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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

001-08931

Commission File Number

CUBIC CORPORATION

Exact Name of Registrant as Specified in its Charter

Delaware

95-1678055

State of Incorporation

I.R.S. Employer Identification No.

9333 Balboa Avenue
San Diego, California 92123
Telephone (858) 277-6780

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Common Stock

CUB

New York Stock Exchange, Inc.

Title of each class

Trading symbol

Name of exchange on which registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes No

As of January 21, 2020, the registrant had only one class of common stock of which there were 31,296,448 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended December 31, 2019

TABLE OF CONTENTS

    

    

Page

 

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

3

Condensed Consolidated Statements of Operations

3

Condensed Consolidated Statements of Comprehensive Income (Loss)

4

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Cash Flows

6

Condensed Consolidated Statements of Changes in Shareholders’ Equity

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

50

Item 4.

Controls and Procedures

50

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 6.

Exhibits

51

2

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended

 

December 31,

    

2019

    

2018

 

Net sales:

Products

$

200,604

$

182,253

Services

 

128,235

 

123,006

 

328,839

 

305,259

Costs and expenses:

Products

 

166,843

 

125,485

Services

 

82,648

 

92,785

Selling, general and administrative expenses

 

65,915

 

62,986

Research and development

 

8,422

 

12,012

Amortization of purchased intangibles

 

10,089

 

10,565

Gain on sale of property, plant and equipment

 

(170)

 

Restructuring costs

 

1,575

 

1,992

 

335,322

 

305,825

Operating loss

 

(6,483)

 

(566)

Other income (expenses):

Interest and dividend income

 

2,218

 

1,234

Interest expense

 

(5,363)

 

(4,032)

Other income (expense), net

 

(127)

 

(4,753)

Loss from continuing operations before income taxes

 

(9,755)

 

(8,117)

Income tax provision

 

6,246

 

2,497

Loss from continuing operations

(16,001)

(10,614)

Net loss from discontinued operations

 

(584)

 

Net loss

(16,585)

(10,614)

Less noncontrolling interest in net income (loss) of VIE

 

3,990

 

(4,027)

Net loss attributable to Cubic

$

(20,575)

$

(6,587)

Amounts attributable to Cubic:

Net loss from continuing operations

$

(19,991)

$

(6,587)

Net loss from discontinued operations

 

(584)

 

Net loss attributable to Cubic

$

(20,575)

$

(6,587)

Net loss per share:

Basic

Continuing operations attributable to Cubic

$

(0.64)

$

(0.23)

Discontinued operations

$

(0.02)

$

Basic earnings per share attributable to Cubic

$

(0.66)

$

(0.23)

Diluted

Continuing operations attributable to Cubic

$

(0.64)

$

(0.23)

Discontinued operations

$

(0.02)

$

Diluted earnings per share attributable to Cubic

$

(0.66)

$

(0.23)

Weighted average shares used in per share calculations:

Basic

 

31,273

 

28,492

Diluted

31,273

28,492

See accompanying notes.

3

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

Three Months Ended

 

December 31,

    

2019

    

2018

 

Net loss

$

(16,585)

$

(10,614)

Other comprehensive income (loss):

Foreign currency translation

 

10,480

 

(3,318)

Change in unrealized gains/losses from cash flow hedges:

Change in fair value of cash flow hedges, net of tax

(1,185)

1,343

Adjustment for net gains/losses realized and included in net income, net of tax

49

(24)

Total change in unrealized gains/losses realized from cash flow hedges, net of tax

(1,136)

1,319

Total other comprehensive income (loss)

 

9,344

 

(1,999)

Total comprehensive loss

(7,241)

(12,613)

Noncontrolling interest in comprehensive income (loss) of consolidated VIE, net of tax

3,990

(4,027)

Comprehensive loss attributable to Cubic, net of tax

$

(11,231)

$

(8,586)

See accompanying notes.

4

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

December 31,

September 30,

 

    

2019

    

2019

 

ASSETS

Current assets:

Cash and cash equivalents

$

61,599

$

65,800

Cash in consolidated VIE

410

347

Restricted cash

 

22,482

 

19,507

Restricted cash in consolidated VIE

9,967

9,967

Accounts receivable:

Billed

 

113,493

 

127,406

Allowance for doubtful accounts

 

(1,407)

 

(1,392)

 

112,086

 

126,014

Contract assets

 

320,188

 

349,559

Recoverable income taxes

 

10,295

 

7,754

Inventories

 

122,912

 

106,794

Other current assets

 

48,941

 

38,534

Other current assets in consolidated VIE

 

79

 

33

Total current assets

 

708,959

 

724,309

Long-term contracts financing receivables

 

33,685

 

36,285

Long-term contracts financing receivables in consolidated VIE

124,576

115,508

Property, plant and equipment, net

 

151,218

 

144,969

Operating lease right-of-use asset

 

80,747

 

Deferred income taxes

 

5,169

 

4,098

Goodwill

 

582,549

 

578,097

Purchased intangibles, net

 

155,862

 

165,613

Other assets

 

77,264

 

76,872

Other assets in consolidated VIE

1,419

Total assets

$

1,920,029

$

1,847,170

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term borrowings

$

226,500

$

195,500

Trade accounts payable

109,827

180,773

Trade accounts payable in consolidated VIE

25

Contract liabilities

 

62,500

 

46,170

Accrued compensation and current liabilities

102,933

95,013

Other current liabilities in consolidated VIE

171

191

Income taxes payable

 

5,893

 

773

Current portion of long-term debt

 

10,714

 

10,714

Total current liabilities

 

518,538

 

529,159

Long-term debt

 

189,118

 

189,110

Long-term debt in consolidated VIE

 

82,984

 

61,994

Operating lease liability

 

73,924

 

Other noncurrent liabilities

 

63,670

 

64,734

Other noncurrent liabilities in consolidated VIE

 

17,267

 

21,605

Shareholders’ equity:

Common stock

276,497

 

274,472

Retained earnings

 

841,549

 

862,948

Accumulated other comprehensive loss

 

(130,349)

 

(139,693)

Treasury stock at cost

 

(36,078)

 

(36,078)

Shareholders’ equity related to Cubic

 

951,619

 

961,649

Noncontrolling interest in VIE

 

22,909

 

18,919

Total shareholders’ equity

 

974,528

 

980,568

Total liabilities and shareholders’ equity

$

1,920,029

$

1,847,170

See accompanying notes.

5

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Three Months Ended

 

December 31,

    

2019

    

2018

 

Operating Activities:

Net loss

$

(16,585)

$

(10,614)

Net loss from discontinued operations

 

584

 

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

16,950

 

16,011

Share-based compensation expense

 

4,477

 

2,720

Change in fair value of contingent consideration

(3,005)

429

Change in fair value of interest rate swap in VIE

(4,337)

6,133

Other items

4,295

462

Changes in operating assets and liabilities, net of effects from acquisitions

(49,941)

(76,308)

NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS

 

(47,562)

 

(61,167)

NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS

 

(44)

 

NET CASH USED IN OPERATING ACTIVITIES

 

(47,606)

 

(61,167)

Investing Activities:

Acquisition of businesses, net of cash acquired

 

 

(247,150)

Purchases of property, plant and equipment

 

(11,833)

 

(12,045)

Receipt of withheld proceeds from sale of trade receivables

 

5,521

 

NET CASH USED IN INVESTING ACTIVITIES

 

(6,312)

 

(259,195)

Financing Activities:

Proceeds from short-term borrowings

 

157,500

 

372,000

Principal payments on short-term borrowings

 

(126,500)

 

(307,500)

Proceeds from long-term borrowings in consolidated VIE

 

20,186

 

5,798

Proceeds from stock issued under employee stock purchase plan

1,169

Purchase of common stock

(3,621)

(3,419)

Contingent consideration payments related to acquisitions of businesses

 

 

(435)

Proceeds from equity offering, net

215,832

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

48,734

 

282,276

Effect of exchange rates on cash

 

4,021

 

1,962

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

(1,163)

 

(36,124)

Cash, cash equivalents and restricted cash at the beginning of the period

 

95,621

 

139,608

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD

$

94,458

$

103,484

Supplemental disclosure of non-cash investing and financing activities:

Receivable recognized in connection with the acquisition of Trafficware, net

1,588

See accompanying notes.

6

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

For the Three Months Ended December 31, 2019

    

    

    

    

Accumulated

    

    

    

    

    

    

Other

Noncontrolling

Number

Common

Retained

Comprehensive

Treasury

Interest in

of Shares

(in thousands)

Stock

Earnings

Loss

Stock

VIE

Outstanding

October 1, 2019

$

274,472

$

862,948

$

(139,693)

$

(36,078)

$

18,919

31,178

Net income (loss)

 

 

(20,575)

 

 

 

3,990

 

Other comprehensive income (loss), net of tax

 

 

 

9,344

 

 

 

Stock issued under equity incentive plans

149

Stock issued under employee stock purchase plan

1,169

Purchase of common stock

(3,621)

(53)

Stock-based compensation

 

4,477

 

 

 

 

 

Cumulative effect of accounting standard adoption

(824)

December 31, 2019

$

276,497

$

841,549

$

(130,349)

$

(36,078)

$

22,909

 

31,274

For the Three Months Ended December 31, 2018

Accumulated

Other

Noncontrolling

Number

Common

Retained

Comprehensive

Treasury

Interest in

of Shares

(in thousands)

    

Stock

    

Earnings

    

Loss

    

Stock

    

VIE

  

Outstanding

October 1, 2018

$

45,008

$

801,834

$

(110,643)

$

(36,078)

$

24,075

27,255

Net loss

 

 

(6,587)

 

 

 

(4,027)

 

Other comprehensive loss, net of tax

 

 

 

(1,999)

 

 

 

Stock issued under equity incentive plans

129

Purchase of common stock

(3,419)

(46)

Stock-based compensation

 

2,720

 

 

 

 

 

Cumulative effect of accounting standard adoption

19,834

4,655

Stock issued under equity offering

215,832

3,795

Other

2

December 31, 2018

$

260,141

$

815,083

$

(112,642)

$

(36,078)

$

24,703

 

31,133

See accompanying notes.

7

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2019

Note 1 — Basis for Presentation

Cubic Corporation (“we”, “us”, and “Cubic”) has prepared the accompanying unaudited condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

In our opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter ended December 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2019.

The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the FASB) issued ASU 2016-02, Leases (commonly known as ASC 842). Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted ASC 842 on October 1, 2019 using the modified retrospective method, applying the new lease requirements at the beginning of the earliest comparative period presented. We elected the practical expedients which provide that entities need not reassess whether existing contracts contain a lease, lease classification of existing leases, or the treatment of initial direct costs on existing leases. On October 1, 2019, we recorded a right-of-use asset of $80 million and a lease liability of $88 million, in our consolidated balance sheets. We also recorded a $0.8 million decrease in retained earnings related to the adoption of ASC 842. The adoption of the standard did not have a material impact on our consolidated statements of operations or consolidated statements of cash flows.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in our financial statements and disclosures. We adopted ASU 2017-12 on October 1, 2019. The adoption of this standard did not have a significant impact on our consolidated financial statements.

Recent Accounting Pronouncements – Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020. We are currently evaluating the impact of this standard on our consolidated financial statements.

8

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be effective for us in our fiscal year beginning October 1, 2020 with early adoption permitted. Adoption of ASU 2017-04 will have no immediate impact on our consolidated financial statements and would only have the potential to impact the amount of any goodwill impairment recorded after the adoption of the ASU. We are currently evaluating whether to adopt the guidance early.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements on fair value measurements. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020 and interim periods within that annual period. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating whether to adopt the guidance early and we do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plans - Disclosure Framework (Topic 715), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020. Early adoption is permitted. We are currently evaluating whether to adopt the guidance early and we do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2021 and interim periods within that annual period. We are currently evaluating the impact of this standard on our consolidated financial statements.

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.

9

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.

10

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.

11

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.

12

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.

13

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.

14

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.

15

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.

Note 3 – Variable Interest Entities

In accordance with ASC 810, Consolidation, we assess our partnerships and joint ventures at inception, and when there are changes in relevant factors, to determine if any meet the qualifications of a variable interest entity (VIE). We consider a partnership or joint venture a VIE if it has any of the following characteristics: (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity, and substantially all of the entity's activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.

We perform a qualitative assessment of each VIE to determine if we are its primary beneficiary. We conclude that we are the primary beneficiary and consolidate the VIE if we have both (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We consider the VIE design, the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if we are the primary beneficiary. We also consider all parties that have direct or implicit variable interests when determining whether we are the primary beneficiary. As required by ASC 810, our primary beneficiary assessment is continuously performed.

In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private partnerships (P3), jointly formed Boston AFC 2.0 HoldCo. LLC (HoldCo). Also in March 2018, HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC (OpCo) which entered into a contract with the Massachusetts Bay Transit Authority (MBTA) for the financing, development, and operation of a next-generation fare payment system in Boston (the MBTA Contract). HoldCo is 90% owned by John Laing and 10% owned by Cubic. Collectively, HoldCo and OpCo are referred to as the P3 Venture. Based on our assessment under ASC 810, we have concluded that OpCo and HoldCo are VIE’s and that we are the primary beneficiary of OpCo. Consequently, we have consolidated the financial statements of OpCo within Cubic’s consolidated financial statements. We have concluded that we are not the primary beneficiary of HoldCo, and thus we have not consolidated the financial statements of HoldCo within Cubic’s consolidated financial statements.

The MBTA Contract consists of a design and build phase of approximately three years and an operate and maintain phase of approximately ten years. The design and build phase is planned to be completed in 2021 and the operate and maintain phase will span from 2021 through 2031. MBTA will make fixed payments of $558.5 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, to OpCo in connection with the MBTA Contract over the ten-year operate and maintain phase. All of OpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo. Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, under its subcontract with OpCo.

In December 2019, Cubic, MBTA, and OpCo entered into a preliminary change order to modify certain aspects of the MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope of the operate and maintain phase. As part of the preliminary change order, MBTA will make payments of up to $30.0 million to Cubic for work performed under the change order while the terms and conditions are finalized. Full execution and financial close of the change order are expected by April 2020.

Upon creation of the P3 Venture, John Laing made a loan to HoldCo of $24.3 million in the form of a bridge loan that is intended to be converted to equity in the future in accordance with its equity funding responsibilities. Concurrently,

16

HoldCo made a corresponding equity contribution to OpCo in the same amount which is included within equity of Noncontrolling interest in VIE in Cubic’s consolidated financial statements. Also, upon creation of the P3 Venture, Cubic issued a letter of credit for $2.7 million to HoldCo in accordance with Cubic’s equity funding responsibilities. HoldCo is able to draw on the Cubic letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of December 31, 2019.

Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility allows for draws up to $212.4 million; draws may only be made during the design and build phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA Contract. The long-term debt facility bears interest at variable rates of London Interbank Offer Rate (LIBOR) plus 1.3% and LIBOR plus 1.55% over the design and build and operate and maintain phases, respectively. At December 31, 2019, the outstanding balance on the long-term debt facility was $83.0 million, which is presented net of unamortized deferred financing costs of $8.8 million. The revolving credit facility allows for draws up to a maximum amount of $13.9 million during the operate and maintain phase of the MBTA Contract. OpCo’s debt is nonrecourse with respect to Cubic and its subsidiaries. The fair value of the long-term debt facility approximates its carrying amount.

The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such progress. The OpCo Credit Agreement also contains a number of customary events of default including, but not limited to, the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in OpCo, and Cubic via its subcontract with OpCo, to incur penalties due to the lenders.

OpCo has entered into pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with its long-term debt. The interest rate swaps contain forward starting notional principal amounts which align with OpCo’s expected draws on its long-term debt facility. At December 31, 2019, the outstanding notional principal amounts on open interest rate swaps were $149.4 million. The fair value of OpCo’s interest rate swaps at December 31, 2019 was $17.3 million and is recorded as a liability in other noncurrent liabilities in our Condensed Consolidated Balance Sheets. OpCo’s interest rate swaps were not designated as effective hedges at December 31, 2019 and as such unrealized gains/losses are included in other income (expense), net. As a result of changes in the fair value of its interest rate swaps, OpCo recognized a gain of $4.3 million for the three months ended December 30, 2019, and a loss of $6.1 million for the three months ended December 31, 2018. See Note 7 for a description of the measurement of fair value of derivative financial instruments, including OpCo’s interest rate swaps.

OpCo holds a restricted cash balance which is required by the MBTA Contract to allow for the delivery of future change orders and unplanned expansions as directed by MBTA.

17

The assets and liabilities of OpCo that are included in our Condensed Consolidated Balance Sheets are as follows:

December 31,

September 30,

 

    

2019

    

2019

 

(in thousands)

Cash

$

410

$

347

Restricted cash

9,967

9,967

Other current assets

79

33

Long-term contracts financing receivable

124,576

115,508

Other noncurrent assets

1,419

Total assets

$

135,032

$

127,274

Trade accounts payable

$

$

25

Accrued compensation and other current liabilities

171

191

Due to Cubic

11,861

25,143

Other noncurrent liabilities

17,267

21,605

Long-term debt

82,984

61,994

Total liabilities

$

112,283

$

108,958

Total Cubic equity

(160)

(603)

Noncontrolling interests

22,909

18,919

Total liabilities and owners' equity

$

135,032

$

127,274

The assets of OpCo are restricted for OpCo’s use only and are not available for the general operations of Cubic. OpCo’s debt is non-recourse to Cubic. Cubic’s maximum exposure to loss as a result of its equity interest in the P3 Venture is limited to the $2.7 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the design and build phase of the MBTA Contract.

OpCo’s results of operations included in our Condensed Consolidated Statements of Operations are as follows (in thousands):

Three Months Ended

 

December 31,

2019

    

2018

Revenue

$

1,245

$

1,961

Operating income

 

972

 

1,668

Other income (expense), net

3,071

(6,133)

Interest income

1,553

503

Interest expense

 

(1,159)

 

(512)

18

Note 4 — Revenue Recognition

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers.

Contract Estimates: Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, and in some cases result in liabilities to complete contracts in a loss position. The aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands, except per share numbers):

Three Months Ended

 

December 31,

2019

    

2018

Operating income (loss)

$

(6,168)

$

1,814

Net income (loss) from continuing operations

 

(5,762)

 

1,271

Diluted earnings (loss) per share

 

(0.18)

 

0.04

Backlog: Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. It is comprised of both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As of December 31, 2019, our ending backlog was $3.8 billion. We expect to recognize approximately 30% of our December 31, 2019 backlog over the next 12 months, and approximately 45% over the next 24 months as revenue, with the remainder recognized thereafter.

Accounts Receivable: Amounts billed include $23.3 million and $60.3 million due on U.S. federal government contracts at December 31, 2019 and September 30, 2019, respectively.

In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. During the first quarter of fiscal 2020, we sold $10.1 million of trade receivables to a financial institution that had not been collected as of December 31, 2019. Also, during the three months ended December 31, 2019, we received $5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.

19

Contract Assets and Liabilities: Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in thousands):

December 31,

September 30,

 

    

2019

    

2019

 

 

Contract assets

$

320,188

$

349,559

Contract liabilities

$

62,500

$

46,170

Contract assets decreased $29.4 million during the three months ended December 31, 2019, due to billings in excess of revenue recognized related to the satisfaction or partial satisfaction of performance obligations. There were no significant impairment losses related to our contract assets during the three months ended December 31, 2019.

Contract liabilities increased $16.3 million during the three months ended December 31, 2019, due to payments received in excess of revenue recognized on these performance obligations. During the three-month period ended December 31, 2019, we recognized $9.2 million of our contract liabilities at September 30, 2019 as revenue. We expect our contract liabilities to be recognized as revenue over the next twelve months.

Note 5 — Net Income (Loss) Per Share

Basic net income (loss) per share (EPS) is computed by dividing the net income (loss) attributable to Cubic for the period by the weighted average number of common shares outstanding during the period, including vested restricted stock units (RSUs).

In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of dilutive RSUs. Dilutive RSUs are calculated based on the average share price for each fiscal period using the treasury stock method. For RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted EPS until the related performance criteria have been met. For RSUs with performance and market-based vesting, no common equivalent shares are included in the computation of diluted EPS until the performance criteria have been met, and once the criteria are met the dilutive RSUs are calculated using the treasury stock method, modified by the multiplier that is calculated at the end of the accounting period as if the vesting date was at the end of the accounting period. The multiplier on RSUs with performance and market-based vesting is further described in Note 11.

In periods with a net loss from continuing operations attributable to Cubic, common equivalent shares are not included in the computation of diluted EPS, because to do so would be anti-dilutive.

The weighted-average number of shares outstanding used to compute net income (loss) per common share were as follows (in thousands):

Three Months Ended

 

December 31,

    

2019

    

2018

 

Weighted average shares - basic

 

31,273

 

28,492

Effect of dilutive securities

 

 

Weighted average shares - diluted

 

31,273

 

28,492

Number of anti-dilutive securities

1,112

990

20

Note 6 — Balance Sheet Details

Restricted Cash

Cash and cash equivalents excludes $32.4 million and $29.5 million of restricted cash at December 31, 2019 and September 30, 2019, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Inventories

Inventories consist of the following (in thousands):

December 31,

September 30,

    

2019

    

2019

 

Finished products

$

11,167

$

10,905

Work in process and inventoried costs under long-term contracts

67,075

46,951

Materials and purchased parts

 

44,670

 

48,938

Net inventories

$

122,912

$

106,794

At December 31, 2019, work in process and inventoried costs under long-term contracts includes approximately $4.8 million in costs incurred outside the scope of work or in advance of a contract award compared to $5.8 million at September 30, 2019. We believe it is probable that we will recover the costs inventoried at December 31, 2019, plus a profit margin, under contract change orders or awards within the next year.

Costs we incur for certain U.S. federal government contracts include general and administrative costs as allowed by government cost accounting standards. The amounts remaining in inventory totaled $0.5 million at both December 31, 2019 and September 30, 2019.

Property, Plant and Equipment

Significant components of property, plant and equipment are as follows (in thousands):

December 31,

September 30,

    

2019

    

2019

Land and land improvements

$

7,463

$

7,348

Buildings and improvements

 

49,359

 

48,191

Machinery and other equipment

 

119,674

 

107,297

Software

107,513

108,526

Leasehold improvements

 

17,671

 

17,064

Construction and internal-use software development in progress

17,785

16,814

Accumulated depreciation and amortization

 

(168,247)

 

(160,271)

$

151,218

$

144,969

Deferred Compensation Plan

We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan are included in other noncurrent liabilities in our Condensed Consolidated Balance Sheets and totaled $11.8 million at December 31, 2019 and $11.0 million at September 30, 2019.

In the past we have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities totaled $6.8 million at December 31, 2019 and at September 30, 2019 and were comprised entirely of life insurance contracts. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the assets held in the rabbi trust are reflected in our Condensed Consolidated Statements of Operations.

21

Note 7 — Fair Value of Financial Instruments

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 - Significant inputs to the valuation model are unobservable.

The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):

December 31, 2019

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets

Current derivative assets

$

$

930

$

$

930

$

$

2,635

$

$

2,635

Noncurrent derivative assets

 

 

1,873

 

 

1,873

 

 

859

 

 

859

Total assets measured at fair value

$

$

2,803

$

$

2,803

$

$

3,494

$

$

3,494

Liabilities

Current derivative liabilities

1,855

1,855

 

529

 

529

Noncurrent derivative liabilities

 

 

272

 

 

272

 

 

228

 

 

228

Contingent consideration to seller of H4 Global

 

 

828

 

828

 

 

1,073

1,073

Contingent consideration to seller of Deltenna

 

 

 

3,000

 

3,000

 

 

 

1,787

 

1,787

Contingent consideration to seller of Shield

 

 

 

4,041

 

4,041

 

 

 

3,814

 

3,814

Contingent consideration to seller of Nuvotronics

 

 

 

 

 

4,200

4,200

Total liabilities measured at fair value

$

$

2,127

$

7,869

$

9,996

$

$

757

$

10,874

$

11,631

Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

The fair value of contingent consideration liabilities to the sellers of businesses that we have acquired are revalued to their fair value each period and any increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value.

At December 31, 2019, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:

H4 Global: Payments of up to $2.9 million of contingent consideration based upon the value of contracts entered into over the five-year period ending September 30, 2020.
Deltenna: Payments of up to $7.2 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the fiscal year ending September 30, 2022.
Shield: Payments of up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025.
Nuvotronics: Payments of 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.

22

The maximum remaining payout to the sellers of H4 Global is $2.9 million at December 31, 2019 and is based upon the value of contracts entered into over the five-year period ending September 30, 2020. The fair value of the H4 Global contingent consideration was estimated using a probability weighted approach. Subject to the terms and conditions of the H4 Global purchase agreement, contingent consideration will be based on a five-year term that commenced on October 1, 2015 and ends on September 30, 2020. The payments will be calculated based on the award of certain contracts during the specified period. The fair value of the contingent consideration was determined by applying probabilities to different scenarios and summing the present value of any future payments.

The fair value of the Deltenna contingent consideration was estimated using a combination of a probability weighted approach and the real option approach. Under the real option approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public companies and was 38% as of December 31, 2019 and 36% as of September 30, 2019. The selected discount rate was 10% as of December 31, 2019 and 11% as of September 30, 2019.

The fair value of the Shield contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $10.0 million if Shield meets certain sales goals from the date of acquisition through July 31, 2025. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected revenues, assumed discount rates for projected revenues and cash flows, and volatility. The volatility and revenue risk adjustment factors were determined based on analysis of publicly traded comparable companies and as of December 31, 2019 were 18% and 14%, respectively, and as of September 30, 2019 were 18% and 13%, respectively. The discount rate used was based on an analysis of publicly traded comparable companies and the expected borrowing rate under our financing arrangements, which was determined to be 3.3% at December 31, 2019 and 3.6% at September 30, 2019.

The fair value of the Nuvotronics contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $8.0 million if Nuvotronics meets certain gross profit goals for the 12- month periods ended December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected gross profits, assumed discount rates for projected gross profits, and gross profit volatility. The volatility factor used as of December 31, 2019 and September 30, 2019 was 13.7% and 12.4%, respectively, and was determined based on analysis of publicly traded comparable companies. The discount rate used as of both December 31, 2019 and September 30, 2019 was 7.4%, which was based on our risk-free rate of return adjusted for our gross profit required risk premium. As of December 31, 2019, the fair value of the Nuvotronics contingent consideration was determined to be zero as its forecasted gross profit was significantly below the payout thresholds.

The inputs to each of the contingent consideration fair value models include significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.

As of December 31, 2019, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):

    

H4 Global

    

Deltenna

    

Shield

    

Nuvotronics

    

Total

Balance as of September 30, 2019

    

$

1,073

$

1,787

$

3,814

$

4,200

$

10,874

 

Total remeasurement (gain) loss recognized in earnings

 

(245)

 

1,213

 

227

 

(4,200)

 

(3,005)

Balance as of December 31, 2019

$

828

$

3,000

$

4,041

$

$

7,869

We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

23

In fiscal 2019, we invested $5.0 million in Franklin Blackhorse, L.P., a limited partnership investment fund that invests in early stage, privately owned companies in the military, commercial, and disruptive technology sectors. We account for our investment using the equity method of accounting. Our share of the fund’s operating results did not have a material impact on our results of operations for the three-month periods ended December 31, 2019 and 2018. We recorded a $5.2 million investment within other assets in our Condensed Consolidated Balance Sheet at December 31, 2019.

The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):

    

December 31,

September 30,

 

    

2019

    

2019

 

Fair value

$

204.0

$

203.3

Carrying value

$

200.0

$

200.0

We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in the first quarter of fiscal 2020 or 2019 other than assets and liabilities acquired in business acquisitions described in Note 2 and the RSUs that contain performance and market-based vesting criteria described in Note 11.

Note 8 — Financing Arrangements

In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. Pursuant to the agreement, on July 17, 2015, we issued an additional $25.0 million of senior unsecured notes bearing interest at a rate of 3.70% and maturing on March 12, 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually and principal payments are due from 2021 through 2025. On February 2, 2016, we revised the note purchase agreement and we issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing on March 12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. The agreement pertaining to the aforementioned notes also contained a provision that the coupon rate would increase by a further 0.50% should Cubic’s leverage ratio exceed a certain level.

We have a committed revolving credit agreement with a group of financial institutions in the amount of $800.0 million which is scheduled to expire in April 2024 (the Revolving Credit Agreement). Under the terms of the Revolving Credit Agreement, we may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i)  LIBOR based upon tenor plus a margin that fluctuates between 1.00% and 2.00%, as determined by Cubic’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in Cubic’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50%, and (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and 1.00%, as determined by Cubic’s Leverage Ratio as set forth in its most recently delivered compliance certificate. At December 31, 2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was 3.34%. Debt issuance and modification costs of $1.9 million were incurred in connection with an April 2019 amendment to the Revolving Credit Agreement which increased permitted borrowings from $400.0 million to $800.0 million. Costs incurred in connection with the establishment of and amendments to this credit agreement are recorded in other assets on our Condensed Consolidated Balance Sheets and are being amortized as interest expense using the effective interest method over the stated term of the Revolving Credit Agreement. At December 31, 2019, our total debt issuance costs have an unamortized deferred financing balance of $3.0 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of December 31, 2019, there were $226.5 million of borrowings under this agreement and there were letters of credit outstanding totaling $94.3 million, which reduce the available line of credit to $479.2 million. The $94.3 million of letters of credit includes both financial letters of credit and performance guarantees.

As of December 31, 2019, we had letters of credit and bank guarantees outstanding totaling $101.7 million, which includes the $94.3 million of letters of credit on the Revolving Credit Agreement above and $7.4 million of letters of credit issued under other facilities. The total of $101.7 million of letters of credit and bank guarantees includes $97.2 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of $4.5 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a

24

drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be zero.

We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £20.0 million British pounds (equivalent to approximately $26.5 million at December 31, 2019) to help meet the short-term working capital requirements of our subsidiary. At December 31, 2019, no amounts were outstanding under this borrowing arrangement.

We maintain a cash account with a bank in the United Kingdom for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of December 31, 2019 was $22.5 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

The terms of certain of our lending and credit agreements include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of December 31, 2019, these agreements have no restrictions on distributions to shareholders, subject to certain tests in these agreements.

In December 2018, we completed an underwritten public offering of 3,795,000 shares of our common stock, including the exercise of the underwriters’ option to purchase additional shares. All shares were offered by us at a price to the public of $60.00 per share. Net proceeds were $215.8 million, after deducting underwriting discounts and commissions and offering expenses of $11.9 million. We used the net proceeds to repay a portion of our outstanding borrowings under our Revolving Credit Agreement which was used to finance the acquisition of Trafficware and for general corporate purposes.

Our self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability and product liability claims. Under these arrangements, we self-insure only up to the amount of a specified deductible for each claim. Self-insurance liabilities included in accrued compensation and other current liabilities on the balance sheet amounted to $7.3 million at December 31, 2019 and $7.4 million at September 30, 2019.

25

Note 9 — Leases

In the first quarter of fiscal 2020, we adopted ASC 842. See “Note 1—Summary of Significant Accounting Policies” for the impacts of adoption. Our primary involvement with leases is in the capacity as a lessee where we lease properties to support our business. A majority of our leases are operating leases of office space. For these leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2030 without taking into consideration available renewal options, and many of them require variable lease payments by us for property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, we include the impact in the measurement of our right-of-use assets and lease liabilities.

Our right-of-use assets for operating leases are included in operating lease right-of-use-assets on our Condensed Consolidated Balance Sheets. Our lease liabilities for operating leases are included in other current liabilities for the current portion and in operating lease liabilities for the long-term portion. We use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in costs and expenses in our consolidated statements of operations. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain properties and sublease income is included as a reduction of rental expense.

The following tables present our operating leases, related lease expenses, and other information (dollars in millions):

Operating Lease Portfolio

December 31,

2019

Right-of-use assets

$

80.7

Lease liabilities

 

89.0

Weighted average remaining lease term

 

6.9 years

Weighted average discount rate

 

2.98%

Operating Lease Expense

Three Months Ended

 

December 31,

2019

Operating lease expense

$

4.6

Short-term lease expense

0.4

Variable lease expense

1.1

Total lease expense

$

6.1

Other Information

Three Months Ended

 

December 31,

2019

Cash paid for amounts included in the measurement of lease liabilities

$

4.5

Right-of-use assets obtained in exchange for new operating lease liabilities

 

9.6

26

Maturities of Lease Liabilities

Our future minimum lease commitments of our operating leases on an undiscounted basis, reconciled to the lease liability at December 31, 2019 were as follows (in millions):

2020

    

$

13.5

 

2021

 

16.2

2022

 

14.0

2023

 

12.0

2024

 

11.2

Thereafter

 

32.1

Total lease payments

99.0

Less: imputed interest

(10.0)

Present value of operating lease liabilities

$

89.0

In fiscal 2019, we entered into agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego, California. Under these agreements, we will act as the construction agent, a financial institution will own the buildings and we will lease the property for a term of five years upon their completion expected in December 2020. The terms of the agreements include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of December 31, 2019, these agreements have no restrictions on distributions to shareholders, subject to certain tests in these agreements.

Note 10 — Pension Plans

The components of net periodic pension cost (benefit) are as follows (in thousands):

Three Months Ended

 

December 31,

2019

    

2018

Service cost

$

165

$

149

Interest cost

 

1,531

 

1,910

Expected return on plan assets

 

(2,946)

 

(3,009)

Amortization of actuarial loss

 

1,001

 

528

Administrative expenses

 

86

 

97

Net pension benefit

$

(163)

$

(325)

Note 11 - Stockholders’ Equity

Long-Term Equity Incentive Plan

Under our long-term equity incentive program we have provided participants with three general categories of grant awards: RSUs with time-based vesting, RSUs with performance-based vesting, and RSUs with performance and market-based vesting.

Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive one share of our common stock. Each RSU with performance and market-based vesting represents a contingent right to receive up to 1.25 shares of our common stock. Dividend equivalent rights accrue with respect to the RSUs as dividends are paid on our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.

Time-based RSUs granted prior to fiscal 2020 generally vest in four equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date. Time-based RSUs granted in fiscal 2020 generally vest in three equal installments on each of the three October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date.

27

The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of certain revenue growth targets, earnings growth targets, and return on equity targets established by the Compensation Committee over the performance periods, subject to the recipient’s continued service through the end of the respective performance periods. The level at which Cubic performs against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

In fiscal 2019 and 2020, the Compensation Committee granted RSUs which contained both performance and market-based vesting criteria. The performance and market-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service through the end of the respective performance periods. The level at which Cubic performs against scalable targets over the performance periods impact the percentage of the RSUs that will ultimately vest. For these RSUs, Cubic’s relative total stock return (TSR) as compared to the Russell 2000 Index (Index) over the performance period will result in a multiplier for the number of RSUs that will vest. If the TSR performance exceeds the performance of the Index based on a scale established by the Compensation Committee, the multiplier will result in up to an additional 25% of RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based on a scale established by the Compensation Committee, the multiplier would result in a reduction of up to 25% of these RSUs vesting at the end of the performance period. For the performance and market-based RSUs granted in fiscal 2020, if Cubic’s absolute TSR is negative for the three-year performance period, the TSR multiplier shall not exceed 100%, regardless of the performance relative to the Index.

During fiscal 2019, the Compensation Committee amended the long-term equity incentive program to provide accelerated vesting for retirement age participants. Under this amendment, participants who are 60 years of age, and have achieved 10 years of continuous service, are eligible for accelerated vesting of their RSUs. Participants who have reached the retirement age criteria must generally provide a one-year notice of retirement to Cubic. For participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.

The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of one share of our common stock at the grant date.

The grant date fair value of each RSU with performance and market-based vesting was calculated using a Monte Carlo simulation valuation method. Under this method, the prices of the Index and our common stock were simulated through the end of the performance period. The correlation matrix between our common stock and the index as well as our stock and the Index’s return volatilities were developed based upon an analysis of historical data. The following tables include the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted during fiscal 2019 and 2020:

 

    

RSUs granted during fiscal 2020

Date of grant

 

November 29, 2019

Grant date fair value

 

$52.51

Performance period begins

 

November 29, 2019

Performance period ends

 

September 30, 2022

Risk-free interest rate

1.6%

Expected volatility

41%

RSUs granted during fiscal 2019

Date of grant

 

November 21, 2018

April 1, 2019

Grant date fair value

 

$67.40

$59.29

Performance period begins

 

November 21, 2018

April 1, 2019

Performance period ends

 

September 30, 2021

September 30, 2021

Risk-free interest rate

2.8%

2.8%

Expected volatility

34%

34%

At December 31, 2019, the total number of unvested RSUs that are ultimately expected to vest, after consideration of

28

expected forfeitures and estimated vesting of performance-based RSUs, is 469,090 RSUs with time-based vesting, 101,818 RSUs with performance-based vesting, and 395,805 RSUs with performance and market-based vesting.

The following table summarizes our RSU activity:

Unvested Restricted Stock Units with Service-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value

 

Unvested at September 30, 2019

 

422,094

 

$

58.84

Granted

 

329,918

59.90

Vested

 

(148,996)

56.07

Forfeited

 

(23,793)

60.14

Unvested at December 31, 2019

579,223

$

60.10

Unvested Restricted Stock Units with Performance-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value

 

Unvested at September 30, 2019

 

315,262

 

$

55.67

Granted

 

 

Vested

 

 

Forfeited

 

(174,824)

 

47.36

Unvested at December 31, 2019

140,438

$

61.40

Unvested Restricted Stock Units with Performance and Market-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value

 

Unvested at September 30, 2019

 

227,402

 

$

66.77

Granted

 

346,826

52.51

Vested

 

 

Forfeited

 

(33,874)

 

59.87

Unvested at December 31, 2019

540,354

$

58.05

We recorded non-cash compensation expense related to stock-based awards as follows (in thousands):

Three Months Ended

December 31,

2019

2018

Cost of sales

$

539

    

$

313

Selling, general and administrative

 

3,938

 

2,407

$

4,477

$

2,720

As of December 31, 2019, there was $61.5 million of unrecognized compensation expense related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance-based RSUs, the aggregate fair value of RSUs expected to ultimately vest is $57.6 million, which is expected to be recognized over a weighted average period of 1.5 years.

We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of December 31, 2019. To the extent the actual forfeiture rate is different from what we have estimated, compensation expense related to these awards will be different from our expectations.

29

Note 12 – Income Taxes

The 2017 U.S. tax legislation fundamentally changed the taxation of multinational corporations. Significant provisions impacting Cubic include GILTI (global intangible low-taxed income), a new tax on income of foreign corporations, and BEAT (base-erosion and anti-abuse tax). The BEAT provisions impose an alternative tax on applicable taxpayers with base-erosion payments greater than a de minimis threshold. After considering available tax planning opportunities, a reasonable forecast of BEAT expense has been made.

The quarterly forecast of our annual effective tax rate is impacted by numerous factors including income fluctuations by tax jurisdiction throughout the year, the level of intercompany transactions, applicability of new tax regimes, and the impact of acquisitions. For the three-month period ended December 31, 2019, we concluded it is more appropriate to use a blend of the discrete effective tax rate method for U.S. operations and the estimated annual effective tax rate method for foreign operations to determine income tax expense for the period, the latter of which comprises the majority of tax expense.

The income tax expense recognized on pre-tax loss from continuing operations for the three months ended December 31, 2019 resulted in an effective tax rate of negative 64% which differs from the effective tax rates of 21% for the year ended September 30, 2019 and negative 31% for the three months ended December 31, 2018. The variability in effective tax rates primarily relates to the difference in jurisdictional mix of earnings, increased U.S. BEAT and state cash tax expense and discrete benefits related to the release of a portion of the existing U.S. deferred tax valuation allowance due to deferred tax liabilities acquired in business combinations.

Note 13 — Derivative Instruments and Hedging Activities

In order to manage our exposure to fluctuations in interest and foreign currency exchange rates we utilize derivative financial instruments such as forward starting swaps and foreign currency forwards for periods typically up to five years. We do not use any derivative financial instruments for trading or other speculative purposes.

All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a derivative is designated as a cash flow hedge, both the effective and ineffective portions of a change in the fair value of the derivative are recognized as a component of accumulated other comprehensive income (loss) until the underlying hedged item is recognized in earnings, or the forecasted transaction is no longer probable of occurring. We formally document all hedging relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or noncurrent assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified in the Condensed Consolidated Statements of Cash Flows in the same category as the item being hedged.

The following table shows the notional principal amounts of our outstanding derivative instruments as of December 31, 2019 and September 30, 2019 (in thousands):

Notional Principal

 

December 31, 2019

September 30, 2019

Instruments designated as accounting hedges:

Foreign currency forwards

$

132,551

$

143,164

Interest rate swaps

 

95,000

 

95,000

Instruments not designated as accounting hedges:

Foreign currency forwards

$

57,844

$

24,220

Included in the amounts not receiving hedge accounting treatment at December 31, 2019 and September 30, 2019 were non-designated foreign currency forwards with notional principal amounts of $51.2 million and $14.0 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards have approximately offset an equal and opposite amount of gains or

30

losses related to the foreign currency exposure. Unrealized gains of $0.8 million and unrealized losses of $0.3 million were recognized in other income (expense), net for the three months ended December 31, 2019 and 2018, respectively, related to these foreign currency forward contracts not designated as accounting hedges.

In conjunction with the agreements related to the construction and leasing of two new buildings on our existing corporate campus, we entered into pay-variable/receive-fixed interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward starting notional principal amounts which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges at September 30, 2019, and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized gains as a result of changes in the fair value of the interest rate swaps were $1.4 million for the three months ended December 31, 2019.

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the periods ended December 31, 2019 and September 30, 2019. Although the table above reflects the notional principal amounts of our foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair values. We did not have any derivative instruments with credit risk-related contingent features that would require us to post collateral as of December 31, 2019 or September 30, 2019.

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the Condensed Consolidated Balance Sheets (in thousands):

Fair Value

 

    

Balance Sheet Location

    

December 31, 2019

    

September 30, 2019

 

Asset derivatives:

Foreign currency forwards

 

Other current assets

$

930

$

2,635

Foreign currency forwards

 

Other assets

 

469

 

619

Forward starting swap

 

Other assets

 

1,404

 

240

$

2,803

$

3,494

Liability derivatives:

Foreign currency forwards

 

Other current liabilities

$

1,855

$

529

Foreign currency forwards

 

Other noncurrent liabilities

 

272

 

228

Total

$

2,127

$

757

31

The tables below present gains and losses recognized in other comprehensive income (loss) related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings (in thousands):

Three Months Ended

December 31, 2019

December 31, 2018

    

    

Gains (losses)

    

    

Gains (losses)

Gains (losses)

reclassified into

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

 OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

$

(1,583)

$

(66)

$

1,779

$

(33)

The amount of realized gains and losses from foreign currency forwards designated as accounting hedges did not have a material impact on the results of operations for the three-month periods ended December 31, 2019.

The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the three-month periods ended December 31, 2019 and 2018. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified to earnings in the next twelve months is $0.7 million, net of income taxes.

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Note 14 — Segment Information

We define our operating segments and reportable segments based on the way our chief executive officer, who we have concluded is our chief operating decision maker, manages our operations for purposes of allocating resources and assessing performance and we continually reassess our operating segment and reportable segment designation based upon these criteria. We evaluate performance and allocate resources based on total segment operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are immaterial and are eliminated in consolidation.

Our reportable segments are business units that offer different products and services. Operating results for each segment are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and to assess performance.

Business segment financial data is as follows (in millions):

Three Months Ended

 

December 31,

    

2019

    

2018

Sales:

Cubic Transportation Systems

$

188.6

$

181.8

Cubic Mission Solutions

58.7

46.4

Cubic Global Defense Systems

 

81.5

 

77.1

Total sales

$

328.8

$

305.3

Operating income (loss):

Cubic Transportation Systems

$

14.3

$

11.0

Cubic Mission Solutions

(14.9)

(4.9)

Cubic Global Defense Systems

 

6.3

 

2.9

Unallocated corporate expenses

 

(12.2)

 

(9.6)

Total operating income (loss)

$

(6.5)

$

(0.6)

Depreciation and amortization:

Cubic Transportation Systems

$

7.1

$

7.7

Cubic Mission Solutions

7.5

5.4

Cubic Global Defense Systems

 

1.7

 

2.2

Corporate

 

0.7

 

0.7

Total depreciation and amortization

$

17.0

$

16.0

Unallocated corporate expenses include costs of strategic and information technology (IT) system resource planning as part of our One Cubic Initiatives, which totaled $1.1 million in the first quarter of fiscal 2020 compared to $1.6 million in the first quarter of last year.

Disaggregation of Total Net Sales: We disaggregate our sales from contracts with customers by end customer, contract type, deliverable type and revenue recognition method for each of our segments, as we believe these factors affect the nature, amount, timing, and uncertainty of our revenue and cash flows.

33

Sales by Geographic Region (in millions):

Three months ended December 31, 2019

CTS

    

CMS

    

CGD

    

Total

United States

$

96.7

$

56.2

$

22.8

$

175.7

United Kingdom

 

47.6

 

0.2

 

4.3

 

52.1

Australia

 

36.4

 

1.3

 

6.5

 

44.2

Far East/Middle East

 

1.3

 

0.4

 

36.3

 

38.0

Other

 

6.6

 

0.6

 

11.6

 

18.8

Total sales

$

188.6

$

58.7

$

81.5

$

328.8

Three months ended December 31, 2018

CTS

    

CMS

    

CGD

    

Total

United States

$

91.3

$

45.5

$

35.7

$

172.5

United Kingdom

 

50.9

 

0.4

 

4.3

 

55.6

Australia

 

29.8

 

0.1

 

5.6

 

35.5

Far East/Middle East

 

4.4

 

0.4

 

18.4

 

23.2

Other

 

5.4

 

 

13.1

 

18.5

Total sales

$

181.8

$

46.4

$

77.1

$

305.3

Sales by End Customer: We are the prime contractor for the vast majority of our sales. The table below presents total net sales disaggregated by end customer (in millions):

Three months ended December 31, 2019

CTS

    

CMS

    

CGD

    

Total

U.S. Federal Government and State and Local Municipalities

$

93.5

$

55.2

$

26.8

$

175.5

Other

 

95.1

 

3.5

 

54.7

 

153.3

Total sales

$

188.6

$

58.7

$

81.5

$

328.8

Three months ended December 31, 2018

CTS

    

CMS

    

CGD

    

Total

U.S. Federal Government and State and Local Municipalities

$

90.8

$

45.8

$

32.4

$

169.0

Other

 

91.0

 

0.6

 

44.7

 

136.3

Total sales

$

181.8

$

46.4

$

77.1

$

305.3

34

Sales by Contract Type: Substantially all of our contracts are fixed-price type contracts. Sales included in Other contract types represent cost-plus and time-and-material type contracts.

On a fixed-price type contract, we agree to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by the customer. On a time-and-material type contract, we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. The table below presents total net sales disaggregated by contract type (in millions):

Three months ended December 31, 2019

CTS

    

CMS

    

CGD

    

Total

Fixed Price

$

184.5

$

50.5

$

74.3

$

309.3

Other

 

4.1

 

8.2

 

7.2

 

19.5

Total sales

$

188.6

$

58.7

$

81.5

$

328.8

Three months ended December 31, 2018

CTS

    

CMS

    

CGD

    

Total

Fixed Price

$

178.2

$

45.8

$

71.6

$

295.6

Other

 

3.6

 

0.6

 

5.5

 

9.7

Total sales

$

181.8

$

46.4

$

77.1

$

305.3

Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is determined by us at the performance obligation level (in millions):

Three months ended December 31, 2019

CTS

    

CMS

    

CGD

    

Total

Product

$

93.4

$

51.2

$

56.0

$

200.6

Service

 

95.2

 

7.5

 

25.5

 

128.2

Total sales

$

188.6

$

58.7

$

81.5

$

328.8

Three months ended December 31, 2018

CTS

    

CMS

    

CGD

    

Total

Product

$

92.0

$

40.6

$

49.7

$

182.3

Service

 

89.8

 

5.8

 

27.4

 

123.0

Total sales

$

181.8

$

46.4

$

77.1

$

305.3

35

Revenue Recognition Method: Sales recognized at a point in time are typically for standard goods with a short production cycle and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Sales for services and for products with a long production cycle, which often include significant customization and development, are recognized over time. The table below presents total net sales disaggregated based on the revenue recognition method applied (in millions):

Three months ended December 31, 2019

CTS

    

CMS

    

CGD

    

Total

Point in Time

$

17.7

$

38.3

$

1.0

$

57.0

Over Time

 

170.9

 

20.4

 

80.5

 

271.8

Total sales

$

188.6

$

58.7

$

81.5

$

328.8

Three months ended December 31, 2018

CTS

    

CMS

    

CGD

    

Total

Point in Time

$

16.7

$

34.4

$

0.5

$

51.6

Over Time

 

165.1

 

12.0

 

76.6

 

253.7

Total sales

$

181.8

$

46.4

$

77.1

$

305.3

Note 15 — Restructuring Costs

In fiscal 2019, we initiated projects to restructure and modify our supply chain strategy, functional responsibilities, methods, capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of our worldwide procurement organization. The majority of the costs associated with these restructuring activities are related to consultants that we have engaged in connection with these efforts, and such costs have been recognized by our corporate entity. The total costs of this restructuring project have been incurred and these efforts have been materially completed as of the first quarter of fiscal 2020.

Also, in the first quarter of fiscal 2019 and 2020 our CTS segment incurred restructuring charges, consisting primarily of employee severance costs related to headcount reductions initiated to optimize our cost positions. The total costs of each of these restructuring plans initiated thus far are not expected to be significantly greater than the charges incurred to date.

Restructuring charges incurred by our business segments were as follows (in millions):

Three Months Ended

December 31,

2019

    

2018

Restructuring costs:

Cubic Transportation Systems

$

0.4

 

$

0.4

Cubic Mission Solutions

 

 

Cubic Global Defense Systems

 

0.1

 

0.1

Unallocated corporate expenses

 

1.1

 

1.5

Total restructuring costs

$

1.6

 

$

2.0

36

The following table presents a rollforward of our restructuring liability as of December 31, 2019, which is included within accrued compensation and other current liabilities within our Condensed Consolidated Balance Sheets (in millions):

Restructuring Liability

Restructuring Liability

    

Employee Separation and other

Consulting Costs

 

Balance as of September 30, 2019

$

2.0

$

0.8

Accrued costs

0.6

1.0

Cash payments

(2.0)

(1.8)

Balance as of December 31, 2019

$

0.6

$

Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred.

Note 16 — Legal Matters

We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.

37

CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

December 31, 2019

Cubic is a technology-driven, market-leading global provider of innovative, mission-critical solutions that reduce congestion and increase operational readiness and effectiveness through superior situational understanding. Cubic designs, integrates and operates systems, products and services focused in the transportation, command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR), and training markets. We operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic Mission Solutions (CMS), and Cubic Global Defense Systems (CGD).

CTS specializes in the design, development, production, installation, maintenance and operation of automated fare payment, traffic management and enforcement solutions, real-time information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing (BPO) services and expertise, such as card and payment media management, central systems and application support, retail network management, customer call centers and financial clearing and settlement support. As transportation authorities seek to optimize their operations by outsourcing bundled systems and services, CTS has transformed itself from a provider of automated fare collection (AFC) systems into a systems integrator and services company focused on the intelligent transportation market.

CMS provides networked C4ISR capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies include protected wide-band communications for space, aircraft, Unmanned Aerial Vehicle (UAV), and terrestrial applications. It provides Rugged Internet of Things (IoT) cloud solutions, interoperability gateways, and artificial intelligence/machine learning (AI/ML) based Command and Control, intelligence, Surveillance and Reconnaissance (C2ISR) applications for video situational understanding. CMS is also building UAV systems to provide intelligence, surveillance and reconnaissance (ISR) -as-a-service.

CGD is a leading diversified supplier of live, virtual, constructive and game-based training solutions to the U.S. Department of Defense, other U.S. government agencies and allied nations. We offer a full range of training solutions for military and security forces. Our customized systems and services accelerate combat readiness in the air, on the ground and at sea while meeting the demands of evolving operations globally.

Consolidated Overview

CONSOLIDATED RESULTS

Three Months Ended

 

December 31,

2019

    

2018

% Change

Sales

$

328.8

$

305.3

8

%

Operating loss

(6.5)

(0.6)

nm

Net loss from continuing operations attributable to Cubic

(20.0)

(6.6)

nm

Diluted earnings per share from continuing operations attributable to Cubic

(0.64)

(0.23)

nm

Adjusted EBITDA

11.4

20.0

(43)

%

Adjusted Net Income (Loss)

(3.7)

9.1

nm

Adjusted EPS

(0.12)

0.32

nm

Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and Adjusted EPS. For an explanation and reconciliation of such measures, see the section titled ‘Non-GAAP Financial Information’ below.

38

Sales: Sales for the quarter ended December 31, 2019 increased 8% to $328.8 million from $305.3 million in the first quarter last year. For the quarter, sales from CMS, CGD and CTS increased by 27%, 6% and 4%, respectively. Sales generated by businesses we acquired during fiscal 2020 and 2019 totaled $16.0 million for the quarter ended December 31, 2019 compared to $10.5 million for the quarter ended December 31, 2018. See the segment discussions below for further analysis of segment sales. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had an unfavorable impact on sales of $1.8 million for the first quarter of fiscal 2020 compared to the first quarter last year.

Gross Margin: Our gross margin percentage on products sales decreased to 17% in the first quarter of fiscal 2020 from 31% in the first quarter of fiscal 2019. The decrease in product sales gross margins in the first quarter of fiscal 2020 were primarily due to incremental investments in the CMS troposcatter and MQ-25 contracts discussed below. Our gross margin percentage on service sales was 36% for the first three months of fiscal 2020 compared to 25% for the first three months of last year, driven primarily by the impact of productivity initiatives in CTS as well as services sales mix.

Selling, General, and Administrative: Selling, general and administrative (SG&A) expenses increased in the first quarter of fiscal 2020 to $65.9 million compared to $63.0 million in the same period last year. As a percentage of sales, SG&A expenses were 20% for the quarter ended December 31, 2019 compared to 21% for the quarter ended December 31, 2018. The increase in SG&A expense for the first quarter of fiscal 2020 was primarily due to the SG&A expenses incurred by two businesses we acquired subsequent to the first quarter of fiscal 2019 including GRIDSMART Technologies, Inc. (GRIDSMART) in January 2019, and Nuvotronics, Inc. (Nuvotronics) in March 2019. In addition, stock-based compensation expense increased due in part to increased grants of restricted stock units made during the first quarter of fiscal 2020.

Research and Development:

The cost of company-sponsored research and development (R&D) activities included in our Condensed Consolidated Statements of Operations are as follows (in thousands):

Three Months Ended

December 31,

    

2019

    

2018

    

Company-Sponsored Research and Development Expense:

Cubic Transportation Systems

$

1,234

$

3,389

Cubic Mission Solutions

4,806

5,343

Cubic Global Defense

 

1,940

 

3,280

Unallocated corporate expenses

 

442

 

Total company-sponsored research and development expense

$

8,422

$

12,012

Company-sponsored R&D expenditures decreased in the first quarter of fiscal 2020 as compared to the first quarter last year due to the timing of certain planned R&D projects including CTS digital initiatives.

In addition to internally funded R&D a significant portion of our new product development occurs in conjunction with the performance of work on our contracts. These costs are included in cost of sales in our Condensed Consolidated Statements of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our cost of sales are as follows (in thousands):

Three Months Ended

    

December 31,

    

2019

    

2018

Cost of Contract Research and Development Activities:

Cubic Transportation Systems

$

14,790

$

12,077

Cubic Mission Solutions

7,705

5,061

Cubic Global Defense

 

7,481

 

8,201

Total cost of contract research and development activities

$

29,976

$

25,339

Amortization of Purchased Intangibles: Amortization of purchased intangibles for the first quarter of fiscal 2020 decreased to $10.1 million from $10.6 million in the first quarter last year. The decrease in amortization expense was driven by the amortization of purchased intangible assets that are amortized based upon accelerated methods, partially offset by the amortization of intangible assets related to businesses acquired subsequent to the first quarter of fiscal 2019.

39

Operating Loss: Our consolidated operating loss was $6.5 million in the first quarter of fiscal 2020 compared to $0.6 million in the first quarter last year. The CMS operating loss for the first quarter increased to $14.9 million this year compared to $4.9 million last year primarily due to incremental investments in our troposcatter and MQ-25 contracts discussed below. CTS operating income increased to $14.3 million for the first quarter compared to $11.0 million last year and CGD had operating income of $6.3 million in the first quarter compared to $2.9 million last year. On a consolidated basis, businesses we acquired during fiscal 2020 and 2019 had operating losses totaling $5.1 million in the first quarter of fiscal 2020 compared to operating losses of $3.3 million in the first quarter of fiscal 2019. For the first quarter of fiscal 2020, the operating losses of businesses acquired in fiscal 2020 and 2019 included total acquisition-related expenses of $1.5 million and amortization of purchased intangibles of $5.4 million in addition to a $4.1 million gain recognized on the revaluation of the fair value of contingent consideration owed to the seller of Nuvotronics. For the first quarter of fiscal 2019, the operating losses of businesses acquired in fiscal 2020 and 2019 included total acquisition-related expenses of $1.4 million and amortization of purchased intangibles of $4.3 million. Unallocated corporate and other costs for the first quarter of fiscal 2020 were $12.0 million compared to $9.5 million in the first quarter last year. The increase in unallocated corporate costs was driven by an increase in stock-based compensation expense.

Interest and Dividend Income and Interest Expense: Interest and dividend income was $2.2 million in the first quarter of 2020 compared to $1.2 million in the first quarter of 2019. The increase was primarily due to the interest income recorded on higher long-term contracts financing receivables in our consolidated balance sheet. Interest expense for the first quarter of fiscal 2020 was $5.4 million compared to $4.0 million in the first quarter of last year primarily due to the increase in the average outstanding non-recourse debt balance of our consolidated variable interest entity (VIE) for the first quarter of fiscal 2020 compared to the first quarter last year. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, which includes the interest income and expense of the VIE, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.

Other Income (Expense): Other income (expense) netted to expense of $0.1 million in the first quarter of 2020 compared to $4.8 million in the first quarter of 2019. Changes in our non-operating expenses are primarily driven by foreign currency gains and losses related to our intercompany balances with our foreign entities as well as changes in the fair value of an interest rate swap held by the VIE that we consolidate. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE’s gain or loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.

Income Tax Provision: The income tax expense recognized on pre-tax loss from continuing operations for the three months ended December 31, 2019 resulted in an effective tax rate of negative 64% which differs from the effective tax rates of 21% for the year ended September 30, 2019 and negative 31% for the three months ended December 31, 2018. The variability in effective tax rates primarily relates to the difference in jurisdictional mix of earnings, increased U.S. BEAT and state cash tax expense and discrete benefits related to the release of a portion of the existing U.S. deferred tax valuation allowance due to deferred tax liabilities acquired in business combinations.

Our effective tax rate could be affected by, among other factors, the mix of business between U.S. and foreign jurisdictions, the level of intercompany transactions, applicability of new tax regimes, the impact of acquisitions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available tax attributes and audits of our records by taxing authorities. After considering these impacts, we have determined that a reliable estimate of the annual effective tax rate for fiscal year 2020 cannot be made.

Net Income (Loss) from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic in the first quarter of fiscal 2020 was $20.0 million compared to $6.6 million in the first quarter of last year. The increase in net loss from continuing operations attributable to Cubic was primarily due to the increases in our operating loss and income tax expense as described above.

Adjusted EBITDA: Adjusted EBITDA decreased to $11.4 million in the first quarter of 2020 compared to $20.0 million in the first quarter of 2019. The decrease in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating loss described above, excluding the amortization expense, acquisition transaction costs, and restructuring costs.

Adjusted Net Income (Loss): Our Adjusted Net Loss was $3.7 million in the first quarter of 2020 compared to Adjusted Net Income of $9.1 million in the first quarter of 2019. The decrease in Adjusted Net Income was primarily due to the

40

same factors that drove the increase in net loss from continuing operations attributable to Cubic described above, but excludes amortization expense, acquisition transaction costs, restructuring costs, acquisition-related costs, and non-operating gains and losses.

Adjusted EPS: Adjusted EPS was negative $0.12 in the first quarter of 2020 compared to positive $0.32 in the first quarter of 2019. The decrease in Adjusted EPS was due to the same factors that impacted Adjusted Net Loss noted above.

Cubic Transportation Systems Segment (CTS)

Three Months Ended

 

December 31,

2019

    

2018

% Change

Sales

$

188.6

$

181.8

4

%

Operating income

14.3

11.0

30

%

Adjusted EBITDA

22.2

19.4

14

%

Sales: CTS sales increased 4% in the first quarter of fiscal 2020 to $188.6 million compared to $181.8 million last year. For the first quarter of fiscal 2020, sales increased in North America and Australia compared to the first quarter of fiscal 2019, while sales in the U.K. decreased slightly for the quarter. Sales were higher in the U.S. primarily due to revenue from system development on our customer contracts in Boston and the San Francisco Bay Area, as well as sales from two U.S. transportation businesses acquired in fiscal 2019, Advanced Traffic Solutions Inc. (Trafficware) and GRIDSMART. The combined sales for Trafficware and GRIDSMART totaled $13.2 million for the first quarter of fiscal 2020 compared to $10.5 million for the first quarter last year. The decrease in sales in the U.K. was primarily caused by a reduction in work on fare system hardware. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $1.5 million for the first quarter of fiscal 2020 compared to the same periods last year, primarily due to the strengthening of the U.S. dollar against the Australian dollar.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS results amounted to $4.4 million in the first quarter of fiscal 2020 and $5.4 million in the first quarter of 2019. The decrease in amortization expense is related to purchased intangible assets that are amortized based upon accelerated methods.

Operating Income: CTS operating income increased 30% in the first quarter of fiscal 2020 to $14.3 million compared to $11.0 million in the first quarter last year. For the first quarter of fiscal 2020 operating income was higher in North America on increased work on contracts in Boston and the San Francisco Bay Area, as well as a change order on the Boston contract. Operating income increased in the U.K. in the first quarter of fiscal 2020 primarily due to productivity measures achieved on service contracts. Operating income in Australia decreased slightly in the first quarter due to the impact of cost growth on a system development contract in Singapore. The operating loss of businesses acquired in fiscal 2020 and 2019 totaled $4.7 million in the first quarter of fiscal 2020 including acquisition-related expenses of $1.0 million and amortization of purchased intangibles of $4.1 million. The operating loss of businesses acquired in fiscal 2020 and 2019 totaled $3.3 million for the first quarter of last year including acquisition-related expenses of $1.4 million and amortization of purchased intangibles of $4.3 million. In addition, the CTS R&D expenditures were lower in the first quarter of fiscal 2020 than the first quarter last year due to the timing of certain planned R&D projects including certain digital initiatives that are expected to accelerate later in fiscal 2020. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $0.1 million for the first quarter of fiscal 2020 compared to the first quarter last year.

Adjusted EBITDA: CTS Adjusted EBITDA increased 14% to $22.2 million in the first quarter of 2020 compared to $19.4 million in the first quarter of 2019. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above, excluding amortization of purchased intangibles and acquisition transaction costs.

41

Cubic Mission Solutions Segment (CMS)

Three Months Ended

 

December 31,

2019

    

2018

% Change

Sales

$

58.7

$

46.4

27

%

Operating loss

(14.9)

(4.9)

nm

Adjusted EBITDA

(9.3)

0.7

nm

Sales: CMS sales increased 27% in the first quarter of fiscal 2020 to $58.7 million compared to $46.4 million in the first quarter of last year. The increase in sales resulted from increased product deliveries in all of our CMS product lines, and particularly expeditionary satellite communications products and other secure communications products. Sales generated by Nuvotronics, which was acquired by CMS in the second quarter of fiscal 2019, totaled $2.8 million in the quarter ended December 31, 2019.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted to $5.6 million in the first quarter of fiscal 2020 and $4.9 million in the first quarter last year.

Operating Income: The CMS operating loss was $14.9 million in the first quarter of fiscal 2020 compared to $4.9 million in the first quarter of last year. The increase in the operating loss for CMS was driven by incremental investments in our troposcatter and MQ-25 contracts, partially offset by increased gross margins on the increased deliveries in all product lines. The operating loss of Nuvotronics totaled $0.4 million in the first quarter of fiscal 2020. The Nuvotronics operating loss for the quarter included acquisition-related expenses of $0.5 million and amortization of purchased intangibles of $1.3 million. The Nuvotronics operating loss was partially offset by a $4.1 million gain recognized on the revaluation of the fair value of contingent consideration owed to the sellers.

Adjusted EBITDA: CMS Adjusted EBITDA decreased to negative $9.3 million in the first quarter of 2020 compared to positive $0.7 million in the first quarter of 2019. The change in CMS Adjusted EBITDA was primarily due to the same factors that drove the increase in operating loss described above, excluding amortization expense, acquisition transaction costs, and the gain on the revaluation of contingent consideration.

Cubic Global Defense Systems Segment (CGD)

Three Months Ended

 

December 31,

2019

    

2018

% Change

Sales

$

81.5

$

77.1

6

%

Operating income

6.3

2.9

117

%

Adjusted EBITDA

7.5

5.7

32

%

Sales: CGD sales increased by 6% to $81.5 million in the first quarter of fiscal 2020 compared to $77.1 million in the first quarter last year. The increase in sales was primarily due to increased work on air combat training systems during the quarter, partially offset by decreased work on ground combat training system development and services work.

Amortization of Purchased Intangibles: CGD had no significant amortization expense in the first quarter of fiscal 2020 compared to $0.3 million in the first quarter last year.

Operating Income: CGD operating income was $6.3 million in the first quarter of fiscal 2020 compared to $2.9 million last year. For the first quarter of fiscal 2020, operating profits increased primarily due to higher gross margins on increased air combat training system product sales, as well as a reduction of SG&A costs as a result of productivity initiatives. Operating income was also positively impacted by a reduction of R&D activities during the first quarter.

42

Adjusted EBITDA: CGD Adjusted EBITDA was $7.5 million in the first quarter of 2020 compared to $5.7 million in the first quarter of 2019. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above.

Backlog

December 31,

September 30,

 

    

2019

    

2019

 

(in millions)

 

Total backlog

Cubic Transportation Systems

$

3,245.7

$

2,953.3

Cubic Mission Solutions

 

114.7

 

103.7

Cubic Global Defense Systems

 

391.6

 

344.0

Total

$

3,752.0

$

3,401.0

Total backlog increased by $351.0 million from September 30, 2019 to December 31, 2019 primarily due to an award for a five-year extension to upgrade a transportation fare collection system for our Chicago customer. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter increased backlog by $76.1 million compared to September 30, 2019.

Non-GAAP Financial Information

In addition to results reported under U.S. generally accepted accounting principles (GAAP), this Quarterly Report on Form 10-Q also contains non-GAAP measures. These non-GAAP measures consist of Adjusted EBITDA, Adjusted Net Income, and Adjusted EPS. We believe that these non-GAAP measures provide additional insight into our ongoing operations and underlying business trends, facilitate a comparison of our results between current and prior periods, and facilitate the comparison of our operating results with the results of other public companies that provide non-GAAP measures. We use Adjusted EBITDA internally to evaluate the operating performance of our business, for strategic planning purposes, and as a factor in determining incentive compensation for certain employees. These non-GAAP measures facilitate company-to-company operating comparisons by excluding items that we believe are not part of our core operating performance. Adjusted net income is defined as GAAP net income (loss) from continuing operations attributable to Cubic excluding amortization of purchased intangibles, restructuring costs, acquisition-related expenses, strategic and IT system resource planning expenses, gains or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and the impact of U.S. Tax Reform. Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to Cubic before interest expense (income), income taxes, depreciation and amortization, other non-operating expense (income), acquisition-related expenses, strategic and IT system resource planning expenses, restructuring costs, and gains or losses on the disposal of fixed assets. Strategic and IT system resource planning expenses consists of expenses incurred in the development of our ERP system and the redesign of our supply chain which include internal labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition-related expenses include business acquisition expenses including retention bonus expenses, due diligence and consulting costs incurred in connection with the acquisitions, and expenses recognized related to the change in the fair value of contingent consideration for acquisitions.

These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered as measures of discretionary cash available to the company or as alternatives to net income as a measure of performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. Investors are advised to carefully review our GAAP financial results that are disclosed in our SEC filings.

We reconcile Adjusted EBITDA and Adjusted Net Income to GAAP net income, which we consider to be the most directly comparable GAAP financial measure. We reconcile Adjusted EPS to GAAP EPS, which we consider to be the most directly comparable GAAP financial measure. The following tables reconcile these non-GAAP measures to their most directly comparable GAAP financial measure.

43

Adjusted Net Income Reconciliation

Three Months Ended

December 31,

    

2019

    

2018

($ In Millions, Except Per Share Data)

GAAP EPS

$

(0.64)

$

(0.23)

GAAP Net income (loss) from continuing operations attributable to Cubic

$

(20.0)

$

(6.6)

Noncontrolling interest in the gain (loss) of the VIE

4.0

(4.0)

Amortization of purchased intangibles

10.1

10.6

Gain on sale of fixed assets

(0.2)

Restructuring costs

1.6

2.0

Acquisition-related expenses (gains), excluding amortization

(0.7)

2.5

Strategic and IT system resource planning expenses

1.1

1.6

Other non-operating expense (income), net

0.1

4.8

Noncontrolling interest in Adjusted Net Income of VIE

(1.2)

(1.5)

Tax impact related to acquisitions1

(0.3)

Tax impact related to non-GAAP adjustments2

1.5

Adjusted net income (loss)

$

(3.7)

$

9.1

Adjusted EPS

$

(0.12)

$

0.32

Weighted Average Diluted Shares Outstanding (in thousands)

31,273

28,492

1 Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.

2 The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.

44

Adjusted EBITDA Reconciliation

Three Months Ended

($ In Millions)

December 31,

Cubic Transportation Systems

2019

    

2018

Sales

$

188.6

$

181.8

Operating income

$

14.3

$

11.0

Depreciation and amortization

7.1

7.7

Noncontrolling interest in income of VIE

(0.9)

(1.5)

Acquisition-related expenses, excluding amortization

1.3

1.8

Restructuring costs

0.4

0.4

Adjusted EBITDA

$

22.2

$

19.4

Adjusted EBITDA margin

11.8%

10.7%

Three Months Ended

December 31,

Cubic Mission Solutions

2019

    

2018

Sales

$

58.7

$

46.4

Operating loss

$

(14.9)

$

(4.9)

Depreciation and amortization

7.5

5.4

Acquisition-related expenses (gains), excluding amortization

(1.9)

0.2

Adjusted EBITDA

$

(9.3)

$

0.7

Adjusted EBITDA margin

(15.8%)

1.5%

Three Months Ended

December 31,

Cubic Global Defense Systems

2019

    

2018

Sales

$

81.5

$

77.1

Operating income

$

6.3

$

2.9

Depreciation and amortization

1.7

2.2

Acquisition-related expenses (gains), excluding amortization

(0.3)

0.5

Gain on sale of fixed assets

(0.2)

Restructuring costs

0.1

Adjusted EBITDA

$

7.5

$

5.7

Adjusted EBITDA margin

9.2%

7.4%

Three Months Ended

December 31,

Cubic Consolidated

2019

    

2018

Sales

$

328.8

$

305.3

Net loss from continuing operations attributable to Cubic

$

(20.0)

$

(6.6)

Noncontrolling interest in net income (loss) of VIE

4.0

(4.0)

Provision for income taxes

6.2

2.5

Interest expense, net

3.1

2.8

Other non-operating expense (income), net

0.1

4.8

Operating loss

$

(6.5)

$

(0.6)

Depreciation and amortization

17.0

16.0

Noncontrolling interest in EBITDA of VIE

(0.9)

(1.5)

Acquisition-related expenses (gains), excluding amortization

(0.7)

2.5

Strategic and IT system resource planning expenses

1.1

1.6

(Gain) loss on sale of fixed assets

(0.2)

Restructuring costs

1.6

2.0

Adjusted EBITDA

$

11.4

$

20.0

Adjusted EBITDA margin

3.5%

6.6%

45

Liquidity and Capital Resources

Operating activities used cash of $47.6 million for the first quarter of fiscal 2020 primarily due to inventory builds for upcoming scheduled deliveries, as well as payments to vendors and contractors for goods and services received related to our significant work on customer contracts in the fourth quarter of fiscal 2019. As further described below, our operating cash flows have been significantly impacted by our consolidation of a VIE.

Investing activities for the first quarter of fiscal 2020 included capital expenditures of $11.8 million as well as $5.5 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities under GAAP, as further described below.

Financing activities for the three-month period ended December 31, 2019 consisted primarily of net short-term borrowings of $31.0 million. Also, as further described below, because we consolidate Boston AFC 2.0 OpCo. LLC (OpCo) into Cubic’s financial statements, any payments from OpCo to Cubic are excluded from our cash flows provided by operating activities in our Consolidated Statements of Cash Flows, and the cash received by OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities in our Consolidated Statements of Cash Flows. Payments that we received from OpCo that were not included in cash provided by operating activities totaled $20.1 million in the first quarter of fiscal 2020 and have totaled a cumulative $92.7 million since the inception of our contract with OpCo in March 2018.

In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private partnerships (P3), jointly formed Boston AFC 2.0 HoldCo. LLC (HoldCo). Also in March 2018, HoldCo created a wholly owned entity, OpCo which entered into a contract with the Massachusetts Bay Transit Authority (MBTA) for the financing, development, and operation of a next-generation fare payment system in Boston (the MBTA Contract). We have consolidated OpCo into Cubic’s financial statements.

The MBTA Contract consists of a design and build phase of approximately three years and an operate and maintain phase of approximately ten years. MBTA will make fixed payments of $558.5 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, to OpCo in connection with the MBTA Contract over the ten-year operate and maintain phase. All of OpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to Cubic by OpCo. Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties under its subcontract with OpCo.

In December 2019, Cubic, MBTA, and OpCo entered into a preliminary change order to modify certain aspects of the MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope of the operate and maintain phase. As part of the preliminary change order, MBTA will make payments of up to $30.0 million to Cubic for work performed under the change order while the terms and conditions are finalized. Full execution and financial close of the change order are expected by April 2020.

Upon creation of the P3 Venture, OpCo entered into a credit agreement with a group of financial institutions (the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit facility. The long-term debt facility allows for draws up to $212.4 million; draws may only be made during the design and build phase of the MBTA Contract. The long-term debt facility, including interest and fees incurred during the design and build phase, is required to be repaid on a fixed monthly schedule over the operate and maintain phase of the MBTA Contract. At December 31, 2019, the outstanding balance on the long-term debt facility was $83.0 million, which is presented net of unamortized deferred financing costs of $8.8 million. As noted above, OpCo’s borrowings are reflected as cash provided by financing activities in our Consolidated Statements of Cash Flows.

The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such progress. The OpCo Credit Agreement also contains a number of events of default including, but not limited to, the delivery of a customized fare collection system to MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in OpCo, and Cubic via its subcontract with OpCo, incurring penalties due to the lenders.

46

A change in exchange rates between foreign currencies, primarily between the Australian dollar and the U.S. dollar and between the British Pound and the U.S. dollar, resulted in an increase of $4.0 million to our cash balance as of December 31, 2019 compared to September 30, 2019.

We have a committed revolving credit agreement with a group of financial institutions in the amount of $800.0 million which is scheduled to expire in April 2024 (the Revolving Credit Agreement). Under the terms of the Revolving Credit Agreement, we may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i) London Interbank Offer Rate (LIBOR) based upon tenor plus a margin that fluctuates between 1.00% and 2.00%, as determined by Cubic’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in Cubic’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50%, and (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and 1.00%, as determined by Cubic’s Leverage Ratio as set forth in its most recently delivered compliance certificate. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of December 31, 2019, there were $226.5 million of borrowings under this agreement and there were letters of credit outstanding totaling $94.3 million, which reduce the available line of credit to $479.2 million.

As of December 31, 2019, we had letters of credit and bank guarantees outstanding totaling $101.7 million, which includes the $94.3 million of letters of credit on the Revolving Credit Agreement described above and $7.4 million of letters of credit issued under other facilities. The total of $101.7 million of letters of credit and bank guarantees includes $97.2 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of $4.5 million which primarily guarantee our payment of certain self-insured liabilities.

Our Revolving Credit Agreement and note purchase and private shelf agreement each contain a number of customary covenants, including requirements for Cubic to maintain certain interest coverage and leverage ratios and restrictions on Cubic’s and certain of its subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions and limitations. These agreements also contain customary events of default, including, without limitation: (a) failure by Cubic to pay principal or interest on the notes when due; (b) failure by Cubic or certain of its subsidiaries to comply with the covenants in the agreements; (c) failure of the representations and warranties made by Cubic or certain of its subsidiaries to be correct in any material respect; (d) cross-defaults with other indebtedness of Cubic or certain of its subsidiaries resulting in the acceleration of the maturity thereof; (e) certain bankruptcy and insolvency events with respect to Cubic or certain of its subsidiaries; (f) failure by Cubic or certain of its subsidiaries to satisfy certain final judgments when due; and (g) a change in control of Cubic, in each case subject to certain exceptions and limitations. The occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding becoming immediately due and payable.

We maintain a cash account with a bank in the U.K. for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of December 31, 2019 was $22.5 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any period presented. During the first quarter of fiscal 2020, we sold $10.1 million of outstanding trade receivables to financial institutions. The cash received for the sale of these trade receivables is included in cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. Also, during the three months ended December 31, 2019, we received $5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.

Our financial condition remains strong with working capital of $190.4 million and a current ratio of 1.4 to 1 at December 31, 2019. We expect that for our current operations that cash on hand, cash flows from operations, and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future. Our cash is invested primarily in highly liquid bank deposits and government instruments in the U.S., the U.K., New Zealand and Australia.

47

Future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to monitor our intentions to repatriate foreign earnings and provide applicable deferred taxes and withholding taxes that would be due upon repatriation of the undistributed foreign earnings.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements of this Form 10-Q, which are incorporated herein by reference.

Critical Accounting Policies, Estimates and Judgments

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill, purchased intangibles, accounting for business combinations, and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended September 30, 2019.

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION

This report, including the documents incorporated by reference herein, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by such Act. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial and/or operating performance, including those concerning new programs and growth in the markets in which we do business, increases in demand for our products and for fully integrated systems, retention of existing contracts and receipt of new contracts, the development of new products, systems and services, expansion of our automated payment and fare collection systems and services, maintenance of long-term relationships with our existing customers, expansion of our service offerings and customer base for services, maintenance of a diversified business mix, expansion of our international footprint, strategic acquisitions, U.S. and foreign government funding, supplies of raw materials and purchased parts, cash needs, financial condition, liquidity, prospects, and the trends that may affect us or the industries in which we operate, are not historical and may be forward-looking.

These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the negatives of these words or phrases. These forward-looking statements involve risks, estimates, assumptions and uncertainties, including those discussed in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019 and throughout this report that could cause actual results to differ materially from those expressed in these statements.

Such risks, estimates, assumptions and uncertainties include, among others:

our dependence on U.S. and foreign government contracts;

48

delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures;

the ability of certain government agencies to unilaterally terminate or modify our contracts with them;

the effects of potential sequestration on our contracts;

our assumptions covering behavior by public transit authorities;

our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition;

the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes;

negative audits by the U.S. government;

the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business;

competition and technology changes in the defense and transportation industries;

changes in the way transit agencies pay for transit systems;

our ability to accurately estimate the time and resources necessary to satisfy obligations under our contracts;

the effect of adverse regulatory changes on our ability to sell products and services;

our ability to identify, attract and retain qualified employees;

our failure to properly implement our enterprise resource planning system;

unforeseen problems with the implementation and maintenance of our information systems;

business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises;

our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct;

our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products;

our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets;

defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems;

changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and

other factors discussed elsewhere in this report.

Because the risks, estimates, assumptions and uncertainties referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate

49

results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks at December 31, 2019 have not changed materially from those described under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended September 30, 2019.

ITEM 4 - CONTROLS AND PROCEDURES

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2019. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, and under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based on our evaluation, we concluded that our disclosure controls and procedures were operating and effective as of that date.

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We have implemented changes to our processes, systems and controls with respect to the adoption of Accounting Standards Update 2016-02, Leases (commonly referred to as ASC 842). These changes included the development of policies and procedures, training, ongoing contract review requirements, internal management reports, controls related to information systems, and disclosures. There have not been any other significant changes in our internal control over financial reporting during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

50

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.

ITEM 1A - RISK FACTORS

There have been no material changes to the risk factors disclosed in “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2019.

ITEM 6 - EXHIBITS

(a) The following exhibits are included herein:

Exhibit No.

    

Description

2.1 †

Agreement and Plan of Merger, dated as of December 18, 2019, by and among Cubic Corporation Locus Merger Sub, Inc. Pixia Corp. and FG Pixia LLC.

2.2

Amendment No. 1 to Amendment and Plan of Merger, dated as of January 1, 2020, by and among Cubic Corporation, Locus Merger Sub, Inc., Pixia Corp. and FG Pixia LLC.

3.1

Amended and Restated Certificate of Incorporation. Incorporated by reference to Form 8-K filed February 19, 2019, file No. 001-08931, Exhibit 3.1.

3.2

Amended and Restated Bylaws. Incorporated by reference to Form 8-K filed November 14, 2018, file No. 001-08931, Exhibit 3.1.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

101

Financial statements from the Cubic Corporation Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

†Portions of this exhibit have been omitted pursuant to Item 601 (b)(10)(iv) of Regulation S-K.

51

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CUBIC CORPORATION

Date

February 5, 2020

/s/ Anshooman Aga

Anshooman Aga

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date

February 5, 2020

/s/ Mark A. Harrison

Mark A. Harrison

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

52

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