Exhibit 99.2
VSE Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Financial Information
Table of Contents
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| Item | | Page |
| Unaudited Condensed Combined Financial Statements | | 2 |
| Unaudited Pro Forma Condensed Combined Balance Sheet | | 3 |
| Unaudited Pro Forma Condensed Combined Statement Of Income | | 5 |
| Notes to Unaudited Pro Forma Condensed Combined Financial Statements | | 6 |
Unaudited Pro Forma Condensed Combined Financial Statements
On January 10, 2019, VSE Corporation ("VSE") and its wholly owned subsidiary VSE Aviation, Inc. ("VSE Aviation") completed an acquisition of 1st Choice Aerospace Inc. ("1st Choice Aerospace"), two privately owned aviation companies with operations in Florida and Kentucky that provide component maintenance, repair and overhaul ("MRO") services and products for new generation and legacy commercial aircraft.
The unaudited pro forma statements of income for the year ended December 31, 2018 combines the historical consolidated statement of income of VSE for the year ended December 31, 2018 and historical unaudited statement of income of 1st Choice Aerospace for the year ended December 31, 2018. The unaudited pro forma condensed consolidated statements of income are presented as if VSE's acquisition of 1st Choice Aerospace (the "Acquisition") had occurred on January 1, 2018.
The historical consolidated financial information of VSE and the financial information of 1st Choice Aerospace have been adjusted in the unaudited pro forma financial statements to give effect to pro forma events that are (1) directly attributable to the Acquisition, (2) factually supportable and (3) with respect to the statements of income, expected to have a continuing impact on the combined results. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the accompanying notes thereto. In addition, the unaudited pro forma condensed consolidated financial information was based on and should be read in conjunction with the historical audited consolidated financial statements for the year ended December 31, 2018 and the related notes of VSE included in its Annual Report on Form 10-K.
The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only and are not intended to represent what the actual results of operations or the financial position of VSE would have been had the Acquisition been completed as of the dates indicated. In addition, the unaudited pro forma condensed consolidated financial information does not purport to project the future financial position or operating results of VSE nor does it reflect any operational efficiency that may have been achieved if the Acquisition had occurred on January 1, 2018.
The unaudited pro forma condensed consolidated financial information has been prepared using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. We believe that the fair values assigned to the assets acquired and the liabilities assumed, as reflected in the pro forma financial statements, are based on reasonable assumptions. However, all components of the purchase price allocation are considered preliminary. VSE's judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed can materially impact the results of operations.
VSE Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2018
(in thousands)
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| | | VSE* | | 1st Choice Aerospace** | | Adjustments | | | | Pro Forma as Adjusted |
| Assets | | | | | | | | | | |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 162 |
| | $ | 796 |
| | | | | | $ | 958 |
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| Accounts receivables, net | | 60,004 |
| | 6,757 |
| | | | | | 66,761 |
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| Unbilled receivables, net | | 41,255 |
| | — |
| | 1,089 |
| | (1) | | 42,344 |
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| Inventories, net | | 166,392 |
| | 7,271 |
| | (654 | ) | | (1) | | 173,009 |
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| Other current assets | | 13,407 |
| | 382 |
| | | | | | 13,789 |
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| Total current assets | | 281,220 |
| | 15,206 |
| |
| | | | 296,861 |
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| Property and equipment, net | | 49,606 |
| | 4,044 |
| | | | | | 53,650 |
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| Intangible assets, net | | 94,892 |
| | — |
| | 63,000 |
| | (2) | | 157,892 |
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| Goodwill | | 198,622 |
| | — |
| | 60,010 |
| | (2) | | 258,632 |
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| Other assets | | 14,488 |
| | 333 |
| | | | | | 14,821 |
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| Total assets | | $ | 638,828 |
| | $ | 19,583 |
| | | | | | $ | 781,856 |
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| Liabilities and Stockholders' equity | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Current portion of long-term debt | | $ | 9,466 |
| | $ | — |
| | | | | | $ | 9,466 |
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| Accounts payable | | 57,408 |
| | 2,788 |
| | | | | | 60,196 |
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| Current portion of earn-out obligation | | — |
| | — |
| | 11,000 |
| | (3) | | 11,000 |
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| Accrued expenses and other current liabilities | | 37,133 |
| | 2,184 |
| | | | | | 39,317 |
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| Dividends payable | | 871 |
| | — |
| | | | | | 871 |
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| Total current liabilities | | 104,878 |
| | 4,972 |
| | | | | | 120,850 |
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| Long-term debt, less current portion | | 151,133 |
| | 8,466 |
| | 104,590 |
| | (4) (5) | | 264,189 |
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| Deferred compensation | | 17,027 |
| | — |
| | | | | | 17,027 |
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| Long-term lease obligations, less current portion | | 18,913 |
| | — |
| | | | | | 18,913 |
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| Earn-out obligation, less current portion | | — |
| | — |
| | 14,000 |
| | (3) | | 14,000 |
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| Deferred tax liabilities | | 18,482 |
| | — |
| | | | | | 18,482 |
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| Total liabilities | | 310,433 |
| | 13,438 |
| | |
| | | | 453,461 |
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| Stockholders' equity: | | | | | | |
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| Common stock | | 544 |
| | 151 |
| | (151 | ) | | (6) | | 544 |
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| Additional paid-in capital | | 26,632 |
| | 2,699 |
| | (2,699 | ) | | (6) | | 26,632 |
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| Retained earnings | | 301,073 |
| | 3,295 |
| | (3,295 | ) | | (6) | | 301,073 |
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| Accumulated other comprehensive income | | 146 |
| | — |
| | | | | | 146 |
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| Total stockholders' equity | | 328,395 |
| | 6,145 |
| | | | | | 328,395 |
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| Total liabilities and equity | | $ | 638,828 |
| | $ | 19,583 |
| | | | | | $ | 781,856 |
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The accompanying notes are an integral part of
these unaudited pro forma condensed combined financial statements.
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| * | | As presented in VSE's annual report on Form 10-K for the year ended December 31, 2018. |
| ** | | Per 1st Choice Aerospace's unaudited historical balance sheet as of December 31, 2018. |
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| Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet: |
| (1) | | To reflect the impact of the adoption and ongoing effects of the accounting treatment of ASC Topic 606. |
| (2) | | To reflect the estimated fair value of acquired intangible assets and residual goodwill. |
| (3) | | To reflect the Acquisition date fair value of the earn-out obligation. |
| (4) | | To eliminate 1st Choice Aerospace’s historical debt paid off at closing. |
| (5) | | To reflect the borrowings from revolving loan facilities to fund the Acquisition. |
| (6) | | To eliminate the historical additional paid-in capital and retained earnings of 1st Choice Aerospace. |
VSE Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 2018
(in thousands, except share and per share amounts)
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| | | VSE* | | 1st Choice Aerospace** | | Adjustments | | | | Pro Forma as Adjusted |
| Revenue: | | | | | | | | | | |
| Products | | $ | 360,505 |
| | $ | — |
| | $ | — |
| | | | $ | 360,505 |
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| Services | | 336,713 |
| | 46,129 |
| | 469 |
| | (7) | | 383,311 |
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| Total revenue | | 697,218 |
| | 46,129 |
| | 469 |
| | | | 743,816 |
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| Operating costs and expenses: | | | | | | | | | | |
| Products | | 303,881 |
| | — |
| | — |
| | | | 303,881 |
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| Services | | 321,076 |
| | 25,380 |
| | 12,014 |
| | (7) (8) | | 358,470 |
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| Selling, general and administrative expenses | | 3,714 |
| | 11,947 |
| | (12,646 | ) | | (8) (9) | | 3,015 |
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| Amortization of intangible assets | | 16,017 |
| | — |
| | 4,124 |
| | (10) | | 20,141 |
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| Total operating costs and expenses | | 644,688 |
| | 37,327 |
| | 3,492 |
| | | | 685,507 |
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| Gain on sale of contract | | 1,700 |
| | | | | | | | 1,700 |
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| Income (loss) from operations | | 54,230 |
| | 8,802 |
| | (3,023 | ) | | | | 60,009 |
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| Interest expense, net | | 8,982 |
| | 427 |
| | 3,621 |
| | (11) | | 13,030 |
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| Income before provision from income taxes | | 45,248 |
| | 8,375 |
| | (6,644 | ) | | | | 46,979 |
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| Provision for income taxes | | 10,168 |
| | 40 |
| | 349 |
| | (12) | | 10,557 |
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| Net income | | $ | 35,080 |
| | $ | 8,335 |
| | $ | (6,993 | ) | | | | $ | 36,422 |
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| Net income per share: | | | | | | | | | | |
| Basic | | $ | 3.23 |
| | | | | | | | $ | 3.35 |
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| Diluted | | $ | 3.21 |
| | | | | | | | $ | 3.33 |
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| Weighted-average number of shares used in per share amounts: | | | | | | | | | | |
| Basic | | 10,876,201 |
| | | | | | | | 10,876,201 |
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| Diluted | | 10,936,057 |
| | | | | | | | 10,936,057 |
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The accompanying notes are an integral part of
these unaudited pro forma condensed combined financial statements.
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| * | | As presented in VSE's annual report on Form 10-K for the year ended December 31, 2018. |
| ** | | Per 1st Choice Aerospace's unaudited historical statement of income for the year ended December 31, 2018. |
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| Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Income: |
| (7) | | To reflect the revenue recognition impact of the adoption and ongoing effects of the accounting treatment of ASC Topic 606. |
| (8) | | To reflect the reclassification of $11,732 of certain operational costs of 1st Choice Aerospace from selling, general and administrative expenses to product costs to conform to VSE's income statement presentation. |
| (9) | | To reflect the elimination of VSE and 1st Choice Aerospace acquisition related costs of $914. |
| (10) | | To reflect the amortization of the preliminary fair values of acquired intangible assets for the year ended December 31, 2018. |
| (11) | | To eliminate 1st Choice Aerospace’s historical interest expense and reflect estimated interest expense associated with borrowings from revolving loan facilities to fund the Acquisition. |
| (12) | | To reflect the tax effects of the pro forma adjustments and the historical pre-tax income of 1st Choice Aerospace at the estimated effective income tax rate that would have been in effect had the Acquisition closed on January 1, 2018. |
(1) Acquisition Transaction
On January 10, 2019, VSE Corporation ("VSE") and its wholly owned subsidiary VSE Aviation, Inc. ("VSE Aviation") completed an acquisition of 1st Choice Aerospace Inc. ("1st Choice Aerospace"), two privately owned aviation companies with operations in Florida and Kentucky that provide component maintenance, repair and overhaul (“MRO”) services and products for new generation and legacy commercial aircraft.
The acquisition of 1st Choice Aerospace was accounted for under FASB Accounting Standards Codification Topic 805 (ASC 805), Business Combinations. The fair values of assets acquired and the liabilities assumed are based on preliminary estimates of fair values as of the acquisition date. Preliminary fair value estimates may change as additional information becomes available. There can be no assurance that the final determination will not result in material changes from these preliminary amounts.
Cash paid at closing included the purchase price of $112 million and an estimated net working capital adjustment of approximately $1 million. The total estimated acquisition consideration used in preparing the unaudited pro forma condensed consolidated financial statements is as follows (in thousands):
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| Cash consideration | $ | 113,056 |
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| Acquisition date fair value of earn-out obligation | 25,000 |
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| Total consideration | $ | 138,056 |
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(2) Preliminary Allocation of Purchase Price
We performed a preliminary allocation of purchase price to the net identifiable assets acquired based on their estimated fair values as of January 10, 2019, with the excess recognized as goodwill. The allocation of the purchase price shown in the table below is preliminary and subject to change based on finalizing our detailed valuations. We allocated the purchase price as follows (in thousands):
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| Description | | Fair Value |
| Cash and cash equivalents | | $ | 796 |
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| Accounts receivable | | 7,846 |
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| Inventories | | 6,617 |
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| Other current assets | | 382 |
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| Property and equipment | | 4,044 |
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| Intangibles - customer-related | | 55,000 |
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| Intangibles - trade name | | 8,000 |
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| Other assets | | 333 |
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| Current liabilities | | (4,972 | ) |
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| Net identifiable assets acquired | | 78,046 |
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| Goodwill | | 60,010 |
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| Total consideration | | $ | 138,056 |
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| Cash consideration | | $ | 113,056 |
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| Acquisition date fair value of earn-out obligation | | 25,000 |
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| Total consideration | | $ | 138,056 |
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The value attributed to customer-related and trade name intangibles is being amortized on a straight-line basis over useful lives of 17 years and 9 years, respectively.
