| Acquisitions and Divestitures | Note 2 — Acquisitions and Divestitures
Definitive Agreement for the Sale of CGD Services
On April 18, 2018, we entered into a stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. Under the terms of the stock purchase agreement, the Purchaser will pay us $135.0 million in cash upon the closing of the transaction. In addition to the upfront cash payment, we are eligible to receive an additional cash payment of $3.0 million based on the achievement of pre-determined earn-out conditions related to the award of certain government contracts. We expect the closing of the transaction to occur during the third quarter of fiscal 2018, subject to the satisfaction of customary closing conditions.
For disposal transactions, a component of an entity that is anticipated to be sold in the future is reported in discontinued operations after it meets the criteria for held-for-sale classification, and if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. We evaluated the quantitative and qualitative factors related to the expected sale of the CGD Services business and have concluded that it met the held-for-sale criteria and that all other conditions for discontinued operations presentation were met as of March 31, 2018. The CGD Services business financial results are reported within discontinued operations in our condensed consolidated financial statements.
As a result, the operating results and cash flows of CGD Services have been classified as discontinued operations in the condensed consolidated statements of income (loss) and condensed consolidated statements of cash flows for all periods presented and the assets and liabilities of CGD Services have been classified as assets and liabilities of discontinued operations in the condensed consolidated balance sheets at March 31, 2018 and September 30, 2017.
The assets and liabilities of a discontinued operation held for sale are measured at lower of carrying value or fair value less cost to sell. In March 2018, we recognized a $6.9 million loss within discontinued operations upon classification of the CGD Services operations as held for sale. This loss was calculated as the excess of the carrying value of the net assets of CGD Services less the sales price in the stock purchase agreement of $135.0 million less estimated selling costs of $4.2 million.
Income (loss) from discontinued operations, net of taxes, is comprised of the following for the quarter and six months ended March 31, 2018 and 2017 (in thousands):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Net sales
$
190,361
$
185,976
$
98,068
$
95,669
Costs and expenses:
Cost of sales
170,682
169,289
87,562
85,991
Selling, general and administrative expenses
7,543
9,282
3,876
4,712
Amortization of purchased intangibles
1,097
1,537
489
608
Restructuring costs
7
334
7
346
Other income
(13)
(33)
(8)
(10)
Earnings from discontinued operations before income taxes
11,045
5,567
6,142
4,022
Income tax provision (benefit)
1,161
50,861
(2,093)
45,432
Net loss upon classification of operations as held for sale
6,900
—
6,900
—
Net income (loss) from discontinued operations
$
2,984
$
(45,294)
$
1,335
$
(41,410)
The carrying amounts of CGD Services segment assets and liabilities that were classified as assets and liabilities of discontinued operations as of March 31, 2018 and September 30, 2017 are as follows (in thousands):
March 31,
September 30,
2018
2017
Accounts receivable - net
$
76,515
$
74,710
Other current assets
1,222
1,190
Property and equipment, net
367
466
Goodwill
94,350
94,350
Purchased intangibles, net
7,140
8,637
Other noncurrent assets
(3,616)
(5,179)
Total assets
175,978
174,174
Accounts payable and other liabilities
44,810
36,862
Net assets
$
131,168
$
137,312
The transaction is anticipated to be completed within 30 to 60 days of the signing of the definitive agreement, subject to customary closing conditions and regulatory approvals. Under a transition services agreement, we will provide the Purchaser with certain post-closing support for the Defense Services business primarily consisting of IT and payroll services. We will charge the Purchaser for the post-closing support in amounts that approximate their expected costs, and these support services will be phased out over an approximate seven month period from the close date.
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.
MotionDSP
On October 31, 2017 we paid cash of $4.7 million to purchase 49% of the outstanding capital stock of MotionDSP, a private artificial intelligence software company based in Burlingame, California, which specializes in real-time video enhancement and computer vision analytics. On February 21, 2018, we paid cash of $5.0 million to purchase the remaining outstanding capital stock of MotionDSP. The addition of MotionDSP enhances the capabilities in real-time video processing of our CMS business and expands our customer base in the public safety and other adjacent markets.
From October 31, 2017 through February 21, 2018, we accounted for our 49% ownership of MotionDSP using the equity method of accounting. During this time period we recorded 49% of the net loss of MotionDSP, totaling $0.2 million, in our Condensed Consolidated Statements of Income within non-operating income (expense). As of February 21, 2018 we began consolidating the results of the operations of MotionDSP in our financial statements.
MotionDSP’s sales and results of operations included in our operating results for the quarter and six-months ended March 31, 2018 and 2017 were as follows (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Sales
$
0.1
$
—
$
0.1
$
—
Operating loss
(0.2)
—
(0.2)
—
Net loss after taxes
(0.2)
—
(0.2)
—
MotionDSP’s operating results above included the following amounts for the quarter and six-month periods (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Amortization
$
0.1
$
—
$
0.1
$
—
Acquisition-related expenses
0.6
—
0.4
—
The estimated acquisition-date fair value of consideration is $9.5 million, which is comprised of cash paid of $9.7 million less the $0.2 million loss recognized during the period that we accounted for our 49% ownership of MotionDSP using the equity method of accounting.
The acquisition of MotionDSP was paid for with funds from existing cash resources. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Customer relationships
$
0.2
Technology
4.5
Trade name
0.1
Accounts payable and accrued expenses
(0.3)
Other noncurrent liabilities
(0.8)
Other net liabilities assumed
(0.9)
Net identifiable assets acquired
2.8
Goodwill
6.7
Net assets acquired
$
9.5
The preliminary estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, inventory and deferred revenue are preliminary estimates pending the finalization of our valuation analyses. The preliminary 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 valuation used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected cash flows from the assets, over a weighted average useful life of seven years from the date of acquisition.
At the time of the acquisition, the goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of MotionDSP with our CMS operating segment, enhancing our capabilities in real-time video processing of our CMS portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill in connection with the acquisition of MotionDSP 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 Motion DSP for fiscal years 2018 through 2022 and thereafter is as follows (in millions):
Year Ended
September 30,
2018
$
0.4
2019
0.7
2020
0.7
2021
0.7
2022
0.7
Thereafter
1.6
Deltenna Ltd.
In July 2017, we acquired all of the outstanding capital stock of Deltenna Ltd (Deltenna), a wireless infrastructure company specializing in the design and delivery of radio and antenna communication solutions. Deltenna designs and manufactures cutting-edge integrated wireless products including compact LTE base stations, broadband range extenders for areas of poor coverage and rugged antennas. The addition of Deltenna, headquartered in Chippenham, U.K., will enhance tactical communication and training capabilities of our Cubic Global Defense Systems (CGD Systems) businesses by effectively delivering high-capacity data networks within challenging and rigorous environments.
Deltenna’s sales and results of operations included in our operating results for the quarter and six months ended March 31, 2018 and 2017 were as follows (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Sales
$
0.1
$
—
$
0.1
$
—
Operating loss
(0.2)
—
(0.1)
—
Net loss after taxes
(0.2)
—
(0.1)
—
Deltenna’s operating results above included the following amounts for the quarter and six-month periods (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Amortization
$
0.1
$
—
$
—
$
—
Acquisition-related expenses
(0.2)
—
(0.2)
—
The acquisition-date fair value of consideration is $5.3 million, which is comprised of cash paid of $4.0 million plus the fair value of contingent consideration of $1.3 million. Under the purchase agreement, we will pay the sellers up to $7.6 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the year ending September 30, 2022. 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 Deltenna was paid for with funds from existing cash resources. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Customer relationships
$
1.0
Technology
1.1
Other net assets acquired (liabilities assumed)
(0.3)
Net identifiable assets acquired
1.8
Goodwill
3.5
Net assets acquired
$
5.3
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 valuation used the excess earnings approach and the technology asset valuations used the relief from royalty approach.
The intangible assets are being amortized using straight-line methods based on the expected period of cash flows from the assets, over a weighted average useful life of eight years from the date of acquisition.
At the time of the acquisition, the goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of Deltenna with our legacy CGD Systems operating segment, and strengthening our capability of developing and integrating products in our defense portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill was reassigned to our legacy CGD Systems segment. As described in Note 12, we concluded that CMS became a separate operating segment beginning on October 1, 2017 distinct from our legacy CGD Systems operating segment. In conjunction with the changes to reporting units, on October 1, 2017 we reassigned goodwill between CGD Systems and CMS based on their relative fair values. The amount recorded as goodwill in connection with the acquisition of Deltenna 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 Deltenna for fiscal years 2018 through 2022 and thereafter is as follows (in millions):
Year Ended
September 30,
2018
$
0.3
2019
0.3
2020
0.3
2021
0.3
2022
0.3
Thereafter
0.8
Vocality
On November 30, 2016, we acquired all of the outstanding capital stock of Vocality International (Vocality), based in Shackleford, U.K., a provider of embedded technology which unifies communications platforms, enhances voice quality, increases video performance and optimizes data throughput. Vocality contributes to our Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) portfolio of products for our CMS segment and expands our customer base. Vocality also sells its technology in the broadcast, oil and gas, mining, and maritime markets.
Vocality’s sales and results of operations included in our operating results for the quarter and six-months ended March 31, 2018 and 2017 were as follows (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Sales
$
2.9
$
0.8
$
0.7
$
0.7
Operating loss
(0.8)
(1.6)
(0.9)
(0.5)
Net loss after taxes
(0.7)
(1.5)
(0.8)
(0.6)
Vocality’s operating results above included the following amounts for the quarter and six month periods (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Amortization
$
0.4
$
0.2
$
0.2
$
0.2
Acquisition-related expenses
0.6
1.2
—
0.4
P rior to our acquisition of Vocality, Vocality had a number of share-based payment awards in place to its employees. Due to the structure of some of these share-based payment awards and the acceleration of vesting of certain of these awards in connection with our acquisition of Vocality, we were required to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these awards. Consequently, we recognized $0.4 million of compensation expense within general and administrative expenses during the quarter ended December 31, 2016 related to this matter. This compensation is reflected in Vocality’s acquisition-related expenses in the first quarter of fiscal 2017 included in the results of operations above for the six months ended March 31, 2017.
The acquisition date fair value of consideration is $9.6 million, which is comprised of cash paid of $9.7 million plus additional held back consideration to be paid in the future estimated at $0.3 million, less the $0.4 million of cash paid to the seller recorded as compensation expense described above .
The acquisition of Vocality was paid for with funds from existing cash resources. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
Customer relationships
$
2.1
Technology
2.4
Trade name
0.4
Inventory
1.7
Accounts payable and accrued expenses
(0.4)
Other net assets acquired (liabilities assumed)
(0.5)
Net identifiable assets acquired
5.7
Goodwill
3.9
Net assets acquired
$
9.6
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 valuation used the excess earnings approach, and the technology and trade name asset valuations used the relief from royalty 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 nine years from the date of acquisition.
At the time of the acquisition, the goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of Vocality with our legacy CGD Systems operating segment, and strengthening our capability of developing and integrating products in our defense portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill was reassigned to our legacy CGD Systems segment. As described in Note 12, we concluded that CMS became a separate operating segment beginning on October 1, 2017 distinct from our legacy CGD Systems operating segment. In conjunction with the changes to reporting units, on October 1, 2017 we reassigned goodwill between CGD Systems and CMS based on their relative fair values. The amount recorded as goodwill in connection with the acquisition of Vocality 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 Vocality for fiscal years 2018 through 2022 and thereafter is as follows (in millions):
Year Ended
September 30,
2018
$
0.8
2019
0.8
2020
0.7
2021
0.6
2022
0.5
Thereafter
1.3
Pro forma information
The following unaudited pro forma information presents our consolidated results of operations as if MotionDSP, Deltenna and Vocality had been included in our consolidated results since October 1, 2016 (in millions):
Six Months Ended
Three Months Ended
March 31,
March 31,
2018
2017
2018
2017
Net sales
$
527.5
$
494.2
$
278.8
$
248.9
Net income (loss)
$
(15.7)
$
41.7
$
(3.7)
$
41.5
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, 2016, and it does not purport to project our future operating results.
Goodwill
Changes in goodwill for the six months ended March 31, 2018 were as follows (in thousands):
Cubic Global
Cubic
Transportation
Defense
Mission
Systems
Systems
Solutions
Total
Net balances at September 30, 2017
$
50,870
$
270,692
$
—
$
321,562
Reassignment on October 1, 2017
—
(125,321)
125,321
—
Acquisitions
—
—
6,676
6,676
Foreign currency exchange rate changes
1,823
256
221
2,300
Net balances at March 31, 2018
$
52,693
$
145,627
$
132,218
$
330,538
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. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. As described in Note 12, we concluded that CMS became a separate operating segment beginning on October 1, 2017. In conjunction with the changes to reporting units, we reassigned goodwill between CGD Systems and CMS based on their relative fair values.
We estimated the fair value of CGD Systems and CMS based upon market multiples from publicly traded comparable companies in addition to discounted cash flows models for CMS and for a combination of CGD Systems and CMS based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated based on projected growth rates and financial ratios, influenced by an analysis of historical ratios and by calculating a terminal value at the end of the discrete financial forecasts. The future cash flows were discounted to present value using a discount rate of 13% for our CMS reporting unit and 11% for the combination of our CGD Systems and CMS reporting units.
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 value, including recorded goodwill. If the carrying value 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 value. Any resulting impairment determined would be recorded in the current period.
In connection with our reassignment of goodwill between CGD Systems and our new CMS reporting unit, we performed a goodwill impairment test on the legacy CGD Systems reporting unit immediately before the reassignment of goodwill. This test indicated that there was no impairment of the legacy CGD Systems reporting unit. We also performed a separate goodwill impairment test on the new CGD Systems and CMS reporting units as of October 1, 2017 after goodwill was reassigned in the amounts identified in the table above. The results of this October 1, 2017 impairment test indicated that the estimated fair values for our CGD Systems reporting unit exceeded its carrying value by over 10%, while the estimated fair value of our CMS reporting unit exceeded its carrying values by over 25%.
Our most recent annual goodwill impairment test for our Cubic Transportation Systems (CTS) reporting unit was our 2017 annual impairment test completed as of July 1, 2017. The results of our 2017 annual impairment test indicated that the estimated fair value for our CTS reporting unit exceeded its carrying value by over 100%. 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.
Unforeseen negative changes in future business or other market conditions for any of our reporting units including margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period. |
