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.

Vocality

On November 30, 2016, we acquired all of the outstanding capital stock of Vocality International (Vocality), based in Shackleford, United Kingdom, a provider of embedded technology which unifies communications platforms, enhances voice quality, increases video performance and optimizes data throughput. Vocality contributes to our Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) portfolio of products for our Cubic Global Defense Systems (CGD Systems) segment and expands our defense customer base. Vocality also sells its technology in the broadcast, oil and gas, mining, and maritime markets.

Vocality’s sales and results of operations included in our operating results for the quarter and six-months ended March 31, 2017 and 2016 were as follows (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Sales	$	0.8	$	—	$	0.7	$	—
Operating income (loss)		(1.6)		—		(0.5)		—
Net income (loss) after taxes		(1.5)		—		(0.6)		—

Vocality’s operating results above included the following amounts for the quarter and six month periods (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Amortization	$	0.2	$	—	$	0.2	$	—
Acquisition-related expenses		1.2		—		0.4		—

Prior to our acquisition of Vocality, Vocality had a number of share-based payment awards in place to its employees. Due to the structure of some of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of Vocality, 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 $0.4 million of compensation expense within general and administrative expenses during the quarter ended December 31, 2016 related to this matter. This compensation is reflected in Vocality’s acquisition-related expenses and results of operations above for the six months ended March 31, 2017.

The estimated acquisition date fair value of consideration is $9.6 million, which was comprised of cash paid of $8.9 million plus additional held back consideration to be paid in the future estimated at $1.1 million, less the $0.4 million of cash paid to the seller recorded as compensation expense described above.

The acquisition of Vocality was paid for with funds from existing cash resources. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Customer relationships	$	2.1
Technology		2.4
Trade name		0.4
Inventory		1.7
Accounts payable and accrued expenses		(0.4)
Other net assets acquired (liabilities assumed)		(0.2)
Net identifiable assets acquired		6.0
Goodwill		3.6
Net assets acquired	$	9.6

The preliminary estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, inventory and deferred revenue are preliminary estimates pending the finalization of our valuation analyses. The preliminary estimated 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 valuation used the excess earnings 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 Vocality with our existing CGD Systems business, including the synergies expected from combining its communication unification technologies with our C4ISR products and other products in our CGD Systems 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 Vocality for fiscal years 2017 through 2021 and thereafter is as follows (in millions):


Year Ended
September 30,
2017	$	0.6
2018		0.8
2019		0.7
2020		0.6
2021		0.5
Thereafter		1.7

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 CGD Systems segment and expands our customer base.

GATR’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Sales	$	27.4	$	9.3	$	8.9	$	9.3
Operating income (loss)		(5.3)		(20.7)		(4.8)		(20.7)
Net loss after taxes		(3.2)		(18.3)		(2.9)		(18.3)

GATR’s operating results above included the following amounts for the quarter and six-month periods (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Amortization	$	6.6	$	2.4	$	3.0	$	2.4
Gains (losses) for changes in fair value of contingent consideration		1.7		(0.1)		1.3		(0.1)
Acquisition-related expenses		0.8		19.4		—		18.8

GATR’s operating results for the quarter ended March 31, 2016 were 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. This compensation expense is reflected in GATR’s acquisition-related expenses and the results of GATR’s operations above. Of this $18.5 million amount, $15.4 million is not deductible for tax purposes.

The estimated acquisition-date fair value of consideration is $220.5 million, which is comprised of cash paid of $236.1 million plus the estimated fair value of contingent consideration of $2.5 million, less $18.1 million of cash paid to the seller that was recognized as expense in fiscal 2016. 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 was paid for predominantly with the proceeds of borrowings on our revolving credit agreement, described below, in the second quarter of fiscal 2016. 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		5.1
Accounts payable and accrued expenses		(2.4)
Deferred tax liabilities		(23.8)
Net identifiable assets acquired		64.6
Goodwill		155.9
Net assets acquired	$	220.5

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 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 C4ISR products and other products in our CGD Systems 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 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 2017 through 2021 and thereafter is as follows (in millions):


Year Ended
September 30,
2017	$	12.7
2018		11.1
2019		9.8
2020		8.3
2021		6.9
Thereafter		13.2

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 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.

Teralogic’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Sales	$	11.0	$	3.8	$	4.8	$	3.8
Operating income (loss)		(0.2)		(2.0)		(0.2)		(0.3)
Net loss after taxes		(0.1)		(1.2)		(0.1)		(0.2)

Teralogic’s operating results above included the following amounts for the quarter and six-month periods (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Amortization	$	1.8	$	1.0	$	0.8	$	1.0
Gains (losses) for changes in fair value of contingent consideration		(0.2)		0.1		(0.3)		0.1
Acquisition-related expenses		0.1		2.2		—		0.5

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. This compensation expense is reflected in Teralogic’s acquisition-related expenses and the results of Teralogic’s operations above.

The estimated acquisition-date 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.

Through March 31, 2017 we have paid $32.4 million to the seller. At March 31, 2017 we have recorded a liability of $3.2 million as an estimate of the additional cash consideration that will be due to the seller in the future.

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 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 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 2017 through 2021 and thereafter is as follows (in millions):


Year Ended
September 30,
2017	$	3.5
2018		2.8
2019		2.1
2020		1.4
2021		0.8
Thereafter		1.4

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 training portfolio.

H4 Global’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2017 and 2016 were as follows (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Sales	$	1.6	$	0.6	$	0.9	$	0.6
Operating income (loss)		(0.3)		—		(0.1)		0.1
Net income (loss) after taxes		(0.2)		—		—		—

H4 Global’s operating results above included the following amounts for the quarter and six-month periods (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Amortization	$	0.1	$	—	$	0.1	$	—
Gains (losses) for changes in fair value of contingent consideration		0.1		0.2		—		0.2
Acquisition-related expenses		—		0.1		—		—

The acquisition-date fair value of consideration is $1.9 million, which is comprised of cash paid of $0.9 million plus the 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.

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.

Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if Vocality, GATR, TeraLogics and H4 Global had been included in our consolidated results since October 1, 2015 (in millions):


	Six Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Net sales	$	678.6	$	703.2	$	343.7	$	369.1

Net income (loss)	$	(2.7)	$	3.8	$	0.5	$	9.5

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, 2015, and it does not purport to project our future operating results.

Goodwill

Changes in goodwill for the six months ended March 31, 2017 were as follows (in millions):


			Cubic Global		Cubic Global
	Transportation		Defense		Defense
	Systems		Systems		Services		Total

Net balances at September 30, 2016	$	49,630	$	262,966	$	94,350	$	406,946
Acquisitions		—		3,642		—		3,642
Foreign currency exchange rate changes		(1,266)		(231)		—		(1,497)
Net balances at March 31, 2017	$	48,364	$	266,377	$	94,350	$	409,091

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired. Goodwill is not amortized but is subject to an impairment test on an annual basis and when circumstances indicate that an impairment is more-likely-than-not. Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying value, including recorded goodwill. If the carrying value of a reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair value of goodwill to its carrying value. Any resulting impairment determined would be recorded in the current period.

Our most recent annual goodwill impairment test was our 2016 annual impairment test completed as of July 1, 2016. Subsequent to the effective date of that test, we do not believe that circumstances have occurred that indicate that an impairment is more-likely-than-not. As such, no subsequent interim impairment test has been performed. The results of our 2016 annual impairment test indicated that the estimated fair values for our CGD Services and Transportation Systems reporting units each exceeded their carrying values by over 20%, while the estimated value of our CGD Systems reporting unit exceeded its carrying value by over 15%.

Significant management judgment is required in the forecast of future operating results that are used in our impairment analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our CGD Services reporting unit, significant assumptions utilized in our discounted cash flow approach included growth rates for sales and margins at greater levels than we have achieved in the past six years, but at levels that are less than the average annual growth we achieved over the period from fiscal 2000 through fiscal 2010. Although we believe our underlying assumptions supporting this assessment are reasonable, if our forecasted sales and margin growth rates, timing of growth, or the discount rate vary from our forecasts, we may be required to perform an interim analysis in 2017 that could expose us to material impairment charges in the future. Assumptions used in our discounted cash flow approach for our CGD Systems reporting unit also included growth rates for sales and margins at greater levels than we have achieved in recent years due to our expectation that businesses recently acquired by this reporting unit will achieve growth at higher rates than the unit’s legacy operations. While our interim assessment of our reporting units did not indicate that impairment was more-likely-than-not for any reporting unit, we believe that, based on the results achieved by our CGD Services reporting unit in the first half of fiscal 2017, there is a heightened risk that a step two impairment test could be required in the future.

Unforeseen negative changes in future business or other market conditions for any of our reporting units including margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.