Business Combinations

On September 17, 2019, the Company entered into and closed on an Asset Purchase Agreement (the “Agreement”) with First Source Electronics, LLC (“FSE”), Kevin Popielarczyk and Richard Vuoto (collectively, “Principals”) and the Company’s wholly-owned subsidiary, CVG FSE, LLC (“CVG FSE”). The Agreement provided for the acquisition (the "FSE Acquisition") by CVG FSE of substantially all of the assets and certain liabilities of FSE in exchange for a cash purchase price of $34 million, subject to a net working capital adjustment, plus a right to earn up to $10.75 million in milestone payments. The purchase was funded through domestic cash on hand and $2 million of borrowings under our revolving credit facility. FSE is in the business of manufacturing, distributing, marketing and selling cable and electro-mechanical assemblies, control panels and other business and consumer electronics products and services. FSE improves our ability to participate in the progression of digitalization, connectivity and associated power and data applications. Furthermore, this strategic acquisition complements our high-complexity, low-to-medium volume electrical business, and provides us an entry into the warehouse automation market, while also providing us with the opportunity to leverage our global footprint and to increase cross selling opportunities.

The milestone payments are payable based on achieving certain earnings before interest, taxes, depreciation and amortization ("EBITDA") thresholds over the periods from (a) September 18, 2019 through September 17, 2020, (b) September 18, 2019 through March 17, 2021, (c) September 18, 2019 through September 17, 2022 and (d) March 18, 2021 through September 17, 2022. The payment amount will be determined on a sliding scale for reaching between 90% and 100% of EBITDA. The fair value for the milestone payments is based on a Monte Carlo simulation utilizing forecasted EBITDA through September 17, 2022. The estimate was recorded within other long-term liabilities in the Condensed Consolidated Balance Sheet as of September 31, 2019. The total undiscounted milestone payments is estimated at $5.6 million and our discounted calculation is $4.7 million as of September 30, 2019.

The Agreement contains customary indemnification provisions and provided for the establishment of an escrow fund of $3 million of the purchase price to secure indemnification claims by CVG FSE for an 18-month period. The Company is a party to the Agreement solely as a guarantor of CVG FSE’s payment obligations.

The operating results of FSE, since the date of acquisition, have been included in our consolidated financial statements. From the date of the FSE Acquisition through September 30, 2019, we recorded revenues of approximately $2.5 million and consolidated net income was not materially impacted for the period. Acquisition related expenses for FSE of approximately $0.9 million were incurred for the three and nine months ended September 30, 2019 and have been recorded as selling, general and administrative expenses in our consolidated statements of income.

The FSE Acquisition was accounted for under the acquisition method of accounting. Under acquisition accounting, the acquired tangible and intangible assets and liabilities of FSE have been recorded at their respective fair values. Due to the proximity of the date of acquisition to the date of issuance of the condensed consolidated financial statements, the Company’s purchase price allocation as of September 30, 2019 reflects various provisional estimates that were based on the information that was available as of the acquisition date and the subsequent filing date of this Form 10-Q. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, however the determination of those fair values is not yet finalized. The purchase price associated with the FSE Acquisition exceeded the preliminary fair value of the net assets acquired by approximately $17.7 million, which is deductible for tax purposes. The excess purchase price over net assets acquired was as follows:



Initial cash paid, net of working capital adjustment	$	34,000
Contingent consideration at fair value	4,700
Total consideration	$	38,700
Net assets at fair value	21,025
Excess of total consideration over net assets acquired	$	17,675

The preliminary fair value of the assets acquired and liabilities assumed allocation was as follows:



Accounts receivable	$	6,567
Inventories	3,140
Prepaid and other current assets	353
Property, plant and equipment	503
Other long-term assets	1,650
Definite-lived intangible assets	17,190
Goodwill	17,675
Accounts payable and accrued liabilities	(7,204		)
Other long-term liabilities	(1,174		)
Total consideration	$	38,700

The following unaudited pro forma information for the three and nine months ended September 30, 2019 and 2018 presents the result of operations as if the FSE Acquisition had taken place at the beginning of the comparable prior annual reporting period. The pro forma results reflect estimates and assumptions and are not necessarily indicative of the financial position or result of operations had the acquisitions taken place at the beginning of the period. The Company adjusted historical results for assumed intangible amortization expense consistent with future years and assumed tax impact of 25%. In addition, the pro forma results are not necessarily indicative of the future financial or operating results:



	Three months ended September 30,				Nine months ended September 30,
(unaudited)	2019		2018		2019		2018
Revenue	$	235,470	$	232,964	$	747,280	$	699,245
Net income	$	8,761	$	12,818	$	29,068	$	36,899
Earnings per share attributable to common stockholders:
Basic	$	0.29	$	0.42	$	0.95	$	1.22
Diluted	$	0.28	$	0.42	$	0.94	$	1.21