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 September 30, 2007 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 www.vsecorp.com
(Address of Principal Executive Offices) (Zip Code) (Webpage)
Registrant's Telephone Number, Including Area Code: (703) 960-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.05 per share NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Number of shares of Common Stock outstanding as of November 1, 2007: 5,042,136.
VSE Corporation and Subsidiaries
Forward Looking Statements
This filing contains statements which, to the extent they are not recitations
of historical fact, constitute "forward looking statements" under federal
securities laws. All such statements are intended to be subject to the safe
harbor protection provided by applicable securities laws. For discussions
identifying some important factors that could cause actual VSE Corporation
("VSE" or the "Company") results to differ materially from those anticipated in
the forward looking statements contained in this filing, see VSE's discussions
captioned "Business," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements" contained in VSE's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 filed with the Securities and Exchange
Commission (the "SEC") on March 5, 2007.
Readers are cautioned not to place undue reliance on these forward looking
statements, which reflect management's analysis only as of the date hereof.
The Company undertakes no obligation to publicly revise these forward looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the SEC, including this and other
Quarterly Reports on Form 10-Q to be filed by the Company subsequent to its
Annual Report on Form 10-K and any Current Reports on Form 8-K filed by the
Company.
-2-
PART I. Financial Information
Item 1. Financial Statements
VSE Corporation and Subsidiaries
Consolidated Financial Statements
-----------------------------------------------------------------------------
Consolidated Balance Sheets
(in thousands except share and per share amounts)
September 30, December 31,
2007 2006
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 7,612 $ 8,745
Accounts receivable, principally
U.S. Government, net . . . . . . . . . . . . . 113,179 66,730
Contract inventories . . . . . . . . . . . . . . 311 4,459
Deferred tax assets . . . . . . . . . . . . . . 1,153 1,196
Other current assets . . . . . . . . . . . . . . 3,189 2,472
-------- --------
Total current assets . . . . . . . . . . . . . 125,444 83,602
Property and equipment, net . . . . . . . . . . . 11,823 8,409
Deferred tax assets . . . . . . . . . . . . . . . 1,763 1,133
Intangible assets . . . . . . . . . . . . . . . . 8,291 -
Goodwill . . . . . . . . . . . . . . . . . . . . . 3,055 1,054
Other assets . . . . . . . . . . . . . . . . . . . 5,297 4,337
-------- --------
Total assets . . . . . . . . . . . . . . . . . $155,673 $ 98,535
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 83,418 $ 44,302
Accrued expenses . . . . . . . . . . . . . . . 16,970 13,486
Dividends payable . . . . . . . . . . . . . . . 202 168
-------- --------
Total current liabilities . . . . . . . . . . 100,590 57,956
Deferred compensation . . . . . . . . . . . . . . 3,239 2,183
Other liabilities . . . . . . . . . . . . . . . . 353 160
-------- --------
Total liabilities . . . . . . . . . . . . . . 104,182 60,299
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.05 per share,
Authorized 15,000,000 shares; issued and
outstanding 5,042,136 in 2007 and 4,788,162
shares in 2006 . . . . . . . . . . . . . . . . 252 239
Paid-in capital . . . . . . . . . . . . . . . . 11,344 7,164
Retained earnings . . . . . . . . . . . . . . . 39,895 30,833
-------- --------
Total stockholders' equity . . . . . . . . . . 51,491 38,236
-------- --------
Total liabilities and stockholders' equity . . $155,673 $ 98,535
======== ========
The accompanying notes are an integral part of these financial statements.
-3-
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
------------------------------------------------------------------------------------
(in thousands except share and per share amounts)
For the three months For the nine months
ended September 30, ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
Revenues . . . . . . . . . . $ 174,692 $ 103,630 $ 455,025 $ 261,774
Costs and expenses of
contracts . . . . . . . . . 168,747 100,457 438,899 252,723
--------- --------- --------- ---------
Gross profit. . . . . . . . . 5,945 3,173 16,126 9,051
Selling, general and
administrative expenses . . 576 199 970 617
Interest income, net. . . . . (161) (56) (532) (276)
--------- --------- --------- ---------
Income before income taxes. . 5,530 3,030 15,688 8,710
Provision for income taxes. . 2,171 1,141 6,053 3,309
--------- --------- --------- ---------
Net income. . . . . . . . . . $ 3,359 $ 1,889 $ 9,635 $ 5,401
========= ========= ========= =========
Basic earnings per share . . $ 0.67 $ 0.40 $ 1.96 $ 1.14
========= ========= ========= =========
Basic weighted average shares
outstanding 5,024,416 4,742,198 4,922,056 4,732,786
========= ========= ========= =========
Diluted earnings per share. . $ 0.66 $ 0.39 $ 1.94 $ 1.11
========= ========= ========= =========
Diluted weighted average
shares outstanding 5,063,279 4,842,200 4,977,371 4,849,671
========= ========= ========= =========
Dividends declared per share $ 0.04 $ 0.04 $ 0.12 $ 0.10
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
VSE Corporation and Subsidiaries
Consolidated Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------
(in thousands)
For the nine months
ended September 30,
2007 2006
---- ----
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 9,635 $ 5,401
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 2,385 1,310
Loss on sale of property and equipment . . . . . . . 1 9
Deferred taxes . . . . . . . . . . . . . . . . . . . (587) (328)
Stock-based compensation . . . . . . . . . . . . . . 228 245
Change in operating assets and liabilities, net of
effect of business combination:
Accounts receivable, net. . . . . . . . . . . . . . . (39,931) (15,198)
Contract inventories . . . . . . . . . . . . . . . . 4,148 (1,848)
Other current assets and noncurrent assets . . . . . (1,730) (2,118)
Accounts payable and deferred compensation . . . . . 36,686 9,697
Accrued expenses . . . . . . . . . . . . . . . . . . 1,035 (1,061)
Other liabilities . . . . . . . . . . . . . . . . . . 193 45
------- -------
Net cash provided by (used in) operating activities 12,063 (3,846)
------- -------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . (4,867) (2,598)
Acquisition of ICRC, including acquisition costs . . . . (11,755) -
------- -------
Net cash used in investing activities (16,622) (2,598)
------- -------
Cash flows from financing activities:
Borrowings on loan arrangement . . . . . . . . . . . . . 9,131 -
Repayments on loan arrangement . . . . . . . . . . . . . (9,131) -
Dividends paid . . . . . . . . . . . . . . . . . . . . . (539) (449)
Excess tax benefits from share-based
payment arrangements . . . . . . . . . . . . . . . . . 2,018 92
Proceeds from the exercise of options of common stock . 1,947 118
------- -------
Net cash provided by (used in) financing activities 3,426 (239)
------- -------
Net decrease in cash and cash equivalents . . . . . . . . (1,133) (6,683)
Cash and cash equivalents at beginning of period . . . . 8,745 12,717
------- -------
Cash and cash equivalents at end of period . . . . . . . $ 7,612 $ 6,034
======= =======
The accompanying notes are an integral part of these financial statements.
-5-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States 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 accounting principles
generally accepted in the United States 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 and nine months ended September 30, 2007 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2007. 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, 2006.
Management of VSE's business operations is conducted under four reportable
operating segments. These operating segments consist of: 1) the Federal
Group, which includes the Communications and Engineering Division ("CED"), the
Engineering and Logistics Division ("ELD"), the Field Support Services
Division ("FSS"), the Management Sciences Division ("MSD"), and the Systems
Engineering Division ("SED"), 2) the International Group, which includes the
BAV Division ("BAV"), the Coast Guard Division ("VCG"), and the Fleet
Maintenance Division ("FMD"), 3) the Energy and Environmental Group, which
includes Energetics Incorporated ("Energetics") and 4) the Infrastructure and
Information Technology Group, which includes Integrated Concepts and Research
Corporation ("ICRC").
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Significant estimates affecting the financial statements include the allowance
for doubtful accounts, accruals for loss contracts, contract disallowance
reserves, self insured health claims and estimated cost to complete on firm
fixed-price contracts.
Stock Split
On May 1, 2007, VSE announced a two for one stock split in the form of a 100%
stock dividend payable to stockholders of record as of June 11, 2007. The
stock dividend was made on June 28, 2007. All share and per share amounts
have been adjusted to give retroactive effect to the increased number of
common shares outstanding due to the stock split.
(2) Contract Inventories
Contract inventories consisted of work in process of approximately $311
thousand and $4.5 million as of September 30, 2007 and December 31, 2006,
respectively.
Contract inventories include materials purchased, and other expenditures for
use in a contract to modify and apply a protective system, the Tanker
Ballistic Protection System ("TBPS"), to military vehicles for the U.S. Army.
-6-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Although these costs are classified as inventories for accounting purposes,
they are similar in nature to materials and direct supplies purchased for use
in performance on the Company's other contracts in that they are solely and
directly attributable to the contract and will be billed to the customer
within a relatively short time. These materials and direct supplies will not
be restocked to maintain any permanent inventory levels. Contract inventories
are relieved when units are delivered and revenue is recognized.
(3) Debt
VSE has a loan agreement with a bank under which credit is made available to
the Company in the form of revolving loans or letters of credit. The loan
agreement provided loan financing up to a maximum commitment of $25 million as
of September 30, 2007. The expiration date of the loan agreement is August 14,
2009. From time to time the bank and the Company may amend the loan to
increase or decrease the amount of available credit, to change the expiration
date to a later date, or make other changes in the terms of the agreement.
The loan agreement contains terms whereby the Company may borrow against the
revolving loan at any time and from time to time can prepay such borrowings in
whole or in part without premium or penalty. There are collateral requirements
by which Company assets secure amounts outstanding, restrictive covenants that
include minimum tangible net worth and profitability requirements, a limit on
annual dividends, and other affirmative and negative covenants. As of
September 30, 2007 the Company has not been notified by the bank, nor is the
Company aware, of any default under the loan agreement.
The Company pays a commitment fee, interest on any revolving loan borrowings
at a prime-based rate or an optional LIBOR-based rate, and fees on any letters
of credit that are issued. As of September 30, 2007 and December 31, 2006,
there were no revolving loan amounts outstanding or letters of credit in
effect. Interest expense incurred on the loan was approximately $6 thousand
and $0 for the nine month periods ended September 30, 2007 and 2006,
respectively.
(4) Stock-based Compensation
The Company has recognized approximately $126 thousand and $436 thousand in
stock-based compensation costs for the three and nine month periods ended
September 30, 2007, respectively, and approximately $63 thousand and $245
thousand for the three and nine month periods ended September 30, 2006,
respectively. These amounts include the stock-based compensation costs
related to the restricted stock grants mentioned below.
Restricted Stock
During 2007 and 2006, the Company granted 5,100 shares and 3,600 shares,
respectively, of restricted VSE Stock to the Company's outside Directors
under the 2006 Restricted Stock Plan. Compensation expense related to those
grants was approximately $11 thousand and $92 thousand for the three and nine
month periods ended September 30, 2007, respectively, and approximately $0 and
$57 thousand for the three and nine month periods ended September 30, 2006,
respectively. The shares issued vested immediately and cannot be sold,
transferred, pledged or assigned before the second anniversary of the grant
date.
The Company notified certain employees that they are eligible to receive
awards under the 2006 Restricted Stock Plan for calendar year 2007 on January
3, 2007. Accordingly, such employees are eligible to receive an award based
-7-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
on VSE's financial performance for 2007. The earned amount will be expensed
ratably over the vesting period of approximately three years, including the
service period of one year which begins on January 1, 2007, because the
Company has concluded that it is probable that certain of the financial
statement targets will be met and the awards will be earned. As a result, the
Company has recognized approximately $69 thousand and $208 thousand in related
expense for the three and nine month periods ended September 30, 2007,
respectively.
(5) Earnings Per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period. Shares issued during the period are weighted for the portion of the
period that they were outstanding.
Diluted earnings per share have been computed in a manner consistent with that
of basic earnings per share while giving effect to all potentially dilutive
common shares that were outstanding during each period. Potentially dilutive
common shares include incremental common shares issuable upon exercise of
stock options.
Three Months Nine Months
ended September 30, ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
Basic weighted average
common shares outstanding 5,024,416 4,742,198 4,922,056 4,732,786
Diluted effect of options 38,863 100,002 55,315 116,885
--------- --------- --------- ---------
Diluted weighted average
common shares outstanding 5,063,279 4,842,200 4,977,371 4,849,671
========= ========= ========= =========
During the nine month period ended September 30, 2007, 248,874 stock options
were exercised which resulted in an increase to additional paid-in capital of
approximately $4 million, including related income tax benefits.
(6) Income Taxes
The Company adopted the provisions of FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," ("FIN 48"), on
January 1, 2007. As a result of the adoption of FIN 48, the Company made a
comprehensive review of its portfolio of uncertain tax positions in accordance
with recognition standards established by FIN 48. In this regard, an uncertain
tax position represents the Company's expected treatment of a tax position
taken in a filed tax return, or planned to be taken in a future tax return,
that has not been reflected in measuring income tax expense for financial
reporting purposes. As a result of this review and subsequent reviews, the
Company concluded that there are no uncertain tax positions. As a result of
applying the provisions of FIN 48, there was no cumulative effect on retained
earnings.
The Company is subject to U.S. federal income tax as well as income tax in
multiple state jurisdictions. The Company has substantially concluded all
U.S. federal income tax matters for years through 2004. Substantially all
material state and local matters have been concluded for years through 2003.
-8-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the Consolidated Statement of Income, the Company classifies interest
expense related to unrecognized tax benefits as "Interest income, net" and any
penalties in "Selling, general and administrative expenses." No interest or
penalty expense related to unrecognized tax benefits was recognized for the
nine month periods ended September 30, 2007. As of September 30, 2007, no
interest or penalties related to unrecognized tax benefits were accrued.
During 2007 and 2006, the Company accrued approximately $15 thousand and $60
thousand, respectively, related to expected interest payments to the Internal
Revenue Service ("IRS") for an open tax issue. This tax issue was settled
during the second quarter of 2007, which resulted in a cash payment of
approximately $20 thousand. No penalty was assessed on the issue.
(7) Litigation
VSE and its subsidiaries have, in the normal course of business, certain
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. However, the results of
any legal proceedings cannot be predicted with certainty.
(8) Segment Information
Management of VSE's business operations is conducted under four reportable
operating segments: the Federal Group, the International Group, the Energy and
Environmental Group, and the Infrastructure and Information Technology Group.
Federal Group - VSE's Federal Group provides engineering, technical,
management, integrated logistics support, and information technology services
to all U.S. military services and other government agencies. It consists of
five divisions: CED, ELD, FSS, MSD and SED.
International Group - VSE's International Group provides engineering,
industrial, logistics, and foreign military sales services to the U.S.
military and other government agencies. It consists of three divisions: BAV,
VCG and FMD.
Energy and Environmental Group - VSE's Energy and Environmental Group provides
high-level consulting services in the field of energy and environmental
management. The Energy and Environmental Group includes VSE's wholly owned
subsidiary, Energetics.
Infrastructure and Information Technology Group - VSE's Infrastructure and
Information Technology Group is a recent segment due to the acquisition on
June 4, 2007 of its wholly owned subsidiary, Integrated Concepts and Resources
Corporation ("ICRC"). ICRC is engaged principally in providing diversified
technical and management services to the U.S. Government, including
information technology, advanced vehicle technology, aerospace services, and
engineering and transportation infrastructure services.
These segments operate under separate management teams and discrete financial
information is produced for each segment. The Company evaluates segment
performance based on consolidated revenues and profits or losses from
operations before income taxes. The Company's segment information for the
three and nine month periods ended September 30, 2007 and 2006 is as follows
(in thousands):
-9-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Nine Months
ended September 30, ended September 30,
2007 2006 2007 2006
---- ---- ---- ----
Revenues:
Federal Group $ 91,619 $ 61,035 $245,414 $127,930
International Group 58,795 38,753 174,810 123,008
Energy and Environmental Group 3,845 3,846 10,698 10,790
Infrastructure and Information
Technology Group 20,449 - 24,068 -
Corporate (16) (4) 35 46
-------- -------- -------- --------
Total revenues $174,692 $103,630 $455,025 $261,774
======== ======== ======== ========
Income before income taxes:
Federal Group $ 2,815 $ 1,613 $ 8,579 $ 3,688
International Group 1,259 864 5,002 3,713
Energy and Environmental Group 429 558 1,196 1,394
Infrastructure and Information
Technology Group 1,469 - 1,636 -
Corporate/unallocated expenses (442) (5) (725) (85)
-------- -------- -------- --------
Income before income taxes $ 5,530 $ 3,030 $ 15,688 $ 8,710
======== ======== ======== ========
Customer Information
The Company is engaged principally in providing engineering, design, logistics,
management and technical services to the U.S. Government (the "government"),
other government prime contractors, and commercial entities. The largest
customer for the Company's services is the U.S. Department of Defense ("DoD"),
including agencies of the U.S. Navy, Army, and Air Force. The Company's revenue
by customer is as follows (in thousands):
Three Months Nine Months
ended September 30, ended September 30,
Source of Revenues 2007 2006 2007 2006
------------------ ---- ---- ---- ----
Army/Army Reserve $ 89,035 $ 56,907 $233,061 $115,900
Navy 47,575 40,818 147,751 128,271
Treasury 16,381 278 38,709 784
Other 21,701 5,627 35,504 16,819
-------- -------- -------- --------
Total Revenues $174,692 $103,630 $455,025 $261,774
======== ======== ======== ========
VSE does not measure revenue or profit by product or service lines, either for
internal management or external financial reporting purposes, because it would
be impractical to do so. Products offered and services performed are
determined by contract requirements and the types of products and services
provided for one contract bear no relation to similar products and services
provided on another contract. Products and services provided vary when new
contracts begin or current contracts expire. In many cases, more than one
product or service is provided under a contract or contract task order.
Accordingly, cost and revenue tracking is designed to best serve contract
requirements and segregating costs and revenues by product or service lines in
situations for which it is not required would be difficult and costly to both
VSE and its customers.
-10-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Acquisition - Integrated Concepts and Research Corporation
On June 4, 2007, the Company acquired all of the equity of ICRC of Alexandria,
Virginia. ICRC's core expertise lies in information technology, advance
vehicle technology, aerospace, engineering and transportation infrastructure.
The Company paid approximately $11.8 million in cash for the ICRC stock,
including direct acquisition costs of approximately $154 thousand consisting
of legal and accounting fees, with the potential for additional payments of up
to approximately $5.8 million if certain financial targets are met during the
next six years. If ultimately paid, the additional purchase price
consideration will be recorded as goodwill on the consolidated balance sheet
under existing accounting guidance. Management believes that the addition of
ICRC will provide the Company with an opportunity to expand and diversify its
business across a number of project areas, including smart vehicles, alternate
fuels, large-scale port engineering development and security, and information
technology services. The results of ICRC's operations are included in the
accompanying consolidated financial statements beginning as of June 4, 2007.
Of the purchase price, approximately $7.1 million was allocated to customer
related intangibles to be amortized over six to eight years. In addition,
approximately $1.5 million was allocated to ICRC's trade name, which has an
indefinite life, and approximately $2 million was allocated to goodwill.
Goodwill and intangible assets with indefinite lives are subject to review for
impairment at least annually.
The Company plans to file an election under the Internal Revenue Code Section
338(h)(10) to treat the transaction as a sale of assets for tax purposes.
The Company is following the guidance of SFAS No. 141 to record the purchase
of ICRC. The allocation of the initial purchase price has been finalized.
The Company has recognized the fair value of assets acquired and liabilities
assumed as follows (in thousands):
Description Fair Value
----------- ----------
Current assets $ 6,544
Property and equipment 429
Other assets 27
Intangibles - customer related 7,134
Intangibles - trade name 1,500
Goodwill 2,001
-------
Total assets acquired 17,635
Liabilities assumed (5,880)
-------
Total purchase price $11,755
=======
(10) Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159
permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect that adoption
-11-
VSE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of this statement may have on the Company's consolidated financial position
and results of operations when it becomes effective in 2008.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which is effective January 1, 2008. SFAS No. 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value and
expands disclosures about fair value measurements. The new standard is
applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value, with limited exceptions.
Management is currently evaluating the effect that adoption of this statement
may have on the Company's consolidated financial position and results of
operations when it becomes effective in 2008.
-12-
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Executive Overview
VSE Organization
VSE's business operations consist primarily of services performed by the
Company's unincorporated divisions and wholly owned subsidiaries. The Company
uses multiple operating entities to bid on and perform contract work. The use
of an operating structure with multiple entities gives the Company certain
competitive advantages and the flexibility to pursue a diverse business base.
The term "VSE" or "Company" refers to VSE and its divisions and subsidiaries
unless the context indicates operations of the parent company only.
Unincorporated divisions include BAV Division ("BAV"), Communications and
Engineering Division ("CED"), Coast Guard Division ("VCG"), Engineering and
Logistics Division ("ELD") beginning in 2006, Field Support Services Division
("FSS") beginning in June 2007, Fleet Maintenance Division ("FMD"), Management
Sciences Division ("MSD"), and Systems Engineering Division ("SED").
Energetics Incorporated ("Energetics") and Integrated Concepts and Research
Corporation ("ICRC"), acquired in June 2007, are VSE's currently active
subsidiaries.
VSE previously conducted business operations in other subsidiaries and
divisions that had no operating activity in 2006 and 2007.
VSE Customers and Services
The Company is engaged principally in providing engineering, design,
logistics, management and technical services to the U.S. Government (the
"government"), other government prime contractors, and commercial entities.
The largest customer for the Company's services is the U.S. Department of
Defense ("DoD"), including agencies of the U.S. Navy, Army, and Air Force.
VSE Operating Segments
Management of VSE's business operations is conducted under four reportable
operating segments: the Federal Group, the International Group, the Energy and
Environmental Group, and the Infrastructure and Information Technology Group.
Federal Group - VSE's Federal Group provides engineering, technical,
management, integrated logistics support, and information technology services
to all U.S. military branches and other government agencies. It consists of
five divisions - CED, ELD, FSS, MSD, and SED.
CED is dedicated to supporting the Army's Communications and Electronics
Command (CECOM) in the management and execution of the Rapid Response (R2)
Program, which supports clients across DoD and the Federal Government. CED
manages execution of tasks involving research and development, technology
insertion, systems integration and engineering, hardware/software fabrication
and installation, testing and evaluation, studies and analysis, technical data
management, logistics support, training, and acquisition support. A large
portion of CED's current work on this program is related to the war effort in
Iraq and Afghanistan, including: 1) the Army Equipment Support Program and the
task order to support U.S. Army PM Assured Mobility Systems and TACOM, each
more fully described later in this discussion; and 2) a task order to provide
close combat systems support.
CED Army Equipment Support Program - In December 2005, VSE's CED Division was
awarded a task order on its Rapid Response support contract to provide
maintenance and logistics services in support of U.S. Army equipment in Iraq
and Afghanistan. Services provided under this program include deployed
sustainment management, deployed logistics and repairs management, unique
system training and curriculum support, resource management, and acquisition
and administrative support. Work on this program began in 2006.
-13-
A large majority of the services on this program are provided by CED's
subcontractor. CED provides certain program management services. The contract
task order has a base year valued at approximately $139 million and an
additional one-year option period valued at approximately $212 million. This
program contributed significantly to VSE's revenues in 2006 and the first
three quarters of 2007, and based on the contract value and a significant
level of contract funding and funded backlog, is expected to contribute
significantly to VSE's revenues in the fourth quarter of 2007. Profit margins
on subcontract work such as this are lower than on work performed by Company
personnel.
ELD provides full life cycle engineering, logistics, maintenance, and
refurbishment services to extend and enhance the life of existing equipment.
ELD principally supports the U.S. Army, Army Reserve, and Army National Guard
with core competencies in combat and combat service support system
conversions, technical research, sustainment and re-engineering, system
integration, and configuration management.
FSS was formed in June 2007 to provide worldwide field maintenance and
logistics support services for a wide variety of military vehicles and
equipment, including performance of organizational, intermediate and
specialized depot-level maintenance. FSS principally supports the U.S. Army
and Marine Corps by providing specialized Field Service Representatives (FSR)
and Field Support Teams (FST) in areas of combat operations and austere
environments. In June 2007, FSS began providing some field service support on
the CED Army Equipment Support program.
MSD provides nationally and internationally recognized experts in product and
process improvement, supporting a variety of government and commercial
clients. MSD provides training, consulting, and implementation support in the
areas of: Enterprise Excellence, Lean Six Sigma, process and product
optimization, project management, leadership quality engineering, Integrated
Product and Process Development (IPPD), and reliability engineering. MSD's
services range from individual improvement projects to global organizational
change programs.
SED provides comprehensive systems and software engineering, logistics, and
prototyping services to DoD. SED principally supports U.S. Army, Air Force,
and Marine Corps combat and combat support systems. SED's core competencies
include: systems technical support, configuration management, and life cycle
support for wheeled and tracked vehicles and ground support equipment;
obsolescence management, service life extension, and technology insertion
programs; and technical documentation and data packages. A large portion of
SED's current work is related to the war effort in Iraq and Afghanistan,
including the TBPS Program and a task order to provide installation and
follow-on support services to the U. S. Army for vehicular remote detection
devices.
TBPS Program - VSE's SED Division performs work on a program providing a
protection system, the Tanker Ballistic Protection System ("TBPS"), for
vehicles deployed by the U.S. Army in Iraq. Under this program, SED applies a
polyurethane based ballistic coating system and necessary Add-on Armor Panels
for Army Fuel Dispensing Tankers as protection from hostile fire. Delivery of
completed vehicle protection systems began in January 2005.
SED has performed on the TBPS program under multiple firm fixed price per unit
contracts. Subsequent to program implementation, VSE has received
modifications to consolidate contracting activity into fewer contracts and to
adjust the number of tankers based on Army tanker availability and needs, and
the possibility remains that there may be future contract modifications as the
Army's needs change. The total contract ceiling value on the TBPS Program
contracts as of September 30, 2007 was approximately $90.4 million, and the
remaining available contract ceiling as of September 30, 2007 was
approximately $12.2 million. These contract ceiling amounts are fully funded.
Contractual coverage on the program runs through July 2008.
-14-
The TBPS Program has contributed to increases in VSE financial results in 2006
and 2007. The work performed on this program increases the amount of fixed
price contract work performed by the Company. In general, fixed price contract
work carries a higher level of risk and has higher profit margins than work on
other contract types. Accordingly, the TBPS program presents VSE's business
with the potential for both increased profit margins and increased risks of
incurring a loss.
International Group - VSE's International Group provides engineering,
industrial, logistics, and foreign military sales services to the U.S.
military and other government agencies. It consists of three divisions - BAV,
FMD, and VCG.
BAV provides assistance to the U.S. Navy in executing its Foreign Military
Sales (FMS) Program for surface ships sold, leased or granted to foreign
countries by providing program management, engineering, technical support, and
logistics services for ship reactivations and transfers, as well as follow-on
support. BAV's expertise includes: ship reactivation/transfer, overhaul and
maintenance, follow-on technical support, FMS integrated logistics support,
engineering and industrial services, training, and spare and repair parts
support.
BAV Ship Transfer Program - BAV provides its ship transfer services to the
Navy under large comprehensive ("omnibus") management contracts. During its
life, this program has been a significant revenue producer for the Company.
The level of revenues and associated profits resulting from fee income
generated by this program varies 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 and annual revenue
fluctuations and anticipates that future quarterly and annual revenues will be
subject to variation due to changes in the level of activity associated with
the Navy's ship transfer program. The transfer of four U.S. Navy ships to
Taiwan conducted under this program was a major contributor to the Company's
revenues in 2006.
The original contract associated with this program was a ten-year cost-plus
award fee contract awarded in 1995 with a total ceiling value of more than $1
billion. BAV was awarded a second contract in April 2005 to continue work on
this program. The new contract is a five-year cost-plus award fee contract
with a total ceiling value of approximately $544 million. The Navy began
issuing orders on the new contract in the second quarter of 2005 and ceased
issuing orders for new work on the original contract at that time. BAV
continued work associated with the transfer of four ships to Taiwan under
delivery orders issued on the original contract until the work was
substantially completed in 2006.
Contract terms under both the original and new contract specify base fee
payments and award fee payments to BAV. Base fee payments are determined by
level of contract activity and base fee income is recognized each month. Award
fee payments are determined by performance and level of contract activity. A
contract modification authorizing the award fee payment is issued subsequent
to the period in which the work is performed. The Company does not recognize
award fee income until the fees are fixed and determinable, generally upon
contract notification confirming the award fee. Award fees are made three
times during the year. Accordingly, the Company typically has three quarterly
reporting periods per year that include the recognition of BAV award fee
income and one quarterly reporting period that does not include BAV award fee
income. Due to such timing, and to fluctuations in the level of revenues,
profits as a percentage of revenues will fluctuate from period to period. The
Company recognized BAV award fee income in the three-month periods ended March
31 and June 30, 2007 and did not recognize any BAV award fee income in the
three-month period ended September 30. In 2006, the Company recognized BAV
award fee income in each of the three-month periods ended March 31, June 30,
and December 31, and did not recognize any BAV award fee income in the three-
month period ended September 30.
-15-
FMD provides global field engineering, logistics, maintenance, and information
technology services to the U.S. Navy and Air Force, including fleet-wide ship
and aircraft support programs. FMD's expertise includes ship repair and
modernization, ship systems installations, ordnance engineering and logistics,
facility operations, war reserve materials management, aircraft sustainment
and maintenance automation, and IT systems integration. FMD also provides
management, maintenance, storage, and disposal support for the U.S. Department
of Treasury's seized and forfeited general property program.
Treasury Seized Asset Program - In August 2006, VSE was awarded a contract to
support the U.S Department of the Treasury seized and forfeited general
property program. VSE assembled a team of experts to support all phases of the
contract. Such support includes: 1) consolidating general personal property
into Regional Property Management Centers, 2) optimizing vehicle sales at
facilities nationwide, 3) providing field representatives nationwide to
support local seizures, 4) utilizing the services of recognized sales and
marketing organizations to increase the sales of general property and vehicles
and 5) providing the Government with visibility, accountability, and controls.
This is a single award, cost-plus-incentive-fee contract that includes a base
period of performance, four option periods, and award term provisions. Phase
in work on the contract began in 2006 to transition the program from a
predecessor contractor. This program has the potential to be a significant
contributor to VSE's financial results in 2007 and future years. If all option
and award term periods are exercised, contract performance is expected to
continue through September 30, 2014. While the contract award specified an
amount of approximately $113 million under the base and option periods, actual
revenues are dependent on service requirements.
Contract terms specify base fee payments and incentive fee payments to VSE.
Base fee payments are determined by level of contract activity and base fee
income is recognized each month. Incentive fee payments are determined by
performance and level of contract activity. Incentive fees are earned once
annually and incentive fee amounts are determined based on an evaluation by
the customer following the government's September 30 fiscal year end. The
Company does not know the amount of incentive fee income for the year until
after notification of the results of this evaluation. The Company does not
recognize incentive fee income until the fees are fixed and determinable.
Accordingly, the Company will not recognize incentive fee income until after
notification of the results of the evaluation and will recognize the entire
annual amount of incentive fee income at one time. Due to such timing, and to
fluctuations in the level of revenues, profits as a percentage of revenues
will vary from period to period. The Company recognized base fee income on
this contract for the nine months ended September 30, 2007, but has not yet
recognized any incentive fee income during this period.
VCG provides the U.S. Coast Guard with FMS support and life cycle support for
vessels transferred to foreign governments. VCG's core competencies include
pre-transfer joint vessel inspections, reactivations, crew training, transit
assistance, heavy-lift contracting, logistics support, technical support, and
overseas husbandry.
Energy and Environmental Group - VSE's Energy and Environmental Group provides
consulting services in the field of energy and environmental management to the
U.S. Department of Energy, including the Office of Nuclear Energy, Science, and
Technology, and to other government agencies and commercial clients. The Energy
and Environmental Group includes VSE's wholly owned subsidiary, Energetics.
Energetics is an energy and environmental consulting company providing
technical and management support in areas of nuclear energy, technology
research, development, and demonstration. Energetics' expertise lies in state-
of-the-art and advanced technology assessment, technical and economic
feasibility analysis, technology transfer, R&D program planning, engineering
studies, market assessment, strategic resource management, regulatory analysis,
environmental compliance, and risk management. Founded in 1979 and acquired by
VSE in 1995, Energetics is dedicated to providing superior products and
services to clients in both the public and private sectors.
-16-
Infrastructure and Information Technology Group - VSE's Infrastructure and
Information Technology Group, a recent segment in the second quarter of 2007,
consists of its subsidiary, ICRC. VSE purchased ICRC in June 2007 for
approximately $11.8 million in cash, including direct acquisition costs of
approximately $154 thousand consisting of legal and accounting fees, with the
potential for additional payments of up to approximately $5.8 million if
certain financial targets are met during the next six years. For its fiscal
year ended March 31, 2007, ICRC recorded revenues of approximately $59 million
and net income of approximately $1.4 million. VSE consolidated results of
operations for the nine months ended September 30, 2007 include ICRC
operations from the June 4, 2007 date of acquisition through September 30,
2007.
ICRC is engaged principally in providing diversified technical and management
services to the U.S. Government, including information technology, advanced
vehicle technology, aerospace services, and engineering and transportation
infrastructure services. The acquisition of ICRC provides VSE with an
opportunity to expand VSE's presence in the markets it serves; opens or
expands markets in smart vehicles, alternate fuels, large-scale port
engineering development and security, and information technology services;
adds approximately 200 technical and professional employees to VSE's staff;
and adds several long-term contracts to VSE's business base.
A material part of ICRC's revenue and net income comes from a ten-year U.S.
Department of Transportation ("DOT") contract awarded in 2003 through the
Section 8(a) Program of the United States Small Business Administration
("SBA") for the provision of infrastructure services for the Port of Anchorage
in Alaska (the "POA Contract"). Revenues from the POA Contract were
approximately $23.5 million for ICRC's fiscal year ended March 31, 2007. DOT
submitted a request to SBA for a waiver to permit the continuation of the POA
Contract under provisions of the Federal Acquisition Regulations requiring,
in the absence of a waiver, the termination for convenience of a Section 8(a)
contract where the ownership of the contractor is no longer controlled or at
least 51% owned by disadvantaged individuals (as defined in the applicable
regulations). VSE understands that, while the SBA has stated it will not grant
such a waiver, it is giving further review to a subsequent DOT request for the
waiver. Payment of the above-noted additional purchase price amounts of up to
approximately $5.8 million is contingent on VSE realizing certain revenues
from the POA Contract during the six-year period following VSE's June 2007
acquisition of ICRC. VSE's management does not believe that the outcome of
this matter will have a material adverse affect on VSE's financial condition
or operations.
Government Procurement Policies and Practices
VSE's business is subject to the risks arising from economic conditions and
political factors that may impact the budgets and program funding of customers
served through VSE's contracts. VSE's revenues have historically been subject
to annual fluctuations resulting from changes in DoD spending. Future
budgetary and funding decisions by government lawmakers or DoD restructuring
efforts could affect the types and level of services provided by VSE to its
government customers and could potentially have a material adverse impact on
the Company's results of operations or financial condition.
The revenues of the Company depend on its ability to win new contracts and on
the amount of work ordered by the government under the Company's existing
contracts. The Company's ability to win new contracts is affected by
government acquisition policies and procedures, including government
procurement practices that in some years have tended toward bundling work
efforts under large omnibus contracts. This emphasis on large contracts
presents challenges to winning new contract work, including making it more
difficult for the Company to qualify as a bidder, increasing the level of
competition due to the award of fewer contracts, and forcing the Company into
competition with larger organizations that have greater financial resources
and larger technical staffs. Competing for these contracts requires the
Company to use teams of subcontractors to be able to offer the range of
technical competencies needed to do the work. While the use of subcontractors
-17-
on a large scale basis allows the Company to compete for this work, profit
margins on subcontract work are lower than on work performed by Company
personnel, thereby reducing the Company's overall profit margins.
The use of subcontractors on government contracts also raises certain
performance and financial risks to VSE because government prime contractors
are responsible for performing to the requirements of the contract and
ensuring compliance with U.S. Government regulations relative to the
performance by subcontractors.
Other government procurement practices that can affect the Company's revenues
are: 1) the length of contracts issued, which may vary depending on changes in
contracting regulations and other factors; 2) the use of past performance
criteria that may preclude entrance into new government markets; and 3)
government social programs that limit contract work to small, female, or
minority owned businesses. Additional risk factors that could potentially
affect the Company's results of operations are the government's right to
terminate contracts for convenience, the government's right to not exercise
all of the option periods on a contract, and funding delays caused by
government political or administrative actions.
Global Economic Conditions and Political Factors
VSE's business is subject to the risks arising from global economic conditions
and political factors associated with current and potential customers served
through VSE's contracts with the U.S. Government. An economic slowdown in
countries served under the BAV Ship Transfer Program could potentially affect
sales. Failure by the government of a potential foreign customer to approve
and fund acquisition of U.S. Navy ships serviced under this program could
affect sales. In any one year, a significant amount of the Company's revenues
may result from sales on the BAV Ship Transfer Program to a single foreign
government. BAV sales to Egypt have historically comprised a large percentage
of the Company's total sales in any one year.
Revenues from the CED Army Equipment Support, BAV Ship Transfer, TBPS and
other programs for which work is performed in foreign countries are subject to
political risks posed by the ongoing conflicts in the Middle East and
potential terrorist activity. A significant amount of VSE revenues in recent
years has resulted from the U. S. military involvement in Iraq and
Afghanistan, and an end to such U. S. military involvement in the future could
potentially cause a decrease in VSE revenues. Similarly, a change in the
political landscape in Egypt or other client countries served by BAV could
potentially cause a decrease in VSE revenues. International tensions can also
affect work by FMD on U.S. Navy ships when they are deployed outside of U.S.
Navy facilities and are unavailable for maintenance work during this time
period. Adverse results arising from these global economic and political risks
could potentially have a material adverse impact on the Company's results of
operations.
-18-
Concentration of Revenues
(in thousands)
For the nine months ended September 30,
---------------------------------------
2007 2006
Source of Revenues Revenues % Revenues %
------------------ -------- - -------- -
CED Army Equipment Support $149,356 33 $ 66,252 25
SED TBPS Program 18,675 4 22,887 9
CED Assured Mobility Systems 14,515 3 - -
BAV Egypt 39,193 9 38,231 15
BAV India 36,765 8 135 -
BAV Greece 7,747 2 - -
BAV Taiwan 5,228 1 39,100 15
BAV Other 5,081 1 8,000 3
-------- --- ------- ---
Total BAV 94,014 21 85,466 33
Treasury Seized Asset Program 37,675 8 9 -
VSE Other 140,790 31 87,160 33
-------- --- ------- ---
Total Revenues $455,025 100 $261,774 100
======== === ======== ===
Revenue by Contract Type
Revenues by contract type for the nine months ended September 30, 2007 and
2006 were as follows (in thousands):
2007 2006
Contract Type Revenues % Revenues %
------------- -------- - -------- -
Cost-type . . . . . $159,932 35 $117,168 45
Time and materials. 261,889 58 112,016 43
Fixed-price . . . . 33,204 7 32,590 12
-------- --- -------- ---
$455,025 100 $261,774 100
======== === ======== ===
A large amount of the time and materials revenues shown in the table above is
attributable to revenues from the CED Army Equipment Support contract that
started in 2006. Substantially all of the revenues on this contract have
resulted from the pass through of subcontractor support services that have a
very low profit margin for VSE.
Management Outlook
The Company's growth in revenues and profits continued in the first nine
months of 2007. Subject to the risk elements discussed above, VSE believes it
has the potential to sustain these revenue and profit levels through the
remainder of 2007. Discussion of some of the events and circumstances that
will impact the Company's results follows below.
CED Army Equipment Support Program. CED began work on this program in 2006 and
revenues from this program in 2006 were approximately $106 million. Work on
the program has increased in 2007. Revenues for the nine months ended
September 30, 2007 were approximately $149 million. The contract task orders
for this program are incrementally funded, with funded backlog of
approximately $159 million as of September 30, 2007. While profit margins on
this program are expected to be low, the Company expects to benefit from the
increased revenue base that this program provides.
ICRC Acquisition. The acquisition of ICRC will contribute to VSE's revenues
and profits in 2007 and is expected to contribute to revenues and profits in
2008. Revenues for ICRC were approximately $59 million in its most recently
-19-
completed fiscal year ended March 31, 2007. ICRC revenues since the June 4,
2007 acquisition date are approximately $24 million, providing an increase to
total VSE revenues during the first nine months of 2007.
Treasury Seized Asset Program. Phase in work on this program began in 2006 to
transition the program from a predecessor contractor. This program has the
potential to be a significant contributor to VSE's financial results in 2007
and future years.
BAV Ship Transfer Program. During the first nine months of 2007, BAV has
supported the transfer of five excess U.S. Navy ships to FMS clients. A large
amphibious ship was transferred to India and four mine hunter ships, two each,
have been transferred to Egypt and Greece. This marks the first opportunity
BAV has had to work with India and a resumption of support for Greece after
several years of inactivity. It is also a significant increase in activity in
Egypt. These efforts, as well as the integration of four U.S. Navy ships into
the fleet operations of the Taiwan Navy under this program, provide BAV with
some solid prospects for follow-on technical support and training services in
these countries. The Company expects the BAV Ship Transfer Program to continue
to be a major provider of revenues in 2007 and future years. Funded backlog on
the BAV Ship Transfer Program was approximately $65 million as of September
30, 2007.
TBPS Program. In 2007, the U. S. Army identified additional work to continue
the TBPS program, added funding, and extended contractual coverage on the
program through July 2008. Revenues from this program were approximately $30
million in both 2006 and 2005. While 2007 revenues are expected to be less
than this level, the TBPS program will continue to be a strong contributor to
VSE financial results in 2007. Funded backlog remaining on the program was
approximately $12.2 million as of September 30, 2007.
ELD Equipment Refurbishment Services. VSE has provided the U. S. Army Reserve
with military vehicle and equipment refurbishment services for several years.
Beginning in 2006, VSE formed ELD to continue the performance of these
services. ELD has expanded its workforce, facilities, capacity to perform
work, contractual coverage and funding since its inception, resulting in
increases in revenues from these services in 2006 and the first nine months of
2007. The Company expects further increases in the remainder of 2007 and
future years.
Other Significant Contracts. VSE has three multiyear, multiple award,
indefinite delivery, indefinite quantity contracts that have large nominal
ceiling amounts with no funding committed at the time of award. VSE is one of
several awardees on each contract. While future VSE revenue from these
contracts cannot be predicted, the award of these contracts provides the
Company with the opportunity to compete for work that could contribute to
future revenue growth, including new work in 2007. These three contracts are
described below.
VSE's CED Division has a multiyear Rapid Response support contract awarded by
the U.S. Army Communications and Electronics Command (CECOM) in January 2003.
The contract enhances the Company's revenue producing capabilities by allowing
it to provide services through any of VSE's operating entities or through
third party subcontractors for various end user government customers. If all
options are exercised, this contract has a potential total nominal ceiling of
approximately $2.9 billion over an eight-year period. While it is unlikely
that the full ceiling amount will be realized, the Company has received over
$1.2 billion in task order awards and over $775 million of funding since
inception of the contract. This contract generated revenues for all of VSE of
approximately $143 million during 2006, including revenues of approximately
$106 million on the CED Army Equipment Support Program. CED was awarded a new
task order under this contract in December 2006 for work to support U.S. Army
PM Assured Mobility Systems and TACOM, most of which will be subcontracted,
that represents potential revenues to the Company of about $212 million over a
16-month period if all options are exercised. VSE continues to pursue new
orders on this contract that provide potential future revenue opportunities.
-20-
VSE's FMD Division has a contract with the U.S. Navy, SeaPort Enhanced,
awarded in April 2004, which includes a five-year base period and two five-
year option periods. This contract is a procurement vehicle for the Navy to
use for ordering services from a wide range of contractors to support all
phases of naval ship and shipboard weapons systems acquisition and life-cycle
support. While this award does not guarantee any revenues for VSE, the Company
is one of several contractors eligible to bid for services during the life of
the contract. As of September 30, 2007, FMD has been awarded approximately
$20.8 million in contract task orders under this contract.
ELD has a contract, the Field and Installation Readiness Support Team
("FIRST") Contract, awarded in November 2006, with the U.S. Army to provide a
broad range of logistics and engineering and technical services to Army
activities in the continental United States and overseas locations. The
contract has a five-year base period and three five-year option periods. VSE
is one of several awardees eligible to share in the potential total contract
ceiling amount, which is expected to be several billion dollars. The award of
this contract provides VSE with the opportunity to compete for work which may
contribute to future revenue growth.
Funded Backlog
Revenues in government contracting businesses are dependent upon contract
funding ("Bookings") and funded contract backlog is an indicator of potential
future revenues. A summary of VSE's bookings, funded contract backlog, and
revenues for the nine months ended September 30, 2007, including ICRC from the
acquisition in June, is as follows:
(in millions)
-----------
Bookings for the nine months ended September 30, 2007 $603
Funded backlog as of September 30, 2007 $478
Revenues for the nine months ended September 30, 2007 $455
Funded backlog includes approximately $48 million of ICRC backlog.
Longer Term
The growth in VSE revenue and profits during 2006 and the first three quarters
of 2007, and the expected continuation of this growth in the remainder of 2007
will present the Company with both challenges and opportunities for future
years. Certain work efforts that have supported VSE's growth in recent years
have expired or are due to expire. VSE has received significant contributions
to its revenue growth: 1) from the Taiwan Ship Transfer work, which was
substantially completed in September 2006; 2) from the TBPS Program work, for
which a large majority of the originally proposed work has been delivered and
current contractual coverage is scheduled to expire in July 2008; and, 3) from
the CED Army Equipment Support Program for which contract coverage currently
expires in February 2008. The expiration of these programs may reduce VSE
annual revenues if the expiring work is not replaced by new or follow-on work.
The Company believes it is well prepared to meet the challenge of replacing
the expiring work. Progress has already been made toward this end with the
start up of the Treasury Seized Property Management program awarded in August
2006, the FIRST contract awarded in November 2006, the new task order awarded
under the Rapid Response support contract in December 2006, continued
increases in ELD's equipment refurbishment services, and the acquisition of
ICRC.
Opportunities associated with VSE's recent growth include a more competitive
price structure with which to bid on future work, a wider range of employee
skill sets, and a broader name recognition and past performance record for use
in expanding the Company's customer base. The larger revenue level and capital
base built up in recent years improves the Company's ability to pursue larger
programs and potential acquisition opportunities.
-21-
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115." SFAS No. 159
permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect that adoption
of this statement will have on the Company's consolidated financial position
and results of operations when it becomes effective in 2008.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which is effective January 1, 2008. SFAS No. 157 defines fair value,
establishes a market-based framework or hierarchy for measuring fair value and
expands disclosures about fair value measurements. The new standard is
applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value, with limited exceptions.
Management is currently evaluating the effect that adoption of this statement
will have on the Company's consolidated financial position and results of
operations when it becomes effective in 2008.
Critical Accounting Policies
VSE's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
VSE to make estimates and assumptions. Please refer to VSE's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006 filed with the Securities
and Exchange Commission (the "SEC") on March 5, 2007 for a full discussion of
the Company's accounting policies.
Revenue Recognition
The Company will occasionally perform work at risk, which is work that is
performed prior to the government formalizing funding for such work. Revenue
related to work performed at risk is not recognized until it can be reliably
estimated and its realization is probable. VSE recognizes this "risk funding"
as revenue when the associated costs are incurred or the work is performed.
VSE is at risk of loss for any risk funding not received. The Company provides
for anticipated losses on contracts by a charge to income during the period in
which losses are first identified. As of September 30, 2007, VSE has
recognized approximately $1 million in risk funding. The Company received
funding modifications for approximately $180 thousand of this amount during
October 2007, leaving approximately $857 thousand of revenues classified as
risk funding. VSE believes that it will receive funding for all of the
remaining risk funding revenue.
-22-
Results of Operations
The following table sets forth certain items for VSE, including consolidated
revenues, pre-tax income and net income, and the changes in these items for
the three and nine month periods ended September 30, 2007 and 2006 (in
thousands):
2007
Increase
Compared
to 2006
Three Months Nine Months --------
ended September 30, ended September 30, Three Nine
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $174,692 $103,630 $455,025 $261,774 $71,062 $193,251
======== ======== ======== ======== ======= ========
Income before income
taxes $ 5,530 $ 3,030 $ 15,688 $ 8,710 $ 2,500 $ 6,978
Provision for income
taxes 2,171 1,141 6,053 3,309 1,030 2,744
-------- -------- -------- -------- ------- --------
Net Income $ 3,359 $ 1,889 $ 9,635 $ 5,401 $ 1,470 $ 4,234
======== ======== ======== ======== ======= ========
Revenues increased by approximately 69% and 74% for the three and nine months
ended September 30, 2007, as compared to the same periods of 2006. The primary
reasons for the increases in revenues were 1) revenues associated with the CED
Army Equipment Support program and other CED task orders, including CED's U.S.
Army PM Assured Mobility Systems and TACOM support; 2) revenues from the start
of FMD's Treasury Seized Property Management Program and increases in other
FMD services; 3) revenues associated with BAV's ship transfer to India; 4)
revenues from newly acquired ICRC; and 5) an increase in ELD equipment
refurbishment services.
Selling, general and administrative expenses consist primarily of costs and
expenses that are not chargeable or reimbursable on the Company's operating
unit contracts. The increase in these expenses for the three and nine month
periods ended September 30, 2007, as compared to the same periods of 2006, is
primarily due to the amortization of intangible assets attributable to the
ICRC acquisition and to the inclusion of ICRC's selling, general and
administrative expenses in VSE results in 2007 but not included in 2006.
Income before income taxes increased by approximately 83% and 80% for the
three month and nine months ended September 30, 2007, as compared to the same
periods of 2006. The increases were primarily due to increased profitability
of SED services performed, the increase in revenues on the CED Army Equipment
Support program, revenues from recently acquired ICRC, revenue and margin
increases on ELD's equipment refurbishment services, profits associated with
the increase in FMD revenues, and increased BAV fee income.
Federal Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the Federal Group for the three and nine
months ended September 30, 2007 and 2006 (in thousands):
2007
Increase Compared
to 2006
Three Months Nine Months -------
ended September 30, ended September 30, Three Nine
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $91,619 $61,035 $245,414 $127,930 $30,584 $117,484
======= ======= ======== ======== ======= ========
Income before income
taxes $ 2,815 $ 1,613 $ 8,579 $ 3,688 $ 1,202 $ 4,891
======= ======= ======== ======== ======= ========
Profit percent 3.1% 2.6% 3.5% 2.9%
Revenues for the Federal Group increased by approximately 50% and 92% for the
three and nine months ended September 30, 2007, as compared to the same
-23-
periods for the prior year. A substantial portion of the increases in revenues
for 2007 was attributable to revenues associated with the CED Army Equipment
Support Program work. Other reasons for the increases in 2007 revenues
included: 1) work on additional CED task orders, including CED's U.S. Army PM
Assured Mobility Systems and TACOM support; 2) increased revenues from ELD's
equipment refurbishment services for the U. S. Army Reserve; and 3)
increases in SED contract services performed other than the TBPS Program. The
increases in revenues of this segment were offset partially by a decrease in
TBPS Program revenues and a decline in MSD revenues for both the three and
nine month period.
Income before income taxes for the Federal Group increased by approximately
75% and 133% for the three and nine months ended September 30, 2007, as
compared to the same periods for the prior year. The increases in income
before income taxes were primarily due to increased profitability of SED
services performed on the TBPS Program and other SED services; profits
associated with the increased military equipment refurbishment services
performed by ELD for the U.S. Army Reserve; the increase in revenues on the
CED Army Equipment Support Program work and other CED task orders. The
increases in income before income taxes of this segment were offset slightly
by a decline in MSD profits for both the three and nine month period.
International Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the International Group for the three and
nine months ended September 30, 2007 and 2006 (in thousands):
2007
Increase Compared
to 2006
Three Months Nine Months -------
ended September 30, ended September 30, Three Nine
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $58,795 $38,753 $174,810 $123,008 $20,042 $51,802
======= ======= ======== ======== ======= =======
Income before income
taxes $ 1,259 $ 864 $ 5,002 $ 3,713 $ 395 $ 1,289
======= ======= ======== ======== ======= =======
Profit percent 2.1% 2.2% 2.9% 3.0%
Revenues for the International Group increased by approximately 52% and 42%
for the three and nine months ended September 30, 2007, as compared to the
same periods for the prior year. The increases in revenues were primarily due
to revenues provided by the start of FMD's Treasury Seized Property Management
Program and increases in other FMD services, and to revenues associated with
BAV's ship transfer to India. These additional revenues were partially offset
by the substantial completion of BAV's work associated with the transfer of
U.S. Navy ships to Taiwan. The increases in revenues of this segment were
helped slightly by an increase in VCG revenues for the three and nine month
periods.
Income before income taxes for the International Group increased by
approximately 46% and 35% for the three and nine months ended September 30,
2007, as compared to the same periods for the prior year. The increase was
primarily due to profits from higher revenue levels in FMD attributable to
FMD's Treasury Seized Property Management Program and to increased BAV fee
income. The increases in income before income taxes of this segment were
helped slightly by an increase in profits for VCG for the three and nine month
periods.
-24-
Energy and Environmental Group Results
The following table shows consolidated revenues and income before income taxes
and the changes in these items for the Energy and Environmental Group for the
three and nine months ended September 30, 2007 and 2006 (in thousands):
2007
Increase Compared
to 2006
Three Months Nine Months -------
ended September 30, ended September 30, Three Nine
Description 2007 2006 2007 2006 Months Months
----------- ---- ---- ---- ---- ------ ------
Revenues $3,845 $3,846 $10,698 $10,790 $ (1) $ (92)
====== ====== ======= ======= ===== ======
Income before income
taxes $ 429 $ 558 $ 1,196 $ 1,394 $(129) $ (198)
====== ====== ======= ======= ===== ======
Profit percent 11.2% 14.5% 11.2% 12.9%
Revenues in the Energy and Environmental Group were substantially unchanged
for the three and nine months ended September 30, 2007, as compared to the
same periods for the prior year.
Income before income taxes in the Energy and Environmental Group decreased by
approximately 23% and 14% for the three and nine months ended September 30,
2007, as compared to the same periods for the prior year. The decrease in
income before income taxes in 2007 was primarily due to the timing of various
costs incurred and associated revenues recognized in 2006 as compared to the
same period of 2007.
Infrastructure and Information Technology Group
The following table shows consolidated revenues and income before income taxes
for the Infrastructure and Information Technology Group for the three and nine
months ended September 30, 2007 (in thousands):
Three Months Nine Months
ended September 30, ended September 30,
2007 2007
---- ----
Revenues $20,449 $24,068
======= =======
Income before income
taxes $ 1,469 $ 1,636
======= =======
Profit percent 7.2% 6.8%
VSE consolidated results of operations for the nine months ended September 30,
2007 include ICRC operations from the June 4, 2007 date of acquisition through
September 30, 2007.
Financial Condition
VSE's financial condition did not change materially during the nine months
ended September 30, 2007. The Company's largest assets are its accounts
receivable. The largest liabilities are its accounts payable and accrued
expenses. Accounts receivable increased by approximately $40 million and
accounts payable and accrued expenses increased by approximately $38 million
during the nine months ended September 30, 2007, primarily as a result of the
Company's increased revenues during this period. The acquisition of ICRC also
caused increases in accounts receivable, accounts payable, and accrued
expenses; and additionally resulted in a decrease in cash and cash equivalents
and increases in intangible assets. The change in total stockholders'
investment in this period was also impacted by earnings and dividend activity
and the exercise of stock options.
-25-
Liquidity and Capital Resources
Cash Flows
Cash and cash equivalents decreased by approximately $1.1 million during the
nine months ended September 30, 2007. The decrease in cash and cash
equivalents during this period resulted from cash used in investing activities
of approximately $16.6 million, cash provided by operating activities of
approximately $12.1 million, and cash provided by financing activities of
approximately $3.4 million. Investing activities included the acquisition of
ICRC for approximately $11.8 million, the expansion and improvement of
facilities of approximately $3.2 million and purchases of property and
equipment, net of dispositions, of approximately $1.7 million. Financing
activities consisted of dividend payments and proceeds from the exercise of
VSE stock options and associated excess tax benefits.
Cash and cash equivalents decreased by approximately $6.7 million during the
nine months ended September 30, 2006. The decrease in cash and cash
equivalents during this period resulted from cash used in operating activities
of approximately $3.8 million, cash used in investing activities of
approximately $2.6 million, and cash used in financing activities of
approximately $239 thousand. Investing activities consisted of expansion and
improvement of facilities of approximately $356 thousand and purchases of
property and equipment, net of dispositions, of approximately $2.2 million.
Financing activities consisted of dividend payments and proceeds received from
the issuance of VSE Stock under stock incentive plans.
The difference between cash provided by operating activities of approximately
$12.1 million in 2007 as compared to cash used in operating activities of
approximately $3.8 million in 2006 is primarily due to the increase in net
income and fluctuations in operating assets and liabilities associated with
increased revenues and the timing of accounts receivable collections and
subcontractor and vendor payments.
Quarterly cash dividends were paid at the rate of $.11 per share during the
nine months ended September 30, 2007, stated on a post-split basis to reflect
the two-for-one stock split paid on June 28, 2007. Pursuant to its bank loan
agreement, the payment of cash dividends by VSE is subject to annual rate
restrictions. VSE has paid cash dividends each year since 1973.
Liquidity
The Company's internal sources of liquidity result primarily from operating
activities, specifically from changes in the level of revenues and associated
accounts receivable and accounts payable from period to period, and from
profitability. Significant increases or decreases in revenue and accounts
receivable and accounts payable can cause significant increases or decreases
in internal liquidity.
Accounts receivable arise primarily from billings made by the Company to the
government or other government prime contractors for services rendered, and
payments received on accounts receivable represent the principal source of
cash for the Company. Accounts receivable levels can be affected significantly
by the timing of large materials purchases and subcontractor efforts used in
performance on the Company's contracts. Accounts receivable levels are also
affected by contract retainages, differences between the provisional billing
rates authorized by the government compared to the costs actually incurred by
the Company, differences between billable amounts authorized by contract terms
compared to costs actually incurred by the Company, contract funding delays
arising from job performance issues, and government delays in processing
administrative paperwork for contract funding.
Work on the TBPS program requires the Company to acquire inventories
consisting of materials, supplies, and other expenditures for which end units
have not yet been completed and accepted. Although these costs are classified
as inventories for accounting purposes, they are similar in nature to
materials and direct supplies purchased for use in performance on the
-26-
Company's other contracts in that they are solely and directly attributable to
the contract and will be billed to the customer within a relatively short
time. All of the inventories are expected to be liquidated, billed, and
collected as vehicle protection systems are completed and accepted by the
government customer. These materials and direct supplies will not be restocked
to maintain any permanent inventory levels.
Accounts payable arise primarily from purchases of subcontractor services and
materials used by the Company in the performance of its contract work.
Payments made on accounts payable, along with payments made to satisfy
employee payroll and payroll associated expenses, make up the principal cash
requirements of the Company. Accounts payable levels can be affected by
changes in the level of contract work performed by the Company and by the
timing of large materials purchases and subcontractor efforts used in
performance on the Company's contracts.
From time to time, the Company may also invest in the acquisition of another
company. The acquisition of ICRC in 2007 represented a substantial use of
cash. While there are no firm plans for additional acquisitions of this nature
at this time, the possibility exists that future acquisitions could be made.
Other cash requirements include income tax payments, the acquisition of
capital assets for shop, office and computer support, and the payment of cash
dividends. The Company also invests in expansion, improvement, and maintenance
of its operational and administrative facilities. The growth in the level of
equipment refurbishment services provided by ELD required an increased level
of investment in operational facilities in 2006 and 2007 and the potential
exists for making additional investments in such facilities in future years.
VSE's external sources of liquidity consist of a revolving loan agreement that
provides loan financing based on the Company's accounts receivable (see "Notes
to Consolidated Financial Statements"). The bank financing complements the
Company's internal sources of liquidity by providing increasing levels of
borrowing capacity as accounts receivable levels increase. The bank loan
agreement provided loan financing up to a maximum commitment of $25 million as
of September 30, 2007. The amount of this commitment is negotiable between the
Company and the bank. The Company has determined that this new amount is
adequate to cover known current and future liquidity requirements.
Performance of work under the Company's larger contracts that require
significant amounts of subcontractor or material purchases have the potential
to cause substantial requirements for working capital; however, management
believes that cash flows from operations and the bank loan commitment are
adequate to meet current operating cash requirements.
Contractual Obligations
In March 2007, the Company signed two five-year facility leases for warehouse
space to begin in March 2007 for an aggregate amount of approximately $8.4
million.
Upon the acquisition of ICRC in June 2007, the Company assumed liability for
certain additional operating lease commitments. This includes five leases for
office space and approximately ten equipment leases for an aggregate amount of
approximately $2.3 million.
In June 2007, the Company signed a contract for approximately $6.1 million for
construction of additional warehouse and shop space at its Ladysmith, Virginia
facility. Work began in July 2007 and is expected to be completed in May 2008.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in VSE's Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 for a summary of the Company's other contractual
obligations.
-27-
Inflation and Pricing
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
computer systems equipment, furniture and fixtures, and land and improvements.
The overall impact of inflation on replacement costs of such property and
equipment is not expected to be material to VSE's future results of operations
or financial condition.
Disclosures About Market Risk
Interest Rates
VSE's bank loan financing provides available borrowing to the Company at
variable interest rates. The Company used a significant amount of its cash
reserves to pay for the ICRC acquisition in June 2007, giving rise to a
situation where the Company may borrow on its bank loan from time to time in
the near term. VSE does not anticipate that such amounts borrowed will be
significant, and accordingly, the Company does not believe that any movement
in interest rates would have a material impact on future earnings or cash
flows. If VSE were to significantly increase borrowings, future interest rate
changes could potentially have a material impact.
Foreign Currency
While a significant amount of the Company's business results from the services
provided by BAV related to the transfer of ships to foreign governments, the
BAV contract payments are made by the U.S. Government in U.S. dollars.
Additionally, most funding requirements to support work performed or services
purchased in foreign countries are made in U.S. dollars, and the infrequent
disbursements that are made in foreign currencies are reimbursable to BAV in
post conversion dollars. Foreign currency transactions of other VSE divisions
or subsidiaries are minimal. Accordingly, the Company does not believe that it
is exposed to any material foreign currency risk.
-28-
VSE CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risks
See "Disclosures About Market Risk" in Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
As of the end of the period covered by this report, based on management's
evaluation, with the participation of VSE's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d - 15(e) under the Securities
Exchange Act of 1934, as amended) our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective in ensuring that information required to be disclosed by us in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms, and that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
There was no change in our internal control over financial reporting during
our third quarter of fiscal 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Registrant did not purchase any of its equity securities during the period
covered by this report.
Under the Registrant's bank loan agreement dividends may be paid in an annual
aggregate amount of $.60 per share, provided there is no default under the
loan agreement.
Item 6. Exhibits
(a) Exhibits.
Exhibit No.
-----------
31.1 Section 302 CEO Certification
31.2 Section 302 CFO and PAO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO and PAO Certification
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has omitted all other items contained in "Part II. Other
Information" because such other items are not applicable or are not required
if the answer is negative or because the information required to be reported
therein has been previously reported.
-29-
VSE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSE CORPORATION
Date: November 9, 2007 /s/ D. M. Ervine
__________________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Date: November 9, 2007 /s/ T. R. Loftus
__________________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
-30-
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, D. M. Ervine, certify that:
1. I have reviewed this report on Form 10-Q of VSE Corporation (the
"Registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such
Internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's Board of Directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: November 9, 2007 /s/ D. M. Ervine
___________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, T. R. Loftus, certify that:
1. I have reviewed this report on Form 10-Q of VSE Corporation (the
"Registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such
Internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's Board of Directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: November 9, 2007 /s/ T. R. Loftus
_____________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Chairman, President, Chief Executive Officer and Chief
Operating Officer of VSE Corporation (the "Company"), does hereby certify that
to the best of the undersigned's knowledge:
1) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 (the "Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Company's Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
Dated: November 9, 2007 /s/ D. M. Ervine
___________________________
D. M. Ervine
Chairman, President,
Chief Executive Officer and
Chief Operating Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Executive Vice President and Chief Financial Officer of VSE
Corporation (the "Company"), does hereby certify that to the best of the
undersigned's knowledge:
1) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 (the "Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Company's Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
Dated: November 9, 2007 /s/ T. R. Loftus
_____________________________
T. R. Loftus
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)