VSE Corporation Form 10-Q Summary
Business Context and Reporting Period
VSE Corporation provides sustainment, supply-chain, logistics, engineering, information technology, energy, health-care IT and consulting services primarily to the U.S. Department of Defense, federal civilian agencies and the U.S. Postal Service. Reportable segments are Supply Chain Management, Federal, International, and IT, Energy and Management Consulting.
This unaudited filing covers the three and six months ended June 30, 2013, compared with the same periods in 2012. The company had 5,333,077 common shares outstanding as of July 22, 2013.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $119.1 million | $135.7 million | $238.2 million | $275.7 million |
| Operating income | $12.7 million | $12.6 million | $22.6 million | $25.0 million |
| Operating margin | 10.7% | 9.3% | 9.5% | 9.1% |
| Net income | $6.9 million | $6.3 million | $12.1 million | $13.0 million |
| Diluted EPS | $1.28 | $1.18 | $2.27 | $2.44 |
| Operating cash flow | Not separately provided | Not separately provided | $23.9 million | $21.9 million |
- Revenue mix for the first six months was 21% cost-type, 30% time-and-materials and 49% fixed-price contracts.
- Cash and cash equivalents were $266,000 at June 30, 2013, down from $1.5 million at December 31, 2012.
- Total assets were $393.8 million, compared with $410.2 million at year-end 2012. Stockholders’ equity increased to $176.8 million from $164.3 million.
- Total bank borrowings were approximately $118.8 million, consisting of $71.9 million of term debt and $46.9 million of revolving borrowings. Letters of credit totaled approximately $573,000.
- The company generated $23.9 million of operating cash flow, used $2.5 million in investing activities and used $22.7 million in financing activities during the first six months.
- Effective interest on aggregate debt was approximately 3.03% at June 30, 2013. Debt maturities following June 30, 2013 included scheduled term-loan payments of $12.5 million in 2013, $25.0 million in 2014 and $34.4 million in 2015.
- The quarterly dividend was $0.09 per share; $0.17 per share was declared for the first six months. The loan agreement permits annual dividends of up to $0.60 per share, subject to compliance with its terms.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 12%; first-half revenue declined 14%, primarily because of lower Federal, International and IT, Energy and Management Consulting activity.
- Second-quarter operating income increased 1%, while first-half operating income declined 10%. Margin improved because costs declined broadly in line with revenue and management reduced indirect costs.
- Second-quarter net income increased 9%, but first-half net income decreased 7%. Discontinued-operation losses declined to $101,000 in the quarter and $114,000 for the first half.
- Supply Chain Management revenue increased 4% in the quarter and 2% for the first half, while operating income increased 31% and 11%, respectively. Growth was primarily attributable to the USPS customer and earn-out adjustments.
- Federal revenue declined 19% in the quarter and 15% year to date, principally following expiration of a Kuwait MRAP maintenance contract. Federal revenue was partly supported by the U.S. Army Reserve refurbishment program.
- International revenue declined 14% in the quarter and 19% year to date, mainly because of lower pass-through work. Operating income increased because of stronger Seized Asset Program performance and the absence of a prior-year $750,000 work-share loss.
- IT, Energy and Management Consulting revenue declined 20% in the quarter and 24% year to date because of contract expirations and lower customer orders. Management said underlying profit percentages benefited from cost efficiencies related to combining Akimeka and G&B, although prior-year results included favorable Akimeka earn-out adjustments.
- Bookings were $248 million for the first half, compared with $266 million in 2012. Funded backlog was $238 million at June 30, 2013, compared with $265 million at June 30, 2012.
Guidance, Outlook, Risks and Unusual Items
- Management described the operating environment as challenging because of delayed government contract awards and funding, program expirations and reduced DoD and IT activity. In April 2013, the company implemented staff reductions and expected approximately $6 million of lower indirect labor and related costs during 2013.
- The U.S. Army Reserve refurbishment contract expired July 20, 2013 before successor contracts were awarded. On July 22, the company suspended related operations and furloughed approximately 700 employees. The program generated approximately $39 million of first-half 2013 revenue, and management stated there was no guarantee of regaining a substantial portion of the work.
- In July 2013, VSE evacuated its workforce from Egypt because of political unrest. Management estimated a potential revenue decline of approximately $800,000 per month, although some Egyptian Navy support would continue elsewhere and the duration was uncertain.
- The company received a five-year, $99 million U.S. Coast Guard FMS contract in February 2013 and a four-year, $24 million U.S. Navy FMS delivery order in April 2013. Potential additional FMS activity includes ship reactivation and transfer work, but timing remains dependent on government and congressional actions.
- VSE expects to sell its ICRC subsidiary and eliminate the Infrastructure Group. ICRC was classified as discontinued operations and held for sale; assets held for sale were $2.1 million and liabilities held for sale were $380,000 at June 30, 2013.
- WBI achieved the performance targets for its second earn-out period, resulting in an estimated earn-out obligation of approximately $9.2 million, including $215,000 classified as current.
- The company was in compliance with its debt covenants. Actual ratios were 1.88 to 1 for Total Funded Debt/EBITDA versus a 2.50 to 1 maximum, 1.30 to 1 for Fixed Charge Coverage versus a 1.20 to 1 minimum, and 1.02 to 1 for Asset Coverage versus a 0.90 to 1 minimum.
- Material contingencies include a Hawaii wrongful-death lawsuit related to a subcontractor fireworks explosion and an Alaska lawsuit against ICRC concerning the Port of Anchorage project. The Hawaii matter was not expected to be material; the potential impact of the Alaska matter could not yet be determined.
- Variable-rate debt exposes the company to interest-rate risk. An amortizing interest-rate swap hedged approximately $63.4 million of term debt at June 30, 2013 and provided a fixed rate of 1.615% plus the applicable base margin through June 2014.
Important Facts for Investors to Verify
- Whether the Army Reserve successor contracts were awarded and the extent to which VSE recovered the approximately $39 million annualized revenue stream and related workforce.
- The duration and financial impact of the Egypt evacuation and any resulting reduction in Egyptian Navy support revenue.
- Actual cash generation, revolving-borrowing requirements and compliance with debt covenants as government funding and collections fluctuate.
- Progress and final consideration for the planned ICRC sale, including any additional discontinued-operation losses.
- Changes in funded backlog, bookings and contract awards following the reported first-half decline.
- Potential outcomes and insurance coverage related to the Hawaii and Alaska legal proceedings.