INTEGRITY • AGILITY
VALUE
2011 VSE Annual Report
and Form 10-K
This document is printed using soy-based inks using FSC and Green
Seal™ certified paper that contains recycled post-consumer fiber.
2011 Highlights
In June 2011, VSE was awarded a contract by the U.S.
Postal Service to develop and deliver a more fuel
efficient repowered gasoline prototype delivery Long Life
Vehicle (LLV) for testing. The truck prototype engine
was designed and built by our subsidiary WBI. Upon
completion of testing, the USPS will evaluate the
feasibility of adding the repowered, reduced emissions
system to their LLV fleet, which is the largest in
the world.
Corporate Profile
We conduct our business operations in more than 100
locations world-wide under five reportable operating
segments, which are: Federal; International; IT, Energy and
Management Consulting; Supply Chain Management and
Infrastructure Management. VSE’s offerings include:
Supply Chain Management—Our network design
and optimization programs maximize transportation,
manufacturing, inventory and supply functions through
application of cost, quality, schedule and risk mitigation
techniques.
Engineering and Equipment Refurbishment—
Conceptual design, engineering of equipment, vehicle
reset, parts supply, and advanced technologies.
IT Services—Complete enterprise architecture, data
mining, public protection/security, and technical/
software engineering for systems, assessments and
reviews.
Technical and Management Consulting—Professional
competencies in technology roadmaps and
solutions, policy impacts, analysis, cyber-security and
infrastructure protection and mitigation measurements.
Construction Management—Planning, preparation,
permitting, feasibility studies, procurement,
construction management for major complexes as well
as all civil works projects.
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)
329-4770.
Further information about VSE and its subsidiaries is
available at www.vsecorp.com; www.icrcsolutions.com;
www.gbsolutionsinc.com, www.energetics.com,
www.akimeka.com and www.teamwbi.com.
We won our contract recompetes and continued to improve
operating margins in 2011. Our acquisition of Wheeler Bros.,
Inc. (“WBI”) brings a well-established supply chain and
inventory management capability that provides opportunities
for market diversification. The WBI acquisition won the
Manufacturing Deal of the Year award at the M&A Atlas Awards
presented at the Harvard Club in New York City.
Revenues were $619 million in 2011 compared to $866
million in 2010. Revenues declined primarily due to the
expiration of our U.S. Army CECOM Rapid Response (“R2”)
contract and work on other programs as well as delays in
federal contract awards and protests of contract awards. The
decline was partially offset by revenues from our acquisitions
of Akimeka, LLC in August 2010 and WBI in June 2011.
Operating income was $36.7 million in 2011 compared to
$38.2 million in 2010. Net income was $20.6 million for
2011, or $3.93 per share, compared to $23.7 million, or
$4.56 per share for 2010. Bookings were $535 million for
2011 compared to $799 million for 2010. Funded contract
backlog at December 31, 2011 was $289 million, compared
to $407 million at December 31, 2010. Federal budget
constraints and contract protests have affected the timeliness
of awards in our market and the industry-wide decrease in
government funding activity has impacted our bookings and
funded backlog in 2011.
Contract highlights include:
In June 2011, VSE finalized the acquisition of Wheeler
Bros., Inc. (WBI), a privately held company headquartered
in Somerset, PA. WBI provides the U.S. Postal Service
(USPS) and the Department of Defense supply chain
and inventory management services for vehicle parts.
The acquisition immediately adds to our revenue and
operating income, expands our competencies and client
base, and positions us to pursue additional opportunities
to diversify and expand our business.
VSE’s GLOBAL Division was awarded a one-year $277
million cost-plus-award-fee, indefinite-delivery/indefinite-
quantity (ID/IQ) contract by the U.S. Naval Sea Systems
Command (NAVSEA) for continuous lifecycle support
of naval vessels bought, sold, or otherwise transferred
to Foreign Military Sales (FMS) customers through the
International Fleet Support Program. This contract
includes options, which, if exercised by NAVSEA, would
bring the cumulative five-year maximum potential value
to $1.5 billion. The award of this contract enables us to
extend our 15-year partnership with NAVSEA’s FMS team.
In January 2011, our Federal Group was awarded a
$410 million, five-year LOGWORLD task order to continue
providing equipment engineering, maintenance, and
logistics readiness support services to the U.S. Army
Reserve Command (USARC) and the 63rd and 88th
Regional Support Commands (RSC). The award enables
us to continue existing work supporting the U.S. Army
Reserve.
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2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE Financial Highlights
4
2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE Message to Stockholders
Overview
VSE has focused on diversifying its markets, clients and
offerings during the past several years in response to the
steady decline in Department of Defense (DoD) budgets. VSE
acquired ICRC in 2007, G&B in 2008, and Akimeka in 2010,
and the net effect of these acquisitions has been strategic
and positive. The company has made measurable progress in
diversification.
To further diversify our markets and offerings, on June 6,
2011, we acquired Wheeler Bros., Inc. (WBI), a world-class
supply chain management company headquartered in
Somerset, PA. WBI has a 52-year history of supplying vehicle
parts to the United States Postal Service and DoD. We see
significant opportunities for leveraging WBI’s supply chain
capabilities with our work of extending the service lives of
legacy ships, vehicles, aircraft and associated systems. At the
end of 2011, 37% of VSE’s revenue was derived from markets
other than defense, compared to 22% in 2010.
Our operating results for 2011 reflect continuing efforts
toward improved profitability. Operating margins increased
from 4.4% to 6.1%. Accordingly, net operating income for
2011 remained strong despite a continued decline in low
margin “pass-through” work. Revenues generated by our
direct labor remained strong and continued to provide a
valuable contribution to our bottom line. Our improved profit
margins in 2011 have enabled us to continue to provide our
stockholders with a solid return on equity.
Strategic Planning
Our Strategic Planning process continues to be an excellent
business tool for ensuring our continued success. Throughout
2011, we reviewed the 2011-2013 Strategic Plan quarterly
and updated the plan in mid-2011. Looking ahead, we
launched our 2012-2014 plan at the end of 2011. Key focus
areas for 2012 include:
Retain and enhance VSE’s operational agility achieved
through the decentralization and autonomy of our
operating groups. Our agile operating model is designed
to leverage each group’s unique client relationships,
lines of business and local workforce. The agility
arising from organic back office capabilities resident in
each operating group continues to validate our belief
that autonomy is a wise investment rather than an
unnecessary expenditure.
Retain and train the next generation of VSE’s leaders.
VSE’s Leader Development Program and its companion
Succession Plan are fully integrated with our Strategic
Plan. Our next generation of leaders is onboard now,
and our long term incentive plans have been tailored to
retain the next generation of our leaders and align their
interests with our stockholders’ interest.
Continue to be recognized as the partner of choice for
“best in niche” small businesses and to expand our
cadre of strategic small business partners. We ended
2011 with more than 70 strategic small business
partners, and our jointly targeted business opportunities
remains robust if not exhibiting strong growth. We will
continue our success in seeking to exceed assigned
government targets for small business work share.
Continue to diversify our markets, clients and
offerings through the synergies obtained through our
acquisitions. We remain acquisitive, and our target
markets and offerings will build on our three most
recent acquisitions. Our model for integration is mature
and has been consistently successful.
Exploit the market diversification we have achieved
through our acquisitions of G&B, Akimeka and WBI.
Combining the client relationships and diverse offerings
of our subsidiaries with our traditional markets is
expected to significantly expand our pipeline. We also
expect our focus on tactical business development
within our current client domains and contracts to result
in enhanced financial performance.
Operational Challenges
As a federal technical services contractor, we depend upon
the priorities and pace of funding of our primary client,
the Federal Government. In 2011, federal budgets were
strained, government spending priorities were in transition
and the industry experienced a sharp increase in protests
of government contract awards. This has affected the
timeliness of awards and the funding of new and existing
contracts in our markets.
We responded to these challenges by successfully pursuing
and winning our key recompete contracts and by diversifying
our revenue and income base through a key acquisition.
We won the follow-on contracts to continue our $1.5 billion
NAVSEA FMS International Fleet Support Program work
and $410 million for USARC equipment sustainment. Our
contract wins included the opportunity to develop a prototype
engine for the USPS Long Life Vehicle (LLV). The engine
was the first collaborative effort for VSE and WBI. Upon
completion of testing, the USPS will evaluate the feasibility
of adding a more fuel-efficient, reduced-emissions system to
their LLV fleet, which is the largest in the world.
International Crisis Challenge
In January 2011, we were faced with political unrest in
Alexandria, Egypt. VSE’s Crisis Response Team made
a timely decision to safely evacuate all employees, and
subcontractors performing work for the Egyptian Navy. The
evacuation of 145 people included family members and
14 teachers from the Shultz School who had no means out
of the country. As conditions stabilized, we were able to
transition the majority of our workforce back into Egypt.
Note of Appreciation
We would like to take a moment to acknowledge retired Army
General Jimmy D. Ross who retired from the VSE Board of
Directors Dec. 31, 2011. General Ross has been an integral
part of VSE’s success and growth over the past 17 years. We
sincerely wish him the best in the years to come and thank
him for his exceptional leadership and dedication to the
success of VSE Corporation.
5
2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE Looking Ahead
While it appears the challenging operating environment
we experienced in 2011 will continue in 2012, we have
implemented strategies to strengthen our business
operations to enhance our ability to secure and execute
federal contracts and venture into new markets. We have
the talent, dedication, experience and leadership in place
who remain focused to serve our clients with the same
commitment VSE has always maintained throughout its
53 years of business. Our core values: Integrity – Agility –
Value will continue to guide us through the challenges that
lie ahead.
Maurice A Gauthier
CEO/President/COO
March 2012
Clifford M. Kendall
Chairman of the Board
March 2012
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2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE Board of Directors
James F. Lafond, CPA
Retired Executive; formerly
Washington Area Managing Partner
PricewaterhouseCoopers LLP
Bonnie K. Wachtel
Vice President and General Counsel
Wachtel & Co., Inc.
David M. Osnos, Esq.
Of Counsel
Arent Fox LLP
Attorneys-at-Law
Clifford M. Kendall
Chairman of the Board
2011 Tech Council of Maryland Lifetime
Achievement Award
2010 First Inductee in Greater Washington
Government Contractor Hall of Fame
Maurice A. Gauthier
CEO/President/COO
VSE Corporation
Ralph E. Eberhart
General, USAF (Ret.)
President, Armed Forces Benefit Association
Chairman and Director of
5Star Bank/Life/Funds/Investments
Jimmy D. Ross
(Retired from VSE Board Dec. 31, 2011)
General, USA (Ret.)
Senior Logistics Consultant
Cypress International, Inc.
Calvin S. Koonce, Ph.D.
Chairman, Koonce Securities, Inc.
Securities Broker/Dealer
7
2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE VSE Corporation is the federal services company of choice for solving problems 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 and equipment refurbishment, supply chain management, engineering, IT services, construction
program 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 teammates.
VSE specializes in improving the reliability of systems and equipment and reducing associated costs. Our reputation for
success and our quality management system are based on self-governance, openness and honesty. The foundation of VSE’s
success is also based on highly experienced leadership, state-of-the-art IT communications, creative thinking, teamwork and
motivation.
VSE’s policy is to provide services of the highest quality to meet or exceed the expectations and requirements of our
customers on time and at a fair price. VSE’s quality management system is registered to the ISO 9001:2008 standard.
VSE is 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 specific problems while remaining true to our
roots as a value engineering firm.
VSE has adopted the primary community responsibility of assisting wounded warriors, military veterans and their families.
NASDAQ: VSEC
ISO 9001:2008
8
2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE VSE Corporation
Headquarters
2550 Huntington Avenue
Alexandria, Virginia 22303
May 2012
6348 Walker Lane
Alexandria, VA 22310
(703) 960-4600 or
Toll-free: (800) 455-4873
United States Locations
Anchorage, Alaska
Texarkana, Arkansas
Barstow, California
Chula Vista, CA
Concord, California
Fort Hunter Liggett, California
Fort Irwin, California
Riverside, California
Yermo, California
Lakewood, Colorado
Maitland, Florida
College Park, Georgia
Fort Stewart, Georgia
Anderson AFB, Guam
Hickam AFB, Hawaii
Honolulu, Hawaii
Kehei, Hawaii
Hamel, Illinois
Barksdale AFB, Louisiana
Baltimore, Maryland
Columbia, Maryland
Indian Head, Maryland
Patuxent River, Maryland
Woodlawn, Maryland
Westfield, Massachusetts
Sterling Heights, Michigan
Long Beach, Mississippi
Great Falls, Montana
Nellis AFB, Nevada
Bridgeport, New Jersey
South Brunswick, New Jersey
Sparta, New Jersey
Fayetteville, North Carolina
Midwest City, Oklahoma
Klamath Falls, Oregon
Portland, Oregon
Chambersburg, Pennsylvania
Somerset, Pennsylvania
Charleston, South Carolina
Locations
Fort Jackson, South Carolina
Fort Sam Houston, Texas
Gatesville, Texas
Ingleside, Texas
Lackland AFB, Texas
San Antonio, Texas
Ogden, Utah
Salt Lake City, Utah
Chesapeake, Virginia
Hampton, Virginia
Ladysmith, Virginia
Ruther Glen, Virginia
Fort Lewis, Washington
Oak Harbor, Washington
Washington, D.C.
Fort McCoy, Wisconsin
International Locations
Afghanistan
Alexandria, Egypt
Kaiserslautern, Germany
Iraq
Kuwait
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2011 VSE Annual Report and Form 10-K—INTEGRITY • AGILITY • VALUE 2550 Huntington Avenue
Alexandria, Virginia 22303-1499
May 2012
6348 Walker Lane
Alexandria, VA 22310
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
1305 N. Holopono Street,
Suite 3
Columbia, Maryland 21046
Reston, Virginia 20190
Alexandria, Virginia 22303
Kihei, Hawaii 96753
384 Drum Ave
Somerset, Pennsylvania
15501
www.energetics.com
www.gbsolutionsinc.com
www.icrcsolutions.com
www.akimeka.com
www.teamwbi.com
(410) 290-0370
(703) 883-1140
(703) 519-9910
(808) 442-7100
(814) 443-2444
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, 2011 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499 www.vsecorp.com
(Address of Principal Executive Offices) (Zip Code) (Webpage)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.05 per share The NASDAQ Global Select Market
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 [x] 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, 2011, was approximately $101.9 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 1, 2012: 5,246,527.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders expected to be held on May 1, 2012, are incorporated by reference
into Part III of this report.
2
TABLE OF CONTENTS
PART I
ITEM 1
Business
ITEM 1A
Risk Factors
ITEM 1B
Unresolved Staff Comments
ITEM 2
Properties
ITEM 3
Legal Proceedings
Mine Safety Disclosures
ITEM 4
ITEM 4(a) Executive Officers of the Registrant
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
ITEM 13
ITEM 14
PART IV
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About
Market Risks
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and
Director Independence
Principal Accountant Fees and Services
ITEM 15
Exhibits, Financial Statement Schedules
Signatures
Exhibits
Page
5
9
12
12
12
12
13
16
19
20
37
38
66
66
68
68
68
68
68
68
68
69
70-79
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"), G&B Solutions, Inc.
(“G&B") and, since August 19, 2010, Akimeka, LLC (“Akimeka”). Our
Infrastructure Group consists of our wholly owned subsidiary Integrated
Concepts and Research Corporation (“ICRC”). Our Supply Chain Management Group
operations are conducted by our wholly owned subsidiary Wheeler Bros., Inc.
(“WBI”), acquired June 6, 2011. 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, equipment refurbishment, supply chain management, IT solutions,
health care 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 five reportable segments aligned
with our management groups: 1) Federal, which generated approximately 30% of
our revenues in 2011; 2) International, which generated approximately 34% of
our revenues in 2011; 3) IT, Energy and Management Consulting, which generated
approximately 17% of our revenues in 2011; 4) Infrastructure, which generated
approximately 6% of our revenues in 2011; and 5) Supply Chain, which generated
approximately 13% of our revenues in 2011. 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, equipment refurbishment, supply chain management, IT solutions,
health care 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, overhaul, and follow-on technical support;
logistics management support; machinery condition analysis; specification
preparation for ship alterations; ship force crew training; life cycle support
for ships; ship communication systems; energy conservation, energy efficiency,
sustainable energy supply, and grid modernization projects; technology road-
mapping;
development,
architecture
information
enterprise
IT
5
assurance/business continuity, security risk management, and network services;
medical logistics; medical command and control; large-scale port engineering
development and construction management; construction renovation; and supply
chain and inventory management services. 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. 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,
including the United States Postal Service (“USPS”). The U.S. Army, Army
Reserve, U.S. Navy and USPS 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
U. S. Postal Service
Department of
U.S. Treasury
Department of
Transportation
Department of Interior
Department of Energy
Other government
Total – Federal Civil
Agencies
2010
2011
$235,055
140,575
%
38.0 $463,305
198,833
22.7
%
54.7
26.7
11,971 1.9 13,303 1.5 13,839 1.4
82.8
%
53.5 $ 555,238
271,189
23.0
840,266
387,601
675,441
2009
78.0
62.6
75,964
12.3
-
-
-
-
41,434
6.7
49,332
5.7
47,676
4.7
25,386
24,254
23,005
3.5
2.9
1.6
32,524 5.3 33,055 3.8 42,670 4.2
35,722
29,275
16,111
51,497
29,810
21,890
6.0
3.4
2.5
4.1
3.9
3.7
222,567
36.0
185,584
21.4
171,454
16.9
Commercial
8,424 1.4 5,011 0.6 2,919 0.3
Total
$618,592 100.0 $866,036 100.0 $1,014,639 100.0
The government’s procurement practices sometimes include the bundling of
various work efforts under large comprehensive management contracts that are
awarded to more than one contractor. 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 larger 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
6
overall profit margins in some years. Although the government’s practice of
using large 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 large multiple award 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 allowable costs are incurred and fees are earned.
Revenues for time and materials contracts are recorded on the basis of
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. 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, 2011, is approximately $289
million. Funded backlog as of December 31, 2010 and 2009 was approximately
$407 million and $476 million, respectively. Changes in funded backlog on
contracts are sometimes unpredictable due to uncertainties associated with
changing government program priorities and availability of funds, which is
heavily dependent upon the congressional authorization and appropriation
process. Delays in this process, such as those experienced in 2011 and 2010,
may temporarily diminish the availability of funds for ongoing and planned
work.
In addition to the funded backlog levels, we have contract ceiling
amounts available for use on multiple award, indefinite delivery, indefinite
quantity contracts with DoD and Federal Civil agencies. 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.
Personnel
Services are provided by our staff of professional and technical
personnel having high levels of education, experience, training and skills. As
7
of December 31, 2011, we had 2,516 employees, a decrease from 2,897 as
compared to December 31, 2010. Principal categories include (a) mechanics and
vehicle and equipment technicians, (b) information technology professionals in
computer systems, applications and products, configuration, change and data
management disciplines, (c) engineers and technicians in mechanical,
electronic, industrial, energy and environmental services, (d) logisticians,
(e) construction and environmental specialists, and (f) warehouse and sales
personnel. 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. Numerous other organizations, including large,
diversified firms, have greater financial resources and larger technical
staffs that are capable of providing the same services offered by us. Our lean
operating model provides the agility and value necessary to remain competitive
in our chosen markets.
Government agencies emphasize 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.
The extent and range of competition that we will encounter as a result
of changing economic or competitive conditions, customer requirements or
technological developments is unpredictable. We believe the principal
competitive factors for our business are technical and financial
qualifications, past performance and price.
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.
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. Our largest contract, the Rapid Response (“R2”) Program, expired in
January 2011, adversely impacting our 2011 revenues and also our 2010 revenues
as specific task orders under the R2 contract expired intermittently prior to
the expiration of the contract. We were awarded a follow-on R2-3G contract;
however, government administrative and funding issues have delayed awards
under this program. Our ICRC subsidiary’s Port of Anchorage Intermodal
Expansion Project (“PIEP”) has experienced declines in work levels due to
funding, technical, and political issues, and there is no assurance that the
work will return to previous levels. In 2011, we were awarded a follow-on
contract for our Foreign Military Sales (“FMS”), and subsequent protest
efforts by an unsuccessful bidder were denied in January 2012. We are awaiting
a final determination regarding the award of a follow-on contract for our U.S.
Department of Treasury Seized Asset Program after a U.S. Government
Accountability Office (“GAO”) protest was dismissed following the U.S.
Department of Treasury’s decision to take corrective action. Our WBI
subsidiary managed inventory program for USPS and our Federal Group ELD
equipment refurbishment contract for the U. S. Army Reserve also provide
significant amounts of revenues and profits, which if interrupted, could
adversely impact our overall company financial performance.
Uncertain and shifting federal government priorities could delay contract
awards and funding and adversely affect our ability to continue work on our
government contracts. Additionally, federal procurement directives could
result in a loss of work on current programs to set-asides and large multiple
award contracts.
Our business is subject to funding delays, terminations, reductions,
extensions, and moratoriums caused by the government’s contracting process.
The current federal procurement environment is unpredictable and could
adversely affect our ability to perform work on new and existing contracts.
Contract award and funding delays extend across the federal technical services
industry. We experienced delays in contract awards and funding on our
contracts during 2010 and 2011 that have impacted our ability to continue
existing work and to replace expiring work. Additionally, 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
large multiple award contracts for very large businesses. These risks can
potentially have an adverse effect on our revenue growth and profit margins.
The nature of our operations and work performed by our employees 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 wide diversity of contract types, nature of work,
work locations, and legal and regulatory complexities challenges our
administrative staff and skill sets. We also face challenges associated with
our quality of workforce, quality of work, safety, and labor relations
9
compliance. Our current and projected work in foreign countries exposes us to
challenges associated with export compliance, local laws and customs,
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, workplace accidents, and regulatory non-compliance.
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.
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.
Additionally, we are exposed to contractual and financial liabilities if our
subcontractors do not perform satisfactorily.
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.
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.
Additionally, a significant percentage of our contract work is performed
by subcontractors, which are subject to government compliance, performance and
financial risks. If unsatisfactory performance or compliance failure occurs on
the part of subcontractors, we must bear the cost to remedy these deficiencies
on our prime contracts.
Increased market competition resulting from decreases in government spending
for contract services could affect our ability to sustain our revenue levels.
Continuing pressure on government budgets may significantly impact the
flow of work to federal contractors, particularly new programs. Accordingly,
competitor contractors that experience a loss of government work may tend to
redirect their marketing efforts toward the types of work performed by us. This
increase in competition for our service offerings could potentially affect our
10
ability to win new work or to win successor contracts to continue work that is
currently performed by us under expiring contracts. Furthermore, disappointed
bidders frequently protest which can either reverse or delay contract awards.
Our business could be adversely affected by incidents that could cause an
interruption in our operations.
Disruption of our operations due to internal or external system or
service failures, accidents or incidents involving employees or third parties
working in high-risk locations, or natural disasters or other crises could
adversely impact our financial performance.
Acquisitions have been a part of our business strategy in recent years. This
presents certain risks.
The decision to acquire a company that does not meet expected operating
and financial performance targets, the ineffective integration of an
acquisition, or the inability of our company to service debt associated with
making an acquisition could potentially adversely impact our financial
performance.
Global economic conditions and political factors could adversely affect
revenues on current programs.
Revenues from our programs for which work is performed in foreign
countries are subject to political risks posed by ongoing foreign conflicts and
potential terrorist activity. A significant amount of our revenues in recent
years resulted from the U.S. military involvement in Iraq and Afghanistan, and
the winding down of this U.S. military involvement has adversely impacted our
revenues. Similarly, political unrest in Egypt has decreased our revenues in
2011 and further political unrest in Egypt or potential changes in the
political landscapes in other countries could potentially impact future
revenues. International tensions can also affect our work 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.
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.
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.
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
11
several acceptable methods that currently exist, or revoking the acceptability
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 May 2012.
We also provide services and products from approximately 36 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. Additionally, we have an option to buy office and warehouse
facilities that we currently lease to conduct WBI’s operations.
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.
Further, from time-to-time, government agencies investigate whether our
operations are being conducted in accordance with applicable regulatory
requirements. Government investigations of us, whether relating to government
contracts or conducted for other reasons, could result in administrative,
civil or criminal liabilities, including repayments, fines or penalties being
imposed upon us, or could lead to suspension or debarment from future
government contracting. Government investigations often take years to complete
and many result in no adverse action against us. We believe, based upon
current information, that the outcome of any such government disputes and
investigations will not have a material adverse effect on our financial
position.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 4(a) EXECUTIVE OFFICERS OF THE REGISTRANT
12
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
Thomas G. Dacus
53
66
Vice President – Human Resources
Executive Vice President and effective
February 15, 2012, President, Supply Chain
Management Group
Randy Davies
54
President, Wheeler Bros., Inc.
Crystal R. Douglas (Williams) 47
Vice President – Contracts
Harold J. Flammang, Jr.
Maurice A. Gauthier
Randy W. Hollstein
Thomas M. Kiernan
James W. Lexo, Jr.
Thomas R. Loftus
Denise Manning
Nancy Margolis
Donelle Moten
60
64
55
44
63
56
Executive Vice President and President,
International Group
Director, Chief Executive Officer,
President and Chief Operating Officer
Vice President – Sales and Marketing
Vice President, General Counsel and
Secretary
Executive Vice President, Strategic
Planning and Business Initiatives
Executive Vice President and Chief
Financial Officer
52 President, G&B Solutions Inc.
56
58
President, Energetics Inc.
President, Federal Group, effective
February 15, 2012
Carl E. Williams
59
President, Infrastructure Group
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 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-employee 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
13
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
Program offered by the Kellogg Graduate School of Management at Northwestern
University.
Ms. Bailey was promoted to Vice President of Human Resources in December
2009, 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. Davies was appointed President and COO for Wheeler Bros., Inc.
(“WBI”) in June 2011 immediately following VSE’s acquisition of WBI. He is
involved in the management of WBI’s day-to-day operations, new business
development, supply chain initiatives and facilities management. Mr. Davies,
who has been with WBI since 1977, was a stockholder and a director of WBI. He
was WBI’s Vice President of Operations from 1985, to June 2011, when VSE
acquired WBI.
Ms. Douglas (Williams) joined VSE in December 2008 as Vice President –
Contracts. Prior to joining VSE, Ms. Douglas was Contracts Director for the
North American Public Sector at CSC. She began her CSC career in 1994. Prior
to joining CSC, Ms. Douglas provided contract administration services at ICF
Kaiser International and at Dynamic Concepts Inc. Ms. Douglas 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.
Mr. Flammang joined VSE in 2004 as a Program Manager for International
Group from 2004 to 2008 and was promoted to President of the International
Group in May of 2011. During his tenure as Program Manager, he oversaw the
four ship transfer of the ex-USS Kidd Class guided missile destroyers to
Taiwan. Mr. Flammang became the Division Manager in 2008 and Deputy Director
of International Group in 2009. As President, he is responsible for the
financial performance of two divisions, GLOBAL and Fleet Maintenance. He also
has overall responsibility for business development and capture efforts within
the International Group. Mr. Flammang has a Bachelor of Arts in Social
Sciences from Ohio State University (1974); Masters of Business Administration
from the Florida Institute of Technology (1981); and holds a Master of
Science in Industrial Administration from the National Defense University
(2000) in Washington, DC.
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. Kiernan joined VSE in November 2008 and serves as Vice President,
General Counsel, and Corporate Secretary. From 2003 to 2008, Mr. Kiernan
14
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.
Ms. Manning became President of our wholly owned subsidiary G&B
Solutions Inc. in 2010. She has served as the Chief Operating Officer for G&B
since 2008, initially joining the company in 2002 as a Director responsible
for service delivery. Prior to joining G&B, Ms. Manning was at Northrop
Grumman for 18 years as a Program Director in the Enterprise Solutions
organization. She also served as a Program Manager for Fairfax Imaging, Inc.
and the Director of Project Management for BIAP Systems. Ms. Manning
graduated with a Computer Science degree from State University of New York
System and is a certified project management professional (PMP).
Ms. Margolis became President of our wholly owned subsidiary Energetics
Incorporated in May 2010. She joined Energetics in 1984 and served as Vice
President of its Science and Technology Division. Prior to joining Energetics,
Ms. Margolis worked at ARINC Corporation from 1981-1984, focusing on power
plant reliability. She also worked as a chemist for Bethlehem Steel
Corporation from 1977-1978. She holds a B.A. in Chemistry from Johns Hopkins
University and an M.S. in Mechanical Engineering from the University of
Maryland at College Park.
Mr. Moten joined VSE in 1989, and prior to his appointment to President
of our Federal Group effective February 15, 2012, has served in various
positions including Program Manager, Department Manager, Division Manager and
Senior VP/Director of Engineering and Logistics Directorate. As the Federal
Group President, Mr. Moten will lead the 900-person Federal Group team. Mr.
Moten has a Bachelor of Science in Business Administration, a Master of
Science in Management Information Systems, and a Master of Business
Administration from the University of Maryland.
Mr. 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.
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
2010:
March 31
June 30
September 30
December 31
For the Year
2011:
March 31
June 30
September 30
December 31
For the Year
(b) Holders
$53.71
41.46
37.57
39.90
$53.71
$33.16
30.98
26.83
30.68
$33.16
$41.16
31.82
26.65
29.78
$26.65
$26.86
24.46
21.00
22.32
$21.00
$0.050
0.060
0.060
0.060
$0.230
$0.060
0.070
0.070
0.070
$0.270
As of February 7, 2012, VSE common stock, par value $0.05 per share, was
held by approximately 258 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 2010 cash dividends were declared quarterly at the annual rate of
$0.20 per share through March 31, 2010, and at the annual rate of $0.24 per
share commencing June 1, 2010.
In 2011 cash dividends were declared quarterly at the annual rate of
$0.24 per share through March 31, 2011, and at the annual rate of $0.28 per
share commencing June 1, 2011.
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 (the “2004
Plan”) and (ii) the VSE Corporation 2006 Restricted Stock Plan (the “2006
Plan”). On May 3, 2011 the stockholders approved amendments to the 2006 Plan
extending the term thereof until May 3, 2016.
As of December 31, 2011, 131,443 shares of VSE common stock were
available for future issuance under the 2006 Plan.
In December 2005, the Board directed us to discontinue awarding options,
both discretionary and nondiscretionary, under the 2004 Plan. The options
outstanding under the 2004 Plan were not affected by this Board action.
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
$350
$300
$250
$200
$150
$100
$50
$0
12/06
12/07
12/08
12/09
12/10
12/11
VSE Corporation
NASDAQ Composite
Peer Group
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Performance Graph Table
VSE
NASDAQ Composite
Peer Group
2006 2007 2008 2009
270
100
95
100
117
100
234
66
113
289
110
133
2010 2011
148
199
111
112
98
111
18
ITEM 6. Selected Financial Data
(In thousands, except per share data)
Revenues
Net income
Years ended December 31,
2011
2010
2009
2008
2007
$618,592
$866,036
$1,014,639 $1,043,735 $653,164
$ 20,552
$ 23,687
$ 24,024
$ 19,040 $ 14,102
Basic earnings per share
$ 3.93
$ 4.56
$ 4.68
$ 3.75 $ 2.85
Diluted earnings per share
$ 3.93
$ 4.56
$ 4.67
$ 3.74 $ 2.82
Cash dividends per common
share
$ 0.27
$ 0.23
$ 0.195
$ 0.175 $ 0.155
2011
2010
2009
2008
2007
As of December 31,
Working capital
$ 71,123
$ 54,569
$ 45,902
$ 24,179 $ 24,756
Total assets
$454,512
$288,426
$253,990
$ 275,966 $171,771
Long-term debt
$144,759
$ 11,111
$ -
$ - $ -
Long-term lease
obligations
$ 33,938
$ 20,258
$ 1,100
$ - $ -
Stockholders' equity
$143,600
$123,776
$101,310
$ 76,123 $ 56,376
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
Customers and Services
consist
We provide sustainment services for legacy systems and equipment and
professional services to the U.S. Department of Defense ("DoD") and Federal
Civilian agencies, including the United States Postal Service (“USPS”). Our
equipment
operations
refurbishment, supply chain management, IT solutions, health care 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. 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.
engineering,
logistics,
primarily
of
Organization
Our business is managed under operating groups consisting of one or more
divisions or wholly owned subsidiaries 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") and Fleet
Maintenance Division ("FMD"). Our IT, Energy and Management Consulting Group
operations are conducted by our wholly owned subsidiaries Energetics
Incorporated ("Energetics"), G&B Solutions, Inc. (“G&B”), and, since August
19, 2010, Akimeka, LLC (“Akimeka”). Our Infrastructure Group operations are
conducted by our wholly owned subsidiary Integrated Concepts and Research
Corporation (“ICRC”). Our Supply Chain Management Group operations are
conducted by our wholly owned subsidiary Wheeler Bros., Inc. (“WBI”), which we
acquired on June 6, 2011.
Segments
Our operations are conducted within five reportable segments aligned
with our management groups: 1) Federal; 2) International; 3) IT, Energy and
Management Consulting; 4) Infrastructure; and 5) Supply Chain Management.
Federal Group - Our Federal Group provides engineering, technical,
management, and integrated logistics support services to U.S. military
branches and other government agencies.
CED - CED manages our execution of programs under large multiple award
contracts which support clients across DoD and the government. We have managed
significant revenue generating delivery orders under the U.S. Army CECOM Rapid
Response (“R2”) Program in 2011 and 2010, including our CED Assured Mobility
Systems Program, under which we provided technical support services in support
of U.S. Army PM Assured Mobility Systems and U.S. Army Tank-automotive and
Armaments Command (“TACOM”), and our RCV Modernization Program, under which we
performed maintenance work on U.S. Army Route Clearance Vehicles in Kuwait. A
substantial portion of our revenue on the R2 Program resulted from the pass-
through of subcontractor support services that have a low profit margin. Our
contract supporting the R2 Program expired in January 2011. In July 2010, we
received one of several new multiple award contracts to continue work under
the R2 replacement program known as Rapid Response-Third Generation (“R2-3G”)
over a five-year period of performance. While the R2-3G contract gives us the
opportunity to pursue follow-on work from the original R2 contract and new
work, future revenue levels from this contract cannot be determined with
certainty and revenue recorded on this contract through December 31, 2011 has
been substantially lower than revenue levels generated by the predecessor R2
contract.
20
ELD - ELD provides full life cycle engineering, logistics, maintenance
and refurbishment services to extend and enhance the life of existing
equipment. ELD supports the U.S. Army and Army Reserve 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.
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.
In September 2011, GLOBAL was awarded a successor contract to continue
this FMS program work. The successor contract is a one year contract with a
maximum potential value of $277 million and four one year options, which, if
exercised, would bring the cumulative five year maximum potential value of
this contract to $1.5 billion. In October 2011, a protest to the award of the
contract was filed with the U.S. Government Accountability Office (GAO).
Performance of the awarded contract was subject to an automatic stay while the
protest was under review, and our work continued under the predecessor
contract at a constrained level of effort. In January 2012, the protest was
denied by the government, which will enable us to continue work on this
program under the new contract.
Our GLOBAL division also performs other services, including management,
maintenance, storage and disposal support for seized and forfeited general
property programs, and boiler inspection services.
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, and IT
systems integration. FMD also provides aircraft sustainment and maintenance
services to the United States Air Force under the Contract Field Teams (“CFT”)
Program.
Seized Asset Programs – Our International Group also provides
management, maintenance, storage and disposal support for seized and forfeited
general property programs for the U.S. Department of Treasury (“Treasury”) and
21
the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms and
Explosives (“ATF”). We had a cost plus incentive fee contract performed under
FMD to support these programs that ended September 30, 2010. In September
2010, ATF awarded a 10-year contract to our GLOBAL division to continue the
ATF seized asset work. We were awarded interim contract coverage to continue
work on the Treasury program. In November 2011, Treasury awarded a one year
contract with nine option years to our GLOBAL division to perform the Treasury
seized asset work. A protest of the award of the contract was subsequently
filed with GAO by an unsuccessful bidder. In response, Treasury elected to
take corrective action to cancel the contract and dismiss the protest. We
continue to provide services for the Treasury program under interim contract
coverage while we wait for Treasury’s direction under their corrective action.
IT, Energy and Management Consulting Group - Our IT, Energy and
Management Consulting Group provides technical and consulting services
primarily to various civilian government agencies.
Energetics - Energetics provides technical, policy and management support
in the areas of energy efficiency, sustainable energy supply, grid
modernization, climate change mitigation, and infrastructure protection and
resilience. Energetics supports all aspects of R&D program management,
including technical and engineering analysis, strategic and collaborative
planning, technology road-mapping, program evaluation and metrics, technical
communications, and market transformation. Customers include the U.S.
Department of Energy and its laboratories, the U.S. Department of Homeland
Security, the U.S. Department of Commerce and others.
G&B - G&B is an established information technology integrator providing
service to many government agencies, including the Departments of Homeland
Security, Interior, Labor, Agriculture, Housing and Urban Development, Health
and Human Services and Defense; the Social Security Administration; and the
National Institutes of Health. G&B’s core expertise lies in enterprise
architecture development, information assurance/business continuity, security
risk management, program and portfolio management, network IT services, systems
design and integration, data center consolidation and management, program
management and quality assurance services, and product and process improvement
using Lean Six Sigma and other methodologies.
Akimeka - Akimeka provides DoD’s health services and logistics sector
with innovative IT solutions that meet high-priority challenges. Akimeka has a
technical team skilled at developing information technology (IT) health care
solutions within government systems and protocols. Akimeka offers solutions in
fields that include medical logistics, medical command and control, e-health,
information assurance and public safety. Most of Akimeka’s customers are in the
military health system.
Infrastructure Group – This group consists of our ICRC subsidiary,
which is engaged principally in providing engineering and transportation
infrastructure services and construction management services primarily to
Federal Civilian agencies. ICRC’s largest contract is with the U.S. Department
of Transportation Maritime Administration for services performed on the Port
of Anchorage Intermodal Expansion Project in Alaska (the "PIEP"). Seasonal
variability at this location and work constraints imposed by the intermittent
presence of endangered species and environmental and other factors have
resulted in fluctuations in revenues from the PIEP.
Supply Chain Management Group – This group consists of our WBI
subsidiary, acquired in June 2011, which supplies vehicle parts primarily to
government clients through a Managed Inventory Program (“MIP”) to USPS and
direct sales to other clients, including DoD.
22
Concentration of Revenues
(in thousands)
Years ended December 31,
Source of Revenues
GLOBAL FMS
USPS MIP
ELD US Army Reserve
CED Assured Mobility Systems
Treasury/ATF Seized Asset Program
PIEP Contract
FSS RCV Modernization
Other
2011
%
2010
%
2009
%
$100,021 16 $141,418 16 $105,464 10
73,753 12 - - - -
63,446 10 61,064 7 70,287 7
61,353 10 167,748 19 144,375 14
34,684 6 47,008 6 45,090 4
26,655 4 51,497 6 35,699 4
1,317 - 58,954 7 82,734 8
257,363 42 338,347 39 530,990 53
Total Revenues
$618,592 100 $866,036 100 $1,014,639 100
Management Outlook
Our company and our industry faced a challenging operating environment
in 2011 that constrained revenue levels. Additionally, we had to manage
through a few contract-specific circumstances that further heightened the
challenges posed by the environment. Our response was to ensure the
preservation of our core operating programs and pursue and add new clients and
competencies. While it appears that our operating environment will continue to
be challenging in 2012, we believe we have made progress through further
diversification toward enhancing our prospects for future revenue and income.
Operating environment challenges have been centered on federal
government budgeting and spending priorities, initiatives, and processes.
Federal budgets have been strained, government spending priorities have been
changing, and there has been an increasing government emphasis on oversight
activities at the expense of contract administration efforts. This has
affected the timeliness of awards and the funding of new and existing
contracts in our markets, impacted the flow of work to federal contractors,
caused increased competition in the federal marketplace, and resulted in a
sharp increase in protests of government contract awards.
Specific circumstances that presented challenges to sustaining our
revenues in 2011 and potential future revenues included the loss of work
performed by our subcontractors on the expired R2 program; loss of work
performed in Egypt on our FMS Program associated with our temporary evacuation
from Egypt due to the shutdown of certain government services and to living
and working environment dangers associated with significant domestic and
political unrest in Egypt; and multiple contract expirations on key programs
for which we had to compete for successor contract coverage to continue the
work.
We responded to these challenges by pursuing and winning successor
contract coverage and expanding our revenue and income base through the key
acquisition of WBI. Our contract wins included an award early in 2011 to which
we expect to transition our work on the ELD U. S. Army Reserve equipment
refurbishment program upon expiration of our R2 contract, an award later in
2011 of a follow-on contract to continue our FMS Program work, and other
follow-on contract awards to our subsidiaries.
The acquisition of WBI in June, 2011 positioned us to improve our
revenues and profit margins, diversify our product offerings and customer
base, and improve the balance between our services to DoD and Federal Civilian
agencies. WBI gives us a well established supply chain management capability,
which when combined with our existing client relationships, provides potential
for future revenue growth in the DoD supply chain management market.
Conversely, WBI’s relationship with the USPS, combined with our existing
capabilities, also presents opportunities to leverage our legacy vehicle life
extension services to a new client. These synergies have already produced
results with the award of a contract from the USPS to develop and deliver a
more fuel efficient repowered gasoline prototype delivery vehicle. If we
successfully move this effort to the production stage, we will generate an
23
additional future revenue stream. Our acquisition of WBI’s supply chain and
inventory management competencies also provides us opportunities to further
diversify our customer base to other markets, including commercial work.
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, 2011, 2010 and 2009, and funded contract backlog as
of December 31, 2011, 2010 and 2009 is as follows.
Bookings
Revenues
Funded Backlog
(in millions)
2011 2010
$799
$866
$407
$535
$619
$289
2009
$939
$1,015
$476
WBI bookings on their USPS contract occur at the time revenue is
recognized. Therefore, WBI’s USPS business does not have the traditional
funded backlog experienced on our other government contracts. Accordingly,
our potential future revenues will be less dependent on funded backlog in 2011
and future years.
Programs and Contracts
In September 2011, our GLOBAL division was awarded a new contract to
continue work on our FMS Program. Work on the new contract was delayed while
the award was going through a protest process initiated by an unsuccessful
bidder. The protest was denied in January 2012, and work will begin in 2012.
The contract has a potential value of approximately $1.5 billion over the next
five years. We have performed work on this program since the initial contract
was awarded in 1995.
Our WBI subsidiary’s USPS Managed Inventory Program (“MIP”) became a
significant contributor to our revenues and profit performance upon our
acquisition of WBI. Through the USPS MIP, WBI provides inventory supply
services to vehicle maintenance facilities throughout the United States. The
program is supported contractually by a National Order Agreement (“NOA”) that
does not have an expiration date but is cancellable by USPS within 60 days.
WBI’s track record with USPS since the initial award of the NOA in 1989 gives
us confidence about continuing this successful customer relationship by
providing valued mission critical service.
In January 2011, ELD was awarded a task order on our LOGWORLD contract
with a base year and four one year options having a potential value of $410
million to continue providing equipment refurbishment support and sustainment
services to its primary customer. We have provided these program services
through ELD since 2006, and prior to that time through another division, using
various contracts.
In November 2011, our GLOBAL division was awarded a new contract to
continue work on our Treasury Seized Asset Program. A protest of the award of
the contract was subsequently filed with GAO by an unsuccessful bidder. In
response, Treasury cancelled the awarded contract. We continue to provide
services for the Treasury program under interim contract coverage while
Treasury considers how to address contractual coverage for the program going
forward. We have performed work on this program since initially winning
contract coverage in 2006.
Our ICRC subsidiary’s work on the PIEP Project in Anchorage, Alaska has
presented challenges for us in 2011 and 2010. Customer funding delays and
changing work requirements, environmental and technical issues impacting the
work, and customer political issues have adversely impacted our work on this
project. We cannot be certain that work on this project will return to prior
levels. ICRC has performed work on this project since 2003.
24
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 several GSA work schedules and multiyear, multiple award,
indefinite delivery, indefinite quantity contracts that have large nominal
ceiling amounts. These contracts include the R2-3G contract; the GSA Logistics
Worldwide (“LOGWORLD”) contract, under which we have been awarded several task
orders, including the $410 million task order awarded to ELD in January 2011;
the Field and Installation Readiness Support Team (“FIRST”) contract with the
U.S. Army; the SeaPort Enhanced contract with the U.S. Navy; the U.S. Army PEO
CS & CSS Omnibus III contract; and the Air Force’s Design & Engineering
Support Program (“DESP”), which we were awarded in January 2012. We are one of
several awardees on each contract. While our future revenues from these GSA
work schedules and multiple award contracts cannot be predicted with
certainty, they allow us to pursue task order awards for new work.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued an accounting update that gives
companies the option to make a qualitative evaluation about the likelihood of
goodwill impairment. Companies will be required to perform the two-step
impairment test only if it concludes that the fair value of a reporting unit
is more likely than not, less than its carrying value. The accounting update
is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, with early adoption permitted.
The implementation of this update is not expected to have a material impact on
our consolidated financial position and results of operations.
In June 2011, the FASB issued amendments to disclosure requirements for
presentation of comprehensive income. This guidance, effective for the
interim and annual periods beginning on or after December 15, 2011 (early
adoption is permitted), requires presentation of total comprehensive income,
the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The implementation of this amended
accounting guidance is not expected to have a material impact on our
consolidated financial position and results of operations.
In May 2011, the FASB issued guidance to amend the fair value
measurement and disclosure requirements. The guidance requires the disclosure
of quantitative information about unobservable inputs used a description of
the valuation processes used, and a qualitative discussion around the
sensitivity of the measurements. The guidance is effective for interim and
annual periods beginning on or after December 15, 2011. The implementation of
this amended accounting guidance is not expected to have a material impact on
our consolidated financial position and results of operations.
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 work is 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
25
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 FMS Program 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 through a contract
modification authorizing the award fee and are issued subsequent to the period
in which the work is performed. We recognize award fee income on the FMS
Program contract when the fees are fixed or determinable and on the PIEP
contract when there is sufficient evidence to estimate award fees based on
past experience and anticipated performance. 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. 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.
Substantially all of the WBI’s revenues result from a Management
Inventory Program (“MIP”) that supplies vehicle parts to clients. We recognize
revenue from the sale of vehicle parts when the product is delivered to the
customer.
Revenues by contract type for the years ended December 31 were as
follows (in thousands):
Contract Type
Time and
materials
Cost-type
Fixed-price
2011
Revenues %
2010
Revenues %
2009
Revenues
%
$270,309 43.7 $547,368
178,781 28.9
169,502
27.4
$618,592 100.0
261,801
56,867
$866,036
63.2 $ 761,644 75.1
20.7
4.2
$1,014,639 100.0
209,946
43,049
30.2
6.6
100.0
WBI’s revenues are classified as fixed-price revenue. Accordingly, the
percentages of work performed by contract type will differ in 2011 as compared
to 2010.
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. Revenues recognized in 2011 include
approximately $5.5 million for which we had not received formalized funding as
of December 31, 2011. We believe that we are entitled to reimbursement and
expect to receive funding for all of this risk funding revenue.
26
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.
Earn-out Obligations
In connection with acquisitions completed after January 1, 2009, the
effective date of new accounting rules for business combinations, we estimate
the fair value of any earn-out payments by using the expected cash flow
approach with probability-weighted revenue inputs and using an appropriate
discount rate. Interest expense and subsequent changes in the fair value of
the earn-out obligations are recognized in earnings for the period of the
change.
In connection with acquisitions completed before January 1, 2009,
payments made related to earn-out arrangements are recorded as goodwill.
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, 2011, we had an aggregate of
approximately $101.3 million of goodwill and intangible assets with indefinite
lives associated with our acquisitions as follows:
Reporting Units
Energetics
ICRC
G&B
Akimeka
WBI
Total
Goodwill and intangible assets
with indefinite lives
as of December 31, 2011
(in millions)
$ 1.0
8.3
15.7
15.1
61.2
$101.3
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.
27
Results of Operations
Federal Group
CED
SED
ELD
FSS
Other
Group Total
International Group
GLOBAL
FMD
Other
Group Total
Revenues
(dollars in thousands)
Years ended December 31,
%
2010
%
2009
4.3
11.2
3.4
10.9 $290,061 33.5 $ 440,165
4.3 28,338
7.6 79,256
7.1 38,079
- - - 113
29.8 454,660 52.5 585,951
36,989
65,896
61,714
2011
$ 67,142
26,525
69,453
21,027
-
184,147
134,187
72,559
-
206,746
21.7 143,671 16.6 105,464
11.7 117,828 13.6 208,669
- - - 1
33.4 261,499 30.2 314,134
%
43.4
2.8
7.8
3.7
0.0
57.7
10.4
20.6
0.0
31.0
IT, Energy and Management
Consulting Group
Energetics
G&B
Akimeka
Other
Group Total
29,035
48,066
29,609
107
106,817
4.7
7.8
4.8
29,778
52,723
12,005
-
- 290 - 326
94,796 10.9 74,117
17.3
3.4 22,482
2.2
6.1 51,309 5.1
-
1.4
-
7.3
Infrastructure Group
ICRC
Supply Chain Group
WBI
37,830
6.1 55,081 6.4 40,437
4.0
83,052
13.4 - - -
-
Total
$618,592 100.0 $866,036 100.0 $1,014,639 100.0
Our revenues decreased by approximately $247 million or 29% for the year
ended December 31, 2011 as compared to the prior year. The change in revenues
for this period resulted from a decrease in our Federal Group of approximately
$271 million; a decrease in our International Group of approximately $55
million; a decrease in our Infrastructure Group of approximately $17 million;
an increase in our IT, Energy, and Management Consulting Group of
approximately $12 million, attributable primarily to the inclusion of full
year revenues of Akimeka of approximately $30 million as compared to partial
year revenues in 2010 of approximately $12 million; and additional partial
year revenues attributable to the acquisition of WBI in June 2011 of
approximately $83 million in 2011.
Our revenues decreased by approximately $149 million or 15% for the year
ended December 31, 2010 as compared to the prior year. The change in revenues
for this period resulted from decreases in revenues in our Federal Group of
approximately $131 million and in our International Group of approximately $53
million; increases in revenues in our Infrastructure Group of approximately
$15 million; and increases in revenues in our IT, Energy, and Management
Consulting Group of approximately $20 million, including revenues attributable
to the acquisition of Akimeka of approximately $12 million in 2010.
28
Revenues
Contract costs
Selling, general and
administrative
expenses
Operating income
Interest (income)
expense, net
Consolidated Statements of Income
(dollars in thousands)
Years ended December 31,
2011
%
2010
%
2009
%
$618,592 100.0 $866,036 100.0 $1,014,639 100.0
576,646 93.2 825,619 95.3 974,897 96.1
5,266 0.9 2,204 0.3 1,263 0.1
36,680 5.9 38,213 4.4 38,479 3.8
3,708 0.6 180 - (120) -
Income before income
taxes
Provision for income taxes
32,972 5.3 38,033 4.4 38,599 3.8
12,420 2.0 14,346 1.7 14,575 1.4
Net income
$ 20,552 3.3 $ 23,687 2.7 $ 24,024 2.4
Selling, general and administrative expenses consist primarily of costs
and expenses that are not chargeable or reimbursable on our operating unit
contracts. These expenses increased in 2011 as compared to 2010 primarily due
to costs associated with the acquisition of WBI, to expenses associated with a
work share agreement with a subcontractor, and to legal fees associated with
protested contract awards. The increase in these costs in 2010 as compared to
2009 is primarily attributable to costs associated with our acquisition of
Akimeka.
Our operating income decreased by approximately $1.5 million or 4% in
2011 as compared to 2010. The decrease resulted primarily from: 1) decreased
operating income of approximately $14.5 million in our Federal Group; 2)
decreased operating income in our International Group of approximately $4.3
million; 3) increased operating income in our IT, Energy and Management
Consulting Group of approximately $2.1 million, attributable primarily to the
inclusion of full year operating income of Akimeka of approximately $3.5
million as compared to partial year operating income in 2010 of approximately
$1.6 million; 4) increased operating income in our Infrastructure Group of
approximately $330 thousand; and 5) additional operating income attributable
to the acquisition of WBI of approximately $16.3 million in 2011.
Our operating income decreased by approximately $266 thousand or 1% in
2010 as compared to 2009. The decrease resulted primarily from: 1) decreased
operating income of approximately $679 thousand from lower revenues in our
Federal Group; 2) decreased operating income in our International Group of
approximately $432 thousand; 3) increased operating income in our IT, Energy
and Management Consulting Group of approximately $2.9 million, including
profits of approximately $1.6 million attributable to our acquisition of
Akimeka in 2010; and 4) decreased operating income in our Infrastructure Group
of approximately $703 thousand.
Interest expense increased in 2011 as compared to 2010 due to borrowing
associated with our acquisition of WBI. We had net interest expense in 2010 as
compared to net interest income in 2009 due to borrowing associated with our
acquisition of Akimeka.
Provision for Income Taxes
Our effective tax rates were 37.7% for 2011, 37.7% for 2010, and 37.8%
for 2009.
29
Federal Group Results
The following table shows consolidated operating results for our Federal
Group (in thousands).
Years ended December 31,
Revenues
Contract costs
Selling, general and
administrative expenses
Operating income
Interest income
Income before income taxes
%
2011
$184,147 100.0 $454,660 100.0 $585,951 100.0
177,745 96.5 434,008 95.5 564,628 96.4
2010
2009
%
%
378 0.2 109 - 101 -
6,024 3.3 20,543 4.5 21,222 3.6
(75) - (31) - (89) -
$ 6,099 3.3 $ 20,574 4.5 $ 21,311 3.6
Revenues for our Federal Group decreased approximately $271 million or
59% for the year ended December 31, 2011, as compared to the prior year. The
decrease in revenues for 2011 was primarily attributable to the expiration of
our R2 program contract. Revenues from R2 program activity decreased
approximately $245 million in 2011, including a decrease associated with the
expiration of our RCV Modernization Program. Revenues from our ELD equipment
refurbishment services increased by approximately $3.6 million in 2011.
Revenues from our other Federal Group activities decreased by approximately
$28.8 million.
Revenues for our Federal Group decreased approximately $131 million or
22% for the year ended December 31, 2010, as compared to the prior year. The
decrease in revenues for 2010 was primarily attributable to the winding down
of programs and expiration of delivery orders on our R2 program as this
contract neared its conclusion. The decline in R2 program revenues was
approximately $144 million in 2010. Revenues from our ELD equipment
refurbishment services decreased by approximately $13 million in 2010. These
decreases were partially offset by a net increase in revenues of approximately
$26 million from our other Federal Group activities.
Operating income for our Federal Group decreased by approximately $14.5
million or 71% for the year ended December 31, 2011 as compared to the prior
year. The decrease in operating income is primarily due to a decrease in
profits on our expired RCV Modernization Program of approximately $3.5
million, and a decrease in profits of approximately $3 million due to lower
profit margins on our ELD equipment refurbishment services, and to lower
revenue levels and profit margins from our other Federal Group activities.
Operating income for our Federal Group decreased by approximately $679
thousand or 3% for the year ended December 31, 2010 as compared to the prior
year. The decrease in operating income is primarily due to a decrease in
profits on our ELD equipment refurbishment services of approximately $6
million and a decrease in profits of approximately $916 thousand on R2 Program
work, resulting from the revenue decreases. These decreases were partially
offset by increased profits of approximately $6 million resulting from the
revenue increases from our other Federal Group activities and from improved
profit margins.
Our Federal Group realized interest income from cash invested in 2011,
2010, and 2009. Interest income and expense will vary from year to year due to
changes in the level of work performed and to normal fluctuations in our
billing and collections cycle.
30
International Group Results
The following table shows consolidated operating results for our
International Group (in thousands).
Years ended December 31,
Revenues
Contract costs
Selling, general and
administrative expenses
Operating income
Interest (income) expense
Income before income taxes
2011
$206,746 100.0 $261,499 100.0 $314,134 100.0
200,309 96.9 251,820 96.3 303,972 96.8
2010
2009
%
%
%
1,116 0.5 106 - 157 -
5,321 2.6 9,573 3.7 10,005 3.2
(21) - 197 0.1 436 0.1
$ 5,342 2.6 $ 9,376 3.6 $ 9,569 3.0
Revenues for our International Group decreased approximately $55 million
or 21% for the year ended December 31, 2011, as compared to the same period
for the prior year. The decrease in revenues for 2011 was primarily
attributable to decreases on the FMS Program of approximately $41 million and
the Seized Asset Program of approximately $12.3 million. This group’s decrease
is due in large part to a reduction in work performed in Egypt and funding and
work order delays associated with the re-compete, award and subsequent
protests of these contracts.
Revenues for our International Group decreased approximately $53 million
or 17% for the year ended December 31, 2010, as compared to the same period
for the prior year. The decrease in revenues resulted from a decrease of
approximately $100 million in the level of FMD services provided on
engineering and technical services task orders. This revenue decrease was
partly offset by an increase in revenues of approximately $38 million from
services performed by our GLOBAL division, and revenue increases from our
other International Group activities.
Operating income for our International Group decreased by approximately
$4.3 million or 44% for the year ended December 31, 2011, as compared to the
prior year. The decline in operating income is primarily due to differences in
the amount and timing of fee income recognized on the Seized Asset Programs.
Under the cost plus incentive fee contract to support the Treasury Seized
Asset Program that ended September 30, 2010, we recognized incentive fee of
approximately $3.2 million in the third quarter of 2010 that was based on a
twelve-month assessment ending September 30, 2010. The interim contract under
which we performed work in 2011 is a cost plus fixed fee contract for which a
lesser fee is earned and recognized as work is performed. Also, because we had
not received contractual notification as of December 31, 2011 for an estimated
$1.1 million award fee for work performed in 2011 on our FMS Program, our
fourth quarter operating results do not include this award fee, which will be
deferred into 2012. A loss of $750 thousand associated with a work share
agreement with a subcontractor also contributed to the decline in operating
income. Profit margins in this group can vary due to fluctuations in contract
activity and the timing of contract award fees associated with the GLOBAL FMS
Program.
Operating income for our International Group decreased by approximately
$432 thousand or 4% for the year ended December 31, 2010, as compared to the
prior year. The decrease is primarily due to a decrease in profits of
approximately $1.5 million from the decreased level of FMD services provided
on engineering and technical services task orders, and a decrease in profits
of approximately $1.2 million on the CFT Program. These decreases were
partially offset by an increase in profits of approximately $1.3 million from
the increase in revenues from our GLOBAL division, and an increase in profits
of approximately $1 million associated with activity on our Treasury Seized
Asset Program.
Our International Group realized interest income from cash invested in
2011 and incurred net interest expense in 2010 and 2009. Interest income and
expense will vary from year to year due to changes in the level of work
performed and to normal fluctuations in our billing and collections cycle.
31
IT, Energy and Management Consulting Group Results
The following table shows consolidated operating results for our IT,
Energy and Management Consulting Group (in thousands).
Years ended December 31,
Revenues
Contract costs
Selling, general and
administrative expenses
Operating income
Interest income
Income before income taxes
2011
$106,817 100.0 $94,796 100.0 $74,117 100.0
93,850 87.9 84,225 88.8 66,344 89.5
2009
2010
%
%
%
600 0.6 345 0.4 406 0.5
12,367 11.5 10,226 10.8 7,367 10.0
(73) (0.1) (49) - (35) -
$ 12,440 11.6 $10,275 10.8 $ 7,402 10.0
Akimeka operating results are included in this segment beginning in
August 2010. The inclusion of Akimeka operating results in this segment for
different lengths of time in each year is the primary reason for changes in
this segment’s revenues and operating income in 2011 and 2010.
Revenues for our IT, Energy and Management Consulting Group increased by
approximately $12 million or 13% for the year ended December 31, 2011, as
compared to the prior year. Operating income for this segment increased by
approximately $2.1 million or 21% for the year ended December 31, 2011, as
compared to the prior year. Full year revenues for Akimeka in 2011 were
approximately $29.6 million compared to partial year revenues in 2010 of
approximately $12 million. Full year operating income for Akimeka in 2011 was
approximately $3.5 million compared to partial year operating income in 2010
of approximately $1.6 million. Energetics revenues were substantially
unchanged and G&B revenues declined approximately $4.7 million for 2011.
Revenues for our IT, Energy and Management Consulting Group increased by
approximately $21 million or 28% for the year ended December 31, 2010, as
compared to the prior year. Operating income for this segment increased by
approximately $2.9 million or 39% for the year ended December 31, 2010, as
compared to the prior year. Approximately $12 million of the revenue increase
and $1.6 million of the profit increase is attributable to the inclusion of
Akimeka’s results in this segment beginning in August 2010. Increases in
Energetics’ revenues of approximately $7 million and Energetics profits of
approximately $2 million contributed to the increases in this segment in 2010.
G&B’s revenue increased approximately $1.4 million in 2010.
Our IT, Energy and Management Consulting Group realized interest income
from cash invested in 2011, 2010, and 2009. Interest income and expense will
vary from year to year due to changes in the level of work performed and to
normal fluctuations in our billing and collections cycle.
Infrastructure Group Results
The following table shows consolidated operating results for our
Infrastructure Group (in thousands).
2011
Years ended December 31,
%
2010
%
2009
%
Revenues
Contract costs
Selling, general and
administrative expenses
Operating income
Interest expense (income)
Income before income taxes
$37,830 100.0 $55,081 100.0 $40,437 100.0
37,174 98.3 54,591 99.1 39,313 97.2
53 0.1 217 0.4 148 0.4
603 1.6 273 0.5 976 2.4
23 0.1 (19) - (14) -
$ 580 1.5 $ 292 0.5 $ 990 2.4
This segment consists of our ICRC subsidiary. Revenues decreased by
approximately $17 million or 31% for the year ended December 31, 2011, and
increased by approximately $15 million or 36% for the year ended December 31,
2010, as compared to the respective prior years. Operating income increased by
approximately $330 thousand or 121% for the year ended December 31, 2011, and
32
decreased by approximately $703 thousand or 72% for the year ended December
31, 2010, as compared to the prior year.
Changes in revenues and operating income for this segment are primarily
attributable to revenue and profit activity on the PIEP. Work on this program
is performed in Alaska and the level of work performed is subject to seasonal
influences and differences in weather patterns during a season as compared to
the same period in a prior year. Additionally, work levels and profits can be
impacted by funding, technical, and political issues; endangered species
declarations; environmental restrictions; permit conditions that slow field
work to best mitigate environmental impacts; delays due to permit application
requirements; and the study, review, and approval of certain technical issues.
During 2011, our customer experienced delays in funding and defining the
scope of work, which have contributed to our decreased revenue levels for this
segment. During 2010, our customer funded the cost of certain work we
performed on this project, but has not funded fees normally associated with
this work pending resolution of environmental and technical issues impacting
the work. Accordingly, we have not recognized fees for most of the work on
this project performed in the second half of 2010. We are currently in
discussions with our customer regarding resolution of the fee issue. If the
fees on this work are funded, we could recognize additional revenue and
operating income up to approximately $2.4 million, which includes base and
award fees.
Supply Chain Management Group Results
The following table shows consolidated operating results for our Supply
Chain Management Group (in thousands):
Revenues
Contract costs
Selling, general and
administrative expenses
Operating income
Interest expense
Income before income taxes
Year ended December 31,
2011
$83,052
66,124
613
16,315
350
$15,965
%
100.0
79.6
0.7
19.6
0.4
19.2
This segment consists of our WBI subsidiary, and was established and
included in our operating results upon our acquisition of WBI on June 6, 2011.
Financial Condition
There has been no material adverse change in our financial condition in
2011. Our capital structure has changed as a result of the WBI acquisition and
associated bank financing. Our bank debt increased by approximately $146
million as of December 31, 2011 compared to December 31, 2010, due to the
acquisition of WBI on June 6, 2011. Changes to other asset and liability
accounts were due primarily to our earnings, our level of business activity,
contract delivery schedules, subcontractor and vendor payments required to
perform our work, and the timing of associated billings to and collections
from our customers.
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $5.3 million during
2011.
Cash provided by operating activities increased by approximately $16.5
million in 2011 as compared to 2010. The change is attributable to an increase
of approximately $4.9 million from an increase in depreciation and
33
amortization and other non-cash operating activities, and an increase of
approximately $14.7 million due to changes in the levels of working capital
components, offset by a decrease of approximately $3.1 million in cash
provided by net income. 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 depending on
the timing of the government services ordered, government funding delays, the
timing of billings received from subcontractors and materials vendors, 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.
Net cash used in investing activities increased approximately $146
million to $183 million in 2011 as compared to 2010. Our most significant
investing activity in 2011 was the acquisition of WBI for approximately $175
million.
Net cash provided by financing activities increased approximately $126
million to $143 million in 2011 as compared to 2010. This was primarily due to
bank borrowing to finance our acquisition of WBI in 2011.
Cash provided by operating activities decreased by approximately $6.6
million in 2010 as compared to 2009. The decrease is attributable to a
decrease of approximately $337 thousand in cash provided by net income, an
increase of approximately $1.5 million from an increase in depreciation and
amortization and other non-cash operating activities, and a decrease of
approximately $7.8 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.
Net cash used in our investing activities increased by approximately
$26.4 million to $37 million in 2010 as compared to 2009. This was primarily
due to cash payments of approximately $30.2 million related to the acquisition
of Akimeka in 2010.
Net cash of approximately $16.6 million was provided by financing
activities in 2010 as compared to net cash used for financing activities of
approximately $6.7 million in 2009. This difference was primarily due to
borrowings on our bank loan in 2010 to finance our acquisition of Akimeka.
We paid quarterly cash dividends totaling approximately $1.4 million or
$0.26 per share during 2011. 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. Increases or
decreases in revenues and accounts receivable and accounts payable can cause
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
34
perform, by the timing of large materials purchases and subcontractor efforts
used in our contracts, and by government delays in the award of contractual
coverage and funding and payments. Government funding delays have caused
delays in our ability to invoice for revenues earned, resulting in a negative
impact on our days sales outstanding in 2011.
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 WBI in 2011 and Akimeka in 2010 required a significant use
of our cash.
Our external financing consists of a loan agreement entered into in June
2011 with a group of banks to make the WBI acquisition and provide working
capital for our continuing operations. The new loan agreement, which expires
in June 2016, replaced a previous loan agreement and consists of a term loan,
revolving loans, and letters of credit.
The term loan requires payments in quarterly installments based on an
accelerating amortization schedule, with 15% of the original $125 million
principal amount due in each of the first two years, 20% due in each of years
three and four, and 30% due in year five. The amount of term loan borrowings
outstanding as of December 31, 2011 is approximately $110.9 million.
The maximum amount of credit available to us from the banking group for
revolving loans and letters of credit as of December 31, 2011 was $125 million
and under the loan agreement we may elect to increase this maximum
availability up to $175 million. We may borrow and repay the revolving loan
borrowings as our cash flows require or permit. We pay an unused commitment
fee and fees on letters of credit that are issued. We had approximately $53.3
million in revolving loan amounts outstanding and $5 million of letters of
credit outstanding as of December 31, 2011. During 2011, the highest
outstanding revolving loan amount was $80 million, immediately after the WBI
acquisition, and the lowest was $0, immediately before the WBI acquisition.
The timing of certain payments made and collections received associated with
our subcontractor and materials requirements and other operating expenses can
cause fluctuations in our outstanding revolving loan amounts. Delays in
government funding of our work performed can also cause additional borrowing
requirements.
We pay interest on the term loan borrowings and revolving loan
borrowings at LIBOR plus a base margin or at a base rate (typically the prime
rate) plus a base margin. The LIBOR base margin as of December 31, 2011 is
2.25% and the base rate base margin as of December 31, 2011 is 0.5%. The base
margins decline in steps as our Total Funded Debt/EBITDA Ratio declines. We
have employed interest rate hedges on a portion of our outstanding borrowings.
After taking into account the impact of hedging instruments, as of December
31, 2011, interest rates on portions of our outstanding debt ranged from 2.53%
to 3.75%, and the effective interest rate on our aggregate outstanding debt
was 2.85%.
The loan agreement contains collateral requirements that secure our
assets, restrictive covenants, other affirmative and negative covenants, and
subjects us to certain conditions and limitations. Restrictive covenants
include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time,
and a minimum Fixed Charge Coverage Ratio. We were in compliance with required
ratios and other terms and conditions at December 31, 2011.
Total Funded Debt/EBITDA Ratio
Current Maximum Ratio
3.25 to 1
Actual Ratio
2.69 to 1
Fixed Charge Coverage Ratio
Minimum Ratio
1.20 to 1
Actual Ratio
1.82 to 1
We currently do not use public debt security financing.
35
Contractual Obligations
The following table shows our consolidated contractual obligations as of
December 31, 2011 (in thousands):
Payments Due by Period
Contractual Obligations
Bank loan debt
Operating leases, net of
non-cancelable sublease
income
Corporate headquarters lease
Capital lease obligations
Purchase obligations
Total
Less
than
1 year
Total
$164,232 $18,750
22,349 7,304
67,538 2,451
13,445 854
859
371
$268,423 $29,730
4-5
1-3
years
years
$48,437 $ 97,045 $ -
After 5
Years
3,812
11,233
7,614
1,708
266
-
8,119 49,354
9,012
1,871
175 47
$69,258 $111,022 $58,413
Long term debt consists of borrowings on our bank loan agreement.
Operating lease commitments are primarily for our current principal
executive and administrative offices and leased facilities for office, shop,
and warehouse space located near customer sites or to serve customer needs. We
also have some equipment and software leases that are included in these
amounts.
In 2009, we signed a 15-year lease agreement that begins in May of 2012
for a new executive and administrative headquarters. Our current headquarters
lease expires in April 2013. In 2011, we signed 15-year lease agreements on
four facilities in Somerset, Pennsylvania to be used for conducting WBI’s
warehousing, distribution, and product development operations that are
accounted for as capital leases.
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 and warehouse 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.
36
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest Rates
Our bank loans provide available borrowing to us at variable interest
rates. Accordingly, future interest rate changes could potentially put us at
risk for a material adverse impact on future earnings and cash flows. To
mitigate the risks associated with future interest rate movements, in July
2011 we employed interest rate hedges to fix the rate on a portion of our
outstanding borrowings for various periods of time. While the immediate result
of fixing these rates is an increase in the net effective rate as compared to
the effective interest rate on our aggregate outstanding debt prior to July
2011, the fixed rates will protect us against future interest rate increases.
In July 2011, we entered into a three-year amortizing LIBOR interest
rate swap on our term loan with a notional amount of $101 million. The swap
amount amortizes as the term loan amortizes, with reductions in the swap
amount occurring on the same dates and for approximately the same amounts as
term loan principal repayments. With the swap in place, we will pay an
effective rate on the hedged term debt of 0.56% plus our base margin from July
2011 through June 2012, and an effective rate of 1.615% plus our base margin
from July 2012 through June 2014. The amount of swapped term loan debt
outstanding as of December 31, 2011 is $91.6 million.
In July 2011, we entered into a two-year LIBOR interest rate swap on the
revolving loan debt with a notional amount of $40 million. The swap amount
declines to $20 million in June 2012, and expires in June 2013. With the swap
in place, we will pay an effective rate on the hedged term debt of 0.7775%
plus our base margin during the two years.
37
ITEM 8. Financial Statements and Supplementary Data
Index To Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Income for the years ended
December 31, 2011, 2010, and 2009
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2011, 2010, and 2009
Consolidated Statements of Cash Flows for the years ended
December 31, 2011, 2010, and 2009
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2011, 2010, and 2009
Notes to Consolidated Financial Statements
Page
39
40
41
42
43
44
45
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, 2011 and 2010, and the related
consolidated statements of income, stockholders' equity, cash flows, and
comprehensive income for each of the three years in the period ended December
31, 2011. 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, 2011 and 2010, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2011, 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 and Subsidiaries'
internal control over financial reporting as of December 31, 2011, 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 7, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 7, 2012
39
VSE Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Receivables, principally U.S. Government, net
Inventories
Deferred tax assets
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued expenses and other current liabilities
Dividends payable
Total current liabilities
Long-term debt, less current portion
Deferred compensation
Long-term lease obligations, less current portion
Earn-out obligations, less current portion
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.05 per share,
authorized 15,000,000 shares; issued and
outstanding 5,246,527 and 5,193,891,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
As of December 31,
2010
2011
$ 451 $ 5,764
156,938
117,568
-
41,990
1,602
1,355
17,083
9,552
173,856
178,447
42,315
57,113
25,003
106,536
36,282
98,879
838
231
10,132
13,306
$454,512 $288,426
$ 18,587 $ 6,667
75,724
50,353
36,584
38,017
367
312
119,287
107,324
144,759
8,215
33,938
16,415
261
310,912
11,111
6,034
20,258
7,807
153
164,650
262
260
15,692
17,069
107,824
126,961
-
(692)
143,600
123,776
$454,512 $288,426
The accompanying notes are an integral part of these financial statements.
40
VSE Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share amounts)
For the years ended December 31,
2010
2011
2009
Revenues:
Services
Products
Total revenues
Contract costs
Services
Products
Total contract costs
Selling, general and
administrative expenses
$ 527,908
90,684
618,592
$ 853,063 $1,010,335
12,973 4,304
866,036 1,014,639
503,655
72,991
576,646
816,880 971,866
8,739 3,031
825,619 974,897
5,266
2,204
1,263
Operating income
36,680
38,213 38,479
Interest expense (income), net
3,708
180 (120)
Income before income taxes
32,972
38,033 38,599
Provision for income taxes
12,420
14,346 14,575
Net income
$ 20,552
$ 23,687 $ 24,024
Basic earnings per share:
$ 3.93
$ 4.56 $ 4.68
Basic weighted average shares
outstanding
5,232,055
5,189,263 5,128,344
Diluted earnings per share:
$ 3.93
$ 4.56 $ 4.67
Diluted weighted average shares
outstanding
5,232,055
5,189,263 5,146,347
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
Other
Total
Accumulated
Common Stock
Shares Amount
Paid-In
Capital
Retained
Earnings
Comprehensive Stockholders’
Loss
Equity
Balance at
December 31, 2008
Net income
Stock-based
compensation
Exercised stock options
Excess tax benefits from
share-based payment
arrangements
Dividends declared
($0.195)
Balance at
December 31, 2009
Net income
Stock-based
compensation
Other
Dividends declared
($0.23)
Balance at
December 31, 2010
Net income
Stock-based
compensation
Change in fair value of
interest rate swap
agreements, net of tax
Dividends declared
($0.27)
Balance at
December 31, 2011
5,099
-
$255
$13,557 $ 62,311 $ -
- - 24,024 -
$ 76,123
24,024
32
39
-
-
1
2
1,234
-
432 - -
-
1,235
434
- 497
-
-
497
- - (1,003) - (1,003)
5,170
-
258 15,720 85,332 - 101,310
- - 23,687 - 23,687
24
-
-
1,035
2
1,037
- (1,063) - - (1,063)
- -
- - (1,195) - (1,195)
5,194
-
260 15,692 107,824 - 123,776
- - 20,552 - 20,552
53
-
-
2
1,377
- -
1,379
- - - (692) (692)
- - (1,415) - (1,415)
5,247
$262
$17,069 $126,961 $(692)
$143,600
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,
2010
2009
2011
$ 20,552
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
(Gain) loss on sale of property and equipment (5)
Deferred taxes
Stock-based compensation
Earn-out obligation adjustment
Excess tax benefits on stock-based compensation -
Changes in operating assets and liabilities,
net of impact of acquisitions:
Receivables, net
Inventories
Other current assets and noncurrent assets
Accounts payable and deferred compensation
Accrued expenses and other current liabilities
Long-term lease obligations
Other liabilities
51,323
(4,758)
(3,420)
(31,596)
(12,782)
(91)
108
1,283
1,033
(2,486)
15,099
$ 23,687
$ 24,024
8,937
77
(728)
1,705
-
-
7,622
(157)
558
1,235
-
(497)
26,061
-
(4,396)
(35,682)
(1,818)
(42)
(14)
31,532
-
949
(43,145)
2,126
378
(240)
Net cash provided by operating activities
34,260
17,787
24,385
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from the sale of property and equipment
Cash paid for acquisitions, net of cash acquired
Earn-out obligation payments
(6,635)
43
(174,945)
(1,384)
(4,805)
170
(30,204)
(1,845)
(8,775)
141
(1,646)
Net cash used in investing activities
(182,921)
(36,684)
(10,280)
Cash flows from financing activities:
Borrowings on loan arrangement
Repayments on loan arrangement
Payment of debt financing costs
Dividends paid
Excess tax benefits on stock-based compensation
Proceeds from the exercise of stock options
471,303
(324,848)
(1,747)
(1,360)
-
-
174,926
(157,148)
-
(1,141)
-
-
204,649
(211,325)
-
(974)
497
434
Net cash provided by (used in) financing
activities
143,348
16,637
(6,719)
Net (decrease) increase in cash and cash equivalents (5,313)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
5,764
$ 451
(2,260)
8,024
$ 5,764
7,386
638
$ 8,024
Supplemental cash flow disclosures (in thousands):
Cash paid for:
Interest
Income taxes
$ 3,149
$12,625
$359
$15,466
$119
$15,729
The accompanying notes are an integral part of these financial statements.
43
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
(in thousands)
For the years ended December 31,
2011
2010
2009
Net income
Change in fair value of interest
rate swap agreements
Comprehensive income
$20,552
$23,687 $24,024
(692)
$19,860
- -
$23,687 $24,024
The accompanying notes are an integral part of these financial statements.
44
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
(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 of 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, including the United States
Postal Service (“USPS”). Our operations consist primarily of logistics,
engineering, equipment refurbishment, supply chain management, IT solutions,
health care IT, construction management and consulting services performed on a
contract basis. Substantially all of our contracts are with United States
Government (“government”) agencies, including USPS, 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”),
Communications and Engineering Division (“CED”), Engineering and Logistics
Division (“ELD”), Field Support Services Division (“FSS”), Fleet Maintenance
Division (“FMD”), and Systems Engineering Division (“SED”). Our active
subsidiaries are Energetics Incorporated (“Energetics”), Integrated Concepts
and Research Corporation (“ICRC”), G&B Solutions, Inc. (“G&B”), Akimeka, LLC
(“Akimeka”), acquired on August 19, 2010, and Wheeler Bros., Inc. (“WBI”),
acquired on June 6, 2011. All intercompany transactions have been eliminated in
consolidation.
Reclassifications
As a result of our acquisition of WBI, we are separately presenting
revenues and contract costs for products and services. Revenues and contract
costs amounts from the prior years have been reclassified to conform to the
current year presentation. We also elected to reclassify our earn-out
obligations of $7.8 million at December 31, 2010 from other liabilities to
earn-out obligations to conform to the December 31, 2011 presentation. During
the first quarter of 2010, we elected to change the presentation of the
accompanying Consolidated Statements of Income to report “operating income”
instead of using “gross profit” terminology. This change was only a wording
change and did not impact any of the amounts previously reported in the
accompanying consolidated statements of income for the year ended December 31,
2009.
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 earn-out
obligations related to acquisitions consummated after January 1, 2009.
45
Stock-Based Compensation
We account for share-based awards in accordance with the applicable
accounting rules that require the measurement and recognition of compensation
expense for all share-based payment awards based on estimated fair values. The
compensation expense, included in contract costs, is amortized over the
requisite service period. See Note 9 for further discussion of our stock-based
compensation plans and related activity.
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 due to anti-dilution for the years ended
December 31, 2011, 2010 and 2009. There were no outstanding stock options at
December 31, 2011 and December 31, 2010.
Years Ended December 31,
2010
2009
2011
Basic weighted average
common shares outstanding
5,232,055
5,189,263
5,128,344
Effect of dilutive options
-
-
18,003
Diluted weighted average
common shares outstanding
Cash and Cash Equivalents
5,232,055
5,189,263
5,146,347
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 by the
straight-line method over periods of approximately 20 to 30 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.
We lease four facilities under capital leases. Amounts due under
capital leases are recorded as liabilities on our consolidated balance sheets.
The properties leased under capital leases are recorded as property and
equipment on our consolidated balance sheets. Amortization of property and
equipment under capital leases is included in depreciation and amortization
expense on our consolidated statements of income.
We signed a lease in November 2009 for a building that will serve as our
headquarters beginning in May 2012. Certain terms in the lease agreement
resulted in the capitalization of construction costs due to specific
accounting regulations. See Note 11 for further discussion.
46
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 ended December 31,
2011, 2010, and 2009. 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 work 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 or products
have been delivered, the price is fixed or determinable and collectability is
reasonably assured.
Revenues on cost-type contracts are recorded as contract allowable costs
are incurred and fees are earned. Award and incentive fee payments on certain
cost plus award fee contracts are determined by performance and level of
contract activity. For contracts for services, we do not recognize award or
incentive fee income until the fees are fixed or determinable, generally upon
contract notification confirming the award fee. For contracts accounted for
under the percentage-of-completion method, we do not recognize award fee
income until there is sufficient evidence to estimate award fees based on past
experience and anticipated performance.
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. 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 are recorded based on a price per unit as units are delivered.
Substantially all of WBI’s revenues, which are included in products
revenues, result from a Management Inventory Program (“MIP”) that supplies
vehicle parts to clients. We recognize revenue from the sale of vehicle parts
when the product is delivered to the customer.
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, we do not believe any future
audits will have a material adverse effect on our results of operations or
financial position.
Receivables and Allowance for Doubtful Accounts
Receivables are recorded at amounts earned less an allowance for
doubtful accounts. We review our receivables regularly to determine if there
47
are any potentially uncollectible accounts. The majority of our receivables
are from government agencies, 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.
Inventories
Inventories are stated at the lower of cost or market using the first-
in, first-out (“FIFO”) method. Included in inventory are related purchasing,
storage, and handling costs. Our inventory primarily consists of vehicle
replacement parts.
Deferred Compensation Plans
We have a deferred compensation plan, the VSE Corporation Deferred
Supplemental Compensation Plan (“DSC Plan”), to provide incentive and reward
for certain management team employees based on overall corporate performance.
We maintain the underlying assets of the DSC Plan in a Rabbi Trust. During
2010 we began to invest the assets held by the Rabbi Trust in both corporate
owned life insurance (“COLI”) products and in mutual funds. The COLI
investments are recorded at cash surrender value and the mutual fund
investments are recorded at fair value. The DSC Plan assets are included in
other assets and the obligation to the participants is included in deferred
compensation on the accompanying consolidated balance sheets.
Deferred compensation plan expense recorded as contract costs in the
accompanying consolidated statements of income for the years ended December
31, 2011, 2010, and 2009 was approximately $1.4 million, $1.9 million, and
$1.7 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets include property and equipment to be held and used. We
review the carrying values of long-lived assets other than goodwill for
impairment if events or changes in the facts and circumstances indicate that
their carrying values may not be recoverable. We assess impairment by
comparing the estimated undiscounted future cash flows of the related asset to
its carrying value. If an asset is determined to be impaired, we recognize an
impairment charge in the current period for the difference between the fair
value of the asset and its carrying value. No impairment charges were recorded
in the years ended December 31, 2011, 2010 or 2009.
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 basis. 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.
48
Goodwill
Goodwill is 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 carrying 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 analyses we performed as of October 1, 2011 and October 1,
2010, we found no impairment in the carrying value of goodwill.
Intangibles
Intangible assets consist of the value of contract-related intangible
assets and trade names acquired in acquisitions (see Notes 5 and 6). We
amortize on a straight-line basis intangible assets acquired as part of
acquisitions over their estimated useful lives unless their useful lives are
determined to be indefinite. The amounts we record related to acquired
intangibles are determined by us considering the results of independent
valuations. Our contract-related intangibles are amortized over their
estimated useful lives of approximately 5 to 12 years with a weighted-average
life of approximately 11.3 years as of December 31, 2011. We have two trade
names that are amortized over an estimated useful life of nine years. We have
an acquired technologies intangible asset that is amortized over an estimated
useful life of 11 years. The weighted-average life for all amortizable
intangible assets is approximately 11.1 years as of December 31, 2011.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued an accounting update that gives
companies the option to make a qualitative evaluation about the likelihood of
goodwill impairment. Companies will be required to perform the two-step
impairment test only if it concludes that the fair value of a reporting unit
is more likely than not, less than its carrying value. The accounting update
is effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, with early adoption permitted.
The implementation of this update is not expected to have a material impact on
our consolidated financial position and results of operations.
In June 2011, the FASB issued amendments to disclosure requirements for
presentation of comprehensive income. This guidance, effective for the
interim and annual periods beginning on or after December 15, 2011 (early
adoption is permitted), requires presentation of total comprehensive income,
the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The implementation of this amended
accounting guidance is not expected to have a material impact on our
consolidated financial position and results of operations.
In May 2011, the FASB issued guidance to amend the fair value
measurement and disclosure requirements. The guidance requires the disclosure
of quantitative information about unobservable inputs used a description of
the valuation processes used, and a qualitative discussion around the
sensitivity of the measurements. The guidance is effective for interim and
annual periods beginning on or after December 15, 2011. The implementation of
this amended accounting guidance is not expected to have a material impact on
our consolidated financial position and results of operations.
(2) Receivables
The components of receivables as of December 31, 2011 and 2010 were as
follows (in thousands):
Billed
Unbilled (principally December work billed in January)
Total receivables, net
2011
2010
$ 48,382 $ 40,494
69,186 116,444
$117,568 $156,938
49
The unbilled balance includes certain costs for work performed at risk
but which we believe will be funded by the government totaling approximately
$5.5 million and $4.2 million as of December 31, 2011, and 2010, respectively.
We expect to invoice substantially all unbilled receivables during 2012.
(3) Other Current Assets and Other Assets
At December 31, 2011 and 2010, 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, 2011 and 2010, other assets primarily consisted of
deferred compensation plan assets, cash surrender value of life insurance
policies and an acquired software license.
(4) Property and Equipment
Property and equipment consisted of the following as of December 31,
2011 and 2010(in thousands):
Buildings and building improvements
Computer equipment
Furniture, fixtures, equipment and other
Leasehold improvements
Land and land improvements
Less accumulated depreciation and amortization
Total property and equipment, net
2011
$41,088
22,218
13,789
6,196
2,834
86,125
2010
$26,031
18,019
12,169
6,126
2,834
65,179
(29,012) (22,864)
$57,113
$42,315
During the fourth quarter of 2011, we determined that four building
leases that we executed in connection with the acquisition of WBI were capital
leases. We incorrectly treated these leases as operating leases in our
financial statements as of and for the periods ended June 30, 2011 and
September 30, 2011. At inception of the leases, we should have recognized
assets with offsetting capital lease obligations aggregating $6.7 million,
representing the fair value of the buildings at that time per a third party
appraisal. At June 30, 2011 and September 30, 2011, total assets and
liabilities were understated by $6.7 million and $6.6 million, respectively.
We have concluded that this error was not material to the affected financial
statements. Additionally, accounting for these leases as operating leases
resulted in us overstating rent expense and understating depreciation expense
and interest expense in the interim periods. The net impact of this
misstatement was inconsequential to the consolidated statements of income and
cash flows of the Company for any period in 2011. The error was corrected in
the fourth quarter of 2011 Depreciation on the capital leases is included in
depreciation expense for the year ended December 31, 2011.
Depreciation and amortization expense for property and equipment for the
years ended December 31, 2011, 2010 and 2009 was approximately $6.9 million,
$6.4 million and $5.6 million, respectively.
In November 2009, we signed an agreement to lease a new building that
will serve as our new headquarters beginning in May 2012. Certain terms in
the lease agreement resulted in the capitalization of construction costs due
to specific accounting regulations. We recorded an asset and corresponding
long-term liability of $26.4 million and $19.2 million, as of December 31,
2011 and 2010, respectively, in connection with this lease, which is included
in the 2011 and 2010 amounts for “Buildings and building improvements” in the
table above (see Note 11).
50
(5) Acquisitions
Wheeler Bros., Inc.
On June 6, 2011, we acquired WBI, a supply chain management company
headquartered in Somerset, PA. WBI supplies vehicle parts to the USPS and
DoD. We see significant opportunities for leveraging WBI’s supply chain
capabilities with our work of extending the service lives of legacy ships,
vehicles, aircraft and their systems.
Cash paid at closing was $180 million, which includes approximately $1.9
million of prepaid retention bonuses that are being expensed in the post-
acquisition period as the employees provide service. As such, the initial cash
purchase price was approximately $178.1 million. Additional cash consideration
of $3 million due to the sellers based on the final working capital adjustment
was recorded as additional goodwill and an accrued liability during December
2011. The $3 million was paid to the sellers during the first quarter of
2012. WBI’s results of operations are included in the accompanying
consolidated financial statements beginning June 6, 2011. WBI had revenues of
approximately $83.1 million and operating income of approximately $16.3
million from the acquisition date through December 31, 2011.
For the acquisition of WBI, we recorded assets acquired and liabilities
assumed at their fair values as of the acquisition date. We incurred
acquisition-related transaction costs of approximately $1.8 million for the
year ended December 31, 2011, which included financial advisory, legal,
accounting and other external costs directly related to the WBI acquisition
and are included in selling, general and administrative expenses in the
accompanying 2011 statement of income.
We filed an election under Internal Revenue Code Section 338(h) (10) to
treat the WBI acquisition as a sale of assets for tax purposes. We made a
payment of approximately $12 thousand to the sellers for the sellers’
incremental tax liabilities as a result of the election. Our tax advantages
resulting from the 338(h) (10) election are expected to significantly exceed
the additional payment that was made to the sellers. The additional amounts
paid to the sellers were recorded as additional purchase price.
We may be required to make additional payments of up to $40 million over
a four-year post-closing period if WBI achieves certain financial performance
targets. Included in earn-out obligations on the December 31, 2011 balance
sheet is an earn-out liability of approximately $11.2 million, net of the
current portion of $4.2 million classified in accrued expenses and other
current liabilities, which represents our best estimate of the present value
of the earn-out obligation. Interest expense and subsequent changes in the
fair value of the earn-out obligations will be recognized in earnings in the
period of change through settlement. We recorded an adjustment of $182
thousand related to the increase in the fair value of the earn-out obligation
during the year ended December 31, 2011 as an increase of contract costs and
earn-out obligations.
The total estimated purchase price was allocated to WBI’s net assets
based on their estimated fair value as of June 6, 2011. We recorded the
excess of the purchase price over the acquired net assets as goodwill.
51
We allocated the purchase price as follows (in thousands):
Description
Cash
Accounts receivable
Inventories
Other current assets
Property and equipment
Intangibles – customer-related
Intangibles – acquired technologies
Intangibles – trade name
Current liabilities
Net identifiable assets acquired
Goodwill
Total consideration
Cash consideration
Acquisition date fair value of earn-out obligation
Total consideration
Fair
Value
$ 1,556
11,953
37,232
6,709
1,228
69,400
12,400
7,600
(12,893)
135,185
61,157
$196,342
$181,095
15,247
$196,342
The amount of goodwill recorded for the WBI acquisition as of the
acquisition date was approximately $61.2 million and reflects the strategic
advantage of adding supply chain management to the work we have historically
performed to extend the life of military ships, vehicles, aircrafts and their
installed systems. We believe that the supply chain capabilities we gain
through the acquisition of WBI will enable vertical market expansion in our
core business of sustaining legacy platforms and systems. The goodwill
recognized is expected to be deductible for income tax purposes. Of the
purchase price, $69.4 million was recorded as a customer-related intangible
asset that will be amortized on a straight-line basis over 12 years.
Approximately $12.4 million was recorded as an acquired technologies
intangible asset that will be amortized on a straight-line basis over 11
years. In addition, $7.6 million was allocated to WBI’s trade name that will
be amortized on a straight-line basis over nine years. The fair values
assigned to the intangible assets acquired were based on estimates,
assumptions, and other information compiled by management, including
independent valuations that utilized established valuation techniques.
The following unaudited pro forma information has been presented as if
the WBI acquisition had occurred on January 1, 2010. This information is
based on historical results of operations, adjusted for the allocation of
purchase price and other acquisition accounting adjustments, and is not
necessarily indicative of results had we completed the WBI acquisition on
January 1, 2010.
Revenues
Net income
Years ended December 31,
2011
2010
$ 687,029
$1,021,385
$ 27,885
$ 36,708
Basic and diluted earnings per share
$ 5.33
$ 7.07
Akimeka, LLC
On August 19, 2010, we acquired Akimeka, which is headquartered in
Hawaii with offices in Virginia, Florida and Texas. Akimeka is a health
services information technology consulting company serving the government
market. Akimeka is a recognized leader in the DoD health services and
logistics sector dedicated to delivering innovative IT solutions. Akimeka
complements our subsidiary, G&B.
52
Cash paid at closing was $33 million, which included $725 thousand of
prepaid retention bonuses that are being expensed in the post-acquisition
period as the employees provide service. As such, the initial cash purchase
price was $32.3 million. Additional cash consideration of approximately $363
thousand was paid in December 2010 to the sellers based on the final working
capital calculation. Akimeka's results of operations are included in the
accompanying consolidated financial statements beginning August 19, 2010.
Upon acquisition, potential additional payments (“earn-out”) were
payable to the sellers of up to $11 million over a three-year post-closing
period if Akimeka achieved certain financial performance targets. Akimeka did
not achieve the required financial performance targets for the year ended
December 31, 2011, therefore no earn-out was due. Included in earn-out
obligations on the December 31, 2011 balance sheet is an earn-out liability of
approximately $5.1 million, which represents our best estimate of the present
value of the earn-out obligation. We estimated the fair value by using the
expected cash flow approach with probability-weighted revenue inputs and using
an appropriate discount rate. Interest expense and subsequent changes in the
fair value of the earn-out obligations will be recognized in earnings in the
period of the change through settlement. We recorded adjustments of $2.7
million related to the decrease in the fair value of the earn-out obligation
during the year ended December 31, 2011, as reductions of contract costs and
earn-out obligations.
G&B Solutions, Inc.
On April 14, 2008, we acquired G&B. Under the terms of the acquisition,
we were required to make additional payments (“earn-out”) of up to $4.2
million over a three-year post-closing period if G&B achieved certain
financial performance targets. Approximately $1.4 million per year was paid to
the seller in 2009 and 2010 and approximately $1.1 million was paid to the
seller in 2011, based on G&B’s performance during the respective earn-out
periods. The payments were recorded as goodwill.
Integrated Concepts and Research Corporation
On June 4, 2007, we acquired ICRC for approximately $11.8 million.
Based on ICRC’s performance total earn-out payments of approximately $2.9
million were paid through December 31, 2010 and were recorded as additional
goodwill. Additional goodwill and a corresponding liability of approximately
$314 thousand were recorded as of December 31, 2011 for the earn-out payment
that will be made to the seller as a result of achievement of the specified
2011 earnings.
(6) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2011 and 2010 are
as follows (in thousands):
Supply Chain
Management
IT, Energy
and
Management
Consulting
Balance as of December 31, 2009
Increase from acquisition
-
15,082
of Akimeka
- 1,400
Earn-out obligation
29,769
Balance as of December 31, 2010
-
Increase from acquisition of WBI 61,169
-
Earn-out obligation
Balance as of December 31, 2011
- 1,114
$61,169
$30,883
$13,287
$ -
Infrastructure
Total
$6,243
$ 19,530
-
270
6,513
-
314
$6,827
15,082
1,670
36,282
61,169
1,428
$ 98,879
Under the terms of the ICRC and G&B acquisitions, additional
consideration is due to the sellers if certain financial performance targets
are achieved. G&B achieved certain financial performance targets for the
final earn-out period ended on March 31, 2011. This resulted in a $1.1 million
earn-out, which was recorded as goodwill and paid to the seller in the second
53
quarter of 2011. ICRC achieved certain financial performance targets for the
period ended December 31, 2011. This resulted in a $314 thousand earn-out,
which was recorded as goodwill and accrued expenses. The earn-out will be
paid to the sellers in the first quarter of 2012.
Intangible assets consist of the value of contract and customer-related
intangible assets, acquired technologies and trade names acquired in the
acquisitions of ICRC, G&B, Akimeka and WBI. Intangible assets with indefinite
lives not subject to amortization consist of ICRC and G&B trade names of
approximately $2.4 million as of December 31, 2011 and December 31, 2010. The
trade names acquired in the Akimeka and WBI acquisitions are being amortized
over nine years. Amortization expense for the years ended December 31, 2011,
2010 and 2009 was approximately $7.9 million, $2.4 million and $1.8 million,
respectively.
Intangible assets consisted of the following (in thousands):
December 31, 2011
Contract and customer-related
Acquired technologies
Trade names – amortizable
Trade names – indefinite lived
Total
December 31, 2010
Cost
Accumulated
Amortization
$ 96,884 $(12,987)
12,400 (642)
9,170 (719)
2,430 -
$120,884 $(14,348)
Accumulated
Amortization
Cost
Net Intangible
Assets
$ 83,897
11,758
8,451
2,430
$106,536
Net Intangible
Assets
Contract-related
Trade name – amortizable
Trade names – indefinite lived
Total
$ 27,484 $ (6,417)
1,570 (64)
2,430 -
$ 31,484 $ (6,481)
$ 21,067
1,506
2,430
$ 25,003
Future expected amortization of intangible assets is as follows for the
years ending December 31, (in thousands):
2012
2013
2014
2015
2016
Thereafter
Total
Amortization
$ 11,207
10,075
9,846
9,567
9,367
54,044
$104,106
(7) Debt
We have a loan agreement with a group of banks that was entered into in
June 2011 to make the WBI acquisition and provide working capital for our
continuing operations. The loan agreement expires in June 2016 and consists of
a term loan facility and a revolving loan facility, and the revolving loan
facility provides us with letters of credit. Financing costs associated with
the loan inception of approximately $1.7 million were capitalized and will be
amortized over the five-year life of the loan. The loan agreement replaced a
predecessor loan agreement that also consisted of a term loan, revolving loan,
and letters of credit.
The term loan requires quarterly installments payable based on an
accelerating amortization schedule, with 15% of the original $125 million
principal amount due in each of the first two years, 20% due in each of years
three and four, and 30% due in year five. The amount of term loan borrowings
outstanding as of December 31, 2011 is approximately $110.9 million. The amount
of term loan borrowings outstanding on the predecessor loan agreement as of
December 31, 2010 was approximately $17.8 million.
Our scheduled term loan payments following December 31, 2011 are: $18.8
million in 2012, $23.4 million in 2013, $25 million in 2014, $34.3 million in
2015, and $9.4 million in 2016.
54
The maximum amount of credit available to us from the banking group for
revolving loans and letters of credit as of December 31, 2011 was $125 million
and the loan agreement has a provision whereby we may elect to increase this
maximum to a total of $175 million. Under the terms of the loan agreement, we
may borrow revolving loan amounts at any time and can repay the borrowings at
any time without premium or penalty. We pay an unused commitment fee and fees
on letters of credit that are issued. We had approximately $53.3 million in
revolving loan borrowings outstanding and $5 million of letters of credit
outstanding as of December 31, 2011. We had approximately $6.9 million of
letters of credit outstanding and no revolving loan borrowings outstanding as
of December 31, 2010 on the predecessor loan agreement.
Total bank loan borrowed funds outstanding as of December 31, 2011,
including both term loan borrowings and revolving loan borrowings, were
approximately $164.2 million. Total bank loan borrowed funds outstanding as of
December 31, 2010, were approximately $17.8 million.
We pay interest on the term loan borrowings and revolving loan borrowings
at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a
base margin. The LIBOR base margin as of December 31, 2011 is 2.25% and the
base rate base margin as of December 31, 2011 is 0.5%. The base margins decline
in steps as our Total Funded Debt/EBITDA Ratio declines.
We have employed interest rate hedges on a significant portion of our
outstanding borrowings. In July 2011, we purchased a three-year amortizing
LIBOR interest rate swap on the term loan debt for an initial amount of $101
million. The swap amount amortizes as the term loan amortizes, with reductions
in the swap amount occurring on the same dates and for approximately the same
amounts as term loan repayments. With the swap in place, we will pay an
effective rate on the hedged term debt of 0.56% plus our base margin from July
2011 through June 2012, and an effective rate of 1.615% plus our base margin
from July 2012 through June 2014. In July 2011, we purchased a two-year LIBOR
interest rate swap on the revolving loan debt for an initial amount of $40
million. The swap amount declines to $20 million in June 2012, and expires in
June 2013. With the swap in place, we will pay an effective rate on the hedged
term debt of 0.7775% plus our base margin during the two years.
As of December 31, 2011, interest rates on portions of our outstanding
debt ranged from 2.53% to 3.75%. The effective interest rate on our aggregate
outstanding debt after taking into account the impact of the interest rate
hedges was 2.85%.
Interest expense incurred on bank loan borrowings was approximately $3.1
million, $253 thousand and $117 thousand for the years ended December 31, 2011,
2010 and 2009, respectively.
The loan agreement contains collateral requirements that secure our
assets, restrictive covenants, other affirmative and negative covenants, and
subjects us to certain conditions and limitations. Restrictive covenants
include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time,
and a minimum Fixed Charge Coverage Ratio. We were in compliance with required
ratios and other terms and conditions at December 31, 2011.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist primarily of
accrued compensation and benefits of approximately $24.0 million and $31.0
million as of December 31, 2011 and 2010, respectively. The accrued
compensation and benefits amounts include bonus, salaries and related payroll
taxes, vacation and deferred compensation.
55
(9) Stock-Based Compensation Plans
(a) Restricted Stock Plan
In 2006, our stockholders approved the VSE Corporation 2006 Restricted
Stock Plan for its directors, officers and other employees (the “2006 Plan”).
On May 3, 2011, the stockholders approved amendments to the 2006 Plan
extending the term thereof until May 3, 2016. Under the provisions of the
2006 Plan, we are authorized to issue up to 250,000 shares of our common
stock. The Compensation Committee is responsible for the administration of
the 2006 Plan, and determines each recipient of an award under the 2006 Plan,
the 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 are included in award agreements between us and the recipients of the
award. As of December 31, 2011, 131,443 restricted shares were available for
issuance under the 2006 Plan.
Non-employee directors were awarded 9,800 shares and 4,900 shares of
restricted stock on January 2, 2011 and 2010, respectively, under the 2006
Plan. The grant-date fair value of these restricted stock grants was $33.16
per share and $47.24 per share for the shares awarded in 2011 and 2010,
respectively. 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 $325
thousand and $231 thousand during the first quarters of 2011 and 2010,
respectively.
In January of every year since 2007, we have notified certain employees
that they are eligible to receive awards under our 2006 Restricted Stock Plan
based on our financial performance for the respective fiscal years. These
restricted stock awards are expensed and a corresponding liability is recorded
ratably over the vesting period of approximately three years. Upon issuance of
shares on each vesting date, the liability is reduced and additional paid-in
capital is increased. The date of award determination is expected to be in
March 2012 for the 2011 awards. The date of award determination for the 2010
awards and the 2009 awards was March 2, 2011 and March 2, 2010, 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, 2011, the employees eligible
for the 2010 awards, 2009 awards and 2008 awards received 32,256 shares of
common stock. The grant-date fair value of these awards was $26.86 per share.
The stock-based compensation amounts of approximately $1.0 million, $1.7
million and $1.2 million shown on the accompanying statements of cash flows
for the years ended December 31, 2011, 2010 and 2009, respectively, are
included in contract costs on the accompanying consolidated statements of
income and are net of the tax withholding associated with the awards issued of
approximately $393 thousand, $307 thousand and $257 thousand, in the years
ended December 31, 2011, 2010 and 2009, respectively. As of December 31,
2011, the total compensation cost related to non-vested awards not yet
recognized was approximately $546 thousand with a weighted average
amortization period of 1.3 years.
The total stock-based compensation expense related to restricted stock
awards for the years ended December 31, are as follows (in thousands):
Employees
Non-employee Directors
Total
2011
$ 882
347
$1,229
2010
$1,656
298
$1,954
2009
$1,117
318
$1,435
The employee-related restricted stock awards are expensed and a
corresponding liability is recorded ratably over the vesting period of
approximately three years. Upon issuance of shares on each vesting date, the
liability is reduced and additional paid-in capital is increased. During 2010, we
56
reclassified approximately $1.1 million from stockholders’ equity to accrued
expenses related to our restricted stock awards.
(b) Stock Option Plans
On December 30, 2005, our Board of Directors directed us to discontinue
awarding options, both discretionary and nondiscretionary under our 2004 Stock
Option Plan. At December 31, 2011 and 2010, no options issued remain
outstanding.
The total intrinsic value of options exercised during 2009 was
approximately $1.3 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 contract costs and
the following line items on the accompanying statements of income for the
years ended December 31, 2011, 2010 and 2009 (in thousands):
Stock-based compensation included in
contract costs
Income tax benefit recognized for stock-
based compensation
Total stock-based compensation expense,
net of income tax benefit
2011
2010
2009
$1,427
2,012
1,492
(546)
(772) (565)
$ 881
$1,240
$ 927
(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 concluded all U.S. federal
income tax matters as well as material state and local tax matters for years
through 2007.
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, 2011, 2010, and 2009 are as follows (in thousands):
Current
Federal
State
Deferred
Federal
State
Provision for income taxes
2011
2010
2009
$ 9,457
1,680
11,137
1,188
95
1,283
$12,420
$13,314
1,760
15,074
$12,075
1,942
14,017
(752) 622
24
(64)
(728) 558
$14,346
$14,575
The differences between the amount of tax computed at the federal
statutory rate of 35% and the provision for income taxes for the years ended
December 31, are as follows (in thousands):
Tax at statutory federal income
tax rate
Increases (decreases) in tax resulting
from:
State taxes, net of federal tax
benefit
Permanent differences, net
Other, net
Provision for income taxes
2011
2010
2009
$11,540
$13,312
$13,509
1,254
192
(566)
$12,420
1,341
(50)
(257)
$14,346
1,230
64
(228)
$14,575
57
Our deferred tax assets and liabilities as of December 31, 2011 and
2010, which represent the tax effects of temporary differences between tax and
financial accounting bases of assets and liabilities and are measured using
current tax rates, are as follows (in thousands):
Current deferred tax assets
Current deferred tax liabilities
Net current deferred tax assets
Noncurrent deferred tax assets
Noncurrent deferred tax liabilities
Net noncurrent deferred tax assets
Net deferred tax assets
2011
2010
$4,823
(3,468)
1,355
$4,063
(2,461)
1,602
5,299
(5,068)
231
$1,586
4,631
(3,793)
838
$2,440
The tax effect of temporary differences representing deferred tax assets
and liabilities as of December 31, 2011 and 2010, are as follows (in
thousands):
Gross deferred tax assets
Deferred compensation and accrued paid leave
Accrued expenses
Stock-based compensation
Interest rate swaps
Reserve for contract disallowances
Acquisition-related expenses
Capitalized inventory
Other
Total gross deferred tax assets
Gross deferred tax liabilities
Depreciation
Deferred revenues
Intangible assets
Total gross deferred tax liabilities
2011
2010
$5,125
946
530
429
316
281
125
61
7,813
$5,130
803
694
-
267
303
-
3
7,200
(2,563)
(2,113)
(1,551)
(6,227)
(2,380)
(1,665)
(715)
(4,760)
Net deferred tax assets
$1,586
$2,440
(11) Commitments and Contingencies
(a) Leases, Related Party Transactions and Other Commitments
We are the tenant under capital leases on four building facilities with
an aggregate obligation of approximately $6.6 million as of December 31, 2011.
We lease two of the facilities from a Limited Liability Corporation (“LLC”) in
which the chief executive officer of our subsidiary WBI has a 25% ownership
interest. Other employees or their direct relatives have the remaining
ownership in this LLC and full ownership in the partnership from which we
lease the two other facilities. The leases were entered into in June 2011 in
connection with our acquisition of WBI and each have terms of 15 years with
two seven-year renewal options. The annual combined base rent amount is
approximately $854 thousand and the leases contain escalation provisions for
future years. Beginning in year five, the rent amount will increase by the
greater of the Consumer Price Index (“CPI”) increase during the first four
year period or 12%. For each successive lease year, the rent will increase
based on any increase in the CPI for the previous lease year. The leases
provide us with an option to purchase three of the facilities for an aggregate
amount of approximately $9 million and an option to purchase the fourth
facility for approximately $650 thousand. The closing for these purchase
options must occur before December 1, 2025. Depreciation and interest expense
for 2011 was approximately $266 thousand and $484 thousand, respectively.
58
In addition to the capital leases above, 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 expense for the years ended December 31, 2011, 2010 and
2009 were as follows (in thousands):
2011
2010
2009
Operating
Lease
Expense
$11,787
$13,209
$12,546
Sublease
Income
Net
Expense
$770
$808
$782
$11,017
$12,401
$11,764
Future minimum annual non-cancelable commitments as of December 31, 2011
are as follows (in thousands):
Capital
Leases
Lease
Commitments
$ 854
854
854
914
957
9,012
Operating Leases
Lease
Commitments
Sublease
Income
Net
Commitments
$8,638
7,480
5,640
1,910
2,117
-
$1,334
1,028
859
215
-
-
$3,436
$7,304
6,452
4,781
1,695
2,117
-
$22,349
2012
2013
2014
2015
2016
Thereafter
Total
$13,445
$25,785
Less amounts
representing
interest
Present value of
future minimum
capital lease
payments
$(6,851)
$ 6,594
We signed a 15-year lease commitment on November 9, 2009 to lease a new
building with approximately 95,000 square feet of office space in Springfield,
Virginia that will serve as our executive and administrative headquarters
beginning in May 2012. We issued a letter of credit under the lease
agreement. The letter of credit is held by the landlord as security for our
performance of obligations under the lease agreement. Under the lease
agreement, the landlord has the ability to draw upon the letter of credit
during the construction period under certain conditions that are not within
our control. Amounts drawn on the letter of credit are not required to be
maintained by the landlord in a separate bank account, which could lead to the
comingling of letter of credit proceeds with other funds of the landlord. Due
to the lease agreement terms regarding the potential of the landlord drawing
on the letter of credit, we have concluded that we are involved in the
construction of the building for accounting purposes and, therefore, we are
considered the owner of the building during the construction period. We have
recorded a construction asset and corresponding long-term liability of
approximately $26.4 million and $19.2 million, respectively, on the
accompanying December 31, 2011 and 2010 consolidated balance sheets in
connection with this lease, which represents the construction costs incurred
by the landlord as of the respective balance sheet dates.
59
Future minimum annual non-cancelable commitments under our new
headquarters lease as of December 31, 2011 are as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Total
(b) Contingencies
Lease Commitments
$ 2,451
3,751
3,863
3,980
4,139
49,354
$67,538
We entered into an agreement with a subcontractor in March 2011 to
satisfy certain work share requirements (the “Agreement”). Under the terms of
the Agreement, we are required to provide the subcontractor with certain
levels of subcontracted work over two specified nine-month periods. The first
period began March 1, 2011 and ended November 30, 2011. The second period
began December 1, 2011 and ends August 31, 2012. If the work share
requirements are not fulfilled, then we are required to make a cash payment to
the subcontractor of up to $750 thousand for each period. If a cash payment
is made after the first nine- month period and we are able to provide a level
of work during the second nine- month period that satisfies all or a portion
of the work requirements for the combined eighteen months, we are entitled to
a return of all or a portion of the cash payment. Under the terms of the
Agreement, we placed $1.5 million in an escrow account to ensure cash payments
to the subcontractor if the work share requirements are not satisfied. The
remaining escrowed funds are classified as other current assets on our
December 31, 2011 financial statements.
Due to delays in contract awards and protests of contracts awarded to
us, we were not able to provide any of the first period required work to the
subcontractor by November 30, 2011. Accordingly, we have recorded an expense
of $750 thousand on our financial statements as of December 31, 2011.
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 five reportable
operating segments: the Federal Group, the International Group, the IT, Energy
and Management Consulting Group, the Infrastructure Group, and the Supply
Chain Management Group. These segments operate under separate management teams
and financial information is produced for each segment. The entities within
each of the Federal Group, International Group, and IT, Energy and Management
Consulting Group reportable segments meet the aggregation of operating
segments criteria as defined by the accounting standard for segment reporting.
We evaluate segment performance based on consolidated revenues and profits or
losses from operations before income taxes.
Federal Group - Our Federal Group provides legacy equipment sustainment,
engineering, technical, management, integrated logistics support and
information technology services to DoD and other government agencies. The
Federal Group consists of four divisions: CED, ELD, FSS and SED.
International Group - Our International Group provides engineering,
industrial, logistics and foreign military sales services to the U.S. military
and other government agencies. It consists of two divisions: GLOBAL and FMD.
60
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 consists of Energetics, G&B and Akimeka.
Infrastructure Group – Our Infrastructure Group is engaged principally in
providing diversified technical and management services to the government,
including transportation infrastructure services, construction management
services and aerospace services. This group consists of ICRC.
Supply Chain Management Group – Our Supply Chain Management Group supplies
vehicle parts primarily through a Managed Inventory Program (“MIP”) to USPS
and direct sales to other clients, including DoD.
Our segment information is as follows (in thousands):
For the years ended December 31,
Revenues
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain Group
Total revenues
Income before income taxes:
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain
Corporate
Income before income taxes
Interest (income) expense
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain
Corporate
Total interest (income)
expense
Depreciation and amortization
expense:
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain Group
Total depreciation and
amortization
Capital expenditures:
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain Group
Corporate
Total capital expenditures
2011
2010
2009
$184,147
206,746
$454,660
261,499
$ 585,951
314,134
106,817
37,830
83,052
$618,592
94,796
55,081
-
$866,036
74,117
40,437
-
$1,014,639
$ 6,099
5,342
$ 20,574
9,376
$ 21,311
9,569
12,440
580
15,965
(7,454)
$ 32,972
10,275
292
-
(2,484)
$ 38,033
7,402
990
-
(673)
$ 38,599
$ (75)
(21)
$ (31)
197
$ (89)
436
(73)
23
350
3,504
(49)
(19)
-
82
(35)
(14)
-
(418)
$ 3,708
$ 180
$ (120)
$ 2,906
1,903
3,256
1,433
5,402
$ 4,115
1,521
1,953
1,348
-
$ 4,008
1,211
1,168
1,235
-
$ 14,900
$ 8,937
$ 7,622
$ 547
573
$ 496
816
$ 2,894
423
236
170
113
4,996
$ 6,635
305
161
-
3,027
$ 4,805
268
162
-
5,028
$ 8,775
61
Total assets:
Federal Group
International Group
IT, Energy and Management
Consulting Group
Infrastructure Group
Supply Chain Group
Corporate
Total assets
December 31,
2011
2010
$ 29,653
49,734
$ 67,452
62,062
70,108
27,372
203,241
74,404
$454,512
24,658
21,239
-
113,015
$288,426
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.
Customer Information
We are engaged principally in providing diversified logistics,
engineering, IT, construction management and consulting services to the
government, other government prime contractors, and commercial entities. The
largest customer for our services is 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
U. S. Postal Service
Department of
U.S. Treasury
Department of
Transportation
Department of Interior
Department of Energy
Other government
Total – Federal Civil
Agencies
Revenues by Customer
(Dollars in Thousands)
Years ended December 31,
%
38.0 $463,305
198,833
22.7
2011
$235,055
140,575
%
54.7
26.7
11,971 1.9 13,303 1.5 13,839 1.4
82.8
%
53.5 $ 555,238
271,189
23.0
840,266
387,601
675,441
2009
2010
78.0
62.6
75,964
12.3
-
-
-
-
41,434
6.7
49,332
5.7
47,676
4.7
25,386
24,254
23,005
32,524
4.1
3.9
3.7
3.5
6.0
2.9
3.4
1.6
2.5
5.3 33,055 3.8 42,670 4.2
35,722
29,275
16,111
51,497
29,810
21,890
222,567
36.0
185,584
21.4
171,454
16.9
Commercial
8,424 1.4 5,011 0.6 2,919 0.3
Total
$618,592 100.0 $866,036 100.0 $1,014,639 100.0
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
62
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
issuance of 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.
(14) 401(k) Plan and Profit Sharing Plan
We maintain a number of defined contribution plans under the provisions
of Section 401(k) of the Internal Revenue Code that cover substantially all of
our employees. Under the provisions of our 401(k) plans, employees’ eligible
contributions are matched at rates specified in the plan documents. Our
expense associated with these plans was approximately $4.6 million, $4.3
million and $3.5 million for the years ended December 31, 2011, 2010, and
2009, respectively.
Energetics maintains a profit sharing plan for its employees. All
employees who have completed at least 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, 2011, 2010,
and 2009 was $360 thousand, $270 thousand, and $190 thousand, respectively.
(15) Fair Value Measurements
The accounting standard for fair value measurements defines fair value,
and establishes a market-based framework or hierarchy for measuring fair
value. The standard is applicable whenever assets and liabilities are
measured at fair value.
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.
63
The following table summarizes the financial assets and liabilities
measured at fair value on a recurring basis as of December 31, 2011 and
December 31, 2010 and the level they fall within the fair value hierarchy (in
thousands):
Amounts Recorded
at Fair Value
Non-COLI assets held
in DSC Plan
Interest rate swaps
Earn-out obligation-
current
Financial
Statement
Classification
Fair
Value
Hierarchy
Fair Value
December 31,
2011
Fair Value
December 31,
2010
Other assets
Level 1
$ 300
$ 1,636
Accrued
expenses
Accrued
expenses
Level 2
$ 1,122
$ -
Level 3
$ 4,153
$ -
Earn-out obligations -
long-term
Earn-out
obligations
Level 3
$16,415
$ 7,807
Changes in the fair value of the Non-COLI assets held in the deferred
supplemental compensation plan are recorded as selling, general and
administrative expenses.
We account for our interest rate swap agreements under the provisions of
ASC 815, and have determined that our swap agreements qualify as highly
effective hedges. Accordingly, the fair value of the swap agreements, which is
a liability of approximately $1.1 million at December 31, 2011, has been
reported in accrued expenses. The offset, net of an income tax effect of
approximately $430 thousand, is included in accumulated other comprehensive
loss in the accompanying consolidated balance sheet as of December 31, 2011.
The amounts paid and received on the swap agreements will be recorded in
interest expense as yield adjustments in the period during which the related
floating-rate interest is incurred. We determine the fair value of the swap
agreements based on a valuation model using market data inputs.
We determined the fair value of the earn-out obligations related to the
Akimeka and WBI acquisitions by using a valuation model that included the
evaluation of all possible outcomes and the application of an appropriate
discount rate. At the end of each reporting period, the fair value of the
contingent consideration is re-measured and any changes are recorded as
contract costs. The fair value of the Akimeka earn-out obligation decreased
approximately $2.7 million for the year ended December 31, 2011. The fair
value of the WBI earn-out obligation increased $182 thousand between the
acquisition date and December 31, 2011.
The following table provides a reconciliation of the beginning and
ending balance of the earn-out obligations measured at fair value on a
recurring basis that used significant unobservable inputs (Level 3).
Earn-out obligations
Balance as of December 31, 2010
Fair value adjustment included
in earnings
Additional earn-out obligations
Balance as of December 31, 2011
Current
portion
$ -
-
4,153
$4,153
Long-term
portion
$ 7,807
Total
$ 7,807
(2,486) (2,486)
11,094
$16,415
15,247
$20,568
64
(16) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2011 and 2010, in
thousands, except earnings per share:
Revenues
Operating income
Net income
2011 Quarters
1st
2nd
3rd
4th
$151,244
$ 6,909
$ 4,172
$158,546
$ 7,273
$ 4,211
$159,923 $148,879
$ 11,387 $ 11,111
$ 6,120 $ 6,049
Basic and diluted earnings per
share
Basic and diluted weighted
average shares outstanding
$ 0.80
$ 0.80
$ 1.17 $ 1.15
5,214
5,237
5,238
5,238
Revenues
Operating income
Net income
Basic and diluted earnings
per share
Basic and diluted weighted
average shares outstanding
2010 Quarters
1st
2nd
3rd
4th
$228,176
$ 8,651
$ 5,398
$212,473
$ 9,953
$ 6,103
$212,943 $212,444
$ 11,845 $ 7,764
$ 7,218 $ 4,968
$ 1.04
$ 1.18
$ 1.39 $ 0.96
5,180
5,192
5,192
5,192
During the fourth quarter of 2011, we determined that four building
leases that we executed in connection with the acquisition of WBI were capital
leases. We incorrectly treated these leases as operating leases in our
financial statements as of and for the periods ended June 30, 2011 and
September 30, 2011. At inception of the leases, we should have recognized
assets with offsetting capital lease obligations aggregating $6.7 million,
representing the fair value of the buildings at that time per a third party
appraisal. At June 30, 2011 and September 30, 2011, total assets and
liabilities were understated by $6.7 million and $6.6 million, respectively.
We have concluded that this error was not material to the affected financial
statements. Additionally, accounting for these leases as operating leases
resulted in us overstating rent expense and understating depreciation expense
and interest expense in the interim periods. The net impact of this
misstatement was inconsequential to the consolidated statements of income and
cash flows of the Company for any period in 2011. The error was corrected in
the fourth quarter of 2011 (see Note 4).
Our profitability will fluctuate based on the mix of contract work
performed and on the timing of fees earned and awarded on certain contracts.
We recognized operating income on our Treasury Seized Asset Program in the
third quarter of 2010 of approximately $3.5 million primarily due to this
program’s annual incentive fee recognition.
65
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 15(d)-
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, 2011 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, 2011. 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 2011, 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.
66
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of VSE Corporation
We have audited VSE Corporation and Subsidiaries’ internal control over
financial reporting as of December 31, 2011, 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
and Subsidiaries’ 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 and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December
31, 2011, 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, 2011 and 2010, and the
related consolidated statements of income, stockholders’ equity, cash flows,
and comprehensive income for each of the three years in the period ended
December 31, 2011 and our report dated March 7, 2012 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 7, 2012
67
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, 2011 in respect to the Annual Meeting of VSE’s
stockholders (the “Proxy Statement”) scheduled to be held on May 1, 2012.
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
All schedules have been omitted because they are not applicable, not
required, or the information has been otherwise supplied in the financial
statements or notes to the financial statements.
3.
Exhibits
reference.
See “Exhibit Index” hereinafter contained and incorporated by
68
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 7, 2012 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 7, 2012
/s/ Thomas R. Loftus
Thomas R. Loftus
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
March 7, 2012
/s/ Clifford M. Kendall
Clifford M. Kendall
Chairman
March 7, 2012
/s/ Calvin S. Koonce
Calvin S. Koonce
/s/ James F. Lafond
James F. Lafond
/s/ David M. Osnos
David M. Osnos
/s/ Bonnie K. Wachtel
Bonnie K. Wachtel
/s/ Ralph E. Eberhart
Ralph E. Eberhart
Director
March 7, 2012
Director
March 7, 2012
Director
March 7, 2012
Director
March 7, 2012
Director
March 7, 2012
69
Reference No.
Per Item 601
of
Regulation S-K
2.1
2.2
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
EXHIBIT INDEX
Description of Exhibit
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)
Share Purchase Agreement, dated as of April 14,
2008,
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)
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)
By-Laws of VSE Corporation as amended through
December 17, 2008 (Exhibit 3.1 to Form 8-K dated
December 17, 2008)
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)
Material contracts
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)
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)
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)
Severance and Mutual Protection Agreement
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)
Exhibit No.
In this Form
10-K
*
*
*
*
* +
* +
* +
* +
* +
70
10.6
10.7
10.8
10.9
10.10
10.11
10.12
13.1
21.1
23.1
31.1
31.2
32.1
32.2
99.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
* +
* +
* +
* +
* +
* +
Exhibit 13
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
*
Statement of Amendment to the Employment Agreement
dated as of April 19, 2010, by and between VSE
Corporation and Maurice G. Gauthier (Exhibit
10.1 to Form 8-K dated April 19, 2010)
Amended and Restated Business Loan and Security
Agreement dated August 19, 2010 among VSE
Corporation, Energetics Incorporated, VSE
Services International, Inc., Integrated
Concepts and Research Corporation, G&B
Solutions, Inc., Akimeka, LLC, Citizens Bank of
Pennsylvania and Suntrust Bank (Exhibit 10.1 to
Form 8-K dated August 19, 2010)
Second Amended and Restated Business Loan and
Security Agreement dated June 6, 2011 among
VSE Corporation and its wholly owned
subsidiaries, Citizens Bank of Pennsylvania and
a syndicate of six other banks (Exhibit 10.1 to
Form 8-K dated June 6, 2011)
Lease Agreement by and between Metropark 7 LLC and
VSE Corporation (Exhibit 10.2 to Form 8-K
dated November 4, 2009)
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)
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)
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)
Annual report to security holders, Form 10-Q
or selected quarterly data
Subsidiaries of the Registrant
Consent of Ernst & Young LLP, independent
registered public accounting firm
Section 302 CEO Certification
Section 302 CFO and PAO Certification
Section 906 CEO Certification
Section 906 CFO and PAO Certification
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)
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase
Document
*Document has been filed as indicated and is incorporated by reference herein.
+Indicates management contract or compensatory plan or arrangement.
71
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
The following is a listing of the subsidiaries of the Registrant:
Energetics Incorporated
G&B Solutions, Inc.
Jurisdiction of
Organization
Maryland
Virginia
Integrated Concepts and Research Corporation
District of Columbia
Akimeka, LLC
Wheeler Bros., Inc.
Hawaii
Pennsylvania
72
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-134285) pertaining to the 2006 Restricted Stock Plan of VSE
Corporation of our reports dated March 7, 2012, with respect to the
consolidated financial statements of VSE Corporation and Subsidiaries and the
effectiveness of internal control over financial reporting of VSE Corporation
and Subsidiaries included in this Annual Report (Form 10-K) for the year ended
December 31, 2011.
/s/ Ernst & Young LLP
McLean, Virginia
March 7, 2012
73
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
74
(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: March 7, 2012
/s/ M. A. Gauthier
M. A. Gauthier
Chief Executive Officer, President
and Chief Operating Officer
75
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
76
(b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: March 7, 2012
/s/ T. R. Loftus
T. R. Loftus
Executive Vice President and
Chief Financial Officer
77
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,
2011 (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 7, 2012
/s/ M. A. Gauthier
M. A. Gauthier
Chief Executive Officer, President
and Chief Operating Officer
78
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,
2011 (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 7, 2012
/s/ T. R. Loftus
T. R. Loftus
Executive Vice President and
Chief Financial Officer
79