UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, ~~2021~~ 2022


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

For the Transition Period from _____ to _____

Commission File Number: 000-03676

VSE CORPORATION

(Exact Name of Registrant as Specified in its Charter)


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

6348 Walker Lane

Alexandria,

Virginia

22310

(Address of Principal Executive Offices)

(Zip Code)

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.05 per share

VSEC

The NASDAQ Global Select Market

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes ☐ No ☒

Number of shares of Common Stock outstanding as of April 22, ~~2021: 12,704,165~~2022: 12,779,729


	TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of March 31,~~, 202~~1 2022 and December 31, 2 ~~020~~2021	4

	Unaudited Consolidated Statements of Income for the three months ended March 31 , 202 12 and 220 02 021	5

	Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31 , 202 12 and 20 2021	6
	��
	Unaudited Consolidated Statements of Stockholders' Equity for the three months ended March 31 , 202 12 and 20 2021	7

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31 , 202 12 and 20 2021	8

	Notes to Unaudited Consolidated Financial Statements	9

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1817

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	3222

ITEM 4.	Controls and Procedures	3222

PART II

ITEM 1.	Legal Proceedings	3223

ITEM 1A.	Risk Factors	3223

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3223

~~ITEM 5.~~	~~Other Information~~	32

ITEM 6.	Exhibits	3324

Signatures		3425

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Table of Contents

~~Forward Looking~~Forward-Looking Statements

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

“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, the impact of widespread health developments, such as the ongoing COVID-19 outbreak, the health and economic impact thereof and the governmental, commercial, consumer and other responses thereto, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified elsewhere in this document, including in Item 1A, Risk Factors, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, as well as with respect to the risks described in Item 1A, Risk Factors, to our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 filed with the SEC on March 5, 11, 2022 (“2021 ~~(“2020~~ Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

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

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Table of Contents

PART I. Financial Information

Item 1. Financial Statements

VSE Corporation and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands except share and per share amounts)


		March 31,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	347	$	378	Cash and cash equivalents	$	498	$	518
Receivables, net		63,552		55,471
Unbilled receivables, net		43,694		22,358
Inventories, net		282,771		253,422
Receivables (net of allowance of $1.6 million and $1.7 million, respectively)						Receivables (net of allowance of $1.6 million and $1.7 million, respectively)	83,958		76,587
Unbilled receivables						Unbilled receivables	31,211		31,882
Inventories						Inventories	332,023		322,702
Other current assets	Other current assets	29,169		23,328		Other current assets	26,966		32,304
Total current assets	Total current assets	419,533		354,957		Total current assets	474,656		463,993

Property and equipment, net		38,318		36,363
Intangible assets, net		105,914		103,595
Property and equipment (net of accumulated depreciation of $68 million and $66 million, respectively)						Property and equipment (net of accumulated depreciation of $68 million and $66 million, respectively)	44,478		42,486
Intangible assets (net of accumulated amortization of $124 million and $135 million, respectively)						Intangible assets (net of accumulated amortization of $124 million and $135 million, respectively)	103,527		108,263
Goodwill	Goodwill	238,126		238,126		Goodwill	248,837		248,753
Operating lease - right-of-use assets	Operating lease - right-of-use assets	22,181		20,515		Operating lease - right-of-use assets	26,061		27,327
Other assets	Other assets	29,016		26,525		Other assets	23,413		27,736
Total assets	Total assets	$	853,088	$	780,081	Total assets	$	920,972	$	918,558

Liabilities and Stockholders' equity	Liabilities and Stockholders' equity					Liabilities and Stockholders' equity
Current liabilities:	Current liabilities:					Current liabilities:
Current portion of long-term debt	Current portion of long-term debt	$	21,316	$	20,379	Current portion of long-term debt	$	14,162	$	14,162
Accounts payable	Accounts payable	73,816		72,682		Accounts payable	94,923		115,064

Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	50,882		45,172		Accrued expenses and other current liabilities	46,684		49,465
Dividends payable	Dividends payable	1,142		995		Dividends payable	1,276		1,273
Total current liabilities	Total current liabilities	147,156		139,228		Total current liabilities	157,045		179,964

Long-term debt, less current portion	Long-term debt, less current portion	232,247		230,714		Long-term debt, less current portion	289,683		270,407
Deferred compensation	Deferred compensation	17,186		16,027		Deferred compensation	13,773		14,328

Long-term operating lease obligations	Long-term operating lease obligations	23,673		22,815		Long-term operating lease obligations	26,336		27,168

Deferred tax liabilities	Deferred tax liabilities	16,523		14,897		Deferred tax liabilities	10,343		9,108
Other long-term liabilities	Other long-term liabilities	2,000		83		Other long-term liabilities	—		250
Total liabilities	Total liabilities	438,785		423,764		Total liabilities	497,180		501,225

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

Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 12,691,570 and 11,055,037, respectively		635		553
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 12,768,983 and 12,726,659, respectively						Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 12,768,983 and 12,726,659, respectively	638		636
Additional paid-in capital	Additional paid-in capital	85,296		31,870		Additional paid-in capital	89,830		88,515
Retained earnings	Retained earnings	329,064		325,097		Retained earnings	333,324		328,358
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(692)		(1,203)		Accumulated other comprehensive loss	—		(176)
Total stockholders' equity	Total stockholders' equity	414,303		356,317		Total stockholders' equity	423,792		417,333
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	853,088	$	780,081	Total liabilities and stockholders' equity	$	920,972	$	918,558

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Income

(in thousands except share and per share amounts)


		For the three months ended March 31,						For the three months ended March 31,
			2021		2020				2022		2021
Revenues:	Revenues:						Revenues:
Products	Products		$	78,580	$	76,342	Products		$	137,231	$	78,580
Services	Services		86,401		101,076		Services		94,008		86,401
Total revenues	Total revenues		164,981		177,418		Total revenues		231,239		164,981

Costs and operating expenses:	Costs and operating expenses:						Costs and operating expenses:
Products	Products		70,712		65,527		Products		122,455		70,712
Services	Services		80,340		90,758		Services		91,228		80,340
Selling, general and administrative expenses	Selling, general and administrative expenses		38		248		Selling, general and administrative expenses		906		38
Amortization of intangible assets	Amortization of intangible assets		4,288		4,723		Amortization of intangible assets		4,736		4,288
Total costs and operating expenses	Total costs and operating expenses		155,378		161,256		Total costs and operating expenses		219,325		155,378

			9,603		16,162

Loss on sale of a business entity and certain assets			0		(7,536)
Gain on sale of property			0		1,108

Operating income	Operating income		9,603		9,734		Operating income		11,914		9,603

Interest expense, net	Interest expense, net		3,030		3,486		Interest expense, net		3,609		3,030

Income before income taxes	Income before income taxes		6,573		6,248		Income before income taxes		8,305		6,573

Provision for income taxes	Provision for income taxes		1,462		2,916		Provision for income taxes		2,061		1,462

Net income	Net income		$	5,111	$	3,332	Net income		$	6,244	$	5,111

Basic earnings per share	Basic earnings per share		$	0.42	$	0.30	Basic earnings per share		$	0.49	$	0.42

Basic weighted average shares outstanding	Basic weighted average shares outstanding		12,076,509		11,000,204		Basic weighted average shares outstanding		12,741,394		12,076,509

Diluted earnings per share	Diluted earnings per share		$	0.42	$	0.30	Diluted earnings per share		$	0.49	$	0.42

Diluted weighted average shares outstanding	Diluted weighted average shares outstanding		12,171,828		11,100,506		Diluted weighted average shares outstanding		12,803,279		12,171,828

Dividends declared per share	Dividends declared per share		$	0.09	$	0.09	Dividends declared per share		$	0.10	$	0.09

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)


		For the three months ended March 31,						For the three months ended March 31,
			2021		2020				2022		2021
Net income	Net income		$	5,111	$	3,332	Net income		$	6,244	$	5,111

Change in fair value of interest rate swap agreements, net of tax	Change in fair value of interest rate swap agreements, net of tax		511		(873)		Change in fair value of interest rate swap agreements, net of tax		176		511

Other comprehensive income (loss), net of tax			511		(873)
Other comprehensive income, net of tax							Other comprehensive income, net of tax		176		511

Comprehensive income	Comprehensive income		$	5,622	$	2,459	Comprehensive income		$	6,420	$	5,622

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

(in thousands except per share data)

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


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


Net income	—	—		—		6,244		—		6,244
Stock-based compensation	42	2		1,315		—		—		1,317
Other comprehensive income, net of tax	—	—		—		—		176		176
Dividends declared ($0.10 per share)	—	—		—		(1,278)		—		(1,278)
Balance at March 31, 2022	12,769	$	638	$	89,830	$	333,324	$	—	$	423,792


		Three months ended March 31, 2020																			Three months ended March 31, 2021
					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 December 31, 2019		10,970	$	549			$	29,411							$	334,246					$	(1,105)		$	363,101

Balance at December 31, 2020																				Balance at December 31, 2020	11,055			$	553			$	31,870		$	325,097		$	(1,203)		$	356,317
Issuance of common stock																				Issuance of common stock	1,599			80			51,937									52,017
Net income	Net income	—	—				—							3,332					—				3,332	Net income		—			—			—			5,111			—	5,111
Stock-based compensation	Stock-based compensation	59	2		1,833				—			—					1,835			Stock-based compensation	37			2			1,489			—			—			1,491
Other comprehensive loss, net of tax		—	—		—				—			(873)					(873)
Other comprehensive income, net of tax																				Other comprehensive income, net of tax	—			—			—			—			511			511
Dividends declared ($0.09 per share)	Dividends declared ($0.09 per share)	—	—		—				(994)			—					(994)			Dividends declared ($0.09 per share)	—			—			—			(1,144)			—			(1,144)
Balance at March 31, 2020		11,029	$	551	$	31,244			$	336,584		$	(1,978)				$	366,401
Balance at March 31, 2021																				Balance at March 31, 2021	12,691			$	635		$	85,296		$	329,064		$	(692)		$	414,303

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

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Table of Contents

VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)


		For the three months ended March 31,					For the three months ended March 31,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	5,111	$	3,332	Net income	$	6,244	$	5,111
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	5,944		6,475		Depreciation and amortization	6,547		5,944
Deferred taxes	Deferred taxes	1,457		1,592		Deferred taxes	1,177		1,457
Stock-based compensation	Stock-based compensation	1,415		897		Stock-based compensation	1,308		1,415
Loss on sale of a business entity and certain assets		0		7,536
Gain on sale of property and equipment		0		(1,127)

Earn-out obligation fair value adjustment		0		301

Changes in operating assets and liabilities, net of impact of acquisitions:	Changes in operating assets and liabilities, net of impact of acquisitions:					Changes in operating assets and liabilities, net of impact of acquisitions:
Receivables	Receivables	(2,787)		(163)		Receivables	(7,371)		(2,787)
Unbilled receivables	Unbilled receivables	(17,341)		(2,041)		Unbilled receivables	671		(17,341)
Inventories	Inventories	(28,910)		(8,255)		Inventories	(9,321)		(28,910)
Other current assets and noncurrent assets	Other current assets and noncurrent assets	(10,306)		2,777		Other current assets and noncurrent assets	6,158		(10,306)
Accounts payable and deferred compensation	Accounts payable and deferred compensation	1,051		395		Accounts payable and deferred compensation	(20,997)		1,051
Accrued expenses and other current and noncurrent liabilities	Accrued expenses and other current and noncurrent liabilities	7,999		(4,961)		Accrued expenses and other current and noncurrent liabilities	(2,590)		7,999

Net cash (used in) provided by operating activities		(36,367)		6,758
Net cash used in operating activities						Net cash used in operating activities	(18,174)		(36,367)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment	Purchases of property and equipment	(2,109)		(724)		Purchases of property and equipment	(1,269)		(2,109)
Proceeds from the sale of property and equipment	Proceeds from the sale of property and equipment	14		2,424		Proceeds from the sale of property and equipment	—		14
Proceeds from payments on notes receivable	Proceeds from payments on notes receivable	412		427		Proceeds from payments on notes receivable	2,662		412
Proceeds from the sale of a business entity and certain assets		0		20,700

Cash paid for acquisitions, net of cash acquired	Cash paid for acquisitions, net of cash acquired	(14,785)		0		Cash paid for acquisitions, net of cash acquired	—		(14,785)

Net cash (used in) provided by investing activities		(16,468)		22,827
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	1,393		(16,468)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Borrowings on loan agreement	Borrowings on loan agreement	146,431		131,148		Borrowings on loan agreement	112,071		146,431
Repayments on loan agreement	Repayments on loan agreement	(144,257)		(127,692)		Repayments on loan agreement	(93,005)		(144,257)
Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs	Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs	52,017		0		Proceeds from issuance of common stock, net of underwriters' discounts and issuance costs	—		52,017
Earn-out obligation payments	Earn-out obligation payments	0		(31,701)		Earn-out obligation payments	(500)		—

Payments of taxes for equity transactions	Payments of taxes for equity transactions	(390)		(543)		Payments of taxes for equity transactions	(530)		(390)
Dividends paid	Dividends paid	(997)		(988)		Dividends paid	(1,275)		(997)

Net cash provided by (used in) financing activities		52,804		(29,776)
Net cash provided by financing activities						Net cash provided by financing activities	16,761		52,804

Net decrease in cash and cash equivalents		(31)		(191)
Net decreases in cash and cash equivalents						Net decreases in cash and cash equivalents	(20)		(31)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	378		734		Cash and cash equivalents at beginning of period	518		378
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	347	$	543	Cash and cash equivalents at end of period	$	498	$	347

Supplemental disclosure of noncash investing and financing activities:
Notes receivable from the sale of a business entity and certain assets $ 12,496 $ 7,461

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

-8-

VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, ~~2021~~2022

Table of Contents

(1) Nature of Operations and Basis of Presentation

Nature of Operations

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

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

Basis of Presentation

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. Therefore, such financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and footnotes thereto included in our ~~2020~~Annual Report on Form ~~10-K.~~10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K"). In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2021.~~ 2022.

Use of Estimates

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

~~Coronavirus (COVID-19) Pandemic~~Recent Accounting Pronouncements

~~On March 11, 2020,~~Recently Adopted Accounting Pronouncements

In October 2021, the ~~World Health Organization declared~~FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the ~~outbreak of~~acquirer on the ~~novel coronavirus disease, known~~acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as ~~COVID-19, as~~if the acquirer had originated the contracts. The new standard is effective on a ~~global pandemic. The pandemic~~prospective basis for fiscal years and ~~the containment and mitigation efforts by governments~~interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted.We elected to attempt to control its spread created uncertainties and disruptions in the economic and financial markets. The pandemic triggered a decline in demand for our Aviation segment products and services beginning with the second quarter of 2020 and continuing through the end of the first quarter of 2021. Our results of operations for the first quarter of 2021 continue to reflect the adverse impact from the COVID-19 pandemic. Although demand has improved since the onset of the pandemic, it remains below demandearly adopt this standard during the first quarter ~~of 2020. The extent~~2022 and will apply the guidance prospectively to ~~which the impact of COVID-19 may continue to have an adverse effect on our future~~ business and results of operations is highly uncertain and unpredictable. However, we believe that with the global vaccination effort underway, that may generate an increase in commercial air travel and result in a gradual recovery in demand for our Aviation segment products and services commencing toward the second half of 2021. We are closely monitoring the effects and risks of COVID-19 to assess its impact on our business, financial condition and results of operations. 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.

~~Underwritten Public Offering~~

~~On January 29, 2021, we~~combinations entered into ~~an underwriting agreement relating~~subsequent to the issuance and sale of 1,428,600 shares of the Company's common stock, at the public offering price of $35.00 per share. The underwriters exercised their option to purchase an additional 170,497 shares. The transaction closed on February 2, 2021. We received net proceeds of approximately $52 million after deducting underwriting discounts, commissions and offering related expenses.

adoption.

(2) ~~Acquisition and Divestitures~~Acquisitions

~~Acquisition~~Global Parts Group, Inc.

On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a preliminary purchase price of $40 million, net of cash acquired. The preliminary purchase price includes $2 million of contingent consideration, representing the fair value

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recognized for potential future earn-out payments. See Note (8) "Fair Value Measurements," for additional information regarding the earn-out obligation.

HAECO Special Services, LLC

On March 1, 2021, we acquired HAECO Special Services, LLC ("HSS") from HAECO Airframe Services, LLC, a division of HAECO Americas ("HAECO") for the purchase price of $14.8 million, subject to post-closing and working capital adjustments. HSS is a leading provider of fully integrated maintenance, repair and overhaul ("MRO") support solutions for military and government aircraft. HSS provides scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for a United States Department of Defense ("DoD") contract specifically for the sustainment of the U.S. Air Force ("USAF") KC-10 fleet. The acquisition was not significant to our consolidated financial statements.million. HSS operating results are included in our Federal and Defense ~~segment in the accompanying unaudited~~segment. The acquisition was not material to our consolidated financial ~~statements beginning on the acquisition date of March 1, 2021.~~statements.

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~~The allocation of~~During the total consideration for the acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until we obtain final information regarding their fair values. Based on preliminary estimates, we allocated approximately $8.2 million to the fair value of net tangible assets (including $9.2 million of accounts receivable) and $6.6 million to customer relationship intangible asset, which is being amortized over approximately 4 years from the acquisition date.

~~Divestitures~~

~~Prime Turbines Sale~~

In January 2020, VSE’s subsidiary VSE Aviation, Inc. entered into 2 definitive agreements to sell (1) Prime Turbines LLC ("Prime Turbines") and (2) certain related inventory assets to PTB Holdings USA, LLC ("PTB"). The transaction was completed on February 26, 2020 with cash proceeds of $20.0 million, including final working capital adjustments, and a note receivable of $8.3 million received as consideration. As a result of the sale of the business and inventory, we derecognized the assets and liabilities of Prime Turbines and recorded a $7.5 million loss in the first quarter of 2020 which was reflected within loss on sale of a business entity and certain assets in the consolidated statements of income. As ofthree months ended March 31, 2021, ~~and December 31, 2020, the total outstanding balance~~we incurred $0.3 million of ~~the note receivable from PTB was $5.8 million and $6.1 million, respectively,~~acquisition-related expenses, which represent the present value of the consideration to be received with an imputed interest rate discount, of which $1.5 million and $1.4 million were current as of March 31, 2021 and December 31, 2020, respectively. The note receivable balance isare included in ~~other assets~~selling, general and ~~other current assets in our consolidated balance sheets.~~

~~CT Aerospace Asset Sale~~administrative expenses.

In June 2020, VSE's subsidiary VSE Aviation, Inc. entered into an asset purchase agreement to sell CT Aerospace, LLC ("CT Aerospace") inventory and certain assets to Legacy Turbines, LLC ("Legacy Turbines") for $6.9 million, with a note receivable received as consideration. As a result of the sale, we recorded a $678 thousand loss in the second quarter of 2020. As of March 31, 2021 and December 31, 2020, the total outstanding balance of the note receivable from Legacy Turbines was $6.4 million, net of a variable discount of $275 thousand, of which $1.3 million was current as of March 31, 2021 and December 31, 2020. The note receivable balance is included in other assets and other current assets in our consolidated balance sheet.

(3) Revenue

~~Disaggregated Revenue~~Disaggregation of Revenues

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

~~A summary of revenues~~Revenues by customer for our each of our operating segments ~~by customer~~ for the three months ended March 31, 2022 and 2021 ~~are~~were as follows (in thousands):


		Three months ended March 31, 2021									Three months ended March 31, 2022
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Federal and Defense		Total
Commercial	Commercial	$	44,346	$	14,437	$	318	$	59,101	Commercial	$	91,912	$	27,856	$	92	$	119,860
DoD	DoD	0		3,102		42,786		45,888		DoD	—		1,729		50,395		52,124
Other government	Other government	25		37,208		22,759		59,992		Other government	1,378		37,445		20,432		59,255
		$	44,371	$	54,747	$	65,863	$	164,981
Total										Total	$	93,290	$	67,030	$	70,919	$	231,239


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

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~~A summary of revenues~~Revenues by type for our each of our operating segments ~~by customer~~ for the three months ended March 31, ~~2020 are~~2022 and 2021 were as follows (in thousands):

Three months ended March 31, 2020
Aviation Fleet Federal and Defense Total
Commercial $ 58,050 $ 8,822 $ 422 $ 67,294
DoD 0 4,567 59,567 64,134
Other government 30 39,815 6,145 45,990
$ 58,080 $ 53,204 $ 66,134 $ 177,418


	Three months ended March 31, 2022
	Aviation		Fleet		Federal and Defense		Total
Repair	$	22,363	$	—	$	—	$	22,363
Distribution	70,927		67,030		—		137,957
Cost Plus Contract	—		—		30,577		30,577
Fixed Price Contract	—		—		18,361		18,361
T&M Contract	—		—		21,981		21,981
Total	$	93,290	$	67,030	$	70,919	$	231,239

~~A summary of revenues for our operating segments by type for the three months ended March 31, 2021 is as follows (in thousands):~~

Three months ended March 31, 2021
Aviation Fleet Federal and Defense Total
Repair $ 18,316 $ 0 $ 0 $ 18,316
Distribution 26,055 54,747 0 80,802
Cost Plus Contract 0 0 16,551 16,551
Fixed Price Contract 0 0 23,931 23,931
T&M Contract 0 0 25,381 25,381
Total $ 44,371 $ 54,747 $ 65,863 $ 164,981

~~A summary of revenues for our operating segments by type for the three months ended March 31, 2020 is as follows (in thousands):~~


		Three months ended March 31, 2020									Three months ended March 31, 2021
		Aviation		Fleet		Federal and Defense		Total			Aviation		Fleet		Federal and Defense		Total
Repair	Repair	$	32,808	$	0	$	0	$	32,808	Repair	$	18,316	$	—	$	—	$	18,316
Distribution	Distribution	25,272		53,204		0		78,476		Distribution	26,055		54,747		—		80,802
Cost Plus Contract	Cost Plus Contract	0		0		19,681		19,681		Cost Plus Contract	—		—		16,551		16,551
Fixed Price Contract	Fixed Price Contract	0		0		38,916		38,916		Fixed Price Contract	—		—		23,931		23,931
T&M Contract	T&M Contract	0		0		7,537		7,537		T&M Contract	—		—		25,381		25,381
Total	Total	$	58,080	$	53,204	$	66,134	$	177,418	Total	$	44,371	$	54,747	$	65,863	$	164,981

Contract Balances

~~Billed receivables, unbilled~~

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 from $22.4~~were $31.2 million ~~at December 31, 2020 to $43.7 million at~~as of March 31, ~~2021, primarily due to revenue recognized on a U.S. Department~~2022 and $31.9 million as of ~~Justice contract for the first quarter of 2021 which was subsequently billed in the second quarter of~~December 31, 2021. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance ~~sheet, increased from $10.1~~sheets, were $7.4 million atas of March 31, 2022 and $7.1 million as of December 31, ~~2020 to~~

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~~$16.0 million at March 31, 2021, primarily due to advance payments received in excess of revenue recognized.~~2021. For the three months ended March 31, ~~2021~~2022 and ~~March 31, 2020,~~2021, we recognized revenue that was previously included in the beginning balance of contract liabilities of ~~$860 thousand~~$2.1 million and ~~$700 thousand,~~$0.9 million, respectively.

Performance Obligations

Our performance obligations are satisfied either at a point in time or over time as work progresses. ~~The majority of our revenue recognized~~Revenues from products and services transferred to customers at a point in time isaccounted for approximately 60% and 49% of our revenues for the three months ended March 31, 2022 and 2021, respectively, primarily related to the sale of vehicle and aircraft parts in our Fleet and Aviation segments. Revenues from products and services transferred to customers ~~at a point in~~over time accounted for approximately ~~49% of our revenues for the three months ended March 31, 2021~~40% and ~~43% of our revenues for the three months ended March 31, 2020. Revenues from products and services transferred to customers over time accounted for approximately~~ 51% of our revenues for the three months ended March 31, 2022 and 2021, ~~and 57% of our revenues for the three months ended March 31, 2020,~~respectively, primarily related to revenues in our Federal and Defense segment and MRO services in our Aviation segment.

As of March 31, ~~2021,~~2022, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was ~~$188~~$198 million. ~~Performance~~The performance obligations expected to be satisfied within one year and greater than one year are ~~90%~~92% and ~~10%~~8%, 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 three months ended March 31, 2021 and March 31, 2020, revenue recognized from performance obligations satisfied in prior periods was not material.~~

~~(4) Debt~~

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

March 31, December 31,
2021 2020
Bank credit facility - term loan $ 73,300 $ 77,988
Bank credit facility - revolver loans 182,335 175,473
Principal amount of long-term debt 255,635 253,461
Less debt issuance costs (2,072) (2,368)
Total long-term debt 253,563 251,093
Less current portion (21,316) (20,379)
Long-term debt, less current portion $ 232,247 $ 230,714

We have a loan agreement with a group of banks that expires in January 2023. We borrow amounts under the loan agreement to provide working capital support, fund letters of credit and finance acquisitions. The loan agreement includes term and revolving loan facilities. The revolving loan facility provides for revolving loans and letters of credit. The fair value of outstanding debt as of March 31, 2021 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 and revolver loan payments after March 31, 2021 are as follows (in thousands):~~

2021 16,875
2022 22,500
2023* 216,260
Total $ 255,635

*Includes the revolver loan required payment of $182.3 million.

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March 31, ~~2021~~2022

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

(4) Debt

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


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

We had letters of credit ~~available under the loan agreement for revolving loans and letters of credit~~outstanding totaling $1.0 million as of March 31, ~~2021 was $350 million. We pay an unused commitment fee~~2022 and ~~fees on letters of credit that are issued. We had $803 thousand letters of credit outstanding as of March 31, 2021 and 0 letters of credit outstanding as of~~ December 31, ~~2020.~~

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.2021.

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 March 31, ~~2021,~~2022, the LIBOR margin was 2.25% and the base margin was ~~3.00% and the base rate base margin was 1.75%~~3.50%. The ~~base~~ margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

~~We use interest rate hedges on a portion of our debt. The amount of our debt with interest rate swap agreements was $75 million and $145 million as~~ As of March 31, ~~2021 and December 31, 2020, respectively.~~

~~After taking into account the impact of interest rate swap agreements, as of March 31, 2021,~~2022, interest rates on ~~portions of~~ our outstanding debt ranged from~~3.75%~~ 4.00% to ~~6.36%~~5.75%, and the effective interest rate on our aggregate outstanding debt was ~~4.13%~~4.09%.

Interest expense incurred on bank loan borrowings and interest rate hedges was ~~approximately $2.7~~$3.4 million and ~~$3.4~~$2.7 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was no hedged portion of our debt as our 2 remaining hedges expired in February and ~~2020, respectively.~~March of 2022. As of December 31, 2021, the portion of our debt with interest rate swap agreements was $75 million.

~~The~~Our required term and revolver 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. principal payments after March 31, 2022 are as follows (in thousands):


Year Ending	Term Loan		Revolver Loan		Total
Remainder of 2022	$	11,250	$	—	$	11,250
2023	15,000		—		15,000
2024	30,175		249,375		279,550
Total	$	56,425	$	249,375	$	305,800

We were in compliance with required ratios and other terms and conditions under our loan agreement as of March 31, 2021. We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants; at this time, we expect that we will remain in compliance with such covenants over the next twelve months.2022.

(5) Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes the dilutive effects for anthe assumed vesting of ~~restricted~~outstanding stock-based awards. There were no antidilutive common stock ~~awards.~~equivalents excluded from the diluted per share calculation.

Three months ended March 31,
2021 2020
Basic weighted average common shares outstanding 12,076,509 11,000,204
Effect of dilutive shares 95,319 100,302
Diluted weighted average common shares outstanding 12,171,828 11,100,506

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March 31, 2022

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


	Three months ended March 31,
		2022	2021
Basic weighted average common shares outstanding		12,741,394	12,076,509
Effect of dilutive shares		61,885	95,319
Diluted weighted average common shares outstanding		12,803,279	12,171,828

(6) Commitments and Contingencies

Contingencies

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 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 audit or investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government audits or investigations of us, whether relating to

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~~March 31, 2021~~

~~Table of Contents~~

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

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(7) Business Segments and Customer Information

Business Segments

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

Aviation ~~– Distribution and MRO Services~~

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

Fleet ~~– Distribution and Fleet Services~~

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

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

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

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~~March 31, 2021~~

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The operating segments reported below are our segments 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~~inter-segment sales as these activities are eliminated in consolidation. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. Our segment information is as follows (in thousands):

Three months ended March 31,
2021 2020
Revenues:
Aviation $ 44,371 $ 58,080
Fleet 54,747 53,204
Federal and Defense 65,863 66,134
Total revenues $ 164,981 $ 177,418
Operating income (loss):
Aviation $ (332) $ (1,880)
Fleet 5,741 6,906
Federal and Defense 5,025 4,924
Corporate/unallocated expenses (831) (216)
Operating income $ 9,603 $ 9,734


	Three months ended March 31,
		2022		2021
Revenues:
Aviation		$	93,290	$	44,371
Fleet		67,030		54,747
Federal and Defense		70,919		65,863
Total revenues		$	231,239	$	164,981

Operating income (loss):
Aviation		$	7,622	$	(332)
Fleet		6,381		5,741
Federal and Defense		(688)		5,025
Corporate/unallocated expenses		(1,401)		(831)
Operating income		$	11,914	$	9,603

~~Customer Information~~

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 (in thousands):

Three months ended March 31,
Customer 2021 % 2020 %
Commercial $ 59,101 36 $ 67,294 38
DoD 45,888 28 64,134 36
Other government 59,992 36 45,990 26
Total $ 164,981 100 $ 177,418 100

~~(8) Goodwill and Intangible Assets~~

~~There were no changes in goodwill for the three months ended March 31, 2021. The goodwill balance consisted of the following (in thousands):~~

Fleet Federal and Defense Aviation Total
Balance as of December 31, 2020 $ 63,190 $ 30,883 $ 144,053 $ 238,126
Balance as of March 31, 2021 $ 63,190 $ 30,883 $ 144,053 $ 238,126

~~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.~~

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March 31, ~~2021~~2022

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

Cost Accumulated Amortization Accumulated
Impairment Loss Net Intangible Assets
March 31, 2021
Contract and customer-related $ 219,801 $ (114,635) $ (3,814) $ 101,352
Acquired technologies 12,400 (11,069) 0 1,331
Trade names 18,770 (15,539) 0 3,231
Total $ 250,971 $ (141,243) $ (3,814) $ 105,914
December 31, 2020
Contract and customer-related $ 213,194 $ (110,917) $ (3,814) $ 98,463
Acquired technologies 12,400 (10,787) 0 1,613
Trade names 18,770 (15,251) 0 3,519
Total $ 244,364 $ (136,955) $ (3,814) $ 103,595
Customer Information

The ~~increase in the gross carrying amount of contract~~USPS and ~~customer-related intangibles during the first quarter of 2021~~U.S. Navy are our largest customers. Our customers also include various other commercial entities and government agencies. Our revenue by customer is ~~related to customer relationship intangible recognized in connection with the acquisition of HSS during the quarter. See Note (2)~~as follows (in thousands):

~~"Acquisition and Divestitures" for additional details regarding the acquisition.~~

~~Amortization expense related to intangible assets was approximately $4.3 million and $4.7 million for the three months ended March 31, 2021 and 2020, respectively.~~


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

~~(9)~~(8) 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 – 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 – 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 – 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 March 31, ~~2021~~2022 and December 31, ~~2020~~2021 and the level they fall within the fair value hierarchy (in thousands):


Amounts Recorded at Fair Value	Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value March 31, 2021		Fair Value December 31, 2020		Amounts Recorded at Fair Value	Financial Statement Classification	Fair Value Hierarchy	Fair Value March 31, 2022		Fair Value December 31, 2021
Non-COLI assets held in Deferred Supplemental Compensation Plan	Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	1,142	$	1,120	Non-COLI assets held in Deferred Supplemental Compensation Plan	Other assets	Level 1	$	577	$	598
Interest rate swap agreements	Interest rate swap agreements	Accrued expenses	Level 2	$	923	$	1,603	Interest rate swap agreements	Accrued expenses and other current liabilities	Level 2	$	—	$	234

Earn-out obligation - short-term								Earn-out obligation - short-term	Accrued expenses and other current liabilities	Level 3	$	750	$	1,000
Earn-out obligation - long-term								Earn-out obligation - long-term	Other long-term liabilities	Level 3	$	—	$	250

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~~VSE CORPORATION AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~March 31, 2021~~

~~Table of Contents~~

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

We ~~account for our~~were a party to interest rate swap agreements ~~under the provisions of ASC 815,~~ ~~Derivatives and Hedging, and have determined that our swap agreements qualify~~qualifying as ~~highly effective~~ cash flow ~~hedges. We evaluate~~hedges under which we hedged a portion of our ~~hedges to determine their effectiveness~~variable-rate debt until the agreements expired in February and asMarch 2022. As of ~~March 31, 2021 and~~ December 31, ~~2020, the swaps were determined to be fully effective. Accordingly,~~2021, the fair value of ~~the~~such swap agreements ~~which is~~was $0.2 million, a liability recorded in accrued expenses and other current liabilities in our consolidated balance ~~sheets, was approximately $923 thousand and $1.6 million at March~~sheets. As of December 31, 2021, ~~and December 31, 2020, respectively. The offset,~~we had $0.2 million, net of an income tax effect of ~~approximately $230~~$58 thousand, ~~and $400 thousand, was~~ included in accumulated other comprehensive income in the accompanying balance sheets ~~as of March 31, 2021 and December 31, 2020, respectively.~~related to the cash flow hedges. 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~~

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


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

Balance as of March 31, 2022	$	750	$	—	$	750

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

Table of Contents

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

~~(10)~~(9) Income Taxes

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

Our effective tax rate was ~~22.2%~~24.8% and ~~46.7% for three months ended March 31, 2021 and 2020, respectively. The difference in the effective tax rate~~22.2% for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate was higher for the three months ended March 31, 2022 compared to the same period of prior year primarily ~~results from 1) a full valuation allowance established in 2020 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, 2) higher estimated Foreign Derived Intangible Income ("FDII") deduction in 2021, and 3) a favorable deduction in 2021~~1) book expense in connection with the fair market value ~~increase~~decrease in our COLI ~~assets..~~

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

Inplan in the period ended March ~~2020,~~31, 2022 that was reversed for tax purposes as opposed to book income in the ~~FASB issued ASU 2020-04,~~ ~~"Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting."~~ ~~The amendments provide optional guidance~~same period in 2021, and 2) significantly lower tax deduction projected for ~~a limited time to ease the potential burden~~foreign derived intangible income ("FDII") 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 to be discontinued2022 due to ~~reference rate reform. These amendments are effective immediately~~reduced profitability within our Federal 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 optional expedients provided by the new standard.

Defense segment.

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

~~General~~Business Overview

~~Our Business~~

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

~~Acquisition and Divestitures~~

In March 2021, we acquired HAECO Special Services, LLC ("HSS"), in an all cash transaction. HSS is a leading provider of fully integrated MRO support solutions for military and government aircraft. HSS offers scheduled depot maintenance, contract field deployment and unscheduled drop-in maintenance for the DoD primarily for the sustainment of the U.S. Air Force ("USAF") KC-10 fleet. The experienced workforce of HSS includes approximately 250 employees~~operating from two hangar locations in Greensboro, North Carolina. HSS is a subsidiary of VSE Corporation under our Federal & Defense Services segment.~~

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

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

~~See Note (2) "Acquisition and Divestitures" to our Consolidated Financial Statements included in Item 1 of this filing for additional information regarding our acquisition and divestitures.~~

~~Public Offering of Common Stock~~

In February 2021, we completed an underwritten public offering of common stock through the issuance of 1,599,097 shares of common stock, including an additional 170,497 shares that were issued pursuant to the underwriters' exercise of their option to purchase additional shares, at an offering price of $35.00 per share. We received net proceeds of approximately $52 million, after deducting underwriting discounts and other offering expenses of approximately $4 million. The net proceeds will be used for general corporate purposes, including financing strategic acquisitions and working capital requirements for new program launches.

~~Organization and Segments~~

Our operations are conducted within three reportable segments aligned with our operating segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense. We provide more information about each of these reportable segments under Item 1, "Business-History and Organization” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 ("~~2020~~2021 Form 10-K").

Recent Acquisitions

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

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~~Concentration of Revenues~~

(in thousands)
Three months ended March 31,
Source of Revenues 2021 % 2020 %
Commercial $ 59,101 36 $ 67,294 38
DoD 45,888 28 64,134 36
Other government 59,992 36 45,990 26
Total $ 164,981 100 $ 177,418 100

~~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. For additional discussion on the uncertainties and business risks associated with the COVID-19 pandemic, refer to Item 1A, "Risk Factors" of our 2020 Form 10-K.

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

~~All of our businesses have remained operational since the onset~~Impact of the COVID-19 pandemic through the end of the first quarter of 2021, and we continue to operate with limited disruption. We have experienced varying levels of reduction in demand for our services and products, and have adjusted our cost structure to support the current and near-term forecasted demand environment. The majority of the cost reductions occurred within our Aviation segment, as a decline in commercial aircraft revenue passenger miles contributed to a reduction in demand for aftermarket parts and MRO services. We currently anticipate demand levels within the Aviation segment will remain at decreased levels through the first half of 2021, pending a recovery in the broader market. This decrease in demand adversely impacted our operating results for 2020 and the first quarter of 2021, and we expect it will adversely impact our operating results for the first half of 2021.

While current conditions raise the potential for a decline in performance for our Fleet segment and our Federal and Defense segment, we anticipate limited disruption in demand for the products and services they offer, as compared to other industries, due to the nature of their government, defense and e-commerce customer bases. Our parts supply for truck fleets, including the United States Postal Service ("USPS") delivery vehicles and our DoD program services, provide support for the essential services conducted by our customers.

We have not experienced a material adverse change in our financial condition at this time as a result of the COVID-19 pandemic; however, a prolonged disruption in the demand for our products and services could have an adverse impact on our operating results and cause a material adverse change in our financial condition. We will continue to evaluate the nature and extent of future impacts of the COVID-19 pandemic on our business.

~~Capital, Financial Resources, Credit Losses, and Liquidity~~Pandemic

Our ~~debt capital and liquidity position have not experienced a material adverse change resulting from~~results of operations for the ~~COVID-19 pandemic at this time, and we are meeting our obligations in a timely manner. We currently have sufficient cash flows and unused loan commitments~~three months ended March 31, 2022 continued to meet our obligations in the near term. Weakness in our Aviation segment customer markets has caused a delay in receivables collections and an increase in bad debt expense. This trend may continue in future periods. We do not anticipate receivables collections to negatively impact our Fleet or Federal and Defense segments.

We have a loan agreement with a bank group comprised of ten banks, including multiple large banks and multiple regional banks. Our revolving credit facility under this loan agreement provides $350 million in loan commitments, of which we have currently borrowed approximately 52%. The potential for additional declines in our earnings may impact our financial covenant ratios in future periods. Accordingly, in the second quarter of 2020 we amended the loan agreement to provide increased financial covenant flexibility through the end of 2021.

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~~Material Impairments, Restructuring Charges~~

~~Due to the continued market volatility caused~~be impacted by the COVID-19 ~~pandemic, we performed an interim impairment analysis of~~global pandemic. We have seen continued improvement in our ~~goodwill~~operating results during the second quarter of 2020. Our interim analysis indicated that our reporting units in our Fleet and Federal and Defense segments had fair values substantially in excess of their carrying values, and we believe the COVID-19 pandemic induced economic crisis is not likely to have a material adverse impact on customer demand for products and services provided by these two segments. Accordingly, at this time we do not anticipate any impairments in these two business segments.

Our interim impairment analysis indicated that our VSE Aviation reporting unit, within our Aviation segment, had a fair value less than its carrying value and had incurred an impairment. We recognized a goodwill impairment charge of $30.9 million for our VSE Aviation reporting unit in the second quarter of 2020. Prior to the onset of the COVID-19 pandemic, our Aviation segment was performing strongly. Our VSE Aviation reporting unit experienced lower customer demand in 2020 and the first quarter of 2021 as compared to 2019, andthree months ended March 31, 2022, which we expect ~~it will~~to continue to experience lower customer demand during the first half of 2021, but we believe market opportunities will increase for us in the longer term. Accordingly, at this time we do not anticipate any further material impairments in our Aviation segment. However, should the magnitude and duration of the downturn be greater than we anticipated in our analysis, there could be further impairment.

~~Balance Sheet Asset Valuation~~

Our goodwill and intangible assets could be impacted by changes in economic conditions affecting our revenue projections and the market valuation of public companies. See "Material Impairments" above for further details. We do not believe that there are or will be significant changes in judgments in determining the fair value of other assets on our balance sheet or that our ability to timely account for them will be negatively impacted. While the COVID-19 pandemic 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 this to have a material impact on our accounts receivable. We have made opportunistic purchases of aviation parts, resulting in an increase in our inventory levels. While the COVID-19 pandemic has slowed demand for our products, we do not expect a material adverse impact to the carrying value of our inventory. If we experience further slowness in demand or if the lower level of demand lasts significantly longer than we anticipate, our inventory may be subject to valuation adjustments.

~~Administrative Continuity and Reporting Systems~~

We have modified our workforce policies, procedures and capabilities for most of our administrative personnel to work remotely, including our financial reporting personnel. This remote work arrangement is working as intended and has not had any adverse effect on our ability to maintain financial operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.

~~Business Continuity Plans~~

As the COVID-19 pandemic continues to drive global uncertainty, we remain focused on protecting the safety of our 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 Federal and State governments.~~throughout 2022. All of our repair, distribution and base operations facilities remain open and operational, and we continue to deliver products and services to customers without interruption. We ~~implemented virus prevention protocols consistent with guidelines issued by~~continue to closely monitor and address the ~~U.S. Centers for Disease Control~~pandemic and ~~Prevention,~~related developments, including the impact to our business, our employees, our customers, and ~~mandated remote working where practicable.~~our suppliers.

~~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 parts availability concerns, disruptions in our supply of materials or resources, or an adverse impact on our procurement capabilities or product costs.

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~~Health and Safety~~

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 and are following local ordinances and guidance. 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. Our operations have not been materially impacted by any constraints or other impacts on our human capital resources and productivity and we do not expect any such material impact.

~~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 continue 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

~~The~~Our Aviation segment operations were impacted by the COVID-19 pandemic. We have seen continued improvement in our sequential quarterly revenue results due to the recovery in demand since the peak of the negative COVID-19 pandemic ~~caused a reduction in global demand for air travel and decreased revenue passenger miles, which had an adverse~~ impact ~~on demand for our Aviation products and services. This caused a steep decline in our Aviation revenues in~~during the second quarter of 2020. ~~While decreased demand resulted~~Our Aviation segment results have benefited in ~~year over year revenue declines for subsequent quarters, we have seen sustained sequential quarterly revenue increases since the second quarter of 2020, including through~~ the first quarter of ~~2021. We believe that this trend will~~2022 from strong performance of both our distribution and repair businesses driven by broader recovery in commercial market activity, together with share gains within the business & general aviation (“B&GA”) market.

Our acquisition of Global Parts in July 2021 expands our product lines and client base. As we continue ~~into the second half of 2021. We have initiated several new distribution~~to experience recovery and growth in our operations, we see opportunities to strategically align platform offerings to include additional airframe components with our existing offerings. Market recovery and our growth initiatives ~~that~~ have resulted in a ~~18% first quarter year over year~~172% and 22% year-over-year increase in distribution and repair revenue, ~~increase, excluding~~respectively, during the three months ended March 31, 2022 compared to the same period for the prior ~~year period revenue from divested business.~~year.

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

extended key distribution agreements to secure multi-year contracts that provide stable, recurring revenue channels. We expect ~~that the current disruption in market conditions will result in strategic opportunities for near~~favorable long-term growth trends as we scale our industry-leading Aviation parts distribution and ~~long-term growth. We intend to continue pursuing these opportunities, which may require future investment.~~MRO platform with new business wins with leading global commercial brands.

Fleet Segment

Our Fleet segment continues to ~~focus~~increase revenue from commercial fleet customers and e-commerce fulfillment sales. 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 continue to execute on ~~both its core USPS and DoD customer base and~~our revenue diversification strategy through sustained growth in commercial ~~customer diversification. We are expanding~~revenue to expand our presence in both new and existing markets, including e-commerce solutions, private brand product sales, traditional parts supply, supply chain services, and just-in-time inventory programs to new commercial customers. beyond the long-term relationship with the United States Postal Service ("USPS").

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Commercial customer revenue continues to see a strong growth trend, increasing approximately ~~64%~~93% during the ~~first quarter of 2021~~three months ended March 31, 2022 compared to the same period in ~~2020, driven by a115% increase~~the prior year. Commercial revenues were 41.6% of total Fleet segment revenue compared to 26.4% in ~~e-commerce fulfillment revenues.~~

~~We believe~~2021, demonstrating the ~~COVID-19 pandemic is likely to continue to have a limited adverse impact on revenues for this segment~~continued success of our ~~business, as demand~~strategic multi-year diversification strategy. We expect continued growth within the commercial channel, coupled with stable contributions from ~~our commercial truck fleet customers~~its USPS and ~~our e-commerce platforms has continued to see growth.~~government customers.

Federal and Defense Segment

Our ~~growth efforts for this~~Federal and Defense segment ~~have focused~~continues to focus on redefining VSE in the federal marketplace ~~expanding our capability~~ and ~~product offerings and broadening our markets and offerings to capture~~recently hired new ~~business, and investing~~leadership in business development to build our contract backlog in current and new markets. Strong revenue performance in our U.S. ~~Department of Justice program and new revenues from the U.S.~~ Air Force work performed by our HSS acquisition enabled us to successfully ~~keep first quarter~~grow our 2022 revenue for this segment ~~consistent with the same period of the prior year~~ despite anticipated declines in our U.S. Army work due to program ~~completions~~completions. In March 2022, we were awarded a 12-month, $100 million contract by Naval Sea Systems Command (NAVSEA) in providing Foreign Military Sales (FMS) and Follow-on Technical Support (FOTS) to NAVSEA. We expect that our investment in business development efforts will drive new revenue additions in subsequent years. Contract funding increases, including work to transfer a ~~decline~~frigate to Bahrain under our FMS Program, have resulted in an increase in bookings of $29.0 million, or 46%, during the three months ended March 31, 2022, further supporting a stable outlook for our ~~U.S. Navy work.~~

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~~Table of Contents~~federal contracting revenue base.

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

Results of Operations

~~Financial Statement Presentation~~Quarter Ended March 31, 2022 Compared to Quarter Ended March 31, 2021

~~The following discussion provides a brief description~~Consolidated Results of ~~certain key items that appear in our~~Operations

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


	Three months ended March 31,
		2022		2021		Change ($)		Change (%)
Revenues		$	231,239	$	164,981	$	66,258	40.2	%
Costs and operating expenses		219,325		155,378		63,947		41.2	%
Operating income		11,914		9,603		2,311		24.1	%
Interest expense, net		3,609		3,030		579		19.1	%
Income before income taxes		8,305		6,573		1,732		26.4	%
Provision for income taxes		2,061		1,462		599		41.0	%
Net income		$	6,244	$	5,111	$	1,133	22.2	%

Revenues

Revenues ~~are derived from the delivery~~increases were attributable to revenue growth within each of ~~products~~our segments: $48.9 million within our Aviation segment, $12.3 million within our Fleet segment, and ~~from professional and technical services performed through various ordering agreements and contract agreements. Our~~$5.1 million within our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost-type, fixed-price, and time and materials. Revenues from these contract types result from work performed on these contracts and from costssegment. See "Segment Operating Results" section below for materials and other work-related contract allowable costs. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers.further discussion of revenues by segment.

Costs and Operating Expenses

Costs and operating expenses ~~consist~~increased primarily ~~of cost of inventory~~due to increases in revenue. Costs 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 administrativeoperating expenses ~~associated with~~for our operating segments ~~and corporate management; and certain costs and charges arising from nonrecurring events outside the ordinary course of business. These costs will generally~~ increase orand decrease in conjunction with ~~our~~the level of ~~products sold~~business activity and revenues generated by each segment. See "Segment Operating Results" for discussion of cost and operating expenses by segment.

Operating Income

Operating income increased $8.0 million for our Aviation segment and $0.6 million for our Fleet segment, partially offset by a decrease of $5.7 million for our Federal and Defense segment. See "Segment Operating Results" for a discussion of operating income by segment.

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Interest Expense

Interest expense increased due to a higher average interest rates on borrowings outstanding.

Provision for Income Taxes

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

Segment Operating Results

Aviation Segment Results

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


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

Revenues for our Aviation segment increased primarily due to distribution revenue growth of $44.9 million, or 172%, driven by contributions from recently initiated distribution contract ~~work performed.~~ wins and contributions from the acquisition of Global Parts, and repair revenue growth of $4.0 million, or 22%, driven by improved demand in end markets as a result of market recovery.

Costs and operating expenses ~~also include expense~~increased primarily due to increased revenues. Costs and operating expenses for this segment included expenses for amortization of intangible assets ~~acquired through our acquisitions.~~associated with acquisitions and allocated corporate costs. Expense for amortization of ~~acquisition related~~ intangible assets ~~is included~~was $2.3 million for the three months ended March 31, 2022 compared to $2.1 million for the same period in the ~~segment results~~prior year. Allocated corporate costs were $2.9 million for the three months ended March 31, 2022, compared to $2.0 million for the same period in ~~which~~ the acquisition is included. Segment results also include expense for an allocation of corporate management costs. We reduced controllable costs during 2020 in line with the anticipated decrease in demand resulting from the COVID-19 pandemic.prior year.

Operating income increased largely due to revenue growth driven by higher sales volumes in our distribution contract wins and contributions from the Global Parts acquisition.

Fleet Segment Results

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


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

Revenues for our Fleet segment increased as a result of increased revenue from sales to commercial customers of $13.4 million, or 92.9%, driven by growth in our e-commerce fulfillment business, partially offset by decreased revenues of $1.4 million or 44.3%, from sales to DoD customers.

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

Operating income increased primarily due to increased commercial customer revenues as described above.

Federal and Defense Segment Results

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


	Three months ended March 31,
		2022			2021			Change ($)		Change (%)
Revenues		$	70,919		$	65,863		$	5,056	8	%
Costs and operating expenses		71,607			60,838			10,769		18	%
Operating income		$	(688)		$	5,025		$	(5,713)	(114)	%
Profit percentage		(1.0)		%	7.6		%

Revenues for our Federal and Defense segment increased due to revenues from our FMS program with the U.S. Navy, partially offset by declines in our U.S. Army work due to program completions.

Costs and operating expenses increased due to increases in revenue and a $3.5 million loss recognized during the period on a fixed-price, non-DoD contract with a foreign customer driven by higher than anticipated supply chain material and labor costs.

Operating income decreased primarily due the contract loss recognized during the period as described above.

Bookings and Funded Backlog

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

For the first quarter of 2021, Federal and Defense segment bookings decreased 6% year-over-year to $63 million, while total funded backlog declined 6% year-over-year to $188 million. The decline in funded backlog was primarily attributable to the completion of certain DoD contracts in 2020. The current management team is focused on revitalizing this business, with an emphasis on growing backlog to promote future revenue growth.

A summary of our bookings and revenues for our Federal and Defense segment for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, and funded contract backlog as of March 31, ~~2021~~2022 and ~~2020~~2021 is as follows (in millions):


		2021		2020			2022		2021
Bookings	Bookings	$	63	$	67	Bookings	$	92	$	63
Revenues	Revenues	$	66	$	66	Revenues	$	71	$	66
Funded Contract Backlog	Funded Contract Backlog	$	188	$	201	Funded Contract Backlog	$	198	$	188

For the three months ended March 31, 2022, Federal and Defense segment bookings increased 46% year-over-year to $92 million, while total funded backlog increased 5% year-over-year to $198 million.

Liquidity and Capital Resources

Liquidity

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Our primary source of external financing is from our loan agreement with a bank group that expires in July 2024 and includes a term loan facility and a revolving loan facility, which also provides for letters of credit. The maximum amount of credit available under our loan agreement for revolving loans and letters of credit is $350 million. Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or a combination of both facilities, subject to customary lender commitment approvals. The aggregate limit of incremental increases is $100 million. Our bank debt increased approximately $19.1 million for the three months ended March 31, 2022. As of March 31, 2022, we had term loan borrowings outstanding of $56.4 million, revolving loan borrowings outstanding of $249.4 million, and outstanding letters of credit of $1.0 million. We had approximately $100 million of unused bank loan commitments as of March 31, 2022.

As of March 31, 2022, we were in compliance with required ratios and other terms and conditions of our loan agreement. We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants; at this time, we expect that we will remain in compliance with such covenants over the next twelve months.

Cash Flows

The following table summarizes our cash flows for the three months endedMarch 31, 2022 and 2021 (in thousand):


	Three months ended March 31,
		2022		2021
Net cash used in operating activities		$	(18,174)	$	(36,367)
Net cash provided by (used in) investing activities		1,393		(16,468)
Net cash provided by financing activities		16,761		52,804
Net decreases in cash and cash equivalents		$	(20)	$	(31)

Cash used in operating activities decreased $18.2 million for the three months ended March 31, 2022, when compared to the same period of the prior year. The decrease was primarily due to strong cash collections of our receivables, lower use of cash for inventory purchases and timing of vendor payments.

Cash provided by investing activities was $1.4 million for the three months ended March 31, 2022 compared to cash used in investing activities of $16.5 million for the same period of the prior year. The change was primarily due to cash paid for the acquisition of HSS in the prior year period.

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

We paid cash dividends totaling $1.3 million or $0.10 per share during the three months ending March 31, 2022. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.

Other Obligations and Commitments

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

Inflation and Pricing

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

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Off-Balance Sheet Arrangements

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

Disclosures About Market Risk

Interest Rate Risk

Our bank loan agreement provides available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. Previously, we have employed the use of interest rate hedges to fix the rate on a portion of our outstanding borrowings. Our interest rate swaps expired in February and March of 2022. As such, as of March 31, 2022, there is no portion of our debt covered under interest rate swaps.

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

Critical Accounting Policies, Estimates and Judgments

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"), which require us to make estimates and assumptions. Certain critical accounting policies affect the more significant accounts, particularly those that involve judgments, estimates and assumptions used in the preparation of our consolidated financial ~~statements. The development~~statements, including revenue recognition, inventory valuation, business combinations, goodwill and ~~selection~~intangible assets, and income taxes. If any of these ~~critical~~estimates, assumptions or judgments prove to be incorrect, our reported results could be materially affected. Actual results may differ significantly from our estimates under different assumptions or conditions. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" and Note (1) "Nature of Business and Summary of Significant Accounting Policies" in our 2021 Annual Report on Form 10-K for further discussions of our significant accounting policies and estimates. There have been ~~determined by our management. We have reviewed~~no significant changes in our critical accounting ~~policies and~~ estimates ~~with~~during the ~~audit committee of~~three months ended March 31, 2022 from those disclosed in our ~~board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that~~

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~~different parties could choose different assumptions and reach different conclusions. We consider our policies relating to the following matters to be critical accounting policies.~~most recently filed Annual Report on Form 10-K.

~~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.

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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 2017 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.

In the second quarter of 2020, due to the significant decline in our market capitalization as well as an overall stock market decline amid market volatility as a result of the COVID-19 pandemic, we performed an interim impairment test utilizing a quantitative assessment approach. Based on the assessment, our VSE Aviation reporting unit was determined to be impaired and a $30.9 million impairment charge was recognized. This impairment charge resulted from changes to estimates and assumptions of the expected future cash flows for the reporting unit, which were adversely impacted by reduced global air travel and decreased passenger miles caused by the COVID-19 pandemic. As of the most recent annual goodwill impairment testing date in the fourth quarter of 2020, for which a qualitative assessment approach was utilized, it was determined that it is more likely than not that the fair value of our reporting units exceeded their carrying value. As described in our 2020 Form 10-K, there was uncertainty surrounding the macroeconomic factors impacting the VSE Aviation reporting unit and a downturn in these factors or a change in the long-term revenue growth or profitability for this reporting unit could increase the likelihood of a future impairment.

Our VSE Aviation reporting unit had approximately $144 million of goodwill as of March 31, 2021. The goodwill balance of this reporting unit continues to be at risk for future impairment for the reasons discussed above.

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We performed a quarterly assessment to identify potential indicators of impairment for each of our reporting units during the first quarter of 2021. Based on our assessment performed, we did not identify any impairment indicators for any reporting unit during the first quarter of 2021 and determined that it was not more likely than not that the carrying value of any of the reporting units exceeded their respective fair values. We will continue to closely monitor the operational performance of these reporting units and the impacts of COVID-19 on the fair value of goodwill.

We also review our long-lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. During the first quarter of 2021, we performed a quarterly assessment to identify potential indicators of impairment of the long-lived assets with finite lives. Based on our assessment, we did not identify any impairment indicators during the first quarter of 2021 that may indicate that the carrying amount of long-lived assets may not be recoverable.

~~As of March 31, 2021, we had no intangible assets with indefinite lives and we had an aggregate of approximately $238 million of goodwill associated with our acquisitions.~~

~~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~~Note (1) "Nature of Business and Significant Accounting Policies — Recent Accounting Pronouncements” ~~in Note (11)~~ 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 the first quarter of 2021 to the first quarter of 2020.~~

Three months Change
ended March 31, Three
2021 2020 Months
Revenues $ 164,981 $ 177,418 $ (12,437)
Costs and operating expenses 155,378 161,256 (5,878)
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 9,603 9,734 (131)
Interest expense, net 3,030 3,486 (456)
Income before income taxes 6,573 6,248 325
Provision for income taxes 1,462 2,916 (1,454)
Net income $ 5,111 $ 3,332 $ 1,779

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~~Quarter Ended March 31, 2021 Compared to Quarter Ended March 31, 2020~~

~~Revenues~~

~~Our revenues decreased approximately $12.4 million or 7.0%~~for the first quarter of 2021 compared to the same period for the prior year. The decrease in revenues resulted from a decrease in our Aviation segment of approximately $13.7 million and an increase in our Fleet segment of approximately $1.5 million. Our Federal and Defense segment revenue was substantially unchanged from the same period in the prior year. See "Segment Operating Results" for a breakdown of our results of operations by segment.

~~Costs and Operating Expenses~~

Our costs and operating expenses decreased approximately $5.9 million or 3.6% for the first quarter of 2021 compared to the same period for the prior year. Costs and operating expenses for our operating segments increase and decrease in conjunction with the level of business activity and revenues generated by each segment. Costs and operating expenses for 2020 included approximately $300 thousand of earn-out adjustment expense.

~~Loss on Sale of a Business Entity and Certain Assets~~

Loss on sale of a business entity and certain assets of $7.5 million in 2020 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 property in 2020 is comprised of $1.1 million associated with the sale of a Miami, Florida real estate holding.~~

~~Operating Income~~

Our operating income decreased approximately $0.1 million or 1% for the first quarter of 2021 compared to the same period for 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 by approximately $1.1 million related to the gain on the sale of the real estate holding in Miami, Florida. Operating income increased approximately $1.5 million for our Aviation segment, decreased approximately $1.2 million for our Fleet segment, and increased approximately $101 thousand for our Federal and Defense segment.

~~Interest Expense~~

~~Interest expense decreased approximately $456 thousand for the first quarter of 2021 compared to the same period for the prior year due to a decrease in our average amounts borrowed.~~

~~Provision for Income Taxes~~

~~Our effective tax rate was 22.2% for the first quarter of 2021 and 46.7%~~for the same period of 2020. 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 resulted 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.

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~~Segment Operating Results~~

~~Aviation Segment Results~~

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

Three months Change
ended March 31, Three
2021 2020 Months
Revenues $ 44,371 $ 58,080 $ (13,709)
Costs and operating expenses 44,703 53,532 (8,829)
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 $ (332) $ (1,880) $ 1,548
Loss percentage (0.7) % (3.2) %

~~Revenues for our Aviation segment decreased approximately $13.7 million or 24%~~compared to the same period of the prior year. Repair revenues decreased approximately $14.5 million, partially offset by an increase in distribution revenues of approximately $783 thousand. The revenue declines are primarily attributable to 1) the impact of the COVID-19 pandemic on the broader aviation markets that has lowered demand from our Aviation customers, 2) the divestiture of Prime Turbines in February 2020 and 3) the sale of all of CT Aerospace inventory in June 2020. We did not have revenue for these two divested businesses for the first quarter of 2021 compared to combined revenues for these businesses of approximately $7.9 million for the first quarter of 2020. Revenues for our Aviation segment non-divested businesses decreased approximately $5.8 million or 12% for the first quarter of 2021 compared to the same period of the prior year.

Costs and operating expenses decreased approximately $8.8 million or 16% for the first quarter due to the decreased demand for our products and services, cost reduction actions implemented in response to the reduction in demand, and the elimination of costs and expenses associated with our divested businesses. Costs and operating expenses for this segment included expenses for amortization of intangible assets associated with acquisitions, allocated corporate costs, and a reduction in expense for valuation adjustments to accrued earn-out obligations associated with acquisitions. Expense for amortization of intangible assets was approximately $2.1 million for the first quarter of 2021 compared to approximately $2.5 million for the first quarter of 2020. Allocated corporate costs were approximately $2.0 million for the first quarter of 2021 compared to approximately $2.1 million for the first quarter of 2020. There was no expense for earn-out valuation adjustments for the first quarter of 2021 compared to earn-out valuation adjustment expense of approximately $300 thousand in the first quarter of 2020.

~~Loss on sale of a business entity and certain assets of$7.5 million~~for the first quarter of 2020 is comprised of the difference between the carrying value on our books for our Prime Turbines business and certain associated assets and the sale price upon divestiture in the first quarter of 2020.

~~Gain on sale of property for the first quarter of 2020 is comprised of approximately $1.1 million associated with the sale of a Miami, Florida real estate holding.~~

Operating loss decreased approximately $1.5 million or 82% for the first quarter of 2021 compared to the same period for the prior year. Components of the change in operating loss included the elimination of profits from our divested businesses in 2020 of approximately $1.2 million, a decline in profits for our continuing businesses in 2021 due to a decrease in demand for products and services associated with the COVID-19 pandemic, a~~$7.5 million loss on the divestiture of Prime Turbines and associated assets in 2020 and a$1.1 million gain on the sale of a real estate property in 2020.~~

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~~Fleet Segment Results~~

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

Three months Change
ended March 31, Three
2021 2020 Months
Revenues $ 54,747 $ 53,204 $ 1,543
Costs and operating expenses 49,006 46,298 2,708
Operating income $ 5,741 $ 6,906 $ (1,165)
Profit percentage 10.5 % 13.0 %

Revenues for our Fleet segment increased approximately $1.5 million or 3% for the first quarter of 2021 compared to the first quarter of 2020. Revenues from commercial customers increased approximately $5.6 million or 64%, driven by growth in our e-commerce fulfillment business. Revenues from sales to DoD customers decreased approximately $1.5 million or 32%, and revenues from sales to other government customers decreased approximately $2.6 million or 7% primarily due to decreased demand from these customers.

Costs and operating expenses increased approximately $2.7 million or 6%, primarily due to increased revenues. Costs and operating expenses for this segment include expense for amortization of intangible assets associated with acquisitions and allocated corporate costs. Expense for amortization of intangible assets was approximately $1.8 million for the first quarter of 2021 and approximately $2.0 million for the first quarter of 2020. Expense for allocated corporate costs was approximately $2.3 million for the first quarter of 2021 and approximately $1.8 million for the first quarter of 2020.

~~Operating incomedecreased approximately $1.2 million or 17%for the first quarter of 2021, primarily due to a change in the mix of products sold, including increased commercial customer revenues and an increase in allocated corporate costs.~~

~~Federal and Defense Segment Results~~

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

Three months Change
ended March 31, Three
2021 2020 Months
Revenues $ 65,863 $ 66,134 $ (271)
Costs and operating expenses 60,838 61,210 (372)
Operating income $ 5,025 $ 4,924 $ 101
Profit percentage 7.6 % 7.4 %

~~Revenues and cost and operating expenses for our Federal and Defense segment were substantially unchanged from the same period in the prior year.~~Strong revenue performance in our U.S. Department of Justice program and new revenues from the U.S. Air Force work performed by our HSS acquisition enabled us to successfully keep first quarter revenue for this segment consistent with the same period of the prior year despite anticipated declines in our U.S. Army work due to program completions and a decline in our U.S. Navy work.

~~Operating income was substantially unchanged compared to the first quarter of 2020. We anticipate continued margin improvements driven by higher margins in our new work.~~

~~Financial Condition~~

There has been no material adverse change in our financial condition in the first quarter of 2021. Our bank debt increased approximately $2.2 million and we had $167 million of unused bank loan commitments as of March 31, 2021. In February 2021, we completed an underwritten public offering of common stock, generating gross proceeds of approximately $56 million and net proceeds of approximately $52 million through the issuance of 1,599,097 shares of common stock. Changes to other asset and liability accounts were primarily due to our earnings; our level of business activity; the timing and level of inventory purchases to

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support new distribution programs, contract delivery schedules, and subcontractor and vendor payments required to perform our contract work; the timing of government contract funding awarded; and collections from our customers.

~~Liquidity and Capital Resources~~

~~Cash Flows~~

~~Cash and cash equivalents decreased approximately $31 thousand during the first three months of 2021.~~

Cash used in operating activities was approximately $36.4 million in the first three months of 2021 compared to cash provided by operating activities of approximately $6.8 million in the same period of the prior year. The change was comprised of an increase of approximately $1.8 million in cash provided by net income, a decrease of approximately $6.9 million in other non-cash operating activities and a decrease of approximately $38.0 million due to changes in the levels of operating assets and 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 $28.9 million, cash used related to increases in receivables and unbilled receivables was approximately $20.1 million, and cash used by increases in accounts payable and deferred compensation was approximately $1.1 million for the first quarter of 2021. The increased cash outflow related to increases in inventory levels over the prior year were primarily due to a required investment in new inventory in order to support recent distribution program wins and program launches within our Aviation segment. 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 accounts receivable and accounts payable may fluctuate depending on the timing of material and inventory purchases, services ordered, 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, and accounts payable in short time periods, and accordingly, can cause 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~~used in investing activities was approximately $16.5 million in the first quarter of 2021 compared to cash provided by investing activities of approximately $22.8 million in the same period of the prior year. In 2021 approximately $14.8 million was used for the acquisition of HSS. In 2020 approximately $23.6 million was provided by proceeds from the divestiture of our Prime Turbines business and CT Aerospace inventory and the sale of a Miami, Florida real estate holding. Other cash used in investing activities consisted primarily of purchases of property and equipment.

Cash provided by financing activities was approximately $52.8 million in the first quarter of 2021 compared to cash used in financing activities of approximately $29.8 million in the same period of 2020. In 2021, we received approximately $52.0 million in proceeds from the February 2021 public offering of our common stock, net of underwriters' discounts and issuance costs. In 2020, approximately $31.7 million was used for the payment of an earn-out obligation in connection with the acquisition of our 1st Choice Aerospace subsidiary in 2019. Other financing activities consisted primarily of borrowing and repayment of debt and payment of dividends.

~~We paid cash dividends totaling approximately $1.0 million or $0.09 per sharein the first quarter of 2021. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual restrictions. We have paid cash dividends each year since 1973.~~

~~Liquidity~~

Our internal sources of liquidity are primarily from operating activities, specifically from changes in our level of revenues and associated inventory, accounts receivable and accounts payable, and from profitability. Significant increases or decreases in revenues and inventory, accounts receivable and accounts payable can affect our liquidity. Our inventory and accounts payable levels can be affected by the timing of large opportunistic inventory purchases and by distributor agreement requirements. Our accounts receivable and accounts payable levels can be affected by changes in the level of 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.

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~~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.~~

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. See “COVID-19 Discussion-Capital, Financial Resources, Credit Losses, and Liquidity” and Item 1A, "Risk Factors" of our 2020 Form 10-K for additional details regarding risks related to the impact of COVID-19 on our liquidity and capital resources. As discussed in greater detail below, under the terms of our existing loan agreement, we are required to maintain certain financial covenants. The COVID-19 pandemic has disrupted the demand for our Aviation segment products and services and further disruption is possible. Accordingly, we amended our existing loan agreement with our banks in the second quarter of 2020 to provide increased financial covenant flexibility.

Our external financing consists of a loan agreement with a bank group that expires in January 2023. The loan agreement includes a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters of credit.

The term loan requires quarterly installment payments. Our required term loan payments after March 31, 2021 are approximately $16.9 million in 2021, $22.5 million in 2022, and $33.9 million in 2023. The amount of term loan borrowings outstanding as of March 31, 2021 was $73.3 million.

The maximum amount of credit available to us under our loan agreement for revolving loans and letters of credit as of March 31, 2021 was $350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately $182.3 million in revolving loan amounts outstanding and $803 thousand of letters of credit outstanding as of March 31, 2021.

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

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. The applicable LIBOR rate has a floor of 0.75%. As of March 31, 2021, the LIBOR base margin was 3.00% and the base rate base margin was 1.75%. The base margins increase or decrease in steps as our Total Funded Debt/EBITDA Ratio increases or decreases.

We use interest rate hedges on a portion of our debt. As of March 31, 2021, interest rates on portions of our outstanding debt ranged from 3.75% to 6.36%, and the effective interest rate on our aggregate outstanding debt was 4.13%.

The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. The restrictive covenants require that we maintain a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00 and a maximum Total Funded Debt to EBITDA Ratio that varies over future periods as indicated in the table below. We were in compliance with required ratios and other terms and conditions as of March 31, 2021. We continue to monitor the impacts of COVID-19 on our results of operations and liquidity relative to compliance with financial covenants; at this time, we expect that we will remain in compliance with such covenants over the next twelve months.


~~Testing Period~~			~~Maximum Total Funded Debt to EBITDA Ratio~~
~~First Amendment Effective Date (November 26, 2019) through and including March 31, 2020~~			~~3.50 to 1.00~~
~~From April 1, 2020 through and including September 30, 2020~~			~~4.00 to 1.00~~
~~From October 1, 2020 through and including March 31, 2021~~			~~4.25 to 1.00~~
~~From April 1, 2021 through and including June 30, 2021~~			~~4.00 to 1.00~~
~~From July 1, 2021 through and including September 30, 2021~~			~~3.75 to 1.00~~
~~From October 1, 2021 through and including December 31, 2021~~			~~3.50 to 1.00~~
~~From January 1, 2022 and thereafter~~			~~3.25 to 1.00~~

~~We currently do not use public debt security financing.~~

~~-30-~~

~~Table of Contents~~

~~Inflation and Pricing~~

Most of our contracts 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 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~~

~~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 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 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.

LIBOR is used as a reference rate for borrowings under our loan agreement and related interest rate swap agreements. LIBOR is expected to be phased out in the future, and the option to select some LIBOR tenors may no longer be available under our loan agreement after December 31, 2021. Other LIBOR tenors, including those that we most commonly use, may no longer be available under our loan agreement after June 30, 2023. At this time, there is no definitive information regarding the future transition of LIBOR to a replacement rate; however, we continue to monitor the developments with respect to the potential discontinuance of LIBOR and intend to work with our bank group to minimize the impact of such discontinuance on our financial condition and results of operations. The consequences of the discontinuance of LIBOR cannot be entirely predicted but could result in an increase in our variable rate debt.

~~-31-~~

~~Table of Contents~~

~~VSE CORPORATIONS AND SUBSIDIARIES~~

Item 3. Quantitative and Qualitative Disclosures About Market Risks

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

Item 4. Controls and Procedures

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

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")),. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2022, our disclosure controls and procedures ~~are~~were effective ~~in ensuring~~to ensure that information we are required to ~~be disclosed by us~~disclose in reports ~~filed~~that we file or ~~submitted~~submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in ~~the SEC's~~SEC rules and forms and that such information ~~required to be disclosed by us in the reports that we file or submit under the Exchange Act~~ is accumulated and

-22-

Table of Contents

communicated to our management, including our ~~principal executive~~Chief Executive Officer and ~~principal financial officers, or persons performing similar functions,~~Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the ~~first quarter of fiscal 2021~~quarterly period covered by this report that ~~have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the previously disclosed risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 ("~~2020~~2021 Form 10-K”). The risk factors disclosed in our ~~2020~~2021 Form 10-K should also be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021~~2022 and ~~should not be considered the only risks to which we are exposed.~~under "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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

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

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

~~Item 5. Other Information~~

On April 26, 2021, VSE Corporation (the “Company”) and Thomas M. Kiernan, the Company’s Vice President, General Counsel and Secretary, entered into a Separation and Release Agreement (the “Separation Agreement”). Under the terms of the Separation Agreement, Mr. Kiernan will step down from his position as the Company’s Vice President, General Counsel and Secretary, effective July 2, 2021. Under the Separation Agreement, in addition to certain accrued compensation, the Company will pay Mr. Kiernan a lump sum cash payment equal to $663,305, contingent upon his execution of a customary release of claims. Mr. Kiernan has also agreed to certain customary confidentiality and non-competition obligations.

~~-32-~~

~~The foregoing description of the Separation Agreement is not complete and is qualified by reference to the full text of the Separation Agreement, a copy of which is filed herewith as Exhibit 10.1.~~

-23-

Item 6. Exhibits


(a) Exhibits
~~Exhibit 10.1~~						~~Separation and Release Agreement dated as of April 26, 2021, by and between VSE Corporation and Thomas M. Kiernan~~
Exhibit 31.1						Section 302 CEO Certification
Exhibit 31.2						Section 302 CFO and PAO Certification
Exhibit 32.1						Section 906 CEO Certification
Exhibit 32.2						Section 906 CFO and PAO Certification
Exhibit 101.INS						XBRL Instance Document
Exhibit 101.SCH						XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB						XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE						XBRL Taxonomy Extension Presentation Document
Exhibit 104						The cover page from this Quarterly Report on Form 10-Q, formatted in inline XBRL.

Pursuant to the requirements 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.

~~-33-~~-24-

Table of Contents

VSE CORPORATION AND SUBSIDIARIES

SIGNATURES

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


			VSE CORPORATION

Date:	April ~~29, 2021~~28, 2022	By:	/s/ John A. Cuomo
			John A. Cuomo
			Director, Chief Executive Officer and President
			(Principal Executive Officer)


Date:	April ~~29, 2021~~28, 2022	By:	/s/ Stephen D. Griffin
			Stephen D. Griffin
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

~~-34-~~-25-


Supplemental disclosure of noncash investing and financing activities:
Notes receivable from the sale of a business entity and certain assets	$	12,496	$	7,461


	Cost		Accumulated Amortization		Accumulated Impairment Loss		Net Intangible Assets
March 31, 2021
Contract and customer-related	$	219,801	$	(114,635)	$	(3,814)	$	101,352
Acquired technologies	12,400		(11,069)		0		1,331
Trade names	18,770		(15,539)		0		3,231
Total	$	250,971	$	(141,243)	$	(3,814)	$	105,914

December 31, 2020
Contract and customer-related	$	213,194	$	(110,917)	$	(3,814)	$	98,463
Acquired technologies	12,400		(10,787)		0		1,613
Trade names	18,770		(15,251)		0		3,519
Total	$	244,364	$	(136,955)	$	(3,814)	$	103,595


		(in thousands)
	Three months ended March 31,
Source of Revenues			2021		%	2020		%
Commercial			$	59,101	36	$	67,294	38
DoD			45,888		28	64,134		36
Other government			59,992		36	45,990		26
Total			$	164,981	100	$	177,418	100


	Three months					Change
	ended March 31,						Three
		2021		2020				Months
Revenues		$	164,981	$	177,418			$	(12,437)
Costs and operating expenses		155,378		161,256				(5,878)
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		9,603		9,734				(131)
Interest expense, net		3,030		3,486				(456)
Income before income taxes		6,573		6,248				325
Provision for income taxes		1,462		2,916				(1,454)
Net income		$	5,111	$	3,332			$	1,779