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VSE Reports Financial Results for Third Quarter 2010

Quarterly Revenue and Income Decline; Operating Margin Improves

ALEXANDRIA, Va.-- VSE Corporation (Nasdaq: VSEC) reported the following unaudited consolidated financial results for its third quarter ended September 30, 2010.

Financial Results


                   Three months ended            Nine months ended

                   September 30,                 September 30,

 (in thousands,
 except per-share  2010      2009      % Change  2010      2009      % Change
 data and
 percentages)

 Revenues          $212,943  $263,068  (19.1)%   $653,592  $758,632  (13.8)%

 Operating income  $11,845   $12,502   (5.3)%    $30,449   $30,435   -

 Operating margin  5.6%      4.8%      Up 80 bp  4.7%      4.0%      Up 70 bp

 Net income        $7,218    $7,726    (6.6)%    $18,719   $18,808   (0.5)%

 Diluted EPS       $1.39     $1.50     (7.3)%    $3.61     $3.66     (1.4)%



For the third quarter of 2010, revenues were $212.9 million compared to $263.1 million in the third quarter of 2009. For the first nine months of 2010, revenues were $653.6 million compared to $758.6 million for the first nine months of 2009.

The decrease in revenues for the third quarter and the first nine months of 2010 as compared to the third quarter and first nine months of 2009 resulted primarily from a decrease in revenues associated with pass-through work performed under our U.S. Army CECOM Rapid Response contract ("R2"). These decreases were partially offset by increased revenues derived from direct labor services provided to Federal Civilian agencies and provided by our recently acquired Akimeka, LLC subsidiary, increases in Foreign Military Sales ("FMS") ship repair and transfer services, and an increase in engineering and design services provided to the U. S. Army.

Operating income for the third quarter of 2010 was $11.8 million (5.6% of revenue) compared to $12.5 million (4.8% of revenue) in the third quarter of 2009. For the first nine months of 2010, operating income was $30.4 million (4.7% of revenue), compared to $30.4 million (4.0% of revenue) for the first nine months of 2009.

Operating income declined for the third quarter and was substantially unchanged for first nine months of 2010 compared to the same periods of 2009. The decreases in operating income resulted primarily from the decline in revenues on our R2 contract and revenue decreases associated with equipment refurbishment services at U. S. locations. These decreases were partially offset by profits from the increased revenues resulting from our strategy to increase our direct labor services, and from increases in our engineering and design services and FMS ship repair and transfer services.

Increases in our direct labor revenue, which is performed by our own employees and carries a higher profit margin, are resulting in higher operating margins on lower overall revenue. Notwithstanding, some of the increased margin improvement for the three months ended September 30, 2010 and 2009 is attributable to an annual incentive fee recognition under our U.S. Treasury Department Seized Asset Program.

Our IT, Energy, and Management Consulting segment continues to deliver particularly strong results in 2010. This segment's revenues increased 33% for the third quarter and 23% for the first nine months of 2010 as compared to the same periods of 2009. Operating income for this segment increased 41% for the third quarter and 35% for the first nine months of 2010 as compared to the same periods of 2009. This segment includes the results of operations of Akimeka since the acquisition date of August 19, 2010.

Net income for the third quarter of 2010 was $7.2 million, or $1.39 per diluted share, compared to $7.7 million, or $1.50 per diluted share in the third quarter of 2009. Net income for the first nine months of 2010 was $18.7 million, or $3.61 per diluted share, compared to $18.8 million, or $3.66 per diluted share, for the first nine months of 2009.

Funded contract backlog at September 30, 2010 was $493 million compared to $476 million at December 31, 2009.

Operational Highlights in Third Quarter 2010

    --  We acquired Akimeka, LLC, a health services information technology
        consulting company headquartered in Hawaii with offices in Virginia,
        Florida and Texas. Most of Akimeka's customers are in the Military
        Health System. Core expertise lies in E-health; Enterprise Architecture;
        Information Assurance/Business Continuity; Public Safety; Web Based
        Technologies and Systems Design and Integration.
    --  Our Federal Group was awarded a five-year ID/IQ prime contract to
        continue work under U.S. Army CECOM's "Rapid Response-Third Generation
        (R2-3G). The award was one of several new multiple award omnibus
        contracts and the VSE Team consists of multiple subcontractors to
        support contract requirements.
    --  Our Energetics Incorporated subsidiary was awarded a three-year $21.7
        million contract to support the U.S. Department of Energy (DOE), Office
        of Electricity Delivery and Energy Reliability (OE) in Washington, DC.
        The contract entails support for two of OE's main programs, the
        Electricity Research and Development program and the Smart Grid
        Investment Grant program.
    --  Our International Group was awarded a 10-year ID/IQ contract potentially
        worth up to $80 million to provide support services to the U.S.
        Department of Justice, Bureau of Alcohol, Tobacco, Firearms and
        Explosives (ATF). The scope of work includes comprehensive services to
        provide nationwide and U.S. Territory coverage for transportation,
        storage, management & disposition of property that has been seized by
        the U.S. Government.
    --  Our International Group was awarded a seven-month interim contract worth
        $25.9 million to provide continued support services to the U.S.
        Department of Treasury. The scope of work includes comprehensive
        services to provide nationwide and U.S. Territory coverage for
        transportation, storage, management and disposition of property that has
        been seized by the U.S. Government.

Commenting on VSE's financial results for the third quarter of 2010, Maurice "Mo" Gauthier, VSE's CEO said, "We continue to experience the effects of delayed Federal contract awards and reduced revenue levels based significantly on expiring pass-through work under a single DoD contract. However, our focus on strategic efforts to improve profitability is paying off, as demonstrated by consistent incremental increases in our profit margins. We are performing more direct labor associated with our services and pursuing markets that offer potential for additional direct labor services. As of September 30, 2010, our total employee count is 2,809. Our workforce has been strengthened further by the addition of approximately 200 employees through the Akimeka acquisition, specifically in the area of Health IT. We continue to concentrate our efforts on IT, energy and management consulting services, legacy systems sustainment, operational support for the warfighter, and engineering support for foreign military sales."

About VSE

VSE is a diversified Federal Services company of choice with over 50 years of experience in solving issues of global significance with integrity, agility, and value. VSE is dedicated to making our clients successful by delivering talented people and innovative solutions for logistics, engineering, IT services, construction management and consulting. For additional information on VSE services and products, please see the Company's web site at www.vsecorp.com or contact Randy Hollstein, VSE Corporate Vice President of Sales and Marketing, at (703) 329-3206.

VSE encourages investors and others to review the detailed reporting and disclosures contained in VSE's public filings with the U.S. Securities and Exchange Commission for further information and analysis of VSE's financial condition and results of operations. The public filings include additional discussion about the status of specific customer programs and contract awards, risks, revenue sources and funding, dependence on material customers, and management's discussion of short and long term business challenges and opportunities.

Safe Harbor

This news release contains statements that to the extent they are not recitations of historical fact, constitute "forward looking statements" under federal securities laws. All such statements are intended to be subject to the safe harbor protection provided by applicable securities laws. For discussions identifying some important factors that could cause actual VSE results to differ materially from those anticipated in the forward looking statements in this news release, see VSE's public filings with the Securities and Exchange Commission, including VSE's annual report on Form 10-K for the year ended December 31, 2009 and subsequent reports filed with the Securities and Exchange Commission.


VSE Corporation and Subsidiaries

Unaudited Consolidated Financial Statements

Consolidated Balance Sheets

(in thousands except share and per share amounts)

                                                     September 30,  December 31,

                                                     2010           2009

Assets

Current assets:

Cash and cash equivalents                            $1,963         $8,024

Receivables, principally U.S. Government, net        145,076        175,185

Deferred tax assets                                  1,522          2,036

Other current assets                                 10,355         7,979

Total current assets                                 158,916        193,224

Property and equipment, net                          40,055         24,683

Intangible assets                                    25,866         9,336

Goodwill                                             35,649         19,530

Other assets                                         9,910          7,217

Deferred tax assets                                  484            -

Total assets                                         $270,880       $253,990

Liabilities and Stockholders' Equity

Current liabilities:

Current portion of long-term debt                    $7,222         $ -

Accounts payable                                     65,911         112,995

Accrued expenses                                     34,379         34,069

Dividends payable                                    312            258

Total current liabilities                            107,824        147,322

Long-term debt                                       12,778         -

Deferred compensation                                5,762          3,934

Deferred income taxes                                -              324

Long-term lease obligations                          17,500         1,100

Other liabilities                                    8,031          -

Total liabilities                                    151,895        152,680

Commitments and contingencies

Stockholders' equity:

Common stock, par value $0.05 per share, authorized
15,000,000 shares; issued and                        260            258
outstanding 5,192,202 and 5,170,190, respectively

Additional paid-in capital                           15,557         15,720

Retained earnings                                    103,168        85,332

Total stockholders' equity                           118,985        101,310

Total liabilities and stockholders' equity           $270,880       $253,990




VSE Corporation and Subsidiaries

Consolidated Financial Statements

Consolidated Statements of Income (Unaudited)

(in thousands except share and per share amounts)

                                     For the three months  For the nine months

                                     ended September 30,   ended September 30,

                                     2010       2009       2010       2009

Revenues                             $212,943   $263,068   $653,592   $758,632

Contract costs                       200,248    250,144    621,538    727,393

Selling, general and administrative  850        422        1,605      804
expenses

Operating income                     11,845     12,502     30,449     30,435

Interest expense (income), net       61         3          75         (116)

Income before income taxes           11,784     12,499     30,374     30,551

Provision for income taxes           4,566      4,773      11,655     11,743

Net income                           $7,218     $7,726     $18,719    $18,808

Basic earnings per share             $1.39      $1.51      $3.61      $3.67

Basic weighted average shares        5,192,202  5,131,869  5,188,217  5,124,937
outstanding

Diluted earnings per share           $1.39      $1.50      $3.61      $3.66

Diluted weighted average shares      5,192,202  5,146,454  5,188,217  5,138,700
outstanding

Dividends declared per share         $ 0.060    $ 0.050    $0.170     $0.145




VSE Corporation and Subsidiaries

Consolidated Financial Statements

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

                                                      For the nine months

                                                      ended September 30,

                                                      2010         2009

Cash flows from operating activities:

Net income                                            $ 18,719     $ 18,808

Adjustments to reconcile net income to net cash
provided by operating activities:

Depreciation and amortization                           6,479        5,576

Loss (gain) on sale of property and equipment           70           (139)

Deferred taxes                                          (294)        (300)

Stock-based compensation                                830          787

Excess tax benefits on stock-based compensation         -            (13)

Changes in operating assets and liabilities, net of
impact of acquisition:

Receivables, net                                        37,923       35,445

Other current assets and noncurrent assets              (4,919)      2,070

Accounts payable and deferred compensation              (45,767)     (43,238)

Accrued expenses                                        (3,013)      343

Other liabilities                                       57           108

Net cash provided by operating activities               10,085       19,447

Cash flows from investing activities:

Purchases of property and equipment                     (3,631)      (7,135)

Proceeds from the sale of property and equipment        -            150

Cash paid for acquisition, net of cash acquired         (29,841)

Contingent consideration payments                       (1,845)      (1,646)

Net cash used in investing activities                   (35,317)     (8,631)

Cash flows from financing activities:

Borrowings on loan arrangement                          159,614      146,243

Repayments on loan arrangement                          (139,614)    (152,919)

Dividends paid                                          (829)        (716)

Excess tax benefits on stock-based compensation         -            13

Proceeds from the exercise of stock options             -            31

Net cash provided by (used in) financing activities     19,171       (7,348)

Net (decrease) increase in cash and cash equivalents    (6,061)      3,468

Cash and cash equivalents at beginning of period        8,024        638

Cash and cash equivalents at end of period            $ 1,963      $ 4,106




    Source: VSE Corporation
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