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 quarterly period ended December 31, 20182019
001-08931OR
☐ | 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
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 Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐ | |
|
| | |
Emerging | | |
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, 2019,21, 2020, the registrant had only one class of common stock of which there were 31,150,23231,296,448 shares outstanding (after deducting 8,945,300 shares held as treasury stock).
CUBIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended December 31, 20182019
| ||||
| Page | |||
| | |
| |
| | | | |
| | | | |
| 3 | | ||
| Condensed Consolidated Statements of | | 3 | |
| Condensed Consolidated Statements of Comprehensive Income | | 4 | |
| | 5 | | |
| | 6 | | |
| Condensed Consolidated Statements of Changes in Shareholders’ Equity | | 7 | |
| | 8 | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 38 | | |
| 50 | | ||
| 50 | | ||
| | | | |
| | | | |
| | | | |
| 51 | | ||
| 51 | | ||
| 51 | |
2
PART I - FINANCIAL INFORMATION
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 |
| ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 |
| ||
Net sales: | | | | | | | |
Products | | $ | 200,604 | | $ | 182,253 | |
Services | |
| 128,235 | |
| 123,006 | |
| |
| 328,839 | |
| 305,259 | |
Costs and expenses: | | | | | | | |
Products | |
| 166,843 | |
| 125,485 | |
Services | |
| 82,648 | |
| 92,785 | |
Selling, general and administrative expenses | |
| 65,915 | |
| 62,986 | |
Research and development | |
| 8,422 | |
| 12,012 | |
Amortization of purchased intangibles | |
| 10,089 | |
| 10,565 | |
Gain on sale of property, plant and equipment | |
| (170) | |
| — | |
Restructuring costs | |
| 1,575 | |
| 1,992 | |
| |
| 335,322 | |
| 305,825 | |
| | | | | | | |
Operating loss | |
| (6,483) | |
| (566) | |
| | | | | | | |
Other income (expenses): | | | | | | | |
Interest and dividend income | |
| 2,218 | |
| 1,234 | |
Interest expense | |
| (5,363) | |
| (4,032) | |
Other income (expense), net | |
| (127) | |
| (4,753) | |
| | | | | | | |
Loss from continuing operations before income taxes | |
| (9,755) | |
| (8,117) | |
| | | | | | | |
Income tax provision | |
| 6,246 | |
| 2,497 | |
| | | | | | | |
Loss from continuing operations | | | (16,001) | | | (10,614) | |
Net loss from discontinued operations | |
| (584) | |
| — | |
Net loss | | | (16,585) | | | (10,614) | |
| | | | | | | |
Less noncontrolling interest in net income (loss) of VIE | |
| 3,990 | |
| (4,027) | |
| | | | | | | |
Net loss attributable to Cubic | | $ | (20,575) | | $ | (6,587) | |
| | | | | | | |
Amounts attributable to Cubic: | | | | | | | |
Net loss from continuing operations | | $ | (19,991) | | $ | (6,587) | |
Net loss from discontinued operations | |
| (584) | |
| — | |
Net loss attributable to Cubic | | $ | (20,575) | | $ | (6,587) | |
| | | | | | | |
Net loss per share: | | | | | | | |
Basic | | | | | | | |
Continuing operations attributable to Cubic | | $ | (0.64) | | $ | (0.23) | |
Discontinued operations | | $ | (0.02) | | $ | — | |
Basic earnings per share attributable to Cubic | | $ | (0.66) | | $ | (0.23) | |
| | | | | | | |
Diluted | | | | | | | |
Continuing operations attributable to Cubic | | $ | (0.64) | | $ | (0.23) | |
Discontinued operations | | $ | (0.02) | | $ | — | |
Diluted earnings per share attributable to Cubic | | $ | (0.66) | | $ | (0.23) | |
| | | | | | | |
Weighted average shares used in per share calculations: | | | | | | | |
Basic | |
| 31,273 | |
| 28,492 | |
Diluted | | | 31,273 | | | 28,492 | |
See accompanying notes.
3
CUBIC CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 |
| ||
Net loss | | $ | (16,585) | | $ | (10,614) | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation | |
| 10,480 | |
| (3,318) | |
Change in unrealized gains/losses from cash flow hedges: | | | | | | | |
Change in fair value of cash flow hedges, net of tax | | | (1,185) | | | 1,343 | |
Adjustment for net gains/losses realized and included in net income, net of tax | | | 49 | | | (24) | |
Total change in unrealized gains/losses realized from cash flow hedges, net of tax | | | (1,136) | | | 1,319 | |
Total other comprehensive income (loss) | |
| 9,344 | |
| (1,999) | |
Total comprehensive loss | | | (7,241) | | | (12,613) | |
Noncontrolling interest in comprehensive income (loss) of consolidated VIE, net of tax | | | 3,990 | | | (4,027) | |
Comprehensive loss attributable to Cubic, net of tax | | $ | (11,231) | | $ | (8,586) | |
|
|
|
|
|
|
|
|
|
| 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.
4
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 |
|
| | | | | | | |
| | December 31, | | September 30, |
| ||
|
| 2019 |
| 2019 |
| ||
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 61,599 | | $ | 65,800 | |
Cash in consolidated VIE | | | 410 | | | 347 | |
Restricted cash | |
| 22,482 | |
| 19,507 | |
Restricted cash in consolidated VIE | | | 9,967 | | | 9,967 | |
Accounts receivable: | | | | | | | |
Billed | |
| 113,493 | |
| 127,406 | |
Allowance for doubtful accounts | |
| (1,407) | |
| (1,392) | |
| |
| 112,086 | |
| 126,014 | |
| | | | | | | |
Contract assets | |
| 320,188 | |
| 349,559 | |
Recoverable income taxes | |
| 10,295 | |
| 7,754 | |
Inventories | |
| 122,912 | |
| 106,794 | |
Other current assets | |
| 48,941 | |
| 38,534 | |
Other current assets in consolidated VIE | |
| 79 | |
| 33 | |
Total current assets | |
| 708,959 | |
| 724,309 | |
| | | | | | | |
Long-term contracts financing receivables | |
| 33,685 | |
| 36,285 | |
Long-term contracts financing receivables in consolidated VIE | | | 124,576 | | | 115,508 | |
Property, plant and equipment, net | |
| 151,218 | |
| 144,969 | |
Operating lease right-of-use asset | |
| 80,747 | |
| — | |
Deferred income taxes | |
| 5,169 | |
| 4,098 | |
Goodwill | |
| 582,549 | |
| 578,097 | |
Purchased intangibles, net | |
| 155,862 | |
| 165,613 | |
Other assets | |
| 77,264 | |
| 76,872 | |
Other assets in consolidated VIE | | | — | | | 1,419 | |
Total assets | | $ | 1,920,029 | | $ | 1,847,170 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Short-term borrowings | | $ | 226,500 | | $ | 195,500 | |
Trade accounts payable | | | 109,827 | | | 180,773 | |
Trade accounts payable in consolidated VIE | | | — | | | 25 | |
Contract liabilities | |
| 62,500 | |
| 46,170 | |
Accrued compensation and current liabilities | | | 102,933 | | | 95,013 | |
Other current liabilities in consolidated VIE | | | 171 | | | 191 | |
Income taxes payable | |
| 5,893 | |
| 773 | |
Current portion of long-term debt | |
| 10,714 | |
| 10,714 | |
Total current liabilities | |
| 518,538 | |
| 529,159 | |
| | | | | | | |
Long-term debt | |
| 189,118 | |
| 189,110 | |
Long-term debt in consolidated VIE | |
| 82,984 | |
| 61,994 | |
Operating lease liability | |
| 73,924 | |
| — | |
Other noncurrent liabilities | |
| 63,670 | |
| 64,734 | |
Other noncurrent liabilities in consolidated VIE | |
| 17,267 | |
| 21,605 | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock | | | 276,497 | |
| 274,472 | |
Retained earnings | |
| 841,549 | |
| 862,948 | |
Accumulated other comprehensive loss | |
| (130,349) | |
| (139,693) | |
Treasury stock at cost | |
| (36,078) | |
| (36,078) | |
Shareholders’ equity related to Cubic | |
| 951,619 | |
| 961,649 | |
Noncontrolling interest in VIE | |
| 22,909 | |
| 18,919 | |
Total shareholders’ equity | |
| 974,528 | |
| 980,568 | |
Total liabilities and shareholders’ equity | | $ | 1,920,029 | | $ | 1,847,170 | |
See accompanying notes.
5
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 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 |
| ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 |
| ||
Operating Activities: | | | | | | | |
Net loss | | $ | (16,585) | | $ | (10,614) | |
Net loss from discontinued operations | |
| 584 | |
| — | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depreciation and amortization | |
| 16,950 | |
| 16,011 | |
Share-based compensation expense | |
| 4,477 | |
| 2,720 | |
Change in fair value of contingent consideration | | | (3,005) | | | 429 | |
Change in fair value of interest rate swap in VIE | | | (4,337) | | | 6,133 | |
Other items | | | 4,295 | | | 462 | |
Changes in operating assets and liabilities, net of effects from acquisitions | | | (49,941) | | | (76,308) | |
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS | |
| (47,562) | |
| (61,167) | |
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS | |
| (44) | |
| — | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (47,606) | |
| (61,167) | |
| | | | | | | |
Investing Activities: | | | | | | | |
Acquisition of businesses, net of cash acquired | |
| — | |
| (247,150) | |
Purchases of property, plant and equipment | |
| (11,833) | |
| (12,045) | |
Receipt of withheld proceeds from sale of trade receivables | |
| 5,521 | |
| — | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (6,312) | |
| (259,195) | |
| | | | | | | |
Financing Activities: | | | | | | | |
Proceeds from short-term borrowings | |
| 157,500 | |
| 372,000 | |
Principal payments on short-term borrowings | |
| (126,500) | |
| (307,500) | |
Proceeds from long-term borrowings in consolidated VIE | |
| 20,186 | |
| 5,798 | |
Proceeds from stock issued under employee stock purchase plan | | | 1,169 | | | — | |
Purchase of common stock | | | (3,621) | | | (3,419) | |
Contingent consideration payments related to acquisitions of businesses | |
| — | |
| (435) | |
Proceeds from equity offering, net | | | — | | | 215,832 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 48,734 | |
| 282,276 | |
| | | | | | | |
Effect of exchange rates on cash | |
| 4,021 | |
| 1,962 | |
| | | | | | | |
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| (1,163) | |
| (36,124) | |
| | | | | | | |
Cash, cash equivalents and restricted cash at the beginning of the period | |
| 95,621 | |
| 139,608 | |
| | | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE PERIOD | | $ | 94,458 | | $ | 103,484 | |
| | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | |
Receivable recognized in connection with the acquisition of Trafficware, net | | | — | | | 1,588 | |
See accompanying notes.
6
CUBIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended December 31, 2019 | | |||||||||||||||
| |
| |
|
| |
| Accumulated |
|
| |
|
| |
|
| | |
| | | | | | | | Other | | | | | Noncontrolling | | Number | | ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares | | |||||
(in thousands) | | Stock | | Earnings | | Loss | | Stock | | VIE | | Outstanding | | |||||
October 1, 2019 | | $ | 274,472 | | $ | 862,948 | | $ | (139,693) | | $ | (36,078) | | $ | 18,919 | | 31,178 | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | |
| — | |
| (20,575) | |
| — | |
| — | |
| 3,990 |
| — | |
Other comprehensive income (loss), net of tax | |
| — | |
| — | |
| 9,344 | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | 149 | |
Stock issued under employee stock purchase plan | | | 1,169 | | | — | | | — | | | — | | | — | | — | |
Purchase of common stock | | | (3,621) | | | — | | | — | | | — | | | — | | (53) | |
Stock-based compensation | |
| 4,477 | |
| — | |
| — | |
| — | |
| — |
| — | |
Cumulative effect of accounting standard adoption | | | — | | | (824) | | | — | | | — | | | — | | — | |
| | | | | | | | | | | | | | | | | | |
December 31, 2019 | | $ | 276,497 | | $ | 841,549 | | $ | (130,349) | | $ | (36,078) | | $ | 22,909 |
| 31,274 | |
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended December 31, 2018 | | |||||||||||||||
| | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | | Other | | | | | Noncontrolling | | Number | | ||
| | Common | | Retained | | Comprehensive | | Treasury | | Interest in | | of Shares | | |||||
(in thousands) |
| Stock |
| Earnings |
| Loss |
| Stock |
| VIE |
| Outstanding | | |||||
October 1, 2018 | | $ | 45,008 | | $ | 801,834 | | $ | (110,643) | | $ | (36,078) | | $ | 24,075 | | 27,255 | |
| | | | | | | | | | | | | | | | | | |
Net loss | |
| — | |
| (6,587) | |
| — | |
| — | |
| (4,027) |
| — | |
Other comprehensive loss, net of tax | |
| — | |
| — | |
| (1,999) | |
| — | |
| — |
| — | |
Stock issued under equity incentive plans | | | — | | | — | | | — | | | — | | | — | | 129 | |
Purchase of common stock | | | (3,419) | | | — | | | — | | | — | | | — | | (46) | |
Stock-based compensation | |
| 2,720 | |
| — | |
| — | |
| — | |
| — |
| — | |
Cumulative effect of accounting standard adoption | | | — | | | 19,834 | | | — | | | — | | | 4,655 | | — | |
Stock issued under equity offering | | | 215,832 | | | — | | | — | | | — | | | — | | 3,795 | |
Other | | | — | | | 2 | | | — | | | — | | | — | | — | |
| | | | | | | | | | | | | | | | | | |
December 31, 2018 | | $ | 260,141 | | $ | 815,083 | | $ | (112,642) | | $ | (36,078) | | $ | 24,703 |
| 31,133 | |
See accompanying notes.
7
CUBIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 20182019
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 periodquarter ended December 31, 20182019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019.2020. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2018.2019.
The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Through September 30, 2017 our principal lines of business were transportation fare collection systems and services, defense 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.
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 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) for the quarter ended December 31, 2018 and our Condensed Consolidated Balance Sheet as of December 31, 2018 are presented under ASC 606, while our Condensed Consolidated Statements of Income (Loss) for the quarter ended December 31, 2017 and our Condensed Consolidated Balance Sheet as of September 30, 2018 are presented under the legacy revenue recognition guidance under ASC 605, Revenue Recognition. See Note 2 for disclosure of the impact of the adoption of ASC 606 on our Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Balance Sheet for the quarter ended December 31, 2018, 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) capabilities. A significant portion of our revenues are generated from 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. Our contracts are primarily with the U.S. government, state and local
7
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) 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 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 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 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.
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.
8
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.
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.
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 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 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 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.
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.
9
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 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 |
| ||
Operating income (loss) |
| $ | 1,814 |
| $ | (929) |
|
Net income (loss) from continuing operations |
|
| 1,271 |
|
| (736) |
|
Diluted earnings per share |
|
| 0.04 |
|
| (0.03) |
|
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 As of December 31, 2018, our ending backlog was $3.814 billion. We expect to recognize approximately 25% of our December 31, 2018 backlog over the next 12 months and approximately 40% 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 million as of December 31, 2018 and September 30, 2018, respectively.
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
10
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, 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. 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 Cuts and Jobs Act of 2017” (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. 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 SAB 118 measurement period subsequently ended on December 22, 2018. Although we no longer considers 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 OctoberFebruary 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
11
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, but resulted in a retrospective change in the presentation of restricted cash, including the inclusion of $27.4 million and $11.8 million of restricted cash on hand at September 30, 2018 and December 31, 2017, respectively, 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(the FASB) issued ASU 2016-02, Leases(commonly known as ASC 842). Under the new guidance, lessees will beare 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 beginningWe adopted ASC 842 on October 1, 2019 with early adoption permitted. ASU 2016-02 will be adopted on ausing the modified retrospective transition basis for leases existingmethod, applying the new lease requirements at or entered into after the beginning of the earliest comparative period presentedpresented. We elected the practical expedients which provide that entities need not reassess whether existing contracts contain a lease, lease classification of existing leases, or the treatment of initial direct costs on existing leases. On October 1, 2019, we recorded a right-of-use asset of $80 million and a lease liability of $88 million, in our consolidated balance sheets. We also recorded a $0.8 million decrease in retained earnings related to the adoption of ASC 842. The adoption of the standard did not have a material impact on our consolidated statements of operations or consolidated statements of cash flows.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in our financial statements and disclosures. We adopted ASU 2017-12 on October 1, 2019. The adoption of this standard did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements – Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires companies to record an allowance for expected credit losses over the contractual term of financial assets, including short-term trade receivables and contract assets, and expands disclosure requirements for credit quality of financial assets. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements and we have determined we will not adopt the new guidance early.statements.
8
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying valueamount 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.
12
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. 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 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements on fair value measurements. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020 and interim periods within that annual period. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating whether to adopt the impact ofguidance early and we do not expect the applicationadoption of this accounting standard updateto have a significant impact on our consolidated financial statements as well as whether to adopt the new guidance early.statements.
In August 2018, the FASB issued ASU 2018-14, Defined Benefit PlanPlans - Disclosure Framework (Topic 715), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2020. Early adoption is permitted. We are currently evaluating whether to adopt the guidance early and we do not expect the adoption of this standard to have a significant impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this accounting standard update are effective for us in our annual period beginning October 1, 2021 and interim periods within that annual period. We are currently evaluating the impact of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt the new guidance early.statements.
Note 2 — New Accounting Standards Implemented
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 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.
Based on contracts in process at September 30, 2018, upon adoption of ASC 606 we recorded a net increase to retained earnings of $24.5 million, which includes the acceleration of net sales of approximately $114.9 million and the related cost of sales. The adjustment to retained earnings 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 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
13
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) 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 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.
14
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 |
| |||
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 111,834 |
| $ | — |
| $ | 111,834 |
|
Cash in consolidated VIE |
|
| 374 |
|
| — |
|
| 374 |
|
Restricted cash |
|
| 17,400 |
|
| — |
|
| 17,400 |
|
Restricted cash in consolidated VIE |
|
| 10,000 |
|
| — |
|
| 10,000 |
|
Accounts receivable, net |
|
| 392,367 |
|
| (236,743) |
|
| 155,624 |
|
Contract assets |
|
| — |
|
| 272,210 |
|
| 272,210 |
|
Recoverable income taxes |
|
| 91 |
|
| — |
|
| 91 |
|
Inventories |
|
| 84,199 |
|
| (22,511) |
|
| 61,688 |
|
Assets held for sale |
|
| 8,177 |
|
| — |
|
| 8,177 |
|
Other current assets |
|
| 43,705 |
|
| — |
|
| 43,705 |
|
Total current assets |
|
| 668,147 |
|
| 12,956 |
|
| 681,103 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term contracts receivables |
|
| 6,134 |
|
| (6,134) |
|
| — |
|
Long-term contracts financing receivables |
|
| — |
|
| 56,228 |
|
| 56,228 |
|
Long-term contracts financing receivables in consolidated VIE |
|
| — |
|
| 38,990 |
|
| 38,990 |
|
Long-term capitalized contract costs |
|
| 84,924 |
|
| (84,924) |
|
| — |
|
Long-term capitalized contract costs in consolidated VIE |
|
| 1,258 |
|
| (1,258) |
|
| — |
|
Property, plant and equipment, net |
|
| 117,546 |
|
| — |
|
| 117,546 |
|
Deferred income taxes |
|
| 4,713 |
|
| 389 |
|
| 5,102 |
|
Goodwill |
|
| 333,626 |
|
| — |
|
| 333,626 |
|
Purchased intangibles, net |
|
| 73,533 |
|
| — |
|
| 73,533 |
|
Other assets |
|
| 14,192 |
|
| — |
|
| 14,192 |
|
Other noncurrent assets in consolidated VIE |
|
| 810 |
|
| — |
|
| 810 |
|
Total assets |
| $ | 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 |
|
Trade accounts payable in consolidated VIE |
|
| 165 |
|
| — |
|
| 165 |
|
Contract liability |
|
| — |
|
| 70,127 |
|
| 70,127 |
|
Customer advances |
|
| 75,941 |
|
| (75,941) |
|
| — |
|
Accrued compensation and other current liabilities |
|
| 118,233 |
|
| 583 |
|
| 118,816 |
|
Income taxes payable |
|
| 8,586 |
|
| — |
|
| 8,586 |
|
Total current liabilities |
|
| 328,339 |
|
| (8,242) |
|
| 320,097 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 199,793 |
|
| — |
|
| 199,793 |
|
Long-term debt in consolidated VIE |
|
| 9,056 |
|
| — |
|
| 9,056 |
|
Other long-term liabilities |
|
| 43,486 |
|
| — |
|
| 43,486 |
|
Other long-term liabilities in consolidated VIE |
|
| 13 |
|
| — |
|
| 13 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| 45,008 |
|
| — |
|
| 45,008 |
|
Retained earnings |
|
| 801,834 |
|
| 19,834 |
|
| 821,668 |
|
Accumulated other comprehensive loss |
|
| (110,643) |
|
| — |
|
| (110,643) |
|
Treasury stock at cost |
|
| (36,078) |
|
| — |
|
| (36,078) |
|
Shareholders’ equity related to Cubic |
|
| 700,121 |
|
| 19,834 |
|
| 719,955 |
|
Noncontrolling interest in VIE |
|
| 24,075 |
|
| 4,655 |
|
| 28,730 |
|
Total shareholders’ equity |
|
| 724,196 |
|
| 24,489 |
|
| 748,685 |
|
Total liabilities and shareholders’ equity |
| $ | 1,304,883 |
| $ | 16,247 |
| $ | 1,321,130 |
|
15
The table below presents how the adoption of ASC 606 affected certain line items on our Condensed Consolidated Statements of Income (Loss) for the three months ended December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended December 31, 2018 |
| |||||||
|
|
|
|
|
|
|
| As Reported |
| |
|
| Under |
| Effect of |
| Under |
| |||
|
| ASC 605 |
| ASC 606 |
| ASC 606 |
| |||
Net sales: |
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 152,562 |
| $ | 29,691 |
| $ | 182,253 |
|
Services |
|
| 124,262 |
|
| (1,256) |
|
| 123,006 |
|
|
|
| 276,824 |
|
| 28,435 |
|
| 305,259 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
Products |
|
| 100,544 |
|
| 24,941 |
|
| 125,485 |
|
Services |
|
| 92,785 |
|
| — |
|
| 92,785 |
|
Selling, general and administrative expenses |
|
| 62,823 |
|
| 163 |
|
| 62,986 |
|
Research and development |
|
| 12,012 |
|
| — |
|
| 12,012 |
|
Amortization of purchased intangibles |
|
| 10,565 |
|
| — |
|
| 10,565 |
|
Restructuring costs |
|
| 1,992 |
|
| — |
|
| 1,992 |
|
|
|
| 280,721 |
|
| 25,104 |
|
| 305,825 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (3,897) |
|
| 3,331 |
|
| (566) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
| 56 |
|
| 1,178 |
|
| 1,234 |
|
Interest expense |
|
| (4,032) |
|
| — |
|
| (4,032) |
|
Other income (expense), net |
|
| (4,753) |
|
| — |
|
| (4,753) |
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
|
|
|
Less noncontrolling interest in loss of VIE |
|
| (5,981) |
|
| 1,954 |
|
| (4,027) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Cubic |
| $ | (9,118) |
| $ | 2,531 |
| $ | (6,587) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to Cubic |
| $ | (0.32) |
| $ | 0.09 |
| $ | (0.23) |
|
Diluted earnings per share attributable to Cubic |
| $ | (0.32) |
| $ | 0.09 |
| $ | (0.23) |
|
16
The table below quantifies the impact of adopting ASC 606 on segment net sales and operating income (loss) for the three months ended December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended December 31, 2018 |
| |||||||
|
|
|
|
|
| As Reported |
| |||
|
| Under |
| Effect of |
| Under |
| |||
|
| ASC 605 |
| ASC 606 |
| ASC 606 |
| |||
Sales: |
| (in thousands) |
| |||||||
Cubic Transportation Systems |
| $ | 172,728 |
| $ | 9,079 |
| $ | 181,807 |
|
Cubic Mission Solutions |
|
| 45,363 |
|
| 1,030 |
|
| 46,393 |
|
Cubic Global Defense |
|
| 58,733 |
|
| 18,326 |
|
| 77,059 |
|
Total sales |
| $ | 276,824 |
| $ | 28,435 |
| $ | 305,259 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
Cubic Transportation Systems |
| $ | 9,186 |
| $ | 1,790 |
| $ | 10,976 |
|
Cubic Mission Solutions |
|
| (5,191) |
|
| 251 |
|
| (4,940) |
|
Cubic Global Defense |
|
| 1,607 |
|
| 1,290 |
|
| 2,897 |
|
Unallocated corporate expenses |
|
| (9,499) |
|
| — |
|
| (9,499) |
|
Total operating income (loss) |
| $ | (3,897) |
| $ | 3,331 |
| $ | (566) |
|
17
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As Reported |
| |
|
| Under |
| Effect of |
| Under |
| |||
|
| ASC 605 |
| ASC 606 |
| ASC 606 |
| |||
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 75,174 |
| $ | — |
| $ | 75,174 |
|
Cash in consolidated VIE |
|
| 421 |
|
| — |
|
| 421 |
|
Restricted cash |
|
| 17,889 |
|
| — |
|
| 17,889 |
|
Restricted cash in consolidated VIE |
|
| 10,000 |
|
| — |
|
| 10,000 |
|
Accounts receivable, net |
|
| 390,855 |
|
| (272,564) |
|
| 118,291 |
|
Contract assets |
|
| — |
|
| 320,277 |
|
| 320,277 |
|
Recoverable income taxes |
|
| 1,086 |
|
| 235 |
|
| 1,321 |
|
Inventories |
|
| 121,223 |
|
| (29,022) |
|
| 92,201 |
|
Assets held for sale |
|
| 8,177 |
|
| — |
|
| 8,177 |
|
Other current assets |
|
| 40,924 |
|
| — |
|
| 40,924 |
|
Total current assets |
|
| 665,749 |
|
| 18,926 |
|
| 684,675 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term contracts receivables |
|
| 4,064 |
|
| (4,064) |
|
| — |
|
Long-term contracts financing receivables |
|
| — |
|
| 44,936 |
|
| 44,936 |
|
Long-term contracts financing receivables in consolidated VIE |
|
| — |
|
| 52,996 |
|
| 52,996 |
|
Long-term capitalized contract costs |
|
| 95,894 |
|
| (95,894) |
|
| — |
|
Long-term capitalized contract costs in consolidated VIE |
|
| 1,551 |
|
| (1,551) |
|
| — |
|
Property, plant and equipment, net |
|
| 125,298 |
|
| — |
|
| 125,298 |
|
Deferred income taxes |
|
| 4,298 |
|
| 389 |
|
| 4,687 |
|
Goodwill |
|
| 484,329 |
|
| — |
|
| 484,329 |
|
Purchased intangibles, net |
|
| 137,201 |
|
| — |
|
| 137,201 |
|
Other assets |
|
| 13,871 |
|
| — |
|
| 13,871 |
|
Other noncurrent assets in consolidated VIE |
|
| 962 |
|
| — |
|
| 962 |
|
Total assets |
| $ | 1,533,217 |
| $ | 15,738 |
| $ | 1,548,955 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
| $ | 64,500 |
| $ | — |
| $ | 64,500 |
|
Trade accounts payable |
|
| 111,310 |
|
| (2,216) |
|
| 109,094 |
|
Trade accounts payable in consolidated VIE |
|
| 205 |
|
| — |
|
| 205 |
|
Contract liability |
|
| — |
|
| 69,713 |
|
| 69,713 |
|
Customer advances |
|
| 80,993 |
|
| (80,993) |
|
| — |
|
Accrued compensation and other current liabilities |
|
| 82,323 |
|
| — |
|
| 82,323 |
|
Income taxes payable |
|
| 6,512 |
|
| 259 |
|
| 6,771 |
|
Total current liabilities |
|
| 345,843 |
|
| (13,237) |
|
| 332,606 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 199,801 |
|
| — |
|
| 199,801 |
|
Long-term debt in consolidated VIE |
|
| 15,357 |
|
| — |
|
| 15,357 |
|
Other long-term liabilities |
|
| 43,838 |
|
| — |
|
| 43,838 |
|
Other long-term liabilities in consolidated VIE |
|
| 6,146 |
|
| — |
|
| 6,146 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
Common stock |
|
| 260,141 |
|
| — |
|
| 260,141 |
|
Retained earnings |
|
| 792,717 |
|
| 22,366 |
|
| 815,083 |
|
Accumulated other comprehensive loss |
|
| (112,642) |
|
| — |
|
| (112,642) |
|
Treasury stock at cost |
|
| (36,078) |
|
| — |
|
| (36,078) |
|
Shareholders’ equity related to Cubic |
|
| 904,138 |
|
| 22,366 |
|
| 926,504 |
|
Noncontrolling interest in VIE |
|
| 18,094 |
|
| 6,609 |
|
| 24,703 |
|
Total shareholders’ equity |
|
| 922,232 |
|
| 28,975 |
|
| 951,207 |
|
Total liabilities and shareholders’ equity |
| $ | 1,533,217 |
| $ | 15,738 |
| $ | 1,548,955 |
|
18
Note 3 — Acquisitions and Divestitures
Sale of CGD Services
On April 18,In May 2018 we entered into a stock purchase agreement with the Purchaser,sold our Cubic Global Defense Services (CGD Services) business to Nova Global Supply & Services, LCC (Purchaser), an entity affiliated with GC Valiant, LP, under which we agreed to sell our CGD Services business to the Purchaser.LP. The sale closed on May 31, 2018. In accordance with the terms of the stock purchase agreement, the Purchaser agreed to pay us $135.0 million in cash upon the closing of the transaction, adjusted for the estimated working capital of CGD Services at the date of the sale compared to a working capital target. In the third quarter of fiscal 2018, we received $133.8 million in connection with the sale and 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. Since the sale we have worked with the Purchaser and revised certain estimates related to the working capital settlement. In connection with the revision of these estimates, we reduced the receivable from the Purchaser by $0.6 million and recognized a corresponding loss on the sale of CGD Services in the first quarter of fiscal 2020. The net receivable from the Purchaser at December 31, 2019 was $2.4 million. Certain remaining working capital settlement hasestimates, primarily related to the fair value of accounts receivable, have not yet been settled with the Purchaser.
In additionBusiness Acquisitions
PIXIA Corp.
On June 27, 2019, we paid cash of $50.0 million 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 assessmentpurchase 20% of the probabilityoutstanding capital stock of achievementPIXIA Corp. (Pixia), a private software company based in Herndon, Virginia, which provides high performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures.
9
Through December 31, 2019 we accounted for our investment in Pixia using the equity method of accounting. In accordance with ASC 323, Investments – Equity Method and Joint Ventures, we accounted for the basis difference between the cost of our investment in Pixia and our equity share of Pixia’s net assets as if Pixia was a consolidated subsidiary. At the date of our investment, we calculated the fair value of our share of Pixia’s identifiable intangible assets as $17.0 million, which will be amortized in other income (expense) over a weighted average remaining useful life of approximately five years. The remaining identifiable intangible assets subject to amortization totaled $13.7 million as of December 31, 2019. Our share of the required conditions.remaining basis difference of $32.3 million is identified as goodwill and will not be amortized.
We concluded that the sale of the CGD Services business met all of the required conditions for discontinued operations presentationrecognize our interest 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. ThePixia’s operating results and cash flowsless the amortization of CGD Services have been classified as discontinued operationsour share of Pixia’s intangible assets within other income (expense) in theour Condensed Consolidated Statements of Income (Loss)Operations. The net amount we recognized in the first quarter of fiscal 2020 for our interest in Pixia’s operating results less the amortization of our share of Pixia’s intangible assets was a loss of $1.8 million. At December 31, 2019, our investment in Pixia amounted to $47.4 million and is recorded within other assets on our Condensed Consolidated StatementsBalance Sheet.
Our purchase agreement with Pixia included an option to purchase the remaining 80% of Cash Flowsits capital stock for all periods presented.
The operations and cash flows of CGD Services are reflected$200.0 million, which we exercised in our consolidated Statements of Income and Consolidated Statements of Cash Flows as discontinued operations through May 31, 2018, the dateNovember 2019. Our acquisition of the sale.remaining capital stock of Pixia closed in January 2020 and was funded from borrowings under our existing credit facilities. After the closing date, this transaction will be treated as a business combination for accounting purposes. The following table presentsamount paid to the compositionsellers of net income from discontinued operations, net of taxes, Pixia will be adjusted for the quarter endeddifference between net working capital acquired and a targeted working capital amount.
Delerrok Inc.
During fiscal years 2018 and 2019, we invested a total of $6.5 million to purchase 17.5% of the outstanding common stock of Delerrok Inc. (Delerrok), a private technology company based in Vista, California, that specializes in electronic fare collection systems. We elected the measurement alternative provided by ASC 321, Investments – Equity Securities, and recorded our investment in Delerrok at cost, adjusted for observable price changes or any impairments, within other assets on our Condensed Consolidated Balance Sheet. At December 31, 2017 (in thousands). No amounts were recognized as2019, our investment in Delerrok amounted to $6.5 million. We did not recognize any income or loss from discontinued operationsour investment in Delerrok for the three months ended December 31, 2018:2019 and 2018.
|
|
|
|
|
|
|
| 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 |
|
UnderOur purchase agreement included an option to purchase the remaining 82.5% of Delerrok’s common stock, which we exercised in November 2019. We paid cash of $36.4 million in January 2020 at closing which was funded from borrowings under our existing credit facilities, and we will pay up to an additional $2.0 million if Delerrok’s sales exceed certain levels in the future. After the closing date, this transaction will be treated as a transition services agreement, we are providingbusiness combination for accounting purposes.
Due to the Purchaser with certain post-closing support primarily consistinglimited time between the acquisition dates of ITDelerrok and payroll services. We are chargingPixia and the Purchaserfiling of this report and due to the difference in fiscal year dates between the acquired companies and Cubic, it is not practicable for us to disclose for these acquired companies: (i) the allocation of purchase price to assets acquired and liabilities assumed as of the date of close, (ii) the methods of amortization and amortization periods of acquired intangible assets, and (iii) pro forma revenues and earnings of the combined company for the post-closing support in amounts that approximate their expected costs,three months ended December 31, 2019 and these support services will be phased out over an approximate ten-month period from the date that the sale closed.2018.
Consolidated Business Acquisitions
Each of the following acquisitions has been treated as a business combination for accounting purposes. The results of operations of each acquired business has been included in our consolidated financial statements since the respective date of each acquisition.
19
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 Cubic Mission Solutions (CMS) business.
10
Nuvotronics’ sales and results of operations included in our operating results were as follows (in millions):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Sales | | $ | 2.8 | | $ | — | |
Operating loss | |
| (0.4) | |
| — | |
Net loss after taxes | |
| (0.4) | |
| — | |
Nuvotronics’ operating results above included the following amounts (in millions):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Amortization | | $ | 1.3 | | $ | — | |
Acquisition-related expenses | |
| 0.5 | |
| — | |
(Gain) loss for changes in fair value of contingent consideration | |
| (4.1) | |
| — | |
The acquisition-date fair value of consideration is $66.8 million, which is comprised of net cash paid of $61.9 million, plus the estimated fair value of contingent consideration of $4.9 million. The acquisition was financed primarily with proceeds from draws on our line of credit. Under the purchase agreement, we will pay the sellers up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021. The contingent consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any subsequent changes in fair value are recognized in earnings.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
Technology |
| $ | 22.7 |
|
Trade name | | | 1.5 | |
Backlog | | | 1.4 | |
Non-compete agreements | | | 0.5 | |
Customer relationships | | | 0.6 | |
Accounts receivable and contract assets | | | 2.6 | |
Fixed assets | | | 2.7 | |
Accounts payable and accrued expenses | | | (1.8) | |
Deferred taxes | | | (3.2) | |
Other net assets acquired (liabilities assumed) | |
| (0.6) | |
Net identifiable assets acquired | |
| 26.4 | |
Goodwill | |
| 40.4 | |
Net assets acquired | | $ | 66.8 | |
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology and backlog valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of nine years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Nuvotronics with our existing CMS business, and strengthening our capability of developing and integrating products in our CMS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CMS segment and is not expected to be deductible for tax purposes.
11
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Nuvotronics is as follows (in millions):
| | | | |
Year Ended | | | | |
September 30, |
| | |
|
2020 | | $ | 4.0 | |
2021 | |
| 3.0 | |
2022 | |
| 3.0 | |
2023 | |
| 2.9 | |
2024 | |
| 2.7 | |
Thereafter | | | 10.1 | |
GRIDSMART Technologies, Inc.
In January 2019, we acquired all of the outstanding capital stock of GRIDSMART Technologies, Inc. (GRIDSMART), a provider of differentiated video tracking solutions to the Intelligent Traffic Systems market. Based in Knoxville, Tennessee, GRIDSMART specializes in video detection at the intersection utilizing advanced image processing, computer vision modeling and machine learning along with a single camera solution providing best-in-class data for optimizing the flow of people and traffic through intersections. GRIDSMART is expected to provide synergies from combining its capabilities with our existing Cubic Transportation Systems (CTS) business.
GRIDSMART’s sales and results of operations included in our operating results were as follows (in millions):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Sales | | $ | 4.1 | | $ | — | |
Operating loss | |
| (1.7) | |
| — | |
Net loss after taxes | |
| (1.7) | |
| — | |
GRIDSMART’s operating results above included the following amounts (in millions):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Amortization | | $ | 1.3 | | $ | — | |
Acquisition-related expenses | |
| 0.5 | |
| — | |
The acquisition-date fair value of consideration is $86.8 million. The acquisition was financed primarily with proceeds from draws on our line of credit.
12
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
| | | | |
| | | | |
Technology |
| $ | 25.7 |
|
Customer relationships | | | 3.6 | |
Trade name | | | 2.4 | |
Inventory | | | 4.3 | |
Accounts receivable | | | 1.7 | |
Accounts payable and accrued expenses | | | (1.9) | |
Deferred taxes | | | (3.3) | |
Other net assets acquired | |
| 0.5 | |
Net identifiable assets acquired | |
| 33.0 | |
Goodwill | |
| 53.8 | |
Net assets acquired | | $ | 86.8 | |
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the customer relationships valuation used the with-and-without valuation method, and the technology valuations used the excess earnings method.
The intangible assets are being amortized using straight-line methods based on the expected period of undiscounted cash flows that will be generated by the assets, over an average useful life of approximately eight years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of GRIDSMART with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of GRIDSMART is as follows (in millions):
| | | | |
Year Ended | | | | |
September 30, |
| | |
|
2020 | | $ | 5.3 | |
2021 | |
| 3.9 | |
2022 | |
| 3.5 | |
2023 | |
| 3.5 | |
2024 | |
| 3.5 | |
Thereafter | | | 8.1 | |
Advanced Traffic Solutions Inc.
In October 2018, we acquired all of the outstanding capital stock of Advanced Traffic Solutions Inc. (Trafficware), a provider of intelligent traffic solutions for the transportation industry based in Sugar Land, Texas. Trafficware provides a fully integrated suite of software, Internet of Things devices, and hardware solutions that optimize the flow of motorist and pedestrian traffic. Trafficware is expected to provide synergies from combining its capabilities with our existing Cubic Transportation System (CTS)CTS business.
13
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 |
| ||
Sales |
| $ | 10.5 |
| $ | — |
|
Operating loss |
|
| (3.3) |
|
| — |
|
Net loss after taxes |
|
| (3.3) |
|
| — |
|
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Sales | | $ | 9.1 | | $ | 10.5 | |
Operating loss | |
| (3.0) | |
| (3.3) | |
Net loss after taxes | | �� | (3.0) | |
| (3.3) | |
Trafficware’s operating results above included the following amounts for the quarter (in millions):
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Amortization |
| $ | 4.3 |
| $ | — |
|
Acquisition-related expenses |
|
| 1.4 |
|
| — |
|
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Amortization | | $ | 2.8 | | $ | 4.3 | |
Acquisition-related expenses | |
| 0.5 | |
| 1.4 | |
The acquisition-date fair value of consideration is $237.6 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) |
| | | (9.5) | |
Other net assets acquired (liabilities assumed) |
|
| (2.0) |
| |
| (2.0) | |
Net identifiable assets acquired |
|
| 85.9 |
| |
| 83.4 | |
Goodwill |
|
| 151.7 |
| |
| 153.8 | |
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. 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 seven years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Trafficware with our existing CTS business, and strengthening our capability of developing and integrating products in our CTS portfolio. The goodwill also includes the value of the assembled workforce that became our employees
20
following the close of the acquisition. The amount recorded as goodwill is allocated to our CTS segment and is not expected to be deductible for tax purposes.
14
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Trafficware for fiscal years 2019 through 2023 and thereafter is as follows (in millions):
|
|
|
|
| ||||
| | | | | ||||
Year Ended |
|
|
|
| | | | |
September 30, |
|
|
|
|
| | |
|
2019 |
| $ | 15.3 |
| ||||
2020 |
|
| 11.4 |
| | $ | 11.4 | |
2021 |
|
| 11.4 |
| |
| 11.4 | |
2022 |
|
| 11.4 |
| |
| 11.4 | |
2023 |
|
| 6.4 |
| |
| 6.4 | |
2024 | |
| 5.9 | | ||||
Thereafter |
|
| 18.8 |
| | | 12.9 | |
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 |
| ||
Sales |
| $ | — |
| $ | — |
|
Operating loss |
|
| (0.9) |
|
| — |
|
Net loss after taxes |
|
| (0.9) |
|
| — |
|
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 |
| ||
Amortization |
| $ | 0.2 |
| $ | — |
|
Acquisition-related expenses |
|
| — |
|
| — |
|
The acquisition-date fair value of consideration is $12.8 million, which is comprised of estimated 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.
21
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 |
|
Other net assets acquired |
|
| 0.3 |
|
Net identifiable assets acquired |
|
| 6.3 |
|
Goodwill |
|
| 6.5 |
|
Net assets acquired |
| $ | 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) 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 |
|
2020 |
|
| 0.8 |
|
2021 |
|
| 0.8 |
|
2022 |
|
| 0.8 |
|
2023 |
|
| 0.8 |
|
Thereafter |
|
| 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 |
| ||
Sales |
| $ | 0.2 |
| $ | — |
|
Operating loss |
|
| (0.4) |
|
| — |
|
Net loss after taxes |
|
| (0.4) |
|
| — |
|
22
MotionDSP’s operating results above included the following amounts for the quarters ended December 31, 2018 and 2017 (in millions):
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Amortization |
| $ | 0.2 |
| $ | — |
|
Acquisition-related expenses |
|
| 0.1 |
|
| — |
|
The acquisition of MotionDSP was paid for with funds from existing cash resources. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in millions):
|
|
|
|
|
Customer relationships |
| $ | 0.2 |
|
Technology |
|
| 4.5 |
|
Trade name |
|
| 0.1 |
|
Accounts payable and accrued expenses |
|
| (0.3) |
|
Other noncurrent liabilities |
|
| (0.8) |
|
Other net liabilities assumed |
|
| (0.9) |
|
Net identifiable assets acquired |
|
| 2.8 |
|
Goodwill |
|
| 6.7 |
|
Net assets acquired |
| $ | 9.5 |
|
The 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 |
|
2020 |
|
| 0.7 |
|
2021 |
|
| 0.7 |
|
2022 |
|
| 0.7 |
|
2023 |
|
| 0.7 |
|
Thereafter |
|
| 0.8 |
|
23
Pro forma information
The following unaudited pro forma information presents our consolidated results of operations as if Trafficware, Shield,Nuvotronics, GRIDSMART, and MotionDSPTrafficware had been included in our consolidated results since October 1, 20172018 (in millions):
|
|
|
|
|
|
|
| |||||||
|
| Three Months Ended |
| |||||||||||
|
| December 31, |
| |||||||||||
|
| 2018 |
| 2017 |
| |||||||||
| | | | | ��� | | | |||||||
| | Three Months Ended |
| |||||||||||
| | December 31, |
| |||||||||||
| | 2019 |
| 2018 |
| |||||||||
Net sales |
| $ | 307.1 |
| $ | 261.8 |
| | $ | 328.8 | | $ | 316.9 | |
|
|
|
|
|
|
|
| |||||||
Net loss |
| $ | (6.3) |
| $ | (13.4) |
| | $ | (20.0) | | $ | (10.0) | |
The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the elimination of interest expense for the repayment of debt. NoNaN adjustments were made for transaction expenses, other adjustmentsitems 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, 2017,2018, and it does not purport to project our future operating results.
Acquisition of GRIDSMART Subsequent to December 31, 2018Goodwill
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 months ended December 31, 20182019 were as follows for each of our reporting units (in thousands):
| | | | | | | | | | | | | |
|
| | |
| | | |
| | |
| ||
| | Cubic Transportation | | Cubic Mission | | Cubic Global | | | |
| |||
| | Systems | | Solutions | | Defense | | Total |
| ||||
| | | | | | | | | | | | | |
Net balances at September 30, 2019 | | $ | 254,592 | | $ | 181,424 | | $ | 142,081 | | $ | 578,097 | |
Adjustments | |
| 603 | | | — | | | — | | | 603 | |
Foreign currency exchange rate changes | |
| 2,862 | |
| 738 | | | 249 | |
| 3,849 | |
Net balances at December 31, 2019 | | $ | 258,057 | | $ | 182,162 | | $ | 142,330 | | $ | 582,549 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Transportation |
| Cubic Mission |
| Cubic Global |
|
|
|
| |||
|
| Systems |
| Solutions |
| Defense |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balances at September 30, 2018 |
| $ | 49,786 |
| $ | 138,127 |
| $ | 145,713 |
| $ | 333,626 |
|
Acquisitions |
|
| 151,670 |
|
| — |
|
| — |
|
| 151,670 |
|
Foreign currency exchange rate changes |
|
| (798) |
|
| (73) |
|
| (96) |
|
| (967) |
|
Net balances at December 31, 2018 |
| $ | 200,658 |
| $ | 138,054 |
| $ | 145,617 |
| $ | 484,329 |
|
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.
24
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 valueamount 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.
15
Our most recent annual goodwill impairment test was our 20182019 annual impairment test completed as of July 1, 2018.2019. The results of our 20182019 annual impairment test indicated that the estimated fair value forvalues of our CTS and Cubic Global Defense Systems (CGD) reporting units exceeded their respective carrying amounts by over 100%, while the estimated fair value of our CMS reporting unit exceeded its carrying valueamount by over 100% while the estimated fair values of our Cubic Global Defense (CGD) and CMS reporting units each exceeded their carrying values by over 40%60%. Subsequent to the effective dates of the tests for each of our reporting units, we do not believe that circumstances have occurred that indicate that an impairment for any of our reporting units is more-likely-than-not. As such, no subsequent interim impairment tests have been performed.
Note 43 – 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 operate and maintain phase. All of OpCo.’sOpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to CTSCubic by OpCo. CTSCubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties, under its subcontract with OpCo.
In December 2019, Cubic, MBTA, and OpCo entered into a preliminary change order to modify certain aspects of the MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope of the operate and maintain phase. As part of the preliminary change order, MBTA will make payments of up to $30.0 million to Cubic for work performed under the change order while the terms and conditions are finalized. Full execution and financial close of the change order are expected by April 2020.
Upon creation of the P3 Venture, John Laing made a loan to HoldCo.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.
16
HoldCo made a corresponding equity contribution to OpCo.OpCo in the same amount which is included within equity of
25
Noncontrolling interest in VIE withinin Cubic’s consolidated financial statements. Also, upon creation of the P3 Venture, CTSCubic issued a letter of credit for $2.7 million to HoldCo.HoldCo in accordance with CTS’sCubic’s equity funding responsibilities. HoldCo.HoldCo is able to draw on the CTSCubic letter of credit in certain liquidity instances, but no0 amounts have been drawn on this letter of credit as of December 31, 2018.2019.
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 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 LIBORLondon Interbank Offer 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.respectively. At December 31, 2018,2019, the outstanding balance on the long-term debt facility was $15.4$83.0 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.’sOpCo’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.’sOpCo’s expected draws on its long-term debt facility. At December 31, 2018,2019, the outstanding notional principal amounts on open interest rate swaps were $61.9$149.4 million. The fair value of OpCo.’sOpCo’s interest rate swaps at December 31, 20182019 was $6.1$17.3 million and is recorded as a liability in Other long-termother noncurrent liabilities in our Condensed Consolidated Balance Sheets. OpCo.’sOpCo’s interest rate swaps were not designated as effective hedges at December 31, 20182019 and as such any unrealized gains/losses are included in other income (expense), net. Unrealized losses asnet. As a result of changes in the fair value of OpCo.’sits interest rate swaps, wereOpCo recognized a gain of $4.3 million for the three months ended December 30, 2019, and a loss of $6.1 million for the three months ended December 31, 2018.2018. See Note 137 for a description of the measurement of fair value of derivative financial instruments, including OpCo.’sOpCo’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.
26
17
The assets and liabilities of OpCo.OpCo that are included in our condensed consolidated balance sheets at December 31, 2018 and September 30, 2018Condensed Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
| |||||||
|
| December 31, |
| September 30, |
| |||||||||
|
| 2018 |
| 2018 |
| |||||||||
|
| (in thousands) |
| |||||||||||
| | | | | | | | |||||||
| | December 31, | | September 30, |
| |||||||||
|
| 2019 |
| 2019 |
| |||||||||
| | (in thousands) | | |||||||||||
Cash |
| $ | 421 |
| $ | 374 |
| | $ | 410 | | $ | 347 | |
Restricted cash |
|
| 10,000 |
|
| 10,000 |
| | | 9,967 | | | 9,967 | |
Long-term capitalized contract costs |
|
| — |
|
| 1,258 |
| |||||||
Other current assets | | | 79 | | | 33 | | |||||||
Long-term contracts financing receivable |
|
| 52,996 |
|
| — |
| | | 124,576 | | | 115,508 | |
Other noncurrent assets |
|
| 962 |
|
| 810 |
| | | — | | | 1,419 | |
Total assets |
| $ | 64,379 |
| $ | 12,442 |
| | $ | 135,032 | | $ | 127,274 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Trade accounts payable |
| $ | 205 |
| $ | 165 |
| | $ | — | | $ | 25 | |
Other long-term liabilities |
|
| 6,146 |
|
| 13 |
| |||||||
Accrued compensation and other current liabilities | | | 171 | | | 191 | | |||||||
Due to Cubic | | | 11,861 | | | 25,143 | | |||||||
Other noncurrent liabilities | | | 17,267 | | | 21,605 | | |||||||
Long-term debt |
|
| 15,357 |
|
| 9,056 |
| | | 82,984 | | | 61,994 | |
Total liabilities |
| $ | 21,708 |
| $ | 9,234 |
| | $ | 112,283 | | $ | 108,958 | |
Total Cubic equity |
|
| 39 |
|
| (304) |
| | | (160) | | | (603) | |
Noncontrolling interests |
|
| 24,703 |
|
| 24,348 |
| | | 22,909 | | | 18,919 | |
Total liabilities and owners' equity |
| $ | 46,450 |
| $ | 33,278 |
| | $ | 135,032 | | $ | 127,274 | |
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 itsOpCo’s use only and are not available for the general operations of Cubic. OpCo.’sOpCo’s debt is non-recourse to Cubic. Cubic’s maximum exposure to loss as a result of its equity interest in the P3 Venture is limited to the $2.7 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the design and build phase of the MBTA Contract.
PriorOpCo’s results of operations included in our Condensed Consolidated Statements of Operations are as follows (in thousands):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Revenue | | $ | 1,245 | | $ | 1,961 | |
Operating income | |
| 972 | |
| 1,668 | |
Other income (expense), net | | | 3,071 | | | (6,133) | |
Interest income | | | 1,553 | | | 503 | |
Interest expense | |
| (1,159) | |
| (512) | |
18
Note 4 — Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers.
Contract Estimates: Use of the cost-to-cost or other similar methods of revenue recognition requires us to make reasonably dependable estimates regarding the revenue and cost associated with the design, manufacture and delivery of our products and services. Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, and in some cases result in liabilities to complete contracts in a loss position. The aggregate impact of net changes in contract estimates are presented in the table below (amounts in thousands, except per share numbers):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
| | 2019 |
| 2018 | | ||
Operating income (loss) | | $ | (6,168) | | $ | 1,814 | |
Net income (loss) from continuing operations | |
| (5,762) | |
| 1,271 | |
Diluted earnings (loss) per share | |
| (0.18) | |
| 0.04 | |
Backlog: Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the adoptioncustomer. It is comprised of ASC 606, Cubicboth funded backlog (firm orders for which funding is authorized and OpCo. were precluded from recognizing revenue on the MBTA Contract because MBTA wasappropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (IDIQ) contracts are not required to make payments to OpCo.included in backlog until the operatetime the option or IDIQ task order is exercised or awarded. For our cost-reimbursable and maintain phasefixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract began. During this time period Cubicmay exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and OpCo. were capitalizing costs associated with designing and buildingis continuously reviewed throughout 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. Uponperiod. In determining the adoption of ASC 606, Cubic and OpCo are now permitted to recognize revenueestimated consideration, we consider the risks related to the MBTAtechnical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As of December 31, 2019, our ending backlog was $3.8 billion. We expect to recognize approximately 30% of our December 31, 2019 backlog over the next 12 months, and approximately 45% over the next 24 months as revenue, with the remainder recognized thereafter.
Accounts Receivable: Amounts billed include $23.3 million and $60.3 million due on U.S. federal government contracts at December 31, 2019 and September 30, 2019, respectively.
In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, costsour sold trade receivables are now recognized as incurred and are no longer capitalized.
The revenue, operating income, and other income (expense), net of OpCo. that arenot included in our condensed consolidated statementCondensed Consolidated Balance Sheet in any period presented. During the first quarter of income (loss) forfiscal 2020, we sold $10.1 million of trade receivables to a financial institution that had not been collected as of December 31, 2019. Also, during the three months ended December 31, 20182019, we received $5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.
19
Contract Assets and 2017 areLiabilities: Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities includeadvance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows:follows (in thousands):
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
Revenue |
| $ | 1,961 |
| $ | — |
|
Operating income |
|
| 1,668 |
|
| — |
|
Other income (expense), net |
|
| (6,133) |
|
| — |
|
Interest income |
|
| 503 |
|
| — |
|
Interest expense |
|
| (512) |
|
| — |
|
| | | | | | | |
| | | | | | | |
| | December 31, | | September 30, |
| ||
|
| 2019 |
| 2019 |
| ||
| | |
| ||||
Contract assets | | $ | 320,188 | | $ | 349,559 | |
Contract liabilities | | $ | 62,500 | | $ | 46,170 | |
Contract assets decreased $29.4 million during the three months ended December 31, 2019, due to billings in excess of revenue recognized related to the satisfaction or partial satisfaction of performance obligations. There were 0 significant impairment losses related to our contract assets during the three months ended December 31, 2019.
Contract liabilities increased $16.3 million during the three months ended December 31, 2019, due to payments received in excess of revenue recognized on these performance obligations. During the three-month period ended December 31, 2019, we recognized $9.2 million of our contract liabilities at September 30, 2019 as revenue. We expect our contract liabilities to be recognized as revenue over the next twelve months.
Note 5 — Net Income (Loss) Per Share
Basic net income (loss) per share (EPS) is computed by dividing the net income (loss) attributable to Cubic for the period by the weighted average number of common shares outstanding during the period, including vested restricted stock units (RSUs).
In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding
27
during the period. Common equivalent shares consist of dilutive restricted stock units.RSUs. Dilutive restricted stock unitsRSUs are calculated based on the average share price for each fiscal period using the treasury stock method. For RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted EPS until the related performance criteria have been met. For RSUs with performance and market-based vesting, no common equivalent shares are included in the computation of diluted EPS until the performance criteria have been met, and once the criteria are met the dilutive RSUs are calculated using the treasury stock method, modified by the multiplier that is calculated at the end of the accounting period as if the vesting date was at the end of the accounting period. The multiplier on RSUs with performance and market-based vesting is further described in Note 11.
In periods with a net loss from continuing operations attributable to Cubic, common equivalent shares are not included in the computation of diluted EPS, because to do so would be anti-dilutive.
The weighted-average number of shares outstanding used to compute net lossincome (loss) per common share were as follows (in thousands):
| | | | | | | |
| | Three Months Ended |
| ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 |
| ||
| | | | | | | |
Weighted average shares - basic | |
| 31,273 | |
| 28,492 | |
Effect of dilutive securities | |
| — | |
| — | |
Weighted average shares - diluted | |
| 31,273 | |
| 28,492 | |
| | | | | | | |
Number of anti-dilutive securities | | | 1,112 | | | 990 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
|
|
|
|
|
|
|
Weighted average shares - basic |
|
| 28,492 |
|
| 27,207 |
|
Effect of dilutive securities |
|
| — |
|
| — |
|
Weighted average shares - diluted |
|
| 28,492 |
|
| 27,207 |
|
|
|
|
|
|
|
|
|
Number of anti-dilutive securities |
|
| 990 |
|
| 1,040 |
|
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 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 |
| ||
|
|
|
| ||||
Contract assets |
| $ | 320,277 |
| $ | 272,210 |
|
Contract liabilities |
| $ | 69,713 |
| $ | 70,128 |
|
Contract assets increased $48.1 million during the three months ended December 31, 2018, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the three months ended December 31, 2018 for which we have not yet billed. There were no significant impairment losses related to our contract assets during the three months ended December 31, 2018 and 2017.
Contract liabilities decreased $0.4 million during the three months ended December 31, 2018, primarily due to payments received in excess of revenue recognized on these performance obligations. During the three months ended December 31, 2018, we recognized $20.7 million 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.
28
20
Note 76 — Balance Sheet Details
Accounts ReceivableRestricted Cash
The componentsCash and cash equivalents excludes $32.4 million and $29.5 million of accounts receivable are as follows (in thousands):restricted cash at December 31, 2019 and September 30, 2019, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.
|
|
|
|
|
|
|
|
| December 31, |
| September 30, | ||
|
| 2018 |
| 2018 | ||
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
Billed |
| $ | 119,943 |
| $ | 156,948 |
Unbilled |
|
| — |
|
| 242,877 |
Allowance for doubtful accounts |
|
| (1,652) |
|
| (1,324) |
Total accounts receivable |
|
| 118,291 |
|
| 398,501 |
Less estimated amounts not currently due |
|
| — |
|
| (6,134) |
Current accounts receivable |
| $ | 118,291 |
| $ | 392,367 |
Inventories
Inventories consist of the following (in thousands):
| | | | | | | |
| | December 31, | | September 30, | | ||
|
| 2019 |
| 2019 |
| ||
| | | | | | | |
Finished products | | $ | 11,167 | | $ | 10,905 | |
Work in process and inventoried costs under long-term contracts | | | 67,075 | | | 46,951 | |
Materials and purchased parts | |
| 44,670 | |
| 48,938 | |
Net inventories | | $ | 122,912 | | $ | 106,794 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| September 30, |
| ||
|
| 2018 |
| 2018 |
| ||
|
|
|
|
|
|
|
|
Finished products |
| $ | 7,716 |
| $ | 7,099 |
|
Work in process and inventoried costs under long-term contracts |
|
| 49,295 |
|
| 63,169 |
|
Materials and purchased parts |
|
| 35,190 |
|
| 23,710 |
|
Customer advances |
|
| — |
|
| (9,779) |
|
Net inventories |
| $ | 92,201 |
| $ | 84,199 |
|
At both December 31, 2018 and September 30, 2018,2019, work in process and inventoried costs under long-term contracts includes approximately $0.9$4.8 million in costs incurred outside the scope of work or in advance of a contract award.award compared to $5.8 million at September 30, 2019. We believe it is probable that we will recover the costs inventoried at December 31, 2018,2019, plus a profit margin, under contract change orders or awards within the next year.
Capitalized Software
We capitalizeCosts we incur for certain U.S. federal government contracts include general and administrative costs associated with the development or purchase of internal-use software.as allowed by government cost accounting standards. The amounts capitalized are includedremaining in inventory totaled $0.5 million at both December 31, 2019 and September 30, 2019.
Property, Plant and Equipment
Significant components of property, plant and equipment 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 follows (in thousands):
| | | | | | | |
| | December 31, | | September 30, | | ||
|
| 2019 |
| 2019 | | ||
Land and land improvements | | $ | 7,463 | | $ | 7,348 | |
Buildings and improvements | |
| 49,359 | |
| 48,191 | |
Machinery and other equipment | |
| 119,674 | |
| 107,297 | |
Software | | | 107,513 | | | 108,526 | |
Leasehold improvements | |
| 17,671 | |
| 17,064 | |
Construction and internal-use software development in progress | | | 17,785 | | | 16,814 | |
Accumulated depreciation and amortization | |
| (168,247) | |
| (160,271) | |
| | $ | 151,218 | | $ | 144,969 | |
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 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 million and $2.5 million for the quarters ended December 31, 2018 and 2017, respectively.
In addition to software costs that were capitalized, during the quarters ended December 31, 2018 and December 31, 2017, we recognized expenses related to the development and implementation of our ERP system of $0.8 million and $6.3 million, respectively, for costs that did not meet the requirements for capitalization. Amounts that were expensed in
29
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).
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-termnoncurrent liabilities in our Condensed Consolidated Balance Sheets and totaled $12.0 million and $11.5$11.8 million at December 31, 20182019 and $11.0 million at September 30, 2018, respectively.2019.
WeIn the past we have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying valuesvalue of the assets set aside to fund deferred compensation liabilities as oftotaled $6.8 million at December 31, 20182019 and at September 30, 2018 were $5.8 million2019 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.
21
Note 87 — Fair Value of Financial Instruments
The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:
| Level 1 - Quoted prices for identical instruments in active markets. |
| Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| Level 3 - Significant inputs to the valuation model are unobservable. |
The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| December 31, 2018 |
| September 30, 2018 |
| |||||||||||||||||||||||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | December 31, 2019 | | September 30, 2019 |
| |||||||||||||||||||||||||||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||||||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 9,000 |
| $ | — |
| $ | — |
| $ | 9,000 |
| |||||||||||||||||||||||||
Current derivative assets |
|
| — |
|
| 5,036 |
|
| — |
|
| 5,036 |
|
| — |
|
| 1,803 |
|
| — |
|
| 1,803 |
| | $ | — | | $ | 930 | | $ | — | | $ | 930 | | $ | — | | $ | 2,635 | | $ | — | | $ | 2,635 | |
Noncurrent derivative assets |
|
| — |
|
| 581 |
|
| — |
|
| 581 |
|
| — |
|
| 314 |
|
| — |
|
| 314 |
| |
| — | |
| 1,873 | |
| — | |
| 1,873 | |
| — | |
| 859 | |
| — | |
| 859 | |
Total assets measured at fair value |
| $ | — |
| $ | 5,617 |
| $ | — |
| $ | 5,617 |
| $ | 9,000 |
| $ | 2,117 |
| $ | — |
| $ | 11,117 |
| | $ | — | | $ | 2,803 | | $ | — | | $ | 2,803 | | $ | — | | $ | 3,494 | | $ | — | | $ | 3,494 | |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Current derivative liabilities |
|
| — |
|
| 3,367 |
|
| — |
|
| 3,367 |
|
| — |
|
| 1,657 |
|
| — |
|
| 1,657 |
| | | — | | | 1,855 | | | — | | | 1,855 | |
| — | | | 529 | | | — | |
| 529 | |
Noncurrent derivative liabilities |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 75 |
|
| — |
|
| 75 |
| |
| — | |
| 272 | |
| — | |
| 272 | |
| — | |
| 228 | |
| — | |
| 228 | |
Contingent consideration to seller of H4 Global | | | — | |
| — | |
| 828 | |
| 828 | | | — | |
| — | |
| 1,073 | | | 1,073 | | |||||||||||||||||||||||||
Contingent consideration to seller of Deltenna |
|
| — |
|
| — |
|
| 1,343 |
|
| 1,343 |
|
| — |
|
| — |
|
| 1,081 |
|
| 1,081 |
| |
| — | |
| — | |
| 3,000 | |
| 3,000 | |
| — | |
| — | |
| 1,787 | |
| 1,787 | |
Contingent consideration to seller of Shield |
|
| — |
|
| — |
|
| 5,618 |
|
| 5,618 |
|
| — |
|
| — |
|
| 5,618 |
|
| 5,618 |
| |
| — | |
| — | |
| 4,041 | |
| 4,041 | |
| — | |
| — | |
| 3,814 | |
| 3,814 | |
Contingent consideration to seller of TeraLogics - revenue targets |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,750 |
|
| 1,750 |
| |||||||||||||||||||||||||
Contingent consideration to seller of H4 Global |
|
| — |
|
| — |
|
| 832 |
|
| 832 |
|
| — |
|
| — |
|
| 665 |
|
| 665 |
| |||||||||||||||||||||||||
Contingent consideration to seller of Nuvotronics | | | — | |
| — | |
| — | |
| — | | | — | |
| — | |
| 4,200 | | | 4,200 | | |||||||||||||||||||||||||
Total liabilities measured at fair value |
| $ | — |
| $ | 3,367 |
| $ | 7,793 |
| $ | 11,160 |
| $ | — |
| $ | 1,732 |
| $ | 9,114 |
| $ | 10,846 |
| | $ | — | | $ | 2,127 | | $ | 7,869 | | $ | 9,996 | | $ | — | | $ | 757 | | $ | 10,874 | | $ | 11,631 | |
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-
30
derivedmodel-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, 2018,2019, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:
|
|
|
|
| Deltenna: Payments of up to $7.2 million of contingent consideration if Deltenna meets certain sales goals from the date of acquisition through the fiscal year ending September 30, 2022. |
● | Shield: Payments of up to $10.0 million of contingent consideration if Shield meets certain sales goals from the date of acquisition through July 31, 2025. |
● | Nuvotronics: Payments of up to $8.0 million of contingent consideration if Nuvotronics meets certain gross profit goals for the 12-month periods ended December 31, 2020 and December 31, 2021. |
22
In addition, we have aTable of Contents
The maximum remaining payout to the sellers of H4 Global is $2.9 million at December 31, 2019 and is based upon the value of contracts entered into over the five-year period ending September 30, 2020. The fair value of the H4 Global contingent consideration arrangement withwas estimated using a probability weighted approach. Subject to the Purchaserterms and conditions of our CGD Services business under which we are eligiblethe H4 Global purchase agreement, contingent consideration will be based on a five-year term that commenced on October 1, 2015 and ends on September 30, 2020. The payments will be calculated based on the award of certain contracts during the specified period. The fair value of the contingent consideration was determined by applying probabilities to receive a cash paymentdifferent scenarios and summing the present value of $3.0 million if the Purchaser is awarded certain government contracts in the future.any future payments.
The fair value of the Deltenna contingent consideration was valuedestimated using a combination of a probability weighted approach and the real option approach. Under thisthe real option approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public companies and the volatility factor used in thewas 38% as of December 31, 2018 valuations was 40% for Deltenna. The volatility factor used in the2019 and 36% as of September 30, 2018 valuation was 53% for Deltenna.2019. The risk-freeselected discount rate was selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment period.
The maximum remaining payout to the sellers10% as of H4 Global is $3.2 million at December 31, 2018,2019 and is based upon the value11% as 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 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.2019.
The fair value of the Shield contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $10.0 million if Shield meets certain sales goals from the date of acquisition through July 31, 2025. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 100,000 iterations.1,000,000 simulation trials. Key inputs for the simulation include projected revenues, assumed discount rates for projected revenuerevenues and cash flows, and volatility. The volatility and revenue risk adjustment factors were determined based on analysis of publicly traded comparable companies and as of December 31, 2019 were 18% and 14%, respectively, and as of September 30, 2019 were 18% and 13%, respectively. The discount rate used was based on an analysis of publicly traded comparable companies and the expected borrowing rate under our financing arrangements, which was determined to be 3.3% at December 31, 2019 and 3.6% at September 30, 2019.
The fair value of the Nuvotronics contingent consideration was estimated based on Monte Carlo simulations. Under the purchase agreement, we will pay the sellers up to $8.0 million if Nuvotronics meets certain gross profit goals for the 12- month periods ended December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was determined based upon a probability distribution of values based on 1,000,000 simulation trials. Key inputs for the simulation include projected gross profits, assumed discount rates for projected gross profits, and gross profit volatility. The volatility factor used as of December 31, 2018 were 20%2019 and 14%September 30, 2019 was 13.7% and 12.4%, respectively, and werewas determined based on analysis of publicly traded comparable companies. The discount rate used as of both December 31, 20182019 and September 30, 20182019 was 7.4%, which was based on our expected borrowingrisk-free rate underof return adjusted for our financing arrangements, whichgross profit required risk premium. As of December 31, 2019, the fair value of the Nuvotronics contingent consideration was determined to be 5.0% at December 31, 2018 and September 30, 2018. zero as its forecasted gross profit was significantly below the payout thresholds.
The inputs to each of the contingent consideration fair value models include significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition dates and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period. period.
31
As of December 31, 2018,2019, 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 |
|
Net balances at September 30, 2018 |
| $ | 665 |
| $ | 1,750 |
| $ | 1,081 |
| $ | 5,618 |
| $ | 9,114 |
|
Cash paid to seller |
|
| — |
|
| (1,750) |
|
| — |
|
| — |
|
| (1,750) |
|
Total remeasurement (gain) loss recognized in earnings |
|
| 167 |
|
| — |
|
| 262 |
|
| — |
|
| 429 |
|
Balance as of December 31, 2018 |
| $ | 832 |
| $ | — |
| $ | 1,343 |
| $ | 5,618 |
| $ | 7,793 |
|
| | | | | | | | | | | | | | | | |
|
| H4 Global |
| Deltenna |
| Shield |
| Nuvotronics |
| Total | | |||||
Balance as of September 30, 2019 |
| $ | 1,073 | | $ | 1,787 | | $ | 3,814 | | $ | 4,200 | | $ | 10,874 |
|
Total remeasurement (gain) loss recognized in earnings | |
| (245) | |
| 1,213 | |
| 227 | |
| (4,200) | |
| (3,005) | |
Balance as of December 31, 2019 | | $ | 828 | | $ | 3,000 | | $ | 4,041 | | $ | — | | $ | 7,869 | |
We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.
23
In fiscal 2019, we invested $5.0 million in Franklin Blackhorse, L.P., a limited partnership investment fund that invests in early stage, privately owned companies in the military, commercial, and disruptive technology sectors. We account for our investment using the equity method of accounting. Our share of the fund’s operating results did not have a material impact on our results of operations for the three-month periods ended December 31, 2019 and 2018. We recorded a $5.2 million investment within other assets in our Condensed Consolidated Balance Sheet at December 31, 2019.
The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):
|
|
|
|
|
|
|
| |||||||
|
| December 31, |
| September 30, |
| |||||||||
|
| 2018 |
| 2018 |
| |||||||||
| | | | | | | | |||||||
|
| December 31, | | September 30, |
| |||||||||
|
| 2019 |
| 2019 |
| |||||||||
Fair value |
| $ | 195.4 |
| $ | 193.7 |
| | $ | 204.0 | | $ | 203.3 | |
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 first quarter of fiscal 20192020 or 20182019 other than assets and liabilities acquired in business acquisitions described in Note 32 and the restricted stock units that were granted in the first quarter of fiscal 2019RSUs that contain performance and market-based vesting criteria described in Note 11.
Note 98 — Financing Arrangements
In December 2018, we completed an underwritten public offering of 3,300,000 shares of our common stock. We granted the underwriters a 30-day 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 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, pursuantPursuant 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. AtThe agreement pertaining to the time ofaforementioned notes also contained a provision that 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 tocoupon rate would increase our leverage capacity. The interest rates on all of the term notes described above may be adjusted upwards by up to 0.75%a further 0.50% should ourCubic’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 expiresis scheduled to expire in August 2021 (RevolvingApril 2024 (the Revolving Credit Agreement). Under the terms of the Revolving Credit Agreement, we may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i) LIBOR based upon tenor plus a margin that fluctuates between 1.00% and 2.00%, as determined by Cubic’s Leverage Ratio (as defined in the Revolving Credit Agreement) as set forth in Cubic’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50%, and (c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and 1.00%, as determined by Cubic’s Leverage Ratio as set forth in its most recently delivered compliance certificate. At December 31, 2018,2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was 3.75%3.34%. 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 amendmentsan April 2019 amendment to the Revolving Credit Agreement respectively.which increased permitted borrowings from $400.0 million to $800.0 million. Costs incurred in connection with the establishment of and amendments to
32
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, 2018,2019, our total debt issuance costs have an unamortized deferred financing balance of $1.7$3.0 million. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of December 31, 2018,2019, there were $64.5$226.5 million of borrowings under this agreement and there were letters of credit outstanding totaling $38.4$94.3 million, which reduce the available line of credit to $297.1$479.2 million. The $38.4$94.3 million of letters of credit includes both financial letters of credit and performance guarantees.
As of December 31, 2019, we had letters of credit and bank guarantees outstanding totaling $101.7 million, which includes the $94.3 million of letters of credit on the Revolving Credit Agreement above and $7.4 million of letters of credit issued under other facilities. The total of $101.7 million of letters of credit and bank guarantees includes $97.2 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit of $4.5 million which primarily guarantee our payment of certain self-insured liabilities. We have never had a
24
drawing on a letter of credit instrument, nor are any anticipated; therefore, we estimate the fair value of these instruments to be 0.
We have entered into a short-term borrowing arrangement in the United Kingdom in the amount of £20.0 million British pounds (equivalent to approximately $26.5 million at December 31, 2019) to help meet the short-term working capital requirements of our subsidiary. At December 31, 2019, 0 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, 20182019 was $17.9$22.5 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, 2018,2019, these agreements have no restrictions on distributions to shareholders, subject to certain tests in these agreements.
In December 2018, we completed an underwritten public offering of 3,795,000 shares of our common stock, including the exercise of the underwriters’ option to purchase additional shares. All shares were offered by us at a price to the public of $60.00 per share. Net proceeds were $215.8 million, after deducting underwriting discounts and commissions and offering expenses of $11.9 million. We used the net proceeds to repay a portion of our outstanding borrowings under our Revolving Credit Agreement which was used to finance the acquisition of Trafficware and for general corporate purposes.
Our self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability and product liability claims. Under these arrangements, we self-insure only up to the amount of a specified deductible for each claim. Self-insurance liabilities included in accrued compensation and other current liabilities on the balance sheet amounted to $8.7$7.3 million at December 31, 20182019 and $8.6$7.4 million at September 30, 2018.2019.
25
Note 9 — Leases
In the first quarter of fiscal 2020, we adopted ASC 842. See “Note 1—Summary of Significant Accounting Policies” for the impacts of adoption. Our primary involvement with leases is in the capacity as a lessee where we lease properties to support our business. A majority of our leases are operating leases of office space. For these leases, we have elected to account for the lease and non-lease components together as a single lease component. Our operating leases expire at various dates through 2030 without taking into consideration available renewal options, and many of them require variable lease payments by us for property taxes, insurance premiums, common area maintenance and other costs. Certain of these leases also have extension or termination options, and we assess the likelihood of exercising such options. If it is reasonably certain that we will exercise the options, we include the impact in the measurement of our right-of-use assets and lease liabilities.
Our right-of-use assets for operating leases are included in operating lease right-of-use-assets on our Condensed Consolidated Balance Sheets. Our lease liabilities for operating leases are included in other current liabilities for the current portion and in operating lease liabilities for the long-term portion. We use our incremental borrowing rate in determining the present value of lease payments. Our operating lease expense is included in costs and expenses in our consolidated statements of operations. Total operating lease expense consists of operating lease cost, which is recognized on a straight-line basis over the lease term, and variable lease cost, which is recognized based on actual amounts incurred. We also sublease certain properties and sublease income is included as a reduction of rental expense.
The following tables present our operating leases, related lease expenses, and other information (dollars in millions):
Operating Lease Portfolio
| | | | |
| | December 31, | | |
| | 2019 | | |
Right-of-use assets | | $ | 80.7 | |
Lease liabilities | |
| 89.0 | |
Weighted average remaining lease term | |
| 6.9 years | |
Weighted average discount rate | |
| 2.98% | |
Operating Lease Expense
| | | | |
| | Three Months Ended |
| |
| | December 31, | | |
| | 2019 | | |
Operating lease expense | | $ | 4.6 | |
Short-term lease expense | | | 0.4 | |
Variable lease expense | | | 1.1 | |
Total lease expense | | $ | 6.1 | |
Other Information
| | | | |
| | Three Months Ended |
| |
| | December 31, | | |
| | 2019 | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 4.5 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | |
| 9.6 | |
26
Maturities of Lease Liabilities
Our future minimum lease commitments of our operating leases on an undiscounted basis, reconciled to the lease liability at December 31, 2019 were as follows (in millions):
| | | | |
2020 |
| $ | 13.5 |
|
2021 | |
| 16.2 | |
2022 | |
| 14.0 | |
2023 | |
| 12.0 | |
2024 | |
| 11.2 | |
Thereafter | |
| 32.1 | |
Total lease payments | | | 99.0 | |
Less: imputed interest | | | (10.0) | |
Present value of operating lease liabilities | | $ | 89.0 | |
In fiscal 2019, we entered into agreements related to the construction and leasing of 2 buildings on our existing corporate campus in San Diego, California. Under these agreements, we will act as the construction agent, a financial institution will own the buildings and we will lease the property for a term of five years upon their completion expected in December 2020. The terms of the agreements include provisions that require and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of December 31, 2019, these agreements have no restrictions on distributions to shareholders, subject to certain tests in these agreements.
Note 10 — Pension Plans
The components of net periodic pension cost (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| Three Months Ended |
| |||||||||||
|
| December 31, |
| |||||||||||
|
| 2018 |
| 2017 |
| |||||||||
| | | | | | | | |||||||
| | Three Months Ended |
| |||||||||||
| | December 31, | | |||||||||||
| | 2019 |
| 2018 | | |||||||||
Service cost |
| $ | 149 |
| $ | 151 |
| | $ | 165 | | $ | 149 | |
Interest cost |
|
| 1,910 |
|
| 1,880 |
| |
| 1,531 | |
| 1,910 | |
Expected return on plan assets |
|
| (3,009) |
|
| (3,525) |
| |
| (2,946) | |
| (3,009) | |
Amortization of actuarial loss |
|
| 528 |
|
| 692 |
| |
| 1,001 | |
| 528 | |
Administrative expenses |
|
| 97 |
|
| 110 |
| |
| 86 | |
| 97 | |
Net pension cost (benefit) |
| $ | (325) |
| $ | (692) |
| |||||||
Net pension benefit | | $ | (163) | | $ | (325) | |
33
Note 11 - Stockholders’ Equity
Long-Term Equity Incentive Plan
In 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved aUnder our long-term equity incentive award program. To date, the Compensation Committee has approvedprogram 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 one1 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 our common stock and vest proportionately with the RSUs to which they relate. Vested shares are delivered to the recipient following each vesting date.
TheTime-based RSUs granted with time-based vestingprior to fiscal 2020 generally vest in four4 equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date. Time-based RSUs granted in fiscal 2020 generally vest in 3 equal installments on each of the three October 1 dates following the grant date, subject to the recipient’s continued service through such vesting date.
27
The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of performance goalscertain revenue growth targets, earnings growth targets, and return on equity targets established by the Compensation Committee over the performance periods, subject to the recipient’s continued service through the end of the respective performance periods. 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 and 2020, the Compensation Committee granted RSUs withwhich contained both performance and market-based vesting criteria. The performance and market-based RSUs granted to participants vest over three-year performance periods based on Cubic’s achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service through the end of the respective performance periods. The level at which Cubic performs against scalable targets over the performance periods impact the percentage of the RSUs that will ultimately vest. For these RSUs, Cubic’s relative total stock return (TSR) as compared to the Russell 2000 Index (Index) over the performance period will result in a multiplier for the number of RSUs that will vest. If the 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 couldwould result in a reduction of up to 25% of these RSUs vesting at the end of the performance period. For the performance and market-based RSUs granted in fiscal 2020, if Cubic’s absolute TSR is negative for the three-year performance period, the TSR multiplier shall not exceed 100%, regardless of the performance relative to the Index.
During fiscal 2019, the Compensation Committee amended the long-term equity incentive program to provide accelerated vesting for retirement age participants. Under this amendment, participants who are 60 years of age, and have achieved 10 years of continuous service, are eligible for accelerated vesting of their RSUs. Participants who have reached the retirement age criteria must generally provide a one-year notice of retirement to Cubic. For participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.
The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of one1 share of our common stock at the grant date.
34
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 includestables include the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted in the first quarter of fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
|
| RSU's granted during the three |
|
|
|
| months ended December 31, 2018 |
|
|
|
|
|
|
Date of grant |
|
| November 21, 2018 |
|
Closing average share value (mean) |
| $ | 68.56 |
|
Performance period begins |
|
| October 1, 2018 |
|
Performance period ends |
|
| September 30, 2021 |
|
Risk-free interest rate |
|
| 2.8% |
|
Expected volatility |
|
| 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 ofduring fiscal 2019 was calculated at $67.40 per RSU.and 2020:
| | | | | | |
| | | |
| | |
|
| | | | | |
| | | RSUs granted during fiscal 2020 | | | |
| | | | | | |
Date of grant |
| | November 29, 2019 | | | |
Grant date fair value |
| | $52.51 | | | |
Performance period begins |
| | November 29, 2019 | | | |
Performance period ends |
| | September 30, 2022 | | | |
Risk-free interest rate | | | 1.6% | | | |
Expected volatility | | | 41% | | | |
| | | | | | |
| | | | | | |
| | | RSUs granted during fiscal 2019 | | ||
| | | | | | |
Date of grant |
| | November 21, 2018 | | April 1, 2019 | |
Grant date fair value |
| | $67.40 | | $59.29 | |
Performance period begins |
| | November 21, 2018 | | April 1, 2019 | |
Performance period ends |
| | September 30, 2021 | | September 30, 2021 | |
Risk-free interest rate | | | 2.8% | | 2.8% | |
Expected volatility | | | 34% | | 34% | |
At December 31, 2018,2019, the total number of unvested RSUs that are ultimately expected to vest, after consideration of
28
expected forfeitures and estimated vesting of performance-based RSUs, is 331,181469,090 RSUs with time-based vesting, 129,907101,818 RSUs with performance-based vesting, and 152,570395,805 RSUs with performance and market-based vesting.
The following table summarizes our RSU activity:
|
|
|
|
|
|
| ||||||
|
| Unvested Restricted Stock Units |
| |||||||||
|
|
|
| Weighted-Average |
| |||||||
|
| Number of Shares |
| Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2018 |
| 366,460 |
| $ | 52.31 |
| ||||||
| | | | | | | ||||||
| | Unvested Restricted Stock Units with Service-Based Vesting |
| |||||||||
|
| |
| Weighted Average |
| |||||||
| | Number of Shares | | Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2019 |
| 422,094 |
| $ | 58.84 | | ||||||
Granted |
| 195,033 |
|
| 64.33 |
|
| 329,918 | | | 59.90 | |
Vested |
| (128,949) |
|
| 50.61 |
|
| (148,996) | | | 56.07 | |
Forfeited |
| (15,391) |
|
| 50.04 |
|
| (23,793) | | | 60.14 | |
Unvested at December 31, 2018 |
| 417,153 |
| $ | 58.54 |
| ||||||
Unvested at December 31, 2019 | | 579,223 | | $ | 60.10 | |
|
|
|
|
|
|
| ||||||
|
| Unvested Restricted Stock Units with Performance Based Vesting |
| |||||||||
|
|
|
| Weighted-Average |
| |||||||
|
| Number of Shares |
| Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2018 |
| 635,628 |
| $ | 50.11 |
| ||||||
| | | | | | | ||||||
| | Unvested Restricted Stock Units with Performance-Based Vesting |
| |||||||||
|
| |
| Weighted Average |
| |||||||
| | Number of Shares | | Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2019 |
| 315,262 |
| $ | 55.67 | | ||||||
Granted |
| — |
|
| — |
|
| — | |
| — | |
Vested |
| — |
|
| — |
|
| — | |
| — | |
Forfeited |
| (295,759) |
|
| 43.86 |
|
| (174,824) | |
| 47.36 | |
Unvested at December 31, 2018 |
| 339,869 |
| $ | 55.54 |
| ||||||
Unvested at December 31, 2019 | | 140,438 | | $ | 61.40 | |
|
|
|
|
|
|
| ||||||
|
| Unvested Restricted Stock Units with Performance and Market Based Vesting |
| |||||||||
|
|
|
| Weighted-Average |
| |||||||
|
| Number of Shares |
| Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2018 |
| — |
| $ | — |
| ||||||
| | | | | | | ||||||
| | Unvested Restricted Stock Units with Performance and Market-Based Vesting |
| |||||||||
|
| |
| Weighted Average |
| |||||||
| | Number of Shares | | Grant-Date Fair Value |
| |||||||
Unvested at September 30, 2019 |
| 227,402 |
| $ | 66.77 | | ||||||
Granted |
| 219,890 |
|
| 67.40 |
|
| 346,826 | | | 52.51 | |
Vested |
| — |
|
| — |
|
| — | |
| — | |
Forfeited |
| — |
|
| — |
|
| (33,874) | |
| 59.87 | |
Unvested at December 31, 2018 |
| 219,890 |
| $ | 67.40 |
| ||||||
Unvested at December 31, 2019 | | 540,354 | | $ | 58.05 | |
35
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 | | |||||||||||
| | December 31, | | |||||||||||
| | 2019 | | 2018 | | |||||||||
Cost of sales |
| $ | 313 |
| $ | 156 |
| | $ | 539 |
| $ | 313 | |
Selling, general and administrative |
|
| 2,407 |
|
| 1,471 |
| |
| 3,938 | |
| 2,407 | |
|
| $ | 2,720 |
| $ | 1,627 |
| |||||||
| | $ | 4,477 | | $ | 2,720 | |
As of December 31, 2018,2019, there was $52.0$61.5 million of unrecognized compensation costexpense related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance basedperformance-based RSUs, the aggregate fair value of RSUs expected to ultimately vest is $37.5. million. This amount$57.6 million, which is expected to be recognized over a weighted-averageweighted average period of 1.61.5 years.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture rate. The forfeiture rate was estimated to be 12.5% per year as of December 31, 2018.2019. 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.
29
Note 12 – Income Taxes
The 2017 U.S. Tax Cuts and Jobs Act
On December 22, 2017,tax legislation fundamentally changed the U.S. government enacted the Tax Act. Due to the complexitytaxation of the Tax Act, the SEC issued guidance in SAB 118 which clarified the accounting formultinational corporations. Significant provisions impacting Cubic include GILTI (global intangible low-taxed income), a new tax on 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 SAB 118 measurement period subsequently ended on December 22, 2018. Although we no longer considers 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 thecorporations, and BEAT (base-erosion and anti-abuse tax). The BEAT provisions impose an alternative tax on GILTI asapplicable taxpayers with base-erosion payments greater than a period cost and thus have not adjusted any net deferredde minimis threshold. After considering available tax assetsplanning opportunities, a reasonable forecast of our foreign subsidiaries in connection with the Tax Act.BEAT expense has been made.
Effective Tax Rate
During interim periods, the Company generally utilizes the estimatedThe quarterly forecast of our annual effective tax rate method which involvesis impacted by numerous factors including income fluctuations by tax jurisdiction throughout the useyear, the level of forecasted information. Under this method,intercompany transactions, applicability of new tax regimes, and the provision is calculated by applying an estimateimpact of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period.acquisitions. For the three-month period ended December 31, 2018, the Company believes2019, we concluded it is more appropriate to use a blend of the discrete effective tax rate method for U.S. operations and the estimated annual effective tax rate method for foreign operations to calculatedetermine income tax expense for the period. period, the latter of which comprises the majority of tax expense.
The Company determined that since small changes in estimated “ordinary” income for U.S. operations would result in significant changes in the worldwide estimated annual effective tax rate, the discrete tax rate method should be utilized to determine a more reliable estimate of U.S. income tax expense for the period.
Income tax expense recognized on pre-tax lossesloss from continuing operations for the three months ended December 31, 20182019 resulted in an effective tax rate of negative 31%64% which differs from the U.S. statutoryeffective tax raterates of 21% primarily due tofor the jurisdictional mix of pre-tax income (loss)year ended September 30, 2019 and U.S. losses for which no tax benefit can be realized due to a
36
valuation allowance. The effective tax ratenegative 31% for the three months ended December 31, 2018 differs from the2018. The variability in effective tax rate of negative 6% and positive 48% forrates primarily relates to the three months ended December 31, 2017 and the year ended September 30, 2018, respectively, primarily due to differencesdifference in the jurisdictional mix of pre-tax income (loss), partially offset byearnings, increased U.S. BEAT and state cash tax expense and discrete benefits resulting fromrelated to the enactmentrelease of a portion of the Tax Act.
Deferred Tax Balances
As of December 31, 2018, we maintained a valuation allowance againstexisting 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 ondue to deferred tax assets by evaluating positive and negative evidence that may exist. Through December 31, 2018, a total valuation allowance of $79.3 million has been established for U.S. net deferred tax assets, certain foreign operating losses and other foreign assets.liabilities acquired in business combinations.
Note 13 — Derivative Instruments and Hedging Activities
In order to manage our exposure to fluctuations in interest and foreign currency exchange rates we utilize derivative financial instruments such as forward starting swaps and foreign currency forwards for periods typically up to threefive 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, thenboth the effective portionand ineffective portions of a change in the fair value of the derivative isare 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, 20182019 and September 30, 20182019 (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| Notional Principal |
| |||||||||||
|
| December 31, 2018 |
| September 30, 2018 |
| |||||||||
| | | | | | | | |||||||
| | Notional Principal |
| |||||||||||
| | December 31, 2019 | | September 30, 2019 | | |||||||||
Instruments designated as accounting hedges: |
|
|
|
|
|
|
| | | | | | | |
Foreign currency forwards |
| $ | 169,095 |
| $ | 169,406 |
| | $ | 132,551 | | $ | 143,164 | |
|
|
|
|
|
|
|
| |||||||
Interest rate swaps | |
| 95,000 | |
| 95,000 | | |||||||
| | | | | | | | |||||||
Instruments not designated as accounting hedges: |
|
|
|
|
|
|
| | | | | | | |
Foreign currency forwards |
| $ | 24,824 |
| $ | 27,909 |
| | $ | 57,844 | | $ | 24,220 | |
Included in the amounts not designated asreceiving hedge accounting hedgestreatment at December 31, 20182019 and September 30, 20182019 were non-designated foreign currency forwards with notional principal amounts of $12.7$51.2 million and $14.7$14.0 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards hashave approximately offset an equal and opposite amount of gains or
30
losses related to the foreign currency exposure. Unrealized gains of $0.8 million and unrealized losses of $0.3 million were recognized in other income (expense), net for the three months ended December 31, 2019 and 2018, and 2017respectively, related to these foreign currency forward contracts not designated as accounting hedges.
In conjunction with the agreements related to the construction and leasing of 2 new buildings on our existing corporate campus, we entered into pay-variable/receive-fixed interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with these future lease obligations. The interest rate swaps contain forward starting notional principal amounts which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges at September 30, 2019, and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). Unrealized gains as a result of changes in the fair value of the interest rate swaps were $1.4 million for the three months ended December 31, 2019.
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the
37
periods ended December 31, 20182019 and September 30, 2018.2019. Although the table above reflects the notional principal amounts of our foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair values. We did not have any derivative instruments with credit-risk relatedcredit risk-related contingent features that would require us to post collateral as of December 31, 20182019 or September 30, 2018.2019.
The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the Condensed Consolidated Balance Sheets as of December 31, 2018 and September 30, 2018 (in thousands):
| | | | | | | | | |
| | | | Fair Value |
| ||||
|
| Balance Sheet Location |
| December 31, 2019 |
| September 30, 2019 |
| ||
Asset derivatives: | | | | | | | | | |
Foreign currency forwards |
| Other current assets | | $ | 930 | | $ | 2,635 | |
Foreign currency forwards |
| Other assets | |
| 469 | |
| 619 | |
Forward starting swap |
| Other assets | |
| 1,404 | |
| 240 | |
| | | | $ | 2,803 | | $ | 3,494 | |
Liability derivatives: | | | | | | | | | |
Foreign currency forwards |
| Other current liabilities | | $ | 1,855 | | $ | 529 | |
Foreign currency forwards |
| Other noncurrent liabilities | |
| 272 | |
| 228 | |
Total | | | | $ | 2,127 | | $ | 757 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value |
| ||||
|
| Balance Sheet Location |
| December 31, 2018 |
| September 30, 2018 |
| ||
Asset derivatives: |
|
|
|
|
|
|
|
|
|
Foreign currency forwards |
| Other current assets |
| $ | 5,036 |
| $ | 1,803 |
|
Foreign currency forwards |
| Other noncurrent assets |
|
| 582 |
|
| 314 |
|
|
|
|
| $ | 5,618 |
| $ | 2,117 |
|
Liability derivatives: |
|
|
|
|
|
|
|
|
|
Foreign currency forwards |
| Other current liabilities |
| $ | 3,367 |
| $ | 1,657 |
|
Foreign currency forwards |
| Other noncurrent liabilities |
|
| — |
|
| 75 |
|
Total |
|
|
| $ | 3,367 |
| $ | 1,732 |
|
31
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) |
|
|
| Gains (losses) | ||||||||||||||||
|
| Gains (losses) |
| reclassified into |
|
|
| reclassified into | ||||||||||||||||
|
| recognized in |
| earnings - |
| Gains (losses) |
| earnings - | ||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | Three Months Ended | ||||||||||||||||||||||
| | December 31, 2019 | | December 31, 2018 | ||||||||||||||||||||
|
| |
| Gains (losses) |
| |
| Gains (losses) | ||||||||||||||||
| | Gains (losses) | | reclassified into | | | | reclassified into | ||||||||||||||||
| | recognized in | | earnings - | | Gains (losses) | | earnings - | ||||||||||||||||
Derivative Type |
| OCI |
| Effective Portion |
| recognized in OCI |
| Effective Portion | | OCI | | Effective Portion | | recognized in OCI | | Effective Portion | ||||||||
Foreign currency forwards |
| $ | 1,779 |
| $ | (33) |
| $ | 656 |
| $ | (774) | | $ | (1,583) | | $ | (66) | | $ | 1,779 | | $ | (33) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | |
The amount of realized gains and losses from foreign currency forwards designated as accounting hedges did not have a material impact on the results of operations for the three-month periods ended December 31, 2019.
The amount of unrealized gains and losses from derivative instruments and hedging activities classified as not highly effective did not have a material impact on the results of operations for the three-month periods ended December 31, 20182019 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$0.7 million, net of income taxes.
38
32
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 |
| |||||||||||
| | December 31, | | |||||||||||
|
| 2019 |
| 2018 | | |||||||||
Sales: |
|
|
|
|
|
|
| | | | | | | |
Cubic Transportation Systems |
| $ | 181.8 |
| $ | 146.5 |
| | $ | 188.6 | | $ | 181.8 | |
Cubic Mission Solutions |
|
| 46.4 |
|
| 33.1 |
| | | 58.7 | | | 46.4 | |
Cubic Global Defense |
|
| 77.1 |
|
| 68.8 |
| |||||||
Cubic Global Defense Systems | |
| 81.5 | |
| 77.1 | | |||||||
Total sales |
| $ | 305.3 |
| $ | 248.4 |
| | $ | 328.8 | | $ | 305.3 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Operating income (loss): |
|
|
|
|
|
|
| | | | | | | |
Cubic Transportation Systems |
| $ | 11.0 |
| $ | 9.9 |
| | $ | 14.3 | | $ | 11.0 | |
Cubic Mission Solutions |
|
| (4.9) |
|
| (8.9) |
| | | (14.9) | | | (4.9) | |
Cubic Global Defense |
|
| 2.9 |
|
| 1.4 |
| |||||||
Cubic Global Defense Systems | |
| 6.3 | |
| 2.9 | | |||||||
Unallocated corporate expenses |
|
| (9.6) |
|
| (14.3) |
| |
| (12.2) | |
| (9.6) | |
Total operating income (loss) |
| $ | (0.6) |
| $ | (11.9) |
| | $ | (6.5) | | $ | (0.6) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Depreciation and amortization: |
|
|
|
|
|
|
| | | | | | | |
Cubic Transportation Systems |
| $ | 7.7 |
| $ | 3.3 |
| | $ | 7.1 | | $ | 7.7 | |
Cubic Mission Solutions |
|
| 5.4 |
|
| 5.9 |
| | | 7.5 | | | 5.4 | |
Cubic Global Defense |
|
| 2.2 |
|
| 2.1 |
| |||||||
Cubic Global Defense Systems | |
| 1.7 | |
| 2.2 | | |||||||
Corporate |
|
| 0.7 |
|
| 1.1 |
| |
| 0.7 | |
| 0.7 | |
Total depreciation and amortization |
| $ | 16.0 |
| $ | 12.4 |
| | $ | 17.0 | | $ | 16.0 | |
Unallocated corporate costs in the first quarter of 2019expenses include costs of strategic and ITinformation technology (IT) system resource planning as part of our One Cubic Initiatives, which totaled $1.6$1.1 million in the first quarter of fiscal 2020 compared to $8.0$1.6 million in the first quarter 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) 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.
39
33
Sales by Geographic Region (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three months ended December 31, 2018 |
| |||||||||||||||||||||||
|
| CTS |
| CMS |
| CGD |
| Total |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three months ended December 31, 2019 | | |||||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
United States |
| $ | 91.3 |
| $ | 45.5 |
| $ | 35.7 |
| $ | 172.5 |
| | $ | 96.7 | | $ | 56.2 | | $ | 22.8 | | $ | 175.7 | |
United Kingdom |
|
| 50.9 |
|
| 0.4 |
|
| 4.3 |
|
| 55.6 |
| |
| 47.6 | |
| 0.2 | |
| 4.3 | |
| 52.1 | |
Australia |
|
| 29.8 |
|
| 0.1 |
|
| 5.6 |
|
| 35.5 |
| |
| 36.4 | |
| 1.3 | |
| 6.5 | |
| 44.2 | |
Far East/Middle East |
|
| 4.4 |
|
| 0.4 |
|
| 18.4 |
|
| 23.2 |
| |
| 1.3 | |
| 0.4 | |
| 36.3 | |
| 38.0 | |
Other |
|
| 5.4 |
|
| — |
|
| 13.1 |
|
| 18.5 |
| |
| 6.6 | |
| 0.6 | |
| 11.6 | |
| 18.8 | |
Total sales |
| $ | 181.8 |
| $ | 46.4 |
| $ | 77.1 |
| $ | 305.3 |
| | $ | 188.6 | | $ | 58.7 | | $ | 81.5 | | $ | 328.8 | |
| | | | | | | | | | | | | |
| | Three months ended December 31, 2018 | | ||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | ||||
| | | | | | | | | | | | | |
United States | | $ | 91.3 | | $ | 45.5 | | $ | 35.7 | | $ | 172.5 | |
United Kingdom | |
| 50.9 | |
| 0.4 | |
| 4.3 | |
| 55.6 | |
Australia | |
| 29.8 | |
| 0.1 | |
| 5.6 | |
| 35.5 | |
Far East/Middle East | |
| 4.4 | |
| 0.4 | |
| 18.4 | |
| 23.2 | |
Other | |
| 5.4 | |
| — | |
| 13.1 | |
| 18.5 | |
Total sales | | $ | 181.8 | | $ | 46.4 | | $ | 77.1 | | $ | 305.3 | |
Sales by End Customer.Customer: We are the prime customercontractor 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 December 31, 2019 | | |||||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
U.S. Federal Government and State and Local Municipalities |
| $ | 90.8 |
| $ | 45.8 |
| $ | 32.4 |
| $ | 169.0 |
| | $ | 93.5 | | $ | 55.2 | | $ | 26.8 | | $ | 175.5 | |
Other |
|
| 91.0 |
|
| 0.6 |
|
| 44.7 |
|
| 136.3 |
| |
| 95.1 | |
| 3.5 | |
| 54.7 | |
| 153.3 | |
Total sales |
| $ | 181.8 |
| $ | 46.4 |
| $ | 77.1 |
| $ | 305.3 |
| | $ | 188.6 | | $ | 58.7 | | $ | 81.5 | | $ | 328.8 | |
| | | | | | | | | | | | | |
| | Three months ended December 31, 2018 | | ||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | ||||
| | | | | | | | | | | | | |
U.S. Federal Government and State and Local Municipalities | | $ | 90.8 | | $ | 45.8 | | $ | 32.4 | | $ | 169.0 | |
Other | |
| 91.0 | |
| 0.6 | |
| 44.7 | |
| 136.3 | |
Total sales | | $ | 181.8 | | $ | 46.4 | | $ | 77.1 | | $ | 305.3 | |
34
Sales by Contract Type.Type: Substantially all of our contracts are fixed-price type contracts. Sales included in Other contract types represent cost pluscost-plus and time and materialtime-and-material type contracts.
On a fixed-price type contract, we agreesagree 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 December 31, 2019 | | |||||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Fixed Price |
| $ | 178.2 |
| $ | 45.8 |
| $ | 71.6 |
| $ | 295.6 |
| | $ | 184.5 | | $ | 50.5 | | $ | 74.3 | | $ | 309.3 | |
Other |
|
| 3.6 |
|
| 0.6 |
|
| 5.5 |
|
| 9.7 |
| |
| 4.1 | |
| 8.2 | |
| 7.2 | |
| 19.5 | |
Total sales |
| $ | 181.8 |
| $ | 46.4 |
| $ | 77.1 |
| $ | 305.3 |
| | $ | 188.6 | | $ | 58.7 | | $ | 81.5 | | $ | 328.8 | |
| | | | | | | | | | | | | |
| | Three months ended December 31, 2018 | | ||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | ||||
| | | | | | | | | | | | | |
Fixed Price | | $ | 178.2 | | $ | 45.8 | | $ | 71.6 | | $ | 295.6 | |
Other | |
| 3.6 | |
| 0.6 | |
| 5.5 | |
| 9.7 | |
Total sales | | $ | 181.8 | | $ | 46.4 | | $ | 77.1 | | $ | 305.3 | |
Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is determined by us at the performance obligation level (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three months ended December 31, 2018 |
| |||||||||||||||||||||||
|
| CTS |
| CMS |
| CGD |
| Total |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | ||||||||||||||
| | Three months ended December 31, 2019 | | |||||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Product |
| $ | 92.0 |
| $ | 40.6 |
| $ | 49.7 |
| $ | 182.3 |
| | $ | 93.4 | | $ | 51.2 | | $ | 56.0 | | $ | 200.6 | |
Service |
|
| 89.8 |
|
| 5.8 |
|
| 27.4 |
|
| 123.0 |
| |
| 95.2 | |
| 7.5 | |
| 25.5 | |
| 128.2 | |
Total sales |
| $ | 181.8 |
| $ | 46.4 |
| $ | 77.1 |
| $ | 305.3 |
| | $ | 188.6 | | $ | 58.7 | | $ | 81.5 | | $ | 328.8 | |
| | | | | | | | | | | | | |
| | Three months ended December 31, 2018 | | ||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | ||||
| | | | | | | | | | | | | |
Product | | $ | 92.0 | | $ | 40.6 | | $ | 49.7 | | $ | 182.3 | |
Service | |
| 89.8 | |
| 5.8 | |
| 27.4 | |
| 123.0 | |
Total sales | | $ | 181.8 | | $ | 46.4 | | $ | 77.1 | | $ | 305.3 | |
40
35
Revenue Recognition Method: Sales recognized at a point in time are typically for standard goods with a short production cycle and are recognized when the customer obtains control, which is generally upon delivery and acceptance. Sales for services and for products with a long production cycle, which often include significant customization and development, are recognized over time. The table below presents total net sales disaggregated based on the revenue recognition method applied (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three months ended December 31, 2018 |
| |||||||||||||||||||||||
|
| CTS |
| CMS |
| CGD |
| Total |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | ||||||||||||||
| | Three months ended December 31, 2019 | | |||||||||||||||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Point in Time |
| $ | 16.7 |
| $ | 34.4 |
| $ | 0.5 |
| $ | 51.6 |
| | $ | 17.7 | | $ | 38.3 | | $ | 1.0 | | $ | 57.0 | |
Over Time |
|
| 165.1 |
|
| 12.0 |
|
| 76.6 |
|
| 253.7 |
| |
| 170.9 | |
| 20.4 | |
| 80.5 | |
| 271.8 | |
Total sales |
| $ | 181.8 |
| $ | 46.4 |
| $ | 77.1 |
| $ | 305.3 |
| | $ | 188.6 | | $ | 58.7 | | $ | 81.5 | | $ | 328.8 | |
| | | | | | | | | | | | | |
| | Three months ended December 31, 2018 | | ||||||||||
| | CTS |
| CMS |
| CGD |
| Total | | ||||
| | | | | | | | | | | | | |
Point in Time | | $ | 16.7 | | $ | 34.4 | | $ | 0.5 | | $ | 51.6 | |
Over Time | |
| 165.1 | |
| 12.0 | |
| 76.6 | |
| 253.7 | |
Total sales | | $ | 181.8 | | $ | 46.4 | | $ | 77.1 | | $ | 305.3 | |
Note 15 — Restructuring Costs
In fiscal 2019, we initiated projects to restructure and modify our supply chain strategy, functional responsibilities, methods, capabilities, processes and rationalize suppliers with the goal of reducing ongoing costs and increasing the efficiencies of our worldwide procurement organization. The majority of the costs associated with these restructuring activities are related to consultants that we have engaged in connection with these efforts, and such costs have been recognized by our corporate entity. The total costs of this restructuring project have been incurred and these efforts have been materially completed as of the first quarter of fiscal 2020.
Also, in the first quarter of fiscal 2019 and 2020 our CTS segment incurred restructuring charges, consisting primarily of employee severance costs related to headcount reductions initiated to optimize our cost positions. The total costs of each of these restructuring plans initiated thus far are not expected to be significantly greater than the charges incurred to date.
Restructuring charges incurred by our business segments were as follows (in millions):
| | | | | |
| Three Months Ended | ||||
| December 31, | ||||
| 2019 |
| 2018 | ||
Restructuring costs: | | | | | |
Cubic Transportation Systems | $ | 0.4 |
| $ | 0.4 |
Cubic Mission Solutions |
| — | |
| — |
Cubic Global Defense Systems |
| 0.1 | |
| 0.1 |
Unallocated corporate expenses |
| 1.1 | |
| 1.5 |
Total restructuring costs | $ | 1.6 |
| $ | 2.0 |
36
The following table presents a rollforward of our restructuring liability as of December 31, 2019, which is included within accrued compensation and other current liabilities within our Condensed Consolidated Balance Sheets (in millions):
| | | | | | | | |
| | Restructuring Liability | | | Restructuring Liability | | ||
|
| Employee Separation and other | | | Consulting Costs |
| ||
Balance as of September 30, 2019 | | $ | 2.0 | | | $ | 0.8 | |
Accrued costs | | | 0.6 | | | | 1.0 | |
Cash payments | | | (2.0) | | | | (1.8) | |
Balance as of December 31, 2019 | | $ | 0.6 | | | $ | — | |
Certain restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred.
Note 16 — Legal Matters
We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.
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.
41
37
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
December 31, 20182019
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 increasedsuperior 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 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 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 Mission Solutions (CMS), and Cubic Global Defense Systems (CGD), and Cubic Mission Solutions (CMS). 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), which we acquired in October 2018, when combined with our existing transportation capabilities, is expected to enhance our ability to offer compelling solutions to reduce urban congestion using Trafficware’s intelligent, data-rich intersection management technology.
CMS provides networked command, control, communication, computers, intelligence, surveillance and reconnaissance (C4ISR)C4ISR capabilities for defense, intelligence, security and commercial missions. CMS’ core competencies include protected wide-band communications for command, controlspace, aircraft, Unmanned Aerial Vehicle (UAV), and intelligence, surveillance and reconnaissance (C2ISR) systems, expeditionary satellite communicationterrestrial applications. It provides Rugged Internet of Things (IoT) cloud solutions, real time processing, exploitation and dissemination of full motion video, deployable secure tactical cloud computing, communicationinteroperability gateways, and artificial intelligence/machine learning (AI/ML) based Command and Control, intelligence, Surveillance and Reconnaissance (C2ISR) applications for video situational understanding. CMS is also building UAV systems to provide intelligence, surveillance and reconnaissance (ISR) services.-as-a-service.
CGD is a leading diversified supplier of live, virtual, constructive and game-based training solutions to the U.S. Department of Defense, other U.S. government agencies and allied nations. We offer a full range of training solutions for military and security forces. Our customized systems and services accelerate combat readiness in the air, on the ground and at sea while meeting the demands of evolving operations globally. Our range design business offers complete range design solutions for military, law enforcement, special forces
Consolidated Overview
CONSOLIDATED RESULTS
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| ||||
| | December 31, | | | | | | ||||
| | 2019 |
| 2018 | | % Change | | | |||
| | | | | | | | | | | |
Sales | | $ | 328.8 | | $ | 305.3 | | | 8 | % | |
Operating loss | | | (6.5) | | | (0.6) | | | nm | | |
Net loss from continuing operations attributable to Cubic | | | (20.0) | | | (6.6) | | | nm | | |
Diluted earnings per share from continuing operations attributable to Cubic | | | (0.64) | | | (0.23) | | | nm | | |
Adjusted EBITDA | | | 11.4 | | | 20.0 | | | (43) | % | |
Adjusted Net Income (Loss) | | | (3.7) | | | 9.1 | | | nm | | |
Adjusted EPS | | | (0.12) | | | 0.32 | | | nm | | |
Note on non-GAAP measures: Throughout the following results of operations discussion, we disclose certain non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and security training centers, including laser-engagement training simulation systems, live-fire range design, exercise planning, expert supportAdjusted EPS. For an explanation and detailed After Action Reviews.
42
reconciliation of such measures, see the section titled ‘Non-GAAP Financial Information’ below.
38
Consolidated Overview
We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ASC 606), effective October 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the quarter ended December 31, 2018 is presented under ASC 606, while the quarter ended December 31, 2017 is presented under ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to October 1, 2018. The cumulative effect of the change in accounting for periods prior to October 1, 2018 was recognized through retained earnings 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 ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended December 31, 2018 |
| |||||||
|
|
|
|
|
| As Reported |
| |||
|
| Under |
| Effect of |
| Under |
| |||
|
| ASC 605 |
| ASC 606 |
| ASC 606 |
| |||
Sales: |
| (in thousands) |
| |||||||
Cubic Transportation Systems |
| $ | 172,728 |
| $ | 9,079 |
| $ | 181,807 |
|
Cubic Mission Solutions |
|
| 45,363 |
|
| 1,030 |
|
| 46,393 |
|
Cubic Global Defense |
|
| 58,733 |
|
| 18,326 |
|
| 77,059 |
|
Total sales |
| $ | 276,824 |
| $ | 28,435 |
| $ | 305,259 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
Cubic Transportation Systems |
| $ | 9,186 |
| $ | 1,790 |
| $ | 10,976 |
|
Cubic Mission Solutions |
|
| (5,191) |
|
| 251 |
|
| (4,940) |
|
Cubic Global Defense |
|
| 1,607 |
|
| 1,290 |
|
| 2,897 |
|
Unallocated corporate expenses |
|
| (9,499) |
|
| — |
|
| (9,499) |
|
Total operating income (loss) |
| $ | (3,897) |
| $ | 3,331 |
| $ | (566) |
|
Sales:Sales for the quarter ended December 31, 20182019 increased 23%8% to $305.3$328.8 million from $248.4$305.3 million in the first fiscal quarter of last year, which includesyear. For the impact of the adoption of the new revenue recognition standard describedquarter, sales from CMS, CGD and quantified above. Sales from CTS CMS and CGD increased by 24%27%, 40%,6% and 12%4%, respectively. Sales generated by businesses we acquired during fiscal 2020 and 2019 totaled $16.0 million for the quarter ended December 31, 2019 compared to $10.5 million for the quarter ended December 31, 2018. See the segment discussions below for further analysis of segment sales. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar had an unfavorable impact on sales of $5.5$1.8 million for the first fiscal quarter of 2019fiscal 2020 compared to the first fiscal quarter of last year. Businesses we acquired during 2019 and 2018 had
Gross Margin: Our gross margin percentage on products sales of $10.7 million for the three-month period ended December 31, 2018, compareddecreased 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 million17% in the first quarter of fiscal 2019 compared to an operating loss of $11.9 million in the first quarter of 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 finalization2020 from 31% 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 sales increased to 31% in the first quarter of 2019 from 30% in the first quarter last year. The increasedecrease in product sales gross margins in the first quarter was of fiscal 2020 were primarily due to increased shipments by ourincremental investments in the CMS segment, which generally have higher gross margins than products sold by our other business segments.troposcatter and MQ-25 contracts discussed below. Our gross margin percentage on service sales was 25% in36% for the first quarterthree months of 2019fiscal 2020 compared to 26% in25% for the first quarterthree months of last year. The decreaseyear, driven primarily by the impact of productivity initiatives in gross margins on serviceCTS as well as services sales was primarily driven by a slight decrease in the proportion of service sales provided by our CTS business segment, which generally has higher gross margins than service sales for our other business segments.mix.
43
Selling, General, and Administrative: Selling, general and administrative (SG&A) expenses increased in the first quarter of 2019fiscal 2020 to $65.9 million compared to $63.0 million compared to $61.7 million in 2018. the same period last year. As a percentage of sales, SG&A expenses were 20% for the quarter ended December 31, 2019 compared to 21% for the quarter ended December 31, 2018, compared to 25% for the quarter ended December 31, 2017.2018. The increase in SG&A expense for the first quarter of fiscal 2020 was primarily due to the SG&A expenses incurred by Trafficware, which wastwo businesses we acquired in October 2018. These increases in SG&A were partially offset by the reduction in unallocated corporate costs, including the reduction of unallocated IT costs described above.
Company funded research and development (R&D) expenditures totaled $12.0 million for both the first quarter of fiscal year 2019 and 2018. There was no significant shift in the mix of R&D expenditures between our business segments from the first quarter of fiscal 2018subsequent to the first quarter of 2019. In the first quarter of fiscal 2019 CTS continuedincluding GRIDSMART Technologies, Inc. (GRIDSMART) in January 2019, and Nuvotronics, Inc. (Nuvotronics) in March 2019. In addition, stock-based compensation expense increased due in part to make R&D investments in new transportation product development, including fare collection technologies, real-time passenger informationincreased grants of restricted stock units made during the first quarter of fiscal 2020.
Research and Development:
The cost of company-sponsored research and development (R&D) activities included in our Condensed Consolidated Statements of tolling, intelligent transport systems, and analytic technologies. CGD’sOperations are as follows (in thousands):
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 |
| ||
Company-Sponsored Research and Development Expense: | | | | | | | |
Cubic Transportation Systems | | $ | 1,234 | | $ | 3,389 | |
Cubic Mission Solutions | | | 4,806 | | | 5,343 | |
Cubic Global Defense | |
| 1,940 | |
| 3,280 | |
Unallocated corporate expenses | |
| 442 | |
| — | |
Total company-sponsored research and development expense | | $ | 8,422 | | $ | 12,012 | |
Company-sponsored R&D expenditures focused on next generation live, virtual, constructive training systems and CMS’decreased in the first quarter of fiscal 2020 as compared to the first quarter last year due to the timing of certain planned R&D expenditures were driven by the developmentprojects including CTS digital initiatives.
In addition to internally funded R&D a significant portion of our new product development occurs in conjunction with the performance of work on our contracts. These costs are included in cost of sales in our Condensed Consolidated Statements of Operations as they are directly related to contract performance. The cost of contract R&D activities included in our cost of sales are as follows (in thousands): | | | | | | | |
| | Three Months Ended | | ||||
|
| December 31, |
| ||||
| | 2019 |
| 2018 | | ||
Cost of Contract Research and Development Activities: | | | | | | | |
Cubic Transportation Systems | | $ | 14,790 | | $ | 12,077 | |
Cubic Mission Solutions | | | 7,705 | | | 5,061 | |
Cubic Global Defense | |
| 7,481 | |
| 8,201 | |
Total cost of contract research and development activities | | $ | 29,976 | | $ | 25,339 | |
Amortization of new antenna technologies for communications.
Purchased Intangibles: Amortization of purchased intangibles for the first quarter of 2019 increasedfiscal 2020 decreased to $10.1 million from $10.6 million from $7.4 million in 2018.the first quarter last year. The increasedecrease in amortization expense was driven by $4.3 million ofthe amortization of Trafficwarepurchased intangible assets that are amortized based upon accelerated methods, partially offset by the amortization of intangible assets related to businesses acquired subsequent to the first quarter of fiscal 2019.
39
Operating Loss:Our consolidated operating loss was $6.5 million in the first quarter of fiscal 2020 compared to $0.6 million in the first quarter last year. The CMS operating loss for the first quarter increased to $14.9 million this year compared to $4.9 million last year primarily due to incremental investments in our troposcatter and MQ-25 contracts discussed below. CTS operating income increased to $14.3 million for the first quarter compared to $11.0 million last year and CGD had operating income of $6.3 million in the first quarter compared to $2.9 million last year. On a consolidated basis, businesses we acquired during fiscal 2020 and 2019 partially offsethad operating losses totaling $5.1 million in the first quarter of fiscal 2020 compared to operating losses of $3.3 million in the first quarter of fiscal 2019. For the first quarter of fiscal 2020, the operating losses of businesses acquired in fiscal 2020 and 2019 included total acquisition-related expenses of $1.5 million and amortization of purchased intangibles of $5.4 million in addition to a $4.1 million gain recognized on the revaluation of the fair value of contingent consideration owed to the seller of Nuvotronics. For the first quarter of fiscal 2019, the operating losses of businesses acquired in fiscal 2020 and 2019 included total acquisition-related expenses of $1.4 million and amortization of purchased intangibles of $4.3 million. Unallocated corporate and other costs for the first quarter of fiscal 2020 were $12.0 million compared to $9.5 million in the first quarter last year. The increase in unallocated corporate costs was driven by an increase in stock-based compensation expense.
Interest and Dividend Income and Interest Expense: Interest and dividend income was $2.2 million in the reductionfirst quarter of amortization2020 compared to $1.2 million in the first quarter of 2019. The increase was primarily due to the interest income recorded on previously acquired intangible assets that are amortized using accelerated methods for which amortization decreases over time.
higher long-term contracts financing receivables in our consolidated balance sheet. Interest expense for the first quarter of fiscal 20192020 was $4.0$5.4 million compared to $2.7$4.0 million in the first quarter of last year. The increase in interest expense wasyear primarily caused bydue to the increase in ourthe average outstanding non-recourse debt balancesbalance of our consolidated variable interest entity (VIE) for the first quarter of fiscal 20192020 compared to the first quarter last year. The 90% noncontrolling interest in the net income (loss) of fiscal 2018. The average outstanding borrowings underthe consolidated VIE, which includes the interest income and expense of the VIE, is added back to our revolving credit agreement increasednet income (loss) to arrive at net income (loss) attributable to Cubic.
Other Income (Expense): Other income (expense) netted to expense of $0.1 million in the first quarter of fiscal 20192020 compared to $4.8 million in the first quarter of 2019. Changes in our non-operating expenses are primarily driven by foreign currency gains and losses related to financeour intercompany balances with our foreign entities as well as changes in the acquisitionfair value of Trafficware.an interest rate swap held by the VIE that we consolidate. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE’s gain or loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.
Income Tax Provision: The income tax expense recognized on pre-tax lossesloss from continuing operations for the three months ended December 31, 20182019 resulted in an effective tax rate of negative 31%,64% which differs from the effective tax rates of 48%21% for the year ended September 30, 20182019 and negative 6% 31% for the three months ended December 31, 2017,2018. The variability in effective tax rates primarily duerelates to the difference in jurisdictional mix of pre-tax income loss), partially offset byearnings, increased U.S. BEAT and state cash tax expense and discrete benefits resulting fromrelated to the enactmentrelease of a portion of the Tax cuts and Jobs Act of 2017 (the Tax Act). Through December 31, 2018, a totalexisting U.S. deferred tax valuation allowance of $79.3 million has been established for U.S. netdue to deferred tax assets, certain foreign operating losses and other foreign assets. The changeliabilities acquired 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.business combinations.
Our effective tax rate could be affected by, among other factors, the mix of business between U.S. and foreign jurisdictions, the level of intercompany transactions, applicability of new tax regimes, the impact of acquisitions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take advantage of available tax creditsattributes and audits of our records by taxing authorities. After considering the impact of the U.S. valuation allowance,these impacts, we have determined that a reliable estimate of the annual effective tax rate for fiscal year 20192020 cannot be made, since relatively small changes in our projected income produce a significant variation in our effective tax rate. made.
Net Income (Loss) from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic in the first quarter of fiscal 20192020 was $6.6$20.0 million compared to $11.4$6.6 million in the first quarter of last year. The changeincrease in net loss from continuing operations attributable to Cubic was primarily due to the increases in our operating loss and income tax expense as described above.
Adjusted EBITDA: Adjusted EBITDA decreased to $11.4 million in the first quarter of 2020 compared to $20.0 million in the first quarter of 2019. The decrease in Adjusted EBITDA was primarily due to the same factors that drove the increase in operating loss described above, excluding the amortization expense, acquisition transaction costs, and restructuring costs.
Adjusted Net Income (Loss): Our Adjusted Net Loss was $3.7 million in the first quarter of 2020 compared to Adjusted Net Income of $9.1 million in the first quarter of 2019. The decrease in Adjusted Net Income was primarily due to the
40
same factors that drove the increase in net loss from continuing operations attributable to Cubic described above, but excludes amortization expense, acquisition transaction costs, restructuring costs, acquisition-related costs, and non-operating gains and losses.
Adjusted EPS: Adjusted EPS was negative $0.12 in the first quarter of 2020 compared to positive $0.32 in the first quarter of 2019. The decrease in Adjusted EPS was due to the same factors that impacted Adjusted Net Loss noted above.
Cubic Transportation Systems Segment (CTS)
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| ||||
| | December 31, | | | | | | ||||
| | 2019 |
| 2018 | | % Change | | | |||
| | | | | | | | | | | |
Sales | | $ | 188.6 | | $ | 181.8 | | | 4 | % | |
Operating income | | | 14.3 | | | 11.0 | | | 30 | % | |
Adjusted EBITDA | | | 22.2 | | | 19.4 | | | 14 | % | |
Sales: CTS sales increased 4% in the first quarter of fiscal 20182020 to $188.6 million compared to $181.8 million last year. For the first quarter of fiscal 2020, sales increased in North America and Australia compared to the first quarter of fiscal 2019, was favorably impacted by the reduction in our operating loss described above, partially offset by an increase in income tax as described above. In addition, nonoperating expensewhile sales in the first quarter of fiscal 2019 included a $6.1 million unrealized loss caused byU.K. decreased slightly for 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 to arrive at net loss attributable to Cubic.
44
Cubic Transportation Systems Segment (CTS)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (in millions) |
| ||||
Transportation Systems Segment Sales |
| $ | 181.8 |
| $ | 146.5 |
|
|
|
|
|
|
|
|
|
Transportation Systems Segment Operating Income |
| $ | 11.0 |
| $ | 9.9 |
|
CTS sales increased 24% in the first quarter of fiscal year 2019 to $181.8 million compared to $146.5 million last year, including the impact of the adoption of the new revenue recognition standard described above. For the first quarter of fiscal 2019, sales increased in North America, Australia, and United Kingdom as compared to the first quarter of fiscal 2018.quarter. Sales were higher in the U.S. primarily due to revenue from system development on our customer contracts in Boston and the New York New Fare Payment System and MBTA contracts, and $10.5 million ofSan Francisco Bay Area, as well as sales from Trafficware, which wetwo U.S. transportation businesses acquired in October 2018. Sales were higher in Australiafiscal 2019, Advanced Traffic Solutions Inc. (Trafficware) and GRIDSMART. The combined sales for Trafficware and GRIDSMART totaled $13.2 million for the first quarter of 2019 largely duefiscal 2020 compared to an increase$10.5 million for the first quarter last year. The decrease in developmentsales in the U.K. was primarily caused by a reduction in work on a number of customer systems.fare system hardware. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in sales of $4.8$1.5 million for the first quarter of fiscal 20192020 compared to the same periodperiods last year, primarily due to the strengthening of the U.S. dollar against the British pound and Australian dollar.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS operating income increasedresults amounted to $11.0 million compared to an operating income of $9.9$4.4 million in the first quarter of fiscal 2020 and $5.4 million in the first quarter of 2019. The decrease in amortization expense is related to purchased intangible assets that are amortized based upon accelerated methods.
Operating Income: CTS operating income increased 30% in the first quarter of fiscal 2020 to $14.3 million compared to $11.0 million in the first quarter last year. For the first quarter of fiscal 2020 operating income was higher fromin North America on increased volumeswork on contracts in Boston and the San Francisco Bay Area, as well as a change order on the Boston contract. Operating income increased in the U.K. in the first quarter of fiscal 2020 primarily due to productivity measures achieved on service contracts. Operating income in Australia decreased slightly in the first quarter due to the impact of cost growth on a system development work, including work on the New York Fare Payment System and MBTA contracts. These increases were partially offset by ancontract in Singapore. The operating loss of businesses acquired in fiscal 2020 and 2019 totaled $4.7 million in the first quarter of fiscal 2020 including acquisition-related expenses of $1.0 million and amortization of purchased intangibles of $4.1 million. The operating loss of businesses acquired in fiscal 2020 and 2019 totaled $3.3 million from Trafficware for the first quarter of fiscal 2019, which included the impactlast year including acquisition-related expenses of $4.3$1.4 million ofand amortization of purchased intangibles and $1.4 million of acquisition-related costs.$4.3 million. In addition, the CTS R&D expenditures were lower in the first quarter of fiscal 2020 than the first quarter last year due to the timing of certain planned R&D projects including certain digital initiatives that are expected to accelerate later in fiscal 2020. The average exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $0.7$0.1 million for the first quarter of fiscal 2020 compared to the first quarter last year.
Adjusted EBITDA: CTS Adjusted EBITDA increased 14% to $22.2 million in the first quarter of 2020 compared to $19.4 million in the first quarter of 2019. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above, excluding amortization of purchased intangibles and acquisition transaction costs.
41
Cubic Mission Solutions Segment (CMS)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (in millions) |
| ||||
Cubic Mission Solutions Segment Sales |
| $ | 46.4 |
| $ | 33.1 |
|
|
|
|
|
|
|
|
|
Cubic Mission Solutions Segment Operating Loss |
| $ | (4.9) |
| $ | (8.9) |
|
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| ||||
| | December 31, | | | | | | ||||
| | 2019 |
| 2018 | | % Change | | | |||
| | | | | | | | | | | |
Sales | | $ | 58.7 | | $ | 46.4 | | | 27 | % | |
Operating loss | | | (14.9) | | | (4.9) | | | nm | | |
Adjusted EBITDA | | | (9.3) | | | 0.7 | | | nm | | |
Sales:CMS sales increased 40%27% in the first quarter of fiscal 20192020 to $58.7 million compared to $46.4 million compared to $33.1 millionin the first quarter of last year. The increase in sales for the first quarter was primarily due toresulted from increased ordersproduct deliveries in all of our CMS product lines, and shipments of particularly expeditionary satellite communications products and command other secure communications products. Sales generated by Nuvotronics, which was acquired by CMS in the second quarter of fiscal 2019, totaled $2.8 million in the quarter ended December 31, 2019.
Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMS results amounted to $5.6 million in the first quarter of fiscal 2020 and control, intelligence, surveillance and reconnaissance (C2ISR) products.$4.9 million in the first quarter last year.
Operating Income: The CMS operating loss was $14.9 million in the first quarter of fiscal 2020 compared to $4.9 million in the first quarter of fiscal 2019 compared to $8.9 million last year. For the first quarter of fiscal 2019 compared to the first quarter last year, CMS had increased operating profits from expeditionary satellite communications products and C2ISR products and services due to increased sales. In addition, CMS had a decreaseyear. The increase in the amortization expense on purchased intangible assets between the first quarter of fiscal 2018operating loss for CMS was driven by incremental investments in our troposcatter and the first quarter of fiscal 2019.
Cubic Global Defense Segment (CGD)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| December 31, |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (in millions) |
| ||||
Cubic Global Defense Segment Sales |
| $ | 77.1 |
| $ | 68.8 |
|
|
|
|
|
|
|
|
|
Cubic Global Defense Segment Operating Income |
| $ | 2.9 |
| $ | 1.4 |
|
45
CGD salesMQ-25 contracts, partially offset by increased in the first quarter of fiscal 2019 to $77.1 million compared to $68.8 million last year. Sales increased due to the impact of 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 forgross margins on the percentage-of-completion cost-to-cost methodincreased deliveries in all product lines. The operating loss of revenue recognition. 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 for the first quarter of 2019 compared to the same period last year.
CGD operating income was $2.9Nuvotronics totaled $0.4 million in the first quarter of fiscal 20192020. The Nuvotronics operating loss for the quarter included acquisition-related expenses of $0.5 million and amortization of purchased intangibles of $1.3 million. The Nuvotronics operating loss was partially offset by a $4.1 million gain recognized on the revaluation of the fair value of contingent consideration owed to the sellers.
Adjusted EBITDA: CMS Adjusted EBITDA decreased to negative $9.3 million in the first quarter of 2020 compared to $1.4positive $0.7 million last year. Operating income increasedin the first quarter of 2019. The change in CMS Adjusted EBITDA was primarily due to the recognition of revenuesame factors that drove the increase in operating loss described above, excluding amortization expense, acquisition transaction costs, and marginthe gain on the contracts that were impactedrevaluation of contingent consideration.
Cubic Global Defense Systems Segment (CGD)
| | | | | | | | | | | |
| | Three Months Ended | | | | |
| ||||
| | December 31, | | | | | | ||||
| | 2019 |
| 2018 | | % Change | | | |||
| | | | | | | | | | | |
Sales | | $ | 81.5 | | $ | 77.1 | | | 6 | % | |
Operating income | | | 6.3 | | | 2.9 | | | 117 | % | |
Adjusted EBITDA | | | 7.5 | | | 5.7 | | | 32 | % | |
Sales: CGD sales increased by the adoption of the new revenue recognition standard described above. The average exchange rates between the prevailing currency6% to $81.5 million in our foreign operations and the U.S. dollar did not have a significant impact on CGD’s operating income for the first quarter of fiscal 2020 compared to $77.1 million in the first quarter last year. The increase in sales was primarily due to increased work on air combat training systems during the quarter, partially offset by decreased work on ground combat training system development and services work.
Amortization of Purchased Intangibles: CGD had no significant amortization expense in the first quarter of fiscal 2020 compared to $0.3 million in the first quarter last year.
Operating Income: CGD operating income was $6.3 million in the first quarter of fiscal 2020 compared to $2.9 million last year. For the first quarter of fiscal 2020, operating profits increased primarily due to higher gross margins on increased air combat training system product sales, as well as a reduction of SG&A costs as a result of productivity initiatives. Operating income was also positively impacted by a reduction of R&D activities during the first quarter.
42
Adjusted EBITDA: CGD Adjusted EBITDA was $7.5 million in the first quarter of 2020 compared to $5.7 million in the first quarter of 2019. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above.
Backlog
|
|
|
|
|
|
|
| |||||||
|
| December 31, |
| September 30, |
| |||||||||
|
| 2018 |
| 2018 |
| |||||||||
|
| (in millions) |
| |||||||||||
| | | | | | | | |||||||
| | December 31, | | September 30, |
| |||||||||
|
| 2019 |
| 2019 |
| |||||||||
| | (in millions) |
| |||||||||||
Total backlog |
|
|
|
|
|
|
| | | | | | | |
Cubic Transportation Systems |
| $ | 3,346.6 |
| $ | 3,544.9 |
| | $ | 3,245.7 | | $ | 2,953.3 | |
Cubic Mission Solutions |
|
| 93.3 |
|
| 77.0 |
| |
| 114.7 | |
| 103.7 | |
Cubic Global Defense |
|
| 374.4 |
|
| 442.6 |
| |||||||
Cubic Global Defense Systems | |
| 391.6 | |
| 344.0 | | |||||||
Total |
| $ | 3,814.3 |
| $ | 4,064.5 |
| | $ | 3,752.0 | | $ | 3,401.0 | |
|
|
|
|
|
|
|
|
Total backlog decreasedincreased by $250.2$351.0 million from September 30, 20182019 to December 31, 2018. We recorded2019 primarily due to an award for a net decreasefive-year extension to backlog of $104.5 million on October 1, 2018 upon adoption of ASC 606.upgrade a transportation fare collection system for our Chicago customer. Changes in exchange rates between the prevailing currency in our foreign operations and the U.S. dollar as of the end of the quarter decreasedincreased backlog by $32.7$76.1 million compared to September 30, 2018.2019.
Non-GAAP Financial Information
In addition to results reported under U.S. generally accepted accounting principles (GAAP), this Quarterly Report on Form 10-Q also contains non-GAAP measures. These non-GAAP measures consist of Adjusted EBITDA, Adjusted Net Income, and Adjusted EPS. We believe that these non-GAAP measures provide additional insight into our ongoing operations and underlying business trends, facilitate a comparison of our results between current and prior periods, and facilitate the comparison of our operating results with the results of other public companies that provide non-GAAP measures. We use Adjusted EBITDA internally to evaluate the operating performance of our business, for strategic planning purposes, and as a factor in determining incentive compensation for certain employees. These non-GAAP measures facilitate company-to-company operating comparisons by excluding items that we believe are not part of our core operating performance. Adjusted net income is defined as GAAP net income (loss) from continuing operations attributable to Cubic excluding amortization of purchased intangibles, restructuring costs, acquisition-related expenses, strategic and IT system resource planning expenses, gains or losses on the disposal of fixed assets, other non-operating expense (income), tax impacts related to acquisitions, and the impact of U.S. Tax Reform. Adjusted EPS is defined as Adjusted Net Income on a per share basis using the weighted average diluted shares outstanding. Adjusted EBITDA is defined as GAAP net income (loss) from continuing operations attributable to Cubic before interest expense (income), income taxes, depreciation and amortization, other non-operating expense (income), acquisition-related expenses, strategic and IT system resource planning expenses, restructuring costs, and gains or losses on the disposal of fixed assets. Strategic and IT system resource planning expenses consists of expenses incurred in the development of our ERP system and the redesign of our supply chain which include internal labor costs and external costs of materials and services that do not qualify for capitalization. Acquisition-related expenses include business acquisition expenses including retention bonus expenses, due diligence and consulting costs incurred in connection with the acquisitions, and expenses recognized related to the change in the fair value of contingent consideration for acquisitions.
These non-GAAP measures are not measurements of financial performance under GAAP and should not be considered as measures of discretionary cash available to the company or as alternatives to net income as a measure of performance. In addition, other companies may define these non-GAAP measures differently and, as a result, our non-GAAP measures may not be directly comparable to the non-GAAP measures of other companies. Furthermore, non-GAAP financial measures have limitations as an analytical tool and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP. Investors are advised to carefully review our GAAP financial results that are disclosed in our SEC filings.
We reconcile Adjusted EBITDA and Adjusted Net Income to GAAP net income, which we consider to be the most directly comparable GAAP financial measure. We reconcile Adjusted EPS to GAAP EPS, which we consider to be the most directly comparable GAAP financial measure. The following tables reconcile these non-GAAP measures to their most directly comparable GAAP financial measure.
43
Adjusted Net Income Reconciliation
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
|
| 2019 |
| 2018 | | ||
($ In Millions, Except Per Share Data) | | | | | | | |
GAAP EPS | | $ | (0.64) | | $ | (0.23) | |
GAAP Net income (loss) from continuing operations attributable to Cubic | | $ | (20.0) | | $ | (6.6) | |
Noncontrolling interest in the gain (loss) of the VIE | | | 4.0 | | | (4.0) | |
Amortization of purchased intangibles | | | 10.1 | | | 10.6 | |
Gain on sale of fixed assets | | | (0.2) | | | — | |
Restructuring costs | | | 1.6 | | | 2.0 | |
Acquisition-related expenses (gains), excluding amortization | | | (0.7) | | | 2.5 | |
Strategic and IT system resource planning expenses | | | 1.1 | | | 1.6 | |
Other non-operating expense (income), net | | | 0.1 | | | 4.8 | |
Noncontrolling interest in Adjusted Net Income of VIE | | | (1.2) | | | (1.5) | |
Tax impact related to acquisitions1 | | | — | | | (0.3) | |
Tax impact related to non-GAAP adjustments2 | | | 1.5 | | | — | |
Adjusted net income (loss) | | $ | (3.7) | | $ | 9.1 | |
Adjusted EPS | | $ | (0.12) | | $ | 0.32 | |
| | | | | | | |
Weighted Average Diluted Shares Outstanding (in thousands) | | | 31,273 | | | 28,492 | |
1 Represents the tax accounting impact of significant discrete items recorded at the time of acquisition.
2 The tax effect of the non-GAAP adjustments is generally based on the statutory tax rate of the jurisdiction of the event.
44
Adjusted EBITDA Reconciliation
| | | | | | | |
| | Three Months Ended | | ||||
($ In Millions) | | December 31, | | ||||
Cubic Transportation Systems | | 2019 |
| 2018 | | ||
Sales | | $ | 188.6 | | $ | 181.8 | |
Operating income | | $ | 14.3 | | $ | 11.0 | |
Depreciation and amortization | | | 7.1 | | | 7.7 | |
Noncontrolling interest in income of VIE | | | (0.9) | | | (1.5) | |
Acquisition-related expenses, excluding amortization | | | 1.3 | | | 1.8 | |
Restructuring costs | | | 0.4 | | | 0.4 | |
Adjusted EBITDA | | $ | 22.2 | | $ | 19.4 | |
Adjusted EBITDA margin | | | 11.8% | | | 10.7% | |
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
Cubic Mission Solutions | | 2019 |
| 2018 | | ||
Sales | | $ | 58.7 | | $ | 46.4 | |
Operating loss | | $ | (14.9) | | $ | (4.9) | |
Depreciation and amortization | | | 7.5 | | | 5.4 | |
Acquisition-related expenses (gains), excluding amortization | | | (1.9) | | | 0.2 | |
Adjusted EBITDA | | $ | (9.3) | | $ | 0.7 | |
Adjusted EBITDA margin | | | (15.8%) | | | 1.5% | |
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
Cubic Global Defense Systems | | 2019 |
| 2018 | | ||
Sales | | $ | 81.5 | | $ | 77.1 | |
Operating income | | $ | 6.3 | | $ | 2.9 | |
Depreciation and amortization | | | 1.7 | | | 2.2 | |
Acquisition-related expenses (gains), excluding amortization | | | (0.3) | | | 0.5 | |
Gain on sale of fixed assets | | | (0.2) | | | — | |
Restructuring costs | | | — | | | 0.1 | |
Adjusted EBITDA | | $ | 7.5 | | $ | 5.7 | |
Adjusted EBITDA margin | | | 9.2% | | | 7.4% | |
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
Cubic Consolidated | | 2019 |
| 2018 | | ||
Sales | | $ | 328.8 | | $ | 305.3 | |
Net loss from continuing operations attributable to Cubic | | $ | (20.0) | | $ | (6.6) | |
Noncontrolling interest in net income (loss) of VIE | | | 4.0 | | | (4.0) | |
Provision for income taxes | | | 6.2 | | | 2.5 | |
Interest expense, net | | | 3.1 | | | 2.8 | |
Other non-operating expense (income), net | | | 0.1 | | | 4.8 | |
Operating loss | | $ | (6.5) | | $ | (0.6) | |
Depreciation and amortization | | | 17.0 | | | 16.0 | |
Noncontrolling interest in EBITDA of VIE | | | (0.9) | | | (1.5) | |
Acquisition-related expenses (gains), excluding amortization | | | (0.7) | | | 2.5 | |
Strategic and IT system resource planning expenses | | | 1.1 | | | 1.6 | |
(Gain) loss on sale of fixed assets | | | (0.2) | | | — | |
Restructuring costs | | | 1.6 | | | 2.0 | |
Adjusted EBITDA | | $ | 11.4 | | $ | 20.0 | |
Adjusted EBITDA margin | | | 3.5% | | | 6.6% | |
45
Liquidity and Capital Resources
Operating activities used cash of $61.2$47.6 million infor the first quarter of fiscal 20192020 primarily due to timing of cash flows on CTS design and build contracts, inventory builds for upcoming scheduled deliveries, as well as paymentpayments to vendors and contractors for goods and services received related to our significant work on customer contracts in the fourth quarter of certain scheduled annual expenditures including annual employee bonuses.fiscal 2019. As further described below, our operating cash flows have been significantly impacted by our consolidation of a VIE.
Investing activities for the first quarter of fiscal 20192020 included $239.2capital expenditures of $11.8 million as well as $5.5 million of cash paidproceeds received related to the acquisitionsale of Trafficware in our CTS segment, and $8.0 million of payments of holdback amounts madetrade receivables to the former owners of DTECH. In addition,banks which are required to be classified 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 capitalizedinvesting activities under GAAP, 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 $1.3 million in the first quarter of fiscal 2019. Of this amount, $0.8 million was recognized as expense and is reflected in cash flows used in operations, while $0.5 million was capitalized and is included in purchases of property, plant and equipment in investing cash flows.further described below.
Financing activities for the three-month period ended December 31, 2018 included2019 consisted primarily of net short-term borrowings of $64.5 million and $215.8 million of net proceeds$31.0 million. Also, as further described below, because we consolidate Boston AFC 2.0 OpCo. LLC (OpCo) into Cubic’s financial statements, any payments from OpCo to Cubic are excluded from our underwritten public offeringcash flows provided by operating activities in our Consolidated Statements 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,Cash Flows, and the remainder for general corporate purposes. In addition, we also used $3.4 million for the repurchase of common stockcash received by OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities in our stock-based compensation plan. Consolidated Statements of Cash Flows. Payments that we received from OpCo that were not included in cash provided by operating activities totaled $20.1 million in the first quarter of fiscal 2020 and have totaled a cumulative $92.7 million since the inception of our contract with OpCo in March 2018.
In March 2018, CTSCubic 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
46
Transit Authority (MBTA) for the financing, development, and operation of a next-generation fare payment system in Boston (the MBTA Contract). HoldCo. is 90% owned by John Laing and 10% owned by CTS. Collectively, HoldCo. and OpCo. are referred to as the P3 Venture. Based on our assessment under ASC 810, we have concluded that OpCo. and HoldCo. are VIE’s and we are the primary beneficiary of both VIE’s. Consequently, weWe have consolidated theOpCo into Cubic’s financial statements of the P3 Venture within Cubic’s consolidated financial statements. As such, the cash flows of the P3 Venture are reflected in 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.
The MBTA Contract consists of a design and build phase of approximately 3three years and an operate and maintain periodphase 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 contractContract over the ten yearten-year operate and maintain phase. All of OpCo.’sOpCo’s contractual responsibilities regarding the design and development and the operation and maintenance of the fare system have been subcontracted to CTSCubic by OpCo. CTSCubic will receive fixed payments of $427.6 million, adjusted for incremental transaction-based fees, inflation, and performance penalties under its subcontract with OpCo.
In December 2019, Cubic, MBTA, and OpCo entered into a preliminary change order to modify certain aspects of the MBTA Contract, such as extending the design and build phase to 2024, adding new functionality to the next-generation fare payment system, and increasing the scope of the operate and maintain phase. As part of the preliminary change order, MBTA will make payments of up to $30.0 million to Cubic for work performed under the change order while the terms and conditions are finalized. Full execution and financial close of the change order are expected by April 2020.
Upon creation of the P3 Venture, John Laing made a loan to HoldCo. of $24.3 million in the form of 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 issued a letter of credit for $2.7 million to HoldCo. in accordance with CTS’s equity funding responsibilities. HoldCo. is able to draw on the CTS letter of credit in certain liquidity instances, but no amounts have been drawn on this letter of credit as of December 31, 2018.
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 throughmillion; 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. At December 31, 2019, the outstanding balance on the long-term debt facility was $83.0 million, which is presented net of unamortized deferred financing costs of $8.8 million. As noted above, OpCo’s borrowings are reflected as cash provided by financing activities in our Consolidated Statements of Cash Flows.
The OpCo Credit Agreement contains a number of covenants which require that OpCo and Cubic maintain progress on the delivery of the MBTA Contract within a specified timeline and budget and provide regular reporting on such progress. The OpCo Credit Agreement also contains a number of events of default including, but not limited to, the delivery of a customized fare collection system to MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in OpCo, and Cubic via its subcontract with OpCo, incurring penalties due to the lenders.
46
A change in exchange rates between foreign currencies, primarily between the Australian dollar and the U.S. dollar and between the British Pound and the U.S. dollar, resulted in a decreasean increase of $2.0$4.0 million to our cash balance as of December 31, 20182019 compared to September 30, 2018.2019.
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 in March 2025. In addition, pursuant to the agreement, in July 2015, we issued an additional $25.0 million of senior unsecured notes bearing interest at a rate of 3.70% and 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 the term notes described above may be adjusted upwards by up to 0.75% should our leverage ratio exceed certain levels.
We have a committed revolving credit agreement with a group of financial institutions in the amount of $400.0$800.0 million which expiresis scheduled to expire in August 2021 (RevolvingApril 2024 (the Revolving Credit Agreement). Debt issuance and modification costsUnder the terms of $2.3 million and $1.3 million were incurred in connection with February 2, 2016 and August 11, 2016 amendments to the Revolving Credit Agreement, respectively. Costs incurredwe may elect that the debts comprising each borrowing bear interest generally at a rate equal to (i) London Interbank Offer Rate (LIBOR) based upon tenor plus a margin that fluctuates between 1.00% and 2.00%, as determined by Cubic’s Leverage Ratio (as defined in connection with establishment of and amendments to the Revolving Credit Agreement are recordedAgreement) as set forth in other assets on our Condensed Consolidated Balance Sheets,Cubic’s most recently delivered compliance certificate or (ii) the Alternate Base Rate (defined as a rate equal to the highest of (a) the Prime Rate (b) the NYFRB rate plus 0.50%, and are being amortized(c) the Adjusted LIBOR Rate plus 1.00%), plus a margin that fluctuates between 0.00% and 1.00%, as interest expense using the effective interest method over the stated term of the Revolving Credit Agreement. At December 31, 2018, our total debt issuance costs have an unamortized balance of $1.7 million.determined by Cubic’s Leverage Ratio as set forth in its most recently delivered compliance certificate. The available line of credit is reduced by any letters of credit issued under the Revolving Credit Agreement. As of December 31, 2018,2019, there were $64.5$226.5 million of borrowings under this agreement and there were letters of credit outstanding totaling $38.4$94.3 million, which reduce the
47
available line of credit to $297.1$479.2 million. The $38.4
As of December 31, 2019, we had letters of credit and bank guarantees outstanding totaling $101.7 million, which includes the $94.3 million of letters of credit on the Revolving Credit Agreement described above and $7.4 million of letters of credit issued under other facilities. The total of $101.7 million of letters of credit and bank guarantees includes both$97.2 million that guarantees either our performance or customer advances under certain contracts and financial letters of credit and performance guarantees.of $4.5 million which primarily guarantee our payment of certain self-insured liabilities.
Our Revolving Credit Agreement and note purchase and private shelf agreement each contain a number of customary covenants, including requirements for usCubic to maintain certain interest coverage and leverage ratios and restrictions on ourCubic’s and certain of ourits 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 KingdomU.K. for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United KingdomKingdom. The balance in the account as of December 31, 20182019 was $17.9$22.5 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.
In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We have entered intodo not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Consolidated Balance Sheet in any period presented. During the first quarter of fiscal 2020, we sold $10.1 million of outstanding trade receivables to financial institutions. The cash received for the sale of these trade receivables is included in cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. Also, during the three months ended December 31, 2019, we received $5.5 million related to withheld proceeds from receivables we sold as of September 30, 2019, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.
Our financial condition remains strong with working capital of $190.4 million and a short-term borrowing arrangementcurrent ratio of 1.4 to 1 at December 31, 2019. We expect that for our current operations that cash on hand, cash flows from operations, and our unused lines of credit will be adequate to meet our liquidity requirements for the foreseeable future. Our cash is invested primarily in highly liquid bank deposits and government instruments in the United Kingdom inU.S., 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.
As of December 31, 2018, virtually all of the of the $103.5 million of our cash and cash equivalents, including restricted cash, was held by our foreign subsidiaries, primarily in the United Kingdom,U.K., New Zealand and Australia.
Subsequent to the enactment47
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 million and a current ratio of 2.1 to 1 at December 31, 2018. 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
48
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 of 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 thereThere 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, 2018.2019.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This report, including the documents incorporated by reference herein, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by such Act. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial and/or operating performance, including those concerning new programs and growth in the markets in which we do business, increases in demand for our products and for fully integrated systems, retention of existing contracts and receipt of new contracts, the development of new products, systems and services, expansion of our automated payment and fare collection systems and services, maintenance of long-term relationships with our existing customers, expansion of our service offerings and customer base for services, maintenance of a diversified business mix, expansion of our international footprint, strategic acquisitions, U.S. and foreign government funding, supplies of raw materials and purchased parts, cash needs, financial condition, liquidity, prospects, and the trends that may affect us or the industries in which we operate, are not historical and may be forward-looking.
These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the negatives of these words or phrases. These forward-looking statements involve risks, estimates, assumptions and uncertainties, including those discussed in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2018,2019 and throughout this report that could cause actual results to differ materially from those expressed in these statements.
Such risks, estimates, assumptions and uncertainties include, among others:
|
|
| our dependence on U.S. and foreign government contracts; |
48
| delays in approving U.S. and foreign government budgets and cuts in U.S. and foreign government defense expenditures; |
| the ability of certain government agencies to unilaterally terminate or modify our contracts with them; |
| the effects of potential sequestration on our contracts; |
| our assumptions covering behavior by public transit authorities; |
| our ability to successfully integrate new companies into our business and to properly assess the effects of such integration on our financial condition; |
| the U.S. government’s increased emphasis on awarding contracts to small businesses, and our ability to retain existing contracts or win new contracts under competitive bidding processes; |
| negative audits by the U.S. government; |
| the effects of politics and economic conditions on negotiations and business dealings in the various countries in which we do business or intend to do business; |
| competition and technology changes in the defense and transportation industries; |
|
|
| our ability to accurately estimate the time and resources necessary to satisfy obligations under our contracts; |
49
| the effect of adverse regulatory changes on our ability to sell products and services; |
| our ability to identify, attract and retain qualified employees; |
| our failure to properly implement our enterprise resource planning system; |
| unforeseen problems with the implementation and maintenance of our information systems; |
| business disruptions due to cyber security threats, physical threats, terrorist acts, acts of nature and public health crises; |
| our involvement in litigation, including litigation related to patents, proprietary rights and employee misconduct; |
| our reliance on subcontractors and on a limited number of third parties to manufacture and supply our products; |
| our ability to comply with our development contracts and to successfully develop, introduce and sell new products, systems and services in current and future markets; |
| defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems; |
| changes in U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and |
| other factors discussed elsewhere in this report. |
Because the risks, estimates, assumptions and uncertainties referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate
49
results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at December 31, 20182019 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, 2018.2019.
ITEM 4 - CONTROLS AND PROCEDURES
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2018.2019. 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.
50
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 amended2016-02, Leases (commonly referred to as ASC 606)842). These changes included the development of policies and procedures, training, ongoing contract review requirements, internal management reports, controls related to information systems, and disclosures. There have not been any other significant changes in our internal control over financial reporting during the quarter ended December 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
5150
PART II - OTHER INFORMATION
We consider all current legal matters to be ordinary proceedings incidental to our business. We believe the outcome of these proceedings will not have a materially adverse effect on our financial position, results of operations, or cash flows.
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 as set forth below.2019.
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 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. The cumulative effect of applying the standard was an increase of $24.5 million to shareholders’ equity as of October 1, 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.
52
(a) The following exhibits are included herein:
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.
|
---|