SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999 Commission File Number: 0-3676
VSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-0649263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2550 Huntington Avenue
Alexandria, Virginia 22303-1499
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05 per share
(Title of Class)
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 [ ]
Number of shares of Common Stock outstanding as of May 1, 1999: 2,114,905.
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
March 31, December 31,
1999 1998
-------- --------
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 105 $ 49
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . . 24,855 27,574
Deferred tax assets . . . . . . . . . . . . . . . 381 422
Other current assets . . . . . . . . . . . . . . . 1,544 1,266
-------- --------
Total current assets . . . . . . . . . . . . . . 26,885 29,311
Property and equipment, net . . . . . . . . . . . . 4,993 5,089
Deferred tax assets . . . . . . . . . . . . . . . . 418 449
Intangible assets, net . . . . . . . . . . . . . . . 2,751 2,836
Other assets . . . . . . . . . . . . . . . . . . . . 2,990 3,052
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 38,037 $ 40,737
======== ========
Liabilities and Stockholders' Investment
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 1,333 $ 1,333
Accounts payable and other current liabilities . . 10,083 11,846
Accrued expenses . . . . . . . . . . . . . . . . 6,642 6,388
Dividends payable . . . . . . . . . . . . . . . . 76 77
-------- --------
Total current liabilities . . . . . . . . . . . 18,134 19,644
Long-term debt . . . . . . . . . . . . . . . . . . . 4,179 5,370
Deferred compensation . . . . . . . . . . . . . . . 1,742 1,871
-------- --------
Total liabilities . . . . . . . . . . . . . . . 24,055 26,885
-------- --------
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.05 per share, authorized
5,000,000 shares; issued 2,186,905 shares in 1999
and 1998 . . . . . . . . . . . . . . . . . . . . 109 109
Paid-in surplus . . . . . . . . . . . . . . . . . 3,832 3,832
Retained earnings . . . . . . . . . . . . . . . . 10,833 10,703
Treasury stock, at cost (72,000 shares in 1999
and 1998) . . . . . . . . . . . . . . . . . . . (792) (792)
-------- --------
Total stockholders' investment . . . . . . . . . 13,982 13,852
-------- --------
Total liabilities and stockholders' investment . $ 38,037 $ 40,737
======== ========
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income For the three months ended March 31,
- -------------------------------------------------------------------------------
(in thousands, except share amounts)
1999 1998
--------- ---------
Revenues, principally from contracts . . . . . . . . . $ 40,917 $ 41,664
Costs and expenses of contracts . . . . . . . . . . . . 40,253 41,023
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . 664 641
Selling, general and administrative expenses . . . . . 215 208
Interest expense . . . . . . . . . . . . . . . . . . . 88 101
--------- ---------
Pretax income . . . . . . . . . . . . . . . . . . . . 361 332
Provision for income taxes . . . . . . . . . . . . . . 155 154
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 206 $ 178
========= =========
Basic earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.08
========= =========
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.08
========= =========
Weighted average shares outstanding: 2,114,905 2,129,867
========= =========
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Stockholders' Investment
- -------------------------------------------------------------------------------
(in thousands)
Common Stock
--------------- Paid-In Retained Treasury ESOP
Shares Amount Surplus Earnings Stock Obligation
------ ------ ------- -------- ------- ----------
Balance at
December 31, 1997 . . 2,165 $ 108 $ 3,631 $ 9,422 $ -- $(680)
Net income
for the year . . . . -- -- -- 1,595 -- --
ESOP Obligation . . . . -- -- -- -- -- (112)
Purchase of Treasury
Stock . . . . . . . . -- -- -- -- (792) 792
Issuance of stock . . . 22 1 201 -- -- --
Dividends declared
($.144) . . . . . . . -- -- -- (314) -- --
------ ------ ------- -------- ------- -----
Balance at
December 31, 1998 . . 2,187 109 3,832 10,703 (792) 0
Net income
for the period . . . -- -- -- 206 -- --
Dividends declared
($.036) . . . . . . . -- -- -- (76) -- --
Balance at ------ ------ ------- -------- ------- -----
March 31, 1999 . . . 2,187 $ 109 $ 3,832 $ 10,833 $ (792) $ 0
====== ====== ======= ======== ======= =====
PAGE
VSE Corporation and Subsidiaries
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Cash Flows For the three months ended March 31,
- -------------------------------------------------------------------------------
(in thousands)
1999 1998
------- -------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 206 $ 178
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 487 440
Deferred compensation plan expense . . . . . . . . . . 15 38
Change in assets and liabilities, net of
discontinued operations
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . 2,719 (1,925)
Other current assets and noncurrent assets . . . . . (216) (567)
Deferred taxes, net . . . . . . . . . . . . . . . . 72 537
Increase (decrease) in:
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . . . (1,790) 1,472
Accrued expenses . . . . . . . . . . . . . . . . . . 254 (411)
------- -------
Net cash provided by (used in) operating activities 1,747 (238)
------- -------
Cash flows from investing activities:
Purchase of property and equipment,
(net of dispositions) . . . . . . . . . . . . . . . . (306) (119)
Net (payments of) proceeds from deferred compensation . . (117) 59
------- -------
Net cash used in investing activities (423) (60)
------- -------
Cash flows from financing activities:
Net (payments of) proceeds from bank loan . . . . . . . . (1,191) 175
Stock grants . . . . . . . . . . . . . . . . . . . . . . 0 202
Cash dividends paid . . . . . . . . . . . . . . . . . . . (77) (79)
------- -------
Net cash (used in) provided by financing activities (1,268) 298
------- -------
Net increase in cash and cash equivalents . . . . . . . . . 56 0
Cash and cash equivalents at beginning of period . . . . 49 15
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 105 $ 15
======= =======
PAGE
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. For further information refer to the
consolidated financial statements and footnotes thereto included in the VSE
Corporation Annual Report on Form 10-K for the year ended December 31, 1998.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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.
Litigation
The company and its subsidiaries have, in the normal course of business, certain
other claims against them and against other parties. In the opinion of
management, the resolution of these claims will not have a material adverse
effect on the company's results of operations or financial position.
Segment Information
VSE has two reportable segments: the engineering, logistics, management, and
technical services segment which provides diversified engineering, technical,
and management services ("ELMTS"), principally to agencies of the United States
Government and to other government prime contractors; and the software products
and services segment, which provides application software and services ("SPS")
related to the installation of the software to primarily commercial customers.
The accounting policies are the same as those described in the summary of
significant accounting policies for each segment. VSE's reportable segments are
strategic business units that offer different products and services. They
PAGE
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
are managed separately because each business requires different technology and
marketing strategies. The software products and services segment was acquired
as a unit, and the management has been maintained separately since the
acquisition.
The following table presents revenues and other financial information by
business segment for the periods ended March 31, 1999 and March 31, 1998, in
thousands:
March 31, 1999 ELMTS SPS Eliminations Total
- -----------------------------------------------------------------------------
Revenues from unaffiliated
customers $ 40,233 $ 684 $ $40,917
Interest expense (40) 128 88
Depreciation and amortization 421 66 487
Operating income (loss) 578 (217) 361
Assets 57,490 2,438 (21,891) 38,037
Expenditures for capital assets 371 0 371
March 31, 1998 ELMTS SPS Eliminations Total
- -----------------------------------------------------------------------------
Revenues from unaffiliated
customers $ 40,831 $ 833 $ $41,664
Interest expense 0 101 101
Depreciation and amortization 380 60 440
Operating income (loss) 938 (606) 332
Assets 54,906 2,094 (17,318) 39,682
Expenditures for capital assets 115 6 121
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
VSE and its subsidiaries and divisions have two reportable segments: the
engineering, logistics, management and technical services segment ("ELMTS")
and the software products and services segment ("SPS").
Engineering, logistics, management and technical services including
information technology services are provided by VSE and by each of its
subsidiaries and divisions including Energetics Incorporated ("Energetics"),
Human Resource Systems, Inc. ("HRSI"), and BAV Division ("BAV"), GSA IT
Services Division formed in January 1999, Indian Head Division
("Ordnance"), and Value Systems Services Division ("VSS"), unincorporated
divisions of VSE. Two other VSE subsidiaries, VSE Corona, Inc. ("VCI") and
Ship Remediation and Recycling, Inc. ("SRR") (formerly VSE Services
Corporation ("VSES")) have generally been inactive since 1992.
Software products and services include sales of developed software products
and the services related to the installation and use of the software. This
is the primary business of VSE's subsidiary CMstat Corporation ("CMstat").
The following table sets forth certain items including consolidated revenues,
pretax income and net income, and the changes in these items by segment for
the three month periods ended March 31, 1999 and 1998 (in thousands).
1999
Compared
to
1999 1998 1998
------- ------- ------
Engineering, Logistics, Management and
Technical Services Segment:
Revenues . . . . . . . . . . . . . . . . . . $40,233 $40,831 $ (598)
======= ======= ======
Pretax income . . . . . . . . . . . . . . . $ 578 $ 938 $ (360)
Provision for income taxes . . . . . . . . . 270 441 (171)
------- ------- ------
Net income . . . . . . . . . . . . . . . . $ 308 $ 497 $ (189)
======= ======= ======
Software Products and Services Segment:
Revenues . . . . . . . . . . . . . . . . . . $ 684 $ 833 $ (149)
======= ======= =======
Pretax (loss) . . . . . . . . . . . . . . . $ (217) $ (606) $ 389
Benefit for income taxes . . . . . . . . . . (115) (287) 172
------- ------- ------
Net (loss) . . . . . . . . . . . . . . . . . $ (102) $ (319) $ 217
======= ======= ======
RESULTS OF OPERATIONS
The discussion and analysis which follows is intended to assist in
understanding and evaluating the results of operations, financial condition,
and certain other matters of the company. The company is engaged principally
in providing engineering, testing, and management services to the U.S.
Government (the "government") and software products and related services to
commercial customers. All significant intercompany transactions have been
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
eliminated in consolidation. Certain prior year balances have been
reclassified for comparative purposes.
Engineering, Logistics, Management and Technical Services Segment
Revenues for this segment for the three month period ending March 31, 1999
decreased by approximately 1% as compared to the same period of 1998. The
decrease in revenues is primarily due to a decrease in work performed by VSE
in 1999. Pretax income for this segment decreased by approximately 38% for
the three month period ended March 31, 1999 as compared to the same period of
1998 due primarily to the decrease in work performed by VSE in 1999 without
a corresponding timely decrease in indirect costs.
The largest customer for the engineering, logistics, management and technical
services rendered by the company is the U.S. Department of Defense
("Defense"), including agencies of the U.S. Army, Navy, and Air Force. VSE's
engineering services revenues have historically been subject to year to year
fluctuations resulting from changes in the level of Defense spending.
Defense spending has been reduced in recent years, and there can be no
assurance that future reductions in the Defense spending will not have a
material adverse impact on the company's results of operations or financial
position.
Substantially all of the company's revenues from this segment depend on the
award of new contracts, on current contracts not being terminated for the
convenience of the government, and on the exercise of option periods and the
satisfaction of incremental funding requirements on current contracts. In
1999 and 1998, the company did not experience any termination of contracts
for the convenience of the government or any non-exercise of option periods
on current contracts which were material to the company's ongoing results of
operations or financial position.
BAV Contract. In August 1995, VSE's BAV Division was awarded a contract with
the U.S. Navy to provide engineering, technical and logistical support
services associated with the sale, lease, or transfer of Navy ships to
foreign governments. BAV began work on the contract in September 1995. This
contract has the potential, if all options are exercised, to generate
revenues in excess of one billion dollars over a ten year period from 1995
through 2005. The contract accounted for approximately 54% and 53% of
consolidated revenues from operations during the three month periods ended
March 31, 1999 and 1998, respectively. The level of revenues generated by
this contract will vary depending on a number of factors including the timing
of ship transfers and associated support services ordered by foreign
governments and economic conditions of potential customers worldwide. The
company has experienced significant quarterly revenue fluctuations and
anticipates that future quarterly revenues will be subject to significant
variations primarily due to changes in the level of activity on this contract.
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
Software Products and Services Segment
Revenues for this segment for the three month period ending March 31, 1999
decreased by about 18% as compared to the same period of 1998. The decrease
in revenues is due to decreases in both product sales and consulting services
related to the installation and implementation of CMstat products. Pretax
loss for this segment was reduced by approximately 64% for the three month
period ended March 31, 1999 as compared to the same period of 1998. The
reduced loss is primarily due to operating cost reduction efforts implemented
by management. The profitability of this segment is dependent upon CMstat's
sales.
While management believes that CMstat will generate sufficient future
revenues, failure to do so could adversely affect the company's results of
operations.
The company expects that this segment will experience significant
fluctuations in quarterly operating results due largely to the nature of
CMstat's business. CMstat's future operating results will depend upon a
number of factors, including the demand for its products, the size and timing
of specific sales, the delay or deferral of customer implementations, the
level of product and price competition that it encounters, the length of its
sales cycles, the timing of new product introductions and product
enhancements by CMstat and its competitors, the mix of products and services
sold, the activities of and acquisitions by its competitors, and its ability
to develop and market new products and control costs. CMstat's operating
results could also be affected by general economic conditions. In addition,
the decision to license and implement an enterprise-level business software
system is usually discretionary, involves a significant commitment of
customer resources and is subject to delays, budget cycles and to the
internal authorization procedures of CMstat's customers. The loss or delay
of individual orders could have a significant impact on CMstat's operating
results, particularly on a quarterly basis. Furthermore, while CMstat's
revenue from license fees is difficult to predict because of the length and
variability of CMstat's sales cycles, CMstat's operating expenses are based
on anticipated revenue trends. Because a high percentage of these expenses
are relatively fixed, a delay in the recognition of revenue from a limited
number of license transactions could cause significant variations in
operating results from quarter to quarter. To the extent such expenses
precede, or are not subsequently followed by, anticipated revenue, the
company's operating results could be materially and adversely affected.
CMstat derives substantially greater profit margins from license fees than
from service revenues or from sales of third-party equipment and software.
The mix of revenues among these three components can fluctuate materially
from quarter to quarter, and such fluctuations can have a significant effect
on margins. Should lower margin service revenues or revenues from sales of
third-party equipment and software increase in the future as a percentage of
the company's total revenues, CMstat's margins and income from operations
could be adversely affected.
As a result of these and other factors, the company's operating results for
any quarter are subject to significant variation, and the company believes
that period-to-period comparisons of its operating results are not
necessarily
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
meaningful and should not be relied upon as indications of future
performance. The company's 1999 quarterly operating results are not a good
indicator of future quarterly results.
Liquidity and Capital Resources
Cash and cash equivalents increased by approximately $56 thousand during the
three month period ended March 31, 1999. Cash provided by operating
activities of approximately $1.7 million was used to reduce financing
requirements by approximately $1.3 million and to finance investing
activities of approximately $.4 million. Significant financing activities
included reduced borrowing on the company's bank loan, including commitments
for checks outstanding, of approximately $1.2 million. Significant investing
activities included purchases of property and equipment of approximately $.3
million.
Cash and cash equivalents remained unchanged during the three month period
ended March 31, 1998. Cash provided by financing activities of approximately
$298 thousand was used to finance approximately $238 thousand in operating
activities and approximately $60 thousand in investing activities.
Significant financing activities included increased borrowing on the
company's revolving loan, including commitments for checks outstanding, of
approximately $175 thousand. Significant investing activities included
purchases of property and equipment of approximately $119 thousand.
The difference between the cash provided by operating activities of
approximately $1.7 million in 1999 as compared to the cash used in operating
activities of approximately $.2 million in 1998 is primarily due to changes
in the levels of accounts receivable and accounts payable associated with
fluctuations in BAV contract activity.
The company's principal requirements for cash are to finance the costs of
operations pending the collection of accounts receivable, to acquire capital
assets for office and computer support, to pay cash dividends, and to finance
internal research and development, primarily software development.
Performance of work under the BAV contract has the potential to cause
substantial requirements for cash; however, management believes that the cash
flows from future operations and the bank term loan and revolving loan
commitment are adequate to meet current operating cash requirements.
VSE's requirements for working capital are affected significantly by its
revenues and accounts receivable, which are primarily from billings made by
the company to the government or other government prime contractors for
services rendered. Such accounts receivable generally do not present
liquidity or collection problems. Working capital is also affected by (a)
contract retainages, (b) start-up and termination costs associated with new
or completed contracts, (c) capital equipment requirements, and (d)
differences between the provisional billing rates authorized by the
government compared to the costs actually incurred by the company, and (e)
profitability.
Government contracts generally require VSE to pay for material and
subcontract costs included in VSE's contract billings prior to receiving
payment for such
PAGE
VSE CORPORATION AND SUBSIDIARIES
Management Discussion and Analysis
costs from the government. However, such contracts generally provide for
progress payments on a monthly or semimonthly basis, thereby reducing
requirements for working capital.
Quarterly cash dividends at the rate of $.036 per share were declared during
the three month period ended March 31, 1999. Pursuant to its bank loan
agreement, the payment of cash dividends by VSE is subject to a maximum
annual rate. VSE has paid cash dividends each year since 1973.
ESOP Advances
During 1998, 1997 and 1996, the company advanced the ESOP trust $112
thousand, $330 thousand and $350 thousand, respectively, in connection with
distributions made to terminated participants. In December 1998, the company
purchased 72,000 shares of VSE stock from the ESOP at market price and the
ESOP simultaneously returned the proceeds of $792,000 from the stock sale to
the company as repayment of the advances.
Inflation and Pricing Policy
Most of the contracts performed by VSE provide for estimates of future labor
costs to be escalated for any option periods provided by the contracts, while
the non-labor costs included in such contracts are normally considered
reimbursable at cost. VSE property and equipment consists principally of