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Acquisitions and Divestitures

9 Months Ended

Jun. 30, 2019

Note 3 — Acquisitions and Divestitures

Sale of CGD Services

On April 18, 2018, we entered into a stock purchase agreement with the Purchaser, an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. We concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations presentation in the second quarter of fiscal 2018. Consequently, in the second quarter of fiscal 2018, we recognized a $6.9 million loss within discontinued operations, which was calculated as the excess of the carrying value of the net assets of CGD Services less the estimated sales price in the stock purchase agreement less estimated selling costs.

The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement, the Purchaser agreed to pay us $135.0 million in cash upon the closing of the transaction, adjusted for the estimated working capital of CGD Services at the date of the sale compared to a working capital target. In the third quarter of fiscal 2018, we received $133.8 million in connection with the sale and we recorded a receivable from the Purchaser for the estimated amount due related to the working capital settlement. The balance of this receivable was $3.7 million at December 31, 2018. In the second quarter of fiscal 2019, we worked with the Purchaser and revised certain estimates related to the working capital settlement. In connection with the revision of these estimates, we reduced the receivable from the Purchaser by $1.3 million and recognized a loss on the sale of CGD Services in the second quarter of fiscal 2019. Certain remaining working capital settlement estimates, primarily related to the fair value of accounts receivable, have not yet been settled with the Purchaser.

In addition to the amounts described above, we are eligible to receive an additional cash payment of $3.0 million based on the achievement of pre-determined earn-out conditions related to the award of certain government contracts. No amount has been recorded as a receivable related to the potential achievement of earn-out conditions based upon our assessment of the probability of achievement of the required conditions.

The operations and cash flows of CGD Services are reflected in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the date of the sale. The following table presents the composition of net income from discontinued operations, net of taxes for the three- and nine-month periods ended June 30, 2019 and June 30, 2018 (in thousands).


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Net sales	$	—	$	71,867	$	—	$	262,228
Costs and expenses:
Cost of sales		—		64,597		—		235,279
Selling, general and administrative expenses		—		3,133		—		10,676
Amortization of purchased intangibles		—		276		—		1,373
Restructuring costs		—		—		—		7
Other income		—		(2)		—		(15)
Earnings from discontinued operations before income taxes		—		3,863		—		14,908
Net (gain) loss on sale		202		(819)		1,541		6,081
Income tax (benefit) provision		—		(698)		—		463
Net income (loss) from discontinued operations	$	(202)	$	5,380	$	(1,541)	$	8,364

Business Acquisitions

PIXIA Corp.

On June 27, 2019, we paid cash of $50.0 million to purchase 20% of the outstanding capital stock of PIXIA Corp (Pixia), a private software company based in Herndon, Virginia, which provides high performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures. Our purchase agreement with Pixia includes an option to purchase the remaining

80% of the capital stock, which must be exercised by December 31, 2019. We are accounting for our investment in Pixia using the equity method of accounting. As such, we recorded a $50.0 million investment in Pixia within other assets on our Condensed Consolidated Balance Sheet, and our interest in Pixia’s operating results is recognized in other income (expense) outside of operating income on our Condensed Consolidated Statements of Income. However, our interest in Pixia’s operating income was not significant for the quarter ended June 30, 2019.

Consolidated Business 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.

Nuvotronics, Inc.

In March 2019, we acquired all of the outstanding capital stock of Nuvotronics, Inc. (Nuvotronics), a provider of microfabricated radio frequency (RF) products. Based in Durham, North Carolina, Nuvotronics’ patented PolyStrata technology enables the design and production of uniquely packaged RF devices, such as antennas, filters, and combiners, all of which are components in Cubic’s advanced technology product offerings. Nuvotronics is expected to provide synergies from combining its capabilities with our existing CMS business.

Nuvotronics’ sales and results of operations included in our operating results were as follows (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	3.6	$	—	$	4.3	$	—
Operating loss		(3.2)		—		(4.9)		—
Net loss after taxes		(3.2)		—		(4.9)		—

Nuvotronics’ operating results above included the following amounts (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	0.6	$	—	$	0.7	$	—
Acquisition-related expenses		1.1		—		2.9		—

The acquisition-date fair value of consideration is $66.8 million, which is comprised of net cash paid of $61.5 million, plus the estimated fair value of contingent consideration of $4.9 million, plus a $0.4 million estimated payable due to the sellers for the difference between the net working capital acquired and the targeted working capital amounts. The acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement, we will pay the sellers up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):


Technology	$	22.7
Trade name		1.5
Backlog		1.4
Non-compete agreements		0.5
Customer relationships		0.6
Accounts receivable and contract assets		2.6
Fixed assets		2.7
Accounts payable and accrued expenses		(1.8)
Deferred taxes		(3.5)
Other net assets acquired (liabilities assumed)		(0.6)
Net identifiable assets acquired		26.1
Goodwill		40.7
Net assets acquired	$	66.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles are preliminary estimates pending the finalization of our valuation analyses and the receipt of further information from the seller regarding its assets and liabilities. The 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 trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an 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 Nuvotronics with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS 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 CMS 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 Nuvotronics is as follows (in millions):


Year Ended
September 30,
2019	$	1.2
2020		4.0
2021		3.0
2022		3.0
2023		2.9
Thereafter		12.6

GRIDSMART Technologies, Inc.

In January 2019, we acquired all of the outstanding capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a provider of differentiated video tracking solutions to the Intelligent Traffic Systems (ITS) market. Based in Knoxville, Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing, computer vision modeling and machine learning along with a single camera solution providing best-in-class data for optimizing the flow of people and traffic through intersections. GRIDSMART is expected to provide synergies from combining its capabilities with our existing CTS business.

GRIDSMART’s sales and results of operations included in our operating results were as follows (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	7.7	$	—	$	14.0	$	—
Operating income (loss)		0.7		—		(1.3)		—
Net income (loss) after taxes		0.7		—		(1.3)		—

GRIDSMART’s operating results above included the following amounts (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	1.3	$	—	$	2.7	$	—
Acquisition-related expenses		0.6		—		2.4		—

The acquisition-date fair value of consideration is $86.8 million, which is comprised of net cash paid of $87.2 million less a $0.4 million receivable due from the sellers for the difference between the net working capital acquired and the targeted working capital amounts. The acquisition was financed primarily with proceeds from draws on our line of credit.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):



Technology	$	25.7
Customer relationships		3.6
Trade name		2.4
Inventory		4.3
Accounts receivable		1.7
Accounts payable and accrued expenses		(2.5)
Deferred taxes		(3.9)
Other net assets acquired		0.5
Net identifiable assets acquired		31.8
Goodwill		55.0
Net assets acquired	$	86.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses, including the filing of pre-acquisition income tax returns. The 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 trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GRIDSMART with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS 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 CTS 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 GRIDSMART is as follows (in millions):


Year Ended
September 30,
2019	$	4.0
2020		5.3
2021		3.9
2022		3.5
2023		3.5
Thereafter		11.5

Advanced Traffic Solutions Inc.

In October 2018, we acquired all of the outstanding capital stock of Advanced Traffic Solutions Inc. (Trafficware), a provider of intelligent traffic solutions for the transportation industry based in Sugar Land, Texas. Trafficware provides a fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist and pedestrian traffic. Trafficware is expected to provide synergies from combining its capabilities with our existing CTS business.

Trafficware’s sales and results of operations included in our operating results were as follows (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	15.8	$	—	$	38.0	$	—
Operating loss		(1.0)		—		(9.5)		—
Net loss after taxes		(1.0)		—		(9.5)		—

Trafficware’s operating results above included the following amounts (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	2.8	$	—	$	12.4	$	—
Acquisition-related expenses		0.9		—		4.4		—

The acquisition-date fair value of consideration is $237.2 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):



Technology	$	43.3
Customer relationships		21.9
Backlog		4.8
Trade name		4.6
Accounts receivable		10.4
Inventory		9.9
Accounts payable and accrued expenses		(6.6)
Other net assets acquired (liabilities assumed)		(1.9)
Net identifiable assets acquired		86.4
Goodwill		150.8
Net assets acquired	$	237.2

appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS 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 CTS 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 Trafficware is as follows (in millions):


Year Ended
September 30,
2019	$	15.3
2020		11.4
2021		11.4
2022		11.4
2023		6.4
Thereafter		18.7

Shield Aviation, Inc.

In July 2018, we acquired the assets of Shield Aviation (Shield), based in San Diego, California, a provider of autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance services. The addition of Shield expands our C4ISR portfolio for our CMS segment and will provide our customers with a rapidly deployable, medium AAS that offers unique mission enabling capabilities. We already provide the data link as well as the command and control link for the Shield AAS.

Shield’s sales and results of operations included in our operating results were as follows (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	—	$	—	$	—	$	—
Operating loss		(2.0)		—		(4.8)		—
Net loss after taxes		(2.0)		—		(4.8)		—

Shield’s operating results above included the following amounts (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	0.2	$	—	$	0.6	$	—
(Gains) for changes in fair values of contingent consideration		(0.7)		—		(0.4)		—

The acquisition-date fair value of consideration is $12.8 million, which is comprised of the fair value of contingent consideration of $5.6 million, extinguishment of secured loans and warrants due from Shield of $5.2 million, cash paid of $1.3 million, plus additional consideration to be paid in the future of $0.7 million. Under the purchase agreement, we will pay the sellers up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.

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



Technology	$	6.0
Other net assets acquired		0.3
Net identifiable assets acquired		6.3
Goodwill		6.5
Net assets acquired	$	12.8

The technology asset valuation used the excess earnings approach and is being amortized using the straight-line method over eight years, which is based on the expected period of cash flows that will be generated by the asset.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Shield with our existing CMS business, and strengthening our capability of developing and integrating products and services in our CMS 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 CMS segment and is expected to be deductible for tax purposes.

The amortization expense related to the intangible assets recorded in connection with our acquisition of Shield is as follows (in millions):


Year Ended
September 30,
2019	$	0.8
2020		0.8
2021		0.8
2022		0.8
2023		0.8
Thereafter		2.1

MotionDSP

In October 2017 we paid cash of $4.7 million to purchase 49% of the outstanding capital stock of MotionDSP, a private artificial intelligence software company based in Burlingame, California, which specializes in real-time video enhancement and computer vision analytics. On February 21, 2018, we paid net cash of $4.8 million to purchase the remaining outstanding capital stock of MotionDSP. The addition of MotionDSP enhances the capabilities in real-time video processing of our CMS business and expands our customer base in the public safety and other adjacent markets.

MotionDSP’s sales and results of operations included in our operating results since its consolidation in our financial statements were as follows (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	0.6	$	0.3	$	1.1	$	0.4
Operating loss		(0.1)		(0.2)		(0.5)		(1.0)
Net loss after taxes		(0.1)		(0.2)		(0.5)		(1.0)

MotionDSP’s operating results above included the following amounts (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	0.2	$	0.2	$	0.6	$	0.2
Acquisition-related expenses		—		0.1		0.2		0.7

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


Customer relationships	$	0.2
Technology		4.5
Trade name		0.1
Accounts payable and accrued expenses		(0.3)
Other noncurrent liabilities		(0.8)
Other net liabilities assumed		(0.9)
Net identifiable assets acquired		2.8
Goodwill		6.7
Net assets acquired	$	9.5

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 trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology valuation used the excess earnings method.

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

The goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of MotionDSP with our CMS operating segment, enhancing our capabilities in real-time video processing and computer vision analytics of our CMS portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill in connection with the acquisition of MotionDSP is not expected to be deductible for tax purposes.

The amortization expense related to the intangible assets recorded in connection with our acquisition of MotionDSP is as follows (in millions):


Year Ended
September 30,
2019	$	0.7
2020		0.7
2021		0.7
2022		0.7
2023		0.7
Thereafter		0.8

Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if Nuvotronics, GRIDSMART, Trafficware, Shield, and MotionDSP had been included in our consolidated results since October 1, 2017 (in millions):


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net sales	$	382.7	$	322.4	$	1,039.6	$	891.4

Net income (loss)		24.1		(1.5)		4.9		(28.3)

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 items 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, 2017, and it does not purport to project our future operating results.

Goodwill

Changes in goodwill for the nine months ended June 30, 2019 were as follows for each of our reporting units (in thousands):



	Cubic Transportation		Cubic Mission		Cubic Global
	Systems		Solutions		Defense		Total

Net balances at September 30, 2018	$	49,786	$	138,127	$	145,713	$	333,626
Acquisitions		205,778		40,709		—		246,487
Reassignment of goodwill		—		3,428		(3,428)		—
Foreign currency exchange rate changes		(989)		(215)		36		(1,168)
Net balances at June 30, 2019	$	254,575	$	182,049	$	142,321	$	578,945

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 at a reporting unit level on an annual basis and when circumstances indicate that an impairment is more-likely-than-not. Circumstances that might indicate an impairment is more-likely-than-not 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 amount, including recorded goodwill. If the carrying amount 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 amount. Any resulting impairment determined would be recorded in the current period.

Our most recent annual goodwill impairment test was our 2018 annual impairment test completed as of July 1, 2018. The results of our 2018 annual impairment test indicated that the estimated fair value for our CTS reporting unit exceeded its carrying value by over 100% while the estimated fair amounts of our CGD and CMS reporting units each exceeded their respective carrying amounts by over 40%. Subsequent to the effective dates of the tests for each of our reporting units, we do not believe that circumstances have occurred that indicate that an impairment for any of our reporting units is more-likely-than-not. As such, no subsequent interim impairment tests have been performed.

In July 2017, we acquired Deltenna, a wireless infrastructure company specializing in the design and delivery of radio and antenna communication solutions. The acquisition-date fair value of consideration paid for Deltenna was $5.3 million. Deltenna’s operations were included in our CGD reporting unit upon its acquisition. On April 1, 2019, we

reorganized our reporting structure to include Deltenna in our CMS reporting unit and reassigned $3.4 million of goodwill from CGD to CMS based upon its relative fair value. Since its acquisition, Deltenna’s sales, operating results, and cash flows have not been significant to our consolidated results. As such, reportable segment information has not been restated for this change in the composition of our reportable segments.