Earnings Per Share
Basic earnings per share ("EPS") is 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. Our calculation of diluted earnings per common share includes the dilutive effects for the assumed vesting of restricted stock awards.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Basic weighted average common shares outstanding
|
10,876,201
|
|
|
10,834,562
|
|
|
10,793,723
|
|
Effect of dilutive shares
|
59,856
|
|
|
33,272
|
|
|
34,429
|
|
Diluted weighted average common shares outstanding
|
10,936,057
|
|
|
10,867,834
|
|
|
10,828,152
|
|
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Due to the short maturity of these instruments, the carrying values on our consolidated balance sheets approximate fair value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of computer equipment, furniture, other equipment is provided principally by the straight-line method over periods of
three
to
15 years
. Depreciation of buildings and land improvements is provided by the straight-line method over periods of approximately
15
to
20 years
. Amortization of leasehold improvements is provided by the straight-line method over the lesser of their useful life or the remaining term of the lease.
Concentration of Credit Risk/Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and trade receivables. Contracts with the government, either as a prime or subcontractor, accounted for approximately
78%
,
82%
, and
80%
of revenues for the years ended
December 31, 2018
,
2017
and
2016
, respectively. We believe that concentrations of credit risk with respect to trade receivables are limited as they are primarily government receivables. We believe that the fair market value of all financial instruments, including debt, approximate book value.
Revenues for 2018
We account for revenue in accordance with ASC 606. The unit of account in ASC 606 is a performance obligation. At the inception of each contract with a customer, we determine our performance obligations under the contract and the contract's transaction price. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the respective goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For product sales, each product sold to a customer typically represents a distinct performance obligation. Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and therefore are accounted for as part of the existing contract.
Substantially all of
our Supply Chain Management Group revenues from the sale of vehicle parts to customers is recognized at the point in time of the transfer of control to the customer. Sales returns and allowances for vehicle parts are not significant.
Our Aviation Group revenues result from the sale of aircraft parts and performance of MRO services for private and commercial aircraft owners, other aviation MRO providers, and aviation original equipment manufacturers. Our Aviation Group recognizes revenues for the sale of aircraft parts at a point in time when control is transferred to the customer, which usually occurs when the parts are shipped. Our Aviation Group recognizes revenues for MRO services over time as the services are transferred to the customer. MRO services revenue recognized is measured based on the cost-to-cost input method, as costs incurred reflect the work completed, and therefore the services transferred to date. Sales returns and allowances are not significant.
Our Federal Services Group revenues result from professional and technical services, which we perform for customers on a contract basis. Revenue is recognized for performance obligations over time as we transfer the services to the customer. The
three
primary types of contracts used are cost-type, fixed-price and time and materials. Revenues result from work performed on these contracts by our employees and our subcontractors and from costs for materials and other work related costs allowed under our contracts.
Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned. Variable consideration, typically in the form of award fees, is included in the estimated transaction price, to the extent that it is probable that a significant reversal will not occur, when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment based on current facts and circumstances.
Revenues on fixed-price contracts are recorded as work is performed over the period. Revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with the transfer of control to the customer. For such contracts, we estimate total costs at the inception of the contract based on our assumptions of the cost elements required to complete the associated tasks of the contract and assess the affects of the risks on our estimates of total costs to complete the contract. Our cost estimates are based on assumptions that include the complexity of the work, our employee labor costs, the cost of materials and the performance of our subcontractors. These cost estimates are subject to change as we perform under the contract and as a result, the timing of revenues and amount of profit on a contract may change as there are changes in estimated costs to complete the contract. Such adjustments are recognized on a cumulative catch-up basis in the period we identify the changes.
Revenues for time and materials contracts are recorded based on the amount for which we have the right to invoice our customers, because the amount directly reflects the value of our work performed for the customer. Revenues are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in performance on the contract. Generally, profits on time and materials contracts result from the difference between the cost of services performed and the contract defined billing rates for these services.
Revenue related to work performed on government contracts at risk, which is work performed at the customer's request prior to the government formalizing funding, is not recognized until it can be reliably estimated and its realization is probable.
A substantial portion of contract and administrative costs are subject to audit by the Defense Contract Audit Agency. Our indirect cost rates have been audited and approved for 2013 and prior years with no material adjustments to our results of operations or financial position. While we maintain reserves to cover the risk of potential future audit adjustments based primarily on the results of prior audits, we do not believe any future audits will have a material adverse effect on our results of operations, financial position, or cash flows.
Revenues for 2017 and 2016
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectability is probable.
Substantially all of our Supply Chain Management Group revenues result from the sale of vehicle parts to clients. We recognize revenue from the sale of vehicle parts when the customer takes ownership of the parts. Sales returns and allowances are not significant.
Our Aviation Group revenues are recognized upon the shipment or delivery of products to customers based on when title or risk of loss transfers to the customer. Sales returns and allowances are not significant.
Substantially all of our Federal Services work is performed for our customers on a contract basis. The
three
primary types of contracts used are cost-type, fixed-price and time and materials. Revenues result from work performed on these contracts by our employees and our subcontractors and from costs for materials and other work related costs allowed under our contracts.
Revenues on cost-type contracts are recorded as contract allowable costs are incurred and fees are earned. Our FMS Program contract is a cost plus award fee contract. This contract has terms that specify award fee payments that are determined by performance and level of contract activity. Award fees are made during the year through a contract modification authorizing the award fee that is issued subsequent to the period in which the work is performed. We recognize award fee income on the FMS Program contract when the fees are fixed or determinable. Due to such timing and fluctuations in the level of revenues, profits as a percentage of revenues on this contract will fluctuate from period to period.
Revenue recognition methods on fixed-price contracts will vary depending on the nature of the work and the contract terms. Revenues on fixed-price service contracts are recorded as work is performed, typically ratably over the service period. Revenues on fixed-price contracts that require delivery of specific items are recorded based on a price per unit as units are delivered.
Revenues for time and materials contracts are recorded on the basis of contract allowable labor hours worked multiplied by the contract defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work
used in performance on the contract. Generally, profits on time and materials contracts result from the difference between the cost of services performed and the contract defined billing rates for these services.
Receivables and Allowance for Doubtful Accounts
Receivables are recorded at amounts earned less an allowance for doubtful accounts. We review our receivables regularly to determine if there are any potentially uncollectible accounts. The majority of our receivables are from government agencies, where there is minimal credit risk. We record allowances for bad debt as a reduction to receivables and an increase to bad debt expense. We assess the adequacy of these reserves by considering general factors, such as the length of time individual receivables are past due and historical collection experience.
Unbilled Receivables
Unbilled receivables include amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Unbilled receivables are classified as current based on our contract operating cycle.
Inventories
Inventories for our Supply Chain Group are stated at the lower of cost or net realizable value using the first-in, first-out ("FIFO") method. Included in inventory are related purchasing, storage and handling costs. Our inventory primarily consists of vehicle replacement parts.
Inventories for our Aviation Group are stated at lower of cost or net realizable value. Inventories for our Aviation Group primarily consist of general aviation jet aircraft engines and engine accessories and parts. The cost for purchased engines and parts is determined by the specific identification method. Included in inventory are related purchasing, overhaul labor, storage and handling costs. We also purchase aircraft engines for disassembly into individual parts and components.
Deferred Compensation Plans
We have a deferred compensation plan, the VSE Corporation Deferred Supplemental Compensation Plan ("DSC Plan"), to provide incentive and reward for certain management employees based on overall corporate performance. We maintain the underlying assets of the DSC Plan in a Rabbi Trust and changes in asset values are included in costs and operating expenses on the accompanying consolidated statements of income. We invest the assets held by the Rabbi Trust in both corporate owned life insurance ("COLI") products and in mutual funds. The COLI investments are recorded at cash surrender value and the mutual fund investments are recorded at fair value. The DSC Plan assets are included in other assets and the obligation to the participants is included in deferred compensation on the accompanying consolidated balance sheets.
Deferred compensation plan expense recorded as costs and operating expenses in the accompanying consolidated statements of income for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$2.1 million
,
$1.9 million
and
$1.7 million
, respectively.
Impairment of Long-Lived Assets
Long-lived assets include intangible assets and property and equipment to be held and used. We review the carrying values of long-lived assets other than goodwill for impairment if events or changes in the facts and circumstances indicate that their carrying values may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of the related asset to its carrying value. If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying value.
No
impairment charges related to long-lived assets, other than goodwill, were recorded in the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The carrying value of net deferred tax assets is based on assumptions regarding our ability to generate sufficient future taxable income to utilize these deferred tax assets.
Goodwill
We test goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Goodwill is tested for impairment at the reporting unit level. A qualitative assessment can be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value using a quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss.
For the quantitative assessment, we estimate the fair value of each reporting unit using a combination of an income approach using a discounted cash flow ("DCF") analysis and a market-based valuation approach based on as comparable public company trading values. Determining the fair value of a reporting unit requires the exercise of significant management judgments, including the amount and timing of projected future revenues, earnings and cash flows, discount rates, long-term growth rates and comparable public company revenues and earnings multiples. The projected results used in our quantitative assessment are based on our best estimate as of the testing date of future revenues, earnings and cash flows after considering factors such as recent operating performance, general market and industry conditions, existing and expected future contracts, changes in working capital and long-term business plans and growth initiatives. The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill. There are no significant allocations of amounts held at the Corporate level to the reporting units.
Based on our annual goodwill impairment analysis we performed in the fourth quarter of
2018
, the fair value of our reporting units exceeded their carrying values.
Intangible Assets
Intangible assets consist of the value of contract-related intangible assets, trade names and acquired technologies acquired in acquisitions. We amortize on a straight-line basis intangible assets acquired as part of acquisitions over their estimated useful lives unless their useful lives are determined to be indefinite. The amounts we record related to acquired intangibles are determined by us considering the results of independent valuations. Our contract-related intangibles are amortized over their estimated useful lives of approximately
seven
to
16 years
with a weighted-average life of approximately
12.6 years
as of
December 31, 2018
. We have
four
trade names that are amortized over an estimated useful life of approximately
nine years
. We have an acquired technologies intangible asset that is amortized over an estimated useful life of
11 years
. The weighted-average life for all amortizable intangible assets is approximately
12.2 years
as of
December 31, 2018
.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Act from accumulated other comprehensive income to retained earnings. The new standard is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. We currently are assessing whether to elect the option and the impact that this standard will have on our consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
Targeted Improvements to Accounting for Hedging Activities
, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The new standard is effective for fiscal years beginning after December 15,
2018 with early adoption permitted. We currently are assessing the impact that this standard will have on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Measurement of Credit Losses on Financial
Instruments,
which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The new standard is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for reporting periods beginning after December 15, 2018. We currently are assessing the impact that this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is required to be adopted using a modified retrospective method and is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB provided an alternative transition method of adoption through ASU No. 2018-11,
Targeted Improvements
, which provides entities with an optional transition method to apply the transition provisions of ASU 2016-02 at the beginning of the period of adoption.
We elected to adopt the standard on January 1, 2019 using the alternative transition method provided by ASU 2018-11 whereby we will record right-of-use assets and lease liabilities for our existing leases as of January 1, 2019, as well as a cumulative-effect adjustment to retained earnings of initially applying the new standard as of January 1, 2019. In addition, the new standard provides several optional practical expedients for use in transition. We have elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to lease identification, lease classification, and treatment for initial direct lease costs. We have not elected the practical expedients pertaining to the use of hindsight and land easements.
We are in the process of finalizing the changes required for the adoption of the new standard on our current lease arrangements, including our headquarters lease, as well as the quantitative impact this guidance will have on our consolidated financial statements and related disclosures. For our headquarters lease, which was accounted for using the financing method under previously existing build-to-suit accounting rules, we expect to derecognize existing liabilities of approximately
$20.3 million
and assets of
$15.2 million
as well as any related deferred taxes with a cumulative-effect adjustment of approximately
$4.0 million
recognized in opening retained earnings as of the January 1, 2019. We are continuing to evaluate the appropriate transition method for the headquarters lease, which as discussed was not previously accounted for as a lease under US GAAP
.
Upon adoption of the new standard, we will record a right-of-use asset and lease liability, ranging from
$18 million
to
$24 million
, on our consolidated balance sheets for our headquarters lease. Our other existing lease arrangements, which are currently classified as operating leases, will continue to be classified as operating leases under the new standard. For these operating leases, we estimate the standard will result in the recognition of right-of-use assets of approximately
$5.5 million
and lease liabilities of
$5.6 million
upon adoption on January 1, 2019, with immaterial changes to other balance sheet accounts. We do not anticipate that adoption of the new standard will have a significant impact on our consolidated results of operations or cash flows.
(2) Revenue Recognition
Disaggregated Revenue
Our revenues are derived from contract services performed for the United States Postal Service ("USPS"), United States Department of Defense ("DoD") agencies or federal civilian agencies and from the delivery of products to our clients. Our customers also include various other government agencies and commercial entities.
A summary of revenues for our operating groups by customer for the year ended
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
Supply Chain Management
|
|
Aviation
|
|
Federal Services
|
|
Total
|
USPS
|
|
$
|
175,339
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175,339
|
|
DoD
|
|
24,280
|
|
|
7,387
|
|
|
302,827
|
|
|
334,494
|
|
Commercial
|
|
14,329
|
|
|
135,864
|
|
|
413
|
|
|
150,606
|
|
Other government
|
|
861
|
|
|
2,172
|
|
|
33,746
|
|
|
36,779
|
|
|
|
$
|
214,809
|
|
|
$
|
145,423
|
|
|
$
|
336,986
|
|
|
$
|
697,218
|
|
A summary of revenues for our operating groups by contract type for the year ended
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Type
|
|
Supply Chain Management
|
|
Aviation
|
|
Federal Services
|
|
Total
|
Cost-type
|
|
$
|
—
|
|
|
$
|
4,863
|
|
|
$
|
188,867
|
|
|
$
|
193,730
|
|
Fixed-price
|
|
214,809
|
|
|
84,600
|
|
|
70,669
|
|
|
370,078
|
|
Time and materials
|
|
—
|
|
|
55,960
|
|
|
77,450
|
|
|
133,410
|
|
Total revenues
|
|
$
|
214,809
|
|
|
$
|
145,423
|
|
|
$
|
336,986
|
|
|
$
|
697,218
|
|
Contract Balances
Billed receivables, unbilled receivables (contract assets), and contract liabilities are the results of revenue recognition, customer billing, and timing of payment receipts. Billed receivables, net, represent unconditional rights to consideration under the terms of the contract and include amounts billed and currently due from our customers. Unbilled receivables represent our right to consideration in exchange for goods or services that we have transferred to the customer prior to us having the right to payment for such goods or services. Contract liabilities are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a period of time.
We present our unbilled receivables and contract liabilities on a contract-by-contract basis. If a contract liability exists, it is netted against the unbilled receivables balance for that contract. Unbilled receivables decreased from
$46.0
million at adoption of ASC 606 on January 1, 2018 to
$41.3 million
at December 31, 2018, primarily due to billings in excess of revenue recognized. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, decreased from
$9.8 million
at adoption of ASC 606 on January 1, 2018 to
$5.0 million
at December 31, 2018, primarily due to revenue recognized in excess of advance payments received. For the year ended December 31, 2018, we recognized revenue of
$7.9 million
that was previously included in the beginning balance of contract liabilities.
Performance Obligations
Our performance obligations are satisfied over time as work progresses or at a point in time. Revenues from products and services transferred to customers over time accounted for approximately
57%
of our revenues for the year ended December 31, 2018, primarily related to revenues in our Federal Services Group and for MRO services in our Aviation Group. Revenues from products and services transferred to customers at a point in time accounted for approximately
43%
of our revenues for the year ended December 31, 2018. The majority of our revenue recognized at a point in time is for the sale of vehicle and aircraft parts in our Supply Chain Management and Aviation groups.
As of December 31, 2018, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was
$290 million
. Performance obligations expected to be satisfied within one year and greater than one year are
95%
and
5%
, respectively. We have applied the practical expedient for certain parts sales and MRO services to exclude the amount of remaining performance obligations for (i) contracts with an original expected term of one year or less or (ii) contracts for which we recognize revenue in proportion to the amount we have the right to invoice for services performed.
During the year ended December 31, 2018, revenue recognized from performance obligations satisfied in prior periods was not material.
(3) Receivables and Unbilled Receivables
Receivables, net and unbilled receivables, net as of
December 31, 2018
and
2017
, respectively, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Receivables, net
|
$
|
60,004
|
|
|
$
|
55,760
|
|
Unbilled receivables, net
|
41,255
|
|
|
42,577
|
|
|
$
|
101,259
|
|
|
$
|
98,337
|
|
Receivables, net are recorded at face value less an allowance for doubtful accounts of approximately
$79 thousand
and
$83 thousand
as of
December 31, 2018
and
2017
, respectively.
The unbilled receivables balance includes certain costs for work performed at risk but which we believe will be funded by the government totaling approximately
$4.7 million
and
$4.0 million
as of
December 31, 2018
and
2017
, respectively. We expect to invoice substantially all unbilled receivables during
2019
.
(4) Other Current Assets and Other Assets
At
December 31, 2018
and
2017
, other current assets primarily consisted of vendor advances, prepaid rents and deposits, prepaid income taxes, software licenses, prepaid maintenance agreements and deferred contract costs. At
December 31, 2018
and
2017
, other assets primarily consisted of deferred compensation plan assets.
(5) Property and Equipment
Property and equipment, net consisted of the following as of
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Buildings and building improvements
|
$
|
53,121
|
|
|
$
|
53,049
|
|
Computer equipment
|
26,489
|
|
|
27,775
|
|
Furniture, fixtures, equipment and other
|
32,991
|
|
|
30,704
|
|
Leasehold improvements
|
600
|
|
|
545
|
|
Land and land improvements
|
4,551
|
|
|
4,462
|
|
|
117,752
|
|
|
116,535
|
|
Less accumulated depreciation and amortization
|
(68,146
|
)
|
|
(61,389
|
)
|
Total property and equipment, net
|
$
|
49,606
|
|
|
$
|
55,146
|
|
Depreciation and amortization expense for property and equipment for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$8.5 million
,
$9.3 million
and
$9.4 million
, respectively.
(6) Goodwill and Intangible Assets
Changes in goodwill for the years ended
December 31, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply Chain Management
|
|
Federal Services
|
|
Aviation
|
|
Total
|
Balance as of December 31, 2016
|
$
|
63,190
|
|
|
$
|
30,883
|
|
|
$
|
104,549
|
|
|
$
|
198,622
|
|
Increase from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2017
|
$
|
63,190
|
|
|
$
|
30,883
|
|
|
$
|
104,549
|
|
|
$
|
198,622
|
|
Increase from acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2018
|
$
|
63,190
|
|
|
$
|
30,883
|
|
|
$
|
104,549
|
|
|
$
|
198,622
|
|
The results of our annual goodwill impairment testing in the fourth quarter of
2018
indicated that the fair value of our reporting units exceeded their carrying values.
Intangible assets consist of the value of contract-related assets, technologies and trade names. Amortization expense for the years ended
December 31, 2018
,
2017
and
2016
was approximately
$16.0 million
,
$16.0 million
and
$16.1 million
, respectively.
Intangible assets were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Accumulated Impairment Loss
|
|
Net Intangible Assets
|
December 31, 2018
|
|
|
|
|
|
|
|
Contract and customer-related
|
$
|
173,094
|
|
|
$
|
(86,076
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
85,993
|
|
Acquired technologies
|
12,400
|
|
|
(8,533
|
)
|
|
—
|
|
|
3,867
|
|
Trade names
|
16,670
|
|
|
(11,638
|
)
|
|
—
|
|
|
5,032
|
|
Total
|
$
|
202,164
|
|
|
$
|
(106,247
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
94,892
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Contract and customer-related
|
$
|
173,094
|
|
|
$
|
(72,937
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
99,132
|
|
Acquired technologies
|
12,400
|
|
|
(7,406
|
)
|
|
—
|
|
|
4,994
|
|
Trade names
|
16,670
|
|
|
(9,887
|
)
|
|
—
|
|
|
6,783
|
|
Total
|
$
|
202,164
|
|
|
$
|
(90,230
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
110,909
|
|
Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands):
|
|
|
|
|
|
Amortization
|
2019
|
$
|
15,953
|
|
2020
|
15,362
|
|
2021
|
14,998
|
|
2022
|
13,252
|
|
2023
|
9,252
|
|
Thereafter
|
26,075
|
|
Total
|
$
|
94,892
|
|
(7) Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Bank credit facility - term loan
|
$
|
80,800
|
|
|
$
|
94,375
|
|
Bank credit facility - revolver loans
|
81,934
|
|
|
79,324
|
|
Principal amount of long-term debt
|
162,734
|
|
|
173,699
|
|
Less debt issuance costs
|
(2,135
|
)
|
|
(1,125
|
)
|
Total long-term debt
|
160,599
|
|
|
172,574
|
|
Less current portion
|
(9,466
|
)
|
|
(6,960
|
)
|
Long-term debt, net of current portion
|
$
|
151,133
|
|
|
$
|
165,614
|
|
We have a loan agreement with a group of banks to provide working capital support, letters of credit and finance acquisitions. The loan agreement, which was amended in January 2018 and expires in January 2023, is comprised of a term loan facility and a revolving loan facility. The revolving loan facility provides for revolving loans and letters of credit. The fair value
of outstanding debt under our bank loan facilities as of
December 31, 2018
approximates its carrying value using Level 2 inputs based on market data on companies with a corporate rating similar to ours that have recently priced credit facilities.
Our required term loan payments after December 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
|
2019
|
|
$
|
10,000
|
|
2020
|
|
11,875
|
|
2021
|
|
14,375
|
|
2022
|
|
15,000
|
|
2023
|
|
29,550
|
|
Total
|
|
$
|
80,800
|
|
The maximum amount of credit available to us under the loan agreement for revolving loans and letters of credit as of
December 31, 2018
was
$300 million
. We may borrow and repay the revolving loan borrowings as our cash flows require or permit. We pay an unused commitment fee and fees on letters of credit that are issued. We had approximately
$57 thousand
letters of credit outstanding as of
December 31, 2018
and
no
of letters of credit outstanding as of
December 31, 2017
.
Under the loan agreement we may elect to increase the maximum availability of the term loan facility, the revolving loan facility, or both facilities up to an aggregate additional amount of
$100 million
.
We pay interest on the term loan borrowings and revolving loan borrowings at LIBOR plus a base margin or at a base rate (typically the prime rate) plus a base margin. As of
December 31, 2018
, the LIBOR base margin was
1.75%
and the base rate base margin was
0.50%
. The base margins increase or decrease in increments as our Total Funded Debt/EBITDA Ratio increases or decreases.
The loan agreement requires us to have interest rate hedges on a portion of the outstanding term loan for the first
three years
after the January 2018 amendment. We have executed compliant interest rate hedges. The amount of swapped debt outstanding as of December 31, 2018 was
$50 million
.
After taking into account the impact of hedging instruments, as of
December 31, 2018
, interest rates on portions of our outstanding debt ranged from
3.00%
to
6.00%
, and the effective interest rate on our aggregate outstanding debt was
4.17%
.
Interest expense incurred on bank loan borrowings and interest rate hedges was approximately
$6.9 million
,
$7.2 million
and
$7.8 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The loan agreement contains collateral requirements to secure our loan agreement obligations, restrictive covenants, a limit on annual dividends, and other affirmative and negative covenants, conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, and a minimum Fixed Charge Coverage Ratio. We were in compliance with required ratios and other terms and conditions as of
December 31, 2018
.
(8) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist primarily of accrued compensation and benefits of approximately
$24.6 million
and
$23.3 million
as of
December 31, 2018
and
2017
, respectively. The accrued compensation and benefits amounts include bonus, salaries and related payroll taxes, vacation and deferred compensation.
(9) Stock-Based Compensation Plans
In 2006, our stockholders approved the VSE Corporation 2006 Restricted Stock Plan for VSE's directors, officers and other employees (the "2006 Plan"). In May 2014, the stockholders approved amendments to the 2006 Plan extending its term until May 6, 2021 and authorizing an additional
500,000
shares of our common stock for issuance under the 2006 Plan. Under the 2006 Plan, we are authorized to issue up to
1,000,000
shares of our common stock and, as of
December 31, 2018
,
394,173
shares remained available for issuance under the 2006 Plan. The Compensation Committee is responsible for the administration of the 2006 Plan, and determines each recipient of an award under the 2006 Plan, the number of restricted shares of common stock
subject to such award and the period of continued employment required for the vesting of such award. These terms are included in award agreements between VSE and the recipients of the award.
During
2018
,
2017
and
2016
, non-employee directors were awarded
11,200
,
16,100
and
17,600
shares of restricted stock, respectively, under the 2006 Plan. The weighted average grant-date fair value of these restricted stock grants was
$49.38
per share,
$39.85
per share, and
$30.89
per share for the shares awarded in
2018
,
2017
and
2016
, respectively. The shares issued vested immediately and, without the Compensation Committee's approval, cannot be sold, transferred, pledged or assigned before the second anniversary of the grant date. Compensation expense related to these grants was approximately
$553 thousand
,
$642 thousand
and
$544 thousand
during
2018
,
2017
and
2016
, respectively.
In January of every year since 2007, we have notified certain employees that they are eligible to receive awards of VSE stock under our 2006 Plan, based on our financial performance for the respective fiscal years. These restricted stock awards vest ratably over three years and are expensed on an accelerated basis over the vesting period of approximately three years. Upon issuance of shares on each vesting date, the liability is reduced and additional paid-in capital is increased. The date of award determination is expected to be in March 2019 for the 2018 awards. The date of award determination for the 2017 awards and the 2016 awards was March 1, 2018 and 2017, respectively. On each vesting date,
100%
of the vested award is paid in our shares. The number of shares issued is based on the fair market value of our common stock on the vesting date. On March 1, 2018, the employees eligible for the 2017 awards, 2016 awards and 2015 awards received a total of
31,159
shares of common stock. The grant-date fair value of these awards was
$47.14
per share.
The total stock-based compensation expense related to restricted stock awards for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Employees
|
$
|
2,332
|
|
|
$
|
2,416
|
|
|
$
|
1,555
|
|
Non-employee Directors
|
553
|
|
|
642
|
|
|
544
|
|
Total
|
$
|
2,885
|
|
|
$
|
3,058
|
|
|
$
|
2,099
|
|
Employees are permitted to use a certain number of shares of restricted stock to cover their personal tax liability for restricted stock awards. We paid approximately
$641 thousand
,
$500 thousand
and
$499 thousand
, to cover this liability in the years ended
December 31, 2018
,
2017
and
2016
, respectively. These payments are classified as financing cash flows on the consolidated statements of cash flows. The total compensation cost related to non-vested awards not yet recognized was approximately
$1.5 million
with a weighted average amortization period of
1.8 years
and
$2.3 million
with a weighted average amortization period of
1.7 years
as of
December 31, 2018
and
2017
, respectively.
Stock-based compensation consisting of restricted stock awards was included in costs and operating expenses and provision for income taxes on the accompanying statements of income for the years ended
December 31, 2018
,
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Stock-based compensation included in costs and operating expenses
|
$
|
3,027
|
|
|
$
|
3,068
|
|
|
$
|
2,109
|
|
Income tax benefit recognized for stock-based compensation
|
(755
|
)
|
|
(1,180
|
)
|
|
(811
|
)
|
Stock-based compensation expense, net of income tax benefit
|
$
|
2,272
|
|
|
$
|
1,888
|
|
|
$
|
1,298
|
|
(10) Income Taxes
We are subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions. We have concluded all U.S. federal income tax matters as well as material state and local tax matters for years through 2014.
The Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017. The Tax Act significantly affects the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%. In connection with the permanent reduction in the U.S. statutory corporate tax rate, we recalculated our net deferred tax liabilities as of December 31, 2017 and recorded a provisional tax benefit of approximately
$10.6 million
in 2017.
We applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2017, we had substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of such effects. During 2018, we refined our calculations, evaluated changes in interpretations and assumptions that we had made, applied additional guidance issued by the U.S. Government,
and evaluated actions and related accounting policy decisions we have made. As of December 22, 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and identified an additional tax benefit of approximately
$795 thousand to the provisional one-time charge for the year ended December 31, 2017, related to the Tax Act.
We file consolidated federal income tax returns that include all of our subsidiaries. The components of the provision for income taxes from continuing operations for the years ended
December 31, 2018
,
2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
Federal
|
$
|
9,667
|
|
|
$
|
14,149
|
|
|
$
|
13,648
|
|
State
|
1,758
|
|
|
2,511
|
|
|
2,379
|
|
Foreign
|
140
|
|
|
—
|
|
|
—
|
|
|
11,565
|
|
|
16,660
|
|
|
16,027
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
(1,114
|
)
|
|
(10,645
|
)
|
|
(983
|
)
|
State
|
(347
|
)
|
|
110
|
|
|
(163
|
)
|
Foreign
|
64
|
|
|
(136
|
)
|
|
—
|
|
|
(1,397
|
)
|
|
(10,671
|
)
|
|
(1,146
|
)
|
Provision for income taxes
|
$
|
10,168
|
|
|
$
|
5,989
|
|
|
$
|
14,881
|
|
The differences between the amount of tax computed at the federal statutory rate of
21%
in 2018 and
35%
in 2017 and 2016, and the provision for income taxes from continuing operations for the years ended
December 31, 2018
,
2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Tax at statutory federal income tax rate
|
$
|
9,502
|
|
|
$
|
15,780
|
|
|
$
|
14,586
|
|
Increases (decreases) in tax resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
1,861
|
|
|
1,732
|
|
|
1,599
|
|
Permanent differences, net
|
367
|
|
|
(275
|
)
|
|
(545
|
)
|
Impact of Tax Act
|
(795
|
)
|
|
(10,556
|
)
|
|
—
|
|
Other provision adjustments
|
(767
|
)
|
|
(692
|
)
|
|
(759
|
)
|
Provision for income taxes
|
$
|
10,168
|
|
|
$
|
5,989
|
|
|
$
|
14,881
|
|
Certain amounts from the prior years have been reclassified to conform to the current year presentation.
The tax effect of temporary differences representing deferred tax assets and liabilities as of
December 31, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Gross deferred tax assets
|
|
|
|
Deferred compensation and accrued paid leave
|
$
|
5,794
|
|
|
$
|
5,594
|
|
Accrued expenses
|
1,310
|
|
|
1,013
|
|
Stock-based compensation
|
819
|
|
|
772
|
|
Reserve for contract disallowances
|
120
|
|
|
84
|
|
Acquisition-related expenses
|
151
|
|
|
—
|
|
Capitalized inventory
|
742
|
|
|
916
|
|
State operating loss carryforward
|
24
|
|
|
263
|
|
Tax credit carryforward
|
47
|
|
|
178
|
|
Foreign country operating loss carryforward
|
157
|
|
|
136
|
|
Foreign country valuation allowance
|
(107
|
)
|
|
—
|
|
Total gross deferred tax assets
|
9,057
|
|
|
8,956
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
Interest rate swaps
|
(49
|
)
|
|
(74
|
)
|
Depreciation
|
(1,739
|
)
|
|
(2,439
|
)
|
Deferred revenues
|
(2,164
|
)
|
|
(1,875
|
)
|
Goodwill and intangible assets
|
(23,395
|
)
|
|
(23,854
|
)
|
Prepaid expenses
|
(120
|
)
|
|
—
|
|
Total gross deferred tax liabilities
|
(27,467
|
)
|
|
(28,242
|
)
|
|
|
|
|
Net deferred tax liabilities
|
$
|
(18,410
|
)
|
|
$
|
(19,286
|
)
|
(11) Commitments and Contingencies
(a) Leases and Other Commitments
We have various non-cancelable operating leases for facilities, equipment, and software with terms between
two
and
15 years
. The terms of the facilities leases typically provide for certain minimum payments as well as increases in lease payments based upon the operating cost of the facility and the consumer price index. Rent expense is recognized on a straight-line basis for rent agreements having escalating rent terms. Lease expense for the years ended
December 31, 2018
,
2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease
Expense
|
|
Sublease
Income
|
|
Net
Expense
|
2018
|
$
|
3,363
|
|
|
$
|
1,198
|
|
|
$
|
2,165
|
|
2017
|
$
|
4,924
|
|
|
$
|
1,134
|
|
|
$
|
3,790
|
|
2016
|
$
|
5,100
|
|
|
$
|
888
|
|
|
$
|
4,212
|
|
Future minimum annual non-cancelable commitments as of December 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Lease
Commitments
|
|
Sublease
Income
|
|
Net
Commitments
|
2019
|
$
|
2,527
|
|
|
$
|
—
|
|
|
$
|
2,527
|
|
2020
|
1,479
|
|
|
—
|
|
|
1,479
|
|
2021
|
1,270
|
|
|
—
|
|
|
1,270
|
|
2022
|
1,189
|
|
|
—
|
|
|
1,189
|
|
2023
|
898
|
|
|
—
|
|
|
898
|
|
Thereafter
|
167
|
|
|
—
|
|
|
167
|
|
Total
|
$
|
7,530
|
|
|
$
|
—
|
|
|
$
|
7,530
|
|
We signed a lease in 2009 for our headquarters building with a rent commencement date of May 1, 2012. Certain terms in the lease agreement resulted in the capitalization of construction costs due to specific accounting rules. We recorded a construction asset and corresponding long-term liability of approximately
$27.3 million
on May 1, 2012, which represents the construction costs incurred by the landlord as of that date. According to accounting rules, we have forms of continuing involvement that required us to account for this transaction as a financing lease upon commencement of the lease period. The building and building improvements are included on our consolidated balance sheets and are being depreciated over a
15
-year period. The accumulated depreciation of the construction asset was
$12.1 million
and
$10.9 million
as of December 31, 2018 and 2017, respectively. Payments made under the lease agreement are applied to service the financing obligation and interest expense based on an imputed interest rate amortizing the obligation over the life of the lease agreement. The long-term lease liability of
$18.7 million
and
$20.3 million
as of December 31, 2018 and 2017, respectively, is included in long-term lease obligations in our consolidated balance sheets. The current portion of our obligation, which is included in accrued expenses and other current liabilities in our consolidated balance sheets, was
$1.6 million
and
$1.4 million
as of December 31, 2018 and 2017, respectively.
Future minimum annual non-cancelable commitments under our headquarters lease as of
December 31, 2018
, which are not included in the table above, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Commitments
|
|
Sublease
Income
|
|
Net
Commitments
|
2019
|
$
|
4,456
|
|
|
$
|
376
|
|
|
$
|
4,080
|
|
2020
|
4,579
|
|
|
—
|
|
|
4,579
|
|
2021
|
4,705
|
|
|
—
|
|
|
4,705
|
|
2022
|
4,827
|
|
|
—
|
|
|
4,827
|
|
2023
|
4,948
|
|
|
—
|
|
|
4,948
|
|
Thereafter
|
17,388
|
|
|
—
|
|
|
17,388
|
|
Total
|
$
|
40,903
|
|
|
$
|
376
|
|
|
$
|
40,527
|
|
(b) Contingencies
On or about April 19, 2018 Joseph Waggoner, on behalf of himself and all similarly situated individuals, filed a lawsuit against VSE and
two
of our subcontractors in the United State District Court, Eastern District of Texas, Texarkana Division, alleging overtime compensation entitlement at a rate of one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek. The plaintiffs have certified the case as a collective action for similarly situated individuals. The plaintiffs work under a contract between defendants and the United States Army at the Red River Army Depot in Texas. The plaintiffs assert that employees' 15-minute unpaid work breaks should have been included as "working hours" in calculating overtime. We believe it is probable that VSE will incur a loss related to this matter. We have accrued an immaterial loss provision in an amount representing our reasonable estimate related to an unfavorable settlement of the matter, and we do not believe that we have any further exposure that would be material to VSE in excess of the amount we have accrued related to this matter.
In addition to the above-referenced legal proceeding, we may have certain claims in the normal course of business, including legal proceedings, against us and against other parties. In our opinion, the resolution of these other claims will not have a material adverse effect on our results of operations, financial condition, or cash flows. However, because the results of any legal proceedings cannot be predicted with certainty, the amount of loss, if any, cannot be reasonably estimated.
Further, from time-to-time, government agencies investigate whether our operations are being conducted in accordance with applicable contractual and regulatory requirements. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future government contracting. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government disputes and investigations will not have a material adverse effect on our results of operations, financial condition or cash flows.
(12) Business Segments and Customer Information
Segment Information
Beginning in 2017, we changed our structure and as a result our former IT, Energy and Management Consulting Group was combined with our Federal Services Group. Consequently, our segment financial information for 2016 has been restated to reflect such change. Management of our business operations is conducted under
three
reportable operating segments:
Supply Chain Management Group
– Our Supply Chain Management Group supplies vehicle parts primarily through a Managed Inventory Program ("MIP") and direct sales to the USPS and to other customers.
Aviation Group
– Our Aviation Group provides MRO services, parts supply and distribution, and supply chain solutions for commercial and general aviation jet aircraft engines and engine accessories.
Federal Services Group
– Our Federal Services Group provides engineering, industrial, logistics, foreign military sales, legacy equipment sustainment services, IT and technical and consulting services primarily to the DoD and other government agencies.
These segments operate under separate management teams and financial information is produced for each segment. We evaluate segment performance based on consolidated revenues and operating income. Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation.
Our segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
Supply Chain Management Group
|
$
|
214,809
|
|
|
$
|
214,542
|
|
|
$
|
205,475
|
|
Aviation Group
|
145,423
|
|
|
134,809
|
|
|
133,466
|
|
Federal Services Group
|
336,986
|
|
|
410,762
|
|
|
352,849
|
|
Total revenues
|
$
|
697,218
|
|
|
$
|
760,113
|
|
|
$
|
691,790
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Supply Chain Management Group
|
$
|
30,626
|
|
|
$
|
33,754
|
|
|
$
|
34,632
|
|
Aviation Group
|
11,076
|
|
|
9,695
|
|
|
12,823
|
|
Federal Services Group
|
15,797
|
|
|
13,419
|
|
|
7,796
|
|
Corporate expenses
|
(3,269
|
)
|
|
(2,543
|
)
|
|
(3,722
|
)
|
Operating income
|
$
|
54,230
|
|
|
$
|
54,325
|
|
|
$
|
51,529
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
Supply Chain Management Group
|
$
|
7,299
|
|
|
$
|
6,536
|
|
|
$
|
6,445
|
|
Aviation Group
|
5,123
|
|
|
4,835
|
|
|
5,461
|
|
Federal Services Group
|
12,802
|
|
|
14,511
|
|
|
14,140
|
|
Total depreciation and amortization
|
$
|
25,224
|
|
|
$
|
25,882
|
|
|
$
|
26,046
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Supply Chain Management Group
|
$
|
802
|
|
|
$
|
1,376
|
|
|
$
|
4,195
|
|
Aviation Group
|
1,772
|
|
|
1,387
|
|
|
1,459
|
|
Federal Services Group
|
209
|
|
|
177
|
|
|
94
|
|
Corporate
|
334
|
|
|
373
|
|
|
1,624
|
|
Total capital expenditures
|
$
|
3,117
|
|
|
$
|
3,313
|
|
|
$
|
7,372
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Total assets:
|
|
|
|
Supply Chain Management Group
|
$
|
166,015
|
|
|
$
|
176,860
|
|
Aviation Group
|
316,197
|
|
|
282,738
|
|
Federal Services Group
|
92,098
|
|
|
102,372
|
|
Corporate
|
64,518
|
|
|
67,043
|
|
Total assets
|
$
|
638,828
|
|
|
$
|
629,013
|
|
Revenues are net of inter-segment eliminations. Corporate expenses are primarily selling, general and administrative expenses not allocated to segments. In the third quarter of 2018, we completed the sale of a contract we had been awarded by the National Institutes of Health, which resulted in a
$1.7 million
gain recorded within our Federal Services Group. Included in our Corporate expenses for 2016 is a charge of approximately
$3.3 million
for the settlement of the Heritage Litigation offset by a gain of approximately
$1.4 million
resulting primarily from the Maritime Administration contract close-outs. Corporate assets are primarily cash, property and equipment and investments held in separate trust.
Customer Information
Our revenues are derived from contract services performed for DoD agencies or federal civilian agencies and from the delivery of products to our clients. The USPS, U.S. Army and Army Reserve, and U.S. Navy are our largest customers. Our customers also include various other government agencies and commercial entities. Our revenue by customer is as follows for the years ended December 31, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by Customer
Years ended December 31,
|
Customer
|
|
2018
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
USPS
|
|
$
|
175,339
|
|
|
25.1
|
|
$
|
180,205
|
|
|
23.7
|
|
$
|
181,215
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Navy
|
|
160,952
|
|
|
23.1
|
|
206,644
|
|
|
27.2
|
|
190,155
|
|
|
27.5
|
U.S. Army
|
|
156,519
|
|
|
22.5
|
|
188,462
|
|
|
24.8
|
|
139,764
|
|
|
20.2
|
U.S. Air Force
|
|
17,023
|
|
|
2.4
|
|
7,123
|
|
|
0.9
|
|
3,482
|
|
|
0.5
|
Total - DoD
|
|
334,494
|
|
|
48.0
|
|
402,229
|
|
|
52.9
|
|
333,401
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Aviation
|
|
135,864
|
|
|
19.5
|
|
126,960
|
|
|
16.7
|
|
131,067
|
|
|
19.0
|
Other Commercial
|
|
14,742
|
|
|
2.1
|
|
12,498
|
|
|
1.7
|
|
10,721
|
|
|
1.5
|
Total - Commercial
|
|
150,606
|
|
|
21.6
|
|
139,458
|
|
|
18.4
|
|
141,788
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Government
|
|
36,779
|
|
|
5.3
|
|
38,221
|
|
|
5.0
|
|
35,386
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
697,218
|
|
|
100.0
|
|
$
|
760,113
|
|
|
100.0
|
|
$
|
691,790
|
|
|
100.0
|
We do 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 us and our customers.
Geographical Information
Revenue by geography is based on the billing address of the customer. Our revenue by geographic area is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
United States
|
|
$
|
647,168
|
|
|
$
|
708,474
|
|
|
$
|
638,726
|
|
Other Countries
(1)
|
|
50,050
|
|
|
51,639
|
|
|
53,064
|
|
Total revenue
|
|
$
|
697,218
|
|
|
$
|
760,113
|
|
|
$
|
691,790
|
|
(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented
.
(13) Capital Stock
Common Stock
Our common stock has a par value of
$0.05
per share. Proceeds from common stock issuances that are greater than
$0.05
per share are credited to additional paid in capital. Holders of common stock are entitled to
one
vote per common share held on all matters voted on by our stockholders. Stockholders of record are entitled to the amount of dividends declared per common share held.
(14) 401(k) Plan
We maintain a defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, that covers substantially all of our employees. Under the provisions of our 401(k) plan, employees' eligible contributions are matched at rates specified in the plan documents. Our expense associated with this plan was approximately
$5.9 million
,
$6.2 million
and
$6.3 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
(15) Fair Value Measurements
The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value.
The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;
Level 2 – Observable inputs other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2018
and
December 31, 2017
and the level they fall within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded at Fair Value
|
|
Financial Statement Classification
|
|
Fair Value Hierarchy
|
|
Fair Value December 31, 2018
|
|
Fair Value December 31, 2017
|
Non-COLI assets held in Deferred Supplemental Compensation Plan
|
|
Other assets
|
|
1
|
|
$
|
403
|
|
|
$
|
389
|
|
Interest rate swaps
|
|
Other current assets
|
|
2
|
|
$
|
195
|
|
|
$
|
294
|
|
Non-COLI assets held in the deferred supplemental compensation plan consist of equity funds with fair value based on observable inputs such as quoted prices for identical assets in active markets and changes in its fair value are recorded as selling, general and administrative expenses.
We account for our interest rate swap agreements under the provisions of ASC 815,
Derivatives and Hedging
, and have determined that our swap agreements qualify as cash flow hedges. Accordingly, the fair value of the swap agreements, which is an asset recorded in other current assets of approximately
$195 thousand
and approximately
$294 thousand
at
December 31, 2018
and
2017
, respectively. The offset, net of an income tax effect of approximately
$49 thousand
and
$113 thousand
is included in accumulated other comprehensive income in the accompanying balance sheets as of
December 31, 2018
and
2017
, respectively. The amounts paid and received on the swap agreements are recorded in interest expense in the period during which the related floating-rate interest is incurred. We determine the fair value of the swap agreements based on a valuation model using market data inputs.
(16) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for
2018
and
2017
, in thousands, except earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
176,897
|
|
|
$
|
170,394
|
|
|
$
|
168,931
|
|
|
$
|
180,996
|
|
Costs and operating expenses
|
$
|
165,304
|
|
|
$
|
156,539
|
|
|
$
|
154,934
|
|
|
$
|
167,911
|
|
Operating income
(1)
|
$
|
11,593
|
|
|
$
|
13,855
|
|
|
$
|
15,697
|
|
|
$
|
13,085
|
|
Net income
|
$
|
7,052
|
|
|
$
|
8,751
|
|
|
$
|
10,034
|
|
|
$
|
9,243
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
0.65
|
|
|
$
|
0.80
|
|
|
$
|
0.92
|
|
|
$
|
0.85
|
|
Basic weighted average shares outstanding
|
10,861
|
|
|
10,881
|
|
|
10,881
|
|
|
10,882
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
0.65
|
|
|
$
|
0.80
|
|
|
$
|
0.92
|
|
|
$
|
0.84
|
|
Diluted weighted average shares outstanding
|
10,897
|
|
|
10,919
|
|
|
10,935
|
|
|
10,993
|
|
(1) Operating income for the third quarter of 2018 includes a
$1.7 million
gain from the sale of a contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarters
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
197,294
|
|
|
$
|
193,860
|
|
|
$
|
174,164
|
|
|
$
|
194,795
|
|
Costs and operating expenses
|
$
|
183,098
|
|
|
$
|
178,855
|
|
|
$
|
161,927
|
|
|
$
|
181,908
|
|
Operating income
|
$
|
14,196
|
|
|
$
|
15,005
|
|
|
$
|
12,237
|
|
|
$
|
12,887
|
|
Net income
(1)
|
$
|
7,293
|
|
|
$
|
7,807
|
|
|
$
|
6,639
|
|
|
$
|
17,357
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income
(1)
|
$
|
0.67
|
|
|
$
|
0.72
|
|
|
$
|
0.61
|
|
|
$
|
1.60
|
|
Basic weighted average shares outstanding
|
10,823
|
|
|
10,838
|
|
|
10,838
|
|
|
10,838
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(1)
|
$
|
0.67
|
|
|
$
|
0.72
|
|
|
$
|
0.61
|
|
|
$
|
1.59
|
|
Diluted weighted average shares outstanding
|
10,849
|
|
|
10,862
|
|
|
10,857
|
|
|
10,903
|
|
(1) For the fourth quarter of 2017 net income and basic and diluted earnings per share were affected by the Tax Cuts and Jobs Act. See Note 10 "Income Taxes" for additional information.
(17) Subsequent Events
In January 2019, we acquired
100%
of the equity of
two
privately held companies, both named 1st Choice Aerospace Inc. (collectively, "1st Choice Aerospace"), that specialize in maintenance, repair and overhaul (“MRO”) services for new generation and legacy commercial aircraft families. 1st Choice Aerospace will operate as a combined group under our subsidiary VSE Aviation, Inc. to expand our sustainment services into the aviation supply chain market. We have retained key members of 1st Choice Aerospace's management team under
three
-year employment contracts with
five
-year non-compete covenants.
The aggregate initial cash purchase price for 1st Choice Aerospace was approximately
$112 million
(subject to working capital adjustments) which was funded under our existing bank revolving loan. We will also be required to make earn-out payments to the sellers of 1st Choice Aerospace of up to
$40 million
if 1st Choice Aerospace meets certain financial targets during 2019 and 2020.
We incurred approximately
$569 thousand
of acquisition-related expenses as of December 31, 2018 which are included in selling, general and administrative expenses.
We expect to account for the 1st Choice Aerospace acquisition as a business combination.