Acquisitions and Divestitures

6 Months Ended

Mar. 31, 2020

Acquisitions and Divestitures

Acquisitions and Divestitures

Note 3 — Acquisitions and Divestitures

Sale of CGD Services

In May 2018, we sold our Cubic Global Defense Services (“CGD Services”) business to Nova Global Supply & Services, LCC (Purchaser), an entity affiliated with GC Valiant, LP. The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement executed in connection with the transaction, 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 established by the parties. 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. Since the sale we have 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 $0.6 million and recognized a corresponding loss on the sale of CGD Services in the first quarter of fiscal 2020. The net receivable from the Purchaser at March 31, 2020 was $2.4 million. Certain remaining working capital settlement estimates, primarily related to the fair value of accounts receivable, have not yet been settled with the Purchaser.

Business Acquisitions

Each of the following acquisitions have 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.

Cubic Mission Solutions (“CMS”)

PIXIA Corp.

On June 27, 2019, we paid cash of $50.0 million to purchase 20% of the outstanding shares of PIXIA Corp. (“Pixia”), a provider of high performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures. The purchase agreement with Pixia included an option to purchase the remaining 80% of its shares of capital stock for $200.0 million, subject to certain post-closing adjustment provisions, which we exercised in November 2019. On January 3, 2020, we completed the purchase of the remaining 80% of Pixia’s issued and outstanding shares of capital stock for aggregate consideration consisting of $197.6 million in net cash, resulting in our ownership of all of Pixia’s issued and outstanding shares of capital stock. The acquisition was financed primarily with proceeds from draws on our line of credit.

From June 27, 2019 through January 3, 2020, we accounted for our 20% ownership of Pixia using the equity method of accounting. Upon completion of the acquisition of the remaining 80% ownership interest, we now consolidate Pixia into our financial statements. The estimated acquisition-date fair value of consideration transferred is $243.8 million and is comprised of total cash paid of $247.6 million, less a $1.2 million receivable due from the sellers of Pixia for the difference between the net working capital acquired and the targeted working capital amounts, less a $2.0 million dividend received from Pixia and less a $0.6 million loss recognized during the period that we accounted for our 20% ownership of Pixia using the equity method of accounting.

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

Backlog	$	42.5
Customer relationships		25.5
Developed technology		14.1
Trade name		5.7
Accounts receivable, prepaids and other assets		3.9
Deferred taxes		(18.3)
Other net assets acquired (liabilities assumed)		(1.8)
Net identifiable assets acquired		71.6
Goodwill		172.1
Net assets acquired	$	243.7

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our detailed valuation analyses and necessary calculations. 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 and non-compete agreements valuations used the lost profits 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 a weighted average useful life of approximately four years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Pixia 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.

Nuvotronics, Inc.

In March 2019, we acquired all of the outstanding shares of capital stock of Nuvotronics, Inc. (Nuvotronics), a provider of microfabricated radio frequency 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 Cubic Mission Solutions (CMS) business.

The acquisition-date fair value of consideration is $66.8 million, which is comprised of net cash paid of $61.9 million, plus the estimated fair value of contingent consideration of $4.9 million. The acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement executed in connection with the acquisition, we will pay the sellers up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month period ending on each of 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 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		(3.2)
Other net assets acquired (liabilities assumed)		(0.6)
Net identifiable assets acquired		26.4
Goodwill		40.4
Net assets acquired	$	66.8

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 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.

Operating Results

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

	Three Months Ended
	March 31, 2020				March 31, 2019
	Pixia		Nuvotronics		Pixia		Nuvotronics
Sales	$	1.1	$	3.2	$	—	$	0.7
Operating loss		(10.0)		(4.5)		—		(1.7)
Net loss after taxes		(10.0)		(4.5)		—		(1.7)
	Six Months Ended
	March 31, 2020				March 31, 2019
	Pixia		Nuvotronics		Pixia		Nuvotronics
Sales	$	1.1	$	6.0	$	—	$	0.7
Operating loss		(10.0)		(4.9)		—		(1.7)
Net loss after taxes		(10.0)		(4.9)		—		(1.7)

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

	Three Months Ended
	March 31, 2020				March 31, 2019
	Pixia		Nuvotronics		Pixia		Nuvotronics
Amortization	$	7.2	$	0.9	$	—	$	0.1
Acquisition-related expenses		2.0		0.7		—		1.8
	Six Months Ended
	March 31, 2020				March 31, 2019
	Pixia		Nuvotronics		Pixia		Nuvotronics
Amortization	$	7.2	$	2.2	$	—	$	0.1
Acquisition-related expenses		2.0		1.3		—		1.8
Gain for changes in fair value of contingent consideration		—		(4.2)		—		—

The estimated amortization expense related to the intangible assets recorded in connection with our acquisitions of Pixia and Nuvotronics is as follows (in millions):

Year Ending
September 30,	Pixia		Nuvotronics
2020	$	21.5	$	4.0
2021		28.7		3.0
2022		12.7		3.0
2023		7.3		2.9
2024		7.3		2.7
Thereafter		10.5		10.1

Cubic Transportation Systems (“CTS”)

Delerrok Inc.

Since fiscal 2018, we invested a total of $8.3 million to purchase 17.5% of the outstanding shares of common stock of Delerrok Inc. (“Delerrok”), a private technology company based in Vista, California, that specializes in electronic fare collection systems for the mid-market. Our purchase agreement included an option to purchase the remaining 82.5% of Delerrok’s outstanding shares of common stock, which we exercised in November 2019. On January 3, 2020, we completed the purchase of the remaining 82.5% of Delerrok’s outstanding shares of common stock for aggregate

consideration consisting of $37.0 million in net cash, resulting in our ownership of all of Delerrok’s shares of common stock. We will also pay the sellers up to an additional $2.0 million if Delerrok’s sales exceed certain levels from the date of acquisition through December 31, 2020.

Prior to the acquisition of all of Delerrok’s outstanding shares of common stock, we accounted for our investment in Delerrok using the cost method of accounting. Upon completion of the acquisition of all of Delerrok’s outstanding shares of common stock, we now consolidate Delerrok into our financial statements. The estimated acquisition-date fair value of consideration is $45.1 million. The acquisition was financed primarily with proceeds from draws on our line of credit and is comprised of total cash paid of $43.5 million and the estimated fair value of contingent consideration of $1.6 million.

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

Technology	$	14.9
Trade name		0.9
Accounts receivable		0.9
Other net assets acquired		(0.2)
Deferred tax liability		(2.0)
Net identifiable assets acquired		14.5
Goodwill		30.6
Net assets acquired	$	45.1

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our detailed valuation analyses and necessary calculations. 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 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 approximately eight years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Delerrok 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.

GRIDSMART Technologies, Inc.

In January 2019, we acquired all of the outstanding shares of capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a provider of differentiated video tracking solutions to the Intelligent Traffic Systems 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.

The acquisition-date fair value of consideration is $86.8 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

The following table summarizes the 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		(1.9)
Deferred taxes		(3.3)
Other net assets acquired		0.5
Net identifiable assets acquired		33.0
Goodwill		53.8
Net assets acquired	$	86.8

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 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 approximately eight years from the date of acquisition.

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.

Advanced Traffic Solutions Inc.

In October 2018, we acquired all of the outstanding shares of 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.

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 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		(9.5)
Other net assets acquired (liabilities assumed)		(2.0)
Net identifiable assets acquired		83.4
Goodwill		153.8
Net assets acquired	$	237.2

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 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 seven years from the date of acquisition.

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.

Operating Results

The sales and results of operations from Delerrok, GRIDSMART and Trafficware included in our operating results were as follows (in millions):

	Three Months Ended
	March 31, 2020						March 31, 2019
	Delerrok		GRIDSMART		Trafficware		Delerrok		GRIDSMART		Trafficware
Sales	$	0.7	$	7.7	$	14.0	$	—	$	6.3	$	11.7
Operating income (loss)		(1.1)		0.9		(0.2)		—		(2.0)		(5.2)
Net income (loss) after taxes		(1.1)		0.9		(0.2)		—		(2.0)		(5.2)
	Six Months Ended
	March 31, 2020						March 31, 2019
	Delerrok		GRIDSMART		Trafficware		Delerrok		GRIDSMART		Trafficware
Sales	$	0.7	$	11.9	$	23.0	$	—	$	6.3	$	22.2
Operating income (loss)		(1.1)		(0.8)		(3.2)		—		(2.0)		(8.5)
Net loss after taxes		(1.1)		(0.8)		(3.2)		—		(2.0)		(8.5)

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

	Three Months Ended
	March 31, 2020						March 31, 2019
	Delerrok		GRIDSMART		Trafficware		Delerrok		GRIDSMART		Trafficware
Amortization	$	0.4	$	1.3	$	2.8	$	—	$	1.4	$	5.3
Acquisition-related expenses		0.7		(0.1)		0.4		—		1.8		2.1
	Six Months Ended
	March 31, 2020						March 31, 2019
	Delerrok		GRIDSMART		Trafficware		Delerrok		GRIDSMART		Trafficware
Amortization	$	0.4	$	2.7	$	5.7	$	—	$	1.4	$	9.6
Acquisition-related expenses		0.7		0.4		0.9		—		1.8		3.5

The estimated amortization expense related to the intangible assets recorded in connection with our acquisitions are as follows (in millions):

Year Ending
September 30,	Delerrok		GRIDSMART		Trafficware
2020	$	1.3	$	5.3	$	11.4
2021		1.7		3.9		11.4
2022		1.6		3.5		11.4
2023		1.6		3.5		6.4
2024		1.6		3.5		5.9
Thereafter		8.0		8.1		12.9

Pro forma Information

The following unaudited pro forma information presents our consolidated results of operations as if Pixia, Nuvotronics, Delerrok, GRIDSMART and Trafficware had been included in our consolidated results since October 1, 2018 (in millions):

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2020		2019		2020		2019
Net sales	$	321.5	$	342.3	$	654.6	$	665.8
Net loss		(39.3)		(17.7)		(68.1)		(33.3)

The pro forma information includes adjustments to give effect to events that are directly attributable to the acquisitions and have a continuing impact on our 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, 2018, and it does not purport to project our future operating results.

Goodwill

Changes in goodwill for the six months ended March 31, 2020 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, 2019	$	254,592	$	181,424	$	142,081	$	578,097
Acquisitions		30,621		172,068		—		202,689
Adjustments		603		—		—		603
Foreign currency exchange rate changes		385		99		(190)		294
Net balances at March 31, 2020	$	286,201	$	353,591	$	141,891	$	781,683

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 2019 annual impairment test completed as of July 1, 2019. The results of our 2019 annual impairment test indicated that the estimated fair values of our CTS and Cubic Global Defense Systems (“CGD”) reporting units exceeded their respective carrying amounts by over 100%, while the estimated fair value of our CMS reporting unit exceeded its carrying amount by over 60%. 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.

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 CMS 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 prior 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. Although we believe our underlying assumptions supporting these assessments 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 interim analyses in fiscal 2020 that could expose us to material impairment charges in the future.