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, 2005 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: 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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
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 is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Number of shares of Common Stock outstanding as of October 28, 2005: 2,349,500.
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 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, 2004 filed with the Securities and Exchange Commission (the
"SEC"), together with the Annual Report on Form 10-K/A filed with the SEC on
June 15, 2005 (collectively, "Form 10-K"). 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 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.
-2-
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)
September 30, December 31,
2005 2004
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 9,758 $ 130
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 46,353 40,274
Contract inventories . . . . . . . . . . . . . . . 3,531 8,504
Deferred tax assets . . . . . . . . . . . . . . . 1,162 1,077
Other current assets . . . . . . . . . . . . . . . 2,442 1,595
-------- --------
Total current assets . . . . . . . . . . . . . . 63,246 51,580
Property and equipment, net . . . . . . . . . . . . 4,918 4,435
Deferred tax assets . . . . . . . . . . . . . . . . 608 312
Goodwill . . . . . . . . . . . . . . . . . . . . . . 1,054 1,054
Other assets . . . . . . . . . . . . . . . . . . . . 3,199 2,971
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 73,025 $ 60,352
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Bank notes payable . . . . . . . . . . . . . . . . $ - $ 1,578
Accounts payable . . . . . . . . . . . . . . . . . 33,491 26,853
Accrued expenses . . . . . . . . . . . . . . . . 9,290 7,452
Dividends payable . . . . . . . . . . . . . . . . - 114
-------- --------
Total current liabilities . . . . . . . . . . . 42,781 35,997
Deferred compensation . . . . . . . . . . . . . . . 1,564 1,312
-------- --------
Total liabilities . . . . . . . . . . . . . . . 44,345 37,309
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,349,500 in 2005 and
2,276,688 shares in 2004 . . . . . . . . . . . . 117 114
Paid-in surplus . . . . . . . . . . . . . . . . . 6,109 4,879
Deferred stock-based compensation . . . . . . . . (1) (4)
Retained earnings . . . . . . . . . . . . . . . . 22,455 18,054
-------- --------
Total stockholders' investment . . . . . . . . . 28,680 23,043
-------- --------
Total liabilities and stockholders' investment . $ 73,025 $ 60,352
======== ========
The accompanying notes are an integral part of these balance sheets.
-3-
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,
2005 2004 2005 2004
---- ---- ---- ----
Revenues, principally from
contracts . . . . . . . . . $ 76,600 $ 62,223 $ 215,201 $ 158,869
Costs and expenses of
contracts . . . . . . . . . 73,883 60,620 207,354 154,505
--------- --------- --------- ---------
Gross profit. . . . . . . . . 2,717 1,603 7,847 4,364
Selling, general and
administrative expenses . . 173 192 340 450
Interest income, net. . . . . (43) (31) (84) (76)
--------- --------- --------- ---------
Income before income taxes. . 2,587 1,442 7,591 3,990
Provision for income taxes. . 1,000 557 2,935 1,542
--------- --------- --------- ---------
Income from continuing
operations . . . . . . . . 1,587 885 4,656 2,448
Discontinued operations:
Loss from operations,
before income taxes . . . - - - (2)
Benefit for income taxes. . - - - (1)
--------- --------- --------- ---------
Loss from discontinued
operations . . . . . . . - - - (1)
--------- --------- --------- ---------
Net income. . . . . . . . . . $ 1,587 $ 885 $ 4,656 $ 2,447
========= ========= ========= =========
Basic earnings per share:
Income from continuing
operations $ 0.68 $ 0.40 $ 2.01 $ 1.10
Loss from discontinued
operations 0.00 0.00 0.00 0.00
--------- --------- --------- ---------
Net income . . . . . . . . . $ 0.68 $ 0.40 $ 2.01 $ 1.10
========= ========= ========= =========
Basic weighted average shares
outstanding 2,348,228 2,225,307 2,313,058 2,221,043
========= ========= ========= =========
Diluted earnings per share:
Income from continuing
operations $ 0.66 $ 0.38 $ 1.95 $ 1.06
Loss from discontinued
operations 0.00 0.00 0.00 0.00
--------- --------- --------- ---------
Net income. . . . . . . . . . $ 0.66 $ 0.38 $ 1.95 $ 1.06
========= ========= ========= =========
Diluted weighted average
shares outstanding 2,417,056 2,301,040 2,382,986 2,297,866
========= ========= ========= =========
Dividends declared per share $ 0.00 $ 0.05 $ 0.11 $ 0.14
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Stockholders' Investment (Unaudited)
- --------------------------------------------------------------------------------------------
(in thousands except per share data)
Deferred Total
Common Stock Paid-In Stock-Based Retained Stockholders'
Shares Amount Surplus Compensation Earnings Investment
------ ------ ------- ------------ -------- ----------
Balance at
December 31, 2004 . . . . . 2,277 $ 114 $ 4,879 $ (4) $ 18,054 $ 23,043
Net income for the period . . - - - - 4,656 4,656
Exercised stock options . . . 73 3 549 - - 552
Tax benefit of options
exercised . . . . . . . . . - - 684 - - 684
Deferred stock-based
compensation . . . . . . . - - (3) 3 - -
Dividends declared ($.11) . . - - - - (255) (255)
----- ----- ------- ----- -------- --------
Balance at
September 30, 2005 . . . . 2,350 $ 117 $ 6,109 $ (1) $ 22,455 $ 28,680
===== ===== ======= ===== ======== ========
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
- ------------------------------------------------------------------------------
(in thousands)
For the nine months
ended September 30,
2005 2004
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 4,656 $ 2,447
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 1,010 977
Loss on sale of property and equipment . . . . . . . 2 -
Deferred taxes . . . . . . . . . . . . . . . . . . . (381) (265)
Tax benefit of options exercised . . . . . . . . . . 684 261
Amortization of deferred stock-based compensation . . - 12
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net. . . . . . . . . . . . . . . (6,079) (26,743)
Contract inventories . . . . . . . . . . . . . . . . 4,973 -
Other current assets and noncurrent assets . . . . . (1,075) (536)
Increase (decrease) in:
Accounts payable and deferred compensation . . . . . 6,890 21,554
Accrued expenses . . . . . . . . . . . . . . . . . . 1,838 879
------- -------
Net cash provided by (used in) operating activities 12,518 (1,414)
------- -------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . (1,495) (2,265)
------- -------
Net cash used in investing activities (1,495) (2,265)
------- -------
Cash flows from financing activities:
Net repayment of bank loans . . . . . . . . . . . . . . (1,578) -
Dividends paid . . . . . . . . . . . . . . . . . . . . . (369) (289)
Proceeds from the exercise of options of common stock . 552 299
------- -------
Net cash (used in) provided by financing activities (1,395) 10
Net increase (decrease) in cash and cash equivalents . . . 9,628 (3,669)
Cash and cash equivalents at beginning of period . . . . 130 9,843
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 9,758 $ 6,174
======= =======
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 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, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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, 2004. The Company operates within
one reportable segment.
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. Significant
estimates affecting the financial statements include the allowance for doubtful
accounts, accruals for loss contracts, contract disallowance reserves, self
insured health claims and estimated cost to complete on firm fixed-price
contracts.
Contract Inventories
The components of contract inventories as of September 30, 2005 and December 31,
2004 were as follows (in thousands):
2005 2004
---- ----
Raw material . . . . . . . . . . . . . . . . . . . . . . . $ - $4,783
Work in process . . . . . . . . . . . . . . . . . . . . . 9,245 3,721
------- ------
$ 9,245 $8,504
Less: Progress payments and customer advances received. . (5,714) -
------- ------
Total contract inventories $ 3,531 $8,504
======= ======
Contract inventories consist of materials purchased, advances to suppliers, and
other expenditures for use in a contract to modify and apply a protective
system, the Tanker Ballistic Protection System ("TBPS"), to military vehicles
for the U.S. Army.
Although these costs are classified as contract inventories for accounting
purposes, they are similar in nature to materials and direct supplies purchased
for use in performance on the Company's other contracts in that they are solely
and directly attributable to the contract and will be billed to the customer
within a relatively short time. These materials and direct supplies will not be
restocked to maintain any permanent inventory levels.
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Raw material inventories consist of advances to suppliers for materials on this
contract but on which work has not yet begun. Work in process contract
inventories consist of amounts for materials, supplies and other expenditures
for which work has been performed but for which the end unit has not yet been
completed and accepted. Work in process contract inventory includes applicable
indirect cost burdens, including general and administrative costs, of
approximately $972 thousand and $442 thousand as of September 30, 2005 and
December 31, 2004, respectively.
Debt
VSE has a loan agreement with a bank under which credit is made available to the
Company in the form of revolving loan amounts or letters of credit. The amount
of credit available to the Company is $15 million, subject to certain
conditions, including a borrowing formula based on billed receivables. The
Company pays a fixed annual commitment fee of $20 thousand and interest on any
revolving loan borrowings at a prime-based rate or an optional LIBOR-based rate.
The expiration date of the loan agreement is May 31, 2007. 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. As of September 30, 2005, there were no revolving loan
amounts outstanding and one letter of credit for approximately $192 thousand.
Amounts outstanding under this loan agreement as of December 31, 2004 were
approximately $1.6 million in revolving loan borrowings and no letters of
credit. Interest expense incurred for revolving loan amounts borrowed for the
nine months ending September 30, 2005 and 2004 was approximately $1 thousand and
$0, respectively.
Subsequent Dividend Declaration
A quarterly dividend of $.06 per share was declared on October 3, 2005, to be
paid in November 2005. The Company has paid dividends each year since 1973,
with quarterly dividend payment dates that generally occur in February, May,
August, and November. Dividends paid are usually, but not always, declared
during the quarter preceding the payment date. The dividend declared on
October 3, 2005 will be the fourth quarterly dividend paid in 2005.
Accounting for Stock-based Compensation
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock-Based Compensation," as amended by SFAS 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." Accordingly, the Company accounts
for stock-based compensation under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
using the intrinsic value method. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to all stock-based employee compensation (in
thousands, except per share amounts):
-8-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income, as reported $1,587 $ 885 $4,656 $2,447
Add: Total stock-based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) for all awards, net
of related tax effects - 2 - 7
Deduct: Total stock-based
compensation expense
determined under fair value based
method (SFAS No. 123) for all
awards, net of related tax effects (61) (19) (173) (57)
------ ------ ------ ------
Pro forma net income $1,526 $ 868 $4,483 $2,397
====== ====== ====== ======
Earnings per share:
Basic - as reported $ 0.68 $ 0.40 $ 2.01 $ 1.10
Diluted - as reported $ 0.66 $ 0.38 $ 1.95 $ 1.06
Basic - pro forma $ 0.65 $ 0.39 $ 1.94 $ 1.08
Diluted - pro forma $ 0.63 $ 0.38 $ 1.88 $ 1.04
In December 2004, the Financial Accounting Standards Board issued SFAS 123(R),
"Share-Based Payment," which is a revision to SFAS 123. SFAS 123(R) supersedes
APB Opinion No. 25 and amends SFAS 95, "Statement of Cash Flows." Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative. The
Company can adopt SFAS 123(R) in one of two ways - the modified prospective
method or the modified retrospective method. The Company will adopt SFAS 123(R)
on January 1, 2006 and is currently evaluating the alternative methods.
The impact of adoption of SFAS 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share above. SFAS 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement may
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. The Company cannot estimate what those amounts will be in the
future because they depend on, among other things, when employees exercise stock
options.
Earnings Per Share
Basic earnings per share 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 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
-9-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
common shares that were outstanding during each period. Potentially dilutive
common shares include incremental common shares issuable upon exercise of stock
options.
Three Months Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
---- ---- ---- ----
Basic weighted average
common shares outstanding 2,348,228 2,225,307 2,313,058 2,221,043
Dilutive effect of options 68,828 75,733 69,928 76,823
--------- --------- --------- ---------
Diluted weighted average
common shares outstanding 2,417,056 2,301,040 2,382,986 2,297,866
========= ========= ========= =========
Litigation
The Company is a party to or has property subject to litigation during the
normal course of business. In the opinion of management, the resolution of any
such litigation will not have a material adverse effect on the Company's results
of operations or financial position. However, the results of any legal
proceedings cannot be predicted with certainty.
-10-
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
VSE Organization
VSE's business operations consist primarily of services performed by the
Company's wholly owned subsidiaries and unincorporated divisions. The Company
uses multiple operating entities to bid on and perform contract work. The use
of an operating structure with multiple entities gives the Company certain
competitive advantages and the flexibility to pursue a diverse business base.
The term "VSE" or "Company" refers to VSE and its subsidiaries and divisions
unless the context indicates operations of the parent company only.
Energetics Incorporated ("Energetics") is currently VSE's only active
subsidiary. Active divisions as of September 30, 2005 include BAV Division
("BAV"), Coast Guard Division ("VCG"), Communications and Engineering Division
("CED"), Fleet Maintenance Division ("FMD"), Management Sciences Division
("MSD"), and, Systems Engineering Division ("SED").
TTD Discontinued Operations
In February 2003, VSE decided to terminate operations of its Telecommunications
Technologies Division ("TTD") due to declining revenues and significant losses
sustained by this division. TTD continued work on uncompleted contracts during
2003 and 2004 to satisfy its contractual obligations and upon finishing work in
July 2004, TTD was classified as a discontinued operation. Some of TTD's
technical capabilities were transferred to other VSE divisions.
VSE Customers and 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 Company's services is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Navy, Army, and Air Force. Other
customers include the Department of Homeland Security, the U.S. Postal Service,
the Department of Energy, and the Department of Treasury.
Navy - The majority of VSE's work is performed for the U.S. Navy. BAV is a major
provider of logistics, training, and technical assistance in support of the
Navy's ship transfer program. FMD supports the Navy by providing a variety of
services including ship installation efforts, combat systems inspections, ship
repair and overhaul availability planning, harpoon weapons management, ordnance
alteration, and air combat logistics. VCG provides services to the U.S. Coast
Guard that are similar to the work performed by BAV for the Navy.
Army/Army Reserve - VSE also performs a significant amount of its work for the
U.S. Army and U. S. Army Reserve. SED provides these customers equipment
refurbishment services, military vehicle protection systems, engineering and
technical support for ground weapons, logistics and training services, material
procurement support, and prototype development support for combat vehicles. MSD
provides the Army, as well as other government agencies and commercial
organizations, with quality training services for product, process, and
management optimization. CED provides management oversight and coordinates
support efforts for a variety of government work orders on a large Army
contract.
Other - Energetics provides the Department of Energy and other government and
industry customers with expert consulting services that typically include
program planning and analysis, R&D management services, technology assessment
and performance metrics, communications and outreach, and conference planning.
VSE provides base support and other services to the U.S. Air Force
-11-
through contract work performed by FMD and SED. The Company has also provided
support services to the U.S. Postal Service and U.S. Department of Treasury.
BAV Ship Transfer Program
VSE's BAV Division provides the U.S. Navy with engineering, technical and
logistical support services associated with the sale, lease, or transfer of Navy
ships to foreign governments. The original contract associated with this program
was a ten-year cost-plus award fee contract awarded in 1995 with a total ceiling
value of more than $1 billion. BAV was awarded a second contract in April 2005
to continue work on this program. The new contract is a five-year cost-plus
award fee contract with a total ceiling value of approximately $544 million. 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. The Company has
experienced significant quarterly and annual revenue fluctuations and
anticipates that future quarterly and annual revenues will be subject to
variation due to changes in the level of activity associated with the Navy's
ship transfer program.
During its life, this program has been the Company's single largest revenue
producer. Revenues generated by this program have typically accounted for
approximately 40% to 50% of consolidated VSE revenues, and revenues generated by
this program accounted for approximately 43% and 54% of consolidated revenues
during the nine month periods ended September 30, 2005 and 2004, respectively.
The transfer of four U.S. Navy ships to Taiwan currently conducted under this
program is a major contributor to the Company's revenues in 2005 and 2004. The
Navy began issuing orders on the new contract in the second quarter of 2005 and
ceased issuing orders for new work on the original contract at that time. BAV
will continue work associated with the transfer of four ships to Taiwan under
delivery orders previously issued on the original contract.
Contract terms under both the original and new contracts specify base fee
payments and award fee payments to BAV. Base fee payments are determined by
level of contract activity and base fee income is recognized each month. Award
fee payments are determined by performance and level of contract activity. 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 certain.
Award fees are made three times during the year. Accordingly, the Company
typically has three quarterly reporting periods per year that include the
recognition of BAV award fee income and one quarterly reporting period that does
not include BAV award fee income. Due to such timing, and to fluctuations in the
level of revenues, profits as a percentage of revenues will fluctuate from
period to period. The three month periods ended September 30, 2005 and 2004 do
not include BAV award fee income. Each of the three month periods ended June 30,
2005 and 2004 and March 31, 2005 and 2004 includes BAV award fee income. Total
fee income as a percentage of revenue on the original contract has been
relatively low compared to other VSE contracts.
TBPS Program
In November 2004, VSE's SED Division was awarded a fixed-price letter contract
by the U.S. Army to begin work on a program to provide a protection system for
Army vehicles, the Tanker Ballistic Protection System ("TBPS"). Under this
program, SED applies a Fuel Tank Self-Sealing System and necessary Add-on Armor
Panels for Army Fuel Dispensing Tankers as protection from damage resulting from
hostile fire. Testing and preparatory work on this program was conducted in
November and December 2004 and the TBPS was applied to the first tanker in
January 2005. SED received a definitized firm fixed price per unit contract to
formalize contract coverage and funding in March 2005. In April 2005, the
Company received a second fixed-price letter contract under this program that
increased the amount of work by adding two more types of tankers to be included
in the program. In September 2005, this second letter contract was definitized
and VSE was awarded a second fixed price per unit contract.
-12-
Subsequent to award, VSE has received modifications to the first contract to
adjust the number of tankers based on Army tanker availability and needs and
VSE anticipates that there may be future modifications to both contracts as the
Army's needs change. The current funded contract ceiling for the TBPS program
contracts is approximately $84 million as of September 30, 2005. Contractual
coverage for work on the TBPS program runs through 2007 and the Company expects
to most likely complete work in early 2007.
The TBPS Program has contributed significantly to revenue growth in 2005. The
work performed on this program also significantly increases the amount of fixed
price contract work performed by the Company. In general, fixed price contract
work carries a higher level of risk and has higher profit margins than work on
other contract types. Accordingly, the TBPS program is expected to present VSE's
business with the potential for both increased profit margins and increased
risks and challenges.
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from 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 revenues of the Company depend on its ability 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") 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, increasing 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. While the use of subcontractors on a large
scale basis allows the Company to compete for this work, profit margins on
subcontract work are lower than on work performed by Company personnel, thereby
reducing the Company's overall profit margins.
The use of subcontractors on government contracts also raises certain
performance and financial risks to VSE in that government prime contractors are
responsible for performing to the requirements of the contract and ensuring
compliance with U.S. Government regulations relative to the performance by
subcontractors.
Other government procurement practices that can affect the Company's revenues
are 1) the length of contracts issued, which may vary depending on changes in
contracting regulations and other factors; 2) the use of past performance
criteria that may preclude entrance into new government markets; and
3) government socioeconomic 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.
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
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countries served under the BAV Ship Transfer Program could potentially affect
sales. Failure by the government of a potential foreign customer to approve and
fund acquisition of U.S. Navy ships serviced under this program could affect
sales. In any one year, a significant amount of the Company's revenues may
result from sales on the BAV Ship Transfer Program to a single foreign
government. BAV sales to Egypt have historically comprised a large percentage
of the Company's total sales in any one year. Work associated with the transfer
of four ships to Taiwan under the BAV Ship Transfer Program during 2004 and 2005
also comprised a large percentage of total sales.
The current international situation posed by potential terrorist activity and
the continuing conflict in the Middle East could potentially increase the
political risks for revenues from both the BAV Ship Transfer and TBPS Programs.
International tensions can also affect work by FMD on U.S. Navy ships when they
are deployed outside of U.S. Navy facilities and are unavailable for maintenance
work during this time period. Adverse results arising from these global economic
and political risks could potentially have a material adverse impact on the
Company's results of operations.
Selected VSE Revenues (in thousands)
------------------------------------
For the Nine months ended September 30,
2005 2004
Source of Revenue Revenues % Revenues %
----------------- -------- - -------- -
BAV Taiwan $ 47,978 22 $ 43,774 28
BAV Egypt 40,432 19 37,406 23
BAV Other 4,390 2 5,306 3
-------- --- -------- ---
Total BAV $ 92,800 43 $ 86,486 54
TBPS Program 25,938 12 - -
VSE Other 96,463 45 72,383 46
-------- --- -------- ---
Total Revenues $215,201 100 $158,869 100
======== === ======== ===
Management Outlook
The growth trend established by VSE's record high revenues and profits in 2004
is continuing in 2005. The major contributors to 2005 results are expected to
be: 1) performance on the TBPS Program; 2) a continuation of the Taiwan Ship
Transfer work performed by BAV; and 3) additional work provided by Other
Significant Contracts.
TBPS Program. A majority of the work on the initial contract on the TBPS
Program is expected to be completed by early 2006. Additionally, the second
contract under this program is expected to begin generating revenue in the
fourth quarter of 2005. Work on this program is contributing to increases in
Company revenues and profits in 2005 and has the potential for continued
contributions to revenues and profits in 2006.
Taiwan Ship Transfer. BAV's Taiwan ship transfer effort, entering its second
full year, is contributing significantly to VSE revenue levels in 2005 and is
expected to continue to contribute significantly to revenues in 2006.
Other Significant Contracts. VSE has three multi-year, multiple award,
indefinite delivery, indefinite quantity contracts that have large nominal
ceiling amounts with no funding committed at the time of award. VSE is one of
several awardees on each contract. While future VSE revenue from these contracts
cannot be predicted with certainty, the award of these contracts provides the
Company with the opportunity to compete for work that could contribute to future
revenue growth, including new work in 2005. These three contracts are described
below.
-14-
VSE's CED Division has a multi-year Rapid Response support contract issued by
the U.S. Army Communications-Electronics Command (CECOM) that was awarded in
January 2003. The contract enhances the Company's revenue producing capabilities
by allowing it to provide services through any of VSE's operating entities or
through third party subcontractors for various end user government customers.
If all options are exercised, this contract has a potential total ceiling of
approximately $2.9 billion over an eight-year period. While it is not likely
that the full ceiling amount will be realized, this contract has generated
revenues for VSE of approximately $29.3 million and $18.7 million during the
nine months ended September 30, 2005 and 2004, respectively. VSE continues to
pursue new orders on this contract that present potential revenue opportunities
for the future.
VSE's FMD Division has a contract with the U.S. Navy, SeaPort Enhanced, awarded
in April 2004, which includes a five-year base period and two five-year option
periods. This contract is a procurement vehicle for the Navy to use for ordering
services from a wide range of contractors to support all phases of naval ship
and shipboard weapons systems acquisition and life-cycle support. While this
award does not guarantee any revenues for VSE, the Company is one of several
contractors eligible to bid for services during the life of the contract. FMD
has generated only minor amounts of revenue from this contract.
FMD also has a contract, awarded in September 2004, with the U.S. Navy to
provide engineering and technical services to support Naval Sea Systems Command
maintenance, overhaul, repair, and alteration of systems aboard ships. This
contract has a total contract ceiling amount of $1.022 billion over a five-year
period if all option periods are exercised. VSE is one of several awardees
eligible to share in the potential total contract ceiling amount. Since the date
of the contract award, FMD has been awarded delivery orders totaling
approximately $44 million in work on this contract. Although it is not likely
that the full $1.022 billion ceiling amount will be realized, this contract does
present potential future revenue opportunities.
Funded Backlog
Revenue increases in government contracting businesses are typically preceded by
increases in contract funding ("bookings") and a build-up of funded contract
backlog. VSE's bookings and funded backlog during the first nine months of 2005
have remained at levels that give the Company a firm basis for continued revenue
growth in 2005 and into 2006.
(in millions)
-------------
Bookings for the nine months ended September 30, 2005. . . . $259
Funded backlog as of September 30, 2005 . . . . . . . . . . $212
Revenues for the nine months ended September 30, 2005. . . . $215
Longer Term Concerns and Risks
Certain work efforts that have supported VSE's growth in 2004 and 2005 are due
to expire in the future. VSE has received significant contributions to its
revenue growth in 2004 from the Taiwan Ship Transfer work and in 2005 from both
the Taiwan Ship Transfer work and the TBPS program work. The Taiwan Ship
Transfer work is expected to continue contributing significant levels of revenue
through 2005 and 2006 and be substantially completed in late 2006. The TBPS
program contractual coverage runs through 2007 and the Company expects to
continue work on the program through 2006 at approximately the same levels
experienced in 2005. At this time, the Company has no indication that there will
be any further work ordered on the TBPS program beyond early 2007. The expected
expiration of these two programs will present challenges for VSE to sustain the
revenue growth that it has experienced during 2004 and 2005 and that it expects
to experience in the remainder of 2005 and 2006 into years beyond 2006. VSE is
tracking multiple bidding opportunities for new contract work and is also
exploring potential acquisition opportunities to mitigate the future loss of
revenues associated with the expiration of the TBPS Program and the Taiwan Ship
Transfer work.
-15-
Critical Accounting Policies
VSE's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require VSE
to make estimates and assumptions. The Company believes the following critical
accounting polices affect our more significant judgments, estimates and
assumptions used in the preparation of its consolidated financial statements.
Revenue Recognition
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 BAV contract terms specify award fee payments 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 record award fee revenue until constructive notification of
the award terms is received from the customer. 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 multiplied by 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.
Revenue recognition methods on fixed-price contracts will vary depending on the
nature of the work and the contract terms. On some fixed-price contracts
revenues are recorded as costs are incurred, using the percentage-of-completion
method of accounting. Revenues on fixed-price service contracts are recorded as
services are provided. Revenues on fixed-price contracts that require delivery
of specific items are recorded based on a price per unit as units are delivered.
Profits on fixed-price contracts result from the difference between the incurred
costs and the revenue earned.
Revenues by contract type for the nine months ended September 30, 2005 and 2004
were as follows (in thousands):
2005 2004
Contract Type Revenues % Revenues %
------------- -------- - -------- -
Cost-type . . . . . $134,247 62 $117,563 74
Time and materials. 45,998 22 19,064 12
Fixed-price . . . . 34,956 16 22,242 14
-------- --- -------- ---
$215,201 100 $158,869 100
======== === ======== ===
The Company will occasionally perform work at risk, which is work that is
performed prior to the government formalizing funding for such work. 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 September 30, 2005, VSE has recognized approximately $170 thousand in risk
funding. VSE believes that it will receive funding for all of this risk funding
revenue. VSE is at risk of loss for any risk funding not received. The Company
provides for anticipated losses on contracts by a charge to income during the
period in which losses are first identified.
-16-
Long-Lived Assets
In assessing the recoverability of long-lived assets, including goodwill and
other intangibles, VSE 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, VSE may
be required to record impairment charges for these assets not previously
recorded.
Goodwill
Goodwill and intangible assets with indefinite lives are subject to a review
for impairment at least annually. The Company performs its annual impairment
test on September 30. As of September 30, 2005, the Company had approximately
$1.1 million of goodwill associated with its acquisition of Energetics in 1995.
The Company has not recognized any reduction to the goodwill due to the
impairment rules. If at some time in the future it is determined that impairment
has occurred, such impairment could potentially have an adverse impact on the
Company's results of operations or financial condition.
Contingencies
From time to time VSE is subject to proceedings, lawsuits, and other claims
related to environmental, labor, and other matters. VSE is 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 VSE net deferred tax assets is based on assumptions
regarding VSE's ability to generate sufficient future taxable income to utilize
these deferred tax assets. If the estimates and related assumptions regarding
VSE's future taxable income change, VSE may be required to record valuation
allowances against its deferred tax assets, resulting in additional income tax
expense.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS 123(R),
"Share-Based Payment," which is a revision to SFAS 123. SFAS 123(R) supersedes
APB Opinion No. 25 and amends SFAS 95, "Statement of Cash Flows." Generally, the
approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative. The
Company can adopt SFAS 123(R) in one of two ways - the modified prospective
method or the modified retrospective method. The Company must adopt SFAS 123(R)
on January 1, 2006 and is currently evaluating the alternative methods.
The impact of adoption of SFAS 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share above. SFAS 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement may
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. The Company cannot estimate what those amounts will be in the
future because they depend on, among other things, when employees exercise stock
options.
-17-
Results of Operations
The following table sets forth certain items, including consolidated revenues,
pretax income and net income from continuing operations, and the changes in
these items for the three and nine month periods ended September 30, 2005 and
2004 (in thousands):
2005
Increase
Compared
to
2004
Three Months Nine Months ----------------
Ended September 30, Ended September 30, Three Nine
2005 2004 2005 2004 Months Months
---- ---- ---- ---- ------ -------
Revenues . . . . . . $76,600 $62,223 $215,201 $158,869 $14,377 $56,332
======= ======= ======== ======== ======= =======
Income before income
taxes . . . . . . $ 2,587 $ 1,442 $ 7,591 $ 3,990 $ 1,145 $ 3,601
Provision for income
taxes . . . . . . 1,000 557 2,935 1,542 443 1,393
------- ------- -------- -------- ------- -------
Income from continuing
operations . . . . $ 1,587 $ 885 $ 4,656 $ 2,448 $ 702 $ 2,208
======= ======= ======== ======== ======= =======
Revenues increased by approximately 23% and 35% for the three and nine month
periods ended September 30, 2005, as compared to the same periods of 2004. The
primary reasons for the increases in revenues were 1) work attributable to the
TBPS program; 2) increased levels of work performed by FMD on its U. S. Navy
contracts; 3) an increase in work performed on the CED Rapid Response contract;
4) an increase in work performed under the BAV Ship Transfer Program, including
revenues associated with the Taiwan ship transfer; and 5) increased levels of
military equipment refurbishment services performed by SED for the U. S. Army
Reserve.
Income before income taxes increased by approximately 79% and 90% for the three
and nine month periods ended September 30, 2005, as compared to the same periods
of 2004. The increases in income before income taxes resulted from the profits
associated with additional revenues and an increase in gross margins. The
increase in gross margins were primarily attributable to spreading corporate
fixed costs over a larger revenue base and an increase in the percentage of work
performed on time and materials and fixed-price contracts, which have more
favorable profit margins than work performed on cost type contracts. The TBPS
program increased both the Company's overall revenue and percentage of fixed
price contract work, and made the most significant contribution to increased
income. Profits associated with the increase in military equipment refurbishment
services performed by SED, profits from the increased revenues of BAV and FMD,
profits associated with an increase in MSD services, and a decrease in the
losses incurred by CED in 2005 as compared to 2004 also contributed to the
Company's increase in pretax income during these periods as compared to the same
periods of 2004. Also, the Company's selling, general, and administrative
expenses declined for the three and nine month periods ended September 30, 2005
as compared to the same periods of 2004 because the Company has subleased most
of its office space in 2005 that had been vacant in 2004, thereby eliminating
costs in 2005 as compared to the prior year.
The provision for income taxes for the periods ended September 30, 2005 and 2004
were computed at an effective tax rate of approximately 39%.
Financial Condition
VSE's financial condition did not change materially during the nine months ended
September 30, 2005. The Company's largest assets are its accounts receivable and
cash and cash equivalents. The largest liabilities are its accounts payable and
accrued expenses. Accounts receivable increased approximately $6.1 million, cash
-18-
and cash equivalents increased approximately $9.6 million, accounts payable
increased approximately $6.6 million, and accrued expenses increased
approximately $1.8 million during the first nine months of 2005 due primarily to
the increase in the level of business activity and the associated billings to
customers and subcontractor payments required to perform this work. Inventories
declined approximately $5.0 million during the first nine months of 2005 as
materials and supplies were used to complete protection systems for vehicles on
the TBPS Program. The change in total stockholders' investment in this period
resulted from earnings and dividend activity and from the exercise of stock
options.
Subsequent Dividend Declaration
A quarterly dividend of $.06 per share was declared on October 3, 2005, to be
paid in November 2005. The Company has paid dividends each year since 1973,
with quarterly dividend payment dates that generally occur in February, May,
August, and November. Dividends paid are usually, but not always, declared
during the quarter preceding the payment date. The dividend declared on
October 3, 2005 will be the fourth quarterly dividend paid in 2005.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased by approximately $9.6 million during the
nine months ended September 30, 2005. The increase in cash and cash equivalents
during this period resulted from cash provided by operating activities of
approximately $12.5 million, cash used in investing activities of approximately
$1.5 million, and cash used in financing activities of approximately
$1.4 million. Investing activities consisted of facilities related expenditures,
including expenditures for facilities expansion and improvement, of
approximately $351 thousand and purchases of property and equipment, net of
dispositions, of approximately $1.1 million. Financing activities consisted of
repayment of amounts previously borrowed on the Company's bank loan of
approximately $1.6 million, dividend payments, and proceeds received from the
issuance of common stock due to the exercise of stock options.
Cash and cash equivalents decreased by approximately $3.7 million during the
nine months ended September 30, 2004. The decrease in cash and cash equivalents
during this period resulted from cash used in investing activities of
approximately $2.3 million, cash used in operating activities of approximately
$1.4 million, and cash provided by financing activities of approximately
$10 thousand. Investing activities consisted of expansion and improvement of
facilities of approximately $755 thousand and purchases of property and
equipment, net of dispositions, of approximately $1.5 million. Financing
activities consisted of dividend payments and proceeds received from the
issuance of common stock due to the exercise of stock options.
The difference between cash provided by operating activities of approximately
$12.5 million in 2005 as compared to cash used of approximately $1.4 million in
2004 is primarily due to: 1) an increase in net income; and 2) changes in the
levels of accounts receivable, inventories, and accounts payable resulting from
increases in revenue and the timing of associated material purchases,
subcontractor payments, and receivables collections.
Quarterly cash dividends were paid at the rate of $.05 per share during the
three month periods ended March 31 and June 30, 2005, and at the rate of $.06
per share during the three month period ended September 30, 2005. 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.
Liquidity
The Company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
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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
payments received on accounts receivable represent the principal source of cash
for the Company. Accounts receivable levels can be affected significantly by the
timing of large materials purchases and subcontractor efforts used in
performance on the Company's contracts. Accounts receivable levels are also
affected by contract retainages, differences between the provisional billing
rates authorized by the government compared to the costs actually incurred by
the Company, and government delays in processing administrative paperwork for
contract funding.
Work on the TBPS program requires the Company to acquire inventories consisting
of materials, supplies, and other expenditures for which end units have not yet
been completed and accepted. Although these costs are classified as inventories
for accounting purposes, they are similar in nature to materials and direct
supplies purchased for use in performance on the Company's other contracts in
that they are solely and directly attributable to the contract and will be
billed to the customer within a relatively short time. All of the inventories
are expected to be liquidated, billed, and collected as vehicle protection
systems are completed and accepted by the government customer. These materials
and direct supplies will not be restocked to maintain any permanent inventory
levels.
Accounts payable arise primarily from purchases of subcontractor services and
materials used by the Company in the performance of its contract work. Payments
made on accounts payable, along with payments made to satisfy employee payroll
and payroll associated expenses, make up the principal cash requirements of the
Company. Accounts payable levels can be affected significantly by the timing of
large materials purchases and subcontractor efforts used in performance on the
Company's contracts and by changes in the level of contract work performed by
the Company.
Other cash requirements include income tax payments, acquisition of capital
assets for office and computer support, facilities improvements, and payment of
cash dividends.
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
September 30, 2005. The amount of this commitment is negotiable between the
Company and the bank. The Company has determined that the current $15 million
commitment amount is adequate to cover known current and future liquidity
requirements.
Performance of work under the BAV Ship Transfer Program, the TBPS program, and
other contracts requiring large subcontract or material expenditures have the
potential to cause substantial requirements for working capital; however,
management believes that current cash surpluses, cash flows from future
operations, and the bank loan commitment are adequate to meet current operating
cash 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, furniture and fixtures, and land and improvements.
The overall impact of inflation on replacement costs of such property and
-20-
equipment is not expected to be material to VSE's future results of operations
or financial condition.
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 any
movement 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
agreement, future interest rate changes could potentially have 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 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.
-21-
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 VSE Corporation's 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.
There was no change in our internal control over financial reporting during our
third quarter of fiscal 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
The Company is a party to or has property subject to litigation during the
normal course of business. In the opinion of management, the resolution of any
such litigation will not have a material adverse effect on the Company's results
of operations or financial position. However, the results of any legal
proceedings cannot be predicted with certainty.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Registrant 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 $.60 per share, provided there is no default under the loan
agreement.
Item 6. Exhibits and Reports on Form 8-K
(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
-22-
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K on August 1, 2005, to report
the financial results of the second quarter 2005.
The Registrant filed a Current Report on Form 8-K on August 5, 2005 to report
that the VSE Corporation Board of Directors approved an increase in non-employee
director fees and the adoption of an attendance fee for each meeting of the
Board of Directors or committee of the Board of Directors attended.
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.
-23-
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 28, 2005 /s/ D. M. Ervine
__________________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
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