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 Quarter Ended September 30, 2009 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499 www.vsecorp.com
(Address of Principal Executive Offices) (Zip Code) (Webpage)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $.05 per share The 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 [x] 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 filer [ ] Accelerated filer [x]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock outstanding as of October 30, 2009: 5,131,869.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Financial Statements(unaudited)
Consolidated Balance Sheets as of September 30, 2009 and
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Income for the three- and
nine-months ended September 30, 2009 and 2008 . . . . . . . 6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2009 and 2008 . . . . . . . . . . 7
Notes to Unaudited Consolidated Financial Statements . . . . 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 15
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risks . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . 30
PART II
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
ITEM 6. Exhibits, Financial Statements and Schedules . . . . . . . . 30
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-35
3
VSE Corporation and Subsidiaries
Forward Looking Statements
This report contains statements which, 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 Corporation
("VSE," the "Company," "us," "our," or "we") results to differ materially from
those anticipated in the forward looking statements contained in this report,
see VSE's discussions captioned "Business," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Notes to Consolidated Financial Statements" contained in VSE's Annual Report
on Form 10-K for the fiscal year ended December 31, 2008 filed with the
Securities and Exchange Commission (the "SEC") on March 3, 2009.
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 revise publicly these forward looking
statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in VSE's
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and in
the reports and other documents the Company files from time to time with the
SEC, including this and other Quarterly Reports on Form 10-Q to be filed by the
Company subsequent to its Annual Report on Form 10-K and any Current Reports on
Form 8-K filed by the Company.
4
PART I. Financial Information
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
(in thousands except share and per share amounts)
(Unaudited)
September 30, December 31,
2009 2008
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 4,106 $ 638
Receivables, principally
U.S. Government, net . . . . . . . . . . . . . 171,272 206,717
Deferred tax assets . . . . . . . . . . . . . . 2,764 2,297
Other current assets . . . . . . . . . . . . . . 8,390 10,945
-------- --------
Total current assets . . . . . . . . . . . . . 186,532 220,597
Property and equipment, net . . . . . . . . . . . 24,573 21,484
Intangibles, net . . . . . . . . . . . . . . . . . 9,796 11,176
Goodwill . . . . . . . . . . . . . . . . . . . . . 19,085 17,439
Other assets . . . . . . . . . . . . . . . . . . . 7,094 5,270
-------- --------
Total assets . . . . . . . . . . . . . . . . . $247,080 $275,966
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank notes payable . . . . . . . . . . . . . . . $ - $ 6,676
Accounts payable . . . . . . . . . . . . . . . . 114,592 158,015
Accrued expenses . . . . . . . . . . . . . . . 31,828 31,498
Dividends payable . . . . . . . . . . . . . . . 257 229
-------- --------
Total current liabilities . . . . . . . . . . 146,677 196,418
Deferred compensation . . . . . . . . . . . . . . 3,744 2,059
Deferred income taxes . . . . . . . . . . . . . . 571 404
Other liabilities . . . . . . . . . . . . . . . . 1,070 962
-------- --------
Total liabilities . . . . . . . . . . . . . . 152,062 199,843
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.05 per share,
authorized 15,000,000 shares; issued and
outstanding 5,131,869 and 5,098,542,
respectively . . . . . . . . . . . . . . . . . 256 255
Additional paid-in capital . . . . . . . . . . . 14,387 13,557
Retained earnings . . . . . . . . . . . . . . . 80,375 62,311
-------- --------
Total stockholders' equity . . . . . . . . . . 95,018 76,123
-------- --------
Total liabilities and stockholders' equity . . $247,080 $275,966
======== ========
The accompanying notes are an integral part of these financial statements.
5
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,
2009 2008 2009 2008
---- ---- ---- ----
Revenues . . . . . . . . . . $ 263,068 $ 306,811 $ 758,632 $ 747,222
Contract costs . . . . . . . 250,144 297,790 727,393 724,245
--------- --------- --------- ---------
Gross profit. . . . . . . . . 12,924 9,021 31,239 22,977
Selling, general and
administrative expenses . . 422 298 804 681
Interest expense (income),
net . . . . . . . . . . . . 3 (5) (116) (118)
--------- --------- --------- ---------
Income before income taxes. . 12,499 8,728 30,551 22,414
Provision for income taxes. . 4,773 3,419 11,743 8,738
--------- --------- --------- ---------
Net income. . . . . . . . . . $ 7,726 $ 5,309 $ 18,808 $ 13,676
========= ========= ========= =========
Basic earnings per share . . $ 1.51 $ 1.05 $ 3.67 $ 2.70
========= ========= ========= =========
Basic weighted average shares
outstanding 5,131,869 5,075,830 5,124,937 5,066,837
========= ========= ========= =========
Diluted earnings per share. . $ 1.50 $ 1.04 $ 3.66 $ 2.68
========= ========= ========= =========
Diluted weighted average
shares outstanding 5,146,454 5,099,794 5,138,700 5,093,715
========= ========= ========= =========
Dividends declared per share $ 0.050 $ 0.045 $ 0.145 $ 0.13
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
6
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
- ---------------------------------------------------------------------------------
(in thousands)
For the nine months
ended September 30,
2009 2008
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 18,808 $ 13,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 5,576 3,813
(Gain) loss on sale of property and equipment . . . . (139) 19
Deferred taxes . . . . . . . . . . . . . . . . . . . (300) 672
Stock-based compensation . . . . . . . . . . . . . . 787 688
Changes in operating assets and liabilities,
net of impact of acquisition:
Receivables, net . . . . . . . . . . . . . . . . . . 35,445 (35,728)
Other current assets and noncurrent assets . . . . . 2,070 (5,334)
Accounts payable and deferred compensation . . . . . (43,238) 41,867
Accrued expenses . . . . . . . . . . . . . . . . . . 330 (515)
Other liabilities . . . . . . . . . . . . . . . . . . 108 299
-------- --------
Net cash provided by operating activities 19,447 19,457
-------- --------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (7,135) (7,225)
Proceeds on the sale of property and equipment . . . . 150 -
Cash paid for acquired business, net of cash acquired . (1,646) (17,129)
------- --------
Net cash used in investing activities (8,631) (24,354)
------- --------
Cash flows from financing activities:
Borrowings on loan arrangement . . . . . . . . . . . . 146,243 164,173
Repayments on loan arrangement . . . . . . . . . . . . (152,919) (158,030)
Dividends paid . . . . . . . . . . . . . . . . . . . . (716) (632)
Excess tax benefits from share-based
payment arrangements . . . . . . . . . . . . . . . . 13 173
Proceeds from the exercise of options of common stock . 31 208
-------- --------
Net cash (used in) provided by financing activities (7,348) 5,892
-------- --------
Net increase in cash and cash equivalents . . . . . . . 3,468 995
Cash and cash equivalents at beginning of period . . . . 638 109
-------- --------
Cash and cash equivalents at end of period . . . . . . . $ 4,106 $ 1,104
======== ========
The accompanying notes are an integral part of these financial statements.
7
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(1) Nature of Business and Basis of Presentation
Our business is focused on providing sustainment services for U.S. Department
of Defense ("DoD") legacy systems and equipment and professional services to
DoD and Federal Civilian agencies. Operations consist primarily of diversified
program management, logistics, engineering, equipment refurbishment, IT,
construction management and consulting services performed on a contract basis.
Substantially all of our contracts are with United States Government
("Government") agencies and other Government prime contractors.
Our active divisions include GLOBAL Division ("GLOBAL"), formerly known as
"BAV Division" or "BAV," Communications and Engineering Division ("CED"),
Engineering and Logistics Division ("ELD"), Field Support Services Division
("FSS"), Fleet Maintenance Division ("FMD"), and Systems Engineering Division
("SED"). Energetics Incorporated ("Energetics"), Integrated Concepts and
Research Corporation ("ICRC"), and G&B Solutions, Inc. ("G&B"), acquired in
April 2008, are our currently active subsidiaries. In 2009, our inactive
divisions include Coast Guard Division ("VCG"), and Management Sciences
Division ("MSD").
Our accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, 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, 2009 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2009. For further information refer to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008. We evaluated
subsequent events after the balance sheet date of September 30, 2009 through
the time of filing this Form 10-Q with the SEC on October 30, 2009. There were
no subsequent events that required recognition or disclosure.
Reclassifications
Certain amounts from the prior year were reclassified to conform to the
current year presentation. For the three- and nine-month periods ended
September 30, 2008, we reclassified amortization expense for contract-related
intangible assets from "Selling, general and administrative expenses" to
"Contract costs" in the "Consolidated Statements of Income."
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management 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.
Estimates affecting the financial statements include accruals for contract
disallowance reserves, self insured health claims and estimated cost to
complete on firm fixed-price contracts.
8
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(2) Bank Notes Payable
We have a loan agreement with a group of banks that provides us with revolving
loans and letters of credit. The maximum amount of credit available to us as
of September 30, 2009 was $50 million and under the loan agreement we may
elect to increase the maximum credit availability up to $75 million. The
maturity date of the loan agreement is August 26, 2011. The amount of credit
available to us under the loan agreement is subject to certain conditions,
including a borrowing formula based on our billed receivables. Under the terms
of the loan agreement, we may borrow against the revolving loan at any time
and can repay the borrowings at any time without premium or penalty. We pay a
commitment fee, interest on any revolving loan borrowings at a prime-based
rate or an optional LIBOR-based rate, and fees on any letters of credit that
are issued.
We had no revolving loan amounts outstanding as of September 30, 2009 and
approximately $6.7 million outstanding as of December 31, 2008. We had letters
of credit outstanding of approximately $2.4 million and approximately $1.4
million as of September 30, 2009 and December 31, 2008, respectively.
Interest expense incurred on the loan was approximately $15 thousand and
approximately $88 thousand for the three- and nine-month periods ended
September 30, 2009, respectively, and approximately $73 thousand and
approximately $161 thousand for the three- and nine-month periods ended
September 30, 2008, respectively.
The loan agreement contains collateral requirements that secure our assets,
restrictive covenants, a limit on annual dividends, and other affirmative and
negative covenants. We were in compliance with the covenants at September 30,
2009.
(3) Stock-based Compensation
Restricted Stock
On January 2, 2009, we awarded 6,300 shares of restricted stock to our non-
employee Directors under the 2006 Restricted Stock Plan. The grant-date fair
value of these restricted stock grants was $39.81 per share. The shares issued
vested immediately and cannot be sold, transferred, pledged or assigned before
the second anniversary of the grant date. Compensation expense related to
these grants was approximately $250 thousand during the first quarter of 2009.
On January 2, 2008, we awarded 3,500 shares of restricted stock to our non-
employee Directors under the 2006 Restricted Stock Plan. The grant-date fair
value of these restricted stock grants was $47.92 per share. The shares issued
vested immediately and cannot be sold, transferred, pledged or assigned before
the second anniversary of the grant date. Compensation expense related to
these grants was approximately $168 thousand during the first quarter of 2008.
On January 2, 2009, January 3, 2008 and January 2, 2007, we notified certain
employees that they are eligible to receive awards under the 2006 Restricted
Stock Plan based on financial performance for the fiscal years 2009 (the "2009
Awards"), 2008 (the "2008 Awards"), and 2007 (the "2007 Awards"),
respectively. Vesting of each award occurs one-third on the date of award and
one-third on each of the next two anniversaries of such date of award. The
date of award determination is expected to be in March 2010 for the 2009
Awards. The date of award determination for the 2008 Awards and 2007 Awards
9
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
was March 3, 2009 and March 3, 2008, respectively. On each vesting date, 100%
of the vested award is paid in our shares. The number of shares issued is
based on the fair market value of our common stock on the vesting date. The
earned amount is expensed ratably over the vesting period of approximately
three years. On March 2, 2009, the employees eligible for the 2008 Awards and
2007 Awards received 23,538 shares of common stock. The grant-date fair value
of these awards was $21.17 per share.
The compensation expense related to all restricted stock awards included in
contract costs was approximately $162 thousand and approximately $1 million
for the three- and nine-month periods ended September 30, 2009, respectively,
and approximately $181 thousand and approximately $834 thousand for the three-
and nine-month periods ended September 30, 2008, respectively.
The stock-based compensation amount of approximately $787 thousand and
approximately $688 thousand shown on the accompanying statements of cash flows
for the nine-month periods ended September 30, 2009 and 2008, respectively, is
based on the compensation expense included in contract costs reduced by the
tax withholding associated with the awards issued during the nine-month
periods ended September 30, 2009 and 2008, respectively.
On April 28, 2009, M. A. Gauthier received 989 shares of common stock based on
the vesting schedule of the award issued on April 22, 2008. The fair value of
this award was $34.30 per share at the time of the award.
(4) Earnings Per Share
Basic earnings per share ("EPS") have been 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.
Diluted EPS has been computed in a manner consistent with that of basic
earnings per share while giving effect to all potentially dilutive common
shares that were outstanding during each period. Potentially dilutive common
shares represent incremental common shares issuable upon exercise of stock
options. There were no common shares issuable upon the exercise of stock
options that could potentially dilute EPS in the future that were not included
in the computation of diluted EPS because to do so would have been anti-
dilutive for the three- and nine-month periods ended September 30, 2009 and
2008.
Three Months Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
---- ---- ---- ----
Basic weighted average
shares outstanding 5,131,869 5,075,830 5,124,937 5,066,837
Dilutive effect of options 14,585 23,964 13,763 26,878
--------- --------- --------- ---------
Diluted weighted average
shares outstanding 5,146,454 5,099,794 5,138,700 5,093,715
========= ========= ========= =========
During the nine-month period ended September 30, 2009, 2,500 stock options
were exercised and such exercises resulted in an increase to additional paid-
in capital of approximately $45 thousand, including related income tax
benefits. No stock options were exercised during the three-month period ended
September 30, 2009.
10
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
During the three and nine-month periods ended September 30, 2008, 15,500 and
16,500 stock options, respectively, were exercised and such exercises resulted
in an increase to additional paid-in capital of approximately $361 thousand
and approximately $380 thousand, respectively, including related income tax
benefits.
(5) Commitments and Contingencies
We have, in the normal course of business, certain claims 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 or financial
position. However, the results of any legal proceedings cannot be predicted
with certainty.
(6) Segment Information
Management of our business operations is conducted under four reportable
operating segments: the Federal Group, the International Group, the IT, Energy
and Management Consulting Group, and the Infrastructure Group. These segments
operate under separate management teams and financial information is produced
for each segment. The various divisions within the Federal Group and the
International Group and the two subsidiaries within the IT, Energy and
Management Consulting Group are operating segments as defined by the
accounting standard for segment reporting and meet the aggregation of
operating segments criteria of the accounting standard. We evaluate segment
performance based on consolidated revenues and profits or losses from
operations before income taxes.
Federal Group - The Federal Group provides legacy equipment sustainment,
engineering, technical, management, integrated logistics support and
information technology services to all U.S. military branches and other
Government agencies. The Federal Group consists of five divisions: CED, ELD,
FSS, SED and MSD. MSD became inactive in 2009.
International Group - Our International Group provides engineering,
industrial, logistics and foreign military sales services to the U.S. military
and other Government agencies. It consists of three divisions: GLOBAL, FMD and
VCG. VCG became inactive in 2009.
IT, Energy and Management Consulting Group - The IT, Energy and
Management Consulting Group provides technical and consulting services primarily
to various civilian Government agencies. This group consists of Energetics and,
upon acquisition in April 2008, G&B.
Infrastructure Group - The Infrastructure Group is engaged principally
in providing diversified technical and management services to the Government,
including transportation infrastructure services and aerospace services. This
group consists of ICRC.
11
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
Our segment information for the three- and nine-month periods ended September
30, 2009 and 2008 is as follows (in thousands):
Three Months Nine Months
ended September 30, ended September 30,
2009 2008 2009 2008
---- ---- ---- ----
Revenues:
Federal Group $142,332 $188,934 $446,591 $475,400
International Group 88,675 55,577 226,098 156,462
IT, Energy and Management
Consulting Group 19,377 15,853 54,702 33,766
Infrastructure Group 12,684 46,443 31,241 81,581
Corporate - 4 - 13
-------- -------- -------- --------
Total revenues $263,068 $306,811 $758,632 $747,222
======== ======== ======== ========
Three Months Nine Months
ended September 30, ended September 30,
2009 2008 2009 2008
---- ---- ---- ----
Income before income taxes:
Federal Group $ 6,039 $ 4,830 $ 17,042 $ 13,149
International Group 3,980 1,005 7,359 4,080
IT, Energy and Management
Consulting Group 2,516 1,413 5,934 3,172
Infrastructure Group 297 2,011 645 3,369
Corporate/unallocated expenses (333) (531) (429) (1,356)
-------- -------- -------- --------
Income before income taxes $ 12,499 $ 8,728 $ 30,551 $ 22,414
======== ======== ======== ========
Our International Group provides management, maintenance, storage and disposal
support for the U.S. Department of Treasury's seized and forfeited general
property program. Contract terms on this program allow for adjustments to the
target costs on which our incentive fee is calculated when work requirements
vary from the original scope. In the third quarter of 2009, we came to an
agreement with our customer that amended certain contract terms, including the
target cost levels. Under terms of the agreement, target cost levels for the
customer's fiscal year ending September 30, 2009 have been increased to
reflect more closely the customer's work requirements. This allowed us to
recognize increased fees in the third quarter of 2009 on all of our work
performed during the Government's fiscal year ended September 30, 2009. We
recognized additional revenues and pretax income on this program in the third
quarter of 2009 of approximately $3.3 million, primarily due to this incentive
fee recognition.
Customer Information
- --------------------
Our revenue by customer is as follows (in thousands):
Three Months Nine Months
ended September 30, ended September 30,
Source of Revenues 2009 2008 2009 2008
- ------------------ ---- ---- ---- ----
Army/Army Reserve $129,487 $176,449 $418,430 $446,413
Navy 72,765 52,611 195,788 139,478
Department of Treasury 14,363 13,220 35,409 42,172
Department of Transportation 11,383 42,657 26,611 67,707
Other 35,070 21,874 82,394 51,452
-------- -------- -------- --------
Total revenues $263,068 $306,811 $758,632 $747,222
======== ======== ======== ========
12
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(7) Acquisitions
G&B Solutions, Inc.
On April 14, 2008, we acquired G&B. Cash paid at closing for G&B was
approximately $19.5 million, including approximately $650 thousand of prepaid
retention bonuses that are being expensed in the post-acquisition period as
the affected employees provide services, less approximately $600 thousand for
certain closing adjustments. We also incurred approximately $200 thousand of
direct acquisition costs consisting of legal, accounting and other fees.
Under the terms of the acquisition, we are required to make additional
payments of up to $4.2 million over a three-year post closing period if G&B
achieves certain financial performance targets. The first earn-out payment
period was from April 14, 2008 to March 31, 2009. Based on G&B's performance
from April 14, 2008 to March 31, 2009, $1.4 million was earned by the seller
and was paid in the second quarter and recorded as additional goodwill. The
subsequent earn-out payment periods are April 1, 2009 to March 31, 2010 and
April 1, 2010 to March 31, 2011. If earned and paid, such additional purchase
price consideration of up to $2.8 million will be recorded as goodwill on
the consolidated balance sheet. Additionally, $212 thousand was paid and
recorded as goodwill during the second quarter of 2009 for taxes related to
the Section 338(h)(10) election for the G&B acquisition. The results of G&B's
operations are included in the accompanying unaudited consolidated financial
statements beginning as of April 14, 2008.
(8) Fair Value Measurements
The accounting standard for fair value measurements defines fair value,
establishes a market-based framework or hierarchy for measuring fair value,
and expends disclosures about fair value measurements. The standard is
applicable whenever assets and liabilities are measured at fair value.
The fair value hierarchy established in the standard prioritizes the inputs
used in valuation techniques into three levels as follows:
Level 1 - Observable inputs - quoted prices in active markets for identical
assets and liabilities;
Level 2 - Observable inputs other than the quoted prices in active markets for
identical assets and liabilities - includes quoted prices for similar
instruments, quoted prices for identical or similar instruments in inactive
markets, and amounts derived from valuation models where all significant
inputs are observable in active markets; and
Level 3 - Unobservable inputs - includes amounts derived from valuation models
where one or more significant inputs are unobservable and require us to
develop relevant assumptions.
Included in other current assets and other assets as of September 30, 2009 is
approximately $4.6 million of investments we hold in a trust related to a non-
qualified benefit plan. We determined the fair value of these assets using
the Level 1 methodology. We have an offsetting deferred compensation
liability for this plan. As such, we do not have income statement volatility
as a result of fluctuations in the value of the plan's investments.
13
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
In the first quarter of 2009, we adopted the provision of the accounting
standard for fair value as it relates to non-financial assets and liabilities
that are recorded at fair value on a non-recurring basis. The impact of this
adoption was not material.
(9) Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") revised its
accounting guidance related to revenue arrangements with multiple
deliverables. The guidance relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting and modifies the manner in which the
transaction consideration is allocated across the individual deliverables.
Also, the guidance expands the disclosure requirements for revenue
arrangements with multiple deliverables. The guidance will be effective for
us beginning on January 1, 2011, and may be applied retrospectively for all
periods presented or prospectively to arrangements entered into or materially
modified after the adoption date. Early adoption is permitted provided that
the guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the potential effect the adoption of
this new guidance will have, if any, on our financial statements.
14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
Organization
Our business is focused on providing sustainment services for U.S. Department
of Defense ("DoD") legacy systems and equipment and professional services to
DoD and Federal Civilian agencies. Operations consist primarily of diversified
program management, logistics, engineering, equipment refurbishment, IT,
construction management and consulting services performed on a contract basis.
Substantially all of our contracts are with United States Government
("Government") agencies and other Government prime contractors.
Our business operations are managed under groups that consist of one or more
divisions or wholly owned subsidiaries. Our Federal Group operations are
conducted by our Communications and Engineering Division ("CED"), Engineering
and Logistics Division ("ELD"), Field Support Services Division ("FSS"), and
Systems Engineering Division ("SED"). Our International Group operations are
conducted by our GLOBAL Division ("GLOBAL", formerly our BAV Division), and
Fleet Maintenance Division ("FMD"). Our IT, Energy and Management Consulting
Group operations are conducted by our wholly owned subsidiaries Energetics
Incorporated ("Energetics") and G&B Solutions, Inc. ("G&B"). Our
Infrastructure Group operations are conducted by our wholly owned subsidiary
Integrated Concepts and Research Corporation ("ICRC"). Our Management Sciences
Division ("MSD") formerly conducted operations in our Federal Group, but is
currently inactive. Our Coast Guard Division ("VCG") formerly conducted
operations in our International Group, but is currently inactive.
Customers and Services
We provide program management, logistics, engineering, legacy equipment
sustainment, IT, construction program, and consulting services to the
Government, other Government prime contractors, and commercial entities. Our
largest customer is the U.S. Department of Defense ("DoD"), including agencies
of the U.S. Navy, Army and Air Force. We also provide services to civilian
Government customers.
Segments
Our operations are conducted within four reportable segments aligned with our
management groups: 1) Federal; 2) International; 3) IT, Energy and Management
Consulting; and 4) Infrastructure.
Federal Group - Our Federal Group provides engineering, technical, management
and integrated logistics support services to U.S. military branches and other
Government agencies. The divisions in this group include CED, ELD, FSS, SED
and MSD. MSD became inactive in 2009.
CED - CED is dedicated to supporting the Army's Communications and Electronics
Command ("CECOM") in the management and execution of the Rapid Response ("R2")
Program, which supports clients across DoD and Government. CED manages
execution of tasks involving research and development, technology insertion,
systems integration and engineering, hardware/software fabrication and
installation, testing and evaluation, studies and analysis, technical data
management, logistics support, training and acquisition support. A large
portion of our current work on this program is related to the U.S. military
involvement in the Middle East and Asia. The contract supporting the R2
Program is scheduled to expire in January 2011.
CED Army Equipment Support Program - Our CED division had a program on
its R2 support contract to provide maintenance and logistics services in
support of U.S. Army equipment in Iraq and Afghanistan. We performed work on
this program for a full year in 2008, but only two months in 2009 because the
program expired in February 2009.
15
CED Assured Mobility Systems Program - Our CED division has a program on
its R2 support contract to provide technical support services in support of
U.S. Army PM Assured Mobility Systems and U.S. Army Tank-automotive and
Armaments Command ("TACOM"). In January 2009, we were awarded a $389 million
follow-on task order on this program for work that will run through January
2011.
RCV Modernization Program - We received a task order on our R2 support
contract for a program to provide maintenance work on U.S. Army Route
Clearance Vehicles in Kuwait (the "RCV Modernization Program") in September
2008. We expect the initial phase of this program to run for two years under
contractual coverage of approximately $235 million.
ELD - ELD provides full life cycle engineering, logistics, maintenance and
refurbishment services to extend and enhance the life of existing equipment.
ELD principally supports the U.S. Army, Army Reserve and Army National Guard
with core competencies in combat and combat service support system
conversions, technical research, sustainment and re-engineering, system
integration and configuration management.
FSS - FSS provides worldwide field maintenance and logistics support services
for a wide variety of military vehicles and equipment, including performance
of organizational, intermediate and specialized depot-level maintenance. FSS
principally supports the U.S. Army and Marine Corps by providing specialized
Field Service Representatives ("FSR") and Field Support Teams ("FST") in areas
of combat operations and austere environments.
MSD - Past activities of MSD focused on services for product and process
improvement, supporting a variety of Government and commercial clients. These
service offerings have been transferred to our G&B operations and MSD does not
currently conduct operating activities.
SED - SED provides comprehensive systems and software engineering, logistics,
and prototyping services to the DoD. SED principally supports the U.S. Army,
Air Force, and Marine Corps combat and combat support systems. SED's core
competencies include: systems technical support, configuration management and
life cycle support for wheeled and tracked vehicles and ground support
equipment; obsolescence management, service life extension, and technology
insertion programs; and technical documentation and data packages.
International Group - Our International Group provides engineering,
industrial, logistics and foreign military sales services to the U.S. military
and other Government agencies. The divisions in this Group include GLOBAL, FMD
and VCG. VCG became inactive in 2009.
GLOBAL - Through GLOBAL, we provide assistance to the U.S. Navy in executing
its Foreign Military Sales ("FMS") Program for surface ships sold, leased or
granted to foreign countries by providing program management, engineering,
technical support, logistics services for ship reactivations and transfers and
follow-on support. Our expertise includes: ship reactivation/transfer,
overhaul and maintenance, follow-on technical support, FMS integrated
logistics support, engineering and industrial services, training and spare and
repair parts support. The level of revenues and associated profits resulting
from fee income generated by this program varies depending on a number of
factors, including the timing of ship transfers and associated support
services ordered by foreign governments and economic conditions of potential
customers worldwide. Changes in the level of activity associated with the
Navy's ship transfer program have historically caused quarterly and annual
revenue fluctuations.
FMD - FMD provides field engineering, logistics, maintenance, and information
technology services to the U.S. Navy and Air Force, including fleet-wide ship
and aircraft support programs. FMD's expertise includes ship repair and
modernization, ship systems installations, ordnance engineering and logistics,
facility operations, war reserve materials management, aircraft sustainment
and maintenance automation and IT systems integration.
16
Treasury Seized Asset Program - FMD also provides management,
maintenance, storage and disposal support for the U.S. Department of
Treasury's seized and forfeited general property program. Our contract with
the Department of Treasury to support this program is a cost plus incentive
fee contract that contains certain conditions under which the incentive fee
revenue is earned. The amount of incentive fee earned depends on our costs
incurred on the contract compared to certain target cost levels specified in
the contract. Per the contract, an assessment of actual costs compared to
target costs is made once annually. The target cost levels in this contract
may be subject to negotiation and change if the customer's work requirements
vary from the scope of work originally contained in the contract. We recognize
incentive fee when the amount is fixed or determinable and collectability is
reasonably assured. Due to the conditions under which the incentive fee for
this contract is awarded, and to the potential for changes in the cost targets
as work requirements vary, the full amount of incentive fee for the work we
perform in any one period may not be fixed or determinable and the
collectability may not be reasonably assured until a subsequent period. See
our Management Outlook section for further discussion of recent events
relating to financial performance on this program.
Contract Field Teams Program - In July 2008, our FMD division was
awarded one of several prime contracts to support the United States Air Force
Contract Field Teams ("CFT") Program. The CFT Program awards have a maximum
ceiling of approximately $10.12 billion. Under the program, we are providing
rapid deployment and long-term support services for a variety of Air Force
requirements to maintain, repair and modernize equipment and systems. While
our revenues under the contract cannot be predicted with certainty, the award
provides us with the opportunity to compete for and expand our work performed
for the Air Force.
VCG - VCG has provided the U.S. Coast Guard with FMS support and life cycle
support for vessels transferred to foreign governments. The work performed by
VCG for the U.S. Coast Guard has decreased and we have made this division
inactive beginning in 2009.
IT, Energy and Management Consulting Group - The IT, Energy and Management
Consulting Group provides technical and consulting services primarily to
various civilian Government agencies. This group includes Energetics and, as of
April 2008, G&B.
Energetics - Energetics provides technical, policy, business, and management
support in areas of clean and efficient energy, climate change mitigation,
infrastructure protection, measurement technology, and global health.
Energetics' expertise lies in managing collaborative processes to bring
together diverse stakeholders in decision making, R&D program planning and
evaluation metrics, state-of-the-art technology assessments, technical and
economic feasibility analysis, and technical communications. Customers
include the U.S. Department of Energy, the U.S. Department of Homeland
Security, U.S. Department of Commerce, and other Government agencies and
commercial clients.
G&B - G&B is an established information technology provider to many Government
agencies, including the Departments of Homeland Security, Interior, Labor,
Agriculture, Housing and Urban Development, and Defense; the Social Security
Administration; the Pension Benefit Guaranty Corporation; and the National
Institutes of Health. G&B's core expertise lies in enterprise architecture
development, information assurance/business continuity, program and portfolio
management, network IT services, systems design and integration, and quality
assurance services.
Infrastructure Group - This group consists of our ICRC subsidiary. ICRC is
engaged principally in providing engineering and transportation infrastructure
services.
Port of Anchorage Intermodal Expansion Project ("PIEP") - A significant
amount of ICRC's revenues and income comes from services performed on the Port
of Anchorage Intermodal Expansion Project in Alaska (the "PIEP") under a
17
contract with the U.S. Department of Transportation Maritime Administration.
This contract requires ICRC to provide program management services, including
project management, procurement, permitting, design, and construction to the
Government to expand the size of the port's facilities to accommodate larger
ships, more dock space, improved cargo flow, improved traffic flow at the
port, more environmentally friendly port operations and other modernization
enhancements. The PIEP contract has an estimated ceiling amount of $704
million, a three-year base period of performance, and four one-year option
periods. Some of the infrastructure improvements under the PIEP typically
cannot be performed during the winter months due to subarctic conditions. The
seasonal nature of this work will cause fluctuations in our revenues on this
contract, with revenue levels typically higher in summer months and lower in
winter months. In addition, revenues and profits are down significantly on
this project during the nine months ended September 30, 2009 due to temporary
delays in the work schedule caused by certain environmental and technical
issues near the site on which ICRC conducts its PIEP work. We expect revenue
levels on this job to recover because most of the work that we are unable to
perform in 2009 will be performed in future years.
Concentration of Revenues
(in thousands)
For the nine months ended September 30,
---------------------------------------
2009 2008
Source of Revenue Revenues % Revenues %
- ----------------- -------- - -------- -
CED Army Equipment Support $ 54,099 7 $244,896 33
CED Assured Mobility Systems 102,844 14 61,231 8
RCV Modernization 62,751 8 - -
CED Other 123,409 16 112,747 15
-------- --- -------- ---
Total CED 343,103 45 418,874 56
GLOBAL Egypt 42,313 5 36,879 5
GLOBAL Romania 15,648 2 6,637 1
GLOBAL Other 14,082 2 15,239 2
-------- --- ------- ---
Total GLOBAL 72,043 9 58,755 8
Treasury Seized Asset Program 34,988 5 40,760 5
PIEP Contract 26,607 4 67,700 9
Other 281,891 37 161,133 22
-------- --- -------- ---
Total revenues $758,632 100 $747,222 100
======== === ======== ===
Revenues on the "Other" line in the table above include: 1) revenues in our
Federal Group from legacy sustainment equipment refurbishment services
performed by our ELD division and from work performed by our FSS and SED
divisions on programs other than the RCV Modernization Program; 2) revenues in
our FMD division from services provided on engineering and technical services
task orders and from work performed on the CFT Program; and 3) revenues from
various contracts performed in our IT, Energy and Management Consulting Group.
Management Outlook
We have made a strategic commitment to increase our direct labor revenue and
diversify our service offerings and customer base to improve our profit
margins. These efforts are showing results in 2009 and we anticipate further
advances in future years. Concurrently, we will continue to pursue large DoD
management contracts for which we have demonstrated proven expertise as those
opportunities arise.
18
Our employee count increased significantly in 2008 and this trend has
continued in 2009. As of September 30, 2009, we had 2,501 employees, which
represents an increase of 581 employees, or approximately 30% since December
31, 2008. The majority of our new employees are engaged in work on DoD legacy
systems sustainment services, an area on which we believe DoD will be sharply
focused in the near future. Concurrently, requirements for work performed by
our subcontractors that generated much of our revenue growth in years prior to
2009 have tapered off. As a result, an increasing amount of our work is
performed by our employees and we are relying less on subcontractors. Revenue
from work performed by our employees, or direct labor revenue, typically has a
higher profit margin than subcontractor generated revenue, which generally has
little or no associated profit. While the decline in subcontractor work is
expected to result in flatter overall revenue growth in the near term, we will
benefit from improved profit margins associated with our strong employee
growth, enhanced control of our client relationships, and reduced dependence
upon subcontractor priorities.
We are augmenting our core base of DoD work by emphasizing growth in our non-
DoD services. These efforts have included: 1) an emphasis on marketing our
Energetics services that has shown favorable results, including some major
recent contract awards that will be performed during the next three to five
years; 2) the growth of G&B employee count and revenues in 2009; and 3) our
continued commitment to grow through strategic acquisitions of companies that
perform work outside the DoD market. We expect these efforts directed toward
the growth of our work in the Federal Civilian marketplace to contribute to
overall future revenue growth and financial performance.
We also know there are risks and uncertainties related to our business. We
recognize that 2009 is a Government transition year and Government spending
priorities may change significantly. There are indications of a shift in
Government spending to more energy, IT-related infrastructure, health care IT,
and DoD legacy systems sustainment services. We believe that our current
capabilities have us well prepared to pursue these opportunities.
The Government transition can also affect the timing of contract awards and
the funding process. The federal technical services industry is experiencing
an extraordinary delay in contract awards while the new administration ensures
these transactions are consistent with its priorities. Additionally, the
Government workforce has experienced a loss of qualified contracting personnel
in recent years. While the Government is seeking to replace this personnel
loss, we believe that this transition in the Government workforce may impact
proposal decisions and delay funding of new and ongoing contract efforts. A
summary of our funding activity is presented below.
Funded Backlog
Revenues in our industry depend on contract funding ("bookings") and funded
contract backlog is an indicator of potential future revenues. A summary of
our bookings and revenues for the nine-month periods ended September 30, 2009
and 2008, and funded contract backlog as of September 30, 2009 and 2008 is as
follows:
(in millions)
2009 2008
---- ----
Bookings $789 $1,033
Revenue $759 $747
Funded backlog $597 $706
Rapid Response Program
The U.S. Army informed us in January 2009 that it would not consider our
proposal for a new contract, known as Rapid Response - Third Generation ("R2-
3G") to succeed our current R2 Program contract. We protested this decision
with the General Accounting Office ("GAO") in June 2009. As a result of the
protest efforts by us and other offerors, the Army has agreed to take
corrective action and may amend the solicitation to allow additional prime
contract awards. If additional prime contract awards are solicited, VSE and
19
other offerors that originally were not considered for contract awards may be
eligible for such additional awards. There is also a possibility that new
awards will not be granted and that the entire R2-3G program will be cancelled
by the Army.
Concurrent with the initial notification that we would not be considered for
an R2-3G award, we began moving work that had previously been performed
through our R2 contract to our other omnibus contracts. We are continuing this
effort by seeking new task order awards on our other omnibus contracts for
this work as the R2 task orders expire. The award of a prime contract under
the R2-3G program would provide us with an additional contract on which to
place this work and potential new work. We expect to continue our work on
existing task orders under our current R2 contract through the scheduled
contract expiration in January 2011, including work on our CED Assured
Mobility Systems and RCV Modernization Programs that we expect will continue
generating significant revenues, despite CED revenues tapering off while the
R2 contract nears completion. As anticipated and communicated in our previous
SEC filings, the CED division had program work set to expire in February 2009,
but we were also awarded new work in January 2009. As shown in the
"Concentration of Revenues" table above, the total CED revenue under the R2
contract for the nine months ended September 30, 2009, as compared to the nine
months ended September 30, 2008, has declined from 56% to 45% of our revenues.
It is difficult to assess the financial impact regarding the final outcome of
the R2-3G program and our level of participation, given uncertain DoD work
requirements and the potential to perform work under other multiple award
omnibus contracts.
A substantial portion of our revenues on the R2 contract are from low profit
margin subcontract work. We believe our efforts in replacing subcontract work
with direct labor are resulting in expected increases in our profit margins.
Treasury Seized Asset Program
Contract terms on this program allow changes to the target costs on which our
incentive fee is calculated on an annual basis when work requirements vary
from the original scope. We recently concluded negotiations with our customer
that finalized target cost levels for the customer's fiscal year ending
September 30, 2009 to reflect more closely the customer's work requirements
for the year and amended certain other terms. With the conclusion of these
negotiations, our incentive fee for this fiscal year became fixed and
determinable and collectability was reasonably assured. This allowed us to
recognize incentive fees in the third quarter of 2009 on all of our work
performed during the Government's fiscal year ended September 30, 2009. We
recognized revenue and pretax income on this program in the third quarter of
2009 of approximately $3.3 million, primarily due to this incentive fee
recognition. The customer also exercised the next option year, allowing us to
continue work through September 30, 2010. A similar process to determine
incentive fees related to work performed during the September 30, 2010 fiscal
year will be made and associated incentive fees will likely be recognized in
the third quarter of 2010. We also agreed with the customer that future award
periods in the contract would be terminated.
As a result of these negotiations, we have come to a mutual agreement with our
customer that the current cost plus incentive fee contract type is
inappropriate for the volatility of the workload. Accordingly, this contract
will be re-competed under a more appropriate contract type for work to be
performed after September 30, 2010.
Other Programs and Contracts
Our work has increased significantly in recent years and we believe that
several new and ongoing efforts will help us sustain this level of work.
In addition to a significant new source of work in 2009 and 2010, the RCV
Maintenance Program gives us a key presence in Kuwait and is expected to
provide us with significant potential for additional work in the future. Our
FSS division is performing the work on the RCV Maintenance Program and
currently has bids pending on additional work in Kuwait and in Afghanistan. If
20
we are awarded these contracts, we believe they would significantly increase
our workforce and revenues in these locations.
Our ELD division has expanded its workforce, facilities, capacity to provide
services, contractual coverage and funding since its inception, resulting in
further increases in revenues from these services in the first nine months of
2009. ELD revenues are primarily generated from direct labor. Our investment
in facilities and personnel to support this work enhances our ability to serve
DoD's growing need for our equipment refurbishment and sustainment services.
Our ELD division currently has several bids pending for additional new work.
If we are awarded these task orders, we believe they would significantly
increase the number of our employees and revenues.
Our SED division was recently awarded a subcontract to provide Vehicle
Integration Kits ("VIKs"), spare VIK components, and engineering and
installation support on tactical wheeled vehicles and combat vehicles for the
U.S. Army and U.S. Marine Corps through a multiple award indefinite
delivery/indefinite quantity contract under the Driver's Vision Enhancer-
Family of Systems ("DVE-FOS") program. The subcontract has an anticipated
ceiling value of approximately $190 million over a five-year period. We have
pursued this work for several years and we believe that this award will
rekindle the growth of revenues and profits in our SED division after its
successful completion in November 2008 of a four-year, $96 million program to
provide a protection system, the Tanker Ballistic Protection System ("TBPS"),
for vehicles deployed by the U.S. Army in Iraq.
Our GLOBAL division revenues have increased in 2009 compared to the prior year
and based on indications from new requests for FMS assets, congressional
approval of certain ship transfers, and our receipt of an award of a $249
million contract option modification from the U. S. Navy to provide one
additional year of continued support, we expect further increases in our ship
transfer revenues in the near term. This may include some of our current
client countries and some new client countries.
The CFT Program contract gives us the opportunity to increase our sustainment
and legacy services performed for the Air Force. This program is contributing
to direct labor revenue increases in our FMD division. Our FMD division also
recently entered into a software license and services agreement that will
enable us to expand our logistics support services for air, sea and land
military assets. Our investment in this asset gives us the opportunity for
further increases in our FMD division revenues.
Our G&B subsidiary has received two major awards in 2009. One award is a
subcontract to provide Systems Operations Support Services to the Social
Security Administration. While future revenues from this award cannot be
determined with certainty, the engagement has a ceiling value of $100 million
over five years. G&B also received a $26 million prime contract award with a
base period of one year and four one-year option periods from the Army
Armament Research, Development and Engineering Center to provide Enterprise
Excellence services. This award is an indicator of the success we anticipated
in our transition of product and process improvement service offerings from
our MSD division to G&B. We expect both awards to provide solid growth
prospects for our G&B subsidiary in the years ahead.
Our Energetics subsidiary was awarded one of the largest contracts in its
history in 2009 by the U.S. Department of Energy's Office of Electricity
Delivery and Energy Reliability. Energetics expects to receive up to $11.3
million to provide services under a three-year subcontract.
Our ICRC subsidiary's work on the PIEP in Anchorage, Alaska has been a
challenge in 2009. Revenues and profits are down significantly on this project
in 2009 due to temporary delays in the work schedule caused by certain
environmental and technical issues near the site on which ICRC conducts its
PIEP work. We expect revenue levels on this job to recover because most of the
work we are unable to perform in 2009 will be performed in future years.
21
We were awarded a General Services Administration ("GSA") Logistics Worldwide
("LOGWORLD") contract in 2009. This new contract is available to all
Government agencies and represents potential revenues of approximately $50
million for the five-year base period, with options to extend the period of
performance for up to 10 additional years. This award supplements several
other work schedules and large multiyear, multiple award, indefinite delivery,
indefinite quantity ("omnibus") contracts that have large nominal ceiling
amounts. These contracts include the Field and Installation Readiness Support
Team ("FIRST") contract with the U.S. Army, the SeaPort Enhanced contract with
the U.S. Navy, and the U.S. Army PEO CS & CSS Omnibus III contract. We are one
of several awardees on each contract. While our future revenues from these
contracts cannot be predicted with certainty, these contracts, along with our
CFT Program contract, allow us to pursue task order awards for new work.
To summarize our outlook, we believe our business prospects are both bright
and challenging. We are confident that we are well positioned to meet the
challenges of expiring work with 1) the expansion of our equipment
refurbishment and sustainment services performed by ELD and the ship transfer
services performed by GLOBAL; 2) our new work on the RCV Maintenance and CFT
Programs; 3) our position as a prime contractor on our FIRST contract that
presents us with some significant bidding opportunities and award prospects;
4) our growing level of work in the Federal Civil marketplace; 5) our
increased emphasis on bolstering our marketing efforts in both our DoD and
Federal Civilian markets; and 6) our continued commitment to grow through
strategic acquisitions.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") revised its
accounting guidance related to revenue arrangements with multiple
deliverables. The guidance relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting and modifies the manner in which the
transaction consideration is allocated across the individual deliverables.
Also, the guidance expands the disclosure requirements for revenue
arrangements with multiple deliverables. The guidance will be effective for us
beginning on January 1, 2011, and may be applied retrospectively for all
periods presented or prospectively to arrangements entered into or materially
modified after the adoption date. Early adoption is permitted provided that
the guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the potential effect the adoption of
this new guidance will have, if any, on our financial statements.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
us to make estimates and assumptions. There have been no changes in our
critical accounting policies since December 31, 2008. Please refer to our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with the
SEC on March 3, 2009 for a full discussion of our critical accounting policies.
Revenue by Contract Type
Our revenues by contract type were as follows (in thousands):
Nine Months
Ended September 30,
Contract Type 2009 % 2008 %
- ------------- ---- - ---- -
Cost-type . . . . . . . . . . . . . . $151,598 20 $182,689 25
Time and materials . . . . . . . . . 576,333 76 533,345 71
Fixed price . . . . . . . . . . . . . 30,701 4 31,188 4
-------- --- -------- ---
$758,632 100 $747,222 100
======== === ======== ===
22
A significant portion of our time and materials revenues are from CED R2
Program task orders under which revenues result primarily from the pass
through of subcontractor support services. These revenues have a lower profit
margin than revenues generated by work performed by our employees.
Results of Operations
The results of operations are as follows (in thousands):
Three Months Nine Months
Ended Ended Change
September 30, September 30, Three Nine
Description 2009 2008 2009 2008 Months Months
- ----------- ---- ---- ---- ---- ------ ------
Revenues $263,068 $306,811 $758,632 $747,222 $(43,743) $11,410
Contract costs 250,144 297,790 727,393 724,245 (47,646) 3,148
-------- -------- -------- -------- -------- -------
Gross Profit 12,924 9,021 31,239 22,977 3,903 8,262
Selling, general and
Administrative
Expenses 422 298 804 681 124 123
Interest expense
(income), net 3 (5) (116) (118) 8 2
-------- -------- -------- -------- -------- -------
Income before income
taxes 12,499 8,728 30,551 22,414 3,771 8,137
Provision for income
taxes 4,773 3,419 11,743 8,738 1,354 3,005
-------- -------- -------- -------- -------- -------
Net income $ 7,726 $ 5,309 $ 18,808 $ 13,676 $ 2,417 $ 5,132
======== ======== ======== ======== ======== =======
Our revenues decreased approximately $43.7 million, or 14%, for the three
months ended September 30, 2009, as compared to the same period of 2008.
Revenues increased approximately $11.4 million, or 2%, for the nine months
ended September 30, 2009, as compared to the same period of 2008. Revenues in
our International and IT, Energy, and Management Consulting Groups increased
during these periods while revenues in Federal and Infrastructure Groups
declined.
Our gross profits increased approximately $3.9 million, or approximately 43%
for the three months ended September 30, 2009, as compared to the same period
of 2008. Gross profits increased approximately $8.3 million, or approximately
36% for the nine months ended September 30, 2009, as compared to the same
period of 2008. Profits for the three-month period increased in our Federal,
International and IT, Energy, and Management Consulting Groups and declined in
our Infrastructure Group. Profits for the nine-month period increased in our
Federal, International, and IT, Energy, and Management Consulting Groups and
declined in our Infrastructure Group.
Changes in revenues and income are further discussed in the summaries of our
group results that follow.
Selling, general and administrative expenses consist primarily of costs and
expenses that are not chargeable or reimbursable on our operating unit
contracts. Changes in these expenses for the three and nine months ended
September 30, 2009 as compared to the same periods of 2008 are not
significant.
23
Federal Group Results
The results of operations for our Federal Group are as follows (in thousands):
Three Months Nine Months
Ended Ended Change
September 30, September 30, Three Nine
Description 2009 2008 2009 2008 Months Months
- ----------- ---- ---- ---- ---- ------ ------
Revenues $142,332 $188,934 $446,591 $475,400 $(46,602) $(28,809)
======== ======== ======== ======== ======== ========
Income before
income taxes $ 6,039 $ 4,830 $ 17,042 $ 13,149 $ 1,209 $ 3,893
======== ======== ======== ======== ======== ========
Profit percentage 4.2% 2.6% 3.8% 2.8%
Revenues for our Federal Group decreased approximately $46.6 million or 25%
for the three-month period ended September 30, 2009, as compared to the same
period for the prior year. Revenues for this group decreased approximately
$28.8 million or 6% for the nine-month period ended September 30, 2009, as
compared to the same period for the prior year. Income before income taxes
for our Federal Group increased approximately $1.2 million, or 25% for the
three-month period ended September 30, 2009 as compared to the same period for
the prior year. Income before income taxes for this group increased
approximately $3.9 million, or 30% for the nine-month period ended September
30, 2009 as compared to the same period for the prior year. This increase in
profits and associated profit margins is an indication of success in our
efforts to replace low-to-no margin subcontractor work with VSE direct labor.
These efforts are also allowing us to increase our client visibility and
decrease our dependence upon subcontractor performance and priorities.
The change in revenues for the three-month period resulted primarily from a
decrease in revenues associated with the expiration of the CED Army Equipment
Support Program of approximately $91.7 million, an increase in revenues from
work on the RCV Modernization program of approximately $25.5 million, an
increase in the CED Assured Mobility Systems Program revenues of approximately
$12.9 million, a decrease in revenues of approximately $11.5 million from
other R2 program task orders, and an increase in revenues of approximately
$10.8 million from growth in the equipment refurbishment services provided by
our ELD division.
The change in revenues for the nine-month period resulted primarily from a
decrease in revenues associated with the expiration of the CED Army Equipment
Support Program of approximately $190.7 million. This decrease was partially
offset by an increase in revenues from work on the RCV Modernization program
of approximately $62.8 million, an increase in the CED Assured Mobility
Systems Program revenues of approximately $41.6 million, and an increase in
revenues of approximately $30.8 million from growth in the equipment
refurbishment services provided by our ELD division.
The three-month period increase in income before income taxes is primarily due
to an increase in profits on our ELD equipment refurbishment services of
approximately $3.7 million resulting from the increase in ELD revenues and an
improvement in profit margins, and an increase in profits of approximately
$472 thousand on the RCV Modernization Program. These increases helped to
replace a decrease in profits of approximately $1.5 million due to the
completion of the TBPS program in 2008 and the resulting absence of this
program from our operating results in 2009, and a decrease in profits of
approximately $1.1 million associated with the expiration of the CED Army
Equipment Support Program in February 2009.
The nine-month period increase in income before income taxes is primarily due
to an increase in profits on our ELD equipment refurbishment services of
approximately $7.6 million resulting from the increase in ELD revenues and an
improvement in the profit margins, and an increase in profits of approximately
$1.7 million on the RCV Modernization Program. These increases helped to
replace a decrease in profits of approximately $3.9 million due to the
completion of the TBPS program in 2008 and the resulting absence of this
24
program from our operating results in 2009, and a decrease in profits of
approximately $2.1 million associated with the expiration of the CED Army
Equipment Support Program in February 2009.
International Group Results
The results of operations for our International Group are as follows (in
thousands):
Three Months Nine Months
Ended Ended Change
September 30, September 30, Three Nine
Description 2009 2008 2009 2008 Months Months
- ----------- ---- ---- ---- ---- ------ ------
Revenues $88,675 $55,577 $226,098 $156,462 $ 33,098 $ 69,636
======= ======= ======== ======== ======== ========
Income before income
taxes $ 3,980 $ 1,005 $ 7,359 $ 4,080 $ 2,975 $ 3,279
======= ======= ======== ======== ======== ========
Profit percentage 4.5% 1.8% 3.3% 2.6%
Revenues for our International Group increased approximately $33.1 million or
60% for the three-month period ended September 30, 2009, as compared to the
same period for the prior year. Revenues for this group increased
approximately $69.6 million or 45% for the nine-month period ended September
30, 2009, as compared to the same period for the prior year.
The increase in revenues for the three-month period resulted primarily from an
increase of approximately $25.3 million in the level of FMD services provided
on engineering and technical services task orders, revenues on the CFT Program
in 2009 of approximately $4.3 million, and an increase of approximately $2.1
million in the level of GLOBAL services due in part to a delivery order to
provide support services to the government of Romania.
The increase in revenues for the nine-month period resulted primarily from an
increase of approximately $51.7 million in the level of FMD services provided
on engineering and technical services task orders, an increase of
approximately $13.3 million in the level of GLOBAL services due in part to a
delivery order to provide support services to the government of Romania, and
to revenues on the CFT Program in 2009 of approximately $11 million. The
revenue increases for this period were partly offset by a decrease in revenues
on the Treasury Seized Asset Program of approximately $5.8 million.
Income before income taxes for our International Group increased approximately
$3 million, or 296% for the three-month period ended September 30, 2009 as
compared to the same period for the prior year. Income before income taxes for
this group increased approximately $3.3 million, or 80% for the nine-month
period ended September 30, 2009 as compared to the same period for the prior
year. The three and nine month increases are primarily due to an increase in
profits of approximately $3.1 million recognized in the third quarter of 2009
on the Treasury Seized Asset Program contract resulting from the agreement
reached in this period.
25
IT, Energy and Management Consulting Group Results
The results of operations for our IT, Energy and Management Consulting Group
are as follows (in thousands):
Three Months Nine Months
Ended Ended Change
September 30, September 30, Three Nine
Description 2009 2008 2009 2008 Months Months
- ----------- ---- ---- ---- ---- ------ ------
Revenues $19,377 $15,853 $54,702 $33,766 $ 3,524 $20,936
======= ======= ======= ======= ======= =======
Income before income
taxes $ 2,516 $ 1,413 $ 5,934 $ 3,172 $ 1,103 $ 2,762
======= ======= ======= ======= ======= =======
Profit percentage 13.0% 8.9% 10.8% 9.4%
Revenues for our IT, Energy and Management Consulting Group increased
approximately $3.5 million or 22%, and approximately $20.9 million or 62%, for
the three- and nine-month periods ended September 30, 2009 as compared to the
same periods for the prior year. Income before income taxes for this segment
increased approximately $1.1 million or 78%, and approximately $2.8 million or
87% for the three- and nine-month periods ended September 30, 2009 as compared
to the same periods for the prior year.
Upon our acquisition of G&B in April 2008, G&B became part of this segment,
and the inclusion of G&B in this segment's operating results for a full year
was the primary reason for the increases in 2009. Additional contract awards
and an increasing employee workforce have also helped to increase G&B's
revenues and income. G&B revenues increased approximately $2.5 million and
$18.4 million, and pretax income increased approximately $1 million and $3.1
million, respectively, for the three- and nine-month periods ended September
30, 2009.
Increases in Energetics' revenues of approximately $934 thousand and $2.7
million for the three- and nine-month periods also contributed to the
increases in this segment in 2009.
Infrastructure Group Results
The results of operations for our Infrastructure Group are as follows (in
thousands):
Three Months Nine Months
Ended Ended Change
September 30, September 30, Three Nine
Description 2009 2008 2009 2008 Months Months
- ----------- ---- ---- ---- ---- ------ ------
Revenues $12,684 $46,443 $31,241 $81,581 $(33,759) $(50,340)
======= ======= ======= ======= ======== ========
Income before income
taxes $ 297 $ 2,011 $ 645 $ 3,369 $ (1,714) $ (2,724)
======= ======= ======= ======= ======== ========
Profit percentage 2.3% 4.3% 2.1% 4.1%
This segment consists of our ICRC subsidiary. Revenues for the three- and
nine-month periods ended September 30, 2009 decreased by approximately $33.8
million or 73%, and $50.3 million or 62%, as compared to the same periods of
2008. Income before income taxes for the three- and nine-month periods ended
September 30, 2009 decreased by approximately $1.7 million or 85%, and $2.7
million or 81%, as compared to the same periods of 2008.
Certain environmental and technical issues near the site on which ICRC
conducts its PIEP work have caused temporary delays in the work schedule in
2009. These delays have had a negative impact on 2009 revenues and profits,
with revenues from the PIEP work decreasing by approximately $31.3 million and
$41 million and profits from the PIEP work decreasing by approximately $1.6
million and $2.1 million for the three- and nine-month periods ended September
30, 2009 as compared to the same periods of 2008. The environmental and
26
technical issues are not caused by the work conducted by ICRC, but ICRC must
comply with recent changes and delays from environmental restrictions, recent
endangered species declarations and delays due to new permit application
requirements, recent permit conditions that slow the field work to best
mitigate environmental impacts, and the study, review, and approval of certain
technical issues by the client prior to moving planned work forward. We have
also seen delays in contract actions on proposals pending evaluation by the
federal government.
We have transferred certain types of work previously performed by ICRC to our
other groups to better align the work or the customers served with our longer
term corporate level strategies. Specifically, information technology services
work has been transferred to our IT, Energy and Management Consulting Group
and certain U. S. Army vehicle work has been transferred to our Federal Group.
The decreases in the Infrastructure Group's revenues and pretax income for the
three- and nine-month periods that are not attributable to the decrease in
PIEP work are primarily the result of transferring work to our other groups.
Financial Condition
Our financial condition did not change materially in the first nine months of
2009. Changes to asset and liability accounts were due primarily to our
earnings, our level of business activity, contract delivery schedules,
subcontractor and vendor payments required to perform our work, and the timing
of associated billings to and collections from our customers.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased approximately $3.5 million during the
first nine months of 2009.
Cash provided by operating activities was substantially unchanged during the
first nine months of 2009 as compared to the first nine months of 2008. An
increase of approximately $5.1 million in cash provided by net income and an
increase of approximately $732 thousand from an increase in depreciation and
amortization and other non-cash operating activities was offset by a decrease
of approximately $5.9 million in cash provided by operating activities due to
changes in the levels of working capital components. Of these working capital
components, our largest assets are our accounts receivable and our largest
liabilities are our accounts payable. A significant portion of our accounts
receivable and accounts payable result from the use of subcontractors to
perform work on our contracts and from the purchase of materials to fulfill
our contract requirements. Accordingly, our levels of accounts receivable and
accounts payable may fluctuate significantly depending on the timing of
Government services ordered, the timing of billings received from
subcontractors and materials vendors to fulfill these services, and the timing
of payments received from Government customers in payment of these services.
Such timing differences may cause significant increases and decreases in our
accounts receivable and accounts payable in short time periods.
Cash used in investing activities decreased approximately $15.7 million in the
first nine months of 2009 as compared to the same period of 2008. This was
primarily due to the acquisition of G&B for $17.1 million in 2008.
Cash of approximately $7.3 million was used for financing activities in the
first nine months of 2009 as compared to cash provided by financing activities
of approximately $5.9 million for the same period of 2008. This difference was
primarily due to paying down borrowings on our bank loan in 2009 as compared
to 2008 when we borrowed to finance our acquisition of G&B.
27
We paid quarterly cash dividends totaling $0.14 per share during the first
three quarters of 2009. Pursuant to our bank loan agreement, our payment of
cash dividends is subject to annual rate restrictions. We have paid cash
dividends each year since 1973.
Liquidity
Our internal sources of liquidity are primarily from operating activities,
specifically from changes in the level of revenues and associated accounts
receivable and accounts payable, and from profitability. Significant increases
or decreases in revenues and accounts receivable and accounts payable can
cause significant increases or decreases in internal liquidity. Our accounts
receivable and accounts payable levels can be affected by changes in the level
of the work we perform and by the timing of large materials purchases and
subcontractor efforts used in our contracts.
From time to time, we may also invest in the acquisition of other companies.
Our acquisitions of ICRC in 2007 and G&B in 2008 required a significant use of
our cash. While there are no plans for any specific additional acquisitions at
this time, we continue to seek opportunities for growth through strategic
acquisitions. We may also invest in expansion, improvement, and maintenance of
our operational and administrative facilities.
Our external liquidity consists of a loan agreement with a group of banks that
provides us with revolving loans and letters of credit. The maximum amount of
credit available to us as of September 30, 2009 was $50 million and under the
loan agreement we may elect to increase the maximum credit availability up to
$75 million. The maturity date of the loan agreement is August 26, 2011. The
amount of credit available to us under the loan agreement is subject to
certain conditions, including a borrowing formula based on our billed
receivables. Under the terms of the loan agreement, we may borrow against the
revolving loan at any time and can repay the borrowings at any time without
premium or penalty. We pay a commitment fee, interest on any revolving loan
borrowings at a prime-based rate or an optional LIBOR-based rate, and fees on
any letters of credit that are issued.
We were using approximately $2.4 million of the loan agreement availability as
of September 30, 2009, consisting of letters of credit. We had no revolving
loan amounts outstanding as of September 30, 2009. Average revolving loan
amounts outstanding during the first three quarters of 2009 were approximately
$3.6 million per day. The highest outstanding amount was $23.4 million and the
lowest was $0. The timing of certain payments made and collections received
associated with our subcontractor and materials requirements and other
operating expenses can cause temporary peaks in our outstanding revolving loan
amounts.
The loan agreement contains collateral requirements that secure our assets,
restrictive covenants, a limit on annual dividends, and other affirmative and
negative covenants. Restrictive covenants include a maximum Leverage Ratio
(Total Funded Debt/EBITDA) and a minimum Fixed Charge Coverage Ratio that we
were in compliance with at September 30, 2009.
Maximum Ratio Actual Ratio
------------- ------------
Leverage Ratio 3.00 to 1 0.05 to 1
Maximum Ratio Actual Ratio
------------- ------------
Fixed Charge Coverage Ratio 1.25 to 1 3.08 to 1
Our banks continue to maintain investment grade credit ratings from the
ratings services and we believe that we are well positioned to obtain
financing from other banks if the need should arise. Accordingly, we do not
believe that turbulence in the financial markets will have a material adverse
impact on our ability to finance our business, financial condition, or results
of operations. We currently do not use public debt security financing.
28
Inflation and Pricing
Most of our contracts provide for estimates of future labor costs to be
escalated for any option periods, while the non-labor costs in our contracts
are normally considered reimbursable at cost. Our property and equipment
consists principally of computer systems equipment, furniture and fixtures,
shop equipment, and land and improvements. We do not expect the overall impact
of inflation on replacement costs of our property and equipment to be material
to our future results of operations or financial condition.
Disclosures About Market Risk
Interest Rates
Our bank loan provides available borrowing to us at variable interest rates.
The amount borrowed is not large with respect to our cash flows and we believe
that we will be able to pay down any bank loan borrowings in a relatively
short time frame. Because of this, we do not believe that any adverse movement
in interest rates would have a material impact on future earnings or cash
flows. If we were to significantly increase our borrowings, future interest
rate changes could potentially have a material impact on us.
29
VSE CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risks
See "Disclosures About Market Risk" in Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
As of the end of the period covered by this report, based on management's
evaluation, with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d - 15(e) under the Securities
Exchange Act of 1934, as amended) our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective in ensuring that information required to be disclosed by us in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms, and that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There was no change in our internal control over financial reporting during
our third quarter of fiscal 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
VSE did not purchase any of its equity securities during the period covered by
this report.
Under the Registrant's bank loan agreement dividends may be paid in an annual
aggregate amount of $0.60 per share, provided there is no default under the
loan agreement.
Item 6. Exhibits
(a) Exhibits.
Exhibit No.
-----------
31.1 Section 302 CEO Certification
31.2 Section 302 CFO and PAO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO and PAO Certification
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other
Information" because such other items are not applicable or are not required
if the answer is negative or because the information required to be reported
therein has been previously reported.
30
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
Date: October 30, 2009 /s/ M. A. Gauthier
__________________________________
M. A. Gauthier
Director, Chief Executive Officer,
President and Chief Operating
Officer
Date: October 30, 2009 /s/ T. R. Loftus
__________________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
31