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,
|
|
2019
|
|
2018
|
|
2017
|
Basic weighted average common shares outstanding
|
10,957,750
|
|
|
10,876,201
|
|
|
10,834,562
|
|
Effect of dilutive shares
|
86,981
|
|
|
59,856
|
|
|
33,272
|
|
Diluted weighted average common shares outstanding
|
11,044,731
|
|
|
10,936,057
|
|
|
10,867,834
|
|
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. Our trade receivables consist of amounts due from various government clients and commercial entities. We believe that concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the customer base and their dispersion across many different geographic regions. Contracts with the government, either as a prime or subcontractor, accounted for approximately 68%, 78%, and 82% of revenues for the years ended December 31, 2019, 2018 and 2017, respectively. The credit risk, with respect to contracts with the government, is limited due to the creditworthiness of the respective governmental entity. We perform ongoing credit evaluations and monitoring of the financial condition of all our customers. We believe that the fair market value of all financial instruments, including debt, approximate book value.
Revenues for 2019 and 2018
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018, including the aggregate effect of modifications to such contracts through January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.
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 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 impact 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.
Revenues 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
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 aftermarket parts for distribution, 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 key 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, 2019, 2018 and 2017 was approximately $1.7 million, $2.1 million and $1.9 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets include amortizable 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 were recorded in the years ended December 31, 2019, December 31, 2018 and December 31, 2017.
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 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 2019, 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 intangible assets on a straight-line basis 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 five to 18 years with a weighted-average life of approximately 13.9 years as of December 31, 2019. We have six trade names that are amortized over an estimated useful life of approximately two to 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 13.4 years as of December 31, 2019.
Recently Issued Accounting Pronouncements Not Yet Adopted
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. We have adopted the new standard effective January 1, 2020. We do not anticipate that the adoption of the new standard will have a significant impact on our operating results, financial position or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosures related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We currently are assessing the impact this standard will have on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard is effective for fiscal years beginning after December 15, 2019. We have adopted the new standard effective January 1, 2020. We do not anticipate that the adoption of the new standard will have a significant impact on our operating results, financial position or cash flows.
(2) Acquisition
On January 10, 2019, our wholly owned subsidiary VSE Aviation, Inc. ("VSE Aviation") acquired 100% of the equity of 1st Choice Aerospace Inc. ("1st Choice Aerospace"), a provider of MRO services and products for new generation and legacy commercial aircraft platforms. 1st Choice Aerospace has operations in Florida and Kentucky. Key members of 1st Choice Aerospace's management team were retained under three-year employment contracts with five-year non-compete covenants.
The initial purchase consideration paid at closing for 1st Choice Aerospace was approximately $113 million, which included $1.1 million as an estimated net working capital adjustment. We will also be required to make earn-out payments of up to $40 million if 1st Choice Aerospace meets certain financial targets during 2019 and 2020. Approximately $1.1 million of our closing payments were deposited into an escrow account to secure the sellers' indemnification obligations. Any amount remaining in such escrow account at the end of the indemnification period less any then pending indemnification claims will be distributed to the sellers. 1st Choice Aerospace's results of operations are included in our Aviation Group in the accompanying consolidated financial statements beginning on the acquisition date of January 10, 2019. 1st Choice Aerospace had revenues of approximately $63.0 million and operating income of approximately $14.0 million before amortization of intangible assets of approximately $3.3 million and allocated corporate costs of approximately $1.7 million from the acquisition date through December 31, 2019.
The purchase accounting entries above include the impact of the Section 338(h)(10) election under the current U.S. tax code. We reflected the $1.7 million impact of this election in the purchase price. Our tax advantages resulting from the 338(h) (10) election are expected to significantly exceed the additional payment that was made to the sellers.
We completed our purchase price allocation. During the year ended December 31, 2019, we recorded an increase to goodwill of $17.2 million related to measurement-period adjustments to the preliminary purchase price allocation. The measurement-period adjustments were primarily related to reduction of $5.9 million to the valuation of intangibles - trade name, as well as a $9.8 million and $1.7 million adjustments to the fair value of the earn-out obligation and Section 338(h)(10) election, respectively, that increased the purchase price. The measurement-period adjustments were not significant to our previously reported consolidated results of operations or cash flows.
The fair values assigned to our earn-out obligation and intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques. Based on the Company's valuation, the total consideration of approximately $113 million (excluding any earn-out payments), which includes a final cash and net working capital consideration of $1.1 million, has been allocated to assets acquired (including identifiable intangible assets and goodwill) and liabilities assumed, as follows (in thousands):
|
|
|
|
|
|
Description
|
|
Fair Value
|
Accounts receivable
|
|
$
|
7,295
|
|
Unbilled receivables
|
|
431
|
|
Inventories
|
|
8,016
|
|
Prepaid expenses and other current assets
|
|
766
|
|
Property and equipment
|
|
4,521
|
|
Intangibles - customer related
|
|
54,500
|
|
Intangibles - trade name
|
|
2,100
|
|
Goodwill
|
|
77,828
|
|
Operating lease right-of-use assets
|
|
2,594
|
|
Other assets
|
|
333
|
|
Other current liabilities
|
|
(6,576
|
)
|
Long-term operating lease liabilities
|
|
(2,127
|
)
|
|
|
$
|
149,681
|
|
|
|
|
Cash consideration
|
|
$
|
113,181
|
|
Acquisition date estimated fair value of earn-out obligation
|
|
34,800
|
|
Section 338(h)(10) election
|
|
1,700
|
|
Total
|
|
$
|
149,681
|
|
The value attributed to customer relationships is being amortized on a straight-line basis using weighted average useful lives of 18 years. The value attributed to trade name is being amortized on a straight-line basis over five years. The amount of goodwill recorded for our 1st Choice Aerospace acquisition was approximately $77.8 million, all of which is expected to be amortizable for income tax purposes. The goodwill recognized reflects the strategic advantage of expanding our sustainment services into the aviation supply chain market.
We incurred approximately $408 thousand of acquisition-related expenses for the year ended December 31, 2019, which are included in selling, general and administrative expenses. The following VSE consolidated pro forma results are prepared as if the 1st Choice Aerospace acquisition had occurred on January 1, 2018. Significant pro forma adjustments incorporated into the pro forma results below include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to debt incurred to finance the acquisition. Significant nonrecurring adjustments include the elimination of non-recurring acquisition-related expenses incurred during the year ended December 31, 2019. This information is for comparative purposes only and does not necessarily reflect the results that would have occurred or may occur in the future.
The unaudited consolidated pro forma results of operations are as follows (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
2018
|
Revenue
|
|
|
|
|
|
|
|
$
|
743,347
|
|
Net Income
|
|
|
|
|
|
|
|
$
|
35,963
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
$
|
3.31
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
$
|
3.29
|
|
(3) Revenue Recognition
Disaggregated Revenue
Our revenues are derived from contract services performed for 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, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
Supply Chain Management
|
|
Aviation
|
|
Federal Services
|
|
Total
|
DoD
|
|
24,246
|
|
|
3,775
|
|
|
276,313
|
|
|
304,334
|
|
Other government
|
|
168,113
|
|
|
1,885
|
|
|
35,777
|
|
|
205,775
|
|
Commercial
|
|
22,161
|
|
|
218,886
|
|
|
1,471
|
|
|
242,518
|
|
|
|
$
|
214,520
|
|
|
$
|
224,546
|
|
|
$
|
313,561
|
|
|
$
|
752,627
|
|
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
|
DoD
|
|
24,280
|
|
|
7,387
|
|
|
302,827
|
|
|
334,494
|
|
Other government
|
|
176,200
|
|
|
2,172
|
|
|
33,746
|
|
|
212,118
|
|
Commercial
|
|
14,329
|
|
|
135,864
|
|
|
413
|
|
|
150,606
|
|
|
|
$
|
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, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Type
|
|
Supply Chain Management
|
|
Aviation
|
|
Federal Services
|
|
Total
|
Cost-type
|
|
$
|
—
|
|
|
$
|
696
|
|
|
$
|
144,600
|
|
|
$
|
145,296
|
|
Fixed-price
|
|
214,520
|
|
|
104,806
|
|
|
78,163
|
|
|
397,489
|
|
Time and materials
|
|
—
|
|
|
119,044
|
|
|
90,798
|
|
|
209,842
|
|
Total revenues
|
|
$
|
214,520
|
|
|
$
|
224,546
|
|
|
$
|
313,561
|
|
|
$
|
752,627
|
|
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 increased from $41.3 million at December 31, 2018 to $46.3 million at December 31, 2019, primarily due to revenue recognized in excess of billings. Contract liabilities, which are included in accrued expenses and other current liabilities in our consolidated balance sheet, were $5.0 million at December 31, 2018 and $5.0 million at December 31, 2019. For the year ended December 31, 2019 and 2018, we recognized revenue of $2.2 million and $7.9 million, respectively, 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, 2019 and 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, 2019 and 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, 2019, the aggregate amount of transaction prices allocated to unsatisfied or partially unsatisfied performance obligations was $213 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, 2019, revenue recognized from performance obligations satisfied in prior periods was not material.
(4) Receivables and Unbilled Receivables
Receivables, net and unbilled receivables, net as of December 31, 2019 and 2018, respectively, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Receivables, net
|
$
|
70,630
|
|
|
$
|
60,004
|
|
Unbilled receivables, net
|
46,279
|
|
|
41,255
|
|
|
$
|
116,909
|
|
|
$
|
101,259
|
|
Receivables, net are recorded at face value less an allowance for doubtful accounts of approximately $396 thousand and $79 thousand as of December 31, 2019 and 2018, 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 $15.2 million and $4.7 million as of December 31, 2019 and 2018, respectively. We expect to invoice substantially all unbilled receivables during 2020.
(5) Other Current Assets and Other Assets
At December 31, 2019 and 2018, 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, 2019 and 2018, other assets primarily consisted of deferred compensation plan assets.
(6) Property and Equipment
Property and equipment, net consisted of the following as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Buildings and building improvements
|
$
|
31,463
|
|
|
$
|
53,121
|
|
Computer equipment
|
26,697
|
|
|
26,489
|
|
Furniture, fixtures, equipment and other
|
38,637
|
|
|
32,991
|
|
Leasehold improvements
|
3,717
|
|
|
600
|
|
Land and land improvements
|
5,151
|
|
|
4,551
|
|
|
105,665
|
|
|
117,752
|
|
Less accumulated depreciation and amortization
|
(62,200
|
)
|
|
(68,146
|
)
|
Total property and equipment, net
|
$
|
43,465
|
|
|
$
|
49,606
|
|
Depreciation and amortization expense for property and equipment for the years ended December 31, 2019, 2018 and 2017 was approximately $7.0 million, $8.5 million and $9.3 million, respectively.
(7) Goodwill and Intangible Assets
Changes in goodwill for the years ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply Chain Management
|
|
Federal Services
|
|
Aviation
|
|
Total
|
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
|
|
Increase from acquisitions
|
—
|
|
|
—
|
|
|
77,828
|
|
|
77,828
|
|
Balance as of December 31, 2019
|
$
|
63,190
|
|
|
$
|
30,883
|
|
|
$
|
182,377
|
|
|
$
|
276,450
|
|
The results of our annual goodwill impairment testing in the fourth quarter of 2019 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, 2019, 2018 and 2017 was approximately $19.3 million, $16.0 million and $16.0 million, respectively.
Intangible assets were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Accumulated Impairment Loss
|
|
Net Intangible Assets
|
December 31, 2019
|
|
|
|
|
|
|
|
Contract and customer-related
|
$
|
227,594
|
|
|
$
|
(102,169
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
124,400
|
|
Acquired technologies
|
12,400
|
|
|
(9,660
|
)
|
|
—
|
|
|
2,740
|
|
Trade names
|
18,770
|
|
|
(13,735
|
)
|
|
—
|
|
|
5,035
|
|
Total
|
$
|
258,764
|
|
|
$
|
(125,564
|
)
|
|
$
|
(1,025
|
)
|
|
$
|
132,175
|
|
|
|
|
|
|
|
|
|
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
|
|
Future expected amortization of intangible assets is as follows for the years ending December 31, (in thousands):
|
|
|
|
|
|
Amortization
|
2020
|
$
|
18,809
|
|
2021
|
18,446
|
|
2022
|
16,700
|
|
2023
|
12,700
|
|
2024
|
9,119
|
|
Thereafter
|
56,401
|
|
Total
|
$
|
132,175
|
|
(8) Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Bank credit facility - term loan
|
$
|
120,800
|
|
|
$
|
80,800
|
|
Bank credit facility - revolver loans
|
152,000
|
|
|
81,934
|
|
Principal amount of long-term debt
|
272,800
|
|
|
162,734
|
|
Less debt issuance costs
|
(2,789
|
)
|
|
(2,135
|
)
|
Total long-term debt
|
270,011
|
|
|
160,599
|
|
Less current portion
|
(16,883
|
)
|
|
(9,466
|
)
|
Long-term debt, net of current portion
|
$
|
253,128
|
|
|
$
|
151,133
|
|
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 November 2019 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, 2019 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, 2019 are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
|
2020
|
|
$
|
17,813
|
|
2021
|
|
21,562
|
|
2022
|
|
22,500
|
|
2023
|
|
58,925
|
|
Total
|
|
$
|
120,800
|
|
The maximum amount of credit available to us under the loan agreement for revolving loans and letters of credit as of December 31, 2019 was $350 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 $54 thousand letters of credit outstanding as of December 31, 2019 and $57 thousand of letters of credit outstanding as of December 31, 2018.
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, 2019, the LIBOR base margin was 2.50% and the base rate base margin was 1.25%. 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 until February 6, 2021. We have executed compliant interest rate hedges. After taking into account the impact of hedging instruments, as of December 31, 2019, interest rates on portions of our outstanding debt ranged from 4.21% to 6.00%, and the effective interest rate on our aggregate outstanding debt was 4.77%.
Interest expense incurred on bank loan borrowings and interest rate hedges was approximately $13.3 million, $6.9 million and $7.2 million during the years ended December 31, 2019, 2018 and 2017, 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 and a minimum Fixed Charge Coverage Ratio. We were in compliance with required ratios and other terms and conditions as of December 31, 2019.
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist primarily of accrued compensation and benefits of approximately $24.2 million and $24.6 million as of December 31, 2019 and 2018, respectively. The accrued compensation and benefits amounts include bonus, salaries and related payroll taxes, vacation and deferred compensation.
(10) 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, 2019, 310,086 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 2019, 2018 and 2017, non-employee directors were awarded 18,900, 11,200 and 16,100 shares of restricted stock, respectively, under the 2006 Plan. The weighted average grant-date fair value of these restricted stock grants was $31.58 per share, $49.38 per share, and $39.85 per share for the shares awarded in 2019, 2018 and 2017, 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 $597 thousand, $553 thousand and $642 thousand during 2019, 2018 and 2017, 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 2020 for the 2019 awards. The date of award determination for the 2018 awards and the 2017 awards was March 2, 2019 and March 1, 2018, 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 2, 2019, the employees eligible for the 2018 awards, 2017 awards and 2016 awards received a total of 44,839 shares of common stock. The grant-date fair value of these awards was $34.84 per share.
In April 2019, upon the resignation of our CEO, President and Chief Operating Officer, we awarded to him 20,348 shares of restricted VSE common stock under the 2006 Plan. The grant-date fair value of this award was $30.66 per share. We paid approximately $267 thousand to cover the personal tax liability related to this award. The shares issued vested immediately and cannot be sold, transferred, pledged or assigned before the second anniversary of the grant date. Compensation expense related to this award was approximately $736 thousand for the year ended December 31, 2019.
The total stock-based compensation expense related to restricted stock awards for the years ended December 31, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Employees
|
$
|
2,667
|
|
|
$
|
2,332
|
|
|
$
|
2,416
|
|
Non-employee Directors
|
597
|
|
|
553
|
|
|
642
|
|
Total
|
$
|
3,264
|
|
|
$
|
2,885
|
|
|
$
|
3,058
|
|
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 $688 thousand, $641 thousand and $500 thousand, to cover this liability in the years ended December 31, 2019, 2018 and 2017, 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 $873 thousand with a weighted average amortization period of 1.8 years and $1.5 million with a weighted average amortization period of 1.8 years as of December 31, 2019 and 2018, 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, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Stock-based compensation included in costs and operating expenses
|
$
|
3,264
|
|
|
$
|
3,027
|
|
|
$
|
3,068
|
|
Income tax benefit recognized for stock-based compensation
|
(663
|
)
|
|
(755
|
)
|
|
(1,180
|
)
|
Stock-based compensation expense, net of income tax benefit
|
$
|
2,601
|
|
|
$
|
2,272
|
|
|
$
|
1,888
|
|
(11) 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 2015.
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, 2019, 2018 and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
Federal
|
$
|
7,739
|
|
|
$
|
9,667
|
|
|
$
|
14,149
|
|
State
|
1,344
|
|
|
1,758
|
|
|
2,511
|
|
Foreign
|
825
|
|
|
140
|
|
|
—
|
|
|
9,908
|
|
|
11,565
|
|
|
16,660
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
(66
|
)
|
|
(1,114
|
)
|
|
(10,645
|
)
|
State
|
(490
|
)
|
|
(347
|
)
|
|
110
|
|
Foreign
|
51
|
|
|
64
|
|
|
(136
|
)
|
|
(505
|
)
|
|
(1,397
|
)
|
|
(10,671
|
)
|
Provision for income taxes
|
$
|
9,403
|
|
|
$
|
10,168
|
|
|
$
|
5,989
|
|
The differences between the amount of tax computed at the federal statutory rate of 21% in 2019 and 2018, and 35% in 2017, and the provision for income taxes from continuing operations for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Tax at statutory federal income tax rate
|
$
|
9,749
|
|
|
$
|
9,502
|
|
|
$
|
15,780
|
|
Increases (decreases) in tax resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
1,805
|
|
|
1,861
|
|
|
1,732
|
|
Permanent differences, net
|
(195
|
)
|
|
367
|
|
|
(275
|
)
|
Impact of Tax Act
|
—
|
|
|
(795
|
)
|
|
(10,556
|
)
|
Tax credits
|
(612
|
)
|
|
(375
|
)
|
|
(368
|
)
|
Prior year true-up adjustment
|
(1,274
|
)
|
|
(113
|
)
|
|
(346
|
)
|
Other provision adjustments
|
(70
|
)
|
|
(279
|
)
|
|
22
|
|
Provision for income taxes
|
$
|
9,403
|
|
|
$
|
10,168
|
|
|
$
|
5,989
|
|
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, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Gross deferred tax assets
|
|
|
|
Deferred compensation and accrued paid leave
|
$
|
7,498
|
|
|
$
|
5,794
|
|
Accrued expenses
|
303
|
|
|
1,310
|
|
Stock-based compensation
|
678
|
|
|
819
|
|
Interest rate swaps
|
367
|
|
|
—
|
|
Reserve for contract disallowances
|
145
|
|
|
120
|
|
Acquisition-related expenses
|
—
|
|
|
151
|
|
Capitalized inventory
|
—
|
|
|
742
|
|
State operating loss carryforward
|
24
|
|
|
24
|
|
Tax credit carryforward
|
1,547
|
|
|
47
|
|
Foreign country operating loss carryforward
|
—
|
|
|
157
|
|
|
10,562
|
|
|
9,164
|
|
Valuation allowance (a)
|
(1,165
|
)
|
|
(107
|
)
|
Total gross deferred tax assets
|
9,397
|
|
|
9,057
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
Interest rate swaps
|
—
|
|
|
(49
|
)
|
Depreciation
|
(1,877
|
)
|
|
(1,739
|
)
|
Deferred revenues
|
(1,681
|
)
|
|
(2,164
|
)
|
Goodwill and intangible assets
|
(23,383
|
)
|
|
(23,395
|
)
|
Prepaid expenses
|
(60
|
)
|
|
(120
|
)
|
Capitalized inventory
|
(240
|
)
|
|
—
|
|
Total gross deferred tax liabilities
|
(27,241
|
)
|
|
(27,467
|
)
|
Net deferred tax liabilities
|
$
|
(17,844
|
)
|
|
$
|
(18,410
|
)
|
(a) A valuation allowance was provided against certain state tax credit and foreign tax loss deferred tax assets arising from carryforwards of unused tax benefits.
(12) Commitments and Contingencies
(a) Leases and Other Commitments
We adopted a comprehensive new lease accounting standard effective January 1, 2019 using optional modified retrospective transition method; accordingly, the comparative information as of December 31, 2018 and for the years ended December 31, 2018 and 2017 have not been adjusted and continue to be reported under the previous lease standard. See “Recently Adopted Accounting Pronouncements” in Note 1 for details of the significant changes to our accounting policies resulting from the adoption of the new accounting standard.
We determine at inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term. Substantially all of our leases are long-term operating leases for facilities with fixed payment terms between two and 15 years. Our operating lease ROU assets are recorded in operating lease right-of-use assets on our accompanying consolidated balance sheet. The current portion of operating lease liabilities are presented within accrued expenses and other current liabilities, and the non-current portion of operating lease liabilities are presented under long-term operating lease liabilities on our accompanying consolidated balance sheet.
For leases with terms greater than 12 months, we record the related asset and lease liability at the present value of lease payments over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the term of the lease.
Our lease cost for the year ended December 31, 2019 included the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
|
December 31, 2019
|
Operating lease cost
|
|
|
|
$
|
6,106
|
|
Short-term lease cost
|
|
|
|
698
|
|
Less: sublease income
|
|
|
|
(1,022
|
)
|
Total lease cost, net
|
|
|
|
$
|
5,782
|
|
For the years ended December 31, 2018 and 2017, total lease expense on our operating leases under the previous lease standard, net of sublease rentals, were $2.2 million and $3.8 million, respectively.
Certain of our leases include options to extend the term of the lease or to terminate the lease. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining total future lease payments. Our lease agreements do not provide a readily determinable implicit rate nor is it available to us from our lessors. Instead, we estimate our incremental borrowing rate based on information available at lease commencement to discount lease payments to present value.
The table below summarizes future minimum lease payments under operating leases, recorded on the balance sheet, as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
Operating Leases
|
2020
|
|
$
|
5,468
|
|
2021
|
|
5,210
|
|
2022
|
|
5,180
|
|
2023
|
|
4,758
|
|
2024
|
|
4,333
|
|
After 2024
|
|
9,433
|
|
Minimum lease payments
|
|
34,382
|
|
Less: imputed interest
|
|
(6,231
|
)
|
Present value of minimum lease payments
|
|
28,151
|
|
Less: current maturities of lease liabilities
|
|
(3,710
|
)
|
Long-term lease liabilities
|
|
$
|
24,441
|
|
We made cash payments of approximately $5.7 million for operating leases during the year ended December 31, 2019, which are included in cash flows from operating activities in our consolidated statement of cash flows. The weighted average remaining lease term and discount rate for our operating leases were approximately 6.6 years and 6.0%, respectively at December 31, 2019.
(b) Contingencies
As previously reported, 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 worked under VSE’s contract with the United States Army at the Red River Army Depot in Texas. On January 14, 2020, the parties settled the lawsuit. While the settlement amount VSE agreed to pay the defendants was in excess of the amount that VSE had previously accrued as a loss provision in respect of the lawsuit, the difference was not material.
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 position 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 most 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.
(13) Business Segments and Customer Information
Segment Information
Management of our business operations is conducted under three reportable operating segments:
Aviation Group – Our Aviation Group provides international parts supply and distribution, supply chain solutions, component and engine accessory repair services supporting global aftermarket commercial and business and general aviation customers through product distribution and MRO services.
Supply Chain Management Group – Our Supply Chain Management Group provides parts supply, inventory management, e-commerce fulfillment, logistics, data management, and other services to assist aftermarket United States Postal Service ("USPS"), DoD and aftermarket commercial high duty-cycle truck and fleet customers.
Federal Services Group – Our Federal Services Group provides aftermarket refurbishment and sustainment services to extend and maintain the life cycle of military vehicles, ships, and aircraft for the DoD. The group provides foreign military sales services, engineering, logistics, maintenance, configuration management, prototyping, technology, and field support services to the DoD and other customers. We also provide energy consulting services and healthcare IT and IT data solutions.
The operating segments reported below are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by our Chief Executive Officer in deciding how to allocate resources and in assessing performance. 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,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
Aviation Group
|
$
|
224,546
|
|
|
$
|
145,423
|
|
|
$
|
134,809
|
|
Supply Chain Management Group
|
214,520
|
|
|
214,809
|
|
|
214,542
|
|
Federal Services Group
|
313,561
|
|
|
336,986
|
|
|
410,762
|
|
Total revenues
|
$
|
752,627
|
|
|
$
|
697,218
|
|
|
$
|
760,113
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Aviation Group
|
$
|
17,901
|
|
|
$
|
11,076
|
|
|
$
|
9,695
|
|
Supply Chain Management Group
|
29,819
|
|
|
30,626
|
|
|
33,754
|
|
Federal Services Group
|
18,144
|
|
|
15,797
|
|
|
13,419
|
|
Corporate expenses
|
(5,607
|
)
|
|
(3,269
|
)
|
|
(2,543
|
)
|
Operating income
|
$
|
60,257
|
|
|
$
|
54,230
|
|
|
$
|
54,325
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
Aviation Group
|
$
|
12,546
|
|
|
$
|
5,123
|
|
|
$
|
4,835
|
|
Supply Chain Management Group
|
11,085
|
|
|
7,299
|
|
|
6,536
|
|
Federal Services Group
|
3,296
|
|
|
12,802
|
|
|
14,511
|
|
Total depreciation and amortization
|
$
|
26,927
|
|
|
$
|
25,224
|
|
|
$
|
25,882
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Aviation Group
|
$
|
8,396
|
|
|
$
|
1,772
|
|
|
$
|
1,387
|
|
Supply Chain Management Group
|
1,076
|
|
|
802
|
|
|
1,376
|
|
Federal Services Group
|
58
|
|
|
209
|
|
|
177
|
|
Corporate
|
130
|
|
|
334
|
|
|
373
|
|
Total capital expenditures
|
$
|
9,660
|
|
|
$
|
3,117
|
|
|
$
|
3,313
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Total assets:
|
|
|
|
Aviation Group
|
$
|
522,446
|
|
|
$
|
316,197
|
|
Supply Chain Management Group
|
170,142
|
|
|
166,015
|
|
Federal Services Group
|
88,966
|
|
|
92,098
|
|
Corporate
|
64,310
|
|
|
64,518
|
|
Total assets
|
$
|
845,864
|
|
|
$
|
638,828
|
|
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. Corporate assets are primarily cash, property and equipment and investments held in separate trust.
In 2019, we allocated depreciation and amortization expense to each segment based on the segment in which each asset was utilized. In 2018 and 2017, the allocation method for certain amortization expenses was based on each segment’s percentage of overall cost. The primary reason for the change is to allocate depreciation and amortization expense to a specific segment depending on the asset deployment. Depreciation and amortization expense by segment for 2018 and 2017 was not recast for these allocation changes, and this change did not impact our previously reported consolidated financial results. The impact for 2018, under the new allocation method, would have been a decrease in depreciation and amortization expense for the Federal Services Group of $8.1 million, with a corresponding increase for Aviation Group and Supply Chain Group of $3.7 million and $4.4 million, respectively. The impact for 2017 would have been a decrease in depreciation and amortization expense for the Federal Services Group of $9.1 million, with a corresponding increase for Aviation Group and Supply Chain Group of $4.1 million and $5.0 million, respectively.
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 commercial 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
Years ended December 31,
|
Source of Revenues
|
|
2019
|
|
%
|
|
2018
|
|
%
|
|
2017
|
|
%
|
DoD
|
|
$
|
304,334
|
|
|
41
|
|
$
|
334,494
|
|
|
48
|
|
$
|
402,229
|
|
|
53
|
Other government
|
|
205,775
|
|
|
27
|
|
212,118
|
|
|
30
|
|
218,426
|
|
|
29
|
Commercial
|
|
242,518
|
|
|
32
|
|
150,606
|
|
|
22
|
|
139,458
|
|
|
18
|
Total Revenues
|
|
$
|
752,627
|
|
|
100
|
|
$
|
697,218
|
|
|
100
|
|
$
|
760,113
|
|
|
100
|
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 are 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,
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
659,451
|
|
|
$
|
647,168
|
|
|
$
|
708,474
|
|
Other Countries (1)
|
|
93,176
|
|
|
50,050
|
|
|
51,639
|
|
Total revenue
|
|
$
|
752,627
|
|
|
$
|
697,218
|
|
|
$
|
760,113
|
|
(1) No individual country, other than disclosed above, exceeded 10% of our total revenue for any period presented.
(14) 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.
(15) 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 $5.5 million, $5.9 million and $6.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
(16) 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, 2019 and December 31, 2018 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, 2019
|
|
Fair Value December 31, 2018
|
Non-COLI assets held in Deferred Supplemental Compensation Plan
|
|
Other assets
|
|
1
|
|
$
|
710
|
|
|
$
|
403
|
|
Interest rate swaps
|
|
Accrued expenses/Other current assets
|
|
2
|
|
$
|
1,473
|
|
|
$
|
195
|
|
Earn-out obligation-current
|
|
Current portion of earn-out obligation
|
|
3
|
|
$
|
31,700
|
|
|
$
|
—
|
|
Earn-out obligation-long-term
|
|
Earn-out obligation
|
|
3
|
|
$
|
5,000
|
|
|
$
|
—
|
|
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 $1.5 million and approximately $195 thousand at December 31, 2019 and 2018, respectively. The offset, net of an income tax effect of approximately $367 thousand and $49 thousand is included in accumulated other comprehensive income in the accompanying balance sheets as of December 31, 2019 and 2018, 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.
We utilized an income approach to determine the fair value of our 1st Choice Aerospace acquisition earn-out obligation. Significant unobservable inputs used to value the contingent consideration include projected revenue and cost of services and the discount rate. If a significant increase or decrease in the discount rate occurred in isolation, the result could be significantly higher or lower fair value measurement. In January 2020, after obtaining the sellers' consent to our proposed amount of the earn-out payment for the 2019 performance year, we made a payment of approximately $31.7 million to satisfy the 2019 performance year obligation.
The fair value of the earn-out obligation increased by $1.9 million during the fourth quarter of 2019.
(17) Selected Quarterly Data (Unaudited)
The following table shows selected quarterly data for 2019 and 2018, in thousands, except earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
169,919
|
|
|
$
|
189,111
|
|
|
$
|
198,326
|
|
|
$
|
195,271
|
|
Costs and operating expenses
|
$
|
158,106
|
|
|
$
|
172,695
|
|
|
$
|
181,111
|
|
|
$
|
180,458
|
|
Operating income
|
$
|
11,813
|
|
|
$
|
16,416
|
|
|
$
|
17,215
|
|
|
$
|
14,813
|
|
Net income
|
$
|
6,603
|
|
|
$
|
9,898
|
|
|
$
|
10,527
|
|
|
$
|
9,996
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
0.60
|
|
|
$
|
0.90
|
|
|
$
|
0.96
|
|
|
$
|
0.92
|
|
Basic weighted average shares outstanding
|
10,920
|
|
|
10,970
|
|
|
10,970
|
|
|
10,882
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
0.60
|
|
|
$
|
0.89
|
|
|
$
|
0.95
|
|
|
$
|
0.90
|
|
Diluted weighted average shares outstanding
|
10,974
|
|
|
11,073
|
|
|
11,060
|
|
|
11,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
11,593
|
|
|
$
|
13,855
|
|
|
$
|
15,697
|
|
|
$
|
13,085
|
|
Net income (1)
|
$
|
7,052
|
|
|
$
|
8,751
|
|
|
$
|
10,034
|
|
|
$
|
9,243
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income (1)
|
$
|
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
|
|
|
10,991
|
|
(1) Operating income for the third quarter of 2018 includes a $1.7 million gain from the sale of a contract.
(18) Subsequent Events
On January 28, 2020 VSE’s subsidiary VSE Aviation, Inc entered into a definitive agreement to sell Prime Turbines LLC (Prime Turbines) to PTB Holdings USA, LLC for a sale price of $21 million. The transaction was completed on February 26, 2020. Prime Turbines is a provider of turboprop aircraft engine repair, maintenance and overhaul, including for Pratt & Whitney Canada PT6A and PT6T series engines and is included in our Aviation Group segment. VSE estimates that it will incur a non-cash loss ranging from $6 million to $7.5 million in respect of the sale of Prime Turbines. Prime Turbines did not meet the held for sale criteria per ASC 360 at December 31, 2019, and as such, Prime Turbines assets and liabilities as of December 31, 2019, and results of operations for all periods presented are classified as held and used in the consolidated financial statements.