VSE Corporation — Form 10-Q Summary
Business Context and Reporting Period
VSE Corporation provides sustainment, logistics, supply-chain, engineering, information technology, energy, consulting, and equipment refurbishment services primarily to U.S. Department of Defense, federal civilian, and U.S. Postal Service customers. The filing covers the three and nine months ended September 30, 2013. The financial statements are unaudited.
Reportable segments are Supply Chain Management, Federal, International, and IT, Energy and Management Consulting. ICRC is classified as discontinued operations and held for sale.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $111.1 million | $134.2 million | $349.3 million | $409.9 million |
| Operating income | $9.5 million | $14.3 million | $32.1 million | $39.3 million |
| Operating margin | 8.5% | 10.6% | 9.2% | 9.6% |
| Net income | $5.3 million | $6.0 million | $17.4 million | $18.9 million |
| Diluted EPS | $1.00 | $1.12 | $3.27 | $3.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $39.4 million | $41.0 million |
Revenue declined 17% in the quarter and 15% for the first nine months. Operating income declined 34% and 18%, respectively. Net income declined 11% in the quarter and 8% year to date, partly because the prior-year periods included larger losses from discontinued operations. Continuing-operations income was $5.3 million in Q3 and $17.6 million for the first nine months.
At September 30, 2013, cash and cash equivalents were $0.3 million, compared with $1.5 million at December 31, 2012. Current assets were $128.2 million and current liabilities were $71.6 million. Receivables were $71.5 million and inventories were $40.3 million.
Total bank debt was approximately $104.9 million, consisting of $65.6 million of term-loan borrowings and $39.3 million of revolving borrowings. This compared with approximately $140.2 million at December 31, 2012. The company also had $0.6 million of outstanding letters of credit. The effective interest rate on aggregate debt was 3.08% at September 30, 2013.
VSE generated $39.4 million of operating cash flow, used $3.3 million in investing activities, and used $37.3 million in financing activities during the first nine months. Capital expenditures were $3.3 million, compared with $11.6 million in the prior-year period. Dividends paid were $1.3 million.
Material Changes Versus the Prior Comparable Period
- Supply Chain Management revenue increased 14% in Q3 and 6% year to date, driven primarily by growth in the USPS Managed Inventory Program. Segment operating margin improved to 20.0% in Q3 from 18.7%.
- Federal Group revenue declined 47% in Q3 and 26% year to date. The decline reflected expiration of the Kuwait MRAP maintenance contract and an interruption in U.S. Army Reserve refurbishment work. The segment recorded a $2.3 million Q3 operating loss versus $3.2 million of operating income in the prior-year quarter.
- International Group revenue declined 11% in Q3 and 16% year to date, while operating income increased 74% in Q3 and 31% year to date. Results benefited from Seized Asset Programs and the timing of FMS award-fee recognition.
- IT, Energy and Management Consulting revenue declined 22% in Q3 and 24% year to date. Operating income declined 44% and 40%, respectively, although management stated that results excluding prior-year Akimeka earn-out reductions would have been higher in 2013.
- Bookings were $407 million and funded contract backlog was $268 million at September 30, 2013, compared with $437 million and $295 million, respectively, in the prior-year period.
- The company reduced debt by approximately $35.3 million from year-end 2012 and reduced employee headcount to 1,870 from 2,472 at December 31, 2012.
- Goodwill remained unchanged at $92.1 million. No goodwill or intangible-asset impairment was recorded in 2013; the prior-year period included a $1.0 million impairment charge in the income statement.
Outlook, Risks, Contingencies, and Unusual Items
- Management described the operating environment as challenging because of delayed government awards and funding, program expirations, sequestration-related uncertainty, and reduced DoD and IT activity.
- Staff reductions and other cost actions implemented in April 2013 are expected to reduce indirect labor and related costs by approximately $6 million in 2013.
- The U.S. Army Reserve program was suspended during the transition from a GSA contract to Army contracts, furloughing approximately 700 employees. Three new task orders were awarded in August and September, and most furloughed employees were reinstated. Q3 revenue from the program was approximately $6.4 million.
- The USPS currently does not plan to proceed with programmatic purchases of VSE’s repowered gasoline engines. VSE plans to offer standard engines and components to USPS as needed.
- VSE evacuated its Egypt workforce in July 2013 because of political unrest. Management estimated an approximately $800,000 monthly revenue reduction, although the duration and ultimate effect remain uncertain.
- The company received notice that the follow-on Treasury asset-forfeiture contract was awarded to a competitor. VSE filed a GAO protest and continues performing the work pending the outcome.
- VSE expects to sell ICRC during 2013. ICRC had $2.1 million of assets and $0.4 million of liabilities classified as held for sale at September 30, 2013.
- Construction performance bonds associated with discontinued ICRC operations exceeded a loan-agreement limit. The lending group waived the noncompliance, and management expects compliance by December 31, 2013.
- VSE was in compliance with its debt covenants at September 30, 2013: funded debt/EBITDA was 1.70x versus a 2.50x maximum; fixed-charge coverage was 1.39x versus a 1.20x minimum; and asset coverage was 1.10x versus a 0.90x minimum.
- Material legal matters include a Hawaii wrongful-death action involving a subcontractor-operated fireworks facility and litigation by the Municipality of Anchorage involving ICRC’s Port of Anchorage project. Management could not determine the potential effect of the Anchorage matter but did not expect the Hawaii matter to be material.
Most Important Facts for Investors to Verify
- Whether the reinstated Army Reserve work reaches expected volumes and restores Federal Group profitability.
- The outcome of the GAO protest concerning the Treasury asset-forfeiture contract and the effect of any loss of work.
- The timing and economics of the ICRC sale, including remaining performance-bond obligations and related litigation exposure.
- Progress toward 2013 indirect-cost savings and whether further workforce reductions are required.
- Future government funding, contract awards, program renewals, and funded-backlog conversion.
- Liquidity given only $0.3 million of cash, scheduled term-loan payments of $6.2 million in the remainder of 2013, $25.0 million in 2014, and $34.4 million in 2015, and reliance on revolving borrowings.
- The effect of Egypt-related disruption, USPS engine-program changes, and other customer concentration risks on revenue and margins.