VSE CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
Executive Overview
We provide sustainment services for legacy systems and equipment and professional services to the
Organization and Reporting Segments
Our business is managed under operating groups consisting of one or more divisions or wholly owned subsidiaries that perform our services. We have five reportable segments aligned with our management groups: 1) Federal; 2) International; 3) IT,
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IT,
Concentration of Revenues (in thousands) For the three months ended March 31, 2012 2011 Source of Revenue Revenues % Revenues % USPS MIP $ 34,198 24 $ - - FMS Program 21,888 15 26,168 17 U.S. Army Reserve 15,398 11 16,883 11 Treasury/ATF Seized Asset Programs 7,939 6 10,545 7 R2 and R2-3G Programs 4,593 3 34,929 23 Other 60,325 41 62,719 42 $ 144,341 100 151,244 100 Management Outlook
Our company and our industry are facing a challenging operating environment that is constraining revenue levels. While it appears that conditions will continue to be challenging through most of 2012, we believe we have made progress through our diversification efforts to enhance our prospects for future revenue and income.
Operating environment challenges are centered on federal government budgeting and spending priorities, initiatives, and processes. Federal budgets are strained, government spending priorities are changing, and there is an increasing government emphasis on oversight activities at the expense of contract administration efforts. These conditions are affecting the timeliness of awards and the funding of new and existing contracts in our markets, impacting the flow of work to federal contractors, causing increased competition in the federal marketplace, and resulting in a sharp increase in protests of government contract awards.
Specific circumstances that present challenges to our revenue in 2012 include a slower than usual ramp up of our FMS Program activity on the follow-on contract due to a lengthy award and protest process (which is now completed); and a reduction in our overseas equipment servicing opportunities as U.S. military involvement in
We believe we are positioned to withstand these market condition challenges in the longer term. We believe that potential future opportunities include an expansion of our vehicle and equipment refurbishment program to additional
We also believe that our acquisition of WBI in
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Although the inclusion of WBI in our operations and our strategic direction toward expanding our Supply Chain Management services will lessen our reliance on employee services to generate profitable revenue streams, our employee labor continues to be an important part of our business operations. As of
Bookings and Funded Backlog
Revenues in our industry depend 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 months ended
(in millions) 2012 2011 Bookings $ 168 $ 107 Revenues $ 144 $ 151 Funded Contract Backlog $ 307 $ 357
Recently Adopted Accounting Guidance
On
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in
Revenue by Contract Type
Our revenues by contract type were as follows (in thousands):
Three Months ended March 31, Contract Type 2012 % 2011 % Cost-type $ 31,556 22 $ 44,866 30 Time and materials 47,818 33 86,390 57 Fixed-price 64,967 45 19,988 13 $ 144,341 100 $ 151,244 100
A significant portion of our time and materials revenues in 2011 were from our R2 contract, which expired in
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Results of Operations
Our results of operations are as follows (in thousands):
Three Months ended March 31, 2012 2011 Change % Revenues $ 144,341 $ 151,244 $ (6,903 ) (5 ) Contract costs 131,443 143,514 (12,071 ) (8 ) Selling, general and administrative expenses 555 821 (266 ) (32 ) Operating Income 12,343 6,909 5,434 79 Interest expense, net 1,532 144 1,388 964 Income before income taxes 10,811 6,765 4,046 60 Provision for income taxes 4,143 2,593 1,550 60 Net Income $ 6,668 $ 4,172 $ 2,496 60
Our revenues decreased approximately
Our operating income increased approximately
Changes in revenues and income are further discussed in the summaries of our segment results that follow.
Selling, general and administrative expenses consist primarily of costs and expenses that are not chargeable or reimbursable on our operating unit contracts. These expenses decreased for the quarter ended
Our effective income tax rate for the quarters ended
Federal Group Results
The results of operations for our
Three Months ended March 31, 2012 2011 Change % Revenues $ 30,755 $ 66,348 $ (35,593 ) (54 ) Operating Income $ 1,410 $ 2,544 $ (1,134 ) (45 ) Profit percentage 4.6 % 3.8 %
Revenues for our
Operating income for our
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International Group Results
The results of operations for ourInternational Group are as follows (in thousands): Three Months ended March 31, 2012 2011 Change % Revenues $ 45,764 $ 51,710 $ (5,946 ) (11 ) Operating Income $ 1,516 $ 1,916 $ (400 ) (21 ) Profit percentage 3.3 % 3.7 %
Revenues for our
Operating income for our
IT, Energy and Management Consulting Group Results
The results of operations for our IT,
Three Months ended March 31, 2012 2011 Change % Revenues $ 25,738 $ 27,363 $ (1,625 ) (6 ) Operating Income $ 3,081 $ 2,344 $ 737 31 Profit percentage 12.0 % 8.6 %
Revenues for our IT,
Operating income for this segment increased approximately
Infrastructure Group Results
The results of operations for ourInfrastructure Group are as follows (in thousands): Three Months ended March 31, 2012 2011 Change % Revenues $ 4,354 $ 5,823 $ (1,469 ) (25 ) Operating (Loss)/Income $ (150 ) $ 232 $ (382 ) (165 ) Profit percentage -3.4 % 4.0 % 20
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Revenues for our
Our customer has experienced delays in funding and defining the scope of work on the PIEP, which have contributed to our decreased revenue levels for this segment. Our customer has funded the cost of certain work we performed on this project, but has not funded fees normally associated with this work pending resolution of environmental and technical issues impacting the work. Accordingly, we have not recognized fees for most of the work on this project performed in some periods prior to our first quarter of 2012. We are currently in discussions with our customer regarding resolution of the fee issue. If the fees on this work are funded, we could recognize additional revenue and operating income of between
Supply Chain Management Group Results
The results of operations for ourSupply Chain Management Group are as follows (in thousands): Three Months ended March 31, 2012 2011 Change % Revenues $ 37,730 $ - $ 37,730 - Operating Income $ 6,756 $ - $ 6,756 - Profit percentage 17.9 % - %
This group was established and began contributing to our operating results upon our acquisition of WBI in
Financial Condition
Our financial condition did not change materially in the first quarter of 2012. 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
Cash provided by operating activities in the first quarter of 2012 was approximately
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Net cash used in investing activities increased approximately
Net cash provided by financing activities in the first quarter of 2012 was approximately
We paid quarterly cash dividends of
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 impact our liquidity. Our accounts receivable and accounts payable levels can be affected by changes in the level of the work we perform, by the timing of large materials purchases and subcontractor efforts used in our contracts, and by government delays in the award of contractual coverage and funding and payments. Government funding delays have caused delays in our ability to invoice for revenues earned, resulting in a negative impact on our days sales outstanding.
We also purchase property and equipment and invest in expansion, improvement, and maintenance of our operational and administrative facilities. In the first quarter of 2012, we made approximately
Our external financing consists of a loan agreement entered into in
The term loan requires payments in quarterly installments based on an accelerating amortization schedule, with 15% of the original
The maximum amount of credit available to us from the banking group for revolving loans and letters of credit as of
We pay interest on the term loan borrowings and revolving loan borrowings at
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The loan agreement contains collateral requirements that secure our assets, restrictive covenants, other affirmative and negative covenants, and subjects us to certain conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. We were in compliance with required ratios and other loan agreement terms and conditions at
Current Maximum Ratio Actual Ratio Total Funded Debt/EBITDA Ratio 3.25 to 1 3.05 to 1 Minimum Ratio Actual Ratio Fixed Charge Coverage Ratio 1.20 to 1 1.55 to 1
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 loans provide available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. To mitigate the risks associated with future interest rate movements, in
In
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VSE CORPORATION AND SUBSIDIARIES
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