Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

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Acquisitions
 6 Months Ended
Jun. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]  
Acquisitions Acquisitions
Turbine Controls, LLC

On April 24, 2024, we completed the acquisition of TCI for a total consideration of $122.2 million, consisting of cash consideration of $113.7 million, which included $1.57 million as an estimated net working capital adjustment, and in-kind payment in the form of shares of the Company's common stock with a value equal to $10.0 million. The purchase price of this acquisition was funded by borrowings under our revolving credit facility. TCI is a leading provider of aftermarket maintenance, repair and overhaul ("MRO") support services for complex engine components, as well as engine and airframe accessories, across commercial and military applications. The acquisition presents an opportunity for VSE's Aviation segment to accelerate its MRO strategy, including expanding our repair capability offerings and adding several new OEM relationships.

The purchase price for TCI was allocated on a preliminary basis, among assets acquired and liabilities assumed at fair value based on the best available information on the acquisition date, with the excess purchase price recorded as goodwill. The fair values of the non-financial assets acquired, and liabilities assumed, were determined based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations utilizing established industry valuation techniques. We have not yet finalized the determination of the fair values allocated to various assets and liabilities, including, but not limited to, working capital and income taxes. Therefore, the allocation of the total consideration for the acquisition to the tangible and identifiable intangible assets acquired, and liabilities assumed, is preliminary until we obtain final information regarding their fair values, which could potentially result in changes to the TCI opening balance sheet.

The preliminary purchase price allocation is as follows (in thousands):
Receivables $ 9,122 
Contract assets 16,193 
Inventories 5,512 
Other current assets 570 
Other assets 214 
Property and equipment, net 6,434 
Intangible asset - customer related 59,000 
Goodwill 40,093 
Operating lease right-of-use assets 7,832 
     Total assets acquired 144,970 
Accounts payable (9,764)
Accrued expense and other current liabilities (5,619)
Long-term operating lease obligations (7,339)
     Total liabilities assumed (22,723)
Net assets acquired, excluding cash $ 122,248 
Cash consideration, net of cash acquired $ 112,248 
VSE Common stock, at fair value 10,000 
Total $ 122,248 

Goodwill resulting from the acquisition of TCI reflects the strategic advantage of expanding our MRO services to new customers. The value attributed to goodwill and customer relationships is deductible for income tax purposes. The estimated value attributed to the customer relationship intangible assets is being amortized on a straight-line basis using a useful life of 10 years.
We incurred $0.5 million and $2.0 million of acquisition-related expenses related to the TCI acquisition during the three and six months ended June 30, 2024, respectively, which are included in selling, general and administrative expenses.

The operating results of TCI were included in our consolidated results of operations from the date of acquisition. Our consolidated revenues and operating income include $23.5 million and $1.8 million, respectively, for the three and six months ended June 30, 2024, from the acquisition of TCI. Operating income does not include the impact of acquisition-related expenses incurred by VSE Corporation.

The following unaudited pro forma financial information presents the combined results of operations for TCI and VSE Corporation for the three and six months ended June 30, 2024, and 2023, respectively. The unaudited consolidated pro forma results of operations are as follows (in thousands):

Three months ended June 30, Six months ended June 30,
2024 2023 2024 2023
Revenue
 273,070  225,469  539,280  433,012 
(Loss) income from continuing operations
 (2,791) 8,597  10,045  15,117 

The unaudited pro forma combined financial information presented above has been prepared from historical financial statements that have been adjusted to give effect to the acquisition of TCI as though it had occurred on January 1, 2023 and includes adjustments for intangible asset amortization; interest expense and debt issuance costs on long-term debt; and acquisition and other transaction costs. The unaudited pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had occurred on January 1, 2023, nor is it indicative of future operating results.

Precision Fuel Components, LLC

On February 1, 2023, our Aviation segment acquired Precision Fuel Components, LLC ("Precision Fuel") for a purchase price of $11.7 million. Precision Fuel operating results are included in our Aviation segment beginning on the acquisition date. The acquisition was not material to our consolidated financial statements.

During the six months ended June 30, 2023, we incurred $0.2 million of acquisition-related expenses related to the acquisition of Precision Fuel, which are included in selling, general and administrative expenses.

Desser Aerospace

On July 3, 2023, we completed the acquisition of Desser Holding Company LLC ("Desser Aerospace"), a global aftermarket solutions provider of specialty distribution and MRO services. We purchased Desser Aerospace for a cash consideration of $133.7 million, which included $9.5 million as an estimated net working capital adjustment (subject to post-closing adjustments). Concurrent with the closing of the transaction, we immediately sold, in a separate transaction, Desser Aerospace’s propriety solutions businesses to Loar Group Inc. (“Loar”) for a cash consideration of $31.8 million, which included $1.8 million as an estimated net working capital adjustment (the “Loar Sale”).

During the six months ended June 30, 2024, we adjusted the purchase price allocation as a result of certain measurement period adjustments to acquired assets and liabilities assumed due to updated valuation reports received from our external valuation specialist, revisions to internal estimates, and new information obtained about facts and circumstances that existed as of the acquisition date. The measurement period adjustments included: a decrease in deferred tax liabilities of $1.6 million and an increase in inventories of $0.1 million These adjustments resulted in a decrease to goodwill of $1.7 million.
We completed the purchase accounting valuation for Desser Aerospace during the second quarter of 2024. The final purchase price allocation is as follows (in thousands):
Receivables $ 7,383 
Inventories 31,228 
Other current assets 515 
Property and equipment 2,527 
Intangible assets 21,950 
Goodwill 53,942 
Operating lease right-of-use assets 6,679 
     Total assets acquired 124,224 
Accounts payable (10,128)
Accrued expenses and other current liabilities (5,793)
Long-term operating lease obligations (5,937)
Deferred tax liabilities (2,666)
     Total liabilities assumed (24,524)
Net assets acquired, excluding cash $ 99,700 
Cash consideration $ 101,870 
Post-close adjustment (2,170)
Total $ 99,700 

Goodwill resulting from the acquisition of Desser Aerospace reflects the strategic advantage of expanding our specialty distribution and MRO services to new customers. The value attributed to goodwill and customer relationships is not fully deductible for income tax purposes. The estimated value attributed to the customer relationship intangible assets is being amortized on a straight-line basis using a weighted average useful life of 8.3 years.

We incurred $0.6 million and $1.7 million of acquisition-related expenses related to the Desser Aerospace acquisition during the three and six ended June 30, 2023, respectively, which are included in selling, general and administrative expenses.

The following unaudited pro forma financial information presents the combined results of operations for Desser Aerospace and VSE Corporation for the three and six months ended June 30, 2024 and 2023, respectively. The unaudited consolidated pro forma results of operations are as follows (in thousands):

Three months ended June 30, Six months ended June 30,
2024 2023 2024 2023
Revenue
 $ 265,959  229,066  $ 507,498  441,565 
(Loss) Income from continuing operations $ (2,777) 11,001  $ 9,323  20,353 

The unaudited pro forma combined financial information presented above has been prepared from historical financial statements that have been adjusted to give effect to the acquisition of Desser Aerospace as though it had occurred on January 1, 2023 and includes adjustments for intangible asset amortization; interest expense and debt issuance costs on long-term debt; acquisition and other transaction costs; and certain costs allocated from the former parent. The unaudited pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had occurred on January 1, 2023, nor is it indicative of future operating results.
Honeywell Fuel Control Systems

On September 27, 2023, our Aviation segment entered into an Asset Purchase and License Agreement with Honeywell International Inc., for a purchase price of $105.0 million, to exclusively manufacture, sell, market, distribute, and repair certain Honeywell fuel control systems (the "Honeywell FCS Acquisition"). The purchase price of this acquisition was funded by borrowings under our revolving credit facility. This agreement expands existing distribution and MRO capabilities supporting certain Honeywell’s fuel control systems and associated subcomponents.

The acquisition was accounted for as a business combination under ASC 805, Business Combinations. The purchase price for the acquisition was allocated on a preliminary basis, among assets acquired, at fair value based on the best available information on the acquisition date, with the excess purchase price recorded as goodwill. The fair values of the non-financial assets acquired were determined based on preliminary estimates, assumptions, and other information compiled by management, including independent valuations utilizing established industry valuation techniques. We have not yet finalized the purchase price allocation related to this acquisition due to the fact that while legal control has occurred, we have not received physical possession of the prepaid inventory and property and equipment, and thus these assets will be subject to settlement adjustments upon transfer as outlined in the Asset Purchase and License Agreement with Honeywell. Therefore, the allocation of the total consideration for the acquisition is preliminary until we obtain final information regarding their fair values, which could potentially result in changes in the fair values and an adjustment to goodwill. There were no changes in the preliminary purchase price allocation for the three and six months ended June 30, 2024.

The adjusted preliminary purchase price allocation is as follows (in thousands):
Other current assets (a)
$ 12,000 
Property and equipment 2,714 
Intangible assets 16,200 
Goodwill 74,086 
     Total assets acquired $ 105,000 
Cash consideration $ 105,000 
Total consideration $ 105,000 
(a) Represents prepaid inventory consisting of finished goods acquired but not in our physical possession as of the acquisition date.

The pro-forma impact of the acquisition is not material to the Company’s results of operations.