vsec-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 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 October 21, 2022: 12,799,678


	TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements

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

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

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

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

	Unaudited Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021	9

	Notes to Unaudited Consolidated Financial Statements	10

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	25

ITEM 4.	Controls and Procedures	25

PART II

ITEM 1.	Legal Proceedings	26

ITEM 1A.	Risk Factors	26

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

ITEM 6.	Exhibits	27

Signatures		28

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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, 2021 filed with the SEC on March 11, 2022 (“2021 Form 10-K"). All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

Readers are cautioned not to place undue reliance on these forward-looking 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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PART I. Financial Information

Item 1. Financial Statements

VSE Corporation and Subsidiaries

Unaudited Consolidated Balance Sheets

(in thousands except share and per share amounts)


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

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

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

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

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

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

Commitments and contingencies (Note 6)

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

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

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VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Income

(in thousands except share and per share amounts)


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

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

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

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

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

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

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

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

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

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

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

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

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

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VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)


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

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

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

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

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

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VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity

(in thousands except per share data)


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

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


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

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

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

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VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Stockholders' Equity (continued)

(in thousands except per share data)


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


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


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

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

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VSE Corporation and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(in thousands)


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



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



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

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

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

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

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

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

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

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

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

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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. We conduct our operations under three segments: (1) Aviation; (2) Fleet; and (3) Federal and Defense.

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

Basis of Presentation

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and in accordance with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K"). In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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 fair value measurements, inventory provisions, collectability of receivables, estimated profitability of long-term contracts, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In October 2021, the 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 acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. The new standard is effective on a prospective basis for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022, with early adoption permitted. We elected to early adopt this standard during the first quarter 2022 and will apply the guidance prospectively to business combinations entered into subsequent to adoption.

(2) Acquisitions

Global Parts Group, Inc.

On July 26, 2021, we acquired Global Parts Group, Inc. ("Global Parts") for a purchase price of $40 million, net of cash acquired. The purchase price includes $2 million of contingent consideration, representing the fair value recognized for potential future earn-out payments. During the third quarter of fiscal 2022, we settled the final payment of the obligation. See Note (8) "Fair

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Table of Contents

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

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

HAECO Special Services, LLC

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

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

(3) Revenue

Disaggregation of Revenues

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

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


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


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

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


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

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

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


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


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

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


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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

Contract Balances

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

We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables were $44.1 million as of September 30, 2022 and $31.9 million as of December 31, 2021. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheets, were $7.7 million as of September 30, 2022 and $7.1 million as of December 31, 2021. For the nine months ended September 30, 2022 and 2021, we recognized revenue that was previously included in the beginning balance of contract liabilities of $2.7 million.

Performance Obligations

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

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

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

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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(4) Debt

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


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

We had letters of credit outstanding totaling $1.2 million and $1.0 million as of September 30, 2022 and December 31, 2021, respectively.

We pay interest on the term 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, 2022, the LIBOR margin was 2.25% and the base margin was 6.25%. The margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases. As of September 30, 2022, interest rates on our outstanding debt ranged from 6.13% to 8.50%, and the effective interest rate on our aggregate outstanding debt was 6.42%.

Interest expense incurred on bank loan borrowings, inclusive of the effect of interest rate hedges, was $4.6 million and $2.7 million for the three months ended September 30, 2022 and 2021, respectively, and $11.7 million and $7.9 million for the nine months ended September 30, 2022 and 2021, respectively.

Our required term and revolver loan principal payments as of September 30, 2022 are as follows (in thousands):


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

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

Subsequent Event

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

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

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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(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 the assumed vesting of outstanding stock-based awards. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation for the three and nine month ended September 30, 2022 and 2021 were not material.

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


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

(6) Commitments and Contingencies

Contingencies

We are involved in various claims and lawsuits arising in the normal conduct of its business, none of which we believe, based on current information, is expected to have a material adverse effect on our financial position, results of operations or cash flows.

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

(7) Business Segments and Customer Information

Business Segments

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

Aviation

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

Fleet

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.

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VSE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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Federal and Defense

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 procurement; supply chain management; vehicle, maritime and aircraft sustainment services; base operations support; IT services and energy consulting.

We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude 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 September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Revenues:
Aviation	$	102,625	$	73,124	$	300,934	$	165,010
Fleet	64,754		60,268		196,526		173,072
Federal and Defense	75,108		67,190		217,979		202,593
Total revenues	$	242,487	$	200,582	$	715,439	$	540,675

Operating income (loss):
Aviation	$	10,017	$	3,719	$	24,089	$	(18,885)
Fleet	6,539		5,387		18,286		15,128
Federal and Defense	1,939		5,386		3,803		17,410
Corporate/unallocated expenses