INTEGRITY • AGILITY • VALUE
2013 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.
Revenues were $471.6 million in 2013 compared to $546.8
million in 2012. Revenues decreased by approximately $75
million or 14% for the year ended December 31, 2013 as
compared to the prior year. The revenue decrease was primarily
due to contract expirations and declines in services ordered
by clients on continuing contracts, including a $26 million
decline attributable to the expiration of a contract at the end
of 2012 to provide mechanical maintenance services for Mine
Resistance Ambush Protected (“MRAP”) vehicles and systems
in Kuwait; an $18 million reduction in revenues from our
vehicle and equipment refurbishment work for the U.S. Army
Reserve due to the interruption of contract coverage in the
third quarter of 2013; an $18 million decline in pass-through
work provided on engineering and technical services task
orders; and a $20 million decline in IT and energy consulting
revenues. These declines are partially offset by a $12 million
increase in Supply Chain Management revenues.
Operating income was $44.1 million in 2013 compared to
$51.1 million in 2012. The decrease in our 2013 operating
income is primarily due to our revenue decline. Our income
from continuing operations was $24 million for 2013, or $4.49
per diluted share, compared to $27.4 million, or $5.15 per
diluted share for 2012. Our net income was $22.9 million for
2013, or $4.28 per diluted share, compared to $21.3 million,
or $4.01 per diluted share for 2012.
Bookings were $501 million for 2013 compared to revenue of
$472 million. Bookings were $539 million in 2012 compared to
revenue of $547 million. Funded contract backlog at December
31, 2013 was $236 million, compared to $268 million at
September 30, 2013 and $250 million at December 31, 2012.
Operational and Contract Highlights in 2013
Our Wheeler Bros., Inc. subsidiary (“WBI”) in our Supply
Chain Management Group continues to operate efficiently
and effectively, providing steady operating results that
have made it a significant contributor to our business. WBI
revenues grew by approximately $12 million, or about 8%, in
2013 compared to 2012.
We appointed Chad Wheeler President and COO of WBI in
July 2013. Also in July, Randy Davies, then CEO of WBI, was
appointed to the Postal Supplier Council (PSC) Board of
Advisors (BoA.) Nomination and appointment to the BoA is
based on exceptional contribution to the PSC. WBI has been
a PSC member since 2006.
Our International Group was awarded an indefinite delivery/
indefinite quantity (IDIQ) contract to provide program and
technical support services for Security Assistance Projects
administered by the U.S. Coast Guard Foreign Military Sales
Program. This single-award contract has a five-year period of
performance (a base year plus four one-year options) and a
ceiling in excess of $99 million.
Our International Group was awarded an IDIQ contract
to support the U.S. Department of Justice (DOJ) Criminal
Division, Asset Forfeiture and Money Laundering Section
in international asset recovery services. This contract has
a period of performance of 12 months with four 12-month
options. The initial ceiling for this award is $9 million.
Our Federal Group was awarded a task order under our
Rapid Response Third Generation (R2-3G) prime contract
to continue support services to the U.S. Army Reserve
Command for its Equipment, Engineering, Maintenance and
Logistics Readiness Program. The R2-3G task order has a
12 month period of performance with a funded value of $32
million and a ceiling of $46.5 million.
2013 Highlights
Our Federal Group was also awarded two firm fixed price
(FFP) task orders in September 2013 under its Field and
Installation Readiness Support Team (FIRST) prime contract
to continue the support services to USARC for its 63rd and
88th Regional Support Command (RSC) Logistics Readiness
Support programs. The 63rd RSC task order has a period
of performance of 12 months with one 12-month option.
The 88th RSC task order has a period of performance of
12 months with two 12-month options. The total combined
value of both task orders is approximately $63 million.
Our Federal Group was awarded a delivery order to support
Taiwan’s Maritime Defense efforts, managed by the Army
Aviation and Missile Command’s Integrated Material
Management Center (AMCOM IMMC) Lower Tier Project
Office (LTPO). The delivery order has a four-year period of
performance and a value of approximately $24 million.
Our Federal Group was also awarded two FFP/IDIQ contracts
to support the Marine Corps Logistics Command Marine
Depot Maintenance Command (MDMC) in Albany, GA. We
will support the rebuild effort of approximately 170 40-ton
payload, three-axle Medium Heavy Equipment Transporters
(MHET) semitrailers and 230 5,000-gallon fuel dispensing
semitrailers. Both contracts have a period of performance
that includes a 12-month base and four 12-month options
with a total combined value of approximately $12 million.
Corporate Profile
We conduct our business operations in more than 100
locations under four reportable operating segments, which
are: Supply Chain Management; Federal; International; and IT,
Energy and Management Consulting. VSE’s offerings include:
Supply Chain Management—Our network design
and optimization programs maximize transportation,
manufacturing, inventory and supply functions through
application of cost, quality, schedule and risk mitigation
techniques.
Engineering, Maintenance, Sustainment and Reset—
Conceptual design, engineering of equipment, vehicle reset,
parts supply, and advanced technologies, as well as ship
maintenance, overhaul and follow-on technical support.
IT Services—Complete enterprise architecture, data
mining, public protection/security, and technical/software
engineering for systems, assessments and reviews.
Technical and Management Consulting—Professional
competencies in technology roadmaps and solutions,
policy impacts, analysis, cyber-security and infrastructure
protection and mitigation measurements.
Stockholder Inquiries
VSE is a publicly owned company and its shares are traded
on the NASDAQ Global Select Market under the symbol VSEC.
Inquiries about stock ownership, dividends, and stockholder
changes of address may be directed to our Transfer Agent:
Registrar and Transfer Company, 10 Commerce Drive,
Cranford, New Jersey 07016-1340, or to VSE at 6348 Walker
Lane, Alexandria, VA 22310, Attention: Corporate Secretary,
Telephone (703) 329-4770.
Further information about VSE and its subsidiaries is available
at www.vsecorp.com, www.akimeka.com, www.energetics.com,
and www.teamwbi.com.
3
INTEGRITY • AGILITY • VALUE Financial Highlights
Revenues
($M)
Net Income
($M)
974.2
974.2
937.4
937.4
811.0
811.0
603.2
603.2
580.8
580.8
546.8
546.8
471.6
471.6
24.024.0
23.723.7
22.922.9
21.321.3
20.620.6
19.019.0
14.114.1
364.0
364.0
280.1
280.1
216.0
216.0
7.87.8
6.26.2
3.43.4
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
Y E A R
Y E A R
Funded
Backlog ($M)
Number of
Employees
523523
461461
400
400
375375
299299
276276
168168
282
282
250
250
236
236
2897
2897
2534
2534
2516 2472
2516
2472
1920
1920
1872
1872
1223
1223
857857
716716
625625
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
Y E A R
Y E A R
Earnings Per
Share Diluted ($)
Stockholders’
Equity ($M)
4.674.67
4.534.53
4.284.28
4.014.01
3.903.90
3.743.74
2.822.82
186.8
186.8
164.3
164.3
143.6
143.6
123.8
123.8
101.3
101.3
1.611.61
1.291.29
0.750.75
76.176.1
56.456.4
38.238.2
30.230.2
23.023.0
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
Y E A R
Y E A R
4
2013 VSE Annual Report and Form 10-K Dividends
Per Share ($)
Stock Price,
End of Year ($)
0.350.35
0.31
0.31
0.27
0.27
0.23
0.23
0.195
0.195
0.175
0.175
0.155
0.155
0.135
0.135
0.115
0.115
0.095
0.095
48.84
48.84
45.08
45.08
39.23
39.23
48.01
48.01
33.02
33.02
24.51
24.51
24.28
24.28
21.05
21.05
16.95
16.95
12.59
12.59
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11
‘12 ‘13
Y E A R
Y E A R
Income Statement Data (in thousands, except share data)
Year Ended December 31
2013
% CHANGE
2012
Revenues
$
471,638
-13.7%
$
546,755
Net income
Earnings per share (diluted)
22,852
4.28
7.3%
6.7%
Weighted average shares (diluted)
5,343,267
21,294
4.01
5,309,862
Balance sheet data (in thousands, except percentages)
December 31
2013
% CHANGE
2012
Total assets
$
380,529
Working capital
Stockholders’ equity
Return on equity
47,691
186,803
13.9%
-7.2%
-26.6%
13.7%
$
410,211
64,976
164,335
14.8%
NOTE: Some of the financial information above has been adjusted for discontinued operation, as reflected in the 2012 10-K
5
INTEGRITY • AGILITY • VALUE Message to Stockholders
This year we celebrated our 55th anniversary, and our
consistent value proposition during those years has
been to affordably extend the service life of our U.S.
and international clients’ aging fleets of vehicles, ships
and aircraft. Our renewed emphasis on the supply chain
component of this offering has strengthened and will
continue to improve our position in those markets for
years to come.
As we move forward into 2014, it is appropriate
to address the challenges and successes that we
experienced this past year. The federal contracting
environment continues to operate with tight budget
constraints, delays in contract awards and funding
delays that adversely impact our industry. These
external forces have required us to align our cost
structure to retain competitive pricing. Early in 2013 we
aggressively reduced our indirect costs in order to be
more competitive in the shrinking government market
place. We achieved further efficiencies by successfully
merging our two IT subsidiaries, G&B Solutions, Inc. and
Akimeka, LLC.
While some parts of our company have been hit hard by
industry challenges, we have diversified our business
base. Wheeler Bros., Inc., acquired in 2011, continues
to be a strong contributor to our bottom line, and
provides further growth potential for our Supply Chain
Management services. We have been pleased with their
performance during the past two years and have had
success in marketing their Managed Inventory Program
(MIP) to adjacent markets.
We are optimistic about our future. Our pipeline of
potential future business is robust, greater than at any
time during the last few years. We have had success
with our supply chain management emphasis, and
as a result, have acquired new customers in adjacent
markets. We now anticipate growing revenue by
defending our traditional markets where we have earned
a great reputation, and capitalizing on our diversification
program.
We want to recognize the professionalism and
commitment shown by the men and women of VSE.
We are very proud of our team and its demonstrated
commitment to our future during very challenging times.
It is because of their efforts we are optimistic about the
future of our company.
We are pleased to welcome Jack Potter to our Board of
Directors. Mr. Potter served 10 years as United States
Postmaster General and CEO of the United States Postal
Service (USPS), where he managed an organization with
more than 500,000 employees, 35,000 post offices and
200,000 postal service vehicles. Since July 2011,
Mr. Potter has served as the President and Chief
Executive Officer of the Metropolitan Washington
Airports Authority (MWAA). MWAA operates Ronald
Reagan Washington National and Washington Dulles
International Airports, which serves more than 40
million passengers annually, and oversees the 23-
mile, $6 billion Dulles Corridor Metrorail Project. Mr.
Potter brings the leadership, management expertise
and experience necessary to enhance VSE’s core
capabilities and key markets.
We have successfully navigated some difficult years, and
moving forward we will continue to make incremental
adjustments to maintain our competitive position. The
approach we have chosen will preserve our competitive
edge and provide for growth in the future. We have a
strong team, a solid strategic plan, and an exciting new
mix of markets, clients and offerings.
Maurice A Gauthier
CEO/President/COO
March 2014
Clifford M. Kendall
Chairman of the Board
March 2014
6
2013 VSE Annual Report and Form 10-K Board of Directors
Clifford M. Kendall
Chairman of the Board
2012 Visionary Award (Montgomery County
Chamber of Commerce)
James F. Lafond, CPA
Retired Executive; formerly
Washington Area Managing Partner,
PricewaterhouseCoopers LLP
Maurice A. “Mo” 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
Calvin S. Koonce, Ph.D.
Chairman, Koonce Securities, Inc.
Securities Broker/Dealer
David M. Osnos, Esq.
Of Counsel
Arent Fox LLP
Attorneys-at-Law
John E. “Jack” Potter
President/CEO, Metropolitan Washington Airports
Authority, Former Postmaster General
Elected as a member of the VSE Board of Directors
effective January 1, 2014.
Jack C. Stultz, Jr.
Lieutenant General, USAR (Ret.)
Bonnie K. Wachtel
Vice President and General Counsel,
Wachtel & Co., Inc.
VSE Board of Directors (left to right): Jack Potter, Jim Lafond, Calvin Koonce, Mo Gauthier (CEO), Cliff Kendall
(Chairman), Bonnie Wachtel, Gen. Ralph Eberhart, Lt. Gen. Jack Stultz, and David Osnos.
7
INTEGRITY • AGILITY • VALUE VSE Corporation is the federal services company of choice for solving problems of global significance with integrity, agility and
value. VSE is dedicated to making our clients successful through the effective use of highly experienced people, systems, and
technology in logistics, vehicle/vessel and equipment refurbishment, engineering, IT services, supply chain management,
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 flexible and highly experienced leadership, state-of-the-art IT communications, creative thinking and teamwork.
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, federal and civil agencies, and
adjacent markets. 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 with
quality of life issues and employment.
NASDAQ: VSEC
ISO 9001:2008
Celebrating
55
Years
of Excellence
Corporate Supporter: Yellow Ribbon Fund
8
2013 VSE Annual Report and Form 10-K Locations
VSE Corporation Headquarters
Pompano Beach, Florida
Charleston, South Carolina
6348 Walker Lane
Alexandria, VA 22310
(703) 960-4600 or
Toll-free: (800) 455-4873
Albany, Georgia
El Paso, Texas
College Park, Georgia
Fort Sam Houston, Texas
Fort Stewart, Georgia
Gatesville, Texas
Hunter Army Airfield, Georgia
Grand Prairie, Texas
Other United States Locations
Anderson AFB, Guam
North Little Rock, Arkansas
Texarkana, Arkansas
Barstow, California
Camp Pendleton, California
China Lake, California
Chula Vista, California
Fort Hunter Liggett, California
Miramar, California
Riverside, California
Twentynine Palms, California
Fort Collins, Colorado
Denver, Colorado
Washington, D.C.
Orlando, Florida
Mayport, Florida
Honolulu, Hawaii
Maui, Hawaii
Bethesda, Maryland
Columbia, Maryland
Fort Detrick, Maryland
Houston, Texas
Laredo, Texas
San Antonio, Texas
Ogden, Utah
Arlington, Virginia
Chantilly, Virginia
Baltimore, Maryland
Chesapeake, Virginia
Indian Head, Maryland
Falls Church, Virginia
Sterling Heights, Michigan
Fort Belvoir, Virginia
Long Beach, Mississippi
Ladysmith, Virginia
South Brunswick, New Jersey
Reston, Virginia
Durham, North Carolina
Vienna, Virginia
Fayetteville, North Carolina
Yorktown, Virginia
Fort Sill, Oklahoma
Fort Lewis, Washington
Klamath Falls, Oregon
Tacoma, Washington
Somerset, Pennsylvania
Fort McCoy, Wisconsin
9
INTEGRITY • AGILITY • VALUE This page intentionally left blank
10
2013 VSE Annual Report and Form 10-K 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, 2013 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
54-0649263
(I.R.S. Employer
Identification No.)
6348 Walker Lane
Alexandria, Virginia
(Address of Principal Executive Offices)
22310
(Zip Code)
www.vsecorp.com
(Webpage)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.05 per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
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, 2013, was
approximately $191.7 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, 2014: 5,343,477.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders expected to be held on May 6,
2014, are incorporated by reference into Part III of this report.
2
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of Registrant
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
PART I
ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
ITEM 4(a)
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
ITEM 15
Exhibits and Financial Statement Schedules
Signatures
Exhibits
3
Page
5
8
11
11
11
12
13
14
17
18
31
32
56
56
58
58
58
58
58
58
58
59
61-70
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 (“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 managing and consolidating entity
for our business operations. Our business operations are managed under groups consisting of one or more divisions
or wholly owned subsidiaries that perform our services. VSE’s operating groups include our Supply Chain
Management Group, International Group, Federal Group, and IT, Energy and Management Consulting Group. 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 of vehicle fleet and equipment sustainment services, including supply chain
management services, and diversified technical services, including logistics, engineering, IT solutions, health care
IT, and consulting services performed on a contract basis. Our services are performed for the United States
Government (the "government"), including the United States Department of Defense (“DoD”), United States Postal
Service (“USPS”), and various federal civilian agencies, and other clients.
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, equipment and business operations.
(b) Financial Information
Our operations are conducted within four reportable segments aligned with our management groups: 1)
Supply Chain, which generated approximately 33% of our revenues in 2013; 2) International, which generated
approximately 31% of our revenues in 2013; 3) Federal, which generated approximately 20% of our revenues in
2013; and 4) IT, Energy and Management Consulting, which generated approximately 16% of our revenues in 2013.
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
We use a broad array of capabilities and resources to support military, federal civilian, and other
government and non-government vehicle fleets, systems, equipment and processes. We are focused on creating,
sustaining and improving the vehicle fleets, systems, equipment and processes of our clients through core offerings
in supply chain management, equipment refurbishment, logistics, engineering, IT solutions, health care IT, and
consulting services.
Typical service offerings include supply chain and inventory management services; vehicle fleet
sustainment programs; vehicle fleet parts; 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’s force crew
training; life cycle support for ships; ship communication systems; energy conservation, energy efficiency,
sustainable energy supply, and electric power grid modernization projects; technology road-mapping; IT enterprise
architecture development, information assurance/business continuity, security risk management, and network
services; medical logistics; and medical command and control. See Item 7 “Management’s Discussion and Analysis
of Financial Information and Results of Operations” for more information regarding our business.
5
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. 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.
The majority of our revenues are derived from contract services performed for DoD agencies or federal
civilian agencies. The USPS, U.S. Navy, U.S. Army and Army Reserve are our largest customers. Other significant
customers include the Department of Treasury, the Department of Energy and the Department of Interior. Our
customers also include various other government agencies and commercial entities.
Customer
U.S. Navy
U.S. Army/Army Reserve
U.S. Air Force
Total - DoD
U.S. Postal Service
Department of Treasury
Department of Energy
Department of Interior
Other government
Total – Federal civilian agencies
Commercial
Total
Revenues by Customer
(dollars in thousands)
Years ended December 31,
%
26.1
21.6
0.8
48.5
2013
$123,307
101,736
3,625
228,668
2012
$120,867
182,412
6,963
310,242
142,203
35,929
20,124
1,545
40,919
240,720
2,250
30.1
7.6
4.3
0.3
8.7
51.0
0.5
130,866
33,369
20,898
16,884
32,231
234,248
2,265
%
22.1
33.4
1.3
56.8
23.9
6.1
3.8
3.1
5.9
42.8
0.4
2011
$140,551
231,615
11,971
384,137
75,964
41,434
23,010
24,254
28,160
192,822
3,803
%
24.2
39.9
2.0
66.1
13.1
7.1
4.0
4.2
4.8
33.2
0.7
$471,638
100.0
$546,755
100.0
$580,762
100.0
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 work performed by our
subcontractors, and from costs of materials used in performing the work. 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 are 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 by us 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 reported backlog is
comprised of funding received by us in incremental amounts intended to fund work that is generally expected to be
completed within six to twelve months following the award of the funding. Accordingly, substantially our entire
reported backlog is reasonably expected to be filled within this time. Our funded backlog as of December 31, 2013,
was approximately $236 million. Funded backlog as of December 31, 2012 and 2011 was approximately $250
million and $282 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
6
dependent upon the congressional authorization and appropriation process. Delays in this process, such as those
experienced in recent years, 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 civilian agencies. While these
contracts increase the opportunities available for us to pursue future work, the actual amount of future work is
indeterminate 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. 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 of December 31, 2013, we had 1,872 employees, a decrease from 2,472 as of
December 31, 2012. 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) environmental specialists, and (f) warehouse and sales personnel. The
expertise required by our customers also frequently includes knowledge of government administrative procedures.
Approximately one-third of our employees have previously served as members in 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.
Government agencies emphasize awarding contracts on a competitive basis as opposed to a sole source or
other noncompetitive basis. Most of the significant contracts under which 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 services through contracts awarded by the General Services Administration (“GSA”). GSA provides a
schedule of services at fixed prices that may be ordered outside of the solicitation process. We have eight 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 general decline in government budgets, or a reallocation of government
spending priorities that results in lower levels of potential business in the markets we serve or the services we offer,
will cause increased competition. Further, we have noticed an increase in awards that have been protested to the
Government Accounting Office (“GAO”).
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, government
budgetary stress, 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
7
soon as reasonably practicable after the reports are electronically filed with the Securities and Exchange
Commission (“SEC”).
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
risks set forth below, one-time events and other important factors disclosed previously and from time to time in our
other filings with the SEC.
Uncertain government budgets and shifting government priorities could delay contract awards and funding
and adversely affect our ability to continue work under our government contracts. Additionally, federal
procurement directives could result in our 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 budgeting and contracting process. The current federal procurement environment is unpredictable
and could adversely affect our ability to perform work under 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 in recent years 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.
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 adversely affect the flow of work to federal contractors,
particularly new programs. Consequently, competitor contractors that experience a loss of government work have
tended to redirect their marketing efforts toward the types of work that we perform. This increase in competition for
our service offerings has affected our ability to win new work or successor contracts to continue work that is currently
performed by us under expiring contracts. Furthermore, disappointed bidders frequently protest, which can delay or
reverse contract awards.
Our business could be adversely affected by incidents that could cause an interruption in our operations or
impose a significant financial liability on us.
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
affect our financial performance and condition. Our Managed Inventory Program (“MIP”) that supplies truck
replacement parts for the United States Postal Service (“USPS”) fleet, our Foreign Military Sales ("FMS") Program for
the U.S. Navy, and our vehicle and equipment refurbishment work for the U.S. Army Reserve are our three largest
revenue generators, accounting for 30%, 20%, and 13% of our 2013 revenues. A fire, flood, earthquake, or other
natural disaster at physical facilities that support these operations, or a procurement system or contractual delay such as
we experienced on our U.S. Army Reserve contract in 2013, could potentially interrupt the revenues from our
operations.
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 staff 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 compliance. Our current and projected work in foreign countries exposes
8
us to challenges associated with export compliance, local laws and customs, workforce issues, extended supply
chain, political unrest 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,
regulatory
noncompliance.Our work on large government program efforts presents a risk to revenue and profit growth
and sustainability.
from cost overruns, performance deficiencies, workplace accidents, and
losses
The eventual expiration of large government 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 Supply Chain Management Group managed inventory
program for USPS, our Federal Group equipment refurbishment program for the U.S. Army Reserve, and our
International Group FMS Program provide significant amounts of revenues and profits, which if interrupted, could
adversely impact our overall financial performance.
Acquisitions, which have been a part of our business strategy in recent years, present certain risks.
The decision to acquire a company that subsequently does not meet expected operating and financial
performance targets, the failure to make or timely complete an acquisition, the ineffective integration of an acquisition,
or the inability of our company to service debt associated with making an acquisition could potentially adversely affect
our financial performance.
Global economic conditions and political factors could adversely affect revenues on current government
programs.
Revenues from our government programs for which work is performed in foreign countries are subject to
economic conditions in these countries and to political risks posed by ongoing foreign conflicts and potential terrorist
activity. A significant amount of our revenues in past years resulted from the U.S. military involvement in Iraq and
Afghanistan, and the winding down of this U.S. military involvement has adversely affected our revenues. Also,
services performed by our employees on our FMS Program are, to a certain extent, dependent on our placement of
employees in a client country. In 2011, political unrest in Egypt caused us to temporarily evacuate employees from that
country, resulting in a decline in services performed by our employees for our Egyptian Navy client. This resulted in a
decline in our revenues as compared to pre-evacuation periods. Similarly, in 2013 further political unrest in Egypt
caused a second evacuation from the country and a decline in our revenues. Revenues from our Egyptian Navy client
were approximately $48 million in 2013 as compared to $52 million in 2012. Such global economic and political risks
could have a material adverse effect on our future financial performance.
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 government
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. A termination for default could also impact our past performance and
ability to win new work. 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.
9
Additionally, some of our contract work is performed by subcontractors, and such work is 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.
Due to the nature of our work we could potentially be exposed to legal actions arising from our operations.
Our work includes many manual tasks, including warehousing, shipping and packing of truck parts
inventory, maintaining and repairing military and non-military vehicles and equipment, and maintaining and
overhauling U.S. Navy ships. This may pose certain challenges that could potentially cause us to be exposed to legal
and other liabilities arising from performance issues or from work related incidents that result in damages, injury or
death to third parties (see “Item 3. Legal Proceedings”). Such events could cause us to suffer financial losses and
adversely affect our financial condition.
Technology security risks could potentially impact our financial results.
Some of our contract work includes data management and technology services associated with Social
Security Administration and military medical and health records. This exposes us to certain information and
technology security risks. If there was a security breach of sensitive data in our custody or for which we provide
services, we could possibly be held liable for damages to third parties related to such security breach and incur costs
to prevent future incidents. Costs associated with preventing or remediating information management security
breaches have not had a material adverse effect on our capital expenditures, earnings, or competitive position.
However, the occurrence of a future security breach event could potentially have such an adverse effect.
Environmental and pollution risks could potentially impact our financial results.
Some of our contract work includes the use of chemical solvents and the handling of hazardous materials to
maintain and refurbish vehicles and equipment. This exposes us to certain environmental and pollution risks. Costs
associated with preventing or remediating pollution clean-up efforts and environmental regulatory compliance have
not yet had a material adverse effect on our capital expenditures, earnings, or competitive position. However, the
occurrence of a future environmental or pollution event could potentially have such an adverse effect.
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. We
incurred charges against operating income of approximately $1.2 million in 2013 and $1.9 million in 2012
associated with the lease of warehouse facilities for our Seized Asset programs.
Our business could be adversely affected by government audits.
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 and any 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.
New accounting standards could result in changes to our methods of quantifying and recording accounting
transactions, and could affect our financial results and financial position.
10
Changes to generally accepted accounting principles in the United States (“GAAP”) arise from new and
revised guidance issued by the Financial Accounting Standards Board, the SEC, and others. The effects of such
changes may include prescribing an accounting method where none had been previously specified, prescribing a
single acceptable method of accounting from among several acceptable methods that currently exist, or revoking the
acceptability 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.
Certain contracts comprise a material portion of our backlog.
Contracts supporting work performed on our FMS Program and our U.S. Army Reserve vehicle and
equipment refurbishment work constitute a material portion of our backlog. Once funded, the likelihood of not
fulfilling the work requirements associated with our backlog is remote. However, this concentration of our backlog
in a few key contracts subjects us to risk of material adverse revenue disruptions if contractual or other issues
prevent or delay the fulfillment of work requirements associated with backlog on these key contracts.
ITEM 1B. Unresolved Staff Comments
None
ITEM 2. Properties
Our executive and administrative headquarters are located in a five-story building in Alexandria, Virginia,
with approximately 95,000 square feet of office space leased by us through April 2027.
We own five land parcels containing four buildings located in an industrial park in Somerset, Pennsylvania
that we use to conduct the operations of our subsidiary Wheeler Bros., Inc. These properties consist of
approximately 30 acres of land and buildings totaling approximately 210,000 square feet of office, engineering, and
warehouse space.
We also 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 also own and operate a facility in Texarkana, Arkansas consisting of approximately
10 acres of land and buildings totaling approximately 79,000 square feet. We use these three properties primarily to
provide refurbishment services for military equipment, storage and maintenance.
We also provide services and products from approximately 27 leased facilities located near customer sites
to facilitate communications and enhance program performance. These facilities are generally occupied under short-
term leases and currently include a total of approximately 900,000 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 locations outside of the United States, generally at foreign shipyards or U.S. military
installations.
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 claims, including legal proceedings, cannot be
predicted with certainty.
On or about May 24, 2012, four complaints were filed in the Circuit Court of the First Circuit, State of
Hawaii, by the estates of five deceased individuals and certain of their relatives against VSE and certain other
entities and individuals. The complaints allege, among other things, that the explosion of fireworks and diesel fuel
that injured and killed the five individuals on or about April 8, 2011 was caused by negligence, actions and
omissions of VSE and the other defendants and their employees, agents and representatives. The five deceased
11
plaintiffs were employees of Donaldson Enterprises, Inc., which was a vendor retained by VSE to warehouse, store
and dispose of fireworks and other explosives seized by the federal government from entities and persons illegally in
possession of the fireworks and other explosives. We had a prime contract with the U.S. Department of Treasury
(“Treasury”) to support the Treasury Executive Office for Asset Forfeiture to manage various seized assets,
including management and disposal of fireworks and other explosives seized by various federal government
agencies.
We have denied the allegations and, together with our insurance carriers, will aggressively defend the
proceedings. The litigation is in the early stages, but currently we do not anticipate that it will have a material
adverse effect on our results of operations or financial condition.
On or about March 8, 2013, a lawsuit, Anchorage v. Integrated Concepts and Research Corporation, et al.,
was filed in the Superior Court for the State of Alaska at Anchorage by the Municipality of Anchorage, Alaska
against our wholly owned subsidiary Integrated Concepts and Research Corporation (“ICRC”) and two former
subcontractors of ICRC. With respect to ICRC, the lawsuit asserts, among other things, breach of contract,
professional negligence and negligence in respect of work and services ICRC rendered on the Port of Anchorage
Intermodal Expansion Contract with the Maritime Administration, a federal agency with the United States
Department of Transportation. On or about April 10, 2013, ICRC removed the case to the United States District
Court for the District of Alaska. Because of the preliminary stage of this lawsuit, we cannot currently determine
whether the lawsuit will have a material adverse effect on our results of operations or financial condition.
Further, from time-to-time, government agencies investigate whether our operations are being conducted in
accordance with applicable contractual and 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.
12
ITEM 4(a). Executive Officers of Registrant
Our executive officers are listed below, as well as information concerning their age and positions held with
VSE. There were no family relationships among any of our executive officers. For executive officers who have
been with us less than five years, their principal occupations and business experience over the last five years are
provided. The executive officers are appointed annually to serve until the first meeting of VSE’s Board of Directors
(the “Board”) following the next annual meeting of stockholders and until their successors are elected and have
qualified, or until death, resignation or removal, whichever is sooner.
Name
Age Position with Registrant
Maurice A. Gauthier
66
Director, Chief Executive Officer, President and Chief Operating Officer
Harold J. Flammang, Jr. 62
President, International Group
John T. Harris
62
President, VSE’s subsidiary Akimeka, LLC
Thomas M. Kiernan
46
Vice President, General Counsel and Secretary
Thomas R. Loftus
58
Executive Vice President and Chief Financial Officer
Nancy Margolis
58
President, VSE’s subsidiary Energetics Incorporated
Donelle L. Moten
60
President, Federal Group
Chad Wheeler
39
President VSE’s subsidiary Wheeler Bros., Inc.
Mr. Harris was appointed President and Chief Operating Officer of Akimeka, LLC in August 2010
immediately following VSE’s acquisition of the company. Mr. Harris joined Akimeka LLC in 2001 as Chief
Operating Officer. Prior to that, he was president of JJA Enterprises, an independent consulting firm specializing in
acquisition, business and financial management, and business development services. Mr. Harris has a Bachelor of
Science degree from Middle Tennessee State University and an Master of Science degree in Healthcare
Administration from Southwest Texas State University. He also carries a Masters equivalent in International Affairs
from the Armed Forces Staff College in Norfolk, Virginia.
Mr. Wheeler was appointed President and Chief Operating Officer of Wheeler Bros., Inc. (“WBI”), in July
2013. He is involved in the executive management of day-to-day operations, government contract administration,
new business development, supply chain initiatives and facilities management. He serves as a member of the
operational board for WBI, and has played an active role at WBI since 1991. Previously, Mr. Wheeler assumed various
roles at WBI, including Senior Vice President of Operations, Senior Vice President of Sales and Marketing, and Marketing
and Sales Manager. While serving as Marketing and Sales Manager, Mr. Wheeler coordinated implementation of WBI’s
Managed Inventory Program which is used at the USPS’ Vehicle Maintenance Facilities throughout the country. Mr.
Wheeler graduated summa cum laude from Indiana University of Pennsylvania in 1998 with a degree in Marketing.
13
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
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
2012:
March 31
June 30
September 30
December 31
For the Year
2013:
March 31
June 30
September 30
December 31
For the Year
(b)
Holders
$27.14
25.64
24.99
25.27
$27.14
$25.93
41.09
49.12
52.20
$52.20
$22.85
20.76
21.77
20.91
$20.76
$22.14
25.00
42.05
42.08
$22.14
$0.070
0.080
0.080
0.080
$0.310
$0.080
0.090
0.090
0.090
$0.350
As of February 6, 2014, VSE common stock, par value $0.05 per share, was held by approximately 260
stockholders of record. The number of stockholders of record is not representative of the number of beneficial
holders because many of VSE’s shares are held by depositories, brokers or nominees.
(c)
Dividends
In 2012 cash dividends were declared quarterly at the annual rate of $0.28 per share through March 31,
2012, and at the annual rate of $0.32 per share commencing June 1, 2012.
In 2013 cash dividends were declared quarterly at the annual rate of $0.32 per share through March 31,
2013, and at the annual rate of $0.36 per share commencing June 1, 2013.
Pursuant to our bank loan agreement (see Note 7, Debt, 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 and have increased our dividend each year since 2004.
14
(d)
Certain Sales and Repurchases of VSE Common Stock
During the fiscal year covered by this Form 10-K, VSE did not sell any equity securities of VSE that were
not registered under the Securities Act of 1933, as amended. During the fourth quarter of the fiscal year covered by
this Form 10-K, no purchases of equity securities of VSE were made by or on behalf of VSE or any “affiliated
purchaser” (as defined in Exchange Act Rule 10b-18 (a)(3)).
(e)
Equity Compensation Plan Information
We have two compensation plans approved by our stockholders under which our equity securities are
authorized for issuance to employees and directors: (i) the VSE Corporation 2004 Non-Employee Directors Stock
Plan and (ii) the VSE Corporation 2006 Restricted Stock Plan. On May 3, 2011, the stockholders approved
amendments to the VSE Corporation 2006 Restricted Stock Plan extending the term thereof until May 3, 2016.
As of December 31, 2013, 69,238 shares of VSE common stock were available for future issuance under
the VSE Corporation 2004 Non-Employee Directors Stock Plan and 51,503 shares of VSE common stock were
available for future issuance under the VSE Corporation 2006 Restricted Stock Plan.
15
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 (The NASDAQ Global Select Market) on 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) our peer group.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among VSE Corporation, the NASDAQ Composite Index, and a Peer Group
$300
$250
$200
$150
$100
$50
$0
12/08
12/09
12/10
12/11
12/12
12/13
VSE Corporation
NASDAQ Composite
Peer Group
*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Performance Graph Table
VSE
NASDAQ Composite
Peer Group
2008
100
100
100
2009
115.60
144.88
102.15
2010
85.14
170.58
102.47
2011
63.25
171.30
91.48
2012
2013
64.67 127.94
199.99 283.39
95.53 146.84
16
ITEM 6. Selected Financial Data
(In thousands, except per share data)
Years ended December 31,
2013
2012
2011
2010
2009
Revenues
$471,638
$546,755
$580,762
$810,955
$974,202
Income from continuing operations
(Loss) income from discontinued operations
Net income
$23,990
(1,138)
$ 22,852
$27,364
(6,070)
$ 21,294
$20,190
362
$ 20,552
$23,505
182
$ 23,687
$23,408
616
$24,024
Basic earnings per share:
Income from continuing operations
(Loss) income from discontinued operations
Net income
Diluted earnings per share:
Income from continuing operations
(Loss) income from discontinued operations
Net income
Cash dividends per common share
$4.50
(0.21)
$4.29
$4.49
(0.21)
$4.28
$0.35
$5.18
(1.15)
$4.03
$5.15
(1.14)
$4.01
$0.31
$3.86
0.07
$ 3.93
$3.83
0.07
$3.90
$0.27
As of December 31,
$4.53
0.03
$4.56
$4.50
0.03
$4.53
$4.56
0.12
$4.68
$4.55
0.12
$4.67
$0.23
$ 0.195
Working capital
Total assets
Long-term debt
2013
2012
2011
2010
2009
$47,691
$64,976
$71,123
$54,569
$ 45,902
$380,529
$410,211
$454,512
$288,426
$253,990
$64,487
$116,377
$144,759
$11,111
$ -
Long-term lease obligations
$25,721
$27,435
$ 33,938
$20,258
$1,100
Stockholders' equity
$186,803
$164,335
$143,600
$123,776
$101,310
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.
17
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Customers and Services
We provide sustainment services for legacy systems and equipment and professional and technical services to
the U.S. Department of Defense ("DoD"), the United States Postal Service ("USPS"), federal civilian agencies, and
other customers. Our operations consist primarily of vehicle fleet parts, supply chain management, vehicle and
equipment maintenance and refurbishment, logistics, engineering, energy and environmental, IT solutions, health care
IT, and consulting services performed on a contract basis. Our services are performed for the United States
Government (the "government"), including DoD and various federal civilian agencies, and other clients. Our largest
customers are the DoD and the USPS. See Item 1 “Business – Contracts” on page 6 for revenues by customer.
Discontinued Operations
In December 2012, we decided to divest and sell certain assets of our subsidiary, Integrated Concepts and
Research Corporation (“ICRC”), thereby eliminating our Infrastructure Group. We acquired ICRC in 2007. ICRC
was engaged principally in providing engineering and transportation infrastructure services and construction
management services primarily to federal civilian agencies. ICRC’s largest contract was with the U.S. Department
of Transportation Maritime Administration (“MARAD”) for services performed on the Port of Anchorage
Intermodal Expansion Project in Alaska (the "PIEP"). The MARAD contract expired on May 31, 2012, when the
option year was not exercised. Upon evaluating the impact of the elimination of this PIEP program from ICRC’s
business base, we determined that expected financial results of our remaining construction management services
business would not justify our continuation of its operations. As of December 31, 2013, we had not completed a sale
of the ICRC assets and there is no assurance that we will succeed in selling the ICRC assets. Accordingly, we have
abandoned our operations of ICRC and have included in loss from discontinued operations, net of tax, a charge of
approximately $1 million related to the write-off of goodwill and accounts receivable for the quarter ended
December 31, 2013.
Organization and Segments
Our business is managed under operating groups consisting of one or more divisions or wholly owned
subsidiaries that perform our services. We have four reportable segments aligned with our management groups: 1)
Supply Chain Management; 2) International; 3) Federal; and 4) IT, Energy and Management Consulting.
Supply Chain Management Group – Our Supply Chain Management Group provides sourcing,
acquisition, scheduling, transportation, shipping, logistics, data management, and other services to assist our clients
with supply chain management efforts. This group consists of our Wheeler Bros., Inc. (“WBI”) subsidiary, acquired
in June 2011. Significant current work efforts for this group include WBI’s ongoing Managed Inventory Program
(“MIP”) that supplies vehicle parts for the USPS truck fleet and direct sales to other clients.
International Group – Our International Group provides engineering, industrial, logistics, maintenance,
information technology, fleet-wide ship and aircraft support, aircraft sustainment and maintenance, facility
operations, storage and disposal support for seized and forfeited general property programs, and foreign military
sales services to the U.S. military branches, government agencies, and other customers. This group provides its
services to the U.S. Navy, Department of Treasury, Air Force, Department of Justice, Bureau of Alcohol, Tobacco,
Firearms and Explosives (“ATF”), and other customers. Significant work efforts for this group include ongoing
assistance to the U.S. Navy in executing its Foreign Military Sales (“FMS”) Program for surface ships sold, leased
or granted to foreign countries, various task orders under the U.S. Air Force Contract Field Teams (“CFT”)
Program, and management of Department of Treasury and ATF seized and forfeited general property programs
(“Seized Asset Programs”).
Federal Group - Our Federal Group provides engineering, technical, management, and integrated logistics
support services to U.S. military branches, government agencies and other customers. These services include full life
cycle engineering, logistics, maintenance, field support, and refurbishment services to extend and enhance the life of
existing vehicles and equipment; comprehensive systems and software engineering, systems technical support,
configuration management, obsolescence management, prototyping services, technology insertion programs, and
18
technical documentation and data packages; and management and execution of government programs under large
multiple award contracts. This group provides its services to the U.S. Army, Army Reserve, Marine Corps, and other
customers. Significant current work efforts for this group include our ongoing U.S. Army Reserve vehicle
refurbishment program and various vehicle and equipment maintenance and sustainment programs for U.S. Army
commands. Significant work efforts in prior years included task orders performed under our U.S. Army CECOM
Rapid Response (“R2”) contract, which expired in 2011.
IT, Energy and Management Consulting Group – Our IT, Energy and Management Consulting Group
consists of our wholly owned subsidiaries Energetics Incorporated ("Energetics"), Akimeka, LLC ("Akimeka"), and
G&B Solutions, Inc. ("G&B"). This group provides technical and consulting services primarily to various DoD and
federal civilian government agencies, including the U.S. Energy, Homeland Security, Commerce, Interior, Labor,
Agriculture and Housing and Urban Development; the Social Security Administration; the Pension Benefit Guaranty
Corporation; the National Institutes of Health; customers in the military health system; and other government agencies
and commercial clients. Energetics provides technical, policy, business, and management support in areas of energy
modernization, clean and efficient energy, climate change mitigation, infrastructure protection, and measurement
technology. Effective January 1, 2013, the businesses of Akimeka and G&B were combined and we are in the process
of transitioning G&B’s work to Akimeka. Akimeka offers solutions in fields that include medical logistics, medical
command and control, e-health, information assurance, public safety, enterprise architecture development, information
assurance/business continuity, program and portfolio management, network IT services, systems design and
integration, quality assurance services, and product and process improvement services.
Concentration of Revenues
Source of Revenues
USPS MIP
FMS Program
U.S. Army Reserve
Other
Total Revenues
Management Outlook
(in thousands)
Years ended December 31,
2013
$142,147
94,950
60,162
174,379
$471,638
%
30
20
13
37
100
2012
$129,392
88,167
78,269
250,927
$546,755
%
24
16
14
46
100
2011
$ 73,753
100,021
62,848
344,140
$580,762
%
13
17
11
59
100
Our success with newer markets and services and the challenges we have experienced and continue to face
with our legacy markets and services has given us a clear direction for our future. Going forward, our growth
initiatives will focus on these more promising business offerings while we continue to defend and maintain our
presence in our legacy business offerings in anticipation of a future rebound for these markets.
Our newer markets and service offerings include managed inventory services centered on vehicle fleet
sustainment offered by our Supply Chain Management Group. WBI’s USPS MIP provides ongoing mission-critical
support to the USPS, which provides us with a steady revenue and earnings source. This program does not rely on
tax funded government spending, as it is primarily self-funded through revenues generated through USPS business
operations. This is our largest source of revenue and we have seen some growth in this program. Additionally,
WBI's supply chain and inventory management competencies provide us opportunities to further diversify our
customer base to new client markets. We are actively marketing these service offerings to new client targets, and are
currently beginning to service other vehicle fleets that have potential for further development. Our success in
expanding our markets for these service offerings has encouraged us to focus our strategic direction on this part of
our business and direct financial and management resources toward such efforts.
The challenges faced by our legacy business offerings in recent years continued in 2013, resulting in
revenue declines. We have seen declines in some of our DoD and IT revenues due to delays in government contract
awards and funding, and to the expiration of programs without follow-on contract awards to continue the work. In
response to our uncertain legacy business environment, we took actions to reduce our indirect costs to achieve and
retain balance with our workload in 2013. We made staff reductions and took other actions that resulted in
approximately $6 million of reduced indirect labor and related costs in 2013. We will continue to assess the need for
further reductions to remain competitive and profitable as we go forward.
19
Despite the challenges, we have key programs centered on our legacy systems and equipment sustainment
heritage that continue to provide a substantial portion of our business. These programs include our International
Group’s U.S. Navy FMS Program, and our Federal Group’s U.S. Army Reserve vehicle refurbishment work.
Our International Group’s U.S. Navy FMS Program has been our second largest source of revenue in 2012
and 2013. This program does not rely on tax funded government spending as it is largely funded by foreign
government clients. FMS Program revenues for these two years have been generated primarily from follow on
technical services work with very little ship reactivation and transfer work. Due to extended legislation delays in the
U.S. Congress, our traditional mainstay of ship reactivation and transfer work continues to be deferred. Our contract
supporting this work gives us potential contract coverage of up to $1.5 billion over a five-year period beginning in
January 2012. This level of contract coverage, combined with the eligibility, upon approval, of multiple U.S. Navy
ships for transfer to foreign government clients, presents us with an opportunity for revenue growth from this
program if and when a Naval Vessel Transfer Act is passed by Congress.
FMS Program follow on technical services work has generated relatively consistent revenues. These
services are provided to a number of foreign client countries, the largest of which is the Egyptian Navy. In July
2013, we evacuated our workforce from Egypt due to significant domestic and political unrest in that country.
Support services for the Egyptian Navy have continued to be performed at other locations, but revenue levels
associated with the Egyptian Navy support will be lower than during the time our workforce was located in Egypt.
Our revenues from Egyptian Navy support declined by approximately $4 million in 2013 compared to 2012. The
operating profit margin on this work is consistent with the reported profit margin of our International Group. We
cannot predict if or when or for what period of time any portion of our workforce will be able to return to Egypt, or
the longer range impact that the political situation in Egypt will have on our Egyptian Navy support program.
Our Federal Group’s vehicle and equipment refurbishment work for the U.S. Army Reserve has been our
third largest source of revenue in 2012 and 2013. Our U.S. Army Reserve contract was re-competed to transition the
work from a General Services Administration (“GSA”) contract to multiple Army contracts. The GSA contract
expired in July 2013 prior to the award of the Army successor follow-on awards. Consequently, we suspended
operations for this work and placed our workforce of approximately 700 employees for this program on furlough. In
August and September 2013, we were awarded three new task orders on our existing Army contracts to continue the
suspended work. While work on the new task orders continues to be primarily performed by our employees, it is
supplemented by small business subcontractor labor. The majority of our furloughed workforce on this program was
reinstated, and going forward the number of our employees plus subcontractor employees performing on this
program is expected to approximate the number of employees furloughed when the work was suspended. The
suspension of work on this program had an adverse effect on our results of operations in 2013. This program
generated approximately $60 million of revenue in 2013 as compared to $78 million of revenue in 2012.
VSE has been the prime contractor for the U.S. Department of Treasury Executive Office for Asset
Forfeiture (TEOAF) general property program since 2006. We received notice in September 2013 that the follow-on
contract for this work was awarded to a competitor. We are continuing to perform work on this program until its
expected transition to the successor contractor in the first half of 2014. The majority of the work should be
transferred by the end of March 2014. This program generated approximately $36 million of revenue in 2013.
Our cash flow remains strong and during 2013 we made progress in reducing our bank debt. We expect to
be able to continue reducing our debt at a rate that will position us to consider a variety of options to increase
stockholder value.
Bookings and Funded Backlog
Our revenues depend on contract funding (“bookings”), and bookings generally occur when contract
funding documentation is received. For our revenues that depend on bookings arising from the receipt of contract
funding documentation, funded contract backlog is an indicator of potential future revenues. While bookings and
funded contract backlog generally result in revenues, occasionally we will have funded contract backlog that expires
or is de-obligated upon contract completion and does not generate revenue.
WBI’s revenues are driven by maintenance schedules and the rate and timing of parts failure on customer
vehicles, and WBI bookings occur at the time of sale instead of the receipt of contract funding documentation.
Accordingly, WBI does not generally have funded contract backlog and it is not an indicator of potential future
20
revenues for WBI. Therefore, total funded contract backlog is less of an indicator of our overall potential future
revenue than in years prior to our acquisition of WBI.
A summary of our bookings and revenues for the years ended December 31, 2013, 2012 and 2011, and
funded contract backlog as of December 31, 2013, 2012 and 2011 is as follows (in millions).
Bookings
Revenues
Funded Backlog
Critical Accounting Policies
2013
$501
$472
$236
(in millions)
2012
$539
$547
$250
2011
$493
$581
$282
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 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 are earned.
Our FMS Program contract is a cost plus award fee contract. This contract has 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 that is 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. Due to such timing, and to fluctuations in the level of revenues, profits as a percentage of revenues on
this contract will fluctuate from period to period.
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 are recorded based
on a price per unit as units are delivered.
Substantially all of the WBI’s revenues result from the Management Inventory Program (“MIP”) that
supplies vehicle parts to clients. We recognize revenue from the sale of vehicle parts when the product is used by the
customer.
21
Revenues by contract type for the years ended December 31 were as follows (in thousands):
Contract Type
Cost-type
Time and materials
Fixed-price
2013
Revenues
$119,350
95,099
257,189
$471,638
%
25.3
20.2
54.5
100.0
2012
Revenues
$124,908
197,369
224,478
$546,755
%
22.8
36.1
41.1
100.0
2011
Revenues
$149,382
266,106
165,274
$580,762
%
25.7
45.8
28.5
100.0
A significant portion of our time and materials revenues in 2011 were from our R2 contract, which expired
in January 2011. WBI revenues are classified as fixed-price revenue.
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 as of December
31, 2013 include approximately $5 million for which we had not received formalized funding, which includes
approximately $3.9 million of risk funding associated with our expired MARAD contract. We believe that we are
entitled to reimbursement and expect to receive all of this funding.
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.
Goodwill and Intangible Assets
Goodwill is subject to a review for impairment at least annually. We perform this review at the beginning of
our fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. The impairment assessment requires us to estimate the fair value of our reporting units and involves the
use of subjective assumptions. We estimated the fair value of ICRC and Akimeka using a weighting of fair values
derived from the income approach, market approach, and comparative transactions approach with the heaviest
weighting placed on the income approach. Under the income approach, we calculate the fair value of a reporting unit
based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of
revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount
rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the
characteristics of the business and the projected cash flows.
In the fourth quarter of 2013, we performed our annual goodwill impairment analysis for each of our reporting
units. The results of the impairment analysis indicated that the estimated fair values of our reporting units substantially
exceeded their carrying values.
As of December 31, 2013, we have no intangible assets with indefinite lives and we had an aggregate of
approximately $92 million of goodwill associated with our acquisitions.
22
Results of Operations
Revenues
(in thousands)
Years ended December 31,
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
2013
$154,702
146,908
95,435
74,593
%
32.8
31.2
20.2
15.8
2012
$143,014
167,193
142,323
94,225
%
26.2
30.6
26.0
17.2
2011
$ 83,052
206,746
184,147
106,817
%
14.3
35.6
31.7
18.4
$471,638
100.0
$546,755
100.0
$580,762
100.0
Our revenues decreased by approximately $75 million or 14% for the year ended December 31, 2013 as
compared to the prior year. The change in revenues for this period resulted from a decrease in our Federal Group of
approximately $47 million; a decrease in our International Group of approximately $20 million and a decrease in our
IT, Energy, and Management Consulting Group of approximately $20 million. These decreases were partially offset
by an increase in our Supply Chain Management Group of approximately $12 million.
Our revenues decreased by approximately $34 million or 6% for the year ended December 31, 2012 as
compared to the prior year. The change in revenues for this period resulted from a decrease in our Federal Group of
approximately $42 million; a decrease in our International Group of approximately $40 million and a decrease in our
IT, Energy, and Management Consulting Group of approximately $12 million. These decreases were partially offset
by an increase in our Supply Chain Management Group of approximately $60 million, attributable primarily to the
inclusion of WBI in our operating results for a full year in 2012 as compared to a partial year in 2011. Certain
warehousing operations included in our Federal Group operating results for 2013 were previously included in our
Supply Chain Management Group in 2012 and have been reclassified to the Federal Group for comparative
purposes.
Revenues
Contract costs
Selling, general and administrative expenses
Impairment of goodwill and intangible assets
Operating income
Interest expense, net
Income before income taxes
Provision for income taxes
Consolidated Statements of Income
(in thousands)
Years ended December 31,
2013
%
$471,638
424,250
100.0
90.0
2012
$546,755
490,686
%
100.0
89.8
2011
$580,762
539,472
%
100.0
92.9
3,285
-
44,103
5,789
38,314
14,324
0.7
0.0
9.3
1.2
8.1
3.0
3,968
1,025
51,076
7,224
43,852
16,488
0.7
0.2
9.3
1.3
8.0
3.0
5,213
0
36,077
3,685
32,392
12,202
Income from continuing operations
23,990
5.1
27,364
5.0
20,190
(Loss) income from discontinued operations,
net of tax
(1,138)
(0.2)
(6,070)
(1.1)
362
Net income
$ 22,852
4.9
$ 21,294
3.9
$ 20,552
23
0.9
0.0
6.2
0.6
5.6
2.1
3.5
0.1
3.6
Contract costs consist primarily of direct costs including labor, inventory, material, and supplies used in the
performance of our work and delivery of our products, and indirect costs associated with these direct costs. These
costs will generally increase or decrease in conjunction with our level of work or products sold and associated
revenues.
Our contract costs decreased by approximately $66 million or 14% in 2013 as compared to 2012. The
decrease resulted from a decrease in our Federal Group of approximately $39 million, a decrease in our International
Group of approximately $21 million, a decrease in our IT, Energy, and Management Consulting Group of
approximately $17 million, and an increase in our Supply Chain Management Group of approximately $9 million.
Our contract costs decreased by approximately $49 million or 9% in 2012 as compared to 2011. The
decrease resulted from a decrease in our Federal Group of approximately $46 million, a decrease in our International
Group of approximately $40 million, and a decrease in our IT, Energy and Management Consulting Group of
approximately $12 million. These decreases were partially offset by an increase in our Supply Chain Management
Group of approximately $52 million, attributable primarily to the inclusion of WBI in our operating results for a full
year in 2012 as compared to a partial year in 2011.
Selling, general and administrative expenses consist primarily of costs and expenses that are not chargeable
or reimbursable on our operating unit contracts. This includes costs associated with the acquisition of WBI in 2011,
cost associated with a work share agreement with a subcontractor in 2011 and 2012, and legal fees associated with
protested contract awards.
Our operating income decreased by approximately $7 million or 14% in 2013 as compared to 2012. The
decrease resulted primarily from a decrease in operating income of approximately $8 million in our Federal Group
and a decrease in operating income in our IT, Energy and Management Consulting Group of approximately $2.8
million. These decreases were partially offset by an increase in operating income in our Supply Chain Management
Group of approximately $3.3 million and an increase in operating income in our International Group of
approximately $1 million.
Our operating income increased by approximately $15 million or 42% in 2012 as compared to 2011. The
increase resulted primarily from: 1) increased operating income in our Supply Chain Management Group of
approximately $7.7 million, attributable primarily to the inclusion of WBI in our operating results for a full year in
2012 as compared to a partial year in 2011; 2) increased operating income of approximately $4.4 million in our
Federal Group; and 3) increased operating income in our International Group of approximately $731 thousand.
These increases were partially offset by decreased operating income in our IT, Energy and Management Consulting
Group of approximately $551 thousand.
Interest expense decreased in 2013 as compared to 2012 due to reductions in our level of borrowing as we
paid down our bank loan during 2013. Due to the impending expiration of our lease and planned demolition of our
headquarters facility after more than four decades of occupancy, we relocated our executive and administrative
headquarters in 2012. Lease payments for our new executive and administrative headquarters office building began
in May 2012. Terms of our lease agreement have required us to capitalize the construction costs of the leased
building. We are also required to classify a significant portion of the monthly expense associated with the lease as
depreciation and interest expense, instead of rent expense normally associated with an operating lease. The
combined expenses will be a greater monthly amount than the comparable operating rent expense would be in the
beginning years of the lease term, and a lesser amount in the later years of the lease. Interest expense increased in
2012 as compared to the prior year due to the interest associated with the headquarters office building lease and to
an increase in interest associated with a full year of bank loan financing in 2012 as compared to a partial year of
bank loan financing in 2011 related to our acquisition of WBI in 2011.
Provision for Income Taxes
Our effective tax rate from continuing operations was 37.4% for 2013, 37.6% for 2012 and 37.7% for 2011.
Our tax rate is affected by discrete items that may occur in any given year, but may not be consistent from year to
year. In addition to state income taxes, certain tax credits and other items had an impact on the difference between
our statutory U.S. Federal income tax rate of 35% and our effective tax rate. The work opportunity tax credit and a
state educational improvement tax credit provided a significant benefit to our tax rates of 3.9% and 3.7% for the
years ended December 31, 2013 and 2012, respectively.
24
Supply Chain Management Group Results
The results of operations for our Supply Chain Management Group are (in thousands):
Revenues
Contract costs
Selling, general and administrative expenses
Operating income
2013
$154,702
126,869
534
$ 27,299
Years ended December 31,
%
100.0
82.0
0.4
17.6
2012
%
$143,014
118,146
854
24,014
100.0
82.6
0.6
16.8
2011
$83,052
66,124
613
16,315
%
100.0
79.6
0.8
19.6
Revenues for our Supply Chain Management Group increased approximately $12 million or 8% for 2013,
as compared to the prior year. The revenue increase resulted primarily from an increase in WBI’s USPS MIP
revenues of approximately $11.4 million. Contract costs for our Supply Chain Management Group increased by
approximately $9 million or 7% for 2013 as compared to the prior year. Operating income for our Supply Chain
Management Group increased by approximately $3 million or 14% for 2013 as compared to the prior year. Contract
cost, operating income and profit percentage increases resulted primarily from the increase in USPS MIP revenues.
Operating income for this segment in 2013 was decreased by approximately $183 thousand for an increase to the
accrued earn-out obligations associated with our acquisition of WBI.
Vehicle parts and equipment sold by WBI to DoD clients are included in our Supply Chain Management
Group results presented above for all years. These sales to DoD clients were included in our Federal Group results
in our quarterly reports for 2013. Revenues for vehicle parts and equipment sold to DoD were approximately $11
million for 2013.
Our Supply Chain Management Group was established and began contributing to our operating results
upon our acquisition of WBI in June 2011. Accordingly, we had a full year of operating results for this segment in
2012 compared to a partial year in 2011, and therefore financial performance comparisons for these years are not
meaningful. Operating income for this segment in 2012 was decreased by approximately $802 thousand for an
increase to the accrued earn-out obligations associated with our acquisition of WBI.
International Group Results
The results of operations for our International Group are (in thousands):
Revenues
Contract costs
Selling, general and administrative expenses
Operating income
2013
$146,908
138,857
982
$ 7,069
Years ended December 31,
%
100.0
94.5
0.7
4.8
2012
%
$167,193
159,967
1,174
$ 6,052
100.0
95.7
0.7
3.6
2011
$206,746
200,309
1,116
$ 5,321
%
100.0
96.9
0.5
2.6
Revenues for our International Group decreased approximately $20 million or 12% for 2013, as compared
to the prior year. The decrease in revenues for 2013 was primarily attributable to a decline of approximately $18
million in pass-through work provided on engineering and technical services task orders, and to lesser declines in
revenues from our CFT Program services. These declines were partially offset by increases in revenues on our FMS
and Seized Asset Programs.
Revenues for our International Group decreased approximately $40 million or 19% for 2012, as compared
to the prior year. The decrease in revenues for 2012 was primarily attributable to a decline of approximately $17
million in pass-through work provided on engineering and technical services task orders, decreases on our FMS
Program of approximately $12 million, and a decline of approximately $7 million on our CFT program work.
Contract costs for our International Group decreased approximately $21 million or 13% for 2013, as
compared to the prior year. The decrease in contract costs for 2013 was primarily attributable to a decline of
approximately $18 million in pass-through work provided on engineering and technical services task orders, and to
lesser declines in revenues from our CFT Program services. These declines were partially offset by increases on our
FMS and Seized Asset Programs.
25
Contract costs for our International Group decreased approximately $40 million or 20% for 2012, as
compared to the prior year. The decrease in contract costs for 2012 was primarily attributable to a decline of
approximately $17 million in pass-through work provided on engineering and technical services task orders,
decreases in contract costs on our FMS Program of approximately $10 million, and a decline of approximately $7
million on our CFT program work.
Operating income for our International Group increased by approximately $1 million or 17% for 2013, as
compared to the prior year. Our operating income was reduced for these two years by: 1) charges of approximately
$1.9 million in 2012 and approximately $1.2 million in 2013 associated with idle warehouse facilities; 2) a charge of
$485 thousand in December 2013 for a Department of Treasury claim for flood damage to vehicles; and 3) a loss of
$750 thousand in 2012 associated with the final payment on a work share agreement with a subcontractor, all of
which were associated with our Seized Asset Programs. The charges for the idle warehouse facilities will not
continue after 2013. The year over year change in operating income was also impacted by an increase in operating
income in 2013 associated with the increased revenues on our Seized Asset Programs and the timing of award fee
recognition on our FMS Program. Profit margins in this group can vary due to fluctuations in contract activity and
the timing of contract award fees associated with our FMS Program. Award fee evaluations on our FMS Program
occur three times per year and we recognize award fee revenue and income in the period we receive contractual
notification of the award. We recognized award fee revenue and income in 2013 from three award fee notifications.
Due to a catch up of delays in government contractual notification, we recognized revenue and income from four
award fees in 2012, including approximately $1.1 million in award fee revenue and income that would typically
have been recognized in the prior year. This effectively increased 2012 operating income associated with this
program as compared to the typical pattern.
Operating income for our International Group increased by approximately $731 thousand or 14% for 2012,
as compared to the prior year. We recognized four award fees in our operating results in 2012 and two award fees in
2011 on this program. 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, revenue and income for this award fee was
recognized in 2012 instead of 2011. This effectively decreased 2011 operating income and increased 2012 operating
income as compared to the typical pattern associated with this program, and was the primary reason for the increase
in operating income for this group in 2012. Operating income was reduced in 2012 by charges of approximately
$1.9 million associated with idle warehouse facilities on our Seized Asset Programs.
Federal Group Results
The results of operations for our Federal Group are (in thousands):
Years ended December 31,
Revenues
Contract costs
Selling, general and administrative expenses
Operating income
2013
$95,435
92,681
354
$ 2,400
%
2012
%
100.0 $142,323
97.1
131,269
636
0.4
2.5 $ 10,418
100.0
92.2
0.5
7.3
2011
$184,147
177,745
378
$ 6,024
%
100.0
96.5
0.2
3.3
Revenues for our Federal Group decreased approximately $47 million or 33% for the year ended 2013, as
compared to the prior year. The decrease in revenues is primarily due to the expiration of a contract at the end of
2012 to provide mechanical maintenance services for Mine Resistance Ambush Protected (“MRAP”) vehicles and
systems in Kuwait and to a reduction in revenues from our vehicle and equipment refurbishment work for the U.S.
Army Reserve due to the interruption of contract coverage in the third quarter of 2013. The reduction in revenues
due to the expiration of the MRAP contract was approximately $26 million. The reduction in revenues from our
vehicle and equipment refurbishment work for the U.S. Army Reserve was approximately $18 million.
Revenues for our Federal Group decreased approximately $42 million or 23% for 2012, as compared to the
prior year. The revenue decrease resulted primarily from a decrease in revenues associated with our expiring R2
contract of approximately $72 million. This decrease was partially offset by an increase in work on our U.S. Army
Reserve vehicle refurbishment program of approximately $15 million and increases in other work of approximately
$13 million.
26
Contract costs for our Federal Group decreased approximately $39 million or 29% for 2013, as compared
to the prior year. The decrease in contract costs is primarily due to the expiration of the MRAP contract and to a
reduction in contract costs from our U.S. Army Reserve vehicle refurbishment program. The reduction in contract
costs due to the expiration of the MRAP contract was approximately $24 million. The reduction in contract costs
from our vehicle and equipment refurbishment work for the U.S. Army Reserve was approximately $13 million.
Contract costs for our Federal Group decreased approximately $46 million or 26% for 2012, as compared
to the prior year. The decrease resulted primarily from a decrease in contract costs associated with our expiring R2
contract of approximately $72 million. This decrease was partially offset by increases in costs associated with work
on our U.S. Army Reserve vehicle refurbishment program of approximately $11 million and increases in other work.
Operating income for our Federal Group decreased by approximately $8 million or 77% for 2013 as
compared to the prior year. The decrease resulted primarily from a reduction of profits on our U.S. Army Reserve
program of approximately $5 million due to the reduction in revenues on this program and to the continuation of
fixed infrastructure costs during the time that work was suspended, and to a decrease of approximately $2 million in
profits associated with the expiration of the MRAP contract. The decrease in the profit percentage in 2013 as
compared to 2012 is also primarily due to the continuation of fixed infrastructure costs while work was suspended
under the U.S. Army Reserve program.
Operating income for our Federal Group increased by approximately $4.4 million or 73% for 2012 as
compared to the prior year. The increase resulted primarily from an increase in profits of approximately $4 million
associated with the increase in work on our U. S. Army Reserve vehicle refurbishment program. The increase in the
profit percentage in 2012 as compared to 2011 is primarily due to a decrease in the lower margin subcontract work
performed on our R2 contract that ended in early 2011.
IT, Energy and Management Consulting Group Results
The results of operations for our IT, Energy and Management Consulting Group are (in thousands):
Years ended December 31,
Revenues
Contract costs
Selling, general and administrative expenses
Operating income
2013
$74,593
65,359
173
$ 9,061
%
100.0
87.6
0.2
12.2
2012
$94,225
82,085
324
$11,816
%
2011
$106,817
93,850
600
$ 12,367
100.0
87.1
0.4
12.5
%
100.0
87.9
0.6
11.5
Revenues for our IT, Energy and Management Consulting Group decreased approximately $20 million or
21% for 2013, as compared to the prior year. Contract costs for our IT, Energy and Management Consulting Group
decreased approximately $17 million or 20% for 2013, as compared to the prior year. The decreases in revenues and
contract costs were due primarily to a decrease in services performed due to contract expirations and a decline in
services ordered by clients on continuing contracts. Operating income for this segment decreased approximately
$2.8 million, or 23% for 2013, as compared to the prior year. The decrease in operating income is primarily
attributable to a reduction of $5.1 million in the accrued earn-out obligation associated with our acquisition of
Akimeka that increased prior year operating income. There was no earn-out obligation adjustment in 2013. Without
the prior year earn-out obligation adjustment, operating income for 2013 would be higher than in the prior year due
to improved operating and cost efficiencies, including those associated with combining the operations of Akimeka
and G&B.
Revenues for our IT, Energy and Management Consulting Group decreased approximately $13 million or
12% for 2012, as compared to the prior year. Contract costs for our IT, Energy and Management Consulting Group
decreased approximately $12 million or 13% for 2012, as compared to the prior year. The decreases in revenues and
contract costs were due primarily to a general decline in services ordered by clients. Operating income for this
segment decreased approximately $551 thousand, or 4% for 2012, as compared to the prior year. The year over year
changes in operating income are attributable to a decrease in profits associated with the revenue declines and a
charge for impairment of acquisition related intangible assets for Akimeka, offset by increases to operating income
from reductions in the accrued earn-out obligations associated with our acquisition of Akimeka. Operating income
increases from reductions of our accrued earn-out liability for Akimeka were approximately $5.1 million for 2012,
compared to approximately $2.7 million for the prior year. The charge for impairment of acquisition related
27
intangible assets for Akimeka for 2012 was approximately $1 million, compared to no impairment charges in the
prior year.
Financial Condition
Our financial condition did not change materially in 2013. We used our positive cash flow to reduce our
bank debt by approximately $50 million in 2013. 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 $1.3 million during 2013.
Cash provided by operating activities decreased by approximately $3.2 million in 2013 as compared to
2012. The change is attributable to a decrease of approximately $1.2 million due to changes in the levels of
operating assets and liabilities; a decrease of approximately $3.6 million in depreciation and amortization and other
non-cash operating activities; and an increase of approximately $1.6 million in cash provided by net income. Our
largest operating assets are our accounts receivable and inventories. Our largest operating liabilities are our accounts
payable and accrued expenses. 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. Our levels of inventories and accrued expenses tend
to vary in accordance with our levels revenues and services performed.
Cash used in investing activities decreased approximately $21 million in 2013 as compared to 2012. This
was primarily due to nonrecurring events in 2012, including cash used of approximately $9 million for capital
investments related to the move of our corporate headquarters offices in May 2012 and approximately $9 million to
purchase office, warehouse and distribution facilities that support our WBI operations in December 2012.
Cash used in financing activities increased approximately $20 million in 2013 as compared to 2012. This
was primarily due to an increase of approximately $26 million in repayments on our bank loan.
Cash provided by operating activities increased by approximately $25 million in 2012 as compared to
2011. The change is attributable to an increase of approximately $14 million due to changes in the levels of
operating assets and liabilities; an increase of approximately $11 million in depreciation and amortization and other
non-cash operating activities, including impairments of goodwill and other intangible assets of approximately $9
million; and an increase of approximately $741 thousand in cash provided by net income.
Cash used in investing activities decreased approximately $156 million in 2012 as compared to 2011. This
was primarily due to cash used for our acquisition of WBI of approximately $175 million in 2011.
Cash used in financing activities was approximately $33 million in 2012 compared to cash provided by
financing activities of approximately $142 million for 2011. This difference was primarily due to bank borrowing to
finance our acquisition of WBI in 2011.
We paid quarterly cash dividends totaling approximately $1.9 million or $0.34 per share during 2013.
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 and have increased our dividend each year since 2004.
28
Liquidity
Our internal sources of liquidity are primarily from operating activities, specifically from changes in the
level of revenues and associated accounts receivable and accounts payable, and from profitability. Significant
increases or decreases in revenues and accounts receivable and accounts payable can impact our liquidity. Our
accounts receivable and accounts payable levels can be affected by changes in the level of the work we perform, by
the timing of large materials purchases and subcontractor efforts used in our contracts, and by government delays in
the award of contractual coverage and funding and payments. Government funding delays can cause delays in our
ability to invoice for revenues earned, resulting in a negative impact on our days sales outstanding.
We also purchase property and equipment and invest in expansion, improvement, and maintenance of our
operational and administrative facilities. In 2012, we made approximately $9 million in capital investments related
to the move of our corporate headquarters offices in May 2012 and in December 2012 we used approximately $9
million to purchase office, warehouse and distribution facilities that support our WBI operations. From time to time,
we may also invest in the acquisition of other companies. Our acquisition of WBI in 2011 required a significant use
of our cash.
Our external financing consists of a loan agreement with a group of banks. This loan agreement expires in
June 2016 and consists of a term loan, revolving loans, and letters of credit.
The term loan requires quarterly installment payments. Our scheduled term loan payments after December
31, 2013 are $25 million in 2014 and $34.4 million in 2015. The amount of term loan borrowings outstanding as of
December 31, 2013 was approximately $59.4 million.
The maximum amount of credit available to us from the banking group for revolving loans and letters of
credit as of December 31, 2013 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 $30.3 million in revolving loan amounts outstanding and $573 thousand of letters of credit
outstanding as of December 31, 2013. During 2013, the highest outstanding revolving loan amount was $54.5
million and the lowest was $23.9 million. 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. As of December 31, 2013, the LIBOR base margin is
2.00% and the base rate base margin is 0.25%. The base margins increase or decrease in increments as our Total
Funded Debt/EBITDA Ratio increases or decreases.
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, 2013, interest rates on portions of our outstanding debt
ranged from 2.16% to 3.62%, and the effective interest rate on our aggregate outstanding debt was 3.07%.
The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive
covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations.
Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, a minimum Fixed Charge Coverage
Ratio, and a minimum Asset Coverage Ratio, which increases over time. We were in compliance with required
ratios and other terms and conditions at December 31, 2013.
29
Total Funded Debt/EBITDA Ratio
Current Maximum Ratio
2.50 to 1
Fixed Charge Coverage Ratio
Asset Coverage Ratio
Minimum Ratio
1.20 to 1
Minimum Ratio
0.90 to 1
We currently do not use public debt security financing.
Contractual Obligations
Our contractual obligations as of December 31, 2013 are (in thousands):
Actual Ratio
1.44 to 1
Actual Ratio
1.41 to 1
Actual Ratio
1.30 to 1
Contractual Obligations
Bank loan debt
Operating leases, net of non-cancelable
sublease income
Corporate headquarters lease
Purchase obligations
Total
Payments Due by Period
Total
$89,721
12,317
61,417
4,423
$167,878
Less than
1 year
$25,000
5,934
3,868
1,797
$36,599
1-3 years
$64,721
4-5 years
$ -
4,610
8,089
2,221
$79,641
1,773
8,557
348
$10,678
After
5 years
$ -
-
40,903
57
$40,960
Estimated cash requirements for interest on our bank loan debt are approximately $1.9 million for 2014 and
$570 thousand for 2015.
Operating lease commitments are primarily for 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.
We have a 15-year lease agreement whereby lease payments began in May of 2012 for executive and
administrative headquarters space. Terms of our lease agreement have required us to capitalize the construction
costs of the leased building and account for the lease upon occupancy in May 2012 under the finance method of
lease accounting rules.
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 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, buildings 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.
30
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 we have employed an interest rate hedge to fix the rate on a
portion of our outstanding borrowings. The resulting fixed rate on this portion of our debt is higher than the variable
rate and has increased our net effective rate, but gives us protection against 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 pay an effective rate of 1.615% plus our base margin through June 2014.
The amount of swapped term loan debt outstanding as of December 31, 2013 is $51 million.
31
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, 2013 and 2012
Consolidated Statements of Income for the years ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the years ended
December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Page
33
34
35
36
37
38
39
32
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, 2013 and 2012, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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, 2013, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 Framework) and our report dated March 6, 2014 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 6, 2014
33
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
Current assets of discontinued operations
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
Current liabilities of discontinued operations
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
As of December 31,
2013
2012
$ 220
78,387
39,315
863
10,641
-
129,426
57,738
82,257
92,052
2,545
16,511
$380,529
$ 24,837
31,757
24,661
480
-
81,735
64,487
11,454
25,721
9,062
1,267
193,726
$ 1,501
90,621
41,555
767
8,641
2,890
145,975
62,468
92,421
92,052
2,099
15,196
$410,211
$ 23,274
30,063
26,688
423
551
80,999
116,377
10,684
27,435
9,098
1,283
245,876
Stockholders’ equity:
Common stock, par value $0.05 per share, authorized 15,000,000 shares;
issued and outstanding 5,333,077 and 5,293,316 respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
267
19,139
167,598
(201)
186,803
$380,529
265
18,193
146,614
(737)
164,335
$410,211
The accompanying notes are an integral part of these financial statements.
34
VSE Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share amounts)
Revenues:
Services
Products
Total revenues
Contract costs
Services
Products
Total contract costs
Selling, general and administrative expenses
Impairment of intangible assets
Operating income
Interest expense, net
For the years ended December 31,
2012
2011
2013
$314,306
157,332
471,638
$398,682
148,073
546,755
$ 490,078
90,684
580,762
295,223
129,027
424,250
3,285
-
368,540
122,146
490,686
3,968
1,025
466,481
72,991
539,472
5,213
-
44,103
51,076
36,077
5,789
7,224
3,685
Income from continuing operations before income taxes
38,314
43,852
32,392
Provision for income taxes
14,324
16,488
12,202
Income from continuing operations
(Loss) income from discontinued operations, net of tax
23,990
(1,138)
27,364
(6,070)
20,190
362
Net income
$ 22,852
$ 21,294
$ 20,552
Basic earnings per share:
Income from continuing operations
(Loss) income from discontinued operations
Net income
$ 4.50
(0.21)
$ 4.29
$ 5.18
(1.15)
$ 4.03
$ 3.86
0.07
$ 3.93
Basic weighted average shares outstanding
5,329,208
5,282,047
5,232,055
Diluted earnings per share:
Income from continuing operations
(Loss) income from discontinued operations
Net income
$ 4.49
(0.21)
$ 4.28
$ 5.15
(1.14)
$ 4.01
$ 3.83
0.07
$ 3.90
Diluted weighted average shares outstanding
5,343,267
5,309,862
5,267,857
The accompanying notes are an integral part of these financial statements.
35
VSE Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
For the years ended December 31,
2013
2012
2011
Net income
Change in fair value of interest rate swap
agreements, net of tax
Comprehensive income
$22,852
536
$23,388
$21,294
$20,552
(45)
$21,249
(692)
$19,860
The accompanying notes are an integral part of these financial statements.
36
VSE Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands except per share data)
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
Net income
Stock-based compensation
Change in fair value of interest rate swap
agreements, net of tax
Dividends declared ($0.31)
Balance at December 31, 2012
Net income
Stock-based compensation
Change in fair value of interest rate swap
agreements, net of tax
Dividends declared ($0.35)
Balance at December 31, 2013
Common Stock
Shares
5,194
-
53
Amount
$260
-
2
Additional
Paid-In
Capital
$15,692
-
1,377
Accumulated
Other
Retained
Earnings
$107,824
20,552
-
Comprehensive
Income (Loss)
$ -
-
-
Total
Stockholders’
Equity
$123,776
20,552
1,379
-
-
5,247
-
46
-
-
5,293
-
40
-
-
5,333
-
-
262
-
3
-
-
265
-
2
-
-
$267
-
-
17,069
-
1,124
-
-
18,193
-
946
-
-
$19,139
-
(1,415)
126,961
21,294
-
-
(1,641)
146,614
22,852
-
-
(1,868)
$167,598
(692)
-
(692)
-
-
(45)
-
(737)
-
-
536
-
$(201)
(692)
(1,415)
143,600
21,294
1,127
(45)
(1,641)
164,335
22,852
948
536
(1,868)
$186,803
The accompanying notes are an integral part of these financial statements.
37
VSE Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Impairment of goodwill and intangible assets
Depreciation and amortization
Loss on sale of property and equipment
Deferred taxes
Stock-based compensation
Earn-out obligation adjustment
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
For the years ended December 31,
2012
2011
2013
$ 22,852
$ 21,294
$ 20,552
790
20,016
246
(874)
1,576
183
14,130
2,240
(3,798)
1,922
(843)
(1,826)
(16)
8,953
21,162
-
(1,253)
1,076
(4,337)
25,051
435
5,938
(17,279)
(1,719)
(506)
992
-
15,099
-
1,283
1,427
(2,486)
51,323
(4,758)
(3,420)
(31,596)
(12,745)
(91)
108
Net cash provided by operating activities
56,598
59,807
34,696
Cash flows from investing activities:
Purchases of property and equipment
Cash paid for acquisitions, net of cash acquired
(4,416)
-
(20,863)
(4,607)
(6,635)
(174,945)
Net cash used in investing activities
(4,416)
(25,470)
(181,580)
Cash flows from financing activities:
Borrowings on loan arrangement
Repayments on loan arrangement
Earn-out obligation payments
Payments on capital lease obligations
Payment of taxes for equity transactions
Payment of debt financing costs
Dividends paid
290,137
(340,627)
(180)
(725)
(257)
-
(1,811)
269,388
(293,409)
(6,787)
(562)
(332)
-
(1,585)
471,303
(324,848)
(1,384)
-
(393)
(1,747)
(1,360)
Net cash (used in) provided by financing activities
(53,463)
(33,287)
141,571
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(1,281)
1,501
$ 220
1,050
451
$ 1,501
(5,313)
5,764
$ 451
Supplemental cash flow disclosures (in thousands):
Cash paid for:
Interest
Income taxes
$ 4,192
$15,638
$ 5,512
$10,686
$ 3,149
$12,625
The accompanying notes are an integral part of these financial statements.
38
VSE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
(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 operations consist of vehicle fleet and equipment sustainment services, including supply chain
management services, and diversified technical services, including logistics, engineering, IT solutions, health care
IT, and consulting services performed on a contract basis. Our services are performed for the United States
Government (the "government"), including the United States Department of Defense (“DoD”), United States Postal
Service (“USPS”), and various federal civilian agencies, and other clients.
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 subsidiaries are Energetics Incorporated (“Energetics”), G&B Solutions, Inc.
(“G&B”), Akimeka, LLC (“Akimeka”) and Wheeler Bros., Inc. (“WBI”). All intercompany transactions have been
eliminated in consolidation. These consolidated financial statements also account for the classification of the Infrastructure
Group as a result of discontinued operations of our subsidiary Integrated Concepts and Research Corporation (“ICRC”) and
therefore any financial impact of such group has been presented as discontinued operations in the 2013, 2012 and 2011
reporting periods.
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, recoverability of
goodwill and intangible assets and earn-out obligations related to acquisitions consummated after January 1, 2009.
Reclassifications
Certain amounts from the prior year have been reclassified to conform to the current year presentation.
Such reclassifications were not material.
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, Stock-Based Compensation Plans, for further discussion of our stock-based compensation plans and related
activity.
Earnings Per Share
Basic earnings per share (“EPS”) have been computed by dividing net income by the weighted average
number of shares of common stock outstanding during each period. Shares issued during the period are weighted for
39
the portion of the period that they were outstanding. Our calculation of diluted earnings per common share includes
the dilutive effects for the assumed vesting of restricted stock awards.
During the first quarter of 2012, we determined that our restricted stock awards should be included in our
diluted weighted average common shares outstanding.
Basic weighted average common shares outstanding
Effect of dilutive shares
Diluted weighted average common shares outstanding
Cash and Cash Equivalents
2013
5,329,208
14,059
5,343,267
Years Ended December 31,
2012
5,282,047
27,815
5,309,862
2011
5,232,055
35,802
5,267,857
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, furniture, other
equipment is provided principally by the straight-line method over periods of 3 to 15 years. Depreciation of
buildings and land improvements is provided by the straight-line method over periods of approximately 15 to 20
years. Amortization of leasehold improvements is provided by the straight-line method over the lesser of their useful
life or the remaining term of the lease.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash,
cash equivalents and trade receivables. Contracts with the government, either as a prime or subcontractor,
accounted for approximately 99% of revenues for each of the years ended December 31, 2013, 2012, and 2011. 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 debt,
approximate book value.
Revenues
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 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 are earned.
Our FMS Program contract is a cost plus award fee contract. This contract has 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 that is 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. Due to such timing, and to fluctuations in the level of revenues, profits as a percentage of revenues on
this contract will fluctuate from period to period.
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
40
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 the WBI’s revenues result from a Managed Inventory Program (“MIP”) that supplies
vehicle parts to clients. We recognize revenue from the sale of vehicle parts when the product is used by 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 2006 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 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 employees based on overall corporate
performance. We maintain the underlying assets of the DSC Plan in a Rabbi Trust and changes in asset values are
included in contract costs on the accompanying consolidated statements of income. We 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, 2013, 2012, and 2011 was approximately $1.4 million, $1.2
million, and $1.4 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.
During 2012, impairment charges of approximately $1 million were recorded for the intangible assets related to the
acquisition of Akimeka (see Note 6, Goodwill and Intangible Assets). Also during 2012, an impairment charge of
approximately $1.9 million was recorded for the intangible assets related to our acquisition of ICRC (see Note 6,
41
Goodwill and Intangible Assets). No impairment charges related to intangible assets, other than goodwill, were
recorded in the year ended December 31, 2013.
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.
Goodwill
We review goodwill for impairment annually at the beginning of the fourth quarter and whenever events or
changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment
test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying
value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further
testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second
step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair
value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible
assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the
reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill
is less than the carrying value, the difference is recorded as an impairment loss. Based on our annual goodwill
impairment analysis we performed during the fourth quarter of 2013, we found no impairment in the carrying value
of goodwill.
During 2013, goodwill of $790 thousand included in current assets of discontinued operations was impaired
(See Note 16, Discontinued Operations). Based on the results of the impairment analyses performed during 2012,
goodwill impairment charges of approximately $6 million were recorded related to our ICRC acquisition (see Note
6, Goodwill and Intangible Assets).
Intangibles
Intangible assets consist of the value of contract-related intangible assets, trade names and acquired
technologies acquired in acquisitions (see Notes 5, Acquisitions and 6, Goodwill and Intangible Assets). 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 8 to 12 years with a weighted-average life of approximately 11.8
years as of December 31, 2013. We have three trade names that are amortized over an estimated useful life of
approximately 8.4 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 11.4 years as
of December 31, 2013.
42
(2) Receivables
The components of receivables as of December 31, 2013 and 2012 were as follows (in thousands):
Billed
Unbilled (principally December work billed in January)
Total receivables, net
2013
$ 36,703
41,684
$ 78,387
2012
$ 41,078
49,543
$ 90,621
The unbilled balance includes certain costs for work performed at risk but which we believe will be funded
by the government totaling approximately $5 million and $7.1 million as of December 31, 2013, and 2012,
respectively. We expect to invoice substantially all unbilled receivables during 2014.
(3) Other Current Assets and Other Assets
At December 31, 2013 and 2012, other current assets primarily consisted of vendor advances, prepaid rents
and deposits, prepaid income taxes, software licenses and prepaid maintenance agreements. At December 31, 2013
and 2012, 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, 2013 and 2012 (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
2013
$45,418
24,933
16,604
3,567
3,410
93,932
(36,194)
$57,738
2012
$44,428
28,704
16,897
6,248
3,310
99,587
(37,119)
$62,468
Depreciation and amortization expense for property and equipment for the years ended December 31, 2013,
2012 and 2011 was approximately $9 million, $9.2 million and $6.9 million, respectively.
(5) Acquisitions
Wheeler Bros., Inc.
On June 6, 2011, we acquired WBI, a supply chain management company that supplies vehicle parts to the
USPS and DoD. We may be required to make total payments of up to $40 million in respect of a four-year post-
closing period ending June 30, 2015 if WBI achieves certain financial performance targets during such four-year
period. WBI achieved required financial performance targets for the first year earn-out period ended June 30, 2012
and, as a result, the sellers were paid approximately $7.1 million in September 2012 in respect of WBI’s
performance during the first earn-out period. WBI achieved required performance targets for the second year earn-
out period ended June 30, 2013 and, as a result, the sellers were paid $219 thousand in September 2013 in respect of
WBI’s performance during the second earn-out period. Included in earn-out obligation on the December 31, 2013
balance sheet is a liability of approximately $9.1 million for WBI, which represents our best estimate of the present
value of our remaining earn-out obligation. Changes in the fair value of the earn-out obligations are recognized in
earnings in the period of change through settlement.
43
Akimeka, LLC
On August 19, 2010, we acquired Akimeka, a health services information technology consulting company
serving the government market.
Upon acquisition, potential additional payments (“earn-out”) were payable to the sellers of up to $11
million in respect of a three-year post-closing period if Akimeka achieved certain financial performance targets
during the earn-out period. Because Akimeka did not achieve the required financial performance targets for the
years ended December 31, 2012 and 2011, no earn-out payments were made. Because Akimeka did not achieve the
required financial performance targets for the final one-year earn-out period ended December 31, 2013, no liability
for such final earn-out period was recorded. Changes in the fair value of the earn-out obligations are recognized in
earnings in the period of change through settlement.
(6) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2013 and 2012 are as follows (in thousands):
Balance as of December 31, 2011
Impairment loss
Reclassification to current assets of
discontinued operations
Balance as of December 31, 2012
Balance as of December 31, 2013
Supply Chain
Management
$ 61,169
-
-
$ 61,169
$ 61,169
IT, Energy and
Management
Consulting
$ 30,883
-
-
$ 30,883
$ 30,883
Infrastructure
$ 6,827
(6,037)
(790)
$ -
$ -
Total
$ 98,879
(6,037)
(790)
$ 92,052
$ 92,052
During 2012, we tested goodwill for impairment in the third quarter and at our October 1 annual testing
date. The first step of our interim testing performed during the third quarter indicated a potential impairment in
goodwill. We performed the second step and recorded a goodwill impairment charge for ICRC of $2.4 million
during the third quarter of 2012. The outcome of the test for ICRC was impacted primarily by the May 31, 2012
contract expiration of the Port of Anchorage Intermodal Expansion Project contract in Alaska. Akimeka’s goodwill
was not impaired. During the step two allocation of the fair values to assets and liabilities of ICRC and Akimeka, we
determined the carrying values of the contract-related intangible assets of ICRC and Akimeka and the trade name of
ICRC were impaired. As a result, we recorded an impairment charge of approximately $1.1 million related to the
contract-related intangible assets of ICRC and Akimeka and $420 thousand related to the trade name ICRC.
The results of our annual impairment testing indicated that the fair value of our reporting units exceeded
their carrying values as of October 1, 2012.
As a result of the decision made in December 2012 to divest ICRC, we determined the fair value of ICRC’s
goodwill and intangible assets based on an expected sales price as compared to our estimation of the net assets to be
sold at closing less costs to sell and, as such, recorded an additional goodwill impairment charge of approximately
$3.6 million, contract and customer-related intangible asset impairment charge of $333 thousand, and trade name
intangible asset impairment charge of $1.1 million during the fourth quarter of 2012. Accumulated goodwill
impairment as of December 31, 2012 was approximately $6 million which is included in loss from discontinued
operations, net of tax, on the Consolidated Statements of Income. Accumulated intangible asset impairments as of
December 31, 2012 for ICRC of approximately $1.9 million are included in loss from discontinued operations, net
of tax and for Akimeka are included in impairment of goodwill and intangible assets on our Consolidated Statements
of Income. Goodwill and intangible assets annual and interim valuations are based on unobservable inputs and as
such, are considered level 3 fair value measurements.
Due to our decision to abandon our ICRC operations in the fourth quarter of 2013, we wrote-off ICRC’s
remaining goodwill. The loss from discontinued operations for the year ended December 31, 2013 includes a write-
off of $790 thousand for ICRC goodwill.
44
Intangible assets consist of the value of contract-related assets, technologies and trade names acquired in
the acquisitions of ICRC, G&B, Akimeka and WBI. The impairment charges recorded in 2012 reduced the value of
the ICRC trade name to zero at December 31, 2012. The G&B trade name is being amortized over two years
beginning in 2012. The trade names acquired in the Akimeka and WBI acquisitions are being amortized over nine
years. Amortization expense for the years ended December 31, 2013, 2012 and 2011 was approximately $10.2
million, $11.2 million and $7.9 million, respectively.
Intangible assets consisted of the following (in thousands):
December 31, 2013
Contract and customer-related
Acquired technologies
Trade names – amortizable
Total
December 31, 2012
Contract and customer-related
Acquired technologies
Trade names – amortizable
Trade names – indefinite lived
Total
Accumulated
Amortization
Accumulated
Impairment
Loss
Net Intangible
Assets
$(26,287)
(2,896)
(3,339)
$(32,522)
$(21,923)
(1,769)
(1,855)
-
$(25,547)
$(1,025)
-
-
$(1,025)
$(1,416)
-
-
(1,500)
$(2,916)
$ 65,992
9,504
6,761
$ 82,257
$ 73,545
10,631
8,245
-
$ 92,421
Cost
$ 93,304
12,400
10,100
$115,804
$ 96,884
12,400
10,100
1,500
$120,884
Future expected amortization of intangible assets is as follows for the years ending December 31, (in
thousands):
2014
2015
2016
2017
2018
Thereafter
Total
Amortization
$10,048
9,439
9,255
9,255
9,255
35,005
$82,257
(7) Debt
We have a loan agreement with a group of banks that was entered into in June 2011 to fund our acquisition of
Wheeler Bros., Inc (“WBI”) and provide working capital for our continuing operations. The loan agreement, which
expires in June 2016, consists of a term loan facility and a revolving loan facility that also provides us with letters of
credit. Financing costs associated with the loan inception of approximately $1.7 million were capitalized and are
being amortized over the five-year life of the loan.
The term loan requires quarterly installment payments. Our scheduled term loan payments after December
31, 2013 are $25 million in 2014 and $34.4 million in 2015. The amount of term loan borrowings outstanding as of
December 31, 2013 was approximately $59.4 million. The amount of term loan borrowings outstanding as of
December 31, 2012 was approximately $92.2 million.
The maximum amount of credit available to us from the banking group for revolving loans and letters of
credit as of December 31, 2013 was $125 million. The loan agreement provides that we may elect to increase this
maximum to $175 million. Under the loan agreement terms, 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 $30.3 million in revolving loan amounts and $573 thousand of
letters of credit outstanding as of December 31, 2013. We had approximately $48 million in revolving loan amounts
outstanding and $1.3 million of letters of credit outstanding as of December 31, 2012.
45
Total bank loan borrowed funds outstanding as of December 31, 2013, including term loan borrowings and
revolving loan borrowings, were approximately $89.7 million. Total bank loan borrowed funds outstanding as of
December 31, 2012 were $140.2 million. The fair value of outstanding debt under our bank loan facilities as of
December 31, 2013 approximates its carrying value using Level 2 inputs based on market data on companies with a
corporate rating similar to ours that have recently priced credit facilities.
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. As of December 31, 2013, the LIBOR base margin is 2.00%
and the base rate base margin is 0.25%. The base margins increase or decrease in increments as our Total Funded
Debt/EBITDA Ratio increases or decreases.
We have employed an interest rate hedge to fix the rate on a portion of our outstanding borrowings. In July
2011, we purchased a three-year amortizing LIBOR interest rate swap on the term loan debt for 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 repayments. With the swap in place, we pay an
effective rate of 1.615% plus our base margin through June 2014. The amount of swapped term loan debt outstanding
as of December 31, 2013 is $51 million.
After taking into account the impact of hedging instruments, as of December 31, 2013, interest rates on
portions of our outstanding debt ranged from 2.16% to 3.62%, and the effective interest rate on our aggregate
outstanding debt was 3.07%.
Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $3.7 million
and $5.2 million during the years ended December 31, 2013 and 2012, respectively.
The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive
covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations.
Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, a minimum Fixed Charge Coverage
Ratio, and a minimum Asset Coverage Ratio, which increases over time. We were in compliance with required
ratios and other terms and conditions at December 31, 2013.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist primarily of accrued compensation and benefits of
approximately $17.6 million and $19.5 million as of December 31, 2013 and 2012, respectively. The accrued
compensation and benefits amounts include bonus, salaries and related payroll taxes, vacation and deferred
compensation.
(9) Stock-Based Compensation Plans
(a) Restricted Stock Plan
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, 2013, 51,503 shares of our common stock were available for issuance under the 2006 Plan.
Non-employee directors were awarded 16,100 and 10,800 shares of restricted stock on January 2, 2013 and
January 3, 2012, respectively, under the 2006 Plan. The grant-date fair value of these restricted stock grants was
$25.68 per share and $25.22 per share for the shares awarded in 2013 and 2012, respectively. The shares issued
vested immediately and cannot be sold, transferred, pledged or assigned before the second anniversary of the grant
46
date. Compensation expense related to these grants was approximately $413 thousand and $272 thousand during
2013 and 2012, respectively.
In January of every year since 2007, we have notified certain employees that they are eligible to receive
awards under our 2006 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 2014 for the 2013 awards. The date of award determination for the
2012 awards and the 2011 awards was March 1, 2013 and March 2, 2012, 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 1, 2013, the employees eligible for the 2012 awards, 2011 awards and 2010 awards received
a total of 23,661 shares of common stock. The grant-date fair value of these awards was $22.58 per share.
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
2013
$ 1,163
413
$ 1,576
2012
$ 650
272
$ 922
2011
$ 882
347
$1,229
Employees are permitted to forfeit a certain number of shares to cover their personal tax liability for
restricted stock awards. We paid approximately $257 thousand, $332 thousand and $393 thousand, to cover this
liability in the years ended December 31, 2013, 2012 and 2011, respectively. These payments are classified as
financing cash flows on the consolidated statements of cash flows. As of December 31, 2013, the total compensation
cost related to non-vested awards not yet recognized was approximately $891 thousand with a weighted average
amortization period of 2.1 years.
(b) 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, 2013, 2012 and 2011 (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
2013
$1,576
(606)
2012
$1,076
(414)
2011
$1,427
(546)
$ 970
$ 662
$ 881
(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 2009.
47
We file consolidated federal income tax returns that include all of our subsidiaries. The components of the
provision for income taxes from continuing operations for the years ended December 31, 2013, 2012, and 2011 are
as follows (in thousands):
Current
Federal
State
Deferred
Federal
State
Provision for income taxes
2013
2012
2011
$12,654
2,544
15,198
(848)
(26)
(874)
$14,324
$14,782
2,959
17,741
(999)
(254)
(1,253)
$16,488
$ 9,272
1,647
10,919
1,188
95
1,283
$12,202
The differences between the amount of tax computed at the federal statutory rate of 35% and the provision
for income taxes from continuing operations 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
2013
$13,410
1,630
(685)
(31)
$14,324
2012
$15,348
1,901
(522)
(239)
$16,488
2011
$11,343
1,233
(221)
(153)
$12,202
The tax effect of temporary differences representing deferred tax assets and liabilities as of December 31,
2013 and 2012, 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
Goodwill and intangible assets
Total gross deferred tax liabilities
Net deferred tax assets
(11) Commitments and Contingencies
(a) Leases and Other Commitments
2013
2012
$6,805
1,489
510
125
326
603
409
-
10,267
$5,947
1,533
386
456
328
262
424
61
9,397
(3,237)
(1,921)
(1,701)
(6,859)
(3,288)
(2,746)
(497)
(6,531)
$3,408
$2,866
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
48
expense is recognized on a straight-line basis for rent agreements having escalating rent terms. Lease expense for the
years ended December 31, 2013, 2012 and 2011 were as follows (in thousands):
2013
2012
2011
Operating
Lease
Expense
$9,826
$11,544
$11,787
Sublease
Income
$531
$671
$770
Net
Expense
$9,295
$10,873
$11,017
Future minimum annual non-cancelable commitments as of December 31, 2013 are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
Lease
Commitments
$ 6,901
2,781
2,035
1,458
315
-
$13,490
Operating Leases
Sublease
Income
Net
Commitments
$967
206
-
-
-
-
$1,173
$ 5,934
2,575
2,035
1,458
315
-
$12,317
We signed a lease in 2009 for a building to serve as our headquarters with a rent commencement date of
May 1, 2012. Certain terms in the lease agreement resulted in the capitalization of construction costs due to specific
accounting rules. We recorded a construction asset and corresponding long-term liability of approximately $27.3
million on May 1, 2012, which represents the construction costs incurred by the landlord as of that date. According
to accounting rules, we have forms of continuing involvement that require us to account for this transaction as a
financing lease upon commencement of the lease period. The building and building improvements will remain on
our consolidated balance sheet and will be depreciated over a 15-year period. Payments made under the lease
agreement are applied to service the financing obligation and interest expense based on an imputed interest rate
amortizing the obligation over the life of the lease agreement.
Future minimum annual non-cancelable commitments under our new headquarters lease as of December
31, 2013, which are not included in the table above, are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
(b) Contingencies
Lease Commitments
$ 3,868
3,985
4,104
4,221
4,336
40,903
$61,417
We are one of the primary defendants in a multiple plaintiff wrongful death action in Hawaii related to a
fireworks explosion that occurred in April 2011 at a facility operated by one of our subcontractors, which resulted in
the death of five subcontractor employees. The litigation is in the early stages, but at this time we believe it is not
probable that it will have a material adverse effect on our results of operations or financial position.
On or about March 8, 2013, a lawsuit, Anchorage v. Integrated Concepts and Research Corporation, et al.,
was filed in the Superior Court for the State of Alaska at Anchorage by the Municipality of Anchorage, Alaska
against our wholly owned subsidiary Integrated Concepts and Research Corporation (“ICRC”) and two former
subcontractors of ICRC. With respect to ICRC, the lawsuit asserts, among other things, breach of contract,
professional negligence and negligence in respect of work and services ICRC rendered on the Port of Anchorage
Intermodal Expansion Contract with the Maritime Administration, a federal agency with the United States
49
Department of Transportation. On or about April 10, 2013, ICRC removed the case to the United States District
Court for the District of Alaska. Because of the preliminary stage of this lawsuit, we cannot currently determine
whether the lawsuit will have a material adverse effect on our results of operations or financial position.
We have, in the normal course of business, certain claims against us and against other parties and we may
be subject to various governmental investigations. In our opinion, the resolution of these claims and investigations
will not have a material adverse effect on our results of operations or financial position. However, the results of any
legal proceedings cannot be predicted with certainty.
(12) Business Segments and Customer Information
Segment Information
Management of our business operations is conducted under four reportable operating segments:
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.
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.
International Group - Our International Group provides engineering, industrial, logistics and foreign military sales
services to the U.S. military and other government agencies.
IT, Energy and Management Consulting Group – Our IT, Energy and Management Consulting Group provides technical and
consulting services primarily to various civilian government agencies.
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
operating income. Net sales of our business segments exclude intersegment sales as these activities are eliminated in
consolidation. Beginning with the second quarter of 2013, we no longer allocate interest to our reportable segments.
50
Our segment information is as follows (in thousands):
For the years ended December 31,
Revenues
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
Total revenues
Operating income:
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
Corporate
Operating income
Depreciation and amortization expense:
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
Total depreciation and amortization
Capital expenditures:
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
Corporate
Total capital expenditures
2013
2012
2011
$154,702
146,908
95,435
74,593
$471,638
$ 27,299
7,069
2,400
9,061
(1,726)
$ 44,103
$ 4,265
7,323
6,033
2,387
$ 20,008
$ 895
236
1,211
71
2,003
$ 4,416
$143,014
167,193
142,323
94,225
$546,755
$ 24,014
6,052
10,418
11,816
(1,224)
$ 51,076
$ 9,891
3,035
3,116
3,753
$ 19,795
$ 341
83
763
53
19,623
$20,863
$ 83,052
206,746
184,147
106,817
$580,762
$16,315
5,321
6,024
12,367
(3,950)
$ 36,077
$ 5,402
1,903
2,906
3,256
$ 13,467
$ 113
573
547
236
5,166
$ 6,635
Total assets:
Supply Chain Management Group
International Group
Federal Group
IT, Energy and Management Consulting Group
Corporate
Total assets
December 31,
2013
2012
$185,976
33,355
20,846
57,610
82,742
$380,529
$192,892
31,485
30,452
64,502
90,880
$410,211
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. Vehicle parts and equipment sold by WBI to DoD clients, which were included in our Federal Group
results in our quarterly reports for 2013, are now included in our Supply Chain Management Group results above for
all years. Also, certain warehousing operations included in our Federal Group operating results for 2013 were
previously included in our Supply Chain Management Group in 2012 and have been reclassified to the Federal
Group for comparative purposes.
Customer Information
The majority of our revenues are derived from contract services performed for DoD agencies or federal
civilian agencies. The USPS, U.S. Navy, U.S. Army and U.S. Army Reserve are our largest customers. Other
51
significant customers include the Department of Treasury, the Department of Energy and the Department of Interior.
Our customers also include various other government agencies and commercial entities. Our revenue by customer is
as follows for the years ended December 31, (in thousands):
Customer
U.S. Navy
U.S. Army/Army Reserve
U.S. Air Force
Total - DoD
U.S. Postal Service
Department of Treasury
Department of Energy
Department of Interior
Other government
Total – Federal civilian agencies
Commercial
Total
Revenues by Customer
(dollars in thousands)
Years ended December 31,
%
26.1
21.6
0.8
48.5
2013
$123,307
101,736
3,625
228,668
2012
$120,867
182,412
6,963
310,242
142,203
35,929
20,124
1,545
40,919
240,720
2,250
30.1
7.6
4.3
0.3
8.7
51.0
0.5
130,866
33,369
20,898
16,884
32,231
234,248
2,265
%
22.1
33.4
1.3
56.8
23.9
6.1
3.8
3.1
5.9
42.8
0.4
2011
$140,551
231,615
11,971
384,137
75,964
41,434
23,010
24,254
28,160
192,822
3,803
%
24.2
39.9
2.0
66.1
13.1
7.1
4.0
4.2
4.8
33.2
0.7
$471,638
100.0
$546,755
100.0
$580,762
100.0
We do not measure revenue or profit by product or service lines, either for internal management or external
financial reporting purposes, because it would be impractical to do so. Products offered and services performed are
determined by contract requirements and the types of products and services provided for one contract bear no
relation to similar products and services provided on another contract. Products and services provided vary when
new contracts begin or current contracts expire. In many cases, more than one product or service is provided under a
contract or contract task order. Accordingly, cost and revenue tracking is designed to best serve contract
requirements and segregating costs and revenues by product or service lines in situations for which it is not required
would be difficult and costly to both us and our customers.
(13) Capital Stock
Common Stock
Our common stock has a par value of $0.05 per share. Proceeds from the 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 defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as
amended, that cover substantially all of our employees. Under the provisions of our 401(k) plan, employees’ eligible
contributions are matched at rates specified in the plan documents. Our expense associated with this plan was
approximately $3.7 million, $4.9 million and $4.6 million for the years ended December 31, 2013, 2012, and 2011,
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, 2013, 2012, and 2011 was $175 thousand, $217
thousand, and $360 thousand, respectively.
52
(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.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring
basis as of December 31, 2013 and December 31, 2012 and the level they fall within the fair value hierarchy (in
thousands):
Amounts Recorded
at Fair Value
Financial Statement
Classification
Non-COLI assets held in DSC Plan
Other assets
Fair Value
Hierarchy
Level 1
Interest rate swaps
Accrued expenses
Level 2
December 31,
2013
December 31,
2012
$198
$326
$120
$ 1,194
Earn-out obligations - long-term
Earn-out obligations
Level 3
$9,062
$9,098
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 $326 thousand and $1.2 million at December 31, 2013 and 2012, respectively,
has been reported in accrued expenses. The offset, net of an income tax effect of approximately $125 thousand and
$457 thousand, is included in accumulated other comprehensive loss in the accompanying consolidated balance
sheet as of December 31, 2013 and 2012, respectively. 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.
The Akimeka acquisition required additional payments to be made to the sellers of up to $11 million over a
three-year post-closing period ended December 31, 2013 if Akimeka achieved certain financial performance targets
during such period. Because Akimeka did not achieve the required financial performance targets for the year ended
December 31, 2013, no earn-out was due. See Note 5, Acquisitions, for the contingent earn-out obligations resulting
from the WBI acquisition. WBI earned approximately $219 thousand and $7.1 million based on its financial
performance for the earn-out periods ended June 30, 2013 and 2012, respectively. 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.
No liability was recorded for the fair value of the Akimeka earn-out obligation at December 31, 2013 and December
31, 2012. There was no change in the fair value of the Akimeka earn-out obligation during 2013. The fair value of
the WBI earn-out obligation increased $183 thousand and $802 thousand for the years ended December 31, 2013
and 2012, respectively.
53
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, 2012
Earn-out payments
Fair value adjustment included in earnings
Balance as of December 31, 2013
Long-term obligation
$ 9,098
(219)
183
$ 9,062
(16) Discontinued Operations
In December 2012, we decided to divest and sell certain assets of our subsidiary ICRC and eliminate our
Infrastructure Group. ICRC’s largest contract was with the U.S. Department of Transportation Maritime
Administration (“MARAD”) for services performed on the Port of Anchorage Intermodal Expansion Project in
Alaska (the "PIEP"). The MARAD contract expired on May 31, 2012, when the option year was not exercised by
MARAD. Upon evaluating the impact of the elimination of this program from ICRC’s business base, we determined
that expected financial results of the remaining construction management services business would not justify our
continuation of such business. As of December 31, 2013, we have not completed a sale of the ICRC assets and there
is no assurance that we will succeed in selling the ICRC assets. Accordingly, we have abandoned our operations of
ICRC and have included in loss from discontinued operations, net of tax, a charge of approximately $1 million in the
fourth quarter of 2013 related to the write-off of goodwill and accounts receivables.
Revenues and costs of ICRC have been reclassified as discontinued operations for all periods presented.
The major categories included in discontinued operations on the consolidated statements of income are as follows
(in thousands):
Revenues
Year ended December 31,
2013
$225
2012
$23,128
2011
$37,830
(Loss) income before income taxes
Income tax (benefit)/expense
(Loss) income from discontinued operations, net
$(1,818)
(680)
$(1,138)
$(9,728)
(3,658)
$(6,070)
$580
218
$362
54
(17) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2013 and 2012, in thousands, except earnings per
share. The 2012 quarter data for revenues, contract costs, operating income, and income (loss) from continuing and
discontinued operations varies from the amounts previously reported on our 2012 quarterly reports on Form 10-Qs
as a result of ICRC being classified as discontinued operations in the fourth quarter of 2012.
Revenues
Contract costs
Operating income
Income from continuing operations
Loss from discontinued operations
Net income
Basic earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income
Basic weighted average shares outstanding
Diluted earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income
Diluted weighted average shares outstanding
Revenues
Contract costs
Operating income
Income from continuing operations
Loss income from discontinued operations
Net income
Basic earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income
Basic weighted average shares outstanding
Diluted earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income
Diluted weighted average shares outstanding
2013 Quarters
1st
2nd
3rd
4th
$119,157
$108,783
$9,942
$5,271
$(13)
$5,258
$0.99
$0.00
$0.99
5,317
$0.99
$0.00
$0.99
5,329
$119,062
$105,555
$12,701
$6,963
$(101)
$6,862
$1.31
$(0.02)
$1.29
5,333
$1.30
$(0.02)
$1.28
5,340
$111,069
$101,026
$9,460
$5,327
$(1)
$5,326
$1.00
$0.00
$1.00
5,333
$1.00
$0.00
$1.00
5,339
$122,350
$108,886
$12,000
$6,429
$(1,023)
$5,406
$1.20
$(0.19)
$1.01
5,333
$1.20
$(0.19)
$1.01
5,364
2012 Quarters
1st
2nd
3rd
4th
$135,671
$121,741
$12,552
$6,631
$(336)
$6,295
$1.25
$(0.06)
$1.19
5,287
$1.24
$(0.06)
$1.18
5,312
$134,237
$117,798
$ 14,267
$7,486
$(1,522)
$5,964
$1.42
$(0.29)
$1.13
5,287
$1.41
$(0.29)
$1.12
5,311
$136,860
$124,201
$11,764
$6,478
$(4,111)
$2,367
$1.23
$(0.78)
$0.45
5,238
$1.22
$(0.77)
$0.45
5,323
$139,987
$126,946
$12,493
$6,769
$(101)
$6,668
$1.29
$(0.02)
$1.27
5,267
$1.28
$(0.02)
$1.26
5,293
55
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,
2013 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (1992 Framework). 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, 2013. 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 Form 10-K.
Change in Internal Controls
During the fourth quarter of fiscal year 2013, 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.
56
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,
2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 Framework) (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, 2013, 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, 2013 and 2012,
and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2013 of VSE Corporation and Subsidiaries and our report
dated March 6, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
March 6, 2014
57
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, 2013
in respect to the Annual Meeting of VSE’s stockholders scheduled to be held on May 6, 2014 (the “Proxy
Statement”).
ITEM 10. Directors, Executive Officers and Corporate Governance
See Item 4 under the caption “Executive Officers of 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(e) 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 and Financial Statement Schedules
1. Financial Statements
PART IV
The consolidated financial statements are listed under Item 8 of this Form 10-K.
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
See “Exhibit Index” hereinafter contained and incorporated by reference.
58
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 6, 2014
By:
VSE CORPORATION
/s/ M. A. Gauthier
M. A. Gauthier
Director, Chief Executive Officer,
President and Chief Operating
Officer
59
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Maurice A. Gauthier
Maurice A. Gauthier
/s/ Thomas R. Loftus
Thomas R. Loftus
/s/ Clifford M. Kendall
Clifford M. Kendall
/s/ Calvin S. Koonce
Calvin S. Koonce
/s/ James F. Lafond
James F. Lafond
/s/ David M. Osnos
David M. Osnos
/s/ Bonnie K. Wachtel
Bonnie K. Wachtel
/s/ Ralph E. Eberhart
Ralph E. Eberhart
/s/ Jack C. Stultz
Jack C. Stultz
/s/ John E. Potter
John E. Potter
Director, Chief Executive
Officer, President and
Chief Operating Officer
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
March 6, 2014
March 6, 2014
Chairman/Director
March 6, 2014
March 6, 2014
March 6, 2014
March 6, 2014
March 6, 2014
March 6, 2014
March 6, 2014
March 6, 2014
Director
Director
Director
Director
Director
Director
Director
60
Reference No.
Per Item 601 of
Regulation S-K
EXHIBIT INDEX
Description of Exhibit
Exhibit No.
In this Form 10-K
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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 July 1, 2004,
by and between VSE Corporation and Thomas R.
Loftus (Exhibit 10.1 to Form 10-Q dated July 30,
2004)
Amended and Restated Employment Agreement
dated as of December 6, 2013, by and between VSE
Corporation and Maurice G. Gauthier (Form 8-K dated
December 9, 2013)
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)
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)
*
*
* +
* +
* +
* +
* +
* +
61
* +
Exhibit 13
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
*
10.8
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
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.
62
SUBSIDIARIES OF THE REGISTRANT
The following is a listing of the subsidiaries of the Registrant:
Exhibit 21
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
63
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 6, 2014, 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, 2013.
/s/ Ernst & Young
McLean, Virginia
March 6, 2014
64
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;
2. Based on my knowledge, this report does not contain any untrue statement 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;
3. Based on my knowledge, the financial statements, and other financial 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;
4. The registrant’s other certifying officers and I are responsible for 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
5. The registrant’s other certifying officer and I have disclosed, based on 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
65
(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 6, 2014
/s/ M. A. Gauthier
M. A. Gauthier
Chief Executive Officer, President and Chief
Operating Officer
66
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;
2. Based on my knowledge, this report does not contain any untrue statement 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;
3. Based on my knowledge, the financial statements, and other financial 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;
4. The registrant’s other certifying officers and I are responsible for 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
5. The registrant’s other certifying officer and I have disclosed, based on 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
67
(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 6, 2014
/s/ T. R. Loftus
T. R. Loftus
Executive Vice President and
Chief Financial Officer
68
CERTIFICATION 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
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, 2013 (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 6, 2014
/s/ M. A. Gauthier
M. A. Gauthier
Chief Executive Officer, President and Chief
Operating Officer
69
CERTIFICATION 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
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, 2013 (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 6, 2014
/s/ T. R. Loftus
T. R. Loftus
Executive Vice President and
Chief Financial Officer
70
6348 Walker Lane
Alexandria, VA 22310
www.vsecorp.com
email: info@vsecorp.com
(703) 960-4600
(800) 455-4873
HEELER
BROS., Inc.
384 Drum Ave
901 North Lake Destiny Road
Somerset, Pennsylvania 15501
Maitland, Florida 32751
www.teamwbi.com
(814) 443-2444
www.akimeka.com
(407) 875-2457
A Subsidiary of VSE Corporation
7067 Columbia Gateway Drive,
Suite 200
Columbia, Maryland 21046
www.energetics.com
(410) 290-0370