VSE buys perpetual MRO license, assets from Honeywell for $105M

VSE Corporation (VSEC) announced that it has entered into an asset purchase and perpetual license agreement with Honeywell International (HON) to exclusively manufacture and support certain of Honeywell’s fuel control systems on four key engine platforms through its VSE Aviation business. Under the terms of the agreement, VSE Aviation acquired certain contracts, equipment, and inventory from Honeywell and will utilize the acquired assets and the license to exclusively manufacture, manage aftermarket distribution, and repair more than 340 unique Honeywell fuel control systems. VSE Aviation will support three in-production engine platforms manufactured by Rolls Royce and Pratt & Whitney Canada, P&WC, including P&WC PT-6 engine variants. These systems and subcomponents will support more than 20,000 in-service aircraft powered by these engines, spanning over 120 platforms in the business and general aviation B&GA and rotorcraft markets. This new agreement expands VSE Aviation’s existing capabilities supporting Honeywell’s fuel control systems and associated subcomponents. Since 2015, VSE Aviation has served as the exclusive distributor of these products. In addition, VSE Aviation has a long-established and successful history as an MRO provider to support these fuel control systems. Through this new agreement, VSE expands the relationship to become the licensed manufacturer with perpetual rights to the intellectual property of these components…VSE acquired the perpetual license and asset for $105 M. The purchase price also included $12M of existing inventory. The Company expects to lower its net working capital requirements by approximately $10Mratably throughout 2024 through lower inventory costs. This more favorable product cost, offset partially by production expenses, is expected to contribute approximately $7 mMand $14M of additional EBITDA in 2024 and 2025 respectively, and is not expected to have a material effect in the fourth quarter of 2023. The Company funded the purchase through a drawdown on its existing credit facility. VSE anticipates its net leverage ratio to be below 4.0 times at the end of the third quarter and improving by the end of the year, when including the trailing twelve-month results from prior acquisitions and the recent purchase of the Honeywell fuel control license. The Company is also increasing full year 2023 revenue and Adjusted EBITDA guidance for its Aviation segment, reaffirming full year 2023 revenue and Adjusted EBITDA guidance for its Fleet segment, and maintaining second half 2023 free cash flow guidance