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.

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 (PED) 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 Cubic Global Defense Systems (CGD Systems) segment and expands our customer base. In the short period between our acquisition of TeraLogics and December 31, 2015, Teralogics did not have significant sales. For the quarter ended December 31, we incurred $0.4 million of transaction and acquisition expenses as well as a $1.3 million charge for compensation expense related to amounts paid to TeraLogics employees upon the close of the acquisition. As a consequence of these charges, the net loss after taxes related to the TeraLogics acquisition was $1.5 million in the first quarter of fiscal 2016.

The estimated acquisition date fair value of consideration is $33.9 million, which is comprised of cash paid of $28.8 million plus the estimated fair value of contingent consideration of $5.1 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.

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

Customer relationships	$	6.8
Backlog	5.5
Software	2.7
Non compete agreements	0.1
Accounts receivable	1.3
Accounts payable and accrued expenses	(0.5		)
Other net assets acquired (liabilities assumed)	(0.2		)

Net identifiable assets acquired	15.7
Goodwill	18.2

Net assets acquired	$	33.9

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles and deferred revenue, as well as the estimated fair value of contingent consideration are preliminary estimates pending the finalization of our valuation analyses. 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 valuation uses the Replacement Cost New less cost decrements for obsolescence 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 three years from the date of acquisition.

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 that 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 related to the intangible assets recorded in connection with our acquisition of TeraLogics for future periods is as follows (in millions):

Year Ended September 30,
2016	$	3.1
2017	3.5
2018	2.8
2019	2.1
2020	1.4
Thereafter	2.2

H4 Global

On November 4, 2015 we acquired all of the assets of H4 Global, a UK-based provider of simulation-based training solutions which complements our CGD Systems segment portfolio. In the short time period between our acquisition of H4 Global and December 31, 2015, H4 Global did not have significant sales or net income. During the quarter ended December 31, we incurred $0.1 million of transaction costs to acquire H4 Global.

The estimated acquisition date fair value of consideration is $2.5 million, which is comprised of cash paid of $0.9 million plus the estimated fair value of contingent consideration of $1.6 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 $2.5 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 expected to be deductible for tax purposes. The estimated fair values of purchased intangibles and the estimated fair value of contingent consideration are preliminary estimates pending the finalization of our valuation analyses.

DTECH

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 that adds networking capability to our secure communications business. This acquisition expands the portfolio of product offerings and the customer base of our CGD Systems segment.

For the three months ended December 31, 2015, the amounts of DTECH’s sales and net loss after taxes included in our Consolidated Statement of Income (Loss) were $7.8 million and $1.3 million, respectively. For the three months ended December 31, 2014, the amount of DTECH’s sales and net loss after tax were $1.0 million and $0.8 million, respectively. The DTECH operating results for the quarter ended December 31, 2015 include a charge of $0.8 million for the increase in the fair value of contingent consideration and for the quarter ended December 31, 2014 DTECH’s operations included $0.8 million of transaction and acquisition related costs before related income taxes. There was no significant change in the fair value of contingent consideration in the quarter ended December 31, 2014.

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 was $99.4 million. The total acquisition date fair value of consideration includes the acquisition fair value of holdback consideration and contingent consideration described below.

Approximately $4.7 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 $4.3 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. At the acquisition date, the total fair value of the contingent consideration was estimated at $3.9 million using a real options approach (see Note 3 for further discussion of fair value measurements). During the measurement period ended September 30, 2015, DTECH met both the revenue and gross profit targets. As a result, $5.0 million was paid to the seller in December 2015. The remaining 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. At December 31, 2015 the fair value of the contingent consideration was $3.3 million and we recognized a charge of $0.8 million for the change in the fair value of contingent consideration during the quarter ended December 31, 2015.

Through December 31, 2015 we have paid $96.3 million to the seller. At December 31, 2015 we have recorded a liability of $7.6 million as an estimate of the additional cash consideration that will be due to the seller in the future, including the Holdback Consideration and contingent consideration.

The acquisition of DTECH 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	$	35.1
Non compete agreements	0.7
Backlog	2.1
Cash	0.9
Accounts receivable	5.4
Inventory	4.2
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	41.5
Goodwill	57.9

Net assets acquired	$	99.4

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 agreements used the with-and-without approach.

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

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,
2016	$	8.0
2017	6.8
2018	5.5
2019	4.1
2020	2.8
Thereafter	1.5

Changes in goodwill for the three months ended December 31, 2015 were as follows (in millions):

				Cubic Global		Cubic Global
	Transportation			Defense		Defense
	Systems			Systems		Services		Total

Balances at September 30, 2015	$	56.0		$	87.5	$	94.4	$	237.9
Acquisitions	—			20.3		—		20.3
Foreign currency exchange rate changes	(1.2		)	0.3		—		(0.9		)

Balances at December 31, 2015	$	54.8		$	108.1	$	94.4	$	257.3

Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if TeraLogics, H4 Global and DTECH had been included in our consolidated results since October 1, 2014 (in millions):

	Three Months Ended
	December 31,
	2015			2014

Net sales	$	316.5		$	331.2

Net income attributable to Cubic	$	(5.4	)	$	7.0

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, 2014, and it does not purport to project our future operating results.

Subsequent event - acquisition of GATR

In early February 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. The purchase price is $225.0 million adjusted for the difference between net working capital acquired and a targeted working capital amount plus up to $7.5 million of contingent consideration.