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 June 30, 2007 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499 www.vsecorp.com
(Address of Principal Executive Offices) (Zip Code) (Webpage)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.05 per share NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
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 August 1, 2007: 5,004,860.
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 discussions
captioned "Business," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements" contained in VSE's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 filed with the Securities and Exchange
Commission (the "SEC") on March 5, 2007.
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)
June 30, December 31,
2007 2006
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 1,267 $ 8,745
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . 107,589 66,730
Contract inventories . . . . . . . . . . . . . . 1,323 4,459
Deferred tax assets . . . . . . . . . . . . . . 1,307 1,196
Other current assets . . . . . . . . . . . . . . 2,827 2,472
-------- --------
Total current assets . . . . . . . . . . . . . 114,313 83,602
Property and equipment, net . . . . . . . . . . . 9,919 8,409
Deferred tax assets . . . . . . . . . . . . . . . 1,502 1,133
Intangible assets . . . . . . . . . . . . . . . . 6,423 -
Goodwill . . . . . . . . . . . . . . . . . . . . . 5,051 1,054
Other assets . . . . . . . . . . . . . . . . . . . 5,201 4,337
-------- --------
Total assets . . . . . . . . . . . . . . . . . $142,409 $ 98,535
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 76,672 $ 44,302
Accrued expenses . . . . . . . . . . . . . . . 14,722 13,486
Dividends payable . . . . . . . . . . . . . . . 200 168
-------- --------
Total current liabilities . . . . . . . . . . 91,594 57,956
Deferred compensation . . . . . . . . . . . . . . 3,131 2,183
Other liabilities . . . . . . . . . . . . . . . . 321 160
-------- --------
Total liabilities . . . . . . . . . . . . . . 95,046 60,299
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.05 per share,
Authorized 15,000,000 shares; issued and
outstanding 5,004,860 in 2007 and 4,788,162
shares in 2006 . . . . . . . . . . . . . . . . 250 120
Paid-in capital . . . . . . . . . . . . . . . . 10,375 7,283
Retained earnings . . . . . . . . . . . . . . . 36,738 30,833
Total stockholders' equity . . . . . . . . . . 47,363 38,236
-------- --------
Total liabilities and stockholders' equity . . $142,409 $ 98,535
======== ========
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 six months
ended June 30, ended June 30,
2007 2006 2007 2006
---- ---- ---- ----
Revenues . . . . . . . . . . $ 159,644 $ 94,844 $ 280,333 $ 158,144
Costs and expenses of
contracts . . . . . . . . . 153,904 91,354 270,152 152,266
--------- --------- --------- ---------
Gross profit. . . . . . . . . 5,740 3,490 10,181 5,878
Selling, general and
administrative expenses . . 243 295 394 418
Interest income, net. . . . . (255) (83) (371) (220)
--------- --------- --------- ---------
Income before income taxes. . 5,752 3,278 10,158 5,680
Provision for income taxes. . 2,205 1,251 3,882 2,168
--------- --------- --------- ---------
Net income. . . . . . . . . . $ 3,547 $ 2,027 $ 6,276 $ 3,512
========= ========= ========= =========
Basic earnings per share . . $ 0.72 $ 0.43 $ 1.29 $ .74
========= ========= ========= =========
Basic weighted average shares
outstanding 4,931,942 4,733,424 4,870,027 4,728,002
========= ========= ========= =========
Diluted earnings per share. . $ 0.71 $ 0.42 $ 1.27 $ .72
========= ========= ========= =========
Diluted weighted average
shares outstanding 4,977,390 4,840,448 4,933,705 4,853,468
========= ========= ========= =========
Dividends declared per share $ 0.04 $ 0.035 $ 0.075 $ 0.065
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Stockholders' Equity (Unaudited)
-----------------------------------------------------------------------------------------
(in thousands except per share data)
Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Surplus Earnings Investment
------ ------ ------- -------- ----------
Balance at
December 31, 2006 2,394 $ 120 $ 7,283 $ 30,833 $38,236
Net income . . . . . . . . . . . - - - 6,276 6,276
Stock-based compensation . . . . 2 - 172 - 172
Exercised stock options . . . . . 106 5 1,555 - 1,560
Excess tax benefits from
Share-based payment
arrangements. . . . . . . . . . - - 1,490 - 1,490
Stock split effected in the
form of a 100% stock dividend . 2,503 125 (125) - -
Dividends declared ($.075). . . . - - - (371) (371)
----- ----- ------- -------- -------
Balance at
June 30, 2007 5,005 $ 250 $10,375 $ 36,738 $47,363
===== ===== ======= ======== =======
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 six months
ended June 30
2007 2006
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 6,276 $ 3,512
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 1,357 791
Loss on sale of property and equipment . . . . . . . 1 8
Deferred taxes . . . . . . . . . . . . . . . . . . . (480) (559)
Stock-based compensation . . . . . . . . . . . . . . 172 182
Change in operating assets and liabilities, net of
effect of business combination:
(Increase) decrease in:
Accounts receivable, net. . . . . . . . . . . . . . . (34,341) (10,799)
Contract inventories . . . . . . . . . . . . . . . . 3,136 (4,379)
Other current assets and noncurrent assets . . . . . (1,218) (1,453)
Increase (decrease) in:
Accounts payable and deferred compensation . . . . . 29,832 8,370
Accrued expenses . . . . . . . . . . . . . . . . . . (1,213) (1,616)
Other liabilities . . . . . . . . . . . . . . . . . . 161 33
------- -------
Net cash provided by (used in) operating activities 3,683 (5,910)
------- -------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (2,271) (1,658)
Acquisition of ICRC . . . . . . . . . . . . . . . . . . (11,601) -
------- -------
Net cash used in investing activities (13,872) (1,658)
------- -------
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . (339) (283)
Excess tax benefits from share-based
payment arrangements . . . . . . . . . . . . . . . . . 1,490 92
Proceeds from the exercise of options of common stock . 1,560 118
------- -------
Net cash provided by (used in) financing activities 2,711 (73)
------- -------
Net decrease in cash and cash equivalents . . . . . . . . (7,478) (7,641)
Cash and cash equivalents at beginning of period . . . . 8,745 12,717
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 1,267 $ 5,076
======= =======
The accompanying notes are an integral part of these financial statements.
-6-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) 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 six months ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007. 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, 2006.
Management of VSE's business operations is conducted under four reportable
operating segments, the Federal Group, the International Group, the Energy and
Environmental Group, and the Infrastructure and Information Technology Group.
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.
Stock Split
On May 1, 2007, VSE announced a two for one stock split in the form of a 100%
stock dividend payable to stockholders of record as of June 11, 2007. The
stock dividend was made on June 28, 2007. All share and per share amounts
have been adjusted to give retroactive effect to the increased number of
common shares outstanding due to the stock split.
(2) Contract Inventories
The components of contract inventories as of June 30, 2007 and December 31,
2006 were as follows (in thousands):
2007 2006
---- ----
Work in process . . . . . . . . . . . . . . . . . . . . $ 1,323 $ 4,459
------- -------
Total contract inventories $ 1,323 $ 4,459
======= =======
Contract inventories consist of materials purchased, 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 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
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Contract inventories
are relieved when units are delivered and revenue is recognized.
Work in process 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 inventories at
June 30, 2007 and December 31, 2006 included applicable indirect cost
burdens, including general and administrative costs totaling approximately
$181 thousand and $608 thousand, respectively. Indirect cost burdens,
including general and administrative costs charged to cost of sales from
inventories for the periods ended June 30, 2007 and December 31, 2006 totaled
$1.6 million and $3.9 million, respectively.
(3) 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
bank loan agreement provided loan financing up to a maximum commitment of $15
million as of June 30, 2007. The expiration date of the loan agreement is
May 31, 2008. From time to time the bank and the Company may negotiate an
amendment to the loan to increase or decrease the amount of available credit,
to change the expiration date to a later date, or make other changes in the
terms of the agreement. The Company and its bank are currently in negotiation,
and the Company has received a commitment letter from the bank, to increase
the maximum commitment amount to $25 million, extend the expiration date, and
make certain other changes.
The loan agreement contains terms whereby the Company may borrow against the
revolving loan and at any time and from time to time can prepay such
borrowings in whole or in part without premium or penalty. There are
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 June 30, 2007 the Company has not been notified
by the bank, nor is the Company aware of any default under the loan agreement.
The Company pays a commitment fee, interest on any revolving loan borrowings
at a prime-based rate or an optional LIBOR-based rate, and fees on any letters
of credit that are issued. As of June 30, 2007 and December 31, 2006, there
were no revolving loan amounts outstanding or letters of credit in effect.
There was no interest expense incurred on the loan for the six months ended
June 30, 2007 or June 30, 2006.
(4) Stock-based Compensation
2006 Restricted Stock Plan
On May 2, 2006, the Company's stockholders approved the VSE Corporation 2006
Restricted Stock Plan (the "2006 Plan"). Under the 2006 Plan, not more than a
total of 250,000 shares of VSE Common Stock, par value $.05 per share
("shares" or "VSE Stock") may be issued. The shares issued under the 2006 Plan
may, at the Company's option, be either shares held in treasury or shares
originally issued.
On January 2, 2007 and June 27, 2006, the Company granted 4,800 shares and
3,600 shares, respectively, of restricted VSE Stock to the Company's outside
Directors under the 2006 Plan. The fair market value on the grant date was
$16.84 and $15.75 per share, respectively. The shares issued vested
-8-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
immediately and cannot be sold, transferred, pledged or assigned before the
second anniversary of the grant date.
The Company notified certain employees of their participation in the 2006 VSE
Corporation Restricted Stock Plan for calendar year 2007 on January 3, 2007.
Accordingly, such employees are eligible to receive an award based on VSE's
financial performance for 2007. The earned amount will be expensed ratably
over the vesting period of approximately three years, including the service
period of one year which begins on January 1, 2007. As a result, the Company
has recognized approximately $86 thousand and $139 thousand in related expense
for the three and six months ended June 30, 2007, respectively.
Stock Option Plans
2004 Stock Option Plan
As of June 30, 2007, options issued under the 2004 Plan for up to 88,476
shares remain outstanding. Each option granted under the 2004 Plan was issued
at the fair market value of VSE shares on the date of grant. Each option
vests 25% on date of award and 25% on each anniversary date thereafter,
becoming 100% vested as of the third anniversary date of award. The 2004 Plan
will terminate on the earliest of May 1, 2014, or the date on which all
options issued under the 2004 Plan have been exercised, expire, or have been
terminated.
1998 Stock Option Plan
As of June 30, 2007, options issued under the 1998 Plan for up to 32,876
shares remain outstanding. The 1998 Plan will terminate on the earliest of May
6, 2008, or the date on which all options issued under the 1998 Plan have been
exercised, expire, or have been terminated.
Accounting for Stock-based Compensation
As a result of adopting SFAS 123(R) on January 1, 2006, the Company has
recognized approximately $46 thousand and $91 thousand in compensation costs
for the three and six month periods ended June 30, 2007, respectively, and
approximately $63 thousand and $126 thousand for the three and six month
periods ended June 30, 2006, respectively. The Company's net income was
approximately $29 thousand lower or approximately $.01 per share basic and
diluted and $57 thousand lower or approximately $.01 per share basic and
diluted for the three and six month periods ended June 30, 2007, respectively,
and approximately $39 thousand lower or approximately $.01 per share basic and
diluted and $78 thousand lower or approximately $.02 per share basic and
diluted for the three and six month periods ended June 30, 2006, respectively,
than if it had continued to account for share-based compensation under Opinion
25. The total compensation cost not yet recognized in the Company's income
before income taxes as of June 30, 2007 is approximately $91 thousand, to be
recognized over approximately six months.
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits
of deductions resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. Approximately $1.5 million and $92
thousand in excess tax benefits classified as cash provided by financing
activities for the six months ended June 30, 2007 and 2006, respectively,
would have been classified as cash provided by operating activities if the
Company had not adopted SFAS 123(R).
-9-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Set forth below is a summary of the Company's stock option activity for the
six months ended June 30, 2007 and 2006:
Weighted Weighted
Average Average
Exercise Exercise
2007 Price 2006 Price
---- ----- ---- -----
Number of shares under
stock options:
Outstanding at beginning of period 333,250 $ 8.61 395,126 $ 7.92
Exercised (211,898) 7.36 (19,376) 6.01
------- ------ ------- ------
Outstanding at end of period 121,352 $10.80 375,750 $ 8.01
======= ====== ======= ======
Exercisable at end of period 86,352 $10.07 273,500 $ 7.03
======= ====== ======= ======
Weighted average remaining
contractual life 1 Year 2 Years
The aggregate intrinsic values of outstanding, exercisable and exercised stock
options as of June 30, 2007 and 2006 are as follows (in thousands):
2007 2006
---- ----
Outstanding stock options $2,306 $2,582
Exercisable stock options $3,152 $2,148
Exercised stock options $3,955 $ 94
(5) 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 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. Potentially dilutive
common shares include incremental common shares issuable upon exercise of
stock options.
Three Months Six Months
Ended June 30, Ended June 30,
2007 2006 2007 2006
---- ---- ---- ----
Basic weighted average
common shares outstanding 4,931,942 4,733,424 4,870,027 4,728,002
Diluted effect of options 45,448 107,024 63,678 125,466
--------- --------- --------- ---------
Diluted weighted average
common shares outstanding 4,977,390 4,840,448 4,933,705 4,853,468
========= ========= ========= =========
-10-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Income Taxes
The Company adopted the provisions of FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," (FIN 48), on
January 1, 2007. As a result of the implementation of FIN 48, the Company made
a comprehensive review of its portfolio of uncertain tax positions in
accordance with recognition standards established by FIN 48. In this regard,
an uncertain tax position represents the Company's expected treatment of a tax
position taken in a filed tax return, or planned to be taken in a future tax
return, that has not been reflected in measuring income tax expense for
financial reporting purposes. As a result of this review, the Company
concluded that at this time there are no uncertain tax positions. As a result
of applying the provisions of FIN 48, there was no cumulative effect on
retained earnings.
The Company is subject to U.S. federal income tax as well as income tax of
multiple state jurisdictions. The Company has substantially concluded all
U.S. federal income tax matters for years through 2004. Substantially all
material state and local matters have been concluded for years through 2002.
In the Consolidated Statement of Income, the Company classifies interest
expense related to unrecognized tax benefits as "Interest income, net" and any
penalties in "Selling, general and administrative expenses." No interest or
penalty expense related to unrecognized tax benefits was recognized for the
six months ended June 30, 2007. As of June 30, 2007, no interest or penalties
related to unrecognized tax benefits were accrued.
The Company had accrued approximately $75 thousand related to expected
interest payments to the Internal Revenue Service ("IRS") for an open tax
issue. This tax issue was settled for approximately $20 thousand of interest
expense during the three months ended June 30, 2007. No penalty was assessed
on the issue resolved.
(7) Litigation
VSE and its subsidiaries have, in the normal course of business, certain
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. However, the results of
any legal proceedings cannot be predicted with certainty.
(8) Segment Information
Management of VSE's business operations is conducted under four reportable
operating segments, the Federal Group, the International Group, the Energy and
Environmental Group, and the Infrastructure and Information Technology Group.
Federal Group - VSE's Federal Group provides engineering, technical,
management, integrated logistics support, and information technology services
to all U.S. military services and other government agencies. It consists of
five divisions: CED, ELD, FSS, MSD and SED.
International Group - VSE's International Group provides engineering,
industrial, logistics, and foreign military sales services to the U.S.
military and other government agencies. It consists of three divisions: BAV,
VCG and FMD.
Energy and Environmental Group - VSE's Energy and Environmental Group provides
high-level consulting services in the field of energy and environmental
-11-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
management. The Energy and Environmental Group includes VSE's wholly owned
subsidiary, Energetics, Inc.
Infrastructure and Information Technology Group - VSE's Infrastructure and
Information Technology Group, a new segment in the quarter ended June 30,
2007, consists of its wholly owned subsidiary, ICRC. ICRC is engaged
principally in providing diversified technical and management services to the
U.S. Government, including information technology, advanced vehicle
technology, aerospace services, and engineering and transportation
infrastructure services.
These segments operate under separate management teams and discrete financial
information is produced for each segment. The Company evaluates segment
performance based on consolidated revenues and profits or losses from
operations before income taxes. The Company's segment information for the
three and six months ended June 30, 2007 and 2006 is as follows (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2007 2006 2007 2006
---- ---- ---- ----
Revenues:
Federal Group $ 83,292 $46,690 $153,795 $ 66,895
International Group 69,111 44,406 116,015 84,255
Energy and Environmental Group 3,607 3,720 6,853 6,944
Infrastructure and Information
Technology Group 3,619 - 3,619 -
Corporate 15 28 51 50
-------- ------- -------- --------
Total revenues $159,644 $94,844 $280,333 $158,144
======== ======= ======== ========
Income before income taxes:
Federal Group $ 3,038 $ 1,369 $ 5,764 $ 2,075
International Group 2,256 1,527 3,743 2,849
Energy and Environmental Group 454 460 767 836
Infrastructure and Information
Technology Group 167 - 167 -
Corporate/unallocated expenses (163) (78) (283) (80)
-------- ------- -------- --------
Income before income taxes $ 5,752 $ 3,278 $ 10,158 $ 5,680
======== ======= ======== ========
Customer Information
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. The
Company's revenue by customer is as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
Source of Revenues 2007 2006 2007 2006
------------------ ---- ---- ---- ----
Army/Army Reserve $ 78,142 $47,670 $144,026 $ 58,993
Navy 59,755 42,413 100,176 87,453
Treasury 13,450 267 22,328 506
Other 8,297 4,494 13,803 11,192
-------- ------- -------- --------
Total Revenues $159,644 $94,844 $280,333 $158,144
======== ======= ======== ========
-12-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
VSE does not measure revenue or profit by product or service lines, either for
internal management or external financial reporting purposes, because it would
be impractical to do so. Products offered and services performed are
determined by contract requirements and the types of products and services
provided for one contract bear no relation to similar products and services
provided on another contract. Products and services provided vary when new
contracts begin or current contracts expire. In many cases, more than one
product or service is provided under a contract or contract task order.
Accordingly, cost and revenue tracking is designed to best serve contract
requirements and segregating costs and revenues by product or service lines in
situations for which it is not required would be difficult and costly to both
VSE and its customers.
(9) Acquisition - Integrated Concepts and Research Corporation
On June 4, 2007, the Company acquired 100% of the voting equity of Integrated
Concepts and Research Corporation ("ICRC") of Alexandria, Virginia. ICRC's
core expertise lies in information technology, advance vehicle technology,
aerospace, engineering and transportation infrastructure.
The Company paid approximately $11.6 million in cash for the ICRC stock, with
the potential for additional payments to ICRC shareholders of up to
approximately $5.8 million if certain financial targets are met during the
next six years. Management believes that the addition of ICRC will provide
the Company with an opportunity to expand and diversify its business across a
number of project areas including smart vehicles, alternate fuels, large-scale
port engineering development and security, and information technology
services. The results of ICRC's operations are included in the accompanying
consolidated financial statements beginning as of June 4, 2007.
Of the purchase price, approximately $5.1 million was allocated to customer
related intangibles to be amortized over six to eight years. In addition,
approximately $1.4 million was allocated to ICRC's trade name, which has an
indefinite life, and approximately $4 million was allocated to goodwill.
Goodwill and intangible assets with indefinite lives are subject to review for
impairment at least annually.
The Company plans to file an election under the Internal Revenue Code Section
338(h)(10) which will treat the transaction as a sale of assets for tax
purposes.
The Company is following the guidance of SFAS No. 141 to record the purchase
of ICRC. The Company is in the process of valuing the assets and liabilities
of the acquisition. The purchase price allocation has not been finalized.
The following table summarizes the preliminary estimated fair value of assets
acquired and liabilities assumed at the date of acquisition (in thousands):
Description Fair Value
----------- ----------
Current assets $ 6,544
Property and equipment 429
Other assets 27
Intangibles - customer related 5,124
Intangibles - trade name 1,360
Goodwill 3,997
-------
Total assets acquired 17,481
Liabilities assumed (5,880)
-------
Net purchase price $11,601
=======
-13-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro Forma Information
The following unaudited condensed pro forma results of operations sets forth
the consolidated revenue, net income, and basic and diluted earnings per share
of the Company for the three and six months ended June 30, 2007. The
information has been compiled as if the ICRC acquisition had occurred at the
beginning of the period presented. The pro forma results include the
amortization of customer related intangible assets, net of tax, of
approximately $112 thousand and $225 thousand for the three and six month
periods ended June 30, 2007, respectively. These intangible assets are being
amortized over a period of six to eight years. The pro forma results also
include non-recurring acquisition costs, net of tax, of approximately $389
thousand and $449 thousand ($.08 per share basic and diluted and $.09 per
share basic and diluted) incurred by ICRC for the three and six month periods
ended June 30, 2007, respectively. This unaudited pro forma information does
not purport to be indicative of the actual results that would have occurred if
the acquisition had actually been completed on January 1, 2007 due in part to
the acquisition related expenses.
(in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
2007 2007
---- ----
Revenues $166,089 $297,666
======== ========
Net income $ 3,283 $ 5,989
======== ========
Basic earnings per share $ .67 $ 1.23
======== ========
Diluted earnings per share $ .66 $ 1.21
======== ========
(10) Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159
permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect that adoption
of this statement will have on the Company's consolidated financial position
and results of operations when it becomes effective in 2008.
-14-
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 unincorporated divisions and wholly owned subsidiaries. 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 divisions and subsidiaries
unless the context indicates operations of the parent company only.
Unincorporated divisions include BAV Division ("BAV"), Communications and
Engineering Division ("CED"), Coast Guard Division ("VCG"), Engineering and
Logistics Division ("ELD") beginning in 2006, Field Support Services Division
("FSS") beginning in June 2007, Fleet Maintenance Division ("FMD"), Management
Sciences Division ("MSD"), and Systems Engineering Division ("SED").
Energetics Incorporated ("Energetics") and Integrated Concepts and Research
Corporation ("ICRC"), acquired in June 2007, are VSE's currently active
subsidiaries.
VSE previously conducted business operations in other subsidiaries and
divisions that had no operating activity in 2006 and 2007.
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.
VSE Operating Segments
Management of VSE's business operations is conducted under four reportable
operating segments, the Federal Group, the International Group, the Energy and
Environmental Group, and the Infrastructure and Information Technology Group.
Federal Group - VSE's Federal Group provides engineering, technical,
management, integrated logistics support, and information technology services
to all U.S. military services and other government agencies. It consists of
five divisions - CED, ELD, FSS, MSD, and SED.
CED is dedicated to supporting the Army's Communications and Electronics
Command (CECOM) in the management and execution of the Rapid Response (R2)
Program, which supports clients across DoD and the Federal Government. CED
manages execution of tasks involving research and development, technology
insertion, systems integration and engineering, hardware/software fabrication
and installation, testing and evaluation, studies and analysis, technical data
management, logistics support, training, and acquisition support.
CED Army Equipment Support Program - In December 2005, VSE's CED Division was
awarded a task order on its Rapid Response support contract to provide
maintenance and logistics services in support of U.S. Army equipment in Iraq
and Afghanistan. Services provided under this program include deployed
sustainment management, deployed logistics and repairs management, unique
system training and curriculum support, resource management, and acquisition
and administrative support. Work on this program began in 2006.
A large majority of the services on this program are provided by CED's
subcontractor. CED provides certain program management services. The contract
task order has a base year valued at approximately $139 million and an
additional one-year option period valued at approximately $212 million. In
-15-
June 2007, VSE's FSS division began providing some field service support on
this program. This program contributed significantly to VSE's revenues in 2006
and the first two quarters of 2007, and based on the contract value and a
significant level of contract funding and funded backlog, is expected to
contribute significantly to VSE's revenues in the remaining two quarters of
2007; however, profit margins on subcontract work such as this are lower than
on work performed by Company personnel.
ELD provides full life cycle engineering, logistics, maintenance, and
refurbishment services to extend and enhance the life of existing equipment.
ELD principally supports the U.S. Army, Army Reserve, and Army National Guard
with core competencies in combat and combat service support system
conversions, technical research, sustainment and re-engineering, system
integration, and configuration management.
FSS was formed in June 2007 to provide worldwide field maintenance and
logistics support services for a wide variety of military vehicles and
equipment including performance of organizational, intermediate and
specialized depot-level maintenance. FSS principally supports the U.S. Army
and Marine Corps by providing specialized Field Service Representatives (FSR)
and Field Support Teams (FST) in areas of combat operations and austere
environments.
MSD provides nationally and internationally recognized experts in product and
process improvement, supporting a variety of government and commercial
clients. MSD provides training, consulting, and implementation support in the
areas of: Enterprise Excellence, Lean Six Sigma, process and product
optimization, project management, leadership quality engineering, Integrated
Product and Process Development (IPPD), and reliability engineering. MSD's
services range from individual improvement projects to global organizational
change programs.
SED provides comprehensive systems and software engineering, logistics, and
prototyping services to DoD. SED principally supports U.S. Army, Air Force,
and Marine Corps combat and combat support systems. SED's core competencies
include: systems technical support, configuration management, and life cycle
support for wheeled and tracked vehicles and ground support equipment;
obsolescence management, service life extension, and technology insertion
programs; and technical documentation and data packages.
TBPS Program - VSE's SED Division performs work on a program to provide a
protection system, the Tanker Ballistic Protection System ("TBPS"), for
vehicles deployed by the U.S. Army in Iraq. Under this program, SED applies a
polyurethane based ballistic coating system and necessary Add-on Armor Panels
for Army Fuel Dispensing Tankers as protection from hostile fire. Delivery of
completed vehicle protection systems began in January 2005.
SED has performed on the TBPS program under multiple firm fixed price per unit
contracts. Subsequent to program implementation, VSE has received
modifications to consolidate contracting activity into fewer contracts and to
adjust the number of tankers based on Army tanker availability and needs, and
the possibility remains that there may be future contract modifications as the
Army's needs change. The total contract ceiling value on the TBPS Program
contracts as of June 30, 2007 was approximately $78 million, and the remaining
available contract ceiling as of June 30, 2007 was approximately $5.2 million.
These contract ceiling amounts are fully funded. The U. S. Army recently
identified additional work to continue the TBPS program, and subsequent to
June 30, 2007, added contract value and funding of approximately $11.3 million
and extended contractual coverage on the program through July 2008.
The TBPS Program contributed to increases in VSE financial results in 2006 and
the first two quarters of 2007. The work performed on this program 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
presents VSE's business with the potential for both increased profit margins
and increased risks of incurring a loss.
-16-
International Group - VSE's International Group provides engineering,
industrial, logistics, and foreign military sales services to the U.S.
military and other government agencies. It consists of three divisions - BAV,
FMD, and VCG.
BAV provides assistance to the U.S. Navy in executing its Foreign Military
Sales (FMS) Program for surface ships sold, leased or granted to foreign
countries by providing program management, engineering, technical support, and
logistics services for ship reactivations and transfers, as well as follow-on
support. BAV's expertise includes: ship reactivation/transfer, overhaul and
maintenance, follow-on technical support, FMS integrated logistics support,
engineering and industrial services, training, and spare and repair parts
support.
BAV Ship Transfer Program - BAV provides its ship transfer services to the
Navy under large omnibus contracts. During its life, this program has been a
significant revenue producer for the Company. 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. The transfer of four U.S. Navy ships to Taiwan conducted under this
program was a major contributor to the Company's revenues in 2006.
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 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
continued work associated with the transfer of four ships to Taiwan under
delivery orders issued on the original contract until the work was
substantially completed in 2006.
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 fees are fixed and determinable, generally upon
contract notification confirming the award fee. 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
Company recognized BAV award fee income in the three-month periods ended March
31 and June 30, 2007. In 2006, the Company recognized BAV award fee income in
each of the three-month periods ended March 31, June 30, and December 31, and
did not recognize any BAV award fee income in the three-month period ended
September 30.
FMD provides global field engineering, logistics, maintenance, and information
technology services to the U.S. Navy and Air Force, including fleet-wide ship
and aircraft support programs. FMD's expertise includes ship repair and
modernization, ship systems installations, ordnance engineering and logistics,
facility operations, war reserve materials management, aircraft sustainment
and maintenance automation, and IT systems integration. FMD also provides
management, maintenance, storage, and disposal support for the U.S. Department
of Treasury's seized and forfeited general property program.
-17-
Treasury Seized Asset Program - In August 2006, VSE was awarded a contract to
support the U.S Department of the Treasury seized and forfeited general
property program. VSE assembled a team of experts to support all phases of the
contract including consolidating general personal property into Regional
Property Management Centers, optimizing vehicle sales at facilities
nationwide, providing field representatives nationwide to support local
seizures, and utilizing the services of recognized sales and marketing
organizations to increase the sales of general property and vehicles while
providing the Government with visibility, accountability, and controls. This
is a single award, cost-plus-incentive-fee contract that includes a base
period of performance, four option periods, and award term provisions. Phase
in work on the contract began in 2006 to transition the program from a
predecessor contractor. This program has the potential to be a significant
contributor to VSE's financial results in 2007 and future years. If all option
and award term periods are exercised, contract performance is expected to
continue through September 30, 2014. While the contract award specified an
amount of approximately $113 million under the base and option periods,
revenues may be more or less than this amount depending on service
requirements.
Contract terms specify base fee payments and incentive fee payments to VSE.
Base fee payments are determined by level of contract activity and base fee
income is recognized each month. Incentive fee payments are determined by
performance and level of contract activity. Incentive fees are earned once
annually and incentive fee amounts are determined based on the evaluation of
the incentive by the customer following the government's September 30 fiscal
year end. The Company does not know the amount of incentive fee income for the
year until after notification of the results of this evaluation. The Company
does not recognize incentive fee income until the fees are fixed and
determinable. Accordingly, the Company will not recognize incentive fee income
until after notification of the results of the evaluation and will recognize
the entire annual amount of incentive fee income at one time. Due to such
timing, and to fluctuations in the level of revenues, profits as a percentage
of revenues will vary from period to period. The Company recognized base fee
income on this contract for the six months ended June 30, 2007, but has not
yet recognized any incentive fee income during this period.
VCG provides the U.S. Coast Guard with FMS support and life cycle support for
vessels transferred to foreign governments. VCG's core competencies include
pre-transfer joint vessel inspections, reactivations, crew training, transit
assistance, heavy-lift contracting, logistics support, technical support, and
overseas husbandry.
Energy and Environmental Group - VSE's Energy and Environmental Group provides
high-level consulting services in the field of energy and environmental
management. The Energy and Environmental Group includes VSE's wholly owned
subsidiary, Energetics, Inc.
Energetics, Inc. is a full-service energy and environmental consulting company
providing technical and management support in all aspects of technology
research, development, and demonstration. The company's expertise lies in
state-of-the-art and advanced technology assessment, technical and economic
feasibility analysis, technology transfer, R&D program planning, engineering
studies, market assessment, strategic resource management, regulatory analysis,
environmental compliance, and risk management. Founded in 1979 and acquired by
VSE in 1995, Energetics has enjoyed steady growth as a result of its dedication
to providing superior products and services to clients in both the public and
private sectors.
Infrastructure and Information Technology Group - VSE's Infrastructure and
Information Technology Group, a new segment in the second quarter of 2007,
consists of its wholly owned subsidiary, ICRC. VSE purchased ICRC in June 2007
for approximately $11.6 million in cash, with the potential for additional
payments of up to approximately $5.8 million if certain financial targets are
met during the next six years.
-18-
ICRC is engaged principally in providing diversified technical and management
services to the U.S. Government, including information technology, advanced
vehicle technology, aerospace services, and engineering and transportation
infrastructure services. The acquisition of ICRC provides VSE with an
opportunity to expand VSE's presence in the markets it serves; opens or
expands markets in smart vehicles, alternate fuels, large-scale port
engineering development and security, and information technology services;
adds approximately 200 technical and professional employees to VSE's staff;
and adds several long-term contracts to VSE's business base. For its fiscal
year ended March 31, 2007, ICRC recorded revenues of approximately $59 million
and net income of approximately $1.5 million. VSE consolidated results of
operations for the six months ended June 30, 2007 include ICRC operations from
the June 4, 2007 date of acquisition through June 30, 2007.
Pro Forma Information
The following unaudited condensed pro forma results of operations sets forth
the consolidated revenue, net income, and basic and diluted earnings per share
of the Company for the three and six months ended June 30, 2007. The
information has been compiled as if the ICRC acquisition had occurred at the
beginning of the period presented. The pro forma results include the
amortization of customer related intangible assets, net of tax, of
approximately $112 thousand and $225 thousand for the three and six month
periods ended June 30, 2007, respectively. These intangible assets are being
amortized over a period of six to eight years. The pro forma results also
include non-recurring acquisition costs, net of tax, of approximately $389
thousand and $449 thousand ($.08 per share basic and diluted and $.09 per
share basic and diluted) incurred by ICRC for the three and six month periods
ended June 30, 2007, respectively. This unaudited pro forma information does
not purport to be indicative of the actual results that would have occurred if
the acquisition had actually been completed on January 1, 2007 due in part to
the acquisition related expenses.
(in thousands)
Three Months Six Months
Ended June 30, Ended June 30,
2007 2007
---- ----
Revenues $166,089 $297,666
======== ========
Net income $ 3,283 $ 5,989
======== ========
Basic earnings per share $ .67 $ 1.23
======== ========
Diluted earnings per share $ .66 $ 1.21
======== ========
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
-19-
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 because 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 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.
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 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.
The ongoing international situation posed by potential terrorist activity and
conflicts in the Middle East could potentially increase the political risks
for revenues from the BAV Ship Transfer, TBPS, and CED Army Equipment Support
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.
Concentration of Revenues
(in thousands)
For the six months ended June 30,
---------------------------------
2007 2006
Source of Revenue Revenues % Revenues %
----------------- -------- - -------- -
CED Army Equipment Support $ 92,701 33 $ 28,366 18
BAV India 31,489 11 - -
BAV Egypt 28,444 10 24,792 16
BAV Taiwan 3,671 1 29,969 19
BAV Other 2,011 1 4,248 2
-------- --- -------- ---
Total BAV 65,615 23 59,009 37
TBPS Program 13,366 5 14,200 9
Treasury Seized Asset Program 21,650 8 - -
VSE Other 87,301 31 56,569 36
-------- --- -------- ---
Total Revenues $280,333 100 $158,144 100
======== === ======== ===
-20-
Management Outlook
The Company's growth in revenues and profits continued in the first six months
of 2007. Subject to the risk elements discussed above, VSE believes it has the
potential to sustain these revenue and profit levels through the remainder of
2007. Discussion of some of the events and circumstances that will impact the
Company's results follows below.
CED Army Equipment Support Program. CED began work on this program in 2006 and
revenues from this program in 2006 were approximately $106 million. Work on
the program is expected to increase in 2007. Revenues for the six months ended
June 30, 2007 were approximately $93 million. The contract task orders for
this program are incrementally funded, with funded backlog of approximately
$134 million as of June 30, 2007. While profit margins on this program are
expected to be low, the Company expects to benefit from the increased revenue
base that this program provides.
ICRC Acquisition. The acquisition of ICRC will immediately contribute to VSE's
revenues and profits in 2007 and in future years, making ICRC a key
contributor to the Company's future growth. Revenues for ICRC were
approximately $59 million in its most recently completed fiscal year ended
March 31, 2007.
Treasury Seized Asset Program. Phase in work on this program began in 2006 to
transition the program from a predecessor contractor. Revenues for the six
months ended June 30, 2007 were approximately $22 million. This program has
the potential to be a significant contributor to VSE's financial results in
2007 and future years.
BAV Ship Transfer Program. Work on the transfer of four U.S. Navy ships to
Taiwan under this program was substantially completed in September 2006,
marking the end of a major contributor to the Company's revenues in recent
years. Despite the absence of this work going forward, BAV has some solid
prospects for follow on work in Taiwan and additional work in other countries,
including work currently performed to transfer a ship to India. The Company
expects the BAV Ship Transfer Program to continue to be a major provider of
revenues in 2007 and future years. Funded backlog on the BAV Ship Transfer
Program was approximately $68 million as of June 30, 2007.
TBPS Program. The U. S. Army recently identified additional work to continue
the TBPS program, added funding, and extended contractual coverage on the
program through July 2008. Revenues from this program were approximately $30
million in both 2006 and 2005. While 2007 revenues are expected to be slightly
less than this level, the TBPS program will continue to be a strong
contributor to VSE financial results in 2007. Funded backlog remaining on the
program was approximately $5.2 million as of June 30, 2007, and additional
contract value and funding of approximately $11.3 million was received in
July 2007.
ELD Equipment Refurbishment Services. VSE has provided the U. S. Army Reserve
with military vehicle and equipment refurbishment services for several years.
Beginning in 2006, VSE formed ELD to continue the performance of these
services. ELD has expanded its workforce, facilities, capacity to perform
work, contractual coverage and funding since its inception, resulting in
increases in revenues from these services in 2006 and the first six months of
2007. The Company expects further increases in the remainder of 2007 and
future years.
Other Significant Contracts. VSE has three multiyear, 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 2007. These three
contracts are described below.
-21-
VSE's CED Division has a multiyear Rapid Response support contract awarded by
the U.S. Army Communications and Electronics Command (CECOM) 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 nominal ceiling of
approximately $2.9 billion over an eight-year period. While it is unlikely
that the full ceiling amount will be realized, the Company has received over
$721 million in task order awards and over $588 million of funding since
inception of the contract. This contract generated revenues for all of VSE of
approximately $143 million during 2006, including revenues of approximately
$106 million on the CED Army Equipment Support Program. CED was awarded a new
task order under this contract in December 2006 for work to support U.S. Army
PM Assured Mobility Systems and TACOM, most of which will be subcontracted,
that represents potential revenues to the Company of about $164.8 million over
a 16-month period if all options are exercised. 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. As of June 30, 2007, FMD has been awarded approximately $20.8
million in contract task orders under this contract.
ELD has a contract, the Field and Installation Readiness Support Team
("FIRST") Contract, awarded in November 2006, with the U.S. Army to provide a
broad range of logistics and engineering and technical services to Army
activities in the continental United States and overseas locations. The
contract has a five-year base period and three five-year option periods. VSE
is one of several awardees eligible to share in the potential total contract
ceiling amount, which is expected to be several billion dollars. The award of
this contract provides VSE with the opportunity to compete for work which may
contribute to future revenue growth.
Funded Backlog
Revenues in government contracting businesses are dependent upon contract
funding ("Bookings") and funded contract backlog is an indicator of potential
future revenues. A summary of VSE's bookings, funded contract backlog, and
revenues for the six months ending June 30, 2007, including ICRC from the
acquisition in June, is as follows:
(in millions)
-------------
Bookings for the six months ended June 30, 2007 $321
Funded backlog as of June 30, 2007 $372
Revenues for the six months ended June 30, 2007 $280
Funded backlog includes approximately $43 million from the acquisition of ICRC
in June 2007.
Longer Term
The growth in VSE revenue and profits during 2006 and the first two quarters
of 2007, and the expected continuation of this growth in the remainder of 2007
will present the Company with both challenges and opportunities for future
years. Certain work efforts that have supported VSE's growth in recent years
have expired or are due to expire. VSE has received significant contributions
to its revenue growth 1) from the Taiwan Ship Transfer work, which was
substantially completed in September 2006; 2) from the TBPS Program work, for
which a large majority of the originally proposed work has been delivered and
current contractual coverage is scheduled to expire in July 2008; and, 3) from
the CED Army Equipment Support Program, which is scheduled to expire in
-22-
December 2007. The expiration of these programs may reduce VSE annual revenues
if the expiring work is not replaced by new or follow-on work.
The Company believes it is well prepared to meet the challenge of replacing
the expiring work. Progress has already been made toward this end with the
start up of the Treasury Seized Property Management program awarded in August
2006, the FIRST contract awarded in November 2006, the new task order awarded
under the Rapid Response support contract in December 2006, continued
increases in ELD's equipment refurbishment services, and the acquisition of
ICRC.
Opportunities associated with VSE's recent growth include a more competitive
price structure with which to bid on future work, a wider range of employee
skill sets, and a broader name recognition and past performance record for use
in expanding the Company's customer base. The larger revenue level and capital
base built up in recent years improves the Company's ability to pursue larger
programs and potential acquisition opportunities.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159
permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect that adoption
of this statement will have on the Company's consolidated financial position
and results of operations when it becomes effective in 2008.
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 recognize award fee income until the fees are fixed and
determinable, generally upon contract notification confirming the award fee.
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.
Revenue recognition methods on fixed-price contracts will vary depending on
the nature of the work and the contract terms. On certain fixed-price
-23-
contracts revenues are recorded as costs are incurred, using the percentage-
of-completion method of accounting, since these contracts require design,
engineering, and manufacturing performed to the customer's specifications.
Revenues on fixed-price service contracts are recorded as work is performed.
Revenues on fixed-price contracts that require delivery of specific items may
be 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 six months ended June 30, 2007 and 2006 were
as follows (in thousands):
2007 2006
Contract Type Revenues % Revenues %
------------- -------- - -------- -
Cost-type . . . . . $ 97,431 35 $ 81,058 51
Time and materials. 160,684 57 57,182 36
Fixed-price . . . . 22,218 8 19,904 13
-------- --- -------- ---
$280,333 100 $158,144 100
======== === ======== ===
A large amount of the time and materials revenues shown in the table above is
attributable to revenues from the CED Army Equipment Support contract that
started in 2006. Substantially all of the revenues on this contract have
resulted from the pass through of subcontractor support services that have a
very low profit margin for VSE.
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.
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. As of June 30, 2007, VSE has recognized
approximately $539 thousand in risk funding. The Company received funding
modifications for approximately $143 thousand of this amount as of July 2007,
leaving approximately $396 thousand of revenues classified as risk funding.
VSE believes that it will receive funding for this remaining risk funding
revenue.
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 and Intangible Assets
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 June 30, 2007, the Company had approximately $1.1
million of goodwill associated with its acquisition of Energetics in 1995 and
approximately $5.4 million of goodwill and intangible assets with indefinite
lives associated with its acquisition of ICRC in 2007. The Company has not
recognized any reduction to the goodwill or intangibles due to the impairment
rules. 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.
Employee Stock Options
In accordance with SFAS 123(R), VSE recognizes expense associated with
employee stock options in the income statement based on their fair values. The
amount of this expense for 2006 was approximately $252 thousand and for the
-24-
six months ended June 30, 2007 was approximately $91 thousand. VSE
discontinued awarding employee stock options as of December 30, 2005. Options
outstanding as of that date are not affected by this action.
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.
Results of Operations
The following table sets forth certain items for VSE, including consolidated
revenues, pre-tax income and net income, and the changes in these items for
the three and six month periods ended June 30, 2007 and 2006 (in thousands):
2007
Increase Compared
Three Months Six Months to 2006
Ended June 30, Ended June 30, Three Six
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $159,644 $94,844 $280,333 $158,144 $64,800 $122,189
======== ======= ======== ======== ======= ========
Income before income
taxes $ 5,752 $ 3,278 $ 10,158 $ 5,680 $ 2,474 $ 4,478
Provision for income
taxes 2,205 1,251 3,882 2,168 954 1,714
-------- ------- -------- -------- ------- --------
Net Income $ 3,547 $ 2,027 $ 6,276 $ 3,512 $ 1,520 $ 2,764
======== ======= ======== ======== ======= ========
Revenues increased by approximately 68% and 77% for the three and six month
periods ended June 30, 2007, as compared to the same periods of 2006.The
primary reasons for the increases in revenues were 1) revenues associated with
the CED Army Equipment Support program and CED's U.S. Army PM Assured Mobility
Systems and TACOM support; 2) revenues from the start of FMD's Treasury Seized
Property Management Program and increases in other FMD services; 3)revenues
associated with BAV's ship transfer to India; 4) an increase in the level of
ELD equipment refurbishment services; and 5) revenues from newly acquired
ICRC.
Income before income taxes increased by approximately 76% and 79% for the
three month and six month periods ended June 30, 2007, as compared to the same
periods of 2006. The increases were primarily due to the increase in revenues
on the CED Army Equipment Support program, increased profitability of SED
services performed, revenue and margin increases on ELD's equipment
refurbishment services, increased BAV award fee income, the Treasury Seized
Property Management program, and revenues from newly acquired ICRC.
-25-
Federal Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the Federal Group for the three and six
month periods ended June 30, 2007 and 2006 (in thousands).
2007
Increase Compared
Three Months Six Months to 2006
Ended June 30, Ended June 30, Three Six
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $83,292 $46,690 $153,795 $66,895 $36,602 $86,900
======= ======= ======== ======= ======= =======
Income before income
taxes $ 3,038 $ 1,369 $ 5,764 $ 2,075 $ 1,669 $ 3,689
======= ======= ======== ======= ======= =======
Profit percent 3.6% 2.9% 3.7% 3.1%
Revenues for the Federal Group increased by approximately 78% and 130% for the
three and six month periods ended June 30, 2007, as compared to the same
periods for the prior year. A substantial portion of the increases in revenues
for 2007 was attributable to revenues associated with the CED Army Equipment
Support Program work. Other reasons for the increases in 2007 revenues
included: 1) work on additional CED task orders, including CED's U.S. Army PM
Assured Mobility Systems and TACOM support; 2) increases in SED contract
services performed other than the TBPS Program; and 3) increased revenues from
ELD's equipment refurbishment services for the U. S. Army Reserve. The
increases in revenues of this segment were offset slightly by a decline in MSD
revenues for both the three and six month period.
Income before income taxes for the Federal Group increased by approximately
122% and 178% for the three and six month periods ended June 30, 2007, as
compared to the same periods for the prior year. The increases in income
before income taxes were primarily due to increased revenue levels and
profitability of SED services performed on the TBPS Program and other SED
services; profits associated with the increased military equipment
refurbishment services performed by ELD for the U. S. Army Reserve; and the
increase in revenues on the CED Army Equipment Support Program work and other
CED task orders. The increases in income before income taxes of this segment
were offset slightly by a decline in MSD profits for both the three and six
month period.
Most of the work on The CED Army Equipment Support Program work is performed
by a subcontractor and these costs are passed on to the government essentially
at cost. Accordingly, the Federal Group profit percent can vary from year to
year depending on the level of subcontractor activity.
International Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the International Group for the three and
six month periods ended June 30, 2007 and 2006 (in thousands).
2007
Increase Compared
Three Months Six Months to 2006
Ended June 30, Ended June 30, Three Six
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $69,111 $44,406 $116,015 $84,255 $24,705 $31,760
======= ======= ======== ======= ======= =======
Income before income
taxes $ 2,256 $ 1,527 $ 3,743 $ 2,849 $ 729 $ 894
======= ======= ======== ======= ======= =======
Profit percent 3.3% 3.4% 3.2% 3.4%
Revenues for the International Group increased by approximately 56% and 38%
for the three and six month periods ended June 30, 2007, as compared to the
-26-
same periods for the prior year. The increases in revenues were primarily due
to revenues provided by the start of FMD's Treasury Seized Property Management
Program and to revenues associated with BAV's ship transfer to India. These
additional revenues were offset somewhat by the decrease in revenues of BAV in
2007 due to the substantial completion of work associated with the transfer of
U.S. Navy ships to Taiwan. The increases in revenues of this segment were
offset slightly by a decline in VCG revenues for the three month period and
helped slightly by an increase in VCG revenues for the six month period.
Income before income taxes for the International Group increased by
approximately 48% and 31% for the three and six month periods ended June 30,
2007, as compared to the same periods for the prior year. The increase was
primarily due to profits from FMD's Treasury Seized Property Management
Program and to increased BAV award fee income. The increases in income before
income taxes of this segment were helped slightly by an increase in profits
for VCG for the three and six month periods.
Energy and Environmental Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the Energy and Environmental Group for the
three and six month periods ended June 30, 2007 and 2006 (in thousands).
2007
Increase Compared
Three Months Six Months to 2006
Ended June 30, Ended June 30, Three Six
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $3,607 $3,720 $6,853 $6,944 $(113) $(91)
====== ====== ====== ====== ===== ====
Income before income
taxes $ 454 $ 460 $ 767 $ 836 $ (6) $(69)
====== ====== ====== ====== ===== ====
Profit percent 12.6% 12.4% 11.2% 12.0%
Revenues in the Energy and Environmental Group declined by approximately 3%
and 1% for the three and six month periods ended June 30, 2007, as compared to
the same periods for the prior year.
Income before income taxes in the Energy and Environmental Group declined by
approximately 1% and 8% for the three and six month periods ended June 30,
2007, as compared to the same periods for the prior year. The decrease in
income before income taxes in 2007 was primarily due to performance related
issues that reduced profit on certain task orders and to the timing of award
fees received in 2006 as compared to the same period of 2007.
Infrastructure and Information Technology Group
The following table shows consolidated revenues and income before income taxes
for the Infrastructure and Information Technology Group for the three and six
month periods ended June 30, 2007 (in thousands).
Three Months Six Months
Ended June 30, Ended June 30,
2007 2007
---- ----
Revenues $3,619 $3,619
====== ======
Income before income
taxes $ 167 $ 167
====== ======
Profit percent 4.6% 4.6%
This segment was formed as a result of the acquisition of ICRC on June 4,
2007.
-27-
Financial Condition
VSE's financial condition did not change materially during the six months
ended June 30, 2007. The Company's largest assets are its accounts receivable.
The largest liabilities are its accounts payable and accrued expenses.
Accounts receivable increased by approximately $41 million and accounts
payable and accrued expenses increased by approximately $34 million during the
six months ended June 30, 2007, primarily as a result of the Company's
increased revenues during this period. The acquisition of ICRC also caused
increases in accounts receivable, accounts payable, and accrued expenses; and
additionally resulted in a decrease in cash and cash equivalents and increases
in intangible assets. The change in total stockholders' investment in this
period was also impacted by earnings and dividend activity and the exercise of
stock options.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $7.5 million during the
six months ended June 30, 2007. The decrease in cash and cash equivalents
during this period resulted from cash used in investing activities of
approximately $13.9 million, cash provided by operating activities of
approximately $3.7 million, and cash provided by financing activities of
approximately $2.7 thousand. Investing activities included the acquisition of
ICRC for approximately $11.6 million, the expansion and improvement of
facilities of approximately $1.1 million and purchases of property and
equipment, net of dispositions, of approximately $1.2 million. Financing
activities consisted of dividend payments and proceeds from the exercise of
VSE stock options and associated excess tax benefits.
Cash and cash equivalents decreased by approximately $7.6 million during the
six months ended June 30, 2006. The decrease in cash and cash equivalents
during this period resulted from cash used in operating activities of
approximately $5.9 million, cash used in investing activities of approximately
$1.7 million, and cash used in financing activities of approximately $73
thousand. Investing activities consisted of expansion and improvement of
facilities of approximately $191 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 VSE stock under stock incentive plans.
The difference between cash provided by operating activities of approximately
$3.7 million in 2007 as compared to cash used in operating activities of
approximately $5.9 million in 2006 is primarily due to the increase in net
income and to fluctuations in operating assets and liabilities associated with
increased revenues and the timing of accounts receivable collections and
subcontractor and vendor payments.
Quarterly cash dividends were paid at the rate of $.07 per share during the
six months ended June 30, 2007, stated on a post-split basis to reflect the
2-for-1 stock split paid on June 28, 2007. Pursuant to its bank loan
agreement, the payment of cash dividends by VSE is subject to annual rate
restrictions. 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
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
-28-
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, differences between billable amounts authorized by contract terms
compared to costs actually incurred by the Company, contract funding delays
arising from job performance issues, 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 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.
From time to time, the Company may also invest in the acquisition of another
company. The acquisition of ICRC in 2007 represented a substantial use of
cash. While there are no firm plans for additional acquisitions of this nature
at this time, the possibility exists that future acquisitions could be made.
Other cash requirements include income tax payments, the acquisition of
capital assets for shop, office and computer support, and the payment of cash
dividends. The Company also invests in expansion, improvement, and maintenance
of its operational and administrative facilities. The growth in the level of
equipment refurbishment services provided by ELD required an increased level
of investment in operational facilities in 2006 and the Company anticipates
making additional investments in such facilities 2007 and future years.
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 Company's 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 June 30, 2007. The amount of this commitment is negotiable between the
Company and the bank. The Company and its bank are currently in negotiation,
and the Company has received a commitment letter from the bank, to increase
the maximum commitment amount to $25 million. The Company has determined that
this new amount is adequate to cover known current and future liquidity
requirements.
Performance of work under the Company's larger contracts that require
significant amounts of subcontractor or material purchases have the potential
to cause substantial requirements for working capital; however, management
believes that cash flows from operations and the bank loan commitment are
adequate to meet current operating cash requirements.
-29-
Contractual Obligations
In March 2007, the Company signed two five-year facility leases for warehouse
space to begin in March 2007 for an aggregate amount of approximately $8.4
million.
Upon the acquisition of ICRC in June 2007, the Company assumed liability for
certain additional operating lease commitments. This includes five leases for
office space and approximately ten equipment leases for an aggregate amount of
approximately $2.3 million.
[See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in VSE's Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 for a summary of the Company's other contractual
obligations.]
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
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 used a significant amount of its cash
reserves to pay for the ICRC acquisition in June 2007, giving rise to a
situation where the Company may borrow on its bank loan from time to time in
the short term future. VSE does not anticipate that such amounts borrowed will
be significant, and 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, 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 minimal. Accordingly, the Company does not believe that it
is exposed to any material foreign currency risk.
-30-
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'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, and that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There was no change in our internal control over financial reporting during
our second quarter of fiscal 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 4. Submission of Matters to a Vote of Security Holders
The 2007 annual meeting of the Company's stockholders was held on May 1, 2007,
for the following purposes:
1. To elect seven directors to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified;
2. To ratify the appointment of Ernst & Young LLP as VSE's independent
certified public accountants for the fiscal year ending December 31, 2007.
-31-
All of the Company's seven nominees were elected as directors, and the
appointment of Ernst & Young LLP as VSE's independent certified public
accountants for the year ending December 31, 2007, was ratified. Voting
results were as follows:
Shares Voted
--------------------------------------------
Withhold/ Broker
For Against Abstain Non-Votes
-------------------------------------------
1. Nominee
Donald M. Ervine 4,179,454 -- 89,348 186,986
Clifford M. Kendall 4,144,640 -- 123,582 186,986
Calvin S. Koonce 4,140,624 -- 128,198 186,986
James F. Lafond 4,177,974 -- 90,848 186,986
David M. Osnos 3,916,740 -- 352,082 186,986
Jimmy D. Ross 4,179,474 -- 89,348 186,986
Bonnie K. Wachtel 4,141,324 -- 127,498 186,986
4. Ernst & Young LLP
appointment 4,216,250 2,946 1,206 186,986
Item 6. Exhibits
(a) Exhibits.
Exhibit No.
-----------
10.1 Employment Agreement dated as of May 31, 2007, by and between VSE
Corporation and James W. Lexo, Jr.
31.1 Section 302 CEO Certification
31.2 Section 302 CFO and PAO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO and PAO Certification
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other
Information" because such other items are not applicable or are not required
if the answer is negative or because the information required to be reported
therein has been previously reported.
-32-
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: August 1, 2007 /s/ D. M. Ervine
__________________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Date: August 1, 2007 /s/ T. R. Loftus
__________________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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