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 $34.0 million, subject to a net working capital adjustment, plus a right to earn up to $10.8 million in contingent milestone payments. The purchase was funded through domestic cash on hand and $2.0 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 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 the respective EBITDA targets. 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 Consolidated Balance Sheet as of September 30, 2019. The total undiscounted milestone payments is estimated at $5.6 million and the fair value 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 $3.0 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 December 31, 2019, FSE operations recorded revenues of approximately $12.8 million resulting in net income of $0.2 million for the period within the Electrical Systems Segment. Acquisition related expenses for FSE of approximately $0.9 million were incurred for the year ended December 31, 2019 and have been recorded as selling, general and administrative expenses in our consolidated statements of operations.

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. The Company has completed its preliminary assessment of fair values of assets acquired and liabilities assumed, and the preliminary amounts are reflected in the table below. The purchase price associated with the FSE Acquisition exceeded the preliminary fair value of the net assets acquired by approximately $20.4 million. This reflects an increase of $2.7 million from the initial valuation as of September 30, 2019. As of December 31, 2019, the net working capital adjustment is still preliminary. The excess purchase price over net assets acquired is recorded as goodwill and was determined 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	18,335
Excess of total consideration over net assets acquired	$	20,365

In the fourth quarter of 2019, management decreased the value of definite-lived intangible assets with an offset to goodwill to reflect a refinement of valuation assumptions. The allocation of the fair value of the assets acquired and liabilities assumed is 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	14,500
Goodwill	20,365
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 twelve months ended December 31, 2019 and 2018 presents the result of operations as if the FSE Acquisition had taken place at the beginning of the 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 acquisition taken place at the beginning of the period. The Company adjusted historical results for assumed intangible amortization expense consistent with future years and assumed an effective tax rate of 25%. In addition, the pro forma results are not necessarily indicative of the future financial or operating results.



	Twelve months ended December 31,
(unaudited)	2019		2018 (as restated)
Revenue	$	936,766	$	935,596
Net income	$	18,324	$	44,139
Earnings per share attributable to common stockholders:
Basic	$	0.60	$	1.46
Diluted	$	0.59	$	1.44