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.
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."
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.
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