been one of our more~~be significant ~~revenue generators, our profit margins have been modest. In the coming year, we have other significant programs for which we will have to compete for the successor contracts.~~

Our Federal Services Group revenues declined in the first nine months of 2019 compared to the same period of 2018 due primarily to a decrease in our FMS revenues. This decline has been partially offset by increases in revenues on other programs. This change in the mix of contract work has benefited our profit margins.

~~Bookings and Funded Backlog~~

Revenues for federal government contract work performed by our Federal Services Group 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 does not generate revenue due to contract expiration, reduction in work levels or de-obligation upon contract completion.

A summary of our bookings and revenues for our Federal Services Group for the nine months ended September 30, 2019 and 2018, and funded contract backlog as of September 30, 2019 and 2018 was as follows (in millions):

2019 2018
Bookings $ 190
$ 284
Revenues $ 233
$ 252
Funded Contract Backlog $ 252
$ 345

We will occasionally perform contract work prior to formalizing contract funding ("risk funding"). Revenue related to work performed under risk funding is not recognized until it can be reliably estimated and its realization is probable. We recognize such revenue when the associated costs are incurred or the work is performed. We are at risk of loss for any risk funding not received. Included in our unbilled receivables are revenues recognized for which we have not received formalized funding of approximately $10.8 million and $4.7 million as of September 30, 2019 and~~December 31, 2018, respectively. We believe that we are entitled to reimbursement and expect to receive all of this funding.~~

~~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 11 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 2018 Form 10-K for a full discussion of our critical accounting policies.

~~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~~judgments in determining the fair value of other assets on our ~~reporting units using~~balance sheet or that our ability to timely account for them will be negatively impacted. While the COVID-19 crisis may cause some delays in collecting some of our accounts receivable and potentially give rise to some bad debt write offs, we do not expect the majority of our accounts receivable to be affected in such a ~~weighting of fair values derived from the income approach and market~~manner.

Material Impairments, Restructuring Charges

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 2018, we performed our annual goodwill impairment analysis for each of our reporting units with goodwill. The results of the~~Our most recent impairment analysis indicated that our reporting units in our Fleet and Federal and Defense segments had fair values substantially in excess of their carrying values, ~~except~~and we believe the COVID-19 induced economic crisis is not likely to have an adverse impact on customer demand for ~~our VSE Aviation~~products and ~~Akimeka reporting units.~~services provided by these two segments. Accordingly, at this time we do not anticipate any impairments in these two business segments.

~~The fair value of~~Our interim impairment analysis also indicated that our VSE Aviation reporting unit, within our Aviation ~~Group, exceeded~~segment, approximated its carrying value, ~~by approximately 6%. VSE Aviation achieved its 2018 earnings projections primarily due to growth in our Singapore distribution operation. While revenues~~ and ~~operating income in years prior to 2018 did not meet our cash flow projections, primarily due to a decreased demand for new parts and slower than anticipated development of new business opportunities,~~ we ~~believe~~determined that those conditions were temporary and that the overall outlook for our VSE Aviation business remains consistent with our long-term projections. Under the income approach, we used a 13.5% discount rate (a 100 basis point increase from the discount rate used in the prior year annual analysis), a compounded annual revenue growth rate of approximately 8% over a seven-year period, and a long-term revenue growth rate of three percent in the terminal year. Our compounded annual growth rate over the seven-year period is primarily based on projected organic growth, which is corroborated by market studies related to our aviation business, and significant initiatives, including international opportunities for parts distribution. We believe the discount rate properly reflects the risks in our future cash flows assumptions including the risk that the new business opportunities take longer to develop or do not meet our expectations. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") and factored in a control premium and applied such multiples to both of VSE Aviation's historical and one-year projected revenues and EBITDA. Negative changes in the key assumptions used in the annual impairment analysis or an increase in the carrying value may result in a future impairment of this reporting ~~unit's goodwill.~~

~~Based on~~unit has an increased likelihood of impairment if a prolonged downturn in customer demand were to occur. Prior to the ~~results~~onset of the ~~annual impairment analysis performed, we have determined~~COVID-19 pandemic, our Aviation segment was performing strongly. We anticipate that VSE Aviation is at risk of a future goodwill impairment if there are future declines in our cash flow projections or if we are unsuccessful in implementing our revenue growth plans. Additionally, the fair value of VSE Aviation could be adversely affected by other market factors such as an increase in the discount rate used in the income approach or a decrease in the market multiples used in the market approach, or an increase in the carrying value of this reporting unit. We will perform our annual goodwill impairment test during the fourth quarter of 2019 and will perform a quantitative assessment of the fair value of our VSE Aviation reporting ~~unit. As of September 30, 2019~~unit will experience a downturn in customer demand in the near term, but believe in the market opportunities for us in the long term. Accordingly, at this time we do not anticipate any material impairments in our ~~balance sheet included goodwill associated with VSE~~ Aviation ~~of approximately $104.5 million.~~segment.

The ~~fair value~~COVID-19 induced economic crisis did not result in any material restructuring charges in the quarter.

Administrative Continuity and Reporting Systems

We have modified our workforce policies, procedures and capabilities for most of our ~~Akimeka~~administrative personnel to work remotely, including our financial reporting ~~unit, within~~personnel. This remote work arrangement is working as intended and has not had any adverse effect on our ~~Federal Services Group, exceeded its carrying value by approximately 30%. Akimeka has experienced a reduction in services performed in prior years due~~ability to ~~a decline in services ordered by clients on contracts~~maintain financial operations, including financial reporting systems, internal control over financial reporting, 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. These factors have been considered in the projections used in our impairment analysis. 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 discount rate used in the income approach or a decrease in the market multiples used in the market approach, or an increases in carrying value of this reporting unit. We will perform our annual goodwill impairment test during the fourth quarter of 2019disclosure controls and ~~will perform a quantitative assessment of the fair value of our Akimeka reporting unit. The carrying value of Akimeka as of September 30, 2019 included goodwill of approximately $30.9 million.~~

~~As of September 30, 2019, we have no intangible assets with indefinite lives and we had an aggregate of approximately $259 million of goodwill associated with our acquisitions.~~procedures.

Business Continuity Plans

~~Results~~As the COVID-19 pandemic continues to drive global uncertainty, we remain focused on protecting the safety of ~~Operations~~employees, continuing to serve our customers with the highest quality product and repair services, and on upholding the strength of the business.

Our business operations are deemed critical and essential by the U.S. Department of Homeland Security. All of our repair, distribution and base operations facilities remain open and operational, and we continue to deliver products and services to customers without interruption. We implemented virus prevention protocols consistent with guidelines issued by the U.S. Centers for Disease Control and Prevention, and mandated remote working where practicable.

We do not anticipate any material expenditures or resource constraints in supporting our operations at this time.

Impact on Supply Chain

Major customers and suppliers of our Fleet, Federal and Defense and Aviation segments remain open and continue to operate. Our Fleet segment customers provide essential services, and we, along with our suppliers, play a key role in keeping truck fleets operable. Our Federal and Defense segment customers continue their mission critical essential services. Our Aviation segment customers continue to operate, albeit at lower rates. While the overall economic downturn may cause some slowness in every industry, we do not anticipate any material parts availability concerns, disruptions in our supply of materials or resources, or a material adverse impact on our procurement capabilities or product costs.

Human Capital Resources

The health and safety of our employees, customers and communities are of primary concern. We have taken significant steps to protect our workforce including but not limited to, working remotely. For our locations with an active on-site workforce, we implemented virus prevention protocols consistent with guidelines issued by the U.S. Centers for Disease Control and Prevention. We have taken steps at our facilities to ensure additional employee safety, including implementing separate operational shifts, strict social distancing requirements, providing personal protective equipment, and stringent requirements for cleaning and sanitizing at our work sites. We do not anticipate our operations being materially impacted by any constraints or other impacts on our human capital resources and productivity.

We recently completed a cost reduction plan which included a reduction in workforce. The plan is expected to reduce approximately $13 million in expenses on an annualized basis beginning in the second quarter of 2020.

Travel Restrictions

Travel restrictions and border closures may limit the manner in which our sales and support staff service our customers. We do not anticipate this will have a material impact on our ability to operate.

Business Trends

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

Aviation Segment

Organic revenue growth in our Aviation businesses for the first quarter was approximately 18%. Growth in our distribution services was driven by our parts distribution expansion to global commercial and business and general aviation customers. Growth in our repair services was driven primarily by expansion of our engine accessory and component repair work. We believe this progress, together with the introduction of new sales initiatives, has positioned us for above market growth for the remainder of 2020. However, the COVID-19 pandemic induced a reduction in global demand for air travel, and decreased revenue passenger miles will have an adverse impact on demand for our Aviation products and services for the remainder of 2020. Since industry demand is currently uncertain, we cannot predict the extent the pandemic will have on our Aviation revenues if health and safety requirements such as travel restrictions and social distancing measures are ~~as follows (dollars in thousands):~~extended.

Three months Nine months Change
ended September 30, ended September 30, Three Nine
2019 2018 2019 2018 Months Months
Revenues $ 198,326
$ 168,931
$ 557,356
$ 516,222
$ 29,395
$ 41,134
Costs and operating expenses 181,111
154,934
511,912
476,777
26,177
35,135
Gain on sale of contract —
1,700
—
1,700
(1,700 ) (1,700 )
Operating income 17,215
15,697
45,444
41,145
1,518
4,299
Interest expense, net 3,706
2,340
10,262
6,697
1,366
3,565
Income before income taxes 13,509
13,357
35,182
34,448
152
734
Provision for income taxes 2,982
3,323
8,154
8,611
(341 ) (457 )
Net income $ 10,527
$ 10,034
$ 27,028
$ 25,837
$ 493
$ 1,191
In the first quarter of 2020, we divested our Prime Turbines subsidiary, a business offering turboprop engine MRO services. We will no longer offer these services, focusing instead on higher growth component/accessory repair and parts distribution.

Fleet Segment

Our ~~revenues increased~~Fleet segment continues to focus on both its core USPS and DOD customer base and customer diversification. Non-USPS segment revenue grew approximately ~~$29.4 million or 17.4% for~~49% on a year-over-year basis in the ~~third~~first quarter of ~~2019~~2020, supported by increased activity with commercial parts distribution. To enable this transition, we are expanding our presence in both new and ~~approximately $41.1 million or 8.0% for~~existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs to new commercial customers. Our e-commerce fulfillment services resulted in continued growth in the first ~~nine months~~quarter and we expect additional expansion of ~~2019, compared~~this service offering going forward. We believe the COVID-19 pandemic is likely to have a limited adverse impact on revenues for this segment of our business, as demand from our commercial truck fleet customers and our e-commerce platforms appears to be progressing steadily.

Federal and Defense Segment

We entered 2020 with a focus on growing this segment of our business and redefining VSE in the federal marketplace. We are investing in business development, growing our capability offerings, and broadening our range of new business targets to build our contract backlog and expand our markets. The anticipated revenue decline experienced by this segment in the first quarter of 2020 is primarily attributable to the ~~same periods~~expiration of ~~2018.~~ a large U.S. Army contract in January. We are confident our refocused business development efforts in 2020 will produce revenue growth in subsequent years. We expect the COVID-19 pandemic to have a limited adverse impact on revenues for this segment, as the U.S. government is expected to maintain critical DoD preparedness programs.

Financial Statement Presentation

The ~~change~~following discussion provides a brief description of certain key items that appear in ~~revenues resulted primarily~~our consolidated financial statements:

Revenues

Revenues are derived from ~~an increase in revenues~~the delivery of products and from ~~our Aviation Group~~professional and technical services performed through various ordering agreements and contract agreements. The three primary types of ~~approximately $25.2 million~~contracts used are cost-type, fixed-price, and time and materials. Revenues from these contract types result from work performed on these contracts and from costs for ~~the third quarter~~materials and approximately $61.0 million for the nine months, which include revenues from our acquisition of 1st Choice Aerospace. Our Federal Services Group revenues were substantially unchanged for the third quarterother work-related contract allowable costs.

Costs and decreased approximately $18.8 million for the nine months. Our Supply Chain Management Group revenues increased approximately $3.5 million for the third quarter and decreased approximately $1.1 million for the nine months.Operating Expenses

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~~segments 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. We reduced controllable costs during the first quarter of 2020 and plan for further reductions to begin in the second quarter of 2020.

Bookings and Funded Backlog

Revenues for federal government contract work performed by our Federal and Defense segment depend on contract funding ("bookings”), and bookings generally occur when contract funding documentation is received. Funded contract backlog is an indicator of potential future revenue. While bookings and funded contract backlog generally result in revenue, we may occasionally have funded contract backlog that expires or is de-obligated upon contract completion and does not generate revenue.

For the first quarter of 2020, Federal and Defense segment bookings increased 31% year-over-year to $67 million, while total funded backlog declined 28% year-over-year to $201 million. The decline in funded backlog was primarily attributable to the expiration of a contract in the first quarter of 2020. The current management team is focused on revitalizing this business, with an emphasis on growing backlog and developing a channel of new customer activity in the current year, with good process in the first quarter.

A summary of our bookings and revenues for our Federal and Defense segment for the three months ended March 31, 2020 and 2019, and funded contract backlog as of March 31, 2020 and 2019 is as follows (in millions):



	2020		2019
Bookings	$	67	$	51
Revenues	$	66	$	69
Funded Contract Backlog	$	201	$	278

Critical Accounting Policies, Estimates and Judgments

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

Revenue Recognition

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

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

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

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

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

Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned. Variable consideration, typically in the form of award fees, is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not occur, when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment based on current facts and circumstances.

Revenues on fixed-price contracts are recorded as work is performed over the period. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. For such contracts, we

estimate total costs at the inception of the contract based on our assumptions of the cost elements required to complete the associated tasks of the contract and assess the effects of the risks on our estimates of total costs to complete the contract. Our cost estimates are based on assumptions that include the complexity of the work, our employee labor costs, the cost of materials, and the performance of our subcontractors. These cost estimates are subject to change as we perform under the contract and as a result, the timing of revenues and amount of profit on a contract may change as there are changes in estimated costs to complete the contract. Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes.

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

Revenues related to work performed on government contracts at risk, which is work performed at the customer's request prior to the government formalizing funding, is not recognized until it can be reliably estimated and its realization is probable.

A substantial portion of contract and administrative costs are subject to audit by the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 2013 and prior years with no material adjustments to our results of operations or financial position. While we maintain reserves to cover the risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.

Business Combinations

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

As part of the agreement to acquire certain subsidiaries, we may be obligated to pay contingent consideration should the acquired entity meet certain earnings objectives subsequent to the date of acquisition. As of the acquisition date, contingent consideration is recorded at fair value as determined through the use of a probability-based scenario analysis approach. Under this approach, a set of potential future subsidiary earnings is estimated based on various revenue growth rate assumptions for each scenario. A probability of likelihood is then assigned to each potential future earnings estimate and the resultant contingent consideration is calculated and discounted using a weighted average discount rate. The fair value is measured each reporting period subsequent to the acquisition date and any changes are recorded within cost and operating expenses within our consolidated statement of income. Changes in either the revenue growth rates, related earnings or the discount rate could result in a material change to the amount of the contingent consideration accrued.

Goodwill and Intangible Assets

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

Despite the excess fair value identified in our 2019 impairment assessment, market conditions from the COVID-19 pandemic resulted in a significant decline in our market capitalization. Over the same period, the equity value of our peer group companies and the

overall U.S. stock market also declined significantly amid market volatility. Based on these factors, we concluded that a triggering event occurred and, we performed a qualitative assessment whether it was more likely than not that our goodwill was impaired as of March 31, 2020.

We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including the duration and extent of impact to our business from the COVID-19 pandemic. Based on our qualitative assessment as of March 31, 2020, we have determined it is more likely than not that the fair value exceeded the carrying value of our reporting units with the exception of our VSE Aviation reporting unit, which required a quantitative interim impairment test.

Declines were driven by the uncertainty surrounding the outbreak of the COVID-19 and macroeconomic events, which resulted in decreases in air travel. Accordingly, an interim quantitative impairment test was performed as of March 31, 2020 for our VSE Aviation reporting unit. Under the income approach, the fair value for our VSE Aviation reporting unit was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We used our internal forecasts, updated for recent events, to estimate future cash flows and an increased discount rate of 100 basis points from the rate used in the analysis performed in the prior year. Based on our interim goodwill impairment analysis, the fair value of our VSE Aviation reporting unit approximated its carrying value. Because the fair value of our VSE Aviation reporting unit approximated its carrying value, a negative change in the key assumptions used in the interim impairment analysis or an increase in the carrying value may result in a future impairment of this reporting unit's goodwill. Any significant adverse changes in future periods to our internal forecasts or external market conditions could reasonably be expected to negatively affect our key assumptions and may result in future goodwill impairment charges which could be material. For example, keeping all other assumptions the same, an additional increase in the discount rate or an increase in the carrying value could result in an impairment in the reporting unit's goodwill.

The carrying value of our VSE Aviation reporting unit included goodwill of approximately $175 million as of March 31, 2020.

As of March 31, 2020, we have no intangible assets with indefinite lives and we had an aggregate of approximately $269 million of goodwill associated with our acquisitions.

We also review the recoverability of our long-lived intangible assets with finite lives when an indicator of impairment exists. For the same reasons discussed above, we assessed the recoverability of the long-lived intangible assets with finite lives as of March 31, 2020. Based on our analysis of estimated undiscounted future cash flows expected to result from the use of these long-lived intangible assets with finite lives, we determined that their carrying values were recoverable.

Income Taxes

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

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

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 (12) of the Notes to our Unaudited Consolidated Financial Statements in Item 1 of this report.

Results of Operations

The following discussion of our Results of Operations and Liquidity and Capital Resources includes a comparison of first quarter 2020 to first quarter 2019.



	Three months					Change
	ended March 31,					Three
	2020			2019		Months
Revenues	$	177,418		$	169,919	$	7,499
Costs and operating expenses	161,256			158,106		3,150
Loss on sale of a business entity and certain assets	(7,536		)	—		(7,536		)
Gain on sale of property	1,108			—		1,108
Operating income	9,734			11,813		(2,079		)
Interest expense, net	3,486			3,158		328
Income before income taxes	6,248			8,655		(2,407		)
Provision for income taxes	2,916			2,052		864
Net income	$	3,332		$	6,603	$	(3,271	)

Quarter Ended March 31, 2020 Compared to Quarter Ended March 31, 2019

Revenues

Our revenues increased approximately$7.5 million or 4.4% for the first quarter of 2020 compared to the same period for the prior year. The change in revenues resulted from an increase in our Aviation segment of approximately $8.7 million, an increase in our Fleet segment of approximately $1.5 million, and a decrease in our Federal and Defense segment of approximately $2.7 million. See "Segment Operating Results" for a breakdown of our results of operations by segment.

Costs and Operating Expenses

Our costs and operating expensesincreased approximately ~~$26.2~~$3.2 million or ~~16.9%~~2.0% for the ~~third~~first quarter of ~~2019 and approximately $35.1 million or 7.4% for the nine months,~~2020 compared to the same ~~periods of 2018. Costs and operating expenses for our Federal Services Group increased~~period for the ~~quarter and decreased for the nine months. Costs and operating expenses for our Supply Chain Management Group increased for the quarter and were substantially unchanged for the nine months.~~prior year. Costs and operating expenses for our Aviation ~~Group~~segment and our Fleet segment increased for the quarter and costs and operating expenses for our Federal and Defense segment decreased for the ~~nine months.~~quarter due to changes in revenues.Costs and operating expenses for 2020 included approximately $300 thousand of earn-out adjustment expense. Costs and operating expenses for 2019 included approximately $1.1 million of acquisition related and executive succession costs.

Loss on Sale of a Business Entity and Certain Assets

Loss on sale of a business entity and certain assets of $7.5 million is comprised of the difference between the carrying value on our books for our Prime Turbines, LLC business and the sale price upon divestiture, plus the difference between the carrying value on our books of inventory sold that is used to support the operations of our divested Prime Turbines, LLC business and the sale price of the inventory upon divestiture.

Gain on Sale of Property

Gain on sale of ~~contract~~property is comprised of ~~$1.7~~$1.1 million associated with the sale of ~~an indefinite-delivery/indefinite-quantity government-wide acquisition contract in~~a Miami, Florida real estate holding.

Operating Income

Excluding the ~~third~~loss on sale of a business entity and certain assets and gain on sale of property, our operating income for the first quarter of ~~2018.~~

~~Our~~2020 was approximately $16.2 million, an increase of approximately $4.3 million or 37% over the prior year. Operating income for 2020 was decreased by $7.5 million due to the loss on the sale of Prime Turbines LLC and certain assets and increased approximately $1.1 million by the gain on the sale of the real estate holding. After accounting for these events, our operating income for the first quarter of 2020 decreased approximately $2.1 million or 17.6% compared to the same period for the prior year. Operating income decreased approximately $4.9 million for our Aviation segment and increased approximately $1.5 million ~~or 9.7%~~ for ~~the third quarter of 2019~~our Federal and ~~approximately $4.3 million or 10.4% for the first nine months of 2019 as compared to the same periods of 2018.~~Defense segment. Operating income from our Aviation Group increased for the third quarter and the first nine months of 2019. Operating income from our Federal Services Group decreased for the third quarter and increased for the first nine months of 2019. Operating income from our Supply Chain Management Group was substantially unchanged for ~~the third quarter and decreased for the first nine months of 2019.~~our Fleet segment. Operating income for 2019 was ~~reduced by~~decreased approximately ~~$518 thousand for the third quarter of 2019 and approximately $2.3~~$1.1 million ~~for the first nine months of 2019~~ due to the costs and expenses associated with ~~our CEO~~acquisition related and ~~Federal Services Group President successions and our acquisition of 1st Choice Aerospace.~~executive succession costs.

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

Interest Expense

Interest expense increased approximately ~~$3.6 million~~$328 thousand for the first ~~nine months~~quarter of ~~2019~~2020 compared to the same period ~~of 2018,~~for the prior year, due primarily to an increase in our average level of bank ~~borrowing resulting from the acquisition of 1st Choice Aerospace in January 2019.~~borrowing.

Provision for Income Taxes

Our effective tax rate was ~~22.1% for the third quarter and 23.2%~~46.7% for the first ~~nine months~~quarter of ~~2019,~~2020 and ~~24.9% and 25.0%~~ 23.7%for the ~~third~~first quarter ~~and first nine months~~ of ~~2018, 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.~~2019. Our tax rate is affected by discrete items that may occur in any given year but may not be consistent from year to year. Capital gains tax treatment, state income taxes, certain tax credits and other items caused differences between our statutory U.S. Federal income tax rate and our effective tax rate. Other permanent differences and federal and state tax credits such as foreign derived intangible income ("FDII") deduction, the work opportunity tax credit, and educational improvement tax credits provide benefit to our tax rates. The higher effective tax rate for the first quarter of 2020 primarily results from a full valuation allowance established to offset the capital loss benefit in connection with our sale of Prime Turbines due to a lack of anticipated capital gain income in the carryforward period. We expect a lower effective tax rate for the year ended December 31, 2020 than the first quarter rate when the impact of the discrete item is spread over the entire twelve month period.

~~Supply Chain Management Group~~Segment Operating Results

Aviation Segment Results

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


	Three months						Nine months						Change					Three months						Change
	ended September 30,						ended September 30,						Three		Nine			ended March 31,						Three
	2019			2018			2019			2018			Months		Months			2020			2019			Months
Revenues	$	55,369		$	51,834		$	160,878		$	161,961		$	3,535	$	(1,083	)	$	58,080		$	49,370		$	8,710
Costs and operating expenses	47,526			44,051			138,490			138,414			3,475		76			53,532			46,322			7,210
Operating income	$	7,843		$	7,783		$	22,388		$	23,547		$	60	$	(1,159	)
Loss on sale of a business entity and certain assets																		(7,536		)	—			(7,536		)
Gain on sale of property																		1,108			—			1,108
Operating (loss) income																		$	(1,880	)	$	3,048		$	(4,928	)
Profit percentage	14.2		%	15.0		%	13.9		%	14.5		%						(3.2		)%	6.2		%

Revenues for our Aviation segment increased approximately $8.7 million or 17.6% for the first quarter of 2020 compared to the same period of the prior year primarily due to growth in our MRO services. Costs and operating expenses increased approximately $7.2 million or 15.6%,primarily due to the increased level of repair services.

Gain on sale of property is comprised of approximately $1.1 million associated with the sale of a Miami, Florida real estate holding.

Excluding the loss on sale of a business entity and certain assets and gain on sale of property, our operating income for the first quarter of 2020 was approximately $4.5 million, an increase of $1.5 million or 49% over the prior year. The increase was primarily attributable to increased revenues and profits in our repair businesses. We had an operating loss of approximately $1.9 million for the first quarter of 2020 compared to operating income of approximately $3.0 million for the prior year.

Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions, allocated corporate costs, and valuation adjustments to accrued earn-out obligations associated with acquisitions. Expense for amortization of intangible assets was approximately $2.5 million and $2.6 million for the first quarters of 2020 and 2019, respectively. Expense for allocated corporate costs was approximately $2.1 million and $1.7 million for the first quarters of 2020 and 2019, respectively. Valuation adjustments to the accrued earn-out obligation increased costs and operating expenses approximately $300 thousand for the first quarter of 2020. There were no valuation adjustments to the accrued earn-out obligation for the first quarter of 2019.

Fleet Segment Results

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



	Three months						Change
	ended March 31,						Three
	2020			2019			Months
Revenues	$	53,204		$	51,704		$	1,500
Costs and operating expenses	46,298			44,716			1,582
Operating income	$	6,906		$	6,988		$	(82	)
Profit percentage	13.0		%	13.5		%

Revenues for our ~~Supply Chain Management Group~~Fleet segment increased approximately ~~$3.5~~$1.5 million or ~~6.8% for the third quarter of 2019 and decreased approximately $1.1 million or 0.7%~~3% for the first ~~nine months~~quarter of ~~2019~~2020 compared to the same ~~periods~~period of ~~2018. Revenues from sales to~~ the ~~USPS decreased approximately $700 thousand for the quarter and approximately $3.1 million or 2.4% for the nine months.~~prior year. Revenues from sales to DoD customers ~~increased approximately $1.5 million for the quarter and~~ decreased approximately ~~$2.9 million~~$300 thousand or ~~13.9% for the nine months. Revenues~~6%, revenues from sales to other government customers decreased approximately $3.0 million or 7%, and revenues from commercial customers increased approximately ~~$2.7 million for the quarter and approximately $5.0~~$4.8 million or ~~49% for the nine months.~~122%. Costs and operating expenses increased approximately ~~$3.5~~$1.6 million or ~~7.9% for~~4% and operating income decreased by approximately $82 thousand or 1%. The decrease in operating income was primarily attributable to a change in the ~~third quarter~~mix of ~~2019~~customers and ~~were substantially unchanged for the nine months.~~products sold, which lowered our profit margins.

Costs and operating expenses for this segment include ~~the~~expense for amortization of intangible assets associated with ~~the acquisition of our supply chain management businesses~~acquisitions and allocated corporate costs. Expense for amortization of intangible assets was approximately ~~$1.9 million for the third quarter and approximately $5.8~~$2.0 million for the first ~~nine months~~quarters of both ~~2019~~2020 and ~~2018. Allocated~~2019. Expense for allocated corporate costs ~~were~~was approximately ~~$1.5 million for the third quarter and approximately $4.7~~$1.8 million for the first ~~nine months~~quarters of ~~2019, compared to approximately $1.4 million for the third quarter~~both 2020 and ~~approximately $4.7 million for the first nine months of 2018.~~

~~Operating income was substantially unchanged for the third quarter of 2019 and decreased approximately $1.2 million or 4.9% for the first nine months of~~ 2019. The decrease in operating income was primarily attributable to a decrease in DoD sales and an increase in health insurance and other administrative related expenses which was partially offset by an increase in sales to commercial customers.

~~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
2019 2018 2019 2018 Months Months
Revenues $ 59,186
$ 34,000
$ 163,553
$ 102,554
$ 25,186
$ 60,999
Costs and operating expenses 52,618
31,816
148,733
95,263
20,802
53,470
Operating income $ 6,568
$ 2,184
$ 14,820
$ 7,291
$ 4,384
$ 7,529
Profit percentage 11.1 % 6.4 % 9.1 % 7.1 %

Revenues for our Aviation Group increased approximately $25.2 million, or 74.1% for the third quarter and approximately $61.0 million or 59.5% for the first nine months of 2019, compared to the same periods of 2018. The revenue increase was primarily driven by the inclusion of revenues of 1st Choice Aerospace beginning in January 2019 and from increases in parts distribution revenues in our international markets. Our 1st Choice Aerospace revenues were approximately $17.9 million for the third quarter and approximately $45.1 million for the first nine months of 2019. Costs and operating expenses increased approximately $20.8 million or 65.4% for the quarter and approximately $53.5 million or 56.1% for the nine months, due primarily to the increased revenues.

Costs and operating expenses include the amortization of intangible assets associated with the acquisition of our aviation businesses and allocated corporate costs. Expense for amortization of intangible assets was approximately $2.7 million for the third quarter and approximately $8.0 million for the first nine months of 2019, compared to approximately $1.7 million for the third quarter and approximately $5.0 million for the first nine months of 2018. The increase was due to amortization associated with the acquisition of 1st Choice Aerospace. Allocated corporate costs were approximately $1.6 million for the third quarter and approximately $4.8 million for the first nine months of 2019, compared to approximately $1.0 million for the third quarter and approximately $3.1 million for the first nine months of 2018.

~~Operating income increased approximately $4.4 million or200.7%for the third quarter and approximately $7.5 million or103.3%~~for the nine months. The increases in operating income were attributable primarily to the increases in revenues from our 1st Choice Aerospace acquisition and from parts distribution sales in both our domestic and international markets.

Federal ~~Services Group~~and Defense Segment Results

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


	Three months						Nine months						Change						Three months						Change
	ended September 30,						ended September 30,						Three			Nine			ended March 31,						Three
	2019			2018			2019			2018			Months			Months			2020			2019			Months
Revenues	$	83,771		$	83,097		$	232,925		$	251,707		$	674		$	(18,782	)	$	66,134		$	68,845		$	(2,711	)
Costs and operating expenses	79,247			78,611			219,957			241,137			636			(21,180		)	61,210			65,460			(4,250		)
Gain on sale of contract	—			1,700			—			1,700			(1,700		)	(1,700		)
Operating income	$	4,524		$	6,186		$	12,968		$	12,270		$	(1,662	)	$	698		$	4,924		$	3,385		$	1,539
Profit percentage	5.4		%	7.4		%	5.6		%	4.9		%							7.4		%	4.9		%

Revenues for our Federal ~~Services Group increased~~and Defense segment decreased by ~~$674 thousand or 0.8% for the third quarter of 2019 and decreased approximately $18.8~~$2.7 million or ~~7.5%~~4% and costs and operating expenses decreased $4.3 million or 6% for the first ~~nine months~~quarter of ~~2019 as~~2020 compared to the same ~~periods~~period of ~~2018. The decrease~~the prior year primarily due to the expiration of a large U.S. Army contract in January 2020 and changes in the ~~nine months revenue is primarily due a reduction in~~level of work ~~ordered by the customer~~required on our ~~FMS Program of $40.8 million. This decrease was offset by increased~~existing contracts. Other significant changes affecting our revenues ~~of approximately $11.2 million on our U. S. Army equipment refurbishment program~~ and $7.4 million on our Department of Justice International Asset Recovery Support Services contract due to increased work ordered by these customers and increased revenues of approximately $3.2 million on our CFT program related primarily to a task order that began in March 2018.

~~Costs and operating expenses increased approximately $636 thousand for the third quarter or 0.8% and decreased approximately $21.2 million or 8.8% for the nine months. The decrease in~~ costs and operating expenses ~~for the nine months is primarily attributable to the~~included an increase of approximately $8.5 million in revenues from U.S. Navy program and decreased ~~level~~revenues of ~~work in 2019.~~approximately $3.3 million from other work.

~~Gain on sale of contract~~Operating income increased approximately $1.5 million or 45% for ~~2018 is comprised of $1.7 million associated with~~ the ~~sale of an indefinite-delivery/indefinite-quantity government-wide acquisition contract in the third~~first quarter of ~~2018.~~

~~Operating income decreased approximately$1.7 million or 26.9% for the third quarter and increased approximately $698 thousand or 5.7% for the nine months. The decrease in operating income for the quarter was primarily attributable~~2020 compared to the ~~gain on sale~~same period of ~~contract in 2018.~~the prior year. Revenue declines ~~for the nine months~~ occurred in our lower margin work, resulting in minimal loss of operating income, and we have increased operating income ~~for this group~~ through margin improvements ~~on our other work.~~

primarily due to increased work being performed under more profitable fixed price contracts.

Financial Condition

There has been no material adverse change in our financial condition in the first ~~nine months~~quarter of ~~2019.~~2020. Our bank debt increased approximately $3.5 million and our earn-out obligation decreased approximately $31.4 million. We had $176 million of unused bank loan commitments as of March 31, 2020. Changes to other asset and liability accounts were primarily 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, the timing of associated billings to and collections from our customers, the sale of a real estate holding in Miami, Florida, and tothe divestiture of our ~~acquisition of 1st Choice Aerospace.~~

Prime Turbines subsidiary.

Liquidity and Capital Resources

Cash Flows

Cash and cash equivalents ~~increased~~decreased approximately ~~$933~~$191 thousand during the first ~~nine months~~quarter of ~~2019.~~2020.

Cash provided by operating activities increased approximately ~~$14.0~~$5.7 million in the first ~~nine months~~quarter of ~~2019~~2020 compared to the same period in ~~2018.~~2019. The change was ~~primarily~~ attributable to a decrease of approximately $3.3 million in cash provided by net income, an increase of approximately ~~$8.5~~$7.2 million in other non-cash operating activities and an increase of approximately $1.8 million due to changes in the levels of operating assets and ~~liabilities, an increase~~liabilities.

Inventories and accounts receivable represent a significant amount of our assets, and accounts payable represent a significant amount of our operating liabilities. Cash used related to increases in inventory was approximately ~~$4.3~~$8.3 million, cash used related to increases in ~~non-cash operating activities,~~receivables and ~~an increase of~~unbilled receivables was approximately ~~$1.2~~$2.2 million, inand cash provided by ~~net income.~~

~~Our~~increases in accounts payable and deferred compensation was approximately $395 thousand for the first quarter of 2020. A significant portion of accounts receivable and accounts payable result from the use of subcontractors to perform work on our contracts and from the purchase of materials and inventory to fulfill contract obligations and distribution agreements. Accordingly, our levels of ~~inventory,~~ accounts receivable ~~unbilled receivables,~~ and accounts payable may fluctuate depending on the timing of material and inventory purchases, services ordered, ~~and products sold,~~product sales, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received for services. Such timing differences have the potential to cause significant increases and decreases in our inventory, accounts receivable, ~~unbilled receivables,~~ and accounts payable ~~balances~~ in short time periods, and accordingly, can cause ~~significant~~ increases or decreases in our cash provided by operations.

We have recently experienced and expect to continue to experience delays in some of our Aviation segment receivables as a result of the COVID-19 economic down-turn.

Cash provided by investing activities was approximately $22.8 million in the first quarter of 2020 compared to cash used in investing activities ~~increased~~of approximately ~~$119.6~~$113.3 million in the ~~first nine months of 2019 as compared to the~~ same period ~~in 2018.~~of the prior year. In 2019 ~~we used~~ approximately $113 million was used for the acquisition of 1st Choice Aerospace and in 2020 approximately $5$23.6 million ~~for~~was provided by proceeds from the ~~purchase of an operating facility for one~~sale of our ~~1st Choice Aerospace locations.~~Prime Turbines business and sale of a Miami, Florida real estate holding. Other cash used in investing activities ~~in 2019 and 2018~~ consisted primarily of purchases of property and ~~equipment and the sale of a contract in 2018.~~equipment.

Cash provided by financing activities increased approximately $106.2 million in the first nine months of 2019 as compared to the same period in 2018. Cash provided by financing activities consisted primarily of bank borrowing activities. Cash used in financing activities ~~included~~was approximately $29.8 million in the first quarter of 2020 compared to cash provided by financing activities of approximately $112.9 million in the same period of 2019. Financing activities consisted primarily of borrowing and repayment of debt, payment of dividends and ~~stock transaction taxes.~~payment of earn-out obligation.

We paid cash dividends totaling approximately ~~$2.7~~$1.0 million or ~~$0.25~~$0.09 per share in the first ~~nine months~~quarter of ~~2019. Our~~2020. Pursuant to our bank loan agreement, 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.~~restrictions. 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 of large ~~strategic~~opportunistic inventory purchases. Our accounts receivable and accounts payable levels can be affected by changes in the level of contract work we perform, by the timing of large materials purchases and subcontractor efforts used in our contracts, and by delays in the award of contractual coverage and funding and payments. Government funding delays can cause delays in our ability to invoice for revenues earned, presenting a potential negative impact on our days sales outstanding.

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

See “COVID-19 Discussion-Capital, Financial Resources, Credit Losses, and Liquidity” and "Item 1A. Risk Factors" for additional details regarding the impact of COVID-19 on our liquidity and capital resources. We have considered the effects of the COVID-19 pandemic on our liquidity and capital resources, and we currently do not expect a material adverse impact on our ability to meet future liquidity needs. As discussed in greater detail below, under the terms of our debt facility, we are required to maintain certain financial covenants. The pandemic has disrupted the demand for our Aviation segment products and services and further disruption

is possible. If our Aviation segment sales decline to the levels of having a material impact on our revenues, we may be not be able to satisfy our covenant requirements in the future. We are proactively working with our bank group to mitigate this circumstance.

Our external financing consists of a loan agreement with a bank group that provides for a term loan, revolving loans and letters of credit. The loan agreement, which was amended in ~~January 2018~~November 2019 and expires in January 2023, has a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters of credit. ~~Our outstanding debt of approximately $268.5 million as of September 30, 2019 was net of unamortized deferred financing costs of approximately $1.7 million.~~

The term loan ~~has~~requires quarterly installment payments. Our required term loan payments after ~~September 30, 2019~~March 31, 2020 are approximately ~~$2.5 million in 2019, $11.9~~$14.1 million in 2020, ~~$14.4~~$21.6 million in 2021, ~~$15.0~~$22.5 million in 2022, and ~~$29.5~~$43.9 million in 2023. The amount of term loan borrowings outstanding as of ~~September 30, 2019~~March 31, 2020 was ~~$73.3~~$102.1 million.

The maximum amount of credit available to us under our loan agreement for revolving loans and letters of credit as of ~~September 30, 2019~~March 31, 2020 was ~~$300~~$350 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 ~~$197~~approximately $174.2 million in revolving loan amounts outstanding and ~~$72 thousand in~~no of letters of credit outstanding as of September 30, 2019. 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.~~March 31, 2020.

Under ~~our~~the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or a combination of both ~~facilities, up to an~~facilities. The aggregate ~~additional amount~~limit of incremental increases is $100 million.

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. As of ~~September 30, 2019,~~March 31, 2020, the LIBOR base margin was 2.50% and the base rate base margin was 1.25%. The base margins increase or decrease in steps as our Total Funded Debt/EBITDA Ratio increases or ~~decreases, respectively.~~decreases.

~~Our~~The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan ~~for the first three years after the date of the amendment.~~until February 6, 2021. We ~~have~~ executed compliant interest rate hedges. As of ~~September 30, 2019,~~March 31, 2020, interest rates on portions of our outstanding debt ranged from ~~4.53%~~3.11% to ~~6.25%~~5.31%, and the effective interest rate on our aggregate outstanding debt was ~~4.91%~~4.06%.

~~Our~~The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. ~~Restrictive~~The restrictive covenants ~~include~~require that we maintain a ~~maximum Total~~Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a Funded Debt/EBITDA Ratio ~~and a minimum Fixed Charge Coverage Ratio.~~of not more than 3.50 to 1.00 (subject to adjustment, in certain circumstances). We were in compliance with ~~the financial covenants~~required ratios and other terms and conditions ~~at September 30, 2019.~~



	~~Maximum Ratio~~	~~Actual Ratio~~
~~Total Funded Debt/EBITDA Ratio~~	~~3.50 to 1~~	~~3.13 to 1~~



	~~Minimum Ratio~~	~~Actual Ratio~~
~~Fixed Charge Coverage Ratio~~	~~1.20 to 1~~	~~3.03 to 1~~

as of March 31, 2020.

We currently do not use public debt security financing.

Inflation and Pricing

Most of our contracts ~~under which services are performed for the government~~ provide for estimates of future labor costs to be escalated for any option periods, while the non-labor costs in our contracts are normally considered reimbursable at cost. Our property and equipment ~~consists~~consist principally of land, buildings and improvements, shop and warehouse equipment, computer systems equipment, and furniture and fixtures. We do not expect the overall impact of inflation on replacement costs of our property and equipment to be material to our future results of operations or financial condition.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Disclosures About Market Risk

Interest Rates

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 interest rate movements we have employed interest rate hedges to fix the rate on a portion of our outstanding borrowings for various periods.

In February 2018, we entered into a LIBOR based interest rate swap on our term loan for a term of three years with a notional amount of $10 million for the first year and $50 million for the second and third years. We pay an effective interest rate of 2.54% plus our base margin on the debt matched to this swap.

In February 2019, we entered into a LIBOR based interest rate swap on our revolving loan for a term of three years with a notional amount of $75 million. This swap amount decreases in increments on an annual basis to $45 million for the second year and to $25 million for the third year. We pay an effective interest rate of 2.805% plus our base margin on the debt matched to ~~it.~~this swap.

In March 2020, we entered into a LIBOR based interest rate swap on our revolving loan for a term of two years with a notional amount of $50 million. We pay an effective interest rate of 0.73% plus our base margin on the debt matched to this swap.

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.

COVID-19 Risks and Uncertainties

See "Item 1A. Risk Factors" in Part II within this Form 10-Q for additional discussion of current and potential risks of the COVID-19 pandemic on our business and financial performance.

Item 4. Controls and Procedures

As of the end of the period covered by this report, based on management's evaluation, 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")), our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that 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 and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In connection with our 1st Choice Aerospace acquisition, certain areas of internal control over financial reporting changed. These areas are primarily related to integrating our corporate functions such as entity level controls and certain financial reporting controls. Certain control structure items remain in operation at 1st Choice Aerospace, primarily related to information technology, inventory management, human resources, processing and billing of revenues, and collection of those revenues. The control structure at 1st Choice Aerospace has been modified to appropriately oversee and incorporate these activities into the overall control structure. We will continue to evaluate the need for additional internal controls over financial reporting.

There were no additional changes in our internal control over financial reporting during our ~~third~~first quarter of fiscal ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

~~Currently, we are involved in legal proceedings, including as~~None.

Item 1A. Risk Factors

The risk factors disclosed in ~~Item 1. "Legal Proceedings" of Part II of~~ our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "Form 10-K”) should be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2019, as filed with~~2020 and should not be considered the ~~SEC on May 3, 2019. For a discussion of contingencies related~~only risks to ~~legal proceedings, see Note 6~~which we are exposed. We are providing the following information regarding changes that have occurred to the previously disclosed risk factors in our Form 10-K. In addition to the risk factors discussed below, the impact of the ~~Notes~~Coronavirus Disease 2019 ("COVID-19") may also exacerbate other risks discussed in Item 1A. Risk Factors in our Form 10-K, any of which could have a material effect on us. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our Form 10-K.

The COVID-19 outbreak has adversely affected and could in the future continue to ~~Unaudited Consolidated Financial Statements included~~adversely affect our business.

The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution systems, and we have experienced and expect to continue to experience unpredictable reductions in ~~this Report,~~demand for certain of our products and services, particularly in the aviation aftermarket. The global aviation market is experiencing a significant decline, specifically in global commercial air travel, which is ~~hereby incorporated by reference.~~having a significant impact on the parts distribution and maintenance, repair and overhaul services markets supporting general aviation and commercial aircraft. We expect international and domestic commercial airline demand and spending to worsen for a prolonged period of time.

We operate numerous "touch labor” warehouse and maintenance facilities supporting each of our three business segments both in our own facilities and customer facilities. A local outbreak of the virus in any of these facilities could temporarily shut down operations at those facilities until they have been thoroughly cleaned. Employees who become exposed to the virus would need to be quarantined and would be unable to work for fourteen days or longer. Similarly, customers who have warehouse or maintenance facilities could be impacted, slowing or reducing demand for our parts distribution services.

Furthermore, as a result of COVID-19, some of our commercial customers in the Aviation segment have been and could continue to be negatively impacted as a result of disruption in demand, which has led to delays and could lead to defaults on collections of receivables from them. Such continued delays could negatively impact our business, results of operations and financial condition.

The impact of the COVID-19 pandemic continues to evolve, and while we expect it to have an adverse effect on our business, financial condition, liquidity, cash flow and results of operations, we are unable to predict the extent, nature or duration of these impacts at this time, although we expect such negative impacts for the remainder of the fiscal year and perhaps longer.

As a result of the disruptions caused by the COVID-19 global pandemic, if we are unable to re-commence normal operations in the near-term, we may be out of compliance with the financial covenants in our debt facility.

We have a loan agreement with a bank group comprised of ten banks. Under the terms of our debt facility, we are required to maintain certain financial covenants. As a result of the COVID-19 global pandemic, our business operations have been and could be further disrupted and if we are unable to re-commence normal operations in the near term, we may be not be able to satisfy our financial covenant requirements. We are working with our bank group to mitigate this circumstance, which may result in waivers, consents, modifications, amendments, extensions, or other changes to the facility. There can be no assurance that we would be able to obtain future changes in a timely manner, on acceptable terms, or at all. If we were not able to obtain satisfactory changes to the debt facility, we could be in default, which could trigger an acceleration of repayment provisions that we would be unable to meet and would impair our ability to operate our businesses. If we make changes, it may lead to fees, increased costs, increased interest rates, additional restrictive covenants and other available lender protections that would be applicable to us under the debt facility.

The COVID-19 outbreak has adversely impacted our global supply chain network, which could result in significant shipping delays and a material reduction of available products.

We have experienced and expect to experience continued delays throughout our global supply chain network, both with respect to reduced available products and delays in shipping both domestically and internationally. Concerns regarding and measures implemented in response to pandemics of infectious disease have and could further cause changes in global supply chain network patterns, negatively influencing demand and availability of products. China has also limited the shipment of products through its borders which have negatively impact our ability to receive certain products flowing through that region. At this point, the extent to which COVID-19 may continue to impact our global supply chain network is uncertain, but continued disruptions could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

Item 6. Exhibits



(a) Exhibits
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

Pursuant to the requirements 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.

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 31, 2019~~May 1, 2020	By:	/s/ John A. Cuomo
			John A. Cuomo
			Chief Executive Officer and President
			(Principal Executive Officer)



Date:	~~October 31, 2019~~May 1, 2020	By:	/s/ Thomas R. Loftus
			Thomas R. Loftus
			Executive Vice President and
			Chief Financial Officer
			(Principal Accounting Officer)

~~-33-~~-35-



	Three months ended September 30, 2018
				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at June 30, 2018	10,881	$	544	$	26,490	$	283,767		$	515	$	311,316
Net income	—	—		—		10,034			—		10,034
Other comprehensive income, net of tax	—	—		—		—			28		28
Dividends declared ($0.08 per share)	—	—		—		(871		)	—		(871		)
Balance at September 30, 2018	10,881	$	544	$	26,490	$	292,930		$	543	$	320,507



	Nine months ended September 30, 2019
				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2018	10,886	$	544	$	26,632	$	301,073		$	146		$	328,395
Cumulative effect of adoption of ASU 2016-02, net of tax	—	—		—		1,944			—			1,944
Net income	—	—		—		27,028			—			27,028
Stock-based compensation	84	5		2,779		—			—			2,784
Other comprehensive loss, net of tax	—	—		—		—			(1,437		)	(1,437		)
Dividends declared ($0.26 per share)	—	—		—		(2,854		)	—			(2,854		)
Balance at September 30, 2019	10,970	$	549	$	29,411	$	327,191		$	(1,291	)	$	355,860



	Nine months ended September 30, 2018
				Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Common Stock
	Shares	Amount
Balance at December 31, 2017	10,839	$	542	$	24,470	$	267,902		$	181	$	293,095
Cumulative effect of adoption of ASU 2014-09, net of tax	—	—		—		1,695			—		1,695
Net income	—	—		—		25,837			—		25,837
Stock-based compensation	42	2		2,020		—			—		2,022
Other comprehensive income, net of tax	—	—		—		—			362		362
Dividends declared ($0.23 per share)	—	—		—		(2,504		)	—		(2,504		)
Balance at September 30, 2018	10,881	$	544	$	26,490	$	292,930		$	543	$	320,507



Description	Fair Value
Cash	$	396
Accounts receivable	7,409
Inventories	6,879
Prepaid expenses and other current assets	382
Property and equipment	4,044
Intangibles - customer related	55,000
Intangibles - trade name	8,000
Goodwill	60,590
Operating lease right-of-use assets	2,643
Other assets	333
Other current liabilities	(5,244		)
Long-term operating lease liabilities	(2,376		)
	$	138,056

Cash consideration	$	113,056
Acquisition date estimated fair value of earn-out obligation	25,000
Total	$	138,056



	Three months ended September 30, 2019
Customer	Supply Chain Management		Aviation		Federal Services		Total
USPS	$	42,282	$	—	$	—	$	42,282
DoD	6,935		1,613		76,505		85,053
Commercial	6,015		56,839		—		62,854
Other government	137		734		7,266		8,137
	$	55,369	$	59,186	$	83,771	$	198,326



	Three months ended September 30, 2019
Contract Type	Supply Chain Management		Aviation		Federal Services		Total
Cost-type	$	—	$	315	$	41,691	$	42,006
Fixed-price	55,369		26,268		19,078		100,715
Time and materials	—		32,603		23,002		55,605
Total revenues	$	55,369	$	59,186	$	83,771	$	198,326



	Three months			Nine months
Operating lease cost	$	1,465		$	4,715
Short-term lease cost	146			445
Less: sublease income	(251		)	(791		)
Total lease cost, net	$	1,360		$	4,369



	Operating Leases
Last three months of 2019	$	972
2020	5,486
2021	5,192
2022	5,156
2023	4,790
After 2023	14,149
Minimum lease payments	35,745
Less: imputed interest	(6,654		)
Present value of minimum lease payments	29,091
Less: current maturities of lease liabilities	(3,967		)
Long-term lease liabilities	$	25,124



Concentration of Revenues
(dollars in thousands)
	For the nine months ended September 30,
	2019			2018
Source of Revenue	Revenues		%	Revenues		%
USPS	$	127,077	23	$	130,151	25
FMS Program	63,201		11	103,955		20
Other	367,078		66	282,116		55
Total revenues	$	557,356	100	$	516,222	100