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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 September 30, 2020 
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)
Delaware54-0649263
(State or Other Jurisdiction of(I.R.S. Employer
Incorporation or Organization)Identification No.)
6348 Walker Lane  
Alexandria,Virginia22310
(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 classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.05 per shareVSECThe NASDAQ Global Select Market

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes     No




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

Number of shares of Common Stock outstanding as of October 22, 2020: 11,050,996



 TABLE OF CONTENTS 
   
   
  Page
  
   
ITEM 1. 
   
 
   
 
   
 
   
 
   
 
   
ITEM 2.
   
ITEM 3.
   
ITEM 4.
   
  
   
ITEM 1.
ITEM 1A.
ITEM 2.
   
ITEM 6.
   
 
   


-3-

Table of Contents
VSE Corporation and Subsidiaries


Forward Looking Statements

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

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


-4-

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)
September 30,December 31,
20202019
Assets
Current assets:
Cash and cash equivalents$551 $734 
Receivables, net59,135 70,630 
Unbilled receivables, net26,953 46,279 
Inventories, net230,816 218,627 
Other current assets24,874 19,071 
Total current assets342,329 355,341 
Property and equipment, net36,264 43,465 
Intangible assets, net107,754 132,175 
Goodwill238,126 276,450 
Operating lease - right-of-use assets21,399 20,943 
Other assets24,759 17,490 
Total assets$770,631 $845,864 
Liabilities and Stockholders' equity  
Current liabilities:  
Current portion of long-term debt$19,441 $16,883 
Accounts payable63,011 68,099 
Current portion of earn-out obligation1,905 31,700 
Accrued expenses and other current liabilities48,746 46,514 
Dividends payable994 987 
Total current liabilities134,097 164,183 
Long-term debt, less current portion230,580 253,128 
Deferred compensation18,905 18,146 
Long-term operating lease obligations24,136 24,441 
Earn-out obligation, less current portion 5,000 
Deferred tax liabilities12,456 17,865 
Total liabilities420,174 482,763 
Commitments and contingencies (Note 7)
Stockholders' equity:  
Common stock, par value $0.05 per share, authorized 15,000,000 shares; issued and outstanding 11,043,246 and 10,970,123, respectively
552 549 
Additional paid-in capital31,494 29,411 
Retained earnings320,080 334,246 
Accumulated other comprehensive loss(1,669)(1,105)
Total stockholders' equity350,457 363,101 
Total liabilities and stockholders' equity$770,631 $845,864 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
-5-

Table of Contents
VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Income (Loss)
(in thousands except share and per share amounts)
 For the three months ended September 30,For the nine months ended September 30,
 2020201920202019
Revenues:
Products$80,942 $79,467 $243,031 $230,167 
Services84,563 118,859 268,607 327,189 
Total revenues165,505 198,326 511,638 557,356 
Costs and operating expenses:    
Products72,526 67,675 214,575 195,788 
Services73,751 107,881 238,441 298,228 
Selling, general and administrative expenses885 541 2,428 2,911 
Amortization of intangible assets4,158 5,014 13,345 14,985 
Total costs and operating expenses151,320 181,111 468,789 511,912 
14,185 17,215 42,849 45,444 
Loss on sale of a business entity and certain assets  (8,214) 
Gain on sale of property  1,108  
Goodwill and intangible asset impairment  (33,734) 
Operating income 14,185 17,215 2,009 45,444 
Interest expense, net3,530 3,706 10,088 10,262 
Income (loss) before income taxes10,655 13,509 (8,079)35,182 
Provision for income taxes2,547 2,982 3,105 8,154 
Net income (loss)$8,108 $10,527 $(11,184)$27,028 
Basic earnings (loss) per share$0.73 $0.96 $(1.01)$2.47 
Basic weighted average shares outstanding11,043,246 10,970,123 11,028,283 10,953,581 
Diluted earnings (loss) per share$0.73 $0.95 $(1.01)$2.45 
Diluted weighted average shares outstanding11,100,356 11,060,081 11,028,283 11,035,951 
Dividends declared per share$0.09 $0.09 $0.27 $0.26 





The accompanying notes are an integral part of these unaudited consolidated financial statements.
-6-

Table of Contents
VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
 For the three months ended September 30,For the nine months ended September 30,
 2020201920202019
Net income (loss)$8,108 $10,527 $(11,184)$27,028 
Change in fair value of interest rate swap agreements, net of tax388 (16)(564)(1,437)
Other comprehensive income (loss), net of tax388 (16)(564)(1,437)
Comprehensive income (loss)$8,496 $10,511 $(11,748)$25,591 









































The accompanying notes are an integral part of these unaudited consolidated financial statements.
-7-

Table of Contents
VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity
(in thousands except per share data)
Three months ended September 30, 2020
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
 Common Stock
 SharesAmount
Balance at June 30, 202011,043 $552 $31,494 $312,965 $(2,057)$342,954 
Net income— — — 8,108 — 8,108 
Other comprehensive income, net of tax— — — — 388 388 
Dividends declared ($0.09 per share)
— — — (993)— (993)
Balance at September 30, 202011,043 $552 $31,494 $320,080 $(1,669)$350,457 


Three months ended September 30, 2019
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
 Common Stock
 SharesAmount
Balance at June 30, 201910,970 $549 $29,411 $317,652 $(1,275)$346,337 
Net income— — — 10,527 — 10,527 
Other comprehensive loss, net of tax— — — — (16)(16)
Dividends declared ($0.09 per share)
— — — (988)— (988)
Balance at September 30, 201910,970 $549 $29,411 $327,191 $(1,291)$355,860 




























The accompanying notes are an integral part of these unaudited consolidated financial statements.
-8-

Table of Contents
VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity (continued)
(in thousands except per share data)
Nine months ended September 30, 2020
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
 Common Stock
 SharesAmount
Balance at December 31, 201910,970 $549 $29,411 $334,246 $(1,105)$363,101 
Net loss— — — (11,184)— (11,184)
Stock-based compensation73 3 2,083 — — 2,086 
Other comprehensive loss, net of tax— — — — (564)(564)
Dividends declared ($0.27 per share)
— — — (2,982)— (2,982)
Balance at September 30, 202011,043 $552 $31,494 $320,080 $(1,669)$350,457 


Nine months ended September 30, 2019
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
 Common Stock
 SharesAmount
Balance at December 31, 201810,886 $544 $26,632 $301,073 $146 $328,395 
Cumulative effect of adoption of ASU 2016-02, net of tax
— — — 1,944 — 1,944 
Net income— — — 27,028 — 27,028 
Stock-based compensation84 5 2,779 — — 2,784 
Other comprehensive loss, net of tax— — — — (1,437)(1,437)
Dividends declared ($0.26 per share)
— — — (2,854)— (2,854)
Balance at September 30, 201910,970 $549 $29,411 $327,191 $(1,291)$355,860 

























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 nine months ended September 30,
 20202019
Cash flows from operating activities:
Net (loss) income$(11,184)$27,028 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization18,213 20,622 
Deferred taxes(2,089)(1,230)
Stock-based compensation1,723 2,592 
Loss on sale of a business entity and certain assets8,214  
Gain on sale of property and equipment(928) 
Goodwill and intangible asset impairment33,734  
Earn-out obligation fair value adjustment(3,094) 
  Changes in operating assets and liabilities, net of impact of acquisitions:  
Receivables4,068 (2,380)
Unbilled receivables15,099 (12,896)
Inventories(27,566)(29,540)
Other current assets and noncurrent assets(2,119)(481)
Accounts payable and deferred compensation(3,290)11,793 
Accrued expenses and other current and noncurrent liabilities4,454 1,931 
Net cash provided by operating activities35,235 17,439 
Cash flows from investing activities:  
Purchases of property and equipment(2,956)(7,689)
Proceeds from the sale of property and equipment2,847 4 
Proceeds from the sale of a business entity and certain assets20,753  
Cash paid for acquisitions, net of cash acquired (112,660)
Net cash provided by (used in) investing activities20,644 (120,345)
Cash flows from financing activities:  
Borrowings on loan agreement340,679 382,501 
Repayments on loan agreement(360,794)(274,969)
Earn-out obligation payments(31,701) 
Payment of debt financing costs(636) 
Payments of taxes for equity transactions(635)(955)
Dividends paid(2,975)(2,738)
Net cash (used in) provided by financing activities(56,062)103,839 
Net (decrease) increase in cash and cash equivalents(183)933 
Cash and cash equivalents at beginning of period734 162 
Cash and cash equivalents at end of period$551 $1,095 
Supplemental disclosure of noncash investing and financing activities:
Notes receivable from the sale of a business entity and certain assets$13,129 $ 



The accompanying notes are an integral part of these unaudited consolidated financial statements.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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(1) 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 2019 Form 10-K. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. 

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

Coronavirus (COVID-19) Pandemic

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

Reclassifications

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

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted ASU 2018-13 in the first quarter of 2020. The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We adopted ASU 2018-15 in the first quarter of 2020 and applied the standard prospectively. The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and certain other instruments, including trade receivables and contract assets. The new standard replaces the current incurred loss model for measurement of credit losses on financial assets with a forward-looking expected loss model based on historical experience, current conditions, and reasonable and supportable forecasts. The new standard is effective for reporting periods beginning after December 15, 2019. We adopted the standard in the first quarter of 2020 using the modified-retrospective approach, which requires the standard to be applied on a prospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the guidance is effective. Upon adoption, we did not record an adjustment to opening retained earnings as of January 1, 2020 because the adoption did not have a material impact on our financial position, results of operations or cash flows.

(2) Acquisition

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

In connection with the acquisition, the total consideration included required earn-out payments of up to $40 million if 1st Choice Aerospace met certain financial targets during 2019 and 2020. In January 2020, we made a payment of approximately $31.7 million to satisfy the earn-out payment for the 2019 performance year. Included in earn-out obligation on our September 30, 2020 balance sheet is approximately $1.9 million classified as the current portion of earn-out obligation, which represents the fair value of such earn-out obligation for the 2020 performance year. Changes in the fair value of the earn-out obligations are recognized in earnings in the period of change through settlement.


(3) Divestiture

Prime Turbines Sale
On January 28, 2020, VSE’s subsidiary VSE Aviation, Inc. entered into two 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.
Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines. Prime Turbines was included in our Aviation segment.
The divestiture of Prime Turbines does not have a major effect on our operations and financial results, and therefore does not qualify for reporting as a discontinued operation.
As a result of the sale of the business and inventory, we derecognized the assets and liabilities of Prime Turbines and recorded a $7.5 million loss in the first quarter of 2020 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income. The note receivable from PTB of $5.1 million and $1.4 million is included in other assets, and other current assets in our consolidated balance sheets as of September 30, 2020, respectively, which represents the present value of the consideration to be received with an imputed interest rate discount.
CT Aerospace Asset Sale
On June 26, 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 which is reflected within loss on sale of a business entity and certain assets in the consolidated statements of income. The note receivable from Legacy Turbines of $6.7 million, net of a variable discount of $275 thousand, is included in other assets in our consolidated balance sheets as of September 30, 2020.

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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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(4) Revenue

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

A summary of revenues for our operating segments by customer for the three and nine months ended September 30, 2020 are as follows (in thousands):
Three months ended September 30, 2020
AviationFleetFederal and DefenseTotal
DoD$104 $7,275 $49,556 $56,935 
Other government39 43,973 15,584 59,596 
Commercial36,075 12,471 428 48,974 
$36,218 $63,719 $65,568 $165,505 

Nine months ended September 30, 2020
AviationFleetFederal and DefenseTotal
DoD$941 $16,937 $168,078 $185,956 
Other government283 141,390 27,579 169,252 
Commercial125,295 29,818 1,317 156,430 
$126,519 $188,145 $196,974 $511,638 

A summary of revenues for our operating segments by customer for the three and nine months ended September 30, 2019 are as follows (in thousands):
Three months ended September 30, 2019
AviationFleetFederal and DefenseTotal
DoD$1,613 $6,935 $76,505 $85,053 
Other government734 42,419 7,266 50,419 
Commercial56,839 6,015  62,854 
$59,186 $55,369 $83,771 $198,326 

Nine months ended September 30, 2019
AviationFleetFederal and DefenseTotal
DoD$2,768 $18,238 $201,828 $222,834 
Other government1,385 127,555 29,993 158,933 
Commercial159,400 15,085 1,104 175,589 
$163,553 $160,878 $232,925 $557,356 

We changed our disaggregated revenue by type presentation below in the first quarter of 2020 to better align with our operating segments. Revenues from our Aviation and Fleet segment are derived from repair and distribution services primarily through shorter term purchase orders from customers. Our Federal and Defense segment's revenue results from services provided on longer term contracts, including cost plus, fixed price and time and materials contract types. This change provides a clearer
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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picture of the nature of each segment's contractual arrangements, how revenues derived from those contracts are affected by economic factors, and underlying performance trends impacting each segment. Additionally, the presentation is more in-line with how each segments' results are evaluated by our Chief Executive Officer in deciding how to allocate resources and evaluate performance.

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

A summary of revenues by type and operating segment for the three and nine months ended September 30, 2020 is as follows (in thousands):
Three months ended September 30, 2020
AviationFleetFederal and DefenseTotal
Repair$17,280 $ $ $17,280 
Distribution18,938 63,719  82,657 
Cost Plus Contract  18,194 18,194 
Fixed Price Contract  32,937 32,937 
T&M Contract  14,437 14,437 
     Total$36,218 $63,719 $65,568 $165,505 

Nine months ended September 30, 2020
AviationFleetFederal and DefenseTotal
Repair$66,936 $ $ $66,936 
Distribution59,583 188,145  247,728 
Cost Plus Contract  61,182 61,182 
Fixed Price Contract  107,932 107,932 
T&M Contract  27,860 27,860 
     Total$126,519 $188,145 $196,974 $511,638 

A summary of revenues by type and operating segment for the three and nine months ended September 30, 2019 is as follows (in thousands):
Three months ended September 30, 2019
AviationFleetFederal and DefenseTotal
Repair$32,603 $ $ $32,603 
Distribution26,583 55,369  81,952 
Cost Plus Contract  41,691 41,691 
Fixed Price Contract  19,078 19,078 
T&M Contract  23,002 23,002 
     Total$59,186 $55,369 $83,771 $198,326 
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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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Nine months ended September 30, 2019
AviationFleetFederal and DefenseTotal
Repair$87,597 $ $ $87,597 
Distribution75,956 160,878  236,834 
Cost Plus Contract  103,027 103,027 
Fixed Price Contract  58,098 58,098 
T&M Contract  71,800 71,800 
     Total$163,553 $160,878 $232,925 $557,356 

Contract Balances
Billed receivables, unbilled receivables (contract assets), and contract liabilities are the results of revenue recognition, customer billing, and timing of payment receipts. Billed receivables, net, represent unconditional rights to consideration under the terms of the contract and include amounts billed and currently due from our customers. Unbilled receivables represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying related performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.
We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables decreased from $46.3 million at December 31, 2019 to $27.0 million at September 30, 2020, primarily due to the billing of our customers in excess of revenue recognized as performance obligations were satisfied. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, increased from $5.0 million at December 31, 2019 to $10.4 million at September 30, 2020, primarily due to advance payments received in excess of revenue recognized. For the nine months ended September 30, 2020 and September 30, 2019, we recognized revenue that was previously included in the beginning balance of contract liabilities of $2.0 million and $2.1 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 at a point in time is for 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 time accounted for approximately 50% of our revenues for the three and nine months ended September 30, 2020 and 43% of our revenues for the three and nine months ended September 30, 2019. Revenues from products and services transferred to customers over time accounted for approximately 50% of our revenues for the three and nine months ended September 30, 2020 and 57% of our revenues for the three and nine months ended September 30, 2019, primarily related to revenues in our Federal and Defense segment and repair services in our Aviation segment.
As of September 30, 2020, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $177 million. Performance obligations expected to be satisfied within one year and greater than one year are 90% and 10%, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.

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


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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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(5) Debt

Long-term debt consisted of the following (in thousands):
September 30,December 31,
 20202019
Bank credit facility - term loan$92,675 $120,800 
Bank credit facility - revolver loans160,010 152,000 
Principal amount of long-term debt252,685 272,800 
Less debt issuance costs(2,664)(2,789)
Total long-term debt250,021 270,011 
Less current portion(19,441)(16,883)
Long-term debt, less current portion$230,580 $253,128 

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. In June 2020, we amended the loan agreement to provide increased covenant flexibility in response to changes in financial operating performance resulting from the COVID-19 pandemic. Financing costs associated with the loan agreement amendment of approximately $636 thousand were capitalized and are being amortized over the remaining term of the loan. The fair value of outstanding debt as of September 30, 2020 under our bank loan facilities approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.

Our required term and revolver loan payments after September 30, 2020 are as follows (in thousands):
20204,688 
202121,562 
202222,500 
2023*203,935 
Total$252,685 
*Includes the revolver loan required payment of $160.0 million.

The maximum amount of credit available under the loan agreement for revolving loans and letters of credit as of September 30, 2020 was $350 million. We pay an unused commitment fee and fees on letters of credit that are issued. We had no letters of credit outstanding as of September 30, 2020 and $54 thousand in letters of credit outstanding as of December 31, 2019.

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

We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. As of September 30, 2020, the LIBOR base margin was 3.00% and the base rate base margin was 1.75%. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.

The loan agreement requires interest rate hedges on a portion of the outstanding term loan until February 6, 2021. We have executed compliant interest rate hedges. The amount of our debt with interest rate swap agreements was $145 million and $125 million as of September 30, 2020 and December 31, 2019, respectively.

After taking into account the impact of interest rate swap agreements, as of September 30, 2020, interest rates on portions of our outstanding debt ranged from 3.75% to 6.31%, and the effective interest rate on our aggregate outstanding debt was 4.82%.

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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $3.2 million and $3.6 million for the three months ended September 30, 2020 and 2019, respectively, and $9.5 million and $9.9 million for the nine months ended September 30, 2020 and 2019, respectively.

The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions, and limitations. The restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio and a minimum Fixed Charge Coverage Ratio. We were in compliance with required ratios and other terms and conditions as of September 30, 2020.


(6) 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 an assumed vesting of restricted stock awards. The antidilutive common stock equivalents excluded from the diluted per share calculation are not material.
Three months ended September 30,Nine months ended September 30,
 2020201920202019
Basic weighted average common shares outstanding11,043,246 10,970,123 11,028,283 10,953,581 
Effect of dilutive shares57,110 89,958  82,370 
Diluted weighted average common shares outstanding11,100,356 11,060,081 11,028,283 11,035,951 


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


(8) Business Segments and Customer Information

Business Segments

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


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VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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Management of our business operations is conducted under three reportable operating segments:

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

Fleet – Distribution and Fleet Services
Our Fleet segment (formerly Supply Chain Management Group) 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 United States Department of Defense ("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 (formerly Federal Services Group) 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; IT services and energy consulting.

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 sales as these activities are eliminated in consolidation. Our segment information is as follows (in thousands):
 Three months ended September 30,Nine months ended September 30,
 2020201920202019
Revenues:
Aviation$36,218 $59,186 $126,519 $163,553 
Fleet