Acquisitions and Divestitures

3 Months Ended

Dec. 31, 2019

Acquisitions and Divestitures

Acquisitions and Divestitures

Note 2 — 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, 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. 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 December 31, 2019 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

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.

Through December 31, 2019 we accounted for our investment in Pixia using the equity method of accounting. In accordance with ASC 323, Investments – Equity Method and Joint Ventures, we accounted for the basis difference between the cost of our investment in Pixia and our equity share of Pixia’s net assets as if Pixia was a consolidated subsidiary. At the date of our investment, we calculated the fair value of our share of Pixia’s identifiable intangible assets as $17.0 million, which will be amortized in other income (expense) over a weighted average remaining useful life of approximately five years. The remaining identifiable intangible assets subject to amortization totaled $13.7 million as of December 31, 2019. Our share of the remaining basis difference of $32.3 million is identified as goodwill and will not be amortized.

We recognize our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets within other income (expense) in our Condensed Consolidated Statements of Operations. The net amount we recognized in the first quarter of fiscal 2020 for our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets was a loss of $1.8 million. At December 31, 2019, our investment in Pixia amounted to $47.4 million and is recorded within other assets on our Condensed Consolidated Balance Sheet.

Our purchase agreement with Pixia included an option to purchase the remaining 80% of its capital stock for $200.0 million, which we exercised in November 2019. Our acquisition of the remaining capital stock of Pixia closed in January 2020 and was funded from borrowings under our existing credit facilities. After the closing date, this transaction will be treated as a business combination for accounting purposes. The amount paid to the sellers of Pixia will be adjusted for the difference between net working capital acquired and a targeted working capital amount.

Delerrok Inc.

During fiscal years 2018 and 2019, we invested a total of $6.5 million to purchase 17.5% of the outstanding common stock of Delerrok Inc. (Delerrok), a private technology company based in Vista, California, that specializes in electronic fare collection systems. We elected the measurement alternative provided by ASC 321, Investments – Equity Securities, and recorded our investment in Delerrok at cost, adjusted for observable price changes or any impairments, within other assets on our Condensed Consolidated Balance Sheet. At December 31, 2019, our investment in Delerrok amounted to $6.5 million. We did not recognize any income or loss from our investment in Delerrok for the three months ended December 31, 2019 and 2018.

Our purchase agreement included an option to purchase the remaining 82.5% of Delerrok’s common stock, which we exercised in November 2019. We paid cash of $36.4 million in January 2020 at closing which was funded from borrowings under our existing credit facilities, and we will pay up to an additional $2.0 million if Delerrok’s sales exceed certain levels in the future. After the closing date, this transaction will be treated as a business combination for accounting purposes.

Due to the limited time between the acquisition dates of Delerrok and Pixia and the filing of this report and due to the difference in fiscal year dates between the acquired companies and Cubic, it is not practicable for us to disclose for these acquired companies: (i) the allocation of purchase price to assets acquired and liabilities assumed as of the date of close, (ii) the methods of amortization and amortization periods of acquired intangible assets, and (iii) pro forma revenues and earnings of the combined company for the three months ended December 31, 2019 and 2018.

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 Cubic Mission Solutions (CMS) business.

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

	Three Months Ended
	December 31,
	2019		2018
Sales	$	2.8	$	—
Operating loss		(0.4)		—
Net loss after taxes		(0.4)		—

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

	Three Months Ended
	December 31,
	2019		2018
Amortization	$	1.3	$	—
Acquisition-related expenses		0.5		—
(Gain) loss for changes in fair value of contingent consideration		(4.1)		—

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, 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 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.

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,
2020	$	4.0
2021		3.0
2022		3.0
2023		2.9
2024		2.7
Thereafter		10.1

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 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 Cubic Transportation Systems (CTS) business.

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

	Three Months Ended
	December 31,
	2019		2018
Sales	$	4.1	$	—
Operating loss		(1.7)		—
Net loss after taxes		(1.7)		—

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

	Three Months Ended
	December 31,
	2019		2018
Amortization	$	1.3	$	—
Acquisition-related expenses		0.5		—

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.

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,
2020	$	5.3
2021		3.9
2022		3.5
2023		3.5
2024		3.5
Thereafter		8.1

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
	December 31,
	2019		2018
Sales	$	9.1	$	10.5
Operating loss		(3.0)		(3.3)
Net loss after taxes		(3.0)		(3.3)

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

	Three Months Ended
	December 31,
	2019		2018
Amortization	$	2.8	$	4.3
Acquisition-related expenses		0.5		1.4

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 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.

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,
2020	$	11.4
2021		11.4
2022		11.4
2023		6.4
2024		5.9
Thereafter		12.9

Pro forma information

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

	Three Months Ended
	December 31,
	2019		2018
Net sales	$	328.8	$	316.9
Net loss	$	(20.0)	$	(10.0)

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 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 three months ended December 31, 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, 2019	$	254,592	$	181,424	$	142,081	$	578,097
Adjustments		603		—		—		603
Foreign currency exchange rate changes		2,862		738		249		3,849
Net balances at December 31, 2019	$	258,057	$	182,162	$	142,330	$	582,549

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.