VSE Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies Disclosure [Abstract]

(a) Leases and Other Commitments

We have various non-cancelable operating leases for facilities, equipment, and software with terms between two and 15 years. The terms of the facilities leases typically provide for certain minimum payments as well as increases in lease payments based upon the operating cost of the facility and the consumer price index. Rent expense is recognized on a straight-line basis for rent agreements having escalating rent terms. Lease expense for the years ended December 31, 2018, 2017 and 2016 was as follows (in thousands):



	Operating Lease Expense		Sublease Income		Net Expense
2018	$	3,363	$	1,198	$	2,165
2017	$	4,924	$	1,134	$	3,790
2016	$	5,100	$	888	$	4,212

Future minimum annual non-cancelable commitments as of December 31, 2018 are as follows (in thousands):



	Operating Leases
	Lease Commitments		Sublease Income		Net Commitments
2019	$	2,527	$	—	$	2,527
2020	1,479		—		1,479
2021	1,270		—		1,270
2022	1,189		—		1,189
2023	898		—		898
Thereafter	167		—		167
Total	$	7,530	$	—	$	7,530

We signed a lease in 2009 for our headquarters building with a rent commencement date of May 1, 2012. Certain terms in the lease agreement resulted in the capitalization of construction costs due to specific accounting rules. We recorded a construction asset and corresponding long-term liability of approximately $27.3 million on May 1, 2012, which represents the construction costs incurred by the landlord as of that date. According to accounting rules, we have forms of continuing involvement that required us to account for this transaction as a financing lease upon commencement of the lease period. The building and building improvements are included on our consolidated balance sheets and are being depreciated over a 15-year period. The accumulated depreciation of the construction asset was $12.1 million and $10.9 million as of December 31, 2018 and 2017, respectively. Payments made under the lease agreement are applied to service the financing obligation and interest expense based on an imputed interest rate amortizing the obligation over the life of the lease agreement. The long-term lease liability of $18.7 million and $20.3 million as of December 31, 2018 and 2017, respectively, is included in long-term lease obligations in our consolidated balance sheets. The current portion of our obligation, which is included in accrued expenses and other current liabilities in our consolidated balance sheets, was $1.6 million and $1.4 million as of December 31, 2018 and 2017, respectively.

Future minimum annual non-cancelable commitments under our headquarters lease as of December 31, 2018, which are not included in the table above, are as follows (in thousands):



	Lease Commitments		Sublease Income		Net Commitments
2019	$	4,456	$	376	$	4,080
2020	4,579		—		4,579
2021	4,705		—		4,705
2022	4,827		—		4,827
2023	4,948		—		4,948
Thereafter	17,388		—		17,388
Total	$	40,903	$	376	$	40,527

(b) Contingencies

On or about April 19, 2018 Joseph Waggoner, on behalf of himself and all similarly situated individuals, filed a lawsuit against VSE and two of our subcontractors in the United State District Court, Eastern District of Texas, Texarkana Division, alleging overtime compensation entitlement at a rate of one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek. The plaintiffs have certified the case as a collective action for similarly situated individuals. The plaintiffs work under a contract between defendants and the United States Army at the Red River Army Depot in Texas. The plaintiffs assert that employees' 15-minute unpaid work breaks should have been included as "working hours" in calculating overtime. We believe it is probable that VSE will incur a loss related to this matter. We have accrued an immaterial loss provision in an amount representing our reasonable estimate related to an unfavorable settlement of the matter, and we do not believe that we have any further exposure that would be material to VSE in excess of the amount we have accrued related to this matter.

In addition to the above-referenced legal proceeding, we may have certain claims in the normal course of business, including legal proceedings, against us and against other parties. In our opinion, the resolution of these other claims will not have a material adverse effect on our results of operations, financial condition, or cash flows. However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated.

Further, from time-to-time, government agencies investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.