Note 2 — Acquisitions

Each of the following acquisitions has been treated as a business combination for accounting purposes. The results of operations of each acquired business has been included in our consolidated financial statements since the respective date of each acquisition.

GATR

On February 2, 2016 we acquired all of the outstanding capital stock of GATR Technologies, LLC (GATR), a defense systems business based in Huntsville, Alabama which manufactures deployable satellite communication terminal solutions. GATR expands our satellite communications and networking applications technologies for our Cubic Global Defense Systems (CGD Systems) segment and expands our customer base.

GATR’s sales have totaled $9.3 million since the acquisition date. GATR’s operating income for the quarter ended March 31, 2016 was significantly impacted by the GAAP accounting requirements regarding business combinations. Prior to our acquisition of GATR, GATR had a number of share-based payment awards in place to its employees. Due to the structure of certain of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of GATR, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, we recognized $18.5 million of compensation expense within general and administrative expenses during the quarter ended March 31, 2016 related to this matter. Of this $18.5 million amount, $15.4 million is not expected to be deductible for tax purposes. In addition during the quarter ended March 31, 2016, GATR incurred charges of $2.4 million for the amortization of intangibles and acquisition costs of $0.4 million. As a result of the charges above, the GATR net loss after taxes for the three and six-month periods ended March 31, 2016 totaled $18.3 million.

The estimated fair value of consideration is $221.2 million, which is comprised of cash paid of $231.3 million plus the estimated fair value of contingent consideration of $2.5 million, plus additional held back consideration to be paid in the future estimated at $5.2 million, less $17.7 million of cash paid to the seller related to the $18.5 million recorded as expense described above. Under the purchase agreement, we will pay the sellers up to $7.5 million of contingent consideration if GATR meets certain gross profit goals for the 12 month periods ended February 28, 2017 and 2018. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings.

The acquisition of GATR is being paid for predominantly with the proceeds of the borrowings described below. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Customer relationships	$	51.7
Backlog		3.4
Technology		10.7
Non-compete agreements		1.2
Trade name		4.7
Accounts receivable		10.6
Inventory		3.4
Income tax receivable		5.5
Accounts payable and accrued expenses		(2.4)
Deferred tax liabilities		(22.2)
Other net assets acquired (liabilities assumed)		(0.1)
Net identifiable assets acquired		66.5
Goodwill		154.7
Net assets acquired	$	221.2

The estimated fair values of assets acquired and liabilities assumed, including deferred tax assets and liabilities, purchased intangibles and deferred revenue, as well as the estimated fair value of contingent consideration and the amount of expense recognized in connection with the modification of the share-based payment awards described above are preliminary estimates pending the finalization of our valuation analyses. The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess earnings approach, the non-compete agreements used the with-and-without approach, and the technology and trade name asset valuations used the relief from royalty approach.

The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, over a weighted average useful life of nine years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GATR with our existing CGD Systems business, including the synergies expected from combining its satellite communications and networking applications technologies with our CGD Systems product portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is generally not expected to be deductible for tax purposes.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of GATR for fiscal years 2016 through 2020 and thereafter is as follows (in millions):


Year Ended
September 30,
2016	$	9.7
2017		12.7
2018		11.1
2019		9.8
2020		8.3
Thereafter		20.1

TeraLogics

On December 21, 2015 we acquired all of the assets of TeraLogics, LLC, an Ashburn, Virginia-based provider of real-time full motion video processing, exploitation and dissemination (PED) for the Department of Defense, the intelligence community and commercial customers. TeraLogics’ ability to develop real-time video analysis and delivery software for full motion video complements the existing tactical communications portfolio of our CGD Systems segment and expands our customer base. For the quarter ended March 31, 2016, TeraLogics had sales of $3.8 million, but had no significant sales between the acquisition date and December 31, 2015. TeraLogics net loss after taxes was $0.2 million, and $1.2 million for three and six months ended March 31, 2016, respectively, including the impact of charges related to the acquisition. For the quarter and six months ended March 31, 2016 we incurred $0.5 million and $0.9 million, respectively, of transaction and acquisition expenses. In addition, during the quarter ended December 31, 2015 we incurred a $1.3 million charge for compensation expense incurred related to amounts paid to TeraLogics employees upon the close of the acquisition.

The estimated fair value of consideration is $33.9 million, which is comprised of cash paid of $28.9 million plus the estimated acquisition-date fair value of contingent consideration of $5.0 million. Under the purchase agreement, we will pay the sellers up to $9.0 million of contingent consideration. Of this amount, up to $6.0 million will be paid if TeraLogics meets certain revenue thresholds in fiscal years 2016, 2017 and 2018; and up to $3.0 million will be paid if specific contract extensions are exercised by TeraLogics customers through fiscal 2018. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings. There has been no significant change in the fair value of contingent consideration since the date of the acquisition.

The acquisition of TeraLogics is being paid for with a combination of funds from our existing cash resources and borrowings on our revolving credit facility. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Customer relationships	$	6.7
Backlog		5.6
Software		2.5
Non compete agreements		0.1
Accounts receivable		1.4
Accounts payable and accrued expenses		(0.5)
Other net assets acquired (liabilities assumed)		(0.1)
Net identifiable assets acquired		15.7
Goodwill		18.2
Net assets acquired	$	33.9

The estimated fair values of purchased intangibles and deferred revenue, as well as the estimated fair value of contingent consideration are preliminary estimates pending the finalization of our valuation analyses. The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess earnings approach, the non-compete agreements used the with-and-without approach, and the software used the replacement cost new less cost decrements for obsolescence approach.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of TeraLogics with our existing CGD Systems business, including the synergies expected from combining TeraLogics real-time video capabilities with our existing tactical communications product portfolio. The goodwill also includes the value of the assembled workforce who became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is expected to be deductible for tax purposes.

The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition of TeraLogics for fiscal years 2016 through 2020 and thereafter is as follows (in millions):


Year Ended
September 30,
2016	$	3.0
2017		3.5
2018		2.8
2019		2.1
2020		1.4
Thereafter		2.1

H4 Global

On November 4, 2015 we acquired all of the assets of H4 Global, a U.K.-based provider of simulation-based training solutions which complements our CGD Systems segment portfolio. For the quarter ended March 31, 2016, the amounts of H4 Global’s sales and net income after taxes included in our Consolidated Statement of Income (Loss) were $0.6 million and $0.1 million, respectively. In the short time period between our acquisition of H4 Global and December 31, 2015, H4 Global did not have significant sales or net income. During the quarter ended December 31, 2015 we incurred $0.1 million of transaction costs to acquire H4 Global.

The estimated fair value of consideration is $1.9 million, which is comprised of cash paid of $0.9 million plus the estimated fair value of contingent consideration of $1.0 million. Under the purchase agreement, we will pay the sellers up to $4.1 million of contingent consideration, based upon the value of contracts entered over the five-year period beginning on the acquisition date. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value will be recognized in earnings. There has been no significant change in the fair value of contingent consideration since the date of the acquisition.

The fair value of the net assets acquired and liabilities assumed was not material. Consequently, virtually the entire purchase price of $1.9 million was recorded as goodwill, which is comprised of expected synergies and assembled workforce. The amount recorded as goodwill is allocated to our CGD Systems segment and is not expected to be deductible for tax purposes. The estimated fair values of purchased intangibles and the estimated fair value of contingent consideration are preliminary estimates pending the finalization of our valuation analyses.

DTECH

On December 16, 2014 we acquired all of the outstanding capital stock of DTECH LABs, Inc. (DTECH). Based in Sterling, VA, DTECH is a provider of modular networking and baseband communications equipment that adds networking capability to our secure communications business. This acquisition expands the portfolio of product offerings and the customer base of our CGD Systems segment.

For the three months ended March 31, 2016, the amounts of DTECH’s sales and net loss after taxes included in our Consolidated Statement of Income (Loss) were $1.4 million and $2.3 million, respectively, compared to $10.8 million and $1.0 million, respectively for the three months ended March 31, 2015. For the six months ended March 31, 2016, the amount of DTECH’s sales and net loss after tax were $9.2 million and $3.6 million, respectively, compared to $11.8 million and $1.8 million, respectively for the six months ended March 31, 2015. The DTECH operating results for the quarter and six months ended March 31, 2016 include charges of $1.1 million and $1.9 million, respectively for the increase in the fair value of contingent consideration. There was no significant change in the fair value of contingent consideration in the quarter or six months ended March 31, 2015. For the six months ended March 31, 2015, DTECH’s operations also included $0.8 million of transaction and acquisition related costs before related income taxes.

The purchase agreement states that the cost of the acquisition is approximately $99.5 million, adjusted by the difference between the net working capital acquired and the targeted working capital amounts and adjusted for other acquisition related payments made upon closing, plus a contingent amount of up to $15.0 million based upon DTECH’s achievement of revenue and gross profit targets in the future. The acquisition date fair value of the consideration was $99.4 million. The total acquisition date fair value of consideration includes the acquisition fair value of holdback consideration and contingent consideration described below.

Approximately $4.7 million of cash consideration (Holdback Consideration) will be paid to the seller over time when certain events occur in the future. At March 31, 2016, the fair value of the Holdback Consideration is estimated to approximate $4.4 million using a discounted cash flow model, based upon the expected timing of the payment of the Holdback Consideration. In addition to the Holdback Consideration, we will pay the seller up to $15.0 million of contingent cash consideration based upon DTECH’s achievement of revenue and gross profit targets. The purchase agreement specifies independent revenue and gross profit targets for the period from our acquisition of DTECH through September 30, 2015, and separately for each of fiscal 2016 and fiscal 2017. At the acquisition date, the total fair value of the contingent consideration was estimated at $3.9 million using a real options approach (see Note 5 for further discussion of fair value measurements). During the measurement period ended September 30, 2015, DTECH met both the revenue and gross profit targets. As a result, $5.0 million was paid to the seller in December 2015. The remaining contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings. At March 31, 2016 the fair value of the contingent consideration was $4.4 million.

Through March 31, 2016 we have paid $96.3 million to the seller. At March 31, 2016 we have recorded a liability of $8.8 million as an estimate of the additional cash consideration that will be due to the seller in the future, including the Holdback Consideration and contingent consideration.

The acquisition of DTECH is being paid for with a combination of funds from our existing cash resources and borrowings on our revolving credit facility. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Customer relationships	$	35.1
Non-compete agreements		0.7
Backlog		2.1
Cash		0.9
Accounts receivable		5.4
Inventory		4.2
Warranty obligation		(0.4)
Tax liabilities		(3.3)
Accounts payable and accrued expenses		(3.4)
Other net assets acquired		0.2
Net identifiable assets acquired		41.5
Goodwill		57.9
Net assets acquired	$	99.4

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess earnings approach and the non-compete agreements used the with-and-without approach.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of DTECH with our existing CGD Systems business, including the synergies expected from combining the networking and secure communications technologies of DTECH, and complementary products that will enhance our overall product and service portfolio. The goodwill also consists of the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CGD Systems segment and is expected to be deductible for tax purposes.

The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition of DTECH for fiscal years 2016 through 2020 and thereafter is as follows (in millions):


Year Ended September 30,
2016	$	8.0
2017		6.8
2018		5.5
2019		4.1
2020		2.8
Thereafter		1.5

Changes in goodwill for the six months ended March 31, 2016 were as follows (in millions):


			Cubic Global		Cubic Global
	Transportation		Defense		Defense
	Systems		Systems		Services		Total

Balances at September 30, 2015	$	56.0	$	87.5	$	94.4	$	237.9
Acquisitions		—		173.6		—		173.6
Foreign currency exchange rate changes		(2.3)		0.2		—		(2.1)
Balances at March 31, 2016	$	53.7	$	261.3	$	94.4	$	409.4

Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if GATR, TeraLogics, H4 Global and DTECH had been included in our consolidated results since October 1, 2014 (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2016		2015		2016		2015
Net sales	$	699.9	$	694.7	$	367.3	$	352.1

Net income attributable to Cubic	$	3.8	$	(6.3)	$	9.5	$	(12.4)

The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. No adjustments were made for transaction expenses, other adjustments that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial information is not necessarily indicative of what the consolidated financial results of our operations would have been had the acquisitions been completed on October 1, 2014, and it does not purport to project our future operating results.