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| VSR > SEC Filings for VSR > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
This report contains certain forward-looking statements which are based on current expectations. Actual results may differ materially. The forward-looking statements include without limitation, those regarding the continued award of future work or task orders from government and private clients, cost controls and reductions, the expected resolution of delays in billing of certain projects, and the possible impact of current and future claims against the Company based upon negligence and other theories of liability. Forward-looking statements involve numerous risks and uncertainties that could cause actual results to differ materially, including, but not limited to, the possibility that the demand for the Company's services may decline as a result of possible changes in general and industry specific economic conditions and the effects of competitive services and pricing; the possibility that the Company will not be able to perform work within budget or contractual limitations; one or more current or future claims made against the Company may result in substantial liabilities; the possibility that the Company will not be able to attract and retain key professional employees; changes to or failure of the Federal government to fund certain programs in which the Company participates; delays in project funding; and such other risks and uncertainties, described in our Form 10-K for fiscal year ended June 27, 2008 and in other reports and other documents filed by the Company from time to time with the Securities and Exchange Commission.
Financial Trends
In fiscal year 2006, the Company's gross revenues declined primarily due to the continuation of federal government delays in federal government funding, which in certain instances, spanned as much as nine months and the continued diversion of funding to the war in Iraq. The Company adapted to the funding shifts by expanding its services in Iraq work under existing contracts and seeking new contract work in Iraq. By the end of fiscal year 2006, the project funding began to return to normal levels and as a result the Company's funded backlog increased by 55% to $48 million. By the end of fiscal year 2007, as a result of continued efforts to grow the business and with new contracts, funded backlog had increased by an additional 19% to $57 million. During fiscal year 2008, backlog continued to grow, increasing by 12% to $64 million at June 27, 2008.
In the first six months of fiscal year 2009, the Company was awarded an additional $88 million in additional work, which increased funded backlog to $99 million as of December 26, 2008. The Company has continued to experience success with the award of additional work. During the first six months of fiscal year 2009, the Company experienced a 9% decline in gross revenues. This decline was primarily attributable to a decrease in the award of construction projects in the U.S. in the Project Management segment in fiscal year 2009 and a decline in aquatic facility work in the Compliance and Environmental Programs segment. Several awards of new, larger projects for the Project Management segment were received late during the first quarter of fiscal year 2009 and the Company anticipates that these new awards will result in additional construction work during the second half of fiscal year 2009. There continues to be a decline in the award of additional aquatic facility work and the Company expects the Compliance and Environmental Program segment to continue to experience a decline in revenues during the 2009 fiscal year.
Approximately 53% of the Company's business volume was related to the reconstruction efforts in Iraq for fiscal year 2008. However, the Company is taking steps during fiscal year 2009 to further diversify its business to prepare for a time when opportunities in Iraq may be reduced or eliminated. The Company's primary focus is on BRAC efforts and requirements which have been delayed as a result of the war in Iraq. We continue to follow the funding shifts in Iraq and Afghanistan to maintain and expand our business basis. We believe the funding of BRAC work world-wide represents our greatest opportunity for growth in the second half of fiscal year 2009.
There are a number of risk factors or uncertainties that could significantly impact our future financial performance including the following:
* General economic or political conditions;
* Threatened or pending litigation;
* The timing of expenses incurred for corporate initiatives;
* Employee hiring, utilization, and turnover rates;
* The seasonality of spending in the federal government and
for commercial clients;
* Delays in project contracted engagements;
* Unanticipated contract changes impacting profitability;
* Increased pricing competition due to reductions in prices
by our competitors;
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
* The ability to obtain follow-on project work;
* Failure to properly manage projects resulting in additional
costs;
* The cost of compliance for the Company's laboratories;
* The results of a negative government audit potentially
impacting our costs, reputation and ability to work with
the federal government;
* Loss of key personnel;
* The ability to compete in a highly competitive environment;
and
* Federal funding delays due to the war in Iraq.
Results of Operations
---------------------
Second Quarter Comparison of Fiscal Year 2009 and 2008
------------------------------------------------------
For the Three-Month Periods Ended
---------------------------------
December 26, December 28,
2008 2007
-------------- --------------
GROSS REVENUE
-------------
Program Management $ 17,080 $ 16,541
Compliance and Environmental
Programs 5,704 8,699
Professional Services 2,784 2,323
National Security 2,399 1,792
-------------- --------------
$ 27,967 $ 29,355
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Gross revenue for the second quarter of fiscal year 2009 was $27,967,000, a decrease of $1,388,000 (5%) from the second quarter of fiscal year 2008. Gross revenue in the Program Management business segment for the second quarter of fiscal year 2009 was $17,080,000, an increase of $539,000 (3%) from that reported in the second quarter of fiscal year 2008. The increase is due to new project work in the United Arab Emirates. Gross revenue in the Compliance and Environmental Programs business segment for the second quarter was $5,704,000, a decrease of $2,995,000 (34%) from the second quarter of fiscal year 2008. The decrease is due to the completion of several large municipal aquatic facility projects at the end of fiscal year 2008, and a reduction in new aquatic facility projects due to municipal budget constraints resulting from the poor economy. Gross revenue in the Professional Services business segment for the second quarter of fiscal year 2009 was $2,784,000, an increase of $461,000 (20%) from the second quarter of fiscal year 2008. The increase is attributable to continuing work in larger professional services outsourcing awards received in fiscal year 2008. Gross revenue for the National Security business segment for the second quarter of fiscal year 2009 was $2,399,000, an increase of $607,000 (34%) from the second quarter of fiscal year 2008. The increase is attributable to additional chemical laboratory work, personal protective suit sales and meteorological work during the quarter.
Purchased services and materials decreased by $2,314,000 (13%) in the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008. The decrease is attributable to the decrease in municipal aquatic facility work in the Compliance and Environmental Programs business segment as mentioned above.
Direct costs of services and overhead include the cost to Versar of direct and overhead staff, including recoverable and unallowable costs that are directly attributable to contracts. Direct costs of services and overhead increased by $788,000 (9%) in the second quarter of fiscal year 2009 compared to the second quarter of 2008. The increase is primarily due to additional costs required to support business growth efforts in the Program Management business segment supporting United Arab Emirates business expansion and Continental United States based construction activity.
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Gross profit for the second quarter of fiscal year 2009 was
$3,205,000, an increase of $138,000 (4%) from the second quarter of fiscal
year 2008. The increase is primarily due to improved profitability in
the National Security business segment, offset in part by a decline in
the Compliance and Environmental Programs segment, as shown in the table
below.
For the Three-Month Periods Ended
---------------------------------
December 26, December 28,
2008 2007
-------------- --------------
GROSS PROFIT
------------
Program Management $ 2,158 $ 2,090
Compliance and Environmental
Programs 309 480
Professional Services 388 366
National Security 350 133
-------------- --------------
$ 3,205 $ 3,067
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Gross profit for the Program Management business segment for the second quarter of fiscal year 2009 was $2,158,000, an increase of $68,000 (3%) from the second quarter of fiscal year 2008. Gross profit in the Compliance and Environmental Programs business segment for the second quarter of fiscal year 2009 was $309,000, a decrease of $171,000 (36%) compared to the second quarter of fiscal year 2008. The decrease is due to the reduced gross revenues as previously mentioned above resulting from poor economic conditions. Gross profit in the Professional Services business segment for the second quarter of fiscal year 2009 was $388,000, an increase of $22,000 (6%) over that reported in the second quarter of fiscal year 2008. Gross profit in the National Security business segment for the second quarter of fiscal year 2009 was $350,000, an increase of $217,000 (163%) from the second quarter of fiscal year 2008. The increase is directly attributable to the increased gross revenue as mentioned above.
Selling, general and administrative expenses increased by $342,000 (18%) during the second quarter of fiscal year 2009 compared to the second quarter of fiscal year 2008. The increase is primarily due to increased business development activities.
Operating income for the second quarter of fiscal year 2009 was $1,007,000, a decrease of $204,000 (17%) compared to the second quarter of fiscal year 2008. The decrease is attributable to the higher selling, general and administrative costs as mentioned above.
Interest expense for the second quarter of fiscal year was $74,000, compared to interest income of $52,000 reported in the second quarter of fiscal year 2008. The expense is attributable to the cost of financing the Company's various insurance policies together with a reduction in interest income as a result of the reduced federal government borrowing rates on the Company's cash balances invested in overnight repurchase agreements.
Income tax expense for the second quarter of fiscal year 2009 was $375,000 compared to $518,000 in the second quarter of fiscal year 2008. The effective tax rates were 40% and 41% for the second quarter of fiscal years 2009 and 2008, respectively.
Versar's net income for the second quarter of fiscal year 2009 was $565,000 compared to $745,000 in the second quarter of fiscal year 2008. The decreased gross revenues coupled with higher selling, general and administrative costs accounted for the reduced net income for the second quarter of fiscal year 2009.
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Six Month Comparison of Fiscal Year 2009 and 2008
-------------------------------------------------
For the Six-Month Periods Ended
---------------------------------
December 26, December 28,
2008 2007
-------------- --------------
GROSS REVENUE
-------------
Program Management $ 32,730 $ 33,804
Compliance and Environmental
Programs 10,464 16,925
Professional Services 4,962 3,778
National Security 4,809 3,730
-------------- --------------
$ 52,965 $ 58,237
============== ==============
|
Gross revenue for the first six months of fiscal year 2009 was $52,965,000, a decrease of $5,272,000 (9%) from the first six months of fiscal year 2008. Gross revenue in the Program Management business segment for the first six months of fiscal year 2009 was $32,730,000, a decrease of $1,074,000 (3%) from the first six months of fiscal year 2008. The decrease is due to lower construction related work in the United States as several large projects in the pipeline were not awarded until late in the first quarter of fiscal year 2009. Gross revenue in the Compliance and Environmental Programs business segment for the first six months was $10,464,000, a decrease of $6,461,000 (38%) from the first six months of fiscal year 2008. The decrease is due to the completion of several large municipal aquatic facility projects at the end of fiscal year 2008, and a reduction in new aquatic facility projects due to municipal budget constraints resulting from the poor economy. Gross revenue in the Professional Services business segment for the first six months of fiscal year 2009 was $4,962,000, an increase of $1,184,000 (31%) from the first six months of fiscal year 2008. The increase is attributable to continuing work on larger professional services outsourcing awards received in fiscal year 2008. Gross revenue for the National Security business segment for the first six months of fiscal year 2009 was $4,809,000, an increase of $1,079,000 (29%) from the first six months of fiscal year 2008. The increase is attributable to additional chemical laboratory work, personal protective suit sales and meteorological work during the period.
Purchased services and materials decreased by $6,936,000 (19%) in the first six months of fiscal year 2009 compared to the first six months of fiscal year 2008. The decrease is attributable to the decrease in construction work in the Program Management business segment and in municipal aquatic facility work in the Compliance and Environmental Programs business segment as mentioned above.
Direct costs of services and overhead include the cost to Versar of direct and overhead staff, including recoverable and unallowable costs that are directly attributable to contracts. Direct costs of services and overhead increased by $1,847,000 (12%) in the first six months of fiscal year 2009 compared to the first six months of 2008. The increase is primarily due to additional costs required to support business growth efforts in the Program Management and Professional Services business segments.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Gross profit for the first six months of fiscal year 2009 was $6,383,000, a decrease of $183,000 (3%) from the first six months of fiscal year 2008. The decrease is primarily attributable to reduced gross revenues and profitability in the Compliance and Environmental Programs business segment offset in part by increases in the Professional Services and National Security business segments as shown in the table below.
For the Six-Month Periods Ended
---------------------------------
December 26, December 28,
2008 2007
-------------- --------------
GROSS PROFIT
------------
Program Management $ 4,471 $ 4,372
Compliance and Environmental
Programs 535 1,160
Professional Services 809 614
National Security 568 420
-------------- --------------
$ 6,383 $ 6,566
============== ==============
|
Gross profit for the Program Management business segment for the first six months of fiscal year 2009 was $4,471,000, an increase of $99,000 (2%) from the first six months of fiscal year 2008. Gross profit in the Compliance and Environmental Programs business segment for the first six months of fiscal year 2009 was $535,000, a decrease of $625,000 (54%) compared to the first six months of fiscal year 2008. The decrease is due to the reduced gross revenues as mentioned above resulting from poor economic conditions. Gross profit in the Professional Services business segment for the first six months of fiscal year 2009 was $809,000, an increase of $195,000 (32%) from the first six months of fiscal year 2008. Gross profit in the National Security business segment for the first six months of fiscal year 2009 was $568,000, an increase of $148,000 (35%) from the first six months of fiscal year 2008. These increases are directly attributable to the increased gross revenue as mentioned above.
Selling, general and administrative expenses increased by $602,000 (17%) during the first six months of fiscal year 2009 compared to that reported in the first six months of fiscal year 2008. The increase is primarily due to increased business development activities.
Operating income for the first six months of fiscal year 2009 was $2,149,000, a decrease of $785,000 (27%) compared to the first six months of fiscal year 2008. The decreased is primarily attributable to the higher selling, general and administrative costs as mentioned above.
During the first quarter of fiscal year 2009, the Company recorded a $352,000 loss on marketable securities the Company was holding in the FISCO Income Plus Funds. The FISCO fund received an immediate demand margin call from its broker, UBS. Rather than allow the fund the customary time to satisfy the margin call at the end of the day, UBS demanded the fund cover all calls and puts at high premiums immediately or indicated it would take control of the fund and start liquidating the fund itself. The fund has terminated its relationship with UBS and transferred the assets to a new custodian. The fund has indicated it will seek legal action against UBS to cover its losses. The Company will participate in any recovery from any such action. The Company has reallocated its remaining assets from marketable securities to its primary bank due to the volatile nature of the market.
Interest expense for the first six months of fiscal year 2009 was $19,000, compared to interest income of $116,000 for the first six months of fiscal year 2008. The expense is attributable to the cost of financing the Company's various insurance policies together with reduced interest income resulting from reduced federal government borrowing rates on the Company's cash balances invested in overnight repurchase agreements.
Income tax expense for the first six months of fiscal year 2009 was $695,000 compared to $1,288,000 in the first six months of fiscal year 2008. The effective tax rates were 39% and 41% for the first six months of fiscal years 2009 and 2008, respectively.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Versar's net income for the first six months of fiscal year 2009 was $1,089,000 compared to $1,762,000 in the first six months of fiscal year 2008. The decrease in gross revenue along with higher selling, general and administrative costs, and the loss on marketable securities accounted for the reduced net income for the first six months of fiscal year 2009.
Liquidity and Capital Resources
The Company's working capital as of December 26, 2008 approximated $23,585,000, an increase of $1,314,000 (6%) from June 27, 2008. In addition, at December 26, 2008, the Company's current ratio was 3.14, an improvement over the 2.67 current ratio reported on June 27, 2008. The increase was due to the reduction of current liabilities during the first six months of fiscal year 2009.
The Company has a line of credit facility with United Bank (the Bank) that provides for advances up to $7.5 million based upon qualifying receivables. Interest on borrowings is based upon the prime rate of interest minus 0.5% (2.75% as of December 26, 2008). In October 2006, the Company obtained a letter of credit of approximately $1.6 million which serves as collateral for surety bond coverage provided by the Company's insurance carrier against project construction work. The letter of credit has subsequently been reduced to $455,147 in January 2009. The letter of credit reduces the Company's availability on the line of credit. Availability under the line of credit at December 26, 2008 was $5.9 million. There are no borrowings outstanding under the line of credit as of December 26, 2008. Obligations under the credit facility are guaranteed by Versar and each subsidiary individually and are secured by accounts receivable, equipment and intangibles, plus all insurance policies on property constituting collateral of Versar and its subsidiaries. The line of credit matures in November 2009 and is subject to certain covenants related to the maintenance of financial ratios. These covenants require a minimum tangible net worth of $15 million; a maximum total liabilities to tangible net worth ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. The Company was in compliance with such covenants as of December 26, 2008.
Management believes that the current cash balance of over $7.7 million along with anticipated cash from operations and existing availability under the line of credit, are sufficient to meet its liquidity needs within the next year. Expected capital requirements for the remainder of fiscal year 2009 are approximately $450,000 primarily to maintain our existing information technology systems and software applications. Such capital requirements will be funded through existing working capital.
The global economic business downturn has primarily impacted our commercial and state and municipal work in our Compliance and Environmental Programs business segment. As such, we are adjusting the Company's cost structure to minimize the impact to the overall Company financial performance.
Critical Accounting Policies and Related Estimates That Have a Material Effect on Versar's Consolidated Financial Statements
Below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding the Company's consolidated financial position and results of operations, which require management judgments and estimates, or involve uncertainties. Information regarding our other accounting policies is included in the notes to our consolidated financial statements included elsewhere in this report on Form 10-Q and in our annual report on Form 10-K filed for the 2008 fiscal year.
Revenue recognition: Contracts in process are stated at the lower of actual costs incurred plus accrued profits or incurred costs reduced by progress billings. On cost-plus fee contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on time-and-material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. The Company records income from major fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During the performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. Fixed price contracts can be significantly impacted by changes in contract performance, contract delays, liquidated damages and penalty provisions and contract change orders, which may affect the revenue recognition on a project. Revisions to such estimates are made when they become known.
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
There is the possibility that there will be currently unforeseeable adjustments to our estimated contract revenues, costs and margins for fixed price contracts in the future, particularly in the later stages of these contracts. Such adjustments are common in the construction industry given the nature of the contracts. These adjustments could either positively or negatively impact our estimates due to the circumstances surrounding the negotiations of change orders, the impact of schedule slippage, subcontractor claims and contract disputes which are normally resolved at the end of the contract.
Allowance for doubtful accounts: Disputes arise in the normal course of the Company's business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability and collectibility. Such disputes, whether claims or unapproved change orders in process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Management reviews outstanding receivables on a regular basis and assesses the need for reserves, taking into consideration past collection history and other events that bear on the collectibility of such receivables.
Asset retirement obligation: The Company has recorded an asset retirement obligation associated with the estimated clean-up costs for its chemical laboratory in its National Security business segment. In accordance with SFAS 143, the Company estimated the costs to clean up the laboratory and return it to its original state at a present value of approximately $497,000. The Company currently estimates the amortization and accreation expense to be approximately $180,000 to $190,000 per year over the next 2 1/2 years. The Company is rigorously pursuing reimbursement for such costs and other costs from the U.S. Army as a significant portion of the chemical agent that was used in the chemical laboratory was government owned. If the Company determines that the estimated clean up cost is higher than expected or the likelihood of recovery from the U.S. Army is remote, such adjustments will be reflected when they become known in accordance with SFAS 143. At December 26, 2008, the Company has accrued approximately $562,000 long-term liability to clean up the chemical laboratory.
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