~~O[‘~~

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

~~QUARTERLY REPORT~~

~~Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

For the ~~Quarter Ended December 31, 2018~~quarterly period ended June 30, 2019

~~001-08931~~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		IRS Employer Identification No.

9333 Balboa Avenue
San Diego, California92123
Telephone ~~(858)~~ (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, 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 ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 ☐		Small 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 23,~~July 22, 2019, registrant had only one class of common stock of which there were ~~31,150,232~~31,178,486 shares outstanding (after deducting 8,945,300 shares held as treasury stock).

Table of Contents

CUBIC CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended ~~December 31, 2018~~June 30, 2019

TABLE OF CONTENTS


		Page
		~~Page~~

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Statements of ~~Income (Loss)~~Operations	3
	Condensed Consolidated Statements of Comprehensive Income ~~(Loss~~(Loss))	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	6
	Notes to Condensed Consolidated Financial Statements	7 9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42 48
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50 58
Item 4.	Controls and Procedures	50 58

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	52 59
Item 1A.	Risk Factors	52 59
Item 6.	Exhibits	53 59

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME (LOSS)~~OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended

December 31,

2018

2017

Net sales:

Products

$
182,253

$
131,743

Services

123,006

116,648

305,259

248,391

Costs and expenses:

Products

125,485

91,573

Services

92,785

86,217

Selling, general and administrative expenses

62,986

61,680

Research and development

12,012

11,977

Amortization of purchased intangibles

10,565

7,351

Restructuring costs

1,992

1,495

305,825

260,293

Operating loss

(566)

(11,902)

Other income (expenses):

Interest and dividend income

1,234

482

Interest expense

(4,032)

(2,674)

Other income (expense), net

(4,753)

(78)

Loss from continuing operations before income taxes

(8,117)

(14,172)

Income tax (benefit) provision

2,497

(2,737)

Loss from continuing operations

(10,614)

(11,435)

Net income from discontinued operations

—

1,649

Net loss

(10,614)

(9,786)

Less noncontrolling interest in loss of VIE

(4,027)

—

Net loss attributable to Cubic

$
(6,587)

$
(9,786)

Amounts attributable to Cubic:

Net loss from continuing operations

$
(6,587)

$
(11,435)

Net income from discontinued operations

—

1,649

Net loss attributable to Cubic

$
(6,587)

$
(9,786)

Net income (loss) per share:

Basic

       Continuing operations attributable to Cubic

$
(0.23)

$
(0.42)

       Discontinued operations

$
—

$
0.06

Basic earnings per share attributable to Cubic

$
(0.23)

$
(0.36)

Diluted

       Continuing operations attributable to Cubic

$
(0.23)

$
(0.42)

       Discontinued operations

$
—

$
0.06

Diluted earnings per share attributable to Cubic

$
(0.23)

$
(0.36)

Weighted average shares used in per share calculations:

Basic

28,492

27,207

Diluted

28,492

27,207


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net sales:
Products	$	255,900	$	179,761	$	660,897	$	468,949
Services		126,779		116,451		364,380		354,240
		382,679		296,212		1,025,277		823,189
Costs and expenses:
Products		190,434		125,536		491,856		334,202
Services		77,224		80,401		243,851		245,075
Selling, general and administrative expenses		82,167		58,267		211,348		183,720
Research and development		12,470		13,934		38,236		40,113
Amortization of purchased intangibles		9,717		6,153		32,677		19,988
Gain on sale of fixed assets		(32,563)		—		(32,563)		—
Restructuring costs		8,505		1,631		12,254		3,382
		347,954		285,922		997,659		826,480

Operating income (loss)		34,725		10,290		27,618		(3,291)

Other income (expenses):
Interest and dividend income		1,696		765		4,343		1,872
Interest expense		(6,132)		(2,567)		(14,695)		(8,152)
Other income (expense), net		(8,714)		(3,831)		(17,069)		(1,881)

Income (loss) from continuing operations before income taxes		21,575		4,657		197		(11,452)

Income tax (benefit) provision		1,029		5,627		(305)		4,299

Income (loss) from continuing operations		20,546		(970)		502		(15,751)
Net income (loss) from discontinued operations		(202)		5,380		(1,541)		8,364
Net income (loss)		20,344		4,410		(1,039)		(7,387)

Less noncontrolling interest in loss of VIE		(3,566)		(1,881)		(8,970)		(1,881)

Net income (loss) attributable to Cubic	$	23,910	$	6,291	$	7,931	$	(5,506)

Amounts attributable to Cubic:
Net income (loss) from continuing operations	$	24,112	$	911	$	9,472	$	(13,870)
Net income (loss) from discontinued operations		(202)		5,380		(1,541)		8,364
Net income (loss) attributable to Cubic	$	23,910	$	6,291	$	7,931	$	(5,506)

Net income (loss) per share:
Basic
Continuing operations attributable to Cubic	$	0.77	$	0.03	$	0.31	$	(0.51)
Discontinued operations	$	(0.01)	$	0.20	$	(0.05)	$	0.31
Basic earnings per share attributable to Cubic	$	0.77	$	0.23	$	0.26	$	(0.20)

Diluted
Continuing operations attributable to Cubic	$	0.77	$	0.03	$	0.31	$	(0.51)
Discontinued operations	$	(0.01)	$	0.20	$	(0.05)	$	0.31
Diluted earnings per share attributable to Cubic	$	0.77	$	0.23	$	0.26	$	(0.20)

Dividends per common share	$	—	$	—	$	0.14	$	0.14

Weighted average shares used in per share calculations:
Basic		31,160		27,232		30,267		27,221
Diluted		31,249		27,374		30,332		27,221

See accompanying notes.

Table of Contents

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net income (loss)	$	20,344	$	4,410	$	(1,039)	$	(7,387)
Other comprehensive income (loss):
Foreign currency translation		(1,900)		(10,628)		(2,256)		(7,276)
Change in unrealized gains/losses from cash flow hedges:
Change in fair value of cash flow hedges, net of tax		(483)		640		98		(123)
Adjustment for net gains/losses realized and included in net income, net of tax		69		502		331		1,101
Total change in unrealized gains/losses realized from cash flow hedges, net of tax		(414)		1,142		429		978
Total other comprehensive loss		(2,314)		(9,486)		(1,827)		(6,298)
Total comprehensive income (loss)		18,030		(5,076)		(2,866)		(13,685)
Noncontrolling interest in comprehensive loss of consolidated VIE, net of tax		(3,566)		(1,881)		(8,970)		(1,881)
Comprehensive income (loss) attributable to Cubic, net of tax	$	21,596	$	(3,195)	$	6,104	$	(11,804)

Three Months Ended

December 31,

2018

2017

Net loss

$
(10,614)

$
(9,786)

Other comprehensive income (loss):

Foreign currency translation

(3,318)

(192)

Change in unrealized gains/losses from cash flow hedges:

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

1,343

28

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

(24)

503

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

1,319

531

Total other comprehensive income (loss)

(1,999)

339

Total comprehensive loss

(12,613)

(9,447)

Noncontrolling interest in comprehensive loss of consolidated VIE, net of tax

(4,027)

—

Comprehensive loss attributable to Cubic, net of tax

$
(8,586)

$
(9,447)

See accompanying notes.

Table of Contents

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

December 31,

September 30,

2018

2018

ASSETS

Current assets:

Cash and cash equivalents

$
75,174

$
111,834

Cash in consolidated VIE

421

374

Restricted cash

17,889

17,400

Restricted cash in consolidated VIE

10,000

10,000

Accounts receivable:

Long-term contracts

119,943

393,691

Allowance for doubtful accounts

(1,652)

(1,324)

118,291

392,367

Contract assets

320,277

—

Recoverable income taxes

1,321

91

Inventories

92,201

84,199

Assets held for sale

8,177

8,177

Other current assets

40,924

43,705

Total current assets

684,675

668,147

Long-term contracts receivables

—

6,134

Long-term contracts financing receivables

44,936

—

Long-term contracts financing receivables in consolidated VIE

52,996

—

Long-term capitalized contract costs

—

84,924

Long-term capitalized contract costs in consolidated VIE

—

1,258

Property, plant and equipment, net

125,298

117,546

Deferred income taxes

4,687

4,713

Goodwill

484,329

333,626

Purchased intangibles, net

137,201

73,533

Other assets

13,871

14,192

Other assets in consolidated VIE

962

810

Total assets

$
1,548,955

$
1,304,883

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term borrowings

$
64,500

$
—

Trade accounts payable

109,094

125,414

Trade accounts payable in consolidated VIE

205

165

Contract liability

69,713

—

Customer advances

—

75,941

Accrued compensation and other current liabilities

82,323

118,233

Income taxes payable

6,771

8,586

Total current liabilities

332,606

328,339

Long-term debt

199,801

199,793

Long-term debt in consolidated VIE

15,357

9,056

Other long-term liabilities

43,838

43,486

Other long-term liabilities in consolidated VIE

6,146

13

Shareholders’ equity:

Common stock

260,141

45,008

Retained earnings

815,083

801,834

Accumulated other comprehensive loss

(112,642)

(110,643)

Treasury stock at cost

(36,078)

(36,078)

Shareholders’ equity related to Cubic

926,504

700,121

Noncontrolling interest in consolidated VIE

24,703

24,075

Total shareholders’ equity

951,207

724,196

Total liabilities and shareholders’ equity

$
1,548,955

$
1,304,883


	June 30,		September 30,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	62,522	$	111,834
Cash in consolidated VIE		359		374
Restricted cash		17,062		17,400
Restricted cash in consolidated VIE		9,967		10,000
Accounts receivable:
Long-term contracts		180,594		393,691
Allowance for doubtful accounts		(1,745)		(1,324)
		178,849		392,367

Contract assets		275,422		—
Recoverable income taxes		8,701		91
Inventories		124,297		84,199
Assets held for sale		—		8,177
Other current assets		40,615		43,705
Other current assets in consolidated VIE		53		—
Total current assets		717,847		668,147

Long-term contracts receivables		—		6,134
Long-term contracts financing receivables		38,885		—
Long-term contracts financing receivables in consolidated VIE		90,233		—
Long-term capitalized contract costs		—		84,924
Long-term capitalized contract costs in consolidated VIE		—		1,258
Property, plant and equipment, net		137,004		117,546
Deferred income taxes		5,102		4,713
Goodwill		578,945		333,626
Purchased intangibles, net		175,207		73,533
Other assets		70,396		14,192
Other assets in consolidated VIE		1,266		810
Total assets	$	1,814,885	$	1,304,883

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	231,000	$	—
Trade accounts payable		154,291		125,414
Trade accounts payable in consolidated VIE		88		165
Contract liabilities		62,266		—
Customer advances		—		75,941
Accrued compensation and other current liabilities		92,327		118,233
Accrued compensation and other current liabilities in consolidated VIE		183		—
Income taxes payable		1,292		8,586
Current portion of long-term debt		10,713		—
Total current liabilities		552,160		328,339

Long-term debt		189,103		199,793
Long-term debt in consolidated VIE		45,991		9,056
Other long-term liabilities		45,152		43,486
Other long-term liabilities in consolidated VIE		16,897		13

Shareholders’ equity:
Common stock		268,965		45,008
Retained earnings		825,396		801,834
Accumulated other comprehensive loss		(112,470)		(110,643)
Treasury stock at cost		(36,078)		(36,078)
Shareholders’ equity related to Cubic		945,813		700,121
Noncontrolling interest in consolidated VIE		19,769		24,075
Total shareholders’ equity		965,582		724,196
Total liabilities and shareholders’ equity	$	1,814,885	$	1,304,883

See accompanying notes.

Table of Contents

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Three Months Ended

December 31,

2018

2017

Operating Activities:

Net loss

$
(10,614)

$
(9,786)

Net income from discontinued operations

—

(1,649)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

16,011

12,433

Share-based compensation expense

2,720

1,627

Change in fair value of contingent consideration

429

298

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

(69,713)

(14,437)

NET CASH USED IN CONTINUING OPERATING ACTIVITIES

(61,167)

(11,514)

NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS

—

(15,424)

NET CASH USED IN OPERATING ACTIVITIES

(61,167)

(26,938)

Investing Activities:

Acquisition of businesses, net of cash acquired

(247,150)

(4,650)

Purchases of property, plant and equipment

(12,045)

(6,318)

Purchase of non-marketable debt and equity securities

—

(671)

NET CASH USED IN INVESTING ACTIVITIES

(259,195)

(11,639)

Financing Activities:

Proceeds from short-term borrowings

372,000

82,000

Principal payments on short-term borrowings

(307,500)

(49,000)

Proceeds from long-term borrowings in consolidated VIE

5,798

—

Purchase of common stock

(3,419)

(2,256)

Contingent consideration payments related to acquisitions of businesses

(435)

(656)

Proceeds from equity offering, net

215,832

—

NET CASH PROVIDED BY FINANCING ACTIVITIES

282,276

30,088

Effect of exchange rates on cash

1,962

677

NET DECREASE IN CASH AND CASH EQUIVALENTS

(36,124)

(7,812)

Cash and cash equivalents at the beginning of the period

139,608

68,577

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD

$
103,484

$
60,765

Supplemental disclosure of non-cash investing and financing activities:

Receivable recognized in connection with the acquisition of Trafficware, net

$
1,588

$
—


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Operating Activities:
Net income (loss)	$	20,344	$	4,410	$	(1,039)	$	(7,387)
Net (income) loss from discontinued operations		202		(5,380)		1,541		(8,364)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		15,351		10,642		48,949		34,133
Share-based compensation expense		4,402		2,603		10,760		5,100
Change in fair value of contingent consideration		1,163		(6)		1,833		446
Gain on sale of property, plant and equipment		(32,563)		—		(32,563)		—
Gain on sale of investment in real estate		—		—		—		(1,474)
Deferred income taxes		(948)		(10,013)		(6,773)		(10,198)
Changes in operating assets and liabilities, net of effects from acquisitions		(6,897)		(35,026)		(105,364)		(44,047)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS		1,054		(32,770)		(82,656)		(31,791)
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS		—		8,364		—		14,497
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,054		(24,406)		(82,656)		(17,294)

Investing Activities:
Acquisition of businesses, net of cash acquired		—		—		(395,854)		(9,534)
Proceeds from sale of property, plant and equipment		44,891		—		44,891		—
Purchases of property, plant and equipment		(13,114)		(9,334)		(35,291)		(21,120)
Proceeds from sale of investment in real estate		—		—		—		2,400
Purchase of non-marketable debt and equity securities		(52,997)		(222)		(52,997)		(1,472)
NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS		(21,220)		(9,556)		(439,251)		(29,726)
NET CASH PROVIDED BY INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS		—		133,795		—		133,795
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(21,220)		124,239		(439,251)		104,069

Financing Activities:
Proceeds from short-term borrowings		168,000		79,700		782,500		198,820
Principal payments on short-term borrowings		(146,000)		(156,700)		(551,500)		(253,820)
Proceeds from long-term borrowings in consolidated VIE		19,841		28,378		35,816		28,378
Deferred financing fees		(1,854)		—		(1,854)		—
Deferred financing fees in consolidated VIE		(213)		(2,180)		(690)		(2,180)
Proceeds from stock issued under employee stock purchase plan		—		(88)		783		710
Purchase of common stock		—		(31)		(3,419)		(2,355)
Dividends paid		—		—		(4,205)		(3,676)
Contingent consideration payments related to acquisitions of businesses		—		—		(820)		(656)
Proceeds from equity offering, net		—		—		215,832		—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		39,774		(50,921)		472,443		(34,779)

Effect of exchange rates on cash		(1,574)		342		(234)		(190)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		18,034		49,254		(49,698)		51,806

Cash and cash equivalents at the beginning of the period		71,876		71,129		139,608		68,577

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD	$	89,910	$	120,383	$	89,910	$	120,383

Supplemental disclosure of non-cash investing and financing activities:
Receivable recognized in connection with the acquisition of Trafficware, net	$	—	$	—	$	1,588	$	—
Receivable recognized in connection with the acquisition of GRIDSMART, net	$	—	$	—	$	442	$	—
Liability recognized in connection with the acquisition of Nuvotronics, net	$	—	$	—	$	5,300	$	—

See accompanying notes.

Table of Contents

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


	For the Quarter Ended June 30, 2019
					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
(in thousands except per share amounts)	Stock		Earnings		Loss		Stock		VIE		Outstanding
April 1, 2019	$	264,612	$	801,486	$	(110,156)	$	(36,078)	$	23,325	31,150

Net income (loss)		—		23,910		—		—		(3,566)	—
Other comprehensive loss, net of tax		—		—		(2,314)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	12
Purchase of common stock		—		—		—		—		—	(2)
Stock-based compensation		4,402		—		—		—		—	—
Other		(49)		—		—		—		10	—

June 30, 2019	$	268,965	$	825,396	$	(112,470)	$	(36,078)	$	19,769	31,160


	For the Nine Months Ended June 30, 2019
					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
(in thousands except per share amounts)	Stock		Earnings		Loss		Stock		VIE		Outstanding
October 1, 2018	$	45,008	$	801,834	$	(110,643)	$	(36,078)	$	24,075	27,255

Net income (loss)		—		7,931		—		—		(8,970)	—
Other comprehensive loss, net of tax		—		—		(1,827)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	144
Stock issued under employee stock purchase plan		783		—		—		—		—	15
Purchase of common stock		(3,419)		—		—		—		—	(49)
Stock-based compensation		10,760		—		—		—		—	—
Cumulative effect of accounting standard adoption		—		19,834		—		—		4,655	—
Stock issued under equity offering, net		215,832		—		—		—		—	3,795
Cash dividends paid -- $.14 per share of common stock		—		(4,205)		—		—		—	—
Other		1		2		—		—		9	—

June 30, 2019	$	268,965	$	825,396	$	(112,470)	$	(36,078)	$	19,769	31,160

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CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


	For the Quarter Ended June 30, 2018
					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
(in thousands except per share amounts)	Stock		Earnings		Loss		Stock		VIE		Outstanding
April 1, 2018	$	40,079	$	779,012	$	(103,438)	$	(36,078)	$	—	27,225

Net income (loss)		—		6,291		—		—		(1,881)	—
Other comprehensive loss, net of tax		—		—		(9,486)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	19
Purchase of common stock		(114)		—		—		—		—	(5)
Stock-based compensation		1,500		—		—		—		—	—

June 30, 2018	$	41,465	$	785,303	$	(112,924)	$	(36,078)	$	(1,881)	27,239


	For the Nine Months Ended June 30, 2018
					Accumulated
					Other				Noncontrolling		Number
	Common		Retained		Comprehensive		Treasury		Interest in		of Shares
(in thousands except per share amounts)	Stock		Earnings		Loss		Stock		VIE		Outstanding
October 1, 2017	$	37,850	$	794,485	$	(106,626)	$	(36,078)	$	—	27,127

Net loss		—		(5,506)		—		—		(1,881)	—
Other comprehensive loss, net of tax		—		—		(6,298)		—		—	—
Stock issued under equity incentive plans		—		—		—		—		—	151
Stock issued under employee stock purchase plan		710		—		—		—		—	14
Purchase of common stock		(2,355)		—		—		—		—	(53)
Stock-based compensation		5,260		—		—		—		—	—
Cash dividends paid -- $.14 per share of common stock		—		(3,676)		—		—		—	—

June 30, 2018	$	41,465	$	785,303	$	(112,924)	$	(36,078)	$	(1,881)	27,239

See accompanying notes.

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CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~December 31, 2018~~June 30, 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 ~~three-month period~~three- and nine-month periods ended ~~December 31, 2018~~June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019. 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, 2018.

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.

Through September 30, 2017 our principal lines of business were ~~transportation~~ fare collection and real time information systems and services, defense training and command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR) systems, and defense services. On April 18, 2018, we entered into a stock purchase agreement with Nova Global Supply & Services, LLC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell our Cubic Global Defense Services (CGD Services) business to the Purchaser. The sale closed on May 31, 2018. As a result of the sale, the operating results and cash flows of CGD Services have been classified as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for all periods presented. Refer to “Note 3 – Acquisitions and Divestitures” for additional information about the sale of CGD Services and the related discontinued operation classification. In addition, we concluded that Cubic Mission Solutions became a separate operating and reportable segment beginning on October 1, 2017. As a result, we now operate in three reportable segments: Cubic Transportation Systems (CTS), Cubic Global Defense (CGD) and Cubic Mission Solutions (CMS).

Recently Adopted Accounting Pronouncements – Revenue Recognition

Revenue Recognition: Effective October 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ~~ASC~~Accounting Standards Codification (ASC) 606), using the modified retrospective transition method. The adoption of ASC 606 resulted in a change in our significant accounting policy regarding revenue recognition, and resulted in changes in our accounting policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and contract liabilities as described below.

The cumulative effect of applying the standard was an increase of $24.5 million to shareholders' equity as of October 1, 2018. Our Condensed Consolidated Statements of ~~Income (Loss)~~Operations for the quarter and nine months ended ~~December 31, 2018~~June 30, 2019 and our Condensed Consolidated Balance Sheet as of ~~December 31, 2018~~June 30, 2019 are presented under ASC 606, while our Condensed Consolidated Statements of ~~Income (Loss)~~Operations for the quarter and nine months ended ~~December 31, 2017~~June 30, 2018 and our Condensed Consolidated Balance Sheet as of September 30, 2018 are presented under the legacy revenue recognition guidance under ASC ~~605, Revenue Recognition.~~605. See Note 2 for disclosure of the impact of the adoption of ASC 606 on our Condensed Consolidated Statements of ~~Income (Loss)~~Operations for the quarter and nine months ended June 30, 2019 and our Condensed Consolidated Balance Sheet ~~for the quarter ended December 31, 2018,~~as of June 30, 2019, and the effect of changes made to our Condensed Consolidated Balance Sheet as of October 1, 2018.

We generate revenue from the sale of integrated solutions such as mass transit fare collection systems, air and ground combat training systems, and products with ~~command, control, communication, computers, intelligence, surveillance and reconnaissance~~ ~~(C4ISR)~~ C4ISR capabilities. A significant portion of our revenues are generated from

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long-term fixed-price contracts with customers that require us to design, develop, manufacture, modify, upgrade, test and integrate complex systems according to the customer’s specifications. We also generate revenue from services we provide, such as the operation and maintenance of fare systems for mass transit customers and the support of specialized military training exercises mainly for international ~~customers~~.customers. Our contracts are primarily with the U.S. government, state and local

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municipalities, ~~and other~~ international government customers, and international local municipal transit agencies. We classify sales as products or services in our Condensed Consolidated Statements of ~~Income (Loss)~~Operations based on the attributes of the underlying contracts.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases where regulatory approval is required in addition to approval from both parties, we recognize revenue based on the likelihood of obtaining timely regulatory approvals based upon all known facts and circumstances.

To determine the proper revenue recognition method, we evaluate each contractual arrangement to identify all performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of our contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized engineering, development and manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which may include the delivery of multiple units.

Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goods or services or (ii) due to the contract covering multiple phases of the product lifecycle (for instance: development and engineering, production, maintenance and support). For contracts with more than one performance obligation, we allocate the transaction price to the performance obligations based upon their relative standalone selling prices. For such contracts we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. In cases where a contract requires a customized good or service, our primary method used to estimate the standalone selling price is the expected cost plus a margin approach. In cases where we sell a standard product or service offering, the standalone selling price is based on an observable standalone selling price. ~~Our~~A number of our contracts with the U.S. government, including contracts under the U.S. Department of Defense’s Foreign Military Sales program (FMS Contracts), are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. government and FMS Contracts are typically equal to the selling price stated in the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance obligations in our contracts with the U.S. government.

The majority of our sales are from performance obligations satisfied over time. Sales are recognized over time when control is continuously transferred to the customer during the contract or the contracted good does not have alternative use to us. For U.S. government contracts, the continuous transfer of control to the customer is supported by contract clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case we have the right to receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative uses to us. Our contracts with international governments and local municipal transit agencies contain similar termination for convenience clauses, or we have a legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not have alternative uses to us.

For those contracts for which control transfers over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. For our design and build type contracts, we generally use the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs, and

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are generally expensed as incurred for these contracts. For contracts with the U.S. government, general and administrative costs are included in contract costs; however, for purposes of revenue measurement, general and administrative costs are not considered contract costs for any other customers.

Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Costs of sales are recorded in the period in which revenue is recognized.

We record sales under cost-reimbursement-type contracts as we incur the costs. For cost-reimbursement type contracts with the U.S. government, the FAR provides guidance on the types of costs that we will be reimbursed in establishing the contract price.

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Sales under service contracts are generally recognized as services are performed or value is provided to our customers. We measure the delivery of value to our customers using a number of metrics including ridership, units of work performed, and costs incurred. We determine which metric represents the most meaningful measure of value delivery based on the nature of the underlying service activities required under each individual contract. In certain circumstances we recognize revenue based on the right to bill when such amounts correspond to the value being delivered in a billing cycle. Certain of our transportation systems service contracts contain service level penalties or bonuses, which we recognize in each period incurred or earned. These contract penalties or bonuses are generally incurred or earned on a monthly basis; however, certain contracts may be based on a quarterly or annual evaluation. Sales under service contracts that do not contain measurable units of work performed are recognized on a straight-line basis over the contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different manner. Costs incurred under these service contracts are generally expensed as incurred.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for our long-term contracts to contain bonuses, penalties, transactional variable based fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are incurred or earned upon certain performance metrics, program milestones, transactional based activities and other similar contractual events. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts ~~with the U.S. government~~to deliver complex systems provide that the customer pays either performance-based payments based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. ~~For the majority of our international contracts to deliver complex systems, we typically receive milestone payments that are paid in accordance with the terms of our contract as we perform.~~ For the majority of our service contracts, we generally bill on a monthly basis which corresponds with the satisfaction of our monthly performance obligation under these contracts. We recognize a liability for payments received in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract. For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of certain performance obligations, but rather we will be paid when subsequent performance obligations are satisfied. Generally, in these cases we have determined that a separate financing component exists as a performance obligation under the contract. In these instances, we allocate a portion of the transaction price to this financing component. We determine the value of the embedded financing component by discounting the repayment of the financed amount over the implied repayment term using the effective interest method. This discounting methodology uses an implied interest rate which reflects the credit quality of the customer and represents an interest rate that would be similar to what we would offer the customer in a separate financing transaction. Unpaid principal and interest amounts associated with the financed performance obligation and the value of the embedded financing component are presented as ~~Long-term~~long-term contracts financing receivables in our consolidated balance sheet. We recognize the allocated transaction price of the financing component as interest income over the implied financing term.

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For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.

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We only include amounts representing contract change orders, claims or other items in the contract value when we believe the rights and obligations become enforceable. Contract modifications routinely occur to account for changes in contract specifications or requirements. In most cases, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional consideration for submitted contract modifications or claims when we believe there is an enforceable right to the modification or claim, the amount can be reliably estimated, and its realization is reasonably assured. Amounts representing modifications accounted for as part of the existing contract are included in the transaction price and recognized as an adjustment to sales on a cumulative catch-up basis.

In addition, we are subject to ~~audit~~audits of incurred costs related to many of our U.S. government contracts. These audits could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S. government; however, our experience has been that our costs are acceptable to the government.

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).


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Operating income (loss)	$	1,814	$	(929)	$	(1,054)	$	2,239	$	(1,040)	$	114
Net income (loss) from continuing operations		1,271		(736)		(1,185)		1,739		(1,100)		109
Diluted earnings per share		0.04		(0.03)		(0.04)		0.06		(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 comprises 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~~accordingly. As of ~~December 31, 2018,~~June 30, 2019, our ending backlog was $~~3.814~~$3.688 billion. We expect to recognize approximately ~~25%~~30% of our ~~December 31, 2018~~June 30, 2019 backlog over the next 12 months and approximately ~~40%~~45% over the next 24 months as revenue, with the remainder recognized thereafter.

Disaggregation of Revenue: See Note 14 for information regarding our sales by customer type, contract type and geographic region for each of our segments. We believe those categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Accounts Receivable: Receivables consist of billed amounts due from our customers. Due to the nature of our customers, we generally do not require collateral. We have limited exposure to credit risk as we have historically collected substantially all of our receivables. We generally require minimal allowance for doubtful accounts for our customers, which amounted to $1.7 million and $~~1.3~~$1.3 million as of ~~December 31, 2018~~June 30, 2019 and September 30, 2018, respectively.

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Inventories: We state our inventories at the lower of cost or market. We determine cost using the first-in, first-out (FIFO) method, which approximates current replacement cost. We value our work in process at the actual production and

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engineering costs incurred to date, including applicable overhead. Any inventoried costs in excess of estimated realizable value are immediately charged to cost of sales.

Contract Assets: Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Contract assets are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-cycle nature of many of our contracts.

Long-term Capitalized Contract Costs: Through September 30, 2018, and prior to the adoption of ASC 606 long-term capitalized contract costs included costs incurred on contracts to develop and manufacture transportation systems for customers for which revenue recognition did not begin until the customers begin operating the ~~systems prior to the adoption of ASC 606.~~systems. Upon adoption of ASC 606, revenue recognition and cost recognition are no longer deferred in these situations and therefore we no longer have long-term capitalized contract costs.

Contract Liabilities: Contract liabilities (formerly referred to as customer advances prior to the adoption of ASC 606) include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current liabilities based on our contract operating cycle and calculated on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

Recently Adopted Accounting Pronouncements – Income Taxes

On December 22, 2017 the U.S. government enacted the ~~“Tax~~Tax Cuts and Jobs Act of ~~2017”~~2017 (Tax Act). Due to the complexity of the Tax Act, the SEC issued guidance in ~~SAB~~Staff Accounting Bulletin (SAB) 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. ~~During the first quarter of fiscal year 2019, we did not adjust provisional amounts recorded in the prior fiscal year and the~~The SAB 118 measurement period subsequently ended on December 22, 2018. Although we no longer ~~considers~~consider these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.

Recently Adopted Accounting Pronouncements – Other

~~In October 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-16,~~ ~~Intra-Entity Transfers of Assets Other Than Inventory,~~ ~~which~~ ~~requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 was effective for us beginning October 1, 2018~~ ~~and did not have any significant impact on our consolidated financial statements.~~

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10),~~ which requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for entities to disclose the methods and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 was adopted by us beginning October 1, 2018 and did not have any significant impact on our consolidated financial statements.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~, which provides clarifying guidance on how entities should classify cash receipts and cash payments from specific types of transactions on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ~~ASU 2016-15 was~~

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~~effective for us beginning October 1, 2018~~ ~~and did not have any significant impact on our consolidated financial statements.~~

In November 2016, the FASB issued ASU 2016-18,Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 was adopted by us beginning October 1, 2018. The application of this accounting standard update did not impact ~~financial results,~~our Condensed Consolidated Statements of Income or our Condensed Consolidated Balance Sheets, but resulted in a retrospective change in the presentation of restricted cash, including the inclusion of ~~$27.4 million and $11.8 million of~~our restricted cash ~~on hand at September 30, 2018 and December 31, 2017, respectively,~~balances within the beginning and ending amounts of cash and cash equivalents in our Statements of Cash Flows. In addition, changes in the total of cash, cash equivalents and restricted cash are now reflected in our Statements of Cash Flows for all periods presented.

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805) Clarifying the Definition of a Business~~. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets transferred is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. ~~ASU 2017-01 was adopted by us on October 1, 2018~~ and did not have any immediate impact on our consolidated financial statements. However, adoption of ASU 2017-01 could impact the accounting for future acquisitions or disposals of assets and activities because the accounting for a business combination differs significantly from that of an asset acquisition.

~~In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715):Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ~~We adopted ASU 2017-07 beginning October 1, 2018 and it did not have any significant impact~~ on our consolidated financial statements. The components of net periodic benefit cost, other than the service cost component, are included in other income (expense) in our condensed consolidated statements of income (loss).

Recent Accounting Pronouncements – Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (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. The ASU will be effective for us beginning October 1, 2019 with early adoption permitted. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact of the

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application of this accounting standard update on our consolidated financial statements and we have determined we will not adopt the new guidance early.

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 value 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.

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In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. 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. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments (1) permit hedge accounting for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The amendments in this ASU are effective for us in our annual period beginning October 1, 2019 and interim periods within that ~~year, with early adoption permitted.~~ year. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial ~~statements as well as whether to adopt the new guidance early.~~statements.

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 the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plan - 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 the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.

Note 2 — Implementation of the New ~~Accounting Standards Implemented~~Revenue Recognition Standard

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, was effective for us beginning on October 1, 2018.

As discussed in Note 1, we adopted ASC 606 using the modified retrospective transition method. Results for reporting periods beginning after September 30, 2018 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, the accounting standard in effect for periods ending prior to October 1, 2018. ~~The adoption~~

Table of ASC 606 primarily impacted certain (i) multiple-element transportation contracts that previously deferred the recognition of all revenue and related costs during the design and build phase, as the collection of payment occurred during the subsequent operate and maintain phase, and (ii) contracts previously covered by contract accounting standards that recognized revenue using the units-of-delivery method. Under ASC 606, we now recognize sales on these contracts over time by using the cost-to-cost method.Contents

Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to ~~retained earnings~~shareholders’ equity of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of ~~sales.~~sales of $90.4 million. The adjustment to ~~retained earnings~~shareholders’ equity primarily relates to multiple element transportation contracts that previously required the deferral of revenue and costs during the design and build phase, as the collection of all customer payments occurs during the subsequent operate and maintain phase. Under ASC 606, deferral of such revenue and costs is not required. In addition, the adjustment to ~~retained earnings~~shareholders’ equity is attributed to contracts previously accounted for under the units-of-delivery method, which are now recognized under ASC 606 earlier in the performance period as costs are incurred, as opposed to when the units are delivered under ASC 605. In accordance with the modified retrospective

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transition provisions of ASC 606, we will not recognize any of the accelerated net sales and related cost of sales through October 1, 2018 in our Condensed Consolidated Statements of ~~Income (Loss)~~Operations for any historical or future period.

We made certain presentation changes to our Consolidated Balance Sheet on October 1, 2018 to comply with ASC 606. The component of accounts receivable that consisted of unbilled contract receivables as reported under ASC 605 ~~which included unbilled contract receivables,~~ has been reclassified as contract assets under ASC 606, after certain adjustments described below. The adoption of ASC 606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from converting contracts previously applying the units-of-delivery method to the cost-to-cost method with a corresponding reduction in inventoried contract costs. Additionally, the adoption of ASC 606 resulted in an increase in unbilled receivables from converting multiple element transportation contracts that previously deferred all revenue and costs during the design and build phase, with a corresponding reduction in long-term capitalized contract costs. Advance payments and deferred revenue, previously primarily classified in customer advances, are now presented as contract liabilities.

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The table below presents the cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of October 1, 2018 due to the adoption of ASC 606 (in thousands):


			Adjustments		October 1, 2018
	September 30,		Due to		As Adjusted
	2018		ASC 606		Under ASC 606

									Adjustments		October 1, 2018
							September 30,		Due to		As Adjusted
							2018		ASC 606		Under ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	111,834	$	—	$	111,834	$	111,834	$	—	$	111,834
Cash in consolidated VIE		374		—		374		374		—		374
Restricted cash		17,400		—		17,400		17,400		—		17,400
Restricted cash in consolidated VIE		10,000		—		10,000		10,000		—		10,000
Accounts receivable, net		392,367		(236,743)		155,624		392,367		(236,743)		155,624
Contract assets		—		272,210		272,210		—		272,210		272,210
Recoverable income taxes		91		—		91		91		—		91
Inventories		84,199		(22,511)		61,688		84,199		(22,511)		61,688
Assets held for sale		8,177		—		8,177		8,177		—		8,177
Other current assets		43,705		—		43,705		43,705		—		43,705
Total current assets		668,147		12,956		681,103		668,147		12,956		681,103


Long-term contracts receivables		6,134		(6,134)		—		6,134		(6,134)		—
Long-term contracts financing receivables		—		56,228		56,228		—		56,228		56,228
Long-term contracts financing receivables in consolidated VIE		—		38,990		38,990		—		38,990		38,990
Long-term capitalized contract costs		84,924		(84,924)		—		84,924		(84,924)		—
Long-term capitalized contract costs in consolidated VIE		1,258		(1,258)		—		1,258		(1,258)		—
Property, plant and equipment, net		117,546		—		117,546		117,546		—		117,546
Deferred income taxes		4,713		389		5,102		4,713		389		5,102
Goodwill		333,626		—		333,626		333,626		—		333,626
Purchased intangibles, net		73,533		—		73,533		73,533		—		73,533
Other assets		14,192		—		14,192		14,192		—		14,192
Other noncurrent assets in consolidated VIE		810		—		810		810		—		810
Total assets	$	1,304,883	$	16,247	$	1,321,130	$	1,304,883	$	16,247	$	1,321,130


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	—	$	—	$	—	$	—	$	—	$	—
Trade accounts payable		125,414		(3,011)		122,403		125,414		(3,011)		122,403
Trade accounts payable in consolidated VIE		165		—		165		165		—		165
Contract liability		—		70,127		70,127
Contract liabilities								—		70,127		70,127
Customer advances		75,941		(75,941)		—		75,941		(75,941)		—
Accrued compensation and other current liabilities		118,233		583		118,816		118,233		583		118,816
Income taxes payable		8,586		—		8,586		8,586		—		8,586
Total current liabilities		328,339		(8,242)		320,097		328,339		(8,242)		320,097


Long-term debt		199,793		—		199,793		199,793		—		199,793
Long-term debt in consolidated VIE		9,056		—		9,056		9,056		—		9,056
Other long-term liabilities		43,486		—		43,486		43,486		—		43,486
Other long-term liabilities in consolidated VIE		13		—		13		13		—		13


Shareholders’ equity:
Common stock		45,008		—		45,008		45,008		—		45,008
Retained earnings		801,834		19,834		821,668		801,834		19,834		821,668
Accumulated other comprehensive loss		(110,643)		—		(110,643)		(110,643)		—		(110,643)
Treasury stock at cost		(36,078)		—		(36,078)		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		700,121		19,834		719,955		700,121		19,834		719,955
Noncontrolling interest in VIE		24,075		4,655		28,730		24,075		4,655		28,730
Total shareholders’ equity		724,196		24,489		748,685		724,196		24,489		748,685
Total liabilities and shareholders’ equity	$	1,304,883	$	16,247	$	1,321,130	$	1,304,883	$	16,247	$	1,321,130

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The table below presents how the adoption of ASC 606 affected certain line items on our Condensed Consolidated Statements of ~~Income (Loss)~~Operations for the three ~~months~~and nine month periods ended ~~December 31, 2018~~June 30, 2019 (in ~~thousands)~~thousands, except per share data):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606

							Three months ended June 30, 2019						Nine months ended June 30, 2019
											As Reported						As Reported
							Under		Effect of		Under		Under		Effect of		Under
							ASC 605		ASC 606		ASC 606		ASC 605		ASC 606		ASC 606
Net sales:
Products	$	152,562	$	29,691	$	182,253	$	240,604	$	15,296	$	255,900	$	588,754	$	72,143	$	660,897
Services		124,262		(1,256)		123,006		126,790		(11)		126,779		365,099		(719)		364,380
		276,824		28,435		305,259
								367,394		15,285		382,679		953,853		71,424		1,025,277
Costs and expenses:
Products		100,544		24,941		125,485		179,281		11,153		190,434		433,351		58,505		491,856
Services		92,785		—		92,785		77,224		—		77,224		243,851		—		243,851
Selling, general and administrative expenses		62,823		163		62,986		81,673		494		82,167		210,791		557		211,348
Research and development		12,012		—		12,012		12,470		—		12,470		38,236		—		38,236
Amortization of purchased intangibles		10,565		—		10,565		9,717		—		9,717		32,677		—		32,677
Gain on sale of fixed assets								(32,563)		—		(32,563)		(32,563)		—		(32,563)
Restructuring costs		1,992		—		1,992		8,505		—		8,505		12,254		—		12,254
		280,721		25,104		305,825

Operating loss		(3,897)		3,331		(566)

								336,307		11,647		347,954		938,597		59,062		997,659

Operating income								31,087		3,638		34,725		15,256		12,362		27,618

Other income (expenses):
Interest and dividend income		56		1,178		1,234		39		1,657		1,696		169		4,174		4,343
Interest expense		(4,032)		—		(4,032)		(6,132)		—		(6,132)		(14,695)		—		(14,695)
Other income (expense), net		(4,753)		—		(4,753)		(8,714)		—		(8,714)		(17,069)		—		(17,069)

Loss from continuing operations before income taxes		(12,626)		4,509		(8,117)

Income tax provision		2,473		24		2,497

Net loss		(15,099)		4,485		(10,614)


Income (loss) from continuing operations before income taxes								16,280		5,295		21,575		(16,339)		16,536		197

Income tax provision (benefit)								1,113		(84)		1,029		(467)		162		(305)

Income (loss) from continuing operations								15,167		5,379		20,546		(15,872)		16,374		502
Net loss from discontinued operations								(202)		—		(202)		(1,541)		—		(1,541)
Net income (loss)								14,965		5,379		20,344		(17,413)		16,374		(1,039)

Less noncontrolling interest in loss of VIE		(5,981)		1,954		(4,027)		(7,074)		3,508		(3,566)		(16,940)		7,970		(8,970)

Net loss attributable to Cubic	$	(9,118)	$	2,531	$	(6,587)


Net income (loss) attributable to Cubic							$	22,039	$	1,871	$	23,910	$	(473)	$	8,404	$	7,931

Amounts attributable to Cubic:
Net income from continuing operations								22,241		1,871		24,112		1,068		8,404		9,472
Net loss from discontinued operations								(202)		—		(202)		(1,541)		—		(1,541)
Net income (loss) attributable to Cubic							$	22,039	$	1,871	$	23,910	$	(473)	$	8,404	$	7,931

Net income (loss) per share:
Basic earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)	$	0.71	$	0.06	$	0.77	$	(0.02)	$	0.28	$	0.26
Diluted earnings per share attributable to Cubic	$	(0.32)	$	0.09	$	(0.23)	$	0.71	$	0.06	$	0.77	$	(0.02)	$	0.28	$	0.26

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The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the three ~~months~~and nine month periods ended ~~December 31, 2018~~June 30, 2019 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606

							Three months ended June 30, 2019						Nine months ended June 30, 2019
											As Reported						As Reported
							Under		Effect of		Under		Under		Effect of		Under
							ASC 605		ASC 606		ASC 606		ASC 605		ASC 606		ASC 606
Sales:	(in thousands)
Cubic Transportation Systems	$	172,728	$	9,079	$	181,807	$	201,935	$	10,737	$	212,672	$	557,234	$	37,938	$	595,172
Cubic Mission Solutions		45,363		1,030		46,393		94,352		626		94,978		202,392		914		203,306
Cubic Global Defense		58,733		18,326		77,059		71,107		3,922		75,029		194,227		32,572		226,799
Total sales	$	276,824	$	28,435	$	305,259	$	367,394	$	15,285	$	382,679	$	953,853	$	71,424	$	1,025,277


Operating income (loss):
Cubic Transportation Systems	$	9,186	$	1,790	$	10,976	$	14,489	$	2,788	$	17,277	$	29,348	$	7,700	$	37,048
Cubic Mission Solutions		(5,191)		251		(4,940)		1,187		43		1,230		(12,045)		(88)		(12,133)
Cubic Global Defense		1,607		1,290		2,897		1,121		807		1,928		5,248		4,750		9,998
Unallocated corporate expenses		(9,499)		—		(9,499)		14,290		—		14,290		(7,295)		—		(7,295)
Total operating income (loss)	$	(3,897)	$	3,331	$	(566)
Total operating income							$	31,087	$	3,638	$	34,725	$	15,256	$	12,362	$	27,618

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The table below presents how the impact of the adoption of ASC 606 affected certain line items on our Condensed Consolidated Balance Sheet at ~~December 31, 2018~~June 30, 2019 (in thousands):


					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606

											As Reported
							Under		Effect of		Under
							ASC 605		ASC 606		ASC 606
ASSETS
Current assets:
Cash and cash equivalents	$	75,174	$	—	$	75,174	$	62,522	$	—	$	62,522
Cash in consolidated VIE		421		—		421		359		—		359
Restricted cash		17,889		—		17,889		17,062		—		17,062
Restricted cash in consolidated VIE		10,000		—		10,000		9,967		—		9,967
Accounts receivable, net		390,855		(272,564)		118,291		394,777		(215,928)		178,849
Contract assets		—		320,277		320,277		(5,052)		280,474		275,422
Recoverable income taxes		1,086		235		1,321		8,481		220		8,701
Inventories		121,223		(29,022)		92,201		171,247		(46,950)		124,297
Assets held for sale		8,177		—		8,177		—		—		—
Other current assets		40,924		—		40,924		40,615		—		40,615
Other current assets in consolidated VIE								53		—		53
Total current assets		665,749		18,926		684,675		700,031		17,816		717,847


Long-term contracts receivables		4,064		(4,064)		—		3,201		(3,201)		—
Long-term contracts financing receivables		—		44,936		44,936		—		38,885		38,885
Long-term contracts financing receivables in consolidated VIE		—		52,996		52,996		—		90,233		90,233
Long-term capitalized contract costs		95,894		(95,894)		—		119,331		(119,331)		—
Long-term capitalized contract costs in consolidated VIE		1,551		(1,551)		—		2,255		(2,255)		—
Property, plant and equipment, net		125,298		—		125,298		137,004		—		137,004
Deferred income taxes		4,298		389		4,687		4,867		235		5,102
Goodwill		484,329		—		484,329		578,945		—		578,945
Purchased intangibles, net		137,201		—		137,201		175,207		—		175,207
Other assets		13,871		—		13,871		70,396		—		70,396
Other noncurrent assets in consolidated VIE		962		—		962		1,266		—		1,266
Total assets	$	1,533,217	$	15,738	$	1,548,955	$	1,792,503	$	22,382	$	1,814,885


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	64,500	$	—	$	64,500	$	231,000	$	—	$	231,000
Trade accounts payable		111,310		(2,216)		109,094		156,544		(2,253)		154,291
Trade accounts payable in consolidated VIE		205		—		205		88		—		88
Contract liability		—		69,713		69,713
Contract liabilities								—		62,266		62,266
Customer advances		80,993		(80,993)		—		78,760		(78,760)		—
Accrued compensation and other current liabilities		82,323		—		82,323		92,327		—		92,327
Accrued compensation and other current liabilities in consolidated VIE								183		—		183
Income taxes payable		6,512		259		6,771		1,026		266		1,292
Current portion of long-term debt								10,713		—		10,713
Total current liabilities		345,843		(13,237)		332,606		570,641		(18,481)		552,160


Long-term debt		199,801		—		199,801		189,103		—		189,103
Long-term debt in consolidated VIE		15,357		—		15,357		45,991		—		45,991
Other long-term liabilities		43,838		—		43,838		45,152		—		45,152
Other long-term liabilities in consolidated VIE		6,146		—		6,146		16,897		—		16,897


Shareholders’ equity:
Common stock		260,141		—		260,141		268,965		—		268,965
Retained earnings		792,717		22,366		815,083		797,158		28,238		825,396
Accumulated other comprehensive loss		(112,642)		—		(112,642)		(112,470)		—		(112,470)
Treasury stock at cost		(36,078)		—		(36,078)		(36,078)		—		(36,078)
Shareholders’ equity related to Cubic		904,138		22,366		926,504		917,575		28,238		945,813
Noncontrolling interest in VIE		18,094		6,609		24,703		7,144		12,625		19,769
Total shareholders’ equity		922,232		28,975		951,207		924,719		40,863		965,582
Total liabilities and shareholders’ equity	$	1,533,217	$	15,738	$	1,548,955	$	1,792,503	$	22,382	$	1,814,885

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Note 3 — Acquisitions and Divestitures

Sale of CGD Services

On April 18, 2018, we entered into a stock purchase agreement with the Purchaser, an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser. We concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations presentation in the second quarter of fiscal 2018. Consequently, in the second quarter of fiscal 2018, we recognized a $6.9 million loss within discontinued operations, which was calculated as the excess of the carrying value of the net assets of CGD Services less the estimated sales price in the stock purchase agreement less estimated selling costs.

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 ~~at December 31, 2018,~~ we ~~have~~ recorded a receivable from the Purchaser ~~of $3.7 million~~ for the estimated amount due related to the working capital settlement. The balance of this receivable was $3.7 million at December 31, 2018. In the second quarter of fiscal 2019, we 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 $1.3 million and recognized a loss on the sale of CGD Services in the second quarter of fiscal 2019. Certain remaining working capital settlement ~~has~~estimates, primarily related to the fair value of accounts receivable, have not yet been settled with the Purchaser.

In addition to the amounts described above, we are eligible to receive an additional cash payment of $3.0 million based on the achievement of pre-determined earn-out conditions related to the award of certain government contracts. No amount has been recorded as a receivable related to the potential achievement of earn-out conditions based upon our assessment of the probability of achievement of the required conditions.

We concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations presentation in the second quarter of fiscal 2018. As such, the CGD Services business financial results are reported within discontinued operations in our condensed consolidated financial statements. The operating results and cash flows of CGD Services have been classified as discontinued operations in the Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Statements of Cash Flows for all periods presented.

The operations and cash flows of CGD Services are reflected in our ~~consolidated~~Consolidated Statements of ~~Income~~Operations and Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the date of the sale. The following table presents the composition of net income from discontinued operations, net of taxes for the three- and nine-month periods ended June 30, 2019 and June 30, 2018 (in thousands).


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Net sales	$	—	$	71,867	$	—	$	262,228
Costs and expenses:
Cost of sales		—		64,597		—		235,279
Selling, general and administrative expenses		—		3,133		—		10,676
Amortization of purchased intangibles		—		276		—		1,373
Restructuring costs		—		—		—		7
Other income		—		(2)		—		(15)
Earnings from discontinued operations before income taxes		—		3,863		—		14,908
Net (gain) loss on sale		202		(819)		1,541		6,081
Income tax (benefit) provision		—		(698)		—		463
Net income (loss) from discontinued operations	$	(202)	$	5,380	$	(1,541)	$	8,364

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. Our purchase agreement with Pixia includes an option to purchase the remaining

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80% of the capital stock, which must be exercised by December 31, 2019. We are accounting for our investment in Pixia using the equity method of accounting. As such, we recorded a $50.0 million investment in Pixia within other assets on our Condensed Consolidated Balance Sheet, and our interest in Pixia’s operating results is recognized in other income (expense) outside of operating income on our Condensed Consolidated Statements of Income. However, our interest in Pixia’s operating income was not significant for the quarter ended ~~December 31, 2017 (in thousands). No amounts were recognized as income or loss from discontinued operations for the three months ended December 31, 2018:~~June 30, 2019.

Three Months Ended

December 31, 2017

Net sales

$
92,293

Costs and expenses:

Cost of sales

83,120

Selling, general and administrative expenses

3,667

Amortization of purchased intangibles

608

Other income

(5)

Earnings from discontinued operations before income taxes

4,903

Income tax provision

3,254

Net income from discontinued operations

$
1,649

Under a transition services agreement, we are providing the Purchaser with certain post-closing support primarily consisting of IT and payroll services. We are charging the Purchaser for the post-closing support in amounts that approximate their expected costs, and these support services will be phased out over an approximate ten-month period from the date that the sale closed.

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.

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Nuvotronics, Inc.

~~Advanced Traffic Solutions Inc.~~

In ~~October 2018,~~ 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 CMS business.

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


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	3.6	$	—	$	4.3	$	—
Operating loss		(3.2)		—		(4.9)		—
Net loss after taxes		(3.2)		—		(4.9)		—

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


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	0.6	$	—	$	0.7	$	—
Acquisition-related expenses		1.1		—		2.9		—

The acquisition-date fair value of consideration is $66.8 million, which is comprised of net cash paid of $61.5 million, plus the estimated fair value of contingent consideration of $4.9 million, plus a $0.4 million estimated payable due to the sellers for the difference between the net working capital acquired and the targeted working capital amounts. 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.

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The following table summarizes the estimated 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		(3.5)
Other net assets acquired (liabilities assumed)		(0.6)
Net identifiable assets acquired		26.1
Goodwill		40.7
Net assets acquired	$	66.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles are preliminary estimates pending the finalization of our valuation analyses and the receipt of further information from the seller regarding its assets and liabilities. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of nine years from the date of acquisition.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Nuvotronics with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is not expected to be deductible for tax purposes.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Nuvotronics is as follows (in millions):


Year Ended
September 30,
2019	$	1.2
2020		4.0
2021		3.0
2022		3.0
2023		2.9
Thereafter		12.6

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 (ITS) 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 CTS business.

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


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Sales	$	7.7	$	—	$	14.0	$	—
Operating income (loss)		0.7		—		(1.3)		—
Net income (loss) after taxes		0.7		—		(1.3)		—

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


	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Amortization	$	1.3	$	—	$	2.7	$	—
Acquisition-related expenses		0.6		—		2.4		—

The acquisition-date fair value of consideration is $86.8 million, which is comprised of net cash paid of $87.2 million less a $0.4 million receivable due from the sellers for the difference between the net working capital acquired and the targeted working capital amounts. The acquisition was financed primarily with proceeds from draws on our line of credit.

The following table summarizes the estimated 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		(2.5)
Deferred taxes		(3.9)
Other net assets acquired		0.5
Net identifiable assets acquired		31.8
Goodwill		55.0
Net assets acquired	$	86.8

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our valuation analyses, including the filing of pre-acquisition income tax returns. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.

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.

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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,
2019	$	4.0
2020		5.3
2021		3.9
2022		3.5
2023		3.5
Thereafter		11.5

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 ~~Cubic Transportation System (CTS)~~CTS business.

Trafficware’s sales and results of operations included in our operating results ~~for the quarter ended December 31, 2018 and 2017~~ were as follows (in millions):


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Sales	$	10.5	$	—	$	15.8	$	—	$	38.0	$	—
Operating loss		(3.3)		—		(1.0)		—		(9.5)		—
Net loss after taxes		(3.3)		—		(1.0)		—		(9.5)		—

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


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Amortization	$	4.3	$	—	$	2.8	$	—	$	12.4	$	—
Acquisition-related expenses		1.4		—		0.9		—		4.4		—

The acquisition-date fair value of consideration is $237.6 million, which is comprised of net cash paid of $239.2 million less a $1.6 million receivable due from the sellers for the difference between the net working capital acquired and the targeted working capital amounts. $237.2 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

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





Technology	$	43.3	$	43.3
Customer Relationships		21.9
Customer relationships				21.9
Backlog		4.8		4.8
Trade Name		4.6
Accounts Receivable		10.4
Trade name				4.6
Accounts receivable				10.4
Inventory		9.4		9.9
Accounts payable and accrued expenses		(6.5)		(6.6)
Other net assets acquired (liabilities assumed)		(2.0)		(1.9)
Net identifiable assets acquired		85.9		86.4
Goodwill		151.7		150.8
Net assets acquired	$	237.6	$	237.2

The estimated fair values of assets acquired and liabilities assumed, including purchased intangibles, are preliminary estimates pending the finalization of our valuation ~~analyses.~~analyses and the filing of pre-acquisition income tax returns. The estimated fair values of purchased intangibles were determined using the valuation methodology deemed to be the most

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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 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

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following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.

The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Trafficware ~~for fiscal years 2019 through 2023 and thereafter~~ is as follows (in millions):



Year Ended
September 30,
2019	$	15.3	$	15.3
2020		11.4		11.4
2021		11.4		11.4
2022		11.4		11.4
2023		6.4		6.4
Thereafter		18.8		18.7

Shield Aviation, Inc.

In July 2018, we acquired the assets of Shield Aviation (Shield), based in San Diego, California, a provider of autonomous aircraft systems (AAS) for intelligence, surveillance and reconnaissance ~~(ISR)~~ services. The addition of Shield expands our C4ISR portfolio for our CMS segment and will provide our customers with a rapidly deployable, medium AAS that offers unique mission enabling capabilities. We already provide the data link as well as the command and control link for the Shield AAS.

Shield’s sales and results of operations included in our operating results ~~for the three months ended December 31, 2018 and 2017~~ were as follows (in millions):


	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Sales	$	—	$	—	$	—	$	—	$	—	$	—
Operating loss		(0.9)		—		(2.0)		—		(4.8)		—
Net loss after taxes		(0.9)		—		(2.0)		—		(4.8)		—

Shield’s operating results above included the following amounts ~~for the three months ended December 31, 2018 and 2017~~ (in millions):


	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Amortization	$	0.2	$	—	$	0.2	$	—	$	0.6	$	—
Acquisition-related expenses		—		—
(Gains) for changes in fair values of contingent consideration						(0.7)		—		(0.4)		—

The acquisition-date fair value of consideration is $12.8 million, which is comprised of ~~estimated~~the fair value of contingent consideration of $5.6 million, extinguishment of secured loans and warrants due from Shield of $5.2 million, cash paid of $1.3 million, plus additional consideration to be paid in the future of $0.7 million. Under the purchase agreement, we will pay the sellers up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025. 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.

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The acquisition of Shield was paid for with funds from existing cash resources. The following table summarizes the ~~estimated~~ fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):





Technology	$	6.0	$	6.0
Other net assets acquired		0.3		0.3
Net identifiable assets acquired		6.3		6.3
Goodwill		6.5		6.5
Net assets acquired	$	12.8	$	12.8

The technology asset valuation used the excess earnings approach and is being amortized using the straight-line method over eight years, which is based on the expected period of cash flows that will be generated by the asset.

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Shield with our existing ~~Cubic Mission Solutions (CMS)~~CMS business, and strengthening our capability of developing and integrating products and services 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 expected to be deductible for tax purposes.

The ~~estimated~~ amortization expense related to the intangible assets recorded in connection with our acquisition of Shield ~~for fiscal years 2019 through 2023 and thereafter~~ is as follows (in millions):



Year Ended
September 30,
2019	$	0.8	$	0.8
2020		0.8		0.8
2021		0.8		0.8
2022		0.8		0.8
2023		0.8		0.8
Thereafter		2.1		2.1

MotionDSP

In October 2017 we paid cash of $4.7 million to purchase 49% of the outstanding capital stock of MotionDSP, a private artificial intelligence software company based in Burlingame, California, which specializes in real-time video enhancement and computer vision analytics. On February 21, 2018, we paid net cash of $4.8 million to purchase the remaining outstanding capital stock of MotionDSP. The addition of MotionDSP enhances the capabilities in real-time video processing of our CMS business and expands our customer base in the public safety and other adjacent markets.

MotionDSP’s sales and results of operations included in our operating results since its consolidation in our financial statements ~~for the quarters ended December 31, 2018 and 2017~~ were as follows (in millions):


	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Sales	$	0.2	$	—	$	0.6	$	0.3	$	1.1	$	0.4
Operating loss		(0.4)		—		(0.1)		(0.2)		(0.5)		(1.0)
Net loss after taxes		(0.4)		—		(0.1)		(0.2)		(0.5)		(1.0)

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MotionDSP’s operating results above included the following amounts ~~for the quarters ended December 31, 2018 and 2017~~ (in millions):


	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Amortization	$	0.2	$	—	$	0.2	$	0.2	$	0.6	$	0.2
Acquisition-related expenses		0.1		—		—		0.1		0.2		0.7

The acquisition of MotionDSP was paid for with funds from existing cash resources. The following table summarizes the ~~estimated~~ fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):



Customer relationships	$	0.2	$	0.2
Technology		4.5		4.5
Trade name		0.1		0.1
Accounts payable and accrued expenses		(0.3)		(0.3)
Other noncurrent liabilities		(0.8)		(0.8)
Other net liabilities assumed		(0.9)		(0.9)
Net identifiable assets acquired		2.8		2.8
Goodwill		6.7		6.7
Net assets acquired	$	9.5	$	9.5

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 valuation used the excess earnings method.

The intangible assets are being amortized using straight-line methods based on the expected cash flows from the assets, over a useful life of seven years from the date of acquisition.

The goodwill resulting from the acquisition was deemed to consist primarily of the synergies expected from combining the operations of MotionDSP with our CMS operating segment, enhancing our capabilities in real-time video processing and computer vision analytics of our CMS portfolio, as well as the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill in connection with the acquisition of MotionDSP is not expected to be deductible for tax purposes.

The ~~estimated~~ amortization expense related to the intangible assets recorded in connection with our acquisition of MotionDSP ~~for fiscal years 2019 through 2023 and thereafter~~ is as follows (in millions):



Year Ended
September 30,
2019	$	0.7	$	0.7
2020		0.7		0.7
2021		0.7		0.7
2022		0.7		0.7
2023		0.7		0.7
Thereafter		0.8		0.8

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Pro forma information

The following unaudited pro forma information presents our consolidated results of operations as if Nuvotronics, GRIDSMART, Trafficware, Shield, and MotionDSP had been included in our consolidated results since October 1, 2017 (in millions):


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Net sales	$	307.1	$	261.8	$	382.7	$	322.4	$	1,039.6	$	891.4

Net loss	$	(6.3)	$	(13.4)

Net income (loss)						24.1		(1.5)		4.9		(28.3)

The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. No adjustments were made for transaction expenses, other ~~adjustments~~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, 2017, and it does not purport to project our future operating results.

~~Acquisition of GRIDSMART Subsequent to December 31, 2018~~Goodwill

In January 2019, we acquired all of the outstanding capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a provider of differentiated video tracking to the Intelligent Traffic Systems (ITS) 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 CTS business. The purchase price was $87.0 million adjusted for the difference between net working capital acquired and a targeted working capital amount, and was financed primarily with proceeds from draws on our line of credit. Due to the limited time between the acquisition date and the filing of this report and due to the difference in fiscal year dates between GRIDSMART and Cubic, it is not practicable for us to disclose: (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 quarter ended December 31, 2018.

~~Goodwill~~

Changes in goodwill for the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019 were as follows for each of our reporting units (in thousands):



	Transportation		Cubic Mission		Cubic Global
	Systems		Solutions		Defense		Total



									Cubic Transportation		Cubic Mission		Cubic Global
									Systems		Solutions		Defense		Total

Net balances at September 30, 2018	$	49,786	$	138,127	$	145,713	$	333,626	$	49,786	$	138,127	$	145,713	$	333,626
Acquisitions		151,670		—		—		151,670		205,778		40,709		—		246,487
Reassignment of goodwill										—		3,428		(3,428)		—
Foreign currency exchange rate changes		(798)		(73)		(96)		(967)		(989)		(215)		36		(1,168)
Net balances at December 31, 2018	$	200,658	$	138,054	$	145,617	$	484,329
Net balances at June 30, 2019									$	254,575	$	182,049	$	142,321	$	578,945

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.

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The test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of each reporting unit to its carrying ~~value,~~amount, including recorded goodwill. If the carrying ~~value~~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 ~~value.~~amount. Any resulting impairment determined would be recorded in the current period.

Our most recent annual goodwill impairment test was our 2018 annual impairment test completed as of July 1, 2018. The results of our 2018 annual impairment test indicated that the estimated fair value for our CTS reporting unit exceeded its carrying value by over 100% while the estimated fair ~~values~~amounts of our ~~Cubic Global Defense (CGD)~~CGD and CMS reporting units each exceeded their respective carrying ~~values~~amounts by over 40%. 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.

In July 2017, we acquired Deltenna, a wireless infrastructure company specializing in the design and delivery of radio and antenna communication solutions. The acquisition-date fair value of consideration paid for Deltenna was $5.3 million. Deltenna’s operations were included in our CGD reporting unit upon its acquisition. On April 1, 2019, we

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reorganized our reporting structure to include Deltenna in our CMS reporting unit and reassigned $3.4 million of goodwill from CGD to CMS based upon its relative fair value. Since its acquisition, Deltenna’s sales, operating results, and cash flows have not been significant to our consolidated results. As such, reportable segment information has not been restated for this change in the composition of our reportable segments.

Note 4 – 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, ~~CTS, a wholly owned subsidiary of~~ 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.)~~(HoldCo). Also in March 2018, ~~HoldCo.~~HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC ~~(OpCo.)~~(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.~~HoldCo is 90% owned by John Laing and 10% owned by ~~CTS.~~Cubic. Collectively, ~~HoldCo.~~HoldCo and ~~OpCo.~~OpCo are referred to as the P3 Venture. Based on our assessment under ASC 810, we have concluded that ~~OpCo.~~OpCo and ~~HoldCo.~~HoldCo are VIE’s and that we are the primary beneficiary of OpCo. Consequently, we have consolidated the financial statements of ~~OpCo.~~OpCo within Cubic’s consolidated financial statements. We have concluded that we are not the primary beneficiary of ~~HoldCo.,~~HoldCo, and thus we have not consolidated the financial statements of ~~HoldCo.~~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.~~OpCo in connection with the MBTA Contract over the ~~ten-year~~ten- year operate and maintain phase. All of ~~OpCo.’s~~OpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to ~~CTS~~Cubic by OpCo. ~~CTS~~Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, under its subcontract with OpCo.

Upon creation of the P3 Venture, John Laing made a loan to ~~HoldCo.~~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, ~~HoldCo.~~HoldCo made a corresponding equity contribution to ~~OpCo.~~OpCo in the same amount which is included within equity of

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Noncontrolling interest in VIE ~~within~~in Cubic’s consolidated financial statements. Also, upon creation of the P3 Venture, ~~CTS~~Cubic issued a letter of credit for $2.7 million to ~~HoldCo.~~HoldCo in accordance with ~~CTS’s~~Cubic’s equity funding responsibilities. ~~HoldCo.~~HoldCo is able to draw on the ~~CTS~~Cubic letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of ~~December 31, 2018.~~June 30, 2019.

Upon creation of the P3 Venture, ~~OpCo.~~OpCo entered into a credit agreement with a group of financial institutions ~~(the OpCo.~~(the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit ~~facility~~.facility. The long-term debt facility allows for draws up to a maximum amount of $212.4 million; draws may only be made during the design and build

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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 LIBOR plus 1.3% and LIBOR plus 1.55% over the design and build and operate and maintain phases of the MBTA Contract, ~~respectively~~.respectively. At ~~December 31, 2018,~~June 30, 2019, the outstanding balance on the long-term debt facility was ~~$15.4~~$46.0 million, which is presented net of unamortized deferred financing costs of $8.8 ~~million.~~million. The revolving credit facility allows for draws up to a maximum amount of $13.9 million and is only available to be drawn on during the operate and maintain phase of the MBTA Contract. ~~OpCo.’s~~OpCo’s debt is nonrecourse with respect to Cubic and its subsidiaries. The fair value of the long-term debt facility approximates its carrying ~~value.~~amount.

The ~~OpCo.~~OpCo Credit Agreement contains a number of covenants which require that ~~OpCo.~~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.~~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.,~~OpCo, and Cubic via its subcontract with ~~OpCo.,~~OpCo, to incur penalties due to the ~~lenders~~.lenders.

~~OpCo.~~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~~OpCo’s expected draws on its long-term debt facility. At ~~December 31, 2018,~~June 30, 2019, the outstanding notional principal amounts on open interest rate swaps were ~~$61.9~~$117.3 million. The fair value of ~~OpCo.’s~~OpCo’s interest rate swaps at ~~December 31, 2018~~June 30, 2019 was ~~$6.1~~$16.9 million and is recorded as a liability in ~~Other~~other long-term liabilities in our Consolidated Balance Sheets. ~~OpCo.’s~~OpCo’s interest rate swaps were not designated as effective hedges at ~~December 31, 2018~~June 30, 2019 and as such ~~any~~ unrealized gains/losses are included in other income (expense), ~~net~~.net. Unrealized losses as a result of changes in the fair value of ~~OpCo.’s~~OpCo’s interest rate swaps were ~~$6.1~~$7.0 million and $16.9 million for the ~~three months~~three- and nine-month periods ended ~~December 31, 2018.~~June 30, 2019, respectively. See Note 13 for a description of the measurement of fair value of derivative financial instruments, including ~~OpCo.’s~~OpCo’s interest rate swaps.

~~At December 31, 2018, OpCo.~~OpCo holds a ~~$10.0 million~~ 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~~.MBTA.

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The assets and liabilities of ~~OpCo.~~OpCo that are ~~included in~~consolidated into our ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets at ~~December 31, 2018~~June 30, 2019 and September 30, 2018 are as follows:


	December 31,		September 30,
	2018		2018
	(in thousands)

					June 30,		September 30,
					2019		2018
					(in thousands)
Cash	$	421	$	374	$	359	$	374
Restricted cash		10,000		10,000		9,967		10,000
Other current assets						53		—
Long-term capitalized contract costs		—		1,258		—		33,818
Long-term contracts financing receivable		52,996		—		90,233		—
Other noncurrent assets		962		810		1,266		810
Total assets	$	64,379	$	12,442	$	101,878	$	45,002


Trade accounts payable	$	205	$	165	$	88	$	165
Accrued compensation and other current liabilities						183		—
Due to Cubic						19,460		11,724
Other long-term liabilities		6,146		13		16,897		13
Long-term debt		15,357		9,056		45,991		9,056
Total liabilities	$	21,708	$	9,234	$	82,619	$	20,958
Total Cubic equity		39		(304)		(510)		(304)
Noncontrolling interests		24,703		24,348		19,769		24,348
Total liabilities and owners' equity	$	46,450	$	33,278	$	101,878	$	45,002

~~The balance sheets of OpCo. at December 31, 2018 and September 30, 2018 exclude $17.9 million of liabilities and $20.8 million of assets, respectively, that are eliminated in consolidation.~~

The assets of ~~OpCo.~~OpCo are restricted for its use only and are not available for the general operations of Cubic. ~~OpCo.’s~~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

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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.

Prior to the adoption of ASC 606, Cubic and ~~OpCo.~~OpCo were precluded from recognizing revenue on the MBTA Contract because MBTA was not required to make payments to ~~OpCo.~~OpCo until the operate and maintain phase of the contract began. During this time period Cubic and ~~OpCo.~~OpCo were capitalizing costs associated with designing and building the system for MBTA. ~~The total amount of such costs capitalized through September 30, 2018 was $27.8 million, which was classified within long-term capitalized contract costs.~~ Upon the adoption of ASC 606, Cubic and OpCo ~~are now permitted to recognize~~no longer defer the recognition of revenue and costs related to the MBTA contract and therefore costs are ~~now recognized as incurred and are~~ no longer capitalized.

The revenue, operating income, and other income (expense), net of ~~OpCo.~~OpCo that are included in our ~~condensed consolidated statement~~Condensed Consolidated Statements of ~~income (loss) for the three months ended December 31, 2018 and 2017~~Operations are as follows:


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Revenue	$	1,961	$	—	$	3,233	$	—	$	7,519	$	—
Operating income		1,668		—		2,823		—		6,521		—
Other income (expense), net		(6,133)		—		(7,031)		(2,090)		(16,884)		(2,090)
Interest income		503		—		1,075		—		2,335		—
Interest expense		(512)		—		(829)		—		(1,939)		—

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

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during the period. Common equivalent shares consist of dilutive restricted stock units. Dilutive restricted stock units 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. 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~~weighted average number of shares outstanding used to compute net loss per common share were as follows (in thousands):


	December 31,
	2018		2017


					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018

Weighted average shares - basic		28,492		27,207		31,160		27,232		30,267		27,221
Effect of dilutive securities		—		—		89		142		65		—
Weighted average shares - diluted		28,492		27,207		31,249		27,374		30,332		27,221


Number of anti-dilutive securities		990		1,040		—		—		—		1,023

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Note 6 — Contract Assets and Liabilities

Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities (formerly referred to as customer advances prior to the adoption of ASC ~~606~~606) include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in thousands):



	December 31,		October 1,
	2018		2018



					June 30,		October 1,
					2019		2018

Contract assets	$	320,277	$	272,210	$	275,422	$	272,210
Contract liabilities	$	69,713	$	70,128	$	62,266	$	70,127

Contract assets increased ~~$48.1~~$3.2 million during the ~~three~~nine months ended ~~December 31, 2018, primarily~~June 30, 2019, due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019 for which we have not yet billed. There were no significant impairment losses related to our contract assets during the ~~three~~nine months ended ~~December 31, 2018 and 2017.~~June 30, 2019.

Contract liabilities decreased ~~$0.4~~$7.9 million during the ~~three~~nine months ended ~~December 31, 2018, primarily~~June 30, 2019, due to ~~payments received~~revenue recognition in excess of ~~revenue recognized~~payments received on these performance obligations. During the ~~three months~~three- and nine-month periods ended ~~December 31, 2018,~~June 30, 2019, we recognized ~~$20.7~~$12.8 million and $47.6 million, respectively, of our contract liabilities at October 1, 2018 as revenue. We expect our contract liabilities to be recognized as revenue over the next twelve months.

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Note 7 — Balance Sheet Details

Accounts Receivable

The components of accounts receivable are as follows (in thousands):


	December 31,		September 30,
	2018		2018


					June 30,		September 30,
					2019		2018

Accounts receivable
Billed	$	119,943	$	156,948	$	180,594	$	156,948
Unbilled		—		242,877		—		242,877
Allowance for doubtful accounts		(1,652)		(1,324)		(1,745)		(1,324)
Total accounts receivable		118,291		398,501		178,849		398,501
Less estimated amounts not currently due		—		(6,134)		—		(6,134)
Current accounts receivable	$	118,291	$	392,367	$	178,849	$	392,367

~~Inventories~~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 third quarter of fiscal 2019, we sold $25.0 million of trade receivables to a financial institution that had not been collected as of June 30, 2019.

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Inventories

Inventories consist of the following (in thousands):


	December 31,		September 30,
	2018		2018


					June 30,		September 30,
					2019		2018

Finished products	$	7,716	$	7,099	$	12,745	$	7,099
Work in process and inventoried costs under long-term contracts		49,295		63,169		73,838		63,169
Materials and purchased parts		35,190		23,710		37,714		23,710
Customer advances		—		(9,779)		—		(9,779)
Net inventories	$	92,201	$	84,199	$	124,297	$	84,199

At ~~both December 31, 2018 and September~~June 30, ~~2018,~~2019, work in process and inventoried costs under long-term contracts includes approximately ~~$0.9~~$2.5 million in costs incurred outside the scope of work or in advance of a contract ~~award.~~award compared to $0.9 million at September 30, 2018. We believe it is probable that we will recover the costs inventoried at ~~December 31, 2018,~~June 30, 2019, plus a profit margin, under contract change orders or awards within the next year.

Property, Plant and Equipment

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


	June 30,		September 30,
	2019		2018
Land and land improvements	$	9,611	$	13,132
Buildings and improvements		32,343		57,959
Machinery and other equipment		94,447		81,727
Software		94,821		84,631
Leasehold improvements		17,351		11,991
Construction and internal-use software development in progress		18,069		12,888
Accumulated depreciation and amortization		(129,638)		(144,782)
	$	137,004	$	117,546

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, a financial institution will own the buildings, and we will lease the property for a term of five years upon their completion.

In the third quarter of fiscal 2019 we sold the land and buildings comprising our separate CTS campus in San Diego. We have entered into a lease with the buyer of this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate campus are ready for occupancy in fiscal 2021. In the third quarter of fiscal 2019 we also sold land and buildings in Orlando, Florida and we are entering a lease for new space in Orlando to accommodate our employees and operations in Orlando. In connection with the sale of these real estate campuses we received total net proceeds of $44.9 million and recognized net gains on the sales totaling $32.6 million.

Capitalized Software

We capitalize certain costs associated with the development or purchase of internal-use software. The amounts capitalized are included in property, plant and equipment in our Condensed Consolidated Balance Sheets and are amortized on a straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No amortization expense is recorded until the software is ready for its intended use.

As a part of our efforts to upgrade our current information systems, early in fiscal 2015 we purchased new enterprise resource planning (ERP) software and began the process of designing and configuring this software and other software applications to manage our operations. Various components of our ERP system became ready for their intended use and were placed into service in phases from fiscal 2016 through fiscal 2018. As each component became ready for its

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intended use, the component’s costs were transferred into completed software and we began amortizing these costs over their seven-year estimated useful life.

Excluding businesses that we acquired in fiscal 2019, we completed the planned implementation of our ERP system in the fourth quarter of fiscal 2018. We continue to capitalize costs associated with the development of certain ERP features and upgrades that are not yet ready for their intended use. We capitalized costs related to ERP components in development totaling ~~$0.5~~$0.1 million and ~~$2.5~~$0.7 million for the ~~quarters~~three- and nine-month periods ended ~~December 31,~~June 30, 2019, respectively, and $1.9 million and $6.5 million for the three- and nine-month periods ended June 30, 2018, ~~and 2017,~~ respectively.

In addition to software costs that were capitalized, during the ~~quarters~~three- and nine-month periods ended ~~December 31, 2018 and December 31, 2017,~~June 30, 2019, we recognized expenses related to the development and implementation of our ERP system of ~~$0.8~~$0.3 million and ~~$6.3~~$1.3 million, respectively, compared to $2.8 million and $13.1 million during the three- and nine-month periods ended June 30, 2018, respectively, for costs that did not meet the requirements for capitalization. Amounts that were expensed in

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connection with the development and implementation of these systems are classified within selling, general and administrative expenses in the Condensed Consolidated Statements of ~~Income (Loss).~~Operations.

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 long-term liabilities in our Condensed Consolidated Balance Sheets and totaled ~~$12.0~~$11.1 million at June 30, 2019 and $11.5 million at ~~December 31, 2018 and~~ September 30, ~~2018, respectively.~~2018.

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 values of assets set aside to fund deferred compensation liabilities ~~as of December 31, 2018~~totaled $6.3 million at June 30, 2019 and at September 30, 2018 ~~were $5.8 million~~ and ~~$6.4 million, respectively, which~~ 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 ~~Income (Loss).~~Operations.

Note 8 — 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.

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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, 2018								September 30, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

																	June 30, 2019								September 30, 2018
																	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	—	$	—	$	—	$	—	$	9,000	$	—	$	—	$	9,000	$	—	$	—	$	—	$	—	$	9,000	$	—	$	—	$	9,000
Current derivative assets		—		5,036		—		5,036		—		1,803		—		1,803		—		2,019		—		2,019		—		1,803		—		1,803
Noncurrent derivative assets		—		581		—		581		—		314		—		314		—		314		—		314		—		314		—		314
Noncurrent investment assets																		—		—		3,076		3,076		—		—		—		—
Total assets measured at fair value	$	—	$	5,617	$	—	$	5,617	$	9,000	$	2,117	$	—	$	11,117	$	—	$	2,333	$	3,076	$	5,409	$	9,000	$	2,117	$	—	$	11,117
Liabilities
Current derivative liabilities		—		3,367		—		3,367		—		1,657		—		1,657		—		1,263		—		1,263		—		1,657		—		1,657
Noncurrent derivative liabilities		—		—		—		—		—		75		—		75		—		116		—		116		—		75		—		75
Contingent consideration to seller of Deltenna		—		—		1,343		1,343		—		—		1,081		1,081		—		—		2,580		2,580		—		—		1,081		1,081
Contingent consideration to seller of Shield		—		—		5,618		5,618		—		—		5,618		5,618		—		—		5,203		5,203		—		—		5,618		5,618
Contingent consideration to seller of TeraLogics - revenue targets		—		—		—		—		—		—		1,750		1,750		—		—		—		—		—		—		1,750		1,750
Contingent consideration to seller of H4 Global		—		—		832		832		—		—		665		665		—		—		679		679		—		—		665		665
Contingent consideration to seller of Nuvotronics																		—		—		5,250		5,250		—		—		—		—
Total liabilities measured at fair value	$	—	$	3,367	$	7,793	$	11,160	$	—	$	1,732	$	9,114	$	10,846	$	—	$	1,379	$	13,712	$	15,091	$	—	$	1,732	$	9,114	$	10,846

The fair value of certain of our cash equivalents are based upon quoted prices for identical instruments in active markets. The fair value of our other cash equivalents is based upon a discounted cash flow model and approximate cost. 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-~~

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~~derived~~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, 2018,~~June 30, 2019, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:

●

~~Deltenna:~~ ~~Payment~~H4 Global: Payments of up to ~~$6.9 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the year ending September 30, 2022.~~

~~H4 Global:~~ ~~Payment of up to $3.2~~$3.0 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 $7.1 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.

In addition, we have a contingent consideration arrangement with the Purchaser of our CGD Services business under which we are eligible to receive a cash payment of $3.0 million if the Purchaser is awarded certain government contracts in the future.

The fair value of Deltenna contingent consideration was valued using the real option approach. Under this approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each

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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 ~~the volatility factor used in the December 31, 2018 valuations~~ was ~~40% for Deltenna. The volatility factor used in the~~37% as of June 30, 2019 and 53% as of September 30, ~~2018 valuation was 53% for Deltenna.~~2018. The ~~risk-free~~selected discount rate was ~~selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment period.~~11% as of June 30, 2019 and 11.5% as of September 30, 2018.

The maximum remaining payout to the sellers of H4 Global is ~~$3.2~~$3.0 million at ~~December 31, 2018,~~June 30, 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 paid over a ~~five year~~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 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 ~~100,000 iterations.~~1,000,000 simulation trials. Key inputs for the simulation include projected revenues, assumed discount rates for projected ~~revenue~~revenues and cash flows, and volatility. The volatility and revenue risk adjustment factors ~~used as of December 31, 2018 were 20% and 14%, respectively, and~~ were determined based on analysis of publicly traded comparable ~~companies.~~companies and as of June 30, 2019 were 26.0% and 17.4%, respectively, and as of September 30, 2018 were 20.0% and 14.5%, respectively. The discount rate used ~~as of December 31, 2018 and September 30, 2018~~ was based on our expected borrowing rate under our financing arrangements, which was determined to be ~~5.0%~~4.1% at June 30, 2019 and 3.9% at September 30, 2018.

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, ~~2018~~2020 and ~~September~~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 June 30, ~~2018.~~ 2019 was 12.9% and was determined based on analysis of publicly traded comparable companies. The discount rate used as of June 30, 2019 was 7.3%, which was based on our risk-free rate of return adjusted for our gross profit required risk premium.

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~~. period.

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As of ~~December 31, 2018,~~June 30, 2019, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):


		H4 Global		TeraLogics (Revenue Targets)		Deltenna		Shield		Total

											H4 Global		TeraLogics (Revenue Targets)		Deltenna		Shield		Nuvotronics		Total
Net balances at September 30, 2018	$	665	$	1,750	$	1,081	$	5,618	$	9,114	$	665	$	1,750	$	1,081	$	5,618	$	—	$	9,114
Initial measurement recognized at acquisition												—		—		—		—		4,900		4,900
Cash paid to seller		—		(1,750)		—		—		(1,750)		(385)		(1,750)		—		—		—		(2,135)
Total remeasurement (gain) loss recognized in earnings		167		—		262		—		429
Balance as of December 31, 2018	$	832	$	—	$	1,343	$	5,618	$	7,793
Total remeasurement loss recognized in earnings												399		—		1,499		(415)		350		1,833
Balance as of June 30, 2019											$	679	$	—	$	2,580	$	5,203	$	5,250	$	13,712

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.

As of June 30, 2019, we invested $3.1 million in a limited partnership investment fund that invests in mid-sized, privately owned companies in the military, commercial, or disruptive technology sectors. We have a maximum additional commitment to this fund of $6.9 million. As the fund holds investments in privately held companies with no

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quoted market prices in active markets, significant unobservable inputs are used to value our investment and therefore represent Level 3 measurements within the fair value hierarchy.

As of June 30, 2019, the following table summarizes the change in fair value of our Level 3 investment assets (in thousands):


	Investment
Balance as of September 30, 2018	$	—
Cash paid for initial investment		3,076
Total remeasurement gain/(loss) recognized in earnings		—
Balance as of June 30, 2019	$	3,076

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,
	2018		2018

					June 30,		September 30,
					2019		2018
Fair value	$	195.4	$	193.7	$	202.9	$	193.7
Carrying value	$	200.0	$	200.0	$	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 third quarter and first ~~quarter~~nine months of fiscal 2019 or 2018 other than assets and liabilities acquired in business acquisitions described in Note 3 and the restricted stock units that were granted ~~in the first quarter of~~during fiscal 2019 that contain performance and market-based vesting criteria described in Note 11.

Note 9 — Financing Arrangements

In December 2018, we completed an underwritten public offering of ~~3,300,000~~3,795,000 shares of our common ~~stock. We granted~~stock, including the ~~underwriters a 30-day~~exercise of the underwriters’ option to purchase ~~up to an~~ additional ~~495,000 shares of common stock. In December 2018, the underwriters exercised their option to purchase the additional 495,000~~ 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.

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. ~~In addition, pursuant~~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. ~~The agreement pertaining to the aforementioned notes also contained a provision that the coupon rate would increase by a further 0.50% should the company’s leverage ratio exceed a certain level.~~ 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. At the time of the issuance of this last series of notes, certain terms and conditions of the note purchase and private shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement as discussed below in order to increase our leverage capacity. The ~~interest rates on all of~~agreement pertaining to the ~~term~~aforementioned notes ~~described above may be adjusted upwards~~also contains a provision that the coupon rate would increase by ~~up to 0.75%~~a further 0.50% should ~~our~~the company’s leverage ratio exceed a certain ~~levels.~~level.

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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, 2018,~~June 30, 2019, our total debt issuance costs have an

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unamortized deferred financing balance of ~~$1.7~~$3.4 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of ~~December 31, 2018,~~June 30, 2019, there were ~~$64.5~~$231.0 million of borrowings under this agreement and there were letters of credit outstanding totaling ~~$38.4~~$34.7 million, which reduce the available line of credit to ~~$297.1~~$534.3 million. The ~~$38.4~~$34.7 million of letters of credit includes both financial letters of credit and performance guarantees.

As of June 30, 2019, we had letters of credit and bank guarantees outstanding totaling $42.7 million, which includes the $34.7 million of letters of credit on the Revolving Credit Agreement above and $8.0 million of letters of credit issued under other facilities. The total of $42.7 million of letters of credit and bank guarantees includes $37.2 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of $5.5 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a 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 $25.4 million at June 30, 2019) to help meet the short-term working capital requirements of our subsidiary. At June 30, 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, 2018~~June 30, 2019 was ~~$17.9~~$17.1 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

As of December 31, 2018, we had letters of credit and bank guarantees outstanding totaling $50.1 million, which includes the $38.4 million of letters of credit on the Revolving Credit Agreement above and $11.7 million of letters of credit issued under other facilities. The total of $50.1 million of letters of credit and bank guarantees includes $42.9 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of $7.2 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a 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 $25.5 million) to help meet the short-term working capital requirements of our subsidiary. At December 31, 2018, no amounts were outstanding under this borrowing arrangement.

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, 2018,~~June 30, 2019, these agreements have no restrictions on distributions to shareholders, subject to certain tests in these agreements.

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 ~~$8.7~~$7.6 million at ~~December 31, 2018~~June 30, 2019 and $8.6 million at September 30, 2018.

Note 10 — Pension Plans

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


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Service cost	$	149	$	151	$	150	$	153	$	449	$	459
Interest cost		1,910		1,880		1,915		1,891		5,746		5,672
Expected return on plan assets		(3,009)		(3,525)		(3,020)		(3,549)		(9,063)		(10,644)
Amortization of actuarial loss		528		692		530		700		1,592		2,098
Administrative expenses		97		110		97		108		291		328
Net pension cost (benefit)	$	(325)	$	(692)	$	(328)	$	(697)	$	(985)	$	(2,087)

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Note 11 - Stockholders’ Equity

Long-Term Equity Incentive Plan

~~In 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved a~~Under our long-term equity incentive ~~award program. To date, the Compensation Committee has approved~~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. Through December 31, 2018, the Compensation Committee has granted 1,285,560 RSUs with time-based vesting, 1,173,766 RSUs with performance-based vesting, and 219,890 RSUs with performance and market-based vesting under this program.

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 ~~when and~~ as dividends are paid on

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our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.

The RSUs granted with time-based vesting 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.

The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of performance goals established by the Compensation Committee over the performance periods, subject to the recipient’s continued service through the end of the respective performance periods. For the performance-based RSUs granted prior to September 30, 2018, the vesting is contingent upon Cubic meeting ~~one of three types of~~ vesting criteria over the performance period, including revenue growth targets, earnings growth targets, and return on equity targets. 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, the Compensation Committee granted RSUs with 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 ~~our~~ 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 ~~could~~would result in a reduction of up to 25% of these RSUs vesting at the end of the performance 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.

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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 table includes the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted ~~in the first quarter of~~during fiscal 2019:



		RSU's granted during the three
		months ended December 31, 2018




			RSUs granted during the nine months ended June 30, 2019

Date of grant		November 21, 2018	November 21, 2018	April 1, 2019
Closing average share value (mean)	$	68.56
Grant date fair value			$67.40	$59.29
Performance period begins		October 1, 2018	October 1, 2018	October 1, 2018
Performance period ends		September 30, 2021	September 30, 2021	September 30, 2021
Risk-free interest rate		2.8%	2.8%	2.8%
Expected volatility		34%	34%	34%

~~As a result of the valuation analysis, the fair value of the RSUs with performance and market-based vesting granted in the first quarter of fiscal 2019 was calculated at $67.40 per RSU.~~

At ~~December 31, 2018,~~June 30, 2019, the total number of unvested RSUs that are ultimately expected to vest, after consideration of expected forfeitures and estimated vesting of performance-based RSUs, is ~~331,181~~353,979 RSUs with time-based vesting, ~~129,907~~112,070 RSUs with performance-based vesting, and ~~152,570~~168,664 RSUs with performance and market-based vesting.

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The following table summarizes our RSU activity:


	Unvested Restricted Stock Units
		Weighted-Average
	Number of Shares	Grant-Date Fair Value

				Unvested Restricted Stock Units with Service-Based Vesting
					Weighted Average
				Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	366,460	$	52.31	366,460	$	52.31
Granted	195,033		64.33	232,667		62.50
Vested	(128,949)		50.61	(143,513)		50.73
Forfeited	(15,391)		50.04	(34,744)		54.80
Unvested at December 31, 2018	417,153	$	58.54
Unvested at June 30, 2019				420,870	$	58.28

Unvested Restricted Stock Units with Performance Based Vesting

Weighted-Average

Number of Shares

Grant-Date Fair Value

Unvested at September 30, 2018

635,628

$
50.11

Granted

—

—

Vested

—

—

Forfeited

(295,759)

43.86

Unvested at December 31, 2018

339,869

$
55.54

Unvested Restricted Stock Units with Performance and Market Based Vesting

Weighted-Average

Number of Shares

Grant-Date Fair Value

Unvested at September 30, 2018

—

$
—

Granted

219,890

67.40

Vested

—

—

Forfeited

—

—

Unvested at December 31, 2018

219,890

$
67.40


	Unvested Restricted Stock Units with Performance-Based Vesting
		Weighted Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	635,628	$	50.11
Granted	—		—
Vested	—		—
Forfeited	(320,753)		44.63
Unvested at June 30, 2019	314,875	$	55.68


	Unvested Restricted Stock Units with Performance and Market-Based Vesting
		Weighted Average
	Number of Shares	Grant-Date Fair Value
Unvested at September 30, 2018	—	$	—
Granted	237,616		66.79
Vested	—		—
Forfeited	(10,214)		67.40
Unvested at June 30, 2019	227,402	$	66.77

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


	Three Months Ended
	December 31,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Cost of sales	$	313	$	156	$	498	$	357	$	1,236	$	729
Selling, general and administrative		2,407		1,471		3,904		2,246		9,524		4,371
	$	2,720	$	1,627
					$	4,402	$	2,603	$	10,760	$	5,100

As of ~~December 31, 2018,~~June 30, 2019, there was ~~$52.0~~$44.1 million of unrecognized compensation ~~cost~~expense related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of ~~performance based~~performance-based RSUs, the aggregate fair value of RSUs expected to ultimately vest is ~~$37.5.~~$37.6 million. This amount is expected to be recognized over a ~~weighted-average~~weighted average period of ~~1.6~~1.7 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, 2018.~~June 30, 2019. To the extent the actual forfeiture rate is different from what we have estimated, ~~stock-based~~ compensation expense related to these awards will be different from our expectations.

Note 12 – Income Taxes

U.S. Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Act. Due to the complexity of the Tax Act, the SEC issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act.

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SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must be completed. During fiscal year 2018, we recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period.

~~During the first quarter of fiscal year 2019, we did not adjust provisional amounts recorded in the prior fiscal year and the~~The SAB 118 measurement period ~~subsequently~~ ended on December 22, 2018. Although we no longer ~~considers~~consider these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.

The Tax Act includes provisions for Global Intangible Low-Tax Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of foreign subsidiaries.Consistent with accounting guidance, we have elected to account for the tax on GILTI as a period cost and thus have not adjusted any net deferred tax assets of our foreign subsidiaries in connection with the Tax Act.

Effective Tax Rate

During interim periods, ~~the Company~~we generally ~~utilizes~~utilize the estimated annual effective tax rate method which involves the use of forecasted information. Under this method, the provision is calculated by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss ~~(pretax~~(pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. For the ~~three-month~~nine-month period ended ~~December 31, 2018, the Company believes~~June 30, 2019, we believe it is more appropriate to use a blend of the discrete effective tax rate method and the estimated annual effective tax rate method to calculate income tax expense for the period. ~~The Company determined that since small changes in estimated “ordinary”~~Since income ~~for~~from U.S. operations ~~would result in significant changes in~~fluctuates throughout the ~~worldwide estimated annual effective tax rate,~~year, we determined the discrete tax rate method should be utilized to determine a more reliable estimate of U.S. income tax expense for the period.

~~Income~~The income tax expense recognized on pre-tax ~~losses~~income from continuing operations for the three months ended ~~December 31, 2018~~June 30, 2019 resulted in an effective tax rate of 5%, which differs from the U.S. statutory tax rate of 21% primarily due to the change in U.S. valuation allowance related to tax attributes projected to be utilized. The income tax benefit recognized on pre-tax income from continuing operations for the nine months ended June 30, 2019 resulted in an effective tax rate of negative ~~31%~~166% which differs from the U.S. statutory tax rate of 21% primarily due to the jurisdictional mix of pre-tax income (loss) and discrete tax benefits related to the release of a portion of the existing U.S. ~~losses for which no~~deferred tax ~~benefit can be realized~~valuation allowance due to a

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~~valuation allowance.~~deferred tax liabilities acquired in business combinations. The effective tax rate for the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019 differs from the effective tax rate of negative 6%38% and ~~positive~~ 48% for the ~~three~~nine months ended ~~December 31, 2017~~June 30, 2018 and the year ended September 30, 2018, respectively, primarily due to differences in the jurisdictional mix of pre-tax income (loss), partially offset by discrete benefits resulting from the enactment of the Tax ~~Act.~~Act and by discrete benefits recorded 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.

Deferred Tax Balances

As of ~~December 31, 2018,~~June 30, 2019, we maintained a valuation allowance against U.S. deferred tax assets as realization of such assets does not meet the more-likely-than-not threshold required under accounting guidelines. We will continue to assess the need for a valuation allowance on deferred tax assets by evaluating positive and negative evidence that may exist. Through ~~December 31, 2018,~~June 30, 2019, a total valuation allowance of ~~$79.3~~$61.9 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets.

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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 three 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, then the effective portion of a change in the fair value of the derivative is 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. If a derivative does not qualify as a highly effective hedge, any change in fair value is immediately recognized in earnings. 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, 2018~~June 30, 2019 and September 30, 2018 (in thousands):


	Notional Principal
	December 31, 2018		September 30, 2018

					Notional Principal
					June 30, 2019		September 30, 2018
Instruments designated as accounting hedges:
Foreign currency forwards	$	169,095	$	169,406	$	157,196	$	169,406


Instruments not designated as accounting hedges:
Foreign currency forwards	$	24,824	$	27,909	$	16,957	$	27,909

Included in the amounts not designated as accounting hedges at ~~December 31, 2018~~June 30, 2019 and September 30, 2018 were foreign currency forwards with notional principal amounts of ~~$12.7~~$7.6 million and $14.7 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 has approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure. Unrealized losses of $0.2 million and unrealized gain of $0.3 million were recognized in other income (expense), net for the three months ended ~~December 31,~~June 30, 2019 and 2018, ~~and 2017~~respectively, related to these foreign currency forward contracts not designated as accounting ~~hedges~~. hedges. Unrealized losses of $0.3 million and $0.1 million were recognized in other income (expense), net for the nine months ended June 30, 2019 and 2018, respectively, related to foreign currency forwards not designated as accounting hedges.

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

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periods ended ~~December 31, 2018~~June 30, 2019 and September 30, 2018. 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~~credit risk-related contingent features that would require us to post collateral as of ~~December 31, 2018~~June 30, 2019 or September 30, 2018.

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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 ~~as of December 31, 2018 and September 30, 2018~~ (in thousands):


		Fair Value
	Balance Sheet Location	December 31, 2018		September 30, 2018

							Fair Value
						Balance Sheet Location	June 30, 2019		September 30, 2018
Asset derivatives:
Foreign currency forwards	Other current assets	$	5,036	$	1,803	Other current assets	$	2,019	$	1,803
Foreign currency forwards	Other noncurrent assets		582		314	Other assets		314		314
		$	5,618	$	2,117
							$	2,333	$	2,117
Liability derivatives:
Foreign currency forwards	Other current liabilities	$	3,367	$	1,657	Other current liabilities	$	1,263	$	1,657
Foreign currency forwards	Other noncurrent liabilities		—		75	Other long-term liabilities		116		75
Total		$	3,367	$	1,732		$	1,379	$	1,732

The tables below present gains and losses recognized in other comprehensive income (loss) ~~for the three months ended December 31, 2018 and 2017~~ related to derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified into earnings ~~during those periods~~ (in thousands):

Three Months Ended

December 31, 2018

December 31, 2017

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Nine Months Ended

June 30, 2019

June 30, 2018

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

1,779

(33)

656

(774)

(134)

466

163

(1,468)

Three Months Ended

June 30, 2019

June 30, 2018

Gains (losses)

reclassified into

recognized in

earnings -

Gains (losses)

earnings -

Derivative Type

OCI

Effective Portion

recognized in OCI

Effective Portion

Foreign currency forwards

661

(848)

(670)

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~~three- and nine-month periods ended ~~December 31, 2018~~June 30, 2019 and ~~2017.~~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 ~~$1.7~~$0.6 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,
	2018		2017

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
Sales:
Cubic Transportation Systems	$	181.8	$	146.5	$	212.7	$	164.6	$	595.2	$	478.1
Cubic Mission Solutions		46.4		33.1		95.0		42.7		203.3		111.9
Cubic Global Defense		77.1		68.8		75.0		88.9		226.8		233.2
Total sales	$	305.3	$	248.4	$	382.7	$	296.2	$	1,025.3	$	823.2


Operating income (loss):
Cubic Transportation Systems	$	11.0	$	9.9	$	17.2	$	18.6	$	37.0	$	42.7
Cubic Mission Solutions		(4.9)		(8.9)		1.3		(0.5)		(12.1)		(17.2)
Cubic Global Defense		2.9		1.4		1.9		6.9		10.0		13.6
Unallocated corporate expenses		(9.6)		(14.3)		14.3		(14.7)		(7.3)		(42.4)
Total operating income (loss)	$	(0.6)	$	(11.9)	$	34.7	$	10.3	$	27.6	$	(3.3)


Depreciation and amortization:
Cubic Transportation Systems	$	7.7	$	3.3	$	6.9	$	2.8	$	24.1	$	9.1
Cubic Mission Solutions		5.4		5.9		6.0		4.7		17.2		15.8
Cubic Global Defense		2.2		2.1		1.7		2.0		5.4		6.1
Corporate		0.7		1.1		0.7		1.1		2.2		3.1
Total depreciation and amortization	$	16.0	$	12.4	$	15.3	$	10.6	$	48.9	$	34.1

Unallocated corporate ~~costs~~expenses in the third quarter and first ~~quarter~~nine months of fiscal 2019 include gains totaling $32.6 million on the sales of land and buildings in San Diego, California and Orlando, Florida. Unallocated corporate expenses include costs of strategic and ITinformation technology (IT) system resource planning as part of our One Cubic Initiatives, which totaled ~~$1.6~~$2.4 million in the third quarter of fiscal 2019 compared to ~~$8.0~~$5.0 million in the third quarter of last year and $6.3 million in the first ~~quarter~~nine months of 2019 compared to $18.8 million in the first nine months of last year. As described in Note 3, the operating results of CGD Services have been classified as discontinued operations in the Condensed Consolidated Statements of ~~Income (Loss)~~Operations for all periods presented.

Disaggregation of Total Net ~~Sales~~.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.

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Sales by Geographic Region (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total


									Three months ended June 30, 2019									Nine months ended June 30, 2019
									CTS		CMS		CGD		Total			CTS		CMS		CGD		Total

United States	$	91.3	$	45.5	$	35.7	$	172.5	$	128.9	$	94.0	$	31.6	$	254.5		$	327.3	$	200.1	$	101.3	$	628.7
United Kingdom		50.9		0.4		4.3		55.6		47.5		0.2		7.7		55.4			151.6		1.3		16.3		169.2
Australia		29.8		0.1		5.6		35.5		30.9		0.3		8.1		39.3			91.1		0.5		20.7		112.3
Far East/Middle East		4.4		0.4		18.4		23.2		0.7		0.1		15.2		16.0			8.5		0.7		45.8		55.0
Other		5.4		—		13.1		18.5		4.7		0.4		12.4		17.5	��		16.7		0.7		42.7		60.1
Total sales	$	181.8	$	46.4	$	77.1	$	305.3	$	212.7	$	95.0	$	75.0	$	382.7		$	595.2	$	203.3	$	226.8	$	1,025.3

Sales by End ~~Customer.~~Customer: We are the prime ~~customer~~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, 2018
	CTS		CMS		CGD		Total


									Three months ended June 30, 2019								Nine months ended June 30, 2019
									CTS		CMS		CGD		Total		CTS		CMS		CGD		Total

U.S. Federal Government and State and Local Municipalities	$	90.8	$	45.8	$	32.4	$	169.0	$	123.1	$	91.8	$	37.4	$	252.3	$	310.7	$	195.6	$	107.3	$	613.6
Other		91.0		0.6		44.7		136.3		89.6		3.2		37.6		130.4		284.5		7.7		119.5		411.7
Total sales	$	181.8	$	46.4	$	77.1	$	305.3	$	212.7	$	95.0	$	75.0	$	382.7	$	595.2	$	203.3	$	226.8	$	1,025.3

Sales by Contract ~~Type.~~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 ~~agrees~~agree to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, we are is 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, 2018
	CTS		CMS		CGD		Total


									Three months ended June 30, 2019								Nine months ended June 30, 2019
									CTS		CMS		CGD		Total		CTS		CMS		CGD		Total

Fixed Price	$	178.2	$	45.8	$	71.6	$	295.6	$	210.5	$	93.2	$	69.5	$	373.2	$	586.3	$	199.6	$	209.4	$	995.3
Other		3.6		0.6		5.5		9.7		2.2		1.8		5.5		9.5		8.9		3.7		17.4		30.0
Total sales	$	181.8	$	46.4	$	77.1	$	305.3	$	212.7	$	95.0	$	75.0	$	382.7	$	595.2	$	203.3	$	226.8	$	1,025.3

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, 2018
	CTS		CMS		CGD		Total


									Three months ended June 30, 2019								Nine months ended June 30, 2019
									CTS		CMS		CGD		Total		CTS		CMS		CGD		Total

Product	$	92.0	$	40.6	$	49.7	$	182.3	$	122.8	$	87.3	$	45.8	$	255.9	$	328.7	$	183.9	$	148.3	$	660.9
Service		89.8		5.8		27.4		123.0		89.9		7.7		29.2		126.8		266.5		19.4		78.5		364.4
Total sales	$	181.8	$	46.4	$	77.1	$	305.3	$	212.7	$	95.0	$	75.0	$	382.7	$	595.2	$	203.3	$	226.8	$	1,025.3

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Revenue Recognition Method: The table below presents total net sales disaggregated based on the revenue recognition method applied (in millions):


	Three months ended December 31, 2018
	CTS		CMS		CGD		Total


									Three months ended June 30, 2019								Nine months ended June 30, 2019
									CTS		CMS		CGD		Total		CTS		CMS		CGD		Total

Point in Time	$	16.7	$	34.4	$	0.5	$	51.6	$	29.7	$	76.0	$	1.0	$	106.7	$	68.2	$	169.2	$	2.9	$	240.3
Over Time		165.1		12.0		76.6		253.7		183.0		19.0		74.0		276.0		527.0		34.1		223.9		785.0
Total sales	$	181.8	$	46.4	$	77.1	$	305.3	$	212.7	$	95.0	$	75.0	$	382.7	$	595.2	$	203.3	$	226.8	$	1,025.3

Note 15 — Restructuring Costs

In 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 are expected to exceed amounts incurred to date by $2.5 million and these efforts are expected to be completed early in fiscal 2020.

Also, in 2019 our CTS and CGD segments 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				Nine Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Restructuring costs:
Cubic Transportation Systems	$	1.4		0.3	$	2.2	$	0.6
Cubic Mission Solutions		—		—		—		—
Cubic Global Defense		2.6		0.3		2.7		1.0
Unallocated corporate expenses		4.5		1.0		7.4		1.8
Total restructuring costs	$	8.5	$	1.6	$	12.3	$	3.4

The following table presents a rollforward of our restructuring liability as of June 30, 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, 2018	$	0.7	$	0.2
Accrued costs		5.9		6.4
Cash payments		(2.8)		(6.1)
Balance as of June 30, 2019	$	3.8	$	0.5

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

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us. Although our investigation into this matter is not yet complete, we currently believe this matter will not have a materially adverse effect on our financial position, results of operations, or cash flows. No liability for this claim has been recorded as of June 30, 2019.

We consider all other 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.

~~Note 16 — Subsequent Event~~

On February 5, 2019, we entered into agreements related to the construction and leasing of two buildings on our existing corporate campus in San Diego. This will allow us to consolidate virtually all of our San Diego operations in a single location and accommodate the expected growth of our business. Under these agreements a legal entity affiliated with the financial institutions involved with the project will own the buildings, and we will lease the buildings for a term of five years upon their completion. At the end of the lease term we will be required to elect to negotiate a new lease term, purchase the property, or arrange for a sale of the property to a third party. Alternatively the financial institutions may elect to keep the building and release us from these requirements.

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~~3.3~~ CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

~~December 31, 2018~~June 30, 2019

Cubic Corporation is a technology-driven, market-leading global provider of innovative, mission-critical solutions that reduce congestion and increase operational readiness and effectiveness through increased 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 offer integrated payment and information systems, expeditionary communications, cloud-based computing and intelligence delivery, as well as state-of-the-art training systems and readiness solutions. We believe that we have significant transportation and defense industry expertise which, combined with our innovative technology capabilities, contributes to our leading market positions and allows us to deepen and further expand each of our business segments in key markets.

Through September 30, 2017 our principal lines of business were transportation systems and services, defense systems, and defense services. On May 31, 2018, we sold the non-Original Equipment Manufacturer (OEM) Cubic Global Defense Services (CGD Services) business. In March 2018, all of the criteria were met for the classification of CGD Services as a discontinued operation. As a result, the operating results, assets, liabilities, and cash flows of CGD Services have been classified as discontinued operations for all periods presented and have been excluded from amounts described below. In addition, we concluded that Cubic Mission Solutions became a separate operating segment and reportable segment beginning on October 1, 2017. As a result, we now operate in three reportable business segments: Cubic Transportation Systems (CTS), Cubic ~~Global Defense Systems (CGD)~~Mission Solutions (CMS), and Cubic ~~Mission Solutions (CMS)~~Global Defense (CGD). All of our business segments share a common mission of increasing situational awareness to create enhanced value for our customers worldwide through common technologies. Our defense customers benefit from increased readiness and effectiveness, while our transportation customers benefit from enhanced efficiency and reduced congestion.

CTS specializes in the design, development, production, installation, maintenance and operation of automated fare payment, ~~intelligent~~ 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. Advanced Traffic Solutions Inc. (Trafficware) and GRIDSMART Technologies, Inc. (GRIDSMART), which we acquired in ~~October 2018,~~fiscal 2019, when combined with our existing transportation capabilities, ~~is expected to~~ enhance our ability to offer compelling solutions to reduce urban congestion using ~~Trafficware’s~~their intelligent, data-rich intersection management technology.

CMS provides networked command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR) capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies include protected wide-band communications for ~~command, control~~space, aircraft, UAV, and ~~intelligence, surveillance and reconnaissance (C2ISR) systems, expeditionary satellite communication~~terrestrial applications. It provides Rugged IoT cloud solutions, ~~real time processing, exploitation and dissemination of full motion video, deployable secure tactical cloud computing, communication~~interoperability gateways, and ~~intelligence, surveillance~~AI/ML based C2ISR applications for video situation understanding. CMS also provides UAV systems and ~~reconnaissance (ISR) services.~~payloads to provide 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 (DoD), 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. Our range design business offers complete range design solutions for military, law enforcement, special forces and security training centers, including laser-engagement training simulation systems, live-fire range design, exercise planning, expert support and detailed After Action Reviews.

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Consolidated Overview

We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ~~ASC~~Accounting Standards Codification (ASC) 606), effective October 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the ~~quarter~~three- and nine-month periods ended ~~December 31, 2018 is~~June 30, 2019 are presented under ASC 606, while the ~~quarter~~three- and nine-month periods ended ~~December 31, 2017 is~~June 30, 2018 are presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. The

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cumulative effect of the change in accounting for periods prior to October 1, 2018 was recognized through ~~retained earnings~~shareholders’ equity at the date of adoption.

The table below quantifies the impact of adopting ASC 606 on net sales and operating income (loss) for the ~~three months~~three- and nine-month periods ended ~~December 31, 2018~~June 30, 2019 (in thousands):


	Three months ended December 31, 2018
					As Reported
	Under		Effect of		Under
	ASC 605		ASC 606		ASC 606

							Three months ended June 30, 2019						Nine months ended June 30, 2019
											As Reported						As Reported
							Under		Effect of		Under		Under		Effect of		Under
							ASC 605		ASC 606		ASC 606		ASC 605		ASC 606		ASC 606
Sales:	(in thousands)
Cubic Transportation Systems	$	172,728	$	9,079	$	181,807	$	201,935	$	10,737	$	212,672	$	557,234	$	37,938	$	595,172
Cubic Mission Solutions		45,363		1,030		46,393		94,352		626		94,978		202,392		914		203,306
Cubic Global Defense		58,733		18,326		77,059		71,107		3,922		75,029		194,227		32,572		226,799
Total sales	$	276,824	$	28,435	$	305,259	$	367,394	$	15,285	$	382,679	$	953,853	$	71,424	$	1,025,277


Operating income (loss):
Cubic Transportation Systems	$	9,186	$	1,790	$	10,976	$	14,489	$	2,788	$	17,277	$	29,348	$	7,700	$	37,048
Cubic Mission Solutions		(5,191)		251		(4,940)		1,187		43		1,230		(12,045)		(88)		(12,133)
Cubic Global Defense		1,607		1,290		2,897		1,121		807		1,928		5,248		4,750		9,998
Unallocated corporate expenses		(9,499)		—		(9,499)		14,290		—		14,290		(7,295)		—		(7,295)
Total operating income (loss)	$	(3,897)	$	3,331	$	(566)
Total operating income							$	31,087	$	3,638	$	34,725	$	15,256	$	12,362	$	27,618

~~Sales for~~All comparative amounts below include the ~~quarter ended December 31, 2018 increased 23% to $305.3 million from $248.4 million in the first fiscal quarter of last year, which includes the impact~~effect of the adoption of the new revenue recognition standard described and quantified above.

Sales for the quarter ended June 30, 2019 increased 29% to $382.7 million from ~~CTS,~~$296.2 million in the same quarter last year, while sales for the nine months ended June 30, 2019 increased 25% from $823.2 million last year to $1,025.3 million. For the quarter, sales from CMS and ~~CGD~~CTS increased by 122% and 29%, respectively, while sales from CGD decreased by 16%. For the first nine months of fiscal 2019, sales from CMS and CTS increased by 82% and 24%, ~~40%,~~respectively, while sales from CGD decreased by 3%. Sales generated by businesses we acquired during fiscal 2019 and ~~12%,~~2018 totaled $27.7 million and $57.4 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $2.2 million and $5.3 million for the three- and nine-month periods ended June 30, 2018, respectively. 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 unfavorable impacts on sales of $5.4 million for the third quarter of fiscal 2019 and $18.1 million for the first nine months of fiscal 2019 compared to the same periods last year.

Our consolidated operating income was $34.7 million in the third quarter of fiscal 2019 compared to $10.3 million in the third quarter of last year. Our consolidated operating income in the third quarter of fiscal 2019 included a gain of $32.6 million recognized at our corporate entity related to the sale of real estate. The CMS operating income for the third quarter increased to $1.3 million this year compared to an operating loss of $0.5 million last year. CTS operating income decreased to $17.2 million for the third quarter compared to $18.6 million last year while CGD had operating income of $1.9 million in the third quarter compared to $6.9 million last year. The operating results of CTS and CMS were significantly impacted by the impacts of accounting for businesses acquired during fiscal 2019, as further described in the segment discussions below. On a consolidated basis, businesses we acquired during fiscal 2019 and 2018 had operating losses totaling $5.6 million and $21.0 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to operating income of $0.3 million and an operating loss of $1.9 million for the three- and nine-month periods ended June 30, 2018, respectively. The operating losses of businesses acquired by Cubic included acquisition-related expenses of $2.6 million and $9.9 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $0.1 million and $0.7 million for the three- and nine-month periods ended June 30, 2018, respectively, and included amortization of purchased intangibles of $5.1 million and $17.0 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $0.2 million in each of the three- and month-month periods ended June 30, 2018. Excluding the gain recorded on the sale of real estate, unallocated corporate and other costs for the third quarter of fiscal 2019 were $18.6 million compared to $14.7 million in the same period last year.

Our consolidated operating income for the first nine months of fiscal 2019 was $27.6 million, including the $32.6 million gain on the sale of real estate described above, compared to an operating loss of $3.3 million for the same period last year. The operating loss for CMS decreased 30% in the first nine months of fiscal 2019 compared to the first nine

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months of last year, while CGD operating income for the first nine months of fiscal 2019 decreased by 26% and CTS operating income decreased by 13%. Both the CMS and CTS operating results were significantly impacted by accounting for businesses acquired in fiscal 2019. See the segment discussions below for further analysis of segment operating income (loss) including the impacts of business acquisition accounting. Excluding the gain on the sale of real estate, unallocated corporate and other costs for the first nine months of fiscal 2019 were $40.1 million compared to $42.4 million in the same period last year. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had an unfavorable impact on ~~sales~~our operating results of $5.5 million for the first fiscal quarter of 2019 compared to the first fiscal quarter of last year. Businesses we acquired during 2019 and 2018 had sales of $10.7 million for the three-month period ended December 31, 2018, compared to no sales in the three-month period ended December 31, 2017. See the segment discussions following for further analysis of segment sales.

~~Our consolidated operating loss was $0.6~~$2.2 million in the first ~~quarter~~nine months of fiscal 2019 compared to ~~an operating loss of $11.9 million in~~ the ~~first quarter of~~same period last year. CTS operating income increased to $11.0 million for the first quarter compared to $9.9 million last year while CGD had operating income of $2.9 million in the first quarter compared to $1.4 million last year. The CMS operating loss for the first quarter decreased to $4.9 million this year compared to $8.9 million last year. Unallocated corporate and other costs for the first quarter of 2019 were $9.6 million compared to $14.3 million in 2018. Unallocated corporate costs included unallocated IT costs which totaled $1.6 million in the first quarter of fiscal 2019 compared to $8.0 million for last year. The reduction in unallocated IT costs is the result of many of our IT projects reaching or approaching finalization in the first quarter of fiscal 2019. The average exchange rates between the prevailing currency in our foreign operations and the U.S. had an unfavorable impact on our quarterly operating results of $0.6 million in the first quarter compared to the same quarter last year. Businesses we acquired during 2019 and 2018 had operating losses totaling $4.6 million for the first quarter of fiscal 2019 and had no operating losses in the first quarter of last year. See the segment discussions following for further analysis of segment operating income (loss).

Our gross margin percentage on ~~product~~products sales ~~increased~~decreased to ~~31%~~26% in the first ~~quarter~~nine months of fiscal 2019 from ~~30%~~29% in the first ~~quarter last year~~. nine months of fiscal 2018. The ~~increase~~decrease in product sales gross margins in the third quarter and first ~~quarter~~ ~~was~~nine months of fiscal 2019 were primarily due to ~~increased shipments by our CMS segment, which generally have higher gross margins than products sold by our other business segments~~.sales mix. Our gross margin percentage on service sales was ~~25% in~~33% for the first ~~quarter~~nine months of fiscal 2019 compared to ~~26% in~~31% for the first ~~quarter~~nine months of last year. The ~~decrease~~increase in total services sales and gross margins on service sales was primarily driven by the mix of higher-margin CTS services as a ~~slight decrease in the proportion~~percentage of total service ~~sales provided by our CTS business segment, which generally has higher gross margins than service sales for our other business segments.~~sales.

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Selling, general and administrative (SG&A) expenses increased in the ~~first~~third quarter of fiscal 2019 to ~~$63.0~~$82.2 million compared to ~~$61.7~~$58.3 million in ~~2018.~~ the same period last year. For the nine months ended June 30, 2019, SG&A expenses increased to $211.3 million compared to $183.7 million for the same period last year. As a percentage of sales, SG&A expenses were 22% and 21% for the ~~quarter~~three- and nine-month periods ended ~~December 31, 2018,~~June 30, 2019, respectively, compared to ~~25%~~20% and 22% for the ~~quarter~~three- and nine-month periods ended ~~December 31, 2017~~.June 30, 2018, respectively. The increase in SG&A expense for the third quarter and first ~~quarter~~nine months of fiscal 2019 was primarily due to the SG&A expenses incurred by ~~Trafficware, which was~~three businesses we acquired in the first nine months of fiscal 2019 including Trafficware in October ~~2018. These increases~~2018, GRIDSMART in ~~SG&A were partially offset by the reduction~~January 2019, and Nuvotronics in ~~unallocated corporate costs,~~March 2019, including the ~~reduction~~impacts of ~~unallocated IT costs~~business acquisition accounting which is further described ~~above.~~in the segment discussions below.

Company funded research and development (R&D) expenditures ~~totaled $12.0~~decreased slightly to $12.5 million for ~~both~~ the ~~first~~third quarter of fiscal 2019 compared to $13.9 million for the same period last year, and decreased slightly to $38.2 million for the nine-month period this year compared to $40.1 million last year. For the third quarter and first nine months of fiscal 2019 ~~and 2018.~~ ~~There~~there was ~~no significant~~a slight shift in the mix of R&D expenditures between our business segments ~~from~~with CMS increasing its portion of our total R&D spend and CTS and CGD decreasing. In the third quarter and first ~~quarter~~nine months of fiscal ~~2018 to~~2019 CMS’ R&D expenditures were driven by the ~~first quarter~~development of ~~2019. In the first quarter of fiscal 2019~~secure communications and ISR as a service technologies and CTS continued to make R&D investments in new transportation product development, including fare collection technologies, real-time passenger information and development of ~~tolling,~~ intelligent transport systems and analytic technologies. CGD’s R&D expenditures focused on next generation live, virtual and constructive training systems ~~and CMS’ R&D expenditures were driven by the development of new antenna technologies for communications.~~

Amortization of purchased intangibles for the ~~first quarter of 2019 increased to $10.6 million from $7.4 million in 2018. The increase was driven by $4.3 million of amortization of Trafficware intangible assets in the first~~third quarter of fiscal 2019 ~~partially offset~~increased to $9.7 million from $6.2 million in the same period last year and increased to $32.7 million in the first nine months of fiscal 2019 as compared to $20.0 million in the first nine months last year. These increases were driven by the ~~reduction~~amortization of ~~amortization on previously acquired~~ intangible assets from businesses acquired in the first nine months of fiscal 2019.

In line with our OneCubic strategic objective, in fiscal 2019, we have entered into agreements that will allow us to co-locate our San Diego-based employees on a single modern campus to foster innovation and collaboration across our business. We have entered contracts related to the construction and leasing of two buildings on our existing corporate campus in San Diego, California. Under these agreements, a financial institution will own the buildings, and we will lease the facilities for a term of five years commencing upon their completion. In the third quarter of fiscal 2019, we sold land and buildings comprising our separate CTS campus in San Diego. We have entered a lease with the buyer of this campus and CTS employees will continue to occupy this separate campus until the new buildings on our corporate campus are ~~amortized using accelerated methods~~ready for ~~which amortization decreases over time.~~occupancy in fiscal 2021. In the third quarter of fiscal 2019, we also sold land and buildings in Orlando, Florida and we are entering a lease for new space with a smaller footprint in Orlando to accommodate our employees and operations in Orlando. In connection with the sale of these real estate campuses we received total net proceeds of $44.9 million and recognized net gains on the sales totaling $32.6 million within operating income.

In the third quarter and first nine months of fiscal 2019, we incurred $8.5 million and $12.3 million of charges related to restructuring activities, respectively, compared to $1.6 million and $3.4 million of charges incurred in the third quarter and first nine months of fiscal 2018, respectively. The majority of the charges incurred in fiscal 2019 relate to our efforts to restructure our worldwide supply chain processes in order to reduce ongoing costs and increase organizational

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competitiveness and efficiencies. In addition, our CTS and CGD segments have incurred restructuring charges in fiscal 2019 primarily related to employee severance costs connected with headcount reductions.

Interest expense for the third quarter of fiscal 2019 was $6.1 million, compared to $2.6 million in the third quarter of last year. Interest expense for the first ~~quarter~~nine months of fiscal 2019 ~~was $4.0~~increased to $14.7 million, compared to ~~$2.7~~$8.2 million in the first ~~quarter~~nine months of last year. The increase in interest expense was primarily caused by the increase in our average outstanding debt balances for the third quarter and first ~~quarter~~nine months of fiscal 2019 compared to the third quarter and first ~~quarter~~nine months of fiscal 2018. The average outstanding borrowings under our revolving credit agreement increased induring the first ~~quarter~~nine months of fiscal 2019 primarily to finance the acquisition of ~~Trafficware.~~three businesses.

The income tax ~~expense~~benefit recognized on pre-tax ~~losses~~income from continuing operations for the ~~three~~nine months ended ~~December 31, 2018~~June 30, 2019 resulted in an effective tax rate of negative ~~31%~~166%, which differs from the effective tax rates of 48% for the year ended September 30, 2018 and negative 6%37.5% for the ~~three~~nine months ended ~~December 31, 2017,~~June 30, 2018, primarily due to the difference in jurisdictional mix of pre-tax income ~~loss)~~(loss), ~~partially offset~~and by discrete benefits resulting from the enactment of the Tax ~~cuts~~Cuts and Jobs Act of 2017 (the Tax Act). 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. Through ~~December 31, 2018,~~June 30, 2019, a total valuation allowance of ~~$79.3~~$61.9 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets. The change in the valuation allowance does not have any impact on our consolidated operations or cash flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future.

Our effective tax rate could be affected by, among other factors, the mix of business between U.S. and foreign jurisdictions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available tax credits and audits of our records by taxing authorities. After considering the impact of the U.S. valuation allowance, we have determined that a reliable estimate of the annual effective tax rate for fiscal year 2019 cannot be made, since relatively small changes in our projected income produce a significant variation in our effective tax ~~rate~~. rate.

Our net ~~loss~~income from continuing operations attributable to Cubic in the ~~first~~third quarter of fiscal 2019 was ~~$6.6~~$24.1 million compared to ~~$11.4~~$0.9 million in the ~~first~~third quarter last year. ~~The change in~~For the first nine months of fiscal 2019, our net ~~loss~~income from continuing operations attributable to Cubic was $9.5 million compared to a net loss of $13.9 million last year. The increases in net income from continuing operations attributable to Cubic for the third quarter and first ~~quarter of fiscal 2018 to the first quarter~~nine months of fiscal 2019 ~~was favorably impacted by~~compared to the ~~reduction~~corresponding periods in ~~our~~fiscal 2018 were primarily due to the increases in operating ~~loss described above,~~income and the reductions in income tax expense, partially offset by ~~an increase~~increases in ~~income tax as~~interest expense which are all described above. In addition, nonoperating expense in the third quarter and first ~~quarter~~nine months of fiscal 2019 included ~~a $6.1~~unrealized losses of $7.0 million ~~unrealized loss~~and $16.9 million, respectively, caused by the change in the fair value of an interest rate swap held by a variable interest entity (VIE) that is consolidated by Cubic. The 90 percent noncontrolling interest in the net loss of the consolidated VIE, which is comprised primarily of the VIE’s loss on its interest rate swap, is added back to our net ~~loss~~income (loss) to arrive at net ~~loss~~income (loss) attributable to Cubic.

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Cubic Transportation Systems Segment (CTS)


	Three Months Ended
	December 31,
	2018		2017
	(in millions)

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
					(in millions)
Transportation Systems Segment Sales	$	181.8	$	146.5	$	212.7	$	164.6	$	595.2	$	478.1


Transportation Systems Segment Operating Income	$	11.0	$	9.9	$	17.2	$	18.6	$	37.0	$	42.7

CTS sales increased ~~24%~~29% in the ~~first~~third quarter of fiscal ~~year~~ 2019 to ~~$181.8~~$212.7 million compared to ~~$146.5~~$164.6 million last year, and increased 24% for the first nine months of fiscal 2019 to $595.2 million from $478.1 million in the same period last year, including the impact of the adoption of the new revenue recognition standard described above. For the third quarter and first ~~quarter~~nine months of fiscal 2019, sales increased in North America ~~Australia, and United Kingdom as~~significantly compared to these same periods last year, while sales in the ~~first quarter of fiscal 2018.~~U.K and Australia decreased slightly for such periods. Sales were higher in the U.S. primarily due to revenue from system development on ~~the~~our customer contracts in Boston, New York, ~~New Fare Payment System~~Los Angeles and ~~MBTA contracts, and $10.5 million of~~the Bay Area, as well as sales from ~~Trafficware, which we~~two U.S. businesses acquired in ~~October 2018.~~fiscal 2019, Trafficware and GRIDSMART. Sales ~~were higher in Australia~~for Trafficware and GRIDSMART totaled $23.5 million and $52.0 million for the ~~first quarter~~three- and nine-month periods ended June 30, 2019, respectively. The decreases in sales in the UK and Australia were primarily caused by the impact of ~~2019 largely due to an increase in development work on a number~~foreign currency

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exchange rates. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of ~~$4.8~~$4.7 million for the ~~first~~third quarter of fiscal 2019 and $15.8 million for the nine-month period compared to the same ~~period~~periods last year, primarily due to the strengthening of the U.S. dollar against the British pound and Australian dollar.

CTS operating income ~~increased to $11.0 million compared to an operating income of $9.9 million~~decreased 8% in the first quarter of last year. For the quarter, operating income was higher from increased volumes of system development work, including work on the New York Fare Payment System and MBTA contracts. These increases were partially offset by an operating loss of $3.3 million from Trafficware for the firstthird quarter of fiscal 2019 to $17.2 million compared to operating income of $18.6 million in the third quarter of last year, and decreased 13% for the first nine months of fiscal 2019 to $37.0 million from $42.7 million for the first nine months of last year. The decreases in operating income were impacted by the operating losses generated by businesses that CTS acquired during fiscal 2019, which ~~included~~totaled $0.3 million and $10.8 million for the ~~impact~~three- and nine-month periods ended June 30, 2019, respectively, driven by acquisition-related expenses of ~~$4.3~~$1.5 million ofand $6.8 million for the three- and nine-month periods ended June 30, 2019, respectively, and amortization of purchased intangibles of $4.1 million and ~~$1.4~~$15.1 million ~~of acquisition-related costs.~~for the three- and nine-month periods ended June 30, 2019, respectively. 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 ~~$0.7~~$0.5 million for the third quarter of fiscal 2019 and $2.4 million for the first ~~quarter~~nine months of fiscal 2019 compared to the ~~first quarter~~same periods last year. For the third quarter and first nine months of fiscal 2019, operating income was higher from increased volumes of system development work in North America on the contracts noted above and for train operating companies in the U.K. These increases in operating income were partially offset by the impact of cost growth on a system development contract in Singapore.

Cubic Mission Solutions Segment (CMS)


	Three Months Ended
	December 31,
	2018		2017
	(in millions)

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
					(in millions)
Cubic Mission Solutions Segment Sales	$	46.4	$	33.1	$	95.0	$	42.7	$	203.3	$	111.9

Cubic Mission Solutions Segment Operating Loss	$	(4.9)	$	(8.9)

Cubic Mission Solutions Segment Operating Income (Loss)					$	1.3	$	(0.5)	$	(12.1)	$	(17.2)

CMS sales increased ~~40%~~122% in the ~~first~~third quarter of fiscal 2019 to ~~$46.4~~$95.0 million compared to ~~$33.1~~$42.7 million in the third quarter last year, and increased 82% for the first nine months of fiscal 2019 to $203.3 million from $111.9 million for the first nine months of last year. The increase in sales for the third quarter and first ~~quarter was primarily due to~~nine months of the year resulted from increased ~~orders~~product deliveries in all of our CMS product lines, and ~~shipments of~~ particularly expeditionary satellite communications products and ~~command~~ secure network products. Sales generated by businesses acquired by CMS during fiscal 2019 and ~~control, intelligence, surveillance~~2018 totaled $3.7 million and ~~reconnaissance (C2ISR) products.~~$4.8 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $2.0 million and $5.0 million for the three- and nine-month periods ended June 30, 2018.

~~The~~ CMS operating ~~loss~~income was ~~$4.9~~$1.3 million in the ~~first~~third quarter of fiscal 2019 compared to ~~$8.9~~an operating loss $0.5 million in the third quarter last year,~~. For~~ and an operating loss of $12.1 million for the first ~~quarter~~nine months of fiscal 2019 compared to an operating loss of $17.2 million for the first ~~quarter~~nine months of last ~~year, CMS had~~year. The improvement in operating results was primarily from increased ~~operating profits~~margins earned on higher sales from expeditionary satellite communications ~~products~~products. The improvement was also impacted by operating losses incurred by businesses that CMS acquired during fiscal 2019 and ~~C2ISR products~~2018, which totaled $5.2 million and ~~services~~ ~~due~~$10.3 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to ~~increased sales. In addition,~~operating income of $0.1 million and operating loss of $2.0 million for each of the three- and nine-month periods ended June 30, 2018, respectively. The operating losses of businesses acquired by CMS ~~had a~~ ~~decrease~~included acquisition-related expenses of $1.1 million and $3.1 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $0.1 million and $0.7 million for the three- and nine-month periods ended June 30, 2018, respectively, and included amortization of purchased intangibles of $1.0 million and $1.9 million for the three- and nine-month periods ended June 30, 2019, respectively, compared to $0.2 million in each of the ~~amortization expense on purchased intangible assets between the first quarter~~three- and nine-month periods ended June 30, 2018.

Table of ~~fiscal 2018 and the first quarter of fiscal 2019.~~Contents

Cubic Global Defense Segment (CGD)


	Three Months Ended
	December 31,
	2018		2017
	(in millions)

					Three Months Ended				Nine Months Ended
					June 30,				June 30,
					2019		2018		2019		2018
					(in millions)
Cubic Global Defense Segment Sales	$	77.1	$	68.8	$	75.0	$	88.9	$	226.8	$	233.2


Cubic Global Defense Segment Operating Income	$	2.9	$	1.4	$	1.9	$	6.9	$	10.0	$	13.6

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CGD sales ~~increased~~decreased by 16% in the ~~first~~third quarter of fiscal 2019 to ~~$77.1~~$75.0 million compared to ~~$68.8~~$88.9 million in the third quarter of last year and 3% for the first nine months of fiscal 2019 to $226.8 million from $233.2 million for the first nine months of last year. ~~Sales increased due to the impact~~The timing of sales recognition was impacted by the adoption of the new revenue recognition standard described and quantified above. Under the new revenue recognition standard, a number of our CGD contracts, most significantly in air combat training and ground live training, for which revenue was historically recorded upon delivery of products to the customer, are now accounted for on the percentage-of-completion cost-to-cost method of revenue recognition. For the third quarter and first nine months of fiscal 2019, sales were lower from air combat training system, simulation product development contracts, and international services contracts, partially offset by higher sales from ground combat training systems. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $0.7 million and $2.3 million for the third quarter and first ~~quarter~~nine months of fiscal 2019, respectively, compared to the same ~~period~~periods last year.

CGD operating income was ~~$2.9~~$1.9 million in the ~~first~~third quarter of fiscal 2019 compared to ~~$1.4~~$6.9 million in the third quarter last year and decreased 26% for the first nine months of fiscal 2019 to $10.0 million from $13.6 million for the first nine months of last year. ~~Operating income increased~~For the third quarter and first nine months of fiscal 2019, operating profits were lower primarily due to decreased air combat training system and simulation product sales, and also due to restructuring charges incurred in the ~~recognition~~third quarter of ~~revenue and margin on the contracts that were impacted by the adoption of the new revenue recognition standard described above.~~fiscal 2019 related to headcount reductions designed to optimize our cost position. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar did not have a significant impact on CGD’s operating income for the third quarter or first ~~quarter~~nine months of fiscal 2019.

Backlog


	December 31,		September 30,
	2018		2018
	(in millions)

					June 30,		September 30,
					2019		2018
					(in millions)
Total backlog
Cubic Transportation Systems	$	3,346.6	$	3,544.9	$	3,168.7	$	3,544.9
Cubic Mission Solutions		93.3		77.0		171.0		77.0
Cubic Global Defense		374.4		442.6		348.2		442.6
Total	$	3,814.3	$	4,064.5	$	3,687.9	$	4,064.5

Total backlog decreased by ~~$250.2~~$376.6 million from September 30, 2018 to ~~December 31, 2018. We~~June 30, 2019 as sales outpaced new business orders in the first nine months of fiscal 2019. In addition, we recorded a net decrease to backlog of $104.5 million on October 1, 2018 ~~upon~~for the impact of the adoption of ASC 606. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter decreased backlog by ~~$32.7~~$36.9 million compared to September 30, 2018.

Liquidity and Capital Resources

Operating activities used cash of ~~$61.2~~$82.7 million infor the first ~~quarter~~nine months of fiscal 2019 primarily due to ~~timing of cash flows on CTS design and build contracts,~~ inventory builds for upcoming scheduled deliveries, the timing of customer milestone payments on certain transportation development contracts as well as payment of certain scheduled annual ~~expenditures including annual employee bonuses.~~expenditures.

Investing activities for the first ~~quarter~~nine months of fiscal 2019 included $239.2 million of cash paid related to the acquisition of Trafficware and $87.2 million of cash paid related to the acquisition of GRIDSMART in our CTS segment, $61.5 million of cash paid related to the acquisition of Nuvotronics in our CMS segment, and $8.0 million of payments of holdback amounts made to the former owners of DTECH. In addition, as a part of our efforts to upgrade our current information systems, early in fiscal 2015 we began the process of designing and implementing new ERP software and other software applications to manage our operations. Certain costs incurred in the development of internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are capitalized as computer software costs. Costs incurred outside of the application development stage, or that do not meet the capitalization requirements, are expensed as incurred. Cash used in connection with ERP design and development totaled $1.3We also invested $53.0 million in non-marketable equity securities including $50.0 million in Pixia, a private software company based in Herndon, Virginia. In the ~~first~~third quarter

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of fiscal ~~2019. Of this amount, $0.8 million was recognized as expense~~2019 we received net proceeds on the sale of land and ~~is reflected~~buildings in ~~cash flows used in operations, while $0.5 million was capitalized~~San Diego, California and ~~is included in purchases of property, plant and equipment in investing cash flows.~~Orlando, Florida totaling $44.9 million.

Financing activities for the ~~three-month~~nine-month period ended ~~December 31, 2018~~June 30, 2019 included net short-term borrowings of ~~$64.5~~$231.0 million, and $215.8 million of net proceeds from our underwritten public offering of 3,795,000 shares of our common stock at a price to the public of $60.00 per share, which we completed in December 2018. We used the net proceeds from the offering to repay a portion of our outstanding borrowings under our revolving credit agreement, which was used to finance the acquisition of Trafficware, and the remainder for general corporate purposes. Proceeds from short-term borrowings were primarily used to finance the acquisitions of GRIDSMART and Nuvotronics. In addition, we ~~also~~ used $3.4 million for the repurchase of common stock in connection with our stock-based compensation ~~plan.~~ plan and paid dividends to shareholders of $4.2 million.

In March 2018, ~~CTS~~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.)~~(HoldCo). Also in March 2018, ~~HoldCo.~~HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC ~~(OpCo.)~~(OpCo) which entered into a contract with the Massachusetts Bay

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Transit Authority (MBTA) for the financing, development, and operation of a next-generation fare payment system in Boston (the MBTA Contract). ~~HoldCo.~~HoldCo is 90% owned by John Laing and 10% owned by ~~CTS.~~Cubic. Collectively, ~~HoldCo.~~HoldCo and ~~OpCo.~~OpCo are referred to as the P3 Venture. Based on our assessment under ASC 810, Consolidation, we have concluded that ~~OpCo.~~OpCo and ~~HoldCo.~~HoldCo are ~~VIE’s~~VIEs and that we are the primary beneficiary of ~~both VIE’s.~~OpCo. Consequently, we have consolidated the financial statements of ~~the P3 Venture~~OpCo within Cubic’s consolidated financial statements. ~~As such,~~We have concluded that we are not the ~~cash flows~~primary beneficiary of HoldCo, and thus we have not consolidated the ~~P3 Venture are reflected in~~financial statements of HoldCo within Cubic’s Condensed Consolidated Statements of Cash Flows including net proceeds of long-term borrowings of the P3 Venture totaling $5.8 million described below, even though the P3 Venture’s long-term debt is non-recourse to Cubic Corporation.consolidated financial statements.

The MBTA Contract consists of a design and build phase of approximately 3three years and an operate and maintain period of approximately 10ten 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.~~OpCo in connection with the MBTA contract over the ~~ten year~~ten-year operate and maintain phase. All of ~~OpCo.’s~~OpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to ~~CTS~~Cubic by OpCo. ~~CTS~~Cubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, under its subcontract with OpCo.

Upon creation of the P3 Venture, John Laing made a loan to ~~HoldCo.~~HoldCo of $24.3 million in the form of an equity bridge loan. The loan carries a 2.5% interest rate and matures at the end of the design and build phase of the MBTA contract. ~~CTS~~Cubic issued a letter of credit for $2.7 million to ~~HoldCo.~~HoldCo in accordance with ~~CTS’s~~Cubic’s equity funding responsibilities. ~~HoldCo.~~HoldCo is able to draw on the ~~CTS~~Cubic letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of ~~December 31, 2018.~~June 30, 2019.

Upon creation of the P3 Venture, ~~OpCo.~~OpCo entered into a credit agreement with a group of financial institutions ~~(the P3~~(the OpCo Credit Agreement) which includes a long-term debt facility and a revolving credit ~~facility~~.facility. The long-term debt facility allows for draws up to a maximum amount of $212.4 ~~million through~~million; draws may only be made during the design and build phase of the MBTA ~~contract.~~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 Inter-bank Offered Rate (LIBOR) plus 1.3% and LIBOR plus 1.55% over the design and build and operate and maintain phases of the MBTA Contract, respectively. At June 30, 2019, the outstanding balance on the long-term debt facility was $46.0 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 and is only available to be drawn on during the operate and maintain phase of the MBTA Contract. OpCo’s debt is nonrecourse with respect to Cubic and its subsidiaries.

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 a decrease of ~~$2.0~~$0.2 million to our cash balance as of ~~December 31, 2018~~June 30, 2019 compared to September 30, 2018.

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maturing in March 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually and principal payments are due from 2021 through 2025. ~~The agreement pertaining to the aforementioned notes also contained a provision that the coupon rate would increase by a further 0.50% should the company’s leverage ratio exceed a certain level.~~ In February 2016, we revised the note purchase agreement and issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing in March 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. At the time of the issuance of this last series of notes, certain terms and conditions of the note purchase and private shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement as discussed below in order to increase our leverage capacity. The ~~interest rates on all of~~agreement pertaining to the ~~term~~aforementioned notes ~~described above may be adjusted upwards~~also contains a provision that the coupon rate would increase by ~~up to 0.75%~~a further 0.50% should ~~our~~the company’s leverage ratio exceed a certain ~~levels.~~level.

We have a committed revolving credit agreement with a group of financial institutions in the amount of ~~$400.0~~$800.0 million which ~~expires~~is scheduled to expire in ~~August 2021~~April 2024 (Revolving Credit Agreement). Borrowings under this agreement bear a variable rate of interest which is calculated based upon the U.S. Dollar Libor rate plus a contractually defined credit spread that is based upon the tenor of the specific borrowing. At June 30, 2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was 4.02%. Debt issuance and modification costs of ~~$2.3 million and $1.3~~$1.9 million were incurred in connection with ~~February 2, 2016 and August 11, 2016 amendments~~an April 2019 amendment to the Revolving Credit ~~Agreement, respectively.~~Agreement. Costs incurred in connection with establishment of and amendments to ~~the Revolving Credit Agreement~~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, 2018,~~June 30, 2019, our total debt issuance costs have an unamortized deferred financing balance of ~~$1.7~~$3.4 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of ~~December 31, 2018,~~June 30, 2019, there were ~~$64.5~~$231.0 million of borrowings under this agreement and there were letters of credit outstanding totaling ~~$38.4~~$34.7 million, which reduce the

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available line of credit to ~~$297.1~~$534.3 million. The ~~$38.4~~$34.7 million of letters of credit includes both financial letters of credit and performance guarantees.

Our Revolving Credit Agreement and note purchase and private shelf agreement each contain a number of customary covenants, including requirements for us to maintain certain interest coverage and leverage ratios and restrictions on our and certain of our 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 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~~Kingdom. The balance in the account as of ~~December 31, 2018~~June 30, 2019 was ~~$17.9~~$17.1 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

As of ~~December 31, 2018,~~June 30, 2019, virtually all of the of the ~~$103.5~~$89.9 million of our cash and cash equivalents, including restricted cash, was held by our foreign subsidiaries, primarily in the United Kingdom, New Zealand and Australia.

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Subsequent to ~~the~~ enactment of the Tax Act, 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.

Our financial condition remains strong with working capital of ~~$352.2~~$165.7 million and a current ratio of ~~2.1~~1.3 to 1 at ~~December 31, 2018.~~June 30, 2019. We expect 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.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements of this Form 10-Q, which are ~~hereby~~ 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

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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.

Effective October 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which changed the way we recognize revenue for certain contracts. See “Recently Adopted Accounting Pronouncements – Revenue Recognition” within “Note 1 – Basis offor Presentation” included in our Notes to Consolidated Financial Statements for changes to our critical accounting policies as a result of adopting ASC 606. Other than changes to our revenue recognition policy as a result of adopting ASC 606 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, 2018.

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 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, 2018 and in “Part II - Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, 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 ability to monitor and evaluate the effectiveness of new processes and procedures we have implemented to remediate the material weaknesses that previously existed in our internal control over financial reporting;

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

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

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

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the effects of sequestration on our contracts;

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our assumptions covering behavior by public transit authorities;

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

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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;

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negative audits by the U.S. government;

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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;

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competition and technology changes in the defense and transportation industries;

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~~the change~~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;

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

●

our ability to identify, attract and retain qualified employees;

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~~our failure to properly implement our enterprise resource planning system;~~

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

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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;

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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 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

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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, 2018~~June 30, 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, 2018.

ITEM 4 - CONTROLS AND PROCEDURES

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of ~~December 31, 2018.~~June 30, 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.

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We have implemented changes to our processes, systems and controls with respect to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606). 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, 2018,~~June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

In August 2019, a transit authority asserted loss of revenue due to alleged accidental undercharging of their customers for specific transactions by a fare system which we operate for them and has requested a corresponding recoupment from us. Although our investigation into this matter is not yet complete, we currently believe this matter will not have a materially adverse effect on our financial position, results of operations, or cash flows. No liability for this claim has been recorded as of June 30, 2019.

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, 2018, ~~except~~other than as ~~set forth below.~~

~~Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to~~ previously ~~filed financial statements, which could cause our stock price to decline.~~

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results.

For example, in May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606). We adopted ASC 606 effective October 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 resulted in a changedisclosed in our significant accounting policy regarding revenue recognition, and resulted in changes in our accounting policies regarding contract estimates, backlog, inventory, contract assets, long-term capitalized contract costs, and contract liabilities. The cumulative effect of applyingQuarterly Report on Form 10-Q for the ~~standard was an increase of $24.5 million to shareholders’ equity as of October 1,~~quarter ended December 31, 2018. However, the adoption of ASC 606 or any other new or revised accounting standard could adversely affect our financial position or operating results in the future or may retroactively adversely affect previously reported results, which could cause our stock price to decline.

~~For a discussion of the impact that the adoption of ASC 606 has had and is expected to have on our consolidated financial statements and related disclosures, see~~ ~~“Recently Adopted Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements of this Form 10-Q.~~

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ITEM 6 - EXHIBITS

(a) The following exhibits are included herein:


	Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation. Incorporated by reference to Form ~~10-Q for the quarter ended June 30, 2006~~8-K filed February 19, 2019, file No. 001-08931, Exhibit 3.1.
3.2		~~Certificate of Amendment of Amended and Restated Certificate of Incorporation. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2016, file No. 001-08931, Exhibit 3.2.~~
~~3.3~~		Amended and Restated Bylaws. Incorporated by reference to Form 8-K filed November 14, 2018, file No. 001-08931, Exhibit 3.1.
10.1* 10.1 †		~~Form~~Fourth Amended and Restated Credit Agreement, dated as of ~~Performance-Based Vesting Restricted Stock Unit Award Grant Notice~~April 30, 2019, by and ~~Award Agreement under the~~among Cubic Corporation, ~~2015 Incentive Award Plan.~~
10.2*		~~Incentive Bonus Plan.~~JP Morgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2019, file No. 001-08931, Exhibit 10.8.
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, 2018,~~June 30, 2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Condensed Consolidated Statements of ~~Income (Loss),~~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.

*Indicates management contract or compensatory plan or arrangement.

†Portions of this exhibit have been omitted.

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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~~August 6, 2019	/s/ Anshooman Aga
		Anshooman Aga
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)


Date	~~February~~August 6, 2019	/s/ Mark A. Harrison
		Mark A. Harrison
		Senior Vice President and ~~Corporate Controller~~Chief Accounting Officer
		(Principal Accounting Officer)

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