VSE Corporation 2015 Form 10-K Summary
Business Context and Reporting Period
VSE Corporation filed its annual report for the fiscal year ended December 31, 2015. The company provides supply-chain management, vehicle and aviation maintenance, repair and overhaul, logistics, engineering, information technology, energy, environmental and consulting services. Its principal customers are the U.S. Postal Service, Department of Defense and other government agencies, with commercial aviation becoming a significant business following the 2015 acquisition of VSE Aviation.
Reportable segments were Supply Chain Management, Aviation, Federal Services, and IT, Energy and Management Consulting. Government customers represented approximately 76% of 2015 revenue, compared with 99% in 2014 and 2013.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $534.0 million | $424.1 million | +26% |
| Operating income | $50.5 million | $36.9 million | +37% |
| Operating margin | 9.5% | 8.7% | +0.8 percentage points |
| Net income | $24.9 million | $19.4 million | +29% |
| Net margin | 4.7% | 4.6% | Improved |
| Diluted EPS | $4.62 | $3.61 | +28% |
| Operating cash flow | $37.6 million | $49.7 million | -$12.1 million |
| Cash and equivalents | $0.7 million | $0.3 million | +$0.5 million |
| Long-term debt | $216.1 million | $23.6 million | Substantial increase |
| Working capital | $104.4 million | $34.9 million | Substantial increase |
Products generated $318.1 million of revenue and services generated $215.8 million. Segment revenue was $196.8 million for Supply Chain, $119.7 million for Aviation, $167.0 million for Federal Services and $50.5 million for IT, Energy and Management Consulting.
Cash used in investing activities was $205.2 million, including $195.1 million for acquisitions and $10.6 million for capital expenditures. Financing activities provided $168.1 million, primarily reflecting borrowings used to finance acquisitions. Inventory increased to $109.1 million from $49.4 million, and receivables increased to $78.5 million from $59.4 million.
Total bank debt was approximately $234.7 million at year-end, consisting of $133.8 million of term borrowings and approximately $101 million of revolving borrowings. The effective interest rate on aggregate debt was 3.29%. The company was in compliance with its financial covenants; its total funded debt-to-EBITDA ratio was 2.97x against a 3.25x maximum, and its fixed-charge coverage ratio was 1.71x against a 1.20x minimum.
Cash dividends were $0.43 per share for 2015, compared with $0.39 per share in 2014. Management stated that dividends remain subject to restrictions under the bank loan agreement.
Material Changes Versus the Prior Comparable Period
- The January 2015 acquisition of four aviation businesses contributed approximately $119.7 million of revenue and $10.6 million of operating income from the acquisition date through year-end. The acquisition required approximately $191.9 million of cash consideration and added approximately $104.5 million of goodwill.
- Supply Chain revenue increased 14% to $196.8 million, primarily due to growth in the USPS Managed Inventory Program, DoD sales and commercial customers. Segment operating income increased 19% to $35.5 million.
- Federal Services revenue declined 12% to $167.0 million, reflecting lower Army Reserve refurbishment and Foreign Military Sales activity and completion of the Treasury Seized Assets Program. Segment operating income declined to $2.1 million from $3.5 million.
- IT, Energy and Management Consulting revenue declined 17% to $50.5 million, primarily due to lower customer orders, contract expirations and work transferred to small-business set-aside contracts. Segment operating income declined 29% to $4.7 million.
- Commercial revenue increased to $124.4 million, or 23.3% of total revenue, from $3.7 million, or 0.9%, in 2014, largely because of the Aviation acquisition.
- Funded backlog for the Federal Services and IT groups increased to approximately $238 million from $193 million. Bookings increased to approximately $281 million from $217 million.
- Employees increased to 2,057 from 1,589, primarily reflecting the Aviation acquisition and business growth.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal quantitative revenue or earnings guidance. Management stated that 2015 results indicated continued improvement entering 2016, citing Supply Chain growth, the Aviation acquisition, improving government-services performance, new contract awards and increased funding.
- The Fort Benning Logistics Support Services Program began generating revenue in the third quarter of 2015 and includes options for performance over five and one-half years.
- In December 2015, VSE received a Red River Army Depot task-order award with potential value of $243.8 million over three and one-half years if all options are exercised. The award was protested, with a ruling expected in March or April 2016; the filing does not provide the later outcome.
- Government funding delays, shifting priorities, procurement set-asides, contract protests, lowest-price award criteria and contract terminations could reduce revenue and margins.
- The USPS Managed Inventory Program represented approximately 33% of revenue, and the Foreign Military Sales Program represented approximately 14%. Loss or disruption of either program could materially affect results.
- Akimeka’s fair value exceeded carrying value by approximately 9%, but management identified the reporting unit as at risk of future goodwill impairment. Akimeka carried approximately $29.8 million of goodwill at year-end.
- Approximately $1.5 million of revenue related to work performed before formal government funding had been received. Management expected reimbursement, but the company remained exposed to funding risk.
- Pending litigation includes Hawaii wrongful-death claims related to a 2011 fireworks explosion, Anchorage-related litigation and an insurance-coverage dispute, and a contractor payment lawsuit. The company could not predict the effect of the Anchorage-related and Heritage matters; it did not expect the Hawaii case to have a material adverse effect.
- Interest-rate exposure remains significant because portions of the debt bear variable rates, although the company entered into interest-rate swaps covering $125 million of debt.
- The Aviation acquisition created approximately $19.8 million of year-end earn-out obligations, including $10.2 million classified as long-term, with potential additional purchase-price payments of up to $40 million based on performance targets.
Key Facts Investors Should Verify
- Whether Aviation acquisition earnings and cash generation justify the substantial increase in debt, goodwill and intangible assets.
- The outcome of the Red River Army Depot protest and the timing and funding of related work.
- Renewal, funding and profitability trends for the USPS Managed Inventory Program, Foreign Military Sales Program and other concentrated government programs.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the scheduled 2016 term-loan payment of approximately $17.8 million.
- Whether operating cash flow improves as acquisition-related working-capital investment moderates.
- Potential goodwill impairment at Akimeka and the performance of the acquired Aviation reporting unit.
- Resolution and insurance coverage of the disclosed litigation, claims and government investigations.
- The filing’s audited financial statements and the reported unqualified opinions on the financial statements and internal control over financial reporting.