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 condensed consolidated financial statements since the respective date of each acquisition.

DTECH LABS, Inc.

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

For the three months ending December 31, 2014, the amount of DTECH’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $1.0 million and $0.8 million, respectively. Included in DTECH’s operating results for the three months ended December 31, 2014 are $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 transferred is estimated to be $99.2 million. In December 2014, we paid cash of approximately $83.4 million and have recorded a liability of $14.9 million as an estimate of the fair value of additional cash consideration that will be due to the seller in the future. The fair value of the additional consideration is made up of two components, the holdback consideration and the contingent consideration.

Approximately $11.4 million of cash consideration (Holdback Consideration) will be paid to the seller over time when certain events occur in the future. The fair value of the Holdback Consideration is estimated to approximate $11.0 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. The total fair value of the contingent consideration has been estimated at $3.9 million using a real options approach (see Note 5 for further discussion of fair value measurements). The contingent consideration liability will be re-measured to fair value at each reporting date until the contingency is resolved and any changes in fair value will be recognized in earnings.

The acquisition of DTECH was 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	$	35.1
Non compete agreements	0.7
Backlog	2.1
Cash	0.9
Accounts receivable	5.4
Inventory	4.1
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	41.4
Goodwill	57.8
Net assets acquired	$	99.2

The estimated fair values of the assets acquired and liabilities assumed, including the fair value of purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses. The estimated fair value of the accounts receivable, inventory, warranty obligation, accounts payable and accrued expenses will be finalized as further information is received from the seller regarding these items and analysis of this information is completed.

The preliminary 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 intangible assets will be 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 two years from the date of acquisition and is expected to be deductible for tax purposes.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of DTECH with our existing CDS business, including the synergies expected from combining the networking and secure communications technologies of DTECH, and complimentery 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 CDS segment and is expected to be deductible for tax purposes.

Based upon the preliminary estimate of the fair value of identifiable intangible assets, the estimated amortization expense related to the intangible assets recorded in connection with our acquisition of DTECH for future periods is as follows (in millions):

Year Ended September 30,
2015	$	9.2
2016	8.0
2017	6.8
2018	5.5
2019	4.1
Thereafter	4.3

Intific

On February 28, 2014 we acquired all of the outstanding capital stock of Intific Inc. (Intific). Intific is focused on software and game-based solutions in modeling and simulation, training and education, cyber warfare, and neuroscience. The acquisition of Intific expanded the portfolio of services and customer base of our Cubic Defense Systems (CDS) segment.

For the three months ended December 31, 2014, the amount of Intific’s sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $3.4 million and $0.7 million, respectively.

The acquisition date fair value of the consideration transferred was $12.4 million. Through December 31, 2014, we have paid cash of approximately $11.2 million to the seller and as of December 31, 2014 we have accrued a liability of $1.2 million for the remaining cash to be paid.

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

Customer relationships	$	2.0
Technology	0.7
Backlog	0.7
Other intangible assets	0.2
Accounts receivable	1.5
Deferred tax assets	1.5
Accounts payable and accrued expenses	(0.6		)
Deferred tax liabilities	(1.5		)
Other net assets acquired	0.5
Net identifiable assets acquired	5.0
Goodwill	7.4
Net assets acquired	$	12.4

The net deferred tax assets and liabilities offset each other to a negligible amount. However, the deferred tax liabilities of $1.5 million were primarily recorded to reflect the tax impact of amortization related to identified intangible assets that is not expected to be deductible for tax purposes, net of acquisition consideration that is a tax deductible expense. The deferred tax assets of $1.5 million primarily related to the future tax deduction for the cancellation of unvested options.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Intific with our existing CDS business and the acquired assembled workforce. The anticipated synergies include the ability to expand services offerings and cost reductions. The amount recorded as goodwill is allocated to our CDS 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 Intific for future periods is as follows (in millions):

Year Ended September 30,
2015	$	0.9
2016	0.7
2017	0.6
2018	0.5
2019	0.2
Thereafter	0.1

ITMS

On November 26, 2013 we acquired all of the outstanding capital stock of Intelligent Transport Management Solutions Limited (ITMS) from Serco Limited. ITMS is a provider of traffic management systems technology, traffic and road enforcement and maintenance of traffic signals, emergency equipment and other critical road and tunnel infrastructure. The acquisition of ITMS expands the portfolio of services and customer base of our Cubic Transportation Systems (CTS) segment.

For the three months ended December 31, 2014, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $10.0 million and $1.1 million, respectively. For the three months ended December 31, 2013, the amount of ITMS’ sales and net loss after taxes included in our Condensed Consolidated Statement of Income were $4.7 million and $0.5 million, respectively. Included in the ITMS operating results for the three months ended December 31, 2013 are $0.4 million of transaction costs.

The acquisition date fair value of the consideration transferred was $72.2 million. We paid the seller cash of $69.0 million in November 2013 and in May 2014, we paid the remaining cash of $3.2 million.

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

Customer relationships	$	15.7
Intellectual property	1.6
Backlog	5.7
Supplier relationships	0.6
Agreements with seller	1.3
Accounts receivable - billed	4.4
Accounts receivable - unbilled	6.9
Deferred tax liabilities, net	(0.2		)
Deferred revenue	(2.6		)
Accounts payable and accrued expenses	(4.6		)
Other net assets acquired	2.6
Net identifiable assets acquired	31.4
Goodwill	40.8
Net assets acquired	$	72.2

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 customer relationships and backlog valuation used the excess earnings approach and the non-compete agreement and seller agreements valuations used the with-and-without approach. The supplier relationship and intellectual property valuations used the replacement cost approach.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of ITMS with our existing CTS business and the acquired assembled workforce. The anticipated synergies include the ability to expand services offerings and cost reductions. 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 ITMS for future periods is as follows (in millions):

Year Ended September 30,
2015	$	5.9
2016	4.9
2017	3.9
2018	2.9
2019	0.9
Thereafter	0.1

Changes in goodwill for the three months ended December 31, 2014 were as follows (in millions):

				Mission
	Transportation			Support		Defense
	Systems			Services		Systems			Total

Balances at September 30, 2014	$	59.2		$	94.4	$	30.6		$	184.2
Acquisitions	—			—		57.8			57.8
Foreign currency exchange rate changes	(1.9		)	—		(0.2		)	(2.1		)
Balances at December 31, 2014	$	57.3		$	94.4	$	88.2		$	239.9

Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if DTECH, Intific and ITMS had been included in our consolidated results since October 1, 2013 (in millions):

	Three Months Ended
	December 31,
	2014		2013

Net sales	$	328.2	$	326.7

Net income attributable to Cubic	$	6.2	$	7.7

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. There were no material, nonrecurring pro forma adjustments directly attributable to the business combinations included in the reported pro forma sales and net income (loss) attributable to Cubic. 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, 2013, and it does not purport to project our future operating results.