VSE Corporation 2013 Form 10-K Summary
Business context and reporting period
VSE Corporation provides vehicle fleet and equipment sustainment, supply-chain management, logistics, engineering, information technology, health-care IT, energy, and consulting services. Customers are primarily the U.S. government, including the Department of Defense and U.S. Postal Service. This filing covers the fiscal year ended December 31, 2013; quarterly data includes the fourth quarter ended December 31, 2013.
Reportable segments were Supply Chain Management, International, Federal, and IT, Energy and Management Consulting. Government customers represented approximately 99% of revenue. The USPS Managed Inventory Program, U.S. Navy Foreign Military Sales Program, and U.S. Army Reserve refurbishment program represented approximately 30%, 20%, and 13% of 2013 revenue, respectively.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $471.6 million | $546.8 million | Down 14% |
| Operating income | $44.1 million | $51.1 million | Down 14% |
| Operating margin | 9.3% | 9.3% | Stable |
| Income from continuing operations | $24.0 million | $27.4 million | Down 12% |
| Net income | $22.9 million | $21.3 million | Up 7% |
| Diluted EPS | $4.28 | $4.01 | Up 7% |
| Cash flow from operations | $56.6 million | $59.8 million | Down 5% |
| Funded backlog | $236 million | $250 million | Down 6% |
Net income benefited from a substantially smaller loss from discontinued operations: $1.1 million in 2013 versus $6.1 million in 2012. The effective tax rate on continuing operations was 37.4%. Fourth-quarter 2013 revenue was $122.4 million, operating income was $12.0 million, and net income was $5.4 million, including a $1.0 million discontinued-operations charge.
Segment revenue and operating income were: Supply Chain Management, $154.7 million and $27.3 million; International, $146.9 million and $7.1 million; Federal, $95.4 million and $2.4 million; and IT, Energy and Management Consulting, $74.6 million and $9.1 million.
Cash flow, liquidity, debt, and capital structure
- Cash and cash equivalents declined to $0.2 million from $1.5 million. Working capital was $47.7 million.
- Operating cash flow was $56.6 million; capital expenditures were $4.4 million.
- Management used operating cash flow to reduce total bank debt by approximately $50 million, to $89.7 million at year-end from $140.2 million.
- Year-end debt included approximately $59.4 million of term borrowings and $30.3 million of revolving borrowings, plus $0.6 million of letters of credit.
- The credit facilities expire in June 2016. Scheduled term-loan payments after year-end were $25.0 million in 2014 and $34.4 million in 2015.
- Revolving-loan and letter-of-credit availability was $125 million, with the option to increase availability to $175 million.
- The company was in compliance with its debt covenants at year-end: funded debt/EBITDA was 1.44x versus a 2.50x maximum, fixed-charge coverage was 1.41x versus a 1.20x minimum, and asset coverage was 1.30x versus a 0.90x minimum.
- Cash dividends declared were $0.35 per share for 2013, compared with $0.31 in 2012. Dividend payments are subject to debt-agreement restrictions.
Material changes versus the prior comparable period
- Revenue declined by $75.1 million, primarily from Federal Group revenue declines of $46.9 million, International declines of $20.3 million, and IT-related declines of $19.6 million. Supply Chain Management increased revenue by $11.7 million.
- Federal revenue and operating income were adversely affected by the expiration of a $26 million MRAP-related contract and an interruption in U.S. Army Reserve contract coverage. Army Reserve revenue fell to approximately $60 million from $78 million, and approximately 700 employees were temporarily furloughed before most were reinstated.
- Supply Chain Management revenue increased 8%, primarily from approximately $11.4 million of growth in the USPS Managed Inventory Program. Segment operating margin increased to 17.6% from 16.8%.
- International revenue fell 12%, mainly because of an $18 million decline in pass-through work. Operating income increased to $7.1 million from $6.1 million, partly because of award-fee timing and the absence of certain prior-year charges.
- IT, Energy and Management Consulting revenue declined 21% because of contract expirations and lower customer orders. The company combined Akimeka and G&B operations effective January 1, 2013.
- The company reduced staff and other indirect costs, producing approximately $6 million of savings in 2013.
- VSE received notice that its Treasury seized-asset follow-on contract was awarded to a competitor. The program generated approximately $36 million of 2013 revenue and was expected to transition primarily by the end of March 2014.
- VSE abandoned its ICRC operations and recorded approximately $1 million of fourth-quarter discontinued-operations charges for goodwill and receivables write-offs. The company had not completed a sale of the related assets.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific quantitative revenue or earnings guidance. Its strategy is to expand newer supply-chain and managed-inventory offerings while maintaining legacy defense and technical-services businesses pending a potential market recovery. Management cited the USPS program and the largely foreign-government-funded Navy FMS program as relatively stable sources of revenue, while noting that traditional ship reactivation and transfer work remains subject to congressional approval.
- Key risks include federal budget pressure, funding and award delays, contract protests, program expirations, procurement set-asides, contract termination, and increased competition.
- Revenue concentration is significant: the three largest programs generated approximately 63% of 2013 revenue, and the company had $236 million of funded backlog, concentrated in several key contracts.
- Political unrest in Egypt led to a workforce evacuation and reduced Egyptian Navy revenue by approximately $4 million to $48 million in 2013.
- Approximately $5 million of recognized revenue remained unfunded at year-end, including approximately $3.9 million associated with the expired MARAD contract. Management expected reimbursement but acknowledged the related funding risk.
- Material contractual commitments included $167.9 million of total obligations, including $89.7 million of bank debt, $61.4 million of headquarters lease commitments, and $12.3 million of other operating leases.
- Pending matters included a Hawaii wrongful-death action related to a subcontractor-operated fireworks facility and an Alaska lawsuit involving ICRC. Management did not currently expect the Hawaii matter to be material but could not determine the potential impact of the Alaska lawsuit because it was in an early stage.
- Interest-rate exposure remained relevant because borrowings were principally variable-rate debt. A swap covered approximately $51 million of term debt through June 2014.
Most important facts for investors to verify
- Whether USPS Managed Inventory Program growth can offset continuing declines in legacy defense and IT programs.
- The timing, funding, profitability, and contract coverage of U.S. Army Reserve and Navy FMS work.
- The effect of the Treasury seized-asset contract transition on 2014 revenue, workforce, facilities, and margins.
- Whether the company can meet $25.0 million of 2014 scheduled term-debt payments while maintaining adequate operating liquidity.
- The collectibility of approximately $5 million in unfunded recognized revenue and the outcome of the Alaska and Hawaii litigation.
- The renewal, extension, or replacement of contracts underlying the company’s concentrated backlog and major customer relationships.