Nature of Business and Significant Accounting Policies |
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Dec. 31, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Nature of Business and Significant Accounting Policies | Nature of Business and Summary of Significant Accounting Policies Nature of Business
VSE Corporation, through its subsidiaries (collectively, "VSE" or the "Company") is a diversified aftermarket products and services company serving commercial and government markets. The Company's operations include aircraft and airframe parts supply and distribution and MRO services of aircraft components and engine accessories. The Company operates as one reportable segment aligned with the Company's operating segment: Aviation.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and include the assets, liabilities, results of operations and cash flows of the parent company and the Company's wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
In April 2025, VSE completed the sale of all of the issued and outstanding shares of common stock of its Fleet segment. See Note (3) "Discontinued Operations" for further information. The consolidated financial statements present the results of operations for the Fleet segment as discontinued operations for all periods presented, and the related assets and liabilities as held-for-sale as of December 31, 2024.
In February 2024, VSE completed the sale of substantially all of the Federal and Defense segment assets. See Note (3) "Discontinued Operations" for further information. The consolidated financial statements present the results of operations for the Federal and Defense segment as discontinued operations for all periods presented.
Certain reclassifications, including reclassifications for discontinued operations, have been made to the prior period financial information. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies 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 may include, but are not limited to, fair value measurements, inventory provisions, collectability of receivables, valuation allowances on deferred tax assets, fair value of goodwill and other intangible assets and contingencies.
Stock-Based Compensation
The Company issues stock-based awards as compensation to employees and directors. Stock-based awards include stock-settled bonus awards, time-vested stock awards and performance share awards. The Company recognizes stock-based compensation expense over the underlying award’s requisite service period, as measured using the award’s grant date fair value. The Company's policy is to recognize forfeitures as they occur. For performance share awards, the Company assesses the probability of achieving the performance conditions at each reporting period end and adjusts compensation expense based on the number of shares it expects to ultimately issue.
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. The Company's calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of outstanding stock-based awards. The antidilutive common stock equivalents excluded from the diluted per share calculation are not material.
The weighted-average number of shares outstanding used to compute basic and diluted EPS were as follows:
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, the carrying values on the Company's consolidated balance sheets approximate fair value. Although certain cash balances exceed insurance limits of the Federal Deposit Insurance Corporation, the Company does not limit its credit exposure to any one financial institution and utilizes financial institutions with high credit quality. As of December 31, 2025, the Company held approximately $6.3 million of cash in foreign bank accounts.
Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization is generally calculated on a straight-line basis over the estimated useful lives of the various assets. Property and equipment is generally depreciated over the following estimated useful lives: computer equipment, furniture, other equipment from to 15 years; and buildings and land improvements from 15 to 20 years. Amortization of leasehold improvements is calculated on a straight-line basis over the lesser of their useful life or the remaining term of the lease.
Leases
The Company determines at inception whether an arrangement that provides the Company control over the use of an asset is a lease. Substantially all of the Company's leases are long-term operating leases for facilities with fixed payment terms. The Company recognizes a right-of-use ("ROU") asset and a lease liability upon commencement of operating leases. The initial lease liability is equal to the future fixed minimum lease payments discounted using the Company's incremental borrowing rate, on a secured basis. The lease term includes option renewal periods and early termination payments when it is reasonably certain that the Company will exercise those rights. The initial measurement of the ROU asset is equal to the initial lease liability plus any initial indirect costs and prepayments, less any lease incentives. The Company's lease arrangements do not contain any material residual guarantees, variable payment provisions, or restrictive covenants. Finance leases are not material to the Company's consolidated financial statements.
The Company recognizes lease costs on a straight-line basis over the remaining lease term, except for variable lease payments that are expensed in the period in which the obligation for those payments is incurred.
Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet. Operating lease cost is included in costs and operating expenses on the Company's consolidated statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade receivables. Trade receivables consist of amounts due from various commercial entities and government clients. The Company believes that concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the customer base and their dispersion across many different geographic regions. The credit risk, with respect to contracts with the government, is limited due to the creditworthiness of the respective governmental entities. The Company performs ongoing credit evaluations and monitoring of the financial condition of all customers. The Company maintains an allowance for credit losses based upon several factors, including historical collection experience, current aging status of the customer accounts and financial condition of customers.
Revenue Recognition
The Company accounts 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, the Company determines its 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 the Company's 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. 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 customers.
The Company's 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. The Company 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. The Company 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.
Receivables and Contract Balances
Receivables are recorded at amounts earned less an allowance. The Company reviews receivables regularly to determine if there are any potentially uncollectible accounts.
Contract assets include unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Contract assets are classified as current based on the Company's contract operating cycle. Contract liabilities include customer advances and billings in excess of revenue recognized and are included within accrued expenses and other current liabilities in the Company's consolidated balance sheets.
Allowance for Credit Losses
The Company establishes allowances for credit losses on accounts receivable and contract assets. To measure expected credit losses, the Company has disaggregated pools of receivable balances which exhibit similar risk characteristics. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status. The Company also considers current market conditions and forecasts of future economic conditions to inform potential adjustments to historical loss data. In addition, the Company also records allowances for credit losses for specific receivables that are deemed to have a higher risk profile than the rest of the respective pool of receivables, such as concerns about a specific customer's inability to meet its financial obligation. The adequacy of these allowances is assessed quarterly through consideration of factors on a collective basis where similar characteristics exist and on an individual basis.
Inventories
Inventories are stated at the lower of cost or net realizable value using the FIFO method. Inventories consist primarily of aftermarket parts for distribution, and general aviation engine accessories and parts, and also include related purchasing, overhaul labor, storage, and handling costs.
The Company periodically evaluates the carrying value of inventory, considering factors such as its physical condition, sales patterns and demand in order to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
Deferred Compensation Plans
The Company provides for certain key management employees to be incentivized and rewarded based on overall company performance through the Company's Deferred Supplemental Compensation Plan (the "DSC Plan"). DSC Plan expenses were $0.4 million, $0.3 million, and $0.4 million for the years ended December 31, 2025, 2024 and 2023, respectively.
The Company invests in corporate owned life insurance ("COLI") products and in mutual funds that are held in a Rabbi Trust to fund the DSC Plan obligations. The COLI investments are recorded at cash surrender value and the mutual fund investments are recorded at fair value. The DSC Plan assets are included in other assets on the accompanying consolidated balance sheets. DSC Plan assets were $13.2 million and $12.0 million as of December 31, 2025 and December 31, 2024, respectively. Gains and losses recognized on the changes in fair value of the investments are recorded as selling, general and administrative expenses on
the accompanying consolidated statements of operations. The Company recorded net gains of $0.7 million, $0.6 million, and $0.6 million for the years ended December 31, 2025, 2024 and 2023, respectively.
Derivative Instruments
Derivative instruments are recorded on the consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income and reclassified into earnings in a manner that matches the timing of the earnings impact of the hedged transactions.
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 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 the Company's ability to generate sufficient future taxable income to utilize these deferred tax assets.
Business Combinations
The Company allocates the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values, with any excess recorded as goodwill. The operating results of acquired businesses are included in the Company's results of operations beginning as of their effective acquisition dates. For contingent consideration arrangements, a liability is recognized at fair value as of the acquisition date with subsequent fair value adjustments recorded in operations.
Goodwill
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is tested for potential impairment at the reporting unit level annually at the beginning of the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When testing goodwill for impairment, the Company may initially qualitatively assess whether it is necessary to perform a quantitative goodwill impairment test, which is only required if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considered the totality of all relevant events and circumstances that affect the fair value or carrying amount of a reporting unit in accordance with ASC 350-20-35-3C. In the event the Company deems a quantitative impairment test necessary, the Company estimates and compares the reporting unit fair value to its respective carrying value including goodwill. Reporting unit fair value is determined using a combination of the income approach and the market approach, which involves the use of estimates and assumptions, including projected future operating results and cash flows, the cost of capital, and financial measures derived from observable market data of comparable public companies. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit’s fair value and the reporting unit’s carrying value. Based on the annual goodwill impairment test performed during the fourth quarter of 2025, the Company's qualitative impairment test determined that it was more likely than not that the reporting unit fair value exceeded carrying value.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including amortizable intangible assets, operating lease right-of-use assets, and property and equipment, for impairment whenever events or changes in facts and circumstances indicate that their carrying values may not be fully recoverable and the carrying amount of the asset exceeds its estimated future undiscounted cash flows. When the carrying amount of the asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized to reduce the asset’s carrying amount to its estimated fair value based on the present value of its estimated future cash flows.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company adopted the standard during 2025 and applied the disclosure retrospectively to all prior periods presented in the financial statements. The adoption of ASU 2023-09 did not have an impact on the Company's consolidated financial position, results of operations or cash flows. See Note (11) "Income Taxes" for further information.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires public entities to disclose additional information about specific expense categories in the notes to the financial statements. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The adoption will not have an impact on the Company's consolidated financial position, results of operations or cash flows. The Company is currently evaluating the impact that adoption of ASU 2024-03 will have on its disclosures.
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