INTEGRITY • AGILITY • VALUE
2009 VSE Annual Report and Form 10-K
INTEGRITY • AGILITY • VALUE
INTEGRITY (cid:129) AGILITY (cid:129) VALUE. Three words...hallmarks of VSE and principles that guide us through
every day, every engagement, every year.
2009 was a year of challenge and of change. Customer requirements increased while customer budgets
remained challenged. Yet, once again, VSE reached and in many cases, exceeded expectations. We anticipated
market conditions and reduced overall spending, streamlined operations, and cut costs to our customers
wherever possible. Without missing a beat, we continued to provide outstanding service to our global clients,
and added more than 600 professionals to our workforce.
We also have upgraded and expanded some of our production facilities for the reset of military vehicles.
For example, we have stood up a 900,000 square foot facility in Kuwait; and we recently completed
refurbishment of a 69,000 square foot reset facility in Gatesville, Texas…all to improve and enhance our
support of U.S. and allied warfi ghters deployed around the world. Additionally, we have embarked on a
leadership-driven initiative seeking to create a supportive, employee-focused environment featuring leader
development, as well as workforce training and education.
During 2009, we made the news for several notable accomplishments. For the second year in a row
Government Executive Magazine named VSE the “Number #1 Government Contractor (small);” The
Washington Post recognized us as the “Number #1 Climbing Business in the DC Metro Area” and we were
included in the Washington Business Journal list of the top 50 Fastest Growing Companies.
Looking ahead, our pipeline is robust as of March 2010. We are confi dent and excited about the future and
look forward to making sure our customers meet their goals in 2010.
Corporate Profile
We are a federal technical services company with four reporting segments: Federal; International; IT, Energy
and Management Consulting; and Infrastructure. Our business operations are conducted in over 100
locations worldwide. We provide services in the following areas:
Logistics — Multi-dimensional functions that converge to support legacy systems by providing fi eld
support, supply chain management and warehouse management.
Engineering and Refurbishment — Conceptual design, R&D prototyping; facilities designed and built
to refurbish military vehicles.
IT Services — Enterprise architecture, data mining, public protection/security, and technical and
software engineering for systems, assessments and reviews.
Construction Management — Development planning, preparation, permitting, feasibility studies,
procurement/contracts, and for major complexes as well as all civil works projects.
Consulting — Professional competencies in technology roadmaps and solutions, policy impacts,
analysis, cyber-security and infrastructure protection and mitigation measurements.
Stockholder Inquiries
VSE is a publicly owned company, and its shares are traded on the NASDAQ Global Select Market under
the symbol VSEC. Inquiries about stock ownership, dividends, and stockholder changes of address may
be directed to our Transfer Agent: Registrar and Transfer Company, 10 Commerce Drive, Cranford, New
Jersey 07016-1340, or to VSE at 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, Attention:
Corporate Secretary, Telephone (703) 960-4600.
Further information about VSE and its subsidiaries is available at www.vsecorp.com; www.icrcsolutions.com;
www.gbsolutionsinc.com and www.energetics.com
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
3
Financial Highlights
Revenues
($M)
Net Income
($M)
Earnings Per
Diluted
Share
($)
Stockholders’
Equity ($M)
1,043.6
1,014.6
653.2
24.0
19.0
14.1
363.7
280.1
7.8
6.2
1.61
1.29
4.67
3.74
2.82
101.3
76.1
56.4
38.2
30.2
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
Y E A R
Y E A R
Funded
Backlog ($M)
Number of
Employees
Dividends
Per Share ($)*
Stock Price,
End of Year ($)*
567
476
408
2,534
1,920
1,223
299
276
857
716
48.84
45.08
39.23
0.195
0.175
21.05
16.95
0.155
0.135
0.115
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
’05
’06
’07
’08
’09
Y E A R
Y E A R
Y E A R
Y E A R
Income Statement Data (in thousands, except share data)
Year Ended December 31
Revenues
Net income
Earnings per share (diluted)
Weighted average shares (diluted)
Balance sheet data (in thousands, except percentages)
December 31
Total assets
Working capital
Stockholders’ equity
Return on equity
2009
% Change
2008
$
1,014,639
24,024
4.67
5,146,347
-2.8%
26.2%
24.9%
$
1,043,735
19,040
3.74
5,096,186
2009
% Change
2008
$
253,990
45,902
101,310
31.6%
-8.0%
89.8%
33.1%
$
275,966
24,179
76,123
33.8%
4
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
Message to Stockholders
2009 Milestones
We are pleased to report that 2009 proved to be another banner year. For the second year in a row our annual
revenues have exceeded $1 billion. This is a signifi cant benchmark in light of many delays with client funding
and contract awards. Our net income was $24 million, a 26% increase from last year ($4.67 per diluted
share); with a 31.6% return on equity. Our cash dividend also increased in 2009 by 11%.
The fi nancial results reported for 2009 are consistent with the positive trend we have achieved in recent years.
VSE earnings have grown signifi cantly as we continue to improve our ability to meet customer needs, allocate
our corporate costs over a larger base and improve our margins on certain time and materials and fi xed-price
contracts.
We owe our success to making customer service our top priority. We work hard to ensure we deliver quality
service on time and at a fair price. As a result, we have more than doubled the size of our skilled workforce
in the past two years. We added more than 600 employees last year, which is quite an accomplishment,
especially during these diffi cult economic times.
Strategic Planning Guidance 2010-2012
The VSE Executive Team briefed our fi rst Strategic Planning Guidance (SPG) for 2009-2011 to the Board
of Directors in December 2008. The Board endorsed the SPG and the strategic planning process we used to
build it. Under the auspices of the SPG, we are executing on several vital strategic initiatives to ensure our
continued growth and profi tability. We will continue to expand the share of our work that is performed by
our own direct labor as opposed to subcontractors. We have launched a Leadership Development Program
that will identify and train the next generation of VSE leaders. We are also aiming to balance our portfolio of
federal services through strong growth in serving federal civilian agency customers.
Throughout 2009, the VSE Executive Team and senior management reviewed the SPG on a quarterly basis,
measuring our results and adjusting the SPG goals, strategies and metrics as assumptions became facts.
We updated the plan in mid-2009 and at the end of the year we launched the Board-approved 2010-2012
plan. VSE now has a robust strategic planning process that is owned by our senior leaders. We continue to
diligently execute the plan as we move forward into 2010.
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
5
Operational Challenges
First, as a federal technical services contractor, we depend completely upon the priorities and pace of funding
of our primary client, the Federal Government. Retaining and expanding our workforce while clients work
through contract award delays and funding issues is our fi rst challenge. We are prepared for this challenge and
have already implemented programs to achieve our objectives.
The second is common in our business—bidding and winning contracts. We have a very robust “pipeline” of
proposals under government evaluation, and our Business Capture Center is staffed by seasoned professionals.
We have an excellent team in place, an enviable track record and a leadership team dedicated to growth,
profi tability and excellence. We will continue to aggressively bid and win contracts while continuing to
monitor trends and opportunities as we move forward through 2010.
The third major challenge is preparing for and executing these contracts once awarded. Each of our business
segments is primed for contract awards, and have detailed plans in place to allow for a smooth start up and
transition once a contract win is announced.
Looking Ahead
We continue to meet the challenge of keeping our infrastructure aligned with our growth. We have the
talent, dedication, experience and management in place to meet these challenging times. We remain
focused on the future and to serving our customers with the same dedication and commitment VSE
has always maintained throughout its 51 years of business. We will continue to be guided by our core
values — Integrity - Agility - Value.
Maurice A. Gauthier
CEO/President/COO
March 2010
Donald M. Ervine
Chairman of the Board
March 2010
6
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
Board of Directors
Ralph E. Eberhart
General, USAF (Ret.)
President, Armed Forces Benefi t
Association
Chairman and Director of
5Star Bank/Life/Funds/Investments
Maurice A. Gauthier
CEO/President/COO
VSE Corporation
Clifford M. Kendall
Private Investor and
Chairman of the Board of Regents
of the University System of Maryland
Calvin S. Koonce, Ph.D.
Chairman, Koonce Securities, Inc.
Securities Broker/Dealer
Bonnie K. Wachtel
Principal and Director,
Wachtel & Co., Inc.
Donald M. Ervine
Chairman of the Board
VSE Corporation
David M. Osnos, Esq.
Of Counsel
Arent Fox LLP
Attorneys-at-Law
Jimmy D. Ross
General, USA (Ret.)
Senior Logistics Consultant,
Cypress International, Inc.
James F. Lafond, CPA
Retired Executive; formerly
Washington Area Managing Partner,
PricewaterhouseCoopers LLP
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
7
VSE Corporation is the federal services company of choice for solving issues of global significance with
agility, integrity and value. VSE is dedicated to making our clients successful through the effective
use of highly experienced people, systems, and technology in logistics, engineering and refurbishment,
IT services, construction management and consulting. In helping others succeed, we increase shareholder value by
capturing new work, exceeding our customers’ expectations, increasing our technical competence, affording more
employment opportunities and building great industry teaming relationships.
We specialize in extending the service life and improving the reliability of systems and equipment in a cost
effective manner. Our record of performance and our quality management system are based on self-governance,
openness and honesty. The foundation of VSE’s success also is based on highly experienced leadership, state-of-
the-art IT tools, innovative teamwork, and motivation.
Our policy is to provide only products and services of the highest quality to meet or exceed the expectations
and requirements of our customers on time and at a competitive price. Our quality management system is
registered to the ISO 9001:2008 standard.
We are proud of our continued growing support to the U.S. military, navies of allied nations and federal
and civil agencies. VSE strives to provide our customers with competitive, cost effective solutions to specifi c
problems while remaining true to our roots as a value engineering fi rm.
We have adopted as our principal corporate community responsibility the creation of opportunities for
America’s wounded warriors and their families. Over 40 percent of VSE’s employees have worn the uniform
of our Nation.
NASDAQ: VSEC
ISO 9001:2008
Celebrating
51
years
of Excellence
8
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
Federal Group
President, Thomas G. Dacus
2009 was a good year for Federal Group despite the national economic slowdown. We have aggressively
submitted proposals and this approach will continue throughout 2010. We targeted direct labor
opportunities as our primary business focus. These efforts enabled us to increase our direct labor by 71%.
Signifi cant growth such as this always presents both benefi ts and challenges. We have added many talented,
experienced people to our team, as part of our growth in 2009. I’m also pleased to report that our embedded
operations support model is working very effi ciently. We began test driving this model in 2008, went live
in 2009, and now have embedded teams in business development, human resources, contracts, quality
control/health, environmental, and safety, that are exceeding expectations. Our Business Development team
has signifi cantly increased our opportunity pipeline by identifying and qualifying growth targets. Our HR
department has done an outstanding job hiring “A” players. This has helped us build a solid, quality work
force that is unparalleled, despite the break-neck pace of growth in direct labor.
Our employee growth is good news in an otherwise depressed nationwide job market. It’s important that we
are able to provide job security in this challenging market and we will continue to be focused on this as a
priority.
The growth of our workforce is a direct refl ection on the quality products and services we provide to enable
and protect our warfi ghters. We specialize in bringing broken, weathered and overtaxed military equipment
to a renewed state, able to withstand the robust operational tempo of our U.S. Armed Forces. Our Soldiers,
Sailors, Airmen, Marines and their families can have confi dence in our quality product. There will always
be a demand for quality products and services, and our outstanding workforce will remain committed to
excellence. For that, I thank them.
In 2010 we will continue to look toward expanding our international growth by supporting the needs of the
military. In particular, we will be looking toward growth through foreign military sales (FMS). Along with
FMS we are looking at the continued expansion of our reset/refurbishment support to more logistics sites in
the Continental United States (CONUS), where we have been able to organically grow our work.
In 2009 we gained ground in our Mine Resistant Ambush Protection modernization/upgrade program
in Kuwait, housed in our Kuwait facility. We also won a substantial contract supporting the MRAP Joint
Logistics Integrator (JLI) Program.
New work in 2009 in CONUS has included programs out of the Red River Army Depot for M916
and M920 tractor modernization. We also began refurbishing the high mobility, multi-wheeled vehicle
(HMMWV) for the United States Army Reserve Command, and that program continues to grow. The
army has announced they will not buy additional new HMMWVs so it is critical that this current fl eet be
as operationally ready as possible. These completely refurbished vehicles will serve as a bridge before the
new, light, tactical vehicle eventually replaces this fl eet, which could take more than a decade. Our current
work here and abroad on the HMMWVs has included everything from total restoration to up-armoring kit
installations.
During the past year, we have expanded our facilities in Texarkana (Arkansas) to support Red River Army
Depot and Gatesville (Texas) in close proximity to our customers at Fort Hood. In California, our work
continues to grow, especially at Fort Hunter Liggett.
These are just a few examples of how we retain the trust and confi dence of the warfi ghter. Again this is
directly tied back to our workforce as they continue to excel above and beyond our customer’s expectations.
But then again, this is nothing new for VSE. We have more than 51 years of specializing in sustaining legacy
systems.
In summary, the top three highlights for the year have been: 1) Quality products and services from our
employees; 2) phenomenal growth in the number of employees and the new embedded infrastructure we
have in place for 2010 and beyond; and 3) a robust pipeline of new opportunities.
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
9
International Group
President, Michael E. Hamerly
The true heart and soul of VSE is our people. 2009 was a year of building on our group’s reputation for
integrity, agility, and value which resulted in a signifi cant increase in personnel (41%) and revenues (43%).
Our team’s tireless efforts, outstanding skills and true dedication are the reasons for our success. I am
especially proud that we were the fi rst group to incorporate Project Manager Certifi cation into our leadership
development program. Enhancing the skills of our operations personnel combined with our embedded
professional staff, provides the customer an even higher standard of agility and value.
One of the group’s most exciting strategic planning projects in 2009 was launching the new Naval Ship Transfer
and Repair (N*STAR) initiative to better serve the Department of the Navy. VSE has been the prime contractor
performing ship transfer work and follow-on-technical support for the Naval Sea Systems Command since this
function was outsourced in 1995. Over the years, we have built solid relationships with the Naval Sea Systems
Command and multiple foreign Navies. We are now poised to take that unparalleled experience and apply the
tremendous technical capabilities of the new N*STAR team to all aspects of the Foreign Military Sales (FMS)
program. The team includes such fi rms as SAIC, Raytheon, GDIT, Lockheed Martin, CSC, BAE SYSTEMS,
Thales, Colonna’s Shipyard, Atlantic Marine, American Systems and a host of best-in-niche small businesses.
Other International Group highlights include:
Our new team reactivated a Navy oiler and transferred it to the Chilean Navy, a $23 million project. This
ship will support Chilean and Allied Navies in the Southern Hemisphere. We led a group of European and
Turkish subcontractors in the design, hardware and software development, and integration of a modern
Anti-air Warfare system for the Turkish Navy’s ex-FFG 7 and Meko II class ships.
We began a seven-year operation as a Contract Field Team (CFT) prime contractor in support of the
military services in the performance of fi eld maintenance of aircraft weapons systems and ground vehicles.
During 2009, new VSE maintenance teams began supporting Department of Defense depot facilities at
China Lake (CA); Whidbey Island (WA); Mountain Home (Idaho); Fort Devens (MA) and
New River (NC).
An important function of our U.S. Treasury Management of Seized and Forfeited Property contract is
conducting auction sales of forfeited property. We conducted two specialty auctions — a diamond auction
in New York City with the proceeds totaling over $600,000 and a rare coin auction was held in Riverside
(CA) reaping over a quarter of a million dollars. Proceeds for all items auctioned during the year totaled
over $11 million. All auction sales proceeds were returned to the U.S. Treasury Asset Forfeiture Fund.
A $249 million cost-plus award fee contract option modifi cation was awarded by the Naval Sea Systems
Command to provide an additional year of continued services supporting ex-U.S. ships sold, leased or
otherwise transferred to FMS clients.
A fi ve-year $25.4 million follow-on contract to support the Joint Program Offi ce for Cartridge Actuated
Devices and Propellant Actuated Devices (CAD/PAD).
The $45 million Romanian Coastal Surveillance Program has been progressing successfully with two
phases out of three near completion.
We received a $47 million delivery order to continue work in Alexandria, Egypt, providing management,
engineering, technical, training and logistical support to the Egyptian Navy.
Under subcontract to Raytheon Integrated Defense Systems, we applied our advanced Prognostics
Framework to achieving a Health Management System for the US Army Joint Land Attack Cruise Missile
Defense Elevated Netted Sensor (JLENS) system.
The VSE team located in Warner Robins (GA) is currently managing a newly established Future Flexible
Acquisition and Sustainment Tool (F2AST) as a partner of choice on six different prime ID/IQ
contracting teams with a combined 10-year $6.9 billion ceiling.
When the Bahrain Navy accepted a role in joint anti-piracy operations in the Indian Ocean, our people
assembled a team of combat systems experts in a matter of weeks to assist their ex-US Navy FFG-7 in its
preparations to deploy, the fi rst such event for our foreign client.
We are looking forward to continuing our support to U. S. warfi ghters around the globe and to our allies.
We believe that by keeping our focus on delivering to our customer integrity, agility and value, 2010 will be
another year of continued success.
10
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
IT, Energy, and Management Consulting Group
President, Energetics Incorporated, James E. Reed
President, G&B Solutions Inc., Denise E. Manning
The IT, Energy, and Management Consulting Group grew our business share by delivering integrity, agility,
and value to our clients in 2009. We added many talented people to our staff during the year as new contracts
were won and existing programs expanded. The Group, which consists of G&B Solutions Inc. and Energetics
Incorporated, increased revenue by approximately $24 million, while gross profi ts increased by
$3 million. Approximately $14 million of this growth in revenue and $1.4 million of the growth in gross
profi ts resulted from the inclusion of a full year of fi nancial results for G&B Solutions.
We are pleased to report that our strategic planning and leader development efforts are paying dividends by
adding clear focus, career paths, and long term security to our staff, enhancing the prospects of the Group’s
business future. The embedded support model adopted across VSE is working extremely well for us as
subsidiaries, combining the best of localized support functions with strong corporate backup when needed.
The basis for our growth has been strong client relationships earned through the personal commitment of our
staff members to advancing their clients’ programs with superb work products, working in partnership with
them to achieve their mission goals. We strive always to become the partner of choice among our corporate
associates as well, by keeping our word and paying on time.
G&B Solutions, VSE’s newest subsidiary, arrived in 2008. G&B is an established management consulting
and information technology provider to many government agencies, including the Departments of
Homeland Security, Interior, Labor, Agriculture, Housing and Urban Development, and Defense; the Social
Security Administration; the Pension Benefi t Guaranty Corporation; and the National Institutes of Health.
G&B Solutions’ core expertise lies in advisory and consulting services, transformation and modernization,
Lean Six Sigma, Security and Risk Services, program and portfolio management, network IT services,
software development, integration and operations, and quality assurance services. G&B serves clients across
the federal government at 26 locations nationwide. G&B Solutions delivers the full spectrum of business
consulting and IT services to provide solutions that enable our clients’ to realize their critical mission
objectives. We are committed to partnering with our clients to fi nd the best mix of people, processes, and
tools to realize our clients’ business goals over the entire lifecycle.
In 2009, G&B Solutions received two major contract awards. The fi rst is a subcontract to provide Systems
Operations Support Services to the Social Security Administration. While future revenues from this award
cannot be determined with certainty, the engagement has a ceiling value of $100 million over fi ve years.
G&B also received a $26 million prime contract award with a base period of one year and four one-year
option periods from the Army Armament Research, Development and Engineering Center (ARDEC) to
provide Enterprise Excellence services.
Energetics also grew in 2009, adding 39 new staff members for a total of 161 by the end of the year. Much
of this growth resulted from new tasks received through multi-year contracts previously awarded by the
Department of Energy. These multi-year contracts support three high-priority federal efforts: the national
program to modernize the electricity system, the national program in energy effi ciency and renewable energy,
and planning related to the distribution of funds provided by the American Recovery and Reinvestment Act
of 2009 (ARRA). In 2009, Energetics also received new contracts to support the Department of Energy’s
Offi ce of Electricity Delivery and Energy Reliability and the Department of Homeland Security’s Voluntary,
Private-Sector Preparedness Program. In addition, Energetics successfully continued its work to support the
Department of Homeland Security in infrastructure protection, the U.S. Commerce Department’s National
Institute of Standards and Technology in maintaining the U.S. Measurement System, and the Department of
Energy’s R&D program in civilian nuclear energy.
We would like to take this opportunity to thank the dedicated employees of G&B Solutions and Energetics
for their vital contributions to the ongoing success of the IT, Energy, and Management Consulting Group.
They live our commitment to delivering service with integrity, agility, and value every day.
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
11
Infrastructure Group
President, Carl Williams
2009 was a challenging year for the Infrastructure Group. Transitioning most of our Engineering Services
and Information Technology work to Federal Group and G&B Solutions respectively in late 2008 and early
2009 reduced our revenue stream in 2009. Widespread project funding delays throughout the construction
industry during 2009, as well as environmental, technical and weather issues at our port project in
Anchorage, adversely impacted our revenues and profi ts. We tackled each one of these challenges guided by
our core belief system: Professional employees delivering services in an atmosphere of total integrity; with
proactive agility and added value every step of the way.
Implementing our Strategic Plan for 2009-2012 has shifted our focus towards program/construction
management. As a consequence, we have established a sustainable qualifi ed new business pipeline in
program/construction management; developed new client relationships; and we are working with small and
large businesses to be their partner of choice in these markets.
In the process of downsizing our corporate staff to fi t the leaner structure we now require, we have been able
to take care of those redundant personnel by fi nding them opportunities in other groups or support roles at
VSE. Additionally we have been able to shape our compensation package to retain our remaining staff by
offering competitive wages, benefi ts and work conditions. Despite the tough year we have had little turnover
and maintained strong employee loyalty.
ICRC’s primary program, the Port of Anchorage Intermodal Expansion Program (PIEP) at Cook Inlet in
Anchorage, Alaska, was particularly affected by funding delays, environmental and technical issues. Under a
contract with the U.S. Department of Transportation Maritime Administration, ICRC serves as the prime
contractor for the expansion and modernization efforts taking place at the Port. Although these issues remain
a concern in 2010, we believe that we have accounted for them in our projections.
Maintaining a sharp focus on building a qualifi ed pipeline, ICRC increased its bidding rate and was
successful in winning work in Alaska and Hawaii as well as receiving our GSA construction management
schedule in January 2010, which will allow us to bid a wider variety of construction management
opportunities in the federal space.
Structural Construction
Interior/Architectural Installations
Meanwhile, ICRC seeks to broaden its footprint beyond the port market. We are seeking a more diversifi ed
portfolio of opportunities in terms of size and types of projects by focusing on institutional markets such
as college campuses, research facilities, hospitals and large facilities on military installations. These facilities
require sophisticated biosafety level, information technology, security and telecommunications capabilities.
We are building on our current skill sets by expanding our team of experienced construction management
professionals. We are adding these service areas:
Mechanical/Electrical/Plumbing Installations
Communication System Installations
Security System Installations
Special Construction Installations
Facility Maintenance
Fire Protection Installations
This approach is synergetic with the capabilities of the broader VSE and will open up other opportunities for
ICRC in a wider range of federal markets.
ICRC is well positioned for growth. While the economic conditions remain uncertain, we are optimistic that
the ICRC Team is positioned to penetrate its chosen markets in 2010. We have a strategic plan that focuses
on our core competencies in markets where our people and skills are in demand and our core values of
integrity, agility and value highly prized.
12
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
Facilities
VSE Corporation Headquarters
2550 Huntington Avenue
Alexandria, Virginia 22303
(703) 960-4600 or
Toll-free: (800) 455-4873
United States Locations
Huntsville, Alabama
Anchorage, Alaska
Fort Smith, Arkansas
North Little Rock, Arkansas
Texarkana, Arkansas
Barstow, California
China Lake, California
Concord, California
Dublin, California
Fort Hunter Liggett, California
Fort Irwin, California
Fresno, California
Jolon, California
Los Alamitos, California
Los Angeles, California
Point Mugu, California
Riverside, California
Sacramento, California
San Diego, California
San Jose, California
Santa Clara, California
Denver, Colorado
Fort Carson, Colorado
Bradley Airport, Connecticut
Jacksonville, Florida
Miami, Florida
Orlando, Florida
Valrico, Florida
College Park, Georgia
East Point, Georgia
Forest Park, Georgia
Fort McPherson, Georgia
Fort Stewart, Georgia
Warner Robbins, Georgia
Kaiserslautern, Germany
Hickam AFB, Hawaii
Kaneohe Bay, Hawaii
Schofi eld Barracks, Hawaii
Artist rendition of New VSE Headquarters in Springfi eld, VA set to open in Spring 2012
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
13
Facilities
Boise, Idaho
Mountain Home AFB, Idaho
Darien, Illinois
Hamel, Illinois
Indianapolis, Indiana
Des Moines, Iowa
Fort Polk, Louisiana
Adelphi, Maryland
Baltimore, Maryland
Columbia, Maryland
Fort Meade, Maryland
Indian Head, Maryland
Lexington Park, Maryland
Sterling Heights, Michigan
Long Beach, Mississippi
Vicksburg, Mississippi
Weldon Springs, Missouri
Helena, Montana
Bridgeport, New Jersey
Fort Dix, New Jersey
Shrewsbury, New Jersey
South Brunswick, New Jersey
Sparta, New Jersey
Chaparral, New Mexico
Cherry Point, North Carolina
Fort Bragg, North Carolina
Marine Corps Air Station New River,
North Carolina
Bismarck, North Dakota
Broken Arrow, Oklahoma
Fort Sill, Oklahoma
Tinker AFB, Oklahoma
Coraopolis, Pennsylvania
Guaynabo, Puerto Rico
Beaufort, South Carolina
Charleston, South Carolina
Fort Jackson, South Carolina
Marine Corps Air Station, Beaufort,
South Carolina
Fort Hood, Texas
Fort Sam Houston, Texas
Gatesville, Texas
Harlingen, Texas
San Antonio, Texas
Texarkana, Texas
Ogden, Utah
Salt Lake City, Utah
Arlington, Virginia
Ashland, Virginia
Ashburn, Virginia
Chesapeake, Virginia
Fort Monroe, Virginia
Hampton, Virginia
Ladysmith, Virginia
Langley AFB, Virginia
Ruther Glen, Virginia
Fort Lewis, Washington
Vancouver, Washington
Morgantown, West Virginia
Washington, D.C.
Fort McCoy, Wisconsin
Corpus Christi, Texas
International Locations
Afghanistan
Alexandria, Egypt
Anderson AFB, Guam
Iraq
Rome, Italy
Atsugi, Japan
Kadena AFB/Torri Station,
Okinawa, Japan
Tokyo, Japan
Kuwait
Tuxpan, Vera Cruz, Mexico
Osan Air Base, Republic of Korea
Camp Carroll, South Korea
Raohsiong, Taiwan
Golchuk, Turkey
14
2009 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 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 $0.05 per share The NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T(section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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 Act). Yes [ ] No [x]
The aggregate market value of outstanding voting stock held by nonaffiliates of the
Registrant as of June 30, 2009, was approximately $107.6 million based on the last
reported sales price of the Registrant’s common stock on the Nasdaq Global Select
Market as of that date.
Number of shares of Common Stock outstanding as of March 4, 2010: 5,175,080.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 4, 2010, are incorporated by reference
into Part III of this report.
2
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
TABLE OF CONTENTS
PART I
Page
ITEM 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . 12
ITEM 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . 12
Submission of Matters to a Vote of Security Holders . . . 12
ITEM 4.
Executive Officers of the Registrant . . . . . . . . . . . 13
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities. . . . . 16
Selected Financial Data . . . . . . . . . . . . . . . . . 19
Management’s Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 20
Quantitative and Qualitative Disclosures About
Market Risks . . . . . . . . . . . . . . . . . . . . . . . 37
Financial Statements and Supplementary Data . . . . . . . 38
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 61
Controls and Procedures . . . . . . . . . . . . . . . . . 61
Other Information . . . . . . . . . . . . . . . . . . . . 63
Directors, Executive Officers and Corporate Governance . . 63
Executive Compensation . . . . . . . . . . . . . . . . . . 63
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . 63
Certain Relationships and Related Transactions, and . . .
ITEM 13.
Director Independence . . . . . . . . . . . . . . . . . . 63
Principal Accountant Fees and Services . . . . . . . . . . 63
ITEM 14.
PART IV
ITEM 15.
Exhibits, Financial Statement Schedules . . . . . . . . . 63
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-75
3
Forward Looking Statements
This filing contains statements that, 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 filing, see VSE's “Narrative Description of Business” (Items 1, 1A, 2
and 3), and “Management’s Discussion and Analysis.” 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 Securities and Exchange Commission, including
Quarterly Reports on Form 10-Q filed by the Company subsequent to this Annual
Report on Form 10-K and any Current Reports on Form 8-K filed by the Company.
4
ITEM 1. Business
(a) General Background
VSE was incorporated in Delaware in 1959 and serves as a centralized
management and consolidating entity for our business operations. Our business
operations are managed under groups that perform our services. Our Federal
Group consists of our Communications and Engineering Division ("CED"),
Engineering and Logistics Division ("ELD"), Field Support Services Division
(“FSS”), and Systems Engineering Division ("SED"). Our International Group
consists of our GLOBAL Division ("GLOBAL") 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”). The term "VSE" or
"Company" means VSE and its subsidiaries and divisions unless the context
indicates operations of the parent company only.
Our business operations consist primarily of diversified logistics,
engineering, IT, construction management and consulting services performed on
a contract basis. Almost all of our contracts are with agencies of the United
States Government (the "government") and other government prime contractors.
We seek to provide our customers with competitive, cost-effective
solutions to specific problems. These problems generally require a detailed
technical knowledge of materials, processes, functional characteristics,
information systems, technology and products and an in-depth understanding of
the basic requirements for effective systems and equipment.
(b) Financial Information
Our operations are conducted within four reportable segments aligned
with our management groups: 1) Federal, which generated approximately 58% of
our revenues in 2009; 2) International, which generated approximately 31% of
our revenues in 2009; 3) IT, Energy and Management Consulting, which generated
approximately 7% of our revenues in 2009; and 4) Infrastructure, which
generated approximately 4% of our revenues in 2009. Additional financial
information for our reportable segments appears in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
(c) Description of Business
Services and Products
Our services include a broad array of capabilities and resources that
support military, federal civil, and other government systems, equipment and
processes. We are focused on creating, sustaining and improving the systems,
equipment and processes of government through core offerings in logistics,
engineering, IT, construction management and consulting services.
Typical projects include sustaining engineering support for military
vehicles and combat trailers; military equipment refurbishment and
modification; ship maintenance, repair, overhaul planning and follow-on
technical support; logistics management support; machinery condition analysis;
specification preparation for ship alterations and repairs; ship force crew
training; life cycle support for ships; ship communication systems; energy
conservation and advanced technology demonstration projects; technical data
package preparation; multimedia, computer local area network (“LAN”), and
telecommunications systems; cross-platform technical data; product data;
technical manual development and support; information technology management
consulting, services, and solutions; and large-scale port engineering
development and construction management.
5
See Item 7 “Management’s Discussion and Analysis of Financial
Information and Results of Operations” for more information regarding our
business.
Contracts
Depending on solicitation requirements and other factors, we offer our
professional and technical services and products through various competitive
contract arrangements and business units that are responsive to customer
requirements and may also provide an opportunity for diversification. Such
arrangements may include prime contracts, subcontracts, cooperative
arrangements, General Services Administration (“GSA”) schedules, dedicated
cost centers (divisions) and subsidiaries. Some of the contracts permit the
contracting agency to issue delivery orders or task orders in an expeditious
manner to satisfy relatively short-term requirements for engineering and
technical services.
Almost all of our revenues are derived from contract services performed
for Department of Defense (“DoD”) agencies or for Federal Civil agencies. The
U.S. Army, Army Reserve and U.S. Navy are our largest customers. Other
significant customers include the Department of Treasury, the Department of
Transportation, the Department of Energy and the Department of Interior. To a
lesser degree, our customers also include various other government agencies
and commercial entities.
Revenues by Customer
(Dollars in Thousands)
Years ended December 31,
Customer
U.S. Army/Army Reserve
U.S. Navy
U.S. Air Force
Total - DoD
Department of
U.S. Treasury
Department of
Transportation
Department of Interior
Department of Energy
Other government
Total – Federal Civil
Agencies
2009
Revenues
$ 555,238
271,189
%
54.7
26.7
13,839 1.4
82.8
840,266
%
2008
Revenues
$ 625,237
195,792
2007
Revenues
59.9 $344,296
18.8 189,534
%
52.7
29.0
10,720 1.0 4,628 0.7
82.4
79.7 538,458
831,749
47,676
4.7
57,021
5.5
55,020
8.4
35,722
29,275
16,111
3.5
2.9
1.6
42,670 4.2
89,873
19,156
12,812
4.7
0.2
1.6
29,748 2.9 11,427 1.8
30,977
1,053
10,537
8.6
1.8
1.2
171,454
16.9
208,610
20.0 109,014
16.7
Commercial
2,919 0.3
3,376 0.3 5,692 0.9
Total
$1,014,639 100.0
$1,043,735 100.0 $653,164 100.0
The government’s procurement practices sometimes include the bundling of
various work efforts under large comprehensive management contracts
(“omnibus”). As a result, the growth opportunities available to us can occur
in significant, unpredictable increments. We have pursued these larger
opportunities by assembling teams of subcontractors to offer the range of
technical competencies required by these omnibus contracts. Typically the use
of subcontractors and large material purchases on government contracts
provides lower profit margins than work performed by our own personnel. As a
result, the use of such teaming arrangements may lower our overall profit
6
margins in some years. Although the government’s practice of using omnibus
multiple award contracts is expected to continue, we also have opportunities
to compete for other contracts requiring our specific areas of expertise. We
are positioned to pursue these opportunities while continuing to use
subcontractor teams to compete for the omnibus contracts.
Our contracts with the government are typically cost plus fee, time and
materials, or fixed-price contracts. Revenues result from work performed on
these contracts by our own employees, from pass-through of costs for work
performed by our subcontractors, and for materials. Revenues on cost-type
contracts are recorded as contract allowable costs are incurred and fees are
earned.
Revenues for time and materials contracts are recorded on the basis of
contract allowable labor hours worked multiplied by the contract defined
billing rates, plus the cost of materials used in performance on the contract.
Profits or losses 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 vary depending on
the nature of the work and the contract terms. On design and development
fixed-price contracts revenues are recorded as costs are incurred, using the
percentage-of-completion method of accounting. Revenues on fixed-price service
contracts are recorded as work is performed, typically ratably over the
service period. Revenues on fixed-price contracts that require delivery of
specific items may be recorded based on a price per unit as units are
delivered.
Backlog
Funded backlog for government contracts represents a measure of our
potential future revenues. Funded backlog is defined as the total value of
contracts that has been appropriated and funded by the procuring agencies,
less the amount of revenues that have already been recognized on such
contracts. Our funded backlog as of December 31, 2009, is approximately $476
million. Funded backlog as of December 31, 2008 and 2007 was approximately
$567 million and $408 million, respectively. Changes in funded backlog on
contracts are sometimes unpredictable due to uncertainties associated with
changing government program priorities and the ultimate availability of funds,
which is heavily dependent upon the congressional authorization and
appropriation process. When there are delays in this process, such as those
experienced in 2009, the availability of funds for ongoing and planned work is
temporarily diminished.
In addition to the funded backlog levels, we have contract ceiling
amounts available for use on multiple award, indefinite delivery, indefinite
quantity contracts with the U.S. Army, U.S. Air force, and U.S. Navy. While
these contracts increase the opportunities available for us to pursue future
work, the amount of future work is not determinable until delivery orders are
placed on the contracts. Frequently, these delivery orders are competitively
awarded. Additionally, these delivery orders must be funded by the procuring
agencies before we can perform work and begin generating revenues.
Marketing
Our marketing activities are conducted at the operating group level by
our business development staff and our professional staff of engineers,
program managers, and other personnel. These activities are centrally
coordinated through our Corporate Sales and Marketing Department. Information
concerning new programs and requirements becomes available in the course of
contract performance, through formal and informal briefings, from
participation in professional organizations, and from literature published by
the government, trade associations, professional organizations and commercial
entities.
7
Personnel
Services are provided by our staff of professional and technical
personnel having high levels of education, experience, training and skills. As
of December 31, 2009, we had 2,534 employees, an increase from 1,920 as
compared to December 31, 2008. Principal categories include (a) engineers and
technicians in mechanical, electronic, industrial, energy and environmental
services, (b) information technology professionals in computer systems,
applications and products, configuration, change and data management
disciplines, (c) technical editors and writers, (d) multimedia and computer
design engineers, (e) graphic designers and technicians, (f) logisticians, (g)
construction and environmental specialists, and (h) mechanics and vehicle and
equipment technicians. The expertise required by our customers also frequently
includes knowledge of government administrative procedures. Many of our
employees have previously served as government employees or members of the
U.S. Armed Forces.
Competition
The professional and technical services industry in which we are engaged
is very competitive. There are numerous other organizations, including large,
diversified firms with greater financial resources and larger technical staffs
that are capable of providing the same services offered by us. These companies
may be publicly owned or privately held or may also be divisions of much
larger organizations.
Government agencies have emphasized awarding contracts on a competitive
basis as opposed to a sole source or other noncompetitive basis. Most of the
significant contracts that we currently perform were either initially awarded
on a competitive basis or have been renewed at least once on a competitive
basis. Government agencies also order work through contracts awarded by
General Services Administration (“GSA”). GSA provides a schedule of services
at fixed prices that may be ordered outside of the solicitation process. We
have nine GSA schedule contracts for different classes of services. There is
no assurance regarding the level of work we may obtain under these contracts.
Government budgets, and in particular the budgets of certain government
agencies, can also affect competition in our business. A reallocation of
government spending priorities or a general decline in government budgets can
result in lower levels of potential business, thereby intensifying
competition.
It is not possible to predict the extent and range of competition that
we will encounter as a result of changing economic or competitive conditions,
customer requirements or technological developments. We believe the principal
competitive factors for our business are technical and financial
qualifications, past performance and price.
Government acquisition policies and procedures often emphasize factors
that present challenges to our efforts to win new business, and may make it
difficult for us to qualify as a potential bidder. For example, past
performance may be used to exclude entrance into new government markets, and
multiple-award schedules may result in unequal contract awards between
successful contractors.
Available Information
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K and amendments to those reports are filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended. They are available free of charge through our website
www.vsecorp.com as soon as reasonably practicable after the reports are
electronically filed with the Securities and Exchange Commission (“SEC”).
8
ITEM 1A. Risk Factors
Our future results may differ materially from past results and from
those projected in the forward-looking statements contained in this Form 10-K
due to various uncertainties and risks, including but not limited to those set
forth below, one-time events and other important factors disclosed previously
and from time to time in our other filings with the SEC.
The nature of our operations and significant increases in work performed by
our employees in recent years present certain challenges related to work force
management.
Our financial performance is heavily dependent on the abilities of our
operating and administrative staffs with respect to technical skills,
operating performance, pricing, cost management, safety, and administrative
and compliance efforts. A wider diversity of contract types, nature of work,
work locations, and increased legal and regulatory complexities challenges our
administrative staff and skill sets more than in prior years. Also, the recent
increases and geographical expansion in our domestic operating workforce
presents challenges for our quality of workforce, quality of work, safety, and
labor relations compliance. The scale of our current and projected work in
foreign countries is exposing us to new challenges associated with export
compliance, local laws and customs, third world workforce issues, extended
supply chain, and war zone threats. Failure to attract or retain an adequately
skilled workforce, lack of knowledge or training in critical functions, or
inadequate staffing levels can result in lost work, reduced profit margins,
losses from cost overruns, performance deficiencies, and regulatory non-
compliance.
Our work on large program efforts presents a risk to revenue and profit growth
and sustainability.
The eventual expiration of large programs, or the loss of or disruption
of revenues on a single contract, presents the potential for reduced revenues
and profits. Such revenue losses could also erode profits on our remaining
programs that would have to absorb a larger portion of the fixed corporate
costs previously allocated to the expiring programs or discontinued contract
work. While our largest contract, the Rapid Response (“R2”) Program, is
scheduled to expire in January 2011, we expect to continue our work on
existing task orders under such contract through that time, however, specific
task orders under the R2 contract will expire intermittently prior to the
expiration date of the contract. We have submitted a bid for a follow-on to
this contract that is currently under evaluation by our U. S. Army customer.
However, we cannot determine revenue levels precisely even if we are awarded a
follow-on contract.
We are exposed to contractual and financial liabilities if our subcontractors
do not perform satisfactorily.
A large percentage of our contract work is performed by subcontractors,
which are subject to government compliance, performance and financial risks.
Subcontractor terms generally specify the terms and performance for which the
subcontractor is obligated to us. If, however, any unsatisfactory performance
or compliance failure occurs on the part of subcontractors, we must still bear
the cost to remedy these deficiencies on our prime contracts.
Uncertain and shifting federal government priorities could delay contract
awards and funding and adversely affect our ability to continue work on our
government contracts.
The current federal procurement environment is unpredictable and could
adversely affect our ability to perform work on new and existing contracts.
The delays in contract awards during the second half of 2009 is unprecedented
in our experience, and appears to extend across the federal technical services
industry. We anticipate that these delays in contract awards will continue
9
into the first half of 2010. Our business is subject to funding delays,
terminations, reductions, extensions, and moratoriums caused by political and
administrative disagreements and inefficiencies within the government.
Federal procurement directives could result in a loss of work on current
programs to set-asides and omnibus contracts.
Our government business is subject to the risk that one or more of our
potential contracts or contract extensions may be awarded by the contracting
agency to a small or disadvantaged or minority-owned business pursuant to set-
aside programs administered by the Small Business Administration, or may be
bundled into omnibus contracts for very large businesses. These risks can
potentially have an adverse effect on our revenue growth and profit margins.
As a government contractor, we are subject to a number of procurement rules
and regulations that could expose us to potential liabilities or loss of work.
We must comply with and are affected by laws and regulations relating to
the award, administration and performance of government contracts.
Additionally, we are responsible for subcontractor compliance with these laws
and regulations. Government contract laws and regulations affect how we
conduct business with our customers and, in some instances, impose added costs
to us. A violation of specific laws and regulations could result in the
imposition of fines and penalties or the termination of contracts or debarment
from bidding on contracts.
In some instances, these laws and regulations impose terms or rights
that are significantly more favorable to the government than those typically
available to commercial parties in negotiated transactions. For example, the
government may terminate any government contract or subcontract at its
convenience, as well as for performance default. Upon termination for
convenience of a fixed-price type contract, we would normally be entitled to
receive the purchase price for delivered items, reimbursement for allowable
costs for work-in-process and an allowance for profit on the contract or
adjustment for loss if completion of performance would have resulted in a
loss. Upon termination for convenience of a cost-type contract, we would
normally be entitled to reimbursement of allowable costs plus a portion of the
fee. Such allowable costs would include the cost to terminate agreements with
suppliers and subcontractors. The amount of the fee recovered, if any, is
related to the portion of the work accomplished prior to termination and is
determined by negotiation.
A termination for default could expose us to liability and have a
material adverse effect on our ability to compete for future contracts and
orders. In addition, the government could terminate a prime contract under
which we are a subcontractor, irrespective of the quality of services provided
by us as a subcontractor.
Our business could be adversely affected by a negative audit by the
government.
Government agencies, including the Defense Contract Audit Agency and the
Department of Labor, routinely audit and investigate government contractors.
These agencies review a contractor’s performance under its contracts, cost
structure and compliance with applicable laws, regulations and standards. The
government also may review the adequacy of, and a contractor’s compliance
with, its internal control systems and policies, including the contractor’s
purchasing, property, estimating, compensation and management information
systems. Any costs found to be improperly allocated to a specific contract
will not be reimbursed, while such costs already reimbursed must be refunded.
If an audit uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of payments, fines
and suspension or prohibition from doing business with the government. In
addition, we could suffer serious harm to our reputation if allegations of
impropriety were made.
10
Global economic conditions and political factors could adversely affect
revenues on current programs.
Revenues from our CED Army Equipment Support, CED Assured Mobility
Systems Program, GLOBAL Ship Transfer and other programs for which work is
performed in foreign countries are subject to political risks posed by the
ongoing conflicts in the Middle East and potential terrorist activity. A
significant amount of our revenues in recent years has resulted from the U.S.
military involvement in Iraq and Afghanistan, and an end to or substantial
reduction of such U.S. military involvement could cause a decrease in our
revenues. Similarly, a change in the political landscape in Egypt or other
client countries could cause a decrease in our revenues. International tensions
can also affect our 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
those times. Adverse results arising from these global economic and political
risks could have a material adverse impact on our results of operations.
Our earnings and margins may vary based on the mix of contracts and programs.
Our business includes both cost-type and fixed-price contracts. Cost-
type contracts generally have lower profit margins than fixed-price contracts.
Typically the use of subcontractors and large material purchases on government
contracts do not allow for profit margins that are as high as profit margins
from contracts under which the work is performed by our own personnel. The use
of subcontractors and large material purchases may lower our overall profit
margins in some years.
Investments in facilities could cause losses if certain work is disrupted or
discontinued.
We have made investments in facilities and lease commitments to support
specific business programs, work requirements, and service offerings. A
slowing or disruption of these business programs, work requirements, or
service offerings that results in operating below intended levels could cause
us to suffer financial losses.
Environmental and pollution risks could potentially impact our financial
results.
We are exposed to certain environmental and pollution risks due to the
nature of some of the contract work we perform. Costs associated with
pollution clean up efforts and environmental regulatory compliance have not
yet had a material adverse impact on our capital expenditures, earnings, or
competitive position. However, the occurrence of a future environmental or
pollution event could potentially have an adverse impact.
We use estimates in accounting for our programs. Changes in estimates could
affect future financial results.
We use 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
contract disallowance and self-insured health claims, and estimated cost-to-
complete on certain fixed-price contracts.
New accounting standards could result in changes to our methods of quantifying
and recording accounting transactions, and could affect financial results and
financial position.
Changes to Generally Accepted Accounting Principles in the United States
(“GAAP”) arise from new and revised guidance issued by the Financial
Accounting Standards Board, the SEC, and others. The effects of such changes
may include prescribing an accounting method where none had been previously
specified, prescribing a single acceptable method of accounting from among
several acceptable methods that currently exist, or revoking the acceptability
11
of a current method and replacing it with an entirely different method, among
others. These changes could result in unanticipated effects on results of
operations, financial position and other financial measures.
ITEM 1B. Unresolved Staff Comments
None
ITEM 2. Properties
Our principal executive and administrative offices are located in a
five-story building in Alexandria, Virginia, leased by us through April 30,
2013. This building contains approximately 127,000 square feet of engineering,
shop, and administrative space. In November 2009, we signed an agreement to
lease a new building with approximately 95,000 square feet of office space in
Springfield, Virginia that will serve as our new executive and administrative
headquarters. This agreement includes a 15-year lease commitment. We expect to
take occupancy of the building in the spring of 2012.
We also provide services and products from approximately 37 leased
facilities located near customer sites to facilitate communications and
enhance project performance. These facilities are generally occupied under
short-term leases and currently include a total of approximately 1.4 million
square feet of office and warehouse space. Our employees often provide
services at customer facilities, limiting our requirement for additional
space. We also provide services from several locations outside of the United
States, generally at foreign shipyards or U.S. military installations.
We own and operate two facilities in Ladysmith, Virginia. One of these
properties consists of approximately 44 acres of land and multiple storage and
vehicle maintenance buildings totaling approximately 57,000 square feet of
space. The other property consists of 30 acres of land and buildings totaling
approximately 13,500 square feet of space. We use these properties primarily
to provide refurbishment services for military equipment, storage and
maintenance and to supplement our Alexandria, Virginia, office and shop
facilities.
ITEM 3. Legal Proceedings
We may have, in the normal course of business, certain claims, including
legal proceedings, 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the three-month period ended
December 31, 2009.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are listed below, as well as information
concerning their age and positions held with VSE. There were no family
relationships among any of our executive officers. For executive officers who
have been with us less than five years, their principal occupations and
business experience over the last five years are provided. The executive
officers are appointed annually to serve until the first meeting of VSE’s
Board of Directors (the “Board”) following the next annual meeting of
stockholders and until their successors are elected and have qualified, or
until death, resignation or removal, whichever is sooner.
Name
Age
Position with Registrant
Tina B. Bailey
51
Vice President – Human Resources
Thomas G. Dacus
Group
64
Executive Vice President and President, Federal
Maurice A. Gauthier 62
and Chief Operating Officer
Director, Chief Executive Officer, President
Michael E. Hamerly 64
International Group
Executive Vice President and President,
Randy W. Hollstein 53
Vice President – Marketing
William J. Jonas
Thomas M. Kiernan
57
42
Vice President - Procurement
Vice President, General Counsel and Secretary
James W. Lexo, Jr. 61
and Business Initiatives and Vice Chairman
Executive Vice President, Strategic Planning
of the Board of Directors, ICRC
Thomas R. Loftus
Officer
54
Executive Vice President and Chief Financial
James E. Reed
Group
61
President, IT, Energy and Management Consulting
Carl E. Williams
57
President, Infrastructure Group
Crystal R. Williams 46
Vice President – Contracts
Mr. Gauthier joined VSE in April 2008 as Chief Executive Officer,
President and Chief Operating Officer. He was elected as a VSE director by the
Board in February, 2009. Mr. Gauthier completed a distinguished military
career of over 28 years of service, retiring in 1997 as a Navy Captain and
board certified Department of Defense Major Program Manager. Mr. Gauthier
worked for VSE from October 1997 through February 1999 as Vice President and
Chief Technology Officer, and as Director of Strategic Planning and Business
Development, before joining the Nichols Research Corporation Navy Group as its
President. With the acquisition of Nichols Research Corporation by Computer
Sciences Corporation (“CSC”) in 1999, Mr. Gauthier served as Vice President of
CSC’s Advanced Marine Center. His most recent assignment with CSC was as Vice
President and General Manager of CSC’s Navy and Marine Corps Business Unit
where he was responsible for the overall leadership and financial performance
of a 2,500-person organization providing systems engineering, technical,
information technology and telecommunications support to U.S. Navy and Marine
Corps customers. Mr. Gauthier earned a Bachelor of Science degree from the
U.S. Naval Academy. He received a Master of Science degree in Systems
Engineering from the U.S. Naval Postgraduate School, Monterey, CA. He is a
graduate of the Defense Acquisition University’s Defense Systems Management
College and of the Advanced Executive Program and the International Marketing
13
Program offered by the Kellogg Graduate School of Management at Northwestern
University.
In December 2009, Ms. Bailey was promoted to Vice President of Human
Resources, after joining VSE as Assistant Vice President, Director of Human
Resources for the Federal Group in October 2008. Prior to joining VSE, Ms.
Bailey served as Vice President of Administration, Human Resources Director,
at Science Applications International Corporation (“SAIC”). Ms. Bailey has
over 20 years of experience as a human resources professional serving in a
variety of increasingly responsible roles at several Fortune 500 companies,
including Aetna Casualty and Surety Company, Travelers Group and Citigroup.
Ms. Bailey joined SAIC in 1998 as a Senior Level Employee Relations Manager.
Ms. Bailey earned a Bachelor of Arts degree from Virginia Commonwealth
University and a Master of Arts degree in Human Resources Management from
Marymount University.
Mr. Hollstein joined VSE in August 2008 as Vice President of Marketing.
Mr. Hollstein has over 30 years of experience as a naval officer and defense
industry professional. Mr. Hollstein served in the U.S. Navy as a surface
warfare officer before leaving to join industry. He has worked in several
leading companies at increasing levels of responsibility in program
management, government relations and business development. Before joining VSE,
Mr. Hollstein was Senior Director of Business Development for Maersk Line,
Limited where he was responsible for business development activities related
to maritime and maritime security opportunities. In prior assignments at other
companies, he has been responsible for business development with Navy, Marine
Corps, Coast Guard and Army clients and for developing new business with other
government agencies. Mr. Hollstein earned his Bachelor of Science degree in
Business Management from Babson College.
Mr. Jonas joined VSE in March of 2009 as Vice President of Procurement.
Prior to joining VSE, Mr. Jonas served as co-founder and President of
Comprehensive Contracting Services (“CCS”), which provides Program Management
services to U.S. Government customers in the Intelligence community. Prior to
CCS, Mr. Jonas was Vice President, General Manager of the Health and Logistics
division of IMC. Mr. Jonas has also served as Vice President of Procurement
with IAP Corporation and with Kellogg, Brown and Root, where he was
responsible for the support of government support contracts. He has held
positions of responsibility with Raytheon Company as well as TRW Space and
Electronics (now Northrop Grumman Corp.) where he spent 23 years in
increasingly responsible roles. Mr. Jonas earned a Juris Doctorate degree
from Loyola Law School in Los Angeles and a Bachelor of Science degree in
Business Administration from the University of Redlands.
Mr. Kiernan joined VSE in November 2008 as Vice President, General
Counsel, and Assistant Secretary. From 2003 to 2008, Mr. Kiernan served as
Vice President, General Counsel and Secretary for Intelsat General
Corporation, a subsidiary of Intelsat, Ltd. serving government and commercial
customers. From 2000 to 2003, Mr. Kiernan served as a member of the Intelsat,
Ltd., Office of General Counsel. From 1994 to 2000, Mr. Kiernan served as
corporate counsel for SRA Life Sciences. Mr. Kiernan is a graduate of Virginia
Tech University (B.A., Political Science) and George Mason University School
of Law. He is a member of the Virginia State Bar.
Mr. Lexo joined VSE in 2007 as Executive Vice President of Strategic
Planning and Business Initiatives and Vice Chairman of the Board of Directors
of VSE’s wholly owned subsidiary ICRC. Mr. Lexo was the founder of ICRC and
served as chief executive officer until its acquisition by VSE. Before his
career in business, he served on Capitol Hill as the Administrative Aide to
Congressman Don Young of Alaska for 12 years. Mr. Lexo received a Bachelor of
Arts Degree in Political Science from Westminster College in Pennsylvania, and
participated in graduate studies in government contracting at the University
of Virginia.
Mr. Reed joined VSE in 2005 as Chief Operating Officer of VSE’s wholly
owned subsidiary Energetics, and since April 2005, he has served as
Energetics’ President. Mr. Reed was a founder of Energetics in 1979 and served
14
as an officer of Energetics from 1979 to 2001. He provided consulting services
to government and private clients as a sole proprietor during the period 2001
through 2004. Mr. Reed is a Registered Professional Engineer in Maryland. He
was appointed President of VSE’s IT, Energy and Management Consulting Group in
2008. Mr. Reed received a Bachelor of Science Degree in Engineering Science
from Pennsylvania State University and received a Master of Science Degree in
Electrical Science and Applied Physics from Case Western Reserve University in
Ohio.
Mr. Carl Williams joined VSE in 2007 as President and Chief Operating
Officer of ICRC. Mr. Williams completed 23 years of service in the U.S. Navy,
retiring as Commander. He joined ICRC as its Executive Vice President of
Operations in 2000 and has served as Chief Operating Officer of ICRC since
2003. Mr. Williams was appointed President of VSE’s Infrastructure Group in
2008. Mr. Williams received a Bachelor of Science Degree in Mechanical
Engineering from North Carolina State University.
Ms. Crystal Williams joined VSE in December 2008 as Vice President –
Contracts. Prior to joining VSE, Ms. Williams was Contracts Director for the
North American Public Sector at CSC. She began her CSC career in 1994. Prior
to joining CSC, Ms. Williams provided contract administration services at ICF
Kaiser International and at Dynamic Concepts Inc. Ms. Williams is a graduate
of George Mason University (B.S., Public Administration) and has earned
continuing education credits in contracts and marketing at the American
Graduate University and at George Mason University, Continuing Education.
15
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
(a)
Market Information
VSE common stock, par value $0.05 per share, is traded on the Nasdaq
Global Select Market, trading symbol, "VSEC," Newspaper listing, "VSE."
The following table sets forth the range of high and low sales price
(based on information reported by the Nasdaq Global Select Market) and cash
dividend per share information for our common stock for each quarter and
annually during the last two years.
Quarter Ended
High
Low
Dividends
2008:
March 31 . . . . . . . $49.69 $22.72 $0.040
0.045
June 30 . . . . . . . 35.46
0.045
September 30 . . . . . 43.00
0.045
December 31 . . . . . 40.32
$0.175
$49.69 $22.72
27.50
24.86
23.00
For the Year
2009:
March 31 . . . . . . . $48.44 $19.51
23.42
June 30 . . . . . . . 31.50
24.53
September 30 . . . . . 41.52
37.00
December 31 . . . . . 49.00
For the Year $49.00 $19.51
$0.045
0.050
0.050
0.050
$0.195
(b) Holders
As of February 6, 2010, VSE common stock, par value $0.05 per share, was
held by approximately 281 stockholders of record. The number of stockholders
of record is not representative of the number of beneficial holders because
many of the shares are held by depositories, brokers or nominees.
(c) Dividends
In 2008 cash dividends were declared quarterly at the annual rate of
$0.16 per share through March 31, 2008, and at the annual rate of $0.18 per
share commencing June 3, 2008.
In 2009 cash dividends were declared quarterly at the annual rate of
$0.18 per share through March 31, 2009, and at the annual rate of $0.20 per
share commencing June 2, 2009.
Pursuant to our bank loan agreement (see Note 7 of "Notes to
Consolidated Financial Statements" in Item 8 of this Form 10-K), the payment
of cash dividends is subject to annual rate restrictions. We have paid cash
dividends each year since 1973.
16
(d)
Equity Compensation Plan Information
Compensation Plans
We have two compensation plans approved by our stockholders under which
our equity securities are authorized for issuance to employees and directors:
(i) the VSE Corporation 2004 Non-employee Directors Stock Plan and (ii) the
VSE Corporation 2006 Restricted Stock Plan.
In December 2005, the Board directed VSE to discontinue, until the Board
determined
and
nondiscretionary, to purchase VSE’s common stock, under the 2004 Plan. The
options outstanding under the 2004 Plan and predecessor 1998 Stock Option Plan
were not affected by this Board action.
discretionary
otherwise,
options,
awarding
both
The following table provides information about our equity compensation
plans as of December 31, 2009:
Number of Shares
Remaining
Available for
Number of Weighted Future Issuance
Shares to be Average Under Equity
Issued upon Exercise Compensation Plans
Exercise of Price of (excluding shares
Outstanding Outstanding reflected in
Options Options column (a))(1)(2)
Plan Category (a) (b) (c)
Equity compensation
plans approved by
stockholders . . . . . - $ - 197,487
Equity compensation
plan not approved
by stockholders . . . . - - 4,373
Total - $ - 201,860
(1) At December 31, 2009, 197,487 shares of VSE common stock were available
under the 2006 Restricted Stock Plan.
(2) Includes the remaining 4,373 shares of the 5,831 shares of VSE common
stock, with subsequent vesting and issuance dates, awarded to Maurice A.
Gauthier on April 28, 2008, as an inducement to Mr. Gauthier entering into an
employment agreement with VSE to become VSE’s Chief Executive Officer and
President. Such issuance of common stock was approved by a majority of VSE’s
independent directors. Subject to the term of Mr. Gauthier’s Employment
Agreement not having terminated, the Employment Agreement provides for vesting
and issuance dates for the 5,831 shares as follows: 25% of the shares were
vested and issued to Mr. Gauthier on April 28, 2009, 25% of the shares will
vest and be issued to Mr. Gauthier on April 28, 2010 and 50% of the shares
will vest and be issued to Mr. Gauthier on April 28, 2011.
17
Performance Graph
Set forth below is a line graph comparing the cumulative total return of
VSE common stock with (a) a performance index for the broad market (NASDAQ
Global Select Market) in which VSE common stock is traded and (b) a published
industry index. VSE common stock is traded on the NASDAQ Global Select Market,
and our industry group is engineering and technical services (formerly SIC
Code 8711). Accordingly, the performance graph compares the cumulative total
return for VSE common stock with (a) an index for the NASDAQ Global Select
Market (U.S. companies) (“NASDAQ Index”) and (b) a published industry index
for SIC Code 8711 (“Industry Index”).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among VSE Corporation, The NASDAQ Composite Index
And A Peer Group
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/04
12/05
12/06
12/07
12/08
12/09
VSE Corporation
NASDAQ Composite
Peer Group
*$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Performance Graph Table
VSE
NASDAQ Composite
Peer Group
2004 2005 2006 2007 2008 2009
369
106
200
168
101
147
396
124
376
237
114
183
320
73
182
100
100
100
18
ITEM 6. Selected Financial Data
(In thousands, except per share data)
Years ended December 31,
2009 2008 2007 2006 2005
Revenues . . . . . . . . . . . . . . . . $1,014,639 $1,043,735 $653,164 $363,734 $280,139
Net income . . . . . . . . . . . . . . . $ 24,024 $ 19,040 $ 14,102 $ 7,789 $ 6,169
Basic earnings per share . . . . . . . . $ 4.68 $ 3.75 $ 2.85 $ 1.64 $ 1.33
Diluted earnings per share . . . . . . . $ 4.67 $ 3.74 $ 2.82 $ 1.61 $ 1.29
Cash dividends per common share . . . . $ 0.195 $ 0.175 $ 0.155 $ 0.14 $ 0.12
As of December 31,
2009 2008 2007 2006 2005
Working capital . . . . . . . . . . . . $ 45,902 $ 24,179 $ 24,756 $ 25,646 $ 22,028
Total assets . . . . . . . . . . . . . . $ 253,990 $ 275,966 $171,771 $ 98,535 $ 73,833
Stockholders' equity . . . . . . . . . . $ 101,310 $ 76,123 $ 56,376 $ 38,236 $ 30,151
This consolidated summary of selected financial data should be read in
conjunction with Management’s Discussion and Analysis of the Financial
Condition and Results of Operations included in Item 7 of this Form 10-K and
with the Consolidated Financial Statements and related Notes included in Item
8 of this Form 10-K. The historical results set forth in this Item 6 are not
necessarily indicative of the results of operations to be expected in the
future.
19
ITEM 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
Organization
Our business is focused on providing sustainment services for DoD legacy
systems and equipment and professional services to DoD and Federal Civilian
agencies. VSE operations consist primarily of diversified logistics,
engineering, IT, construction management 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 perform our
services. Our Federal Group operations are conducted by our Communications and
Engineering Division ("CED"), Engineering and Logistics Division ("ELD"),
Field Support Services Division (“FSS”), and Systems Engineering Division
("SED"). Our International Group operations are conducted by our GLOBAL
Division ("GLOBAL", formerly our BAV Division), and Fleet Maintenance Division
("FMD"). Our IT, Energy and Management Consulting Group operations are
conducted by our wholly owned subsidiaries Energetics Incorporated
("Energetics") and G&B Solutions, Inc. (“G&B”). Our Infrastructure Group
operations are conducted by our wholly owned subsidiary Integrated Concepts
and Research Corporation (“ICRC”). Our Management Sciences Division ("MSD")
formerly conducted operations in our Federal Group, but is currently inactive.
Our Coast Guard Division ("VCG") formerly conducted operations in our
International Group, but is currently inactive.
Customers and Services
We provide logistics, engineering, legacy equipment sustainment, IT,
construction management and consulting services to the government, other
government prime contractors, and commercial entities. Our largest customer is
the DoD, including agencies of the U.S. Army, Navy and Air Force. We also
provide services to civilian government customers. See Item 1 “Business –
Contracts” on page 6 for revenues by customer.
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. MSD’s service offerings have been transferred to our G&B
operations and MSD is currently inactive.
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. The R2 Program supports clients across DoD and the
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. A substantial portion of
our revenues on the R2 contract result from the pass through of subcontractor
support services that have a low profit margin. 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. We performed work on
20
this program for a full year in 2008, but only two months in 2009 because the
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”). 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 received 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
this task order with contractual coverage of approximately $235 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.
SED - SED provides comprehensive systems and software engineering,
logistics, and prototyping services to DoD. Our services offered through SED
principally support 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 GLOBAL, FMD
and VCG. VCG became inactive in 2009.
GLOBAL - Through GLOBAL, 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. Global provides program management,
engineering, technical support, logistics services for ship reactivations and
transfers and follow-on technical support. The level of revenues and
associated profits resulting from fee income generated by this program varies
depending on several 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 historically caused
quarterly and annual revenue fluctuations.
FMD - FMD provides 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.
Treasury Seized Asset Program – 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
21
fee contract that contains certain conditions under which the incentive fee
revenue 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. An assessment of actual costs compared to target costs is made
once annually pursuant to the contract. We recognize incentive fee revenue
when the amount is fixed or determinable and 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 concluded negotiations with our customer that finalized target cost
levels for the fiscal year ending September 30, 2009 to reflect more closely
the work requirements for the year and amended certain other terms. With the
conclusion of these negotiations, our incentive fee became fixed and
determinable and collectability was reasonably assured. This allowed us to
recognize incentive fees in the third quarter of 2009 on all of our work
performed during the government’s fiscal year ended September 30, 2009. We
recognized pretax income on this program in the third quarter of 2009 of
approximately $3.3 million, primarily due to this incentive fee recognition.
Contract Field Teams Program –Our FMD division has one of several prime
contracts to support the U.S. Air Force Contract Field Teams (“CFT”) Program.
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. The contract provides us with the opportunity
to compete for and expand our work performed for the Air Force.
IT, Energy and Management Consulting Group - Our 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, policy, business, and
management support in areas of clean and efficient energy, climate change
mitigation, infrastructure protection, measurement technology, and global
health. Energetics’ expertise lies in managing collaborative processes for
diverse stakeholders in decision making, R&D program planning and evaluation
metrics, state-of-the-art technology assessments, technical and economic
feasibility analysis, and technical communications. Customers include the U.S.
Department of Energy, the U.S. Department of Homeland Security, U.S. Department
of Commerce, 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, and Defense; 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, systems design and integration,
quality assurance services and product and process improvement services.
Infrastructure Group – This group consists of our ICRC subsidiary,
which 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
(“POA Project”). 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. The PIEP contract has an estimated ceiling
22
amount of $704 million, a three-year base period of performance, and four one-
year option periods. 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. In addition, during 2009, revenues and
profits were significantly reduced on the POA Project due to temporary work
schedule delays caused by environmental, technical and weather issues near the
site on which ICRC conducts its PIEP work. We expect revenue levels on the
POA Project to recover because most of the work that were unable to perform in
2009 will be performed in future years.
Concentration of Revenues
(in thousands)
Years ended December 31,
Source of Revenues
CED Army Equipment
Support
CED Assured Mobility
Systems
RCV Modernization
(including FSS and
SED labor support)
CED Other
Total CED
GLOBAL Egypt
GLOBAL Romania
GLOBAL India
GLOBAL Other
Total GLOBAL
Treasury Seized
Asset Program
2009
Revenues
%
2008
Revenues
%
2007
Revenues
%
$ 55,381 5.4 $ 319,933 30.7 $218,615 33.5
144,375 14.2 92,669 8.9
27,547 4.2
82,734 8.2 3,565 0.3
- -
175,048 17.3 172,153 16.5 47,482 7.3
457,538 45.1 588,320 56.4 293,644 45.0
55,317 5.5 49,926 4.8 51,295 7.9
20,136 1.9 9,737 0.9 3,682 0.6
- 0.0 55 0.0 38,337 5.9
30,011 3.0 22,013 2.1 20,410 3.1
105,464 10.4 81,731 7.8 113,724 17.5
45,090 4.4 55,218 5.3 53,690 8.2
POA Project
35,699 3.5 89,722 8.6 30,674 4.7
Other
370,848 36.6 228,744 21.9 161,432 24.6
Total Revenues
$1,014,639 100.0 $1,043,735 100.0 $653,164 100.0
Management Outlook
We have made a strategic commitment to increase our direct labor revenue
and diversify our service offerings and customer base to improve our profit
margins. Concurrently, we will continue to pursue large DoD contracts for
which we have demonstrated proven expertise as those opportunities arise.
We have significantly increased our workforce in 2008 and 2009 and we
expect to achieve further increases in future years.
Employee Count % Increase
As of December 31, 2007
Increase in 2008
As of December 31, 2008
Increase in 2009
As of December 31, 2009
1,223
+ 697
1,920
+ 614
2,534
+ 57%
+ 32%
The majority of our new employees are engaged in work on DoD legacy
systems sustainment services, an area on which we believe DoD will continue to
23
be focused in the near future. Concurrently, requirements for work performed
by our subcontractors that generated much of our revenue growth in years prior
to 2009 have declined. As a result, an increasing amount of our work is
performed by our employees and we are relying less on subcontractors. Revenue
from work performed by our employees, or direct labor revenue, typically has a
higher profit margin than revenue generated by our subcontractors, which
generally has little or no associated profit. While the decline in
subcontractors is expected to result in flatter overall revenue growth in the
near term, we expect to benefit from improved profit margins associated with
our employee growth, enhanced control of our client relationships, and reduced
dependence upon subcontractor priorities.
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 subsidiary services that has shown favorable results, including
some recent contract awards that will be performed during the next three to
five years; 2) the increase in our G&B subsidiary employees and revenues
during 2009; 3) an emphasis on marketing our ICRC subsidiary infrastructure
services to a wider range of clients; and 4) our continued commitment to grow
through strategic acquisitions of companies that perform work outside the DoD
market. We expect these efforts directed toward the growth of our work in the
Federal Civilian marketplace to contribute to overall future revenue growth
and financial performance.
We also know there are risks and uncertainties related to our business.
We recognize that 2009 was a government transition year and government
spending priorities may continue to change significantly. There are
indications of a shift in government spending to more energy, IT-related
infrastructure, health care IT, and DoD legacy systems sustainment services.
We believe that our current capabilities have us well positioned to pursue
these opportunities.
The government transition has also affected the timing of contract
awards and the funding process. The federal technical services industry
experienced an extraordinary delay in contract awards during the first year of
the new administration as it ensured these transactions were consistent with
its priorities. We anticipate that this delay in contract awards will
continue into the first half of 2010. Additionally, the government workforce
has continued to experience a loss of qualified contracting personnel in
recent years. While the government is seeking to replace this personnel loss,
we believe that this transition in the government workforce may impact
proposal decisions and delay funding of new and ongoing contract efforts. The
impact of the government’s transition and workforce issues is reflected in the
summary of funding activity presented below.
Bookings and 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 our bookings and revenues for the
years ended December 31, 2009, 2008 and 2007, and funded contract backlog as
of December 31, 2009, 2008 and 2007 is as follows.
(in millions)
2009 2008 2007
Bookings . . . . . . . . . . . . . . . . $939 $1,189 $736
Revenues . . . . . . . . . . . . . . . . $1,015 $1,044 $653
Funded Backlog . . . . . . . . . . . . . $476 $567 $408
Rapid Response Program
In January 2009, the U.S. Army informed us that it would not consider
our proposal for a new contract, known as Rapid Response – Third Generation
(“R2-3G”) to succeed our current R2 Program contract. Partially due to protest
efforts by us and other offerors, the Army subsequently amended the
solicitation to allow additional prime contract awards. We were eligible for
24
these additional awards and submitted a proposal that is currently under
evaluation.
In addition, we have been transferring work that had previously been
performed through our R2 contract to our other omnibus contracts. We are
continuing this effort by seeking new task order awards on our other omnibus
contracts for this work as the R2 task orders expire. The award of a prime
contract under the R2-3G program would provide us with an additional, but not
essential, contract on which to place existing work and potential new work. We
expect to continue our work on existing task orders under our current R2
contract through the scheduled contract expiration in January 2011. CED
revenues are expected to decrease as the R2 contract nears completion due to
the expiration of individual task orders. While the CED division had program
work set to expire in February 2009, it was awarded new work in January 2009.
It is difficult to assess the financial impact regarding the final outcome of
the R2-3G program and our level of participation, given uncertain DoD work
requirements and our potential to perform work under other multiple award
omnibus contracts. A substantial portion of our revenues on the R2 contract
are from low profit margin subcontract work. We believe our efforts in
replacing subcontract work with direct labor are resulting in increases in our
profit margins.
Other Programs and Contracts
In addition to a significant new source of work in 2009 and 2010, the
RCV Maintenance Program gives us a key presence in Kuwait and could
potentially provide us with additional work in the future. Our FSS division is
performing the work on the RCV Maintenance Program and the presence of the FSS
workforce and the facility it occupies in Kuwait could attract additional
similar work.
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 2009. ELD
revenues are primarily generated from direct labor. Our investment in
facilities and personnel to support this work enhances our ability to serve
DoD’s growing need for our equipment refurbishment and sustainment services.
Our ELD division currently has several bids pending for additional new work
that if awarded, would be expected to increase significantly the number of our
employees and revenues. Recently released DoD budget exhibits reflect a
significant plan for continuing this type of work for several years to come.
Our SED division was awarded a subcontract in 2009 to provide Vehicle
Integration Kits (“VIKs”), spare VIK components, and engineering and
installation support on tactical wheeled vehicles and combat vehicles for the
U.S. Army and U.S. Marine Corps through a multiple award indefinite
delivery/indefinite quantity contract under the Driver’s Vision Enhancer-
Family of Systems (“DVE-FOS”) program. The subcontract has an anticipated
ceiling value of approximately $190 million over a five-year period. We have
pursued this work for several years and we believe that this award will
rekindle the growth of revenues and profits in our SED division after its
completion in 2008 of 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.
Our GLOBAL division revenues have increased in 2009 compared to the
prior year. Also, we expect further increases in our ship transfer revenues in
the near term based on indications from new requests for FMS assets,
congressional approval of certain ship transfers, and our receipt of a $249
million contract option modification award in November 2009 from the U.S. Navy
to provide for an additional 12 months of continued support. This may include
some of our current client countries and some new client countries.
The CFT Program contract gives us the opportunity to increase our
sustainment and legacy services performed for the Air Force. This program is
contributing to direct labor revenue increases in our FMD division. Our FMD
division also recently entered into a software license and services agreement
25
that will enable us to expand our logistics support services for air, sea and
land military assets.
The U. S. Department of Treasury has extended our Treasury Seized Asset
Program work through September 30, 2010. Due to larger than anticipated levels
of work on this contract and the complexity in administering performance
incentives under the contract, we agreed with our customer to discontinue
additional award terms to allow the customer to re-compete the contract under
a more appropriate contract type for work to be performed after September 30,
2010.
Our G&B subsidiary received two major awards in 2009. One award is a
subcontract to provide systems operations support services to the Social
Security Administration. While future revenues from this award cannot be
determined with certainty, the engagement has a ceiling value of $100 million
over five years. G&B also received a $26 million prime contract award with a
base period of one year and four one-year option periods from the Army
Armament Research, Development and Engineering Center to provide enterprise
excellence services.
Our Energetics subsidiary was awarded one of the largest contracts in
its history in 2009 by the U.S. Department of Energy’s Office of Electricity
Delivery and Energy Reliability. Energetics expects to receive up to $11.3
million to provide services under a three-year subcontract.
Our ICRC subsidiary’s work on the POA Project in Anchorage, Alaska has
been a challenge in 2009. Revenues and profits were down significantly on this
project in 2009 due to temporary work schedule delays caused by environmental,
technical and weather issues near the site on which ICRC conducts its PIEP
work. We expect revenue levels on this job to recover because most of the work
we were unable to perform in 2009 will be performed in 2010 and future years.
We were awarded a GSA Logistics Worldwide (“LOGWORLD”) contract in 2009.
This new contract is available to all government 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 have several GSA work schedules and multiyear, multiple award,
indefinite delivery, indefinite quantity (“omnibus”) contracts that have large
nominal ceiling amounts. These contracts include the Field and Installation
Readiness Support Team (“FIRST”) contract with the U.S. Army, the SeaPort
Enhanced contract with the U.S. Navy, 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 GSA work schedules and omnibus contracts cannot be
predicted with certainty, they, along with our CFT Program contract, allow us
to pursue task order awards for new work.
In summary, we believe that we are well positioned to meet the
challenges of sustaining and improving the revenue and profit levels we have
achieved in recent years. This confidence is supported by 1) the expansion of
our equipment refurbishment and sustainment services performed by ELD and the
ship transfer services performed by GLOBAL; 2) our new work on the RCV
Maintenance and CFT Programs; 3) our position as a prime contractor on our
FIRST contract that presents us with some significant bidding opportunities
and award prospects; 4) our growing level of work in the Federal Civil
marketplace; 5) our increased marketing efforts in both our DoD and Federal
Civilian markets; and 6) our continued commitment to grow through strategic
acquisitions.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2009-01, “Generally Accepted Accounting
Principles” (“ASC Topic 105”), which establishes the Accounting Standards
Codification (the “Codification” or “ASC”) as the single source of
26
authoritative nongovernmental U.S. GAAP, effective July 1, 2009. The
Codification supersedes existing FASB, American Institute of Certified Public
Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related
literature. The Codification establishes one level of authoritative GAAP.
All other literature is considered non-authoritative. The Codification is
effective for interim and annual financial periods ending after September 15,
2009. We adopted the Codification in the quarter ending September 30, 2009.
In October 2009, the FASB revised its accounting guidance related to
revenue arrangements with multiple deliverables. The guidance relates to the
determination of when the individual deliverables included in a multiple-
element arrangement may be treated as separate units of accounting and
modifies the manner in which the transaction consideration is allocated across
the individual deliverables. Also, the guidance expands the disclosure
requirements for revenue arrangements with multiple deliverables. The guidance
will be effective for us beginning on January 1, 2011, and may be applied
retrospectively for all periods presented or prospectively to arrangements
entered into or materially modified after the adoption date. Early adoption
is permitted provided that the guidance is retroactively applied to the
beginning of the year of adoption. We are currently assessing the potential
effect the adoption of this new guidance will have, if any, on our
consolidated financial statements.
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. We believe the following critical accounting
policies affect the more significant accounts, particularly those that involve
judgments, estimates and assumptions used in the preparation of our
consolidated financial statements.
Revenue Recognition
Substantially all of our services are performed for our customers on a
contract basis. The three primary types of contracts used are time and
materials, cost-type, and fixed-price. Revenues result from work performed on
these contracts by our employees and our subcontractors and from costs for
materials and other work related costs allowed under our contracts.
Revenues for time and materials contracts are recorded on the basis of
contract allowable labor hours worked multiplied by the contract defined
billing rates, plus the direct costs and indirect cost burdens associated with
materials and subcontract work used in performance on the contract. Generally,
profits on time and materials contracts result from the difference between the
cost of services performed and the contract defined billing rates for these
services.
Revenues on cost-type contracts are recorded as contract allowable costs
are incurred and fees earned. Our Global contract and our PIEP contract are
cost plus award fee contracts. Both of these contracts have terms that specify
award fee payments that are determined by performance and level of contract
activity. Award fees are made during the year a contract modification
authorizing the award fee payment is issued subsequent to the period in which
the work is performed. We do not recognize award fee income until the fees are
certain, 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 these contracts will fluctuate from period to
period.
Revenue recognition methods on fixed-price contracts will vary depending
on the nature of the work and the contract terms. On design, development and
production fixed-price contracts revenues are recorded as costs are incurred,
using the percentage-of-completion method of accounting. Revenues on fixed-
price service contracts are recorded as work is performed, typically ratably
over the service period. Revenues on fixed-price contracts that require
27
delivery of specific items may be recorded based on a price per unit as units
are delivered.
Revenues by contract type for the years ended December 31 were as
follows (in thousands):
Contract Type
2009
Revenues
%
2008
Revenues
%
2007
Revenues
%
Time and
materials . .
$ 761,644
Cost-type . . . 209,946
Fixed-price . . 43,049
$ 1,014,639
75.1
20.7
4.2
100.0
$ 759,693
72.8 $ 388,564 59.5
247,857 23.7 220,782 33.8
3.5 43,818 6.7
36,185
100.0 $ 653,164 100.0
$ 1,043,735
The increases in time and materials revenues in 2009 and 2008 shown in
the table above is primarily attributable to revenues from the CED Army
Equipment Support Program, the CED Assured Mobility Systems Program, and other
CED 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.
We will occasionally perform work at risk, which is work 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. We recognize this “risk funding” as revenue when the
associated costs are incurred or the work is performed. We are at risk of loss
for any risk funding not received. We provide for anticipated losses on
contracts by a charge to income during the period in which losses are first
identified. Revenues recognized in 2009 include approximately $841 thousand
for which we had not received formalized funding as of December 31, 2009. We
believe that we are entitled to reimbursement and will receive funding for all
of this risk funding revenue.
Long-Lived Assets
In assessing the recoverability of long-lived assets, we 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, we 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. We perform our annual impairment test
as of October 1. The annual impairment assessment requires us to estimate the
fair value of our reporting units. This estimation process involves the use of
subjective assumptions. As of December 31, 2009, we had approximately $1.1
million of goodwill associated with our acquisition of Energetics,
approximately $7.7 million of goodwill and intangible assets with indefinite
lives associated with our acquisition of ICRC, and approximately $13.2 million
of goodwill and intangible assets with indefinite lives associated with our
acquisition of G&B. We have not recognized any reduction to the goodwill or
indefinite-lived intangibles as a result of the annual impairment tests.
Recoverability of Deferred Tax Assets
The carrying value of our net deferred tax assets is based on
assumptions regarding our ability to generate sufficient future taxable income
to utilize these deferred tax assets. If the estimates and related assumptions
regarding our future taxable income change in the future, we may be required
to record valuation allowances against our deferred tax assets, resulting in
additional income tax expense.
28
Results of Operations
Years ended December 31,
Revenues
(dollars in thousands)
2009
%
2008
%
2007
%
$ 440,165 43.4 $ 587,044 56.2 $293,644 45.0
28,338 2.8 26,520 2.5 36,854 5.6
79,256 7.8 43,954 4.2 26,158 4.0
38,079 3.7 7,999 0.8 1,335 0.2
113 0.0 1,890 0.2 2,700 0.4
585,951 57.7 667,407 63.9 360,691 55.2
105,464 10.4 81,731 7.8 113,724 17.4
208,669 20.6 137,655 13.2 112,805 17.3
1 0.0 635 0.1 1,472 0.2
314,134 31.0 220,021 21.1 228,001 34.9
Federal Group
CED
SED
ELD
FSS
MSD
Group Total
International Group
GLOBAL
FMD
VCG
Group Total
IT, Energy and
Management Consulting
Group
Energetics
G&B 51,309 5.1
Other
22,482 2.2 19,161 1.8 14,522 2.2
30,664 3.0 - -
326 - 102 - - -
74,117 7.3 49,927 4.8 14,522 2.2
Group Total
Infrastructure Group
ICRC
40,437 4.0 106,380
10.2 49,918 7.7
Other
- 0.0 - 0.0 32 0.0
$1,014,639 100.0 $1,043,735 100.0 $653,164 100.0
Our revenues decreased by approximately $29 million or 3% for the year
ended December 31, 2009 as compared to the prior year. The slight decline in
revenues for this period resulted from decreases in revenues in our Federal
Group of approximately $81 million and in our Infrastructure Group of
approximately $66 million; increases in revenues in our International Group of
approximately $94 million; and increases in revenues in our IT, Energy, and
Management Consulting Group of approximately $24 million.
Our revenues increased by approximately $391 million or 60% for the year
ended December 31, 2008 as compared to the prior year. The primary reason for
the increases in revenues for 2008 was additional work associated with our CED
R2 Program of approximately $404 million, including increased work on the CED
Army Equipment Support Program of approximately $101 million and the CED
Assured Mobility Systems Program of approximately $65 million. Additional
significant reasons for the increase in our revenues in 2008 are: 1) ICRC is
included in our financial results for the full year in 2008 compared to a
shorter period in 2007 as a result of the June 2007 acquisition, resulting in
an increase in ICRC revenues of approximately $57 million; and 2) the
inclusion of revenues of G&B from the April 14, 2008 date of acquisition
through year end of approximately $31 million.
29
Consolidated Statements of Income
(dollars in thousands)
Years ended December 31,
Revenues
Contract costs
Gross profit
Selling, general and
administrative expenses
Interest income, net
%
2008
2009
$1,014,639 100.0 $1,043,735 100.0 $653,164 100.0
974,897 96.1 1,011,408 96.9 629,951 96.5
39,742 3.9 32,327 3.1 23,213 3.5
2007
%
%
1,263 0.1 1,193 0.1 905 0.1
(120) 0.0 (115) 0.0 (699) (0.1)
Income before income taxes 38,599 3.8 31,249 3.0 23,007 3.5
Provision for income taxes 14,575 1.4 12,209 1.2 8,905 1.4
Net income
$ 24,024 2.4 $ 19,040 1.8 $ 14,102 2.1
Our gross profit dollars increased by approximately $7.4 million or 23%
in 2009 as compared to 2008. The increase resulted primarily from: 1)
increased profits from revenues in our Federal Group of approximately $3.2
million; 2) increased profits from revenues in our International Group of
approximately $4.3 million; 3) increased profits from revenues in our IT,
Energy and Management Consulting Group of approximately $4.2 million; and 4)
decreased profits from revenues in our Infrastructure Group of approximately
$2.5 million.
Our gross profit dollars increased by approximately $9.1 million or 39%
in 2008 as compared to 2007. The increases are primarily due to: 1) increased
profits of approximately $5 million from the growth of revenues on our R2
program contract; 2) increased profits of approximately $3 million from the
inclusion of G&B revenues beginning in April 2008; 3) increased profits of
approximately $1.7 million from the inclusion of ICRC revenues in our
operating results for the full year in 2008 as compared to only a partial year
in 2007.
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on our operating unit
contracts. As a percentage of revenues, these expenses varied little in 2009
and 2008 as compared to the respective prior years.
We did not have significant borrowing requirements or interest expense
in 2009, 2008 or 2007. Our net interest income increased in 2009 as compared
to 2008 as profits from operations and resulting cash surpluses were invested.
Our net interest income decreased in 2008 as compared to 2007 due to cash
requirements associated with our acquisition of G&B and the growth of other
parts of our business.
Provision for Income Taxes
Our effective tax rates were 37.8% for 2009, 39.1% for 2008, and 38.7%
for 2007.
30
Federal Group Results
The following table shows consolidated operating results for our Federal
Group (in thousands).
Revenues
Contract costs
Gross profit
Selling, general and
administrative expenses
Interest income, net
2009
%
2008
%
2007
%
$585,951 100.0 $667,407 100.0 $360,690 100.0
564,628 96.4 649,149 97.3 348,794 96.7
21,323 3.6 18,258 2.7 11,896 3.3
101 0.0 43 0.0 73 0.0
(89) 0.0 (379) (0.1) (252) 0.0
Income before income taxes
$ 21,311 3.6 $ 18,594 2.8 $ 12,075 3.3
Revenues for our Federal Group decreased approximately $81 million or
12% for the year ended December 31, 2009, as compared to the prior year. The
decrease in revenues for 2009 was primarily attributable to a decrease in
revenues on the CED Army Equipment Support Program of approximately $265
million. The decrease in revenues was partially offset by an increase in
revenues on the RCV Modernization Program of approximately $79 million, an
increase in revenues on the CED U.S. Army PM Assured Mobility Systems Program
of approximately $52 million, and an increase in revenues of approximately $35
million from ELD’s equipment refurbishment services.
Revenues for our Federal Group increased by approximately $307 million
or 85% for the year ended December 31, 2008, as compared to the prior year. A
substantial portion of the increase in revenues for 2008 was attributable to
an increase in revenues of approximately $293 million associated with work on
R2 Program task orders, including an increase in revenues on the CED Army
Equipment Support Program of approximately $101 million and an increase in
revenues on the CED U.S. Army PM Assured Mobility Systems Program of
approximately $65 million. Revenue increases of approximately $18 million from
ELD’s equipment refurbishment services also contributed to the revenue
increases in this segment in 2008.
Gross profits for our Federal Group increased by approximately $3.1
million or 17% for the year ended December 31, 2009 as compared to the prior
year. The increase in gross profits is primarily due to an increase in profits
on our ELD equipment refurbishment services of approximately $8.4 million
resulting from the increase in ELD revenues and an improvement in the profit
margins, and an increase in profits of approximately $2.1 million on the RCV
Modernization Program. These increases helped to replace a decrease in profits
of approximately $4.7 million due to the completion of the TBPS program in
2008 and the resulting absence of this program from our operating results in
2009, and a decrease in profits of approximately $3.0 million associated with
the expiration of the CED Army Equipment Support Program in February 2009.
Profit margins also improved in 2009 as compared to the prior year due to an
increased level of direct labor generated revenues, primarily in ELD, and a
decline in lower margin subcontractor generated revenue in CED.
Gross profits for our Federal Group increased by approximately $6.4
million or 53% for the year ended December 31, 2008, as compared to the prior
year. The primary reason for the increased gross profit dollars was increased
profits on R2 Program task orders of approximately $5.8 million arising from
the increase in R2 Program revenues, including increased profits of
approximately $1.9 million on the CED Army Equipment Support Program and
increased profits of approximately $700 thousand on the CED U.S. Army PM
Assured Mobility Systems Program. Profits from the inclusion of FSS services
in our operating results for a full year contributed approximately $ 1.1
million to the increase in gross profits of this segment in 2008. These
increases in profits were partially offset by a decline in ELD profits of
approximately $500 thousand resulting from losses on work performed during the
establishment of a new location in 2008.
31
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on our Federal Group’s
contracts. As a percentage of revenues, these expenses varied little in 2009
and 2008 as compared to the respective prior years and have not been
significant in relation to revenues levels.
The Federal Group realized interest income from cash invested in 2009,
2008, and 2007. During these years, we benefited from efficient cash flow
cycles on certain CED task order work.
International Group Results
The following table shows consolidated operating results for our
International Group (in thousands).
Revenues
Contract costs
Gross profit
%
2008
2009
$314,134 100.0 $220,021 100.0 $228,002
303,972 96.8 214,146 97.3 220,624
10,162 3.2 5,875 2.7 7,378
%
2007 %
Selling, general and
administrative expenses 157 0.0 46 0.0 67
Interest expense
(income)
Income before income
taxes
$ 9,569 3.1 $ 5,719 2.6 $ 7,435
436 0.1 110 0.1 (124)
100.0
96.8
3.2
0.0
(0.1)
3.3
Revenues for our International Group increased approximately $94 million
or 43% for the year ended December 31, 2009, as compared to the same period
for the prior year. The increase in revenues resulted primarily from an
increase of approximately $67 million in the level of FMD services provided on
engineering and technical services task orders; an increase of approximately
$24 million in the level of GLOBAL services, including increased revenues of
approximately $10 million to provide support services to the government of
Romania; and to an increase in revenues on the CFT Program in 2009 of
approximately $14 million. The revenue increases for this period were partly
offset by a decrease in revenues on the Treasury Seized Asset Program of
approximately $10 million.
Revenues for our International Group decreased by approximately $8
million or 3.5% for the year ended December 31, 2008, as compared to the prior
year. Our GLOBAL division had approximately $38 million of 2007 revenues from
a ship transfer to India that was completed in 2007, and there was no similar
ship transfer in 2008. This resulted in lower GLOBAL revenues and was the
primary reason for the decrease in revenues for our International Group in
2008. This decrease was partially offset by increases of approximately $23
million in the level of FMD services provided on engineering and technical
services task orders and an increase of approximately $6.5 million in GLOBAL
services provided to the country of Taiwan.
Gross Profits for our International Group increased by approximately
$4.3 million or 73% for the year ended December 31, 2009, as compared to the
prior year. The increase is primarily due to an increase in profits of
approximately $2.3 million on the Treasury Seized Asset Program resulting from
an increase in incentive fees earned associated with re-negotiated target cost
levels; an increase in profits of approximately $621 thousand from the
increased level of FMD services provided on engineering and technical services
task orders; and an increase in profits of approximately $487 thousand from
the increase in revenues on the CFT Program.
Gross Profits for our International Group decreased by approximately
$1.5 million or 20% for the year ended December 31, 2008, as compared to the
prior year. The decrease in 2008 resulted primarily from a decrease of
approximately $1 million in GLOBAL profits due to a reduction in fees earned
by GLOBAL as a result of the lower GLOBAL revenues.
32
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on the International
Group’s contracts. As a percentage of revenues, these expenses varied little
in 2009 and 2008 as compared to the respective prior years and have not been
significant in relation to revenues.
Our International Group had net interest expense in 2009 and 2008 and
net interest income in 2007. Interest income and expense vary from year to
year due to growth in work performed and to normal fluctuations in the billing
and collections cycle.
IT, Energy and Management Consulting Group Results
The following table shows consolidated operating results for our IT,
Energy and Management Consulting Group (in thousands).
Revenues
Contract costs
Gross profit
2009
$74,117
66,344
7,773
2008
%
100.0 $49,927
89.5 45,148
10.5 4,779
%
100.0
90.4
9.6
2007
$14,522
13,139
1,383
%
100.0
90.5
9.5
Selling, general and
administrative expenses 406
Interest income, net
Income before income
taxes
$ 7,402
(35)
0.5 375
0.0 (198)
0.8
(0.4) (272)
41
0.3
(1.9)
10.0 $ 4,602
9.2
$ 1,614
11.1
Upon our acquisition of G&B in April 2008, G&B became part of this
segment. G&B revenues and profits are included in this segment for 12 months
in 2009 and 8½ months in 2008. G&B revenues and profits are not included in
2007. The inclusion of G&B’s revenues and profits in this segment for
different lengths of time in each year is the primary reason for significant
increases to the segment’s revenues and profits in 2009 and 2008.
Revenues for our IT, Energy and Management Consulting Group increased by
approximately $24 million for the year ended December 31, 2009, as compared to
the prior year. Gross profits for this segment increased by approximately $3.0
million for the year ended December 31, 2009, as compared to the prior year.
Approximately $14 million of the revenue increase and $1.4 million of the
profit increase is attributable to the inclusion of G&B’s results in this
segment for a full year in 2009 as compared to 8½ months in 2008.
Approximately $7 million of the revenue increase and $1.2 million of the
profit increase is attributable to additional contract awards for G&B and
increases in G&B’s employee workforce in 2009. Increases in Energetics’
revenues of approximately $3 million and Energetics profits of approximately
$481 thousand also contributed to the increases in this segment in 2009.
Revenues for this segment increased by approximately $35 million for the
year ended December 31, 2008, as compared to the prior year. Gross profits for
this segment increased by approximately $3.4 million for the year ended
December 31, 2008, as compared to the prior year. Approximately $31 million of
the revenue increase and $3 million of the profit increase is attributable to
the inclusion of G&B’s results in this segment beginning in 2008. Increases in
Energetics’ revenues of approximately $4.6 million and Energetics profits of
approximately $646 thousand also contributed to the increases in this segment
in 2009.
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on our contracts. The
increase in these costs for this segment in 2008 is due to the inclusion of
G&B’s results in this segment.
Interest income for our IT, Energy and Management Consulting Group
decreased in 2009 and 2008 as compared to the respective prior years as cash
surpluses were used to finance the increases in revenues.
33
Infrastructure Group
The following table shows consolidated operating results for the
Infrastructure Group (in thousands).
2009
$40,437
39,313
1,124
Revenues
Contract costs
Gross profit
Selling, general and
administrative expenses 148
Interest income, net
Income before income
taxes
$ 990
%
2008
%
100.0 $106,380 100.0 $49,918
97.2 102,131 96.0 46,844
2.8 4,249 4.0 3,074
2007
%
100.0
93.8
6.2
0.6
(14) 0.0 (72) 0.0 (44) 0.0
0.4 154 0.1 310
2.4 $ 4,167 3.9 $ 2,808
5.6
This segment consists of our ICRC subsidiary that we acquired in June of
2007. Revenues decreased by approximately $66 million or 62% for the year
ended December 31, 2009, as compared to the prior year. Gross profits for this
segment decreased by approximately $3.1 million or 74% for the year ended
December 31, 2009, as compared to the prior year.
Certain environmental, technical and weather issues near the site on
which ICRC conducts its POA Project work have caused temporary work schedule
delays in 2009. These delays have had a negative impact on 2009 revenues and
profits, with revenues from the PIEP work decreasing by approximately $54
million and profits from the POA Project decreasing by approximately $2.8
million. The environmental and technical issues are not caused by the work
conducted by ICRC, but ICRC must comply with recent changes and delays from
environmental restrictions, recent endangered species declarations and delays
due to new permit application requirements, recent permit conditions that slow
the field work to best mitigate environmental impacts, and the study, review,
and approval of certain technical issues by the client prior to moving planned
work forward. We have also seen delays in contract actions on proposals
pending evaluation by the government.
We have transferred certain work previously performed by ICRC to our
other groups to better align the work or the customers served with our longer
term corporate level strategies. Specifically, information technology services
work has been transferred to our IT, Energy and Management Consulting Group
and certain U. S. Army vehicle work has been transferred to our Federal Group.
The decreases in our Infrastructure Group’s revenues and profits in 2009 that
are not attributable to the decrease in PIEP work are primarily the result of
transferring work to our other groups.
Revenues increased by approximately $56 million or 113% for the year
ended December 31, 2008, as compared to the prior year. Gross profits for this
segment increased by approximately $1.2 million or 38% for the year ended
December 31, 2008, as compared to the prior year. The increases in revenues
and profits in 2008 are primarily due to the inclusion of ICRC in our
operating results for a full year in 2008 as compared to approximately seven
months in 2007.
Financial Condition
Our financial condition did not change materially during 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.
34
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents increased by approximately $7.4 million during
2009.
Cash provided by operating activities increased by approximately $1.5
million in 2009 as compared to 2008. An increase of approximately $5 million
in cash provided by net income and an increase of approximately $1.4 million
from an increase in depreciation and amortization and other non-cash operating
activities was offset by a decrease of approximately $1.5 million for the
acquisition of a software license and a decrease of approximately $3.4 million
due to changes in the levels of working capital components. Of these working
capital components, our largest asset is our accounts receivable and our
largest liability is 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 have the potential to cause significant increases and
decreases in our accounts receivable and accounts payable in short time
periods.
Cash used in our investing activities in 2009 decreased by approximately
$18.5 million as compared to 2008. This was primarily due to the acquisition
of G&B for which we expended cash at closing of approximately $17.1 million in
2008.
Cash of approximately $6.7 million was used for financing activities in
2009 as compared to cash provided by financing activities of approximately
$6.4 million for the same period of 2008. This difference was primarily due to
paying down borrowings on our bank loan in 2009 as compared to 2008 when we
borrowed to finance our acquisition of G&B.
Our cash and cash equivalents increased by approximately $529 thousand
during 2008.
Cash provided by operating activities in 2008 increased by approximately
$14.7 million in 2008 as compared to 2007. Approximately $4.9 million of this
increase was due to the increase in net income, approximately $6.4 million was
due to an increase in depreciation and amortization and other non-cash
operating activities and approximately $3.4 million was due to changes in the
levels of working capital components such as receivables, contract
inventories, accounts payable, and accrued expenses that are associated with
our contract requirements and billing and collections cycle. As described
above, these working capital components tend to fluctuate significantly
depending on the timing of government services ordered, which has the
potential to cause significant increases and decreases in these working
capital components.
Cash used in our investing activities in 2008 increased by approximately
$8.3 million as compared to 2007. This was due primarily to the higher cost of
acquiring G&B in 2008 for approximately $17.1 million compared to the cost of
acquiring ICRC in 2007 for approximately $11.6 million, additional payments
associated with the cost of acquiring ICRC made in 2008, and to an increased
level of investment in property and equipment.
Cash provided by our financing activities in 2008 increased by a net
amount of approximately $2.8 million as compared to 2007. This resulted from
an increase of approximately $6.6 million in net bank borrowings and a
decrease of approximately $3.6 in cash provided by activity associated with
our stock incentive plans.
35
We paid quarterly cash dividends totaling $0.19 per share during 2009.
Pursuant to our bank loan agreement, our payment of cash dividends is subject
to annual 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.
We also purchase property and equipment and invest in expansion,
improvement, and maintenance of our operational and administrative facilities.
From time to time, we may also invest in the acquisition of other companies.
Our acquisitions of ICRC in 2007 and G&B in 2008 required a significant use of
our cash. While there are no pending specific additional acquisitions at this
time, we continue to seek opportunities for growth through strategic
acquisitions.
Our external liquidity consists of a loan agreement with a group of
banks that provides us with revolving loans and letters of credit. The maximum
amount of credit available to us as of December 31, 2009 was $50 million and
under the loan agreement we may elect to increase the maximum credit
availability up to $75 million. The maturity date of the loan agreement is
August 26, 2011. 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 $4.8 million of the loan agreement
availability as of December 31, 2009, consisting of letters of credit. We had
no revolving loan amounts outstanding as of December 31, 2009. During 2009,
the highest outstanding amount was $23.4 million and the lowest was $0. The
timing of certain payments made and collections received associated with our
subcontractor and materials requirements and other operating expenses can
cause temporary peaks in our outstanding revolving loan amounts.
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 December 31, 2009.
Leverage Ratio
Fixed Charge Coverage Ratio
Maximum Ratio
3.00 to 1
Minimum Ratio
1.25 to 1
Actual Ratio
0.11 to 1
Actual Ratio
2.93 to 1
Our banks continue 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 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.
36
Contractual Obligations
The following table shows our consolidated contractual obligations as of
December 31, 2009 (in thousands):
Payments Due by Period
Contractual Obligations
Total
Less
than
1 year
1-3
years
4-5 After 5
years
years
Operating leases, net of
non-cancelable sublease
income
Purchase obligations
Total
$106,283 $10,170 $18,568 $17,923 $59,622
1,168 1,168 - - -
$107,451 $11,338 $18,568 $17,923 $59,622
Operating lease commitments are primarily for our principal executive
and administrative offices and leased facilities for office, shop, and
warehouse space located near customer sites or to serve customer needs,
including the new 15-year lease agreement we signed during 2009, for the new
executive and administrative headquarters beginning in the spring of 2012. We
also have some equipment and software leases that are included in these
amounts.
Purchase obligations consist primarily of contractual commitments
associated with our information technology systems. The table excludes
contractual commitments for materials or subcontractor work purchased to
perform U.S. Government contracts. Such commitments for materials and
subcontractors are reimbursable when used on the contracts, and generally are
also reimbursable if a contract is “terminated for convenience” by the
government pursuant to federal contracting regulations.
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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest Rates
Our bank loan provides available borrowing to us at variable interest
rates. The amount borrowed is not large with respect to our cash flows and we
believe that we will be able to pay down any 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.
37
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Report of Independent Registered Public Accounting Firm . . . . 39
Consolidated Balance Sheets as of December 31, 2009 and 2008 . . 40
Consolidated Statements of Income for the years ended
December 31, 2009, 2008, and 2007 . . . . . . . . . . . . 41
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2009, 2008, and 2007 . . 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008, and 2007 . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . 44
Page
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of VSE Corporation
We have audited the accompanying consolidated balance sheets of VSE
Corporation and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VSE Corporation
and subsidiaries at December 31, 2009 and 2008, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), VSE Corporation's internal control
over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 4, 2010 expressed an unqualified opinion thereon.
McLean, VA
March 4, 2010
/s/ Ernst & Young LLP
39
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
As of December 31,
2009 2008
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 8,024 $ 638
Receivables, principally
U.S. Government, net . . . . . . . . . . . . . . . . 175,185 206,717
Deferred tax assets . . . . . . . . . . . . . . . . . 2,036 2,297
Other current assets . . . . . . . . . . . . . . . . . 7,979 10,945
Total current assets . . . . . . . . . . . . . . . 193,224 220,597
Property and equipment, net . . . . . . . . . . . . . . 24,683 21,484
Intangible assets . . . . . . . . . . . . . . . . . . . 9,336 11,176
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 19,530 17,439
Other assets . . . . . . . . . . . . . . . . . . . . . . 7,217 5,270
Total assets . . . . . . . . . . . . . . . . . . . $253,990 $275,966
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $112,995 $158,015
Bank notes payable . . . . . . . . . . . . . . . . . . - 6,676
Accrued expenses . . . . . . . . . . . . . . . . . . . 34,069 31,498
Dividends payable . . . . . . . . . . . . . . . . . . 258 229
Total current liabilities . . . . . . . . . . . . 147,322 196,418
Deferred compensation . . . . . . . . . . . . . . . . . 3,934 2,059
Deferred income taxes . . . . . . . . . . . . . . . . . 324 404
Other liabilities . . . . . . . . . . . . . . . . . . . 1,100 962
Total liabilities . . . . . . . . . . . . . . . . 152,680 199,843
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.05 per share, authorized
15,000,000 shares; issued and outstanding 5,170,180
and 5,098,542, respectively . . . . . . . . . . . . 258 255
Additional paid-in capital . . . . . . . . . . . . . . 15,720 13,557
Retained earnings . . . . . . . . . . . . . . . . . . 85,332 62,311
Total stockholders' equity . . . . . . . . . . . . 101,310 76,123
Total liabilities and stockholders' equity . . . . $253,990 $275,966
The accompanying notes are an integral part of these balance sheets.
40
VSE Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share amounts)
For the years ended December 31,
2009 2008 2007
Revenues . . . . . . . . . . . . . . . . . $1,014,639 $1,043,735 $ 653,164
Contract costs . . . . . . . . . . . . . 974,897 1,011,408 629,951
Gross profit . . . . . . . . . . . . . . . 39,742 32,327 23,213
Selling, general and administrative expenses 1,263 1,193 905
Interest income, net . . . . . . . . . . . (120) (115) (699)
Income before income taxes . . . . . . . . 38,599 31,249 23,007
Provision for income taxes . . . . . . . . 14,575 12,209 8,905
Net income . . . . . . . . . . . . . . . . $ 24,024 $ 19,040 $ 14,102
Basic earnings per share: $ 4.68 $ 3.75 $ 2.85
Basic weighted average shares outstanding 5,128,344 5,072,131 4,953,289
Diluted earnings per share: $ 4.67 $ 3.74 $ 2.82
Diluted weighted average shares
outstanding . . . . . . . . . . . . . . . 5,146,347 5,096,186 5,003,675
The accompanying notes are an integral part of these financial statements.
41
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands except per share data)
Additional Total
Common Stock Paid-In Retained Stockholders’
Shares Amount Capital Earnings Equity
Balance at
December 31, 2006 4,788 $ 240 $ 7,163 $30,833 $ 38,236
Net income for the year . . - - - 14,102 14,102
Stock-based compensation . 5 - 551 - 551
Exercised stock options . . 260 13 2,004 - 2,017
Excess tax benefits from
share-based payment
arrangements. . . . . . . - - 2,245 - 2,245
Dividends declared ($0.155) - - - (775) (775)
Balance at
December 31, 2007 5,053 253 11,963 44,160 56,376
Net income for the year . . - - - 19,040 19,040
Stock-based compensation (1) 14 1 955 - 956
Exercised stock options . . 32 1 324 - 325
Excess tax benefits from
share-based payment
arrangements. . . . . . . - - 315 - 315
Dividends declared ($0.175) - - - (889) (889)
Balance at
December 31, 2008 5,099 255 13,557 62,311 76,123
Net income for the year . . - - - 24,024 24,024
Stock-based compensation (2) 32 1 1,234 - 1,235
Exercised stock options . . 39 2 432 - 434
Excess tax benefits from
share-based payment
arrangements. . . . . . . - - 497 - 497
Dividends declared ($0.195) - - - (1,003) (1,003)
Balance at
December 31, 2009 5,170 $ 258 $15,720 $85,332 $101,310
(1) The stock-based compensation amount of $956 for 2008 is based on the
compensation expense included in Contract costs of approximately $1,062, reduced
by the tax withholding associated with the 2007 awards issued in March, 2008.
(2) The stock-based compensation amount of $1,235 for 2009 is based on the
compensation expense included in Contract costs of $1,492, reduced by the
tax withholding associated with the 2007 and 2008 awards issued in March, 2009.
The accompanying notes are an integral part of these financial statements.
42
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the years ended December 31,
2009 2008 2007
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $24,024 $19,040 $14,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 7,622 5,437 3,463
(Gain) loss on sale of property and equipment . . . . . . . (157) 10 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . 558 1,241 (805)
Stock-based compensation . . . . . . . . . . . . . . . . . 1,235 956 551
Excess tax benefits on stock-based compensation . . . . . . (497) (315) (2,245)
Changes in operating assets and liabilities,
net of impact of acquisitions:
Receivables, net . . . . . . . . . . . . . . . . . . . . . 31,532 (66,928) (59,141)
Contract inventories . . . . . . . . . . . . . . . . . . . - - 4,459
Other current assets and noncurrent assets . . . . . . . . 949 (8,318) (1,254)
Accounts payable and deferred compensation. . . . . . . . . (43,145) 65,513 41,812
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 2,126 5,868 7,071
Other liabilities . . . . . . . . . . . . . . . . . . . . . 138 421 235
Net cash provided by operating activities 24,385 22,925 8,248
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . (8,634) (10,016) (8,731)
Cash paid for acquired businesses, net of cash acquired . . . . (1,646) (18,753) (11,755)
Net cash used in investing activities (10,280) (28,769) (20,486)
Cash flows from financing activities:
Borrowings on loan arrangement . . . . . . . . . . . . . . . . 204,649 245,864 9,589
Repayments on loan arrangement . . . . . . . . . . . . . . . . (211,325)(239,269) (9,508)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (974) (862) (741)
Excess tax benefits on stock-based compensation . . . . . . . 497 315 2,245
Proceeds from the exercise of stock options . . . . . . . . . 434 325 2,017
Net cash (used in) provided by financing activities (6,719) 6,373 3,602
Net increase (decrease) in cash and cash equivalents . . . . . . 7,386 529 (8,636)
Cash and cash equivalents at beginning of year . . . . . . . . 638 109 8,745
Cash and cash equivalents at end of year . . . . . . . . . . . $ 8,024 $ 638 $ 109
Supplemental cash flow disclosures (in thousands):
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119 $ 214 $ 6
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $15,729 $10,919 $ 7,139
2009 2008 2007
The accompanying notes are an integral part of these financial statements.
43
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
(1) Nature of Business and Significant Accounting Policies
Nature of Business
The term “VSE,” the “Company,” “us,” “we,” or “our” means VSE and its
subsidiaries and divisions unless the context indicates operations on the
parent company only.
Our business is focused on providing sustainment services for U.S.
Department of Defense ("DoD") legacy systems and equipment and professional
services to DoD and Federal Civilian agencies. VSE operations consist
primarily of diversified program management, logistics, engineering, equipment
refurbishment, IT, construction management and consulting services performed
on a contract basis. Substantially all of our contracts are with United States
Government (“government”) agencies and other government prime contractors.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements consist of the operations of our
parent company, our unincorporated divisions and wholly owned subsidiaries. Our
active, unincorporated divisions include GLOBAL Division (“GLOBAL”), formerly
known as “BAV Division” or “BAV,” Communications and Engineering Division
(“CED”), Engineering and Logistics Division (“ELD”), Field Support Services
Division (“FSS”), Fleet Maintenance Division (“FMD”), 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. In 2009, our inactive
divisions include Coast Guard Division (“VCG”), and Management Sciences
Division (“MSD”). All intercompany transactions have been eliminated in
consolidation.
Subsequent Events
There were no subsequent events that required recognition or disclosure.
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 us 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 accruals for
contract disallowance reserves, self-insured health claims, and estimated
cost-to-complete on certain fixed-price contracts.
Stock-Based Compensation
We account for share-based awards in accordance with the applicable
accounting rules which require the measurement and recognition of compensation
expense for all share-based payment awards based on estimated fair values. The
compensation expense, included in operating expenses, is amortized on a
straight-line basis over the requisite service period. See Note 9 for further
discussion of our stock-based compensation plans and related activity.
44
Earnings Per Share
Basic earnings per share have been computed by dividing net income by
the weighted average number of shares of common stock outstanding during each
period. Shares issued during the period and shares reacquired during the
period are weighted for the portion of the period that they were outstanding.
Diluted earnings per share have been computed in a manner consistent with that
of basic earnings per share while giving effect to all potentially dilutive
common shares that were outstanding during each period. Potentially dilutive
common shares include 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 years ended December 31, 2009, 2008 and 2007.
Years Ended December 31,
2009 2008 2007
Basic weighted average
common shares outstanding . . 5,128,344 5,072,131 4,953,289
Effect of dilutive options . . 18,003 24,055 50,386
Diluted weighted average
common shares outstanding . . 5,146,347 5,096,186 5,003,675
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Due to the short maturity of
these instruments, the carrying values on our consolidated balance sheets
approximate fair value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of computer
equipment and furniture is provided principally by the straight-line method
over periods of three to nine years. Depreciation of other equipment is
provided principally by the double-declining method over periods of five to
ten years. Depreciation of buildings and land improvements is provided
principally by the straight-line method over periods of approximately twenty
to thirty years. Amortization of leasehold improvements is provided by the
straight-line method over the lesser of their useful life or the remaining
term of the lease.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of
credit risk consist primarily of cash, cash equivalents and trade receivables.
Contracts with the government either as a prime or subcontractor, accounted
for approximately 99% of revenues for each of the years ending December 31,
2009, 2008, and 2007. We believe that concentrations of credit risk with
respect to trade receivables are limited as they are primarily government
receivables. We believe that the fair market value of all financial
instruments, including assets of the deferred compensation plan and debt,
approximate book value.
Revenues
Substantially all of our revenues result from contract services
performed for the government or for contractors engaged in work for the
government under a variety of contracts. Revenues are considered earned when
persuasive evidence of an arrangement exists, services have been rendered, the
price is fixed or determinable and collectability is reasonably assured.
45
Revenues on cost-type contracts are recorded as contract allowable costs
are incurred and fees earned. Award fee payments on certain cost plus award
fee contracts are determined by performance and level of contract activity. We
do not recognize award fee income until the fees are fixed or determinable,
generally upon contract notification confirming the award fee.
Revenues for time and materials contracts are recorded on the basis of
contract allowable labor hours worked multiplied by the contract defined
billing rates, plus the direct costs and indirect cost burdens associated with
materials and subcontract work used in performance on the contract. Profits on
time and materials 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 vary depending on
the nature of the work and the contract terms. On design, development and
production fixed-price contracts revenues are recorded as costs are incurred,
using the percentage-of-completion method of accounting. Revenues on fixed-
price service contracts are recorded as 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.
For design and development contracts, we provide for anticipated losses
on contracts, based on total revenue compared to total contract costs, by a
charge to income during the period in which losses are first identified.
Contract costs include direct and indirect costs, including general and
administrative costs, which are considered costs and expenses of contracts.
Revenue related to work performed on contracts at risk, which is work
performed at the customer’s request prior to the government formalizing
funding, is not recognized until it can be reliably estimated and its
realization is probable.
A substantial portion of contract and administrative costs are subject
to audit by the Defense Contract Audit Agency. Our indirect cost rates have
been audited and approved for 2005 and prior years with no material
adjustments to our results of operations or financial position. While we
maintain reserves to cover the risk of potential future audit adjustments
based primarily on the results of prior audits, there can be no assurances
that the audits of the indirect cost rates for 2009, 2008, 2007 and 2006 will
not result in material adjustments to our results of operations or financial
position.
Receivables and Allowance for Doubtful Accounts
Receivables are recorded at face value less an allowance for doubtful
accounts. We review our receivables regularly to determine if there are any
potential uncollectible accounts. The majority of our receivables are from
agencies of the government, where there is minimal credit risk. We record
allowances for bad debt as a reduction to receivables and an increase to bad
debt expense. We assess the adequacy of these reserves by considering general
factors, such as the length of time individual receivables are past due and
historical collection experience.
Deferred Compensation Plans
We have a deferred compensation plan, the VSE Corporation Deferred
Supplemental Compensation Plan, to provide incentive and reward for our
management team based on overall corporate performance. Deferred compensation
plan expense for the years ended December 31, 2009, 2008, and 2007 was
approximately $1.7 million, $1.4 million, and $1.1 million, respectively.
Included in other current assets and other assets on the accompanying
Consolidated Balance Sheets are assets of the deferred compensation plans
which include debt and equity securities recorded at fair value. The fair
value of the deferred compensation plan assets was approximately $4.8 million
and $3.3 million as of December 31, 2009, and 2008, respectively. Because plan
46
participants are at risk for market value changes in these assets, the
liability to plan participants fluctuates with the asset values.
Impairment of Long-Lived Assets
Long-lived assets include property and equipment to be held and used.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that such a review is necessary. The criteria for
determining impairment for such long-lived assets to be held and used are
determined by comparing the carrying value of these long-lived assets to our
best estimate of future undiscounted cash flows expected to result from the
use of the assets. No impairment charges were recorded in the years ended
December 31, 2009, 2008, and 2007.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. This method also
requires the recognition of future tax benefits, such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The carrying value of net deferred tax assets is based on assumptions
regarding our ability to generate sufficient future taxable income to utilize
these deferred tax assets.
In the accompanying Consolidated Statements of Income, we classify
interest expense related to unrecognized tax benefits as “Interest income,
net” and any penalties in “Selling, general and administrative expenses.”
No interest or penalties related to unrecognized tax benefits were recorded in
2009, 2008 or 2007.
Goodwill and Intangibles
Goodwill and other indefinite-lived assets are not amortized, but are
reviewed for impairment annually, or more frequently if potential interim
indicators are identified. We test for impairment using a two-step approach
at the reporting unit level by comparing the reporting unit’s carry amount,
including goodwill, to the estimated fair value of the reporting unit. If the
carrying amount of the unit exceeds its estimated fair value, a second step is
performed to measure the amount of impairment loss, if any. Based on the
analysis we performed as of October 1, 2009, 2008 and 2007, respectively, we
found no impairment in the carrying value of goodwill.
Intangible assets consist of the value of contract-related intangible
assets and trade names acquired in the ICRC and G&B acquisitions (see Note 6).
The contract related intangible assets are amortized on a straight line basis
over their estimated useful lives of approximately 5 to 8 years with a
weighted average life of approximately 6.2 years as of December 31, 2009.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update No. 2009-01, “Generally Accepted Accounting
Principles” (“ASC Topic 105”), which establishes the Accounting Standards
Codification (the “Codification” or “ASC”) as the single source of
authoritative nongovernmental U.S. GAAP, effective July 1, 2009. The
Codification supersedes existing FASB, American Institute of Certified Public
Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related
literature. The Codification establishes one level of authoritative GAAP.
47
All other literature is considered non-authoritative. The Codification is
effective for interim and annual financial periods ending after September 15,
2009. We adopted the Codification in the quarter ending September 30, 2009.
In October 2009, the FASB revised its accounting guidance related to
revenue arrangements with multiple deliverables. The guidance relates to the
determination of when the individual deliverables included in a multiple-
element arrangement may be treated as separate units of accounting and
modifies the manner in which the transaction consideration is allocated across
the individual deliverables. Also, the guidance expands the disclosure
requirements for revenue arrangements with multiple deliverables. The guidance
will be effective for us beginning on January 1, 2011, and may be applied
retrospectively for all periods presented or prospectively to arrangements
entered into or materially modified after the adoption date. Early adoption
is permitted provided that the guidance is retroactively applied to the
beginning of the year of adoption. We are currently assessing the potential
effect the adoption of this new guidance will have, if any, on our financial
statements.
(2) Receivables
The components of receivables as of December 31, 2009 and 2008, were as
follows (in thousands):
2009 2008
Billed . . . . . . . . . . . . . . . . . . . . $ 50,410 $ 70,044
Unbilled:
Government retainage . . . . . . . . . . . . 13 76
Subcontract retainage . . . . . . . . . . . . - 3,372
Other (principally December work billed in
January) . . . . . . . . . . . . . . . . . 124,762 133,225
Total receivables, net $175,185 $206,717
The “Unbilled: Other” includes certain costs for work performed at risk
but which we believe will be funded by the government. Amounts not currently
funded included in “Unbilled: Other” were approximately $841 thousand and $1.0
million as of December 31, 2009, and 2008, respectively.
The following table summarizes activity in the allowance for doubtful
accounts (in thousands):
Charged to Balance at
Costs and End of
Allowance for Doubtful Accounts of Year Deductions(1) Expenses Year
Balance at
Beginning
Year ended December 31, 2009 . . . . $ -
$92 $92 $ -
Year ended December 31, 2008 . . . . $11
$11 $ - $ -
Year ended December 31, 2007 . . . . $14
$ 3 $ - $11
(1) Write-offs and settlements
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(3) Other Current Assets and Other Assets
At December 31, 2009 and 2008, other current assets primarily consisted
of vendor advances, prepaid rents and deposits, prepaid income taxes, software
licenses, deferred compensation plan assets and prepaid maintenance
agreements.
At December 31, 2009 and 2008, other assets primarily consisted of
deferred compensation plan assets and cash surrender value of life insurance
policies. In addition, at December 31, 2009, other assets included an
acquired software license.
(4) Property and Equipment
Property and equipment consisted of the following as of December 31,
2009 and 2008(in thousands):
2009 2008
Computer equipment . . . . . . . . . . . . . . . . . $14,323 $ 9,553
Furniture, fixtures, equipment and other . . . . . . 12,108 10,459
Leasehold improvements . . . . . . . . . . . . . . . 5,968 4,699
Buildings and building improvements. . . . . . . . . 6,573 6,564
Land and land improvements . . . . . . . . . . . . . 3,084 3,085
42,056 34,360
Less accumulated depreciation and amortization . . . (17,373) (12,876)
Total property and equipment, net $24,683 $21,484
Depreciation and amortization expense for property and equipment for the
years ended December 31, 2009, 2008 and 2007 was approximately $5.6 million,
$3.6 million and $2.6 million, respectively.
(5) Acquisitions
G&B Solutions, Inc.
On April 14, 2008, we acquired all of the capital stock of G&B. G&B’s
core expertise lies in enterprise architecture development, information
assurance/business continuity, program and portfolio management, network IT
servicers and systems design and integration. Cash paid at closing for G&B
was approximately $19.5 million, including approximately $650 thousand of
prepaid retention bonuses that were expensed in the post-acquisition period as
the affected employees provided services, less approximately $600 thousand for
certain closing adjustments. We also incurred approximately $200 thousand of
direct acquisition costs consisting of legal, accounting and other fees.
Under the terms of the acquisition, we are 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 ended on March 31, 2009 and resulted in a $1.4 million cash payment to
the seller in the second quarter which was recorded as goodwill. 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. Additionally, $212 thousand was paid and recorded as goodwill during
the second quarter of 2009 for taxes related to the Internal Revenue Code
Section 338(h)(10) election for the G&B acquisition. The results of G&B’s
operations are included in the accompanying consolidated financial statements
beginning as of April 14, 2008.
49
Integrated Concepts and Research Corporation
On June 4, 2007, we acquired all of the capital stock of ICRC. ICRC’s
core expertise lies in engineering and transportation infrastructure,
information technology, advance vehicle technology, aerospace, engineering and
transportation infrastructure.
Cash paid at closing for ICRC was approximately $11.8 million. Potential
additional cash payments of up to approximately $5.8 million are contingent on
meeting certain financial targets during the first six years after the June
2007 acquisition related to the earn-out provisions of the agreement.
Based on ICRC’s performance for the 2008 and 2007 earn-out periods,
approximately $1.6 million and $557 thousand, respectively, was paid to the
seller and recorded as goodwill. Additional goodwill of approximately $445
thousand was recorded as of December 31, 2009 for the earn-out payment that
will be made to the seller as a result of achievement of the specified
earnings target in 2009. The results of ICRC’s operations are included in the
accompanying consolidated financial statements beginning as of June 4, 2007.
(6) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2009 and 2008 are
as follows (in thousands):
IT, Energy and
Management
Consulting Infrastructure Total
Balance as of December 31, 2007 $ 1,054 $4,174 $ 5,228
Goodwill recorded during the year 10,587
- 10,587
Contingent consideration earned - 1,624 1,624
Balance as of December 31, 2008 11,641 5,798 17,439
Contingent consideration earned 1,400 445 1,845
Tax payments and other 246 - 246
Balance as of December 31, 2009 $13,287 $6,243 $19,530
Intangible assets consist of the value of contract-related intangible
assets and trade names acquired in the ICRC and G&B acquisitions (see Note 5).
Intangible assets not subject to amortization consist of trade names of
approximately $2.4 million as of December 31, 2009 and 2008. Amortization of
contract-related intangible assets was approximately $1.8 million, $1.6
million and $600 thousand for the years ended December 31, in 2009, 2008 and
2007, respectively.
Amortizable intangible assets were comprised of the following (in
thousands):
Gross Net
Carrying Accumulated Carrying
Value Amortization Value
Contract-related intangible
assets as of December 31, 2009 $10,954 $4,048 $6,906
Contract-related intangible
assets as of December 31, 2008 $10,954 $2,208 $8,746
50
Future expected amortization expense of the contract related intangible
asset is as follows for the years ending December 31, (in thousands):
Amortization
Expense
2010 $1,840
2011 1,840
2012 1,840
2013 708
2014 479
Thereafter 199
Total $6,906
(7) Bank Notes Payable
We have a loan agreement with a group of banks that provides us with
revolving loans and letters of credit. The maximum amount of credit available
to us as of December 31, 2009 was $50 million and includes a provision whereby
we may elect to increase the maximum credit availability to a total of $75
million. The maturity date of the loan agreement is August 26, 2011. From time
to time we may request changes in the amount, maturity date, or other terms and
the banks 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 had approximately $4.8 million and $1.35 million of letters of credit
outstanding as of December 31, 2009 and 2008, respectively. We had no revolving
loan amounts outstanding as of December 31, 2009. As of December 31, 2008,
revolving loan amounts outstanding were approximately $6.7 million. Interest
expense incurred on revolving loan borrowings was approximately $117 thousand
for the year ended December 31, 2009 and approximately $216 thousand for the
year ended December 31, 2008.
The loan agreement contains collateral requirements that secure our
assets, restrictive covenants, a limit on annual dividends, and other
affirmative and negative covenants. Under the terms of the loan agreement, we
have agreed to maintain a $600 thousand compensating balance with one of the
banks. As of December 31, 2009 we have not been notified by the banks, nor are
we aware, of any defaults under the loan agreement. We were in compliance with
the covenants at December 31, 2009.
(8) Accrued Expenses
Accrued expenses consisted primarily of accrued compensation and
benefits of approximately $28.9 million and $22.7 million as of December 31,
2009 and 2008, respectively. The accrued compensation and benefits amounts
include bonus, salaries and related payroll taxes, vacation and deferred
compensation.
(9) Stock-Based Compensation Plans
(a) Restricted Stock Plan
On January 2, 2006, our stockholders approved the VSE Corporation
2006 Restricted Stock Plan (the “2006 Plan”) for its directors, officers and
other employees. Under the provisions of the 2006 Plan, we are authorized to
issue 250,000 shares of our common stock. The Compensation Committee is
responsible for the administration of the 2006 Plan. The Compensation
Committee determines each recipient of an award under the 2006 Plan, the
51
number of restricted shares of common stock subject to such award and the
period of continued employment required for the vesting of such award. These
terms will be included in award agreements between us and the recipients of
the award. As of December 31, 2009, 197,487 restricted shares were available
for grant under this plan.
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 $251 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 could not 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, January 3, 2008 and January 2, 2007, we notified
certain employees that they are eligible to receive awards under the 2006
Restricted Stock Plan based on our financial performance for the fiscal years
2009 (the “2009 Awards”), 2008 (the “2008 Awards”), and 2007 (the “2007
Awards”), 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. 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.
On April 28, 2009, an executive received 989 shares of common stock
based on the vesting schedule of the award issued on April 22, 2008. The fair
value of this award was $34.30 per share at the time of the award.
The stock-based compensation amount of approximately $1.2 million and
approximately $1 million shown on the accompanying statements of cash flows
for the years ended December 31, 2009 and 2008, respectively, is based on the
compensation expense included in contract costs reduced by the tax withholding
associated with the awards issued.
We have recognized approximately $1.2 million, $700 thousand, and $278
thousand in expense related to the awards to employees described above for the
years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009,
there was approximately $1.5 million of unrecognized compensation costs related to
these restricted stock awards which we expect to recognize over the next 26
months.
(b) Stock Option Plans
On December 30, 2005, our Board of Directors (the "Board") directed us
to discontinue awarding options, both discretionary and nondiscretionary under
our 1998 Stock Option Plan (the “1998 Plan”) and our 2004 Stock Option Plan
approved by our stockholders on May 3, 2005 (the "2004 Plan"). The 1998 Plan
terminated on May 6, 2008 and no options issued remain outstanding.
As of December 31, 2009, no options issued under the 2004 Plan for VSE
common stock remain outstanding. Each option granted under the 2004 Plan was
issued at the fair market value of our common stock on the date of grant.
52
Information with respect to the number of shares under stock options is
as follows:
Weighted
Average
Exercise
Shares Price
Outstanding at January 1, 2008 73,500 $11.53
Granted . . . . . . . . - -
Exercised . . . . . . . (32,000) 10.07
Forfeited . . . . . . . - -
Terminations . . . . . .
Outstanding at January 1, 2009 41,500 12.59
Granted . . . . . . . . - -
Exercised . . . . . . . (41,500) 12.59
Forfeited . . . . . . . - -
Terminations . . . . . . - -
Outstanding at December 31, 2009 - $ -
- -
The total intrinsic value of options exercised during 2009, 2008 and
2007 was approximately $1.3 million, $819 thousand and $5.8 million,
respectively. The aggregate intrinsic value of options outstanding and
exercisable as of December 31, 2008 was approximately $1.1 million. All
options outstanding as of December 31, 2008 and December 31, 2007 were fully
vested as of December 31, 2007. The total fair value of shares vested during
the year ended December 31, 2007 was approximately $1.7 million. At December
31, 2009, there was no unrecognized compensation cost related to nonvested
stock options.
(c) Stock-Based Compensation Expense
Stock-based compensation, which includes compensation recognized on stock
option grants and restricted stock awards, was included in the following line
items on the accompanying statements of income for the years ended December
31, 2009, 2008 and 2007 (in thousands):
2009 2008 2007
Contract costs . . . . . . . . . . . . . . . . . $1,492 $1,062 $370
Selling, general and administrative expenses . . - - 181
Total pre-tax stock-based compensation
included in income before income taxes 1,492 1,062 551
Income tax benefit recognized for
stock-based compensation . . . . . . . . . . (565) (408) (212)
Total stock-based compensation expense,
net of income tax benefit
$ 927 $ 654 $339
(10) Income Taxes
We are subject to U.S. federal income tax as well as income tax in
multiple state and local jurisdictions. We have substantially concluded all
U.S. federal income tax matters as well as material state and local tax
matters for years through 2005.
53
We file consolidated federal income tax returns that include all of our
subsidiaries. The components of the provision for income taxes for the years
ended December 31, 2009, 2008, and 2007 are as follows (in thousands):
2009 2008 2007
Current
Federal . . . . . . . . . . . . . . . . . . $12,075 $ 9,061 $8,326
State . . . . . . . . . . . . . . . . . . . 1,942 1,907 1,384
14,017 10,968 9,710
Deferred
Federal . . . . . . . . . . . . . . . . . . 622 1,284 (702)
State . . . . . . . . . . . . . . . . . . (64) (43) (103)
558 1,241 (805)
Provision for income taxes $14,575 $12,209 $8,905
The differences between the amount of tax computed at the federal
statutory rate of 35% for 2009, 2008 and 2007, and the provision for income
taxes for 2009, 2008, and 2007 are as follows (in thousands):
2009 2008 2007
Tax at statutory federal income
tax rate . . . . . . . . . . . . . . . . . $13,509 $10,937 $8,053
Increases (decreases) in tax resulting from:
State taxes, net of federal tax benefit . . 1,230 1,211 833
Permanent differences, net . . . . . . . . 64 61 19
Other, net . . . . . . . . . . . . . . . . (228) - -
Provision for income taxes $14,575 $12,209 $8,905
Our deferred tax assets and liabilities as of December 31, 2009 and
2008, which represent the tax effects of temporary differences between tax and
financial accounting bases of assets and liabilities and are measured using
presently enacted tax rates, are as follows (in thousands):
2009 2008
Current deferred tax assets . . . . . . . . . . . $3,353 $2,816
Current deferred tax liabilities . . . . . . . . . (1,317) (519)
Net current deferred tax assets 2,036 2,297
Noncurrent deferred tax assets . . . . . . . . . . 3,147 2,198
Noncurrent deferred tax liabilities . . . . . . . . (3,420) (2,527)
Valuation allowance . . . . . . . . . . . . . . . . (51) (75)
Net noncurrent deferred tax liabilities . . . . . (324) (404)
Net deferred tax assets $1,712 $1,893
As of December 31, 2009 and 2008, we had valuation allowances of
approximately $51 thousand and $75 thousand, respectively, against certain
deferred tax assets, which consisted solely of realized capital losses on
investments in our deferred supplemental compensation plan. The valuation
allowance is based on limited unrealized capital gains within the portfolio
and the uncertainty of the future gains due to the current stock market.
We will continue to evaluate our valuation allowance position on a
regular basis. To the extent that we determine that all or a portion of our
valuation allowance is no longer necessary, we will recognize an income tax
benefit in the period such determination is made for the reversal of the
valuation allowance.
54
The tax effect of temporary differences representing deferred tax assets
and liabilities as of December 31, 2009 and 2008, are as follows (in
thousands):
2009 2008
Gross deferred tax assets
Deferred compensation and accrued paid leave . . . $4,139 $3,242
Restricted stock expense . . . . . . . . . . . . . 430 280
Accrued expenses . . . . . . . . . . . . . . . . . 828 568
Reserve for contract and other disallowances . . . 231 204
Stock option expense . . . . . . . . . . . . . . . - 52
Retainage . . . . . . . . . . . . . . . . . . . . 3 3
Total gross deferred tax assets 5,631 4,349
Less valuation allowance (51) (75)
Net gross deferred tax assets 5,580 4,274
Gross deferred tax liabilities
Depreciation . . . . . . . . . . . . . . . . . . . (2,561) (1,721)
Deferred revenues . . . . . . . . . . . . . . . . (927) (417)
Intangible assets . . . . . . . . . . . . . . . . (380) (243)
Total gross deferred tax liabilities (3,868) (2,381)
Net deferred tax assets $1,712 $1,893
(11) Commitments and Contingencies
(a) Leases and Other Commitments
We have various non-cancelable operating leases for facilities,
equipment, and software with terms between two and fifteen years. The terms of
the facilities leases typically provide for certain minimum payments as well
as increases in lease payments based upon the operating cost of the facility
and the consumer price index. Rent expense is recognized on a straight-line
basis for rent agreements having escalating rent terms. Lease payments for
the years ended December 31, 2009, 2008, and 2007 were as follows (in
thousands):
Lease Sublease Net
Payments Income Expense
2009 . . . . . . . . . . . $12,546 $782 $11,764
2008 . . . . . . . . . . . $10,378 $709 $ 9,669
2007 . . . . . . . . . . . $ 7,180 $981 $ 6,199
Future minimum annual non-cancelable commitments as of December 31, 2009
are as follows (in thousands):
Lease Sublease Net
Commitments Income Commitments
2010 . . . . . . . . . . . $ 10,628 $ 459 $ 10,169
2011 . . . . . . . . . . . 9,190 477 8,713
2012 . . . . . . . . . . . 10,352 497 9,855
2013 . . . . . . . . . . . 9,530 169 9,361
2014 . . . . . . . . . . . 8,563 - 8,563
Thereafter . . . . . . . . 59,622 - 59,622
Total $107,885 $1,602 $106,283
The future minimum annual non-cancelable commitments above includes our
15-year lease commitment under our agreement to lease a new building with
approximately 95,000 square feet of office space that will serve as our new
executive and administrative headquarters beginning in the spring of 2012.
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(b) 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.
(12) Business Segments and Customer Information
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 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 the
accounting standard for segment reporting and meet the aggregation of
operating segments criteria. We evaluate segment performance based on
consolidated revenues and profits or losses from operations before income
taxes.
Federal Group - The Federal Group provides legacy equipment sustainment,
engineering, technical, management, integrated logistics support and
information technology services to all U.S. military branches and other
government agencies. The Federal Group consists of five divisions: CED, ELD,
FSS, SED and MSD. MSD became inactive in 2009.
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: GLOBAL, FMD and
VCG. VCG became inactive 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 consists of Energetics and, upon
acquisition in April 2008, G&B.
Infrastructure Group – The Infrastructure Group is engaged principally
in providing diversified technical and management services to the government,
including transportation infrastructure services and aerospace services. This
group consists of ICRC.
56
Our segment information is as follows (in thousands):
For the years ended December 31,
2009 2008 2007
Revenues:
Federal Group $ 585,951 $ 667,407 $360,690
International Group 314,134 220,021 228,002
IT, Energy and Management Consulting
Group 74,117 49,927 14,522
Infrastructure Group 40,437 106,380 49,918
Corporate - - 32
Total revenues $1,014,639 $1,043,735 $653,164
Income before income taxes:
Federal Group $ 21,311 $ 18,594 $ 12,075
International Group 9,569 5,719 7,435
IT, Energy and Management Consulting
Group 7,402 4,602 1,614
Infrastructure Group 990 4,167 2,808
Corporate/unallocated expenses (673) (1,833) (925)
Income before income taxes $ 38,599 $ 31,249 $ 23,007
Interest (income) expense:
Federal Group $ (89) $ (379) $ (252)
International Group 436 110 (124)
IT, Energy and Management Consulting
Group (35) (198) (272)
Infrastructure Group (14) (72) (44)
Corporate (418) 424 (7)
Total interest (income) expense $ (120) $ (115) $ (699)
Depreciation and amortization expense:
Federal Group $ 4,008 $ 2,242 $ 1,514
International Group 1,211 967 890
IT, Energy and Management Consulting
Group 1,168 877 184
Infrastructure Group 1,235 1,351 875
Total depreciation and amortization $ 7,622 $ 5,437 $ 3,463
Capital expenditures:
Federal Group $ 2,898 $ 5,941 $ 6,401
International Group 427 1,248 332
IT, Energy and Management Consulting
Group 268 419 75
Infrastructure Group 161 247 34
Corporate 4,880 2,161 1,889
Total capital expenditures $ 8,634 $ 10,016 $ 8,731
As of December 31,
Total assets:
Federal Group $ 125,040 $ 145,786 $ 74,204
International Group 38,994 47,331 49,438
IT, Energy and Management Consulting
Group 19,543 17,258 3,860
Infrastructure Group 9,438 17,933 14,885
Corporate 60,975 47,658 29,384
Total assets $ 253,990 $ 275,966 $171,771
Revenues are net of inter-segment eliminations. Corporate/unallocated
expenses are primarily selling, general and administrative expenses not
allocated to segments. Corporate assets are primarily cash and property and
equipment.
57
Customer Information
We are engaged principally in providing engineering, design, logistics,
management and technical services to the government, other government prime
contractors, and commercial entities. The largest customer for our services is
the DoD, including agencies of the U.S. Army, Navy, and Air Force. Our revenue
by customer is as follows for the years ended December 31,(in thousands):
Customer
U.S. Army/Army Reserve
U.S. Navy
U.S. Air Force
Total - DoD
Department of
U.S. Treasury
Department of
Transportation
Department of Interior
Department of Energy
Other government
Total – Federal Civil
Agencies
%
2009
Revenues
$ 555,238
271,189
2008
Revenues
54.7 $ 625,237
195,792
26.7
%
52.7
29.0
13,839 1.4 10,720 1.0 4,628 0.7
82.4
79.7 538,458
2007
Revenues
59.9 $344,296
18.8 189,534
831,749
840,266
82.8
%
47,676
4.7
57,021
5.5
55,020
8.4
35,722
29,275
16,111
4.7
89,873
0.2
19,156
1.6
12,812
42,670 4.2 29,748 2.9 11,427 1.8
30,977
1,053
10,537
8.6
1.8
1.2
3.5
2.9
1.6
171,454
16.9
208,610
20.0 109,014
16.7
Commercial
2,919 0.3 3,376 0.3 5,692 0.9
Total
$1,014,639 100.0 $1,043,735 100.0 $653,164 100.0
We do 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
us and our customers.
(13) Capital Stock
Common Stock
Our common stock has a par value of $0.05 per share. Proceeds from the
issue of the common stock that is greater than $0.05 per share is credited to
additional paid in capital. Holders of common stock are entitled to one vote
per common share held on all matters voted on by our stockholders.
Stockholders of record are entitled to the amount of dividends declared per
common share held.
58
(14) ESOP/401(k) Plan and Profit Sharing Plan
We have an ESOP/401(k), the VSE Corporation ESOP/401(k) Plan (the
“Plan”), that allows employees meeting certain age and service requirements to
contribute a portion of their salary to certain investment trusts. Under the
terms of the plan, employer 401(k) contributions are made on behalf of the
eligible employee participants based on the employees’ 401(k) payroll
deferrals. Effective January 1, 2007, the Plan was amended to incorporate the
Safe Harbor method of meeting nondiscrimination requirements of the Internal
Revenue Code. Beginning with the 2007 plan year, the employer contribution is
equal to 100% of the employee deferral on the first 3% of the employee pay
deferred and 50% of the employee deferral on the next 2% of the employee pay
deferred. Our expense associated with the Plan for the years ended December
31, 2009, 2008, and 2007 was approximately $2.7 million, $1.9 million, and
$1.4 million, respectively.
In 2008, we decided that employees should have an opportunity to
diversify their 401(k) accounts held in the Plan beginning with our 2008 Plan
year. In January 2008, employees were notified that they may elect to transfer
any portion of their 401(k) accounts that is invested in VSE common stock from
that investment into another investment alternative under the Plan. This right
extends to all of the VSE common stock held under the 401(k) portion of the
Plan. In addition, we decided to terminate and liquidate the ESOP portion of
the Plan and, as elected by the employees, either distribute VSE common stock
held in the ESOP accounts to the employees or rollover such VSE common stock
into an Individual Retirement Account or employee plan selected by the
employee. ESOP shares were distributed to employees in the third quarter of
2008. The Plan held 54,475 shares and 95,499 shares of VSE common stock as of
December 31, 2009 and 2008, respectively. Such shares receive dividend
payments and are included in the weighted average shares for earnings per
share calculations.
Energetics maintains a profit sharing plan for its employees. All
employees who have completed two years of service are members of the profit
sharing plan. At our discretion, we may make contributions to the Energetics
plan. Total expense for the years ended December 31, 2009, 2008, and 2007 was
$190 thousand, $240 thousand, and $227 thousand, respectively.
ICRC sponsors a 401(k) profit sharing plan covering all ICRC regular
status employees. To be eligible to participate in the ICRC plan, an employee
must have completed one month of service with ICRC. The discretionary
employer contributions are immediately vested. Amounts charged to operations
for employer contributions for the years ended December 31, 2009, 2008 and the
post-acquisition period of 2007 were approximately $222 thousand, $286
thousand and $378 thousand, respectively.
G&B maintains a defined contribution retirement plan, established under
the provisions of Internal Revenue Code Section 401(k), covering substantially
all employees. Participants may make voluntary contributions up to the
maximum amount allowable by law. We match a percentage of the amount
contributed by each participant to comply with safe harbor methods. At its
discretion, we may make an additional profit sharing contribution for
participants who have completed one year of service. The amount charged to
operations for employer contributions for 2009 and the post acquisition period
of April 14, 2008 through December 31, 2008 was approximately $554 thousand
and $334 thousand, respectively.
(15) Fair Value Measurements
The accounting standard for fair value measurements defines fair value,
establishes a market-based framework or hierarchy for measuring fair value,
and expends disclosures about fair value measurements. The standard is
applicable whenever assets and liabilities are measured at fair value.
59
The fair-value hierarchy established in the standard 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 long-term assets as of
December 31, 2009 and 2008 is approximately $4.8 million and $3.3 million,
respectively, of investments we hold in a rabbi trust related to the deferred
supplemental compensation 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 in long-term
liabilities. 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 the provision of the accounting standard for fair value as
it relates to non-financial assets and liabilities that are recorded at fair
value on a non-recurring basis. The impact of this adoption was not material.
(16) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2009 and 2008, in
thousands, except earnings per share:
2009 Quarters
1st 2nd 3rd 4th
Revenues . . . . . . . . . . . . . . . $240,455 $255,109 $263,068 $256,007
Gross profit . . . . . . . . . . . . . $ 7,646 $ 10,669 $ 12,924 $ 8,503
Net income . . . . . . . . . . . . . . $ 4,640 $ 6,442 $ 7,726 $ 5,216
Basic earnings per share . . . . . . . $ 0.91 $ 1.26 $ 1.51 $ 1.02
Weighted average shares outstanding . 5,112 5,130 5,132 5,138
Diluted earnings per share . . . . . . $ 0.91 $ 1.25 $ 1.50 $ 1.01
Weighted average shares outstanding . 5,127 5,143 5,146 5,169
The increase in profitability during the third quarter of 2009 was
primarily attributable to the conclusion of negotiations on our Treasury
Seized Asset Program that finalized target cost levels for the fiscal year
ending September 30, 2009. This allowed us to recognize incentive fees in the
third quarter of 2009 on all of our work performed during the government’s
fiscal year ended September 30, 2009. We recognized pretax income on this
program in the third quarter of 2009 of approximately $3.3 million, primarily
due to this incentive fee recognition.
60
2008 Quarters
1st 2nd 3rd 4th
Revenues . . . . . . . . . . . . . . . $188,723 $251,688 $306,811 $296,513
Gross profit . . . . . . . . . . . . . $ 5,907 $ 8,049 $ 9,021 $ 9,350
Net income . . . . . . . . . . . . . . $ 3,598 $ 4,769 $ 5,309 $ 5,364
Basic earnings per share . . . . . . . $ 0.71 $ 0.94 $ 1.05 $ 1.05
Weighted average shares outstanding . 5,059 5,066 5,076 5,088
Diluted earnings per share . . . . . . $ 0.71 $ 0.94 $ 1.04 $ 1.05
Weighted average shares outstanding . 5,087 5,095 5,100 5,104
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act).
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of such date, our disclosure controls and
procedures were effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and that such information
is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting as of December 31, 2009 based on
the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
assessment under the framework in Internal Control – Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2009. Ernst & Young LLP, our independent
registered public accounting firm, has issued an opinion on our internal
control over financial reporting. This opinion appears in the Report of
Independent Registered Public Accounting Firm under Item 9(a) of this Annual
Report on Form 10-K.
Change in Internal Controls
During the fourth quarter of fiscal year 2009, there were no changes in
our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have
materially affected these controls, or are reasonably likely to materially
affect these controls subsequent to the evaluation of these controls.
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of VSE Corporation
We have audited VSE Corporation’s internal control over financial reporting as
of December 31, 2009, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). VSE Corporation’s management is
responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, VSE Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
VSE Corporation and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009 and
our report dated March 4, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, VA
March 4, 2010
62
ITEM 9B.
Other Information
None.
PART III
Except as otherwise indicated below, the information required by Items
10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance of
General Instruction G(3) to Form 10-K and is incorporated herein by reference
to our definitive proxy statement to be filed with the SEC not later than 120
days after December 31, 2009 in respect to the Annual Meeting of VSE’s
stockholders (the “Proxy Statement”) scheduled to be held on May 4, 2010.
ITEM 10. Directors, Executive Officers and Corporate Governance
See Item 4 under the caption “Executive Officers of the Registrant,“ and
the remaining information required by this Item is incorporated by reference
to the Proxy Statement.
ITEM 11. Executive Compensation
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Except for the “Equity Compensation Plan Information” disclosed in Item
5(d) above, the information required by this Item is incorporated by reference
to the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions, and Director
Independence
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 15. Exhibits, Financial Statement Schedules
1.
Financial Statements
PART IV
this Form 10-K.
The consolidated financial statements are listed under Item 8 of
2.
Supplemental Financial Statement Schedules
Schedules not included herein have been omitted because of the absence
of conditions under which they are required or because the required
information, where material, is shown in the consolidated financial statements
or notes to the consolidated financial statements.
63
3.
Exhibits
reference.
See “Exhibit Index” hereinafter contained and incorporated by
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 3, 2010 By: /s/ M. A. Gauthier
VSE CORPORATION
M. A. Gauthier
Director, Chief Executive Officer,
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Maurice A. Gauthier
Maurice A. Gauthier
Director, Chief Executive
Officer, President and
Chief Operating Officer
March 3, 2010
/s/ Thomas R. Loftus
Thomas R. Loftus
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
March 3, 2010
/s/ Donald M. Ervine
Donald M. Ervine
/s/ Clifford M. Kendall
Clifford M. Kendall
/s/ Calvin S. Koonce
Calvin S. Koonce
/s/ James F. Lafond
James F. Lafond
/s/ David M. Osnos
David M. Osnos
/s/ Jimmy D. Ross
Jimmy D. Ross
/s/ Bonnie K. Wachtel
Bonnie K. Wachtel
/s/ Ralph E. Eberhart
Ralph E. Eberhart
Chairman
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
Director
March 3, 2010
65
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
EXHIBIT INDEX
*
Share Purchase Agreement, dated as of April 14, 2008,
2.1 Plan of acquisition, reorganization, arrangement,
liquidation or succession
Share Purchase Agreement, dated as of June 4, 2007,
by and among VSE Corporation, Koniag, Inc.,
Koniag Development Corporation, Nancy Ellen Lexo
Living Trust, James W. Lexo, Jr., and Integrated
Concepts and Research Corporation (Exhibit 2.1 to
Form 8-K dated June 4, 2007)
2.2
by and among VSE Corporation, Linda Kay Berdine
Revocable Trust, Linda K. Berdine and
G&B Solutions, Inc. (Exhibit 2.1 to Form 8-K dated
April 14, 2008) *
3.1 Certificate of incorporation and by-laws
Restated Certificate of Incorporation of VSE
Corporation dated as of February 6, 1996 (Exhibit
3.2 to Form 10-K405 dated March 25, 1996) *
3.2 By-Laws of VSE Corporation as amended through
December 17, 2008 (Exhibit 3.1 to Form 8-K dated
December 17, 2008) *
4.1 Instruments defining the rights of security holders,
including indentures
Specimen Stock Certificate as of May 19, 1983
(Exhibit 4 to Registration Statement No. 2-83255
dated April 22, 1983 on Form S-2) * +
10.1 Material contracts
10.2 Employment Agreement dated as of March 10, 2004,
by and between VSE Corporation and Thomas G. Dacus
(Exhibit 10.1 to Form 10-Q dated April 28, 2004) * +
10.3 Employment Agreement dated as of July 1, 2004,
by and between VSE Corporation and Thomas R. Loftus
(Exhibit 10.1 to Form 10-Q dated July 30, 2004) * +
10.4 Employment Agreement dated as of April 22,
2008, by and between VSE Corporation and
Maurice G. Gauthier (Exhibit 10.1 to Form 8-K
dated April 22, 2008) * +
10.5 Transition Agreement dated as of April 22,
2008, by and between VSE Corporation and
Donald M. Ervine (Exhibit 10.2 to Form 8-K dated
April 22, 2008)
* +
Severance and Mutual Protection Agreement
10.6
dated as of November 7, 2008 by and between
VSE Corporation and Thomas M. Kiernan (Exhibit
10.3 to Form 10-K dated March 3, 2009)
10.7 Statement of Amendment Number One to the
Transition agreement, dated December 30, 2008
between VSE Corporation and Donald M. Ervine
(Exhibit 10.1 to Form 8-K dated January 6, 2009)
10.8 Statement of Amendment Number Two to the Transition
Agreement, dated December 31, 2008, between
VSE Corporation and Donald M. Ervine (Exhibit
10.2 to Form 8-K dated January 6, 2009)
10.9 Business Loan and security Agreement dated August 26,
2009 among VSE Corporation, Energetics Incorporated,
VSE Services International, Inc., Integrated
Concepts and Research Corporation, G&B Solutions,
* +
* +
* +
Inc., Citizens Bank of Pennsylvania and Suntrust
Bank (Exhibit 10.1 to Form 8-K dated August 26,
2009)
* +
66
EXHIBIT INDEX
Reference No. Exhibit No.
per Item 601 of in this
Regulation S-K Description of Exhibit Form 10-K
10.10 Lease Agreement by and between Metropark 7 LLC and
VSE Corporation (Exhibit 10.2 to Form 8-K dated
November 4, 2009)
* +
10.11 VSE Corporation Deferred Supplemental Compensation
Plan effective January 1, 1994 as amended by the
Board through March 9, 2004 (Exhibit 10.2 to
Form 10-Q dated April 28, 2004)
10.12 VSE Corporation 2004 Stock Option Plan (Appendix B to
Registrant’s definitive proxy statement for the Annual
Meeting of Stockholders held on May 3, 2004)
10.13 VSE Corporation 2004 Non-employee Directors Stock Plan
(Appendix C to Registrant’s definitive proxy statement
for the Annual Meeting of Stockholders held on
May 3, 2004)
13.1 Annual report to security holders, Form 10-Q
or selected quarterly data
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, independent
registered public accounting firm Exhibit 23.1
31.1 Section 302 CEO Certification Exhibit 31.1
31.2 Section 302 CFO and PAO Certification Exhibit 31.2
32.1 Section 906 CEO Certification Exhibit 32.1
32.2 Section 906 CFO and PAO Certification Exhibit 32.2
Exhibit 13
Exhibit 21
* +
* +
* +
99.1 Audit Committee Charter (as adopted by the Board
Of Directors of VSE Corporation on March 9, 2004)
(Appendix A to Registrant’s definitive proxy
statement for the Annual Meeting of Stockholders
held on May 3, 2004) *
*Document has been filed as indicated and is incorporated by reference herein.
+Indicates management contract or compensatory plan or arrangement.
67
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
The following is a listing of the subsidiaries of the Registrant:
Jurisdiction of
Organization
Energetics Incorporated
Maryland
G&B Solutions, Inc. Virginia
Integrated Concepts and Research Corporation District of Columbia
VSE Services International, Inc.
Delaware
68
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration
Statements of our reports dated March 4, 2010, with respect to the
consolidated financial statements of VSE Corporation and subsidiaries and the
effectiveness of internal control over financial reporting of VSE Corporation
included in this Annual Report (Form 10-K), for the year ended December 31,
2009.
Name
Registration Statements on Form S-8
2006 Restricted Stock Plan
2004 Stock Option Plan and 2004 Non-employee
Directors Stock Plan
Registration
Number
Date
Filed
333-134285
333-115218
5/19/2006
5/6/2004
McLean, Virginia
March 4, 2010
/s/ Ernst & Young LLP
69
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, M. A. Gauthier, certify that:
1.
I have reviewed this annual report on Form 10-K of VSE Corporation;
Based on my knowledge, this report does not contain any untrue statement
2.
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial
3.
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
The registrant’s other certifying officers and I are responsible for
4.
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the
registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on
5.
our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
70
Any fraud, whether or not material, that involves management or other
(b)
employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: March 4, 2010 /s/ M. A. Gauthier
___________________________________
M. A. Gauthier
Chief Executive Officer, President
and Chief Operating Officer
71
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, T. R. Loftus, certify that:
1.
I have reviewed this annual report on Form 10-K of VSE Corporation;
Based on my knowledge, this report does not contain any untrue statement
2.
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial
3.
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
The registrant’s other certifying officers and I are responsible for
4.
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the
registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on
5.
our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
72
Any fraud, whether or not material, that involves management or other
(b)
employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: March 4, 2010
___________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
/s/ T. R. Loftus
73
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
Exhibit 32.1
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as President, Chief Executive Officer and Chief Operating Officer
of VSE Corporation (the "Company"), does hereby certify that to the best of
the undersigned's knowledge:
1) our Annual Report on Form 10-K for the year ending December 31,
2009 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in our Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 4, 2010 /s/ M. A. Gauthier
___________________________________
M. A. Gauthier
Chief Executive Officer, President
and Chief Operating Officer
74
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO
Exhibit 32.2
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Executive Vice President and Chief Financial Officer of VSE
Corporation (the "Company"), does hereby certify that to the best of the
undersigned's knowledge:
1) our Annual Report on Form 10-K for the year ending December 31,
2009 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in our Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 4, 2010
___________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
/s/ T. R. Loftus
75
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
www.vsecorp.com
email: info@vsecorp.com
(703) 960-4600
(800) 455-4873
7067 Columbia Gateway Drive, Suite 200
1861 Wiehle Avenue, Suite 200
2550 Huntington Avenue
Columbia, Maryland 21046
Reston, Virginia 20190
Alexandria, Virginia 22303
www.energetics.com
(410) 290-0370
www.gbsolutionsinc.com
www.icrcsolutions.com
(703) 883-1140
(703) 519-9910