|Edgar Online, Inc.|
We provide sustainment services for legacy systems and equipment and professional services to the
U.S. Department of Defense("DoD") and Federal Civilian agencies, including the United States Postal Service("USPS"). Our operations consist primarily of logistics, engineering, equipment refurbishment, supply chain management, IT solutions, health care IT, energy solutions, construction management and consulting services performed on a contract basis. Substantially all of our contracts are with United States Government("government") agencies and other government prime contractors.
Organization and Reporting Segments
Our business is managed under operating groups consisting of one or more divisions or wholly owned subsidiaries that perform our services. We have five reportable segments aligned with our management groups: 1) Federal; 2) International; 3) IT,
Energy and Management Consulting; 4) Infrastructure; and 5) Supply Chain Management. Federal Group- Our Federal Groupprovides engineering, technical, management, and integrated logistics support services to U.S. military branches, government agencies and other customers. These services include full life cycle engineering, logistics, maintenance, field support, and refurbishment services to extend and enhance the life of existing vehicles and equipment; comprehensive systems and software engineering, systems technical support, configuration management, obsolescence management, prototyping services, technology insertion programs, and technical documentation and data packages; and management and execution of programs under large multiple award contracts. This group provides its services to the U.S. Army, Army Reserve, Marine Corps, and other customers. Significant current and recent work efforts for this group include task orders completed under our U.S. ArmyCECOM Rapid Response ("R2") contract, which expired in 2011, our ongoing U. S. Army Reservevehicle refurbishment program, and our Driver's Vision Enhancer-Family of Systems ("DVE-FOS") program. International Group- Our International Groupprovides engineering, industrial, logistics, maintenance, information technology, fleet-wide ship and aircraft support, and foreign military sales services to the U.S. military branches, government agencies, and other customers. These services include program management, engineering, technical support, logistics services, and follow-on technical support for ship reactivations and transfers; field engineering, ship repair and modernization, ship systems installations, ordnance engineering, facility operations, war reserve materials management, and IT systems integration; aircraft sustainment and maintenance services; and management, maintenance, storage and disposal support for seized and forfeited general property programs. This group provides its services to the U.S. Navy, Air Force, Department of Treasury, Department of Justice, Bureau of Alcohol, Tobacco, Firearms and Explosives("ATF"), and other customers. Significant current and recent work efforts for this group include ongoing assistance to the U.S. Navyin executing its Foreign Military Sales ("FMS") Program for surface ships sold, leased or granted to foreign countries, various task orders under the U.S. AirForce Contract Field Teams ("CFT") Program, and management of Department of Treasuryand ATFseized and forfeited general property programs ("Seized Asset Programs"). IT, Energyand Management Consulting Group - Our IT, Energyand Management Consulting Group provides technical and consulting services primarily to various DoD and civilian government agencies. The group consists of our wholly owned subsidiaries Energetics Incorporated("Energetics"), G&B Solutions, Inc.("G&B"), and Akimeka, LLC("Akimeka"). Energetics provides technical, policy, business, and management support in areas of energy modernization, clean and efficient energy, climate change mitigation, infrastructure protection, measurement technology, and global health. G&B provides enterprise architecture development, information assurance/business continuity, program and portfolio management, network IT services, systems design and integration, quality assurance services and product and process improvement services. Akimekaoffers solutions in fields that include medical logistics, medical command and control, e-health, information assurance, and public safety. This group provides its services to the U.S. Departments of Defense, Energy, Homeland Security, Commerce, Interior, Labor, Agriculture and Housing and Urban Development; the Social Security Administration; the Pension Benefit Guaranty Corporation; the National Institutes of Health; customers in the military health system; and other government agencies and commercial clients. Infrastructure Group- Our Infrastructure Groupis engaged principally in providing engineering and transportation infrastructure services and construction management services primarily to federal civilian agencies. This group consists of our ICRC subsidiary. ICRC provides project design, planning and integration management, environmental planning, construction management, building renovation, and other technical services. ICRC provides services to various DoD and federal civilian departments and agencies, and to other customers. Prior to 2012, ICRC's largest contract was with the U.S. Department of Transportation Maritime Administration("MARAD") for services performed on the Port of Anchorage Intermodal Expansion Projectin Alaska(the "PIEP"). The Port of Anchoragesuspended the port expansion program due to technical difficulties encountered and lack of sufficient funding. Accordingly, MARAD declined to exercise future option years on the contract, ending our contract on this project in May 2012. -16-
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Supply Chain Management Group- Our Supply Chain Management Groupprovides sourcing, acquisition, scheduling, transportation, shipping, logistics, data management, and other services to assist our clients with supply chain management efforts. This group is comprised of our Wheeler Bros., Inc.("WBI") subsidiary, acquired in June 2011, and other VSE Supply Chain Management work. Significant current work efforts for this group include WBI's ongoing Managed Inventory Program ("MIP") to USPSand direct sales to other clients. Concentration of Revenues (in thousands) For the six months ended June 30, 2012 2011 Source of Revenue Revenues % Revenues % USPS MIP $ 67,511 24 $ 9,581 3 FMS Program 45,614 16 50,459 16 U.S. Army Reserve 34,775 12 32,797 10
Treasury/ATF Seized Asset Programs 15,192 5 15,035
5 R2 and R2-3G Programs 7,600 3 51,399 17 Other 112,813 40 150,519 49 $ 283,505 100 $ 309,790 100 Management Outlook Our company and our industry continue to face operating environment challenges caused by changing federal government budgeting and spending priorities, initiatives, and processes. These challenges have constrained our revenue levels in recent reporting periods, but have also presented us the opportunity to direct our efforts toward new and existing markets that are more sustainable in this environment and offer improved income potential. The operating environment challenges have affected the timeliness of awards and the funding of new and existing contracts in our markets, impacted the flow of work to federal contractors, caused increased competition in the federal marketplace, and increased the frequency of protests of government contract awards. Specific circumstances having an adverse impact on our revenues in recent reporting periods include a slower than usual ramp up of our FMS Program activity on the follow-on contract due to a lengthy award and protest process, a reduction in our overseas equipment servicing opportunities as U.S. military involvement winds down, and government delays in awarding and funding contracts. While it appears that conditions will continue to be challenging through most of 2012, we believe we have made progress through our diversification efforts to enhance our prospects for future revenue and income, and are positioned to withstand market condition challenges in the longer term. Potential future opportunities include an expansion of our vehicle and equipment refurbishment program to additional
U.S. Army Reservelocations, the U.S. Army, and other clients; an increase in our FMS Program work as ship reactivations and transfers are approved; and an expansion of our Supply Chain Management services to DoD clients and other customers, including commercial. We believe that our acquisition of WBI in 2011 positioned us to improve our revenues and profit margins, diversify our product offerings and customer base, and improve the balance between our services to DoD and federal civilian agencies. WBI gives us a well established supply chain management capability, which when combined with our existing client relationships, provides potential for future revenue growth in the DoD market. Conversely, WBI's relationship with the USPS, combined with our existing capabilities, also presents opportunities to leverage our legacy vehicle life extension services to a new client. These synergies are already producing results. We have delivered a vehicle for -17-
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evaluation under our contract with the
USPSto develop a more fuel efficient repowered gasoline delivery vehicle. The engine WBI delivered is also capable of using compressed natural gas ("CNG") as a fuel. If the USPSapproves the engine and we successfully move this effort to the production stage, we will generate an additional future revenue stream. The WBI engine has the potential to have a significant impact for the USPSin savings on fuel cost. Our acquisition of WBI's supply chain and inventory management competencies also provides us opportunities to further diversify our customer base to other markets, including commercial work. Sequestration - If automatic spending reductions mandated by the sequestration provisions of the 2011 Budget Control Act were to be implemented, such spending reductions would add to the financial challenges facing our industry. Sequestration could result in delaying, postponing or canceling of awards across all sectors of the federal government as each agency determines how to implement budget impacts. Some of our smaller revenue programs, including some energy and IT programs, may potentially be adversely impacted by sequestration. However, a significant amount of our revenues come from our larger programs that either do not rely on tax funded government spending or provide services that offer a lower cost alternative to mission critical objectives. Our USPS MIP and Treasury and ATF Seized Asset Programs are largely self-funded through collections of postage and asset auction proceeds, and our FMS Program is largely funded by foreign government clients. Our U. S. Army Reservevehicle refurbishment program provides our client with a means to maintain necessary levels of vital capital assets while relieving the client of the need to spend larger amounts on replacement assets. While all the specific effects of sequestration cannot yet be determined, we believe that we are well positioned to minimize the negative impact it could have on our financial results or condition in the coming years. Although the inclusion of WBI in our operations and our strategic direction toward expanding our Supply Chain Management services will lessen our reliance on employee services to generate profitable revenue streams, our employee labor continues to be an important part of our business operations. As of June 30, 2012, our employee count increased to 2,604 as compared to 2,516 as of December 31, 2011. Bookings and Funded Backlog Our revenues depend on contract funding ("bookings"), and bookings generally occur at the time contract funding documentation is received. For our revenues that depend on bookings arising from the receipt of contract funding documentation, funded contract backlog is an indicator of potential future revenues. Revenues for WBI are predominantly driven by the rate and timing of parts failure on customer vehicles, and WBI bookings generally occur at the time of sale instead of the receipt of contract funding documentation. Accordingly, WBI does not generally have significant amounts of funded contract backlog and it is not an indicator of potential future revenues for WBI. The funded contract backlog for WBI was $3 millionand $0 millionas of June 30, 2012and 2011, respectively. A summary of our bookings and revenues for the six months ended June 30, 2012and 2011, and funded contract backlog as of June 30, 2012and 2011 is as follows: (in millions) 2012 2011 Bookings $ 273 $ 240 Revenues $ 284 $ 310 Funded Contract Backlog $ 275 $ 310 Critical Accounting Policies Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. There have been no changes in our critical accounting policies since December 31, 2011. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2011filed with the SECon March 7, 2012
Revenue by Contract Type
Our revenues by contract type were as follows (in thousands):Six months ended June 30, Contract Type 2012 % 2011 % Cost-type $ 65,470 23 $ 92,075 30 Time and materials 100,214 35 164,182 53 Fixed-price 117,821 42 53,533 17 $ 283,505 100 $ 309,790 100 -18-
Table of ContentsA significant portion of our time and materials revenues in 2011 were from our R2 contract, which expired in
January 2011. WBI revenues are classified as fixed-price revenue. Accordingly, the percentages of work performed by contract type will differ in 2012 as compared to 2011.
Results of Operations
The results of operations are as follows (in thousands):Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 139,164 $ 158,546 $ 283,505 $ 309,790 $ (19,382 ) $ (26,285 ) Contract costs 125,753 149,344 257,196 292,858 (23,591 ) (35,662 ) Selling, general and administrative expenses 1,379 1,929 1,934 2,750 (550 ) (816 ) Operating Income 12,032 7,273 24,375 14,182 4,759 10,193 Interest expense, net 1,852 440 3,384 584 1,412 2,800 Income before income taxes 10,180 6,833 20,991 13,598 3,347 7,393 Provision for income taxes 3,885 2,622 8,028 5,215 1,263 2,813 Net Income $ 6,295 $ 4,211 $ 12,963 $ 8,383 $ 2,084 $ 4,580 Our revenues decreased approximately
$19 million, or 12%, for the quarter ended June 30, 2012, and approximately $26 million, or 8%, for the first six months of 2012, as compared to the same periods of 2011. These revenue decreases were primarily due to the expiration of work on our R2 Program, which was completed in 2011. Revenues in our Federal, International, IT, Energy and Management Consulting, and Infrastructure Groups declined. These declines were partially offset by the inclusion of revenues from our Supply Chain Management Group, established in June 2011, in our operating results for 2012. Our operating income increased approximately $4.8 million, or 65% for the quarter ended June 30, 2012, and approximately $10.2 million, or 72%, for the first six months of 2012, as compared to the same periods of 2011. The primary reason for the increase was the inclusion of operating income from our Supply Chain Management Groupin our operating results for 2012.
Changes in revenues and operating income are further discussed in the summaries of our segment results that follow.
Selling, general and administrative expenses consist primarily of costs and expenses that are not chargeable or reimbursable on our operating unit contracts. These expenses decreased in 2012 as compared to 2011 due to costs associated with the acquisition of WBI in 2011.Lease payments for our executive and administrative headquarters office building began in
May 2012. Terms of our lease agreement have required us to capitalize the construction costs of the leased building. We are also required to classify the monthly expense associated with the lease as depreciation and interest expense instead of rent expense normally associated with an operating lease. The depreciation from the building and interest expense will be a greater monthly amount than the comparable operating rent expense would be in the beginning years of the lease term, and a lesser amount in the later years of the lease.
Our effective income tax rates for the six months ended
June 30, 2012and 2011 were 38.2% and 38.4%, respectively.-19-
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Federal Group ResultsThe results of operations for our
Federal Groupare as follows (in thousands): Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 32,942 $ 52,747 $ 63,697 $ 119,095 $
(19,805 ) $ (55,398 )
$ 2,635 $ 3,172 $ 4,045 $ 5,716$(537 ) $ (1,671 ) Profit percentage 8.0 % 6.0 % 6.4 % 4.8 % Revenues for our Federal Groupdecreased approximately $20 millionor 38%, for the quarter ended June 30, 2012as compared to the same period for the prior year. Revenues decreased approximately $55 millionor 47%, for the six months ended June 30, 2011as compared to the same period for the prior year. The decreases in revenues for this segment resulted primarily from a decrease in revenues associated with our expiring R2 contract of approximately $21 millionin the second quarter and approximately $60 millionin the first six months of 2012. Operating income for our Federal Groupdecreased approximately $537 thousand, or 17% for the quarter ended June 30, 2012, as compared to the same period for the prior year. Operating income decreased approximately $1.7 millionor 29%, for the six months ended June 30, 2011as compared to the same period for the prior year. The declines were primarily due to operating income decreases of approximately $647 thousandfor the second quarter and approximately $1.2 millionfor the first six months associated with a decline in work on our DVE-FOS program. The increase in the profit percentage in 2012 as compared to 2011 is primarily due to a decrease in the lower margin subcontract work performed on our R2 contract which ended in early 2011.
International Group ResultsThe results of operations for our
International Groupare as follows (in thousands): Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 42,281 $ 54,682 $ 88,045 $ 106,392 $
(12,401 ) $ (18,347 )
$ 1,319 $ 1,800 $ 2,835 $ 3,716$(481 ) $ (881 ) Profit percentage 3.1 % 3.3 % 3.2 % 3.5 % Revenues for our International Groupdecreased approximately $12 million, or 23%, for the quarter ended June 30, 2012, as compared to the same period for the prior year. Revenues decreased approximately $18 millionor 17%, for the six months ended June 30, 2012as compared to the same period for the prior year. The decreases in revenues resulted primarily from a decline in pass-through work provided on engineering and technical services task orders of approximately $10 millionin the second quarter and approximately $8 millionin the first six months of 2012, and to declines of approximately $5 millionand $3 millionon our FMS and CFT programs in the first six months of 2012. Operating income for our International Groupdecreased approximately $481 thousand, or 27%, for the quarter ended June 30, 2012, as compared to the same period for the prior year. Operating income decreased approximately $881 thousandor 24%, for the six months ended June 30, 2012as compared to the same period for the prior year. The decreases in operating income resulted primarily from a loss of $750 thousandassociated with a work share agreement with a subcontractor and reduced profits associated with the decreased revenue levels. Profit margins in this group can vary due to fluctuations in contract activity and the timing of contract award fees associated with our FMS Program. -20-
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IT, Energy and Management Consulting Group Results
The results of operations for our IT,
Energyand Management Consulting Group are as follows (in thousands):Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 24,019 $ 27,603 $ 49,757 $ 54,966 $
(3,584 ) $ (5,209 )Operating Income $ 2,867 $ 3,133 $ 5,948 $ 5,477 $ (266 ) $ 471 Profit percentage 11.9 % 11.4 % 12.0 % 10.0 % Revenues for our IT,
Energyand Management Consulting Group decreased approximately $3.6 million, or 13% for the quarter ended June 30, 2012, as compared to the same period for the prior year. Revenues decreased approximately $5.2 millionor 9%, for the six months ended June 30, 2012as compared to the same period for the prior year. The decreases in revenues were due primarily to a general decline in services ordered by clients. Operating income for this segment decreased approximately $266 thousand, or 8%, for the quarter ended June 30, 2012, as compared to the same period for the prior year. Operating income increased approximately $471 thousandor 9%, for the six months ended June 30, 2012as compared to the same period for the prior year. The year over year changes in operating income are primarily attributable to a decrease in profits associated with the revenue declines, offset by increases to operating income from reductions in our accrued earn-out obligation associated with our acquisition of Akimeka. Operating income increases from reductions of our accrued earn-out obligation for Akimekawere approximately $967 thousandfor the second quarter and $1.9 millionfor the six months ended June 30, 2012, compared to approximately $352 thousandand $955 thousandfor the same periods of the prior year.
Infrastructure Group ResultsThe results of operations for our
Infrastructure Groupare as follows (in thousands): Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 3,493 $ 12,838 $ 7,847 $ 18,661 $ (9,345 ) $ (10,814 )
Operating (Loss) Income $ (520 )
$ 214$ (670 ) $ 446$ (734 ) $ (1,116 ) Profit percentage-14.9 % 1.7 % -8.5 % 2.4 % Revenues for our Infrastructure Groupdecreased approximately $9 million, or 73%, for the quarter ended June 30, 2012, as compared to the same period for the prior year. Revenues decreased approximately $11 millionor 58%, for the six months ended June 30, 2012as compared to the same period for the prior year. The decreases in revenues were due primarily to a reduction in services ordered on the PIEP. This segment had an operating loss of approximately $520 thousandfor the quarter ended June 30, 2012, as compared to earning operating income of approximately $214 thousandfor the same period of the prior year. For the six months ending June 30, 2012, this segment had an operating loss of approximately $670 thousand, as compared to earning operating income of approximately $446 thousandfor the same period of the prior year. These changes in operating income are primarily due to a reduction of income associated with the decline in revenues, and to the adverse financial impact on this group's fixed price construction projects resulting from the allocation of fixed costs over a smaller revenue base. Our customer has experienced delays in funding and defining the scope of work on the PIEP, which have contributed to our decreased revenue levels for this segment. Our customer chose not to exercise future option years on the contract supporting the PIEP, ending our contract on this project in May 2012. We have not recognized fee income associated with some of the work we performed on this project prior to 2012, because the customer has not funded this fee income due to pending resolution of environmental and technical issues impacting the work. We are currently in discussions with our customer regarding resolution of the fee issue. If the fees on this work are funded, we could recognize additional revenue and operating income of between $1.8 million and $2.4 million. We are unable to predict the outcome of the fee discussions and the eventual realization of this fee income remains uncertain. -21-
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Supply Chain Management Group ResultsThe results of operations for our
Supply Chain Management Groupare as follows (in thousands): Three months Six months Change ended June 30, ended June 30, Three Six 2012 2011 2012 2011 Months Months Revenues $ 36,429 $ 10,676 $ 74,159 $ 10,676 $
$ 5,629 $ 1,959 $ 12,385 $ 1,959 $ 3,670 $ 10,426Profit percentage 15.5 % 18.3 % 16.7 % 18.3 %This group was established and began contributing to our operating results upon our acquisition of WBI in June 2011. Financial performance comparisons to prior year results are not yet meaningful. The operating income for 2012 was reduced by an increase in the earn-out obligation for WBI of approximately $806 thousandand $1.2 millionfor the three- and six-months ended June 30, 2012.
Financial ConditionOur financial condition did not change materially in the first six months of 2012. Changes to asset and liability accounts were due primarily to our earnings, our level of business activity, contract delivery schedules, subcontractor and vendor payments required to perform our work, and the timing of associated billings to and collections from our customers.
Liquidity and Capital Resources
Cash and cash equivalents decreased approximately
$9 thousandduring the first six months of 2012.Cash provided by operating activities increased approximately $21 millionin the first six months of 2012 as compared to the same period of 2011. The change is attributable to an increase of approximately $7.8 millionfrom an increase in depreciation and amortization and other non-cash operating activities, an increase of approximately $4.6 millionin cash provided by net income, and an increase of approximately $8.2 milliondue to changes in the levels of working capital components. Of these working capital components, our largest asset is our accounts receivable and our largest liability is our accounts payable. A significant portion of our accounts receivable and accounts payable result from the use of subcontractors to perform work on our contracts and from the purchase of materials to fulfill our contract requirements. Accordingly, our levels of accounts receivable and accounts payable may fluctuate depending on the timing of the government services ordered, government funding delays, the timing of billings received from subcontractors and materials vendors, and the timing of payments received from government customers in payment of these services. Such timing differences have the potential to cause significant increases and decreases in our accounts receivable and accounts payable in short time periods.
Cash used in investing activities decreased approximately
$161 millionin the first six months of 2012 as compared to the same period of 2011. This was primarily due to cash used for our acquisition of WBI of approximately $175 millionin 2011.
Cash used in financing activities was approximately
$6 millionin the first six months of 2012 compared to cash provided by financing activities of approximately $171 millionfor the same period of 2011. This difference was primarily due to bank borrowing to finance our acquisition of WBI in 2011.We paid quarterly cash dividends of $0.14per share during the first six months of 2012. Pursuant to our bank loan agreement, our payment of cash dividends is subject to annual rate restrictions. We have paid cash dividends each year since 1973, and have increased the dividend each year since 2004. -22-
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LiquidityOur internal sources of liquidity are primarily from operating activities, specifically from changes in the level of revenues and associated accounts receivable and accounts payable, and from profitability. Significant increases or decreases in revenues and accounts receivable and accounts payable can impact our liquidity. Our accounts receivable and accounts payable levels can be affected by changes in the level of the work we perform, by the timing of large materials purchases and subcontractor efforts used in our contracts, and by government delays in the award of contractual coverage and funding and payments. Government funding delays have caused delays in our ability to invoice for revenues earned, resulting in a negative impact on our days sales outstanding. We also purchase property and equipment and invest in expansion, improvement, and maintenance of our operational and administrative facilities. In the first six months of 2012, we made approximately
$9 millionin capital investments related to the move of our corporate headquarters offices in May 2012. From time to time, we may also invest in the acquisition of other companies. Our acquisition of WBI in 2011 required a significant use of our cash. Our external financing consists of a loan agreement entered into in June 2011with a group of banks to make our WBI acquisition and provide working capital for our continuing operations. This loan agreement, which expires in June 2016, replaced a previous loan agreement and consists of a term loan, revolving loans, and letters of credit. The term loan requires quarterly installments. Our scheduled term loan payments following June 30, 2012are: $9.4 millionin 2012, $23.4 millionin 2013, $25 millionin 2014, $34.3 millionin 2015, and $9.4 millionin 2016. The amount of term loan borrowings outstanding as of June 30, 2012is approximately $101.5 million. The maximum amount of credit available to us from the banking group for revolving loans and letters of credit as of June 30, 2012was $125 millionand under the loan agreement we may elect to increase this maximum availability up to $175 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 $58 millionin revolving loan funds borrowed and $5 millionof letters of credit outstanding as of June 30, 2012. During 2012, the highest outstanding revolving loan amount was $81 millionand the lowest was $51 million. The timing of certain payments made and collections received associated with our subcontractor and materials requirements and other operating expenses can cause fluctuations in our outstanding revolving loan amounts. Delays in government funding of our work performed can also cause additional borrowing requirements. 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 June 30, 2012, the LIBOR base margin is 2.5% and the base rate base margin is 0.75%. The base margins increase or decrease in steps as our Total Funded Debt/EBITDA Ratio increases or decreases. We have employed interest rate hedges on a portion of our outstanding borrowings. After taking into account the impact of hedging instruments, as of June 30, 2012, interest rates on portions of our outstanding debt ranged from 2.49% to 4.12%, and the effective interest rate on our aggregate outstanding debt was 3.52%. The loan agreement contains collateral requirements that secure our assets, restrictive covenants, other affirmative and negative covenants, and subjects us to certain conditions and limitations. Restrictive covenants include a maximum Total Funded Debt/EBITDA Ratio, which decreases over time, a minimum Fixed Charge Coverage Ratio, and a minimum Asset Coverage Ratio, which increases over time. We were in compliance with required ratios and other terms and conditions at June 30, 2012. Current Maximum Ratio Actual Ratio Total Funded Debt/EBITDA Ratio 3.25 to 1 2.93 to 1 Minimum Ratio Actual Ratio Fixed Charge Coverage Ratio 1.20 to 1 1.66 to 1 Minimum Ratio Actual Ratio Asset Coverage Ratio 0.80 to 1 0.87 to 1
We currently do not use public debt security financing.-23-
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Inflation and PricingMost of our contracts provide for estimates of future labor costs to be escalated for any option periods, while the non-labor costs in our contracts are normally considered reimbursable at cost. Our property and equipment consists principally of computer systems equipment, furniture and fixtures, shop equipment, and land and improvements. We do not expect the overall impact of inflation on replacement costs of our property and equipment to be material to our future results of operations or financial condition. Disclosures About Market Risk Interest Rates Our bank loans provide available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for a material adverse impact on future earnings and cash flows. To mitigate the risks associated with future interest rate movements, in
July 2011we employed interest rate hedges to fix the rate on a portion of our outstanding borrowings for various periods of time. Fixing these rates increased our net effective rate as compared to the effective interest rate on our aggregate outstanding debt prior to July 2011, but has given us protection us against interest rate increases. In July 2011, we entered into a three-year amortizing LIBOR interest rate swap on our term loan with a notional amount of $101 million. The swap amount amortizes as the term loan amortizes, with reductions in the swap amount occurring on the same dates and for approximately the same amounts as term loan principal repayments. With the swap in place, we paid an effective rate on the hedged term debt of 0.56% plus our base margin from July 2011through June 2012, and we pay an effective rate of 1.615% plus our base margin from July 2012through June 2014. The amount of swapped term loan debt outstanding as of June 30, 2012is $82.2 million. In July 2011, we entered into a two-year LIBOR interest rate swap on the revolving loan debt with a notional amount of $40 million. The swap amount declined to $20 millionin June 2012, and expires in June 2013. With the swap in place, we pay an effective rate on the hedged term debt of 0.7775% plus our base margin during the two years. -24-
Table of ContentsVSE CORPORATION AND SUBSIDIARIES