UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2009 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 The NASDAQ Global Select 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 [x]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock outstanding as of April 30, 2009: 5,129,369.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Financial Statements(unaudited)
Consolidated Balance Sheets as of March 31, 2009 and
December 31, 2008 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Income for the three months
ended March 31, 2009 and 2008 . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2009 and 2008 . . . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 12
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 23
PART II
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds . . 23
ITEM 6. Exhibits, Financial Statements and Schedules . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-28
2
VSE Corporation and Subsidiaries
________________________________________________________________________________
Forward Looking Statements
This report 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," the "Company," "us," "our," or "we") results to differ materially from
those anticipated in the forward looking statements contained in this report,
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, 2008 filed with the
Securities and Exchange Commission (the "SEC") on March 3, 2009.
Readers are cautioned not to place undue reliance on these statements, which
reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to revise publicly these forward looking statements to
reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in the reports and 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.
3
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)
(Unaudited)
March 31, December 31,
2009 2008
---- ----
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 158 $ 638
Receivables, principally
U.S. Government, net . . . . . . . . . . . . . 222,016 206,717
Deferred tax assets . . . . . . . . . . . . . . 2,545 2,297
Other current assets . . . . . . . . . . . . . . 10,130 10,945
-------- --------
Total current assets . . . . . . . . . . . . . 234,849 220,597
Property and equipment, net . . . . . . . . . . . 22,996 21,484
Intangibles, net . . . . . . . . . . . . . . . . . 10,716 11,176
Goodwill . . . . . . . . . . . . . . . . . . . . . 19,051 17,439
Other assets . . . . . . . . . . . . . . . . . . . 5,003 5,270
-------- --------
Total assets . . . . . . . . . . . . . . . . . $292,615 $275,966
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Bank notes payable . . . . . . . . . . . . . . . $ 21,824 $ 6,676
Accounts payable . . . . . . . . . . . . . . . . 157,343 158,015
Accrued expenses . . . . . . . . . . . . . . . 27,668 31,498
Dividends payable . . . . . . . . . . . . . . . 231 229
-------- --------
Total current liabilities . . . . . . . . . . 207,066 196,418
Deferred compensation . . . . . . . . . . . . . . 3,133 2,059
Deferred income taxes . . . . . . . . . . . . . . 496 404
Other liabilities . . . . . . . . . . . . . . . . 1,094 962
-------- --------
Total liabilities . . . . . . . . . . . . . . 211,789 199,843
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.05 per share,
authorized 15,000,000 shares; issued and
outstanding 5,128,380 and 5,098,542,
respectively . . . . . . . . . . . . . . . . . 256 255
Additional paid-in capital . . . . . . . . . . . 13,850 13,557
Retained earnings . . . . . . . . . . . . . . . 66,720 62,311
-------- --------
Total stockholders' equity . . . . . . . . . . 80,826 76,123
-------- --------
Total liabilities and stockholders' equity . . $292,615 $275,966
======== ========
The accompanying notes are an integral part of these financial statements.
4
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
--------------------------------------------------------------------------------
(in thousands except share and per share amounts)
For the three months
ended March 31,
2009 2008
---- ----
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 240,455 $ 188,723
Contract costs . . . . . . . . . . . . . . . . . . . 232,809 182,816
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . 7,646 5,907
Selling, general and administrative expenses . . . . 202 163
Interest income, net . . . . . . . . . . . . . . . . (59) (147)
--------- ---------
Income before income taxes . . . . . . . . . . . . . 7,503 5,891
Provision for income taxes . . . . . . . . . . . . . 2,863 2,293
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . $ 4,640 $ 3,598
========= =========
Basic earnings per share . . . . . . . . . . . . . . $ 0.91 $ 0.71
========= =========
Basic weighted average shares outstanding 5,112,356 5,058,784
========= =========
Diluted earnings per share . . . . . . . . . . . . . $ 0.91 $ 0.71
========= =========
Diluted weighted average shares outstanding 5,126,629 5,086,670
========= =========
Dividends declared per share $ 0.045 $ 0.040
========= =========
The accompanying notes are an integral part of these financial statements.
-5-
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------
(in thousands)
For the three months
ended March 31,
2009 2008
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 4,640 $ 3,598
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 1,633 1,053
(Gain) loss on sale of property and equipment . . . . (147) 1
Deferred taxes . . . . . . . . . . . . . . . . . . . (156) 1,313
Stock-based compensation . . . . . . . . . . . . . . 294 225
Change in operating assets and liabilities:
Receivables, net . . . . . . . . . . . . . . . . . . (15,299) 4,684
Other current assets and noncurrent assets . . . . . 1,028 (3,381)
Accounts payable and deferred compensation . . . . . 402 5,670
Accrued expenses . . . . . . . . . . . . . . . . . . (5,442) (4,569)
Other liabilities . . . . . . . . . . . . . . . . . . 132 36
------- -------
Net cash (used in) provided by operating activities (12,915) 8,630
------- -------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (2,634) (1,980)
Proceeds on the sale of property and equipment . . . . 150 -
Acquisition costs . . . . . . . . . . . . . . . . . . . - (137)
------- -------
Net cash used in investing activities (2,484) (2,117)
------- -------
Cash flows from financing activities:
Borrowings on loan arrangement . . . . . . . . . . . . 75,490 1,140
Repayments on loan arrangement . . . . . . . . . . . . (60,342) (1,221)
Dividends paid . . . . . . . . . . . . . . . . . . . . (229) (202)
Excess tax benefits from share-based
payment arrangements . . . . . . . . . . . . . . . . - 7
Proceeds from the exercise of options of common stock . - 13
------- -------
Net cash provided by (used in) financing activities 14,919 (263)
------- -------
Net (decrease) increase in cash and cash equivalents . . (480) 6,250
Cash and cash equivalents at beginning of period . . . . 638 109
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 158 $ 6,359
======= =======
The accompanying notes are an integral part of these financial statements.
-6-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(1) Nature of Business and Basis of Presentation
Our business operations consist primarily of diversified engineering,
logistics, management, and technical services performed on a contract basis.
Substantially all of our contracts are with agencies of the United States
Government (the "Government") and other Government prime contractors. Our
customers also include non-government organizations and commercial entities.
Our unincorporated divisions include BAV Division ("BAV"), Communications and
Engineering Division ("CED"), Coast Guard Division ("VCG"), Engineering and
Logistics Division ("ELD"), Field Support Services Division ("FSS"), Fleet
Maintenance Division ("FMD"), Management Sciences Division ("MSD"), and
Systems Engineering Division ("SED"). Energetics Incorporated ("Energetics"),
Integrated Concepts and Research Corporation ("ICRC"), and G&B Solutions, Inc.
("G&B"), acquired in April 2008, are our currently active subsidiaries.
Our 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 months ended March 31, 2009 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2009. For further information refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
Reclassifications
Certain amounts from the prior year were reclassified to conform to the
current year presentation. We reclassified the 2008 amortization expense of
contract-related intangible assets from "Selling, general and administrative
expenses" to "Contract costs" in the "Consolidated Statements of Income."
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.
Estimates affecting the financial statements include accruals for contract
disallowance reserves, self insured health claims and estimated cost to
complete on firm fixed-price contracts.
(2) Bank Notes Payable
We have a loan agreement with a bank under which credit is made available to
us in the form of revolving loans or letters of credit. The amount of credit
available to us under the loan is subject to certain conditions, including a
borrowing formula based on our billed receivables. From time to time we may
request changes in the amount, maturity date, or other terms and the bank may
amend the loan to accommodate our request. The amount of credit available to
us as of March 31, 2009 was $35 million and the maturity date of the loan
agreement is May 10, 2010. The loan agreement has collateral requirements that
secure our assets, restrictive covenants, a limit on annual dividends, and
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
other affirmative and negative covenants. As of March 31, 2009 we have not
been notified by the bank, nor are we aware, of any defaults under the loan
agreement.
Under the terms of the loan agreement, we may borrow against the revolving
loan at any time and can repay the borrowings at any time without premium or
penalty. We pay 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 March 31, 2009 and December 31, 2008, revolving
loan amounts outstanding were approximately $22 million and approximately $7
million, respectively. Interest expense incurred on the loan was approximately
$54 thousand and less than one thousand dollars for the three months ended
March 31, 2009 and 2008, respectively. There was one letter of credit for
approximately $1.35 million as of March 31, 2009 and December 31, 2008.
(3) Stock-based Compensation
Restricted Stock
On January 2, 2009, we awarded 6,300 shares of restricted stock to our non-
employee Directors under the 2006 Restricted Stock Plan. The grant-date fair
value of these restricted stock grants was $39.81 per share. The shares issued
vested immediately and cannot be sold, transferred, pledged or assigned before
the second anniversary of the grant date. Compensation expense related to
these grants was approximately $250 thousand during the first quarter of 2009.
On January 2, 2008, we awarded 3,500 shares of restricted stock to our non-
employee Directors under the 2006 Restricted Stock Plan. The grant-date fair
value of these restricted stock grants was $47.92 per share. The shares issued
vested immediately and cannot be sold, transferred, pledged or assigned before
the second anniversary of the grant date. Compensation expense related to
these grants was approximately $168 thousand during the first quarter of 2008.
On January 2, 2009 (the "2009 Awards"), January 3, 2008 (the "2008 Awards")
and January 2, 2007 (the "2007 Awards"), we notified certain employees that
they are eligible to receive awards under the 2006 Restricted Stock Plan based
on financial performance for the fiscal years 2009, 2008, and 2007,
respectively. Vesting of each award occurs one-third on the date of award and
one-third on each of the next two anniversaries of such date of award. The
date of award determination is expected to be in March 2010 for the 2009
Awards. The date of award determination for the 2008 Awards and 2007 Awards
was March 3, 2009 and March 3, 2008, respectively. On each vesting date,
100% of the vested award is paid in our shares. The number of shares issued
is based on the fair market value of our common stock on the vesting date.
The earned amount is expensed ratably over the vesting period of approximately
three years.
The compensation expense related to these restricted stock awards for the
three-month periods ended March 31, 2009 and 2008 was approximately $535
thousand and $154 thousand, respectively.
The stock-based compensation amount of approximately $294 thousand and
approximately $225 thousand shown on the statements of cash flows for the
three-month periods ending March 31, 2009 and 2008 is based on the
compensation expense included in contract costs of approximately $535 and $154
thousand, respectively, reduced by the tax withholding associated with the
2008 and 2007 awards issued in March, 2009.
-8-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
On March 2, 2009, the employees eligible for the 2008 Awards and 2007 Awards
received 23,538 shares of common stock. The grant-date fair value of these
awards was $21.17 per share.
(4) Earnings Per Share
Basic earnings per share ("EPS") 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 EPS has 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 represent incremental common shares issuable upon exercise of stock
options. There were no common shares issuable upon the exercise of stock
options that could potentially dilute EPS in the future that were not included
in the computation of diluted EPS because to do so would have been anti-
dilutive for the three-month periods ended March 31, 2009 and 2008.
Three Months
Ended March 31,
2009 2008
---- ----
Basic weighted average
shares outstanding 5,112,356 5,058,784
Dilutive effect of options 14,273 27,886
--------- ---------
Diluted weighted average
shares outstanding 5,126,629 5,086,670
========= =========
There were 0 and 1,000 stock options exercised during the three-month period
ended March 31, 2009 and 2008, respectively.
(5) Commitments and Contingencies
We have, in the normal course of business, certain claims against us and
against other parties. In our opinion, the resolution of these claims will
not have a material adverse effect on our results of operations or financial
position. However, the results of any legal proceedings cannot be predicted
with certainty.
(6) Segment Information
Management of our business operations is conducted under four reportable
operating segments: the Federal Group, the International Group, the IT, Energy
and Management Consulting Group, and the Infrastructure Group. These segments
operate under separate management teams and discrete financial information is
produced for each segment. The various divisions within the Federal Group and
the International Group and the two subsidiaries within the IT, Energy and
Management Consulting Group are operating segments as defined by SFAS No.
131"Disclosures about Segments of an Enterprise and Related Information,"
("SFAS No. 131"), and meet the aggregation of operating segments criteria of
SFAS No. 131. We evaluate segment performance based on consolidated revenues
and profits or losses from operations before income taxes.
-9-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
Federal Group - The Federal Group provides engineering, technical,
management, integrated logistics support and information technology services to
all U.S. military branches and other Government agencies. The Federal Group
includes five divisions: CED, ELD, FSS, MSD and SED.
International Group - Our 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.
IT, Energy and Management Consulting Group - The IT, Energy and
Management Consulting Group provides technical and consulting services primarily
to various civilian Government agencies. This group includes Energetics and,
upon acquisition in April 2008, also includes G&B.
Infrastructure Group - Our Infrastructure Group was created in
connection with the June 4, 2007 acquisition of our wholly owned subsidiary,
ICRC. ICRC is engaged principally in providing diversified technical and
management services to the Government, including transportation infrastructure
services, advanced vehicle technology, aerospace services and engineering and
information technology.
Our segment information for the three-month periods ended March 31, 2009 and
2008 is as follows (in thousands):
Three Months
Ended March 31,
2009 2008
---- ----
Revenues:
Federal Group $152,957 $122,321
International Group 64,156 48,806
IT, Energy and Management
Consulting Group 16,705 4,079
Infrastructure Group 6,637 13,520
Corporate - (3)
-------- --------
Total revenues $240,455 $188,723
======== ========
Income before income taxes:
Federal Group $ 4,558 $ 3,472
International Group 1,735 1,632
IT, Energy and Management
Consulting Group 1,181 445
Infrastructure Group 42 600
Corporate/unallocated expenses (13) (258)
-------- --------
Income before income taxes $ 7,503 $ 5,891
======== ========
Our revenue by customer is as follows (in thousands):
Three Months
ended March 31,
Source of Revenues 2009 2008
------------------ ---- ----
Army/Army Reserve $144,484 $116,391
Navy 59,224 38,887
Department of Treasury 9,540 15,564
Department of Transportation 4,953 7,491
Other 22,254 10,390
-------- --------
Total Revenues $240,455 $188,723
======== ========
-10-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(7) Acquisitions
G&B Solutions, Inc.
On April 14, 2008, we acquired all of the capital stock of G&B. Under the
terms of the acquisition, we will be required to make additional payments of
up to $4.2 million over a three-year post closing period if G&B achieves
certain financial performance targets. The first earn-out payment period was
from April 14, 2008 to March 31, 2009. Based on G&B's performance from April
14, 2008 to March 31, 2009, $1.4 million was earned by the seller and will be
paid in the second quarter. This amount is reflected in goodwill and accrued
expenses on the March 31, 2009 balance sheet. The subsequent earn-out payment
periods are: April 1, 2009 to March 31, 2010 and April 1, 2010 to March 31,
2011. If earned and paid, such additional purchase price consideration will
be recorded as goodwill on the consolidated balance sheet. The results of
G&B's operations are included in the accompanying unaudited consolidated
financial statements beginning as of April 14, 2008.
Additional goodwill and accrued expenses of $212 thousand were recorded as of
March 31, 2009 for the amount due to the seller for additional taxes related
to the Section 338(h)(10) election.
(8) Fair Value Measurements
On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements," which
defines fair value, establishes a market-based hierarchy for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 is
applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value, but does not require any
new fair value measurements.
The fair-value hierarchy established in SFAS 157 prioritizes the inputs used
in valuation techniques into three levels as follows:
Level 1 - Observable inputs - quoted prices in active markets for identical
assets and liabilities;
Level 2 - Observable inputs other than the quoted prices in active markets for
identical assets and liabilities - includes quoted prices for similar
instruments, quoted prices for identical or similar instruments in inactive
markets, and amounts derived from valuation models where all significant
inputs are observable in active markets; and
Level 3 - Unobservable inputs - includes amounts derived from valuation models
where one or more significant inputs are unobservable and require us to
develop relevant assumptions.
Included in other current assets and other assets as of March 31, 2009 is
approximately $4.6 million of investments we hold in a trust related to a non-
qualified benefit plan. We determined the fair value of these assets and
corresponding liability using the Level 1 methodology. We have an offsetting
deferred compensation liability for this plan. As such, we do not have income
statement volatility as a result of fluctuations in the value of the plan's
investments.
In the first quarter of 2009, we adopted SFAS No. 157 as it relates to non-
financial assets and liabilities that are recorded at fair value on a non-
recurring basis. The impact of its adoption was not material.
-11-
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
Organization
Our business operations consist primarily of diversified program management,
logistics, engineering, IT, construction program and consulting services
performed on a contract basis. Substantially all of our contracts are with
Government agencies and other Government prime contractors.
Our business operations are managed under groups that consist of one or more
divisions or wholly owned VSE subsidiaries that perform our work. Our Federal
Group consists of our Communications and Engineering Division ("CED"),
Engineering and Logistics Division ("ELD"), Field Support Services Division
("FSS"), Management Sciences Division ("MSD"), and Systems Engineering
Division ("SED"). Our International Group consists of our BAV Division
("BAV"), Coast Guard Division ("VCG"), and Fleet Maintenance Division ("FMD").
Our IT, Energy and Management Consulting Group consists of our wholly owned
subsidiaries Energetics Incorporated ("Energetics") and G&B Solutions, Inc.
("G&B"). Our Infrastructure Group consists of our wholly owned subsidiary
Integrated Concepts and Research Corporation ("ICRC").
Customers and Services
We provide program management, logistics, engineering, IT, construction
program, and consulting services to the government, other Government prime
contractors, and commercial entities. Our largest customer is the U.S.
Department of Defense ("DoD"), including agencies of the U.S. Navy, Army and
Air Force. We also provide services to various Federal Civil customers.
Segments
Our operations are conducted within four reportable segments aligned with our
management groups: 1) Federal; 2) International; 3) IT, Energy and Management
Consulting; and 4) Infrastructure.
Federal Group - Our Federal Group provides engineering, technical, management
and integrated logistics support services to U.S. military branches and other
government agencies. The divisions in this group include CED, ELD, FSS, MSD
and SED.
CED - 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 United States Government
("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. A large portion of our current work on this program
is related to the U.S. military involvement in Iraq and Afghanistan. The
contract supporting the R2 Program is scheduled to expire in January 2011.
CED Army Equipment Support Program - Our CED division had a program on
its R2 support contract to provide maintenance and logistics services in
support of U.S. Army equipment in Iraq and Afghanistan. Our revenues on this
program were approximately $34 million and approximately $66 million for the
first quarter of 2009 and 2008, respectively. Work on this program expired in
February 2009.
CED Assured Mobility Systems Program - Our CED division has a program on
its R2 support contract to provide technical support services in support of
U.S. Army PM Assured Mobility Systems and U.S. Army Tank-automotive and
Armaments Command ("TACOM"). Our revenues on this program were approximately
$28 million and approximately $15 million for the first quarter of 2009 and
-12-
2008, respectively. In January 2009, we were awarded a $389 million follow-on
task order on this program for work that will run through January 2011.
RCV Modernization Program - We were awarded a task order on our R2
support contract for a program to provide maintenance work on U.S. Army Route
Clearance Vehicles in Kuwait (the "RCV Modernization Program") in September
2008. We expect the initial phase of this program to run for two years under
contractual coverage of approximately $194 million. Revenues on this program
for the first quarter of 2009 were approximately $19 million.
ELD - 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 - FSS provides 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 - MSD provides services for 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 - SED provides comprehensive systems and software engineering, logistics,
and prototyping services to the DoD. SED principally supports the 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.
International Group - Our International Group provides engineering,
industrial, logistics and foreign military sales services to the U.S. military
and other government agencies. The divisions in this Group include BAV, FMD
and VCG.
BAV - Through BAV, we provide 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, logistics services for ship reactivations and transfers and
follow-on support. Our 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. 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. Changes in the level of activity associated with the
Navy's ship transfer program have caused quarterly and annual revenue
fluctuations.
FMD - 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.
-13-
FMD also provides management, maintenance, storage and disposal support for
the U.S. Department of Treasury's seized and forfeited general property
program. Our contract with the Department of Treasury to support this program
is a cost plus incentive fee contract that contains certain conditions under
which the incentive fee is earned. The amount of incentive fee earned depends
on our costs incurred on the contract compared to certain target cost levels
specified in the contract. Per the contract, an assessment of actual costs
compared to target costs is made once annually. The target cost levels in this
contract may be subject to negotiation and change if the customer's scope of
work required varies from the scope of work originally contained in the
contract. We recognize incentive fee when the amount is fixed or determinable
and the collectability is reasonably assured. Due to the conditions under
which the incentive fee for this contract is awarded, and to the potential for
changes in the cost targets as work requirements vary, the full amount of
incentive fee for the work we perform in any one period may not be fixed or
determinable and the collectability may not be reasonably assured until a
subsequent period. We are currently in discussions with our customer regarding
potential target cost adjustments for the years 2007, 2008 and 2009. A
favorable resolution from these discussions could potentially result in
additional incentive fee income for us in a future period for work previously
performed.
Contract Field Teams Program - In July 2008, our FMD division was
awarded one of several prime contracts to support the United States Air Force
Contract Field Teams ("CFT") Program. The CFT Program awards have a maximum
ceiling of approximately $10.12 billion. Under the program, we are providing
rapid deployment and long-term support services for a variety of Air Force
requirements to maintain, repair and modernize equipment and systems. While
our revenues under the contract cannot be predicted, the award provides us
with the opportunity to compete for and expand our work performed for the Air
Force.
VCG - VCG has provided the U. S. Coast Guard with FMS support and life cycle
support for vessels transferred to foreign governments. The work performed by
VCG for the U.S. Coast Guard has decreased and we have decided to make this
division inactive beginning in 2009.
IT, Energy and Management Consulting Group - The IT, Energy and Management
Consulting Group provides technical and consulting services primarily to
various civilian Government agencies. This group includes Energetics and, as of
April 2008, G&B.
Energetics - Energetics provides technical and management support in areas of
nuclear energy, technology research, development, demonstration, and
consulting services in the field of energy and environmental management.
Energetics' 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. Customers include the U.S. Department of Energy, including the
Office of Nuclear Energy, Science and Technology; the U.S. Department of
Homeland Security, through new contract work won in 2007; and other Government
agencies and commercial clients.
G&B - G&B is an established information technology provider to many
government agencies, including the Departments of Homeland Security, Interior,
Labor, Agriculture, Housing and Urban Development, the Social Security
Administration, the Pension Benefit Guaranty Corporation, and the National
Institutes of Health. G&B's core expertise lies in enterprise architecture
development, information assurance/business continuity, program and portfolio
management, network IT services and systems design and integration. We
acquired G&B in April 2008 for an initial cash purchase price of approximately
$19.5 million plus potential additional payments in future years if specified
financial targets are achieved.
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Infrastructure Group - ICRC, the only subsidiary included within the
infrastructure group, is engaged principally in providing engineering and
transportation infrastructure services.
Port of Anchorage Intermodal Expansion Project ("PIEP") - A significant
amount of ICRC's revenues and income comes from services performed on the Port
of Anchorage Intermodal Expansion Project in Alaska (the "PIEP") under a
contract with the U.S. Department of Transportation Maritime Administration.
This contract requires ICRC to provide program management services, including
project management, procurement, permitting, design, and construction to the
Government to expand the size of the port's facilities to accommodate larger
ships, more dock space, improved cargo flow, improved traffic flow at the
port, more environmentally friendly port operations and other modernization
enhancements. Some of the infrastructure improvements under the PIEP typically
cannot be performed during the winter months due to subarctic conditions. The
seasonal nature of this work will cause fluctuations in our revenues on this
contract, with revenue levels typically higher in summer months and lower in
winter months. The PIEP contract has an estimated ceiling amount of $704
million, a three-year base period of performance, and four one-year option
periods.
Concentration of Revenues
(in thousands)
For the three months ended March 31,
---------------------------------------
2009 2008
Source of Revenue Revenues % Revenues %
----------------- -------- - -------- -
CED Army Equipment Support $ 34,140 14 $ 65,542 35
CED Assured Mobility Systems 28,320 12 15,108 8
RCV Modernization 18,598 8 - -
CED Other 41,693 17 23,613 12
-------- --- -------- ---
Total CED 122,751 51 104,263 55
BAV Egypt 13,598 6 11,908 6
BAV Other 7,046 3 4,012 2
-------- --- -------- ---
Total BAV 20,644 9 15,920 8
Treasury Seized Asset Program 9,343 4 15,280 8
PIEP Contract 4,951 2 7,402 4
Other 82,766 34 45,858 25
-------- --- -------- ---
Total Revenues $240,455 100 $188,723 100
======== === ======== ===
Management Outlook
The growth in our revenues and profits in recent years presents us with both
challenges and opportunities. Our work in the DoD market increased
significantly in 2008 and several efforts within that market remain strong.
Our ELD division has expanded its workforce, facilities, capacity to provide
services, contractual coverage and funding since its inception, resulting in
further increases in revenues from these services in the first quarter of
2009. Our investment in facilities and personnel to support this work leaves
us well positioned to serve DoD's growing need for our equipment refurbishment
and sustainment services. We expect further increases in this division's work
going forward. Based on indications from new requests for FMS assets and on
congressional approval of certain ship transfers, we expect to show increases
in our BAV division ship transfer revenues in 2009 and 2010. Our CED Assured
Mobility Systems Program is expected to continue to contribute significant
revenues through its scheduled expiration in January 2011.
In addition to the growth in some of our current DoD programs, we expect
recent new awards to contribute to our revenues and profits going forward. The
award of the RCV Maintenance Program gives us a significant new source of work
-15-
over the next two years and a key presence in Kuwait that presents us with the
potential for additional work in the future. The award of the CFT Program
contract gives us the opportunity to increase our services performed for the
Air Force. In the first quarter of 2009, we were awarded a General Services
Administration ("GSA") Logistics Worldwide ("LOGWORLD") Schedule 874 V
contract. This new schedule contract is available to all Federal agencies and
represents potential revenues of approximately $50 million for the five-year
base period, with options to extend the period of performance for up to 10
additional years.
We also have three other multiyear, multiple award, indefinite delivery,
indefinite quantity ("omnibus") contracts that have large nominal ceiling
amounts with no funding committed at the time of award. These are the SeaPort
Enhanced contract with the U.S. Navy, the Field and Installation Readiness
Support Team ("FIRST") contract with the U.S. Army, and the U.S. Army PEO CS &
CSS Omnibus III contract. We are one of several awardees on each contract.
While our future revenues from these contracts cannot be predicted with
certainty, these contracts provide us with the opportunity to compete for work
that could contribute to revenues.
The expansion of current work in our ELD and BAV divisions and the new work
arising from the RCV Maintenance and CFT Programs will help us to replace
certain work efforts that have supported our growth in recent years and have
either expired or are due to expire. In November 2008, we successfully
completed a four-year, $96 million program to provide a protection system, the
Tanker Ballistic Protection System ("TBPS"), for vehicles deployed by the U.S.
Army in Iraq. The CED Army Equipment Support Program expired in February 2009,
as scheduled. Additionally, the U.S. Army informed us in January 2009 that
they would not consider our proposal for a new contract to succeed our current
R2 Program contract. The Army Office of Command Counsel encouraged the U.S.
Army to provide us a comprehensive post-award debriefing in accordance with
applicable regulations after the award of the successor contract is eventually
made. We are evaluating our options regarding this matter, including the
filing of a protest after the award of the successor contract. Should we be
unsuccessful in our efforts in challenging our exclusion from this award, we
will need to replace the R2 Program revenues with other new revenues or to
move the work performed through the R2 contract to one of our other omnibus
contracts. Our other omnibus contracts can be used to accommodate work
performed by our employees and subcontractors. We expect to continue our work
on existing task orders on our current R2 contract through the scheduled
contract expiration in January 2011.
We are augmenting our core base of DoD work by emphasizing growth in our non-
DoD services. These efforts have included: 1) an emphasis on marketing our
Energetics services that has shown favorable results, including some major
contract awards in 2008 that will be worked over the next three to five years,
2) work on the Treasury Seized Property Management program, and 3) the
acquisitions of ICRC in 2007 and G&B in 2008. We expect these efforts that are
directed toward the growth of our work in the Federal Civil marketplace to
contribute to overall future revenue growth and financial performance.
Our growth prospects are further evidenced by a continuing increase in our
workforce. As of March 31, 2009, our employee count was 2,244, which
represents an increase of 324 employees, or approximately 17% since December
31, 2008.
We also know there are other risks and uncertainties related to our business.
We recognize that 2009 is a Government transition year and Government spending
priorities may change in ways that we cannot fully predict at this time. There
are indications of a shift in Government spending to more energy, IT related
infrastructure, health care IT, and DoD legacy systems services. We feel that
our current capabilities have us well prepared to pursue these opportunities.
To summarize our outlook, we believe our business prospects are both bright
and challenging. We are confident that the expansion of our equipment
refurbishment and sustainment services performed by ELD and the ship transfer
services performed by BAV; our new work on the RCV Maintenance and CFT
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Programs; our growing level of work in the Federal Civil marketplace; our
increased emphasis on bolstering our marketing efforts in both our DoD and
Federal Civil markets; and our continued commitment to grow through
acquisitions positions us well to meet the challenge of replacing work that
will be expiring in the upcoming two year period.
Funded Backlog
Revenues in our industry depends on contract funding ("Bookings") and funded
contract backlog is an indicator of potential future revenues. A summary of
our bookings and revenues for the three month periods ended March 31, 2009 and
2008, and funded contract backlog as of March 31, 2009 and 2008 is as follows:
(in millions)
2009 2008
---- ----
Bookings $232 $350
Revenue $240 $189
Funded backlog $555 $570
Recent Accounting Pronouncements
On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements," which
defines fair value, establishes a market-based hierarchy for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 is
applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value, but does not require any
new fair value measurements.
In the first quarter of 2009, we adopted SFAS No. 157 as it relates to non-
financial assets and liabilities that are recorded at fair value on a non-
recurring basis. The impact of its adoption was not material.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
us to make estimates and assumptions. Please refer to our Annual Report on
Form 10-K for the year ended December 31, 2008 filed with the SEC on March 3,
2009 for a full discussion of our critical accounting policies.
Revenue by Contract Type
Our revenues by contract type were as follows (in thousands):
Three Months
Ended March 31,
Contract Type 2009 % 2008 %
------------- ---- - ---- -
Cost-type . . . . . . . . . . . . . . $ 41,108 17 $ 44,018 23
Time and materials . . . . . . . . . 190,449 79 135,704 72
Fixed price . . . . . . . . . . . . . 8,898 4 9,001 5
-------- --- -------- ---
$240,455 100 $188,723 100
======== === ======== ===
A significant portion of our time and materials revenues are primarily from
the CED Army Equipment Support Program, the CED Assured Mobility Systems
Program and other CED R2 Program task orders. Substantially all of the
revenues on these programs result from the pass through of subcontractor
support services that have a low profit margin for us.
-17-
Results of Operations
The results of operations are as follows (in thousands):
Three Months
Ended March 31,
Description 2009 2008 Change %
----------- ---- ---- ------ -
Revenues . . . . . . . . . . . . . . . . . $240,455 $188,723 $51,732 27
Contract costs . . . . . . . . . . . . . . 232,809 182,816 49,993 27
-------- -------- ------- ---
Gross Profit . . . . . . . . . . . . . . . 7,646 5,907 1,739 29
Selling, general and
administrative expenses . . . . . . . . 202 163 39 24
Interest income, net . . . . . . . . . . . (59) (147) 88 (60)
-------- -------- ------- ---
Income before income taxes . . . . . . . . 7,503 5,891 1,612 27
Provision for income taxes . . . . . . . . 2,863 2,293 570 25
-------- -------- ------- ---
Net income . . . . . . . . . . . . . . . $ 4,640 $ 3,598 $ 1,042 29
======== ======== ======= ===
Our revenues increased approximately $51.7 million, or approximately 27% for
the three months ended March 31, 2009, as compared to the same period of 2008.
The primary reasons for the increase are 1) an increase in CED revenues from
work on R2 contract task orders, including the RCV Modernization program of
approximately $18.5 million; 2) increases in our International Group revenues
of approximately $15.3 million; 3) G&B revenues of approximately $11.7 million
are included in our financial results in 2009 as compared to 2008 when G&B had
not yet been acquired; and 4) growth in the equipment refurbishment services
provided by our ELD division of approximately $8.6 million.
Our gross profits increased approximately $1.7 million, or approximately 29%
for the three months ended March 31, 2009, as compared to the same period of
2008. The primary reasons for the increase are 1) an increase in gross profits
provided by ELD equipment refurbishment services of approximately $1.5
million, and an increase in gross profits of approximately $1 million
attributable to the inclusion of G&B in our operating results. These increases
helped to replace a decrease in gross profits of approximately $1.4 million
due to completion of the TBPS program in 2008 and resulting absence of this
program from our operating results in 2009. The remaining difference in gross
profits is due to smaller increases and decreases in our other operating
divisions and subsidiaries.
Selling, general and administrative expenses consist primarily of costs and
expenses that are not chargeable or reimbursable on our operating unit
contracts. The increase in these expenses for the three months ended March 31,
2009 as compared to the same period of 2008 is in line with the increase in
our business activity.
Federal Group Results
The results of operations for our Federal Group are as follows (in thousands):
Three Months
Ended March 31,
Description 2009 2008 Change %
----------- ---- ---- ------ -
Revenues $152,957 $122,321 $ 30,636 25
======== ======== ======== ==
Income before income taxes $ 4,558 $ 3,472 $ 1,086 31
======== ======== ======== ==
Profit percentage 3.0% 2.8%
Revenues for our Federal Group increased approximately $30.6 million or
approximately 25% for the three month period ended March 31, 2009, as compared
to the same period for the prior year. The increase in revenues for 2009
resulted primarily from 1) increased CED revenues from work on R2 contract
task orders, including the RCV Modernization program, of approximately $18.5
million; 2) growth in the equipment refurbishment services provided by our ELD
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division of approximately $8.6 million; and 3) growth in the field maintenance
and logistics support services provided by our FSS division of approximately
$3.4 million.
Income before income taxes for our Federal Group increased approximately $1.1
million, or approximately 31% for the three month period ended March 31, 2009
as compared to the same period for the prior year. The increase is primarily
due to 1) an increase in profits on our ELD equipment refurbishment services
of approximately $1.5 million resulting from the increase in ELD revenues and
an improvement in the profit margins on this work due to capital investments
made in prior years; and 2) an increase in profits of approximately $648
thousand on our FSS division field maintenance and logistics support services,
including FSS work on the RCV Modernization Program. These increases helped to
replace a decrease in profits of approximately $1.4 million due to the
completion of the TBPS program in 2008 and the resulting absence of this
program from our operating results in 2009.
International Group Results
The results of operations for our International Group are as follows (in
thousands):
Three Months
Ended March 31,
Description 2009 2008 Change %
----------- ---- ---- ------ -
Revenues $64,156 $48,806 $15,350 31
======= ======= ======= ==
Income before income taxes $ 1,735 $ 1,632 $ 103 6
======= ======= ======= ==
Profit percentage 2.7% 3.3%
Revenues for our International Group increased approximately $15.3 million or
approximately 31% for the three month period ended March 31, 2009 as compared
to the same period for the prior year. The increase in revenues for 2009
resulted primarily from 1) an increase of approximately $10.8 million in the
level of FMD services due in part to new engineering and technical services
task orders; and 2) an increase of approximately $4.7 million in the level of
BAV services due in part to a delivery order to provide support services to
the government of Romania.
Income before income taxes for our International Group did not change
significantly for the three month period ended March 31, 2009 as compared to
the same period for the prior year. The profit as a percentage of revenues
decreased due to lower profit margins in our FMD division. FMD had an
increased amount of low margin subcontractor pass-through work during this
period in 2009 and profits on FMD's U.S. Department of Treasury seized and
forfeited general property program were lower due to certain contract
limitations.
IT, Energy and Management Consulting Group Results
The results of operations for our IT, Energy and Management Consulting Group
are as follows (in thousands):
Three Months
Ended March 31,
Description 2009 2008 Change %
----------- ---- ---- ------ -
Revenues $16,705 $ 4,079 $12,626 310
======= ======= ======= ===
Income before income taxes $ 1,181 $ 445 $ 736 165
======= ======= ======= ===
Profit percentage 7.1% 10.9%
Revenues for our IT, Energy and Management Consulting Group increased
approximately $12.6 million or approximately 310% and income before income
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taxes increased approximately $736 thousand or approximately 165% for the
three month period ended March 31, 2009 as compared to the same period for the
prior year. Upon our acquisition of G&B in April 2008, G&B became part of this
segment, and the inclusion of G&B revenues of approximately $11.7 million and
income before income taxes of approximately $661 thousand, net of acquisition
related amortization expense, in this segment's results was the primary reason
for the increases in 2009. Increases in Energetics' revenues of approximately
$800 thousand and income before income taxes of $75 thousand also contributed
to the increases in this segment in 2009.
Infrastructure Group Results
The results of operations for our Infrastructure Group are as follows (in
thousands):
Three Months
Ended March 31,
Description 2009 2008 Change %
----------- ---- ---- ------ -
Revenues $ 6,637 $13,520 $(6,883) (51)
======= ======= ======= ===
Income before income taxes $ 42 $ 600 $ (558) (93)
======= ======= ======= ===
Profit percentage 0.6% 4.4%
This segment consists of our ICRC subsidiary. Revenues for the three month
period ended March 31, 2009 decreased by approximately $6.9 million or
approximately 51%, and income before income taxes decreased by approximately
$558 thousand or approximately 93%, when compared to the same period for the
prior year. In 2008, ICRC provided information technology services on a
contract with the U. S. Army Corps of Engineers. ICRC work on this contract
ended in June of 2008 when we transferred some of this work as well as some
smaller information technology services work efforts out of ICRC and into G&B.
The reduction of this information technology revenue of approximately $3.4
million for 2009 was a significant reason for the overall decrease in ICRC's
operating results. Also, certain environmental issues near the site that ICRC
conducts its PIEP work have caused a temporary delay in the work schedule and
had a negative impact on first quarter 2009 revenues and profits, with
revenues from the PIEP work decreasing by approximately $2.5 million. The
environmental issues are not caused by the work conducted by ICRC, but ICRC
must comply with certain environmental restrictions.
Financial Condition
Our financial condition did not change materially in the first quarter of
2009. Changes to asset and liability accounts were due primarily to our
earnings, our level of business activity, contract delivery schedules,
subcontractor and vendor payments required to perform our work, and the timing
of associated billings to and collections from our customers.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased approximately $480 thousand during the
first quarter of 2009.
Cash used in operating activities was approximately $12.9 million during the
first three months of 2009 as compared to cash provided by operating
activities of approximately $8.6 million in the first three months of 2008. An
increase of approximately $1 million in cash provided by net income and
approximately $1 million due to an increase in depreciation and amortization
and other non-cash operating activities partially offset an increase of
approximately $21.6 million in cash used in operating activities due to
changes in the levels of working capital components. Of these working capital
components, our largest assets are our accounts receivable and our largest
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liabilities are our accounts payable. A significant portion of our accounts
receivable and accounts payable result from the use of subcontractors to
perform work on our contracts and from the purchase of materials to fulfill
our contract requirements. Accordingly, our levels of accounts receivable and
accounts payable may fluctuate significantly depending on the timing of
government services ordered, the timing of billings received from
subcontractors and materials vendors to fulfill these services, and the timing
of payments received from government customers in payment of these services.
Such timing differences may cause significant increases and decreases in our
accounts receivable and accounts payable in short time periods.
Cash used in investing activities increased approximately $400 thousand in the
first three months of 2009 as compared to the same period of 2008. This was
due to an increase of approximately $600 thousand in purchases of property and
equipment.
Cash provided by financing activities increased approximately $15.1 million in
the first three months of 2009 as compared to the same period of 2008. This
increase was primarily due to an increase in borrowings on our bank loan to
help finance our operating activities.
We paid quarterly cash dividends totaling $0.045 per share during the first
quarter of 2009. Pursuant to our bank loan agreement, our payment of cash
dividends is subject to annual rate restrictions. We have paid cash dividends
each year since 1973.
Liquidity
Our internal sources of liquidity are primarily from operating activities,
specifically from changes in the level of revenues and associated accounts
receivable and accounts payable, and from profitability. Significant increases
or decreases in revenues and accounts receivable and accounts payable can
cause significant increases or decreases in internal liquidity. Our accounts
receivable and accounts payable levels can be affected by changes in the level
of the work we perform and by the timing of large materials purchases and
subcontractor efforts used in our contracts.
From time to time, we may also invest in the acquisition of another company.
Our acquisitions of ICRC in 2007 and G&B in 2008 required a significant use of
our cash. While there are no firm plans for any specific additional
acquisitions at this time, we continue to seek opportunities for growth
through acquisitions.
We may also invest in expansion, improvement, and maintenance of our
operational and administrative facilities such as an additional 40,000 square
feet of warehouse and shop space at our Ladysmith, Virginia facility for
approximately $6.2 million in 2008. We may make additional investments in
operational or administrative facilities in 2009 and in future years.
Our external liquidity consists of a loan agreement with a bank that provides
us with revolving loans and letters of credit. The amount of credit available
to us as of March 31, 2009 was $35 million (an increase from $25 million
pursuant to an amendment) and the maturity date of the loan agreement is
May 21, 2010, unless extended. From time to time we may request changes in the
amount, maturity date, or other terms and the bank may amend the loan to
accommodate our request. The amount of credit available to us under the loan
agreement is subject to certain conditions, including a borrowing formula
based on our billed receivables. Under the terms of the loan agreement, we may
borrow against the revolving loan at any time and can repay the borrowings at
any time without premium or penalty. We pay 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.
We were using approximately $23.2 million of the loan agreement availability,
consisting of approximately $21.8 million in revolving loans and approximately
$1.4 million in letters of credit as of March 31, 2009. Average revolving loan
amounts outstanding during the first quarter of 2009 were approximately $6.5
-21-
million per day. The March 31, 2009 outstanding revolving loan amount was
significantly higher than our average outstanding amount during the first
quarter 2009 due to the timing of certain payments made and collections
received associated with our subcontractor and materials requirements and
other operating expenses. Such timing can cause temporary peaks in our
outstanding revolving loan amounts. We paid down the revolving loan subsequent
to March 31, 2009 and had periods during April 2009 for which there were no
revolving loan amounts outstanding.
The loan agreement contains collateral requirements that secure our assets,
restrictive covenants, a limit on annual dividends, and other affirmative and
negative covenants. Restrictive covenants include a maximum Leverage Ratio
(Total Funded Debt/EBITDA) and a minimum Fixed Charge Coverage Ratio, that we
were in compliance with at March 31, 2009.
Maximum Ratio Actual Ratio at March 31, 2009
------------- ------------------------------
Leverage Ratio 3.00 to 1 0.61 to 1
Minimum Ratio Actual Ratio at March 31, 2009
------------- ------------------------------
Fixed Charge Coverage Ratio 1.25 to 1 3.40 to 1
Our bank continues to maintain investment grade credit ratings from the
ratings services and we believe that we are well positioned to obtain
financing from other banks if the need should arise. Accordingly, we do not
believe that the current turbulence in the financial markets will have a
material adverse impact on our ability to finance our business, financial
condition, or results of operations. We currently do not use public debt
security financing.
Inflation and Pricing
Most of our contracts provide for estimates of future labor costs to be
escalated for any option periods, while the non-labor costs in our contracts
are normally considered reimbursable at cost. Our property and equipment
consists principally of computer systems equipment, furniture and fixtures,
shop equipment, and land and improvements. We do not expect the overall impact
of inflation on replacement costs of our property and equipment to be material
to our future results of operations or financial condition.
Disclosures About Market Risk
Interest Rates
Our bank loan provides available borrowing to us at variable interest rates.
We used a significant amount of cash to pay for our acquisitions of ICRC in
June 2007 and G&B in April 2008, causing us to have to borrow on our bank loan
beginning in April 2008. The amount borrowed is not large with respect to our
cash flows and we believe that we will be able to pay down these bank loan
borrowings in a relatively short time frame. Because of this, we do not
believe that any adverse movement in interest rates would have a material
impact on future earnings or cash flows. If we were to significantly increase
our borrowings, future interest rate changes could potentially have a material
impact on us.
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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 our 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 first quarter of fiscal 2009 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
VSE did not purchase any of its equity securities during the period covered by
this report.
Under the Registrant's bank loan agreement dividends may be paid in an annual
aggregate amount of $.60 per share, provided there is no default under the
loan agreement.
Item 6. Exhibits
(a) Exhibits.
Exhibit No.
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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.
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VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
Date: April 30, 2009 /s/ M. A. Gauthier
__________________________________
M. A. Gauthier
Director, Chief Executive Officer,
President and Chief Operating
Officer
Date: April 30, 2009 /s/ T. R. Loftus
__________________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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