Exhibit 99.2

VSE Corporation and Subsidiaries
Unaudited Pro Forma Combined Financial Statements
As of and for the Three Months ended March 31, 2011
and for the Year ended December 31, 2010
 
 
 
 
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

On June 6, 2011, VSE Corporation (“VSE”) acquired Wheeler Bros., Inc. (“WBI”), a supply chain management company headquartered in Somerset, PA.  WBI supplies vehicle parts to the U.S. Postal Service and the Department of Defense.

At the time of the WBI acquisition, VSE and WBI had different fiscal year ends.  Certain amounts in the historical financial statements of WBI have been reclassified to conform to VSE’s presentation.  
 
The unaudited pro forma combined balance sheet as of March 31, 2011 has been prepared as if the WBI acquisition had occurred on such date and combines the consolidated balance sheet of VSE and the balance sheet of WBI as of March 31, 2011.

The unaudited pro forma combined statements of income are presented as if the WBI acquisition had occurred on January 1, 2010. The unaudited pro forma combined statement of income for the year ended December 31, 2010 combines the consolidated statement of income of VSE for the year ended December 31, 2010 and statement of income of WBI for the twelve months ended September 30, 2010.  The unaudited pro forma combined statement of income for the three months ended March 31, 2011 combines the statements of income of VSE and WBI for the three months ended March 31, 2011.

The historical consolidated financial information of VSE and the financial information of WBI have been adjusted in the unaudited pro forma financial statements to give effect to pro forma events that are (1) directly attributable to the WBI 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 combined financial information should be read in conjunction with the accompanying notes thereto.  In addition, the unaudited pro forma combined financial information was based on and should be read in conjunction with the:

 
·
historical audited consolidated financial statements for the year ended December 31, 2010 and the related notes of VSE included in its Annual Report on Form 10-K;
 
·
historical unaudited interim consolidated financial statements and related notes of VSE included in its Quarterly Report on Form 10-Q for the three months ended March 31, 2011; and
 
·
historical consolidated financial statements of WBI included as Exhibit 99.1 to this Current Report on Form 8-K/A.

The unaudited pro forma combined financial statements are provided for informational purposes only and are not intended to represent what the actual combined results of operations or the combined financial position of VSE would have been had the WBI acquisition been completed as of the dates indicated.  In addition, the unaudited pro forma combined financial information does not purport to project the future financial position or operating results of VSE combined nor does it reflect any operational efficiency that may have been achieved if the acquisition had occurred on January 1, 2010 or March 31, 2011.  WBI’s operating results included in the unaudited pro forma combined statement of income for the three months ended March 31, 2011 are not intended to represent operating results for a full year.  
 
The unaudited pro forma combined 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.  We anticipate finalizing the purchase price allocations during 2011.
 
 

 
 
 



 
VSE Corporation and Subsidiaries
  
Unaudited Pro Forma Combined Balance Sheet
  
As of March 31, 2011
  
(in thousands except share and per share amounts)
  
                                 
                                 
   
VSE Corporation
      
Wheeler Bros., Inc.
    
Adjustments
          
Pro Forma as Adjusted
  
Assets
                                
Current assets:
                                
Cash and cash equivalents
   $ 2,303  
 
   $ 33,625     $ (28,994 )   3 (a)   $ 6,934  
Marketable securities
     -         4,448       (4,448 )   3 (b)     -  
Receivables, principally U.S. Government, net
     137,931         15,356                     153,287  
Inventories
     299         36,354                     36,653  
Deferred tax assets
     403         -                     403  
Other current assets
     9,595         2,872       723     3 (j)     13,190  
    Total current assets
     150,531         92,655       (32,719 )           210,467  
                                         
Property and equipment, net
     43,324         1,481                     44,805  
Intangible assets, net
     24,140         -       89,400     3 (c)     113,540  
Goodwill
     37,396         -       63,627     3 (d)     101,023  
Deferred tax assets
     958         -                     958  
Other assets
     14,217         1,256       2,356     3 (e)     17,829  
    Total assets
   $ 270,566       $ 95,392     $ 122,664           $ 488,622  
                                         
Liabilities and Stockholders’ Equity
                                        
Current liabilities:
                                        
Current portion of long-term debt
   $ 6,667       $ -     $ 12,083     3 (f)   $ 18,750  
Accounts payable
     59,609         7,626       6,468     3 (g)     73,703  
Accrued expenses
     29,413         6,825                     36,238  
Dividends payable
     314         -                     314  
    Total current liabilities
     96,003         14,451       18,551             129,005  
                                         
Long-term debt
     9,444         -       167,970     3 (f)     177,414  
Deferred compensation
     8,882         -                     8,882  
Long-term lease obligations
     21,868         -                     21,868  
Other liabilities
     5,528         -       22,782     3 (h)     28,310  
    Total liabilities
     141,725         14,451       209,303             365,479  
                                         
Commitments and contingencies
                                        
                                         
Stockholders’ equity:
                                        
Common stock
     262         120       (120 )   3 (i)     262  
Additional paid-in capital
     16,898         -                     16,898  
Retained earnings
     111,681         80,404       (86,102 )   3 (j)     105,983  
Other comprehensive income
     -         528       (528 )   3 (i)     -  
Treasury stock
     -         (111 )     111     3 (i)     -  
    Total stockholders’ equity
     128,841         80,941       (86,639 )           123,143  
    Total liabilities and stockholders’ equity
   $ 270,566       $ 95,392     $ 122,664           $ 488,622  
                                         
                                         
                                         
                                         

 

 

 
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements

 

 
 
 
 
 
VSE Corporation and Subsidiaries
  
Unaudited Pro Forma Combined Statement of Income
  
(in thousands except share and per share amounts)
  
                               
   
December 31, 2010
VSE Corporation
    
September 30, 2010
Wheeler Bros., Inc.
    
Adjustments
          
Year Ended December 31, 2010
 Pro Forma as Adjusted
  
                               
Revenues:
                              
  Services
   $ 853,063     $ -     $ -           $ 853,063  
  Products
     12,973       158,223       -             171,196  
    Total revenues
     866,036       158,223       -             1,024,259  
                                       
Contract costs
                                      
  Services
     816,880       -       -             816,880  
  Products
     8,739       126,309       4,755     4 (a)     139,803  
    Total contract costs
     825,619       126,309       4,755             956,683  
                                       
Selling, general and administrative expenses
     2,204       1,299       (800 )   4 (b)     2,703  
                                       
Operating income
     38,213       30,615       (3,955 )           64,873  
                                       
Interest expense, net
     180       206       5,084     4 (c)     5,470  
                                       
Income before income taxes
     38,033       30,409       (9,039 )           59,403  
                                       
Provision for income taxes
     14,346       1,038       7,158     4 (d)     22,542  
                                       
Net income
   $ 23,687     $ 29,371     $ (16,197 )         $ 36,861  
                                       
                                       
Basic and diluted weighted average shares outstanding
     5,189,263                             5,189,263  
                                       
Basic and diluted earnings per share
   $ 4.56                           $ 7.10  
                                       
                                       
                                       

 

 

 

 

 

 

 

 

 

 

 
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
 
 
 
 

 
VSE Corporation and Subsidiaries
  
Unaudited Pro Forma Combined Statement of Income
  
For the Three Months Ended March 31, 2011
  
(in thousands except share and per share amounts)
  
                               
   
VSE Corporation
    
Wheeler Bros., Inc.
    
Adjustments
          
Pro Forma as Adjusted
  
                               
Revenues:
                              
  Services
   $ 148,247     $ -     $ -           $ 148,247  
  Products
     2,997       40,909       -             43,906  
    Total revenues
     151,244       40,909       -             192,153  
                                       
Contract costs
                                      
  Services
     141,426       -       -             141,426  
  Products
     2,088       31,778       1,188     4 (a)     35,054  
    Total contract costs
     143,514       31,778       1,188             176,480  
                                       
Selling, general and administrative expenses
     821       482       (767 )   4 (b)     536  
                                       
Operating income
     6,909       8,649       (421 )           15,137  
                                       
Interest expense, net
     144       2       1,153     4 (c)     1,299  
                                       
Income before income taxes
     6,765       8,647       (1,574 )           13,838  
                                       
Provision for income taxes
     2,593       252       2,461     4 (d)     5,306  
                                       
Net income
   $ 4,172     $ 8,395     $ (4,035 )         $ 8,532  
                                       
                                       
Basic and diluted weighted average shares outstanding
     5,214,334                             5,214,334  
                                       
Basic and diluted earnings per share
   $ 0.80                           $ 1.64  
                                       
                                       
                                       

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements

 
 
 


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)


Note 1- Acquisition Transaction

On June 6, 2011, VSE acquired WBI, a supply chain management company headquartered in Somerset, PA.  WBI supplies vehicle parts to the U.S. Postal Service and the Department of Defense. VSE sees significant opportunities for leveraging WBI’s supply chain capabilities with our work of extending the service lives of legacy ships, vehicles, aircraft and their systems.

Cash paid at closing was $180 million, which includes approximately $1.9 million of prepaid retention bonuses that are being expensed in the post-acquisition period as the employees provide service.  As such, the initial cash purchase price was approximately $178.1 million.
 
 
The total estimated acquisition consideration used in preparing the unaudited pro forma combined financial statements is as follows (in thousands):

Acquisition Consideration:

Cash
  
$178,095
Acquisition date fair value of earn-out obligation (preliminary)
  
  22,782
Total consideration
  
$200,877
 
 
We entered into a loan agreement in June 2011 with a syndicate of banks to finance the WBI acquisition and provide working capital for our continuing operations.  The loan agreement consists of a term loan facility and a revolving loan facility.

The WBI acquisition has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date.

Note 2- Preliminary Allocation of Purchase Price
 
 
The total estimated purchase price was allocated to WBI’s net assets based on their estimated fair value as of June 6, 2011.  We recorded the excess of the purchase price over the net assets acquired 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):
 
Description
  
Fair Value
Cash
  
$  3,163
Accounts receivable
  
  11,953
Inventories
  
  37,524
Other current assets
  
   3,940
Property and equipment
  
   1,637
Intangibles – customer-related
  
  69,400
Intangibles – acquired technologies
  
  12,400
Intangibles – trade name
  
   7,600
Current liabilities
  
 (10,367)
     
Net identifiable assets acquired
  
 137,250
Goodwill
  
  63,627
     
Total consideration
  
$200,877
     
     
Cash consideration
  
$178,095
Acquisition date fair value of earn-out obligation
  
  22,782
Total consideration
  
$200,877

 

 
 
 


 
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)

 
The amount of goodwill recorded for the WBI acquisition as of the acquisition date was approximately $63.6 million and reflects the strategic advantage of adding supply chain management to the work VSE has historically performed to extend the life of military ships, vehicles, aircrafts and their installed systems. We believe that the supply chain capabilities we gain through the acquisition of WBI will enable vertical market expansion in our core business of sustaining legacy platforms and systems.  Of the purchase price, $69.4 million was recorded as customer related intangible asset to be amortized on a straight-line basis over 12 years. Approximately $12.4 million was recorded as an acquired technologies intangible asset that will be amortized on a straight-line basis over 11 years.  In addition, $7.6 million was allocated to WBI’s trade name to be amortized on a straight-line basis over nine years.  The fair values assigned to the intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.
 
 
Note 3 – Unaudited Pro Forma Combined Balance Sheet

The unaudited pro forma combined balance sheet gives effect to the WBI acquisition as if it had occurred on March 31, 2011.

The following pro forma adjustments are included in the unaudited pro forma combined balance sheet:

 
 
a)
To reflect the net cash outflows as a result of the WBI acquisition, which consists of the following:
 
 
Proceeds from term loan and revolving loan facilities
   $ 196,164  
Repayment of existing loans
     (16,111 )
Payment to sellers
     (180,000 )
Reduction in payment to sellers for estimated working capital adjustment
     1,607  
Payment of bank related fees on new loan facilities
     (1,633 )
Payment of interest on existing term loan
     (27 )
Distributions to former WBI shareholders prior to acquisition
     (28,994 )
Net cash outflows
   $ (28,994 )
 
 
b)
To reflect the reduction in marketable securities not acquired in the WBI acquisition.
 
 
 
c)
To reflect the preliminary estimated identifiable intangible assets resulting from the acquisition.  See also Note 2 for a more detailed discussion.
 
 
 
d)
To reflect the preliminary goodwill amount recognized in the WBI acquisition.  See also Note 2 for a more detailed discussion.

 
 
e)
To reflect the increase in other assets resulting from 1) capitalized loan fee of $1,707 related to the WBI acquisition, 2) prepaid retention bonuses of $1,905 that will be expensed over 48 months as the employees provide services and 3) a reduction of $1,256 for WBI key man life insurance policies that were not acquired by VSE.
 
 
 
f)
To reflect the net increase in long-term debt, which consists of the following:

 
   
Current portion of long-term debt
    
Long-term debt, less current portion
  
New borrowings under the term loan and revolving loan facilities
   $ 18,750     $ 177,414  
Repayment of existing borrowings
     (6,667 )     (9,444 )
Net increase
   $ 12,083     $ 167,970  
 
 
 
g)
To reflect accrual of acquisition related costs incurred after March 31, 2011 of $6,421, bank loan fees of $75, and payment of accrued interest and unused loan fees of $28 associated with the repayment of existing borrowings resulting from WBI acquisition.

 
 
h)
To reflect the acquisition date estimated fair value of the earn-out obligation. See also Note 1 for a more detailed discussion.
 
 
 
i)
To eliminate WBI’s common stock, other comprehensive income and treasury stock at acquisition.

 
 
j)
To reflect the elimination of the historical equity balances of WBI of $80,404 and transaction costs of $6,421, reduced by applicable income taxes of $723.

 
 
 
 
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)

 
Note 4 – Unaudited Pro Forma Combined Statements of Income
 
The unaudited pro forma combined statements of income gives effect to the acquisition as if it had occurred on January 1, 2010.  As a result of the WBI acquisition, we are separately presenting revenues and contract costs for products and services.

The following pro forma adjustments are included in the unaudited pro forma combined statements of income:
 
 
 
a)
To reflect the amortization of the preliminary fair values of intangible assets of $7,755 for the year ended December 31, 2010 and $1,939 for the three months ended March 31, 2011 and the reduction of salary expense associated with new employment agreements entered into for certain WBI executives as part of the WBI acquisition of $3,000 for the year ended December 31, 2010 and $750 for the three months ended March 31, 2011.

 
 
b)
To reflect changes in selling, general and administrative costs as follows:

 
Year Ended
December 31, 2010
  
Three Months Ended
March 31,2011
Retention bonus amortization. (See Note 1 for further discussion)
$    459
  
$   114
Eliminate the WBI charitable donations that will not be made after the WBI acquisition
 (1,712)
  
       (519)
Eliminate VSE and WBI acquisition costs
-
  
(406)
Eliminate WBI investment income associated with marketable security investments not acquired by VSE
       453
  
       44
Adjustment to selling, general and administrative cost
$   (800)
  
$   (767)

 
 
c)
To reflect the increase in interest expense associated with the WBI acquisition related debt, as follows:
 
 
 
Year Ended
December 31, 2010
  
Three Months Ended
March 31,2011
Estimated interest expense associated with term and revolving loan facilities
$4,743
  
$1,068
Amortization of bank related fees on new loan facilities
     341
  
       85
Increase in interest expense
$5,084
  
$1,153
 
 
To mitigate the risks associated with future interest rate movements on our term and revolving loan facilities, we employed interest rate hedges to fix the rate on a significant portion of our outstanding borrowings.    While the immediate result of fixing these rates is an increase in the net effective rate as compared to the effective rate on our aggregate borrowing as of June 6, 2011, the fixed rates will protect us against future interest rate increases.  We purchased a three-year amortizing LIBOR interest rate swap on the term loan debt in the amount of $101 million.  With the swap in place, we will pay an effective rate on the hedged term debt of 0.56% plus our base margin during the first year the hedge is in place for an estimated fixed rate of 2.76%.  We also purchased a two year LIBOR interest rate swap on the revolving loan debt in the amount of $40 million.  With the swap in place, we will pay an effective rate on the hedged term debt of 0.7775% plus our base margin for two years for an estimated fixed rate of 3.03%.
 
We computed the interest expense on the portion of our borrowing not hedged at 2.51% which was the effective interest rate on our aggregate outstanding debt at the time of the new loan agreement.  A 1/8% change in this variable interest rate would result in an adjustment to interest expense of approximately $49 for the year ended December 31, 2010 and $17 for the three months ended March 31, 2011.
 
 
d)
To reflect the tax effects of the pro forma adjustments and the historical pre-tax income of WBI at the estimated statutory income tax rate for the period.  WBI was previously registered as an S- corporation, and as such, was not subject to Federal income taxes and most state income taxes.

WBI’s operating results included in the unaudited pro forma combined statement of income for the three months ended March 31, 2011 are not intended to represent operating results for a full year.
     
 
 
 

 
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)


Note 5 – Earnings per Share

Because VSE paid cash to acquire WBI and did not issue any stock or stock-based awards in connection with the WBI acquisition, the number of weighted average common shares outstanding used to compute pro forma basic and diluted earnings per share are the same as the VSE historical amounts.