C A P T U R I N G
O P P O R T U N I T I E S
2 0 1 6 A N N U A L R E P O R T
3/ CUBIC CORPORATION
Cubic Corporation designs, integrates and operates systems, products and services
that increase situational awareness for our customers in the transportation and
defense industries.
At Cubic, we:
• Solve complex problems with innovative technology, systems and solutions
• Collect and analyze large-scale data that is usable to our customers
• Make it our mission to increase efficiencies, reduce costs and improve the user experience
• Accelerate the implementation of next-generation solutions
Sales Price of Common Shares & Dividends
Q1
Q2
Q3
Q4
2016
2015
2016
2015
2016
2015
2016
2015
$49.16 / $40.71
$54.99 / $45.40
$47.87 / $30.80
$53.92 / $50.44
$42.94 / $38.19
$51.27 / $46.92
$48.36 / $38.89
$47.71 / $40.33
-
-
$0.14
$0.14
-
-
$0.14
$0.14
Financial Highlights
AND SUMMARY OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
(amounts in thousands, except per share data)
2016
2015
2014
2013
2012
Sales
Cost of sales
Selling, general and
administrative expenses
Research and development
Interest expense
Income taxes
Net income attributable to
Cubic (1)
PER SHARE DATA
$ 1,461,665
$ 1,431,045
$ 1,398,352
$
1,361,407
$ 1,404,084
1,116,906
1,091,326
1,082,535
1,055,313
1,060,140
269,593
31,976
212,518
17,992
11,199
4,400
(9,212)
48,997
181,672
17,959
4,084
19,831
165,230
24,445
164,189
28,722
3,427
1,602
14,502
40,332
1,735
22,885
69,491
25,086
97,427
Net income per share, basic (1)
$
0.06
$
0.85
$
2.59
$
0.94
$
Net income per share, diluted (1)
Cash dividends
0.06
0.27
0.85
0.27
2.59
0.24
0.94
0.24
3.64
3.64
0.24
SHARES USED IN CALCULATING
NET INCOME PER SHARE
Basic
Diluted
YEAR-END DATA
Shareholders’ equity
related to Cubic
Equity per share, basic
Total assets
Long-term debt
26,976
26,872
26,787
26,736
26,736
27,040
26,938
26,845
26,760
26,736
$
689,896
$
756,288
$
782,278
$
716,946
$
677,171
25.57
28.14
29.20
26.82
25.33
1,504,679
1,300,276
1,194,606
1,109,618
1,014,550
201,012
126,705
102,390
102,920
11,503
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes.
1 Results for the year ended September 30, 2015 include the net impact on income tax expense of establishing valuation
allowances on U.S. deferred tax assets totaling $35.8 million. This valuation allowance was reduced by $6.7million in the
year ended September 30, 2016. See Note 10 of the Consolidated Financial Statements in Item 8 of this Form 10-K for
further discussion of the valuation allowance. Results for the year ended September 30, 2013 include the impact of a
goodwill impairment charge of $50.9 million, before the impact of applicable income taxes.
2016 ANNUAL REPORT /1
A LETTER FROM OUR CEO
Dear Fellow Shareholders,
Fiscal year 2016 was a pivotal year for Cubic. Since I
other larger programs in the U.S. and internationally,
was appointed president and chief executive officer
we anticipate this business will have top-line growth in
2 ½ years ago, Cubic’s senior leadership team and
the mid-teens with EBITDA margins in the high-teens.
I have established Goal 2020. Goal 2020 is Cubic’s
strategic master plan crafted to drive increased
Cubic Mission Solutions consists of four strategic
customer focus, market leadership, innovation,
acquisitions completed during the past two
effectiveness, and efficiency, and to accelerate our
years including DTECH Labs, GATR Technologies,
growth and address the increasing pace of change
TeraLogics, and Vocality International, combined with
in our markets. In the Q&A section of this report, I
our legacy data links and secure communications
describe in detail the individual components of our
businesses. DTECH Labs provides a wide range of
Goal 2020 strategy and how they are integrated
deployable and tactical communications products
through our OneCubic initiative.
and services to meet diverse mission requirements.
GATR Technologies provides world class satellite
In 2016, we significantly expanded and improved our
communication antenna solutions. TeraLogics
product portfolio. We formed Cubic Mission Solutions
provides secure, massively scalable, cloud-based
to provide leading-edge solutions in the growing
distribution of full motion video. Vocality, our most
command, control, communications, computers,
recent acquisition, provides software solutions that
intelligence, surveillance and reconnaissance (C4ISR)
optimize mobile communications links.
market. Due to increasing demand on current
programs and with several opportunities to pursue
Goal 2020
$2 billion+ sales with 10%+ EBITDA margin, growing 10%+ year-on-year
Winning The
Customer
Building
NextCity
Globally
Growing
C4ISR
Globally
Building
NextTraining
Globally
Living
One Cubic
2/ CUBIC CORPORATION
We have made great strides to improve our market
completed important milestones, including key
leading positions with innovation. In transportation,
phases of our OneCubic enterprise resource planning
we are unique in having deployed proven next-
system implementation. We also streamlined our
generation solutions in Chicago, Vancouver and
manufacturing processes and reduced our supply
London, which form the basis of our OneAccount
chain vendors by more than 50 percent and
platform. This, coupled with our award-winning
Ventra mobile solution, allows customers to utilize
“Goal 2020 is Cubic’s strategic master
plan crafted to drive increased customer
focus, market leadership, innovation,
effectiveness, and efficiency, and to
accelerate our growth and address the
increasing pace of change in our markets.”
a single account for all of their transportation
payments across an urban region. Today, we have
achieved more than 60 percent market share of
ridership in the United States, Canada, United
Kingdom, and Australia. We are seeing increased
demand and refresh opportunities for our new
technologies across our large installed customer
base and in the broader market.
We are also transforming defense training by
applying a variety of new technologies to increase
the operational readiness of our customers
consolidated our manufacturing processes into one
globally. We have combined training and gaming
organization. These actions saved over $15 million in
technologies in the Littoral Combat Ship program
supply chain costs, which will have a positive impact
that shows great promise for the U.S. Navy as it
on future earnings. By implementing OneCubic
launches new ship platforms and increases the
size of its fleet. We are combining live, virtual and
initiatives, our goal is to improve our operating profit
margin by 200 to 250 basis points by fiscal year 2019.
constructive simulation techniques to revolutionize
next-generation fighter pilot training. We are creating
We also greatly enhanced our leadership team. Dave
an information, surveillance reconnaissance and
Buss, who recently retired from the U.S. Navy as
social media synthetic environment to increase
a vice admiral, was appointed to lead our defense
training environment complexity and we are utilizing
business and Mike Twyman, a C4ISR executive
augmented reality to enhance training fidelity. We
with 30 years of industry experience, was chosen
are also starting to see traction with our HALO,
to lead our mission solutions business. Matt Cole,
software definable antenna technology that will
the architect of our NextCity vision, had a great first
bring networked wideband communications to
our customers to support the U.S. Department of
year leading our transportation segment and I am
enthusiastic about his plans for the next phase of
Defense anti-access and area denial initiatives.
growth in this segment.
This year we also took important steps forward in
While our sales grew modestly, the year concluded
our enterprise transformation. We made significant
with a disappointing fourth quarter. Due to a change
investments in our OneCubic initiatives and
in funding priorities, our department of defense
2016 ANNUAL REPORT /3
Sales by Country/Region 1
(millions)
United States
United Kingdom
Australia
Far East/Middle East
Canada/Other
Total sales
2016
$827.0
243.0
154.0
128.4
109.3
2015
$765.0
282.4
164.6
123.0
96.0
2014
$749.9
294.4
161.9
118.6
73.6
$1,461.7
$1,431.0
$1,398.4
customer delayed the funding and shipping of a few
account-based and open payment solutions in
orders in our defense systems segment. Under the
the industry. We also have a strong pipeline of
new administration, we anticipate the U.S. defense
opportunities to enter additional markets in cities
market for our systems and services will improve
where we are not currently incumbent.
starting in 2018.
2017 Outlook
The next few years are pivotal for Cubic’s future
Our capital allocation priorities remain unchanged.
Paying down debt is our first priority. Secondly, we
want to fund organic growth. We expect our organic
as we leverage OneCubic investments toward
growth will improve late in 2017 with a contract
achieving Goal 2020 targets. We anticipate better
decision in New York and from an improving defense
financial performance in fiscal year 2017, driven
environment. Thirdly, we will continue to make
by improved performance in defense systems
acquisitions tied to our strategic priorities in C4ISR,
and growth in our C4ISR business. We expect a
NextTraining and NextCity.
decision next summer to move from low-rate initial
production to full-rate production on the U.S. Army
We have paid cash dividends to our shareholders
Transportable Tactical Command Communications
since 1971 and we believe a stable, long-term
program, or T2C2. Under this program of record,
dividend combined with growth is important for
our GATR subsidiary was chosen for its innovative
Cubic shareholders. Our dividend capacity is tied to
inflatable satellite antennas.
our U.S. profitability, which we expect will improve
starting in fiscal year 2018. This will give us more
Our organic growth prospects in transportation
flexibility to raise our dividend over the long term.
are also sound. We expect an upgrade cycle for
next-generation solutions across our customer
In closing, I would like to extend my appreciation to
base, a trend which has already begun with recent
our board of directors for their shared vision, counsel
awards such as Miami, Baltimore and Sydney. The
and support. To our 8,500 employees working in 26
most significant opportunity is New York City. In
nations, I thank you for your dedication, innovative
July we submitted our bid and anticipate an award
drive and hard work that are essential to Cubic’s
decision in the spring of 2017. As the market leader,
prosperity. To our shareholders, we thank you
our credentials to win this and other upgrade
for your continued support. We pledge our total
opportunities are very strong.
commitment as we make Cubic even better.
We have the best resume in the transportation
payment solutions industry. Our track record of
success has been galvanized this year with the
completion of the Compass project in Vancouver,
Bradley H. Feldmann
our award-winning Ventra mobile solution in
President and CEO
Chicago, and the continued global accolades we
December 23, 2016
receive for the system in London. With these
projects, we are the foremost integrator of mobile,
4/ CUBIC CORPORATION
(1) Sales are attributed to countries or regions based on the location of customers.
FY16 SALES
$1,462
MILLION
27%
45%
40%
SALES BY
SEGMENT
SALES
BY TYPE
33%
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
55%
Products
Services
2016 ANNUAL REPORT /5
CONSOLIDATED SALES millions
OPERATING INCOME millions
2016
2015
2014
$1,462
2016 / $7
$1,431
$1,398
2015
2014
$75
$92
ADJUSTED EBITDA millions
FULLY DILUTED EARNINGS PER SHARE
$118
2016 / $0.06
$140
2015
$0.85
$130
2014
$2.59
2016
2015
2014
Adjusted EBITDA
Operating Income represents operating income plus expenses incurred in the development of our ERP system and the redesign of our supply
chain; 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; goodwill impairment charges;
and restructuring costs. Adjusted Operating Income is not a measurement of financial performance under GAAP and should not be considered an
alternative to operating income as a measure of performance.
Fully Diluted EPS represents diluted EPS plus the impact of adding back the following expenses, net of applicable income taxes: expenses incurred
in the development of our ERP system and the redesign of our supply chain; 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; goodwill impairment charges; restructuring costs; and the impact of a 2015 valuation on U.S. deferred
tax assets. Adjusted Diluted EPS is not a measurement of financial performance under GAAP and should not be considered an alternative to
diluted EPS as a measure of performance.
Adjusted EBITDA represents net income plus net interest expense; income tax expense; depreciation expense; amortization expense; expenses
incurred in the development of our ERP system and the redesign of our supply chain; 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; goodwill impairment charges; restructuring costs; and income and expenses classified as other
non-operating income and expenses. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered
an alternative to net income as a measure of performance.
For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, please visit www.cubic.com.
6/ CUBIC CORPORATION
Questions and Answers with
Brad Feldmann, President and
Chief Executive Officer
Goal 2020, Cubic’s strategic master plan, establishes key priorities for Cubic and
drives the innovation and efficiencies we need in order to be the global market leader
in defense and transportation, achieve $2.0B+ in sales growing at 10%+ with 10%+
operating margins, and expand the professional development of our talented employees.
Our key priorities are Winning the Customer, Building NextCity globally, Growing C4ISR
globally, Building NextTraining globally, and Living OneCubic.
Winning the Customer
Cubic is a diversified technology company with customers around the world. How do you
compete for customers in globally competitive markets and retain their business?
Winning The Customer is absolutely paramount to our success. We simply must do better with the customer
than anyone else. We must deliver early, be more responsive and empathetic, discover key insights, and
continuously innovate faster than the competition. We must provide our customers with superior solutions
spurred by innovation and ultimate customer focus. We must earn their trust and loyalty.
What are some recent examples of how Cubic is Winning The Customer?
Innovation is part of our culture. Our industry recognized achievements give us credentials as thought leaders
and help us earn the trust of our customers. Below are a few examples.
•
Innovation Blue Ribbon Award and Recognition as Top Simulation & Training Company by Military
Training International magazine. Published by Defense House Publishing, it is one of the most frequently
referenced military training and simulation publications focusing on live, virtual and constructive training
•
solutions.
Innovation award for Chicago Ventra app which has exceeded one million downloads and enables transit
riders to plan, manage and pay for their journeys.
• Multiple innovation awards for NextAgent - a virtual walk-up ticket office, integrating a ticket vending
machine and a video-linked call center
• Co-Winner, Best Product/Innovation of the Year, Global AirRail Alliance
• Co-Winner, ITS UK Award for Excellence, for NextAgent Virtual Ticketing at Stansted Airport
• Co-Winner, SmartRail Europe Innovation Award
• Most Innovative New Product Award in Defense, Transportation and Cybersecurity at the 2016
CONNECT Awards. GATR Technologies received the Most Innovative New Product Award – during an
event planned to honor the celebrities of innovation along with groundbreaking new products.
2016 ANNUAL REPORT /7
Q&A Building NextCity Globally
Can you help us understand what NextCity means in terms of growth?
The megatrends of population growth, urbanization and the resultant congestion are posing challenges to
cities around the globe. NextCity is our visionary framework to meet growing demand for urban mobility and
how technology can be leveraged to reduce congestion.
Ultimately, we believe the way travelers plan and manage their journeys will be entirely integrated with how
they pay for those journeys. We are winning contracts around the globe to provide our integrated payment
and information solutions for all modes of transport – not just mass transit. Recent examples include next-
generation solutions in Chicago, Miami, Sydney, and London, a tolling back-office solution for New Hampshire
Department of Transportation, asset management services for the London Cycle Hire scheme, and our
NextAgent virtual ticketing office for the Singapore Land Transport Authority.
We anticipate continuing and growing demand for system upgrades to include mobile and open payment
solutions across our customer base.
What are the adjacent markets that expand the company’s addressable market beyond
automated fare collection?
Through strategic acquisitions, innovation and adjacent market entry we are expanding our core market
beyond automated fare collection including:
• Tolling
• Traffic management
• Transportation analytics
• Real time passenger information
• Mobile payment and information systems
• Fare and transportation payment
Day-to-day, who is leading the effort to implement Cubic’s NextCity strategy?
Matt Cole, president of Cubic Transportation Systems, established this strategy and has fostered it ever
since. Matt was recently named as one of The Top 10 Private Sector Disruptors in Transportation by Eno
Transportation, a Washington, D.C. think tank that promotes policy innovation for transportation. He was also
recognized by Mass Transit magazine as one of its Top 40 Under 40 honorees who have made significant
contributions to the public transit industry.
Growing C4ISR Globally
Recently Cubic has expanded into C4ISR with the acquisition of DTECH Labs, TeraLogics, GATR
Technologies, and most recently Vocality International. How do these businesses fit together?
Secure communications is in high demand by national security forces that carry out defense, intelligence,
security, and commercial missions. We have a unique set of capabilities to meet their need. Since 2014 we
have been building a C4ISR business. Our end-to-end solution captures, exploits and disseminates critical
information without borders, across technologies and with full mobility.
Our capabilities include secure communications, ruggedized networks, full motion video, and inflatable
antennas that are revolutionizing the ultra-portable satellite communications industry. Our expertise
unifies communications platforms, enhances voice quality, increases video performance, and improves
data throughput.
8/ CUBIC CORPORATION
What are your expectations for Cubic Mission
Solutions over the next few years?
Several catalysts will support our growth. On the T2C2
program, our GATR subsidiary expects to transition from
low-rate initial production to high-rate production in fiscal
year 2017. In addition, our DTECH subsidiary expects to fulfill
orders for tactical data center equipment in 2017 that were
delayed in 2016 because of funding constraints.
Lastly, we will expand upon Vocality’s international presence
and leverage our C4ISR solutions into new international
markets. Vocality received the 2016 Queen’s Award for
Enterprise in recognition of outstanding exports across
Europe and the rest of the world. This award is the U.K.’s
highest business accolade.
Over the long term, our C4ISR capabilities will give us
the credentials to pursue larger programs.
Day-to-day, who is leading the
effort to implement Cubic’s
C4ISR strategy?
Mike Twyman, president
of Cubic Mission Solutions is
the chief architect of the C4ISR
strategy and is leading its successful
implementation. He is a 30-year
veteran in the defense industry. He has
set a clear path for Cubic’s growth in the
higher margin, high growth C4ISR market.
Building NextTraining Globally
What key changes are taking place in the defense
market today that impact your business and how are
you addressing them?
Innovations in simulation technologies and a budget
constrained environment are key trends influencing the
defense training market. We are at the forefront of providing
cutting-edge technical solutions that provide cost-effective
training, increase operational readiness in security and
military forces in the U.S. and abroad, and improve training
proficiency based on actual training performance outcomes.
As an example of our leadership, Cubic was chosen by the
Air Force Research Lab to help develop and demonstrate
an integrated live, virtual and constructive (LVC) air combat
training system. Our work is part of a larger program called
the Secure LVC Advanced Training Environment Advanced
Technology Demonstration that will develop and demonstrate
the future of training. We are also at the forefront of
2016 ANNUAL REPORT /9
developing game-based learning solutions that employ 21st century training technologies to reinforce training
and readiness goals while reducing costs.
How will the new administration in Washington D.C. impact your defense business?
The new administration has explicitly stated a desire to rebuild both our nation’s military capacity and the
readiness of the forces. If President-elect Trump’s defense policy initiatives for military readiness and training
are implemented, all of our defense businesses are likely to benefit. Additionally, we expect to see benefits
with reduced corporate taxes and the tax abatement on repatriating overseas cash. At a minimum, we remain
hopeful that with executive and legislative party alignment there will be an overall budget deal that will
eliminate the sequester which delayed approval of the 2017 department of defense budget.
Day-to-day, who is leading effort to implement Cubic’s NextTraining strategy?
David Buss, president of Cubic Global Defense, is an exceptional leader. He has a wealth of experience, as well
as a deep understanding of the military training and readiness business. Prior to joining Cubic, Buss served
more than 36 years in the U.S. Navy where he retired in the rank of vice admiral after serving more than two
years as commander, a position commonly known within the Navy as “air boss”.
Living OneCubic
Culture is becoming more important to customers. How is Cubic’s culture changing and how will
it contribute to the company’s success?
Sharing is the foundation of our cultural identity. We want smart sharing. That is a key reason why our
customer facing functions are decentralized. This ensures customer intimacy and responsiveness. Our
support functions are shared to ensure leverage and scale. Our strategy is shared through the Goal 2020
master plan. Our technologies and innovations are shared through an established internal network, facilitated
by our chief innovation officer.
We have tremendous resources at this great company. For the good of everyone we serve, both internally and
externally, we are breaking down cultural and business silos in favor of collaboration. Our initiative is OneCubic.
Living OneCubic means that we share our people, ideas, technologies, strategies, innovations, and global footprint.
A strong and energized culture will enable us to outperform by executing our strategic imperatives. From
talent management, leadership meetings and innovation, to an enterprise resource planning system, many
initiatives are underway to engage and reinforce a culture of collaboration so that we can perform at our
maximum collective ability and retain and attract talented people.
The company is making a significant investment in ERP. What’s the biggest challenge so far and
how much of the system has been implemented across the company? Is the project on track?
When do you expect to complete it?
Our new enterprise resource planning (ERP) system is our most fundamental transformational investment.
Early on, we initiated a change management and communication plan which helped our employees
understand and articulate the need for this change. While the implementation has been challenging, so far, we
have avoided major pitfalls by greatly minimizing ERP customization.
As a result, our ERP implementation is on track. The system was first rolled out to corporate processes and
employees in April and then to the North American defense systems business in October. The rest of our
businesses will follow based on a quarterly rollout schedule. We expect to complete the process in early fiscal
year 2018.
10/ CUBIC CORPORATION
Fiscal Year 2016 in Review
OCTOBER 2015
• Transport for London and Cubic’s contactless system won
MAY 2016
• Cubic and industry partners awarded $200 million
Most Innovative Transport Project at National Transport
contract by U.S. Air Force Research Laboratory for
Awards in London
Warfighter Readiness and Training Research
• Delivered simulation training to Ulchi Freedom Guardian
• Cubic’s GATR Technologies received order to support
2015 exercise, the largest, distributed, simulation-driven
the U.S. Army’s Transportable Tactical Command
exercise in the world
Communications (T2C2) program
NOVEMBER 2015
• Awarded $52 million E-ZPass back-office system contract
by New Hampshire Department of Transportation
JUNE 2016
•
Increased Joint Training Effectiveness with successful
• Signed three-year contract extension to operate and
integration of air and ground training systems during
maintain Brisbane go card system
Exercise Maple Resolve
• Achieved milestone of one billion Ventra transactions
• Launched Ventra Mobile App for Chicago Transit Authority,
Pace and Metra
DECEMBER 2015
• Opened Cubic Innovation Centre in London to drive
JULY 2016
• TfL and Cubic agreed on license for use of London’s
contactless ticketing system worldwide
• Awarded a five-year $73 million follow-on contract to
mobility advances in urban transportation
support U.S. Marine Corps aviation training
• Acquired TeraLogics, LLC and announced the signing of a
• Achieved milestone of more than one million Compass
definitive agreement to acquire GATR Technologies, Inc.
cards in use in Vancouver
• Achieved service commencement in Vancouver
• Received $13.9 million contract to support U.S. Army’s
JANUARY 2016
• Awarded $15 million task order to support U.S. Army’s
• Received Scheme or Product of the Year for NextAgent
virtual ticket office at the 2016 ITS United Kingdom
Force 2025 and Beyond strategy objectives
Awards for Excellence
Bradley Fighting Vehicle Conduct of Fire Trainer
FEBRUARY 2016
• Completed acquisition of GATR Technologies
AUGUST 2016
• Cubic participated in $1.75 billion FTSS IV IDIQ multiple
• Awarded $33.7 million contract to support simulation
award contract to Support U.S. Navy and Marine Corps
training at the Joint Multinational Simulation Center in
• Awarded $33 million contract to take Miami Transit’s
Grafenwoehr, Germany
• Awarded $44 million in orders by the U.S. Army for
I-MILES IWS
MARCH 2016
• Awarded $76.4 million IDIQ contract from Defense
Logistics Agency for Personnel Locator Systems
• Began pilot trial of NextAgent virtual ticketing solution
in Germany
APRIL 2016
• Commenced the project for an open payment trial
in Sydney
EASY Card System to the Cloud, enabling mobile and
open payment
• Awarded $52 million contract modification to continue
support of U.S. Army’s Joint Readiness Training Center
• Awarded nearly $80 million from Navy’s FTSS IV IDIQ
multiple award contract to support aviation training
SEPTEMBER 2016
• Awarded $35.5 million contract to supply fare collection
equipment for Singapore Land Transport Authority’s future
Thomson-East Coast Line
• Received $12.7 million contract extension from MARTA for
Breeze Card in Atlanta, options could increase value to
• Received Product Innovation of the Year for NextAgent
$52 million
self-service video ticket office at SmartRail Europe
• Received APTA Innovation award for the Chicago Ventra
Innovation Awards
mobile app, which now has over 1 million downloads
2016 ANNUAL REPORT /11
Cubic Transportation Systems
A leading integrator of payment and
information technology and services
for intelligent travel solutions.
12/ CUBIC CORPORATION
FY 16 SALES
$586.4 M
FY 16 BACKLOG
$1.79 B
EMPLOYEES
2,400+
Core Capabilities
• Transportation revenue management
(including our long-term core business
of fare collection)
• Real time passenger information
• Traffic management solutions
• Road safety enforcement solutions
• Front-line and back-office services
Market Drivers
• Urbanization and population growth
• Mobile devices
• Shared transportation services
• Flexible payment systems
• Data analytics
52%
SALES
BY TYPE
48%
Services Products
2016 ANNUAL REPORT /13
Cubic Global Defense
A leading global defense company that
provides innovative systems, products,
solutions and technical services to
government and commercial customers
worldwide.
14/ CUBIC CORPORATION
FY 16 SALES
$875.3 M
FY 16 BACKLOG
$1.15 B
EMPLOYEES
5,700+
Core Capabilities
• Training systems and services
• Virtual, immersive and game-based
training solutions
• Special operations and national
security solutions
• Range design solutions
• Secure communications, networking
and cyber
Market Drivers
• Security concerns around the globe
• Integrated, pervasive, agile, and secure
communications and networking on
the battlefield
• Constrained global defense budgets
• Home station training and realistic
LVC-G synthetic environments
45%
SALES
BY TYPE
55%
Services Systems
2016 ANNUAL REPORT /15
A LETTER FROM THE CHAIRMAN
Your board is focused on supporting the company’s strategy for long-term growth. We spend a significant
amount of our time evaluating opportunities to build on Cubic’s market leadership in defense and
transportation and to increase shareholder value over the long term. Our oversight includes a disciplined
evaluation of the way the company manages and allocates capital and assesses risk management of
the enterprise.
This year the board engaged with Cubic’s president and CEO, Brad Feldmann, and his executive management
team to review and assess our Goal 2020 objective. This strategic direction, as highlighted in Brad’s letter,
lays out a framework for the company to achieve its goals by focusing on our core markets and being an
innovative market leader. The board is confident that Cubic’s management team will succeed in taking on the
challenges and opportunities to achieve our Goal 2020 objectives.
I would like to extend my thanks to Dr. Robert Sullivan. After more than 10 years of service as our lead
independent director, he is stepping down from the board in February at Cubic’s annual shareholder meeting.
Dr. Sullivan was an outstanding director and his highly valued contributions will last far beyond his tenure.
We all wish him well.
In December after the close of the fiscal year, the board nominated Ms. Maureen Breakiron-Evans as a
new independent director. Maureen is a certified public accountant and an experienced board member in
the financial services industry. She currently serves on the boards of Ally Bank and Cognizant Technology
Solutions. We anticipate she will formally join Cubic’s board in February 2017, following a vote of shareholders
at company’s annual meeting. The board is delighted to have identified such an outstanding individual. I’m
certain she will have an important and positive influence on our company.
In closing, I thank you for your support and continued interest in Cubic as we
strive to deliver value for each of you – our shareholders, business partners
and employees.
Thank you for being a loyal shareholder. We remain committed to continuing
our transformation toward long-term growth and prosperity.
Walter C. Zable
Chairman of the Board of Directors
Cubic Corporation
December 23, 2016
16/ CUBIC CORPORATION
Directors & Officers
DIRECTORS
Bradley H. Feldmann
Director
President and Chief Executive Officer of Cubic
Steven J. Norris
Independent Director
Chairman of Soho Estates
Corporation (Classified Business Oversight
President ITS UK
Committee)
Bruce G. Blakley
Independent Director
Retired Managing Partner in San Diego Office
of PricewaterhouseCoopers (Chair – Audit and
Compliance Committee, Executive Compensation
Committee)
Edwin A. Guiles
Independent Director
Retired Executive Vice President of Corporate
Development with Sempra Energy
Former Chairman and CEO of San Diego Gas &
Electric Company and Southern California Gas
Former member of Parliament and Minister
of Transport (Chair - Ethics and Corporate
Responsibility Committee, Nominating and Corporate
Governance Committee)
Robert S. Sullivan
Lead Independent Director
Dean of the Rady School of Management, University of
California, San Diego (Chair - Executive Compensation
Committee, Audit and Compliance Committee,
Nominating and Corporate Governance Committee)
John H. Warner, Jr.
Independent Director
Retired Executive Vice President and Director,
Company (Audit and Compliance Committee,
Science Applications International Corporation
Executive Compensation Committee)
(Chair - Classified Business Oversight Committee,
Janice M. Hamby
Independent Director
Retired U.S. Navy Rear Admiral | Chancellor at the
Chair - Nominating and Corporate Governance
Committee, Audit and Compliance Committee, Ethics
and Corporate Responsibility Committee)
Information Resources Management College (IRMC/
College), National Defense University in Washington,
D.C. (Classified Business Oversight Committee,
Walter C. Zable
Director
Chairman of the Board
Ethics and Corporate Responsibility Committee)
(Classified Business Oversight Committee)
OFFICERS
Bradley H. Feldmann
President and Chief Executive Officer of Cubic
David H. Buss
President of Cubic Global Defense and Senior Vice
Corporation
President of Cubic Corporation
John D. Thomas
Executive Vice President, Chief Financial Officer of
Matthew J. Cole
President of Cubic Transportation Systems and
Cubic Corporation
Senior Vice President of Cubic Corporation
James R. Edwards
Senior Vice President, General Counsel and
Michael R. Twyman
President of Cubic Mission Solutions and Senior Vice
Secretary
President of Cubic Corporation
Mark A. Harrison
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
2016 ANNUAL REPORT /17
Shareholder Information
STOCK PERFORMANCE GRAPH
$250
$200
$150
$100
$50
2011
2012
2013
2014
2015
2016
Cubic Corporation
Peer Group Index
S&P 500 Index
The chart assumes that $100 was
invested on October 1, 2011 in each
of Cubic Corporation, the S&P 500
index and the peer group index, and
compares cumulative shareholder
return on investment as of September
30th, of each of the following 5 years.
The return on investment represents
the change in the fiscal-year end stock
price plus reinvested dividends.
Annual Meeting
The 2017 Annual Meeting will be held in the main
conference room at Cubic’s headquarters.
Location
Cubic Corporation
9333 Balboa Avenue, San Diego, California 92123
Date and Time
February 20, 2017, 11:30 a.m. Pacific Time
Shareholders of record on December 23, 2016 are being
sent formal notice of the meeting, together with the proxy
form and statement.
Company News
Visit www.cubic.com for a link to Securities and Exchange
Commission filings, quarterly earnings reports, and other
company news. Additional investor information is available
at the “Investor Relations” tab of the company’s website,
including:
• Corporate governance information
• Company ethics policies
• Contact information
• Annual Reports
• Committee Charters
Cubic will furnish its 2016 Annual Report to shareholders,
its annual SEC form 10-K [excluding exhibits], and ethics
policies without charge to shareholders upon their written
request by mail or e-mail.
Listing
New York Stock Exchange [NYSE]
Symbol
CUB
Shareholders of Record at September 30, 2016
611
Shareholder Services
Shareholders with questions on account balances, dividend
checks, reinvestment, or direct deposit; address changes;
lost or misplaced stock certificates; or other shareholder
account matters may contact Cubic’s stock transfer agent,
registrar, and dividend disbursing agent:
American Stock Transfer and Trust Company
BY TELEPHONE
(800) 937-5449
BY INTERNET
www.amstock.com
info@amstock.com
BY REGULAR MAIL
American Stock Transfer & Trust Company
Operations Center, 6201 15th Avenue
Brooklyn, NY 11219
Cubic Corporation
For shareholder questions on other matters related to
Cubic, contact:
BY REGULAR MAIL
Cubic Corporation
Diane L. Dyer
Director Investor Relations
9333 Balboa Avenue
San Diego, California 92123
BY E-MAIL
investor.relations@cubic.com
BY TELEPHONE
Investor Line: (858) 505-2222
Auditors
Ernst & Young LLP
18/ CUBIC CORPORATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2016
Commission File Number 001-08931
CUBIC CORPORATION
Exact Name of Registrant as Specified in its Charter
Delaware
State of Incorporation
95-1678055
IRS Employer Identification No.
9333 Balboa Avenue
San Diego, California 92123
Telephone (858) 277-6780
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Title of each class
New York Stock Exchange, Inc.
Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:134) Yes (cid:95) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:134) Yes (cid:95) No
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. (cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). (cid:95) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:95)
Non-accelerated filer (cid:134)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) (cid:134) Yes (cid:95) No
The aggregate market value of 24,881,839 shares of common stock held by non-affiliates of the registrant was: $994,278,286 as of March 31, 2016,
based on the closing stock price on that date. Shares of common stock held by each officer and director and by each person or group who owns 10% or
more of the outstanding common stock have been excluded in that such persons or groups may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of common stock outstanding as of November 4, 2016 including shares held by affiliates is: 27,085,927 (after deducting 8,945,300
shares held as treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with its 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy
Statement will be filed with the Securities and Exchange Commission subsequent to the date hereof but not later than 120 days after registrant’s fiscal
year ended September 30, 2016.
CUBIC CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Year Ended September 30, 2016
TABLE OF CONTENTS
Page
No.
3
15
36
36
37
38
39
40
41
63
65
112
112
113
115
115
115
115
115
116
119
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Item 5.
Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
Part IV
2
Item 1. BUSINESS.
PART I
GENERAL
CUBIC CORPORATION (Cubic) designs, integrates and operates systems, products and services that increase
situational awareness for our customers in the transportation and defense industries. We believe that we have significant
transportation and defense industry expertise which, combined with our innovative technology capabilities, contributes
to our leading customer positions and allows us to deepen and further expand each of our business segments in key
markets. We operate in three reportable business segments across the global transportation and defense markets.
Our Cubic Transportation Systems (CTS) business accounted for approximately 40% of our sales in fiscal year 2016.
CTS specializes in the design, development, production, installation, maintenance and operation of automated fare
payment, traffic management and enforcement solutions, real-time information systems, and revenue management
infrastructure and technologies for transportation agencies. As part of our turnkey solutions, CTS also provides these
customers with a comprehensive suite of business process outsourcing (BPO) services and expertise, such as card and
payment media management, central systems and application support, retail network management, customer call centers
and financial clearing and settlement support. As transportation authorities seek to optimize their operations by
outsourcing bundled systems and services, CTS has transformed itself from a provider of automated fare collection
(AFC) systems into a systems integrator and services company focused on the intelligent transportation market.
In February 2015, we implemented a plan to restructure our defense services and defense systems businesses into a
single business called Cubic Global Defense (CGD) to better align our defense business organizational structure with
customer requirements, increase operational efficiencies and improve collaboration and innovation across the company.
After this restructuring there is now a single, combined management structure for our legacy Cubic Defense Systems
(CDS) and legacy Mission Support Services (MSS) segments. However, for segment financial reporting purposes, we
continue to report the financial results of our defense systems and defense services segments separately. These two
reporting segments have been renamed Cubic Global Defense Systems (CGD Systems) and Cubic Global Defense
Services (CGD Services), respectively. To date, there have been no significant changes in the operations that are
included in each of these reporting segments as a result of the restructuring.
Our complementary defense businesses, CGD Services and CGD Systems, provided approximately 60% of our sales in
fiscal year 2016. CGD Services provides comprehensive training and exercise, operations analysis, and modeling and
simulation support, as well as training analysis, curriculum design, and operations and maintenance services to all four
branches of the U.S. military, including the special operations forces, as well as to allied nations. In addition, CGD
Services offers a broad range of highly specialized national security solutions to the intelligence community. CGD
Systems is a leading provider of realistic, high-fidelity air, ground and surface combat training systems for the U.S. and
allied nations. These training solutions offer the latest live, virtual, constructive, and game-based technology, integrated
to optimize training effectiveness. CGD Systems is also a key supplier of secure communications solutions, including
Intelligence, Surveillance and Reconnaissance (ISR) data links, personnel locator systems for search and rescue
missions, high power amplifiers for HF communications and cross domain products. In 2015 and 2016, we acquired
DTECH LABs, Inc. (DTECH), GATR Technologies Inc. (GATR), and TeraLogics, LCC (TeraLogics) in connection
with our strategic efforts to build and expand our command, control, communication, computers, intelligence,
surveillance and reconnaissance (C4ISR) business. In the third quarter of fiscal 2016 we formalized the structure of
Cubic Mission Solutions (CMS), our business unit which combines and integrates our C4ISR and secure
communications operations within the CGD Systems segment.
We have a broad customer base across our businesses, with approximately 60% of our fiscal year 2016 sales generated
from U.S. federal, state and local governments. Approximately 5% of these domestic sales were attributable to Foreign
Military Sales, which are sales to allied foreign governments facilitated by the U.S. government. The remainder of our
fiscal year 2016 sales were attributable to sales to foreign government and municipal agencies. In fiscal year 2016, 55%
of our total sales were derived from services, with product sales accounting for the remaining 45%. Headquartered in San
3
Diego, California, we had approximately 8,500 employees working on 5 continents and in 26 countries as of
September 30, 2016.
We were incorporated in the State of California in 1949 and began operations in 1951. In 1984, we moved our corporate
domicile to the State of Delaware. Our internet address is www.Cubic.com. The content on our website is available for
information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into
this Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports can be found on our internet website under the heading “Investor Relations”. We make
these reports readily available free of charge in a reasonably practicable time after we electronically file these materials
with the Securities and Exchange Commission (the SEC).
BUSINESS SEGMENTS
Information regarding the amounts of revenue, operating profit and loss and identifiable assets attributable to each of our
business segments, is set forth in Note 16 to the Consolidated Financial Statements for the year ended September 30,
2016. Additional information regarding the amounts of revenue and operating profit and loss attributable to major classes
of products and services is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which follows in Item 7 of this Form 10-K.
TRANSPORTATION SYSTEMS SEGMENT
CTS is a systems integrator of payment and information technology and services for intelligent travel solutions. We
deliver integrated systems for transportation and traffic management, delivering tools for travelers to choose the smartest
and easiest way to travel and pay for their journeys, and enabling transportation authorities and agencies to manage
demand across the entire transportation network — all in real time. We offer fare collection and revenue management
devices, software, systems and multiagency, multimodal integration technologies, as well as a full suite of operational
services that help agencies and operators efficiently collect fares and revenue, manage operations, reduce revenue
leakage and make transportation more convenient. Through our NextBus and Intelligent Transport Management
Solutions (ITMS) businesses, respectively, we also deliver real-time passenger information systems for tracking and
predicting vehicle bus arrival times and we are a leading provider of urban and inter-urban intelligent transportation and
enforcement solutions and technology and infrastructure maintenance services to UK and other international city,
regional and national road and transportation agencies. Through our Urban Insights business we use big data and
predictive analytics technology and a consulting model to help the transportation industry improve operations, reduce
costs and better serve travelers.
CTS is comprised of approximately 2,400 employees working in major transportation markets worldwide. As an
established partner with transportation authorities and operators, we have installed over 130,000 devices and deployed
over 20 regional central systems which in total process approximately 24 billion revenue-related transactions per year,
generating more than $18 billion of revenue per year for such transportation authorities and operators. Products
accounted for 48% of the segment’s fiscal year 2016 sales, with services accounting for the remaining 52%.
We believe that we hold the leading market position in large-scale automated fare payment and revenue management
systems and services for major metropolitan areas. CTS has delivered over 20 regional back office operations which
together serve over 38 million people every day in major markets around the world. We have implemented and, in many
cases, operate, automated fare payment and revenue management systems for some of the world’s largest transportation
systems, examples include London (Oyster/Contactless Payment), the Chicago region (Ventra), the San Francisco Bay
Area (Clipper), the Los Angeles region (TAP), the New York region (Metrocard), the Washington D.C. region
(Smartrip), the Vancouver region (Compass), the Sydney region (Opal Card) and the Brisbane region (Go Card). In the
first quarter of fiscal 2016 we were awarded a contract by the New Hampshire State Department of Transportation to
deploy our back-office system for the purposes of toll revenue collection.
Through our NextBus, ITMS and Urban Insights businesses we provide advanced transportation operational
management and analytics capabilities and related services to over 150 customers including organizations such as
Transport for London, Transport Scotland, Highways England, Transport for Greater Manchester, Transport for New
4
South Wales, Los Angeles Metro, San Francisco Muni, the Toronto Transit Commission and the Metropolitan Boston
Transit Administration.
In addition to helping us secure similar projects in new markets, our comprehensive suite of new technologies and
capabilities enables us to benefit from a recurring stream of revenues in established markets resulting from operations,
innovative new services, technology obsolescence, equipment refurbishment and the introduction of new or adjacent
applications.
Consistent with our history of creating next-generation, state-of-the-art technologies and systems, we are in the process
of developing and implementing our NextCity initiative, which envisions integrated payment and information
technology and services across all modes of transport. NextCity comprises a fully integrated solution offering innovative
fare payment and revenue management technologies, the creation and distribution of real-time and predictive
information through the integration of payment and information systems, applications that enable agencies and operators
to plan for and manage demand and applications that allow customers to manage their travel through seamless access to
predictive and relevant information and convenient payment methods.
Industry Overview
We define our addressable transportation market as large-scale, multi-modal transportation revenue management systems
(e.g. public transit fare collection, toll collection), Real-Time Passenger Information and Intelligent Transportation
Systems and services. We project the long-term growth for this market to be driven primarily by customer infrastructure
expansion as well as technological obsolescence and advancement which will lead to replacements and upgrades. The
average lifecycle of our revenue management systems is approximately 10 years, providing long-term recurring sales
visibility and opportunities for future replacements and upgrades. Together with additional opportunities that stem from
our other businesses as well as entry into new geographies, we believe our overall addressable market to be
approximately $12 billion. We believe industry experience, past performance, technological innovation and price are the
key factors customers consider in awarding programs and such factors can serve as barriers to entry to potential
competitors when coupled with scale and the upfront investments required for these programs.
The transportation systems and services business breaks into niche market segments, each of which is only capable of
sustaining a relatively few number of suppliers. Due to the long life expectancy of these systems and the few companies
with the capabilities to supply them, there is fierce competition to win new contracts, often resulting in low initial
contract profitability.
Advances in communications, networking and security technologies are enabling interoperability of multiple modes of
transportation within a single networked system, as well as interoperability of multiple transportation operators within a
single networked system. As such, there is a growing trend for regional payment systems, usually built around a large
agency and including neighboring operators, all sharing a common regional payment media. Recent procurements for
open payment systems will extend the acceptance of payment media from smart cards, to contactless bank cards and
Near Field Communication (NFC) enabled smart phones.
There is also an emerging trend for other applications to be added to these regional systems to expand the utility of the
payment media and back-office system, offering higher value and incentives to the end users, and lowering costs and
creating new revenue streams through the integration of multi-modal and multi-operator systems for the regional system
operators. As a result, these regional systems have created opportunities for new levels of systems support and services
including customer support call centers and web support services, smart card production and distribution, financial
clearing and settlement, retail merchant network management, transit benefit support, and software application support.
In some cases, operators are choosing to outsource the ongoing operations and commercialization of these regional
payment systems. This growing new market provides the opportunity to establish lasting relationships and grow
revenues and profits over the long term.
Our NextBus business uses a software-as-a-service solution. NextBus’ technologies provide transit passengers with
accurate, real-time predicted arrival information about buses, subways and trains, and include real-time management and
dispatch tools that enable transit operators to effectively manage their systems.
5
ITMS has a portfolio of information based solutions and transportation agency customers. ITMS is a provider of traffic
management systems technology, traffic and road enforcement and the maintenance of traffic signals, emergency
equipment and other critical road and tunnel infrastructure.
Urban Insights combines a consulting and services team with specific data science methods and a cloud-based big data
and predictive analytics platform to generate business insight discovery that helps transportation planners and
administrators quickly comprehend what needs to be done to advance service quality for their customers and optimize
urban transportation networks. Urban Insights harnesses the power of big data and predictive analytics to help the
transportation industry improve operations, reduce costs and better serve travelers.
Raw Materials — CTS
Raw materials used by CTS include sheet steel, composite products, copper electrical wire and castings. A significant
portion of our end product is composed of purchased electronic components and subcontracted parts and supplies. We
procure all of these items from third-party suppliers. In general, supplies of raw materials and purchased parts are
adequate to meet our requirements.
Backlog — CTS
Funded sales backlog of CTS at September 30, 2016 and 2015 amounted to $1.793 billion and $1.894 billion,
respectively. We expect that approximately $522 million of the September 30, 2016 backlog will be converted into sales
by September 30, 2017.
CTS Competitive Environment:
We are one of several companies specializing in the transportation systems and services market. Our competitors in
various market segments include Thales, Xerox, Kapsch, Accenture, IBM, Indra, Init, Siemens, Transcore, Trapeze,
Parkeon and Scheidt & Bachmann.
For large tenders, our competitors may form consortiums that could include telecommunications companies, financial
institutions and consulting companies in addition to the companies noted above. These procurement activities are very
competitive and require that we have highly skilled and experienced technical personnel to compete.
We believe that our competitive advantages include intermodal and interagency regional integration expertise, technical
skills, past contract performance, systems quality and reliability, experience in the industry and long-term customer
relationships.
CUBIC GLOBAL DEFENSE SYSTEMS SEGMENT
CGD Systems is focused on two primary lines of business: training systems and secure communications (SC) products.
The first line of business, training systems, is well diversified and supplies to the Department of Defense (DoD) and 34
allied nations. It is a market leader in live and virtual military training systems and has launched an emerging and fast
growing presence in game-based training systems. Training systems provided by CGD Systems include customized
military range instrumentation systems, live-fire range design and maintenance, laser-based training systems, virtual
simulation systems, and game-based synthetic training environments. The second line of business, SC, includes ISR data
links, satellite ground terminals, modular networking and broadband communications equipment, power amplifiers,
avionics systems, and cross domain products to solve data access challenges across multi-level security designations.
CGD Systems is comprised of approximately 2,000 employees working in 20 nations on 4 continents.
Training Systems
Our training systems business is a pioneer and market leader in the design, innovation, and manufacture of instrumented
training systems and products for the U.S. military and the militaries of allied nations. We design and manufacture
6
realistic, high-fidelity air, ground, and surface systems. They are implemented in both live and synthetic training
environments, and are used to effectively deliver a range of training objectives, such as training for fighter pilots, ground
troops, infantry, armored vehicles, ship operation and maintenance personnel, cyber warriors, and special operations
forces. These systems deliver stressful scenarios and weapons’ effects, collect event and tactical performance data,
record simulated engagements and tactical actions, and deliver after actions reviews to evaluate individual and collective
training effectiveness.
Strategically CGD Systems is very well positioned to lead the increasing trend to fully integrated solutions that connect
live, virtual, constructive, and game-based training environments into a seamless training event. Our training business
portfolio is currently organized into air combat, ground combat, virtual training, and game-based advanced learning
systems.
Air Combat Training Systems
In air combat, Cubic was the initial developer and supplier of Air Combat Maneuvering Instrumentation (ACMI)
capability during the Vietnam War, which provides advanced live training to fighter pilots of the U.S. military and allies
around the world. The ACMI product line has progressed through five generations of technologies and capabilities. The
latest generation, the P5 ACMI, provides advanced air combat training capability to the U.S. Air Force, Navy and
Marine Corps, and has solidified Cubic’s market leading position. We have been awarded a series of contracts to produce
and enhance ACMI for the F-35 Joint Strike Fighter. In May 2016, Cubic and its industry partners were selected by the
U.S. Air Force Research Laboratory for Warfighter Readiness and Training Research to develop technologies for next-
generation readiness capabilities. We have also developed a broad international base for our ACMI product, particularly
in Asia Pacific and the Middle East. In addition to procuring the ACMI training system, many nations also rely on Cubic
for on-site operations and maintenance support.
Ground Combat Training Systems
CGD Systems is a leading provider of realistic, easy-to-use, high-fidelity, reliable, and cost effective tactical engagement
simulation systems that minimize user set-up time and increase training effectiveness. Our leadership role in
instrumented training was established during the 1990s when Cubic provided turnkey systems for U.S. Army training
centers including the Joint Readiness Training Center (JRTC) at Fort Polk, Louisiana, and the Combat Maneuver
Training Center (CMTC) at Hohenfels, Germany, now known as the Joint Multinational Readiness Center. Since the
completion of these original contracts, we have significantly expanded our market footprint with the sale of fixed, mobile
and urban operation training centers to uniformed military and security forces in the U.S. and allied nations around the
world. Our ground combat training systems operate at over 25 combat training centers (CTCs) worldwide. Our laser-
based tactical engagement simulation systems, widely known as the Multiple Integrated Laser Engagement Systems
(MILES), are used at CTCs to enable realistic training without live ammunition. Cubic MILES are being utilized by all
branches of the U.S. Armed Services, as well as the Department of Energy, and numerous international government
customers. We have increased our focus on joint training solutions and those that can operate simultaneously in multiple
simulation environments including live, virtual, constructive and gaming domains. In fiscal year 2013 we acquired the
assets of Advanced Interactive Systems (AIS), which provides live fire training solutions to U.S. and international forces,
further deepening our training capabilities and expanding our customer base.
Game-Based Learning Systems
The $298.5 million Littoral Combat Ship (LCS) courseware contract win by the Simulation Systems Division during
2013 has opened a large new market for CGD Systems. A key discriminator in the LCS proposal was the use of a high-
fidelity gaming engine that allows avatars to instruct students at their own pace in an immersive environment based on
realistic graphics. By integrating instructional material into a gaming environment, we have dramatically reduced
instructor costs and provided a platform that is ideal for embedded training. These technologies are easily transferrable to
different training domains and subject matter. The experiential learning environment can be augmented with intelligent
tutoring and assessment tools increasing the value of this approach. At present, we are investing in the appropriate tool
sets and staffing resources to meet the Navy and commercial airline requirements. Near-term opportunities include other
7
Navy and other DoD customers and commercial airlines, while longer-term applications under consideration exist in
commercial markets such as education, health care, and retail.
Secure Communications
Our secure communications products business supplies secure data links, networking and baseband communications
equipment, search and rescue avionics, high power RF amplifiers, cyber security appliances for the U.S. military,
government agencies, and allied nations. In 2015 and 2016 we acquired DTECH, GATR, and TeraLogics in connection
with our strategic efforts to build and expand our C4ISR business. These new businesses provide deployable satellite
communication terminal solutions, full motion video processing and dissemination, and networking and baseband
communications equipment. In the third quarter of fiscal 2016 we combined and integrated our C4ISR and other secure
communications operations into a new business unit, CMS, which is part of our Cubic Global Defense Systems segment.
GATR
On February 3, 2016, we acquired GATR, a manufacturer of next-generation deployable satellite communication
terminal solutions, based in Huntsville, Alabama. GATR expands our satellite communications and networking
applications technologies and expands our customer base.
TeraLogics
On December 21, 2015 we acquired TeraLogics, a business based in Ashburn, Virginia, which is a leading provider of
real-time full motion video processing, exploitation and dissemination for the DoD, the intelligence community and
commercial customers. TeraLogics’ ability to develop real-time video analysis and delivery software for full motion
video is complementary to Cubic’s existing tactical communications portfolio.
DTECH
On December 16, 2014 we acquired DTECH, which is based in Sterling, Virginia, and is a provider of modular
networking and baseband communications equipment that adds networking capability to our secure communications
business. This acquisition expands the portfolio of product offerings and the customer base of our CGD Systems
segment.
Data Links
Our data links portfolio originated with the U.S. Army/Air Force Joint STARS system during the 1980s, and we continue
to supply ISR data links to U.S. and international forces today. More recently we have focused on the supply of Common
Data Link (CDL) products for ship borne applications, unmanned aerial vehicles (UAV), remote video terminals and
hand-held products. Smaller, tactical versions of our Common Data Link have been selected for both UAV and remote
video terminal applications such as the U.K.’s Watchkeeper, the U.S. Navy’s Fire Scout MQ-8 UAV and common data
link programs and the U.S. Marine Corp’s (USMC) Small Unmanned Aerial System and Networking-on-the-move
system programs.
Personnel Locator System and Power Amplifiers
Our Personnel Locator System (PLS) is standard equipment on U.S. aircraft with a search and rescue mission. PLS is
designed to interface with all modern search and rescue system standards. These include systems used by the Canadian
Coast Guard, the U.S. Navy, the U.S. Air Force and the French Army. We also supply high power amplifiers and
direction finding systems to major prime contractors and end users for both domestic and international applications.
Cyber Cross-Domain
In June 2010, Cubic acquired Safe Harbor Holdings, a cyber security and information assurance company. This
acquisition expanded our service offerings into areas including specialized security and networking infrastructure,
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system certification and accreditation, and enterprise-level network architecture and engineering services. We also
provide cross-domain hardware solutions to address multi-level security challenges across common networks.
Raw Materials — CGD Systems
The principal raw materials used by CGD Systems are sheet aluminum and steel, copper electrical wire and composite
products. A significant portion of our end products are composed of purchased electronic components and subcontracted
parts and supplies. We procure these items primarily from third-party suppliers. In general, supplies of raw materials and
purchased parts are adequate to meet our requirements.
Backlog — CGD Systems
Funded and total backlog of CGD Systems at September 30, 2016 was $577 million compared to $596 million at
September 30, 2015. We expect that approximately $251 million of the September 30, 2016 backlog will be converted
into sales by September 30, 2017.
CUBIC GLOBAL DEFENSE SERVICES SEGMENT
CGD Services is a leading provider of training, operations, intelligence, maintenance, technical, and other support
services to the U.S. government and its agencies and allied nations. These services complement the systems and
solutions provided by the CGD Systems segment. CGD Services is comprised of approximately 3,700 employees
working in 13 nations throughout the world. Our employees serve with clients in actual training and operational
environments to help prepare and support forces through the provision of comprehensive training, exercises, staff
augmentation, education, operational, intelligence, technical, and logistical assistance to meet the full scope of their
assigned missions. The scope of mission support that we provide includes: training and rehearsals for both small and
large scale combat operations; training and preparation of military advisor and training teams; combat and material
development; military staff augmentation; information technology and information assurance; logistics and maintenance
support for fielded and deployed systems; support to national intelligence and special operations activities;
peacekeeping; consequence management; and humanitarian assistance operations worldwide. We also plan, prepare,
execute and document realistic and focused mission rehearsal exercises (using both live and computer-based exercises)
as final preparation of forces prior to deployment. In addition, we provide high level consultation and advisory services
to the governments and militaries of allied nations.
U.S. government service contracts are typically awarded on a competitive basis with options for multiple years. We
typically compete as a prime contractor to the government, but also team with other companies on select opportunities.
Over the last several years we have experienced a number of challenges in the defense services market, including
sequestration, reductions in the U.S. government’s budgets, increased price competition, contract awards for shorter
performance periods, and we have seen an increased amount of required subcontracting to small businesses as a result of
the U.S. government’s increased emphasis on meeting small business contracting mandates. In addition, some of the
contracts where we were the prime contractor in the past have been set aside at re-compete for participation by small
businesses only. Lastly, the government continues to use lowest price, technically acceptable evaluation methods to drive
down price in competitions. This has put significant pressure on profit expectations, has diluted our overall services
margin, and has caused us to reevaluate whether we will continue to bid some programs that fall within our core
competencies.
Our comprehensive business base includes integrated live, virtual and constructive training support; advanced distance
learning and other professional military education; comprehensive logistics and maintenance support; weapons effects
and analytical modeling; analysis, training, and other support to the national security community, including intelligence
and special operations forces; homeland security training and exercises; training and preparation of U.S. Army and
Marine Corps foreign service advisor teams; and military force modernization. We provide in-country logistics,
maintenance, operational and training support to U.S. Forces deployed in overseas locations.
Our contracts include providing mission support services to all four of the U.S. Army’s major combat training centers
(CTCs): Joint Readiness Training Center (JRTC) as prime contractor, the National Training Center (NTC) and Mission
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Command Training Program (MCTP) as a principal subcontractor and the Joint Multinational Readiness Center (JMRC)
as prime contractor supporting constructive simulations. These services include planning, executing and documenting
realistic and stressful large scale exercises and mission rehearsals that increase the readiness of both active and reserve
U.S. conventional and special operations forces by placing them in situations as close to actual combat as possible.
For the U.S. Armed Services, CGD Services is a principal member of the contractor team that supports and helps manage
and execute all aspects of the operations of the Joint Force Development (JFD), including support to worldwide joint
exercises and the development and fielding of the Joint National Training Capability (JNTC). We also provide contractor
maintenance and instructional support necessary to operate and maintain a wide variety of flight simulation and training
systems and other facilities worldwide, for U.S. and allied forces under multiple long-term contracts, including direct
support to USMC aircrew training systems worldwide instructional support services for the Chief of Naval Aviation
Training (CNAT) program and support to the Navy helicopter simulator maintenance program. In addition, we provide a
broad range of operational support to the U.S. Navy for Anti-Submarine Warfare (ASW) and counter-mine operations
and training.
We provide comprehensive support to help plan, manage and execute Defense Threat Reduction Agency’s (DTRA)
worldwide consequence management exercise program, which trains senior U.S. and allied civilian and military
personnel, first responders and other users of DTRA products. Additionally we support DTRA with technology-based
engineering and other services necessary to accomplish DTRA’s mission of predicting and defeating the effects of
chemical, biological, radiological, nuclear and high explosive (CBRNE) weapons. We also support DTRA with
modeling and simulations to analyze, assess and predict the effects of such weapons in combat and other environments.
We provide Research, Development and Technical Engineering (RDTE) support to the U.S. Air Force Research
Laboratories (AFRL) for assistance in the identification and application of current, new and emerging technologies
leading to proof-of-principle evaluations of advanced operational concepts.
We have multiple contracts with all U.S. Armed Services and other government agencies to improve the quality and
reach of training and education of individuals and small teams up through collective training of large organizations. Our
services, products and capabilities include development and deployment of curriculum and related courseware,
computer-based training, knowledge management and distribution, advanced distance learning (e-learning), serious
military games for training and other advanced education programs for U.S. and allied forces.
A part of our services business is to provide specialized teams of military experts to advise the governments and
militaries of the nations of the former Warsaw Pact and Soviet Union, and other former communist countries in the
transformation of their militaries to a NATO environment. These very broad defense modernization contracts involve
both the nations’ strategic foundation and the detailed planning of all aspects of reform. We also operate battle
simulation centers for U.S. forces in Europe, as well as for select countries in Central and Eastern Europe.
In recent years we have expanded our support services to the military and national intelligence communities, as well as
for special operations, law enforcement and homeland security clients to broaden our service offerings across the U.S.
DoD and national security markets to pursue prime contract opportunities.
We believe the combination and scope of our defense services and training systems business is unique in the industry,
permitting us to offer customers a complete training and combat readiness capability from one source.
Backlog — CGD Services
Funded sales backlog of our CGD Services segment at September 30, 2016 was $139 million compared to $150 million
at September 30, 2015. Total backlog, including unfunded options under multiyear service contracts, was $570 million at
September 30, 2016 compared to $486 million at September 30, 2015. We expect that approximately $183 million of the
September 30, 2016 total backlog will be converted into sales by September 30, 2017.
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CGD Competitive Environment
Cubic’s broad defense business portfolio means we compete with numerous companies, large and small, across the
globe. Well known competitors include Lockheed Martin, Northrop Grumman, General Dynamics, Boeing, L3
Communications, Saab Training Systems, SAIC, Leidos, Booz Allen Hamilton, and Engility as well as other smaller
companies. In many cases, we have also teamed with several of these companies, in both prime and subcontractor roles,
on specific bid opportunities. While we are generally smaller than our principal competitors, we believe our competitive
advantages include an outstanding record of past performance, strong incumbent relationships, the ability to control
operating costs and rapidly focus technology and innovation to solve customer problems.
In the defense market, we continue to focus on expanding our domestic and international footprint in the global military
simulation and training market as well as enabling the convergence and integration of live, virtual and constructive
training technologies. U.S. federal budgetary decisions and constraints have put downward pressure on growth in the
defense industry and has affected our business. However, we believe that much of our business is well positioned in
areas that the DoD has indicated are areas of focus for future defense spending to help the DoD meet its critical future
capability requirements for protecting U.S. security and the security of our allies in the years to come.
We are also well positioned in large, relatively stable markets. According to the 2016 Global Military Simulation and
Virtual Training Market report, the value of the global military simulation and virtual training programs market is $13.3
billion in 2016. The value of the market is expected to increase at a compound annual growth rate of 2.9% over the
forecast period, to reach a value of $17.7 billion by 2026. In the U.S., we believe that there are near term pressures on
training budgets for systems and services due to cost pressures resulting from sequestration. However, we believe that
changes in training doctrine and the use of new types of training that are cost effective will be essential for the military to
fulfill its mission. Globally, we are focused on the emerging economies within the Asia Pacific region and the Middle
East, which are expected to be strong markets for simulation and training products and services with projected growth
rates in excess of the overall market. In addition, new platforms and the significant increase in unmanned vehicles and
other advanced weapon systems could generate significant demand for operator training on these new platforms.
Our secure communications products address the large and broadly defined C4ISR market, with an estimated addressable
market of approximately $2 billion annually. We believe that our products and technologies address mission critical
requirements such as: integrated communications suites for unmanned aerial vehicles (UAV), ships and the dismounted
soldier, battlefield awareness, and secure and encrypted communications. We believe that these technologies will
continue to experience strong demand as the U.S. military maintains a smaller, more agile force structure.
BUSINESS STRATEGY
Cubic’s strategy remains guided by our objectives of winning the customer to create market-leading positions, delivering
superior operational performance, and investing our capital and talent to enhance our market-leading businesses. All of
this is supported by our One Cubic initiative: sharing resources across the company to achieve superior talent
management, absolute customer focus, innovation, collaboration, cost-effective enterprise systems and impeccable
ethics.
In transportation, we have developed our NextCity vision for the future of transportation. We are repositioning ourselves
from being a leading provider of mass transit fare collection systems to be a leading provider of integrated payment and
information systems across all modes of transportation. We will continue to grow our portfolio beyond fare collection to
include industries such as tolling, analytics, parking and traffic management.
In defense, we have developed our vision for NextTraining — a capability that will allow us to better prepare our
customers for their NextMission by ensuring we apply the most effective training methodologies based on state-of-the-
art learning methods and neurological science in a cost-effective manner. In 2015 and 2016 we acquired DTECH,
GATR, and TeraLogics in connection with our strategic efforts to build and expand our C4ISR business and we
formalized the structure of our CMS business unit which combines and integrates our C4ISR and secure communications
operations within the CGD Systems segment.
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As part of our strategic planning process, we conducted a portfolio review and are already reshaping our portfolio to
allow us to consistently grow sales, improve profitability and deliver attractive returns on capital. Our acquisition
strategy remains focused on opportunities that align with our NextCity strategy and building our C4ISR business both in
the U.S. and internationally. We are reviewing larger transformational opportunities that would leverage our strategy to
invest in higher margin niche markets and utilize our strong capital position.
We believe implementing our strategy will improve Cubic’s competitive advantage and deliver superior value to our
customers as well as superior returns to our shareholders.
Maintain Niche Market Leadership
We seek to defend our leadership positions in core markets by ensuring all our businesses are absolutely customer
facing, thereby maintaining our long-term relationships with our customers. By achieving this goal, we can leverage our
returns through follow-on business with existing customers and expand our presence in the market through sales of
similar systems at competitive prices to new customers. The length of relationship with many of our customers exceeds
30 years and further supports our industry-wide leadership and technological capabilities. In addition, as a result of
maintaining a high level of performance, we continue to provide a combination of support services for our long-term
customers. Such long-term relationships include the following:
Business Area
Automated Fare Collection
Air Combat Training
Ground Combat Training
MILES
Korea Battle Simulation Center (KBSC)
Joint Coalition Warfare Center (JCWC), now Joint
Force Development (JFD)
Superior Operational Performance
Year
1972, provided the San Francisco Bay Area Rapid Transit
(BART) ticket encoding and vending technology.
1973, supplied first “Top Gun” Air Combat Maneuvering
Instrumentation system for the Marine Corps Air Station at Yuma,
AZ.
1990, pioneered the world’s first turnkey ground combat-
instrumentation system at Hohenfels, Germany for the U.S. Army.
1995, won a contract for our first laser engagement simulation
system for the U.S. Army.
1991, won a contract to design, stand up and operate this large and
complex training center to support all U.S. Forces in Korea. Have
provided continuous support since 1991.
1994, won a contract to design, stand up and operate this large and
complex training center to support U.S. joint forces worldwide.
Have provided continuous support since 1994.
Our businesses will continue to achieve high levels of performance on current contracts, delivering world-class solutions
on schedule and on budget. Achieving this level of performance will deliver high value to our customers, employees, and
shareholders. Superior program execution will help us defend our positions in core markets and expand to new customers
by leveraging solid past performance.
Strategic Reinvestment of Capital
We target markets that have the potential for above-average growth where domain expertise, innovation, technical
competency and contracting dynamics can help to create meaningful barriers to entry. We will strategically reinvest our
cash in key program captures, internal research and development (R&D), and acquisitions to target new priority markets,
ensure market leader positions and improve shareholder equity.
Innovation
We continue to invest in R&D to maintain a leadership role in the technological evolution within our core focus areas of
the global transportation and defense markets. We are committed to using innovation and technology to address our
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customers’ most pressing problems and demanding requirements. We have made meaningful and recognized
contributions to technological advancements within our industries.
The cost of company sponsored R&D activities was $32.0 million, $18.0 million, and $18.0 million in 2016, 2015 and
2014, respectively. In 2016 CTS accelerated R&D investment in new transportation product development, including fare
collection technologies, cloud services and development of tolling and analytic technologies. CGD Systems R&D
expenditures increased in 2016, including the R&D expenses incurred by our recently acquired GATR, TeraLogics, and
DTECH businesses. In addition to internally funded R&D, a significant portion of our new product development occurs
in conjunction with the performance of work on our contracts. The amount of contract-required engineering and product
development activity was approximately $86.3 million in 2016 compared to $77.2 million in 2015 and $73.0 million in
2014; however, these costs are included in cost of sales as they are directly related to contract performance. In fiscal year
2016, we spent 8% of our sales on the total of internally funded and contract funded R&D, primarily focused in our CGD
Systems and CTS segments.
Pursue Strategic Acquisitions
We have sought out strategic acquisitions that help us overcome existing barriers in target markets with the goal of
accelerating our growth. We are focused on finding attractive acquisitions that enhance our market positions, provide
expansion into complementary growth markets and ensure sustainable long-term profitability. We have developed an
acquisition strategy that focuses on specific consolidation and growth opportunities in the defense and transportation
markets. Over the last several years, we have completed multiple acquisitions as a means to diversify our customer base
and expand our systems and services offerings.
For example, in fiscal 2015 and 2016 we acquired DTECH, GATR, and TeraLogics in connection with our strategic
efforts to build and expand our C4ISR business.
Enhance Services Business
We view services as a core element of our business and we are working to expand our service offerings and customer
base. In aggregate, approximately 55% of our sales in fiscal year 2016, were from service-related work. We believe that
a strong base of service work helps to consistently generate profits and smooth the sales fluctuations inherent in systems
work.
At CTS, we deliver a number of customer services from key service facilities for multiple transportation authorities
worldwide. Due to the technical complexities of operating electronic fare collection and payment systems, transportation
agencies are turning to their system suppliers for IT services and other operational and maintenance services, such as
regional settlement, card management and customer support services that would otherwise be performed by the agencies.
As a result, we are transitioning from an AFC supplier to an intelligent transportation systems integrator and services
company providing a suite of turnkey outsourced services for more than 20 transit authorities and cities worldwide.
Today, CTS delivers a wide range of services from customer support to financial management and technical support at
operation centers across the United States, Canada, United Kingdom and Australia.
At CGD Services, we provide a combination of services to our many domestic and international customers. Multiple-
award ID/IQ contracts are now the primary contract vehicle in the U.S. government services marketplace. We have
increased our participation on ID/IQ contracts, giving us more opportunities to bid for work and increasing our chances
to develop new customers, programs and capabilities. We expand our scope of opportunities by offering additional
services to current customers and transferring our skill sets to support similar programs for new customers. The broad
spectrum of services we offer reinforces this strategy, and includes planning and support for theater and worldwide
exercises, computer-based simulations, training and preparation of foreign military advisor and transition teams,
mobilization and demobilization of deploying forces, range support and operations, logistics and maintenance operations,
curriculum and leadership development, special operations forces (SOF) support, intelligence support, force
modernization, open source data collection, as well as engineering and other technical support.
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For CGD Systems, increased services and operations and maintenance opportunities can reduce the volatility and timing
uncertainties associated with large equipment contracts and add depth to the revenue base. Compared to the U.S. market
where small business requirements, omnibus contracts and local preferences create acquisition challenges, we believe the
international market offers greater opportunities to bundle and negotiate multi-year, turnkey contracts. We believe these
long-term contracts reinforce CGD Systems competitive posture and enable us to provide enhanced services through
regular customer contact and increased visibility of product performance and reliability.
Expand International Footprint
We have developed a large global presence in our three business segments. CTS has delivered over 400 projects in 40
major markets on 5 continents to date. Approximately 65% of the CTS segment’s fiscal year 2016 sales were attributable
to international customers. In August 2016 the Land Transport Authority in Singapore selected CTS to be the provider of
the fare collection system for the in-construction Thomson-East Coast Line.
CGD Systems has delivered systems in more than 34 allied nations. In fiscal year 2016, approximately 45% of CGD
Systems sales were to allied foreign governments, including projects funded by the U.S. government pursuant to Foreign
Military Sales and Foreign Military Financing arrangements. We have expanded our presence in the United Kingdom,
Canada, and the United Arab Emirates in response to growing opportunities. These complement a well-established and
sound presence in Singapore, Australia, New Zealand, and Italy.
In fiscal year 2016, approximately 9% of CGD Services sales were performed internationally, including its long-term
force modernization programs supporting multiple Central and Eastern European countries. CGD Services is now
coordinating with CTS and CGD Systems to use their broader international presence to help identify additional global
service opportunities. We are actively working to leverage CGD Services significant domestic special operations forces
(SOF) and related security capabilities and experience to develop new international customers. The international
SOF/Security markets, particularly in the area of training support, offer strong potential for near-term and sustained
growth for the foreseeable future.
INTELLECTUAL PROPERTY
We seek to protect our proprietary technology and inventions through patents and other proprietary-right protection, and
also rely on trademark laws to protect our brand. However, we do not regard ourselves as materially dependent on
patents for the maintenance of our competitive position. We also rely on trade secrets, proprietary know-how and
continuing technological innovation to remain competitive.
REGULATION
Our businesses must comply with and are affected by various government regulations that impact our operating costs,
profit margins and our internal organization and operation of our businesses. We deal with numerous U.S. government
agencies and entities, including all branches of the U.S. military and the DoD. Therefore, we must comply with and are
affected by laws and regulations relating to the formation, administration, and performance of U.S. government and other
contracts. These laws and regulations, among other things, include the Federal Acquisition Regulations and all
department and agency supplements, which comprehensively regulate the formation, administration and performance of
U.S. government contracts. These and other federal regulations require certification and disclosure of cost or pricing data
in connection with contract negotiations for certain types of contracts, define allowable and unallowable costs, govern
reimbursement rights under cost-based contracts, and restrict the use, dissemination and exportation of products and
information classified for national security purposes. For additional discussion of government contracting laws and
regulations and related matters, see “Risk factors” and “Business—Industry Considerations” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Estimates and
Judgments—Revenue Recognition” with respect to pricing and revenue under government contracts.
Our business is subject to a range of foreign, federal, state and local laws and regulations regarding environmental
protection and employee health and safety, including those that govern the emission and discharge of hazardous or toxic
materials into the environment and the generation, storage, treatment, handling, use, transportation and disposal of such
14
materials. From time to time, we have been named as a potentially responsible party at third-party waste disposal sites.
We do not currently expect compliance with such laws and regulations to have a material effect upon our capital
expenditures, earnings or competitive position. However, such laws and regulations are complex, change frequently and
have tended to become increasingly stringent over time. Accordingly, we cannot assure you that such laws and
regulations will not have a material effect on our business in the future.
OTHER MATTERS
We do not engage in any business that is seasonal in nature. Since our revenues are generated primarily from work on
contracts performed by our employees and subcontractors, first quarter revenues tend to be lower than the other three
quarters due to our policy of providing many of our employees seven holidays in the first quarter, compared to one or
two in each of the other quarters of the year. In addition, customer demand for training tends to be similarly affected in
the first fiscal quarter. This is not necessarily a consistent pattern as it depends upon actual activities in any given year.
We employed approximately 8,500 persons at September 30, 2016.
Our domestic products and services are sold almost entirely by our employees. Overseas sales are made either directly or
through representatives or agents.
Item 1A. RISK FACTORS.
Risks relating to our business
Within the last five years we have restated our consolidated financial statements, which may lead to additional risks
and uncertainties, including shareholder litigation, loss of investor confidence and negative impacts on our stock
price.
In May 2014, we restated our consolidated financial statements as of and for the years ended September 30, 2013 and
2012 and for the quarterly periods within the fiscal years ended September 30, 2013 and 2012. The determination to
restate these consolidated financial statements and the unaudited interim condensed consolidated financial statements
was made by our Audit and Compliance Committee upon management’s recommendation following the identification of
errors related to our method of recognizing revenues on two contracts at one of our wholly-owned subsidiaries. We
previously restated our historical financial statements in 2012 following the identification of errors, which related
primarily to the misapplication of GAAP for certain methods of revenue recognition.
The fact that we have completed two restatements in the last five years may lead to a loss of investor confidence and
have negative impacts on the trading price of our common stock.
Our business and stock price may be adversely affected if our internal control over financial reporting is not effective.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Management’s assessment of our
internal control over financial reporting as of September 30, 2013, identified material weaknesses in our internal control
over financial reporting related to accounting for revenue of one of our significant wholly owned subsidiaries. A material
weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. In fiscal 2014, we developed and implemented new control procedures over
financial reporting related to accounting for revenue for this significant wholly owned subsidiary, and we concluded that
we had remediated this material weakness as of September 30, 2014. However, we cannot assure you that our internal
control over financial reporting will prevent additional material weaknesses or other deficiencies in the future. For
example, as a result of an investigation by our Audit Committee in the first half of fiscal 2015, we identified certain
deficiencies in our controls and procedures in connection with programs that are accounted for under the percentage of
completion method. Our Audit Committee and management determined that as of September 30, 2014, the total
estimated costs of certain of our CGD Systems segment contracts were inappropriately reduced during its accounting
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close for the year ended September 30, 2014. The inappropriate reduction of the estimated costs to complete these
contracts resulted in the overstatement of CGD Systems sales and operating income by approximately $750,000 for the
fourth quarter and full year of fiscal 2014. In addition, during the accounting close for our March 31, 2015 financial
statements, we identified certain errors, unrelated to the matters described above, in our September 30, 2014 financial
statements. These errors included an overstatement of revenue recognition on one contract and the understatement of
cost of sales on a small number of contracts. The cumulative impact of these errors resulted in an overstatement of our
operating income for the year ended September 30, 2014 of $1.6 million. Although the deficiencies and errors identified
in fiscal 2015 did not, individually or in aggregate, constitute a material weakness, we will need to continue to monitor
and evaluate our procedures for internal control over financial reporting to ensure that they are designed properly and
operating effectively. We may be at risk for future material weaknesses, particularly if these new procedures do not
operate effectively. The existence of a material weakness could result in errors in our financial statements that could
result in a restatement of financial statements, which could cause us to fail to meet our reporting obligations, lead to a
loss of investor confidence and have a negative impact on the trading price of our common stock.
Unforeseen problems with the implementation and maintenance of our information systems could have an adverse
effect on our operations and if internal controls are not designed and operated effectively our internal control over
financial reporting could be ineffective.
As a part of our efforts to upgrade our current information systems, early in fiscal 2015 we began the process of
designing and implementing new enterprise resource planning software and other software applications to manage our
operations. The cost of the software and integration is expected to exceed $80.0 million, and the software applications
are expected to continue to be implemented in phases over the next 1.5 years. As we implement and add functionality,
problems could arise that we have not foreseen, including interruptions in service, loss of data, or reduced functionality.
Such problems could adversely impact our ability to provide quotes, take customer orders, and otherwise run our
business in a timely manner. In addition, if our new systems fail to provide accurate and increased visibility into pricing
and cost structures, it may be difficult to improve or maximize our profit margins. As such, our results of operations and
cash flows could be adversely affected.
In addition, the new ERP software and other applications that we are implementing are new to our organization. We do
not have experience with implementing and maintaining controls over these new systems. If we are unable to design
controls within or around these systems that are effective at preventing and detecting unreliable data, or if we are unable
to design or operate controls within or around these systems to provide effective control around program changes and
access to the systems, we may be at risk for future material weaknesses. The existence of a material weakness could
result in errors in our financial statements that could result in a restatement of financial statements, which could cause us
to fail to meet our reporting obligations, lead to a loss of investor confidence and have a negative impact on the trading
price of our common stock.
We depend on government contracts for substantially all of our revenues and the loss of government contracts or a
delay or decline in funding of existing or future government contracts could decrease our backlog or adversely affect
our sales and cash flows and our ability to fund our growth.
Our revenues from contracts, directly or indirectly, with foreign and U.S. state, regional and local governmental agencies
represented substantially all of our total revenues in fiscal year 2016. Although these various government agencies are
subject to common budgetary pressures and other factors, many of our various government customers exercise
independent purchasing decisions. As a result of the concentration of business with governmental agencies, we are
vulnerable to adverse changes in our revenues, income and cash flows if a significant number of our government
contracts, subcontracts or prospects are delayed or canceled for budgetary or other reasons.
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The factors that could cause us to lose these contracts and could decrease our backlog or otherwise materially harm our
business, prospects, financial condition or results of operations include:
•
•
•
•
•
•
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•
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•
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budget constraints affecting government spending generally, or specific departments or agencies such as U.S. or
foreign defense and transit agencies and regional transit agencies, and changes in fiscal policies or a reduction of
available funding;
re-allocation of government resources as the result of actual or threatened terrorism or hostile activities or for other
reasons;
disruptions in our customers’ ability to access funding from capital markets;
curtailment of governments’ use of outsourced service providers and governments’ in-sourcing of certain services;
the adoption of new laws or regulations pertaining to government procurement;
government appropriations delays or blanket reductions in departmental budgets;
suspension or prohibition from contracting with the government or any significant agency with which we conduct
business;
increased use of shorter duration awards by the federal government in the defense industry, which increases the
frequency we may need to recompete for work;
impairment of our reputation or relationships with any significant government agency with which we conduct
business;
increased use of small business set asides by government agencies, resulting in Cubic being eligible to perform no
more than 49% of the work as a subcontractor;
increased use of lowest-priced, technically acceptable contract award criteria by government agencies;
increased aggressiveness by the government in seeking rights in technical data, computer software, and computer
software documentation that we deliver under a contract, which may result in “leveling the playing field” for
competitors on follow-on procurements;
impairment of our ability to provide third-party guarantees and letters of credit; and
delays in the payment of our invoices by government payment offices.
In addition, some of our international work is done at the request and at the expense of the U.S. government and its
agencies. Therefore, risks associated with performing work for the U.S. government and its agencies may also apply to
our international contracts.
Government spending priorities and terms may change in a manner adverse to our businesses.
At times, our businesses have been adversely affected by significant changes in U.S. and foreign government spending
during periods of declining budgets. A significant decline in overall spending, or the decision not to exercise options to
renew contracts, or the loss of or substantial decline in spending on a large program in which we participate could
materially adversely affect our business, prospects, financial condition or results of operations. For example, the U.S.
defense and national security budgets in general, and spending in specific agencies with which we work, such as those
that are a part of the DoD, have declined from time to time for extended periods, resulting in program delays, program
cancellations and a slowing of new program starts. Future levels of expenditures and authorizations for defense-related
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programs by the U.S. and foreign governments may decrease, remain constant or shift to programs in areas where we do
not currently provide products or services, thereby reducing the chances that we will be awarded new contracts.
Even though our contract periods of performance for a program may exceed one year, Congress and certain foreign
governments must usually approve funds for a given program each fiscal year and may significantly reduce funding of a
program in a particular year. Significant reductions in these appropriations or the amount of new defense contracts
awarded may affect our ability to complete contracts, obtain new work and grow our business. Congress and such
foreign governments do not always enact spending bills by the beginning of the new fiscal year. Such delays leave the
affected agencies under-funded which delays their ability to contract. Future delays and uncertainties in funding could
impose additional business risks on us.
In addition, the DoD has recently increased its emphasis on awarding contracts to small businesses; awarding contracts
for defense-related services to the lowest-priced, technically acceptable offeror; and awarding shorter duration contracts,
each of which has the potential to reduce the amount of revenue we could otherwise earn from such contracts. Shorter
duration contracts lower our backlog numbers and increase the risk associated with recompeting for a contract, as we
would need to do so more often. In addition, as we may need to expend capital resources at higher levels upon the award
of a new contract, the shorter the duration of the contract, the less time we have to recoup such expenditures and turn a
profit under such contract.
Failure to raise the national debt limit may cause the U.S. government to be unable to pay funds due to us.
Congress and the executive branch may reach an impasse on increasing the national debt limit which would restrict the
U.S. government’s ability to pay contractors for prior work. A failure to receive such payments for an extended period of
time could result in substantial layoffs of our employees, drawdowns of our credit lines and our inability to pay debts
when due, which could materially adversely affect our business, prospects, financial condition or results of operations.
A deadlock in the U.S. Congress over budgets and spending could cause another partial shutdown of the U.S.
government or sequestration, which could result in a termination or suspension of some or all of our contracts with
the U.S. government.
If Congress does not agree on a budget or continuing resolution, it may result in a partial shutdown of the U.S.
government or sequestration and cause the termination or suspension of our contracts with the U.S. government or
automatic cuts to the U.S. defense budget, which could impact some or all of our contracts. Under such circumstances,
we could be required to furlough affected employees for an indefinite time, terminate or suspend subcontracts, or incur
contract wind-down costs. It is uncertain if we would be compensated or reimbursed for any loss of revenue during such
periods. If we were not compensated or reimbursed, it could result in significant adverse effects on our revenues,
operating costs and cash flows.
Our contracts with government agencies may be terminated or modified prior to completion, which could adversely
affect our business.
Government contracts typically contain provisions and are subject to laws and regulations that give the government
agencies rights and remedies not typically found in commercial contracts, including providing the government agency
with the ability to unilaterally:
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reduce the value of our existing contracts;
• modify some of the terms and conditions in our existing contracts;
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suspend or permanently prohibit us from doing business with the government or with any specific government
agency;
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control and potentially prohibit the export of our products;
cancel or delay existing multi-year contracts and related orders if the necessary funds for contract performance for
any subsequent year are not appropriated;
decline to exercise an option to extend an existing multi-year contract; and
claim rights in technologies and systems invented, developed or produced by us.
Most U.S. government agencies and some other agencies with which we contract can terminate their contracts with us
for convenience, and in that event we generally may recover only our incurred or committed costs, settlement expenses
and profit on the work completed prior to termination. If an agency terminates a contract with us for default, we may be
denied any recovery and may be liable for excess costs incurred by the agency in procuring undelivered items from an
alternative source. We may receive show-cause or cure notices under contracts that, if not addressed to the agency’s
satisfaction, could give the agency the right to terminate those contracts for default or to cease procuring our services
under those contracts.
In the event that any of our contracts were to be terminated or adversely modified, there may be significant adverse
effects on our revenues, operating costs and income that would not be recoverable.
We have made assumptions concerning behavior by public transit authorities which may not hold true over time.
In our transportation business we have made certain assumptions that support the growth of the business. For example,
we have assumed that governments will continue to charge passengers for using public transit. We have also assumed
that transit agencies will continue to outsource operations and services. Should these assumptions not hold true, our
transportation business could experience a material loss of business.
Changes in future business or other market conditions could cause business investments and/or recorded goodwill or
other long-term assets to become impaired, resulting in substantial losses and write-downs that would reduce our
results of operations.
As part of our strategy, we will, from time to time, acquire a minority or majority interest in a business. These
investments are made upon careful analysis and due diligence procedures designed to achieve a desired return or
strategic objective. These procedures often involve certain assumptions and judgment in determining acquisition price.
After acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not
recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may
vary significantly from initial estimates.
We evaluate our recorded goodwill balances for potential impairment annually as of July 1, or when circumstances
indicate that the carrying value may not be recoverable. The goodwill impairment test is performed by comparing the fair
value of each reporting unit to its carrying value, including recorded goodwill. In the fourth quarter of fiscal 2013, we
recognized a goodwill impairment in our CGD Services segment of $50.9 million. This goodwill impairment, and any
impairment that might be necessary in the future, is measured by comparing the implied fair value of goodwill to its
carrying value, and any impairment determined is recorded in the current period.
No goodwill impairment has been recognized subsequent to the fourth quarter of fiscal 2013. Any future impairment
could result in substantial losses and write-downs that would reduce our results of operations. For more information on
the accounting policies we have in place for impairment of goodwill, see our discussion under “Valuation of Goodwill”
in Item 7 of this Form 10-K.
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Failure to retain existing contracts or win new contracts under competitive bidding processes may adversely affect
our revenue.
We obtain most of our contracts through a competitive bidding process, and substantially all of the business that we
expect to seek in the foreseeable future likely will be subject to a competitive bidding process. Competitive bidding
presents a number of risks, including:
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the need to compete against companies or teams of companies with more financial and marketing resources and
more experience in bidding on and performing major contracts than we have;
the need to compete against companies or teams of companies that may be long-term, entrenched incumbents for a
particular contract for which we are competing and that have, as a result, greater domain expertise and better
customer relations;
the need to compete to retain existing contracts that have in the past been awarded to us on a sole-source basis or as
to which we have been incumbent for a long time;
the U.S. government’s increased emphasis on awarding contracts to small businesses could preclude us from bidding
on certain work or reduce the scope of work we can bid as a prime contractor and limit the amount of revenue we
could otherwise earn as a prime contractor for such contracts;
the award of contracts on a “lowest-priced technically acceptable” basis which may lower the profit we may
generate under a contract awarded using this evaluation method or prevent us from submitting a bid for such work
due to us deeming such work to be unprofitable;
the reduction of margins achievable under any contracts awarded to us;
the expense and delay that may arise if our competitors protest or otherwise challenge new contract awards;
the need to bid on some programs in advance of the completion of their design, which may result in higher R&D
expenditures, unforeseen technological difficulties, or increased costs which lower our profitability;
the substantial cost and managerial time and effort, including design, development and marketing activities,
necessary to prepare bids and proposals for contracts that may not be awarded to us;
the need to develop, introduce and implement new and enhanced solutions to our customers’ needs;
the need to locate and contract with teaming partners and subcontractors; and
the need to accurately estimate the resources and cost structure that will be required to perform any fixed-price
contract that we are awarded.
We may not be afforded the opportunity in the future to bid on contracts that are held by other companies and are
scheduled to expire if the agency decides to extend the existing contract. If we are unable to win particular contracts that
are awarded through the competitive bidding process, we may not be able to operate in the market for services that are
provided under those contracts for a number of years. If we win a contract, and upon expiration the customer requires
further services of the type provided by the contract, there is frequently a competitive rebidding process and there can be
no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or
completion of a contract.
As a result of the complexity and scheduling of contracting with government agencies, we occasionally incur costs
before receiving contractual funding by the government agency. In some circumstances, we may not be able to recover
these costs in whole or in part under subsequent contractual actions.
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In addition, the customers currently serviced by our CTS segment are finite in number. The loss of any one of these
customers, or the failure to win replacement awards upon expiration of contracts with such customers could adversely
impact us.
If we are unable to consistently retain existing contracts or win new contract awards, our business, prospects, financial
condition and results of operations will be adversely affected.
Many of our U.S. government customers spend their procurement budgets through multiple-award or ID/IQ
contracts, under which we are required to compete among the awardees for post-award orders. Failure to win post-
award orders could affect our ability to increase our sales.
The U.S. government can select multiple winners under multiple-award contracts, federal supply schedules and other
agency-specific ID/IQ contracts, as well as award subsequent purchase orders among such multiple winners. This means
that there is no guarantee that these ID/IQ, multiple-award contracts will result in the actual orders equal to the ceiling
value under the contract, or result in any actual orders. We are only eligible to compete for work (purchase orders and
delivery orders) as an awardee pursuant to government-wide acquisition contracts already awarded to us. Our failure to
compete effectively in this procurement environment could reduce our sales, which would adversely affect our business,
results of operations and financial condition.
The U.S. government’s emphasis on awarding contracts to small businesses could preclude us from acting as a prime
contractor and increase the number of contracts we receive as a subcontractor to small businesses, which could
decrease the amount of our revenues from such contracts. Some of these small businesses may not be financially
sound, which could adversely affect our business.
There is emphasis by the U.S. government on awarding contracts to small businesses, which may preclude companies the
size of ours from obtaining certain work, other than as a subcontractor to these small businesses for no more than 49% of
the total contract price. There are inherent risks in contracting with small companies that may not have the capability or
financial resources to perform these contracts or administer them correctly. If a small business with which we have a
subcontract fails to perform, fails to bill the government properly or fails financially, we may have difficulty receiving
timely payments or may incur bad debt write-offs if the small business is unable or unwilling to pay us for work we
perform. In addition, being a subcontractor may limit the amount of revenue we could otherwise earn as a prime
contractor for such contracts. When we only act as a subcontractor, we may only receive up to 49% of the value of the
contract award, and such percentage may be less should the small business partner or partners be able to service a larger
piece of the award. Failure to maintain good relationships with small business partners operating in our industries could
preclude us from winning work as a subcontractor as part of a large contracting consortium. This could result in
significant adverse effects on our revenues, operating costs and cash flows.
Government audits of our contracts could result in a material charge to our earnings, have a negative effect on our
cash position following an audit adjustment or adversely affect our ability to conduct future business.
U.S. government agencies, including the DoD and others, routinely audit and review a contractor’s performance on
government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement
laws, regulations and standards. Based on the results of such audits, the auditing agency is authorized to adjust our unit
prices if the auditing agency does not find them to be “fair and reasonable.” The auditing agency is also authorized to
require us to refund any excess proceeds we received on a particular item over its final adjusted unit price.
The DoD, in particular, also reviews the adequacy of, and compliance with, our internal control systems and policies,
including our purchasing, accounting, financial capability, pricing, labor pool, overhead rate and management
information systems. Our failure to obtain an “adequate” determination of our various accounting and management
internal control systems from the responsible U.S. government agency could significantly and adversely affect our
business, including our ability to bid on new contracts and our competitive position in the bidding process. Failure to
comply with applicable contracting and procurement laws, regulations and standards could also result in the U.S.
government imposing penalties and sanctions against us, including suspension of payments and increased government
scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on contracts or perform
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contracts, or could result in suspension or debarment from competing for contracts with the U.S. government. In
addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or
not true.
In addition, transit authorities have the right to audit our work under their respective contracts. If, as the result of an
adverse audit finding, we were suspended or prohibited from contracting with the U.S. government, any significant
government agency or a transit authority terminated its contract with us, or our reputation or relationship with such
agencies and authorities was impaired or they otherwise ceased doing business with us or significantly decreased the
amount of business done with us, it would adversely affect our business, results of operations and financial condition.
Our international business exposes us to additional risks, including exchange rate fluctuations, foreign tax and legal
regulations and political or economic instability that could harm our operating results.
Our international operations subject us to risks associated with operating in and selling products or services in foreign
countries, including:
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devaluations and fluctuations in currency exchange rates;
changes in foreign laws that adversely affect our ability to sell our products or services or our ability to repatriate
profits to the United States;
increases or impositions of withholding and other taxes on remittances and other payments by foreign subsidiaries or
joint ventures to us;
increases in investment and other restrictions or requirements by foreign governments in order to operate in the
territory or own the subsidiary;
costs of compliance with local laws, including labor laws, privacy laws, and import/export regulations;
compliance with applicable U.S. and foreign anti-corruption laws, anti-trust/competition laws, anti-Boycott Israel
laws, anti-money laundering laws and sanctions;
export control regulations and policies which govern our ability to supply foreign customers;
unfamiliar and unknown business practices and customs;
compliance with domestic and foreign government policies, including requirements to expend a portion of contract
funds locally and governmental industrial cooperation or offset requirements;
the complexity and necessity of using foreign representatives and consultants or being prohibited from such use;
the difficulty of ensuring that our foreign representatives, consultants and partners comply with applicable U.S. and
foreign anti-corruption laws and anti-trust/competition laws;
the need to form joint ventures or other special purpose companies with local, in-country partners to pursue projects
as a prime contractor;
the uncertainty of the ability of foreign customers to finance purchases;
imposition of tariffs or embargoes, export controls and other trade restrictions;
potentially being prohibited from bidding for international work due to perceived conflicts or national security
concerns resulting from the significant amount of work we do for the U.S. government and its agencies;
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the difficulty of management and operation of an enterprise in various countries; and
economic and geopolitical developments and conditions, including ongoing instability in global economies and
financial markets, international hostilities, acts of terrorism and governmental reactions, inflation, trade relationships
and military and political alliances.
Our foreign subsidiaries generally enter into contracts and make purchase commitments that are denominated in foreign
currencies. Accordingly, we are exposed to fluctuations in exchange rates, which could have a significant impact on our
results of operations. We have no control over the factors that generally affect this risk, such as economic, financial and
political events and the supply of and demand for applicable currencies. While we use foreign exchange forward and
option contracts to hedge significant contract sales and purchase commitments that are denominated in foreign
currencies, our hedging strategy may not prevent us from incurring losses due to exchange fluctuations.
The results of the United Kingdom’s referendum on withdrawal from the European Union (EU) may have a negative
effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the EU in a national referendum. The
referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two
years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum
has created significant uncertainty about the future relationship between the United Kingdom and the EU, and has given
rise to calls for the governments of other EU member states to consider withdrawal.
These developments, or the perception that any of them could occur, have had and may continue to have a material
adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce
global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset
valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. Lack of
clarity about future United Kingdom laws and regulations as the United Kingdom determines which EU laws to replace
or replicate in the event of a withdrawal, could depress economic activity, restrict our access to capital or adversely
affect our contracts or relationships with customers in the United Kingdom or elsewhere in the European economic area,
including, for example, our contracts with Transport for London, which accounted for $156.3 million, $183.2 million
and $213.2 million of our sales in 2016, 2015 and 2014, respectively. If the United Kingdom and the EU are unable to
negotiate acceptable withdrawal terms or if other EU member states pursue withdrawal, barrier-free access between the
United Kingdom and other EU member states or among the European economic area overall could be diminished or
eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of
operations.
We may not be able to receive the necessary licenses required for us to sell our export-controlled products and
services overseas. In addition, the loss of our registration as either an exporter or a broker under the International
Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR), would adversely affect our
business, results of operations and financial condition.
U.S. government agencies, primarily the Directorate of Defense Trade Controls within the State Department and the
Bureau of Industry Security within the U.S. Department of Commerce, must license shipments of certain export-
controlled products that we export. These licenses are required due to both the products we export and to the foreign
customers we service. If we do not receive a license for an export-controlled product, we cannot ship that product. We
cannot be sure of our ability to gain any licenses required to export our products, and failure to receive a required license
would eliminate our ability to make that sale. A delay in obtaining the necessary licenses to sell our export-controlled
products abroad could result in delayed deliveries and delayed recognition of revenue, which could cause us reputational
damage and could result in a customer’s decision not to do business with us in the future. We may also be subject to
inquiries by such U.S. government agencies relating to issues involving the export-controlled products and services we
export and failure to satisfactorily resolve such inquiries would adversely affect our business, results of operations and
financial condition.
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In addition to obtaining a license for certain of our exports outside of the United States, we are also required to maintain
a standing registry under the ITAR and the EAR as an exporter. We operate as an exporter when we ship certain products
to our customers outside the United States. If we were to lose our registration as an exporter under the ITAR or the EAR,
we would not be able to sell export-controlled products abroad, which would adversely affect our business, results of
operations and financial condition.
The loss of required licenses from the Bureau of Alcohol, Tobacco, Firearms and Explosives could limit our ability to
perform on contracts requiring the use of controlled firearms.
In our training business we use certain firearms which are regulated by the Bureau of Alcohol, Tobacco, Firearms and
Explosives. If we fail to properly manage the firearms pursuant to the regulations, we could face fines and the possible
loss of the licenses. The loss of the licenses could result in our inability to perform on certain contracts, which would
have an adverse business, reputational and financial impact.
Our operating margins may decline under our fixed-price contracts if we fail to accurately estimate the time and
resources necessary to satisfy our obligations.
Approximately 82% of our revenues in fiscal year 2016 were from fixed-price contracts under which we bear the risk of
cost overruns. Our profits are adversely affected if our costs under these contracts exceed the assumptions we used in
bidding for the contract. We may therefore need to absorb any increases in our supply costs and may not be able to pass
such costs increases along to our customers. Sometimes we are required to fix the price for a contract before the project
specifications are finalized, which increases the risk that we will incorrectly price these contracts. The complexity of
many of our engagements makes accurately estimating the time and resources required more difficult.
We may not receive the full amounts estimated under the contracts in our total backlog, which could reduce our sales
in future periods below the levels anticipated and which makes backlog an uncertain indicator of future operating
results.
As of September 30, 2016, our total backlog was approximately $2.9 billion. Orders may be cancelled and scope
adjustments may occur, and we may not realize the full amounts of sales that we may anticipate in our backlog numbers.
There can be no assurance that the projects underlying the contracts and purchase orders will be placed or completed or
that amounts included in our backlog ultimately will be billed and collected. Additionally, the timing of receipt of sales,
if any, on contracts included in our backlog could change. The failure to realize amounts reflected in our backlog could
materially adversely affect our business, financial condition and results of operations in future periods.
We may be liable for civil or criminal penalties under a variety of complex laws and regulations, and changes in
governmental regulations could adversely affect our business and financial condition.
Our business must comply with and are affected by various government regulations that impact our operating costs,
profit margins and our internal organization and operation of our businesses. These regulations affect how we do
business and, in some instances, impose added costs. Any changes in applicable laws could adversely affect our business
and financial condition. Any material failure to comply with applicable laws could result in contract termination, price or
fee reductions or suspension or debarment from contracting. The more significant regulations include:
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the Federal Acquisition Regulations (FAR) and all department and agency supplements, which comprehensively
regulate the formation, administration and performance of U.S. government contracts;
the Truth in Negotiations Act and implementing regulations, which require certification and disclosure of all cost
and pricing data in connection with certain contract negotiations;
the ITAR, which control the export of items on the U.S. Munitions Control List administered by the U.S.
Department of State;
the Export Administration Regulations which control commercial, dual-use and select defense related articles;
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the Bureau of Alcohol, Tobacco, Firearms and Explosives regulations that control the manufacture, possession and
sale of firearms and explosive devices and materials;
laws, regulations and executive orders restricting the use and dissemination of information classified for national
security purposes and the exportation of certain products and technical data;
regulations of most state and regional agencies and foreign governments similar to those described above;
the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign
Assets Control;
the Sherman Act and Clayton Act, which proscribe unlawful, anti-competitive conduct and business practices;
the Foreign Corrupt Practices Act and the U.K. Bribery Act;
the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Protection Act;
healthcare reform laws and regulations, including those enacted under the Patient Protection and Affordable Care
Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010;
the Fair Labor Standards Act and similar state wage and hour laws;
tax laws and regulations in the U.S. and in other countries in which we operate;
the civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a
false or fraudulent claim to the U.S. government for payment or approval;
the Procurement Integrity Act, which requires evaluation of ethical conflicts surrounding procurement activity and
establishing certain employment restrictions for individuals who participate in the procurement process; and
the Small Business Act and the Small Business Administration, size status regulations, which regulate eligibility for
performance of government contracts which are set aside for, or a preference is given in the evaluation process if
awarded to, specific types of contractors such as small businesses and minority-owned businesses.
Many of our U.S. government contracts contain organizational conflicts of interest clauses that may limit our ability to
compete for or perform certain other contracts. Organizational conflicts of interest arise when we engage in activities that
provide us with an unfair competitive advantage. A conflict of interest issue that precludes our competition for or
performance on a significant program or contract could harm our prospects and negative publicity about a conflict of
interest issue could damage our reputation.
In addition, the U.S. and foreign governments may revise existing contract rules and regulations or adopt new contract
rules and regulations at any time and may also face restrictions or pressure regarding the type and amount of services it
may obtain from private contractors. For instance, Congressional legislation and initiatives dealing with procurement
reform and shifts in the buying practices of U.S. government agencies resulting from those proposals could have adverse
effects on government contractors, including us. Any of these changes could impair our ability to obtain new contracts or
renew contracts under which we currently perform when those contracts are eligible for recompetition. Any new
contracting methods could be costly or administratively difficult for us to implement, which would adversely affect our
business, results of operations and financial condition.
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Our failure to identify, attract and retain qualified technical and management personnel could adversely affect our
existing businesses, financial condition and results of operations.
We may not be able to identify, attract or retain qualified technical personnel, including engineers, computer
programmers and personnel with security clearances required for classified work, or management personnel to supervise
such activities that are necessary for maintaining and growing our existing businesses, which could adversely affect our
financial condition and results of operations. The technically complex nature of our operations results in difficulties
finding qualified staff. In our defense businesses especially, experienced personnel possessing required security
clearances are finite in number. A number of our employees maintain a top secret clearance level. Obtaining and
maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain
employees who already hold security clearances. If our cleared employees lose or are unable to timely obtain security
clearances or we lose a facility clearance, our U.S. government customers may terminate the contract or decide not to
renew it upon its expiration. As a result, to the extent we cannot obtain or maintain the required security clearances for a
particular contract, or we fail to obtain them on a timely basis, we may not generate the sales anticipated from the
contract, which could harm our operating results. To the extent we are not able to obtain facility security clearances or
engage employees with the required security clearances for a particular contract, we will be unable to perform that
contract and we may not be able to compete for or win new awards for similar work.
Our business could be negatively affected by cyber or other security threats or other disruptions.
We face cyber threats, threats to the physical security of our facilities and employees, including senior executives, and
terrorist acts, as well as the potential for business disruptions associated with information technology failures, damaging
weather or other acts of nature, and pandemics or other public health crises, which may adversely affect our business.
We routinely experience cyber security threats, threats to our information technology infrastructure and attempts to gain
access to our company sensitive information, as do our customers, suppliers, subcontractors and joint venture partners.
We may experience similar security threats at customer sites that we operate and manage as a contractual requirement.
Prior cyber attacks directed at us have not had a material impact on our financial results, and we believe our threat
detection and mitigation processes and procedures are robust. Due to the evolving nature of these security threats,
however, the impact of any future incident cannot be predicted.
Although we work cooperatively with our customers and our suppliers, subcontractors, and joint venture partners to seek
to minimize the impacts of cyber threats, other security threats or business disruptions, in addition to our internal
processes, procedures and systems, we must also rely on the safeguards put in place by those entities.
The costs related to cyber or other security threats or disruptions may not be fully mitigated by insurance or other means.
Occurrence of any of these events could adversely affect our internal operations, the services we provide to customers,
loss of competitive advantages derived from our R&D efforts, early obsolescence of our products and services, our
future financial results, our reputation or our stock price. The occurrence of any of these events could also result in civil
and/or criminal liabilities.
We may incur significant costs in protecting our intellectual property which could adversely affect our profit margins.
Our inability to obtain, maintain and enforce our patents and other proprietary rights could adversely affect our
businesses’ prospects and competitive positions.
We seek to protect our proprietary technology and inventions through patents and other proprietary-right protection, and
also rely on trademark laws to protect our brand. However, we may fail to obtain the intellectual property rights
necessary to provide us with a competitive advantage, and any of our owned or licensed intellectual property rights could
be challenged, invalidated, circumvented, infringed or misappropriated.
We may also fail to apply for or obtain intellectual property protection in important foreign countries, and the laws of
some foreign countries do not protect proprietary rights to the same extent as the laws of the United States. If we are
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unable to obtain or maintain these protections, we may not be able to prevent third parties from using our technology and
inventions, which could adversely affect our business.
The DoD has become more aggressive in seeking rights in all technical data, computer software, and computer software
documentation that we may deliver under U.S. government contracts. Those rights include the ability of the government
to provide that technical data, computer software, and computer software documentation to our competitors which may
result in “leveling the playing field” for competitors and reducing our incumbency advantage during re-procurements for
those goods or services.
We may incur significant expense in obtaining, maintaining, defending and enforcing our intellectual property rights. We
may fail to take the actions necessary to enforce our intellectual property rights and even if we attempt to enforce such
rights we may ultimately be unsuccessful, and such efforts may result in our intellectual property rights being
challenged, limited in scope, or declared invalid or unenforceable. Also, some aspects of our business and services may
rely on technologies and software developed by or licensed from third parties, and we may not be able to maintain our
relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.
We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We
have taken measures to protect our trade secrets and know-how, including seeking to enter into confidentiality
agreements with our employees, consultants and advisors, but the measures we have taken may not be sufficient. For
example, confidentiality agreements may not provide adequate protection or may be breached. We generally control and
limit access to our product documentation and other proprietary information, but other parties may independently
develop our know-how or otherwise obtain access to our technology, which could adversely affect our businesses’
prospects and competitive position.
Assertions by third parties that we violate their intellectual property rights could have a material adverse effect on our
business, financial condition and results of operations.
Third parties may claim that we, our customers, licensees or parties indemnified by us are infringing upon or otherwise
violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive
advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual
property assets for the purpose of making claims of infringement and attempting to extract settlements from companies
like ours.
Any claims that we violate a third party’s intellectual property rights can be time consuming and costly to defend and
distract management’s attention and resources, even if the claims are without merit. Such claims may also require us to
redesign affected products and services, enter into costly settlement or license agreements or pay costly damage awards,
or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and
services. Even if we have an agreement to indemnify us against such costs, the indemnifying party may not have
sufficient financial resources or otherwise be unable to uphold its contractual obligations. If we cannot or do not license
the infringed technology on favorable terms or cannot or do not substitute similar technology from another source, our
revenue and earnings could be adversely impacted.
We compete primarily for government contracts against many companies that are larger, better capitalized and better
known than us. If we are unable to compete effectively, our business and prospects will be adversely affected.
Our businesses operate in highly competitive markets. Many of our competitors are larger, better financed and better
known companies who may compete more effectively than we can. In order to remain competitive, we must keep our
capabilities technically advanced and compete on price and on value added to our customers. Our ability to compete may
be adversely affected by limits on our capital resources and our ability to invest in maintaining and expanding our market
share. Consolidation in the industries in which we operate and government budget cuts have led to pressure being placed
on the margins we may earn on any contracts we win. In addition, should the transportation market move towards
requiring contractors to provide up-front financing for contracts they are awarded (for example, our contract for the
Chicago Open Standards Fare System), we may need to compete more heavily on the basis of our financial strength,
which may limit the contracts we can service at any one time.
27
The terms of our financing arrangements may restrict our financial and operational flexibility, including our ability
to invest in new business opportunities.
At the beginning of fiscal 2015, we had a committed five-year revolving credit agreement, expiring in May 2017, with a
group of financial institutions in the amount of $200.0 million. On February 2, 2016, we and the group of financial
institutions increased the revolving line of credit available under the agreement to $400.0 million and we borrowed
$150.0 million as a source of financing for the purchase of GATR. In connection with this increase in the facility size,
certain debt covenant definitions and limitations were modified to increase our leverage capacity. On August 11, 2016,
we executed the Third Amended and Restated Credit Agreement, which amended and restated the prior revolving credit
agreement to extend the maturity to August 11, 2021, add a new financial institution to the group of creditors and amend
certain terms and covenants. Borrowings under the agreement bear a variable rate of interest which is calculated based
upon the U.S. dollar LIBOR rate plus a contractually defined credit spread that is based upon the tenor of the specific
borrowing. At September 30, 2016, the weighted average interest rate on outstanding borrowings under the agreement
was 2.5%. The available line of credit is reduced by any letters of credit issued under the agreement. As of September
30, 2016, there were borrowings totaling $240.0 million under this agreement and there were letters of credit outstanding
totaling $20.7 million, which reduce the available line of credit to $139.3 million.
We also have a secured letter of credit facility agreement with a bank that has no expiration date and is cancellable by us
at any time upon the completion of certain conditions to the satisfaction of the bank. As of September 30, 2016, there
were letters of credit outstanding under this agreement of $62.7 million. In support of this facility, we placed $69.4
million of our cash on deposit in the U.K. as collateral in a restricted account with the bank providing the facility. We are
required to leave the cash in the restricted account so long as the bank continues to maintain associated letters of credit
under the facility. The maximum amount of letters of credit currently allowed by the facility is $63.1 million, and any
increase above this amount would require bank approval and additional restricted funds to be placed on deposit. We may
choose at any time to terminate the facility and move the associated letters of credit to another credit facility. Letters of
credit outstanding under the facility do not reduce the available line of credit available under the revolving credit
agreement described above.
On March 12, 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0
million in aggregate principal amount of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on
March 12, 2025. In addition, pursuant to the agreement, on July 17, 2015, we issued an additional $25.0 million in
aggregate principal amount of senior unsecured notes, bearing interest at a rate of 3.70% and maturing on March 12,
2025. Interest payments on the notes issued in 2013 and 2015 are due semi-annually and principal payments are due
from 2021 through 2025. On February 2, 2016 we revised the note purchase agreement and we issued an additional
$75.0 million in aggregate principal amount of senior unsecured notes bearing interest at 3.93% and maturing on March
12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020 through
2026. At the time of the issuance of the last series of notes, certain terms and conditions of the note purchase and private
shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement
discussed above in order to increase our leverage capacity. The terms of the notes payable include provisions that require
and/or limit, among other financial ratios and measurements, the permitted levels of debt, coverage of cash interest
expense, and under certain circumstances, payments of dividends or other distributions to shareholders. As of
September 30, 2016, this agreement does not restrict such distributions to shareholders. As of September 30, 2016, these
agreements restrict such distributions to shareholders to a maximum of $48.7 million per fiscal year.
Our development contracts may be difficult for us to comply with and may expose us to third-party claims for
damages.
We are often party to government and commercial contracts involving the development of new products and systems.
These contracts typically contain strict performance obligations and project milestones. We cannot assure you we will
comply with these performance obligations or meet these project milestones in the future. If we are unable to comply
with these performance obligations or meet these milestones, our customers may terminate these contracts and, under
some circumstances, recover damages or other penalties from us. If other parties elect to terminate their contracts or seek
damages from us, it could materially harm our business and negatively impact our stock price.
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Our revenues could be less than expected if we are not able to deliver services or products as scheduled due to
disruptions in supply.
Since our internal manufacturing capacity is limited, we use contract manufacturers. While we use care in selecting our
manufacturers, we have less control over the reliability of supply, quality and price of products or components than if we
manufactured them. In some cases, we obtain products from a sole supplier or a limited group of suppliers.
Consequently, we risk disruptions in our supply of key products and components if our suppliers fail or are unable to
perform because of shortages in raw materials, operational problems, strikes, natural disasters, financial condition or
other factors. We may have disputes with our vendors arising from, among other things, the quality of products and
services or customer concerns about the vendor. If any of our vendors fail to timely meet their contractual obligations or
have regulatory compliance or other problems, our ability to fulfill our obligations may be jeopardized. Economic
downturns can adversely affect a vendor’s ability to manufacture or deliver products. Further, vendors may also be
enjoined from manufacturing and distributing products to us as a result of litigation filed by third parties, including
intellectual property litigation. If we were to experience difficulty in obtaining certain products, there could be an
adverse effect on our results of operations and on our customer relationships and our reputation. Additionally, our key
vendors could also increase pricing of their products, which could negatively affect our ability to win contracts by
offering competitive prices.
Any material supply disruptions could adversely affect our ability to perform our obligations under our contracts and
could result in cancellation of contracts or purchase orders, penalties, delays in realizing revenues, payment delays, as
well as adversely affect our ongoing product cost structure.
Failure to perform by our subcontractors could materially and adversely affect our contract performance and our
ability to obtain future business.
Our performance of contracts often involves subcontractors, upon which we rely to complete delivery of products or
services to our customers. We may have disputes with subcontractors. A failure by a subcontractor to satisfactorily
deliver products or services can adversely affect our ability to perform our obligations as a prime contractor. Any
subcontractor performance deficiencies could result in the customer terminating our contract for default, which could
expose us to liability for excess costs of reprocurement by the customer and have a material adverse effect on our ability
to compete for other contracts.
Our future success will depend on our ability to develop new products, systems and services that achieve market
acceptance in our current and future markets.
Both our commercial and government businesses are characterized by rapidly changing technologies and evolving
industry standards. Accordingly, our performance depends on a number of factors, including our ability to:
•
•
•
•
identify emerging technological trends in our current and target markets;
develop and maintain competitive products, systems and services;
enhance our offerings by adding technological innovations that differentiate our products, systems and services from
those of our competitors; and
develop, manufacture and bring to market cost-effective offerings quickly.
We believe that, in order to remain competitive in the future, we will need to continue to develop new products, systems
and services, which will require the investment of significant financial resources. The need to make these expenditures
could divert our attention and resources from other projects, and we cannot be sure that these expenditures ultimately
will lead to the timely development of new products, systems or services. In recent years, we have spent an amount equal
to approximately 1% to 2% of our annual sales on internal R&D efforts. There can be no assurances that this percentage
will not increase should we require increased innovations to successfully compete in the markets we serve. We may also
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experience delays in completing development and introducing certain new products, systems or services in the future due
to their design complexity. Any delays could result in increased costs of development or redirect resources from other
projects. In addition, we cannot provide assurances that the markets for our products, systems or services will develop as
we currently anticipate, which could significantly reduce our revenue and harm our business. Furthermore, we cannot be
sure that our competitors will not develop competing products, systems or services that gain market acceptance in
advance of ours, or that cause our existing products, systems or services to become non-competitive or obsolete, which
could adversely affect our results of operations.
If we deliver products or systems with defects, our reputation will be harmed, revenue from, and market acceptance
of, our products and systems will decrease and we could expend significant capital and resources as a result of such
defects.
Our products and systems are complex and frequently operate in high-performance, challenging environments.
Notwithstanding our internal quality specifications, our products and systems have sometimes contained errors, defects
and bugs when introduced. If we deliver products or systems with errors, defects or bugs, our reputation and the market
acceptance and sales of our products and systems would be harmed. Further, if our products or systems contain errors,
defects or bugs, we may be required to expend significant capital and resources to alleviate such problems and incur
significant costs for product recalls and inventory write-offs. Defects could also lead to product liability lawsuits against
us or against our customers, and could also damage our reputation. We have agreed to indemnify our customers in some
circumstances against liability arising from defects in our products and systems. In the event of a successful product
liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.
We face certain significant risk exposures and potential liabilities that may not be covered adequately by insurance or
indemnity.
We are exposed to liabilities that are unique to the products and services we provide. A significant portion of our
business relates to designing, developing, manufacturing, operating and maintaining advanced defense and transportation
systems and products. New technologies associated with these systems and products may be untested or unproven. In
addition, certain activities in connection with which our training systems are used or our services are provided are
inherently dangerous.
While in some circumstances we may receive indemnification from U.S. and foreign governments, and we maintain
insurance for certain risks, the amount of our insurance or indemnity may not be adequate to cover all claims or
liabilities, and we may be forced to bear substantial costs from an accident or incident. It also is not possible for us to
obtain insurance to protect against all operational risks and liabilities. Substantial claims resulting from an incident in
excess of the indemnification we receive and our insurance coverage would harm our financial condition, results of
operations and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could
negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete
effectively, and could significantly impact the cost and availability of adequate insurance in the future.
We may acquire other companies, which could increase our costs or liabilities or be disruptive to our business.
Part of our strategy involves the acquisition of other companies. For example, in February 2016, we acquired all of the
outstanding capital stock of GATR Technologies, LLC (GATR), a defense systems business based in Huntsville,
Alabama which manufactures deployable satellite communication terminal solutions. GATR expands our satellite
communications and networking applications technologies for our CGD Systems segment and expands our customer
base.
We cannot assure you that we will be able to integrate acquired companies successfully without substantial expense,
delay or operational or financial problems. Such expenses, delays or operational or financial problems may include the
following:
• we may need to divert management resources to integration, which may adversely affect our ability to pursue other
more profitable activities;
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•
integration may be difficult as a result of the necessity of coordinating geographically separated organizations,
integrating personnel with disparate business backgrounds and combining different corporate cultures;
• we may not be able to eliminate redundant costs anticipated at the time we select acquisition candidates; and
•
one or more of our acquisition candidates may have unexpected liabilities, fraud risk, or adverse operating issues
that we fail to discover through our due diligence procedures prior to the acquisition.
As a result, the integration of acquired businesses may be costly and may adversely impact our results of operations and
financial condition.
Our employees may engage in misconduct or other improper activities, which could harm our business, financial
condition and results of operations.
We are exposed to the risk of employee fraud or other misconduct. Employee misconduct could include intentionally
failing to comply with U.S. government procurement regulations, engaging in unauthorized activities, attempting to
obtain reimbursement for improper expenses, or submitting falsified time records, which could result in legal
proceedings against us, lost contracts or reduced revenues.
Employee misconduct could also involve improper use of our customers’ sensitive or classified information, which could
result in regulatory sanctions against us and serious harm to our reputation. Misconduct could also involve making
payments to government officials or third parties that would expose us to being in violation of the Foreign Corrupt
Practices Act, the UK Anti-Bribery Act or similar laws in other countries.
It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity
may not be effective in controlling unknown or unmanaged risks or losses, which could harm our business, financial
condition and results of operations. In addition, alleged or actual employee misconduct could result in investigations or
prosecutions of employees engaged in the subject activities, which could result in unanticipated consequences or
expenses and management distraction for us regardless of whether we are alleged to have any responsibility.
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability.
Our business operates in many locations under government jurisdictions that impose taxes based on income and other
criteria. Changes in domestic or foreign tax laws and regulations, or their interpretation, could result in higher or lower
tax rates assessed, changes in the taxability of certain revenues or activities, or changes in the deductibility of certain
expenses, thereby affecting our tax expense and profitability. In addition, audits by tax authorities could result in
unanticipated increases in our tax expense.
Our results of operations have historically fluctuated and may continue to fluctuate significantly in the future, which
could adversely affect our stock price.
Our results of operations are affected by factors such as the unpredictability of contract awards due to the long
procurement process for most of our products and services, the potential fluctuation of governmental agency budgets,
any timing differences between our work performed and costs incurred under a contract and our ability to recognize
revenue and generate cash flow from such contract, the time it takes for the new markets we target to develop and for us
to develop and provide products and services for those markets, competition and general economic conditions. Our
contract type/product mix and unit volume, our ability to keep expenses within budget and our pricing affect our
operating margins. Significant growth in costs to complete our contracts may adversely affect our results of operations in
future periods and cause our financial results to fluctuate significantly on a quarterly or annual basis. In addition, certain
contracts in our CTS segment are structured such that we incur significant expenses during the design and build phases
of the contract that are not offset by revenue recognized or cash flows generated under the contract until we deliver a
product or perform operational or maintenance services during the latter phases of the contract. Consequently, we do not
believe that comparison of our results of operations from period to period is necessarily meaningful or predictive of our
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likely future results of operations. In future financial periods our operating results or cash flows may be below the
expectations of public market analysts or investors, which could cause the price of our stock to decline significantly.
The funding and costs associated with our pension plans may cause our earnings, cash flows, and shareholders’
equity to fluctuate significantly from year to year.
Certain of our employees in the U.S. are covered by a noncontributory defined benefit pension plan and approximately
one-half of our European employees are covered by a contributory defined benefit pension plan. The impact of these
plans on our GAAP earnings may be volatile in that the amount of expense we record for our pension plans may
materially change from year to year because those calculations are sensitive to changes in several key economic
assumptions, including discount rates, inflation, salary growth, expected return on plan assets, retirement rates and
mortality rates. Changes in these factors affect our plan funding, cash flows, earnings, and shareholders’ equity.
In recent years, we have taken certain actions to mitigate the effect of our defined benefit pension plans on our financial
results. For example, benefits under the U.S. plan were frozen as of December 31, 2006, so no new benefits have accrued
after that date, and benefits under the European plan were frozen as of September 30, 2010, though the European plan is
a final pay plan, which means that benefits will be adjusted for increases in the salaries of participants until their
retirement or departure from the company. U.S. and European employees hired subsequent to the dates of freezing of the
respective plans are not eligible for participation in the defined benefit plans. For more information on how these factors
could impact earnings, cash flows and shareholders’ equity, see “Pension costs” in Item 7 of this Form 10-K.
We are subject to various investigations, claims and litigation that could ultimately be resolved against us.
The size, nature and complexity of our business make us susceptible to investigations, claims, and litigation, particularly
those involving governments. We are and may become subject to investigations, claims and administrative, civil or
criminal litigation globally and across a broad array of matters, including, but not limited to, government contracts, false
claims, products liability, fraud, environmental, intellectual property, tax, export/import, anti-corruption, labor, health
and safety, employee benefits and plans, including plan administration, and improper payments. These matters could
divert financial and management resources; result in fines, penalties, compensatory, treble or other damages or non-
monetary relief; and otherwise disrupt our business. Government regulations also provide that certain allegations against
a contractor may lead to suspension or debarment from government contracts or suspension of export privileges for a
company or one or more of its components. Suspension or debarment could have a material adverse effect on our
company because of our reliance on government contracts and export authorizations. An investigation, claim or
litigation, even if fully indemnified or insured, could also negatively impact our reputation among our customers and the
public, and make it more difficult for us to compete effectively or obtain adequate insurance in the future. Investigations,
claims or litigation could have a material adverse effect on our financial position, results of operations and/or cash flows.
Risks relating to our common stock
The price of our common stock may fluctuate significantly
An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price
of our common stock.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the
price you paid for your shares or at all. The market price of our common stock could fluctuate significantly for various
reasons, which include:
•
•
•
our quarterly or annual earnings or those of our competitors;
the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks
of our competitors;
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•
•
•
•
•
•
•
inaccuracy of our guidance regarding future operating results;
new laws or regulations or new interpretations of laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in general conditions in the domestic and global economies or financial markets, including those resulting
from war, incidents of terrorism or responses to such events;
litigation involving our company or investigations or audits by regulators into the operations of our company or our
competitors;
strategic action by our competitors; and
sales of common stock by our directors, executive officers and significant shareholders.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may
seriously affect the market price of our common stock, regardless of actual operating performance. In addition, in the
past, following periods of volatility in the overall market and the market price of a particular company’s securities,
securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it
could result in substantial costs and a diversion of our management’s attention and resources.
Our Chairman of the Board of Directors beneficially owns a large percentage of our common stock and as a result
can exert significant influence over us.
At November 8, 2016, Walter C. Zable, our Chairman of the Board of Directors, and Karen F. Cox, Mr. Zable’s sister,
beneficially owned an aggregate of 3,055,911 shares, or approximately 11.3%, of our outstanding common stock.
Accordingly, Mr. Zable and Ms. Cox may be able to substantially influence all matters requiring approval by our
shareholders, including the election of directors and the approval of mergers or other business combination transactions.
Circumstances may arise in which the interests of these shareholders could conflict with the interests of our other
shareholders. These shareholders could delay or prevent a change in control of Cubic even if such a transaction would be
beneficial to our other shareholders.
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your
influence over matters on which shareholders vote.
Our board of directors has the authority, without action or vote of our shareholders, to issue all or any part of our
authorized but unissued shares of common stock, including shares issuable upon the exercise of options and the vesting
of restricted stock units, shares that may be issued in the future under our 2015 Incentive Award Plan or shares of our
authorized but unissued preferred stock. Issuances of common stock or preferred voting stock could reduce your
influence over matters on which our shareholders vote and, in the case of issuances of preferred stock, likely could result
in your interest in us being subject to the prior rights of holders of that preferred stock.
Provisions in our charter documents and Delaware law could delay or prevent a change in control of Cubic.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage,
delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their shares. In addition, these provisions may
33
frustrate or prevent any attempt by our shareholders to replace or remove our current management by making it more
difficult to replace or remove our board of directors. These provisions include:
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•
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•
•
prior to the date of the transaction, an affirmative vote of the holders of at least 662/3% of our outstanding common
stock is required for the approval, adoption or authorization of a business combination;
a prohibition on shareholder action through written consent;
a requirement that special meetings of shareholders be called only by our board of directors or by a committee of our
board of directors that has been duly designated to do so by our board of directors;
the authority of our board of directors to issue preferred stock with such terms as our board of directors may
determine; and
a requirement for the affirmative vote of the holders of at least 662/3% of the total voting power of all outstanding
shares of our voting stock to amend our amended and restated bylaws, or to amend specific provisions of our
amended and restated certificate of incorporation.
In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with
an interested shareholder, generally a person who, together with its affiliates, owns or within the last three years has
owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became
an interested shareholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware
law may discourage, delay or prevent a change in control of our company.
If we are unable to pay semiannual dividends at the targeted level, our reputation and stock price may be harmed.
We have consistently paid cash dividends to our shareholders since 1971, and, in fiscal 2016, we paid $7.3 million of
cash dividends to our shareholders.
The dividend program requires the use of a portion of our cash flows. Our ability to continue to pay semiannual
dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be
subject to certain economic, financial, competitive and other factors that are beyond our control. Our board of directors
may, at its discretion, decrease the targeted semiannual dividend amount or entirely discontinue the payment of
dividends at any time. Any failure to pay dividends after we have announced our intention to do so may adversely affect
our reputation and investor confidence in us, and negatively impact our stock price.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate
or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might
cause our stock price and trading volume to decline.
We are implementing a new Enterprise Resource Planning (ERP) system and improper implementation may cause
disruptions to our business.
We are part way through the implementation of our new ERP system and full implementation will take at least another
year. If we do not implement the new system properly, it could cause us to miss critical shipments, file our financials
late, improperly pay employees and delay invoices to our customers. The implementation may also take more time and
cost more than we have anticipated, further impacting our financial results. Such results could lead to the loss of
customers, damage to our reputation, litigation and declines in our stock price.
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This report, including the documents incorporated by reference herein, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by such Act.
Any statements about our expectations, beliefs, plans, objectives, assumptions, future events or our future financial
and/or operating performance, including those concerning new programs and growth in the markets in which we do
business, increases in demand for our products and for fully integrated systems, retention of existing contracts and
receipt of new contracts, the development of new products, systems and services, expansion of our automated payment
and fare collection systems and services, maintenance of long-term relationships with our existing customers, expansion
of our service offerings and customer base for services, maintenance of a diversified business mix, expansion of our
international footprint, strategic acquisitions, U.S. and foreign government funding, supplies of raw materials and
purchased parts, cash needs, financial condition, liquidity, prospects, and the trends that may affect us or the industries in
which we operate, are not historical and may be forward-looking. These statements are often, but not always, made
through the use of words or phrases such as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity” and similar words or phrases or the
negatives of these words or phrases. These forward-looking statements involve risks, estimates, assumptions and
uncertainties, including those discussed in “Risk factors” and elsewhere throughout this report and in the documents
incorporated by reference herein, that could cause actual results to differ materially from those expressed in these
statements.
Such risks, estimates, assumptions and uncertainties include, among others: unanticipated issues related to the
restatement of our financial statements; our ability to monitor and evaluate the effectiveness of new processes and
procedures we have implemented to remediate the material weaknesses that existed in our internal control over financial
reporting; our dependence on U.S. and foreign government contracts; 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 effect of 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; the change in the way transit agencies
pay for transit systems; our ability to accurately estimate the time and resources necessary to satisfy obligations under
our contracts; the effect of adverse regulatory changes on our ability to sell products and services; our ability to identify,
attract and retain qualified employees; our failure to properly implement our enterprise resource planning system;
unforeseen problems with the implementation and maintenance of our information systems; business disruptions due to
cyber security threats, physical threats, terrorist acts, acts of nature and public health crises; our involvement in litigation,
including litigation related to patents, proprietary rights and employee misconduct; our reliance on subcontractors and on
a limited number of third parties to manufacture and supply our products; our ability to comply with our development
contracts and to successfully develop, introduce and sell new products, systems and services in current and future
markets; defects in, or a lack of adequate coverage by insurance or indemnity for, our products and systems; changes in
U.S. and foreign tax laws, exchange rates or our economic assumptions regarding our pension plans; and other factors
discussed elsewhere in this report.
Because the risks, estimates, assumptions and uncertainties referred to above could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not
place undue reliance on any forward-looking statements. In addition, past financial and/or operating performance is not
necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate
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
35
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 1B. UNRESOLVED STAFF COMMENTS.
None
Item 2. PROPERTIES.
We conduct our operations in approximately 2.2 million square feet of both owned and leased properties located in the
United States and foreign countries. We own approximately 51% of the square footage, including about 500,000 square
feet located in San Diego, California and 423,000 square feet located in Orlando, Florida. All owned and leased
properties are considered in good condition and adequately utilized. The following table identifies significant properties
by business segment:
Location of Property
Corporate Headquarters:
Arlington, VA
San Diego, CA
Investment properties:
New York, NY
Teterboro, NJ
Transportation Systems:
Atlanta, GA
Brisbane, Australia
Burnaby, BC, Canada
Chicago, IL
Concord, CA
Concord, Canada
Concord, NH
Emeryville, CA
Frankfurt, Germany
Glostrup, Denmark
Greenford, London, England
Hamburg, Germany
Hyderabad, India
Inglewood, CA
Kingswood, Australia
London, England
Malmo, Sweden
Mascot, Australia
Merthsham, Surrey, England
Murrarie, Australia
New York, NY
Norwalk, CA
Oakland, CA
Salfords, Surrey, England
San Diego, CA
San Francisco, CA
36
Owned or Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Location of Property
Sydney, Australia
Tullahoma, TN
Vancouver, BC
Wollongong, Australia
Cubic Global Defense Systems:
Abu Dhabi UAE
Ashburn, VA
Auckland, New Zealand
Austin, TX
Canberra, Australia
Farnham, Surrey, England
Fyschwyck, Australia
Hanover, MD
Heisingor, Denmark
Herndon, VA
Huntsville, AL
Orlando, FL
Riyadh, Saudi Arabia
Salisbury, UK
San Diego, CA
Singapore
Tijuana, Mexico
Townsville, Australia
Cubic Global Defense Services:
Colorado Springs, CO
Columbus, GA
Fayetteville, NC
Hampton, VA
Herndon, VA
Honolulu, HI
Kingstowne, VA
Leavenworth, KS
Olympia, WA
Orlando, FL
San Diego, CA
Shalimar, FL
Owned or Leased
Leased
Leased and Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Item 3. LEGAL PROCEEDINGS.
In October 2014, a lawsuit was filed in the United States District Court, Northern District of Illinois against us and one
of our transit customers alleging infringement of various patents held by the plaintiff, who is seeking judgment that we
have infringed on plaintiff’s patents; regular and treble damages; requiring an accounting of sales, profits, royalties and
damages owed plaintiffs; pre and post judgment interest; an award of costs, fees and expenses, an injunction prohibiting
the continuing infringement of the patents; and any other relief the court deems just and equitable. We are investigating
the matter and plan to vigorously defend the lawsuit. We are also undertaking defense of our customer in this matter
pursuant to our contractual obligations to that customer. Due to the procedural status of this case, we cannot estimate the
probability of loss or any range of estimate of possible loss.
37
We are not a party to any other material pending proceedings and we consider all other matters to be ordinary
proceedings incidental to our business. We believe the outcome of these other proceedings will not have a materially
adverse effect on our financial position, results of operations, or cash flows.
Item 4. MINE SAFETY DISCLOSURES.
Not Applicable.
38
PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The principal market on which our common stock is being traded is the New York Stock Exchange under the symbol
CUB. The closing high and low sales prices for the stock, as reported in the consolidated transaction reporting system of
the New York Stock Exchange for the quarterly periods during the past two fiscal years, and dividend information for
those periods, are as follows:
MARKET AND DIVIDEND INFORMATION
Quarter
First
Second
Third
Fourth
Sales Price of Common Shares
Fiscal 2016
Fiscal 2015
Dividends per Share
Fiscal 2016 Fiscal 2015
High
$ 49.16 $ 40.71 $ 54.99 $ 45.40
High
Low
Low
47.87
42.94
48.36
30.80
38.19
38.89
53.92
51.27
47.71
50.44 $
46.92
40.33 $
—
0.14 $
—
0.14 $
—
0.14
—
0.14
On November 4, 2016, the closing price of our common stock on the New York Stock Exchange was $42.00. There were
608 shareholders of record of our common stock as of November 4, 2016.
39
Item 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS
(amounts in thousands, except per share data)
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes
in Item 8 of this Form 10-K.
2016
Year Ended September 30,
2014
2013
2015
2012
Results of Operations:
Sales
Cost of sales
Selling, general and administrative expenses
Research and development
Interest expense
Income taxes
Net income attributable to Cubic (1)
Per Share Data:
Net income per share, basic (1)
Net income per share, diluted (1)
Cash dividends
Shares used in calculating net income per
share:
Basic
Diluted
Year-End Data:
Shareholders’ equity related to Cubic
Equity per share, basic
Total assets
Long-term debt
$ 1,461,665 $ 1,431,045 $ 1,398,352 $ 1,361,407 $ 1,404,084
1,060,140
164,189
28,722
1,602
40,332
97,427
1,055,313
165,230
24,445
3,427
14,502
25,086
1,082,535
181,672
17,959
4,084
19,831
69,491
1,091,326
212,518
17,992
4,400
48,997
22,885
1,116,906
269,593
31,976
11,199
(9,212)
1,735
$
0.06 $
0.06
0.27
0.85 $
0.85
0.27
2.59 $
2.59
0.24
0.94 $
0.94
0.24
3.64
3.64
0.24
26,976
27,040
26,872
26,938
26,787
26,845
26,736
26,760
26,736
26,736
$ 689,896 $ 756,288 $ 782,278 $
25.57
1,504,679
201,012
28.14
1,300,276
126,705
29.20
1,194,606
102,390
716,946 $ 677,171
25.33
1,014,550
11,503
26.82
1,109,618
102,920
(1) Results for the year ended September 30, 2015 include the net impact on income tax expense of establishing
valuation allowances on U.S. deferred tax assets totaling $35.8 million. This valuation allowance was reduced by
$6.7 million in the year ended September 30,2016. See Note 10 to the Consolidated Financial Statements in Item 8
of this Form 10-K for further discussion of the valuation allowance. Results for the year ended September 30, 2013
include the impact of a goodwill impairment charge of $50.9 million, before the impact of applicable income taxes.
40
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Company Overview
We are a leading international provider of cost-effective systems and solutions that address the global transportation and
defense markets’ most pressing and demanding requirements. We are engaged in the design, development, manufacture,
integration, and sustainment of advanced technology systems and products. We also provide a broad range of
engineering, training, technical, logistic, and information technology services. We serve the needs of various federal and
regional government agencies in the U.S. and allied nations around the world with products and services that have both
defense and civil applications. Our main areas of focus are in transportation automated fare payment and revenue
management infrastructure, defense, intelligence, homeland security, and information technology, including cyber
security. For the fiscal year ended September 30, 2016, 40% of sales were derived from transportation systems and
related services, while 60% were derived from defense systems and services. The U.S. government remains our largest
customer, accounting for approximately 45% of sales in 2016, 47% of sales in 2015, and 47% of sales in 2014. In fiscal
year 2016, 55% of our total sales were derived from services, with product sales accounting for the remaining 45%.
We operate in three reportable business segments: transportation systems, defense services and defense systems. We
organize our business segments based on the nature of the products and services offered.
We are operating in an environment that is characterized by continuing economic pressures in the U.S. and globally. A
significant component of our strategy in this environment is to focus on program execution, improving the quality and
predictability of the delivery of our products and services, and providing opportunities for customers to outsource
services where we can provide a lower cost and more effective solution. Recognizing that many of our U.S. based
customers are resource constrained, we are continuing our focus on developing and extending our portfolio in
international and adjacent markets. Our international sales, including Foreign Military Sales (FMS), comprised 43% of
our total sales for fiscal year 2016. International sales from Cubic Transportation Systems (CTS), Cubic Global Defense
Services (CGD Services) and Cubic Global Defense Systems (CGD Systems) amounted to 65%, 9% and 45%,
respectively, of the applicable segment sales for fiscal year 2016. To the extent our business and contracts include
operations in foreign countries, other risks are introduced into our business, including changing economic conditions,
fluctuations in relative currency values, regulation by foreign countries, and the potential for deterioration of political
relations.
We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our
customers. We accomplish this in part by our independent R&D activities, and through acquisitions. Company-
sponsored R&D spending totaled $32.0 million in 2016. In 2014 through our acquisition of Intific Inc., we significantly
broadened our advanced research capabilities. Intific brings us a wide range of expertise including computer simulation,
animation, human-machine interaction, robotics, neuroscience, visualization, gaming, and artificial intelligence. Intific
performs work funded by the Defense Advanced Research Projects Agency (DARPA) and other U.S. government
agencies; however, most of Intific’s R&D activities are included in cost of sales as they are directly related to contract
performance.
We selectively pursue the acquisition of businesses that complement our current portfolio and allow access to new
customers or technologies. In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and
enter into agreements regarding possible acquisitions. As part of our business strategy, we seek to identify acquisition
opportunities that will expand or complement our existing products and services, or customer base, at attractive
valuations. In fiscal 2015 and 2016, we acquired DTECH, GATR, and TeraLogics in connection with our strategic
efforts to build and expand our command, control, communication, computers, intelligence, surveillance and
reconnaissance (C4ISR) business. In the third quarter of fiscal 2016 we formalized the structure of Cubic Mission
Solutions (CMS), our business unit which combines and integrates our C4ISR and secure communications operations.
We have also made a number of niche acquisitions of businesses during the past several years, including, Intific, Inc. in
February 2014 and Intelligent Transport Management Solutions Limited in November 2013. Generally, our business
acquisitions are dilutive to earnings in the short-term due to acquisition related costs, integration costs, retention
41
payments and often higher amortization of purchased intangibles in the early periods after acquisition and expenses
related to earn-outs. However, we expect that each of these recent acquisitions will be accretive to earnings in the long-
term.
Industry Considerations
The U.S. government continues to focus on discretionary spending, tax, and other initiatives to control spending and
reduce the deficit. The president’s administration and Congress will likely continue to debate the size and expected
growth of the U.S. federal budget as well as the defense budget over the next few years and balance decisions regarding
defense, homeland security, and other federal spending priorities in a constrained fiscal environment imposed by the
Budget Control Act (BCA) and various Bipartisan Budget Acts (BBA) since 2011. The most recent, agreed to on
November 2, 2015, Bipartisan Budget Act of 2015 revised discretionary spending limits to avoid sequestration for fiscal
year 2016 and fiscal year 2017. The ultimate effects of sequestration and any subsequent bipartisan budget acts beyond
2017 still cannot be determined. Absent a new BCA or BBA in 2017, sequestration still threatens to severely limit
discretionary federal funding in 2018. Reductions to 2018 and beyond from current budget projections could have an
impact on our customers’ procurement of products and services.
While these budgetary considerations have put downward pressure on growth in the defense industry and will likely
continue to do so, we believe that much of our business is well positioned in areas that the DoD has indicated are areas of
focus for future defense spending to help the DoD meet its critical future capability requirements for protecting U.S.
security and the security of our allies in the years to come.
In transportation, we continue to believe that our products and services are critical to our customers to ensure that they
maximize revenue and efficiencies in a resource constrained environment. Some customers have responded to the current
market environment by seeking financing for their projects from the system supplier. An example of this is our contract
with the Chicago Transit Authority, awarded in late 2011. We have designed and manufactured a new fare collection
system for the Chicago Transit Authority and will receive monthly payments for the system over an approximate ten-
year period which began on January 1, 2014.
While future defense plans, changes in defense spending levels and changes in spending for mass transit projects could
have a materially adverse effect on our consolidated financial position, we have and plan to continue to make strategic
investments and acquisitions to align our businesses in growth areas of our respective markets that we believe are the
most critical priorities and mission areas for our customers.
Segment Overview
Cubic Transportation Systems
CTS is a systems integrator of payment and information technology and services for intelligent travel solutions. We
deliver integrated systems for transportation and traffic management, delivering tools for travelers to choose the smartest
and easiest way to travel and pay for their journeys, and enabling transportation authorities and agencies to manage
demand across the entire transportation network — all in real time. We offer fare collection and revenue management
devices, software, systems and multiagency, multimodal integration technologies, as well as a full suite of operational
services that help agencies and operators efficiently collect fares and revenue, manage operations, reduce revenue
leakage and make transportation more convenient. Through our NextBus and Intelligent Transport Management
Solutions (ITMS) businesses, respectively, we also deliver real-time passenger information systems for tracking and
predicting vehicle arrival times and we are a leading provider of urban and inter-urban intelligent transportation and
enforcement solutions and technology and infrastructure maintenance services to the United Kingdom and other
international city, regional and national road and transportation agencies. Through our Urban Insights business we use
big data and predictive analytics technology and a consulting model to help the transportation industry improve
operations, reduce costs and better serve travelers.
The transportation markets we serve are undergoing a substantial change. Mounting pressure on transportation
authorities to improve the customer experience yet stretch their operating budgets is fueling a trend toward outsourced
42
services and systems that enable innovation and lower operating cost. We believe we are positioned at the forefront of
this change.
We believe that we hold the leading market position in large-scale automated fare payment and revenue management
systems and services for major metropolitan areas. CTS has delivered over 20 regional back office operations which
together serve over 38 million people every day in major markets around the world. We have implemented and, in many
cases, operate automated fare payment and revenue management systems for some of the world’s largest transportation
systems, examples include London (Oyster/Contactless Payment), the Chicago region (Ventra), the San Francisco Bay
Area (Clipper), the Los Angeles region (TAP), the New York region (Metrocard), the Washington D.C. region
(Smartrip), the Vancouver region (Compass), the Sydney region (Opal Card) and the Brisbane region (Go Card). In the
first quarter of fiscal 2016 we were awarded a contract by the New Hampshire State Department of Transportation to
deploy our back-office system for the purposes of toll revenue collection.
Through our NextBus, ITMS and Urban Insights businesses we provide advanced transportation operational
management and analytics capabilities and related services to over 150 customers including organizations such as
Transport for London, Transport Scotland, Highways England, Transport for Greater Manchester, Transport for New
South Wales, Los Angeles Metro, San Francisco Muni, the Toronto Transit Commission and the Metropolitan Boston
Transit Administration.
In addition to helping us secure similar projects in new markets, our comprehensive suite of new technologies and
capabilities enables us to benefit from a recurring stream of revenues in established markets resulting from operations,
innovative new services, technology obsolescence, equipment refurbishment and the introduction of new or adjacent
applications.
In 2016, revenues from services provided by CTS were $303.0 million, or 52% of CTS sales.
We are currently designing and building major new systems in Singapore, Ireland and New Hampshire. Typically, profit
margins during the design and build phase of major projects are lower than during the operate-and-maintain phase. This
has in the past caused, and may in the future cause, swings in profitability from period to period. In addition, cash flows
are often negative during portions of the design-and-build phase, until major milestones are reached and cash payments
are received.
Cash payment terms offered by our transportation customers in a competitive environment are sometimes not favorable
to us. The customers’ budget constraints often result in less funding available for the build of a new system, with more
funds becoming available when the system becomes operational. This, coupled with the inherent risks in managing large
infrastructure projects, can yield negative cash flows and lower and less predictable profit margins on contracts during
the design and build phase. Conversely, during the operate-and-maintain phase, revenues and costs are typically more
predictable and profit margins tend to be higher.
Gross profit margins from services sales in CTS were 26% and 32% for fiscal years 2016 and 2015, respectively, and
gross profit margin from product sales was 32% and 25% in 2016 and 2015, respectively. Generally, the trend toward a
greater mix of services revenues compared to product sales has helped to generate higher profit margins from the
segment; however in 2016 service gross margins were lower than product gross margins mostly due to the reduction in
margins on our London follow-on contract. Margins were lower on the follow-on contract in 2016 in large part because it
no longer includes the award of usage bonuses as well as the impact of transition costs incurred on this contract in the
first quarter of fiscal 2016. Also, the profitability of our contracts in Chicago, Vancouver, and Sydney all increased
between fiscal 2015 and fiscal 2016. The mix of product and services sales can produce fluctuations in margin from
period-to-period; however, we expect the trend of increasing services sales to continue in the long-term.
Most of our sales in CTS for fiscal year 2016 were from fixed-price contracts. However, some of our service contracts
provide for variable payments, in addition to the fixed payments, based on meeting certain service level requirements
and, in some cases, based on system usage. Service level requirements are generally contingent upon factors that are
under our control, while system usage payments are contingent upon factors that are generally not under our control,
other than basic system availability. Development and system integration contracts in CTS are usually accounted for on a
43
percentage-of-completion basis using the cost-to-cost method to measure progress toward completion, which requires us
to estimate our costs to complete these contracts on a regular basis. Our actual results can vary significantly from these
estimates and changes in estimates can result in significant swings in revenues and profitability from period to period.
Generally, we are at risk for increases in our costs, unless an increase results from customer-requested changes. At times,
there can be disagreement with a customer over who is responsible for increases in costs. In these situations we must use
judgment to determine if it is probable that we will recover our costs and any profit margin.
Revenue under contracts for services in CTS is generally recognized either as services are performed or when a
contractually required event has occurred, depending on the contract. Revenue under such contracts is generally
recognized on a straight-line basis over the period of contract performance, unless evidence suggests that the revenue is
earned or the obligations are fulfilled in a different pattern. Costs incurred under these services contracts are expensed as
incurred, and may vary from period to period. Incentive fees included in some of our CTS service contracts are
recognized when they become fixed and determinable based on the provisions of the contract. As described above, often
these fees are based on meeting certain contractually required service levels or based on system usage levels. Contractual
terms can also result in variation of both revenues and expenses, resulting in fluctuations in earnings from period to
period.
For the fare collection system for the Chicago Transit Authority, the contract specifies that we would not begin to be
paid until we entered the service period. In accordance with authoritative accounting literature, we did not begin
recognizing revenue on this contract until it entered the service period in August 2013. As of September 30, 2016, we
had capitalized $65.4 million, net, in direct costs associated with developing the new fare collection system. Selling,
general and administrative (SG&A) costs associated with this contract are not being capitalized, but are being expensed
as incurred. Capitalized costs are being recognized as cost of sales based upon the ratio of revenue recorded during a
period compared to the revenue expected to be recognized over the term of the contract.
Cubic Global Defense Systems
CGD Systems is focused on two primary lines of business: training systems and secure communications. The segment is
a diversified supplier of live and virtual military training systems as well as secure communication systems and products
to the DoD, other U.S. government agencies and allied nations. We design and manufacture instrumented range systems
for fighter aircraft, armored vehicles and infantry force-on-force live training weapons effects simulations, laser-based
tactical and communication systems, and precision gunnery solutions. Our secure communications products are aimed at
intelligence, surveillance, ground combat, and search and rescue markets. In 2016 we formalized the structure of our
CMS business unit which combines and integrates our C4ISR and secure communications operations. CMS’ C4ISR
solutions provide information capture, assessment, exploitation and dissemination in a secure network-centric
environment.
CGD Systems is continually building upon its role as a leader in air and ground combat training systems worldwide. Our
products and systems help our customers to retain technological superiority with cost-effective solutions. We design,
innovate, manufacture and field a diverse range of technologies that are critical to combat readiness, supply chain
logistics and national security for the U.S. and allied nations. Our primary lines of business include air combat training
ranges and after action review software, ground combat training systems, including a full range of laser engagement
simulation systems, game-based learning systems, virtual small arms training systems, Intelligence, Surveillance and
Reconnaissance (ISR) data links, networking and baseband communications equipment, full-motion video software and
services, deployable satellite communication terminal solutions, personnel locator systems, and cross domain appliances
for cyber security. We also provide ongoing support services for systems we have built for several of our international
customers.
Our established international footprint in 34 allied nations is a key ingredient to our strategy. Our global footprint helps
to insulate us from possible shifts or downturns in DoD spending. Sales to international customers of CGD Systems have
become a major part of our business with 45% of sales in 2016 to international customers. In addition, expansion into
adjacent markets gives us an effective means to add scale to our business. We look for attractive acquisition candidates
to expand our product offerings and we invest in the development of innovative new products that deliver real value to
44
our customers. Through business acquisitions we made in the past three years, we now offer software and game-based
solutions in modeling and simulation, training and education, cyber warfare, neuroscience, networking and satellite
communications, and live fire training solutions to U.S. and international forces. These acquisitions deepen our training
and communication capabilities and expand our customer base.
Fixed-price contracts accounted for 88% of CGD Systems revenue for fiscal year 2016. Development and system
integration contracts in CGD Systems are generally accounted for on a percentage-of-completion basis using the cost-to-
cost method to measure progress toward completion, which requires us to estimate our costs to complete these contracts
on a regular basis. Our actual results can vary significantly from these estimates and changes in estimate can result in
significant swings in revenues and profitability from period to period. Generally, we are at risk for increases in our costs,
unless an increase results from customer-requested changes. At times, there can be disagreement with a customer over
who is responsible for increases in costs. In these situations we must use judgment to determine if it is probable that we
will recover our costs and any profit margin.
CGD Systems also has many long-term, fixed-price production contracts that do not require substantial development
effort. For these contracts we use the units-of-delivery percentage-of-completion method as the basis to measure progress
toward completing the contract and recognizing sales. The units-of-delivery measure recognizes revenues as deliveries
are made to the customer generally using unit sales values in accordance with the contract terms. We estimate profit as
the difference between total estimated revenue and total estimated cost of a contract and recognize that profit over the
life of the contract based on deliveries.
Increasingly, CGD Systems is receiving contracts from foreign customers to not only develop and deliver a system, but
to maintain the system for a period of years after the delivery. While service contracts have not historically been a
significant part of our CGD Systems business, this type of multiple-element contract has become more common in recent
years. Revenues under contracts for services in CGD Systems are generally recognized as services are performed on a
straight-line basis over the period of contract performance. Costs incurred under these services contracts are expensed as
incurred, and may vary from period to period, resulting in fluctuations in earnings.
The gross profit margin in fiscal 2016 was 28%, compared to 29% in 2015 and 30% in 2014. At times, particularly
favorable or unfavorable contracts can cause variation in this ratio, due to competition and the prevalence of fixed-price
arrangements. Fixed-price contracts create both the risk of cost growth and the opportunity to increase margins if we are
able to reduce our costs.
Cubic Global Defense Services
CGD Services is a leading provider of highly specialized support services to the U.S. government and allied nations.
Services provided include live, virtual and constructive training, real-world mission rehearsal exercises, professional
military education, intelligence support, information technology, information assurance and related cyber support,
development of military doctrine, consequence management, infrastructure protection and force protection, as well as
support to field operations, force deployment and redeployment and logistics.
CGD Services is a highly specialized and customer centric business which we believe knows how to meet the unique
requirements of each of its many customers. In the government services marketplace, reputation, quality and
relationships are always important. We uphold our credentials for professional excellence by consistently providing
high-value and cost-effective support for our customers.
CGD Services is focused on customers within the U.S. government, extending to the DoD, all branches of the U.S.
Armed Services, the Department of Homeland Security, non-military agencies, and allied nations under FMS contracts
funded by the U.S. government. CGD Services is the prime contractor at more than 40 military training and support
facilities and supports some of the largest exercises and training events each year including the largest annual
constructive simulation training event under our Korea Battle Simulation Center (KBSC) support contract. Cubic won
the recomplete of the KBSC contract which has a base and four option periods. The segment supports all four of the U.S.
Army’s combat training centers (CTCs) comprised of: the Joint Readiness Training Center (JRTC) in Fort Polk,
Louisiana, which is the nation’s premier training center for light infantry forces; the National Training Center (NTC) in
45
Fort Irwin, California, the Army’s premier heavy maneuver CTC; the Joint Multinational Readiness Center (JMRC) in
Hohenfels, Germany, which is the U.S. Army Europe’s combat maneuver training center for realistic training from the
individual to the brigade level; and the Mission Command Training Program (MCTP) in Fort Leavenworth, Kansas,
which delivers mission command training to the Army’s senior commanders and is the Army’s only worldwide
deployable CTC. We also currently provide and/or have provided defense modernization support for 13 NATO entrants
in Central and Eastern Europe under FMS contracts.
We are adapting to a new era in defense and national security spending practices. In the past, many of the contracts we
were awarded in CGD Services were long-term in nature, spanning periods of five to ten years. The DoD now relies
heavily upon indefinite delivery/indefinite quantity (ID/IQ) and small business set aside contracts. For us that means a
lower backlog of service contracts due to the shorter term nature of these ID/IQ Task Order awards. Shorter-term
contracts combined with this tougher competitive environment, where the “lowest-priced, technically acceptable” bids
often win, have resulted in a trend toward lower profit margins from the segment in recent periods.The gross profit
margin in CGD Services has been about 10% in the period from 2014 through 2016. We must continue to work to keep
our costs low to remain competitive under these market conditions. These conditions also provide the opportunity for us
to increase our market share of the large DoD services market. To maximize our business opportunities under ID/IQ
contract vehicles, we often seek new work both as a prime contractor and a subcontractor. By increasing our
participation in multiple award ID/IQ contracts we improve our chances to develop new customers, programs and
capabilities. Retaining customers is a critical component of our success; we remain vigilant in maintaining a high win
rate on re-compete contracts to retain our customers. Despite the trend toward small business awards by the U.S.
government, where we must take a role as a subcontractor, 89% of our revenues in fiscal year 2016 were as a prime
contractor.
CGD Services has been focused on diversifying its business over the last three years to the national security market. The
acquisitions of Abraxas in fiscal year 2011, and NEK in December 2012, add to the segment’s specialized skills and
further diversify the business to new customers and markets which are directly aligned with DoD’s emphasis on
intelligence and the special operations forces communities where trusted credentials are a high barrier to entry. NEK
provides Special Forces training-related services to the U.S. Army and other national security related customers and
provides a platform to expand CGD Services work both in the U.S. and to key foreign allies.
For fiscal years 2014 and 2015, NEK was slightly dilutive to our earnings per share after consideration of the
amortization of purchased intangibles and acquisition related costs. In 2016, NEK was accretive to earnings.
Cost reimbursable and time and materials contracts accounted for 48% of our sales in CGD Services for fiscal year 2016,
with the remaining sales derived from fixed-price contracts. Revenues under cost reimbursable contracts are recognized
as costs are incurred, plus the estimated fee earned under the contract terms. Often these are structured as award fees
based on performance and are generally accrued during the performance of the contract based on our historical
experience with such awards. Revenues under time and materials contracts are recognized as services are delivered based
on the terms of the contract. Revenues under our fixed-price service contracts with the U.S. government are recorded
using the cost-to-cost percentage-of-completion method.
Operating overview
Cubic Corporation sales in 2016 were $1.462 billion compared to $1.431 billion in 2015, an increase of 2%. Increases in
sales for CTS and CGD Systems of 3% and 5%, respectively, were partially offset by a 3% decrease in CGD Services
sales. Revenues from businesses we acquired in 2016 and 2015, all within our CGD Systems operating segment,
increased our consolidated sales by 3% from 2015 to 2016, partially offset by decreased organic sales due primarily to
changes in foreign currency exchange rates. The impact of changes in foreign currency exchange rates, particularly the
strengthening of the U.S. dollar against the British pound, adversely affected our sales. The average exchange rates
between the prevailing currencies in our foreign operations and the U.S. dollar had a negative impact on sales of 2%, or
$32.3 million in 2016 compared to 2015.
Cubic Corporation sales in 2015 were $1.431 billion compared to $1.398 billion in 2014, an increase of 2%. Increases in
sales for CGD Systems and CGD Services of 15% and 1%, respectively, were partially offset by a 5% decrease in CTS
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sales. Revenues from businesses we acquired in 2015 and 2014 increased our consolidated sales by 4% from 2014 to
2015. The impact of changes in foreign currency exchange rates had a negative impact on sales of 4%, or $52.1 million
in 2015 compared to 2014.
Operating income was $7.2 million in 2016 compared to $75.4 million in 2015, a decrease of 90%. CGD Systems had an
operating loss of $17.1 million in 2016 compared to operating income of $18.4 million in 2015 primarily due to the
impact of purchase accounting on businesses acquired in this segment during fiscal 2016, as further described below.
Businesses we acquired in 2016 and 2015, which were all in our CGD Systems segment, generated operating losses of
$32.7 million in 2016 compared to operating income of $0.9 million in 2015. The vast majority of losses incurred by
business acquired in 2016 was due to the impact of business purchase accounting as described in the CGD Systems
discussion below. CTS operating income decreased by 25% primarily related to lower profits on the transition to
our follow-on fare collection contract in London, partially offset by improved profitability on contracts in Chicago,
Sydney, and Vancouver. CGD Services operating income increased by 70% in 2016 due to decreased amortization of
purchased intangibles and the impact of cost saving efforts. Unallocated corporate and other costs were $44.4 million in
2016 compared to $25.5 million in 2015. The increase in unallocated corporate costs is primarily related to strategic and
IT system resource planning as part of our One Cubic initiative totaling $36.8 million in 2016 compared to $13.2 million
in 2015, partially offset by a reduction in legal and consulting expenses related to an investigation conducted by the
Audit Committee in 2015, for which we incurred expenses of $3.0 million. The average exchange rates between the
prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in operating income of $4.0
million in 2016 compared to 2015.
Operating income was $75.4 million in 2015 compared to $92.5 million in 2014, a decrease of 18%. CGD Systems
operating income decreased by 31% in 2015 from 2014 primarily due to $4.6 million of restructuring charges incurred in
fiscal 2015. CGD Services operating income decreased by 15% in 2015 due to continued competitive pressures driving
down bid prices. CTS operating income increased by 15% predominantly due to improvements in operating results on
service contracts in North America. Businesses we acquired in all of our segments in 2015 and 2014 generated operating
losses of $3.9 million in 2015 compared to $8.3 million in 2014. Unallocated corporate and other costs for fiscal 2015
were $25.5 million in 2015 compared to $8.0 million in 2014. The increase in unallocated corporate costs is primarily
related to strategic and IT system resource planning as part of our One Cubic initiative totaling $13.2 million, $3.0
million of consulting and legal fees related to an investigation conducted by the Audit Committee of the Board of
Directors and a $1.4 million increase in stock-based compensation that was not allocated to segment operations. The
average exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a
decrease in operating income of $7.8 million in 2015 compared to 2014. In 2015 we exited our global asset tracking
business. This business did not generate any significant revenue in 2015 or 2014, and had $2.3 million of operating
losses in each of those years.
Net income attributable to Cubic decreased to $1.7 million ($0.06 cents per share) in 2016 from $22.9 million ($0.85
cents per share) in 2015. The change was primarily due to the decrease in operating income described above and an
increase in interest expense described below, partially offset by a reduction in income tax expense described below.
Net income attributable to Cubic decreased to $22.9 million ($0.85 cents per share) in 2015 from $69.5 million ($2.59
per share) in 2014. The change was primarily due to the increase in income tax expense described below and the
decrease in operating income described above.
The gross margin from product sales was 28% in 2016, compared to 26% in 2015. The increase in gross margin
percentage was primarily due to improved profitability on transportation system sales in North America, Australia, and
the U.K., and a reduction of losses incurred on the virtual combat training deliverables for the U.S. Navy described
below. These increases were partially offset by lower gross margins on lower DTECH sales in 2016, as DTECH sales
generally have a higher gross margin percentage than other Cubic product sales. The gross margin from service sales was
20% in 2016 compared to 22% in 2015. The decrease in the gross margin percentages on services sales was
predominantly the result of lower profits on the transition to our follow-on transportation fare collection contract in
London, as described below.
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The gross margin from product sales was 26% in 2015, compared to 27% in 2014. The decrease in gross margin
percentage was primarily due to increases in estimated costs to complete virtual combat training deliverables for the U.S.
Navy within our CGD Systems business. This decrease in product gross margin percentage was partially offset by the
gross margins on DTECH sales, which have a higher gross margin percentage than the majority of our organic sales. The
gross margin from service sales was 22% in 2015 compared to 19% in 2014. The increase in the gross margin
percentages on services sales was predominantly the result of improvements in operating results on a transportation
services contract in Chicago described below.
SG&A expenses increased to $269.6 million or 18% of sales in 2016, compared to $212.5 million or 15% of sales in
2015. The increase in SG&A expense is primarily related to strategic and IT system resource planning as part of our One
Cubic initiative for which expenses totaled $36.8 million in 2016 compared to $13.2 million in 2015 as well as
approximately $28.7 million of SG&A expenses recognized in 2016 in connection with recent business acquisitions
compared to $7.9 million in 2015. Business acquisition expenses in 2016 include amounts recorded for business
purchase accounting matters described in the CGD Systems section below.
SG&A expenses increased to $212.5 million or 15% of sales in 2015, compared to $181.7 million or 13% of sales in
2014. The increase in SG&A expenses is primarily related to strategic and IT system resource planning as part of our
One Cubic initiative totaling $13.2 million, $3.0 million of consulting and legal fees related to an investigation
conducted by the Audit Committee of the Board of Directors, a $2.5 million increase in stock-based compensation and
SG&A expenses associated with DTECH, a company we acquired in 2015. Included in SG&A expenses for DTECH is
$3.6 million of expense representing the change in the fair value of contingent consideration expected to be paid to the
sellers of DTECH between the acquisition date and September 30, 2015.
Company-sponsored R&D spending, related primarily to new transportation and defense technologies we are
developing, totaled $32.0 million in 2016 compared to $18.0 million in both 2015 and 2014. Company-sponsored R&D
spending for CGD Systems was $16.4 million, 13.2 million, and $9.4 million, respectively, in 2016, 2015 and 2014.
Company-sponsored R&D spending for CTS was $15.6 million, $4.8 million, and $8.5 million for 2016, 2015, and 2014,
respectively. The primary reason for the dip in the 2015 CTS R&D costs is that in 2015 we received a $3.6 million
settlement of a claim related to the reimbursement of expenses we incurred primarily in 2014 for a proposal prepared for
a prospective customer of our transportation systems business. Approximately $2.3 million of this reimbursement was
for R&D expenses incurred and was credited against our expense in fiscal 2015. The remaining amount of the settlement
was recorded as a reduction in 2015 SG&A expenses.
Interest and dividend income was $1.5 million in 2016 compared to $1.8 million in 2015 and $1.4 million in 2014. The
changes in interest and dividend income between these years were generally correlated with changes in the average cash
balances held by our wholly owned subsidiaries in New Zealand and Australia. These foreign currency investments
earned a higher interest rate than our other cash and short-term investments. Interest expense was $11.2 million in 2016
compared to $4.4 million in 2015 and $4.1 million in 2014. The increases in interest expense were consistent with our
average outstanding debt balances for these years.
Other income (expense) netted to expense of $2.3 million in 2016 compared to income of $0.9 million in 2015 and
income of $0.4 million in 2014. During fiscal year 2016, we recognized a loss within other expense of $2.7 million
related to our partial settlement of our remaining obligations associated with its U.S. defined benefit pension plan. The
plan offered certain retired, vested participants the opportunity to voluntarily elect to receive their benefits as an
immediate lump sum distribution. The lump sum distribution was paid out from plan assets in September 2016 and
resulted in a settlement loss of $2.7 million. Other than this settlement loss, the changes in other income (expense) were
caused primarily by the impact of foreign currency exchange rate changes on cash advances to our foreign subsidiaries
that are not hedged.
Our income tax benefit totaled $9.2 million for fiscal 2016, compared to an income tax provision of $49.0 million in
fiscal 2015. The benefit for income taxes in fiscal 2016 primarily results from the benefit derived from the release of a
portion of the existing valuation allowance against U.S. deferred tax assets due to acquired deferred tax liabilities,
partially offset by nondeductible acquisition related compensation expenses. In 2015, we recorded tax expense of $35.8
million in order to establish a valuation allowance against U.S. deferred tax assets. Due to the effects of the deferred tax
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asset valuation allowance, our effective tax rate for fiscal 2016 and 2015 does not correlate to the amount of our pre-tax
income or loss. The change in the valuation allowance does not have any impact on our consolidated operations or cash
flows, nor does such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future.
Until we re-establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S.
income tax expense or benefit related to the recognition of deferred tax assets in the consolidated statement of operations
for future periods will be offset by decreases or increases in the valuation allowance with no net effect on the
consolidated statement of operations.
Our effective tax rate could be affected in future years by, among other factors, the mix of business between U.S. and
foreign jurisdictions, fluctuations in the need for a valuation allowance against deferred tax assets, our ability to take
advantage of available tax credits and audits of our records by taxing authorities.
Through September 30, 2016, a valuation allowance of $47.9 million has been established against U.S. deferred tax
assets, certain foreign operating losses and other foreign deferred tax assets. For fiscal 2016, the valuation allowance was
reduced by $6.9 million, including $9.2 million recorded as a net tax benefit in our Consolidated Statement of Income,
partially offset by amounts recorded through Other Comprehensive Income related to retirement benefits. We will
continue to assess the need for a valuation allowance on deferred tax assets and should circumstances change it is
possible the valuation allowance, or a portion thereof, will be reversed.
Transportation Systems Segment
Transportation Systems Segment Sales
Transportation Systems Segment Operating Income
2016
September 30,
2015
(in millions)
2014
$ 586.4 $ 566.8 $ 599.7
75.9
$ 57.5 $
$ 65.9
CTS sales increased 3% to $586.4 million in 2016 compared to $566.8 million in 2015. Changes in foreign currency
exchange rates had a significant adverse impact on our sales. The average exchange rates between the prevailing
currencies in our foreign operations and the U.S. dollar resulted in a decrease in CTS sales of $28.6 million for 2016
compared to 2015. CTS had higher sales in North America primarily from equipment orders in New York and the San
Francisco Bay Area and increased sales on contracts in Chicago and Vancouver. Sales were lower in the U.K. due to the
weakening of the British pound against the U.S. dollar as well as the transition to our follow-on contract in London in
fiscal 2016. Sales in Australia were slightly lower than last year due to the impact of foreign currency exchange rates.
Australian sales increased by 4% when measured in Australian dollars.
CTS sales decreased 5% to $566.8 million in 2015 compared to $599.7 million in 2014. The average exchange rates
between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in CTS sales of
$40.0 million for 2015 compared to 2014. Sales in North America decreased in 2015 compared to 2014 due to a lower
amount of work on a bus installation contract in New York and on a train line fare system expansion project in
Washington D.C. as these projects moved closer to completion in 2015. Revenue recognized on a system development
and operations contract in Chicago was higher in 2015 than in 2014. For this Chicago contract, the recognition of sales is
limited to billable amounts, and this contract reached milestones that significantly increased monthly billable amounts
beginning in January 2014. Sales in Australia and the U.K. in local currencies were relatively consistent between 2014
and 2015, but after foreign currency translation were impacted by the changes in exchange rates noted above. Businesses
acquired by CTS in fiscal year 2014 contributed sales of $47.0 million in 2015 compared to $43.7 million in 2014.
CTS operating income decreased 24% in 2016 to $57.5 million compared to $75.9 million in 2015. The average
exchange rates between the prevailing currency in our foreign operations and the U.S. dollar resulted in a reduction in
CTS operating income of $3.9 million for 2016 compared to 2015. The decrease in operating income was primarily
related to lower profits on the transition to our follow-on fare collection contract in London, particularly because it no
longer includes the award of usage bonuses, as well as transition costs incurred on this contract in the first quarter of
49
fiscal 2016. The decrease in operating income in fiscal 2016 was partially offset by improved profitability on service
contracts in Sydney, Chicago, and Vancouver. In addition, operating income improved in Australia due to the
finalization of system development contract negotiations. In the third quarter of fiscal 2016 we finalized negotiations
regarding scope and pricing with a customer in Australia for system development work that the customer directed us to
begin in the second quarter of fiscal 2015. We had inventoried costs and deferred revenue on this development work
until such negotiations were complete. As a result of the finalization of the scoping and pricing, we realized increased
sales and operating profits in the third quarter of fiscal 2016. CTS R&D expenses increased by $10.8 million in fiscal
2016 compared to 2015 due to the ramp-up of the development of new transportation technologies, and due to the impact
of a settlement reimbursement from a prospective customer that had reduced fiscal 2015 R&D expenses by $2.3 million.
CTS operating income increased 15% in 2015 to $75.9 million compared to $65.9 million in 2014 despite the negative
impacts of foreign currency exchange rates. The average exchange rates between the prevailing currency in our foreign
operations and the U.S. dollar resulted in a reduction in CTS operating income of $5.5 million for 2015 compared to
2014. The increase in operating income compared to 2014 was primarily attributable to a decrease in losses experienced
on the Vancouver contract, an increase in gross margins on the contract in Chicago, and a gain recognized on proceeds
from a claim settlement of $3.6 million. These increases in operating income were partially offset by slightly lower
margins on development and services work in the U.K. Businesses acquired by CTS in fiscal year 2014 contributed an
operating loss of $2.1 million for 2015 compared to an operating loss of $1.4 million in 2014.
Amortization of purchased intangibles included in the CTS operating results totaled $7.1 million, $8.6 million, and $9.7
million in 2016, 2015 and 2014, respectively.
Cubic Global Defense Systems Segment
Cubic Global Defense Systems Segment Sales
2016
September 30,
2015
(in millions)
2014
$ 484.2 $ 462.1 $ 400.6
Cubic Global Defense Systems Segment Operating Income (Loss)
$ (17.1) $ 18.4 $ 26.8
CGD Systems sales increased 5% to $484.2 million in 2016 compared to $462.1 million in 2015. Businesses acquired by
CGD Systems in fiscal years 2016 and 2015 contributed sales of $79.6 million in 2016 compared to $45.8 million in
2015. Sales were higher from air combat training systems in the U.S., Middle East, and Far East, live fire training
systems and virtual simulation systems. These increases were partially offset by lower sales from ground combat training
systems, datalinks, and personnel locator systems. The average exchange rates between the prevailing currency in our
foreign operations and the U.S. dollar resulted in a decrease in sales of $3.7 million for 2016 compared to 2015.
CGD Systems sales increased 15% to $462.1 million in 2015 compared to $400.6 million in 2014. Businesses acquired
by CGD Systems in fiscal years 2015 and 2014 contributed sales of $60.5 million in 2015 compared to $5.3 million in
2014. In addition to the sales from acquired businesses, sales were higher from air combat training systems, particularly
in the Middle East, as well as from ground combat training systems in the Middle East. These increases were partially
offset by lower sales from ground combat training systems in the U.S. and virtual simulation systems sales. The average
exchange rates between the prevailing currencies in our foreign operations and the U.S. dollar resulted in a decrease in
sales of $12.1 million for 2015 compared to 2014.
CGD Systems had an operating loss of $17.1 million in 2016 compared to operating income of $18.4 million in 2015.
The changes in operating results between fiscal 2015 and fiscal 2016 were primarily caused by charges incurred in
connection with the accounting for business acquisitions in fiscal 2016. Including these impacts of business acquisition
accounting, the businesses we acquired in 2016 and 2015 had an operating loss of $32.7 million for 2016 compared to
operating income of $0.9 million in 2015. Included in the 2016 operating losses were business acquisition transaction
costs of $27.8 million consisting of expenses incurred for 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, most significantly, expenses recognized in connection with our acquisition of GATR
in the second quarter of fiscal 2016. Prior to our acquisition of GATR, GATR had a number of share-based payment
50
awards in place to its employees. Due to the structure of certain of these share-based payment awards, we were required
to recognize compensation expense, rather than purchase consideration, for the portion of our purchase price that we paid
to the seller that was distributed to the recipients of these awards. Consequently, we recognized $18.5 million of
compensation expense during the quarter ended March 31, 2016 related to this matter upon completing this acquisition.
For fiscal 2016, operating income from air combat training systems was higher than fiscal 2015 on increased sales, and
profitability improved from game-based virtual training system sales. In 2015 we had recorded a loss of $9.5 million
related to an increase in estimated costs to complete a contract for the development of a virtual training system. The
increased costs estimates in 2015 resulted, in part, from customer directed work outside the scope of the contract. We did
not recover any of these costs in 2016. While we expect to recover some amount of the costs in the future related to the
work performed outside of the scope of the contract through a contract claim process, at this time it is not possible to
determine the amount that will be recovered. In addition, CGD systems incurred $4.6 million of restructuring charges in
fiscal 2015 as compared to $0.3 million of restructuring charges in fiscal 2016. In 2016, operating income declined as
compared to 2015 on lower sales of ground combat training systems, datalinks, personnel locater systems, and modular
networking and baseband communications equipment. Operating income from virtual simulator system sales were
relatively consistent between 2016 and 2015.
CGD Systems operating income decreased 31% to $18.4 million in 2015 compared to $26.8 million in 2014. As noted
above, increases in estimated costs to complete a contract for the development of a virtual training system, resulted in a
loss of $9.5 million in 2015. In addition, operating income was lower on decreased sales of ground combat training
systems in the U.S. and virtual simulator systems. In addition, CGD systems incurred $4.6 million of restructuring
charges in fiscal 2015. The CGD Systems restructuring charges relate primarily to severance expenses incurred for the
reduction of CGD Systems headcount in connection with the consolidation of management functions and other processes
for CGD Systems and CGD Services businesses. Foreign currency exchange rates also negatively impacted CGD
Systems operating results. The average exchange rates between the prevailing currency in our foreign operations and the
U.S. dollar resulted in a decrease in CGD Systems operating income of $2.2 million for 2015 compared to 2014.
Partially offsetting these decreases in operating income was an increase in operating income on increased sales of ground
combat training systems in the Middle East. Although sales of air combat training systems were higher in 2015 than in
2014, the operating income on these sales was consistent between years based upon the decrease in operating profit
margin percentages on the mix of sales between the years. Also partially offsetting the decrease in operating income was
a decrease in losses incurred by acquired businesses. Businesses acquired by CGD Systems in fiscal years 2015 and 2014
contributed operating losses of $1.8 million for 2015 compared to operating losses of $6.9 million in 2014.
Amortization of purchased intangibles included in the CGD Systems results amounted to $22.3 million, $11.3 million,
and $2.5 million in 2016, 2015 and 2014, respectively.
Cubic Global Defense Services Segment
Cubic Global Defense Services Segment Sales
September 30,
2015
2014
2016
(in millions)
$ 391.1 $ 402.1 $ 398.1
Cubic Global Defense Services Segment Operating Income
$ 11.2 $
6.6 $
7.8
CGD Services sales decreased 3% to $391.1 million in 2016 compared to $402.1 million in 2015. Sales for 2016 were
lower primarily because of decreased activity supporting Special Operations Forces training and lower activity on U.S.
Army support contracts, other than at the Joint Readiness Training Center (JRTC) where activity and revenue was
slightly higher than fiscal 2015. These decreases were partially offset by increased sales on increased intelligence
support services.
CGD Services sales increased 1% to $402.1 million in 2015 compared to $398.1 million in 2014. Although this slight
upward movement in sales between the years appears to reflect little change, there was a change in the mix of sales. We
realized higher sales in 2015 from a Marine Corps training contract we won early in the fiscal year, from Special
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Operations Forces training and from growth in our simulator training operations. Sales were lower from training
exercises at JRTC, the Korea Battle Simulation Center (KBSC) and the Joint Warfighting Center (JWFC).
CGD Services operating income increased 70% to $11.2 million in 2016 compared to $6.6 million in 2015. The largest
individual contributor to the increase in CGD Services operating margins for 2016 was a $2.9 million decrease in the
amortization expense on purchased intangible assets for which amortization is based upon accelerated methods. In fiscal
2016 operating margins also increased on a number of fixed price contracts due to the impacts of cost efficiency efforts.
In fiscal 2016, the increase in operating income was partially offset by an operating loss realized in the first quarter of
fiscal 2016 on a Marine Corps training contract that was bid in an extremely competitive environment.
CGD Services operating income decreased to $6.6 million in 2015 from $7.8 million in 2014. Profit margins were lower
in 2015 than in 2014 due in part to the change in mix of sales described above. Lower sales from the JRTC and JWFC
contracts resulted in lower operating income, while certain contracts generating higher sales, such as the Marine Corps
training contract, produced lower operating income as they were bid with lower margins due to competitive pressures.
The KBSC contract was also won in a very competitive environment, resulting in lower profit margins from this new
contract than our past contracts at the KBSC, which we have operated for nearly 25 years. In addition to these
competitive pressures, we incurred higher compensation costs during the first quarter of fiscal 2015 as the result of
recruiting new executive management. We also incurred restructuring charges of $0.6 million as part of our plan to
improve the cost structure of the business to help improve profit margins. Lower operating income was partially offset
by a $2.7 million decrease in amortization expense related to purchased intangible assets.
Amortization of purchased intangibles included in the CGD Services results amounted to $4.8 million, $7.7 million, and
$10.4 million in 2016, 2015 and 2014, respectively.
Liquidity and Capital Resources
Our operating cash flows have been the primary source of funding for our operations, and have been a source of funding
some of our business acquisitions and all of our capital expenditures. We generated positive operating cash flows in
fiscal 2016, 2015 and 2014. Operating activities provided cash of $44.6 million, $89.7 million and $114.8 million in
fiscal 2016, 2015 and 2014, respectively.
As further described below, from 2014 to 2016 our operating cash flows have been significantly impacted by uses of
cash related to our investment in a new strategic and IT system resource planning system, our recent business
acquisitions, and by the payment terms on some of our customer contracts.
Cash used in connection with the design and development of our new enterprise resource planning system (ERP) totaled
$45.2 million in fiscal 2016. Certain costs incurred in the development of internal-use software and software
applications, including external direct costs of materials and services and applicable compensation costs of employees
devoted to specific software development, are capitalized as computer software costs. Costs incurred outside of the
application development stage, or that do not meet the capitalization requirements, are expensed as incurred. Of the
$45.2 million of cash used in 2016 in these efforts, $24.9 million was recognized as expense and is reflected in our 2016
cash flows used in operations, while $20.3 million was capitalized and is included in 2016 purchases of property, plant
and equipment in investing cash flows. Cash used in connection with ERP design and development totaled $27.5 million
in 2015. Of this amount, $11.5 million was recognized as expense and is reflected in our 2015 cash flows from
operations, and $16.0 million was capitalized and is included in 2015 purchases of property, plant and equipment in
investing cash flows.
Under purchase accounting rules, certain cash flows for businesses acquisitions are considered “purchase consideration”.
In our statement of cash flows, cash paid for purchase consideration is classified as cash used in investing activities.
However, there are a number of transactions related to business acquisitions that are expensed as incurred and that are
included in operating cash flows when paid. Costs that are expensed in connection with business acquisitions include
retention bonus expense and due diligence and consulting costs incurred in connection with the acquisitions. Business
acquisitions costs expensed in 2016, 2105, and 2014 totaled $28.7 million, $7.9 million, and $5.8 million, respectively.
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In our statement of cash flows, the cash used in operations related to these expenses was generally reflected in the same
period as these expenses. The expense amount for 2016 and the related operating cash outflow for 2016 reflected above
includes amounts recognized related to payments to former owners of share-based payment awards for GATR. Prior to
the acquisition, GATR made a number of share-based payment awards to its employees. Due to the structure of certain
of these share-based payment awards, we were required to recognize compensation expense, rather than purchase
consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these
awards. Consequently, upon completing the acquisition we recognized $18.5 million of compensation expense related to
this matter during the quarter ended March 31, 2016.
The changes in operating cash flows between 2014 and 2016 were also impacted by the terms of some of our largest
customer contracts. Our contract terms with our customers can have a significant impact on our operating cash flows.
Contract terms, including payment terms on our long-term development contracts, are customized for each contract
based upon negotiations with the respective customer. For some large long-term development contracts, primarily with
our international customers, we receive significant up-front cash payments from customers based upon the negotiated
terms of these contracts. The customized payment terms on long-term development projects also often include payment
milestones based upon such items as the delivery of components of systems, meeting specific contractual requirements in
the contracts, or other events. These milestone payments can vary significantly based upon the negotiated terms of the
contracts. Changes in the amount of unbilled accounts receivable are reflective of the difference between when costs are
incurred and when we are entitled to receive milestone payments.
In 2016 and 2015, CTS and CGD Services contributed to positive operating cash flows, while CGD Systems operations
used cash, primarily due to the acquisition related expenses described above. In 2014, all three segments contributed to
positive operating cash flows.
Investing activities used cash of $260.6 million in 2016, $125.1 million in 2015 and $121.6 million in 2014.
Cash used in investing activities during fiscal 2016 included $243.5 million in purchase consideration paid for
acquisitions of businesses, and capital expenditures of $32.1 million, including the $20.3 million of capitalized ERP
costs described above. Cash used in investing activities in 2016 was partially offset by $15.0 million net proceeds from
sales or maturities of marketable securities.
In 2015, significant investing activities included $90.4 million of purchase consideration paid related to the acquisition of
DTECH in our CGD Systems segment, $1.7 million of cash paid in 2015 related to business acquisitions made in 2013
and 2014, and capital expenditures of $22.2 million, including the $16.0 million of capitalized ERP costs described
above.
In 2014, investing activities included $72.2 million paid for the acquisition of ITMS, $11.2 million paid for the
acquisition of Intific, $21.5 million in net purchases of marketable securities and capital expenditures of $16.6 million.
Financing activities provided cash of $233.1 million and $73.3 million in 2016 and 2015 and used cash of $9.8 million in
2014. In 2016 and 2015, we borrowed a net of $180.0 million and $60.0 million, respectively, on a short-term basis that,
in addition to existing cash resources, was used to finance acquisitions. In fiscal 2016 we revised a note purchase
agreement and issued $75.0 million of unsecured notes bearing interest at 3.93%, maturing on March 12, 2026. Interest
payments on these notes are due semi-annually and principal payments are due from 2020 through 2026. In 2015 we
issued $25.0 million of senior unsecured notes, bearing interest at a rate of 3.70% and maturing on March 12, 2025. In
2016, 2015 and 2014, respectively, we repurchased $1.6 million, $2.7 million and $1.2 million of common stock in
connection with our stock-based compensation plan. We made payments on long-term borrowings of $0.5 million in
2016 and 2015 and $0.6 million in 2014. Dividends paid to shareholders amounted to $7.3 million ($0.27 cents per
share) in 2016 and 2015, and $6.4 million ($0.24 cents per share) in 2014.
The change in exchange rates between foreign currencies and the U.S. dollar resulted in a decrease of $38.5 million to
our cash balance as of September 30, 2016 compared to September 30, 2015, a decrease of $11.0 million to our cash
balance as of as of September 30, 2015 compared to September 30, 2014 and an increase of $4.2 million to our cash
balance as of September 30, 2014 compared to September 30, 2013.
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At the beginning of fiscal 2016, we had a committed five-year revolving credit agreement expiring in May 2017, with a
group of financial institutions in the amount of $200.0 million. On February 2, 2016, we and the group of financial
institutions increased the revolving line of credit available under the agreement to $400.0 million and we borrowed
$150.0 million as a source of financing for the purchase of GATR. In connection with this increase in the facility size,
certain debt covenant definitions and limitations were modified to increase our leverage capacity. On August 11, 2016
we executed the Third Amended and Restated Credit Agreement, which amended and restated the prior revolving credit
agreement to extend the maturity to August 11, 2021, add a new financial institution to the group of creditors and amend
certain terms and covenants. Borrowings under the agreement bear a variable rate of interest, which is calculated based
upon the U.S. dollar LIBOR rate plus a contractually defined credit spread that is based upon the tenor of the specific
borrowing. The available line of credit is reduced by any letters of credit issued under the agreement. As of September
30, 2016, there were borrowings totaling $240.0 million under this agreement and there were letters of credit outstanding
totaling $20.7 million, which reduce the available line of credit to $139.3 million.
We also have a secured letter of credit facility agreement with a bank that has no expiration date and is cancellable by us
at any time upon the completion of certain conditions to the satisfaction of the bank. At September 30, 2016, there were
letters of credit outstanding under this agreement of $62.7 million. Restricted cash at September 30, 2016 of $69.4
million was held on deposit in the U.K. as collateral in support of this facility. We are required to leave the cash in the
restricted account so long as the bank continues to maintain associated letters of credit under the facility. The maximum
amount of letters of credit currently allowed by the facility is $63.1 million, and any increase above this amount would
require bank approval and additional restricted funds to be placed on deposit. We may choose at any time to terminate
the facility and move the associated letters of credit to another credit facility. Letters of credit outstanding under this
facility do not reduce the available line of credit under the revolving credit agreement described above.
As of September 30, 2016, we had letters of credit and bank guarantees outstanding totaling $79.2 million, including the
letters of credit outstanding under our revolving credit agreement and secured letter of credit facility agreement, which
guarantee either our performance or customer advances under certain contracts. In addition, we had financial letters of
credit outstanding totaling $16.6 million as of September 30, 2016, which primarily guarantee our payment of certain
self-insured liabilities.
We maintain short-term borrowing arrangements in New Zealand and Australia totaling $0.5 million New Zealand
dollars (equivalent to approximately $0.4 million) and $3.0 million Australian dollars (equivalent to approximately $2.3
million) to help meet the short-term working capital requirements of our subsidiaries in those countries. At
September 30, 2016, no amounts were outstanding under these borrowing arrangements.
Our revolving credit agreement and note purchase and private shelf agreement each contain a number of customary
covenants, including requirements for Cubic to maintain certain interest coverage and leverage ratios and restrictions on
Cubic’s and certain of its subsidiaries’ abilities to, among other things, incur additional debt, create liens, consolidate or
merge with any other entity, or transfer or sell substantially all of their assets, in each case subject to certain exceptions
and limitations. These agreements also contain customary events of default, including, without limitation: (a) failure by
Cubic to pay principal or interest on the Notes when due; (b) failure by Cubic or certain of its subsidiaries to comply
with the covenants in the agreements; (c) failure of the representations and warranties made by Cubic or certain of its
subsidiaries to be correct in any material respect; (d) cross-defaults with other indebtedness of Cubic or certain of its
subsidiaries resulting in the acceleration of the maturity thereof; (e) certain bankruptcy and insolvency events with
respect to Cubic or certain of its subsidiaries; (f) failure by Cubic or certain of its subsidiaries to satisfy certain final
judgments when due; and (g) a change in control of Cubic, in each case subject to certain exceptions and limitations. The
occurrence of any event of default under these agreements may result in all of the indebtedness then outstanding
becoming immediately due and payable.
The accumulated deficit in other comprehensive loss increased $68.0 million in 2016. Unrealized translation adjustments
totaled $48.0 million and an increase in the recorded liability for our pension plans increased our accumulated other
comprehensive loss by $19.6 million.
Our financial condition remains strong with net working capital of $262.7 million and a current ratio of 1.5 to 1 at
September 30, 2016. We expect that cash on hand and our revolving credit agreement will be adequate to meet our
54
working capital requirements for the foreseeable future. Our total debt to capital ratio at September 30, 2016 was 29%.
Our cash is invested primarily in highly liquid bank deposits and government instruments in the U.S., U.K., New
Zealand and Australia.
As of September 30, 2016, virtually all of the $285.8 million of our cash, cash equivalents, including restricted cash, and
marketable securities was held by our foreign subsidiaries, primarily in the U.K., New Zealand and Australia. If these
funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these
funds. With the exception of $34.1 million of accumulated earnings from the U.K. which we expect to repatriate, we
have the intent and ability to permanently reinvest the remaining funds outside of the U.S. and our current plans do not
demonstrate a need to repatriate additional amounts to fund our U.S. operations. However, changes in circumstances may
result in changes to our intent or ability to reinvest such funds outside of the U.S., or our need to repatriate additional
amounts.
The following is a schedule of our contractual obligations outstanding as of September 30, 2016:
Short-term borrowings
Long-term debt
Interest payments
Operating leases
Deferred compensation
Total
Less than 1
Year
1 - 3 years 4 - 5 years After 5 years
(in millions)
$ 240.0 $ 240.0 $ — $ — $
201.0
47.1
60.0
11.7
0.4
7.3
12.4
0.8
0.7
14.5
19.6
1.9
46.4
13.2
12.7
1.3
$ 559.8 $ 260.9 $ 36.7 $ 73.6 $
—
153.5
12.1
15.3
7.7
188.6
As of September 30, 2016, we had approximately $11.9 million of recorded liabilities and related interest and penalties
pertaining to uncertain tax positions which are excluded from the table above. None of these liabilities and related
interest and penalties is expected to be paid within one year. We are unable to make a reasonable estimate as to when
cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of
these obligations would result from settlements with taxing authorities. For more information on our uncertain tax
positions, see Note 10 to the Consolidated Financial Statements in Item 8 of this Form 10-K. The table above also
excludes estimated minimum funding requirements for retirement plans as set forth by statutory requirements. For
further information about future minimum contributions for these plans, see Note 12 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
The terms of the purchase agreements in certain of our recent business acquisitions provide that we will pay the sellers
contingent consideration should the acquired companies meet specified goals. As of September 30, 2016, the maximum
future contingent consideration that would be payable if all such goals were met is $23.9 million. However, we are
unable to make a reasonable estimate as to the timing and magnitude of such future payments.
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Backlog
Total backlog
Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Total
Funded backlog
Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Total
September 30, September 30,
2016
2015
(in millions)
$ 1,793.3 $
576.8
570.3
$ 2,940.4 $
$ 1,793.3 $
576.8
139.2
$ 2,509.3 $
1,894.3
595.7
485.6
2,975.6
1,894.3
595.7
149.9
2,639.9
As reflected in the table above, total backlog decreased $35.2 million and funded backlog decreased $130.6 million from
September 30, 2015 to September 30, 2016. The decrease in total backlog in CTS and CGD Systems was partially offset
by an increase in backlog for CGD Services. TeraLogics and GATR, businesses acquired by our CGD Systems segment
in fiscal year 2016, had $49.0 million of total backlog on their respective acquisition dates. Changes in exchange rates
between the prevailing currency in our foreign operations and the U.S. dollar as of the end of fiscal 2016, decreased
backlog by approximately $81.3 million compared to September 30, 2015, primarily in our Transportation Systems
Segment.
The difference between total backlog and funded backlog represents options under multiyear CGD Services contracts.
Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally
exercised annually. Funded backlog includes unfilled firm orders for our products and services for which funding has
been both authorized and appropriated by the customer (Congress, in the case of U.S. government agencies). Options for
the purchase of additional systems or equipment are not included in backlog until exercised. In addition to the amounts
identified above, we have been selected as a participant in or, in some cases, the sole contractor for several substantial
(ID/IQ) contracts. ID/IQ contracts are not included in backlog until an order is received. In the past, many of the
contracts we were awarded in CGD Services were long-term in nature, spanning periods of five to ten years. The U.S.
DoD now awards shorter-term contracts for the services we provide and increasingly relies upon ID/IQ contracts which
can result in a lower backlog and/or lower funded backlog due to the shorter-term nature of Task Orders issued under
these ID/IQ awards.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by the applicable regulations of the SEC) that are
reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a
comprehensive revenue recognition model and supersedes most current revenue recognition guidance and will require
revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the
consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new
rules could affect the timing of revenue recognition for certain transactions. ASU 2014-09 will be effective for us
starting in the first quarter of fiscal 2019 as we have determined that we will not adopt ASU 2014-09 early. ASU 2014-
09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods
presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is
recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet
56
determined which method of adoption we will select. We are currently in the process of modeling the impact of the
adoption of the new standard on certain of our long-term contracts in order to assess the expected impacts. As the new
standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue
and cost recognition on a significant number of contracts across our business segments, in addition to our business
processes and our information technology systems. As a result, our evaluation of the effect of the new standard will
likely extend over several future periods.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which requires
management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and
provide related footnote disclosures. ASU 2014-15 will be effective for us for the year ended September 30, 2017 and for
interim reporting periods thereafter. Early adoption is permitted for financial statements that have not been previously
issued, but we have not yet adopted this standard. This adoption is not expected to have a significant impact on our
financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs which requires that
all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt,
similar to the presentation of debt discounts. ASU 2015-03 is effective for us on October 1, 2016 with early adoption
permitted. We do not expect that the adoption of this new accounting guidance will have a material impact on our
consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a
software license. If a cloud computing arrangement includes a software license, then the customer should account for the
software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a
service contract. ASU 2015-05 will be effective for us beginning on October 1, 2016. We are currently assessing the
impact that adopting this new accounting guidance will have on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes which removes the
requirement to separate deferred tax liabilities and assets into current and noncurrent amounts and instead requires all
such amounts be classified as noncurrent on the balance sheet. We adopted ASU 2015-17 prospectively on October 1,
2015 and reclassified the current portion of our net deferred tax assets and liabilities to net noncurrent deferred tax assets
and liabilities. No prior periods were retrospectively adjusted.
In January 2016, the FASB issued Accounting Standards Update ASU 2016-01, Financial Instruments – Overall
(Subtopic 825-10) which updates certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. ASU 2016-01 will be effective for us beginning October 1, 2018 and, with the exception of a specific
portion of the amendment, early adoption is not permitted. We are currently evaluating the impact this guidance will
have on our financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease
liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
(b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term. The ASU will be effective for us beginning October 1, 2019 with early adoption permitted. We are
currently evaluating the impact of the application of this accounting standard update on our consolidated financial
statements as well as whether to adopt the new guidance early.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation. The new guidance simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments
in this standard are effective for our annual year and first fiscal quarter beginning on October 1, 2017 with early adoption
permitted. We are currently evaluating the impact of the application of this accounting standard update on our
consolidated financial statements as well as whether to adopt the new guidance early.
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In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which
provides clarifying guidance on how entities should classify certain cash receipts and cash payments on the statement of
cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash
payments have aspects of more than one class of cash flows. The guidance will be effective for the Company in its fiscal
year beginning October 1, 2018, and early adoption is permitted. We are currently evaluating the impact of the
application of this accounting standard update on our consolidated financial statements as well as whether to adopt the
new guidance early.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements are based on the application of GAAP, which require us to make estimates and
assumptions about future events that affect the amounts reported in our consolidated financial statements and the
accompanying notes. Future events and their effects cannot be determined with certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences
may be material to our consolidated financial statements. We believe the estimates set forth below may involve a higher
degree of judgment and complexity in their application than our other accounting estimates and represent the critical
accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments related
to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the results
could be materially different from the amounts recorded.
Revenue Recognition
We generate revenue from the sale of products such as mass transit fare collection systems, air and ground combat
training systems, and secure communications products. We provide services such as specialized military training
exercises, including live, virtual and constructive training exercises and support, and we operate and maintain fare
systems for mass transit customers. We classify sales as products or services in our Consolidated Statements of Income
based on the attributes of the underlying contracts.
A significant portion of our business is derived from long-term development, production and system integration
contracts. We consider the nature of these contracts, and the types of products and services provided, when we determine
the proper accounting for a particular contract. Many of our long-term fixed-price contracts require us to deliver
quantities of products over a long period of time or to perform a substantial level of development effort in relation to the
total value of the contract. For long-term fixed-price contracts requiring substantial development effort, we generally
record revenue on a percentage-of-completion basis using the cost-to-cost method to measure progress toward
completion. Under the cost-to-cost method of accounting, we recognize revenue based on a ratio of the costs incurred to
the estimated total costs at completion. For certain other long-term, fixed-price production contracts not requiring
substantial development effort we use the units-of-delivery percentage-of-completion method as the basis to measure
progress toward completing the contract and recognizing sales. The units-of-delivery measure recognizes revenues as
deliveries are made to the customer generally using unit sales values in accordance with the contract terms. We estimate
profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that profit
over the life of the contract based on deliveries.
Generally, we recognize sales and profits earlier in a production cycle when we use the cost-to-cost method of
percentage-of-completion accounting than when we use the units-of-delivery method. In addition, our profits and
margins may vary materially depending on the types of long-term contracts undertaken, the costs incurred in their
performance, the achievement of other performance objectives, and the stage of performance at which the right to
receive fees, particularly under award and incentive fee contracts, is finally determined.
Award fees and incentives related to performance on contracts, which are generally awarded at the discretion of the
customer, as well as penalties related to contract performance, are considered in estimating sales and profit rates.
Estimates of award fees are based on actual awards and anticipated performance. Incentive provisions that increase or
decrease earnings based solely on a single significant event are generally not recognized until the event occurs. Those
incentives and penalties are recorded when there is sufficient information for us to assess anticipated performance.
58
Accounting for long-term contracts requires judgment relative to assessing risks, estimating contract revenues and costs,
and making assumptions for schedule and technical issues. Due to the scope and nature of the work required to be
performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to
many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs.
For contracts with the U.S. government, general and administrative costs are considered contract costs; however, for
purposes of revenue measurement, general and administrative costs are not considered contract costs for any other
customers. We have to make assumptions regarding labor productivity and availability, the complexity of the work to be
performed, the availability of materials, estimated increases in wages and prices for materials, performance by our
subcontractors, and the availability and timing of funding from our customer, among other variables. For contract change
orders, claims, or similar items, we apply judgment in estimating the amounts and assessing the potential for realization.
These amounts are only included in contract value when they can be reliably estimated and realization is considered
probable. Based upon our history, we believe we have the ability to make reasonable estimates for these items. We have
accounting policies and controls in place to address these, as well as other contractual and business arrangements to
properly account for long-term contracts, and we continue to monitor and improve such policies, controls, and
arrangements. For other information on such policies, controls and arrangements, see our discussion in Item 9A of this
Form 10-K.
Products and services provided under long-term, fixed-price contracts represented approximately 82% of our sales for
2016. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts
could be recorded if we used different assumptions or if our underlying circumstances were to change. For example, if
underlying assumptions were to change such that our estimated profit rate at completion for all fixed-price contracts
accounted for under the cost-to-cost percentage-of-completion method was higher or lower by one percentage point, our
2016 net earnings would have increased or decreased by approximately $7.8 million. When adjustments in estimated
contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by
recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods
using the cumulative catch-up method of accounting. When estimates of total costs to be incurred on a contract exceed
total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is
determined.
Changes in estimates on contracts for which revenue is recognized using the cost-to-cost percentage-of-completion
method decreased operating income by approximately $2.8 million in 2016, decreased operating income by
approximately $14.5 million in 2015, and increased operating income by approximately $1.3 million in 2014. These
adjustments decreased net income by approximately $1.6 million ($0.06 per share) in 2016, decreased net income by
approximately $8.0 million ($0.30 per share) in 2015, and increased net income by approximately $3.5 million ($0.13
per share) in 2014.
We occasionally enter into contracts that include multiple deliverables such as the construction or upgrade of a system
and subsequent services related to the delivered system. In recent years we have seen an increase in the number of
customer requests for proposal that include this type of contractual arrangement. For these arrangements revenue is
allocated at the inception of the contract to the different contract elements based on their relative selling price. The
relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price
or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price
exists for a deliverable, which is typically the case for our contracts, the guidance requires us to determine the best
estimate of the selling price, which is the price at which we would sell the deliverable if it were sold on a standalone
basis. In estimating the selling price of the deliverable on a standalone basis, we consider our overall pricing models and
objectives, including the factors we contemplate in negotiating our contracts with our customers. The pricing models and
objectives that we use are generally based upon a cost-plus margin approach, with the estimated margin based in part on
qualitative factors such as perceived customer pricing sensitivity and competitive pressures. Once the contract value is
allocated to the separate deliverables, revenue recognition guidance relevant to each contractual element is followed. For
example, for the long-term construction portion of a contract we generally use the cost-to-cost percentage-of-completion
method and for the services portion we generally recognize the service revenues on a straight-line basis over the
contractual service period or based on measurable units of work performed or incentives earned. The judgment we apply
in allocating the relative selling price to each deliverable can have a significant impact on the timing of recognizing
59
revenues and operating income on a contract. The revenue recognized for each unit of accounting is classified as
products or services sales in our Consolidated Statements of Income based upon the predominant attributes of the unit of
accounting. If product and service deliverables are combined for revenue recognition purposes, revenue recognized is
allocated to products or services in our Consolidated Statements of Income based upon a relative-selling-price method.
For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of
certain units of accounting, but rather we will be paid when subsequent performance obligations are satisfied. Generally,
in these cases the allocation of arrangement consideration to the up-front deliverables is limited, in some cases to zero,
and revenue is reduced, in some cases to zero for the delivery of up-front units of accounting. In such situations, if the
costs associated with the delivered item exceed the amount of allocable arrangement consideration, we defer the direct
and incremental costs associated with the delivered item that are in excess of the allocated arrangement consideration as
capitalized contract costs. We assess recoverability of these costs by comparing the recorded asset to the deferred
revenue in excess of the transaction price allocated to the remaining deliverables in the arrangement. Capitalized contract
costs are subsequently recognized in income in a manner that is consistent with revenue recognition pattern for the
arrangement as a whole. If no pattern of revenue recognition can be reasonably predicted for the arrangement, the
capitalized costs are amortized on a straight-line basis.
We provide services under contracts including outsourcing-type arrangements and operations and maintenance contracts.
Revenue under our service contracts with the U.S. government, which is generally in our CGD Services segment, is
recorded under the cost-to-cost percentage-of-completion method. Award fees and incentives related to performance on
services contracts at CGD Services are generally accrued during the performance of the contract based on our historical
experience with such awards.
Revenue under contracts for services other than those with the U.S. government and those associated with long-term
development projects is recognized either as services are performed or when a contractually required event has occurred,
depending on the contract. These types of service contracts are entered into primarily by our CTS segment and to a lesser
extent by our CGD Systems segment. Revenue under such contracts is generally recognized on a straight-line basis over
the period of contract performance, unless evidence suggests that the revenue is earned or the obligations are fulfilled in
a different pattern. Costs incurred under these services contracts are expensed as incurred. Earnings related to services
contracts may fluctuate from period to period, particularly in the earlier phases of the contract. Certain of our
transportation systems service contracts contain service level or system usage incentives, for which we recognize
revenues when the incentive award is fixed or determinable. These contract incentives are generally based upon monthly
service levels or monthly performance and become fixed or determinable on a monthly basis. However, one of our
legacy transportation systems service contracts that terminated in late fiscal 2015 contained annual system usage
incentive which were based upon system usage compared to annual baseline amounts. For this contract the annual
system usage incentives were not considered fixed or determinable until the end of the contract year for which the
incentives are measured, which fell within the second quarter of our fiscal year. Often these fees are based on meeting
certain contractually required service levels or based on system usage levels.
Approximately half of our total sales are driven by pricing based on costs incurred to produce products or perform
services under contracts with the U.S. government. Cost-based pricing is determined under the Federal Acquisition
Regulation (FAR). The FAR provides guidance on the types of costs that are allowable in establishing prices for goods
and services under U.S. government contracts. For example, costs such as those related to charitable contributions,
interest expense and certain advertising activities are unallowable and, therefore, not recoverable through sales. We
closely monitor compliance with, and the consistent application of, our critical accounting policies related to contract
accounting. Business segment personnel evaluate our contracts through periodic contract status and performance
reviews. Corporate management and our internal auditors also monitor compliance with our revenue recognition policies
and review contract status with segment personnel. Costs incurred and allocated to contracts are reviewed for compliance
with U.S. government regulations by our personnel, and many of them are subject to audit by the Defense Contract Audit
Agency. For other information on accounting policies we have in place for recognizing sales and profits, see our
discussion under “Revenue Recognition” in Note 1 to the Consolidated Financial Statements.
60
Income Taxes
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law
and rate changes are reflected in income in the period such changes are enacted. We record a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not to be realized. We include interest and penalties
related to income taxes, including unrecognized tax benefits, within the income tax provision.
Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal
Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a
two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is
more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions
taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the
adequacy of the provision for income taxes. We continually assess the likelihood and amount of potential adjustments
and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give
rise to a revision become known.
We do not provide for U.S. income taxes on the earnings of foreign subsidiaries which are considered indefinitely
reinvested outside the U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available
for distribution. As of September 30, 2016, the cumulative amount of earnings upon which U.S. income taxes have not
been provided is approximately $389.5 million, of which $360.0 million originates from the U.K. We continually
evaluate the financial requirements of our U.S. operations as well as funding requirements outside the U.S. for potential
mergers and acquisitions, market growth and ongoing operations to determine the amount of excess capital, if any, that is
available for distribution. Whether or not we actually repatriate the excess capital in the form of a dividend, we would
provide for U.S. taxes on the amount determined to be available for distribution. This evaluation is judgmental in nature
and, therefore, the amount of U.S. taxes provided on undistributed earnings of our foreign subsidiaries is affected by
these judgments.
Purchased Intangibles
We generally fund acquisitions using a combination of cash on hand and with the proceeds of debt. Assets acquired and
liabilities assumed in connection with an acquisition are recorded at their fair values determined by management as of
the date of acquisition. The excess of the transaction consideration over the fair value of the net assets acquired is
recorded as goodwill. We amortize intangible assets acquired as part of business combinations over their estimated
useful lives unless their useful lives are determined to be indefinite. For certain business combinations, we utilize
independent valuations to assist us in estimating the fair value of purchased intangibles. Our purchased intangibles
primarily relate to contracts and programs acquired and customer relationships, which are amortized over periods of 15
years or less. The determination of the value and useful life of purchased intangibles is judgmental in nature and,
therefore, the amount of annual amortization expense we record is affected by these judgments. For example, if the
weighted average amortization period for our purchased intangibles was one year less than we have determined, our
2016 amortization expense would have increased by approximately $4.2 million.
Valuation of Goodwill
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 on an annual basis and when circumstances indicate that
an impairment is more likely than not. Such circumstances include a significant adverse change in the business climate
for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit. The
test for goodwill impairment is a two-step process. The first step of the test is performed by comparing the fair value of
each reporting unit to its carrying value, including recorded goodwill. If the carrying value of a reporting unit exceeds its
61
fair value, the second step is performed to measure the amount of the impairment, if any, by comparing the implied fair
value of goodwill to its carrying value. Any resulting impairment determined would be recorded in the current period.
Goodwill balances by reporting unit are as follows:
September 30,
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Total goodwill
2016
2015
(in millions)
2014
$ 49.6 $ 56.0 $ 59.1
30.6
94.4
$ 406.9 $ 237.9 $ 184.1
262.9
94.4
87.5
94.4
Determining the fair value of a reporting unit for purposes of the goodwill impairment test is judgmental in nature and
involves the use of estimates and assumptions. These estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value
are primarily determined using discounted cash flows and market multiples from publicly traded comparable companies.
These approaches use significant estimates and assumptions including projected future cash flows, discount rate
reflecting the inherent risk in future cash flows, perpetual growth rate and determination of appropriate market
comparables.
For the first step of our fiscal 2016 annual impairment test, the discounted cash flows used in the fair value analyses were
based on discrete financial forecasts developed by management for planning purposes. We used three year forecasts for
our reporting units. Cash flows beyond the discrete forecasts were estimated based on projected growth rates and
financial ratios, influenced by an analysis of historical ratios and by calculating a terminal value at the end of the three
year forecasts The future cash flows were discounted to present value using a discount rate of 12.0% for our CGD
Systems reporting unit, 12.5% for our CGD Services reporting unit and 12.0% for our Transportation Systems reporting
unit. The estimated fair values for our CGD Services and Transportation Systems reporting units each exceeded their
carrying values by over 20%, while the estimated value of our CGD Systems reporting unit exceeded its carrying value
by over 15%.
Significant management judgment is required in the forecast of future operating results that are used in our impairment
analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our
CGD Services reporting unit, significant assumptions utilized in our discounted cash flow approach included growth
rates for sales and margins at greater levels than we have achieved in the past five years, but at levels that are less than
the average annual growth we achieved over the period from fiscal 2000 through fiscal 2010. Although we believe our
underlying assumptions supporting this assessment are reasonable, if our forecasted sales and margin growth rates,
timing of growth, or the discount rate vary from our forecasts, we may be required to perform an interim analysis in 2017
that could expose us to material impairment charges in the future. Assumptions used in our discounted cash flow
approach for our CGD Systems reporting unit also included growth rates for sales and margins at greater levels that we
have achieved in recent years due to our expectation that businesses recently acquired by this reporting unit will achieve
growth at higher rates than the unit’s legacy operations. In performing the 2016 annual test for our CGD Services and
CGD Systems reporting units, small changes in the discount rate, growth rate or gross margin assumptions could have a
significant impact on the determination of the estimated fair value of CDG Services. For example a decrease in each
future year’s projected cash flows by 24% for the CGD Services reporting unit or by 16% for the CGD systems reporting
unit would have resulted in us being required to complete step two of the analysis for the respective reporting unit.
Unforeseen negative changes in future business or other market conditions for any of our reporting units including
margin compression or loss of business, could cause recorded goodwill to be impaired in the future. Also, changes in
estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of our
reporting units and could result in a goodwill impairment charge in a future period.
62
Pension Costs
The measurement of our pension obligations and costs is dependent on a variety of assumptions used in our valuations.
These assumptions include estimates of the present value of projected future pension payments to plan participants,
taking into consideration the likelihood of potential future events such as salary increases and demographic experience.
These assumptions may have an effect on the amount and timing of future contributions.
The assumptions used in developing the required estimates include the following key factors:
• Discount rates
•
Inflation
• Salary growth
• Expected return on plan assets
• Retirement rates
• Mortality rates
The discount rate represents the interest rate that is used to determine the present value of future cash flows currently
expected to be required to settle pension obligations. We base the discount rate assumption on investment yields
available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of
external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the
inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our
investment strategy and the views of investment managers and large pension sponsors. Mortality rates are based on
published mortality tables. Retirement rates are based primarily on actual plan experience. The effects of actual results
differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our
recognized expense in such future periods.
Changes in the above assumptions can affect our financial statements, although the relatively small size of our defined
benefit pension plans limits the impact any individual assumption changes would have on earnings. For example, if the
assumed rate of return on pension assets was 25 basis points higher or lower than we have assumed, our 2016 net
earnings would have increased or decreased by approximately $0.5 million, assuming all other assumptions were held
constant.
Holding all other assumptions constant, an increase or decrease of 25 basis points in the discount rate assumption for
2016 would increase or decrease net earnings for 2017 by approximately $0.6 million, and would have decreased or
increased the amount of the benefit obligation recorded at September 30, 2016, by approximately $10.5 million.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We invest in money market instruments and short-term marketable debt securities whose return is tied to short-term
interest rates being offered at the time the investment is made. We maintain short-term borrowing arrangements in the
U.S., Australia and New Zealand which are also tied to short-term rates (the U.S. dollar LIBOR rate, the Australia bank
bill swap bid rate and the New Zealand base rate). We also have senior unsecured notes payable to insurance companies
which have fixed coupon interest rates. See Note 8 to the Consolidated Financial Statements for more information.
Interest income earned on our short-term investments is affected by changes in the general level of interest rates in the
U.S., the U.K., Australia and New Zealand. These income streams are generally not hedged. Interest expense incurred
under the short-term borrowing arrangements is affected by changes in the general level of interest rates in the U.S.,
Australia and New Zealand. The expense related to these cost streams is usually not hedged since it is either payable
within three months and/or immediately callable by the lender at any time. Interest expense incurred under the long-term
notes payable is not affected by changes in any interest rate because it is fixed. However, we may in the future use an
interest rate swap to essentially convert this fixed rate into a floating rate for some or all of the long-term debt
outstanding. The purpose of a swap would be to tie the interest expense risk related to these borrowings to the interest
63
income risk on our short-term investments, thereby mitigating our net interest rate risk. We believe that we are not
significantly exposed to interest rate risk at this point in time.
Foreign Currency Exchange Risk
In the ordinary course of business, we enter into firm sale and purchase commitments denominated in many foreign
currencies. We have a policy to hedge those commitments greater than $50,000 by using foreign currency exchange
forward and option contracts that are denominated in currencies other than the functional currency of the subsidiary
responsible for the commitment, typically the British pound, Canadian dollar, Singapore dollar, Euro, Swedish krona,
New Zealand dollar and Australian dollar. These contracts are designed to be effective hedges regardless of the direction
or magnitude of any foreign currency exchange rate change, because they result in an equal and opposite income or cost
stream that offsets the change in the value of the underlying commitment. See Note 1 to the Consolidated Financial
Statements for more information on our foreign currency translation and transaction accounting policies.
We also use balance sheet hedges to mitigate foreign exchange risk. This strategy involves incurring British pound
denominated debt (See Interest Rate Risk above) and having the option of paying off the debt using U.S. dollar or British
pound funds. We believe that our hedging activities limit our exposure to foreign currency exchange rate risk at this
point in time.
Investments in our foreign subsidiaries in the U.K., Australia, New Zealand and Canada are not hedged because we
consider them to be invested indefinitely. In addition, we generally have control over the timing and amount of earnings
repatriation, if any, and expect to use this control to mitigate foreign currency exchange risk.
64
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Net sales:
Products
Services
Costs and expenses:
Products
Services
Selling, general and administrative expenses
Research and development
Amortization of purchased intangibles
Restructuring costs
Operating income
Other income (expenses):
Interest and dividend income
Interest expense
Pension settlement loss
Other income (expense), net
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Years Ended September 30,
2015
2014
2016
$ 661,904 $
799,761
1,461,665
607,226 $ 583,937
814,415
823,819
1,398,352
1,431,045
473,444
643,462
269,593
31,976
34,120
1,852
1,454,447
451,295
640,031
212,518
17,992
27,550
6,272
1,355,658
424,682
657,853
181,672
17,959
22,602
1,094
1,305,862
7,218
75,387
92,490
1,476
(11,199)
(2,671)
(2,301)
1,809
(4,400)
—
(885)
1,396
(4,084)
—
(391)
(7,477)
71,911
89,411
(9,212)
48,997
19,831
1,735
22,914
69,580
Less noncontrolling interest in income of VIE
—
29
89
Net income attributable to Cubic
Net income per share attributable to Cubic:
Basic
Diluted
Weighted average shares used in per share calculations:
Basic
Diluted
See accompanying notes.
$
$
1,735 $
22,885 $
69,491
0.06 $
0.06
0.85 $
0.85
2.59
2.59
26,976
27,040
26,872
26,938
26,787
26,845
65
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income
Other comprehensive income (loss):
Years Ended September 30,
2015
$ 1,735 $ 22,914 $ 69,580
2014
2016
Adjustment to pension liability, net of tax
Foreign currency translation
Change in unrealized gains/losses from cash flow hedges:
Change in fair value of cash flow hedges, net of tax
Adjustment for net gains/losses realized and included in net income, net of
tax
Total change in unrealized gains/losses realized from cash flow hedges,
net of tax
Total other comprehensive loss
Total comprehensive income (loss)
(19,584)
(47,872)
(15,791)
(31,430)
(1,085)
(2,017)
464
1,574
748
(989)
(817)
(215)
533
757
(525)
(67,981)
(2,569)
(46,464)
$ (66,246) $ (23,550) $ 67,011
See accompanying notes.
66
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivable:
Trade and other receivables
Long-term contracts
Allowance for doubtful accounts
Recoverable income taxes
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Long-term contract receivables
Long-term capitalized contract costs
Property, plant and equipment, net
Deferred income taxes
Goodwill
Purchased intangibles, net
Other assets
Total assets
See accompanying notes.
September 30,
2016
2015
$
197,127 $ 218,476
69,245
75,648
30,533
12,996
15,488
367,419
(326)
382,581
9,706
66,362
—
38,502
782,922
12,812
346,292
(179)
358,925
753
63,700
1,384
32,286
775,302
20,926
65,382
96,316
2,194
406,946
123,403
6,590
36,809
73,017
74,690
11,443
237,899
72,936
18,180
$ 1,504,679 $ 1,300,276
67
CUBIC CORPORATION
CONSOLIDATED BALANCE SHEETS—continued
(in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings
Trade accounts payable
Customer advances
Accrued compensation
Other current liabilities
Income taxes payable
Deferred income taxes
Current maturities of long-term debt
Total current liabilities
Long-term debt
Accrued pension liability
Deferred compensation
Income taxes payable
Deferred income taxes
Other non-current liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value:
Authorized--5,000 shares
Issued and outstanding--none
Common stock, no par value:
Authorized--50,000 shares
35,937 issued and 26,992 outstanding at September 30, 2016
35,828 issued and 26,883 outstanding at September 30, 2015
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost - 8,945 shares
Total shareholders’ equity
September 30,
2016
September 30,
2015
$
240,000 $
81,172
49,481
73,619
74,071
1,450
—
450
520,243
200,562
46,865
10,643
11,855
3,980
20,635
60,000
47,170
77,083
51,065
92,854
4,675
13,404
525
346,776
126,180
26,025
9,913
8,519
1,971
24,604
—
—
32,756
813,035
(119,817)
(36,078)
689,896
25,560
818,642
(51,836)
(36,078)
756,288
Total liabilities and shareholders’ equity
$ 1,504,679 $ 1,300,276
See accompanying notes.
68
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Share-based compensation expense
Change in fair value of contingent consideration
Inventory write-down
Deferred income taxes
Net pension cost (benefit)
Excess tax benefits from equity incentive plans
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Long-term capitalized contract costs
Accounts payable and other current liabilities
Customer advances
Income taxes
Other items, net
NET CASH PROVIDED BY OPERATING ACTIVITIES
Investing Activities:
Acquisition of businesses, net of cash acquired
Purchases of marketable securities
Proceeds from sales or maturities of marketable securities
Purchases of property, plant and equipment
Purchases of other assets
NET CASH USED IN INVESTING ACTIVITIES
Financing Activities:
Proceeds from short-term borrowings
Principal payments on short-term borrowings
Proceeds from long-term borrowings
Principal payments on long-term debt
Deferred financing fees
Proceeds from issuance of common stock
Purchase of common stock
Dividends paid
Excess tax benefits from equity incentive plans
Contingent consideration payments related to acquisitions of businesses
Purchase of noncontrolling interest
Net change in restricted cash
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Effect of exchange rates on cash
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at the beginning of the period
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
Supplemental disclosure of non-cash investing and financing activities:
Liability incurred to acquire GATR, net
Liability incurred to acquire TeraLogics, net
Liability incurred to acquire H4 Global, net
Liability incurred to acquire DTECH, net
Liability incurred to acquire Intific, net
See accompanying notes.
69
Years Ended September 30,
2015
2014
2016
$
1,735 $
22,914
$
69,580
45,478
8,762
1,274
—
(23,988)
1,102
3
4,409
(62)
3,403
7,635
19,874
(24,900)
(5,519)
5,396
44,602
37,662
8,325
3,607
—
33,816
(3,224)
33
(2,230)
(21,669)
(15,045)
3,192
25,599
(10,200)
8,847
(1,938)
89,689
(243,459)
(28,470)
43,456
(32,093)
—
(260,566)
(92,178)
(58,855)
51,173
(22,202)
(2,993)
(125,055)
288,900
(108,900)
75,000
(494)
(3,647)
—
(1,563)
(7,285)
(3)
(2,479)
—
(6,403)
233,126
(38,511)
(21,349)
218,476
197,127 $
111,300
(51,300)
25,000
(537)
—
—
(2,652)
(7,256)
(33)
—
(1,029)
(189)
73,304
(10,950)
26,988
191,488
218,476
$
30,440
5,625
—
598
2,684
(1,626)
(310)
(4,300)
20,590
(6,488)
(7,246)
6,505
7,304
(9,768)
1,222
114,810
(83,456)
(25,557)
4,050
(16,620)
—
(121,583)
38,000
(38,000)
—
(573)
—
113
(1,204)
(6,429)
310
(2,368)
—
325
(9,826)
4,195
(12,404)
203,892
191,488
6,788 $
4,998 $
952 $
— $
— $
— $
— $
— $
$
— $
11,808
—
—
—
—
1,173
$
$
$
$
$
$
CUBIC CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands except per share amounts)
Common
Stock
Retained
Earnings
Comprehensive Treasury
Loss
Stock
Interest in
VIE
of Shares
Outstanding
Accumulated
Other
Noncontrolling Number
October 1, 2013
$ 15,825 $ 740,002 $
(2,803) $ (36,078) $
134
26,736
Net income
Other comprehensive loss, net of tax
Stock issued under equity incentive
plans
Purchase of common stock
Stock-based compensation
Tax benefit (expense) from equity
incentive plans
Cash dividends paid -- $.24 per share
of common stock
—
—
69,491
—
—
(2,569)
113
(1,204)
5,625
310
(5)
—
—
—
—
(6,429)
—
—
—
—
—
—
—
—
—
—
—
—
89
—
—
—
—
—
—
—
—
75
(22)
—
—
—
September 30, 2014
20,669
803,059
(5,372)
(36,078)
223
26,789
Net income
Other comprehensive loss, net of tax
Stock issued under equity incentive
plans
Purchase of common stock
Stock-based compensation
Purchase of noncontrolling interest
Tax benefit (expense) from equity
incentive plans
Cash dividends paid -- $.27 per share
of common stock
—
—
22,885
—
—
(46,464)
—
(2,652)
8,325
(749)
(33)
(46)
—
—
—
—
—
(7,256)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
29
—
—
—
—
(252)
—
—
—
—
160
(66)
—
—
—
—
September 30, 2015
25,560
818,642
(51,836)
(36,078)
0
26,883
Net income
Other comprehensive loss, net of tax
Stock issued under equity incentive
plans
Purchase of common stock
Stock-based compensation
Tax benefit (expense) from equity
incentive plans
Cash dividends paid -- $.27 per share
of common stock
—
—
1,735
—
—
(67,981)
—
(1,563)
8,762
(3)
(57)
—
—
—
—
(7,285)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
152
(43)
—
—
—
September 30, 2016
$ 32,756
$ 813,035
$ (119,817) $ (36,078)
$
—
26,992
See accompanying notes.
70
CUBIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of the Business: We design, develop and manufacture products which are mainly electronic in
nature such as mass transit fare collection systems, air and ground combat training systems, and networked Command,
Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) products and systems.
We provide services such as specialized military training exercises, including live, virtual and constructive training
exercises and support, and we operate and maintain fare systems for mass transit customers. Our principal lines of
business are transportation fare collection systems and services, defense services, and defense systems. Our principal
customers for defense products and services are the U.S. and foreign governments. Our transportation fare collection
systems and services are sold primarily to large local government agencies worldwide. In February 2015, we
implemented a plan to restructure our defense services and defense systems businesses into a single business called
Cubic Global Defense (CGD) to better align our defense business organizational structure with customer requirements,
increase operational efficiencies and improve collaboration and innovation across the company. After this restructuring
there is now a single, combined management structure for our legacy Cubic Defense Systems (CDS) and legacy Mission
Support Services (MSS) segments. However, for segment financial reporting purposes, we continue to report the
financial results of our defense systems and defense services segments separately. These two reporting segments have
been renamed Cubic Global Defense Systems (CGD Systems) and Cubic Global Defense Services (CGD Services),
respectively. CGD Systems includes Cubic Mission Solutions (CMS), a business division that includes our C4ISR
subsidiaries and product offerings. There have been no significant changes in the operations that are included in each of
these reporting segments as a result of the restructuring.
Principles of Consolidation: The consolidated financial statements include the accounts of Cubic Corporation,
subsidiaries we control, and variable interest entities (VIE’s) for which Cubic is the primary beneficiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency Transactions and Translation: Our reporting currency is the U.S. dollar. Assets and liabilities of
foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and our Consolidated
Statements of Income are translated at the average exchange rates in effect during the applicable periods. The resulting
unrealized cumulative translation adjustments are recorded as a component of other comprehensive income (loss) in our
Consolidated Statements of Comprehensive Income (Loss). Cash flows from our operations in foreign countries are
translated at the average rate for the applicable period. The effect of exchange rates on cash balances held in foreign
currencies are separately reported in our Consolidated Statements of Cash Flows.
Transactions denominated in currencies other than our own subsidiaries’ functional currencies are recorded based on
exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in our
Consolidated Balance Sheets related to such transactions result in transaction gains and losses that are reflected in our
Consolidated Statements of Income as either unrealized (based on the applicable period end translation) or realized (upon
settlement of the transactions). Total transaction losses, which are related primarily to advances to foreign subsidiaries
and advances between foreign subsidiaries amounted to $0.9 million, $3.2 million and $1.3 million in 2016, 2015 and
2014, respectively.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Significant estimates include the estimated total costs at completion of our long-
term contracts, estimated loss contingencies, estimated self-insurance liabilities, estimated discounted future cash flows
of our reporting units used for goodwill impairment testing and estimated future cash flows for our long-lived asset
impairment testing, estimated discounted cash flows used for valuation of intangible assets in business combinations, and
estimated rates of return and discount rates related to our defined benefit pension plans. Actual results could differ from
our estimates.
71
Cash Equivalents: We consider highly liquid investments with maturity of three months or less when purchased to be
cash equivalents.
Restricted Cash: Restricted cash represents cash that is restricted as to usage for legal or contractual reasons. Restricted
cash is classified either as current or non-current, depending upon the date of the lapse of the respective restriction.
Concentration of Credit Risk: We have established guidelines pursuant to which our cash and cash equivalents are
diversified among various money market instruments and investment funds. These guidelines emphasize the preservation
of capital by requiring minimum credit ratings assigned by established credit organizations. We achieve diversification
by specifying maximum investments in each instrument type and issuer. The majority of these investments are not on
deposit in federally insured accounts.
Marketable Securities: Marketable securities consist of time deposits with banks. Marketable securities are classified and
accounted for as available-for-sale. These investments are recorded at fair value in the accompanying Consolidated
Balance Sheets and the change in fair value is recorded, net of taxes, as a component of other comprehensive income.
There have been no significant realized or unrealized gains or losses on these marketable securities to date. Marketable
securities have been classified as current assets in the accompanying Consolidated Balance Sheets based upon the nature
of the securities and availability for use in current operations.
Accounts Receivable: Receivables consist primarily of amounts due from U.S. and foreign governments for defense
products and services and local government agencies for transportation systems. Due to the nature of our customers, we
generally do not require collateral. We have limited exposure to credit risk as we have historically collected substantially
all of our receivables from government agencies. We generally require no allowance for doubtful accounts for these
customers.
Inventories: We state our inventories at the lower of cost or market. We determine cost using the first-in, first-out (FIFO)
method, which approximates current replacement cost. We value our work in process at the actual production and
engineering costs incurred to date, including applicable overhead. For contracts with the U.S. government our work in
process also includes general and administrative costs. Any inventoried costs in excess of estimated realizable value are
immediately charged to cost of sales. We include qualifying contract costs allocable to units-of-delivery contracts as
inventory. We also receive performance-based payments and progress payments associated with certain of these
contracts based on the billing terms in the underlying contracts. Pursuant to contract provisions, agencies of the U.S.
government and certain other customers have title to, or security interest in, inventories related to such contracts as a
result of advances, performance-based payments, and progress payments. Contract advances, performance-based
payments and progress payments received are recorded as an offset against the related inventory balances for contracts
that that are accounted for on a percentage-of-completion basis using units-of-delivery as the basis to measure progress
toward completing the contract. This determination is performed on a contract by contract basis. Any amount of
payments received in excess of the cumulative amount of accounts receivable and inventoried costs for a contract is
classified as customer advances, which is classified as a liability on the balance sheet.
Long-term capitalized contract costs: Long-term capitalized contract costs include costs incurred on contracts to develop
and manufacture transportation systems for customers for which revenue recognition does not begin until the customers
begin operating the systems. These capitalized costs are being recognized in cost of sales based upon the ratio of revenue
recorded during a period compared to the revenue expected to be recognized over the term of the contracts.
Property, Plant and Equipment: We carry property, plant and equipment at cost. We provide depreciation in amounts
sufficient to amortize the cost of the depreciable assets over their estimated useful lives. Generally, we use straight-line
methods for depreciable real property over estimated useful lives or the term of the underlying lease, if shorter than the
estimated useful lives, for leasehold improvements. We use accelerated methods (declining balance and sum-of-the-
years-digits) for machinery and equipment over their estimated useful lives.
Certain costs incurred in the development of internal-use software and software applications, including external direct
costs of materials and services and applicable compensation costs of employees devoted to specific software
development, are capitalized as computer software costs. Costs incurred outside of the application development stage are
expensed as incurred. The amounts capitalized are included in property, plant and equipment and are amortized on a
72
straight-line basis over the estimated useful life of the software, which ranges from three to seven years. No amortization
expense is recorded until the software is ready for its intended use.
Goodwill and Purchased Intangibles: We evaluate goodwill for potential impairment annually as of July 1, or when
circumstances indicate that the carrying value may not be recoverable. The test is performed by comparing the fair value
of each of our reporting units, which are consistent with our operating segments, to its carrying value, including recorded
goodwill. If the carrying value exceeds the fair value, we measure impairment by comparing the implied fair value of
goodwill to its carrying value, and any impairment determined would be recorded in the current period. Our purchased
intangible assets are subject to amortization and we use a combination of straight-line and accelerated methods, based on
the expected cash flows from the assets.
Impairment of Long-Lived Assets: We generally evaluate the carrying values of long-lived assets other than goodwill for
impairment only if events or changes in facts and circumstances indicate that carrying values may not be recoverable. If
we determined there was any impairment, we would measure it by comparing the fair value of the related asset to its
carrying value and record the difference in the current period. Fair value is generally determined by identifying estimated
discounted cash flows to be generated by those assets. We have not recorded any impairment of long-lived assets for the
years ended September 30, 2016, 2015 and 2014.
Recognizing assets acquired and liabilities assumed in a business combination: Acquired assets and assumed liabilities
are recognized in a business combination on the basis of their fair values at the date of acquisition. We assess fair value,
which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, using a variety of methods including income approaches such as present
value techniques or cost approaches such as the estimation of current selling prices and replacement values. Fair value of
the assets acquired and liabilities assumed, including intangible assets, and contingent payments, are measured based on
the assumptions and estimations with regards to the variable factors such as the amount and timing of future cash flows
for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors
that market participants would consider. Upon acquisition, we determine the estimated economic lives of the acquired
intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets.
Adjustments to inventory are based on the fair market value of inventory and amortized into income based on the period
in which the underlying inventory is sold. Goodwill is an asset representing the future economic benefits arising from
other assets acquired in a business combination that are not individually identified and separately recognized. Actual
results may vary from projected results and assumptions used in the fair value assessments.
Customer Advances: We receive advances, performance-based payments and progress payments from customers that
may exceed revenues recognized to date on certain contracts, including contracts with agencies of the U.S. government.
We classify such advances, other than those reflected as a reduction of receivables or inventories, as current liabilities.
Contingencies: We establish reserves for loss contingencies when, in the opinion of management, the likelihood of
liability is probable and the extent of such liability is reasonably estimable. Estimates, by their nature, are based on
judgment and currently available information and involve a variety of factors, including the type and nature of the
litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, our defenses and our experience in
similar cases or proceedings as well as our assessment of matters, including settlements, involving other defendants in
similar or related cases or proceedings. We may increase or decrease our legal reserves in the future, on a matter-by-
matter basis, to account for developments in such matters.
Derivative Financial Instruments: All derivatives are recorded at fair value, however, the classification of gains and
losses resulting from changes in the fair values of derivatives are dependent on the intended use of the derivative and its
resulting designation. If a derivative is designated as a fair value hedge, then a change in the fair value of the derivative
is offset against the change in the fair value of the underlying hedged item and only the ineffective portion of the hedge,
if any, is recognized in cost of sales. If a derivative is designated as a cash flow hedge, then the effective portion of a
change in the fair value of the derivative is recognized as a component of accumulated other comprehensive income until
the underlying hedged item is recognized in cost of sales, or the forecasted transaction is no longer probable of
occurring. If a derivative does not qualify as a highly effective hedge, a change in fair value is immediately recognized in
73
earnings. We formally document hedging relationships for all derivative hedges and the underlying hedged items, as well
as the risk management objectives and strategies for undertaking the hedge transactions.
Defined Benefit Pension Plans: Some of our employees are covered by defined benefit pension plans. The net periodic
cost of our plans is determined using several actuarial assumptions, the most significant of which are the discount rate
and the long-term rate of return on plan assets. We recognize on a plan-by-plan basis the funded status of our defined
benefit pension plans as either an asset or liability on our balance sheets, with a corresponding adjustment to
accumulated other comprehensive income (loss), net of tax, in shareholders’ equity. The funded status is measured as the
difference between the fair value of the plan assets and the benefit obligation of the plan.
Comprehensive Income (Loss): Other comprehensive income (loss), which is comprised of unrealized gains and losses
on foreign currency translation adjustments, unrealized gains and losses on cash flow hedges, net of tax, unrealized gains
and losses on available-for-sale securities, net of tax and pension liability adjustments, net of tax is included in our
Consolidated Statement of Comprehensive Income (Loss) as other comprehensive income (loss).
Revenue Recognition: We generate revenue from the sale of products such as mass transit fare collection systems, air
and ground combat training systems, and products with C4ISR capabilities. We also generate revenue from services we
provide such as specialized military training exercises, including live, virtual and constructive training exercises and
support, and we operate and maintain fare systems for mass transit customers. We classify sales as products or services
in our Consolidated Statements of Income based on the attributes of the underlying contracts.
We recognize sales and profits under our long-term fixed-price contracts which require a significant amount of
development effort in relation to total contract value using the cost-to-cost percentage-of-completion method of
accounting. We record sales and profits based on the ratio of contract costs incurred to estimated total contract costs at
completion. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. For
contracts with the U.S. federal government, general and administrative costs are included in contract costs; however, for
purposes of revenue measurement, general and administrative costs are not considered contract costs for any other
customers. Costs are recognized as incurred for contracts accounted for under the cost-to-cost percentage-of-completion
method.
For certain other long-term, fixed price production contracts not requiring substantial development effort we use the
units-of-delivery percentage-of-completion method as the basis to measure progress toward completing the contract and
recognizing sales. The units-of delivery measure recognizes revenues as deliveries are made to the customer generally
using unit sales values in accordance with the contract terms. Costs of sales are recorded as deliveries are made. We
estimate profit as the difference between total estimated revenue and total estimated cost of a contract and recognize that
profit over the life of the contract based on deliveries.
For long-term fixed price contracts, we only include amounts representing contract change orders, claims or other items
in the contract value when they can be reliably estimated and we consider realization probable. Changes in estimates of
sales, costs and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in
the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more
of these estimates could have a material effect on our consolidated financial position or results of operations.
We record sales under cost-reimbursement-type contracts as we incur the costs. The Federal Acquisition Regulations
provide guidance on the types of costs that we will be reimbursed in establishing the contract price. We consider
incentives or penalties and awards applicable to performance on contracts in estimating sales and profits, and record
them when there is sufficient information to assess anticipated contract performance. We do not recognize incentive
provisions that increase or decrease earnings based solely on a single significant event until the event occurs.
We occasionally enter into contracts that include multiple deliverables such as the construction or upgrade of a system
and subsequent services to operate and maintain the delivered system. For such contracts, arrangement consideration is
allocated at the inception of the arrangement to all deliverables using the relative-selling-price method. Under the
relative-selling-price method, the selling price for each deliverable is determined using vendor specific objective
evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor
third-party evidence of selling price exists for a deliverable, which is typically the case for our contracts, the guidance
74
requires us to determine the best estimate of the selling price, which is the price at which we would sell the deliverable if
it were sold on a standalone basis. In estimating the selling price of the deliverable on a standalone basis, we consider
our overall pricing models and objectives, including the factors we contemplate in negotiating our contracts with our
customers. The pricing models and objectives that we use are generally based upon a cost-plus margin approach, with the
estimated margin based in part on qualitative factors such as perceived customer pricing sensitivity and competitive
pressures.
Once the contract value is allocated to the separate deliverables under a multiple-element arrangement, revenue
recognition guidance relevant to each contractual element is followed. For example, for the long-term construction
portion of a contract we generally use the percentage-of completion method and for the services portion we generally
recognize the service revenues on a straight-line basis over the contractual service period or based on measurable units of
work performed or incentives earned.
For certain of our multiple-element arrangements, the contract specifies that we will not be paid upon the delivery of
certain units of accounting, but rather we will be paid when subsequent performance obligations are satisfied. Generally,
in these cases the allocation of arrangement consideration to the up-front deliverables is limited, in some cases to zero,
and revenue is reduced, in some cases to zero for the delivery of up-front units of accounting. In such situations, if the
costs associated with the delivered item exceed the amount of allocable arrangement consideration, we defer the direct
and incremental costs associated with the delivered item that are in excess of the allocated arrangement consideration as
capitalized contract costs. We assess recoverability of these costs by comparing the recorded asset to the deferred
revenue in excess of the transaction price allocated to the remaining deliverables in the arrangement. Capitalized contract
costs are subsequently recognized in income in a manner that is consistent with revenue recognition pattern for the
arrangement as a whole. If no pattern of revenue recognition can be reasonably predicted for the arrangement, the
capitalized costs are amortized on a straight-line basis.
Revenue under our service contracts with the U.S. government is recorded under the cost-to cost percentage-of-
completion method. Award fees and incentives related to performance under these service contracts are accrued during
the performance of the contract based on our historical experience and estimates of success with such awards.
Revenue under contracts for services other than those with the U.S. government and those associated with design,
development, or production activities is recognized either as services are performed or when a contractually required
event has occurred, depending on the contract. For non-U.S. government service contracts that contain measurable units
of work performed we recognize sales when the units of work are completed. Certain of our transportation systems
service contracts contain service level or system usage incentives, for which we recognize revenues when the incentive
award is fixed or determinable. These contract incentives are generally based upon monthly service levels or monthly
performance and become fixed or determinable on a monthly basis. However, one of our legacy transportation systems
service contracts that terminated in late fiscal 2015 contained annual system usage incentive which were based upon
system usage compared to annual baseline amounts. For this contract the annual system usage incentives were not
considered fixed or determinable until the end of the contract year for which the incentives are measured, which fell
within the second quarter of our fiscal year. The follow-on contract to this transportation systems service contract did not
include an annual system usage incentive. Revenue under non-U.S. government service contracts that do not contain
measurable units of work performed, which is generally the case for our service contracts, is recognized on a straight-line
basis over the contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a
different manner. Costs incurred under these services contracts are expensed as incurred.
We make provisions in the current period to fully recognize any anticipated losses on contracts, other than service
contracts. If we receive cash on a contract prior to revenue recognition, and for contracts that are accounted for on a
units-of-delivery method, that is in excess of inventoried costs, we classify it as a customer advance on the balance sheet.
In addition, we are subject to audit of incurred costs related to many of our U.S. government contracts. These audits
could produce different results than we have estimated for revenue recognized on our cost-based contracts with the U.S.
government; however, our experience has been that our costs are acceptable to the government.
75
Research and Development (R&D) : We record the cost of company sponsored R&D activities as the expenses are
incurred. The cost of engineering and product development activities incurred in connection with the performance of
work on our contracts is included in cost of sales as they are directly related to contract performance.
Stock-Based Compensation: Restricted stock units awards (RSUs) are granted to eligible employees and directors and
represent rights to receive shares of common stock at a future date if vesting occurs. RSUs granted to date have either
time-based vesting or performance-based vesting. Compensation expense for all RSUs is measured at fair value at the
grant date and recognized based upon the number of RSUs that ultimately vest. We determine the fair value of RSUs
based on the closing market price of our common stock on the grant date. The grant date of the performance-based RSUs
takes place when the grant is authorized and the specific achievement goals are communicated.
Compensation expense for time-based vesting awards is recorded on a straight-line basis over the requisite service
period, adjusted by estimated forfeiture rates. Vesting of performance-based RSUs is tied to achievement of specific
company goals over the measurement period, which is generally a three-year period from the date of the grant. For
purposes of measuring compensation expense for performance-based RSUs, at each reporting date we estimate the
number of shares for which vesting is deemed probable based on management’s expectations regarding achievement of
the relevant performance criteria, adjusted by estimated forfeiture rates. Compensation expense for the number of shares
ultimately expected to vest is recognized on a straight-line basis over the requisite service period for the performance-
based RSUs. The recognition of compensation expense associated with performance-based RSUs requires judgment in
assessing the probability of meeting the performance goals. For performance-based RSUs, there may be significant
expense recognition or reversal of recognized expense in periods in which there are changes in the assessed probability
of meeting performance-based vesting criteria.
Income Taxes: Our provision for income taxes includes federal, state, local and foreign income taxes. We provide
deferred income taxes on temporary differences between assets and liabilities for financial reporting and tax purposes as
measured by enacted tax rates we expect to apply when the temporary differences are settled or realized. Tax law and
rate changes are reflected in income in the period such changes are enacted. We establish valuation allowances for
deferred tax assets when the amount of future taxable income we expect is not likely to support the realization of the
temporary differences. We evaluate the capital requirements of our foreign subsidiaries and determine the amount of
excess capital, if any, that is available for distribution. We provide for U.S. taxes on the amount we determine to be
excess capital available for distribution. U.S. taxes are not provided on amounts we consider to be permanently
reinvested. We include interest and penalties related to income taxes, including unrecognized tax benefits, within the
income tax provision.
Net Income Per Share: Basic net income per share (EPS) is computed by dividing the net income for the period by the
weighted average number of common shares outstanding during the period, including vested RSUs.
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. Our common equivalent shares consist of dilutive RSUs.
Dilutive RSUs are calculated based on the average share price for each fiscal period using the treasury stock method. For
RSUs with performance-based vesting, no common equivalent shares are included in the computation of diluted EPS
until the related performance criteria have been met.
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Basic and diluted EPS are computed as follows (amounts in thousands, except per share data):
Net income attributable to Cubic
Weighted average shares - basic
Effect of dilutive securities
Weighted average shares - diluted
Three Months Ended
Year Ended September 30,
2015
2014
$ 22,885 $ 69,491
2016
$ 1,735
26,976
64
27,040
26,872
66
26,938
26,787
58
26,845
Net income per share attributable to Cubic, basic
Effect of dilutive securities
Net income per share attributable to Cubic, diluted
$
$
0.06 $
—
0.06 $
0.85 $
—
0.85 $
2.59
—
2.59
Anti-dilutive employee share-based awards
—
—
—
Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a
comprehensive revenue recognition model and supersedes most current revenue recognition guidance and will require
revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the
consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new
rules could affect the timing of revenue recognition for certain transactions. ASU 2014-09 will be effective for us
starting in the first quarter of fiscal 2019 as we have determined that we will not adopt ASU 2014-09 early. ASU 2014-
09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods
presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is
recognized as an adjustment to the opening retained earnings balance in the year of adoption. We have not yet
determined which method of adoption we will select. We are currently in the process of modeling the impact of the
adoption of the new standard on certain of our long-term contracts in order to assess the expected impacts. As the new
standard will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue
and cost recognition on a significant number of contracts across our business segments, in addition to our business
processes and our information technology systems. As a result, our evaluation of the effect of the new standard will
likely extend over several future periods.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which requires
management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and
provide related footnote disclosures. ASU 2014-15 will be effective for us for the year ended September 30, 2017 and for
interim reporting periods thereafter. Early adoption is permitted for financial statements that have not been previously
issued, but we have not yet adopted this standard. This adoption is not expected to have a significant impact on our
financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that
all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt,
similar to the presentation of debt discounts. ASU 2015-03 is effective for us on October 1, 2016. We do not expect that
the adoption of this new accounting guidance will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a
software license. If a cloud computing arrangement includes a software license, then the customer should account for the
software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a
service contract. ASU 2015-05 will be effective for us beginning on October 1, 2016. We are currently assessing the
impact that adopting this new accounting guidance will have on our consolidated financial statements.
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In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes which removes the
requirement to separate deferred tax liabilities and assets into current and noncurrent amounts and instead requires all
such amounts be classified as noncurrent on the balance sheet. We adopted ASU 2015-17 prospectively on October 1,
2015 and reclassified the current portion of our net deferred tax assets and liabilities to net noncurrent deferred tax assets
and liabilities. No prior periods were retrospectively adjusted.
In January 2016, the FASB issued Accounting Standards Update ASU 2016-01, Financial Instruments – Overall
(Subtopic 825-10) which updates certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. ASU 2016-01 will be effective for us beginning October 1, 2018 and, with the exception of a specific
portion of the amendment, early adoption is not permitted. We are currently evaluating the impact this guidance will
have on our financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease
liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
(b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term. The ASU will be effective for us beginning October 1, 2019 with early adoption permitted. ASU
2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the impact
of the application of this accounting standard update on our consolidated financial statements as well as whether to adopt
the new guidance early.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation. The new guidance simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments
in this standard are effective for our annual year and first fiscal quarter beginning on October 1, 2017 with early adoption
permitted. We are currently evaluating the impact of the application of this accounting standard update on our
consolidated financial statements as well as whether to adopt the new guidance early.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which
provides clarifying guidance on how entities should classify certain cash receipts and cash payments on the statement of
cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash
payments have aspects of more than one class of cash flows. The guidance will be effective for the Company in its fiscal
year beginning October 1, 2018, and early adoption is permitted. We are currently evaluating the impact of the
application of this accounting standard update on our consolidated financial statements as well as whether to adopt the
new guidance early.
NOTE 2—ACQUISITIONS
Each of the following acquisitions has been treated as a business combination for accounting purposes. The results of
operations of each acquired business has been included in our consolidated financial statements since the respective date
of each acquisition.
GATR
On February 2, 2016, we acquired all of the outstanding capital stock of GATR Technologies, LLC (GATR), a defense
systems business based in Huntsville, Alabama which manufactures deployable satellite communication terminal
solutions. GATR expands our satellite communications and networking applications technologies for our CGD Systems
segment and expands our customer base.
GATR’s sales totaled $42.9 million for the year ended September 30, 2016. GATR’s operating income since the
acquisition date was significantly impacted by the GAAP accounting requirements regarding business combinations.
Prior to our acquisition of GATR, GATR had a number of share-based payment awards in place to its employees. Due to
78
the structure of certain of these share-based payment awards and the acceleration of vesting of certain of these awards in
connection with our acquisition of GATR, we were required to recognize compensation expense, rather than purchase
consideration, for the portion of our purchase price that we paid to the seller that was distributed to the recipients of these
awards. Consequently, we recognized $18.1 million of compensation expense within general and administrative
expenses as of September 30, 2016. Of this $18.1 million amount, $15.8 million is not expected to be deductible for tax
purposes. In addition, for the year ended September 30, 2016, GATR incurred charges of $9.7 million for the
amortization of intangibles and $0.5 million for acquisition costs. The GATR operating results for the year ended
September 30, 2016 include a charge of $0.7 million for the increase in the fair value of contingent consideration. The
GATR net loss after taxes for the year ended September 30, 2016 totaled $23.0 million, which included the impact of the
charges above.
The estimated fair value of consideration is $220.5 million, which is comprised of cash paid of $231.3 million plus the
estimated acquisition-date fair value of contingent consideration of $2.5 million, plus additional held back consideration
to be paid in the future estimated at $4.8 million, less the $18.1 million of cash paid to the seller recorded as expense
described above. Under the purchase agreement, we will pay the sellers up to $7.5 million of contingent consideration if
GATR meets certain gross profit goals for the 12 month periods ended February 28, 2017 and 2018. The contingent
consideration liability will be re-measured to fair value at each reporting date until the contingencies are resolved and
any changes in fair value are recognized in earnings.
The acquisition of GATR is being paid for predominantly with the proceeds of the borrowings described below. The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date
(in millions):
Customer relationships
Backlog
Technology
Non-compete agreements
Trade name
Accounts receivable
Inventory
Income tax receivable
Accounts payable and accrued expenses
Deferred tax liabilities
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 51.7
3.4
10.7
1.2
4.7
10.6
3.4
5.1
(2.4)
(23.8)
64.6
155.9
$ 220.5
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess
earnings approach, the non-compete agreements used the with-and-without approach, and the technology and trade name
asset valuations used the relief from royalty approach.
The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the
expected cash flows from the assets, over a weighted average useful life of nine years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of GATR with our existing CGD Systems business, including the synergies expected from combining its satellite
communications and networking applications technologies with our C4ISR and other products in our CGD Systems
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 CGD Systems segment and is generally not
expected to be deductible for tax purposes.
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The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of GATR
for fiscal years 2017 through 2021 and thereafter is as follows (in millions):
Year Ended
September 30,
2017
2018
2019
2020
2021
Thereafter
$ 12.7
11.1
9.8
8.3
6.9
13.2
TeraLogics
On December 21, 2015, we acquired all of the assets of TeraLogics, LLC, an Ashburn, Virginia-based provider of real-
time full motion video processing, exploitation and dissemination (PED) for the Department of Defense, the intelligence
community and commercial customers. TeraLogics’ ability to develop real-time video analysis and delivery software for
full motion video complements the existing tactical communications portfolio of our CGD Systems segment and expands
our customer base.
For the year ended September 30, 2016, TeraLogics had sales of $14.2 million and net loss after taxes of $1.7 million,
including $3.0 million for the amortization of intangibles. In addition, during the quarter ended December 31, 2015 we
incurred $0.9 million of transaction and acquisition expenses and a $1.3 million charge for compensation expense
incurred related to amounts paid to TeraLogics employees upon the close of the acquisition.
The estimated fair value of consideration is $33.9 million, which is comprised of cash paid of $28.9 million plus the
estimated acquisition-date fair value of contingent consideration of $5.0 million. Under the purchase agreement, we will
pay the sellers up to $9.0 million of contingent consideration. Of this amount, up to $6.0 million will be paid if
TeraLogics meets certain revenue thresholds in fiscal years 2016, 2017 and 2018; and up to $3.0 million will be paid if
specific contract extensions are exercised by TeraLogics customers through fiscal 2018. The contingent consideration
liability will be re-measured to fair value at each reporting date until the contingencies are resolved and any changes in
fair value are recognized in earnings. The TeraLogics operating results for the year ended September 30, 2016 also
include a charge of $1.5 million for the increase in the fair value of contingent consideration.
The acquisition of TeraLogics is being paid for with a combination of funds from our existing cash resources and
borrowings on our revolving credit facility. The following table summarizes the fair values of the assets acquired and
liabilities assumed at the acquisition date (in millions):
Customer relationships
Backlog
Software
Non compete agreements
Accounts receivable
Accounts payable and accrued expenses
Other net assets acquired (liabilities assumed)
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 6.7
5.6
2.5
0.1
1.4
(0.5)
(0.1)
15.7
18.2
$ 33.9
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess
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earnings approach, the non-compete agreements used the with-and-without approach, and the software used the
replacement cost new less cost decrements for obsolescence approach.
The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the
expected cash flows from the assets, over a weighted average useful life of seven years from the date of acquisition.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of TeraLogics with our existing CGD Systems business, including the synergies expected from combining TeraLogics
real-time video capabilities with our existing tactical communications product portfolio. The goodwill also includes the
value of the assembled workforce who became our employees following the close of the acquisition. The amount
recorded as goodwill is allocated to our CGD Systems segment and is expected to be deductible for tax purposes.
The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition
of TeraLogics for fiscal years 2017 through 2021 and thereafter is as follows (in millions):
Year Ended
September 30,
2017
2018
2019
2020
2021
Thereafter
$ 3.5
2.8
2.1
1.4
0.8
1.4
H4 Global
On November 4, 2015, we acquired all of the assets of H4 Global, a U.K.-based provider of simulation-based training
solutions which complements our CGD Systems segment portfolio.
For the year ended September 30, 2016, the amounts of H4 Global’s sales and net income after taxes included in our
Consolidated Statement of Income were $2.2 million and $0.4 million, respectively, including $0.1 million of transaction
costs to acquire H4 Global.
The fair value of consideration is $1.9 million, which is comprised of cash paid of $0.9 million plus the fair value of
contingent consideration of $1.0 million. Under the purchase agreement, we will pay the sellers up to $4.1 million of
contingent consideration, based upon the value of contracts entered over the five-year period beginning on the
acquisition date. The contingent consideration liability will be re-measured to fair value at each reporting date until the
contingencies are resolved and any changes in fair value will be recognized in earnings. There has been no significant
change in the fair value of contingent consideration since the date of the acquisition.
The fair value of the net assets acquired and liabilities assumed was not material. Consequently, virtually the entire
purchase price of $1.9 million was recorded as goodwill, which is comprised of expected synergies and assembled
workforce. The amount recorded as goodwill is allocated to our CGD Systems segment and is not expected to be
deductible for tax purposes.
DTECH
On December 16, 2014 we acquired all of the outstanding capital stock of DTECH Labs, Inc. (DTECH). Based in
Sterling, Virginia, DTECH is a provider of modular networking and baseband communications equipment that adds
networking capability to our secure communications business. This acquisition expands the portfolio of product offerings
and the customer base of our CGD Systems segment.
81
For the year ended September 30, 2016, the amounts of DTECH’s sales and net loss after taxes included in our
Consolidated Statement of Income were $20.3 million and $2.1 million, respectively. The DTECH operating results for
the year ended September 30, 2016 include a gain of $0.5 million for the decrease in the fair value of contingent
consideration and charges of $8.0 million for the amortization of intangibles. For the year ended September 30, 2015, the
amounts of DTECH’s sales and net income after taxes included in our Consolidated Statement of Income were $45.8
million and $0.5 million, respectively. Included in DTECH’s operating results are $0.8 million of transaction and
acquisition related costs before related income taxes during the year ended September 30, 2015, as well as general and
administrative expenses totaling $3.6 million related to the change in the fair value of contingent consideration described
below.
The purchase agreement states that the cost of the acquisition is approximately $99.5 million, adjusted by the difference
between the net working capital acquired and the targeted working capital amounts and adjusted for other acquisition
related payments made upon closing, plus a contingent amount of up to $15.0 million based upon DTECH’s achievement
of revenue and gross profit targets in the future. The acquisition date fair value of the consideration was $99.4 million.
The total acquisition date fair value of consideration includes the acquisition fair value of holdback consideration and
contingent consideration described below.
Approximately $4.7 million of cash consideration (Holdback Consideration) will be paid to the seller over time when
certain events occur in the future. At September 30, 2016 the fair value of the Holdback Consideration is estimated to
approximate $4.5 million using a discounted cash flow model, based upon the expected timing of the payment of the
Holdback Consideration. In addition to the Holdback Consideration, we will pay the seller up to $15.0 million of
contingent cash consideration based upon DTECH’s achievement of revenue and gross profit targets. The purchase
agreement specifies independent revenue and gross profit targets for the period from our acquisition of DTECH through
September 30, 2015, and separately for each of fiscal 2016 and fiscal 2017. At the acquisition date, the total fair value of
the contingent consideration was estimated at $3.9 million using a real options approach (see Note 3 for further
discussion of fair value measurements). The contingent consideration liability will be re-measured to fair value at each
reporting date until the contingencies are resolved and any changes in fair value are recognized in earnings. The
cumulative change in the fair value of the contingent consideration was recognized as a gain of $0.5 million in 2016 and
an expense of $3.6 million in 2015.
Through September 30, 2016 we have paid $96.3 million to the seller. At September 30, 2016 we have recorded a
liability of $6.5 million as an estimate of the additional cash consideration that will be due to the seller in the future,
including the Holdback Consideration and contingent consideration.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in
millions):
Customer relationships
Non-compete agreements
Backlog
Cash
Accounts receivable
Inventory
Warranty obligation
Tax liabilities
Accounts payable and accrued expenses
Other net assets acquired
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 35.1
0.7
2.1
0.9
5.4
4.2
(0.4)
(3.3)
(3.4)
0.2
41.5
57.9
$ 99.4
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess
earnings approach and the non-compete agreements used the with-and-without approach.
82
The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the
expected cash flows from the assets, over a weighted average useful life of seven years from the date of acquisition and
the amortization is expected to be deductible for tax purposes.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of DTECH with our existing CGD Systems business, including the synergies expected from combining the networking
and secure communications technologies of DTECH, and complementary products that will enhance our overall product
and service portfolio. The goodwill also consists of 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 CGD Systems segment and is
expected to be deductible for tax purposes.
The estimated amortization expense amounts related to the intangible assets recorded in connection with our acquisition
of DTECH for fiscal years 2017 through 2021 is as follows (in millions):
Year Ended September 30,
2017
2018
2019
2020
2021
$ 6.8
5.5
4.1
2.8
1.5
Intific
On February 28, 2014 we acquired all of the outstanding capital stock of Intific Inc. (Intific). Intific is focused on
software and game-based solutions in modeling and simulation, training and education, cyber warfare, and neuroscience.
The acquisition of Intific expanded the portfolio of services and customer base of our CGD Systems segment.
For the year ended September 30, 2016, the amounts of Intific’s sales and net loss after taxes included in our
Consolidated Statement of Income were $17.3 million and $0.8 million, respectively. For the year ended September 30,
2015, the amounts of Intific’s sales and net loss after taxes included in our Consolidated Statement of Income were $14.7
million and $1.8 million, respectively.
The acquisition date fair value of the consideration transferred was $12.4 million. We paid cash of $11.2 million to the
sellers in fiscal 2014 and the remaining $1.2 million was paid in fiscal 2015.
83
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition
date (in millions):
Customer relationships
Technology
Backlog
Other intangible assets
Accounts receivable
Deferred tax assets
Accounts payable and accrued expenses
Deferred tax liabilities
Other net liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 2.0
0.7
0.7
0.2
1.5
1.5
(0.6)
(1.5)
0.5
5.0
7.4
$ 12.4
The fair values of purchased intangibles were determined using the valuation methodology deemed to be the most
appropriate for each type of asset being valued. The customer relationships and backlog valuation used the excess
earnings approach and the technology valuation used the replacement cost approach.
The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the
expected cash flows from the assets, over a weighted average useful life of two years from the date of acquisition and the
amortization expense is not expected to be deductible for tax purposes.
The net deferred tax assets and liabilities offset each other to a negligible amount. However, the deferred tax liabilities of
$1.5 million were primarily recorded to reflect the tax impact of amortization related to identified intangible assets that is
not expected to be deductible for tax purposes, net of acquisition consideration that is a tax deductible expense. The
deferred tax assets of $1.5 million primarily related to the future tax deduction for the cancellation of unvested options.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of Intific with our existing CGD Systems business and the acquired assembled workforce. The anticipated synergies
include the ability to expand services offerings and cost reductions. The amount recorded as goodwill is allocated to our
CGD Systems segment and is not expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of Intific
for fiscal years 2017 through 2020 is as follows (in millions):
Year Ended September 30,
2017
2018
2019
2020
ITMS
$ 0.6
0.5
0.2
0.1
On November 26, 2013 we acquired all of the outstanding capital stock of Intelligent Transport Management Solutions
Limited (ITMS) from Serco Limited. ITMS is a provider of traffic management systems technology, traffic and road
enforcement and maintenance of traffic signals, emergency equipment and other critical road and tunnel infrastructure.
The acquisition of ITMS expands the portfolio of services and customer base of our Cubic Transportation Systems
(CTS) segment.
84
For the year ended September 30, 2016, the amounts of ITMS’ sales and net loss after taxes included in our Consolidated
Statement of Income were $41.3 million and $7.0 million, respectively. For the year ended September 30, 2015, the
amounts of ITMS’ sales and net loss after taxes included in our Consolidated Statement of Income were $47.0 million
and $3.0 million, respectively. For the year ended September 30, 2014, the amounts of ITMS’ sales and net loss after
taxes included in our Consolidated Statement of Income were $43.7 million and $2.3 million, respectively. Included in
ITMS’ operating results are $0.5 million of transaction costs incurred during the year ended September 30, 2014.
The acquisition date fair value of the consideration transferred was $72.2 million. We paid the seller cash of $69.0
million in November 2013 and in May 2014, we paid the remaining cash of $3.2 million.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in
millions):
Customer relationships
Intellectual property
Backlog
Supplier relationships
Agreements with seller
Accounts receivable - billed
Accounts receivable - unbilled
Deferred tax liabilities, net
Deferred revenue
Accounts payable and accrued expenses
Other net assets acquired
Net identifiable assets acquired
Goodwill
Net assets acquired
$ 15.7
1.6
5.7
0.6
1.3
4.4
6.9
(0.2)
(2.6)
(4.6)
2.6
31.4
40.8
$ 72.2
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 customer relationships and backlog valuation used the excess
earnings approach and the non-compete agreement and seller agreements valuations used the with-and-without approach.
The supplier relationship and intellectual property valuations used the replacement cost approach.
The intangible assets are being amortized using a combination of straight-line and accelerated methods based on the
expected cash flows from the assets, over a weighted average useful life of two years from the date of acquisition. Future
amortization of purchased intangibles is not deductible for tax purposes.
The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the operations
of ITMS with our existing CTS business and the acquired assembled workforce. The anticipated synergies include the
ability to expand services offerings and cost reductions. The amount recorded as goodwill is allocated to our CTS
segment and is not expected to be deductible for tax purposes.
The estimated amortization expense related to the intangible assets recorded in connection with our acquisition of ITMS
for fiscal years 2017 through 2020 is as follows (in millions):
Year Ended September 30,
2017
2018
2019
2020
$ 3.6
2.7
0.9
0.1
85
Pro forma information
The following unaudited pro forma information presents our consolidated results of operations as if GATR, TeraLogics,
H4 Global and DTECH had been included in our consolidated results since October 1, 2014 (in millions):
Net sales
Net income attributable to Cubic
Year Ended
September 30,
2016
2015
$ 1,481.7 $ 1,512.4
$
0.8 $
23.1
The pro forma information includes adjustments to give effect to pro forma events that are directly attributable to the
acquisitions and have a continuing impact on operations including the amortization of purchased intangibles and the
elimination of interest expense for the repayment of debt. No adjustments were made for transaction expenses, other
adjustments that do not reflect ongoing operations or for operating efficiencies or synergies. The pro forma financial
information is not necessarily indicative of what the consolidated financial results of our operations would have been had
the acquisitions been completed on October 1, 2014, and it does not purport to project our future operating results.
TranSys
Transaction Systems Limited (TranSys) is the joint venture company through which we won the PRESTIGE contract in
London in 1998. Although in recent years the entity has been less active, we intend to use TranSys in our future
endeavors. We owned 50 percent of TranSys through September 30, 2015, and we consolidated TranSys in our financial
statements because it was a VIE and we were its primary beneficiary. On September 30, 2015 we purchased its
remaining equity for $1.0 million. The difference between the purchase price and the carrying value of our
noncontrolling interest in TranSys was recorded as a decrease in equity.
NOTE 3—FAIR VALUE OF FINANCIAL INSTRUMENTS
The valuation techniques required to determine fair value are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal
market assumptions. The two types of inputs create the following fair value hierarchy:
• Level 1 - Quoted prices for identical instruments in active markets.
• Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
• Level 3 - Significant inputs to the valuation model are unobservable.
The fair value of certain of our cash equivalents are based upon quoted prices for identical instruments in active markets.
The fair value of our other cash equivalents and our available for sale marketable securities is based upon a discounted
cash flow model and approximate cost. The marketable securities in the rabbi trust are carried at fair value, which is
based upon quoted market prices for identical securities. 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.
The fair value of contingent consideration liabilities that are based upon revenue targets or gross margin targets are based
upon a real option approach. The contingent consideration liabilities that are valued using this real option approach
86
include a portion of the TeraLogics contingent consideration, the DTECH contingent consideration, and the GATR
contingent consideration. Under this real option approach, each payment was modeled using a long digital options
written on the underlying revenue or gross margin metric. The strike price for each option is the respective revenue or
gross margin as specified in the related agreement, and the spot price is calibrated to the revenue or gross margin forecast
by calculating the present value of the corresponding projected revenues or gross margins using a risk-adjusted discount
rate. The volatility for the underlying revenue metrics was based upon analysis of comparable guideline public
companies and the volatility factor used in the September 30, 2016 valuations was 17% for TeraLogics, 18% for DTECH
and 17% for GATR. The volatility factor used in the September 30, 2015 valuation for DTECH was 22%. The risk-free
rate was selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment
period.
The fair value of the portion of the TeraLogics contingent consideration that is based on customer execution of contract
extensions was estimated using a probability weighted approach. Subject to the terms and conditions of the TeraLogics
Purchase Agreement, contingent consideration will be paid over a period commencing on the closing date and ending on
December 21, 2018. The fair value of the contingent consideration was determined by applying probabilities of
achieving the periodic payment to each period’s potential payment, and summing the present value of any future
payments.
The fair value of the H4 Global contingent consideration was estimated using a probability weighted approach. Subject
to the terms and conditions of the H4 Global Purchase Agreement, contingent consideration will be paid over a five year
term that commenced on October 1, 2015 and ends on September 30, 2020. The payments will be calculated based on
the award of certain contracts during the specified period. The fair value of the contingent consideration was determined
by applying probabilities to different scenarios, and summing the present value of any future payments.
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 September 30, 2016, the following table summarizes the change in fair value of our Level 3 contingent
consideration liability (in thousands):
Balance as of September 30, 2014
Initial measurement recognized at acquisition
Total remeasurement recognized in earnings
Balance as of September 30, 2015
Initial measurement recognized at acquisition
Cash paid to seller
Adjustment to the provisional acquisition
date valuation
Total remeasurement recognized in earnings
Balance as of September 30, 2016
TeraLogics
(Contract
Extensions)
TeraLogics
(Revenue
Targets)
DTECH H4
— $
$
3,900
3,607
$ 7,507 $
— $
—
—
— $
— $
—
—
— $
— 1,602
—
(5,000)
2,000
(1,000)
GATR Total
—
— $
—
3,900
— 3,607
— $ 7,507
9,202
— (6,000)
— $
—
—
— $
—
3,100 2,500
—
(507)
(616)
(419)
$ 2,000 $ 567 $
(100)
500
1,400 $
—
—
(716)
700 1,274
1,000
4,100 $ 3,200 $ 11,267
87
The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a
recurring basis (in thousands):
Level 1
September 30, 2016
Level 3
Level 2
Total
Level 1
Level 2
Level 3
Total
September 30, 2015
Assets
Cash equivalents
Marketable securities
Current derivative assets
Noncurrent derivative
assets
Marketable securities in
rabbi trust
Total assets measured at fair
value
Liabilities
Current derivative
liabilities
Noncurrent derivative
liabilities
Contingent consideration
to seller of GATR
Contingent consideration
to seller of TeraLogics -
contract extensions
Contingent consideration
to seller of TeraLogics -
revenue targets
Contingent consideration
to seller of H4 Global
Contingent consideration
to seller of DTECH
Total liabilities measured at
fair value
$ 57,455 $
— $
—
—
12,996
14,770
— $ 57,455 $ 68,194 $
—
—
12,996
14,770
—
—
30,533
11,543
— $
— $ 68,194
30,533
—
11,543
—
—
1,201
—
1,201
—
13,909
—
13,909
4
—
—
4
992
—
—
992
57,459
28,967
—
86,426 69,186
55,985
—
125,171
—
13,752
—
13,752
—
9,370
—
9,370
—
1,334
—
1,334
—
13,909
—
13,909
—
—
3,200
3,200
—
—
—
—
—
1,400
1,400
—
—
—
—
—
—
—
4,100
4,100
—
567
567
—
2,000
2,000
—
—
—
—
—
—
—
—
7,507
7,507
$
— $ 15,086 $ 11,267 $ 26,353 $
— $ 23,279 $ 7,507 $ 30,786
—
—
—
—
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 long-term debt is calculated by discounting the value of the note based on market interest rates for
similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying
value of our long-term debt (in millions):
Fair value
Carrying value
September 30, September 30,
2016
210.0 $
201.0 $
2015
125.8
126.7
$
$
We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in 2016,
2015, or 2014 other than assets and liabilities acquired in business acquisitions.
88
NOTE 4—ACCOUNTS RECEIVABLE
The components of accounts receivable under long-term contracts are as follows (in thousands):
September 30,
U.S. Government Contracts:
Amounts billed
Recoverable costs and accrued profits on progress completed--not billed
Commercial Customers:
Amounts billed
Recoverable costs and accrued profits on progress completed--not billed
Less unbilled amounts not currently due--commercial customers
2016
2015
$ 66,668 $ 55,656
63,676
119,332
81,624
148,292
79,955
160,098
240,053
388,345
(20,926)
71,808
191,961
263,769
383,101
(36,809)
$ 367,419 $ 346,292
A portion of recoverable costs and accrued profits on progress completed is billable under progress or milestone payment
provisions of the related contracts. The remainder of these amounts is billable upon delivery of products or furnishing of
services, with an immaterial amount subject to retainage provisions of the contracts. It is anticipated that we will bill and
collect substantially the entire unbilled portion of receivables identified as current assets under progress billing
provisions of the contracts or upon completion of milestones and/or acceptance by the customers during fiscal 2017. The
amount classified as not currently due is an estimate of the amount of long-term contract accounts receivable that will
not be collected within one year from September 30, 2016 under transportation systems contracts in the U.S. and
Australia, and under a CGD Systems contract in Italy based upon the payment terms in the contracts.
NOTE 5—INVENTORIES
Significant components of inventories are as follows (in thousands):
Finished products
Work in process and inventoried costs under long-term contracts
Materials and purchased parts
Customer advances
Net inventories
September 30,
2016
September 30,
2015
$
$
10,018 $
62,570
12,102
(18,328)
66,362 $
644
66,293
2,733
(5,970)
63,700
At September 30, 2016, work in process and inventoried costs under long-term contracts includes approximately $0.7
million in costs incurred outside the scope of work or in advance of a contract award, compared to $1.9 million as of
September 30, 2015. We believe it is probable that we will recover the costs inventoried at September 30, 2016, plus a
profit margin, under contract change orders or awards within the next year.
Costs we incur for certain U.S. federal government contracts include general and administrative costs as allowed by
government cost accounting standards. The amounts remaining in inventory at September 30, 2016 and 2015 were $2.3
million and $1.8 million, respectively.
89
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
Significant components of property, plant and equipment are as follows (in thousands):
September 30,
2016
2015
Land and land improvements
Buildings and improvements
Machinery and other equipment
Software
Leasehold improvements
Construction and internal-use software development in progress
Accumulated depreciation and amortization
$
16,711 $ 16,925
48,637
51,113
65,948
70,547
21,633
51,191
11,737
13,266
18,019
8,150
(108,209)
(114,662)
96,316 $ 74,690
$
As a part of our efforts to upgrade our current information systems, early in fiscal 2015 we purchased new enterprise
resource planning (ERP) software and began the process of designing and configuring this software and other software
applications to manage our operations.
Costs incurred in the development of internal-use software and software applications, including external direct costs of
materials and services and applicable compensation costs of employees devoted to specific software development, are
capitalized as computer software costs. Costs incurred outside of the application development stage are expensed as
incurred. The amounts capitalized are included in property, plant and equipment and are amortized on a straight-line
basis over the estimated useful life of the software, which ranges from three to seven years. No amortization expense is
recorded until the software is ready for its intended use.
Through September 30, 2016 we have incurred costs of $72.7 million related to the purchase and development of our
ERP system, including $45.2 million of costs incurred during fiscal 2016. We recognized expense for $24.9 million and
$11.5 million of these costs in fiscal years 2016 and 2015, respectively, for costs that did not qualify for capitalization.
Amounts that were expensed in connection with the development of these systems are classified within selling, general
and administrative expenses in the Consolidated Statements of Income.
We capitalized $16.0 million of qualifying software development costs in fiscal year 2015 and an additional $20.3
million in fiscal 2016 as internal-use software development in progress. On April 1, 2016 we began using certain
components of the ERP system. We reclassified the costs of the ERP components that we began using, totaling $28.4
million, into completed software and we began amortizing these costs over the seven year estimated useful life of these
software components. We continue to capitalize costs associated with the development of other ERP components that are
not yet ready for their intended use.
In 2014 we capitalized internal costs of $5.0 million related to the development of software that is used to design
products for CGD Systems’ customers. This software was placed in service in late fiscal 2014. Amortization of this
software totaled $1.0 million, $1.0 million, and $0.4 million in fiscal years 2016, 2015, and 2014, respectively.
Our provisions for depreciation of plant and equipment and amortization of leasehold improvements and software
amounted to $11.4 million, $10.1 million and $7.8 million in 2016, 2015 and 2014, respectively. Generally, we use
straight-line methods for depreciable real property over estimated useful lives ranging from 15 to 39 years or for
leasehold improvements, the term of the underlying lease if shorter than the estimated useful lives. We use accelerated
methods (declining balance and sum-of-the-years-digits) for machinery and equipment and software other than our ERP
system over estimated useful lives ranging from 5 to 10 years.
90
NOTE 7—GOODWILL AND PURCHASED INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the two years ended September 30, 2016 are as follows (in
thousands):
Cubic Global Cubic Global
Transportation
Systems
Defense
Systems
Defense
Services
Total
Balances at October 1, 2014
Acquisitions (see Note 2)
Foreign currency exchange rate changes
Balances at September 30, 2015
Acquisitions (see Note 2)
Foreign currency exchange rate changes
Balances at September 30, 2016
$
59,167 $ 30,624 $
—
(3,193)
55,974 $ 87,575 $
57,875
(924)
—
(6,344)
49,630 $ 262,966 $
175,150
241
$
$
The components of the net goodwill balances at September 30, 2016 are as follows (in thousands):
—
—
94,350 $ 184,141
57,875
(4,117)
94,350 $ 237,899
175,150
(6,103)
94,350 $ 406,946
—
—
Cubic Global Cubic Global
Transportation
Systems
Defense
Systems
Defense
Services
Total
Goodwill
Accumulated impairment charges
Net balances
$
$
49,630 $ 262,966 $ 145,215 $ 457,811
(50,865)
49,630 $ 262,966 $ 94,350 $ 406,946
(50,865)
—
—
We complete our annual goodwill impairment test each year as of July 1. The first step of the goodwill impairment test
compares the fair value of our reporting units to their carrying values. We estimate the fair value of our reporting units
primarily based on the discounted projected cash flows of the underlying operations and based upon market multiples
from publicly traded comparable companies. For our 2016 impairment test, the estimated fair value of all three of our
reporting units exceeded their respective carrying values. As such, there was no impairment of goodwill in 2016. The
estimated fair values for our CGD Services and Transportation Systems reporting units each exceeded their carrying
values by over 20%, while the estimated value of our CGD Systems reporting unit exceeded its carrying value by over
15%.
Significant management judgment is required in the forecast of future operating results that are used in our impairment
analysis. The estimates we used are consistent with the plans and estimates that we use to manage our business. For our
CGD Services reporting unit, significant assumptions utilized in our discounted cash flow approach included growth
rates for sales and margins at greater levels than we have achieved in the past five years, but at levels that are less than
the average annual growth we achieved over the period from fiscal 2000 through fiscal 2010. Although we believe our
underlying assumptions supporting this assessment are reasonable, if our forecasted sales and margin growth rates,
timing of growth, or the discount rate vary from our forecasts, we may be required to perform an interim analysis in 2017
that could expose us to material impairment charges in the future. Assumptions used in our discounted cash flow
approach for our CGD Systems reporting unit also included growth rates for sales and margins at greater levels than we
have achieved in recent years due to our expectation that businesses recently acquired by this reporting unit will achieve
growth at higher rates than the unit’s legacy operations.
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Purchased Intangible Assets: The table below summarizes our purchased intangible assets (in thousands):
September 30, 2016
September 30, 2015
Gross
Gross Carrying Accumulated Net Carrying
Amount
Amortization
Amount
Carrying Accumulated Net Carrying
Amount
Amortization
Amount
Contract and program intangibles
Other purchased intangibles
Total
$
$
209,511 $ (123,645)
(19,926)
59,931
13,005
266,974 $ (143,571) $ 123,403 $ 185,016 $ (112,080) $ 72,936
85,866 $ 156,847 $ (96,916)
(15,164)
28,169
37,537
57,463
Total amortization expense for 2016, 2015 and 2014 was $34.1 million, $27.6 million and $22.6 million, respectively.
The table below shows our expected amortization of purchased intangibles as of September 30, 2016, for each of the
next five years and thereafter (in thousands):
2017
2018
2019
2020
2021
Thereafter
Cubic Global Cubic Global
Transportation
Systems
Defense
Systems
Defense
Services
Total
$
5,790 $ 23,842 $
4,869
2,862
944
698
543
19,875
16,240
12,559
9,186
14,606
$
15,706 $ 96,308 $
2,752 $ 32,384
26,819
2,075
20,536
1,434
14,293
790
10,591
707
18,780
3,631
11,389 $ 123,403
NOTE 8—FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
September 30,
2016
2015
Series A senior unsecured notes payable to a group of insurance companies, interest fixed at
3.35%
Series B senior unsecured notes payable to a group of insurance companies, interest fixed at
3.35%
Series C senior unsecured notes payable to a group of insurance companies, interest fixed at
3.70%
Series D senior unsecured notes payable to a group of insurance companies, interest fixed at
3.93%
Mortgage note from a U.K. financial institution, with quarterly installments of principal and
interest at 6.48%
Less current portion
$ 50,000 $ 50,000
50,000
50,000
25,000
25,000
75,000
—
1,012
201,012
(450)
1,705
126,705
(525)
$ 200,562 $ 126,180
Maturities of long-term debt for each of the five years in the period ending September 30, 2021, are as follows: 2017 —
$0.5 million; 2018 — $0.5 million; 2019 — $0.1 million; 2020 — $10.7 million; 2021 — $35.7 million
Interest paid amounted to $11.0 million, $4.8 million and $4.1 million in 2016, 2015 and 2014, respectively.
In March 2013, we entered into a note purchase and private shelf agreement pursuant to which we issued $100.0 million
of senior unsecured notes, bearing interest at a rate of 3.35% and maturing on March 12, 2025. In addition, pursuant to
92
the agreement, on July 17, 2015, we issued an additional $25.0 million of senior unsecured notes, bearing interest at a
rate of 3.70% and maturing on March 12, 2025. Interest payments on the notes issued in 2013 and 2015 are due semi-
annually and principal payments are due from 2021 through 2025. On February 2, 2016 we revised the note purchase
agreement and we issued an additional $75.0 million of senior unsecured notes bearing interest at 3.93% and maturing on
March 12, 2026. Interest payments on these notes are due semi-annually and principal payments are due from 2020
through 2026. At the time of the issuance of the last series of notes, certain terms and conditions of the note purchase and
private shelf agreement were revised in coordination with the revision and expansion of the revolving credit agreement
as discussed below in order to increase our leverage capacity.
At the beginning of fiscal 2016, we had a committed five-year revolving credit agreement expiring in May 2017, with a
group of financial institutions in the amount of $200.0 million. On February 2, 2016, we and the group of financial
institutions increased the revolving line of credit available under this agreement to $400.0 million and we borrowed
$150.0 million as a source of financing for the purchase of GATR. In connection with this increase in the facility size,
certain debt covenant definitions and limitations were modified to increase our leverage capacity. On August 11, 2016
we executed the Third Amended and Restated Credit Agreement (Revolving Credit Agreement) to extend the maturity to
August 11, 2021, add a new financial institution to the group of creditors and amend certain terms and covenants.
Borrowings under the agreement bear a variable rate of interest, which is calculated based upon the U.S. dollar LIBOR
rate plus a contractually defined credit spread that is based upon the tenor of the specific borrowing. At September 30,
2016, the weighted average interest rate on outstanding borrowings under the Revolving Credit Agreement was 2.5%.
Debt issuance costs of $2.3 million and $1.3 million were incurred in connection with February 2, 2016 and August 11,
2016 amendments to the Revolving Credit Agreement, respectively. Debt issuance costs are recorded in Prepaid
expenses and other current assets on the Company’s consolidated balance sheets, and will be amortized as interest
expense using the effective interest method over the stated term of the Revolving Credit Agreement. At September 30,
2016, the Company’s total debt issuance costs have an unamortized balance of $2.9 million. The available line of credit
is reduced by any letters of credit issued under the Revolving Credit Agreement. As of September 30, 2016, there were
borrowings totaling $240.0 million under this agreement and there were letters of credit outstanding totaling $20.7
million, which reduce the available line of credit to $139.3 million.
We have a secured letter of credit facility agreement with a bank (Secured Letter of Credit Facility) which is cancellable
by us at any time upon the completion of certain conditions to the satisfaction of the bank. At September 30, 2016 there
were letters of credit outstanding under this agreement of $62.7 million. Restricted cash at September 30, 2016 of $69.4
million was held on deposit in the U.K. as collateral in support of this Secured Letter of Credit Facility. We are required
to leave the cash in the restricted account so long as the bank continues to maintain associated letters of credit under the
facility. The maximum amount of letters of credit currently allowed by the facility is $63.1 million, and any increase
above this amount would require bank approval and additional restricted funds to be placed on deposit. We may choose
at any time to terminate the facility and move the associated letters of credit to another credit facility. Letters of credit
outstanding under the Secured Letter of Credit Facility do not reduce the available line of credit under the Revolving
Credit Agreement.
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
September 30, 2016 was $6.2 million and is classified as restricted cash in our Consolidated Balance Sheet.
As of September 30, 2016, we had letters of credit and bank guarantees outstanding totaling $79.2 million, including the
letters of credit outstanding under the Revolving Credit Agreement and the Secured Letter of Credit Facility, which
guarantee either our performance or customer advances under certain contracts. In addition, we had financial letters of
credit outstanding totaling $16.6 million as of September 30, 2016, which primarily guarantee our payment of certain
self-insured liabilities. We have never had a drawing on a letter of credit instrument, nor are any anticipated; therefore,
we estimate the fair value of these instruments to be zero.
We maintain short-term borrowing arrangements in New Zealand and Australia totaling $0.5 million New Zealand
dollars (equivalent to approximately $0.4 million) and $3.0 million Australian dollars (equivalent to approximately $2.3
93
million) to help meet the short-term working capital requirements of our subsidiaries in those countries. At September
30, 2016, no amounts were outstanding under these borrowing arrangements.
The terms of certain of our lending and credit agreements include provisions that require and/or limit, among other
financial ratios and measurements, the permitted levels of debt, coverage of cash interest expense, and under certain
circumstances, payments of dividends or other distributions to shareholders. As of September 30, 2016, these agreements
restrict such distributions to shareholders to a maximum of $48.7 million per fiscal year.
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 other current liabilities on the balance sheet amounted to $8.2 million and $8.8
million as of September 30, 2016 and 2015, respectively.
NOTE 9—COMMITMENTS
We lease certain office, manufacturing and warehouse space, vehicles, and other office equipment under non-cancelable
operating leases expiring in various years through 2030. These leases, some of which may be renewed for periods up to
10 years, generally require us to pay all maintenance, insurance and property taxes. Several leases are subject to periodic
adjustment based on price indices or cost increases. Rental expense (net of sublease income of $0.3 million in 2016, $0.3
million in 2015 and $0.2 million in 2014) for all operating leases amounted to $12.7 million, $11.9 million and $12.0
million in 2016, 2015 and 2014, respectively. Future minimum payments, net of minimum sublease income, under non-
cancelable operating leases with initial terms of one year or more consist of the following for the next five years and
thereafter, as of September 30, 2016 (in thousands):
2017
2018
2019
2020
2021
Thereafter
$ 12,397
11,132
8,514
6,599
6,097
15,263
$ 60,002
NOTE 10—INCOME TAXES
Income (loss) before income taxes includes the following components (in thousands):
2016
2014
2015
(in thousands)
$ (57,176) $ (18,712) $ (22,788)
112,199
90,623
$ (7,477) $ 71,911 $ 89,411
49,699
Years ended September 30,
United States
Foreign
Total
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Significant components of the provision for income taxes are as follows:
Years ended September 30,
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Provision for income taxes
2016
2015
(in thousands)
2014
$ 2,469 $ (2,433) $ (8,049)
918
25,705
18,574
723
20,266
18,556
(231)
8,249
10,487
(15,614)
(4,365)
280
(19,699)
1,296
(1,232)
1,193
1,257
$ (9,212) $ 48,997 $ 19,831
24,112
5,710
619
30,441
The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is as follows:
Years ended September 30,
2016
2015
(in thousands)
2014
Tax expense at U.S. statutory rate
State income taxes, net of federal tax effect
Nondeductible expenses (1)
Change in reserve for tax contingencies
Change in deferred tax asset valuation allowance (2)
Foreign income taxed at less than statutory rate
Research and development credits (3)
Other
Provision for income taxes
$ (2,616) $ 25,169 $ 31,294
111
1,319
(601)
921
(12,783)
(584)
154
$ (9,212) $ 48,997 $ 19,831
(34)
1,555
(1,192)
37,589
(11,924)
(2,248)
82
(1,199)
7,828
1,320
(9,228)
(2,999)
(2,542)
224
(1) In 2016, we recorded $6.3 million of tax expense related to nondeductible acquisition related compensation
expenses
(2) In 2016, we recorded a net tax benefit primarily related to a business combination in which we acquired
significant U.S. deferred tax liabilities as well as a utilization and subsequent release of the deferred tax
valuation allowance in Australia. In 2015, we recorded a full valuation allowance on U.S. net deferred tax assets
with a charge to expense of $35.8 million.
(3) In both 2016 and 2015, we recorded tax benefits of $1.0 million and $1.2 million, respectively, related to the
reinstatement of the research and development tax credit.
95
Significant components of our deferred tax assets and liabilities are as follows:
September 30,
Deferred tax assets:
Accrued employee benefits
Long-term contracts and inventory valuation reductions
Allowances for loss contingencies
Deferred compensation
Property, plant and equipment
Intangible assets
Retirement benefits
Tax credit carryforwards
Net operating losses carryforwards
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Deferred revenue
Unremitted foreign earnings
Property, plant and equipment
Intangible assets
Foreign currency mark-to-market
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
2016
2015
(in thousands)
$ 15,133 $ 12,597
13,297
3,793
4,252
1,611
8,037
8,040
11,151
14,795
1,380
78,953
(54,759)
24,194
12,697
5,754
4,369
—
—
12,282
16,512
12,713
2,796
82,256
(47,887)
34,369
(19,952)
(2,347)
(33)
(12,894)
(191)
(740)
(36,157)
(23,981)
(535)
—
—
—
(2,226)
(26,742)
$ (1,788) $ (2,548)
The deferred tax assets and liabilities for fiscal 2016 and 2015 include amounts related to various acquisitions. The total
change in deferred tax assets and liabilities in fiscal 2016 includes changes that are recorded to Other Comprehensive
Income (OCI) and Goodwill.
We calculate deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets
and liabilities, and measure them using the enacted tax rates and laws that we expect will be in effect when the
differences reverse. Certain items within the 2015 presentation of the components of deferred tax assets and liabilities
have been reclassified to conform to the current year presentation. The reclassifications primarily relate to differences of
$0.5 million related to unremitted foreign earnings and $0.5 million of charitable contribution carryovers that were
reclassified from other deferred tax liabilities to unremitted foreign earnings and other deferred tax assets, respectively.
On October 1, 2015, we adopted FASB ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” on a
prospective basis. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of
financial position. Adoption of this ASU resulted in a reclassification of our net deferred tax assets and liabilities to the
net non-current deferred tax asset in our Consolidated Balance Sheet for all periods after adoption. No prior periods were
retrospectively adjusted.
96
At September 30, 2016, we have federal and state income tax credit carryforwards of $8.2 million and $17.9 million,
respectively, which will expire at various dates beginning in 2023. Such credit carryforwards (in thousands) expire as
follows:
U.S. foreign tax credits
U.S. research and development tax credits
State research and development tax credits
$ 4,818
3,405
2023-2026
2035-2036
17,911 Do not expire
We have federal, state and foreign net operating losses (in thousands) which expire as follows:
U.S. net operating loss carryforwards
State net operating loss carryforwards
Foreign net operating loss carryforwards
2036
$ 12,933
51,791
2020-2036
23,046 Do not expire
We evaluated our net deferred income taxes, which included an assessment of the cumulative income or loss over the
prior-three year period and future periods, to determine if a valuation allowance was required. After considering our
recent history of U.S. losses, we recorded a valuation allowance during fiscal year 2015 on our net U.S. deferred tax
assets, with a corresponding charge to our income tax provision of $35.8 million and ended the year with a U.S.
valuation allowance of $47.5 million.
During fiscal 2016 the U.S. valuation allowance decreased $3.8 million to a balance of $43.7 million. The net decrease
primarily related to acquired deferred tax liabilities of $23.8 million offset by current year activity of $20.0 million,
which included the generation of unused tax credits and net operating losses. As of September 30, 2016, we maintained a
valuation allowance against our U.S. net deferred tax assets as it is more likely than not the future realization of all or
some of the deferred tax assets will not be achieved.
In addition, after considering our cumulative three-year income position in Australia and future sources of income in the
near-term, we determined that a valuation allowance was no longer required and the existing $3.1 million valuation
allowance was either utilized or reversed in fiscal 2016.
As of September 30, 2016, a total valuation allowance of $47.9 million has been established against U.S. deferred tax
assets, certain foreign operating losses and other foreign assets. For fiscal 2016, the valuation allowance was reduced by
$6.9 million, of which $9.2 million was recorded as a net tax benefit in our Consolidated Statement of Income, offset
primarily by amounts recorded through Other Comprehensive Income related to retirement benefits.
The non-cash charge to increase or decrease a valuation allowance does not have any impact on our cash flows, nor does
such an allowance preclude us from using loss carryforwards or other deferred tax assets in the future. Until we re-
establish a pattern of continuing profitability, in accordance with the applicable accounting guidance, U.S. income tax
expense or benefit related to the recognition of deferred tax assets in the Consolidated Statement of Income for future
periods will be offset by decreases or increases in the valuation allowance with no net effect on the Consolidated
Statement of Income. If sufficient positive evidence arises in the future, any existing valuation allowance could be
reversed as appropriate, decreasing income tax expense in the period that such conclusion is reached.
We do not provide for U.S. income taxes on the earnings of foreign subsidiaries which are considered indefinitely
reinvested outside the U.S. Deferred income taxes, net of foreign tax credits, are provided for foreign earnings available
for repatriation. As of September 30, 2016, the cumulative amount of earnings upon which U.S. income taxes have not
been provided is approximately $389.5 million of which $360.0 million originates from the U.K. We continually
evaluate the financial requirements of our U.S. operations as well as funding requirements outside the U.S. for potential
acquisitions, market growth and ongoing operations to determine the amount of excess capital, if any, that is available
for distribution. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both
U.S. income taxes and foreign withholding taxes, but would also be able to offset unrecognized foreign tax credit
carryforwards, if any. It is not practicable for us to determine the total amount of unrecognized deferred U.S. income tax
liability because of the complexities associated with its hypothetical calculation.
97
During the year ended September 30, 2016; we identified two errors in our income tax accounting. These errors
understated income tax expense for years prior to fiscal year 2016 by a cumulative amount of $3.0 million, and the
impact of correcting these errors in fiscal 2016 was to overstate income tax expense in 2016 by $3.0 million. Based on a
qualitative and quantitative analysis of these errors, management concluded that all such errors are cumulatively and
individually considered immaterial to the financial statements for all periods presented. As such, these errors have been
corrected in the financial statements for the year ended September 30, 2016.
Accounting for Uncertainty in Income Taxes
During fiscal 2016 and 2015, the aggregate changes in our total gross amount of unrecognized tax benefits are
summarized as follows:
Years ended September 30,
Balance at beginning of year
Additions (reductions) for tax positions taken in prior years:
Recognition of benefits from expiration of statutes
Other
Additions for tax positions related to the current year
Additions for tax positions related to current year acquisitions
Balance at end of year
2016
2015
(in thousands)
$ 12,619 $ 7,306
—
3,641
(1,068)
(359)
3,125
—
472
986
2,784
45
$ 16,932 $ 12,619
At September 30, 2016 and 2015, the amount of unrecognized tax benefits that, if recognized, would affect the effective
tax rate was $7.5 million and $4.5 million, respectively. During the next 12 months, it is reasonably possible that
resolution of reviews by taxing authorities, both domestic and foreign, could be reached with respect to approximately
$4.4 million of the unrecognized tax benefits depending on the timing of examinations or expiration of statute of
limitations, either because our tax positions are sustained or because we agree to the disallowance and pay the related
income tax. We recognize interest and/or penalties related to income tax matters in income tax expense. The amount of
net interest and penalties recognized as a component of income tax expense during 2016, 2015 and 2014 was not
material. Interest and penalties accrued at September 30, 2016 and 2015 amounted to $1.6 million and $1.2 million,
respectively, bringing the total net liability for uncertain tax issues to $15.5 million and $10.9 million, respectively, as of
September 30, 2016 and 2015.
We are subject to ongoing audits from various taxing authorities in the jurisdictions in which we do business. As of
September 30, 2016, the fiscal years open under the statute of limitations in significant jurisdictions include 2012
through 2016 in the U.S. We believe we have adequately provided for uncertain tax issues we have not yet resolved with
federal, state and foreign tax authorities. Although not more likely than not, the most adverse resolution of these issues
could result in additional charges to earnings in future periods. Based upon a consideration of all relevant facts and
circumstances, we do not believe the ultimate resolution of uncertain tax issues for all open tax periods will have a
material adverse effect upon our financial condition or results of operations.
Cash amounts paid for income taxes, net of refunds received, were $14.2 million, $15.2 million and $27.3 million in
2016, 2015 and 2014, respectively.
NOTE 11—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In order to limit our exposure to foreign currency exchange rate risk we generally hedge those commitments greater than
$50,000 by using foreign currency exchange forward and option contracts for periods up to 3 years that are denominated
in currencies other than the functional currency of the subsidiary responsible for the commitment, typically the British
pound, Canadian dollar, Singapore dollar, Euro, Swedish krona, New Zealand dollar and Australian dollar. These
contracts are designed to be effective hedges regardless of the direction or magnitude of any foreign currency exchange
98
rate change, because they result in an equal and opposite income or cost stream that offsets the change in the value of the
underlying commitment. We do not use any derivative financial instruments for trading or other speculative purposes.
All derivatives are recorded at fair value, however, the classification of gains and losses resulting from changes in the
fair values of derivatives are dependent on the intended use of the derivative and its resulting designation. If a derivative
is designated as a fair value hedge, then a change in the fair value of the derivative is offset against the change in the fair
value of the underlying hedged item and only the ineffective portion of the hedge, if any, is recognized in earnings. If a
derivative is designated as a cash flow hedge, then the effective portion of a change in the fair value of the derivative is
recognized as a component of accumulated other comprehensive income until the underlying hedged item is recognized
in earnings, or the forecasted transaction is no longer probable of occurring. If a derivative does not qualify as a highly
effective hedge, any change in fair value is immediately recognized in earnings. We formally document all hedging
relationships for all derivative hedges and the underlying hedged items, as well as the risk management objectives and
strategies for undertaking the hedge transactions. We classify the fair value of all derivative contracts as current or non-
current assets or liabilities, depending on the realized and unrealized gain or loss position of the hedged contract at the
balance sheet date, and the timing of future cash flows. The cash flows from derivatives treated as hedges are classified
in the Consolidated Statements of Cash Flows in the same category as the item being hedged.
The following table shows the notional principal amounts of our outstanding derivative instruments as of September 30,
2016 and 2015 (in thousands):
Instruments designated as accounting hedges:
Foreign currency forwards
Instruments not designated as accounting hedges:
Foreign currency forwards
Notional Principal
September 30, 2016 September 30, 2015
$
$
158,664 $
217,796
115,070 $
142,820
Included in the amounts not designated as accounting hedges at September 30, 2016 and 2015 were foreign currency
forwards with notional principal amounts of $78.4 million and $117.8 million, respectively, that have been designed to
manage exposure to foreign currency exchange risks, and for which the gains or losses of the changes in fair value of the
forwards has approximately offset an equal and opposite amount of gains or losses related to the foreign currency
exposure. Unrealized losses of $8.2 million and unrealized gains of $5.3 million were recognized in other income
(expense), net for the fiscal years ended September 30, 2016 and 2015, respectively.
The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume
outstanding and do not represent the amount of our exposure to credit or market loss. Credit risk represents our gross
exposure to potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties
failed to perform according to the terms of the contract, based on then-current interest or currency exchange rates at each
respective date. Our exposure to credit loss and market risk will vary over time as a function of interest and currency
exchange rates. The amount of credit risk from derivative instruments and hedging activities was not material for the
fiscal years ended September 30, 2016 and 2015. Although the table above reflects the notional principal amounts of our
foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that
the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these
financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market
conditions during the remaining life of the instruments.
We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of
transactions with the same counterparty. We present our derivative assets and derivative liabilities at their gross fair
values. We did not have any derivative instruments with credit-risk related contingent features that would require us to
post collateral as of September 30, 2016 or 2015.
99
The table below presents the fair value of our derivative financial instruments that qualify for hedge accounting as well
as their classification on the consolidated balance sheets as of September 30, 2016 and 2015 (in thousands):
Asset derivatives:
Foreign currency forwards
Foreign currency forwards
Liability derivatives:
Foreign currency forwards
Foreign currency forwards
Total
Balance Sheet Location
Fair Value
September 30, 2016 September 30, 2015
Other current assets
Other noncurrent assets
$
$
Other current liabilities
Other noncurrent liabilities
$
$
14,769 $
1,201
15,970 $
13,752 $
1,333
15,085 $
11,321
13,909
25,230
9,370
13,909
23,279
The tables below present gains and losses recognized in OCI for the years ended September 30, 2016 and 2015 related to
derivative financial instruments designated as cash flow hedges, as well as the amount of gains and losses reclassified
into earnings during those periods (in thousands):
Years ended September 30,
Derivative Type
Foreign currency forwards
2016
2015
Gains (losses)
recognized in
OCI
Gains (losses)
reclassified into
earnings -
Effective Portion
Gains (losses)
recognized in OCI
Gains (losses)
reclassified into
earnings -
Effective Portion
$
(806)
$
1,522
$
1,165
$
1,257
Losses of $0.1 million and gains of $0.1 million from derivative instruments and hedging activities classified as not
highly effective were recognized in other income (expense), net for the years ended September 30, 2016 or 2015,
respectively. The amount of estimated unrealized net gains from cash flow hedges which are expected to be reclassified
to earnings in the next twelve months is $0.7 million, net of income taxes.
NOTE 12—PENSION, PROFIT SHARING AND OTHER BENEFIT PLANS
Deferred Compensation Plan
We have a non-qualified deferred compensation plan offered to a select group of highly compensated employees. The
plan provides participants with the opportunity to defer a portion of their compensation in a given plan year. The
liabilities associated with the non-qualified deferred compensation plan are included in other long-term liabilities in our
Consolidated Balance Sheets and totaled $10.6 million and $9.9 million at September 30, 2016 and 2015, respectively.
In the first quarter of fiscal 2015, we began making 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, which was comprised entirely of life insurance contracts as of September 30, 2016,
was $3.6 million. The total carrying value of the assets set aside to fund deferred compensation liabilities as of
September 30, 2015 was $2.9 million, which included life insurance contracts with a carrying value of $1.9 million and
marketable securities with a carrying value of $1.0 million. The carrying value of the life insurance contracts is based on
the cash surrender value of the policies. The marketable securities in the rabbi trust are carried at fair value, which is
based upon quoted market prices for identical securities. 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 Consolidated
Statements of Income.
Defined Contribution Plans
We have profit sharing and other defined contribution retirement plans that provide benefits for most U.S. employees.
Certain of these plans require us to match a portion of eligible employee contributions up to specified limits. These plans
also allow for additional company contributions at the discretion of the Board of Directors. We also have a defined
100
contribution plan for European employees that were formerly eligible for the European defined benefit plan described
below. Under this plan, we match a portion of the eligible employee contributions up to limits specified in the plan.
Company contributions to defined contribution plans aggregated $15.6 million, $14.2 million and $19.6 million in 2016,
2015 and 2014, respectively.
Defined Benefit Pension Plans
Certain employees in the U.S. are covered by a noncontributory defined benefit pension plan for which benefits were
frozen as of December 31, 2006 (curtailment). The effect of the U.S. plan curtailment is that no new benefits have been
accrued after that date. Approximately one-half of our European employees are covered by a contributory defined benefit
pension plan for which benefits were frozen as of September 30, 2010. Although the effect of the European plan
curtailment is that no new benefits will accrue after September 30, 2010, the plan is a final pay plan, which means that
benefits will be adjusted for increases in the salaries of participants until their retirement or departure from the company.
The European plan was amended in 2014 to reduce the amount of participant compensation used in computing the
pension liability for certain participants. U.S. and European employees hired subsequent to the dates of the curtailment of
the respective plans are not eligible for participation in the defined benefit plans.
During fiscal year 2016, we partially settled our remaining obligations associated with its U.S. plan. The plan offered
certain retired, vested participants the opportunity to voluntarily elect to receive their benefits as an immediate lump sum
distribution. The lump sum distribution was paid out from plan assets in September 2016 and resulted in a settlement
loss of $2.7 million, which is recorded in other non-operating expense for the year ended September 30, 2016.
Our funding policy for the defined benefit pension plans provides that contributions will be at least equal to the
minimum amounts mandated by statutory requirements. Based on our known requirements for the U.S. and U.K. plans,
as of September 30, 2016, we expect to make contributions of approximately $3.9 million in 2017. September 30 is used
as the measurement date for these plans.
The unrecognized amounts recorded in accumulated other comprehensive income (loss) will be subsequently recognized
as net periodic pension cost, consistent with our historical accounting policy for amortizing those amounts. We will
recognize actuarial gains and losses that arise in future periods and are not recognized as net periodic pension cost in
those periods as increases or decreases in other comprehensive income (loss), net of tax, in the period they arise. We
adjust actuarial gains and losses recognized in other comprehensive income (loss) as they are subsequently recognized as
a component of net periodic pension cost. The unrecognized actuarial gain or loss included in accumulated other
comprehensive income (loss) at September 30, 2016 and expected to be recognized in net pension cost during fiscal 2017
is a loss of $4.2 million ($3.2 million net of income tax). The unrecognized actuarial loss was $41.6 million in fiscal year
2016 which was primarily driven by the reduction in discount rates used in the calculation of the net benefit obligation.
No plan assets are expected to be returned to us in 2017.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit
pension plans were as follows (in thousands):
September 30,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2016
2015
$ 241,117 $ 227,527
227,527
201,502
241,117
194,253
101
The following table sets forth changes in the projected benefit obligation and fair value of plan assets and the funded
status for these defined benefit plans (in thousands):
September 30,
Change in benefit obligations:
Net benefit obligation at the beginning of the year
Service cost
Interest cost
Actuarial loss
Plan amendments
Gross benefits paid
Settlements
Foreign currency exchange rate changes
Net benefit obligation at the end of the year
Change in plan assets:
Fair value of plan assets at the beginning of the year
Actual return on plan assets
Employer contributions
Gross benefits paid
Settlements
PBGC Premium paid
Administrative expenses
Foreign currency exchange rate changes
Fair value of plan assets at the end of the year
Unfunded status of the plans
Unrecognized net actuarial loss
Net amount recognized
Amounts recognized in Accumulated OCI
Liability adjustment to OCI
Deferred tax asset
Valuation allowance on deferred tax asset
Accumulated other comprehensive loss
2016
2015
$ 227,527 $ 224,201
670
9,073
8,203
—
(7,047)
—
(7,573)
227,527
595
8,972
41,583
—
(8,365)
(10,424)
(18,771)
241,117
201,502
23,775
4,271
(8,365)
(10,424)
(362)
(925)
(15,219)
194,253
206,982
2,815
6,206
(7,047)
—
—
(682)
(6,772)
201,502
(46,864)
72,909
(26,025)
51,087
$ 26,045 $ 25,062
$ (72,909) $ (51,087)
15,260
(3,415)
$ (58,826) $ (39,242)
19,236
(5,153)
The components of net periodic pension cost (benefit) were as follows (in thousands):
2016
2015
2014
$
595 $
670 $
9,073
636
9,967
(13,835) (13,183)
802
—
152
$ 1,102 $ (3,224) $ (1,626)
8,972
(13,182)
1,869
2,671
177
705
—
163
Years ended September 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss
Settlement loss
Administrative expenses
Net pension cost (benefit)
102
Years ended September 30,
Weighted-average assumptions used to determine benefit obligation at September
30:
Discount rate
Rate of compensation increase
Weighted-average assumptions used to determine net periodic benefit cost for the
years ended September 30:
Discount rate
Expected return on plan assets
Rate of compensation increase
2016
2015
2014
3.0%
3.1%
4.1%
3.1%
4.2%
3.2%
4.1%
6.8%
3.1%
4.2%
6.9%
3.2%
4.8%
7.0%
4.4%
The long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be
invested to provide for the benefits included in the benefit obligations. That assumption is determined based on a number
of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, historical
plan return data, plan expenses, and the potential to outperform market index returns.
We have the responsibility to formulate the investment policies and strategies for the plans’ assets. Our overall policies
and strategies include: maintain the highest possible return commensurate with the level of assumed risk, and preserve
benefit security for the plans’ participants.
We do not direct the day-to-day operations and selection process of individual securities and investments and,
accordingly, we have retained the professional services of investment management organizations to fulfill those tasks.
The investment management organizations have investment discretion over the assets placed under their management.
We provide each investment manager with specific investment guidelines by asset class.
The target ranges for each major category of the plans’ assets at September 30, 2016 are as follows:
Asset Category
Equity securities
Debt securities
Cash
Real estate
Allocation
Range
20% to 55%
25% to 75%
0% to 55%
0% to 10%
Our defined benefit pension plans invest in cash and cash equivalents, equity securities, fixed income securities, pooled
separate accounts and common collective trusts. The following tables present the fair value of the assets of our defined
benefit pension plans by asset category and their level within the fair value hierarchy (in thousands). See Note 3 for a
description of each level within the fair value hierarchy. Beginning in 2015 our plans began investing in diversified
growth funds that hold underlying investments in equities, fixed-income securities, commodities, and real estate.
All assets classified as Level 2 or Level 3 in the table below are invested in pooled separate accounts or common
collective trusts which do not have publicly quoted prices. The fair value of the pooled separate accounts and common
collective trusts are determined based on the net asset value of the underlying investments. The fair value of the
underlying investments held by the pooled separate accounts and common collective trusts, other than real estate
investments, is generally based upon quoted prices in active markets. The fair value of the underlying investments
comprised of real estate properties is determined through an appraisal process which uses valuation methodologies
including comparisons to similar real estate and discounting of income streams. For investments in the pooled separate
103
accounts and common collective trusts categorized as Level 2 below, there are no restrictions on the ability of our benefit
plans to sell these investments.
September 30, 2016
September 30, 2015
Cash equivalents
Equity:
Level 1 Level 2
$ 1,496 $
1,575 $
Level 3
— $
Level 1 Level 2
Total
3,071 $ 766 $
Level 3
988 $
— $
Total
1,754
U.S. equity securities
Foreign equity securities
—
—
35,589
48,288
—
—
35,589
48,288
—
—
38,912
45,120
—
—
38,912
45,120
Fixed Income:
U.S. fixed-income funds
U.K. fixed-income funds
Diversified growth fund
Real Estate
Total
—
—
—
—
49,744
24,707
33,099
8,166
$ 1,496 $ 185,196 $ 7,561 $ 194,253 $ 766 $ 192,570 $ 8,166 $ 201,502
49,744
24,707
33,099
—
46,292
25,927
27,525
7,561
46,292
25,927
27,525
—
—
—
—
—
—
—
—
—
7,561
8,166
The following table presents the changes in the fair value of plan assets categorized as Level 3 in the preceding table (in
thousands):
Balance as of October 1, 2014
Realized and unrealized gains, net
Purchases, sales and settlements, net
Balance as of September 30, 2015
Realized and unrealized gains, net
Purchases, sales and settlements, net
Balance as of September 30, 2016
Real Estate
7,096
$
1,142
(72)
8,166
859
(1,464)
7,561
$
The pension plans held no direct positions in Cubic Corporation common stock as of September 30, 2016 and 2015.
We expect to pay the following pension benefit payments, which reflect expected future service, as appropriate, (in
thousands):
2017
2018
2019
2020
2021
2022-2026
NOTE 13—STOCKHOLDERS’ EQUITY
Long-Term Equity Incentive Plan
$ 8,073
8,229
8,646
9,067
9,289
49,574
In 2013, the Executive Compensation Committee of the Board of Directors (Compensation Committee) approved a long-
term equity incentive award program. Through September 30, 2016, the Compensation Committee has granted 740,384
RSUs with time-based vesting and 785,256 RSUs with performance-based vesting under this program.
Each RSU represents a contingent right to receive one share of our common stock. Dividend equivalent rights accrue
with respect to the RSUs when and as dividends are paid on our common stock and vest proportionately with the RSUs
to which they relate. Vested shares are delivered to the recipient following each vesting date.
The RSUs granted with time-based vesting generally vest in four equal installments on each of the four October 1 dates
following the grant date, subject to the recipient’s continued service through such vesting date.
104
The performance-based RSUs granted to participants vest over three-year performance periods based on Cubic’s
achievement of performance goals established by the Compensation Committee over the performance periods, subject to
the recipient’s continued service through the end of the respective performance periods. For the performance-based
RSUs granted to date, the vesting will be contingent upon Cubic meeting one of three types of vesting criteria over the
performance period. These three categories of vesting criteria consist of revenue growth targets, earnings growth targets,
and return on equity targets. The level at which Cubic’s performs against scalable targets over the performance periods
will determine the percentage of the RSUs that will ultimately vest.
Through September 30, 2016, Cubic has granted 1,525,640 RSUs of which 345,318 have vested. The grant date fair
value of each RSU is the fair market value of one share of our common stock at the grant date. At September 30, 2016,
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 409,619.
The following table summarizes our RSU activity:
Unvested at October 1, 2014
Granted
Vested
Forfeited
Unvested at September 30, 2015
Granted
Vested
Forfeited
Unvested at September 30, 2016
Unvested Restricted Stock Units
Weighted-Average
Number of Shares Grant-Date Fair Value
642,949 $
322,428
(160,499)
(44,976)
759,902 $
471,627
(130,678)
(211,722)
889,129
$
43.76
48.10
45.91
46.65
47.24
43.72
46.94
44.86
45.98
As of September 30, 2016, approximately 914,701 shares remained available for future grants under our long-term
equity incentive plan. On October 1, 2016, 143,726 RSU’s vested.
NOTE 14 — STOCK-BASED COMPENSATION
We recorded non-cash compensation expense related to stock-based awards of $8.8 million for the year ended
September 30, 2016, which was comprised of the following (in thousands):
Cost of sales
Selling, general and administrative
$
$
1,043
7,719
8,762
As of September 30, 2016, there was $35.7 million of unrecognized compensation cost 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 $18.8 million. This amount is expected to be recognized over a weighted-average period of
1.7 years.
We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a
cumulative basis in the period the estimated forfeiture rate changes for all stock-based awards when significant events
occur. We consider our historical experience with employee turnover as the basis to arrive at our estimated forfeiture
rate. The forfeiture rate was estimated to be 12.5% per year as of September 30, 2016. To the extent the actual forfeiture
rate is different from what we have estimated, stock-based compensation related to these awards will be different from
our expectations.
105
NOTE 15—LEGAL MATTERS
In October 2014, a lawsuit was filed in the United States District Court, Northern District of Illinois against us and one
of our transit customers alleging infringement of various patents held by the plaintiff, seeking judgment that we have
infringed on plaintiff’s patents; regular and treble damages; requiring an accounting of sales, profits, royalties and
damages owed plaintiffs; pre and post judgment interest; an award of costs, fees and expenses, an injunction prohibiting
the continuing infringement of the patents; and any other relief the court deems just and equitable. We are investigating
the matter and plan to vigorously defend the lawsuit. We are also undertaking defense of our customer in this matter
pursuant to our contractual obligations to that customer. Due to the preliminary nature of this case, we cannot estimate
the probability of loss or any range of estimate of possible loss.
We are not a party to any other material pending proceedings and we consider all other matters to be ordinary
proceedings incidental to our business. We believe the outcome of these other proceedings will not have a materially
adverse effect on our financial position, results of operations, or cash flows.
NOTE 16—BUSINESS SEGMENT INFORMATION
We have three primary business segments: Cubic Transportation Systems (CTS), Cubic Global Defense Services (CGD
Services) and Cubic Global Defense Systems (CGD Systems). CTS designs, produces, installs and services electronic
revenue collection systems for mass transit projects, including railways and buses. CGD Services provides training,
operations, intelligence, maintenance, technical and other services to the U.S. government and allied nations. CGD
Systems performs work under U.S. and foreign government contracts relating to electronic defense systems and
equipment. CGD Systems products include customized military range instrumentation, laser based training systems, and
virtual simulation systems. CGD systems also includes our secure communications business, called CMS, which offers
products such as datalinks, power amplifiers, avionics systems, modular networking and baseband communications
equipment, deployable satellite communication terminal solutions, real-time video processing, exploitation and
dissemination, and cross domain hardware solutions to address multi-level security requirements.
We evaluate performance and allocate resources based on total segment operating profit or loss. The accounting policies
of the reportable segments are the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are immaterial and are eliminated in consolidation.
Our reportable segments are business units that offer different products and services. Operating results for each segment
are reported separately to senior corporate management to make decisions as to the allocation of corporate resources and
to assess performance.
106
Business segment financial data is as follows (in millions):
Sales:
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Total sales
Operating income (loss):
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Unallocated corporate expenses
Total operating income
Assets:
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Corporate
Total assets
Depreciation and amortization:
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Corporate
Total depreciation and amortization
Capital expenditures:
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Corporate
Total expenditures for long-lived assets
Years ended September 30,
Geographic Information:
Sales (a):
United States
United Kingdom
Canada
Australia
Middle East
Far East
Other
Total sales
Year Ended
September 30,
2015
2014
2016
$ 586.4 $
484.2
391.1
566.8 $ 599.7
400.6
462.1
398.1
402.1
$ 1,461.7 $ 1,431.0 $ 1,398.4
$
$
57.5 $
(17.1)
11.2
(44.4)
7.2 $
75.9 $
18.4
6.6
(25.5)
75.4 $
65.9
26.8
7.8
(8.0)
92.5
$ 338.2 $
616.2
191.2
359.1
410.0 $ 422.2
252.4
341.2
195.8
200.7
324.2
348.4
$ 1,504.7 $ 1,300.3 $ 1,194.6
$
$
$
$
8.2 $
28.7
5.2
3.4
45.5 $
10.8 $
17.1
8.5
1.3
37.7 $
2.2 $
8.9
—
21.0
32.1 $
2.0 $
0.6
—
19.6
22.2 $
11.5
7.4
10.7
0.8
30.4
1.8
13.2
—
1.6
16.6
2016
2015
2014
$ 827.0 $
243.0
44.6
154.0
71.0
57.4
64.7
765.0 $ 749.9
294.4
282.4
9.0
17.6
161.9
164.6
42.0
67.7
76.6
55.3
64.6
78.4
$ 1,461.7 $ 1,431.0 $ 1,398.4
(a) Sales are attributed to countries or regions based on the location of customers.
107
Long-lived assets, net:
United States
United Kingdom
Other foreign countries
Total long-lived assets, net
$ 86.3 $ 65.8 $ 49.8
9.3
6.3
$ 101.0 $ 78.7 $ 65.4
8.6
4.3
5.3
9.4
CGD Services and CGD Systems segment sales include $657.9 million, $670.0 million and $651.1 million in 2016, 2015
and 2014, respectively, of sales to U.S. government agencies. CTS segment sales include $156.3 million, $183.2 million
and $213.2 million in 2016, 2015 and 2014, respectively, of sales under various contracts with our customer, Transport
for London (TfL). No other customer accounts for 10% or more of our revenues for any periods presented.
Changes in estimates on contracts for which revenue is recognized using the cost-to-cost percentage-of-completion
method decreased operating income by approximately $2.8 million in 2016, decreased operating income by
approximately $14.5 million in 2015 and increased operating income by approximately $1.3 million in 2014. These
adjustments decreased net income by approximately $1.6 million ($0.06 per share) in 2016, decreased net income by
approximately $8.0 million ($0.30 per share) in 2015 and increased net income by approximately $3.5 million ($0.13 per
share) in 2014.
Certain of our transportation systems service contracts contain service level or system usage incentives, for which we
recognize revenues when the incentive award is fixed or determinable. These contract incentives are generally based
upon monthly service levels or monthly performance and become fixed or determinable on a monthly basis. However,
one of our legacy transportation systems service contracts that terminated in late fiscal 2015 contained annual system
usage incentive which were based upon system usage compared to annual baseline amounts. For this contract the annual
system usage incentives were not considered fixed or determinable until the end of the contract year for which the
incentives are measured, which fell within the second quarter of our fiscal year. During the second quarter of fiscal years
ended September 30, 2015 and 2014, we recognized sales of $9.3 million and $12.2 million, respectively related to
annual system usage incentives on this transportation systems contract. In August 2015 we completed this contract and
recognized an additional $3.1 million related to the final amount of system usage incentives. The recognition of these
system usage incentives resulted in additional operating income of the same amounts in these respective periods. Upon
completion of this contract we entered into a new service contract with this customer that is structured differently than
the contract that completed in August 2015; the new contract does not have any significant system usage incentives.
In fiscal years 2016, 2015, and 2014 we conducted a number of restructuring initiatives. In 2016, we incurred a total of
$1.9 million of charges related to restructuring. In fiscal 2016 our CGD-Systems and CGD-Services segments incurred
restructuring costs in connection with the formalization of CMS, a business division within our CGD Systems segment
that includes our C4ISR subsidiaries and product offerings. CGD-Systems and CGD Services incurred cumulative
restructuring charges of $0.9 million in connection with this initiative. In addition, during fiscal 2016, our CTS business
implemented a restructuring plan to reduce headcount by approximately 20 in order to rebalance our resources with work
levels. CTS incurred resulting restructuring charges of $1.0 million in connection with this initiative.
In 2015, we incurred a total of $6.3 million of charges related to restructuring. In February 2015, we implemented a plan
to restructure our defense services and defense systems businesses into a single organization to better align our defense
business organizational structure with customer requirements, increase operational efficiencies and improve
collaboration and innovation across the company. CGD Systems and CGD Services incurred restructuring charges of
$4.6 million and $0.6 million, respectively, in connection with these restructuring activities. In addition, CTS incurred
$0.6 million of restructuring costs and we incurred $0.5 million of unallocated corporate expenses related to various
restructuring activities.
In 2014, we incurred restructuring charges of $1.1 million primarily by our CTS business in September 2014 as a result
of a planned reduction of employee headcount in the U.S. by approximately 20. This restructuring was predominantly
driven by the reduction in work on certain contracts that were in the process of moving from the design and build phase
to the services phase.
108
Restructuring charges (reversals) incurred by business segment were as follows (in millions):
Year Ended
September 30,
2015
2014
2016
Restructuring costs (reversals):
Cubic Transportation Systems
Cubic Global Defense Systems
Cubic Global Defense Services
Unallocated corporate expenses and other
Total restructuring costs (reversals)
$ 1.0 $ 0.6 $ 0.7
0.5
—
(0.1)
$ 6.3 $ 1.1
4.6
0.6
0.5
0.3
0.6
—
$ 1.9
A summary of the activity relating to the restructuring liability and employee separation expenses, which is included
within accrued compensation and other current liabilities within our Consolidated Balance Sheet, is as follows (in
thousands):
Balance as of October 1, 2014
Accrued costs
Cash payments
Liability as of September 30, 2015
Accrued costs
Cash payments
Liability as of September 30, 2016
Employee Separation
776
$
6,272
(5,155)
1,893
1,852
(3,096)
649
$
$
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. The total costs of each of the restructuring plans described above are not expected to be significantly greater
than the charges incurred to date.
NOTE 17—SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of our quarterly results of operations for the fiscal years ended September 30, 2016 and
2015:
Fiscal 2016
September 30
March 31 December 31 September 30
Three Months Ended
June 30
Year
Ended
Net sales
Operating income (loss)
Net income (loss) attributable to Cubic
Net income (loss) per share, basic
Net income (loss) per share, diluted
(in thousands, except per share data)
$ 406,588 $ 375,240 $ 366,024
(9,086)
10,144
0.38
0.38
10,488
(7,493)
(0.29)
(0.29)
13,893
4,498
0.17
0.17
$ 313,813 $ 1,461,665
7,218
1,735
0.06
0.06
(8,077)
(5,414)
(0.20)
(0.20)
109
Fiscal 2015
September 30
Three Months Ended
year
Ended
June 30
(in thousands, except per share data)
March 31 December 31 September 30
Net sales
Operating income
Net income (loss) attributable to Cubic
Net income (loss) per share, basic
Net income (loss) per share, diluted
$ 425,917 $ 347,806 $ 338,834 $ 318,488 $ 1,431,045
75,387
22,885
0.85
0.85
23,206
(11,024)
(0.41)
(0.41)
34,709
19,977
0.74
0.74
10,293
8,780
0.33
0.33
7,179
5,152
0.19
0.19
Changes in estimates on contracts for which revenue is recognized using the cost-to-cost-percentage-of-completion
method increased operating profit by approximately $1.3 million in the three months ended September 30, 2016 and
increased operating profit by approximately $0.7 million in the three months ended September 30, 2015. These
adjustments increased net income by approximately $0.9 million ($0.03 per share) in the three months ended September
30, 2016 and increased net income by approximately $0.5 million ($0.02 per share) in the three months ended and
September 30, 2015.
110
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cubic Corporation
We have audited the accompanying consolidated balance sheets of Cubic Corporation as of September 30, 2016 and
2015, and the related consolidated statements of income, comprehensive income (loss), cash flows and changes in
shareholders’ equity for each of the three years in the period ended September 30, 2016. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Cubic Corporation at September 30, 2016 and 2015, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 30, 2016, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Cubic Corporation’s internal control over financial reporting as of September 30, 2016, based on criteria
established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework), and our report dated November 22, 2016, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
San Diego, California
November 22, 2016
111
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in the
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 SEC and is accumulated and communicated to management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosure.
Management, with participation by our CEO and CFO, has designed our disclosure controls and procedures to provide
reasonable assurance of achieving desired objectives. As of September 30, 2016, we carried out an evaluation, under the
supervision of and with the participation of our management, including our CEO and CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the evaluation, as of September 30, 2016, our
CEO and CFO have concluded that our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Internal control over financial reporting refers to the process designed by, or under the supervision of, our CEO and
CFO, and effected by our board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP, and includes those policies and procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial statements.
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as
defined in Exchange Act Rule 13a-15(f)). In order to evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act, under the supervision of and with the participation of
our management, including our CEO and CFO, we conducted an assessment based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of
September 30, 2016.
The effectiveness of our internal control over financial reporting as of September 30, 2016 has been audited by Ernst &
Young, LLP, an independent registered public accounting firm, as stated in their report which follows.
Management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting did not
include an evaluation of the design and operation of internal controls of GATR Technologies Inc. which we acquired in
112
February 2016 and which was included in the 2016 consolidated financial statements of Cubic Corporation and consisted
of $223.6 million and $197.6 million of total and net assets, respectively, as of September 30, 2016 and $43.1 million
and $26.4 million of net sales and operating loss, respectively, for the year then ended.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
We do, however, anticipate that there will be such changes in the first quarter of fiscal year 2017 related to the transition
of certain of our businesses onto our new enterprise resource planning (ERP) system. During the third quarter of fiscal
2016, our corporate operations, including corporate payroll, corporate general ledger, corporate procurements and
payments, and corporate cash receipts functions transitioned to a new ERP system and, accordingly, we modified our
existing internal controls infrastructure, as well as added other processes and internal controls, to adapt to our new ERP
system. The transition of our remaining operations to our new ERP system will be significantly broader than those
operations transitioned to date and will occur in phases in fiscal 2017. The first such phase will begin on October 1,
2016 with the transition of certain of our CGD Systems companies in the U.S. to our new ERP system. We believe that
the new ERP system and related changes to processes and internal controls will ultimately enhance our internal control
over financial reporting while providing us with the ability to scale our business.
Item 9B. OTHER INFORMATION
None.
113
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Cubic Corporation
We have audited Cubic Corporation’s internal control over financial reporting as of September 30, 2016, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) (the COSO criteria). Cubic Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of GATR Technologies, Inc. (GATR), which is included in the 2016 consolidated financial statements of Cubic
Corporation and constituted $223.6 million and $197.6 million of total and net assets, respectively, as of September 30,
2016 and $42.9 million and $23.0 million of net sales and operating loss, respectively, for the year then ended. Our audit
of internal control over financial reporting of Cubic Corporation also did not include an evaluation of the internal control
over financial reporting of GATR.
In our opinion, Cubic Corporation maintained, in all material respects, effective internal control over financial reporting
as of September 30, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Cubic Corporation as of September 30, 2016 and 2015, and the related
consolidated statements of income, comprehensive income (loss), cash flows and changes in shareholders’ equity for
each of the three years in the period ended September 30, 2016 and our report dated November 22, 2016 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
November 22, 2016
114
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information regarding directors and executive officers and corporate governance will be included in our definitive Proxy
Statement to be filed with the SEC in connection with our 2016 Annual Meeting of Shareholders (the Proxy Statement),
and is incorporated herein by reference.
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer, controller and persons performing similar functions, which appears on our website at:
http://www.cubic.com/corp1/invest/governance.html. We intend to disclose future amendments to certain provisions of
our code of ethics, or waivers of such provisions granted to one of these specified officers, on our website within four
business days following the date of such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will be included in the Proxy Statement, and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information regarding security ownership of certain beneficial owners and management and related stockholder matters
will be included in the Proxy Statement, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Information regarding certain relationships and related transactions, and director independence will be included in the
Proxy Statement, and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information regarding principal accounting fees and services will be included in the Proxy Statement, and is incorporated
herein by reference.
115
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this Report:
PART IV
(1)
The following consolidated financial statements of Cubic Corporation, as referenced in Item 8 of this
Form 10-K:
Consolidated Statements of Income Years ended September 30, 2016, 2015 and
2014
Consolidated Statements of Comprehensive Income Years ended September 30,
2016, 2015 and 2014
Consolidated Balance Sheets September 30, 2016 and 2015
Consolidated Statements of Cash Flows Years ended September 30, 2016, 2015
and 2014
Consolidated Statements of Changes in Shareholders’ Equity Years ended
September 30, 2016, 2015 and 2014
Notes to Consolidated Financial Statements September 30, 2016
65
66
67
69
71
72
(2)
The following consolidated financial statement schedules of Cubic Corporation and subsidiaries:
None are required under the applicable accounting rules and regulations of the SEC.
116
(b)
3.1
3.2
3.3
4.1
4.2
Exhibits:
Amended and Restated Certificate of Incorporation. Incorporated by reference to Form 10-Q for the quarter
ended June 30, 2006, file No. 001-08931, Exhibit 3.1.
Certificate of Amendment of Amended and Restated Certificate of Incorporation. Incorporated by reference to
Form 10-Q for the quarter ended March 31, 2016, file No. 001-08931, Exhibit 3.2.
Amended and Restated Bylaws. Incorporated by reference to Form 8-K filed April 22, 2014, file No. 001-
08931, Exhibit 3.1.
Form of Common Stock Certificate. Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 2012, file No. 001-08931, Exhibit 4.1.
Registration Rights Agreement, dated as of February 25, 2013, by and among Cubic Corporation and certain of
its shareholders. Incorporated by reference to Form 8-K filed February 25, 2013, file No. 001-08931,
Exhibit 4.1
10.1*
Cubic Corporation 2015 Incentive Award Plan. Incorporated by reference to Appendix A to the Definitive
Proxy Statement on Schedule 14A filed on January 13, 2015, file No. 001-08931.
10.2*
Cubic Corporation Employee Stock Purchase Plan. Incorporated by reference to Appendix B to the Definitive
Proxy Statement on Schedule 14A filed on January 13, 2015, file No. 001-08931.
10.3*
Form of Time-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement under the
Cubic Corporation 2015 Incentive Award Plan.
10.4*
Form of Performance-Based Vesting Restricted Stock Unit Award Grant Notice and Award Agreement under
the Cubic Corporation 2015 Incentive Award Plan.
10.5*
Form of Non-Employee Director Restricted Stock Unit Award Grant Notice and Award Agreement under the
Cubic Corporation 2015 Incentive Award Plan. Incorporated by reference to form 10-K for the fiscal year
ended September 30, 2015, file No. 001-08931, Exhibit 10.5.
10.6*
Amended Transition Protection Plan. Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 2015, file No. 001-08931, Exhibit 10.6.
10.7*
Incentive Bonus Plan. Incorporated by reference to Form 10-Q for the quarter ended March 31, 2016, file
No. 001-08931, Exhibit 10.1.
10.8*
Severance Policy for Cubic Employees. Incorporated by reference to Form 10-Q for the quarter ended
December 31, 2015, file No. 001-08931, Exhibit 10.2.
10.9*
Separation Agreement, dated February 27, 2015, by and between Cubic Corporation and William W. Boyle.
Incorporated by reference to Form 10-Q for the quarter ended March 31, 2015, file No. 001-08931,
Exhibit 10.6.
10.10* Employment Transition Agreement, dated September 11, 2015, by and between Cubic Corporation and
Stephen Shewmaker. Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2015,
file No. 001-08931, Exhibit 10.9.
10.11* Letter Agreement regarding director compensation, dated September 1, 2015, by and between Cubic
Corporation and Janice M. Hamby. Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 2015, file No. 001-08931, Exhibit 10.10.
10.12*† Separation Agreement, dated June 13, 2016, by and between Cubic Corporation and William J. Toti.
Incorporated by reference to Form 10-Q for the quarter ended June 30, 2016, file No. 001-08931,
Exhibit 10.1.
10.13* Amended and Restated Deferred Compensation Plan dated January 1, 2013. Incorporated by reference to
Form 10-Q for the quarter ended December 31, 2012, file No. 001-08931, Exhibit 10.1.
10.14*
Indemnity Agreement. Incorporated by reference to Form 8-K filed May 3, 2010, file No. 001-08931,
Exhibit 10.1.
10.15
Credit Agreement dated January 12, 2012. Incorporated by reference to Form 10-Q for the quarter ended
March 31, 2012, file No. 001-08931, Exhibit 10.6.
10.16
10.17
Second Amended and Restated Credit Agreement, dated as of May 8, 2012, by and among Cubic Corporation,
JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto. Incorporated by
reference to Form 10-Q for the quarter ended June 30, 2012, file No. 001-08931, Exhibit 10.3.
First Amendment to Second Amended and Restated Credit Agreement, dated as of December 12, 2014, by and
among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders
party thereto. Incorporated by reference to Form 10-Q for the quarter ended December 31, 2015, file
No. 001-08931, Exhibit 10.3.
117
10.18
Second Amendment to Second Amended and Restated Credit Agreement, dated as of February 2, 2016, by and
among Cubic Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders
party thereto. Incorporated by reference to Form 8-K filed February 3, 2016, file No. 001-08931, Exhibit
10.1.
10.19
Third Amended and Restated Credit Agreement, dated as of August 11, 2016, by and among Cubic
10.20
10.21
21.1
23.1
31.1
31.2
32.1
32.2
101
Corporation, JPMorgan Chase Bank, N.A. (as administrative agent) and the other lenders party thereto.
Incorporated by reference to Form 8-K filed August 11, 2016, file No. 001-08931, Exhibit 10.1.
Amended and Restated Note Purchase and Private Shelf Agreement (including the forms of the notes issued
thereunder), dated as of February 2, 2016, by and among Cubic Corporation, the Guarantors (as defined
therein), PGIM, Inc. and the other purchasers party thereto. Incorporated by reference to Form 8-K filed
February 3, 2016, file No. 001-08931, Exhibit 10.2.
Second Amended and Restated Note Purchase and Private Shelf Agreement (including the forms of the notes
issued thereunder), dated as of August 11, 2016, by and among Cubic Corporation, the Guarantors (as
defined therein), PGIM, Inc. and the other purchasers party thereto. Incorporated by reference to Form 8-K
filed August 11, 2016, file No. 001-08931, Exhibit 10.2.
List of Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
Financial statements from the Cubic Corporation Annual Report on Form 10-K for the year ended
September 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated
Statements of Income, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated
Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statement of Changes in
Shareholders’ Equity, and (vi) notes to Consolidated Financial Statements.
* Indicates management contract or compensatory plan or arrangement
† Confidential treatment has been granted for portions of this exhibit. These portions have been omitted and filed
separately with the Securities and Exchange Commission.
118
Pursuant to the requirements of Sections 13 or 15(d) 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:
SIGNATURES
(Registrant)
CUBIC CORPORATION
11/22/16
Date
/s/ Bradley H. Feldmann
BRADLEY H. FELDMANN,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
11/22/16
Date
/s/ Bradley H. Feldmann
BRADLEY H. FELDMANN,
President and
Chief Executive Officer, Director
(Principal Executive Officer)
11/22/16
Date
/s/ Walter C. Zable
WALTER C. ZABLE,
Chairman of the Board of
Directors
11/22/16
Date
/s/ John D. Thomas
JOHN D. THOMAS,
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
11/22/16
/s/ Mark A. Harrison
MARK A. HARRISON,
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
11/22/16
Date
/s/ Bruce G. Blakley
BRUCE G. BLAKLEY,
Director
11/22/16
Date
/s/ Janice M. Hamby
JANICE M. HAMBY,
Director
11/22/16
Date
/s/ Edwin A. Guiles
EDWIN A. GUILES,
Director
11/22/16
Date
/s/ Steven J. Norris
STEVEN J. NORRIS,
Director
11/22/16
Date
/s/ Robert S. Sullivan
ROBERT S. SULLIVAN,
Director
11/22/16
Date
/s/ John H. Warner
JOHN H. WARNER,
Director
119
SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION
PLACE OF INCORPORATION AND PERCENTAGE OWNED
EXHIBIT 21.1
Subsidiary
CTS — NORDIC AKTIEBOLAG
CUBIC (UK) LIMITED
CUBIC DE MEXICO
CUBIC DEFENCE AUSTRALIA PTY LIMITED
Place of
Incorporation
Percentage
Owned
Sweden
England
Mexico
Australia
CUBIC DEFENCE NEW ZEALAND LIMITED
New Zealand
CUBIC DEFENCE UK LTD
CUBIC DEFENSE APPLICATIONS, INC.
CUBIC DEFENSE WLL
CUBIC FIELD SERVICES CANADA LIMITED
CUBIC GLOBAL DEFENSE, INC.
CUBIC HOLDINGS LTD.
CUBIC ITALIA S.R.L.
CUBIC LAND, INC.
CUBIC SIMULATION SYSTEMS, INC.
CUBIC SURFACE TRANSPORTATION SYSTEMS LIMITED
CUBIC TECHNOLOGIES DENMARK APS
CUBIC TECHNOLOGIES SINGAPORE PTE LTD
England
California
Qatar
Canada
Delaware
New Zealand
Italy
California
Delaware
England
Denmark
Singapore
CUBIC TRANSPORTATION SYSTEMS (AUSTRALIA) PTY LIMITED
Australia
CUBIC TRANSPORTATION SYSTEMS (DEUTSCHLAND) GmbH
Germany
CUBIC TRANSPORTATION SYSTEMS (INDIA) PVT LIMITED
CUBIC TRANSPORTATION SYSTEMS (ITMS) LIMITED
CUBIC TRANSPORTATION SYSTEMS CANADA, LTD
CUBIC TRANSPORTATION SYSTEMS LIMITED
CUBIC TRANSPORTATION SYSTEMS NORDIC AS
CUBIC TRANSPORTATION SYSTEMS, INC.
DTECH LABS, INC.
India
England
Canada
England
Norway
California
Delaware
100%
100%
100%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Subsidiary
EMIRATES TRAINING TECHNOLOGY LLC
GATR, INC.
NEXTBUS, INC.
OMEGA TRAINING GROUP, INC.
TERALOGICS, INC.
Place of
Incorporation
Percentage
Owned
UAE
Delaware
Delaware
Georgia
Maryland
49%
100%
100%
100%
100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-204615) pertaining to the Cubic Corporation 2015 Incentive Award
Plan and Cubic Corporation Employees Stock Purchase Plan,
(2) Registration Statement (Form S-8 No. 333-187386) pertaining to the Cubic Corporation 2005 Equity Incentive
Plan, Cubic Corporation Employees’ Profit Sharing Plan and Cubic Applications, Inc. 401(k) Retirement Plan,
and
(3) Registration Statement (Form S-8 No. 333-127493) pertaining to the Cubic Corporation Employees’ Profit-
Sharing Plan, the Cubic Applications, Inc. 401(k) Retirement Plan and the Cubic Corporation 1998 Stock
Option Plan;
of our reports dated November 22, 2016 with respect to the consolidated financial statements of Cubic Corporation and
the effectiveness of internal control over financial reporting of Cubic Corporation included in this Annual Report
(Form 10-K) of Cubic Corporation for the year ended September 30, 2016.
San Diego, California
November 22, 2016
/s/ Ernst & Young LLP
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 31.1
I, Bradley H. Feldmann, certify that:
1. I have reviewed this annual report on Form 10-K of Cubic Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ Bradley H. Feldmann
Bradley H. Feldmann
President and Chief Executive Officer
Date: November 22, 2016
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEY ACT OF 2002
Exhibit 31.2
I, John D. Thomas, certify that:
1. I have reviewed this annual report on Form 10-K of Cubic Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ John D. Thomas
John D. Thomas
Executive Vice President and Chief Financial Officer
Date: November 22, 2016
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
EXHIBIT 32.1
The undersigned, in his capacity as an officer of Cubic Corporation (the “Registrant”) hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s
knowledge:
(1)
The annual report of the Registrant on Form 10-K for the period ended September 30, 2016, (the “Report”),
which accompanies this certification, fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2)
results of operations of the Registrant.
The information contained in the Report fairly presents, in all material respects, the financial condition and
/s/ Bradley H. Feldmann
Bradley H. Feldmann
President and Chief Executive Officer
Date: November 22, 2016
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
EXHIBIT 32.2
The undersigned, in his capacity as an officer of Cubic Corporation (the “Registrant”) hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s
knowledge:
(1)
The annual report of the Registrant on Form 10-K for the period ended September 30, 2016, (the “Report”),
which accompanies this certification, fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2)
results of operations of the Registrant.
The information contained in the Report fairly presents, in all material respects, the financial condition and
/s/ John D. Thomas
John D. Thomas
Executive Vice President and Chief Financial Officer
Date: November 22, 2016
Peer Group Constituents
The defense, homeland security and space index named SPADE is made up of the following companies as of
September 30, 2016.
See Stock Performance Graph on page 18.
AAR Corporation
Aerojet Rocketdyne
AeroVironment
Ball Aerospace
Boeing Co
Booz Allen
BXW Technologies
CACI
CSRA
Comtech Telecom
Cubic
Curtiss Wright
Digital Globe
Engility
General Dynamics
Harris
Heico
Hexcel
Huntington Ingalls
Honeywell
Kaman
KBR
Key W Corporation
Kratos Defense
L-3 Communications
Leidos
Lockheed Martin
Mantech International
Esterline Technologies
Mercury Computer Systems
FireEye
FLIR Systems
MOOG
Northrop Grumman
Orbital ATK
Oshkosh Truck
OSI Systems
Raytheon
Rockwell Collins
SAIC
Sparton
TASER
Teledyne Technologies
Textron
Transdigm Group
Triumph Group
United Technologies
Vectrus
Viasat Inc
Woodward Aerospace
Trademarks
SPADE® and the SPADE® Defense Index are registered trademarks of the ISBC.
The Cubic logo, NextCity™, NextBus®, NextAgent®, and NextWave™ are trademarks of Cubic.
Annual Report Design
Kramer Design www.kramerdesign.com
Photography Credits
Paul Body, Paul Body Photography
Ken Hansen, Hansen Photo
This annual report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 that are subject to the safe harbor created by such Act. Forward-looking statements
include, among others, statements about our expectations regarding future events or our future financial and/
or operating performance. 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 statements involve risks, estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in these statements. Please refer to the risk factors
contained in our SEC filings available at www.sec.gov, including our most recent Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q, for some of the factors that may cause actual results to differ materially
from those expressed in any forward-looking statements. You should not place undue reliance on any forward
looking statements, which speak only as of the date hereof, and, except as required by law, we undertake no
obligation to update any forward-looking statement to reflect events or circumstances after the date hereof.
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9333 Balboa Avenue, San Diego, CA 92123
P.O. Box 85587, San Diego, CA 92186
800.854.2876 858.277.6780
cubic.com
©CUBIC CORPORATION 2015 COR 1377