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VSR > SEC Filings for VSR > Form 10-K on 12-Sep-2013All Recent SEC Filings

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Form 10-K for VERSAR INC


12-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Trends

Fiscal Year 2013 proved to be a challenging year for Versar, with decreased revenue and net income, compared to 2012, although our balance sheet remains strong and is a reflection of our ability to continue to improve liquidity and working capital. Ongoing macro-economic issues, such as sequestration and ongoing federal budget issues resulted in slower and fewer contract awards across the federal government.

For the near-term, it appears that the United States government continues to face substantial fiscal and economic challenges that affect funding for its non-discretionary and discretionary budgets. We believe these conditions will continue based on a variety of factors, including the continued effects of high unemployment, the continuing weak European financial markets, and the existence of debt reduction pressures which will continue to put pressure on a full economic recovery.

In this challenging economic environment, we focus on those opportunities where funding is non-discretionary for our customers such as Sustainable Range Management, Unexploded Ordnance, Performance Based Remediation, and construction contract management. We will also continue to focus on areas that we believe offer attractive enough returns to our clients that they will continue to fund efforts, such as construction type services both in the United States and internationally, improvements in energy efficiency, and facility upgrades. We have invested heavily in business development activities designed to specifically tailor responses to a customer's value solution and sustainability needs. We have invested in new internal technologies to streamline productivity and have realized benefits from continued cost reduction efforts concentrated on our fixed and controllable expenses.

We have decided to discontinue the operations of our Lab, Telecom, and Products components as they are no longer aligned with our business strategy and have ended revenue generating business operations.

We believe that Versar's business segments have the expertise to identify and respond to the challenges raised by the global economic issues we face and are positioned in the coming year to address these concerns. Our business operates through the following three business segments: ECM, ESG, and PSG.

These segments are segregated based on the nature of the work, business processes, customer bases and the business environment in which each of the segments operates.

There are risk factors or uncertainties that could significantly impact our future financial performance. A sample of these risks is listed below. For a complete discussion of these risk factors and uncertainties refer to Item 1A. Risk Factors, herein.

We operate in highly competitive industries;

A reduction or delay in pending awards by government agencies could adversely affect us;

Our inability to win or renew government contacts could adversely affect us;

We are exposed to risks associated with operating internationally;

Our failure to properly manage projects may result in additional costs or claims;

An economic downturn may adversely affect our business;

In order to succeed we need to keep up with a variety of rapidly changing technologies;

We are highly dependent on key personnel;

Future acquisitions may not go as expected and may have unexpected costs and consequences;

The government may adopt new contract laws or regulations at any time.

Consolidated Results of Operations

The table below sets forth our consolidated results of continuing operations for the fiscal years ended June 28, 2013, June 29, 2012, and July 1, 2011. The dollar amounts are in thousands:

                                                         For the Fiscal Years Ended
                                                   June 28,       June 29,       July 1,
                                                     2013           2012           2011
GROSS REVENUE                                     $  102,622     $  114,970     $  128,509
Purchased services and materials, at cost             44,070         51,531         65,669
Direct costs of services and overhead                 44,865         46,988         47,539
GROSS PROFIT                                      $   13,687     $   16,451     $   15,301
Gross profit percentage                                   13 %           14 %           12 %

Selling, general and administrative expenses      $    7,603     $    8,083     $    8,025
Other expense (income)                                  (182 )          199            423
OPERATING INCOME                                       6,266          8,169          6,853

OTHER EXPENSE (INCOME)
Write-off of uncollectible financing receivable            -            694              -
Interest income                                          (28 )          (70 )         (182 )
Interest expense                                          86            182            117
INCOME FROM CONTINUING OPERATIONS, BEFORE
INCOME TAXES                                      $    6,208     $    7,363     $    6,918
 Loss from discontinued operations before
income taxes                                          (2,751 )         (463 )       (1,026 )
INCOME BEFORE INCOME TAXES                             3,457          6,900          5,892

Fiscal Year 2013 Compared to Fiscal Year 2012

Gross revenue for fiscal year 2013 was $102.6 million, a decrease of 11% compared to $115.0 million during the 2012 fiscal year. This decrease was primarily a result of a decrease in ECM segment domestic revenue of approximately $15.4 million related to the completion in fiscal year 2012 of the Tooele Chemical Demilitarization project and decreased revenue in fiscal year of 2013 from domestic construction. Decreases in revenue were partially offset by increased ESG segment revenue attributable to PBRs and UXO projects, while the PSG segment revenue remained flat.

Purchased services and materials for fiscal year 2013 was $44.0 million, a decrease of 14% compared to $51.5 million during the 2012 fiscal year. This decrease was largely due to decreases in the ECM segment as a result of the completion of the Tooele project and reduced domestic construction.

Direct costs of services and overhead for fiscal year 2013 were $44.9 million, a decrease of 5% compared to $47.0 million during the 2012 fiscal year. The decrease was attributable to reduced activity related to the close out of the Tooele Chemical Demilitarization project, partially offset by increased work in our ECM business segment from the Title II Construction Management Services projects and electrical inspection projects.

Gross profit for fiscal year 2013 was $13.7 million, a decrease of 17% compared to $16.5 million during the 2012 fiscal year. The gross profit percentage declined slightly by 1% to 13% from 14% in fiscal year 2012.

Selling, general and administrative expenses for fiscal year 2013 were $7.6 million a decrease of 6% compared to $8.1 million during the 2012 fiscal year. This decrease was primarily attributable to a reduction in rent expense as we reduced the size of our leased space at the Springfield, VA location. In addition, cost reductions continue as we focused on controlling indirect labor and travel as the Company maintains its focus on cost saving initiatives.

Other operating income for fiscal year 2013 was $0.2 million, compared to other operating expense of $0.2 million during the 2012 fiscal year. During 2013 this line item includes $0.2 of income related to the change in the Charron contingent earn out consideration and during 2012 included costs associated with acquisitions.

Operating income for fiscal year 2013 was $6.3 million, a decrease of 23% compared to $8.2 million during the 2012 fiscal year. Declines in gross profit were partially offset by a corresponding reduction is general and administrative expenses.

The 2012 "write-off of uncollectible financing receivable" line item above is comprised of the write-off of approximately $0.7 million that resulted from the determination during fiscal year 2012 that a financing receivable was uncollectible.

Income tax expense for fiscal year 2013 was $2.1 million as compared to income tax expense of $2.9 million during the 2012 fiscal year. The effective tax rate was approximately 33% and 39% for 2013 and 2012, respectively. We were able to achieve this rate reduction by performing an analysis illustrating the Company was eligible for research and development tax credits based on work performed on certain projects.

Net income from continuing operations for fiscal year 2013 was $4.1 million, a decrease of 8% compared to net income from continuing operations of $4.5 million during the 2012 fiscal year. Net income per share, basic and diluted for continuing operations was $0.43 compared to net income per share for continuing operations, basic and diluted, of $0.48 for fiscal year 2012. Net loss per share, basic and diluted, for discontinued operations for fiscal year 2013 was $0.18 compared to net loss per share for discontinued operations, basic and diluted, of $0.03 during the 2012 fiscal year. The decrease in net income and net income per share primarily resulted from our decrease in gross profit, in addition to a significant write-off of an uncollected receivable account of approximately $0.4 million.

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $115.0 million, a decrease of 11% compared to $128.5 million during the 2011 fiscal year. The 2012 fiscal year decrease partially resulted from nonrecurring equipment purchase revenue recorded during the 2011 fiscal year of approximately $8.4 million attributable to the Tooele Chemical Demilitarization project in our ECM business segment. Additionally, the decrease resulted from the fact that fewer projects were awarded to our ESG business segment during fiscal year 2012. In the second half of fiscal year 2012 the ESG business segment submitted a large number of business proposals in an attempt to bolster their pipeline and increase the number or projects awarded. The decrease in revenue was partially offset by an increase in revenue during the 2012 fiscal year within our ECM business segment resulting from additional awards of Title II Construction Management Services projects and electrical inspection projects.

Purchased services and materials for fiscal year 2012 was $51.5 million, a decrease of 22% compared to $65.7 million during the 2011 fiscal year. The decrease largely resulted from the nonrecurring equipment purchase and subcontractor costs for the Tooele Chemical Demilitarization project that occurred in the 2011 fiscal year and also from a decrease in projects awarded to our ESG business segment.

Direct costs of services and overhead for fiscal year 2012 were $47.0 million, a decrease of 1% compared to $47.5 million during the 2011 fiscal year. The decrease was attributable to reduced activity related to the anticipated close out of the Tooele Chemical Demilitarization project, partially offset by increased work in our ECM business segment from the Title II Construction Management Services projects and electrical inspection projects.

Gross profit for fiscal year 2012 was $16.5 million, an increase of 8% compared to $15.3 million during the 2011 fiscal year. This increase results from the improved performance in the ECM business segment during 2012, partially offset by a decline in gross profit in the ESG business segment.

Selling, general and administrative expenses for fiscal year 2012 were $8.1 million, relatively flat when compared with the 2011 fiscal year. The 2012 fiscal year included expenditures to enhance our information technology backbone and to create a more efficient work environment by moving significant amounts of our document management and technology collaboration on-line. Fiscal year 2011 included approximately $0.2 million of severance costs related to the departure of our former Chief Financial Officer.

Other operating expenses for fiscal year 2012 were $0.2 million, a decrease of approximately 50% when compared to the 2011 fiscal year. This line item includes costs associated with acquisitions.

Operating income for fiscal year 2012 was $8.2 million, an increase of 19% compared to $6.9 million during the 2011 fiscal year. The increase in operating income primarily resulted from an increase in gross profit during fiscal year 2012.

The "write-off of uncollectible financing receivable" line item above is comprised the write-off of approximately $0.7 million that resulted from the determination during fiscal year 2012 that a financing receivable was uncollectible.

Income tax expense for fiscal year 2012 was $2.9 million as compared to income tax expense of $2.8 million during the 2011 fiscal year. The effective tax rate of 41.5% was higher in fiscal year 2011 compared to a rate of 39.2% in fiscal year 2012, due to discrete tax items and book versus tax expense variances.

Net income for fiscal year 2012 was $4.5 million, an increase of 9% compared to net income of $4.1 million during the 2011 fiscal year. Net income per share, basic and diluted, for continuing operations for fiscal year 2012 was $0.48 compared to net income per share, basic and diluted, for continuing operations of $0.44 during the 2011 fiscal year. The increase in net income and net income per share primarily resulted from an increase in gross profit, partially offset by the write-off of the uncollectible financing receivable.

Results of Operations by Business Segment

During fiscal year 2012 management realigned the Company's organizational structure resulting in its operations being reorganized into the following three business segments: (1) ECM, (2) ESG, and (3) PSG. During fiscal year 2013, management revised its method of allocating overhead to the segments in order to refine the information used by our Chief Operating Decision Maker ("CODM"). The presentation of 2012 and 2011 has been reclassified to conform to the 2013 presentation. The new methodology allocates certain overhead costs proportionally on the basis of direct labor, while the old methodology allocated such overhead costs on a non-proportional basis.

The tables below set forth the operating results for these three business segments for the fiscal years ended June 28, 2013, June 29, 2012, and July 1, 2011, not including discontinued operations.

ECM



                                                          For the Fiscal Years Ended
                                                   June 28,        June 29,        July 1,
                                                     2013            2012            2011
                                                                (in thousands)

GROSS REVENUE                                     $    49,270     $    69,173     $   72,543
Purchased services and materials, at cost              24,580          39,074         46,273
Direct costs of services and overhead                  13,172          13,276         17,233
GROSS PROFIT, from continuing operations          $    11,518     $    16,823     $    9,037
Profit (Loss) from discontinued operations,
before tax                                             (2,751 )          (463 )       (1,026 )
GROSS PROFIT                                            8,767          16,360          8,011
Gross profit percentage from continuing
operations                                                 23 %            24 %           12 %

Fiscal Year 2013 Compared to Fiscal Year 2012

Gross revenue for fiscal year 2013 was $49.3 million, a decrease of $19.9 million or 29% compared to $69.2 million for fiscal year 2012. This decrease was primarily a result of reductions in government spending for international reconstruction operations both in Iraq for electrical inspection services and in Afghanistan for Air Force Civil Engineer Center (AFCEC) Title II Construction Management Services. This slowdown was coupled with reduced domestic revenue of approximately $15.4 million related to the completion of the Tooele Chemical Demilitarization project during fiscal year 2012 and reduced revenue from domestic construction of approximately $5.5 million. Management is focusing domestic construction operations to specific locations and projects, and as a result of being more selective, we have seen reduced revenue from these operations; International management is currently focused on leveraging the success in the Middle East by increasing business development efforts with other U.S. government and non-governmental agencies in order to offset reduced DOD business and minimize the resulting reduction of revenues. In May 2013, the Company's joint venture with Parsons was awarded a new prime contract from the U.S. Army Corps of Engineers (USACE), Middle East District (MED) to provide Construction Phase Support Services (CPSS) throughout multiple countries within the Central Command Area of Responsibility. The Indefinite Delivery Indefinite Quantity (IDIQ) contract is a single award with a maximum five-year period of performance consisting of a base year and four option years with a maximum contract capacity is $90 million. Additionally, in October of fiscal year 2013 we were awarded a new prime contract with the U.S. Army Corps of Engineers (USACE), Middle East District, to provide Afghanistan National subject matter experts to perform on-site construction management support services for assigned projects supporting two USACE Engineer Districts in Afghanistan. The Indefinite Delivery Indefinite Quantity (IDIQ) contract is a single award with a maximum four and a halfyear period of performance consisting of a base year and three options years. The maximum contract capacity over the entire length of the contract is $170 million. This contract is for Personal Services in exclusive support of the USACE construction mission in Afghanistan.

Gross profit for fiscal year 2013 was $11.5 million, a decrease of $5.3 million or 32% compared to $16.8 million for fiscal year 2012. This decrease was directly related the completion of the Tooele Chemical Demilitarization Project during fiscal year 2012 and the completion of the Iraq electrical inspection program. Management has decided that the Company's Lab, Telecom, and Product components are no longer aligned with the Company's business strategy. As such, management has elected to discontinue the Company's operations in these three components of the ECM segment and has ended revenue generating business operations. Combined, these three components contributed an approximate $1.9 million additional decrease in gross profit.

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $69.2 million, a decrease of 5% compared to $72.5 million during the corresponding period of the 2011 fiscal year. This decrease was largely from nonrecurring equipment purchase revenue earned in the last fiscal year of approximately $8.4 million attributable to the Tooele Chemical Demilitarization project. Additionally, we had fewer construction projects awarded to our U.S. based construction group during fiscal year 2012 and experienced decreased government spending for electrical inspection services. This decrease in gross revenue, however, was partially offset by increased government spending earlier in the fiscal year 2012 for Title II services.

As discussed above, we have changed the method of allocating overhead to the reportable segments and have recast previous year information to conform to the new methodology. Under our revised methodology, gross profit for this segment increased $7.8 million, or 86%, to $16.8 million in FY12, compared to $9.0 million in FY11. Although the dollar values changed under the revised methodology, the direction of the fluctuation and the corresponding explanation have remained consistent. This increase resulted from our effective project management and tight control over all costs related to the Title II Construction Management Services projects and our electrical inspection projects. Additionally, our U.S. based construction group continued to reduce costs relative to the decrease in gross revenue in this portion of the business, thus contributing to the improved gross margin in fiscal year 2012.

ESG



                                                    For the Fiscal Years Ended
                                            June 28,      June 29,
                                              2013          2012          July 1, 2011
                                                          (in thousands)

GROSS REVENUE                               $  38,919     $  30,906      $       42,036
Purchased services and materials, at cost      16,970         8,913              16,154
Direct costs of services and overhead          20,792        23,757              20,934
GROSS PROFIT                                $   1,157     $  (1,764 )    $        4,948
Gross profit percentage                             3 %          (6 )%               12 %

Fiscal Year 2013 Compared to Fiscal Year 2012

Gross revenue for fiscal year 2013 was $38.9 million, an increase of $8.0 million or 26% compared to $30.9 million for fiscal year 2012. This increase is primarily attributable to a $9.5 million increase in work being performed on PBRs for the U.S. Air Force reflecting both the transition from planning phases to site-work phases, and the startup of PBR activities at additional bases. We continue to see revenue increases associated with our UXO projects at Nellis AFB and Fort Irwin, CA. We have also experienced an increase in municipal storm water contract awards reflecting growth in our natural resource services.

Gross profit for fiscal year 2013 was $1.2 million, an increase of $2.9 million or 166% compared to a loss of $1.8 million for fiscal year 2012. Gross profit margin improvement compared to fiscal year 2012 primarily reflects the $0.3 million project profit attributable to the UXO project at Fort Irwin, CA. The segment continues to see an increase in profitability as a result of an increase in direct labor it provides on the PBRs and UXO projects.

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $30.9 million, a decrease of 26% compared to $42.0 million during the 2011 fiscal year. This decrease was primarily the result of the award to us of fewer contracts during this period. In addition, operations from a project acquired with the ADVENT acquisition began wind-down during fiscal year 2011 and we did not see that revenue return in fiscal year 2012.

As discussed above, we have changed the method of allocating overhead to the reportable segments and have recast previous year information to conform to the new methodology. Under our revised methodology, this segment realized losses of $1.8 million during FY12, compared to gross profit of $4.9 million in FY11. Although the dollar values changed under the revised methodology, the directions of the fluctuation and the corresponding explanation have remained consistent. The decrease was primarily a result of increased overhead costs incurred during fiscal year 2012 related to our increased efforts to identify business opportunities and an expanded proposal process to gain additional contracts. Additionally, the decrease in revenue during the 2012 fiscal year contributed to the decrease in gross profit. These decreases were partially offset by the positive contribution from our operations in Ft. Irwin, CA.

PSG



                                                 For the Fiscal Years Ended
                                            June 28,      June 29,      July 1,
                                              2013          2012          2011
                                                       (in thousands)

GROSS REVENUE                               $  14,433     $  14,891     $ 13,930
Purchased services and materials, at cost       2,520         3,544        3,242
Direct costs of services and overhead          10,901         9,955        9,372
GROSS PROFIT                                $   1,012     $   1,392     $  1,316
Gross profit percentage                             7 %           9 %          9 %

Fiscal Year 2013 Compared to Fiscal Year 2012

Gross revenue for fiscal year 2013 was $14.4 million, a decrease of $0.5 million or 3% compared to $14.9 million for fiscal year 2012. This decrease was primarily due to a decrease in project awards resulting from Versar's loss of small business entity status. We have seen an increase in solicitations aimed at small businesses; however we continue to look for new ways to increase our sub/prime contractor relationships with small firms to bring more value to the customer. In addition, contract capacity was reached on one of our U.S Army Corp of Engineers contracts; however we have been positioned for the re-competition on that contract for more than a year and anticipate that it will be released soon.

Gross profit for fiscal year 2013 was $1.0 million, a decrease of $0.4 million or 27% compared to $1.4 million for fiscal year 2012. This decrease was primarily driven by a significant write-off of an uncollected receivables accounts of approximately $0.4 million; however it was partially off-set due to an increase in overhead expenses for staff salaries (and corresponding increase in revenue) to compensate for certain stop work orders, and other contract award delays. Additionally, due to delays in certain contract awards a greater portion of direct labor was absorbed as indirect expense.

Fiscal Year 2012 Compared to Fiscal Year 2011

Gross revenue for fiscal year 2012 was $14.9 million, an increase of 7% compared to $13.9 million during the 2011 fiscal year. This increase was primarily the result of the addition of staff to certain Joint Bases to manage increased responsibilities. The DOD at these locations is charged with managing extensive resources across military services and has turned to Versar for assistance because of our strong reputation for on-site employee care and customer responsiveness.

As discussed above, we have changed the method of allocating overhead to the reportable segments and have recast previous year information to conform to the revised methodology. Under our revised methodology, gross profit for this segment increased $0.1 million, or 6%, to $1.4 million in FY12, compared to $1.3 million in FY11. Although the dollar values changed under the revised methodology, the direction of the fluctuation and the corresponding explanation have remained consistent. During fiscal year 2012 there was an increase in the volume of work without an equivalent increase in off-site staffing levels during the current period. The U.S. Army budget cuts precipitated higher operational expectations with lower margins. Further, offsetting any resulting gross margin improvement was our investment in market diversification efforts and in the training and development of existing staff on new management systems during the 2012 period.

Gross Revenue by Client Base



Our business segments provide services to various industries, serving government
and commercial clients. A summary of gross revenue from continuing operations
generated from our client base is as follows:



                                        For the Years Ended
                   June 28, 2013           June 29, 2012           July 1, 2011
                                          (in thousands)
Government:
DOD             $  85,836        84 %   $  93,560        81 %   $ 100,910        79 %
State & Local       8,573         8 %       7,236         6 %       7,331         6 %
EPA                 1,808         2 %       2,391         2 %       3,662         3 %
Other               3,081         3 %       7,481         7 %      11,043         8 %
Commercial          3,324         3 %       4,302         4 %       5,563         4 %
Gross Revenue   $ 102,622       100 %   $ 114,970       100 %   $ 128,509       100 %

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