Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

 v2.3.0.11
Acquisitions
 6 Months Ended
Jun. 30, 2011
Acquisition [Abstract]  
Acquisition
(8) Acquisitions

Wheeler Bros., Inc.

On June 6, 2011, we 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 (“DoD”).  We see 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. WBI’s results of operations are included in the accompanying consolidated financial statements beginning June 6, 2011. WBI had revenues of approximately $10.7 million and operating income of approximately $2 million from the acquisition date through June 30, 2011.
 
For the acquisition of WBI, we recorded assets acquired and liabilities assumed at their fair values as of the acquisition date.  We incurred acquisition-related transaction costs of approximately $1.4 million and $1.8 million for the three- and six-month periods ended June 30, 2011, respectively, which included financial advisory, legal, accounting and other external costs directly related to the acquisition and are included in the selling, general and administrative expenses in the accompanying statements of income.
 
We plan to file an election under Internal Revenue Code Section 338(h) (10) to treat the WBI acquisition as a sale of assets for tax purposes.  We will make a payment to the sellers for the sellers’ incremental tax liabilities as a result of the election.  Tax advantages to us that will result from the 338(h) (10) election are expected to significantly exceed the additional payment that will be made to the sellers.  The additional federal and state income tax liabilities paid to the sellers will be recorded as additional purchase price.
 
We may be required to make additional payments of up to an aggregate of $40 million over a four year post-closing period if WBI achieves certain financial performance targets.  Included in earn-out obligations on the June 30, 2011 balance sheet is an earn-out liability of approximately $22.8 million which represents our best estimate of the present value of the earn-out obligation. We are in the process of finalizing the detailed valuation of this earn-out obligation and the final result of the valuation may differ from management’s estimate currently recorded. The balance will be adjusted, if necessary, to reflect the final result. After the valuation of the earn-out obligation as of the acquisition date is finalized, it will be re-measured each reporting period and any changes will be recognized in our statement of operations for such period.
 
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 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):

   
Fair
Description
  
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  
           

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 we have 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.  The goodwill recognized is expected to be deductible for income tax purposes. Of the purchase price, $69.4 million was recorded as a customer-related intangible asset that will 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 that will be amortized on a straight-line basis over nine years.  The fair values assigned to the intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques.
 
The following unaudited pro forma information has been presented as if the WBI acquisition had occurred on January 1, 2010.  This information is based on historical results of operations, adjusted for the allocation of purchase price and other acquisition accounting adjustments, and is not necessarily indicative of results had we completed the WBI acquisition on January 1, 2010.  The proforma net income has been adjusted to exclude approximately $1.8 million and $5.0 million of VSE and WBI acquisition-related transaction costs for the six-month period ended June 30, 2011, respectively.
 
   
Six months
ended June 30,
  
   
2011
    
2010
  
             
Revenues
   $ 378,227     $ 518,073  
                 
Net income
   $ 15,302     $ 18,356  
                 
Basic and diluted earnings per share
   $ 2.93     $ 3.54  


Akimeka

On August 19, 2010, we acquired Akimeka, which is headquartered in Hawaii with offices in Virginia, Florida and Texas. Akimeka is a health services information technology consulting company serving the government market. Akimeka is a recognized leader in the DoD health services and logistics sector dedicated to delivering innovative IT solutions.  Akimeka complements our subsidiary, G&B.
 
Cash paid at closing was $33 million, which includes $725 thousand 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 $32.3 million.  Additional cash consideration of approximately $363 thousand was paid in December 2010 to the sellers based on the final working capital calculation. Akimeka's results of operations are included in the accompanying consolidated financial statements beginning August 19, 2010.
 
We may be required to make additional earn-out payments of up to an aggregate of $11 million over a three-year post-closing period if Akimeka achieves certain financial performance targets.  Included in earn-out obligations on the June 30, 2011 balance sheet is an earn-out liability of approximately $6.9 million that represents our best estimate of the present value of the earn-out obligation.  We estimated the fair value by using the expected cash flow approach with probability-weighted revenue inputs and using an appropriate discount rate. Interest expense and subsequent changes in the fair value of the earn-out obligations will be recognized in earnings in the period of the change through settlement. We recorded an adjustment of $955 thousand related to the decrease in the fair value of the earn-out obligation during the six months ended June 30, 2011 as a reduction of contract costs and earn-out obligations.