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 March 31, 2003 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
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
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 [ ]
Number of shares of Common Stock outstanding as of April 30, 2003: 2,188,635.
VSE Corporation and Subsidiaries
Forward Looking Statements
This filing 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" or the "company") results to differ materially from those anticipated
in the forward looking statements contained in this filing, see VSE's
"Narrative Description of Business", "Management's Discussion and Analysis" and
"Notes to Consolidated Financial Statements" contained in VSE's Annual Report
and Form 10-K for the fiscal year ended December 31, 2002 (Form 10-K) filed with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
analysis only as of the date hereof. The company undertakes no obligation to
publicly revise these forward looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the company files from time to
time with the Securities and Exchange Commission, including this Quarterly
Report on Form 10-Q to be filed by the company subsequent to the Annual Report
on Form 10-K and any Current Reports on Form 8-K filed by the company.
-2-
PART I. Financial Information
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(in thousands except share amounts)
March 31, December 31,
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 2,020 $ 4,210
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 18,405 17,524
Deferred tax assets . . . . . . . . . . . . . . . 1,328 1,313
Other current assets . . . . . . . . . . . . . . . 1,559 1,241
-------- --------
Total current assets . . . . . . . . . . . . . . 23,312 24,288
Property and equipment, net . . . . . . . . . . . . 3,339 3,483
Deferred tax assets . . . . . . . . . . . . . . . . 502 449
Intangible assets, net . . . . . . . . . . . . . . . 1,054 1,054
Other assets . . . . . . . . . . . . . . . . . . . . 2,491 2,403
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 30,698 $ 31,677
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 7,845 $ 8,785
Accrued expenses . . . . . . . . . . . . . . . . 4,259 4,654
Dividends payable . . . . . . . . . . . . . . . . 88 87
-------- --------
Total current liabilities . . . . . . . . . . . 12,192 13,526
Deferred compensation . . . . . . . . . . . . . . . 1,087 1,108
-------- --------
Total liabilities . . . . . . . . . . . . . . . 13,279 14,634
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,188,635 in 2003 and
2,185,760 shares in 2002 . . . . . . . . . . . . 109 109
Paid-in surplus . . . . . . . . . . . . . . . . . 3,590 3,558
Retained earnings . . . . . . . . . . . . . . . . 13,720 13,376
Total stockholders' investment . . . . . . . . . 17,419 17,043
-------- --------
Total liabilities and stockholders' investment . $ 30,698 $ 31,677
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three months ended March 31,
- ------------------------------------------------------------------------------
(in thousands except share amounts)
2003 2002
---- ----
Revenues, principally from contracts . . . . . . . . $ 26,462 $ 29,080
Costs and expenses of contracts . . . . . . . . . . 25,765 28,816
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . 697 264
Selling, general and administrative expenses . . . . 42 28
Interest (income) expense. . . . . . . . . . . . . . (16) 17
--------- ---------
Income before income taxes . . . . . . . . . . . . . 671 219
Provision for income taxes . . . . . . . . . . . . . 239 100
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . $ 432 $ 119
========= =========
Basic earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.06
========= =========
Basic weighted average shares outstanding 2,187,038 2,150,540
========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.19 $ 0.06
========= =========
Diluted weighted average shares outstanding 2,224,845 2,150,540
========= =========
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- ---------------------------------------------------------------------------------
(in thousands except share data)
Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Surplus Earnings Investment
------ ------ ------- -------- ----------
Balance at
December 31, 2001 . . . . 2,150 $ 107 $ 3,294 $ 13,074 $16,475
Net income
for the year . . . . . . -- -- -- 652 652
Exercised stock options . . 33 2 213 -- 215
Tax benefit of
options exercised . . . . -- -- 22 -- 22
Issuance of stock . . . . . 3 -- 29 -- 29
Dividends declared
($.16) . . . . . . . . . -- -- -- (350) (350)
----- ------ ------- -------- -------
Balance at
December 31, 2002 . . . . 2,186 109 3,558 13,376 17,043
Net income
for the period . . . . . -- -- -- 432 432
Exercised stock options . . 3 -- 30 -- 30
Tax benefit of
options exercised . . . . -- -- 2 -- 2
Dividends declared
($.04) . . . . . . . . . -- -- -- (88) (88)
----- ------ ------- -------- -------
Balance at
March 31, 2003 . . . . . 2,189 $ 109 $ 3,590 $ 13,720 $ 17,419
===== ====== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
-5-
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the three months ended March 31,
- -------------------------------------------------------------------------------
(in thousands)
2003 2002
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 432 $ 119
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 278 358
(Gain) loss on sale of property and equipment . . . . 4 (2)
Deferred taxes . . . . . . . . . . . . . . . . . . . (68) (107)
Tax benefit of options exercised . . . . . . . . . . 2 -
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . (881) (1,793)
Other current assets and noncurrent assets . . . . . (418) (360)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . (949) 564
Accrued expenses . . . . . . . . . . . . . . . . . . (395) (378)
------- -------
Net cash used in operating activities (1,995) (1,599)
------- -------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . (138) (44)
------- -------
Net cash used in investing activities (138) (44)
------- -------
Cash flows from financing activities:
Net proceeds from long-term bank loan . . . . . . . . . - 1,838
Dividends paid . . . . . . . . . . . . . . . . . . . . . (87) (86)
Proceeds from issuance of common stock . . . . . . . . . 30 -
------- -------
Net cash (used in) provided by financing activities (57) 1,752
------- -------
Net (decrease) increase in cash and cash equivalents . . . (2,190) 109
Cash and cash equivalents at beginning of period . . . . 4,210 209
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 2,020 $ 318
======= =======
The accompanying notes are an integral part of these financial statements.
-6-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 months ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information refer to the consolidated
financial statements and footnotes thereto included in the VSE Corporation
Annual Report on Form 10-K for the year ended December 31, 2002. The company
operates within one reportable segment.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Debt
VSE has a revolving loan agreement with a bank in which the company can borrow
up to $15 million, subject to a borrowing formula based on billed receivables.
Under the agreement, the company pays a fixed amount annual commitment fee and
interest on any borrowings at a prime-based rate or an optional LIBOR-based
rate. The expiration date of the revolving loan is May 31, 2004. The loan
agreement contains collateral requirements by which company assets secure
amounts outstanding, restrictive covenants that include minimum tangible net
worth and profitability requirements, a limit on annual dividends and other
affirmative and negative covenants. This loan agreement replaced the previous
loan agreement that had a maximum commitment of $30 million. The company
determined that the new loan agreement was adequate to cover current and future
liquidity requirements. There were no amounts borrowed under this loan agreement
as of March 31, 2003 and December 31, 2002.
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Earnings Per Share
Basic earnings per share has been computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during each period. Shares issued during the period and shares
reacquired during the period are weighted for the portion of the period that
they were outstanding. Diluted earnings per share have 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.
Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the company's stock at the date of the grant
over the exercise price of the related option. The company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
year ended December 31, 2002 and has adopted the interim disclosure provisions
for its financial reports for the quarter ended March 31, 2003.
Had compensation costs for the company's stock options been determined based on
SFAS No. 123, "Accounting for Stock-Based Compensation," the company's net
income and earnings per share would have been as follows (in thousands, except
per share amounts):
Three Months Ended March 31
2003 2002
---- ----
Net income, as reported $ 432 $ 119
Deduct: Total stock-based
compensation expense
determined under fair value based
method (SFAS No. 123) for all
awards, net of related tax effects (24) (28)
----- -----
Pro forma net income $ 408 $ 91
===== =====
Earnings per share:
Basic - as reported $0.20 $0.06
Diluted - as reported $0.19 $0.06
Basic - pro forma $0.19 $0.04
Diluted - pro forma $0.18 $0.04
Litigation
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of
management, the resolution of these claims will not have a material adverse
effect on the company=s results of operations or financial position.
-9-
VSE CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Company Organization and Overview
Company Organization
The term "VSE" or "company" refers to VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only. VSE's
business operations consist primarily of services performed by the company's
wholly owned subsidiaries and divisions. Wholly owned subsidiaries include
Energetics Incorporated ("Energetics"), Human Resource Systems, Inc. ("HRSI"),
Ship Remediation and Recycling, Inc. ("SRR") and VSE Services International,
Inc. ("VSI"). Unincorporated divisions include BAV Division ("BAV"), Coast Guard
Division ("VCG") beginning in February 2002, Communications and Engineering
Division ("CED") beginning in February 2003, Fleet Maintenance Division ("Fleet
Maintenance"), GSA Services Division ("GSA Services"), Management Sciences
Division ("MSD"), Ordnance Division ("Ordnance"), Systems Engineering Division
("Systems Engineering", formerly Land Systems Division), Telecommunications
Technologies Division ("TTD"), and Value Systems Services Division ("VSS"). As
of March 31, 2003, SRR, VSI, GSA Services, and Ordnance are not conducting any
current business operations. Work contracted under GSA schedules is performed
directly by each of the operating divisions or subsidiaries. In February 2003,
VSE decided to no longer market the services provided by TTD and intends to
phase out the operations of this division during 2003 and transfer some of its
technical capabilities to other VSE divisions.
Due to competitive pressures, the company uses multiple operating divisions to
bid on and perform contract work that had been previously performed by VSE
(parent company). The formation of these divisions has enabled the company to
use an operating structure that is more flexible and better suited to perform
certain types of contract work. The company anticipates that it will continue
using its operating divisions to bid and perform new contract work to better
serve the needs of customers. Management believes that this strategy will better
position the consolidated entity for future revenue growth.
Overview of Services
The company is engaged principally in providing engineering, design, logistics,
management and technical services to the U.S. Government (the "government"),
other government prime contractors, and commercial entities. The largest
customer for the services rendered by the company is the U.S. Department of
Defense ("Defense"), including agencies of the U.S. Army, Navy, and Air Force.
BAV is a major provider of logistics, training, and technical assistance in
support of the Navy's ship transfer program. Fleet Maintenance, Ordnance (in
2001 and prior thereto), and VSS also support the Navy by providing a variety of
services including ship installation efforts, combat systems inspections, ship
repair and overhaul availability planning, harpoon
-10-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
weapons management, ordnance alteration, air combat logistics, and outsourcing
decision assistance. SRR (in 2001 and prior thereto) has provided
environmentally sound solutions for the dismantling and disposal of inactive
ships. Systems Engineering provides the Army with engineering and technical
support for ground weapons, logistics and training services, material procure-
ment support, and prototype development support for combat vehicles. MSD
provides the Army and other government agencies and commercial organizations
with quality training services for product, process, and management optimiza-
tion.
VSE also provides services to other government agencies and industry. The
company has provided support services to the U.S. Postal Service for over twenty
years and is continuing to support this customer through its HRSI subsidiary.
Energetics is focused on providing the Department of Energy and other government
and industry customers with expert consulting services in environmental
management and energy supply, resource management, and conservation. TTD has
offered products, services, and support in network, multimedia, and audio-visual
technology. This includes design, installation, management and support for
voice, data, multimedia and related projects. VSE will transfer many of the
technical capabilities of TTD to other divisions when TTD operations cease in
2003.
Substantially all of the company's services are performed for its customers on
a contract basis. The three primary types of contracts used are cost-type
contracts, time and materials contracts, and fixed-price contracts. Revenues
result from work performed on these contracts by the company's employees and
from pass-through of costs for material and work performed by subcontractors.
Revenues on cost-type contracts are recorded as contract allowable costs are
incurred and fees earned. Profits on cost-type contracts are equal to the fees
that are earned. The company has a contract in its BAV Division for which
contract terms specify award fee payments to BAV that are determined by
performance and level of contract activity. Award fees are made three times
during the year and a contract modification authorizing the award fee payment
is issued subsequent to the period in which the work is performed. The company
does not recognize award fee income until the contract modification authorizing
the award fee is issued. Due to such timing, and to fluctuations in the level of
revenues, profits as a percentage of revenues on this contract will fluctuate
from period to period. Revenues for time and materials contracts are recorded
on the basis of contract allowable labor hours worked times the contract
defined billing rates, plus the cost of materials used in performance on the
contract. Profits on time and material contracts result from the difference
between the cost of services performed and the contract defined billing rates
for these services. Revenues on certain fixed-price services contracts are
recorded each period based on a monthly amount for services provided. Revenues
on other fixed-price contracts are recorded as costs are incurred, using the
percentage-of-completion method of accounting. Profits on fixed-price contracts
result from the difference between the incurred costs and the revenue earned.
The company will occasionally perform work at risk, which is work that is
performed prior to formalizing contract
-11-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
terms for such work. Potential revenue related to work performed at risk is not
recognized until it can be reliably estimated and its realization is probable.
VSE recognizes this "risk funding" as revenue when the associated costs are
incurred or the work is performed. As of March 31, 2003, VSE has recognized
approximately $235 thousand in risk funding. The company provides
for anticipated losses on contracts by a charge to income during the period in
which losses are first identified.
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. In addition to our revenue recognition policy,
discussed under "Overview of Services" above, we believe the following critical
accounting polices affect our more significant judgments, estimates and
assumptions used in the preparation of our consolidated financial statements.
Long-Lived Assets
In assessing the recoverability of long-lived assets, including goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets not previously recorded.
Contingencies
From time to time we are subject to proceedings, lawsuits and other claims
related to environmental, labor and other matters. We are required to assess
the likelihood of any adverse judgments or outcomes to these contingencies as
well as potential ranges of probable losses and establish reserves accordingly.
The amount of reserves required may change in future periods due to new
developments in each matter or changes in approach to a matter such as a change
in settlement strategy.
Income Taxes
The carrying value of our net deferred tax assets is based on assumptions
regarding our ability to generate sufficient future taxable income to utilize
these deferred tax assets. If the estimates and related assumptions regarding
our future taxable income change in the future, we may be required to record
valuation allowances against our deferred tax assets, resulting in additional
income tax expense.
-12-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The following table sets forth certain items, including consolidated revenues,
pretax income and net income, and the changes in these items for the three months
ended March 31, 2003 and 2002 (in thousands):
2003
Compared
to
2003 2002 2002
---- ---- ----
Revenues . . . . . . . . . . . . . . . . . $26,462 $29,080 $(2,618)
======= ======= =======
Income before income taxes . . . . . . . . $ 671 $ 219 $ 452
Provision for income taxes . . . . . . . . 239 100 139
------- ------- -------
Net income . . . . . . . . . . . . . . . $ 432 $ 119 $ 313
======= ======= =======
Revenues declined by approximately 9% for the three months ended March 31, 2003,
as compared to the same period of 2002. The decrease in revenues was primarily
due to a decrease in the amount of subcontract work on Fleet Maintenance efforts
during this period compared to the prior year. Reduced revenue associated with
the decision to phase out the operations of TTD also contributed to the decline
in revenue for this period. Revenues also declined for Energetics, HRSI, and
VSS. The revenues of BAV, MSD, Systems Engineering, and VCG increased for the
period. While the increased revenue in these four divisions was modest in
proportion to total company revenues, the increases in MSD and VCG were
significant in proportion to the prior year revenues for these two divisions.
Pretax income increased by approximately 206% for the three months ended March
31, 2003, as compared to the same period of 2002. The increase in pre-tax income
was primarily due to a reduction in the losses associated with Fleet Maintenance
work. Profitability also improved in BAV, MSD, Systems Engineering, and VCG. The
decision to phase out the operations of TTD resulted in a modest positive effect
on profits during this period. Profitability in Energetics declined during this
period and start-up costs associated with CED further offset company-wide profit
increases.
BAV Contract. VSE's BAV Division has a contract with the U.S. Navy to provide
engineering, technical and logistical support services associated with the sale,
lease, or other transfer of Navy ships to foreign governments. This contract is
a ten-year contract awarded in 1995, and it has the potential to generate total
revenues of over one billion dollars from 1995 through 2005. BAV has recognized
revenues on this contract of approximately $477 million through March 31, 2003,
resulting in a backlog of potential future revenues of approximately $583
million. The amount of this backlog that was funded at March 31, 2003 was
approximately $33 million. The contract accounted for approximately 51% and 46%
of consolidated revenues from operations during the three months ended March 31,
2003 and 2002, respectively. The level of revenues and associated profits
resulting from fee income generated by this
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VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
contract 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. The company has
experienced significant quarterly and annual revenue fluctuations and
anticipates that future quarterly and annual revenues will be subject to
significant variations primarily due to changes in the level of activity on this
contract. See "Global Economic Conditions and Political Factors" below for
further discussion of potential impacts on future revenues associated with this
contract. Contract terms specify award fee payments to BAV that are determined
by performance and level of contract activity. Award fees are made three times
during the year and a contract modification authorizing the award fee payment is
issued subsequent to the period in which the work is performed. The company does
not recognize award fee income until the contract modification authorizing the
award fee is issued. Due to such timing, and to fluctuations in the level of
revenues, profits as a percentage of revenues will fluctuate from period to
period.
Business Terminations and New Business Start-ups. In February 2003, VSE decided
to terminate operations of TTD due to declining revenues and significant losses
sustained by this division. In 2002, TTD experienced a revenue decline of
approximately 26% and a pretax loss of approximately $2.1 million, including a
loss associated with the impairment of intangible assets of $576 thousand. TTD
will continue work on uncompleted contracts until all contractual obligations
are satisfied, which is expected to occur in the second or third quarter of
2003, and then cease operations. Some of TTD's technical capabilities will be
transferred to other VSE divisions. Revenues from TTD represented approximately
4% and 6% of total company revenues during the three months ended March 31, 2003
and 2002, respectively. The loss of future revenue associated with the termina-
tion of TTD operations is not expected to be significant compared to total
future VSE revenue, while the elimination of TTD losses is expected to improve
future VSE profits.
In January 2003, VSE formed its Communications and Engineering Division (CED)
upon the award of a multi-year Rapid Response support contract by the U.S. Army
Communications-Electronics Command (CECOM). If all options are exercised, this
contract has a potential total ceiling of $2.9 billion over an eight-year
period. The contract is a multiple award, indefinite delivery, indefinite
quantity contract, and while actual revenue estimates for the contract cannot
be predicted, it is expected that this contract will contribute to future VSE
revenue growth.
In February 2002, VCG began work for the U.S. Coast Guard under a contract that
has potential to generate total revenues of approximately $25.4 million over
five years. During the three months ended March 31, 2003 and 2002, revenues from
VCG accounted for approximately 3% and less than 1%, respectively, of total
company revenues. While this contract is not expected to significantly increase
total company revenues, the potential for higher profit margins on this fixed
price work is expected to contribute to an increase in the company's overall
profit margins.
-14-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from domestic economic conditions
and political factors that may impact the budgets and program funding of
customers served through VSE's contracts. VSE's revenues have historically been
subject to annual fluctuations resulting from changes in the level of Defense
spending. Future budgetary and funding decisions by government lawmakers or
Defense restructuring efforts could affect the types and level of services
provided by VSE to its government customers and could potentially have a
material adverse impact on the company's results of operations or financial
condition.
The company's revenues depend on the ability of the company to win new contracts
and on the amount of work ordered by the government under the company's existing
contracts. The company's ability to win new contracts is affected by government
acquisition policies and procedures, including government procurement practices
that in some years have tended toward bundling work efforts under large
comprehensive ("omnibus/multiple award") management contracts. This emphasis on
large contracts presents challenges to winning new contract work, including
making it more difficult for the company to qualify as a bidder, increases in
the level of competition due to the award of fewer contracts, and forcing the
company into competition with larger organizations that have greater financial
resources and larger technical staffs. Competing for these contracts requires
the company to use teams of subcontractors to be able to offer the range of
technical competencies needed to do the work. Generally, fees earned and profit
margins on revenues that are derived from non-labor items such as materials,
travel costs, and subcontracted services used to satisfy contract requirements
are significantly lower than fees and profits on labor generated revenues. While
the use of subcontractor teams on a large scale basis allows the company to
compete for larger contracts, profit margins on this work tends to be lower than
on work performed by company personnel, thereby reducing the company's overall
profit margins. Additionally, reliance on subcontractors can introduce risk of
performance issues different from performance risk on the company's labor
generated revenues.
Other government procurement practices that can affect the company's revenues
are the use of past performance criteria that may preclude entrance into new
government markets and government social programs that limit contract work to
small, woman, or minority owned businesses. Additional risk factors that could
potentially affect the company's results of operations are the government's
right to terminate contracts for convenience, the government's right to not
exercise all of the option periods on a contract, and funding delays caused by
government political or administrative actions.
Risk funding revenue recognized for the three months ended March 31, 2003 is
$235 thousand. Risk funding revenue represents certain costs for work performed
at risk which are not reimbursable under current contracts. VSE believes that it
will receive formal contractual coverage through execution of
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VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
contract documentation or amendments increasing funding for all of this risk
funding revenue. If formal contractual coverage is not received, VSE is at risk
of loss for any risk funding coverage not received.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic conditions
and political factors associated with current and potential customers served
through VSE's contracts with the U.S. Government. An economic slowdown in
countries served under the BAV contract could affect sales. The current
international situation posed by potential terrorist activity and the continuing
conflict in the Middle-East could increase the political risks associated with
BAV contract revenues. Failure by the government of a potential foreign customer
to approve and fund acquisition of U.S. Navy ships serviced under the BAV
contract could affect sales. In any one year, a significant amount of the
company's revenues may result from sales on the BAV contract to a single foreign
government. During the three months ended March 31, 2003 and 2002, revenues
associated with BAV contract sales to Egypt accounted for approximately 36% and
31% of the company's revenues, respectively. In addition to the effect on BAV
contract work, international tensions can also affect work by Fleet Maintenance
on U.S. Navy ships when deployed outside of U.S. Navy facilities and are
unavailable for maintenance work during this time period. Severe adverse results
arising from these global economic and political risks could potentially have a
material adverse impact on the company's results of operations.
Financial Condition
VSE's financial condition did not change materially during the three months
ended March 31, 2003. The company's largest asset is its accounts receivable and
its largest liabilities are its accounts payable and accrued expenses. Accounts
receivable increased slightly at March 31, 2003 as compared to December 31, 2002
while accounts payable and cash decreased due to normal fluctuations in the
timing of receivables collections and vendor payments activity. Other assets and
liabilities remained substantially unchanged. The increase in total
stockholders'investment during this period resulted primarily from earnings and
from the exercise of stock options, offset by dividends declared.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $2.2 million during the
three months ended March 31, 2003. The decrease in cash and cash equivalents
during this period resulted from cash used in operating activities of
approximately $2 million, cash used in investing activities of approximately
$138 thousand, and cash used in financing activities of approximately $57
-16-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
thousand. Investing activities consisted of purchases of property and equipment,
net of dispositions. Financing activities consisted of dividend payments and
proceeds received from the issuance of common stock.
Cash and cash equivalents increased by approximately $109 thousand during the
three months ended March 31, 2002. The increase in cash and cash equivalents
during this period resulted from cash provided by financing activities of
approximately $1.8 million, cash used in operating activities of approximately
$1.6 million, and cash used in investing activities of approximately $44
thousand. Significant financing activities included an increase of approximately
$1.8 million in bank loan borrowings. Investing activities consisted of
purchases of property and equipment, net of dispositions.
The difference between cash used in operating activities of approximately $2
million in 2003 as compared to approximately $1.6 million in 2002 is primarily
due to changes in the levels of accounts receivable and accounts payable
resulting from fluctuations in contract activity and receivables collections.
Quarterly cash dividends at the rate of $.04 per share were declared during the
three months ended March 31, 2003. Under its bank loan agreement, VSE's payment
of cash dividends is subject to a maximum annual rate. VSE has paid cash
dividends each year since 1973.
Sources of Liquidity
The company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
accounts receivable and accounts payable from period to period and from
profitability. Significant increases or decreases in revenue and accounts
receivable and accounts payable can cause significant increases or decreases in
internal liquidity. Accounts receivable arise primarily from billings made by
the company to the government or other government prime contractors for services
rendered and generally do not present collection problems. Accounts receivable
levels can also be affected by contract retainages, differences between the
provisional billing rates authorized by the government compared to the costs
actually incurred by the company, government delays in processing administrative
paperwork for contract funding, and the timing of large materials purchases and
subcontractor efforts used in performance on company's contracts. Accounts
payable arise primarily from purchases of subcontractor services and materials
used by the company in the performance of its contract work. Accounts payable
levels can be affected by changes in the level of contract work performed by the
company and by the timing of large materials purchases and subcontractor efforts
used in performance on the company's contracts. An increase in accounts
receivable associated with the timing of receivables collections by BAV
contributed to a decrease in internally generated cash flows during this period.
Internal liquidity is also affected by the acquisition of capital assets for
office and computer support, facilities improvements, and by the payment of cash
dividends. Purchases of capital assets for office and computer support and
facilities improvements
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VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
during the three months ended March 31, 2003 did not substantially affect
internal liquidity.
VSE's external sources of liquidity consist of a revolving bank loan agreement
that provides loan financing based on the company's accounts receivable. (See
"Notes to Consolidated Financial Statements.") The bank financing complements
the internal sources of liquidity by providing increasing levels of borrowing
capacity as accounts receivable levels increase. The bank loan agreement
provided loan financing up to a maximum commitment of $15 million as of
March 31, 2003. While performance of work under the BAV contract has the
potential to cause substantial requirements for working capital, the company has
determined that cash flows from future operations and the $15 million bank
commitment are adequate to cover current and future liquidity requirements.
Inflation and Pricing
Most of the contracts performed by VSE provide for estimates of future labor
costs to be escalated for any option periods provided by the contracts, while
the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of
computer systems equipment and furniture and fixtures. The overall impact of
inflation on replacement costs of such property and equipment is expected to be
insignificant.
Forward-Looking Disclosures
Goodwill
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 modifies the accounting rules governing goodwill
and intangible assets with indefinite lives. Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life and intangible
assets with indefinite lives are no longer amortized over an arbitrary number of
years. Goodwill and intangible assets with indefinite lives are instead subject
to a review for impairment at least annually. The effective date for VSE's
implementation of SFAS No. 142 was January 1, 2002.
As of March 31, 2003, the company had approximately $1.1 million of unamortized
goodwill associated with its acquisition of Energetics in 1995. The goodwill was
being amortized prior to the adoption of SFAS No. 142. In 2002, the company
stopped amortizing the goodwill. As of March 31, 2003, the company has not
recognized any reduction to the goodwill due to the impairment rules associated
with SFAS No. 142. If at some time in the future it is determined that
impairment has occurred, such impairment could potentially have a material
adverse impact on the company's results of operations or financial condition.
-18-
VSE CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Disclosures About Market Risk
Interest Rates
VSE's bank loan financing provides available borrowing to the company at
variable interest rates. The company has not borrowed significant amounts on
the loan in recent years. Accordingly, the company does not believe that changes
in interest rates would have a material impact on future earnings or cash flows.
If VSE were to significantly increase borrowings on the current loan
arrangement, future interest rate changes could potentially have such a material
impact.
Foreign Currency
While a significant amount of the company's business results from the services
provided by BAV related to the transfer of ships to foreign governments, the BAV
contract payments are made to BAV by the U.S. Government in U.S. dollars.
Additionally, most funding requirements to support work performed or services
purchased in foreign countries are made in U.S. dollars, and the infrequent
disbursements that are made in foreign currencies are reimbursable to BAV in
post conversion dollars. Foreign currency transactions of other VSE divisions
or subsidiaries are virtually non-existent. Accordingly, the company does not
believe that it is exposed to any material foreign currency risk.
New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the company's stock at the date of the grant
over the exercise price of the related option. The company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
year ended December 31, 2002 and has adopted the interim disclosure provisions
for its financial reports for the three months ended March 31, 2003.
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VSE CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Inapplicable
Item 4. Controls and Procedures
Based on their most recent evaluation, which was completed within 90 days of the
filing of this Form 10-Q, the company's Chief Executive Officer and Chief
Financial Officer believe the company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that
information required to be disclosed by the company's management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. There were no significant
changes in the company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
PART II. Other Information
Item 1. Legal Proceedings
A settlement and mutual release agreement was executed as of April 1, 2003
settling the previously reported personal injury lawsuit pending against VSE,
Astoria Metals Corporation , Ship Dismantlement and Recycling Joint Venture
(SDR, a partnership in which a wholly owned subsidiary of VSE was a general
partner),and Earth Tech, Inc. in the Superior Court for San Francisco,
California. (See Item 3 of VSE's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.) VSE's insurance carrier defended VSE, SDR and Earth
Tech, Inc. in this matter. Settlement of the lawsuit involved neither the
payment of monies nor the incurrence of any material obligation by VSE, any VSE
subsidiary or SDR.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On March 7, 2003, the Registrant filed a Current Report on Form 8-K to announce,
in respect of Item 5 of such Form, that VSE has discontinued pursuing strategic
business alternatives, including the potential sale of the business.
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.
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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
/s/ D. M. Ervine
Date: April 30, 2003 ______________________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
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CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, D. M. Ervine, Chairman, President, Chief Executive Officer and Chief
Operating Officer of the company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VSE Corporation (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-22-
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: April 30, 2003 /s/ D. M. Ervine
___________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
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CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T. R. Loftus, Senior Vice President and Chief Financial Officer of the
company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VSE Corporation (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-24-
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: April 30, 2003 /s/ T. R. Loftus
___________________________
T. R. Loftus
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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