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CUB Cubic

Filed: 8 Feb 21, 11:56am

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2020

or

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

For the transition period from __________________________________ to __________________________________          

Commission File Number: 001-08931

CUBIC CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

95-1678055

(State or other jurisdiction of incorporation)

(IRS Employer Identification No.)

9333 Balboa Avenue

92123

San Diego, California

(Zip Code)

(Address of principal executive offices)

(858277-6780

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

   

Trading Symbol(s)

   

Name of each exchange on which registered

Common Stock, no par value

CUB

New York Stock Exchange

Preferred Stock Purchase Rights

New York Stock Exchange

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of January 21, 2021, there were 31,834,085 shares of the registrant’s common stock, no par value, issued and outstanding (after deducting 8,945,300 shares held as treasury stock).

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

Three Months Ended

 

December 31,

    

2020

    

2019

 

Net sales:

Products

$

181,489

$

200,604

Services

 

137,305

 

128,235

 

318,794

 

328,839

Costs and expenses:

Products

 

138,019

 

166,843

Services

 

83,430

 

82,648

Selling, general and administrative expenses

 

63,660

 

65,915

Research and development

 

12,146

 

8,422

Amortization of purchased intangibles

 

16,107

 

10,089

Gain on sale of property, plant and equipment

 

 

(170)

Restructuring costs

 

4,135

 

1,575

 

317,497

 

335,322

Operating income (loss)

 

1,297

 

(6,483)

Other income (expenses):

Interest and dividend income

 

1,789

 

2,218

Interest expense

 

(8,171)

 

(5,363)

Other income (expense), net

 

1,296

 

(127)

Loss from continuing operations before income taxes

 

(3,789)

 

(9,755)

Income tax provision

 

3,489

 

6,246

Loss from continuing operations

(7,278)

(16,001)

Net loss from discontinued operations

 

 

(584)

Net loss

(7,278)

(16,585)

Less noncontrolling interest in net income of VIE

 

5,717

 

3,990

Net loss attributable to Cubic

$

(12,995)

$

(20,575)

Amounts attributable to Cubic:

Net loss from continuing operations

$

(12,995)

$

(19,991)

Net loss from discontinued operations

 

 

(584)

Net loss attributable to Cubic

$

(12,995)

$

(20,575)

Net loss per share:

Basic

Continuing operations attributable to Cubic

$

(0.41)

$

(0.64)

Discontinued operations

$

$

(0.02)

Basic earnings per share attributable to Cubic

$

(0.41)

$

(0.66)

Diluted

Continuing operations attributable to Cubic

$

(0.41)

$

(0.64)

Discontinued operations

$

$

(0.02)

Diluted earnings per share attributable to Cubic

$

(0.41)

$

(0.66)

Weighted average shares used in per share calculations:

Basic

 

31,562

 

31,273

Diluted

31,562

31,273

See Notes to Condensed Consolidated Financial Statements.

3

CUBIC CORPORATION

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(amounts in thousands)

Three Months Ended

 

December 31,

    

2020

    

2019

 

Net loss

$

(7,278)

$

(16,585)

Other comprehensive income (loss):

Foreign currency translation

 

11,537

 

10,480

Change in unrealized gains/losses from cash flow hedges:

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

(45)

(1,185)

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

(185)

49

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

(230)

(1,136)

Total other comprehensive income

 

11,307

 

9,344

Total comprehensive income (loss)

4,029

(7,241)

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

5,717

3,990

Comprehensive loss attributable to Cubic, net of tax

$

(1,688)

$

(11,231)

See Notes to Condensed Consolidated Financial Statements.

4

CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands)

December 31,

September 30,

 

    

2020

    

2020

 

ASSETS

Current assets:

Cash and cash equivalents

$

112,451

$

128,619

Cash of consolidated VIE

1,337

1,065

Restricted cash

 

29,610

 

25,478

Restricted cash of consolidated VIE

3,822

1,822

Accounts receivable:

Billed

 

98,116

 

161,473

Allowance for doubtful accounts

 

(1,359)

 

(1,498)

 

96,757

 

159,975

Contract assets

 

288,256

 

268,773

Recoverable income taxes

 

17,707

 

17,434

Inventories

 

130,865

 

127,251

Other current assets

 

38,389

 

32,626

Other current assets of consolidated VIE

 

34

 

31

Total current assets

 

719,228

 

763,074

Long-term contracts financing receivables

 

65,738

 

64,642

Long-term contracts financing receivables of consolidated VIE

241,814

221,245

Property, plant and equipment, net

 

165,576

 

166,301

Operating lease right-of-use asset

 

84,646

 

87,167

Deferred income taxes

 

5,599

 

4,790

Goodwill

 

787,741

 

784,882

Purchased intangibles, net

 

194,467

 

210,361

Other assets

 

34,789

 

21,759

Total assets

$

2,299,598

$

2,324,221

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term borrowings

$

207,040

$

215,716

Trade accounts payable

106,410

156,953

Trade accounts payable of consolidated VIE

23

49

Contract liabilities

 

80,429

 

75,546

Accrued compensation and current liabilities

124,233

126,388

Other current liabilities of consolidated VIE

100

85

Income taxes payable

 

1,116

 

799

Current portion of long-term debt

 

11,250

 

11,250

Total current liabilities

 

530,601

 

586,786

Long-term debt

 

428,143

 

430,115

Long-term debt of consolidated VIE

 

187,688

 

163,348

Operating lease liability

 

78,616

 

80,568

Financing lease liability

 

10,386

 

395

Other noncurrent liabilities

 

67,648

 

68,939

Other noncurrent liabilities of consolidated VIE

 

2,638

 

5,890

Shareholders’ equity:

Common stock

297,655

 

295,986

Retained earnings

 

837,477

 

850,472

Accumulated other comprehensive loss

 

(138,296)

 

(149,603)

Treasury stock at cost - 8,945 shares

 

(36,078)

 

(36,078)

Shareholders’ equity related to Cubic

 

960,758

 

960,777

Noncontrolling interest in VIE

 

33,120

 

27,403

Total shareholders’ equity

 

993,878

 

988,180

Total liabilities and shareholders’ equity

$

2,299,598

$

2,324,221

See Notes to Condensed Consolidated Financial Statements.

5

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

Three Months Ended

 

December 31,

    

2020

    

2019

 

Operating Activities:

Net loss

$

(7,278)

$

(16,585)

Net loss from discontinued operations

 

584

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

Depreciation and amortization

 

24,661

 

16,950

Share-based compensation expense

 

4,679

 

4,477

Change in fair value of contingent consideration

(576)

(3,005)

Change in fair value of interest rate swap of consolidated VIE

(3,252)

(4,337)

Deferred income taxes

 

(1,138)

 

993

Other items

3,611

4,295

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

(42,877)

(50,934)

NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS

 

(22,170)

 

(47,562)

NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS

 

 

(44)

NET CASH USED IN OPERATING ACTIVITIES

 

(22,170)

 

(47,606)

Investing Activities:

Purchases of property, plant and equipment

 

(6,664)

 

(11,833)

Receipt of withheld proceeds from sale of trade receivables

 

1,842

 

5,521

NET CASH USED IN INVESTING ACTIVITIES

 

(4,822)

 

(6,312)

Financing Activities:

Proceeds from short-term borrowings

 

81,858

 

157,500

Principal payments on short-term borrowings

 

(90,690)

 

(126,500)

Principal payments on long-term borrowings

 

(1,972)

 

Proceeds from long-term borrowings of consolidated VIE

 

22,534

 

20,186

Principal payments on finance lease liability

 

(18)

 

Proceeds from stock issued under employee stock purchase plan

1,169

Purchase of common stock

(3,010)

(3,621)

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

8,702

 

48,734

Effect of exchange rates on cash

 

8,526

 

4,021

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

(9,764)

 

(1,163)

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

 

156,984

 

95,621

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

$

147,220

$

94,458

Supplemental disclosure of non-cash investing and financing activities:

Withheld proceeds from the sale of trade receivables to be received in fiscal 2021

640

See Notes to Condensed Consolidated Financial Statements.

6

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(amounts in thousands, except per share data)

For the Three Months Ended December 31, 2020

    

    

    

    

    

Accumulated

    

    

    

    

    

    

 

Other

Noncontrolling

Number

 

Common

Retained

Comprehensive

Treasury

Interest in

of Shares

 

Stock

Earnings

Loss

Stock

VIE

Outstanding

 

October 1, 2020

$

295,986

$

850,472

$

(149,603)

$

(36,078)

$

27,403

31,329

Net income (loss)

 

 

(12,995)

 

 

 

5,717

 

Other comprehensive income, net of tax

 

 

 

11,307

 

 

 

Stock issued under equity incentive plans

547

Purchase of common stock

(3,010)

(66)

Share-based compensation

 

4,679

 

 

 

 

 

December 31, 2020

$

297,655

$

837,477

$

(138,296)

$

(36,078)

$

33,120

 

31,810

    

For the Three Months Ended December 31, 2019

 

Accumulated

Other

Noncontrolling

Number

 

Common

Retained

Comprehensive

Treasury

Interest in

of Shares

 

    

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, 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)

Share-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

See Notes to Condensed Consolidated Financial Statements.

7

CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2020

Note 1 — Basis for Presentation

Cubic Corporation (“we,” “us,” the “Company” 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 GAAP for complete financial statements.

In our opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Operating results for the quarter ended December 31, 2020 are not necessarily indicative of the results that may be expected for our fiscal year ending September 30, 2021 (“fiscal 2021”). For further information, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (“fiscal 2020”).

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.

As described in Note 14, we concluded that the combination of our legacy Cubic Mission Solutions (“CMS”) and our legacy Cubic Global Defense (“CGD”) segments into our new Cubic Mission and Performance Solutions (“CMPS”) segment resulted in CMPS becoming a single operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. We adopted ASU 2016-13 on October 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This standard removes the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. Under this updated standard, goodwill impairment will now be the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted ASU 2017-04 on October 1, 2020. The adoption of ASU 2017-04 did not have an impact on our consolidated financial statements and would only have the potential to impact the amount of goodwill impairment recorded in the event that goodwill is determined to be impaired in the future.

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. We adopted ASU 2018-13 on October 1, 2020. The adoption of this standard did not have an impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, Defined Benefit Plans - Disclosure Framework (Topic 715), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement 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. We adopted ASU 2018-14 on October 1, 2020. The adoption of this standard did not have a significant impact on our consolidated financial statements.

8

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract (Subtopic 350-24), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU 2018-15 on October 1, 2020. The adoption of this standard did not have a significant impact on our consolidated financial statements.

Recent Accounting Pronouncements – Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) (“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 ASU are effective for us in our annual period beginning October 1, 2021 and interim periods within that annual period. We are currently evaluating the impact of this standard on our consolidated financial statements.

Note 2 — Acquisitions and Divestitures

Business Acquisitions

Each of the following acquisitions have been treated as a business combination for accounting purposes. The results of operations of each acquired business have been included in our consolidated financial statements since the respective date of each acquisition.

PIXIA Corp.

On June 27, 2019, we paid cash of $50.0 million to purchase 20% of the outstanding shares of PIXIA Corp. (“Pixia”), a provider of high-performance advanced data indexing, warehousing, processing and dissemination software solutions for large volumes of imagery data within traditional or cloud-based architectures. On January 3, 2020, we completed the purchase of the remaining 80% of Pixia’s issued and outstanding shares of capital stock for aggregate consideration consisting of $197.8 million in net cash, resulting in our ownership of all of Pixia’s issued and outstanding shares of capital stock. The acquisition was financed primarily with proceeds from draws on our line of credit.

From June 27, 2019 through January 3, 2020, we accounted for our 20% ownership of Pixia using the equity method of accounting. Upon completion of the acquisition of the remaining 80% ownership interest, we began consolidating Pixia into our financial statements. The acquisition-date fair value of consideration transferred is $245.2 million and is comprised of cumulative cash paid of $247.8 million, less a $2.0 million dividend received from Pixia and less a $0.6 million loss recognized during the period that we accounted for our 20% ownership of Pixia using the equity method of accounting.

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

Backlog

    

$

42.5

 

Customer relationships

25.5

Developed technology

14.1

Trade name

5.7

Accounts receivable, prepaids and other assets

3.8

Deferred taxes

(17.6)

Other net assets acquired (liabilities assumed)

 

(1.8)

Net identifiable assets acquired

 

72.2

Goodwill

 

173.0

Net assets acquired

$

245.2

The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most appropriate for each type of asset being valued. The trade name valuation used the relief from royalty method, the

9

customer relationships and non-compete agreements valuations used the lost profits 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 a weighted average useful life of approximately four years from the date of acquisition.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Pixia with our existing CMPS business and strengthening our capability of developing and integrating products in our CMPS 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 CMPS segment and is not expected to be deductible for tax purposes.

Delerrok Inc.

In fiscal 2018 and 2019 we invested a total of $8.3 million to purchase 17.5% of the outstanding shares of common stock of Delerrok Inc. (“Delerrok”), a private technology company based in Vista, California, that specializes in electronic fare collection systems for the mid-market. On January 3, 2020, we completed the purchase of the remaining 82.5% of Delerrok’s outstanding shares of common stock for aggregate consideration consisting of $36.8 million, resulting in our ownership of all of Delerrok’s shares of common stock. Prior to January 3, 2020, we accounted for our investment in Delerrok using the cost method of accounting. We began consolidating Delerrok in our financial statements effective January 3, 2020. The acquisition-date fair value of consideration is $45.1 million and is comprised of total cash paid of $43.5 million plus the fair value of contingent consideration of $1.6 million. The acquisition was financed primarily with proceeds from draws on our line of credit.

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

Technology

    

$

14.9

 

Trade name

0.9

Accounts receivable

0.9

Other net assets acquired (liabilities assumed)

 

(0.3)

Deferred tax liability

(1.7)

Net identifiable assets acquired

 

14.7

Goodwill

 

30.4

Net assets acquired

$

45.1

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 ten years from the date of acquisition.

 

The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations of Delerrok 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.

Operating Results

10

The sales and results of operations from Delerrok and Pixia included in our operating results were as follows (in millions):

Three Months Ended

December 31, 2020

Delerrok

Pixia

Sales

$

0.3

$

2.3

Operating loss

(1.1)

(8.0)

Net loss after taxes

 

(1.1)

(8.0)

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

Three Months Ended

December 31, 2020

Delerrok

Pixia

Amortization

$

0.4

$

7.2

Acquisition-related expenses

0.4

0.5

Gain from changes in fair value of contingent consideration

 

(0.9)

The estimated amortization expense related to the intangible assets recorded in connection with our acquisitions are as follows (in millions):

Year Ending September 30,

    

Delerrok

Pixia

 

2021

$

1.7

$

28.7

2022

 

1.6

12.7

2023

 

1.6

7.3

2024

 

1.6

7.3

2025

 

1.6

7.3

Thereafter

6.4

3.2

Pro Forma Information

The following unaudited pro forma information presents our consolidated results of operations as if Pixia and Delerrok had been included in our consolidated results since October 1, 2019 (in millions):

Three Months Ended

 

December 31,

 

2020

    

2019

 

Net sales

$

318.8

$

333.1

Net loss

$

(13.0)

$

(28.8)

The pro forma information includes adjustments to give effect to events that are directly attributable to the acquisitions and have a continuing impact on our operations including the amortization of purchased intangibles. NaN adjustments were made for transaction expenses, other items that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial information is not necessarily indicative of what the consolidated financial results of our operations would have been had the acquisitions been completed on October 1, 2019, and it does not purport to project our future operating results.

11

Goodwill

Changes in goodwill for the three months ended December 31, 2020 were as follows for each of our reporting units (in thousands):

    

    

    

 

Cubic Transportation

Cubic Mission

 

Systems

Performance Solutions

Total

 

Net balances at October 1, 2020

$

287,668

$

497,214

$

784,882

Acquisitions

(260)

(260)

Foreign currency exchange rate changes

 

2,229

 

890

 

3,119

Net balances at December 31, 2020

$

289,637

$

498,104

$

787,741

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.

We complete our annual goodwill impairment test each year as of July 1 separately for each of our reporting units.

For our fiscal 2020 impairment test we concluded there was 0 impairment of goodwill and in the first quarter of fiscal 2021 we concluded that no circumstances were present that required an interim impairment test.

Note 3 – Variable Interest Entities

In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”), we assess our partnerships and joint ventures at inception, and when there are changes in relevant factors, to determine if they are a variable interest entity (a “VIE”). We consider a partnership or joint venture to be 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, or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity.

We continually assess 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 that could potentially be significant to the VIE. We consider the VIE design, ownership and voting structure, contractual relationships, distribution of profits and losses, risks, responsibilities, and indebtedness in determining if we are the primary beneficiary.

In March 2018, Cubic and John Laing, an unaffiliated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo’s created a wholly owned subsidiary, Boston AFC 2.0 OpCo. LLC (“Boston OpCo”), 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, Massachusetts (the “Original MBTA Contract”). Boston HoldCo is 90% owned by John Laing and 10% owned by Cubic. Collectively, Boston HoldCo and Boston OpCo are referred to as the “P3 Venture”. Based on our assessment under ASC 810, we concluded that Boston OpCo and Boston HoldCo are VIEs and that we are the primary beneficiary of Boston OpCo. Consequently, we have consolidated the financial statements of Boston OpCo. We have concluded that we are not the primary beneficiary of Boston HoldCo, and thus we have not consolidated the financial statements of Boston HoldCo. In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”), which modified certain provisions of the Original MBTA Contract

The Amended MBTA Contract consists of a design and build phase of approximately four years and an operate and maintain phase of approximately twelve years. The design and build phase is planned to be completed in 2024 and the initial operate and maintain phase is expected to commence in December 2021, with full service commencement spanning from 2024 through 2033. Under the Amended MBTA Contract, MBTA will make payments to Boston OpCo consisting of fixed payments of $43.5 million during the design and build phase, fixed payments of $175.8 million at the

12

full service commencement date, fixed payments of $618.0 million during the full service operate and maintain phase, variable payments for incremental transaction-based fees and inflation indexed payments during the operate and maintain phase, and payment adjustments for any performance penalties incurred by Boston OpCo during the project.

Boston OpCo subcontracted all of its contractual responsibilities regarding the design and build and the operation and maintenance of the fare system under the Amended MBTA Contract to Cubic. Under its subcontract with Boston OpCo, Cubic will receive fixed payments in the aggregate amount of $596.4 million, adjusted for incremental transaction-based fees, inflation indexed payments, less any performance penalties incurred.

Upon creation of the P3 Venture and upon execution of the Amended MBTA Contract, John Laing made loans to Boston HoldCo totaling $26.2 million in the form of bridge loans that are intended to be converted to equity in the future in accordance with its equity funding responsibilities under the terms of the P3 Venture. Concurrently, Boston HoldCo made corresponding equity contributions to Boston OpCo in the same amounts which are included within equity of noncontrolling interest in the VIE in our consolidated financial statements. Also, we issued a letter of credit for $2.9 million to Boston HoldCo in accordance with our equity funding responsibilities. Boston HoldCo is able to draw on this letter of credit in certain liquidity instances, but 0 amounts have been drawn through December 31, 2020.

In connection with the execution of the Amended MBTA Contract, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the “Boston OpCo Amended Credit Agreement”), which includes 2 long-term debt facilities and a revolving credit facility. Under the Boston OpCo Amended Credit Agreement, the long-term debt facilities allow for draws up to an aggregate of $421.6 million during the design and build phase of the Amended MBTA Contract. The long-term debt facilities, including all interest and fees incurred, are required to be repaid on a fixed monthly schedule commencing once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.0%. Boston OpCo incurred debt issuance and modification costs of $9.2 million during fiscal 2020 in connection with the Boston OpCo Amended Credit Agreement and these fees are being amortized as interest expense using the effective interest method over the term of the long-term debt facilities. Unamortized deferred financing costs are netted against long-term debt and amounted to $17.0 million and $17.2 million at December 31, 2020 and September 30, 2020, respectively. The revolving credit facility allows for draws up to a maximum aggregate amount of $15.8 million during the operate and maintain phase of the Amended MBTA Contract. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries. The fair value of the long-term debt facility approximates its carrying amount.

The Boston OpCo Amended Credit Agreement contains a number of covenants which require that Boston OpCo and Cubic maintain progress on the delivery of the MBTA Amended Agreement within a specified timeline and budget and provide regular reporting on such progress. The Boston OpCo Amended Credit Agreement also contains customary events of default including the delivery of a customized fare collection system to MBTA by a pre-determined date. Failure to meet such delivery date will result in Boston OpCo, and Cubic via our subcontract with Boston OpCo, to incur penalties due to the lenders thereunder.

Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo terminated its existing interest rate swaps and paid termination costs of $34.4 million to the counterparties. Additionally, in connection with the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate the variable interest rate associated with its long-term debt facility. The interest rate swaps contain forward starting notional principal amounts which align with Boston OpCo’s expected draws on its long-term debt facility. Boston OpCo’s interest rate swaps were not designated as effective hedges, and as such unrealized gains (losses) are included in other income (expense), net. At December 31, 2020 and September 30, 2020, the outstanding notional principal amounts on open interest rate swaps were $215.0 million and $194.0 million, respectively. The fair value of Boston OpCo’s interest rate swaps were $2.6 million and $5.9 million at December 31, 2020 and September 30, 2020, respectively, and is recorded as a liability in other noncurrent liabilities in our condensed consolidated balance sheets. As a result of changes in the fair value of its interest rate swaps, Boston OpCo recognized gains of $3.3 million, and $4.3 million for the three months ended December 31, 2020 and 2019, respectively. See Note 7 for a description of the measurement of fair value of derivative financial instruments, including Boston OpCo’s interest rate swaps.

Boston OpCo holds a restricted cash balance which is required by the Amended MBTA Contract to allow for the delivery of future change orders directed by MBTA.

13

The assets and liabilities of Boston OpCo that are included in our condensed consolidated balance sheets are as follows:

December 31,

September 30,

 

    

2020

    

2020

 

(in thousands)

Cash

$

1,337

$

1,065

Restricted cash

3,822

1,822

Other current assets

34

31

Long-term contracts financing receivable

241,814

221,245

Total assets

$

247,007

$

224,163

Trade accounts payable

$

23

$

49

Accrued compensation and other current liabilities

100

85

Due to Cubic

22,674

27,259

Other noncurrent liabilities

2,638

5,890

Long-term debt

187,688

163,348

Total liabilities

$

213,123

$

196,631

Total Cubic equity

764

129

Noncontrolling interests

33,120

27,403

Total liabilities and owners' equity

$

247,007

$

224,163

The assets of Boston OpCo are restricted for its use only and are not available for our general operations. Boston OpCo’s debt is non-recourse to Cubic. Our maximum exposure to loss as a result of our equity interest in the P3 Venture is limited to the $2.9 million outstanding letter of credit, which will be converted to a cash contribution upon completion of the design and build phase of the Amended MBTA Contract.

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

Three Months Ended

 

December 31,

2020

    

2019

Revenue

$

4,021

$

1,245

Operating income

 

3,717

 

972

Other income (expense), net

 

3,252

 

3,071

Interest income

 

1,373

 

1,553

Interest expense

 

(1,989)

 

(1,159)

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 amounts):

14

Three Months Ended

 

December 31,

2020

    

2019

Operating income (loss)

$

1,338

$

(6,168)

Net income (loss) from continuing operations

 

1,059

 

(5,762)

Net income (loss) from continuing operations attributable to Cubic

970

(5,762)

Diluted income (loss) per share attributable to Cubic

 

0.03

(0.18)

Backlog: Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. It is comprised of both funded backlog (firm orders for which funding is authorized and appropriated) and unfunded backlog. Unexercised contract options and indefinite delivery indefinite quantity (“IDIQ”) contracts are not included in backlog until the time the option or IDIQ task order is exercised or awarded. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As of December 31, 2020, our ending backlog was $3.681 billion, compared to $3.667 billion at September 30, 2020. We expect to recognize approximately 30% of our December 31, 2020 backlog over the next 12 months as revenue, and approximately 45% over the next 24 months, with the remainder recognized thereafter.

Accounts Receivable:

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

December 31,

September 30,

    

2020

    

2020

 

Accounts receivable

Billed

$

98,116

$

161,473

Allowance for doubtful accounts

(1,359)

(1,498)

Net accounts receivable

$

96,757

$

159,975

Amounts billed include $26.4 million and $82.2 million due on U.S. federal government contracts at December 31, 2020 and September 30, 2020, respectively.

In our normal course of business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As of December 31, 2020 and September 30, 2020, we sold $6.4 million and $18.4 million, respectively, of outstanding trade receivables to financial institutions. During the three months ended December 31, 2020, we received $1.8 million related to withheld proceeds from receivables we sold as of September 30, 2020, which is included in cash provided by investing activities in our Condensed Consolidated Statements of Cash Flows.

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

December 31,

September 30,

 

    

2020

    

2020

 

 

Contract assets

$

288,256

$

268,773

Contract liabilities

$

80,429

$

75,546

Contract assets increased $19.5 million during the three months ended December 31, 2020, due to revenue recognized in excess of billings 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, 2020.

Contract liabilities increased $4.9 million during the three months ended December 31, 2020, due to payments received in excess of revenue recognized on these performance obligations. During the three months ended December 31, 2020, we recognized $26.7 million of our contract liabilities at September 30, 2020 as revenue. We expect our contract liabilities to be recognized as revenue over the next 24 months.

Note 5 — Net Income (Loss) Per Share

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

In periods with a net income from continuing operations attributable to Cubic, diluted EPS is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of dilutive RSUs. Dilutive RSUs are calculated based on the average share price for each fiscal period using the treasury stock method. For RSUs with performance 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.

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

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

Three Months Ended

 

December 31,

    

2020

    

2019

 

Weighted average shares - basic

 

31,562

 

31,273

Effect of dilutive securities

 

 

Weighted average shares - diluted

 

31,562

 

31,273

Number of anti-dilutive securities

1,226

1,112

Note 6 — Balance Sheet Details

Restricted Cash

Cash and cash equivalents excluded $33.4 million and $27.3 million of restricted cash at December 31, 2020 and

16

September 30, 2020, respectively, which for purposes of our consolidated statements of cash flows, is included in cash, cash equivalents and restricted cash.

Inventories

Inventories consist of the following (in thousands):

December 31,

September 30,

    

2020

    

2020

 

Finished products

$

18,503

$

14,838

Work in process and inventoried costs under long-term contracts

69,347

73,076

Materials and purchased parts

 

43,015

 

39,337

Net inventories

$

130,865

$

127,251

At December 31, 2020, work in process and inventoried costs under long-term contracts included approximately $6.6 million in costs incurred outside the scope of work or in advance of a contract award compared to $5.3 million at September 30, 2020. We believe it is probable that we will recover the costs inventoried at December 31, 2020, plus a profit margin, under contract change orders or awards within the next year.

Property, Plant and Equipment

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

December 31,

September 30,

    

2020

    

2020

Land and land improvements

$

7,200

$

7,423

Buildings and improvements

 

50,166

 

49,716

Machinery and other equipment

 

145,176

 

132,962

Software

124,753

121,890

Leasehold improvements

 

23,381

 

22,295

Construction and internal-use software development in progress

13,853

21,409

Accumulated depreciation and amortization

 

(198,953)

 

(189,394)

$

165,576

$

166,301

Deferred Compensation Plan

We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The liabilities associated with the non-qualified deferred compensation plan are included in other noncurrent liabilities in our Condensed Consolidated Balance Sheets and totaled $10.1 million at December 31, 2020 and $9.6 million at September 30, 2020.

In the past we have made contributions to a rabbi trust to provide a source of funds for satisfying a portion of these deferred compensation liabilities. The total carrying value of the assets set aside to fund deferred compensation liabilities totaled $7.2 million at December 31, 2020 and $6.8 million at September 30, 2020 and were comprised entirely of life insurance contracts. The carrying value of the life insurance contracts is based on the cash surrender value of the policies. Changes in the carrying value of the deferred compensation liability, and changes in the carrying value of the assets held in the rabbi trust are reflected in our Condensed Consolidated Statements of Operations.

Note 7 — Fair Value of Financial Instruments

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

Level 1 - Quoted prices for identical instruments in active markets.

17

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 Condensed Consolidated Balance Sheets on a recurring basis (in thousands):

December 31, 2020

September 30, 2020

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Level 1

    

Level 2

    

Level 3

    

Total

 

Assets

Current derivative assets

$

$

1,443

$

$

1,443

$

$

1,398

$

$

1,398

Noncurrent derivative assets

 

 

770

 

 

770

 

 

222

 

 

222

Total assets measured at fair value

$

$

2,213

$

$

2,213

$

$

1,620

$

$

1,620

Liabilities

Current derivative liabilities

6,055

6,055

 

4,557

 

4,557

Noncurrent derivative liabilities

 

 

14,013

 

 

14,013

 

 

14,070

 

 

14,070

Contingent consideration to seller of H4 Global

 

 

1,296

 

1,296

 

 

1,148

1,148

Contingent consideration to seller of Deltenna

 

 

 

3,180

 

3,180

 

 

 

3,004

 

3,004

Contingent consideration to seller of Shield

 

 

 

5,566

 

5,566

 

 

 

5,566

 

5,566

Contingent consideration to seller of Delerrok

 

 

900

900

Total liabilities measured at fair value

$

$

20,068

$

10,042

$

30,110

$

$

18,627

$

10,618

$

29,245

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

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

At December 31, 2020, we have the following remaining contingent consideration arrangements with the sellers of companies which we acquired:

H4 Global: A payment of $1.3 million was made in January 2021 based on a percentage of the value of H4 contracts entered into from October 1, 2015 through September 30, 2020.

Deltenna: Payments of up to $7.4 million if Deltenna meets certain sales goals from the date of acquisition through September 30, 2022. The fair value of the contingent consideration was estimated using a combination of a probability weighted approach and the real option approach. Under the real option approach, each payment was modeled using long digital options written on the underlying revenue metric. The strike price for each option is the respective revenue as specified in the related agreement, and the spot price is calibrated to the revenue forecast by calculating the present value of the corresponding projected revenues using a risk-adjusted discount rate. The volatility for the underlying revenue metrics was based upon an analysis of comparable public companies and was 52% as of December 31, 2020 and September 30, 2020. The selected discount rate was 10.5% as of December 31, 2020 and September 30, 2020.

Shield: Payments of 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 estimated based on Monte Carlo simulations, which uses a

18

probability distribution of values based on 1 million simulation trials. Key inputs for the simulation include projected revenues, discount rates, risk adjustment factors and volatility. The volatility and revenue risk adjustment factors were determined based on an analysis of publicly traded comparable companies and as of December 31, 2020 and September 30, 2020 were 31% and 16%, respectively. The selected discount rate was based primarily on an analysis of publicly traded comparable companies and was 5.7% at December 31, 2020 and September 30, 2020.

Nuvotronics: Payments of up to $8.0 million if Nuvotronics meets certain gross profit goals for the 12-month periods ending on each of December 31, 2020 and December 31, 2021. The fair value of the contingent consideration was estimated based on Monte Carlo simulations, which uses a probability distribution of values based on 1 million simulation trials. As of December 31, 2020, the fair value of the Nuvotronics contingent consideration was determined to be 0 as its forecasted gross profit amounts were below the payout thresholds.

Delerrok: As of December 31, 2020, the value of the Delerrok contingent consideration was determined to be 0 as its sales amount were below the payout threshold for the measurement period that lapsed on December 31, 2020.

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

As of December 31, 2020, the following table summarizes the change in fair value of our Level 3 contingent consideration liabilities (in thousands):

H4 Global

  

Deltenna

  

Shield

  

Nuvotronics

  

Delerrok

  

Total

Balance as of September 30, 2020

    

$

1,148

$

3,004

$

5,566

$

$

900

$

10,618

 

Total remeasurement (gain) loss recognized in earnings

 

148

 

176

 

 

 

(900)

 

(576)

Balance as of December 31, 2020

$

1,296

$

3,180

$

5,566

$

$

$

10,042

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. The fair value of our variable rate long-term debt approximates its carrying value at December 31, 2020.

In fiscal 2019 and 2020, we invested $5.0 million and $1.2 million, respectively, 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 funds operating loss was $0.1 million for the three-months ended December 31, 2020, and is included in other income (expense), net in our Condensed Consolidated Statements of Operations. Our share of the fund’s operating results was not material for the three-months ended December 31, 2019. Our investment balance is included within other assets in our Condensed Consolidated Statements of Operations and amounted to $5.5 million and $5.6 million as of December 31, 2020 and September 30, 2020, respectively.

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 2021 or fiscal 2020 other than assets and liabilities acquired in business acquisitions described in Note 2 and the RSUs that contain performance and market-based vesting criteria described in Note 11.

Note 8 — Financing Arrangements

On March 27, 2020, we executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $800.0 million to $850.0 million. The commitments under the Credit Facility will mature on March 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between 1.00% and 2.00%. At December 31, 2020, the weighted average interest rate on outstanding borrowings under the Credit Facility was 1.95%. The Credit Facility is unsecured, but it is guaranteed by certain significant domestic subsidiaries of Cubic.

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On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of December 31, 2020 have an interest rate of approximately 2.49% and outstanding notional principal amounts of $500.0 million. See Note 7 for a description of the measurement of fair value of our derivative financial instruments.

Debt issuance and modification costs of $3.4 million were incurred in connection with the execution of the Credit Facility and are classified as a reduction to the related liability on our Condensed Consolidated Balance Sheets and are being amortized as interest expense using the effective interest method over the stated term of the Credit Facility. At December 31, 2020, our total debt issuance costs for our Term Loan and Revolving Line of Credit had an unamortized balance of $5.2 million.

The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of December 31, 2020, there were $441.6 million of borrowings under the Term Loan and $207.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $94.6 million at December 31, 2020, which reduced our available line of credit to $548.4 million. The $94.6 million of letters of credit includes both financial letters of credit and performance guarantees.

As of December 31, 2020, we had letters of credit and bank guarantees outstanding totaling $101.2 million, which includes the $94.6 million of letters of credit issued under the Revolving Line of Credit and $6.6 million of letters of credit issued under other facilities. The $101.2 million of letters of credit and bank guarantees includes $97.5 million that guarantees either our performance or customer advances under certain contracts and $3.7 million of financial letters of credit that primarily guarantees 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 0. We also use surety bonds as an alternative to letters of credit.

We have entered into a short-term borrowing arrangement in the United Kingdom for up to £15.0 million British Pounds (equivalent to approximately $20.5 million at December 31, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At December 31, 2020, 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, 2020 was $29.6 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of December 31, 2020, we were in compliance with all covenants under the Credit Facility.

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 current liabilities in our Condensed Consolidated Balance Sheets amounted to $5.1 million at December 31, 2020 and September 30, 2020.

20

Note 9 — Leases

Our primary involvement with leases is 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 and financing leases expire at various dates through 2032 and 2025, respectively, without taking into consideration available renewal options, and many such leases 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 and our right-of-use assets for financing leases are included in other assets on our Condensed Consolidated Balance Sheets. Our lease liabilities for operating and financing leases are included in other current liabilities for the current portion and separately in operating and financing 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. Our finance lease expense consists of amortization of the right-of-use asset and interest expense. Amortization expense is recognized on a straight-line basis over the lease term and is included in cost of sales and selling, general and administrative expenses in our consolidated statement of operations. Interest expense is calculated using the effective interest method and is included in interest expense in our consolidated statement of operations. We also sublease certain immaterial properties and sublease income is included as a reduction of rental expense.

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

Operating Lease Portfolio

December 31,

September 30,

2020

    

2020

Right-of-use assets

$

84.6

$

87.2

Short-term lease liability

 

15.7

 

16.8

Long-term lease liability

78.6

80.6

Weighted average remaining lease term

 

7.4 years

 

7.6 years

Weighted average discount rate

 

3.0%

 

3.0%

Finance Lease Portfolio

December 31,

September 30,

2020

    

2020

Right-of-use assets

$

13.2

$

0.5

Short-term lease liability

 

2.8

 

0.2

Long-term lease liability

10.4

0.4

Weighted average remaining lease term

 

4.9 years

 

2.4 years

Weighted average discount rate

 

1.75%

 

1.7%

21

Lease Expense

Three Months Ended

 

December 31,

2020

    

2019

Lease Expense

Operating lease expense

$

4.9

$

4.6

Finance lease expense

Amortization of right-of-use asset

0.1

Interest on lease liabilities

Short-term lease expense

0.4

Variable lease expense

0.9

1.1

Total lease expense

$

5.9

$

6.1

Other Information

Three Months Ended

 

December 31,

2020

    

2019

Cash paid related to lease liabilities

Finance lease - cash paid for interest

$

$

Operating lease - cash paid for fixed payments

4.8

4.5

Finance lease - cash paid for finance lease liabilities

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

12.6

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

 

0.2

 

9.6

Maturities of Lease Liabilities

Our future minimum lease commitments of our operating and finance leases on an undiscounted basis, reconciled to the lease liability at December 31, 2020 were as follows (in millions):

Financing

Operating

2021

    

$

2.9

$

12.8

 

2022

2.9

16.3

2023

2.7

14.2

2024

2.7

13.4

2025

2.6

11.1

Thereafter

 

37.9

Total lease payments

13.8

105.7

Less: imputed interest

(0.6)

(11.4)

Present value of lease liabilities

$

13.2

$

94.3

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, a financial institution owns the buildings and we acted as the construction agent. We began leasing the real property for a term of five years upon the completion of the buildings in December 2020, which is reflected in our finance lease right-of-use assets and finance lease liabilities presented above. The terms of these agreements include provisions that require 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, 2020, we were in compliance with all covenants included in these agreements.

22

Note 10 — Pension Plans

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

Three Months Ended

 

December 31,

2020

    

2019

Service cost

$

158

$

165

Interest cost

 

1,333

 

1,531

Expected return on plan assets

 

(2,649)

 

(2,946)

Amortization of actuarial loss

 

1,140

 

1,001

Administrative expenses

 

89

 

86

Net pension cost (benefit)

$

71

$

(163)

Note 11 - Shareholders’ Equity

Long-Term Equity Incentive Plan

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

Each RSU with time-based vesting or performance-based vesting represents a contingent right to receive 1 share of our common stock. Each RSU with performance and market-based vesting represents a contingent right to receive up to 1.25 shares of our common stock. Dividend equivalent rights accrue with respect to the RSUs as dividends are paid on shares of our common stock and vest proportionately with the RSUs to which they relate. Participants receive the full benefit of the underlying common stock upon vesting.

Time-based RSUs granted prior to fiscal 2020 generally vest in 4 equal installments on each of the four October 1 dates following the grant date, subject to the recipient’s continued service with the Company through such vesting date. Time-based RSUs granted in fiscal 2020 and 2021 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 with the Company through such vesting date.

The performance-based RSUs granted to participants vest over three-year performance periods based on our achievement of certain revenue growth targets, earnings growth targets and return on equity targets established by the Compensation Committee of our Board of Directors (the “Compensation Committee”) over the performance periods, subject to the recipient’s continued service with the Company through the end of the respective performance periods. The level at which we perform against scalable targets over the performance periods will determine the percentage of the RSUs that will ultimately vest.

The performance- and market-based RSUs granted to participants vest over three-year performance periods based on our achievement of revenue growth targets and earnings growth targets subject to the recipient’s continued service with the Company through the end of the respective performance periods. For these RSUs, the relative total stock return (“TSR”) for shares of our common stock as compared to the Russell 2000 Index (the “Index”) over the performance period will result in a multiplier for the number of RSUs that will vest. If the TSR performance exceeds the performance of the Index based on a scale established by the Compensation Committee, the multiplier will result in up to an additional 25% of RSUs vesting at the end of the performance period. If the TSR performance is below the performance of the Index based on a scale established by the Compensation Committee, the multiplier would result in a reduction of up to 25% of these RSUs vesting at the end of the performance period. For the performance- and market-based RSUs granted in fiscal 2020 and 2021, if our 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.

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 us with a one-year notice of retirement. For participants who have reached the retirement age criteria, expense is recognized over the adjusted service period.

23

The grant date fair value of each RSU with time-based vesting or performance-based vesting is the fair market value of 1 share of our common stock at the grant date.

The grant date fair value of each RSU with performance and market-based vesting was calculated using a Monte Carlo simulation valuation method. Under this method, the prices of the Index and shares of our common stock were simulated through the end of the performance period. The correlation matrix between shares of our common stock and the Index as well as the corresponding return volatilities were developed based upon an analysis of historical data. The following tables include the assumptions used for the valuation of the RSUs with performance and market-based vesting that were granted during fiscal 2019, 2020 and 2021:

 

    

RSUs granted during fiscal 2021

Valuation Date

 

November 17, 2020

Grant date fair value per RSU

 

$57.71

Performance period begins

 

October 1, 2020

Performance period ends

 

September 30, 2023

Risk-free interest rate

0.2%

Expected volatility

50%

RSUs granted during fiscal 2020

Valuation Date

 

September 17, 2020

Grant date fair value per RSU

 

$41.13

Performance period begins

 

October 1, 2019

Performance period ends

 

September 30, 2022

Risk-free interest rate

0.1%

Expected volatility

52%

At December 31, 2020, the total number of unvested RSUs that are ultimately expected to vest, after consideration of expected forfeitures and estimated vesting of performance-based RSUs, is 456,011 RSUs with time-based vesting, and 400,878 RSUs with performance- and market-based vesting.

24

The following table summarizes our RSU activity:

Unvested RSUs with Time-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value per Share

 

Unvested at September 30, 2020

 

554,423

 

$

58.54

Granted

 

234,899

60.99

Vested

 

(226,934)

58.34

Forfeited

 

(11,147)

59.85

Unvested at December 31, 2020

551,241

$

59.64

Unvested RSUs with Performance-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value per Share

 

Unvested at September 30, 2020

 

137,770

 

$

61.40

Granted

 

 

Vested

 

(110,247)

 

61.40

Forfeited

 

(27,523)

 

61.40

Unvested at December 31, 2020

$

Unvested RSUs with Performance- and Market-Based Vesting

 

    

    

Weighted Average

 

Number of Shares

Grant-Date Fair Value per Share

 

Unvested at September 30, 2020

 

471,496

 

$

51.56

Granted

 

277,250

57.71

Vested

 

 

Forfeited

 

(11,690)

 

50.77

Unvested at December 31, 2020

737,056

$

53.88

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

Three Months Ended

December 31,

2020

2019

Cost of sales

$

601

    

$

539

Selling, general and administrative

 

4,078

 

3,938

$

4,679

$

4,477

As of December 31, 2020, there was $59.3 million of unrecognized compensation expense related to unvested RSUs. Based upon the expected forfeitures and the expected vesting of performance-based RSUs, the aggregate fair value of RSUs expected to ultimately vest is $50.8 million, which is expected to be recognized over a weighted average period of 1.4 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 in each of fiscal 2020 and fiscal 2021. To the extent the actual forfeiture rate is different from what we have estimated, compensation expense related to these awards will be different from our expectations.

Note 12 – Income Taxes

The quarterly forecast of our annual effective tax rate is impacted by numerous factors including income fluctuations by tax jurisdiction throughout the year, the level of intercompany transactions, applicability of new tax regimes and the impact of acquisitions. For the three-month period ended December 31, 2020, we concluded it is more appropriate to determine income tax expense for the period using a blend of the discrete effective tax rate method for U.S. operations and the estimated annual effective tax rate method for foreign operations.

25

The income tax expense recognized on the pre-tax loss from continuing operations for the three months ended December 31, 2020 resulted in tax expense of $3.5 million, or negative 92% effective tax rate, as compared to tax expense of $6.2 million, or negative 64% effective tax rate, for the three month ended December 31, 2019. The variability in tax expense and effective tax rates relates to the difference in jurisdictional mix of earnings and discrete impacts related to current year changes to the existing U.S. deferred tax valuation allowance.

Note 13 — Derivative Instruments and Hedging Activities

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

The following table shows the notional principal amounts of our outstanding derivative instruments as of December 31, 2020 and September 30, 2020 (in thousands):

Notional Principal

 

December 31, 2020

September 30, 2020

Instruments receiving hedge accounting treatment:

Foreign currency forwards

$

118,922

$

92,931

Interest rate swaps

 

595,000

 

595,000

Instruments not receiving hedge accounting treatment:

Foreign currency forwards

$

4,842

$

4,298

Included in the amounts not receiving hedge accounting treatment at December 31, 2020 and September 30, 2020 were foreign currency forwards with notional principal amounts of $4.8 million and $4.3 million, respectively, that have been designed to manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the forwards have approximately offset an equal and opposite amount of gains or losses related to the foreign currency exposure. These foreign currency forward contracts resulted in unrealized gains of $0.8 million for both of the three months ended December 31, 2020 and 2019. Unrealized gains or losses are included in other income (expense), net in our condensed consolidated statements of operations.

We hold pay-fixed/receive-variable interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the lease obligations for our 2 new buildings located on our existing corporate campus. At December 31, 2020 and September 30, 2020, the outstanding notional principal amounts on these interest rate swaps were $95.0 million which align with our expected lease payments. These interest rate swaps were designated as effective cash flow hedges and as such, unrealized gains (losses) are included in accumulated other comprehensive income (loss). As a result of changes in the fair value of the interest rate swaps, unrealized gains were $0.1 million and unrealized losses were $1.4 million for the three months ended December 31, 2020, and 2019, respectively.

In April 2020, we entered into interest rate swaps with a group of financial institutions to mitigate variable interest rate risk associated with the Credit Facility. At December 31, 2020 and September 30, 2020, the interest rate swaps contain outstanding notional principal amounts of $500.0 million and were designated as effective cash flow hedges, 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 $1.0 million for the three months ended December 31, 2020.

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 as of December 31, 2020 and September 30, 2020. 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.

26

We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair values. We did not have any derivative instruments with credit risk-related contingent features that would require us to post collateral as of December 31, 2020 or September 30, 2020.

The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well as their classification in the condensed consolidated balance sheets (in thousands):

Fair Value

 

    

Balance Sheet Location

    

December 31, 2020

    

September 30, 2020

 

Asset derivatives:

Foreign currency forwards

 

Other current assets

$

1,443

$

1,398

Foreign currency forwards

 

Other assets

 

770

 

222

Total

$

2,213

$

1,620

Liability derivatives:

Foreign currency forwards

 

Accrued compensation and current liabilities

$

6,055

$

4,557

Foreign currency forwards

 

Other noncurrent liabilities

 

1,968

 

866

Interest rate swaps

 

Other noncurrent liabilities

 

12,045

 

13,204

Total

$

20,068

$

18,627

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

Three Months Ended

December 31, 2020

December 31, 2019

Gains (losses)

Gains (losses)

Gains (losses)

recognized in

reclassified into

Gains (losses)

reclassified into

Derivative Type

 OCI

earnings

recognized in OCI

earnings

Foreign currency forwards

$

(1,100)

$

255

$

(1,583)

$

(66)

Interest rate swaps

 

1,159

 

 

 

Total

$

59

$

255

$

(1,583)

$

(66)

Foreign currency forwards designated as accounting hedges had realized gains of $0.2 million for the three-months ended December 31, 2020. The amount of realized gains were immaterial for the three-months 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-months ended December 31, 2020 or 2019. 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 $3.3 million, net of income taxes.

27

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. In August 2020, we implemented a plan to realign and combine our legacy CMS and CGD segments into our new CMPS segment. At September 30, 2020, we concluded that CMS and CGD remained separate operating segments based upon factors including the nature of information presented to our chief executive officer and Board of Directors and the consequential level at which certain resource allocations and performance assessments were made. In the first quarter of fiscal 2021, we began providing financial information to our chief executive officer and Board of Directors at the CMPS level, which allowed resource allocation decisions and performance assessments to be made at that level. As such, we concluded that CMPS became an operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.

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 in Note 1. 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,

    

2020

    

2019

Sales:

Cubic Transportation Systems

$

197.1

$

188.6

Cubic Mission and Performance Solutions

 

121.7

 

140.2

Total sales

$

318.8

$

328.8

Operating income (loss):

Cubic Transportation Systems

$

31.7

$

14.3

Cubic Mission and Performance Solutions

 

(16.5)

 

(8.6)

Unallocated corporate expenses

 

(13.9)

 

(12.2)

Total operating income (loss)

$

1.3

$

(6.5)

Depreciation and amortization:

Cubic Transportation Systems

$

7.5

$

7.1

Cubic Mission and Performance Solutions

 

15.1

 

9.2

Corporate

 

2.1

 

0.7

Total depreciation and amortization

$

24.7

$

17.0

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

28

Sales by Geographic Region (in millions):

Three months ended December 31, 2020

    

CTS

    

CMPS

    

Total

United States

$

111.9

$

80.3

$

192.2

United Kingdom

 

47.9

 

8.0

 

55.9

Australia

 

29.1

 

9.6

 

38.7

Far East/Middle East

 

1.0

 

15.8

 

16.8

Other

 

7.2

 

8.0

 

15.2

Total sales

$

197.1

$

121.7

$

318.8

Three months ended December 31, 2019

CTS

    

CMPS

    

Total

United States

$

96.7

$

79.0

$

175.7

United Kingdom

 

47.6

 

4.5

 

52.1

Australia

 

36.4

 

7.8

 

44.2

Far East/Middle East

 

1.3

 

36.7

 

38.0

Other

 

6.6

 

12.2

 

18.8

Total sales

$

188.6

$

140.2

$

328.8

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

Three months ended December 31, 2020

CTS

    

CMPS

    

Total

U.S. Federal Government and State and Local Municipalities

$

107.6

$

79.3

$

186.9

Other

 

89.5

 

42.4

 

131.9

Total sales

$

197.1

$

121.7

$

318.8

Three months ended December 31, 2019

CTS

    

CMPS

    

Total

U.S. Federal Government and State and Local Municipalities

$

93.5

$

82.0

$

175.5

Other

 

95.1

 

58.2

 

153.3

Total sales

$

188.6

$

140.2

$

328.8

29

Sales by Contract Type: The vast majority of our contracts are fixed-price type contracts. Sales included in “Other” contract types represent cost-plus and time-and-material type contracts.

On a fixed-price type contract, we agree to perform the contractual statement of work for a predetermined sales price. Certain of our fixed-price contracts include compensation for bonuses, transactional variable based fees or other similar provisions. On a cost-plus type contract, we are paid our allowable incurred costs plus a profit which can be fixed or variable depending on the applicable contract’s fee arrangement up to funding levels that are predetermined 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, 2020

CTS

    

CMPS

    

Total

Fixed Price

$

194.4

$

101.8

$

296.2

Other

 

2.7

 

19.9

 

22.6

Total sales

$

197.1

$

121.7

$

318.8

Three months ended December 31, 2019

CTS

    

CMPS

    

Total

Fixed Price

$

184.5

$

124.8

$

309.3

Other

 

4.1

 

15.4

 

19.5

Total sales

$

188.6

$

140.2

$

328.8

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, 2020

CTS

    

CMPS

    

Total

Product

$

100.1

$

81.4

$

181.5

Service

 

97.0

 

40.3

 

137.3

Total sales

$

197.1

$

121.7

$

318.8

Three months ended December 31, 2019

CTS

    

CMPS

    

Total

Product

$

93.4

$

107.2

$

200.6

Service

 

95.2

 

33.0

 

128.2

Total sales

$

188.6

$

140.2

$

328.8

30

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, 2020

CTS

    

CMPS

    

Total

Point in Time

$

18.8

$

25.0

$

43.8

Over Time

 

178.3

 

96.7

 

275.0

Total sales

$

197.1

$

121.7

$

318.8

Three months ended December 31, 2019

CTS

    

CMPS

    

Total

Point in Time

$

17.7

$

39.3

$

57.0

Over Time

 

170.9

 

100.9

 

271.8

Total sales

$

188.6

$

140.2

$

328.8

Note 15 — Restructuring Costs

In the fourth quarter of fiscal 2020, we announced our NextCUBIC transformation to restructure the way we work and operate as a business. Part of this initiative included establishing a Transformation Office and appointing a Chief Transformation Officer to identify, vet, plan and implement improvement initiatives across Cubic. Coinciding with this initiative, we also announced the combination of CGD and CMS into CMPS. This combination will help us optimize customer access and presence, leverage key enablers across the combined businesses and realize untapped cross-segment technical synergies to capture organizational efficiencies. The significant portion 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. Other restructuring charges related to headcount reductions initiated to optimize our cost positions. Our NextCUBIC transformation initiatives will continue through fiscal 2021, and our consulting fees that will be incurred in the future are generally contingent upon the achievement of future cost savings, the total expected restructuring costs related to these initiatives cannot currently be estimated.

In the first quarter of fiscal 2021, CMPS also incurred costs related to modifying its go-to market and legal structure in the Middle East. The total cost of these efforts is not expected to be significantly greater than those incurred through December 31, 2020.

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

Three Months Ended

December 31,

    

2020

    

2019

Restructuring costs:

Cubic Transportation Systems

 

$

0.2

0.4

Cubic Mission and Performance Solutions

 

3.1

0.1

Unallocated corporate expenses

 

0.8

1.1

Total restructuring costs

 

$

4.1

 

$

1.6

31

The following table presents a rollforward of our restructuring liability as of December 31, 2020, which is included within accrued compensation and other current liabilities within our condensed consolidated balance sheet (in millions):

Restructuring Liability

Restructuring Liability

    

Employee Separation and Other

Consulting Costs

Balance as of October 1, 2020

    

$

5.2

$

0.8

Accrued costs

 

4.1

 

Cash payments

(5.2)

(0.8)

Balance as of December 31, 2020

$

4.1

$

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 17 — Subsequent Event – Agreement and Plan of Merger

On February 7, 2021, we executed an Agreement and Plan of Merger by and among the Company, Atlas CC Acquisition Corp. and Atlas Merger Sub Inc., pursuant to which the Company will be acquired by Veritas Capital and Evergreen Coast Capital Corporation at a price of $70.00 per outstanding share of common stock of the Company in an all-cash transaction. The transaction is expected to close during the third quarter of fiscal 2021, subject to customary closing conditions, including the receipt of shareholder and regulatory approvals.

 

There can be no assurance that the transaction will close in the timeframe contemplated or on the terms anticipated, if at all.

32

CUBIC CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

December 31, 2020

Overview

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

CTS specializes in the design, development, production, installation, maintenance and operation of automated fare payment, traffic management and enforcement solutions, real-time information systems, and revenue management infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these customers with a comprehensive suite of business process outsourcing 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 systems into a systems integrator and services company focused on the intelligent transportation market.

CMPS provides networked C4ISR capabilities for defense, intelligence, security and commercial missions and is a leading provider of live, virtual, constructive and game-based training solutions for the U.S. and allied forces. CMPS’s core competencies include protected wide-band communications for space, aircraft, unmanned aerial vehicle, and terrestrial applications. It provides rugged internet of things cloud solutions, interoperability gateways, and artificial intelligence/machine learning based command and control, intelligence, surveillance and reconnaissance applications for video situational understanding and offers cloud-based platforms designed to manage and share large amounts of imagery data, wide-area motion imagery and geospatial data. It’s LVC training solutions blend virtual and constructive elements into live training to provide the highest fidelity and most threat realistic secure training environments.

We have concluded that the combination of our legacy Cubic Mission Solutions (“CMS”) and our legacy Cubic Global Defense (“CGD”) segments into our new Cubic Mission and Performance Solutions (“CMPS”) segment resulted in CMPS becoming a single operating segment beginning on October 1, 2020. Applicable prior period amounts have been adjusted retrospectively to reflect the reportable segment change.

The three months ended December 31, 2020 and 2019 represent the first quarters of our fiscal years ending September 30, 2021 (“fiscal 2021”) and September 30, 2020 (“fiscal 2020”), respectively.

COVID-19 Update

33

The COVID-19 pandemic has presented challenges and impacts on each of our businesses, including delays of customer orders, slowdown of certain projects and impacts due to travel restrictions and remote work. We have taken proactive measures in order to reduce the potential impacts of the pandemic. To date we have not experienced significant disruptions in our supply chain, nor have we experienced any significant disruptions at our manufacturing facilities.

The vast majority of revenue from our CTS businesses is earned under fixed-price contracts. However, approximately 2% of our annual revenue is directly tied to the level of transit ridership. While transit ridership levels have improved from the lows of the pandemic, they remain significantly below normal levels impacting our transit agency customer’s revenue, with uncertainty surrounding the pace and timing of recovery. While we continue to believe that CTS’s backlog is largely insulated from the impacts of COVID-19 due to the critical service of fare collection, there could be potential delays in the award of new business. While the U.S. National Defense Strategy continues to drive demand, our CMPS business has experienced some delays in timing of orders and shipments due to the COVID-19 pandemic.

We believe that the fundamentals of our Company remain strong in the midst of the global pandemic. We expect to have sufficient liquidity on hand to continue business operations during this volatile period and we have taken a number of steps to strengthen liquidity and manage cash flow.

The extent to which COVID-19 will adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including the severity and duration of the outbreak and the effectiveness of actions to contain or mitigate its effects. While we expect the pandemic to continue to negatively impact our results, the current level of uncertainty over the economic and operational impacts of COVID-19 could lead to variability in results.

Consolidated Financial Results

Three Months Ended

 

December 31,

2020

    

2019

    

% Change

(in millions, except per share data)

Sales

$

318.8

$

328.8

(3)

%

Operating income (loss)

1.3

(6.5)

nm

Net loss from continuing operations attributable to Cubic

(13.0)

(20.0)

35

%

Diluted loss per share from continuing operations attributable to Cubic

(0.41)

(0.64)

36

%

Adjusted EBITDA

29.7

11.4

161

%

Adjusted net income (loss)

11.9

(3.7)

nm

Adjusted EPS

0.38

(0.12)

nm

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

Sales: Sales for the first quarter of fiscal 2021 decreased 3% to $318.8 million from $328.8 million in the same period last year. The decrease in sales from CMPS of 13% was partially offset by an increase in sales from CTS of 5%. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a favorable impact on sales of $3.9 million for the first quarter of fiscal 2021 compared to the same period last year. Sales generated by businesses we acquired during fiscal 2020 totaled $2.6 million for the first quarter of fiscal 2021, compared to no sales in the first fiscal quarter of last year.

See the segment discussions below for further analysis of segment sales.

Gross Margin: Our gross margin percentage on product sales increased to 24% in the first quarter of fiscal 2021, as compared to 17% in the same period last year. The increase was primarily due to improved contract performance on a number of CTS design and build contracts and on secure communications contracts at CMPS. Our gross margin percentage on service sales increased to 39% in the first quarter of fiscal 2021, as compared to 36% in the first quarter of last year, driven primarily by the impact of productivity initiatives in CTS.

34

Selling, General and Administrative: Selling, General and Administrative (“SG&A”) expenses decreased in the first quarter of fiscal 2021 to $63.7 million compared to $65.9 million in the same period last year. As a percentage of sales, SG&A expenses were 20% in both the first quarter of fiscal 2021 and 2020. The decrease in SG&A expense was driven by cost reduction initiatives at both CTS and CMPS.

Restructuring: Restructuring expenses increased to $4.1 million in the first quarter of fiscal 2021 compared to $1.6 million in the same period last year. In the first quarter of fiscal 2021, CMPS also incurred costs related to modifying its go-to market and legal structure in the Middle East.

Research and Development: Internally funded company-sponsored research and development (“R&D”) expenses, as reflected in our Condensed Consolidated Statements of Operations (as included in Part I, Item 1 of this Quarterly Report on Form 10-Q) are as follows (in thousands):

Three Months Ended

December 31,

    

2020

    

2019

    

Company-Sponsored Research and Development Expense:

Cubic Transportation Systems

$

2,664

$

1,234

Cubic Mission and Performance Solutions

 

9,417

 

6,746

Unallocated corporate expenses

 

65

 

442

Total company-sponsored research and development expense

$

12,146

$

8,422

The increase in Company-sponsored R&D expense in the first quarter of fiscal 2021 was primarily due to the acceleration of work on CMPS secure communication initiatives.

In addition to internally funded Company-sponsored R&D, a significant portion of our new product development occurs during the performance of contractual work for our customers. These costs are included in cost of sales in our Condensed Consolidated Statements of Operations (included in Part I, Item 1 of this Quarterly Report on Form 10-Q) as they are directly related to contract performance. The estimated cost of contract R&D activities included in our cost of sales is as follows (in thousands):

Three Months Ended

    

December 31,

    

2020

    

2019

Cost of Contract Research and Development Activities:

Cubic Transportation Systems

$

13,921

$

14,790

Cubic Mission and Performance Solutions

 

19,473

 

15,186

Total cost of contract research and development activities

$

33,394

$

29,976

Amortization of Purchased Intangibles: Amortization of purchased intangibles for the first quarter of fiscal 2021 increased to $16.1 million from $10.1 million in the same period last year. The increase in amortization expense was driven by the completion of our acquisitions of Delerrok and Pixia in January 2020.

Operating Income (Loss): Our operating income increased to $1.3 million in the first quarter of fiscal 2021 compared to an operating loss of $6.5 million in the same period last year. CTS operating income increased to $31.7 million for the first quarter of fiscal 2021 compared to $14.3 million last year primarily due to improved contract performance. This increase was partially offset by an increased operating loss from CMPS of $16.5 million in the first quarter compared to $8.6 million in the same period last year. Our operating results, and particularly the CMPS operating results, were significantly impacted by accounting for businesses acquired in fiscal 2020. On a consolidated basis, the businesses that we acquired during fiscal 2020 had operating losses totaling $9.1 million in the first quarter of fiscal 2021, as compared to no amounts in the same period last year. The operating losses include acquisition-related expenses, including amortization of intangible assets, of $7.6 million in the first quarter of fiscal 2021, as compared to no amounts in the same period last year.

35

Unallocated corporate and other costs for the first quarter of fiscal 2021 were $13.9 million compared to $12.0 million in the same period last year. The increase was primarily driven by strategic advisory services incurred in the first quarter of fiscal 2021.

The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar had a net favorable impact on operating income in the first quarter of fiscal 2021 of $0.8 million as compared to the same period last year.

See the segment discussions below for further analysis of segment operating income and loss.

Interest and Dividend Income and Interest Expense: Interest and dividend income was $1.8 million in the first quarter of fiscal 2021 compared to $2.2 million in the same period last year. Interest expense was $8.2 million in the first quarter of fiscal 2021 compared to $5.4 million in the same period last year. The increase in interest expense was due to higher average debt balances in the first quarter of fiscal 2021, primarily as a result of the completion of our acquisitions of Pixia and Delerrok in January 2020, as well an increase in the average outstanding non-recourse debt balance of our consolidated variable interest entity (“VIE”). The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, which includes the interest income and expense of such VIE, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.

Other Income (Expense): Other income (expense) netted to income of $1.3 million in the first quarter of fiscal 2021 compared to expense of $0.1 million in the first quarter of fiscal 2020. Changes in our non-operating expenses are primarily driven by changes in the fair value of an interest rate swap held by our consolidated VIE. The 90% noncontrolling interest in the net income (loss) of the consolidated VIE, including the VIE’s loss on its interest rate swap, is added back to our net income (loss) to arrive at net income (loss) attributable to Cubic.

Income Tax Provision:

The income tax expense recognized on pre-tax loss from continuing operations for the three months ended December 31, 2020 resulted in an effective tax rate of negative 92%, which differs from the effective tax rates of 186% and negative 64% for the year ended September 30, 2020 and for the three months ended December 31, 2019, respectively. The variability in effective tax rates primarily relates to the difference in both the level and jurisdictional mix of earnings, discrete impacts related to current year changes to the existing U.S. deferred tax valuation allowance, and the impact of deferred tax liabilities acquired in business combinations.

Our effective tax rate could be affected by, among other factors, the mix of business between U.S. and foreign jurisdictions, the level of intercompany transactions, applicability of changes in U.S. or foreign tax law, the impact of acquisitions, fluctuations in the need for a valuation allowance against deferred tax assets, and our ability to take advantage of available tax attributes. After considering these impacts, we have determined that a reliable estimate of the annual effective tax rate for fiscal 2021 cannot be made.

Net Loss from Continuing Operations attributable to Cubic: Our net loss from continuing operations attributable to Cubic in the first quarter of fiscal 2021 was $13.0 million compared to a loss of $20.0 million in the first quarter of fiscal 2020. The decrease in net loss from continuing operations attributable to Cubic was primarily due to the increase in operating income as described above.

Adjusted EBITDA: Adjusted EBITDA increased to $29.7 million in the first quarter of fiscal 2021 compared to $11.4 million in the same period last year. The increase in Adjusted EBITDA was due to the same factors described above in operating income (loss), but excludes amortization expense, restructuring costs and acquisition-related expenses.

Adjusted Net Income (Loss): Our Adjusted Net Income increased to $11.9 million in the first quarter of fiscal 2021 compared to Adjusted Net Loss of $3.7 million in the same period last year. The increase in Adjusted Net Income was primarily due to the same factors described above in net loss from continuing operations attributable to Cubic, but excludes amortization expense, restructuring costs, acquisition-related expenses and non-operating gains and losses.

Adjusted EPS: Adjusted EPS increased to $0.38 in the first quarter of fiscal 2021 compared to negative $0.12 in the first quarter last year. The changes in Adjusted EPS was due to the same factors that impacted Adjusted Net Income (Loss) noted above.

36

CTS Segment

Three Months Ended

 

December 31,

2020

    

2019

    

% Change

(in millions)

Sales

$

197.1

$

188.6

5

%

Operating income

31.7

14.3

122

%

Adjusted EBITDA

35.8

22.2

61

%

Sales: CTS sales for the first quarter of fiscal 2021 increased 5% to $197.1 million from $188.6 million in the first quarter last year. Sales were higher in the U.S. due to increased work on our system development contracts in Boston, the Bay Area, and Chicago. Sales were lower in Australia due to lower work on our system development contract in Brisbane, and sales were relatively flat in the U.K. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in sales of $3.2 million for the first quarter of fiscal 2021, compared to the first quarter last year.

Operating Income: CTS operating income for the first quarter of fiscal 2021 increased 122% to $31.7 million compared to $14.3 million in the first quarter last year. Operating income was higher in the U.S., U.K., and Australia due to increased work and higher profitability on our system development contracts in the U.S. and the impact of cost savings initiatives in all our regions. The average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in an increase in operating income of $0.7 million for the first quarter of fiscal 2021 compared to the same period last year.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CTS results amounted to $4.8 million in the first quarter of fiscal 2021 compared to $4.4 million in the first quarter of fiscal 2020. The increase in amortization expense is a result of the amortization of intangible assets acquired in our purchase of Delerrok in January 2020.

Adjusted EBITDA: CTS Adjusted EBITDA increased 61% to $35.8 million in the first quarter of fiscal 2021 compared to $22.2 million in the first quarter of fiscal 2020. The increase in Adjusted EBITDA was primarily driven by the same factors that drove the increase in operating income described above.

CMPS Segment

Three Months Ended

 

December 31,

2020

    

2019

    

% Change

(in millions)

Sales

$

121.7

$

140.2

(13)

%

Operating loss

(16.5)

(8.6)

92

%

Adjusted EBITDA

2.7

(1.8)

nm

Sales: CMPS sales for the first quarter of fiscal 2021 decreased 13% to $121.7 million from $140.2 million in the first quarter last year. The decrease in sales primarily resulted from reduced work on an air combat training system program in the far east, which was partially offset by higher sales from our C2ISR business. Businesses acquired by CMPS in fiscal 2020 had sales of $2.3 million for the first quarter of fiscal 2021 and had no sales in the first quarter of fiscal 2020.

Operating Loss: The CMPS operating loss for the first quarter of fiscal 2021 increased to $16.5 million compared to an operating loss of $8.6 million in the same period last year. The increase in operating loss was driven by a $3.0 million increase in restructuring expense, a $2.6 million increase in R&D expense, and $8.0 million in operating losses incurred

37

by Pixia in the first quarter of fiscal 2021 driven primarily by $7.2 million of amortization of purchased intangibles and $0.5 million of acquisition-related costs. Partially offsetting these losses were cost saving initiatives that resulted in $4.3 million in reduced SG&A expense as well as an increase in profits on higher sales from our C2ISR business.

Amortization of Purchased Intangibles: Amortization of purchased intangibles included in the CMPS results amounted to $11.3 million in the first quarter of fiscal 2021 compared to $5.7 million in the first quarter of fiscal 2020. The increase in amortization was due to the amortization of purchased intangibles related to our acquisition of Pixia in January 2020.

Adjusted EBITDA: CMPS Adjusted EBITDA was $2.7 million in the first quarter of fiscal 2021 compared to a loss of $1.8 million in the first quarter of fiscal 2020. The change in Adjusted EBITDA was primarily driven by the same factors that drove the change in operating loss described above, excluding amortization of purchased intangibles, acquisition-related expenses, and restructuring expenses.

Backlog

December 31,

September 30,

 

    

2020

    

2020

 

(in millions)

 

Total backlog

Cubic Transportation Systems

$

3,173.0

$

3,139.9

Cubic Mission and Performance Solutions

 

508.5

 

527.1

Total

$

3,681.5

$

3,667.0

Total backlog increased by $14.5 million from September 30, 2020 to December 31, 2020 including the impact of foreign currency exchange rates. Changes in exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar as of December 31, 2020 increased backlog by a net $76.1 million as compared to September 30, 2020.

Reconciliation of 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 as defined under Regulation G. 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, loss on extinguishment of debt, 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 the Tax Cuts and Jobs Act (“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), loss on extinguishment of debt, 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 enterprise resource planning 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, expenses recognized related to the change in the fair value of contingent consideration for acquisitions, and corporate strategic advisory costs.

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

38

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. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included below.

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:

Adjusted Net Income and Adjusted EPS Reconciliation

Three Months Ended

December 31,

    

2020

    

2019

(in millions, except per share data)

GAAP EPS

$

(0.41)

$

(0.64)

GAAP Net loss from continuing operations attributable to Cubic

$

(13.0)

$

(20.0)

Noncontrolling interest in net income of VIE

5.7

4.0

Amortization of purchased intangibles

16.1

10.1

Gain on sale of fixed assets

(0.2)

Restructuring costs

4.1

1.6

Acquisition-related expenses (gains), excluding amortization

2.4

(0.7)

Strategic and IT system resource planning expenses

0.6

1.1

Other non-operating expense (income), net

(1.3)

0.1

Noncontrolling interest in Adjusted Net Income of VIE

(2.8)

(1.2)

Tax impact related to acquisitions1

0.3

Tax impact related to non-GAAP adjustments2

(0.2)

1.5

Adjusted Net Income (Loss)

$

11.9

$

(3.7)

Adjusted EPS

$

0.38

$

(0.12)

Weighted Average Diluted Shares Outstanding (in thousands)

31,562

31,273

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.

39

Adjusted EBITDA Reconciliation

Three Months Ended

(in millions, except margin data)

December 31,

Cubic Transportation Systems

2020

    

2019

Sales

$

197.1

$

188.6

Operating income

$

31.7

$

14.3

Depreciation and amortization

7.5

7.1

Noncontrolling interest in EBITDA of VIE

(3.4)

(0.9)

Acquisition-related expenses (gains), excluding amortization

(0.2)

1.3

Restructuring costs

0.2

0.4

Adjusted EBITDA

$

35.8

$

22.2

Adjusted EBITDA margin

18.2%

11.8%

Three Months Ended

December 31,

Cubic Mission and Performance Solutions

2020

    

2019

Sales

$

121.7

$

140.2

Operating loss

$

(16.5)

$

(8.6)

Depreciation and amortization

15.1

9.2

Acquisition-related expenses (gains), excluding amortization

1.0

(2.2)

Gain on sale of fixed assets

-

(0.2)

Restructuring costs

3.1

-

Adjusted EBITDA

$

2.7

$

(1.8)

Adjusted EBITDA margin

2.2%

(1.3)%

Three Months Ended

December 31,

Cubic Consolidated

2020

    

2019

Sales

$

318.8

$

328.8

Net loss from continuing operations attributable to Cubic

$

(13.0)

$

(20.0)

Noncontrolling interest in net income of VIE

5.7

4.0

Income tax provision

3.5

6.2

Interest expense, net

6.4

3.1

Other non-operating expense (income), net

(1.3)

0.1

Operating income (loss)

$

1.3

$

(6.5)

Depreciation and amortization

24.7

17.0

Noncontrolling interest in EBITDA of VIE

(3.4)

(0.9)

Acquisition-related expenses (gains), excluding amortization

2.4

(0.7)

Strategic and IT system resource planning expenses

0.6

1.1

Gain on sale of fixed assets

-

(0.2)

Restructuring costs

4.1

1.6

Adjusted EBITDA

$

29.7

$

11.4

Adjusted EBITDA margin

9.3%

3.5%

Note: Amounts may not sum due to rounding

Liquidity and Capital Resources

Operating activities used cash of $22.2 million for the first quarter of fiscal 2021 primarily due to payments to vendors and contractors for goods and services received related to our significant work on customer contracts in the fourth quarter of fiscal 2020, which was partially offset by increased collections for those goods and services. Our use of cash from operating activities includes cash outflows of $20.3 million from our consolidated VIE. As further described below, our consolidated operating cash flows exclude $19.7 million of cash received by Cubic from our consolidated VIE in the first quarter of fiscal 2021.

40

Investing activities used cash of $4.8 million for the first quarter of fiscal 2021, including capital expenditures of $6.6 million, partially offset by $1.8 million of proceeds received related to the sale of trade receivables to banks which are required to be classified as investing activities under GAAP, as further described below.

Financing activities provided cash of $8.7 million for the first quarter of fiscal 2021 and included net payments of $8.8 million and $2.0 million on short-term and long-term borrowings, respectively. Net long-term borrowings undertaken by our consolidated VIE were $22.5 million for the first quarter of fiscal 2021. See discussion of our consolidated VIE in the section below.

Consolidated Variable Interest Entity

In March 2018, Cubic and John Laing, an unrelated company that specializes in contracting under public-private partnerships, jointly formed Boston AFC 2.0 HoldCo. LLC (“Boston HoldCo”). Also in March 2018, Boston HoldCo created a wholly owned entity, Boston AFC 2.0 OpCo. LLC (“Boston 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 “Original MBTA Contract”). In June 2020, MBTA and Boston OpCo executed an amended agreement (the “Amended MBTA Contract”) to reset the project and modify certain aspects of the Original MBTA Contract. Collectively, Boston HoldCo and Boston OpCo are referred to as the “P3 Venture”.

We have consolidated Boston OpCo into our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Because we consolidate Boston OpCo, any payments from Boston OpCo to Cubic are excluded from our cash flows provided by operating activities, and the cash received by Boston OpCo in connection with its draws on its non-recourse debt are reflected as cash provided by financing activities. Boston OpCo’s draws on its non-recourse debt amounted to $22.6 million in the first quarter of fiscal 2021. Payments we received from Boston OpCo that were not included in our cash provided by operating activities totaled $19.7 million in the first quarter of fiscal 2021 and have totaled a cumulative $157.0 million since the inception of our contract with Boston OpCo in March 2018.

In connection with the execution of the Amended MBTA Contract, Boston OpCo entered into an amended credit agreement with a group of financial institutions (the “Boston OpCo Amended Credit Agreement”), which includes two long-term debt facilities and a revolving credit facility. The long-term debt facilities allow for draws up to an aggregate of $421.6 million during the design and build phase. The long-term debt facilities, including all interest and fees incurred, are required to be repaid on a fixed monthly schedule commencing once the design and build phase is completed in 2024. The long-term debt facilities bear interest at variable rates of LIBOR plus a margin of 1.75% to 2.0%. At December 31, 2020, the outstanding balance on the long-term debt facilities was $204.7 million, which is presented net of unamortized deferred financing costs of $17.0 million. The revolving credit facility allows for draws up to a maximum aggregate amount of $15.8 million during the operate and maintain phase. Boston OpCo’s debt is nonrecourse with respect to Cubic and our subsidiaries.

The Boston OpCo Amended Credit Agreement contains covenants that require Boston OpCo and Cubic to maintain progress on the delivery within a specified timeline and budget and provide regular reporting on such progress. It also contains events of default, including the delivery of a customized fare collection system to the MBTA by a pre-determined date as well as other customary events of default. Failure to meet such delivery date will result in incurring penalties due to the lenders thereunder.

Upon execution of the Boston OpCo Amended Credit Agreement, Boston OpCo entered into new pay-fixed/receive-variable interest rate swaps to mitigate variable interest rate associated with its long-term debt. At December 31, 2020, the outstanding notional principal amounts on open interest rate swaps were $215.0 million.

Financing Arrangements

On March 27, 2020, we also executed a Fifth Amended and Restated Credit Agreement (the “Credit Facility”) with a group of financial institutions. The Credit Facility provided for a new term loan in the aggregate amount of $450.0 million (the “Term Loan”) and increased our existing revolving line of credit limit (the “Revolving Line of Credit”) from $800.0 million to $850.0 million. The commitments under the Credit Facility will mature on March 27, 2025 and bear interest generally at the LIBOR rate plus a margin that ranges between 1.00% and 2.00%. At December 31, 2020, the

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weighted average interest rate on outstanding borrowings under the Credit Facility was 1.95%. The Credit Facility is unsecured, but it is guaranteed by certain significant domestic subsidiaries of Cubic.

On April 1, 2020, we entered into interest rate swaps with a group of financial institutions to mitigate the variable interest rate risk associated with the Credit Facility. The interest rate swaps contain forward starting notional principal amounts which align with our fixed repayment schedules under the Credit Facility and as of December 31, 2020 have an interest rate of approximately 2.49% and outstanding notional principal amounts of $500.0 million.

The available credit under our Revolving Line of Credit is reduced by any letters of credit issued under the Credit Facility. As of December 31, 2020, there were $441. 6 million of borrowings under the Term Loan and $207.0 million of borrowings under the Revolving Line of Credit. Letters of credit outstanding under the Credit Facility totaled $94.6 million at December 31, 2020, which reduced our available line of credit to $548.4 million. The $94.6 million of letters of credit includes both financial letters of credit and performance guarantees.

As of December 31, 2020, we had letters of credit and bank guarantees outstanding totaling $101.2 million, which includes the $94.6 million of letters of credit issued under the Revolving Line of Credit and $6.6 million of letters of credit issued under other facilities. The $101.2 million of letters of credit and bank guarantees includes $97.5 million that guarantees either our performance or customer advances under certain contracts and $3.7 million of financial letters of credit that primarily guarantees 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 also use surety bonds as an alternative to letters of credit.

We have entered into a short-term borrowing arrangement in the United Kingdom for up to £15.0 million British Pounds (equivalent to approximately $20.5 million at December 31, 2020) to help meet the short-term working capital requirements of our subsidiary located in the United Kingdom. At December 31, 2020, no amounts were outstanding under this arrangement.

We maintain a cash account with a bank in the U.K. for which the funds are restricted as to use. The account is required to secure the customer’s interest in cash deposited in the account to fund our activities related to our performance under a fare collection services contract in the United Kingdom. The balance in the account as of December 31, 2020 was $29.6 million and is classified as restricted cash in our Condensed Consolidated Balance Sheets.

The terms of the Credit Facility contain financial covenants setting a maximum total ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization and a minimum interest coverage ratio. In addition, the terms contain covenants that restrict, among other things, our ability to sell assets, incur indebtedness, make investments, grant liens, pay dividends and make other restricted payments. As of December 31, 2020, we were in compliance with all covenants under the Credit Facility.

In the normal course of our business, we may sell trade receivables to financial institutions as a cash management technique. We do not retain financial or legal obligations for these receivables that would result in material losses. Our ongoing involvement is limited to the remittance of customer payments to the financial institutions with respect to the sold trade receivables; therefore, our sold trade receivables are not included in our Condensed Consolidated Balance Sheet in any period presented. As of December 31, 2020, we sold $6.4 million of outstanding trade receivables to financial institutions.

Our financial condition remains strong with net working capital of $188.6 million and a current ratio of 1.4 to 1 at December 31, 2020. We expect that cash on hand and our Revolving Credit Agreement will be adequate to meet our working capital requirements for the foreseeable future. Our total debt to capital ratio at December 31, 2020 was 65%.

As of December 31, 2020, the majority of the $142.1 million of our cash, cash equivalents and restricted cash was held by our foreign subsidiaries, primarily in the U.K., New Zealand and Australia

Future repatriations of foreign earnings will generally be exempt from U.S. tax. We will continue to provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of the undistributed foreign earnings.

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Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 1 of the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Critical Accounting Policies, Estimates and Judgments

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

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

There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for fiscal 2020.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial 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, the uncertainty regarding the scope, duration and impact of COVID-19, 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 under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those expressed in these statements.

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

the impact of the COVID-19 outbreak or future epidemics on our business, including the potential for facility closures or work stoppages; supply chain disruptions; program delays; our ability to recover our costs under contracts; changing government funding and acquisition priorities and payment policies and regulations; and potential impacts to the fair value of our assets;

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

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

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

the effects of potential sequestration on our contracts;

our assumptions covering behavior by public transit authorities;

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

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

negative audits by the U.S. government;

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

competition and technology changes in the defense and transportation industries;

changes in the way transit agencies pay for transit systems;

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

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

our ability to identify, attract and retain qualified employees;

our failure to properly implement our enterprise resource planning system;

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

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

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

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

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

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

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

other factors discussed elsewhere in this Quarterly Report on Form 10-Q.

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 or operating performance is not

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necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. Further, any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or 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, 2020 have not materially changed from those described under “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for fiscal 2020.

ITEM 4. CONTROLS AND PROCEDURES

We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020. 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.

There have not been any significant changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2020.

ITEM 6. EXHIBITS

Exhibit Index

Exhibit No.

    

Description

3.1

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

3.2

Amended and Restated Bylaws. Incorporated by reference to Current Report on Form 8-K filed September 21, 2020, File No. 001-08931, Exhibit 3.2.

3.3

Certificate of Designations of Series A Junior Participating Preferred Stock. Incorporated by reference to Current Report on Form 8-K filed September 21, 2020, File No. 001-08931, Exhibit 3.1.

10.1*

Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the Cubic Corporation 2015 Incentive Award Plan (for awards granted during fiscal year 2021).

10.2*

Form of Performance Restricted Stock Unit Award Grant Notice and Performance Restricted Stock Unit Award Agreement under the Cubic Corporation 2015 Incentive Award Plan (for awards granted during fiscal year 2021).

10.3*

Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the Cubic Corporation 2015 Incentive Award Plan (for awards granted during fiscal year 2021).

31.1

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

31.2

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

32.1

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

32.2

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

101

Financial statements from the Cubic Corporation Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

104

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

* Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

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

CUBIC CORPORATION

Date:

February 8, 2021

/s/ Anshooman Aga

Anshooman Aga

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date:

February 8, 2021

/s/ Mark A. Harrison

Mark A. Harrison

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

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