Acquisitions and Divestitures

12 Months Ended

Sep. 30, 2020

Acquisitions and Divestitures

Acquisitions and Divestitures

NOTE 2—ACQUISITIONS AND DIVESTITURES

Sale of CGD Services

On May 31, 2018, we sold our Cubic Global Defense Services (“CGD Services”) business to Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP. 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 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. Subsequent to the close of the sale we have worked with the Purchaser and revised certain estimates related to the working capital settlement and have recognized insignificant gains and losses in connection with the settlement revisions. In fiscal 2020, we settled the working capital receivable with the purchaser and received cash of $2.7 million. The operations and cash flows of CGD services through May 31, 2018 are reflected in our financial statements as discontinued operations on a net basis. The loss recognized on the sale during fiscal 2018 and subsequent working capital adjustments are likewise classified as discontinued operations.

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 have been included in our consolidated financial statements since the respective date of each acquisition.

Cubic Transportation Systems (“CTS”)

Delerrok Inc.

In fiscal 2018 and 2019 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 are also required to 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. We began consolidating Delerrok in our financial statements effective January 3, 2020. 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 plus 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 (liabilities assumed)		(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 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 ten 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.

Prior Fiscal Years Acquisitions

In January 2019 and October 2018, respectively, we acquired all of the outstanding shares of capital stock of GRIDSMART Technologies, Inc. (“GRIDSMART”), a provider of differentiated video tracking solutions and Advanced Trafficware Solutions, Inc. (“Trafficware”), a provider of intelligent traffic solutions. The acquisition date fair-value of consideration was $86.8 million for GRIDSMART and $237.2 million for Trafficware.

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

	GRIDSMART		Trafficware
Technology	$	25.7	$	43.3
Customer relationships		3.6		21.9
Backlog		—		4.8
Trade name		2.4		4.6
Inventory		4.3		9.9
Accounts receivable		1.7		10.4
Accounts payable and accrued expenses		(1.9)		(9.5)
Deferred taxes		(3.3)		—
Other net assets acquired (liabilities assumed)		0.5		(2.0)
Net identifiable assets acquired		33.0		83.4
Goodwill		53.8		153.8
Net assets acquired	$	86.8	$	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 and are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets. The average useful life of these assets is eight years for GRIDSMART and seven years for Trafficware.

The goodwill resulting from these acquisitions consists primarily of the synergies expected from combining the operations of GRIDSMART and Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The resulting goodwill from each acquisition also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amounts recorded as goodwill are allocated to our CTS segment and are 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):

	September 30, 2020
	Delerrok		GRIDSMART		Trafficware
Sales	$	1.7	$	27.8	$	56.0
Operating income (loss)		(2.4)		3.6		(3.6)
Net income (loss) after taxes		(2.4)		3.6		(3.6)
	September 30, 2019
	Delerrok		GRIDSMART		Trafficware
Sales	$	—	$	20.6	$	53.8
Operating income (loss)		—		0.9		(11.0)
Net income (loss) after taxes		—		0.9		(11.0)

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

	September 30, 2020
	Delerrok		GRIDSMART		Trafficware
Amortization	$	1.3	$	5.3	$	11.4
Acquisition-related expenses		1.6		0.7		1.1
(Gain) loss for changes in fair value of contingent consideration		(0.7)		—		—

	September 30, 2019
	Delerrok		GRIDSMART		Trafficware
Amortization	$	—	$	4.0	$	15.3
Acquisition-related expenses		—		2.9		5.2

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
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
2025		1.6		3.5		5.9
Thereafter		6.4		4.6		6.9

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 $197.8 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 began consolidating Pixia into our financial statements. The acquisition-date fair value of consideration transferred is $245.2 million and is comprised of cumulative cash paid of $247.8 million, 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 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		3.8
Deferred taxes		(17.6)
Other net assets acquired (liabilities assumed)		(1.8)
Net identifiable assets acquired		72.2
Goodwill		173.0
Net assets acquired	$	245.2

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 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.

Prior Fiscal Years Acquisitions

In March 2019 and July 2018, respectively, we acquired all of the outstanding shares of capital stock of Nuvotronics, Inc. (“Nuvotronics”), a provider of microfabricated radio frequency products, and Shield Aviation, Inc. (“Shield”), a provider of autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance services. The acquisition date fair-value of consideration was $66.8 million for Nuvotronics and $12.8 million for Shield.

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

	Nuvotronics		Shield
Technology	$	22.7	$	6.0
Backlog and customer relationships		2.0		—
Trade name		1.5		—
Non-compete agreements		0.5		—
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)		0.3
Net identifiable assets acquired		26.4		6.3
Goodwill		40.4		6.5
Net assets acquired	$	66.8	$	12.8

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 and are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets. The average useful life of these assets is nine years for Nuvotronics and eight years for Shield.

The goodwill resulting from these acquisitions consists primarily of the synergies expected from combining the operations of Nuvotronics and Shield with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The resulting goodwill from each acquisition also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amounts recorded as goodwill are allocated to our CMS segment and are not expected to be deductible for tax purposes.

Operating Results

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

	September 30, 2020
	Pixia		Nuvotronics		Shield
Sales	$	23.4	$	13.5	$	—
Operating loss		(9.2)		(9.8)		(6.5)
Net loss after taxes		(9.2)		(9.8)		(6.5)
	September 30, 2019
	Pixia		Nuvotronics		Shield
Sales	$	—	$	7.4	$	—
Operating loss		—		(6.9)		(5.3)
Net loss after taxes		—		(6.9)		(5.3)

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

	September 30, 2020
	Pixia		Nuvotronics		Shield
Amortization	$	21.5	$	4.0	$	0.8
Acquisition-related expenses		4.2		1.7		—
(Gain) loss for changes in fair value of contingent consideration		—		(4.2)		1.8
	September 30, 2019
	Pixia		Nuvotronics		Shield
Amortization	$	—	$	1.2	$	0.8
Acquisition-related expenses		—		3.7		—
Gain for changes in fair value of contingent consideration		—		(0.7)		(1.8)

Shield did not have material operating results in the year ended September 30, 2018.

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

Year Ending September 30,	Pixia		Nuvotronics		Shield
2021	$	28.7	$	3.0	$	0.8
2022		12.7		3.0		0.8
2023		7.3		2.9		0.8
2024		7.3		2.7		0.8
2025		7.3		2.5		0.8
Thereafter		3.2		7.6		0.6

Pro Forma Information

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

	Year Ended
	September 30,
	2020		2019
Net sales	$	1,480.5	$	1,540.3
Net income (loss)	$	(12.5)	$	26.4

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. 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.